**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K/A**

**AmendmentNo. 1**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe fiscal year ended June 30, 2005**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the transition period from                   to                   **

**CommissionFile Number 0-4281**

**BALLY TECHNOLOGIES, INC.**

(Exact name of registrantas specified in its charter)

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

 

**6601 S. Bermuda Rd. LasVegas, Nevada 89119**

(Address of principalexecutive offices)

**Registrant’s telephone number,including area code:**(702) 584-7600

Securities registered pursuant to Section 12(b) ofthe Act:

**None**

Securities registered pursuant to Section 12(g) ofthe Act:

**CommonStock, $0.10 par value per share**

Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. o Yes   x No

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  o 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Exchange Act Rule 12b-2). x Yes   o No

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). o Yes   x No

The aggregate market value of the common stock, $0.10par value, held by non-affiliates of the registrant, computed based on theclosing sale price as of December 31, 2005 of $13.81 per share as reportedby the New York Stock Exchange, was approximately $674,557,000.

Accordingto the records of the registrant’s registrar and transfer agent, the number ofshares of the registrant’s common stock outstanding as of October 27, 2006was 52,934,336, which does not include 526,000 shares held in treasury.

 

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**BALLY TECHNOLOGIES,INC.FORM 10-K/AYear Ended June 30, 2005**

**EXPLANATORY NOTE**

This Amendment No. 1 on Form 10-K/A (“AmendmentNo. 1”) is being filed to effect a restatement of the previously issuedconsolidated financial statements of Bally Technologies, Inc. (formerlyknown as Alliance Gaming Corporation, the “Company”) as of June 30, 2005and 2004, and for each of the three years in the period ended June 30,2005 and the unaudited selected quarterly financial data for the fiscalquarters ended June 30, 2005 and 2004, March 31, 2005 and 2004, December 31,2004 and 2003, and September 30, 2004 and 2003 presented in Note 22 toconsolidated financial statements filed with the Securities and ExchangeCommission (the “SEC”) on December 30, 2005 (the “Original Filing”). Forfurther discussion regarding the restatement, see Note 2 to consolidatedfinancial statements, Restatement of Previously Issued Financial Statements,included in Item 15 of this Amendment No. 1.

This Amendment No. 1 amends and restates Item 1 ofPart I, Items 6, 7, 8 and 9A of Part II and Item 15 of Part IVof the Original Filing to reflect the effects of the restatement.  In addition, in accordance with Rule 12b-15promulgated under the Securities and Exchange Act of 1934, as amended, this AmendmentNo. 1 also includes updated certifications from our Chief ExecutiveOfficer and Chief Financial Officer as Exhibits 31.1, 31.2 and 32.1 and 32.2.

Except in respect of the foregoing and in respect ofthe Company’s name change, the appointment of Robert C. Caller as the Company’sChief Financial Officer and the amendment to the Company’s bank loan agreement referencedbelow, all of the information in this Amendment No. 1 is applicable as ofthe dates addressed in the Original Filing and does not reflect eventsoccurring after the date of the Original Filing or modify or update disclosuresaffected by subsequent events. For the convenience of the reader, thisAmendment No. 1 sets forth the Original Filing in its entirety, as amendedby and to reflect the changes discussed above.

This Amendment No. 1should be read in conjunction with the Company’s Current Reports on Form 8-Kfiled with the SEC subsequent to the date of the Original Filing disclosing,among other things:

·       Thaton March 13, 2006, the Company changed its name to Bally Technologies, Inc.;and

·       Thaton April 3, 2006, the Company appointed Robert C. Caller as Executive VicePresident, Chief Financial Officer and Treasurer; and

·       Thaton October 20, 2006, the Company amended its bank loan agreement.

Except for this filing, wehave not amended, and do not intend to amend, any of our periodic reportspreviously filed with the SEC. Therefore, the consolidated financial statementsand other financial information in our previously filed periodic reports forthe dates and periods referred to above should not be relied upon.

**PART I**

**ITEM 1.**             BUSINESS

**General**

Operating under the name *Bally Gaming and Systems*, we are a worldwide leader indesigning, manufacturing and distributing traditional and nontraditional gamingmachines, having marketed over 

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100,000 gaming machines during the past five years. Wedefine traditional gaming machines as being Class III, casino-style games,and nontraditional gaming machines such as games that are centrally determinedor video lottery terminals (“VLTs”). We also design, integrate and sell highlyspecialized computerized monitoring systems that provide casinos with networkedaccounting and security services for their gaming machines. In our systemsbusiness, we have over 276,000 game monitoring units installed in casinosworldwide. We also own and operate a dockside casino in Vicksburg, Mississippi,which has approximately 12 table games and 890 gaming devices (“CasinoOperations”). You can find further information regarding our individualbusiness units in the notes to our consolidated financial statements includedin this Annual Report on Form 10-K/A.

We were incorporated inNevada on September 30, 1968, under the name Advanced Patent Technology. In1983, we changed our name to Gaming and Technology, Inc., and to UnitedGaming, Inc., in 1988. We became Alliance Gaming Corporation on December 19,1994. We conduct our gaming operations through directly and indirectly ownedsubsidiaries. Unless the context requires otherwise, the terms “Alliance,” “Bally,”“the Company,” “we” and “our” as used herein refer to Bally Technologies, Inc.and subsidiaries. Our principal executive offices are located at 6601 SouthBermuda Road, Las Vegas, Nevada 89119; telephone (702) 584-7600. Ourinternet address is www.ballytech.com. Our Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-Kand all amendments to those reports are available on our website, free ofcharge, as soon as reasonably practicable after such material is electronicallyfiled with or furnished to the SEC. Copies of our Corporate GovernanceGuidelines, Code of Ethics and Business Conduct applicable to our officers,directors and employees and the charters for the Audit, Nominating andCorporate Governance and Compensation Committees of our Board of Directors areavailable on our website by following the links to “Investor Relations” and “CorporateGovernance” or upon written request to our Corporate Secretary at the addressset forth above.

*Acquisitions*

On March 2, 2004, we purchased Sierra DesignGroup (“SDG”), a leading supplier of Class II and Class III gamingdevices, systems and technology, for aggregate initial consideration ofapproximately $126.4 million. The initial purchase price consisted of $108.6million of cash, 662,000 shares of our common stock valued at $11.9 million,the assumption of approximately $8 million of debt and certain transaction feesand expenses. In addition, an earn out provision provided for the payment of upto $95.6 million in additional consideration upon certain financial targetsbeing achieved in the subsequent three-year period. In December 2004, theCompany and the selling shareholders settled the earn out for a fixed amount of$40.0 million, consisting of a one-time cash payment of $12.0 million and theissuance of a subordinated note of $28.0 million. In June 2005, theCompany extinguished $14.0 million of the note and accrued interest there on,by issuing approximately 1.0 million shares of common stock to the note holders.The acquisition of SDG in March 2004 provides us with significanttechnology-based assets including the Alpha Game Engine, as well as positionedus to take advantage of significant opportunities in both the domestic andinternational markets, from the technology advances in traditional casino stylegaming to the Class II environments with central determination features.

On February 19, 2004, we acquired substantiallyall of the assets and liabilities of MindPlay LLC (“MindPlay”), a leadingdeveloper of advanced table game technologies, for aggregate initialconsideration of approximately $16.8 million. The initial purchase priceincluded $9 million cash, a $4 million note payable, the assumption ofapproximately $2 million of debt and the issuance of warrants to purchase100,000 shares of our common stock which were valued at approximately $0.9million. In addition, an earn out provision provided for the payment of 10% ofgross margin from the sale of MindPlay products in the first seven yearssubsequent to the acquisition, and 4.25% of gross margin for the next sixyears, subject to adjustments pursuant to the conditions contained in the saleagreement. The MindPlay technologies are designed to provide data andinformation to casino operators to improve customer service, to provide 

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enhanced security and to increase profitability bylowering the cost of operation and enhancing the casino patron experience.Under the protection of a number of patents acquired, we envision a series ofnew table game products that can potentially redefine the market with theadvances of automation and new gaming features to attract and retain table gameplayers.

On December 31, 2003, we acquired all of the assets of U.K.based Crown Gaming from Crown Leisure Limited for aggregate consideration of$3.9 million. The acquisition of Crown Gaming, which included Crown’sdistributorship agreements for a wide variety of automated table games andvideo bingo machines, strategically built on the Company’s focus towards futuregrowth in the U.K. and Europe.

On April 9, 2003, we acquired all of the assets ofMicro Clever Consulting (“MCC”) for $11.3 million, and on May 28, 2003, weacquired the assets of HoneyFrame Systems Company (“HSC”) for $4.9 million. Bothof these companies provide systems products, primarily to our internationalcustomers.

*Dispositions*

During fiscal year 2005 and 2004, we completed thedisposition of certain of our “non-core” assets. The dispositions were asfollows:

·       on October 14, 2004 wecompleted the sale of our interest in our Louisiana route operations foraggregate consideration of $2 million;

·       on June 30, 2004 wecompleted the sale of our Nevada route operations for aggregate considerationof $105 million;

·       on May 3, 2004 wecompleted the sale of our Rail City Casino for aggregate consideration of $37.9million; and

·       on July 18, 2003 we completed the sale of our BallyWulff wall machine and amusement games business for aggregate consideration of$16.5 million.

*Financial Information*

The financial information required with respect to each ofour business segments and with respect to geographical areas can be found inthe consolidated financial statements included in this Annual Report on Form 10-K/Aand the related notes.

**Bally Gaming and Systems**

*Overview*

The Bally Gaming and Systems businessunit consists of three divisions: Gaming Equipment, Systems and GamingOperations. The following table sets forth the percentages of revenues of BallyGaming and Systems provided by each division for the periods indicated:

| ** **                        | ** ** | **Percentage of Revenues**    | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|
| ** **                        | ** ** | **Years ended June 30,** | ** ** |
| **Revenue by Division** | ** ** | ** **                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Gaming Equipment                  |       |                                    | 47         | % |   |   | 53 | % |   |   | 56 | % |   |
| Systems                           |       |                                    | 23         | % |   |   | 29 | % |   |   | 26 | % |   |
| Gaming Operations                 |       |                                    | 30         | % |   |   | 18 | % |   |   | 18 | % |   |
|                              |       |                                    | 100        | % |   |   | 100 | % |   |   | 100 | % |   |
|                                   |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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*Gaming Equipment*

We design,manufacture and sell a variety of electronic slot and video gaming machines. Slotmachines are normally produced to specific order, configured to a customer’sparticular requirements. Customers may also change the game theme of a slotmachine by purchasing a “conversion kit” that consists of artwork, reel strips(if applicable) and a computer chip. Gaming machines are differentiated fromone another by a number of factors including graphic design and theme, cabinetstyle and size, pay table, reel type design, betting denomination andminimum/maximum betting amount. Our video gaming machines are designed to offerthe player the chance to play a multitude of different games by simulatingvarious card games, video reel-spinning games and keno through a video display.We periodically introduce new games and themes to satisfy customer demand andto compete with our competitors’ product designs. The gaming products createdare the result of a comprehensive product development effort which includesextensive testing in-house and on casino floors for reliability and playerappeal.

Native American gaming differs from the traditional casinomarket in that it is regulated under the Indian Gaming Regulatory Act of 1988,which permits specific types of gaming as follows:

·       Class I Gaming—TraditionalNative American social and ceremonial games; regulated exclusively at thetribal level;

·       Class II Gaming—Pulltabs, instant bingo and other games similar to bingo; regulated by individualtribes, with the National Indian Gaming Commission having oversight of theregulatory process; and

·       Class III Gaming—Allforms of casino-style gaming not included under Class I and Class II,including traditional slot machines and table games; governed by compactsnegotiated between individual tribes and states.

Each gamingmachine contains an operating system, also referred to as a game platform. Themachine’s operating system manages the software needed to run the machine. Gameplatforms are constantly under development or revision to keep pace with theever increasing complexity of game software. ** **In fiscal year 2005, the Companycompleted the successful migration from the EVOTM platform to the Linux basedAlpha platform and operating system (“Alpha Game Engine”). The Alpha GameEngine is the result of a significant investment in hardware and softwareengineering since development efforts first began at SDG in 1999. The platformunderwent the most extensive pre-launch testing in the Company’s history andnow forms the foundation for our new video and mechanical reel-spinningproducts.

The Alpha Game Engine is approved in all majorjurisdictions including Nevada, Mississippi, New Jersey, Missouri, Washington,New York, Rhode Island and various Native American jurisdictions. Theflexibility of the platform allows it to operate in both Class III and Class IImarkets, including random number generated, central determination andbingo-based jurisdictions.

The Alpha Game Engine’s layered architecture andmodular design allow for adaptability and simplified requirement changes. TheLinux based operating system is compatible with the major slot accounting andticket systems and supports 20-plus lines, bonusing, multi-denom andmulti-percentage game configurations. The Alpha Game Engine also supportsmulti-level local and wide-area progressives gaming venues.

The Alpha Game Engine is designed for robust gamedevelopment and incorporates free spin, scatter, bonusing and other advancedgame features. The platform is architected for separation of the gamingoperating system from the game layer to allow for rapid game development. Astandardized game interface allows internal and third-party developers with asecure, easy-to-use programming environment that incorporates an advanced setof development tools.

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We have launched proven game themes including Blazing7s® and Blues BrothersTM on the Alpha Game Engine. In all, we now offer anextensive library of game titles on Alpha in Class III and Class IImarkets. Pursuant to license agreements, we also offer certain game titlesdeveloped by WMS Industries, Inc. (“WMS”), Aristocrat Leisure Limited (“Aristocrat”),Konami Co. Ltd. (“Konami”), which we place in certain jurisdictions pursuant tothose license agreements.

Technologicaladvances, development of new entertaining games, new sound and visual featuresand changing preferences of casino patrons are the main factors that lead tothe replacement of gaming machines, which typically have a useful life of 5 to7 years.

Wegenerally offer a 90-day parts and labor warranty for new gaming machinessold. We also remain actively involved in customer service after the originalinstallation of the machine. We provide several after-sale services toour customers including customer education programs, a 24-hour customerservice telephone hot-line, an Internet web site for technical support,field service support programs and spare parts programs. Our historicalwarranty expense as a percentage of revenues has been less than 1%.

We alsosell used gaming machines, as well as parts for existing machines. Generally weacquire the used machines we sell as trade-ins toward the purchase of newgaming equipment. While a small secondary market exists in the United States,used machines are typically resold into the international market. Some usedequipment is reconditioned for direct sale, but much is sold in container lotson an “as is” basis through independent brokers. Used game sales totaled $14.4 million,$20.4 million and $9.1 million for the years ended June 30,2005, 2004 and 2003, respectively.

Totalrevenue from the Gaming Equipment division totaled $202.8 million, $223.3million and $170.0 million for the years ended June 30, 2005, 2004 and2003, respectively.

In fiscal year 2004 we completed two strategic acquisitionsin the Gaming Equipment area, Crown Gaming and SDG. See “—General-Acquisitions” above.

*Systems*

We design and sell casino enterprise systems. These systemsprovide casino operators integrated modules across multiple platforms. Ourprimary products include slot monitoring, casino management and cashlesssystems, all of which are designed to streamline casino business processesthrough the use of technology. Bally products operate on Windows, AS/400(iSeries), and UNIX platforms, allowing our customers to choose a technologysolution that meets their existing or future infrastructure requirements.

·       Slot Monitoring:   Ourslot monitoring products are comprised of hardware consisting of microcontroller based printed circuit boards installed within the slot machines aswell as card readers, displays and keypads which provide casinos the ability totrack player gaming activity through our casino management systems and monitoremployee access to slot machines, internally developed firmware that providesaccess to the slot machines’ and players’ activity data gathered by the microcontroller hardware; and internally developed slot monitoring businessapplications that manage certain slot machine activity, including securityevents, revenue, expenses and other financial reporting metrics.

·       Casino Management:   Ourcasino management systems are composed of various hardware and softwareproducts that provide casino operators patron loyalty solutions comparable tofrequent guest programs offered in other leisure industries; table gamesaccounting including the calculation of all revenue and expense related items;and cage and credit accountability for all extensions of credit and cage cashbalancing functions.

·       Cashless Systems:   Ourcashless systems provide a suite of products for casino operators to providebonusing and cashless gaming activity to casino patrons.

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We marketour system product solutions through Bally Gaming and Systems under the broadcategories of Bally CMS® (Casino Management Systems), Bally SMS® (SlotManagement Systems) and Bally TMS® (Table Management Systems). These categoriesinclude the product lines consisting of SDS, ACSC, CMP, CMS, MCC and MindPlay.

Our Systemsdivision generated revenues of approximately $97.0 million, $121.9 million and$80.7 million for the years ended June 30, 2005, 2004 and 2003, respectively.

Duringfiscal year 2004, we completed the acquisition of MindPlay. During fiscal year2003, we completed the acquisitions of MCC and HSC. See “—General-Acquisitions”above.

*Gaming Operations*

Our GamingOperations division offers three general types of games that are placed incasinos or other permissible gaming locations. The three general types of gamesare: those that are linked on a proprietary wide-area progressive system, thosethat operate on a proprietary near-area progressive system and those that arenon-linked niche games, which are games that generally offer more complexfeatures than traditional slot machines such as bonus rounds. These gamingmachines earn recurring revenues and cash flows for us rather than being soldon a one-time basis. Rather than being sold, such games are often moreprofitable for us as a result of the recurring nature of the revenue, but theydo require us to invest capital in the cost of manufacturing the gamingmachines, purchasing signs and seating, and at times acquiring certainintellectual property rights.

Wide-AreaProgressive Systems:  We receivedregulatory approval from the Nevada Gaming Control Board of our wide-areaprogressive jackpot system named “ThrillionsTM” in November 1998. TheThrillionsTM system was designed to allow patrons playing nickel, quarter anddollar machines to compete for the same progressive jackpot, with the odds ofwinning the jackpot being proportional to the amount wagered. We also operateseparate wide-area progressives in Nevada, Mississippi and Native Americanlands, as well as through a separate third-party trust arrangement in AtlanticCity, New Jersey. We utilize certain web-based technologies, such as virtualprivate networks to monitor wide-area progressives operating in non-domesticmarkets. We have a total of 1,660 units deployed on our wide-area progressivenetworks as of June 30, 2005.

Weconsolidate the revenues and expenses from certain wide-area progressive trustsin New Jersey due to the accounting rules for variable interest entities (“VIE’s”).

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Near-AreaProgressive Systems:   As an alternative to wide-area games, we also offercustomers the option of purchasing gaming devices and provide the customer withnear-area progressive technology. This approach permits customers to createtheir own branded progressive links for which we also collect a daily fee. Currently,certain Harrah’s Entertainment properties (formerly operated by Caesar’sEntertainment) utilize the ThrillionsTM system as a platform for their near-areaprogressive networks of linked games in the Nevada and Mississippi markets, asdoes Isle of Capri in Mississippi.

Non-LinkedGames:   We also offer a variety of non-linked daily fee games. These gameshave been marketed under such titles as Playboy (Playboy and Rabbit Head Designare marks of Playboy and used under license by Bally Gaming, Inc.), MonteCarloTM, Saturday Night LiveTM and others, all of which are approved in mostmajor gaming markets. We also earn recurring revenues from 798 devices deployedat horseracing facilities under agreements with the Delaware State LotteryCommission. As of June 30, 2005, we had a total installed base of dailyfee games totaling 8,804 units.

BallyGaming and Systems is also a provider of video lottery type terminal devices atrace tracks in the state of New York. Through the competitive bidding process,Bally Gaming and SDG were each awarded approximately 25% of the initialterminals installed. The financial model for this market requires themanufacturer to build, deploy and maintain the terminals in return for a shareof the net win generated by the terminals. The first games were installed atthe Saratoga race track in January 2004, and have since been followed byinstallations at four additional tracks, totaling 2,953 games for the Company. Additionalinstallations at Aqueduct and Yonkers may occur in the late spring or summer of2006.

Additionally,we have a base of centrally determined games operating primarily in Washington,Florida, Alabama, and Oklahoma. With the exception of Oklahoma, these games generallyhave been sold to the customer, and we retain a daily fee for the centraldetermination software license. Participation lease arrangements are still mostprevalent in Oklahoma. As of June 30, 2005, the installed base for thecentrally determined games totaled 18,885 units and full participation feeunits for these markets total 3,100 units.

Gaming Operations generated revenues of approximately$131.3 million, $79.1 million and $55.6 million for the years ended June 30,2005, 2004 and 2003, respectively.

*Product Development*

We believethat providing games and systems with high entertainment value and that arepreferred by the casino patron is key to meeting the demands of casinos. Webelieve that the use of technology is accelerating, and this trend could givenewer gaming machines and systems that incorporate such technology acompetitive advantage over older gaming machines and systems. Total spending onresearch and development by the Bally Gaming and Systems business unit wasapproximately $43.4 million, $36.6 million and $20.0 million during theyears ended June 30, 2005, 2004 and 2003, respectively. The increase inresearch and development spending for these years is a reflection of thecompetitive landscape and the need to continue to develop next generations ofgaming product and systems.

We developour products for both the domestic and international market. Our productdevelopment process for games includes both hardware and software. Major areasof hardware development include cabinet style, electronic capability, printercapability, and coin and currency handling. Hardware development efforts arefocused on player appeal, product reliability and ease of maintenance.Development cycles for hardware can range from a few days for simple enhancementsto more than a year for new electronics or new mechanical packages.

Thesoftware development process for new games, which includes graphicsdevelopment, is continuous and requires significant allocations of humanresources. Creativity in software development is an important element inproduct differentiation. Ideas for new models are generated internally and fromcustomers and other third parties, many of whom have entered into strategicrelationships with us.

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All new ormodified hardware and software are designed to satisfy all applicable testingstandards. Typically, new products require regulatory approval for most NorthAmerican jurisdictions. However, many jurisdictions outside North America donot require approval. For Nevada, new gaming machine platforms must be filedwith the state gaming laboratory which tests the products for at least two tothree months before a mandatory 30 to 60 day field test is conducted in acasino. The Nevada State Gaming Control Board and the Nevada Gaming Commission musteach approve new product platforms at their monthly, public meetings. Theprocess in Nevada for modifications of existing products or casino associatedequipment is similar to that for new platforms, except a field test is usuallynot required and the Nevada State Gaming Control Board staff can approve theproduct administratively. Each jurisdiction that requires regulatory approvalof new products has its own filing requirement and process. Once products areapproved by the gaming regulators, customers may require a 30-90-dayfield trial of the product in their casinos with the right to return theproduct at any time during the field trial period. We do not recognize revenueuntil the customer ends the field trial and accepts the gaming machines.

Productdevelopment for casino enterprise systems also includes hardware and software.The major areas of hardware development include micro controller circuit boarddesign and programming, as well as user interface devices such as card readers,keypads and displays. We have developed a modular and extendible hardware andsoftware architecture, which focuses development on achieving greaterfunctionality, product reliability, and ease of maintenance for the casinooperator, and greater ease of use for the player. In addition, the architectureallows customers to upgrade existing components or add new components withminimal impact. Development cycles for hardware can vary between a few monthsfor minor revisions to more than a year for major design changes or changesmade by various slot machine manufacturers with which our products must bephysically integrated. Software development results in periodic productreleases that include new features that extend or enhance the casino enterprisesystems; periodic maintenance releases that enable casino operators to correctproblems or improve the usability of the system; and documentation needed toinstall and use the system.

We have developed a series of cashless and bonusingproducts marketed under the Bally Power Series name. The Bally Powerproducts represent an integrated set of cashless and bonusing features toenhance the gaming experience of casino patrons. These products allow thetransfer of funds using bar coded coupons and/or encrypted PIN numbers todownload either restricted or unrestricted credits to the gaming device. Theseproducts allow casino operators to reduce cash and coin handling expenses,minimize overall operating expenditures and provide creative marketingincentives to their casino patrons. Our cashless products are in use in Nevada,Michigan, New Jersey, Mississippi, Louisiana, Iowa, Colorado, Missouri, Indianaand various Native American and international jurisdictions encompassing manystates and countries.

The software development process for our systems includesthe design and development of features to meet various regulatory standards. Theregulatory standards vary by jurisdiction forcing us to develop multiplesoftware settings based on the individual state and tribal gaming standards,and each jurisdiction can require the approval of any software modifications ornew products prior to deploying at casino locations. The approval processes canvary significantly by jurisdiction, based on the software changes developed,technology enhancements, and regulator resources.

*Product Markets*

We believethat the domestic installed base of traditional Class III gaming devicesnow exceeds 725,000 units. Nevada has the largest installed base, totalingapproximately 200,000 units as of June 30, 2005.

The gamingindustry continues to expand in international markets. Our primaryinternational markets are Europe, Canada, Latin America and, to a lesserextent, the Far East and the Caribbean. We conduct our 

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business inCanada through our staff based in the United States. We also distribute gamingmachines, manufactured by Bally Gaming, through direct and indirectsubsidiaries: Bally Gaming UK, from our sales office in Wigan, Englandprincipally to customers in Europe and Russia; Bally Gaming de Puerto Rico, Inc.,principally to customers in Puerto Rico; and Bally Gaming and Systems, SA, inMontevideo, Uruguay and its branches in Peru and Argentina, principally tocustomers in South America.

Presently, Class IIgaming devices are marketed to certain Native American gaming markets. Webelieve the domestic installed base of Class II gaming devices isapproximately 31,000 units.

The primary markets for casino enterprise systems are theUnited States and, to a lesser extent, Canada, Latin America, Europe and theCaribbean. Markets for systems within the United States include traditionalland-based casinos concentrated in Nevada, Atlantic City, New Jersey,Native American casinos and riverboats and dockside casinos. Our domesticmarket for casino enterprise systems is new casinos and existing or newcustomers who either acquire casinos with a competitor’s system which wereplace with our system, or expand their casino floors or upgrade theirhardware or software to a new product release. Unlike the United States market,where most jurisdictions require the implementation of systems, fewinternational markets have done so. Management believes, however, that theinternational market for such systems is increasing, and if that expansionoccurs, our Systems’ sales to such markets are likely to increase accordingly.

*Sales and Marketing*

BallyGaming and Systems uses a direct sales force and, to a lesser extent, anindependent distributor network to distribute our products. Bally Gaming andSystems’ North America sales staff consists of approximately 54 people inoffices in Nevada, New Jersey, Mississippi, Illinois, California and Florida.

BallyGaming and Systems’ direct sales force generated approximately, 69%, 75% and 75%of new unit sales for the years ended June 30, 2005, 2004 and 2003,respectively. Bally Gaming and Systems uses distributors for sales to certainjurisdictions. The agreements with distributors generally specify minimumpurchases and generally provide that we may terminate the agreement if certainperformance standards are not met. These independent distributors generatedapproximately, 31%, 25% and 25% of new gaming machine unit sales for the yearsended June 30, 2005, 2004, and 2003, respectively.

As of June 30,2005, we had approximately 276,000 game monitoring units installed in 225locations, of which approximately 92% are in the United States. Substantiallyall of System’s revenues are generated by our direct sales force.

We sell gaming machines and our computerizedmonitoring systems either through normal credit terms of 120 days or less, ormay grant credit terms that may extend up to five years. International salesare either consummated on a cash basis or financed over no more than two years,depending on credit quality.

For casinoenterprise system sales we generally offer limited financing terms, normallyless than one-year, for sales of new installations. Most sales, however, areinvoiced on a net 30-day basis.

For casino enterprise system sales, we offer our customersthe option of signing separate hardware and software maintenance agreements atthe time of sale. These agreements are for one-year terms and automaticallyrenew unless otherwise canceled in writing by either party. After an initialwarranty period, typically 90 days, the customer is invoiced a monthly hardwareand software maintenance fee that provides for, among other things, repair orreplacement of malfunctioning hardware and software, software version upgrades,and on-call support for software.

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*Customers*

The demandfor slot machines and video gaming machines varies depending on the level ofnew construction and renovation of casinos and other facilities, thecorresponding need for new and replacement equipment and product innovation. Thesemachines generally have an average replacement cycle of three to seven years.For the year ended June 30, 2005, our ten largest customers, includingcorporate customers with multiple casino properties, accounted forapproximately 35% of the Bally Gaming and Systems’ new unit sales, with the largestsingle customer accounting for 10% of new unit sales.

In additionwe sell game cabinets to original equipment manufactures (“OEMs”) that in turnprovide games primarily to the Class II non-traditional gaming markets.Typically, the OEM also purchases the rights to certain Bally themes, whichentitles it to certain Bally proprietary game themes and redesigns these gamethemes to be compatible with its operating system configurations. Sales of suchcabinets to OEMs totaled approximately $16.7 million, $9.3 million, and $4.7million for years ended June 30, 2005, 2004 and 2003, respectively, andsales of game themes to the OEMs totaled approximately $3.3 million, $3.1 millionand $1.4 million for the years ended June 30, 2005, 2004 and 2003,respectively.

Duringfiscal year 2005, the Company also licensed certain technologies for “redemption”markets to Spectre Gaming. The Company expects to receive fees for thelicensing of certain technologies, as well as recurring fees from ongoingroyalty fees beginning in fiscal year 2006.

The demandfor casino enterprise systems is driven by regulatory requirements in eachapplicable jurisdiction and by casino operators’ competitive need to properlytrack machine and player activity and, to establish and compile individualmachine and player profitability and other demographic information. Thesefeatures enable casinos to develop or enhance marketing strategies. Revenuesfor casino enterprise systems are derived from selling products to new orexisting customers. For the year ended June 30, 2005, the ten largestcasino enterprise system customers, which include certain multi-sitecasino operators that have corporate agreements, accounted for approximately50.9% of game monitoring unit sales revenues, with the largest single customeraccounting for 9.7% of game monitoring unit sales revenues.

Future growth of Bally Gaming and Systems will be based oncontinued penetration in the international markets, further expansion in theestablished and emerging markets, as well as continued development efforts toprovide customers with new and innovative hardware and software productofferings.

*Assembly Operations*

BallyGaming and Systems’ primary facility, located in Las Vegas, was completed in1990. The facility, which we own, was constructed specifically for the design,assembly and distribution of gaming equipment. The 150,000-square footfacility was designed to meet fluctuating product design demands and volumerequirements. Management believes the facility enables Bally Gaming and Systemsto increase production without significant capital expenditures.

Management believes our assembly operations allow for rapidgeneration of different models to fill orders quickly and efficiently. Anothermajor advantage of the existing plant operation is that a number of machinefeatures can be altered to produce a “customized” product for each customer,including the size, type and color of glass, sound and payoff patterns. BallyGaming and Systems keeps an inventory of parts that allow machines to bealtered quickly to conform to a particular customer’s design and/or featurerequest. Bally Gaming and Systems typically manufactures products forindividual customer orders. Bally Gaming and Systems designs all of the majorassemblies that are incorporated into the final machine configuration.

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*Competition*

There are a number of domestic and internationalbusinesses who compete in the various geographic markets where we sell ourproducts. Our ability to compete effectively is based on a number of factorsincluding, but not limited to, our product quality, product depth, pricing,financing terms, regulatory approvals, the successful development andprotection of intellectual property as well as the success of our distribution,sales and service levels.

The North American market is dominated by a singlecompetitor, International Game Technology (“IGT”). IGT has substantially morefinancial resources, products and intellectual property than nearly all of itscompetitors and many of our customers derive a significant portion of theirgaming revenues using IGT products. Some of our other competitors currentlyinclude GTech, Aristocrat, WMS, Atronic and Konami.

These competitors also compete in the internationalmarkets we serve, along with well established foreign companies such asRecreativos Franco, Cirsa/Unidesa, Ainsworth, Aruze and Novomatic.

We believe the future success of our operations dependon our ability to bring more innovative and higher quality products to themarket in a more cost effective and timely manner than our competitors

The competition in themarket for management systems is also significant. Product feature andfunctionality, accuracy, reliability, and pricing are all key factors indetermining a provider’s success in selling its system. The main competition incasino management systems currently consists of IGT, Aristocrat, MIS Grips andto a lesser extent, Konami and Progressive Gaming. Competition is keen in thismarket due to the number of providers and the limited number of casinos andjurisdictions in which they operate. Management believes the future success ofour operations will be determined by our ability to bring new and innovativeproducts to the market while maintaining our base of loyal existing customers.

**Casino Operation**

*Rainbow Casino*

Our RainbowHotel Casino, located in Vicksburg, Mississippi, began operations in July 1994.The facility includes a 33,000-square foot casino, with 890 gamingdevices and 12****table games as wellas a 310-seat buffet-style restaurant and 20,000-square footconference center. The facility also includes the 89-room Rainbow Hotel,which is owned and operated by a third party. Rainbow Casino is marketed as a “locals”casino and draws customers principally from within a 75-mile radius ofVicksburg. The Vicksburg casino market generated approximately $252 million ingaming revenue in the twelve months ended June 30, 2005, representing agrowth rate of approximately 4%.

We are thegeneral partners of Rainbow Casino Vicksburg Partnership, L.P. (“RCVP”), thelimited partnership that operates the Rainbow Casino. The limited partner,Rainbow Corporation, an unaffiliated third party, is entitled to receive 10% ofthe net available cash flows after debt service and other items, as defined inthe limited partnership agreement, which amount increases to 20% of such amountfor the proportional revenues above $35.0 million each year through December 31,2010. The Company holds the remaining economic interest in the partnership.

The Rainbow Casino was not damaged by Hurricane Katrina,and the property reopened after power was restored on the fourth day after thehurricane. Play levels have subsequently returned to levels at or above thoseof the pre-hurricane period.

*Sales and Marketing*

The Rainbow Casino targets the mid-level gaming customersin the Vicksburg market. We promote the casino primarily through direct mailand special promotional events.

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*Competition*

The operation of casinos is a highly competitive businessand gaming of all types is available throughout Mississippi in numerouslocations. The principal competitive factors in the industry include thequality and location of the facility, the nature and quality of the amenitiesand customer services offered, and the implementation and success of marketingprograms. The Rainbow Casino faces substantial direct competition for gamingcustomers from the three other gaming facilities in Vicksburg, as well as othergaming operations throughout Mississippi. One additional gaming site inVicksburg is currently being pursued by Lakes Gaming, however the timing ofopening and potential impact on the market is not yet known.

**Discontinued Operations**

*Route Operations*

NevadaOperations:   In June 2004, we sold our Nevada route operations toCentury Gaming, Inc., a privately held route operator based in Montana. Wereceived approximately $100 million in cash and the assumption by CenturyGaming of approximately $5 million in debt. We reported a gain on the salebefore income taxes of $15.3 million, or $9.1 million after tax. During fiscalyear 2005, we incurred a litigation charge and we settled certain indemnityclaims raised by Century Gaming, and recorded a reduction in the gain on sale of$9.8 million, or $6.3 million net of tax.

Louisiana Operations:   In October 2004 we soldour interest in our Louisiana route operations to Churchill Downs Incorporatedand received proceeds of approximately $2 million and realized a gain of $1.3million or $0.8 million, net of tax.

*Rail City Casino*

In May 2004, the Company sold its Rail City Casino, a20,000 square-foot facility located between the cities of Reno and Sparksin northern Nevada, to the Sands Regent. We received aggregate consideration of$37.9 million. We reported a gain on the sale before income taxes of $23.1million, or $14.3 million after tax.

*Wall Machines and Amusement Games*

In July 2003,we sold our Bally Wulff wall machine and amusement game business unit to athird party equity investor for $16.5 million in cash, and recorded a loss onsale totaling $25.4 million. During fiscal year 2004 and 2005 the Companynegotiated with the German tax authorities to resolve several tax relatedmatters. See Note 5 to our consolidated financial statements, DiscontinuedOperations, included in this Annual Report on Form 10-K/A.

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**Patents, Copyrights and Trade Secrets**

We rely on a combination of patents, copyrights, tradesecrets, trademarks and proprietary information to maintain and enhance ourcompetitive position. We have been a long standing participant in thedevelopment of intellectual property in our industry. We have been grantedpatents have patent applications pending in United States as well as manyforeign countries. The expiration dates of these patents vary and are based ontheir filing and issuances dates. We intend to continue to actively file forpatent protection, where reasonable, within and outside the United States. Wealso seek protection for a large number of our products by filing forcopyrights and trademarks in the United States and various foreign countries. Underpermission or contract with third parties, we also sell products covered byindependently filed copyrights and trademarks. Typically, these contractsrequire us to pay royalties to the licensing party. Royalty expense is includedin cost of gaming and systems in our consolidated financial statements in thisreport.

We cannot provideassurance that other parties will not infringe our patents or use products thatviolate our copyright and trademark protections. We also cannot provideassurance that other parties will not claim that we violate their intellectualproperty rights. The research, legal, and administrative costs associated withcreating, securing, enforcing and defending our intellectual property rightscan be material. Moreover, the likelihood of success in such matters isgenerally not predictable and is subject to litigation risks.

**Employees and Labor Relations**

As of June 30, 2005, we and our subsidiaries employedapproximately 1,640 individuals worldwide. These employees are not covered bycollective bargaining agreements. We believe we have satisfactory relationshipswith our employees.

**Gaming Regulationsand Licensing**

*General.**  *The manufacturing and distribution of gamingmachines and the operation of gaming facilities are subject to extensivefederal, state, local, and foreign regulations. Although the laws andregulations of the various jurisdictions in which we operate and may expand ourgaming operations vary in their technical requirements and are subject toamendment from time to time, virtually all of these jurisdictions requirelicenses, permits, documentation of qualification, including evidence offinancial stability, and other forms of approval for companies engaged in themanufacture and distribution of gaming machines and the operation of gamingfacilities, as well as the individual licensing of officers, directors, majorstockholders and key personnel of such companies.

Any person who acquires a controlling interest in theCompany would have to meet the requirements of all governmental bodies thatregulate our gaming businesses. A change in the make-up of our Board ofDirectors and management may require the various gaming authorities to examinethe qualifications of the new board and management.

*Nevada.**  *The ownership and operation of casino gamingfacilities in Nevada are subject to (i) the Nevada Gaming Control Act andthe regulations promulgated thereunder (the “Nevada Act”); and (ii) variouslocal ordinances and regulations. Our gaming, manufacturing, and distributingoperations (collectively referred to as “gaming machine operations”) aresubject to the licensing and regulatory control of the Nevada State GamingControl Board (the “Nevada Board”), the Nevada Gaming Commission (the “NevadaCommission”), the Clark County Liquor and Gaming Licensing Board (the “ClarkCounty Board”), and various other county and city regulatory agencies, all ofwhich are collectively referred to as the “Nevada Gaming Authorities.”

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The laws, regulations, and supervisory procedures ofthe Nevada Gaming Authorities are based on declarations of public policyconcerned with, among other things: (i) the prevention of unsavory andunsuitable persons from having any involvement with gaming; (ii) thestrict regulation of all persons, locations, practices, associations andactivities related to the operation of licensed gaming establishments and themanufacture and distribution of gaming machines, cashless wagering systems andassociated equipment; (iii) the establishment and maintenance ofresponsible accounting practices and procedures; (iv) the maintenance ofeffective control over the financial practices of licensees, including theestablishment of minimum procedures for internal fiscal affairs and thesafeguarding of assets and revenues, providing reliable record-keeping andrequiring the filing of periodic reports with the Nevada Gaming Authorities; (v) theprevention of cheating and fraudulent practices; and (vi) providing asource of state and local revenues through taxation and licensing fees. Achange in such laws, regulations and procedures, or non-compliance with some,could have an adverse effect on our gaming-related operations.

Alliance is registered with the Nevada Commission as apublicly traded corporation (a “Registered Corporation”). Our direct andindirect subsidiaries that manufacture or distribute gaming devices or conductgaming operations at various locations (collectively, the “Nevada Subsidiaries”)are required to be licensed by the Nevada Gaming Authorities. The licenses heldby the Nevada Subsidiaries require periodic payments of fees and taxes and arenot transferable. We, through our registered intermediary companies(individually an “Intermediary Company” and collectively the “IntermediaryCompanies”), have been found suitable to own the stock of the NevadaSubsidiaries, each of which is a corporate licensee (individually a “CorporateLicensee” and collectively the “Corporate Licensees”) under the terms of theNevada Act. As a Registered Corporation, we are required to periodically submitdetailed financial and operating reports to the Nevada Gaming Authorities andfurnish any other information the Nevada Gaming Authorities may require. Noperson may become a stockholder of or receive any percentage of the profitsfrom the Corporate Licensees without first obtaining licenses and approvalsfrom the Nevada Gaming Authorities. The Company, the Intermediary Companies,and the Corporate Licensees have obtained from the Nevada Gaming Authoritiesthe various registrations, findings of suitability, approvals, permits, andlicenses required to engage in gaming activities, gaming machine operations,and in the manufacture and distribution of gaming devices for use or play inNevada or for distribution outside of Nevada.

All gaming machines and cashless wagering systemsmanufactured, sold, or otherwise distributed for use or play in Nevada or fordistribution outside of Nevada must be manufactured by licensed manufacturersand distributed or sold by licensed distributors. All gaming machinesmanufactured for use or play in Nevada must be approved by the NevadaCommission before they are distributed or exposed for play. The approvalprocess for gaming machines and cashless wagering systems includes rigoroustesting by the Nevada Board, a field trial, and a determination as to whetherthe gaming machines or cashless wagering systems meet strict technicalstandards set forth in the regulations of the Nevada Commission. Associatedequipment (as defined in the Nevada Act) must be administratively approved bythe chairman of the Nevada Board before it is distributed in Nevada.

The Nevada Gaming Authorities may investigate anyindividual who has a material relationship or material involvement with us, theIntermediary Companies or the Corporate Licensees to determine whether thatindividual is suitable or should be licensed as a business associate of agaming licensee. Officers, directors, and key employees of the Company and theIntermediary Companies who are actively and directly involved in the licensedactivities of the Corporate Licensees are or may be required to be licensed orfound suitable by the Nevada Gaming Authorities. A finding of suitability iscomparable to licensing, and both require submission of detailed personal andfinancial information followed by a thorough investigation. The applicant forlicensing or a finding of suitability must pay all the costs of theinvestigation. Changes in licensed positions must be reported to the NevadaGaming Authorities, and in addition to their authority to deny an applicationfor a finding of suitability or licensing, the Nevada 

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Gaming Authorities have jurisdiction to disapprove achange in a corporate position. The Nevada Gaming Authorities may deny anapplication for licensing or finding of unsuitability for any cause they deemreasonable.

If the Nevada Gaming Authorities were to find anofficer, director, or key employee unsuitable for licensing or unsuitable tocontinue having a relationship with the Intermediary Companies, the CorporateLicensees, or us, the companies involved would have to sever all relationshipswith that person. In addition, the Nevada Commission may require theIntermediary Companies, the Corporate Licensees or us to terminate theemployment of any person who refuses to file appropriate applications. Licensingand suitability determinations are not subject to judicial review in Nevada.

We and the Corporate Licensees are required to submitdetailed financial and operating reports to the Nevada Commission. Substantiallyall material loans, leases, sales of securities, and similar financingtransactions by the Corporate Licensees must be reported to or approved by theNevada Commission.

If it were determined that a Corporate Licensee hadviolated the Nevada Act, the licenses it holds could be limited, conditioned,suspended, or revoked, subject to compliance with certain statutory andregulatory procedures. In addition, the Company, the Intermediary Companies,the Corporate Licensees, and the persons involved could be subject tosubstantial fines for each separate violation of the Nevada Act at thediscretion of the Nevada Commission. Limitation, conditioning, or suspension ofthe gaming licenses of the Corporate Licensees could, and revocation of anygaming license would, materially adversely affect the gaming-relatedoperations of the Company.

The Gaming Authorities may, at their discretion,require the holder of any of our securities to file applications, beinvestigated, and be found suitable to own our securities if the NevadaCommission has reason to believe that the holder’s ownership would beinconsistent with the declared policies of Nevada. The applicant must pay allcosts of investigation incurred by the Nevada Gaming Authorities in conductingany such investigation.

The Nevada Act requires any person who acquires morethan 5% of any class of a Registered Corporation’s voting securities to reportthe acquisition to the Nevada Commission. The Nevada Act requires thatbeneficial owners of more than 10% of any class of a Registered Corporation’svoting securities apply to the Nevada Commission for a finding of suitabilitywithin thirty days after the chairman of the Nevada Board mails writtennotice requiring such filing. Under certain circumstances, an “institutionalinvestor,” as defined in the Nevada Act, that acquires more than 10%, but notmore than 15% (19% if such additional ownership results from a stock repurchaseprogram conducted by the Registered Corporation, subject to certainconditions), of a class of a Registered Corporation’s voting securities mayapply to the Nevada Commission for a waiver of finding of suitability if theinstitutional investor holds the securities for investment purposes only. Aninstitutional investor shall not be deemed to hold voting securities forinvestment purposes unless the voting securities were acquired and are held inthe ordinary course of business as an institutional investor and not for thepurpose of causing, directly or indirectly, the election of a majority of themembers of the Board of Directors of the Registered Corporation, any change inthe corporate charter, bylaws, management, policies, or operations of theRegistered Corporation or any of its gaming affiliates, or any other action theNevada Commission finds to be inconsistent with holding the RegisteredCorporation’s voting securities for investment purposes only. Activities thatare not deemed to be inconsistent with holding voting securities for investmentpurposes include: (i) voting on all matters voted on by stockholders; (ii) makingfinancial and other inquiries of management of the type normally made bysecurities analysts for informational purposes and not to cause a change in theRegistered Corporation’s management, policies, or operations; and (iii) suchother activities as the Nevada Commission may determine to be consistent withinvestment-only intent. If the beneficial holder of voting securities who mustbe found suitable is a corporation, partnership, or trust, it 

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must submit detailed business and financialinformation including a list of beneficial owners. The applicant is required topay all costs of investigation.

Any person who fails or refuses to apply for a findingof suitability or a license within thirty days after being ordered to doso by the Nevada Commission or the chairman of the Nevada Board may be foundunsuitable. The same restrictions apply to a record owner if the record owner,after request, fails to identify the beneficial owner. Any stockholder foundunsuitable and who holds, directly or indirectly, any beneficial ownership ofthe common stock beyond such period of time as may be prescribed by the NevadaCommission may be guilty of a criminal offense. We are subject to disciplinaryaction if, after we receive notice that a person is unsuitable to be astockholder or to have any other relationship with the Company, theIntermediary Companies, or the Corporate Licensees, we (i) pay that personany dividend or interest upon voting securities of the Company; (ii) allowthat person to exercise, directly or indirectly, any voting right conferredthrough securities held by that person; (iii) pay remuneration in any formto that person for services rendered or otherwise; or (iv) fail to pursueall lawful efforts to require such unsuitable person to relinquish his or hervoting securities, including, if necessary, the immediate purchase of saidvoting securities for cash at fair market value. Additionally, the Clark CountyBoard has taken the position that it has the authority to approve all personsowning or controlling the stock of any corporation controlling a gaminglicense.

The Nevada Commission may in its discretion requirethe holder of any debt securities of a Registered Corporation to fileapplications, be investigated, and be found suitable to own the debt securityif the Nevada Commission has reason to believe that such ownership would beinconsistent with the declared policies of Nevada. If the Nevada Commissiondetermines that a person is unsuitable to own such security, then pursuant tothe Nevada Act, the Registered Corporation can be sanctioned, including theloss of its approvals if, without the prior approval of the Nevada Commission,it (i) pays the unsuitable person any dividend, interest or anydistribution whatsoever; (ii) recognizes any voting right by suchunsuitable person in connection with such securities; (iii) pays theunsuitable person remuneration in any form; or (iv) makes any payment tothe unsuitable person by way of principal, redemption, conversion, exchange,liquidation, or similar transaction.

We are required to maintain in Nevada a current stockledger, which may be examined by the Nevada Gaming Authorities at any time. Ifany securities are held in trust by an agent or by a nominee, the record holdermay be required to disclose the identity of the beneficial owner to the NevadaGaming Authorities. A failure to make such disclosure may be grounds forfinding the record holder unsuitable. We are also required to render maximumassistance in determining the identity of the beneficial owner. The NevadaCommission has the power to impose a requirement that a Registered Corporation’sstock certificates bear a legend indicating that the securities are subject tothe Nevada Act. The Nevada Commission previously imposed this requirement onthe Company but removed it in June 2004.

We may not make a public offering of our securitieswithout the prior approval of the Nevada Commission if the securities orproceeds there from are intended to be used to construct, acquire, or financegaming facilities in Nevada or to retire or extend obligations incurred forsuch purposes. In addition, (i) a Corporate Licensee may not guarantee asecurity issued by a Registered Corporation pursuant to a public offeringwithout the prior approval of the Nevada Commission; and (ii) restrictionson the transfer of an equity security issued by a Corporate Licensee orIntermediary Company and agreements not to encumber such securities areineffective without the prior approval of the Nevada Commission.

Changes in control of the Company through merger,consolidation, stock or asset acquisitions, management or consultingagreements, or any act or conduct whereby a person or entity acquires controlmay not occur without the prior approval of the Nevada Commission. Entitiesseeking to acquire control of a Registered Corporation must satisfy the NevadaBoard and Nevada Commission on a variety of stringent standards before assumingcontrol of the Registered Corporation. The Nevada Commission may also 

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require controlling stockholders, officers, directors,and other persons having a material relationship or involvement with the entityproposing to acquire control to be investigated and licensed as a part of theapproval process relating to the transaction.

The Nevada Legislature has declared that somecorporate acquisitions opposed by management, repurchases of voting securities,and corporate defense tactics affecting Nevada corporate gaming licensees andRegistered Corporations that are affiliated with those operations may beinjurious to stable and productive corporate gaming. The Nevada Commission hasestablished a regulatory scheme to ameliorate the potentially adverse affectsof these business practices on Nevada’s gaming industry and to promote Nevada’spolicy to: (i) assure the financial stability of corporate gaminglicensees and their affiliates; (ii) preserve the beneficial aspects ofconducting business in the corporate form; and (iii) promote a neutralenvironment for orderly governance of corporate affairs. Approvals are, incertain circumstances, required from the Nevada Commission before a RegisteredCorporation can make exceptional repurchases of voting securities above thecurrent market price (commonly called “greenmail”) and before a corporateacquisition opposed by management can be consummated. The Nevada Act alsorequires prior approval of a plan of recapitalization proposed by theRegistered Corporation’s board of directors in response to a tender offer madedirectly to the Registered Corporation’s stockholders for the purpose ofacquiring control of the Registered Corporation.

License fees and taxes, computed in various waysdepending on the type of gaming or activity involved, are payable to the Stateof Nevada and to the counties and cities in which the licensees conduct theiroperations. Depending upon the particular fee or tax involved, these fees andtaxes are payable, either monthly, quarterly, or annually and are based oneither (i) a percentage of the gross revenues received; (ii) thenumber of gaming devices operated; or (iii) the number of games operated.An excise tax is also paid by the Corporate Licensees engaged in casinooperations on charges for admission to any facility where certain forms of liveentertainment are provided. The Corporate Licensees that hold gaming deviceroute operator licenses or manufacturer or distributor licenses also paycertain fees to Nevada.

Any person who is licensed, required to be licensed,registered, required to be registered, or who is under common control with suchpersons (collectively, “Licensees”), and who proposes to become involved in agaming venture outside of Nevada, is required to deposit with the Nevada Boardand thereafter maintain a $25,000 revolving fund to pay the expenses of investigationby the Nevada Board of the Licensee’s participation in such foreign gaming. Therevolving fund is subject to increase or decrease in the discretion of theNevada Commission. Thereafter, Licensees are required to comply with certainreporting requirements imposed by the Nevada Act. Licensees are also subject todisciplinary action by the Nevada Commission if they knowingly violate any lawsof the foreign jurisdiction pertaining to the foreign gaming operation, fail toconduct the foreign gaming operation in accordance with the standards of honestyand integrity required of Nevada gaming operations, engage in activities thatare harmful to the State of Nevada or its ability to collect gaming taxes andfees, or employ a person in the foreign operations who has been denied alicense or finding of suitability in Nevada on the ground of personalunsuitability.

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*Mississippi.**  *The manufacturing and distribution of gaming andassociated equipment and the ownership and operation of casino facilities inMississippi are subject to extensive state and local regulation, but primarilythe licensing and regulatory control of the Mississippi Gaming Commission (the “MississippiCommission”).

The Mississippi Gaming Control Act (the “MississippiAct”), which legalized dockside casino gaming in Mississippi, is similar to theNevada Gaming Control Act. The Mississippi Commission has adopted regulationsthat are also similar in many respects to the Nevada gaming regulations.

The laws, regulations and supervisory procedures ofMississippi and the Mississippi Commission are based on declarations of publicpolicy that are concerned with, among other things: (i) the prevention ofunsavory or unsuitable persons from having direct or indirect involvement withgaming at any time or in any capacity; (ii) the establishment andmaintenance of responsible accounting practices and procedures; (iii) themaintenance of effective controls over the financial practices of licensees,including the establishment of minimum procedures for internal fiscal affairsand safeguarding of assets and revenues, providing for reliable record keepingand requiring the filing of periodic reports with the Mississippi Commission; (iv) theprevention of cheating and fraudulent practices; (v) providing a source ofstate and local revenues through taxation and licensing fees; and (vi) ensuringthat gaming licensees, to the extent practicable, employ Mississippi residents.The regulations are subject to amendment and interpretation by the MississippiCommission. We believe our compliance with the licensing procedures andregulatory requirements of the Mississippi Commission will not affect themarketability of our securities. Changes in Mississippi law or regulations maylimit or otherwise materially affect the types of gaming that may be conducted,and such changes, if enacted, could have an adverse effect on us and our Mississippigaming operations.

The Mississippi Act provides for legalized docksidegaming in each of the fourteen counties that border the Gulf Coast or theMississippi River, but only if the voters in the county have not voted toprohibit gaming in that county. Currently, dockside gaming is permissible innine of the fourteen eligible counties in the state, and gaming operations havecommenced in seven counties. Under Mississippi law, gaming vessels must belocated on the Mississippi River or on navigable waters in eligible countiesalong the Mississippi River, or in the waters of the State of Mississippi lyingsouth of the state in eligible counties along the Mississippi Gulf Coast. TheMississippi Act permits unlimited stakes gaming on permanently moored vesselson a 24-hour basis and does not restrict the percentage of space that maybe utilized for gaming.

The Mississippi Act permits substantially alltraditional casino games and gaming devices. The Company, RCVP, Bally Gaming, Inc.(“BGI”), and their affiliates are subject to the licensing and regulatorycontrol of the Mississippi Commission. We are registered under the MississippiAct as a publicly traded corporation (a “Registered Corporation”) and holdingcompany of RCVP and BGI. As a Registered Corporation, we are requiredperiodically to submit detailed financial and operating reports to theMississippi Commission and furnish any other information the MississippiCommission may require. If we are unable to continue to satisfy theregistration requirements of the Mississippi Act, we and our affiliates cannotown or operate gaming facilities or continue to act as a manufacturer anddistributor in Mississippi. No person may become a stockholder of, or receiveany percentage of profits from, a licensed subsidiary of a RegisteredCorporation or a holding company without first obtaining licenses and approvalsfrom the Mississippi Commission. We and our affiliates have obtained thenecessary licenses and approvals from the Mississippi Commission. RCVP must maintaina gaming license from the Mississippi Commission to operate a casino inMississippi and BGI must maintain a manufacturer and distributor license fromthe Mississippi Commission to manufacture and distribute gaming products and awide-area progressive operator license to operate its progressive slot system.Such licenses are issued by the Mississippi Commission subject to certainconditions, including continued compliance with all applicable state laws andregulations.

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There are no limitations on the number of licensesthat may be issued in Mississippi. Gaming and manufacturer and distributorlicenses are not transferable, are issued for a three-year period (andmay be renewed for two additional three-year periods) and must be renewed orcontinued thereafter. In June 2003, RCVP was granted a three-year renewalof its gaming license by the Mississippi Commission, and BGI was grantedthree-year renewals of its manufacturer and distributor license and itswide-area progressive operator license.

Certain of our officers and employees and theofficers, directors, and certain key employees of our licensed subsidiariesmust be found suitable or be licensed by the Mississippi Commission. We believewe have obtained, applied for, or are in the process of applying for allnecessary findings of suitability with respect to such persons affiliated withus, RCVP or BGI, although the Mississippi Commission, in its discretion, mayrequire additional persons to file applications for findings of suitability. Inaddition, any person having a material relationship or involvement with us maybe required to be found suitable, in which case those persons must pay thecosts and fees associated with such investigation. The Mississippi Commissionmay deny an application for a finding of suitability for any cause it deemsreasonable. Changes in certain licensed positions must be reported to theMississippi Commission. In addition to its authority to deny an application forfindings of suitability, the Mississippi Commission can disapprove a change ina licensed position. The Mississippi Commission has the power to require theCompany and its registered or licensed subsidiaries to suspend or dismissofficers, directors and other key employees or sever relationships with otherpersons who refuse to file appropriate applications or whom the authoritiesfind unsuitable to act in such capacities.

Determinations of suitability or questions pertainingto licensing are not subject to judicial review in Mississippi. At any time,the Mississippi Commission has the power to investigate and require the findingof suitability of any record or beneficial stockholder of the Company. TheMississippi Act requires any person who acquires more than 5% of any class ofvoting securities of a Registered Corporation, as reported to the SEC, toreport the acquisition to the Mississippi Commission, and such person may berequired to be found suitable. Also, any person who becomes a beneficial ownerof more than 10% of any class of voting securities of a Registered Corporation,as reported to the SEC, must apply for a finding of suitability by theMississippi Commission. The Mississippi Commission generally has exercised itsdiscretion to require a finding of suitability of any beneficial owner of morethan 5% of any class of voting securities of a Registered Corporation. If astockholder who must be found suitable is a corporation, partnership, or trust,it must submit detailed business and financial information including a list ofbeneficial owners. Any record or beneficial stockholder required to apply for afinding of suitability must pay all investigative fees and costs of theMississippi Commission in connection with the investigation.

The Mississippi Commission has adopted a regulationwhich provides that under certain circumstances, an “institutional investor,”as defined in the regulation, which acquires more than 10%, but not more than15%, of a Registered Corporation’s voting securities may apply to theMississippi Commission for a waiver of such finding of suitability if suchinstitutional investor holds the voting securities for investment purposes only.An institutional investor shall not be deemed to hold voting securities forinvestment purposes only unless the voting securities were acquired and areheld in the ordinary course of business as an institutional investor and notfor the purpose of causing, directly or indirectly, the election of a majorityof the members of the board of directors of the Registered Corporation, anychange in the Registered Corporation’s corporate charter, bylaws, management,policies or operations of the Registered Corporation or any of its gamingaffiliates, or any other action which the Mississippi Commission finds to beinconsistent with holding the Registered Corporation’s voting securities forinvestment purposes only. Activities which are not deemed to be inconsistentwith holding voting securities for investment purposes include:  (i) voting on all matters voted on bythe stockholders; (ii) making financial and other inquiries of managementof the type normally made by securities analysts for informational purposes andnot to cause 

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a change in management, policies or operations; and (iii) suchother activities as the Mississippi Commission may determine to be consistentwith such investment intent.

Any person who fails or refuses to apply for a findingof suitability or a license within 30 days after being ordered to do so by theMississippi Commission may be found unsuitable. The same restrictions apply toa record owner if the record owner, after request, fails to identify thebeneficial owner. Any person found unsuitable and who holds, directly orindirectly, any beneficial ownership of such securities beyond such time as theMississippi Commission prescribes may be guilty of a misdemeanor. We may besubject to disciplinary action if, after receiving notice that a person isunsuitable to be a stockholder or to have any other relationship with us or ourMississippi gaming subsidiaries, the company involved: (i) pays the unsuitableperson any dividend or other distribution on that person’s voting securities; (ii) recognizesthe exercise, directly or indirectly, of any voting rights conferred bysecurities held by the unsuitable person; (iii) pays the unsuitable personany remuneration in any form for services rendered or otherwise, except incertain limited and specific circumstances; or (iv) fails to pursue alllawful efforts to require the unsuitable person to divest himself of thesecurities, including, if necessary, the immediate purchase of the securitiesfor cash at a fair market value.

We may be required to disclose to the MississippiCommission on request the identities of the holders of any of our debt or othersecurities. In addition, under the Mississippi Act, the Mississippi Commissionmay in its discretion require the holders of any debt security of a RegisteredCorporation to file an application, be investigated, and be found suitableto own the debt security if the Mississippi Commission has reason to believethat the ownership would be inconsistent with the declared policies of thestate of Mississippi. Although the Mississippi Commission generally does notrequire the individual holders of obligations such as notes to be investigatedand found suitable, the Mississippi Commission retains the discretion to do sofor any reason, including but not limited to a default or where the holder ofthe debt instrument exercises a material influence over the gaming operationsof the entity in question. Any holder of debt securities required to apply fora finding of suitability must pay all investigative fees and costs of theMississippi Commission in connection with the investigation. If the MississippiCommission determines that a person is unsuitable to own a debt security, thenthe Registered Corporation may be sanctioned, including the loss of itsapprovals, if without the prior approval of the Mississippi Commission it: (i) paysto the unsuitable person any dividend, interest, or any distributionwhatsoever; (ii) recognizes any voting right by the unsuitable person inconnection with those securities; (iii) pays the unsuitable personremuneration in any form; or (iv) makes any payment to the unsuitableperson by way of principal, redemption, conversion, exchange, liquidation, orsimilar transaction.

RCVP and BGI must maintain in Mississippi a currentledger with respect to the ownership of their equity securities, and we mustmaintain a current list of stockholders in the principal office of RCVP, whichlist must reflect the record ownership of each outstanding share of any classof our equity securities. The ledger and stockholder lists must be availablefor inspection by the Mississippi Commission at any time. If any securities areheld in trust by an agent or by a nominee, the record holder may be required todisclose the identity of the beneficial owner to the Mississippi Commission. Afailure to make such disclosure may be grounds for finding the record holderunsuitable. We must also render maximum assistance in determining the identityof the beneficial owner.

The Mississippi Act requires that the certificatesrepresenting securities of a Registered Corporation bear a legend indicatingthat the securities are subject to the Mississippi Act and the regulations ofthe Mississippi Commission. We have received from the Mississippi Commission awaiver of this legend requirement. The Mississippi Commission has the power toimpose additional restrictions on the holders of our securities at any time.

Substantially all material loans, leases, sales ofsecurities and similar financing transactions by a Registered Corporation or alicensed gaming subsidiary must be reported to or approved by the Mississippi 

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Commission. A licensed gaming subsidiary may not makea public offering of its securities, but may pledge or mortgage casinofacilities. A Registered Corporation may not make a public offering of itssecurities without the prior approval of the Mississippi Commission if any partof the proceeds of the offering is to be used to finance the construction,acquisition or operation of gaming facilities in Mississippi or to retire orextend obligations incurred for one or more such purposes. Such approval, ifgiven, does not constitute a recommendation or approval of the investment meritsof the securities subject to the offering.

Under the regulations of the Mississippi Commission, aMississippi gaming subsidiary may not guarantee a security issued by anaffiliated company pursuant to a public offering, or pledge its assets tosecure payment or performance of the obligations evidenced by the securityissued by the affiliated company, without the prior approval of the MississippiCommission. A pledge of the stock of a Mississippi gaming subsidiary and theforeclosure of such a pledge are ineffective without the prior approval of theMississippi Commission. Moreover, restrictions on the transfer of an equitysecurity issued by a Mississippi gaming subsidiary and agreements not toencumber such securities are ineffective without the prior approval of theMississippi Commission.

Changes in control of the Company through merger,consolidation, acquisition of assets, management or consulting agreements, oract or conduct by a person by which he or she obtains control, may not occurwithout the prior approval of the Mississippi Commission. Entities seeking toacquire control of a Registered Corporation must satisfy the MississippiCommission in a variety of stringent standards prior to assuming control of theRegistered Corporation. The Mississippi Commission may also require controllingstockholders, officers, directors, and other persons having a materialrelationship or involvement with the entity proposing to acquire control to beinvestigated and licensed as part of the approval process relating to thetransaction.

The Mississippi legislature has declared that somecorporate acquisitions opposed by management, repurchases of voting securitiesand other corporate defense tactics that affect corporate gaming licensees inMississippi and Registered Corporations may be injurious to stable andproductive corporate gaming. The Mississippi Commission has established aregulatory scheme to ameliorate the potentially adverse effects of thesebusiness practices upon Mississippi’s gaming industry and to promoteMississippi’s policy to: (i) assure the financial stability of corporategaming operators and their affiliates; (ii) preserve the beneficialaspects of conducting business in the corporate form; and (iii) promote aneutral environment for the orderly governance of corporate affairs.

Approvals are, in certain circumstances, required fromthe Mississippi Commission before a Registered Corporation may make exceptionalrepurchases of voting securities (such as repurchases that treat holdersdifferently) in excess of the current market price and before a corporateacquisition opposed by management may be consummated. Mississippi’s gamingregulations also require prior approval by the Mississippi Commission of a planof recapitalization proposed by a Registered Corporation’s board of directorsin response to a tender offer made directly to the stockholders for the purposeof acquiring control of the Registered Corporation.

Neither we nor any of our subsidiaries may engage ingaming activities in Mississippi while also conducting gaming operationsoutside of Mississippi without approval of the Mississippi Commission. TheMississippi Commission may require determinations that, among other things,there are means for the Mississippi Commission to have access to informationconcerning the out-of-state gaming operations of the Company andits affiliates. We have previously obtained a waiver of foreign gaming approvalfrom the Mississippi Commission for operations in other states and will berequired to obtain the approval or a waiver of such approval from theMississippi Commission prior to engaging in any additional future gamingoperations outside of Mississippi.

If the Mississippi Commission determined that we or alicensed gaming subsidiary violated a gaming law or regulation, the MississippiCommission could limit, condition, suspend, or revoke our approvals and the 

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license of the subsidiary. In addition, we, thelicensed subsidiary, and the persons involved could be subject to substantialfines for each separate violation. Because of such violations, the MississippiCommission could seek to appoint a supervisor to operate our casino facilities.Limitation, conditioning or suspension of any gaming license or approval or theappointment of a supervisor could (and revocation of any gaming license orapproval would) materially adversely affect us and RCVP’s gaming operations orBGI’s manufacturer, distributor, and wide-area progressive operations, as thecase may be.

License fees and taxes, computed in various ways dependingon the type of gaming involved, are payable to the State of Mississippi and tothe counties and cities in which a licensed gaming subsidiary’s operations areconducted. Depending on the particular fee or tax involved, these fees andtaxes are payable either monthly, quarterly, or annually and are based on (i) apercentage of the gross gaming revenues received by the casino operation; (ii) thenumber of gaming devices operated by the casino; or (iii) the number oftable games operated by the casino. The license fee payable to the State ofMississippi is based upon “gaming revenues” (generally defined as grossrevenues less payouts to customers as winnings), and equals 4% of gamingrevenues of $50,000 or less per month, 6% of gaming revenues that exceed $50,000but do not exceed $134,000 per month, and 8% of gaming revenues that exceed$134,000 per month. The foregoing license fees we pay are allowed as a creditagainst our Mississippi income tax liability paid for the year. The grossrevenue fee imposed by the City of Vicksburg, Mississippi, where RCVP’s casinooperations are located, equals approximately 4% of gaming revenues.

The Mississippi Commission’s regulations require as acondition of licensing or license renewal that an existing licensed gaming establishment’splan include a 500-car parking facility in close proximity to the casinocomplex and infrastructure facilities that amount to at least 25% of the casinocost. We believe the Rainbow Casino is in compliance with this requirement. TheMississippi Commission adopted a change to this regulation increasing theinfrastructure requirement to 100%; however, the regulation grandfathersexisting licensees and applies only to new casino projects and casinos that arenot operating at the time of acquisition or purchase by new owners.

In recent years, certain anti-gaming groups proposedthe adoption, through the initiative and referendum process, of certainamendments to the Mississippi Constitution that would prohibit gaming in thestate. The proposals were declared illegal by the Mississippi courts onconstitutional and procedural grounds. The latest ruling was appealed to theMississippi Supreme Court, which affirmed the decision of the lower court. Ifanother such proposal were to be offered and if a sufficient number ofsignatures were to be gathered to place a legal initiative on the ballot, it ispossible for the voters of Mississippi to consider such a proposal in November 2006.While we are unable to predict whether such an initiative will appear on aballot or the likelihood of such an initiative being approved by the voters, ifsuch an initiative were passed and gaming were prohibited in Mississippi, itwould have a significant adverse effect on us and our Mississippi gamingoperations.

The sale of alcoholic beverages by the Rainbow Casinoowned and operated by RCVP is subject to the licensing, control and regulationby both the City of Vicksburg and the Alcoholic Beverage Control Division (the “ABC”)of the Mississippi State Tax Commission. The Rainbow Casino area has beendesignated as a special resort area, which allows the Rainbow Casino to servealcoholic beverages on a 24-hour basis. The ABC has the full power tolimit, condition, suspend or revoke any license for the serving of alcoholicbeverages or to place such a licensee on probation with or without conditions.Any such disciplinary action could (and revocation would) have a materialadverse effect on RCVP’s operations. Certain officers and managers of RCVP mustbe investigated by the ABC in connection with its liquor permits, and changesin certain positions must be approved by the ABC.

*NewJersey.**  *BGI is licensed bythe New Jersey Casino Control Commission (the “New Jersey Commission”) as agaming-related casino service industry (“CSI”) in accordance with the NewJersey Casino Control Act (the “Casino Control Act”). We are a holding company,as that term is defined by the 

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Casino Control Act, of BGI and thus are a qualifier inconnection with BGI’s CSI license and have been approved as such by the NewJersey Commission. BGI has an application pending to renew its CSI licenseunder the Casino Control Act.

The New Jersey Commission requires the officers,directors, key personnel, financial sources, and stockholders (in particularthose with holdings in excess of 5%) of a CSI license holder and its holdingand intermediary companies to qualify in accordance with the Casino ControlAct. BGI is required to notify the New Jersey Commission of any appointment,nomination, election, resignation, termination, incapacitation, or death of anyperson or entity otherwise required to qualify pursuant to the Casino ControlAct. Such persons and entities may be investigated and may be required to makecertain regulatory filings and to disclose and/or to provide consents todisclose personal and financial data. The costs associated with suchinvestigation are typically borne by the applicant.

*Louisiana.**  *The manufacturing, distribution, servicing, andoperation of gaming devices (“Devices”) in Louisiana are subject to theLouisiana Gaming Control Law and the rules and regulations promulgatedthereunder (the “Louisiana Act”). Licensing and regulatory control ismaintained by a single gaming control board for the regulation of gaming inLouisiana. This Board, created on May 1, 1996, is called the LouisianaGaming Control Board (the “Louisiana Board”) and oversees all licensing for allforms of legalized gaming in Louisiana (including all regulatory enforcement,and supervisory authority that exists in the state as to gaming on NativeAmerican lands). The Louisiana State Police within the Department of PublicSafety and Corrections (the “Division”) performs the investigative functionsfor the Louisiana Board. The laws and regulations of Louisiana are based onpolicies of maintaining the health, welfare, and safety of the general publicand protecting the gaming industry from elements of organized crime, illegalgambling activities, and other harmful elements, as well as protecting thepublic from illegal and unscrupulous gaming to ensure the fair play of devices.

BGI, doing business as Bally Gaming and Systems, holdsthe following permits (licenses): (i) Gaming Supplier Permit; (ii) Manufacturerof Slot Machines and Video Draw Poker Devices Permit; and (iii) Manufacturerof Gaming Equipment other than Slot Machines and Video Draw Poker DevicesPermit.

The Louisiana Board may deny, impose a condition on,or suspend or revoke a permit, renewal, or application for a permit forviolations of any rules and regulations of the Louisiana Board or anyviolations of the Louisiana Act. In addition, fines for violations of gaminglaws or regulations may be levied against the Louisiana Permitee and thepersons involved for each violation of the gaming laws. The permit is deemed apure and absolute privilege and issuance, condition, denial, suspension orrevocation of a permit is at the discretion of the Louisiana Board under theprovisions of the Louisiana Act. A permit is not property or a protectedinterest under the Louisiana constitution.

The Division has the authority to conduct overt andcovert investigations of any person involved directly or indirectly in thegaming industry in Louisiana. These investigations have extended to informationregarding a prospective permitee’s and his or her spouse’s immediate family andrelatives and their affiliations with certain organizations or other businessentities. The investigation may also extend to any person who has or controlsmore than a 5% ownership of, or interest in income or profits in, an applicantfor or holder of a license or who is a key employee or who has the ability toexercise significant influence over the permitee. All persons or entitiesinvestigated must meet all suitability requirements and qualifications for apermitee. The Louisiana Board may deny an application for permitting for anycause it may deem reasonable. The applicant for permitting must pay a filingfee, which applies to the cost of the investigation.

*FederalRegistration.**  *Theoperating subsidiaries of the Company that are involved in the manufacture,sale, distribution, or operation of gaming machines are required to registerannually with the Attorney General of the United States. All currently requiredfilings have been made.

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From time to time, certain legislators have proposedthe imposition of a federal tax on gross gaming revenues. No specific proposalsfor the imposition of such a federal tax are currently pending. However, noassurance can be given that such a tax will not be imposed in the future. Anysuch tax could have a material adverse effect on our businesses, financialconditions, or results of operations.

*AdditionalJurisdictions.**  *We, inthe ordinary course of our business, routinely consider business opportunitiesto expand our gaming operations into additional jurisdictions. Although thelaws and regulations of the various jurisdictions in which we operate or intowhich we may expand our gaming operations vary in their technical requirementsand are subject to amendment from time to time, virtually all of thosejurisdictions require licenses, permits, documentation of qualification,including evidence of financial stability, and other forms of approval forcompanies engaged in the manufacture, distribution and operation of gamingmachines as well as for the officers, directors, major stockholders, and keypersonnel of such companies.

We and our key personnel have obtained, or appliedfor, all government licenses, registrations, findings of suitability, permits,and approvals necessary for the manufacture, distribution and, where permitted,operation of gaming machines in the jurisdictions in which we do business. Weand the holders of our securities may be subject to the provisions of thegaming laws of each jurisdiction where we or our subsidiaries are licensed orare applying for licensing or conduct business, including, without limitation,Arizona, California, Colorado, Connecticut, Delaware, Florida, Illinois,Indiana, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana,Nevada, New Jersey, New Mexico, New York, Oklahoma, Pennsylvania, Puerto Rico,South Dakota, Washington, West Virginia, Wisconsin, and the local regulatoryauthorities within each such state, as well as Australian, Canadian, and otherforeign gaming jurisdictions in which BGI and its subsidiaries are licensed orconduct business.

Holders of common stock of an entity licensed tomanufacture and sell gaming machines, and in particular those with holdings inexcess of 5%, should note that local laws and regulations may affect theirrights regarding the purchase of such common stock and may require such personsor entities to make certain regulatory filings or seek licensing, findings ofqualification, or other approvals. In some cases this process may require the holderor prospective holder to disclose or provide consents to disclose personal andfinancial data in connection with necessary investigations, the costs of whichare typically borne by the applicant. The investigative and approval processcan take three to six months to complete under normal circumstances.

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**ITEM 2.**                PROPERTIES

Thefollowing table sets forth information regarding our leased properties as of June 30,2005, all of which are fully utilized unless otherwise noted (dollars in 000s):

| **Location**                                  | ** ** | ** **                                     | ** ** | **Use** | ** ** | **Building   Square   Feet** | ** ** | **Annual   Rental   Payments** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------|------------|---------|------------|------------------------------|------------|--------------------------------|------------|
| Bally Gaming and  Systems business unit: |       |                                           |       |    |       |                         |       |                           |       |
| Absecon, NJ                                   |       | Direct  mail office                            |       | 5,300   |       |                         | $          | 63                             |       |   |
| Atlantic City, NJ                             |       | Sales  offices and warehousing                 |       | 15,800  |       |                         | 136        |                           |       |
| Bellevue, WA                                  |       | Administrative  offices                        |       | 7,581   |       |                         | 140        |                           |       |
| Biloxi, MS                                    |       | Sales  offices                                 |       | 5,000   |       |                         | 50         |                           |       |
| Campbell Hall, NY                             |       | Offices                                        |       | 6,900   |       |                         | 128        |                           |       |
| Cheekotowage, NY                              |       | Offices                                        |       | 1,143   |       |                         | 8          |                           |       |
| Chester, NY                                   |       | Office/warehouse                               |       | 5,000   |       |                         | 37         |                           |       |
| Clifton Park, NY                              |       | Offices                                        |       | 504     |       |                         | 9          |                           |       |
| Dover, DE                                     |       | Offices                                        |       | 468     |       |                         | 6          |                           |       |
| Egg Harbor Township, NJ                       |       | General,  research and development offices     |       | 24,750  |       |                         | 461        |                           |       |
| Fife, WA                                      |       | Office/warehouse                               |       | 6,550   |       |                         | 81         |                           |       |
| Gulfport, MS                                  |       | Offices                                        |       | 1,500   |       |                         | 5          |                           |       |
| Hollywood, FL                                 |       | Sales  offices                                 |       | 3,400   |       |                         | 8          |                           |       |
| Huntington Beach, CA                          |       | Offices                                        |       | 3,340   |       |                         | 59         |                           |       |
| Las Vegas, NV                                 |       | Offices/warehouse                              |       | 101,650 |       |                         | 704        |                           |       |
| Las Vegas, NV                                 |       | Warehousing                                    |       | 20,640  |       |                         | 160        |                           |       |
| Las Vegas, NV                                 |       | Offices                                        |       | 2,939   |       |                         | 32         |                           |       |
| Las Vegas, NV                                 |       | Office/warehouse                               |       | 90,000  |       |                         | 283        |                           |       |
| Livermore, CA                                 |       | Office/warehouse                               |       | 43,337  |       |                         | 551        |                           |       |
| Marysville, WA                                |       | Warehousing                                    |       | 4,400   |       |                         | 32         |                           |       |
| Oklahoma City, OK                             |       | Warehouse/storage                              |       | 16,730  |       |                         | 66         |                           |       |
| Pleasanton, CA                                |       | Office  and storage                            |       | 3,176   |       |                         | 52         |                           |       |
| Reno, NV                                      |       | Office/warehouse                               |       | 30,500  |       |                         | 412        |                           |       |
| Reno, NV                                      |       | Offices                                        |       | 20,284  |       |                         | 258        |                           |       |
| Reno, NV                                      |       | Warehousing                                    |       | 9,626   |       |                         | 97         |                           |       |
| Reno, NV                                      |       | Warehousing                                    |       | 3,511   |       |                         | 36         |                           |       |
| San Juan, PR                                  |       | Sales  offices                                 |       | 2,135   |       |                         | 31         |                           |       |
| Slidell, LA                                   |       | Offices                                        |       | 1,250   |       |                         | 15         |                           |       |
| Sommerville, NJ                               |       | Warehousing                                    |       | 10,000  |       |                         | 33         |                           |       |
| Sparks, NV                                    |       | Administrative  /sales offices and warehousing |       | 33,384  |       |                         | 441        |                           |       |
| Temecula, CA                                  |       | Sales  offices                                 |       | 1,920   |       |                         | 21         |                           |       |
| Westchester, IL                               |       | Sales  offices                                 |       | 2,132   |       |                         | 48         |                           |       |
| Hannover, Germany                             |       | Administrative  offices and warehousing        |       | 13,292  |       |                         | 91         |                           |       |
| Hannover, Germany                             |       | Administrative  offices                        |       | 248     |       |                         | 10         |                           |       |
| Montevideo, Uruguay                           |       | Administrative  offices                        |       | 1,367   |       |                         | 28         |                           |       |
| Nice, France                                  |       | Administrative  offices                        |       | 5,844   |       |                         | 137        |                           |       |
| Province of Cordoba,  Argentina               |       | Administrative  offices                        |       | 969     |       |                         | 4          |                           |       |
| Shropshire, England                           |       | Administrative  offices                        |       | 1,550   |       |                         | 17         |                           |       |
| Wigan, England                                |       | Office/warehouse                               |       | 10,985  |       |                         | 71         |                           |       |
|                                               |            |                                                |            |         |            |                              |            |                                |            |  |  |  |

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| Casino Operations  business unit: |   |                   |   |   |   |   |   |   |   |
|-----------------------------------|--------|------------------------|--------|--------|--------|--------|--------|--------|--------|
| Vicksburg, MS                     |   | Storage                |   | 3,000  |   |   | 27     |   |   |
| Vicksburg, MS                     |   | Administrative offices |   | 1,500  |   |   | 10     |   |   |

 

See Note 19 to the consolidated financial statements,Commitments and Contingencies, for information as to our lease commitments withrespect to the foregoing rental properties.

Thefollowing table sets forth information regarding properties owned by us as of June 30,2005, all of which are fully utilized unless otherwise noted. Except for theLas Vegas, NV property, each of the properties listed below is utilized in ourCasino Operation business unit:

| **Location**  | ** ** | ** **                                         | ** ** | **Use** | ** ** | **Building  Square  Feet** | ** ** |
|---------------|------------|----------------------------------------------------|------------|---------|------------|----------------------------|------------|
| Las Vegas, NV |       | Administrative  offices and manufacturing facility |       | 150,000 |       |
| Vicksburg, MS |       | Casino                                             |       | 33,000  |       |
| Vicksburg, MS |       | Entertainment  facility                            |       | 20,000  |       |
| Vicksburg, MS |       | Administrative  offices                            |       | 3,200   |       |
| Vicksburg, MS |       | Vacant-land                                        |       | —  |       |

 

We believe our facilitiesare suitable for our needs and we have no future expansion plans that wouldmake these properties inadequate.

**ITEM 3.**                LEGALPROCEEDINGS

***Litigation***

On September 25, 1995, BGI, a wholly-owned subsidiaryof the Company, was named as a defendant in a class action lawsuit filed in theUnited States District Court for the District of Nevada. The plaintiffs filedsuit against BGI and approximately 45 other defendants, each of which isinvolved in the gaming business as a gaming machine manufacturer, distributor,or casino operator. The lawsuit arises out of alleged fraudulent marketing andoperation of casino video poker machines and electronic slot machines. Theplaintiffs alleged that the defendants have engaged in a course of fraudulentand misleading conduct intended to induce people into playing their gamingmachines based on a false belief concerning how those machines actuallyoperate, as well as the extent to which there is actually an opportunity to winon any given play. The plaintiffs allege that the defendants’ actionsconstitute violations of the Racketeer Influenced and Corrupt Organizations Act(RICO) and give rise to claims of common law fraud and unjust enrichment. Theplaintiffs are seeking monetary damages in excess of $1.0 billion. In July 2002,the federal district court denied the plaintiffs’ request for class actioncertification. In August 2004, the United States Court of Appeals for theNinth Circuit affirmed the district court’s denial of class actioncertification, and the plaintiffs did not appeal. Subsequently, two of the fournamed plaintiffs elected to continue their cases as individual, non-classactions. However, in September 2005, the court granted the defendants’motions for summary judgment, resolving all claims in defendants’ favor withouta trial. In October 2005, the plaintiffs’ appealed the District Court’sgranting of summary judgment in favor of the defendants to the Ninth Circuit.Management believes the plaintiffs lawsuit to be without merit. The Companywill continue to pursue all available legal defenses.

In June 2004, putative class actions were filedagainst Alliance and its officers, Robert Miodunski, Robert Saxton, MarkLerner, and Steven Des Champs, in the United States District Court for theDistrict of Nevada. The nearly identical complaints alleged violations of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”) stemming fromrevised earnings guidance, declines in the stock price, and 

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sales of stock by insiders. The complaints soughtdamages in unspecified amounts. The federal district court granted theplaintiffs’ unopposed motions to consolidate the cases and to appoint a leadcounsel and a lead plaintiff, and the plaintiffs filed a consolidatedcomplaint, all as is customary in such cases. Alliance and the other defendantshave moved for summary judgment, and the motion is being briefed. Alliancebelieves the lawsuits are without merit and intends to vigorously defend itselfand its officers. In addition, in July 2004, two derivative lawsuits werefiled in Nevada state court against the members of the board of directors andthe officers listed above. The Company is named as a nominal defendant in thederivative lawsuits as the claims are purportedly asserted for the benefit ofAlliance. These lawsuits assert claims for breach of fiduciary duty and wasteof corporate assets arising out of the same events as those giving rise to theclass actions described above, and seek injunctive relief and damages inunspecified amounts. These two cases were consolidated, and Alliance and theother defendants moved to dismiss the case. In February 2005, the statedistrict court granted the defendants’ motion and dismissed the case, and theplaintiffs have appealed the case the Nevada Supreme Court, where the matter ispending. Management believes the plaintiffs’ lawsuit to be without merit. TheCompany will continue to pursue all available legal defenses.

In August 2004, Shuffle Master, Inc. suedthe Company in the United States District Court for the District of Nevada,alleging infringement of various patents in connection with the Company’sMindPlay product line and seeking injunctive relief and damages in unspecifiedamounts. In June 2005, it was announced that IGT had acquired an interestin the patents at issue in the case, and thereafter IGT joined the case as aplaintiff. The Company is vigorously defending against the lawsuit, which is inthe discovery phase. Management believes the plaintiffs’ lawsuit to be withoutmerit. The Company will continue to pursue all available legal defenses.

In September 2004, a United States District Courtjury in the District of Nevada entered a $7.4 million verdict against theCompany in a suit filed by Action Gaming, Inc., and IGT. The suit allegedthat the multi-hand video poker game deployed by the Company’s formersubsidiary, United Coin Machine Co. (“United Coin”), infringed the plaintiffs’patents. The district court ruled on summary judgment that the game does not infringethe patents. However, the court left to the jury the question whether the useof “autohold,” a specific, optional feature of the game, caused it to infringeunder the “doctrine of equivalents,” a doctrine of patent law. After a two-weektrial, the jury determined that the game with the autohold option enabled didinfringe under the doctrine of equivalents and awarded damages accordingly. Thefeature has been disabled on all affected games in the field, and the decisionpermits continued deployment of the game as long as the autohold feature is notincluded. The Company is pursuing various remedies and has posted a cash bondtotaling $7.7 million to stay payment of the judgment and accrued interestpending appeal. The cash bond is included in other non-current assets and theaccrued liability is included in accrued liabilities in the accompanyingbalance sheet. This amount has been accrued and the expense for this charge isincluded in discontinued operations in the accompanying statement of operations.

On December 7, 2004, IGT filed a patentinfringement lawsuit against Alliance in the United States District Court forthe District of Nevada. The complaint asserts that Alliance’s wheel-basedgames, such as Monte Carlo and Cash For Life, and its iView products infringeon patents held by IGT, and seeks injunctive relief and damages in unspecifiedamounts. Alliance believes IGT’s claims are without merit and is vigorouslydefending itself against the lawsuit. As part of its defense, Alliance hasasserted counterclaims against IGT, including claims that IGT’s patents areinvalid as well as several claims that IGT has engaged in anti-competitiveconduct in violation of state and federal antitrust laws. By its counterclaims,Alliance is seeking damages and other relief from IGT. The litigation is in thediscovery phase and no trial date has been set.

In February 2005, theSEC initiated an informal inquiry and requested documents and informationregarding matters related to the allegations in the class actions and similarmatters. In August 2005, the 

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SEC notified the Companythat its investigation had entered a formal phase, and has requested additionalinformation from the Company covering the same general areas that wereaddressed in the informal inquiry. Management is cooperating fully with the SECin this matter.

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

Not applicable.

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**PART II**

**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Ourcommon stock is listed on the New York Stock Exchange (the “NYSE”) under thesymbol “AGI”. The following table sets forth the high and low closing bid priceof the common stock as reported by the NYSE for the periods indicated. 

| ** **                              | ** ** | **Price Range of  Common Stock** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------|------------|
| ** **                              | ** ** | **High**                                        | ** ** | **Low** | ** ** |
| *Fiscal Year Ended June 30,  2006* |       |                                            |       |   |   |
| 1st Quarter                             |       | $                                               | 15.53      |   | $ | 10.43 |   |
| *Fiscal  Year Ended June 30, 2005* |       |                                            |       |   |   |
| 1st Quarter                             |       | $                                               | 16.82      |   | $ | 12.09 |   |
| 2nd Quarter                             |       | 14.07                                           |       | 9.12 |   |
| 3rd Quarter                             |       | 13.21                                           |       | 9.40 |   |
| 4th Quarter                             |       | 15.42                                           |       | 9.48 |   |
| *Fiscal  Year Ended June 30, 2004* |       |                                            |       |   |   |
| 1st Quarter                             |       | $                                               | 23.78      |   | $ | 19.01 |   |
| 2nd Quarter                             |       | 27.37                                           |       | 20.72 |   |
| 3rd Quarter                             |       | 33.45                                           |       | 23.27 |   |
| 4th Quarter                             |       | 34.00                                           |       | 15.63 |   |

 

As of****December 26,2005, we had approximately 1,000 holders of record of our common stock.

We have never declared orpaid cash dividends on our common stock. Our bank loan agreement materiallylimits our ability pay dividends on our common stock. We intend to follow apolicy of retaining earnings to finance growth of our business and do notanticipate paying any cash dividends in the foreseeable future. The declarationand payment of future dividends on our common stock will be at the solediscretion of our Board of Directors and will depend on our profitability, ourability to pay dividends under the terms of our bank credit agreement, asdiscussed in Item 7, Management’s Discussion and Analysis of FinancialConditions and Results of Operations—Risk Factors, and our financial condition,capital requirements, statutory and contractual restrictions, future prospectsand other factors the Board of Directors deems relevant.

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**Equity CompensationPlans**

Thefollowing table sets forth information as of June 30, 2005 with respect toour equity compensation plans that provide for the issuance of options topurchase our common stock:

| ** **                                                  | ** ** | **Number of Securities  to be issued upon exercise  of outstanding options,  warrants and rights(1)** | ** ** | **Weighted average  exercise  price of outstanding  options,  warrants and rights(1)** | ** ** | **Number of Securities  remaining available for  future issuance  under equity compensation  plans (excluding securities  reflected in the first column)** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| *Plan Category*                                             |       |                                                                                                                                                    |       |                                                                                                            |       |                                                                                                                                                                                                                        |       |   |   |   |   |   |   |
| Equity compensation plans  approved by security holders     |       |                                                                                                                                                    | 8,716,736  |                                                                                                            |       |                                                                                                                                                                                                                        | $          | 13.79 |   |   |   | 2,009,220 |   |   |
| Equity compensation  plans not approved by security holders |       |                                                                                                                                                    | —     |                                                                                                            |       |                                                                                                                                                                                                                        | —     |   |   |   | — |   |   |
| Total                                                       |       |                                                                                                                                                    | 8,716,736  |                                                                                                            |       |                                                                                                                                                                                                                        | $          | 13.79 |   |   |   | 2,009,220 |   |   |

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(1)          Rightsinclude grants for Restricted Stock and Restricted Stock Units.

**ITEM 6.**                SELECTEDFINANCIAL DATA

The following selected financial data for the fiscalyears ended June 30, 2005, 2004 and 2003 has been derived from theconsolidated financial statements which appear elsewhere in this Amendment No. 1.The consolidated financial statements for each of the three years ended June 30,2005 have been restated in their entirety in this Amendment No. 1, and thefinancial information presented below for the years ended June 30, 2005,2004, 2003 and 2002 reflects the restatements as described in Note 2 toconsolidated financial statements. The Selected Financial Data should be readin conjunction with:

·       Item7 Management’s Discussion and Analysis of Financial Condition and Results ofOperations;

·       Item8 Financial Statements and Supplementary Data;

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·       Note2 to consolidated financial statements, Restatement of Previously IssuedFinancial Statements; and

·       Note 22 to consolidatedfinancial statements, Selected Quarterly Financial Data (unaudited).

| ** **                                                                          | ** ** | **Fiscal Year Ended June 30,**               | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                                                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                          | ** ** | **As restated(1)**                                          | ** ** | **As restated(1)** | ** ** | **As restated(1)** | ** ** | **As restated(1)** | ** ** | ** ** | ** ** |
| ** **                                                                          | ** ** | **(in 000s, except per share amounts)** | ** ** |
| Statement of Operations  Data:                                                      |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenues  from continuing operations                                     |       |                                                             | $          | 483,107 |   |   |   | $ | 476,607 |   |   |   | $ | 357,264 |   |   |   | $ | 264,357 |   |   | $ | 214,098 |   |
| Operating income  (loss)(2)                                                         |       |                                                             | (4,451     | ) |   |   | 88,836 |   |   |   | 66,367 |   |   |   | 45,176 |   |   | 29,449 |   |
| Income (loss)  from continuing operations before income taxes and minority interest |       |                                                             | (19,370    | ) |   |   | 62,412 |   |   |   | 43,339 |   |   |   | 19,538 |   |   | (5,462 | ) |
| Income tax  expense (benefit)                                                       |       |                                                             | (5,192     | ) |   |   | 21,104 |   |   |   | 15,354 |   |   |   | (40,621 | ) |   | (1,313 | ) |
| Minority interest                                                                   |       |                                                             | (3,731     | ) |   |   | (2,309 | ) |   |   | (2,009 | ) |   |   | (1,935 | ) |   | (2,165 | ) |
| Income (loss)  from continuing operations                                           |       |                                                             | (17,909    | ) |   |   | 38,999 |   |   |   | 25,976 |   |   |   | 58,224 |   |   | (6,314 | ) |
| Income (loss)  from discontinued operations(3)                                 |       |                                                             | (4,654     | ) |   |   | 40,889 |   |   |   | (17,638 | ) |   |   | 1,612 |   |   | 20,796 |   |
| Net income (loss)                                                                   |       |                                                             | $          | (22,563 | ) |   |   | $ | 79,888 |   |   |   | $ | 8,338 |   |   |   | $ | 59,836 |   |   | $ | 14,482 |   |
| Basic earning (loss) per  share:                                                    |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                                                               |       |                                                             | $          | (0.35 | ) |   |   | $ | 0.78 |   |   |   | $ | 0.53 |   |   |   | $ | 1.26 |   |   | $ | (0.14 | ) |
| Discontinued operations                                                             |       |                                                             | (0.09      | ) |   |   | 0.82 |   |   |   | (0.36 | ) |   |   | 0.04 |   |   | 0.49 |   |
| Total                                                                               |       |                                                             | $          | (0.44 | ) |   |   | $ | 1.60 |   |   |   | $ | 0.17 |   |   |   | $ | 1.30 |   |   | $ | 0.35 |   |
| Diluted earning (loss)  per  share:                                                 |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                                                               |       |                                                             | $          | (0.35 | ) |   |   | $ | 0.76 |   |   |   | $ | 0.52 |   |   |   | $ | 1.23 |   |   | $ | (0.14 | ) |
| Discontinued operations                                                             |       |                                                             | (0.09      | ) |   |   | 0.80 |   |   |   | (0.36 | ) |   |   | 0.04 |   |   | 0.48 |   |
| Total                                                                               |       |                                                             | $          | (0.44 | ) |   |   | $ | 1.56 |   |   |   | $ | 0.16 |   |   |   | $ | 1.27 |   |   | $ | 0.34 |   |

 

| ** **                                               | ** ** | **As of June 30,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                               | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                               | ** ** | **As restated(1)**           | ** ** | **As restated(1)** | ** ** | **As restated(1)** | ** ** | **As restated(1)** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | **(in 000s)**                | ** ** |
| Balance Sheet Data:                                      |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                               |       |                              | $          | 33,170 |   |   |   | $ | 154,258 |   |   |   | $ | 24,406 |   |   |   | $ | 24,700 |   |   | $ | 27,029 |   |
| Restricted cash                                          |       |                              | 13,421     |   |   |   | 15,590 |   |   |   | 14,478 |   |   |   | 7,100 |   |   | 2,100 |   |
| Working capital                                          |       |                              | 125,164    |   |   |   | 257,217 |   |   |   | 135,289 |   |   |   | 96,959 |   |   | 53,297 |   |
| Total assets                                             |       |                              | 654,934    |   |   |   | 773,927 |   |   |   | 544,814 |   |   |   | 465,900 |   |   | 371,017 |   |
| Total long term  debt, including current maturities |       |                              | 335,117    |   |   |   | 428,955 |   |   |   | 345,215 |   |   |   | 341,793 |   |   | 339,540 |   |
| Total stockholders’  equity (deficiency)            |       |                              | 176,023    |   |   |   | 180,979 |   |   |   | 76,432 |   |   |   | 41,973 |   |   | (39,205 | ) |
|                                                          |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Amounts have beenrestated as discussed in Note 2 to consolidated financial statements,Restatement of Previously Issued Financial Statements.

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(2)          TheCompany has recorded the following significant items affecting comparability ofoperating income (loss):

·       Duringthe fiscal year ended June 30, 2005, we recorded severance chargestotaling $3.7 million (see Note 16 to consolidated financial statements, SeveranceCharges), certain impairment charges of $3.6 million (see Note 17 toconsolidated financial statements, Impairment Charges), inventory impairmentcharges of $26.4 million (see Note 18 to consolidated financial statements,Inventory Impairment Charges), and a charge of $0.6 million related to anamendment to our bank loan agreement (see Note 11 to consolidated financialstatements, Long-Term Debt).

·       Duringthe fiscal year ended June 30, 2004, we recorded a loss on extinguishmentof debt of $12.3 million (see Note 11 to consolidated financial statements,Long-Term Debt).

·       During the fiscal yearended June 30, 2001, the Company incurred costs and expenses related tothe contemplated sale of the Nevada route operations totaling $6.5 million.

(3)          We sold our Nevada routeoperations, the Rail City Casino and Bally Wulff during fiscal year 2004. TheNevada route operation disposition was completed on June 30, 2004, theRail City disposition was completed on May 3, 2004 and the Bally Wulffdisposition was completed on July 18, 2003. On October 14, 2004, wesold our interest in our Louisiana route operations.

**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**Forward-LookingStatements**

Certain matters in this Annual Report on Form 10-K/Aand our other filings with the SEC, including, without limitation, certainmatters discussed in this Item 7, Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and in Item 7A, Quantitative andQualitative Disclosures about Market Risk, constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended (the “Securities Act”), and Section 21E of the ExchangeAct, and are subject to the safe harbor created thereby. Those statementsreflect the intent, belief or current expectations of the Company, itsdirectors or its officers with respect to, among other things, future eventsand financial trends affecting the Company.

Forward-looking statementsare typically identified by the words “believes,” “expects,” “anticipates” andsimilar expressions. In addition, any statements that refer to expectations orother characterizations of future events or circumstances are forward-lookingstatements. Readers are cautioned that any such forward-looking statements arenot guarantees of future performance and that matters referred to in suchforward-looking statements involve known and unknown risks, uncertainties andother factors which may cause actual results, performance or achievements ofthe Company to be materially different from any future results, performance orachievements expressed or implied by such forward-looking statements. Suchfactors include, among other things, the impact of competition anduncertainties concerning such matters as the Company’s ability to service debt,product development, customer financing, sales to non-traditional gamingmarkets, foreign operations, dependence on key personnel, the ability tointegrate future acquisitions, strict regulation by gaming authorities, theoutcome of pending litigation matters including the pending securities classactions, gaming taxes, currency fluctuations and market risk. Certain of thesefactors are discussed in the “Risk Factors” section below. The Companyundertakes no obligation to publicly update or revise these forward-lookingstatements because of new information, future events or otherwise.

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**Restatements to theConsolidated Financial Statements**

***First Restatement***

As previously disclosed, in connection with ouryear-end closing process for the fiscal year 2005, we identified certain errorsin our accounting and previously reported financial information. As a result,in September 2005, we announced that we would delay filing our AnnualReport on Form 10-K for the fiscal year ended June 30, 2005. Basedon an internal review, our Board of Directors concluded on November 2,2005 that there were material errors in our originally reported financialinformation and consequently, that a restatement of our originally reportedfinancial statements for the fiscal years ended June 30, 2004 and 2003 and our originally reported unauditedselected quarterly financial data presented in Note 22 to consolidatedfinancial statements was required (the “First Restatement”).

Our review process included an assessment of ouraccounting methods and practices as well as our previously reported financialinformation. This process, conducted by third party consultants and internalaccountants under the direction of our senior management and with the oversightof the Audit Committee of the Board of Directors, consisted of a review of oursales contracts, account reconciliations, financial information, and certaintransactions. Our review determined that the accounting errors in ourpreviously reported financial information and the failure to prevent or detectthem in our financial reporting process were, in part, attributable to materialweaknesses in our internal control over financial reporting. The materialweaknesses are described in “—Internal Control Over Financial Reporting” inItem 9A, Controls and Procedures.

The adjustmentsrecorded in connection with the First Restatement resulted in a decrease in:

(i)            gaming and systemsrevenues of $8.5 million and $23.2 million in fiscal years 2004 and 2003,respectively;

(ii)        cost of sales and otheroperating expenses of $1.9 million and $9.9 million in fiscal years 2004 and2003, respectively; and

(iii)    income from continuingoperations of $3.9 million and $9.0 million in fiscal years 2004 and 2003,respectively.

We also recorded an adjustment to change theclassification of certain certificates of deposit with maturities beyond 90days when purchased from cash and cash equivalents to other current assets,totaling $3.1 million as of June 30, 2004, and an adjustment to change theclassification of certain jackpot reserve cash accounts from cash and cashequivalents to restricted cash totaling $15.6 million as of June 30, 2004.

We also determined that weshould have presented the cash flows from discontinued operations within therespective operating, investing and financing activities in our statements ofcash flows, rather than as one separate line item. The cash flow statementswere also adjusted for the change in the classification of the jackpot reservecash accounts to restricted cash.

***Second Restatement***

In April 2006, management identified additionaltransactions for which revenue had been recognized on the sale of gamingdevices prior to their physical delivery to customer locations and reported thediscrepancies to the Audit Committee of the Board of Directors. As a result,the Audit Committee of the Board of Directors engaged an independent third party consultant to investigate thesematters. The consultant also reviewed e-mail communications from certainCompany personnel for key terms related to revenue recognition criteria, suchas delivery, acceptance, etc. The initial findings from the third partyinvestigation resulted in the expansion of the scope of management’s review toall jurisdictions in which certain internal forms were utilized to evidence therequisite delivery and acceptance criteria under our revenue recognitionpolicy.

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The scope of our internal review also included thereview of revenue recognition practices of certain transactions recorded infiscal years 2005, 2004, 2003 and 2002. The internal testing included, but wasnot limited to, the review of transactions for the use of internal forms usedto evidence delivery and acceptance and the use of interim storage prior to theultimate physical delivery to customer locations.

After completion of the investigation and our internalreview, on August 8, 2006, the Audit Committee of the Board of Directorsconcluded there were material errors in our previously reported financialinformation as presented in the Original Filing, and consequently, that arestatement of our previously reported consolidated financial statements as of June 30,2005 and 2004 and for each of the three years in the period ended June 30,2005 and our previously reported selected quarterly financial data presented inNote 22 to consolidated financial statements was required (the “SecondRestatement,” and collectively with the First Restatement, the “Restatements”).

We also determined that interest earned on tradeaccounts receivable that was included in gaming and system revenue should havebeen reported as interest income, as well as corrected the recorded value ofcertain grants of restricted stock units to reflect the fair market value ontheir date of grant.

The adjustmentsrecorded in connection with the Second Restatement resulted in:

(i)            an increase (decrease)in gaming and systems revenues of $1.1 million, $(1.8) million and $(4.0)million in fiscal years 2005, 2004 and 2003, respectively;

(ii)        an increase (decrease) incost of sales and other expenses of $2.2 million, $(0.5) million and $(0.7)million in fiscal years 2005, 2004 and 2003, respectively;

(iii)    an increase (decrease) inincome from continuing operations of $2.4 million, $(0.8) million and $(2.1)million in fiscal years 2005, 2004 and 2003, respectively; and

(iv)      a reclassification ofinterest earned on trade accounts receivable from gaming and system revenues tointerest income of $2.1 million, $2.0 million and $2.0 million in fiscal years2005, 2004 and 2003, respectively.

A more detailed discussion of the effects of theRestatements discussed above can be found in Note 2 to consolidated financialstatements, Restatement of Previously Issued Financial Statements and ispresented in summary detail below.

Thefollowing is a reconciliation of income (loss) from continuing operations asoriginally reported to the restated amounts reported in the consolidatedfinancial statements included as Item 15 of this Amendment No. 1:

| ** **                                                        | ** ** | **Year ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                        | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                        | ** ** | **(in 000s)**           | ** ** |
| Income (loss)  from continuing operations, as originally reported |       | $                            | (20,317    | ) | $ | 43,625 |   | $ | 37,162 |   |
| First Restatement                                                 |       |                         |       |   |   |   |   |
| Revenue recognition adjustments, net                              |       | —                       |       | (3,405 | ) | (8,624 | ) |
| Inventory adjustments, net                                        |       | —                       |       | (441 | ) | (420 | ) |
| Other miscellaneous adjustments, net                              |       | —                       |       | (32 | ) | (6 | ) |
| Income (loss)  from continuing operations, as previously restated |       | (20,317                      | )          | 39,747 |   | 28,112 |   |
| Second  Restatement                                               |       |                         |       |   |   |   |   |
| Revenue recognition adjustments, net                              |       | 1,298                        |       | (1,846 | ) | (1,408 | ) |
| Inventory adjustments, net                                        |       | 902                          |       | 706 |   | (557 | ) |
| Other miscellaneous adjustments, net                              |       | 208                          |       | 392 |   | (171 | ) |
| Income (loss) from  continuing operations, as currently restated  |       | $                            | (17,909    | ) | $ | 38,999 |   | $ | 25,976 |   |

 

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The Restatements also resulted in a reduction ofretained earnings as of June 30, 2002 of $4.0 million. 

In connection with the Restatements, deferred revenuesas of June 30, 2005 and 2004 were increased by $9.7 and $45.7 million,respectively, and totaled $41.0 million and $48.0 million as of June 30,2005 and 2004, respectively. The related deferred cost of sales as of June 30,2005 and 2004 were increased by $5.8 million and $18.0 million, respectively,and totaled $18.3 million and $18.2 million as of June 30, 2005 and 2004,respectively.

The following Management’sDiscussion and Analysis of Financial Condition and Results of Operations giveseffect to the Restatements.

**Internal ControlOver Financial Reporting**

We have identified material weaknesses in our internalcontrol over financial reporting which are described in Item 9A, Controls andProcedures that contributed to both the First Restatement and the SecondRestatement. Each of these material weaknesses also results in more than aremote likelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected. As a result, we haveassessed that our internal control over financial reporting was not effectiveas of June 30, 2005.

We are in the process of developingand implementing measures to address these material weaknesses. The keyissues identified by management during its assessment were the high level ofturnover of certain of our key finance and accounting personnel during fiscal2005, our inability to timely replace departed key personnel and themisinterpretation by management of certain complex accounting and tax issues. We are making progress in the implementation ofmeasures to remediate our material weaknesses as discussed under the caption “RemediationPlan” in Item 9A, Controls and Procedures; however, there can be no assuranceas to when the satisfactory implementation of these measures will be completed.Furthermore, we are in process of evaluating our internal control overfinancial reporting as of June 30, 2006. There can be no assurances thatthe material weaknesses described in Item 9A, Control and Procedures were curedas of such date, or that we will not identify additional material weaknesses asa result of such evaluation. Until such measures are fully implemented, we willcontinue to incur the expenses and management burdens associated with theadditional resources required to prepare our consolidated financial statements.

We discuss the risksassociated with the material weaknesses identified below under “—Risk Factors”.

**Our Business**

We are a worldwide leader in designing, manufacturingand distributing gaming machines, having marketed over 100,000 gaming machinesduring the past five years, and computerized monitoring systems for gamingfacilities. We also own and operate the Rainbow Casino, a dockside casino inVicksburg, Mississippi, which has approximately 12 table games andapproximately 890 gaming devices.

We derive our revenues from the following foursources:

*Gaming Equipment**—*Sale of gaming machines

*Systems—*Salesof computerized monitoring systems and related recurring hardware and softwaremaintenance revenue

*Gaming Operations*—Operation ofwide-area progressive systems and lease of gaming machines

*CasinoOperations—*Operation of the Rainbow Casino

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**Critical AccountingPolicies and Estimates**

We prepare ourconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America. Some of our accountingpolicies require us to make difficult and subjective judgments, often as aresult of the need to make estimates of matters that are inherently uncertain. Ourmost critical accounting estimates include valuations utilized in assetimpairment tests, acquisition accounting, revenue recognition, allowance fordoubtful accounts, capitalized costs, inventory valuation and deferred taxreserves. These judgments are subject to an inherent degree of uncertainty. Therecan be no assurance that the actual results will not differ from our estimates.Additional information regarding our significant accounting policies ispresented below.

*Revenue recognition*

Our GamingEquipment and Systems revenue are recognized in accordance with the provisionsof Statement of Position (“SOP”) No. 97-2 and are generallyrecognized when:

·       Persuasiveevidence of an arrangement exists

·       Deliveryhas occurred

·       Thevendors’ fee is fixed or determinable

·       Collectibilityis probable

We sell gaming machines and our computerizedmonitoring systems either through normal credit terms of a 120 days or less, ormay grant extended credit terms of up to five years. Revenue is recorded inaccordance with the terms of sale for contracts with payment terms of 24 monthsor less, or as cash is received for contracts with payment terms in excess of24 months. Games placed with customers on a trial basis are not recognized asrevenue until the trial period ends, the customer accepts the games andcollectibility is probable.

We also sell gaming devices under arrangements inwhich there are multiple elements, as that term is defined in SOP No. 97-2.Contracts may contain multiple elements such as a combination of gamingdevices, central site monitoring equipment, systems software, license fees andtraining. We allocate revenue to each element based upon its fair value asdetermined by “vendor specific objective evidence.” Vendor specific objectiveevidence of fair value for all elements of an arrangement is based upon thenormal pricing and discounting practices for those products and services whensold separately. In addition, software license updates and product supportservices are measured by the renewal rate offered to the customer.

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We recognize revenue when the product is delivered, orover the period in which the service is performed and we defer revenue for anyundelivered elements. If we cannot objectively determine the fair value of anyundelivered elements included in the arrangement, the revenues are deferreduntil all elements are delivered and services have been performed, or untilfair value can objectively be determined for any remaining undelivered element.

The majority of our software license arrangements isnon-perpetual and includes software license updates and product support whichare recognized ratably over the term of the arrangement, typically one year. Softwarelicense updates provide customers with rights to unspecified software productupgrades, maintenance and patches released during the term of the supportperiod. The majority of our customers purchase both software and hardwaremaintenance and product support when they purchase the systems. In addition,substantially all customers renew these maintenance agreements annually. Revenuefrom multi-year licensing arrangements are accounted for as subscriptions, withbillings recorded as unearned revenue and recognized as revenue ratably overthe billing coverage period, generally one year.

Our Gaming Operations earn recurring revenue thatconsists of the operation of wide-area progressive jackpot systems and revenuesfrom gaming machines placed in casinos on a daily lease or rental basis. Revenuefrom these sources is recognized based on the contractual terms of the participationor rental agreements and is generally based on a share of money wagered, ashare of the net winnings, or on a fixed daily rental rate basis.

In accordance withindustry practice, we recognize gaming revenues in our casino operations as thenet win from gaming machine operations, which is the difference between coinsand currency deposited into the machines and payments to customers.

*Inventories*

Inventories are stated atthe lower of cost, determined on a first-in, first-out basis, ormarket. Cost elements included for work-in-process and finishedgoods consist of raw materials, freight, direct labor and manufacturingoverhead. Given the size of the account balance, and the subjective nature of “market”values, management has determined that inventories represent criticalaccounting policies. Accordingly we regularly review inventory quantities andquality and record charges for both obsolete products and products that mayhave become impaired for a variety of reasons, including changes in technology,customer preferences and product demand. Additional valuation charges couldresult in the future as a result of these factors.

*Property, plant andequipment and leased gaming equipment*

Property, plant and equipment are stated at cost anddepreciated over the estimated useful lives or lease terms, whichever is less,using the straight line method. Leased gaming equipment is stated at cost anddepreciated over estimated useful lives ranging from two to four years to anestimated residual value.

Significant replacements and improvements arecapitalized; while other maintenance and repairs are expensed. The cost andaccumulated depreciation of assets retired or otherwise disposed of areeliminated from the accounts and any resulting gain or loss is credited orcharged to income as appropriate.

Given the changes intechnology, customer preferences and product demand, we regularly review andevaluate the recoverability of our investment in such assets, as well as theestimated useful lives used to depreciate these assets. There is the potentialfor acceleration of future depreciation, or even an asset write-down, if suchfactors were determined to have an adverse impact on our ability to realize ourfull investment in such assets.

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*Intangible assets,including goodwill*

We review goodwill andother intangible assets for impairment annually and whenever events orcircumstances indicate carrying value may not be recoverable or warrant arevision to the estimated remaining useful life in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 144, Accounting for theImpairment or Disposal of Long-lived Assets, and SFAS No. 142, Goodwilland other Intangible Assets. Intangible assets primarily consist ofacquisition-related software and trademarks, which are amortized over three tothirteen years, and goodwill which is not amortized. Some of the intangiblesrepresent products that have been deployed such as SDG’s central-determinationgames and others that are just now being deployed such as MindPlay’s table gametechnology. The success or failure of such products and their ability togenerate future cash flows will have a significant impact on the timing ofamortization expense and/or write-downs in those future periods.

*Impairment ofLong-lived Assets*

We review long-livedassets whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. Recoverability of long-lived assetsare measured by a comparison of the carrying amount of the asset to future net cashflows expected to be generated by the asset, undiscounted and without interest.Such estimations involve significant judgments. If such assets are determinedto be impaired, the impairment to be recognized is measured by the amount bywhich the carrying amount of the assets exceeds the fair value of the assets. Forassets held for sale, the Company carries such assets at fair value lessestimated costs to sell.

*Jackpot Liabilities*

We recognize a liability for jackpots not yet won andjackpot expense for the cost to fund jackpots in the future. Jackpots arepayable in either equal installments over a 20-year period or immediatelyin the case of instant win progressive jackpots. Winners may elect to receive asingle payment for the present value of a jackpot discount at applicableinterest rates in lieu of annual installments.

Our jackpot liabilitiestotaled $13.0 million at June 30, 2005, including $4.8 million for theconsolidated VIE’s, and totaled $12.1 million at June 30, 2004. Changes inour estimates and assumptions, including the number of jackpot winners who mayelect single-payments in the future could impact our jackpot expense andjackpot liability.

*Allowances ForDoubtful Accounts*

Allowances for doubtfulaccounts are maintained at levels determined by our management to adequatelyprovide for collection losses. In determining estimated losses, managementconsiders economic conditions, the activity in gaming markets, the financialcondition of customers, changes in technology and other factors whichmanagement believes are relevant.

*Capitalized Costs*

In accordance with SFAS No. 86, *Accounting for the Costs of Computer Software to be Sold, Leased, orOtherwise Marketed*,internally generated software development costs associated with new productsand significant enhancements to existing software products are expensed asincurred until technological feasibility has been established.

We incur significant regulatory approval costs for ourproducts. Such costs are capitalized once technological feasibility has beenestablished and are amortized generally over three years reflective of theestimated product life cycle. Product testing costs related to projects thatare discontinued are expensed when such determination is made. Fees incurredfor such regulatory approvals totaled approximately 

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$8.9 million and $8.5 million for the fiscalyears ended June 30, 2005 and 2004, respectively. Of these amountsincurred, during the fiscal years ended June 30, 2005 and 2004, wecapitalized a total of $2.0 million and $4.8 million respectively that wasdirectly attributable to products, and amortization expense for previouslycapitalized amounts totaled $0.9 million and $0.8 million respectively.

Given the subjectivenature of such capitalized costs, we have instituted a strict review processthat includes a full review of the costs incurred and the nature and prospectsof the related product. After costs are capitalized, they are monitored toensure that they are earning revenues through product sales. Future write-offsare possible if such products do not produce adequate cash flows.

*Income taxes*

Income taxes are accounted for under the asset andliability method. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of assets and liabilities and their respective tax bases.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. The effect on deferred taxassets and liabilities of a change in tax rates is recognized in the periodthat includes the enactment date. Taxes on income of our foreign subsidiariesare provided at the tax rates applicable to the tax jurisdictions in which theyare located.

The recoverability ofcertain deferred tax assets is based in part on estimates of future income andthe timing of temporary differences, and the failure to fully realize suchdeferred tax assets could result in a higher tax provision in future periods. Ournet deferred tax assets totaled $47.4 million and $36.6 million at June 30,2005 and 2004, respectively. Our accrued income taxes totaled $1.8 million at June 30,2005 and $5.7 million at June 30, 2004.

*Recently issuedaccounting pronouncements*

In December 2004, the FASB issued SFAS No. 123R(revised 2004), *Share-Based Payment*(“SFAS 123R”). SFAS 123R requiresrecognition of share-based compensation in the financial statements beginningwith our fiscal quarter ended September 30, 2005. We will continue tocompute compensation expense for stock options using the Black-Scholesvaluation model, and will utilize the modified prospective method for adoptionof SFAS 123R.

In March 2005, the SEC issued Staff AccountingBulletin (“SAB”) No. 107, *Share-Based Payment* (“SAB No. 107”), to provide interpretive guidance onSFAS No. 123R valuation methods, assumptions used in valuation models, andthe interaction of SFAS No. 123R with existing SEC guidance. SAB No. 107also requires the classification of stock compensation expense in the samefinancial statement line as cash compensation, and will therefore impact ourcost of gaming equipment and systems, casino operations (and related grossprofits and margins), research and development costs, and selling, general andadministrative expenses.

We estimate that the expensing of stock options willreduce per net income for fiscal year 2006 by approximately $4.1 million (or$0.08 per share) for the unvested options outstanding as of June 30, 2005.This amount excludes the accelerated vesting of approximately 2.4 millionoptions in June 2005 (see Note 1 to the consolidated financialstatements).

See Note 1 to theconsolidated financial statements, Description of Business and Summary ofSignificant Accounting Principles, for a description of other recently issuedaccounting pronouncements which are relevant to the Company but which webelieve will not have a material impact on the Company.

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*Results OfOperations*

Ourresults of operations include the accounts of Bally Technologies, Inc.,and its wholly-owned and partially-owned, controlled subsidiaries. 

| ** **                                  | ** ** | **Overall Consolidated Operating Results  Year ended June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/(Decrease)** | ** ** |
| ** **                                  | ** ** | **2005**                                                                                      | ** ** | **% Rev** | ** ** | **2004** | ** ** | **% Rev** | ** ** | **2003** | ** ** | **% Rev** | ** ** | **05 vs. 04** | ** ** | **04 vs. 03** | ** ** |
| ** **                                  | ** ** | **(dollars in millions)**                                                           | ** ** |
| Revenues                                    |       | $                                                                                             | 483.1      |   |   | 100 | % |   | $ | 476.6 |   |   | 100 | % |   | $ | 357.3 |   |   | 100 | % |   |   | 1 | % |   |   | 33 | % |   |
| Gross profit                                |       | 222.9                                                                                         |       |   | 46 | % |   | 263.8 |   |   | 55 | % |   | 192.1 |   |   | 54 | % |   |   | (16 | )% |   |   | 37 | % |   |
| Operating income  (loss)                    |       | (4.5                                                                                          | )          |   | (1 | )% |   | 88.8 |   |   | 19 | % |   | 66.4 |   |   | 19 | % |   |   | (105 | )% |   |   | 34 | % |   |
| Income (loss)  from continuing operations   |       | $                                                                                             | (17.9      | ) |   | (4 | )% |   | $ | 39.0 |   |   | 8 | % |   | $ | 25.9 | ) |   | 7 | % |   |   | (146 | )% |   |   | 51 | % |   |
| Income (loss)  from discontinued operations |       | (4.7                                                                                          | )          |   | (1 | )% |   | 40.9 |   |   | 9 | % |   | (17.6 | ) |   | (5 | )% |   |   | (111 | )% |   |   | (332 | )% |   |
| Net income (loss)                           |       | $                                                                                             | (22.6      | ) |   | (5 | )% |   | $ | 79.9 |   |   | 17 | % |   | $ | 8.3 | ) |   | 2 | % |   |   | (128 | )% |   |   | (863 | )% |   |

 

We report our revenue and income in two segments:

·       ***Bally Gaming Equipment and Systems***(which includes Gaming Equipment, Systems and Gaming Operations)

·       ***Casino Operations***

Bally Gaming and Systemsrevenue represents approximately 89.2%, 89.0% and 85.7% of total revenues forthe fiscal years ended June 30, 2005, 2004 and 2003, respectively. CasinoOperations revenue represents approximately 10.8%, 11.0% and 14.3% of totalrevenue for the fiscal years ended June 30, 2005, 2004 and 2003,respectively. Further descriptions of the fluctuations between fiscal year endsare discussed in depth under each respective segment disclosure below.

***Bally Gaming Equipment and Systems***

Through our Bally Gaming Equipment and Systems segmentwe are one of the leading providers of technology to the gaming industry. Thegaming industry has been moving to games which use ticket-in ticket-out (“TITO”)technology over the last several years, thereby reducing coin handling costsand down time for games waiting on the casino floor. During fiscal year 2005,the sale of new gaming devices in the domestic market declined as a result ofthe rapid adoption of TITO capable games during the preceding years. Inaddition, during fiscal year 2005, there were fewer new casino openings andthere were no new domestic markets that opened.

We believe that fiscal year 2006 will represent anopportunity for modest revenue growth for our Gaming Equipment and GamingOperations divisions. Our expectation is based on our belief that the majorityof casino operators will not return to their traditional buying patterns forreplacement games during fiscal year 2006, the domestic market expansionopportunities remain uncertain and several of the international marketopportunities that we are currently pursuing will likely not impact ourfinancial results until fiscal year 2007 and beyond. The aftermath of HurricaneKatrina will negatively impact our wide-area and daily fee revenues throughoutfiscal year 2006. However, we anticipate that the negative impact of HurricaneKatrina on our Gaming Equipment and Gaming Operations divisions may be offsetby sales to properties as they reopen during fiscal year 2006 and beyond.

We believe that Systems revenues could increase infiscal year 2006 as a result of investments we have made in our systemsbusiness and casino operators continued focus on promotions and bonusingsoftware as tools to enhance their player loyalty programs. In addition, weprovide systems technology to several of 

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the large multi-property casino operators that havemade recent acquisitions or are currently developing new properties, and weanticipate such customers will deploy our systems technology solutions.

However, the wide number of new products that we areintroducing, the uncertain market conditions and the changing competitivelandscape make forecasting for fiscal year 2006 particularly difficult.

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

| ** **                           | ** **   | **Year Ended June 30,** | ** **   |
|--------------------------------------|--------------|----------------------------------------|--------------|
| ** **                           | ** **   | ** **                             | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/(Decrease)** | ** ** |
| ** **                           | ** **   | **2005**                               | ** **   | **% Rev** | ** ** | **2004** | ** ** | **% Rev** | ** ** | **2003** | ** ** | **% Rev** | ** ** | **05 vs. 04** | ** ** | **04 vs. 03** | ** ** |
| ** **                           | ** **   | **(dollars in millions)**    | ** **   |
| Revenues                             | *** *** | *** ***                           | *** *** |   | *** *** | *** *** |   | *** *** | *** *** |   | *** *** | *** *** |   | *** *** | *** *** |   | *** *** | *** *** |   |   | *** *** | *** *** |   |   | *** *** | *** *** |   |
| Gaming Equipment                     |         | $                                      | 202.8        |   |   | 47 | % |   | $ | 223.3 |   |   | 53 | % |   | $ | 170.0 |   |   | 56 | % |   |   | (9 | )% |   |   | 31 | % |   |
| Systems                              |         | 97.0                                   |         |   | 22 | % |   | 121.9 |   |   | 29 | % |   | 80.7 |   |   | 26 | % |   |   | (20 | )% |   |   | 51 | % |   |
| Gaming Operations                    |         | 131.3                                  |         |   | 31 | % |   | 79.1 |   |   | 18 | % |   | 55.6 |   |   | 18 | % |   |   | 66 | % |   |   | 42 | % |   |
| Total revenues                       |         | $                                      | 431.1        |   |   | 100 | % |   | $ | 424.3 |   |   | 100 | % |   | $ | 306.3 |   |   | 100 | % |   |   | 2 | % |   |   | 39 | % |   |
| Gross margin                         |         |                                   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gaming Equipment                     |         | $                                      | 43.2         |   |   | 21 | % |   | $ | 101.0 |   |   | 45 | % |   | $ | 69.0 |   |   | 41 | % |   |   | (57 | )% |   |   | 46 | % |   |
| Systems                              |         | 76.9                                   |         |   | 79 | % |   | 91.2 |   |   | 75 | % |   | 63.9 |   |   | 79 | % |   |   | (16 | )% |   |   | 43 | % |   |
| Gaming Operations                    |         | 69.5                                   |         |   | 53 | % |   | 39.4 |   |   | 50 | % |   | 29.5 |   |   | 53 | % |   |   | 76 | % |   |   | 34 | % |   |
| Total gross  margin                  |         | $                                      | 189.6        |   |   | 44 | % |   | $ | 231.6 |   |   | 55 | % |   | $ | 162.4 |   |   | 53 | % |   |   | (18 | )% |   |   | 43 | % |   |
| Selling, general and  administrative |         | $                                      | 126.5        |   |   | 29 | % |   | $ | 98.8 |   |   | 23 | % |   | $ | 71.7 |   |   | 23 | % |   |   | 28 | % |   |   | 38 | % |   |
| Restructuring  charges               |         | 3.0                                    |         |   | 1 | % |   | — |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Impairment  charges                  |         | 3.6                                    |         |   | 1 | % |   | — |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Research and  development costs      |         | 43.4                                   |         |   | 10 | % |   | 36.6 |   |   | 9 | % |   | 20.0 |   |   | 7 | % |   |   | 19 | % |   |   | 83 | % |   |
| Depreciation and  amortization       |         | 15.8                                   |         |   | 4 | % |   | 10.0 |   |   | 2 | % |   | 6.5 |   |   | 2 | % |   |   | 58 | % |   |   | 54 | % |   |
| Operating income  (loss)             |         | $                                      | (2.7         | ) |   | (1 | )% |   | $ | 86.2 |   |   | 20 | % |   | $ | 64.2 |   |   | 21 | % |   |   | (103 | )% |   |   | 34 | % |   |

 

|                                           | ** ** | **Year Ended June 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/(Decrease)** | ** ** |
| ** **                                | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** | **05 vs. 04** | ** ** | **04 vs. 03** | ** ** |
| Operating  Statistics:                    | * *   | * *                               | * *   | * * | * * | * * | * * |   | * * | * * |   |   | * * | * * |   |
| New gaming  devices sold                  |       | 14,070                                 |       | 16,808 |   | 17,050 |   |   | (16 | )% |   |   | (1 | )% |   |
| OEM units sold                            |       | 2,990                                  |       | 2,660 |   | 1,013 |   |   | 12 | % |   |   | 163 | % |   |
| New unit average  selling price           |       | $                                      | 10,389     |   | $ | 9,328 |   | $ | 8,324 |   |   | 11 | % |   |   | 12 | % |   |
| Gaming monitoring units installed base    |       | 276,000                                |       | 279,000 |   | 240,000 |   |   | (1 | )% |   |   | 16 | % |   |
| Casino management  systems installed base |       | 225                                    |       | 219 |   | 194 |   |   | 3 | % |   |   | 13 | % |   |
| Systems managed  cashless games           |       | 128,000                                |       | 83,000 |   | 28,000 |   |   | 54 | % |   |   | 196 | % |   |
| End of period installed base:             |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Wide-area progressive                     |       | 1,660                                  |       | 1,726 |   | 1,910 |   |   | (4 | )% |   |   | (10 | )% |   |
| Daily-fee games                           |       | 8,804                                  |       | 7,985 |   | 2,485 |   |   | 10 | % |   |   | 221 | % |   |
| Centrally  determined games               |       | 18,885                                 |       | 17,995 |   | — |   |   | 5 | % |   |   | — |   |   |
|                                           |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Fiscal 2005 vs.Fiscal 2004**

Total revenues increased $6.8 million or 2% in fiscalyear 2005 compared to the prior fiscal year due to the following:

*GamingEquipment.**  *GamingEquipment revenue decreased by $20.5 million or 9% primarily due to thedecrease in domestic new unit sales to 11,301 units sold in fiscal year 2005 ascompared to 14,213 units sold in the prior fiscal year. This decrease in totalunits sold reflects the general casino industry reduction in new unit purchaseswhich followed the rapid pace of ticket-in ticket-out game replacements whichoccurred over the prior two years. In addition, the Company’s legacy videoproducts did not perform as well as competitor products, which led to theCompany’s decision to move to the new Alpha Game Engine. During 2005, therewere very few new casino openings in the United States. The decrease indomestic new unit sales was partially offset by a 8% increase in internationalnew unit sales from 2,595 in fiscal year 2004 to 2,796 in the current fiscalyear as we expanded our marketing efforts outside the United States and a 2%increase in the new unit average selling price. We believe that foreign marketswill likely expand in coming years, and will be an important source of revenuesfor us.  We will continue to dedicateresearch and development to developing products for foreign markets.

*Systems.**  *Systems revenue decreased $24.9million or 20% primarily as a result of:

·       Adecrease in new property installations in the current year. In the currentyear, new property installations represented approximately $18.5 million ofsystems revenue compared to $31.0 million in the prior fiscal year. Thedecrease in new property installations resulted from the above mentionedslowdown following the TITO system upgrades in the prior two years, and thereduced number of new casino openings during the current year.

·       A$1.2 million increase in deferral of revenue for contracts with non-perpetuallicenses based on the accounting under SOP No. 97-2.

The decrease in new property installations waspartially offset by an increase in recurring hardware and software maintenancerevenue of 22% or $4.8 million to $26.9 million due to the larger base ofinstalled units.

*Gaming Operations.**  *Gaming Operations revenue increased66% for fiscal year 2005 compared to fiscal year 2004 due to the following:

·       Anincrease in revenue of $40.1 million or 337% to $52.0 million from centrallydetermined linked games due to a full year of revenue compared to four monthsin the prior year due to the acquisition of SDG in March 2004.

·       Anincrease in the installed base of games and the benefits of certain Class IIenhancements, such as the “One System,” for which we are generating additionaldaily fee revenue.

·       Anincrease in daily fee games placements of 10% and an increase in averagerevenue per day for both wide-area progressives and Monte Carlo daily feegames.

Gross margin declined to 44% primarily as a result ofthe write-off of obsolete inventory in the amount of $26.4 million and anincrease in sales of Class II games, which traditionally have a lower salemargin when compared to traditional (or Class III) games and which iscompensated by the recurring revenue stream they generate through license feearrangements that have terms of three to five years. The inventory write-offwas primarily a result of a substantial retooling of our product lines to thenew Alpha platform and the decline in the current market conditions.

Selling, generaland administrative expense increased 29% primarily as a result of thefollowing:

·       Theaddition of Class II and central determination operations for a full yearin fiscal year 2005.

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·       Anincrease in legal expense of approximately $4.0 million resulting from higherpatent and litigation costs.

·       Anincrease in the provision for doubtful accounts receivable of $3.4 million,which includes a charge for a large customer that declared bankruptcy duringfiscal year 2005.

·       Severancecharges of $3.0 million for reductions in the workforce both domestically andin our European operations.

We continued to make progress on reducing selling,general and administrative costs during the last half of the fiscal year 2005.

Research and development costs increased as a resultof the increased investment in the development of the Alpha Engine System andrelated game content, and sustaining development of multiple existing gameplatforms and systems.

Depreciation andamortization expense increased as a result of the increase inacquisition-related intangible assets and the increased base of wide-area anddaily fee games.

**Fiscal 2004 vs.Fiscal 2003**

Total revenues increased $118.0 million or 39% infiscal year 2004 compared to the prior fiscal year due to the following:

*Gaming Equipment.*   GamingEquipment revenue increased by $53.3 million or 31% primarily due to:

·       Theacquisition of SDG in March 2004, which contributed an incremental $49.6million.

·       Higherdomestic new unit sales due to increased sales of TITO games and sales toseveral new casinos which opened during the year.

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*Systems.*   Systemsrevenue increased by $41.2 million or 51% primarily as a result of:

·       Increasedsales to multi-property operators resulting from displacements of competitorsystems which occurred as certain casinos were acquired by largermulti-property operators.

·       Increasedsales of software licenses for our TITO solution, as well as its bonusing andpromotions software, caused by the casino industry focus on improved marketingand player retention programs and operating cost efficiencies achieved with TITOsystems and games which reduces coin handling.

·       Recurringhardware and software maintenance revenue increased by 23% to $20.7 million forthe fiscal year, resulting from the larger base of installed units, which nowstands at approximately 276,000.

*GamingOperations.*   Gaming Operations revenue increased42% for fiscal year 2004 compared to the prior fiscal year due to an increaseof 221% in the installed base of daily-fee games deployed, which increased to7,985 units installed. This increase is primarily a result of the launch of theNew York Lottery operations and the acquisition of SDG.

Gross Margin improved to 53% as a result of highermargin systems sales and gaming operations revenue, as a proportion of totalsales.

Selling, general and administrative expenses increased38% in fiscal year 2004 over 2003 primarily due to the acquisitions of SDG,MindPlay and Crown Gaming, LTD, as well as the launch of the New York Lotteryresulting in increases in all operating expense categories except bad debt expense.In addition, selling, general and administrative expenses also increased as aresult of higher legal costs related to the protection of our intellectualproperty rights and higher payroll and payroll related costs primarily in ourcustomer service departments.

Research and developmentcosts increased primarily as a result of increased headcount and reflect theadditional costs incurred to expand our product offerings.

Depreciation andamortization increased as a result of increased capital expenditures and anincrease in acquisition related intangible assets.

***Casino Operations***

Our Rainbow Casino is one of four casinos currentlyoperating in the Vicksburg, Mississippi market. Our casino primarily drawscustomers from within a 75-mile radius surrounding Vicksburg, whichincludes Jackson, Mississippi. We believe that fiscal year 2006 will representa year of modest revenue growth for our casino. While a number of propertieslocated on the gulf coast sustained heavy damage, our casino was not damagedduring the 2005 hurricanes season. Although it was temporarily closed, wereopened the property for business within four days of Hurricane Katrina oncepower was restored to the general area. While the play levels at our casinohave generally increased following the reopening, we anticipate that the playlevel may return to a more typical level once the Gulf coast casinos reopen.

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

| ** **                           | ** ** | **Year Ended June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/(Decrease)** | ** ** |
| ** **                           | ** ** | **2005**                               | ** ** | **% Rev** | ** ** | **2004** | ** ** | **% Rev** | ** ** | **2003** | ** ** | **% Rev** | ** ** | **05 vs. 04** | ** ** | **04 vs. 03** | ** ** |
| ** **                           | ** ** | **(dollars in millions)**    | ** ** |
| Revenue                              |       | $                                      | 52.0       |   |   | 100 | % |   | $ | 52.3 |   |   | 100 | % |   | $ | 50.9 |   |   | 100 | % |   |   | — | % |   |   | 3 | % |   |
| Gross margin                         |       | 33.3                                   |       |   | 64 | % |   | 32.2 |   |   | 62 | % |   | 29.7 |   |   | 58 | % |   |   | 3 | % |   |   | 8 | % |   |
| Selling, general  and administrative |       | 13.2                                   |       |   | 25 | % |   | 12.5 |   |   | 24 | % |   | 12.2 |   |   | 24 | % |   |   | 6 | % |   |   | 3 | % |   |
| Depreciation and  amortization       |       | 3.3                                    |       |   | 6 | % |   | 2.8 |   |   | 5 | % |   | 2.2 |   |   | 4 | % |   |   | 18 | % |   |   | 28 | % |   |
| Operating income                     |       | $                                      | 16.8       |   |   | 32 | % |   | $ | 16.9 |   |   | 32 | % |   | $ | 15.3 |   |   | 30 | % |   |   | (1 | )% |   |   | 11 | % |   |
| Operating  Statistics:               |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average Number of  Gaming  Devices   |       | 890                                    |       |   |   |   |   | 930 |   |   |   |   |   | 930 |   |   |   |   |   |   | (4 | )% |   |   | — |   |   |
| Average Number of Table  Games       |       | 12                                     |       |   |   |   |   | 12 |   |   |   |   |   | 15 |   |   |   |   |   |   | — |   |   |   | (20 | )% |   |

 

**Fiscal 2005 vs.Fiscal 2004**

Rainbow Casino revenue was relatively flat in fiscalyear 2005 compared to the prior year in a market that grew 3.9% for the yearwith the majority of the increase in the fourth quarter of fiscal year 2005 dueto completion of capital improvement projects in the Vicksburg market.

Gross margin improved to 64% in fiscal year 2005 as aresult of continued improvement in operating cost reductions and increases inslot and table wins per day per unit.

The overall selling, general and administrativeexpenses remained relatively stable year over year as a percentage of revenue. Weplan on increasing these expenses marginally in fiscal year 2006 in order toattract players following Hurricane Katrina.

Depreciation andamortization expense increased $0.5 million resulting from additional capitalexpenditures relating to new game replacements.

**Fiscal 2004 vs.Fiscal 2003**

Rainbow Casino revenue increased by $1.4 million infiscal year 2004 resulting primarily from the remodeling project completed infiscal year 2003. The remodeling adversely effected revenues in 2003, andpositively impacted the results in 2004 due to the additional amenities addedto the property.

Gross margin improved to 62% in fiscal year 2004 as aresult of increases in slot and table wins per day per unit.

The overall selling, general and administrativeexpenses remained relatively stable year over year as a percentage of revenue.

Depreciation andamortization expense increased 28% for the fiscal year 2004 period resultingfrom additional capital improvements made to the Rainbow Casino late in fiscalyear 2003 relating to the remodeling project.

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***Parent Company***

Thesummary financial results of Bally Technologies, Inc., our parent entity,are set forth below. These results also include certain other income andexpenses that are otherwise not allocated to a specific business segment.

| ** **                     | ** ** | **Year Ended June 30,** | *** *** |
|--------------------------------|------------|----------------------------------------|--------------|
| ** **                     | ** ** | ** **                             | ** **   | ** ** | ** ** | ** ** | ** ** | **Increase/(Decrease)** | ** ** |
| ** **                     | ** ** | **2005**                               | ** **   | **2004** | ** ** | **2003** | ** ** | **05 vs. 04** | ** ** | **04 vs. 03** | ** ** |
| ** **                     | ** ** | **(dollars in millions)**    | ** **   |
| General and  administrative    |       | $                                      | 17.1         |   | $ | 12.8 |   | $ | 10.9 |   |   | 34 | % |   |   | 17 | % |   |
| Depreciation and  amortization |       | 1.3                                    |         | 1.5 |   | 2.3 |   |   | (12 | )% |   |   | (34 | )% |   |
| Total Parent  company expense  |       | $                                      | 18.4         |   | $ | 14.3 |   | $ | 13.2 |   |   | 29 | % |   |   | 8 | % |   |
| Other income  (expense):       |       |                                   |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                |       | 3.4                                    |         | 4.3 |   | 2.2 |   |   | (20 | )% |   |   | 94 | % |   |
| Interest expense               |       | (18.3                                  | )            | (17.9 | ) | (25.6 | ) |   | 2 | % |   |   | (30 | )% |   |
| Loss on extinguishment of debt |       | (0.6                                   | )            | (12.3 | ) | — |   |   | (95 | )% |   |   | — |   |   |
| Other, net                     |       | 0.6                                    |         | (0.5 | ) | 0.4 |   |   | (223 | )% |   |   | (215 | )% |   |
| Total other  expense           |       | $                                      | (14.9        | ) | $ | (26.4 | ) | $ | (23.0 | ) |   | (44 | )% |   |   | 15 | % |   |
| Income tax expense (benefit)   |       | $                                      | (5.2         | ) | $ | 21.1 |   | $ | 15.4 |   |   | (125 | )% |   |   | 37 | % |   |
| Minority interest              |       | $                                      | (3.7         | ) | $ | (2.3 | ) | $ | (2.0 | ) |   | (62 | )% |   |   | 16 | % |   |

 

**Fiscal 2005 vs.Fiscal 2004**

Ourgeneral and administrative expenses at the parent company increased $4.3million, or 34% in the fiscal year 2005 primarily as a result of:

·       Increasein payroll and related expense during the fiscal year 2005, primarily due torestricted stock unit amortization totaling $2.1 million and a $0.6 millioncharge for severance benefits resulting from reorganization, offset by adecrease in salaries and wages of $1.0 million due to reduced corporateheadcount and for certain personnel reassigned to the gaming equipment andsystems segment.

·       Increasein legal fees of $1.3 million during the fiscal year 2005, relative to theongoing SEC investigation and other related matters. We expect these highercosts to continue in fiscal year 2006.

·       Increasein professional fees of $1.4 million related to Sarbanes-Oxley compliance. Weexpect these additional costs to continue into fiscal year 2006.

·       Minorityinterest increased as a result of the consolidation of certain variableinterest entities.

·       Asa result of a refinancing completed during fiscal year 2004, we recorded apre-tax charge in the quarter ended September 30, 2003 of $12.3 million. InDecember 2004, we amended our bank loan agreement, which resulted in acharge of $0.6 million which was classified as a loss on extinguishment ofdebt.

·       Interestexpense for the current year totaled $18.3 million compared to $17.9 million inthe prior year period due to higher interest rates on lower total debtoutstanding. Virtually all of our debt is floating rate, therefore futureinterest expense will be impacted by future changes in the LIBOR which is thebase rate for our interest payments.

Our effective income taxrate for continuing operations for fiscal year 2005 was approximately 27%. Thisrate reflects a Federal tax benefit computed using a rate of 35% offset by atax charge for the estimated potential tax liability for the reorganization ofour European distribution operations, as well as reserves 

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applied to certaindeferred tax assets. The effective rate for fiscal year 2006 is expected to bebetween 35% and 38%.

**Fiscal 2004 vs.Fiscal 2003**

General andadministrative expenses increased in fiscal year 2004 compared to the priorfiscal year primarily as a result of:

·       Increasein general corporate legal costs resulting from the class action lawsuit andrelated matters.

·       Increasein general liability and director and officer insurance costs resulting from marketconditions.

Total other expenseincreased as a result of the September 2003 refinancing of our creditfacilities. The refinancing charge of $12.3 million was partially offset bydecreases in our net interest expense as a result of the lower interest ratesachieved in the refinancing.

***Significant Items Affecting Comparability***

Certain significant items affect the comparability offinancial statements from the fiscal years ended June 30, 2005, 2004 and2003. These items are discussed below.

*Inventoryand asset write-downs:**  *We perform detailedinventory valuation procedures at least quarterly. This process includesexamining the carrying values of new and used gaming devices, parts andancillary equipment in comparison to the current fair market values for suchequipment (less costs to sell or dispose). Some of the factors involved in thisanalysis include the overall levels of our inventories, the current andprojected sales levels for such products, the projected markets for suchproducts both domestically and internationally, the costs required to sell theproducts including refurbishment costs and importation costs for internationalshipments, and the overall projected demand for products once the nextgeneration of products are scheduled for release.

During fiscal year 2005 we faced declining demand forgaming devices based on our legacy platform, and therefore we continuallyassessed this particular portion of our inventory. In October 2004, wemade the strategic decision to move to our new Alpha video platform, which wasmade commercially available in April 2005 in most markets.

The decision to move our gaming devices to the newvideo platform, the targeting of used equipment for non-domestic markets, andthe consolidation of certain warehouses all led to accelerated disposals oflegacy products. This process has required continual updating of estimates forthe net realizable value of inventories due to the subjectivity involved inprojecting sales volumes, used game sales values, refurbishment costs, andcustomer demand in non-domestic jurisdictions. As a result of our ongoinganalysis of inventory valuations, we have taken a series of inventory andrelated asset write-downs totaling $26.4 million during fiscal year 2005, whichincluded a charge of $4.4 million in the fourth quarter. We continue to hold asignificant number of used gaming devices, therefore there can be no assurancesthat further write-downs will not occur in subsequent periods.

*Impairmentcharges:*   Weentered into an agreement during fiscal year 2004 to provide a development loanto a Native American tribe to further their pursuit of developing a gamingfacility. The amounts advanced under the terms of the loan totaled $1.5million, and we are not obligated for any additional advances. In March 2005,the tribe received an adverse court ruling that we believe materially impairsthe tribe’s ability to pay the loan, and we therefore recorded an impairmentcharge for the full amount of the loan.

During the March 2005 quarter, we performed areview of our intellectual property rights for various video games used on ourthen existing video platforms, which we refer to as our legacy platform. Thisreview was triggered by the declining sales of the games using our legacyplatform during fiscal year 2005. We 

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evaluated the carrying value of certain intellectualproperty assets and determined that several were no longer recoverable and weretherefore deemed to be impaired. The impairment charge totaled $1.3 million.

During the March 2005 quarter, we also evaluatedthe useful lives and salvage values for our leased gaming equipment. Based onrecent historical data indicating a shortening of the average length such gameswere deployed, we decided to reduce the depreciable life for certain videoproducts to two years. The change in the useful life resulted in an impairmentcharge of $0.8 million to write-off the undepreciated portion of the gamevalues (down to salvage value) for games at the end of their two-year life.

*Refinancingand loan amendment charges:**  *During fiscal year 2005,we amended our bank loan agreement. The fee incurred for the amendment totaledapproximately $1.0 million, and resulted in a charge of $0.6 million to writeoff a portion of the previously capitalized fees.

During fiscal year 2004, we initiated a tender offerfor all of our outstanding 10% Senior Subordinated Notes due 2007, which werefer to as our senior subordinated notes, at a price of 103.33% plus a .25%tender premium. The offer was completed on September 16, 2003. As a result,we recorded a pre-tax charge in the September 2003 quarter of $12.3million, which included a $5.0 million charge of the early extinguishment ofthe senior subordinated notes, $7.0 million for the write off of deferredfinancing costs, and $0.3 million in fees and expenses.

Severance charges:   Duringfiscal year 2005, we undertook an extensive review of our operations andreduced our workforce during the September 2004 quarter and the March 2005quarter. As a result of these reductions in force, we incurred severancecharges totaling $3.6 million for the fiscal year 2005.

***Discontinued Operations***

As previously discussed, we sold our Nevada routeoperations, the Rail City Casino and Bally Wulff during fiscal year 2004.

On June 30, 2004, we completed the sale of UnitedCoin to Century Gaming, Inc. and received approximately $100 million incash and the assumption by Century Gaming of approximately $5 million in debt. Additionally,Century Gaming has agreed to acquire a certain number of gaming devices fromour Bally Gaming and Systems business unit over a five-year period. United Coinrevenue totaled $220.9 million and $202.4 million for the years ended June 30,2004, and 2003, respectively. For the same periods, operating income totaled$22.5 million and $7.0 million respectively. Infiscal year 2004, we reported a gain on the sale before income taxes of $15.3million, or $9.1 million after tax. During fiscal year 2005, the gain on salewas adjusted for charges incurred for an adverse outcome in a patent infringementcase and the resolution of certain sale related liabilities, the sum of whichtotaled $6.3 million net of tax, which is included in the discontinuedoperations section of the statement of operations for the fiscal year ended June 30,2005.

The sale of the Rail City Casino to the Sands Regentwas completed on May 3, 2004. Total consideration was $37.9 million incash. Rail City revenue totaled $19.2 million and $21.2 million for the yearsended June 30, 2004 and 2003, respectively. For the same periods,operating income totaled $5.4 million and $5.0 million respectively. Wereported a gain on the sale before income taxes of $23.1 million, or $14.3million after tax.

On July 18, 2003, we sold Bally Wulff wallmachine and amusement game business unit to a third party equity investor for$16.5 million in cash and recorded a loss on sale totaling $25.4 million. BallyWulff reported an operating loss of $40.6 million on revenues of $60.2 millionfor fiscal year 2003.

The Louisiana routeoperations were sold in October 2004 and had revenues totaling $17.0million and $14.9 million for the years ended June 30, 2004 and 2003,respectively. For the same period, operating income totaled $2.8 million and$2.0 million respectively. We recorded a gain on the sale of $1.3 million or 

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$0.8 million after taxesin fiscal year 2005, which is included inthe discontinued operations section of the statement of operations for thefiscal year ended June 30, 2005.

***Recent Developments***

In late August 2005, a devastating hurricane hitthe gulf coast of Mississippi and Louisiana causing substantial damage to theGulfport and Biloxi, Mississippi area, as well as New Orleans, Louisiana. In September 2005,Louisiana was again impacted by a severe hurricane that caused additionalflooding in New Orleans as well as other locations in Louisiana.

We earn revenue in both Louisiana and Mississippi frommachine rentals and participations in various casinos that were damaged by thehurricanes. In some instances, the machines have been damaged or destroyed; inother cases, the machines are undamaged, but the casinos are currently closed.

We carry both property and business interruptioninsurance which will serve to offset some of the losses indicated above. Atthis time we are actively working with our insurance providers to assess lossesand associated recoveries, but anticipate the full claim cycle will cover anextended period of time. Therefore, we cannot reasonably estimate the netproceeds to be recovered in connection with these losses.

Initial indications are that the casinos in the Biloxiand Gulfport areas will need to be rebuilt and will not open for a protractedperiod of time. Some casinos may decide not to rebuild. Casinos in New Orleansmay need major reconstruction and, given the devastation in the area, may beclosed for months. Casinos outside of these areas may also need somerestoration, but others have reopened for business, although their business maybe at lower than historical levels.

For the September 2005 quarter, the impact on ourGaming Operations division as a result of the hurricane is estimated to be lessthan $0.02 per diluted share. Revenue was negatively impacted by approximately$1.4 million related to games scheduled to be sold to customers in the affectedarea, with an associated gross margin of $0.9 million. Our balance sheetexposure for accounts receivable and net book value of games placed in affectedcasinos is approximately $1.9 million.

Management believes thatthe impact of the hurricane will continue throughout fiscal year 2006. At thistime we estimate the total impact to revenue and gross margin will be $9.8million and $4.9 million, respectively, for fiscal year 2006 period.

**Financial Condition**

***Liquidity***

As of June 30, 2005, we had $33.2 million in cashand cash equivalents. In addition, we had net working capital of approximately$125.2 million, a decrease of approximately $132.1 million from June 30,2004, which is explained in “—Working Capital” below. Consolidated cash andcash equivalents at June 30, 2005 includes approximately $2.7 million ofcash utilized in our Casino Operations that is held in vaults, cages or changebanks. Additionally, pursuant to various state gaming regulations, certain cashaccounts totaling approximately $13.4 million as of June 30, 2005, aremaintained to ensure availability of funds to pay wide-area progressive jackpotawards which are classified as restricted cash on the consolidated balancesheets. In addition, we purchase U.S. Treasury Strip Securities for the benefitof jackpot winners who elect to receive annual or weekly installment payments. Thesesecurities are included in restricted long-term investments in the accompanyingconsolidated balance sheets, and totaled $10.1 million and $2.5 million as of June 30,2005 and 2004, respectively.

On September 5, 2003, we completed a refinancingtransaction whereby we entered into a new $275.0 million term loan and a $125.0million revolving credit facility. We used the proceeds from the refinancingtransaction to (1) repay an aggregate of approximately $188.0 millionoutstanding under our existing term 

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loan, (2) repurchase the $150 million aggregateamount of our senior subordinated notes, and (3) pay $5.0 million intransaction fees and expenses. The fees and expenses were capitalized and arebeing amortized on the straight-line basis over the remaining term of the loan.The term loan has a 1% per year mandatory principal amortization after thefirst year, and a six-year maturity. The revolving credit facility commitmentdecreases ratably over its five-year term to a 60% balloon.

In December 2003, we increased the term loan by$75.0 million to a total of $350.0 million. We used the proceeds primarily tofund the acquisition of SDG. As a result of the increase, we incurred an additional$1.6 million in debt issuance costs, which amount has been capitalized and isamortized on the straight-line basis over the remaining term of the term loan.

The sale of our Rail City Casino was completed in May 2004,and the sale of United Coin was completed in June 2004. The bank loanagreement governing the term loan and the revolving credit facility requiredthat we use approximately 50% of the net proceeds from the disposition of theseassets to reduce the term loan and revolving credit facility principal balanceson a pro rata basis. As a result, in August, 2004, we made a payment topermanently reduce the term loan by $31.6 million, and paid down the revolvingcredit facility from $70.0 million to zero.

In December 2004, we amended our bank loanagreement. The amendment provides for (1) an increase in the maximumallowable leverage ratio under the bank loan agreement to a minimum of 4.75times at June 30, 2005, which declines thereafter, (2) a reduction inthe revolving credit facility commitment to $75.0 million and (3) anincrease in the term loan interest rate to LIBOR plus 3.00%, which can beadjusted to be LIBOR plus 3.75% based on certain credit rating and leverageratio criteria. We incurred a fee of approximately $1.0 million in connectionwith the amendment. As of June 30, 2005, we had $314.9 million outstandingunder our term loan accruing interest at a rate of 6.77%, and zero outstandingunder the revolving credit facility.

As a result of the additional time required tocomplete the year end closing process we failed to deliver to our lenders our2005 audited financial statements and the unaudited interim financialstatements for the fiscal quarter ended September 30, 2005 in a timelymanner, and therefore were not in compliance with certain of our debt covenantsunder the bank loan agreement. Pursuant to an agreement with the lenders, wecured the default in December 2005 by delivering our 2005 auditedfinancial statements contained in our Annual Report on Form 10-K andour unaudited interim financial statements for the fiscal quarter ended September 30,2005. During the default period through the date of the filing of our AnnualReport on Form 10-K, we incurred default interest of approximately$0.7 million.

In October 2006, we executed an amendment to ourbank loan agreement, which, among other things, (i) extended the duedate for the  delivery of the our audited financialstatements for the fiscal year ended June 30, 2006, toDecember 31, 2006, (ii) provided that we will deliver our quarterlyreports on Form 10-Q for the Fiscal Quarters ending on September 30,2005, December 31, 2005 and March 31, 2006 no later than December 31,2006, (iii) modified the definition of EBITDA to exclude up to $10 millionof certain cash charges, and (iv) clarified that the definitionof EBITDA includes interest income on trade receivables. We paidan administrative fee of $964,000 in exchange for the concessions granted underthe amendment. There can be no assurances we will be able to comply with theamended covenants. See “Risk Factors” below for a discussion of the risksassociated with our non-compliance with certain of our debt covenants under thebank loan agreement.

We are in compliance with our financial covenantsunder the bank loan agreement, which consist of a leverage ratio, a fixedcharges coverage ratio, and a minimum EBITDA (as that term is defined in thebank loan agreement) ratio. The leverage ratio is computed as total averagedebt outstanding during the quarter divided by the trailing 12 months EBITDAexcluding certain cash and non-cash charges, and is further adjusted to removeEBITDA from discontinued operations at the time those operations are sold. The Company’sleverage ratio as of June 30, 2005 was 4.6 times versus the covenantmaximum of 4.75 times.

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Cash flows from operating activities are derivedprimarily from the cash receipts from the sale of goods and services, theoperation of wide-area progressive systems, lease payments, and monthly cashreceipts from maintenance agreements for our casino systems customers. Inaddition, we generate cash through our casino operations. We utilize our cashto acquire materials for the manufacture of goods for resale or lease, payroll,and all other selling, general and administrative expenses.

Management believes that cash flows from currentoperating activities and the availability under the revolving credit facility shouldprovide us with sufficient capital resources and liquidity. Although theleverage ratio limited our availability under the revolving credit facility at June 30,2005, access to the revolving credit facility in the future will depend on ourability to generate adequate levels of EBITDA, as described above. At June 30,2005, we had no material commitments for capital expenditures.

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***Working Capital***

The following tablepresents the components of consolidated working capital at June 30, 2005and 2004:

| ** **                                           | ** ** | ** **                      | ** ** | ** ** | ** ** | **Increase (decrease)** | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **2005**                        | ** ** | **2004**   | ** ** | **Amount**                   | ** ** | **%** | ** ** |
| ** **                                           | ** ** | **(dollars in 000s)** | ** ** |
| Current Assets:                                      |       |                            |       |       |       |                         |       |   |   |
| Cash and cash equivalents                            |       | $                               | 33,170     |       | $          | 154,258                      |       | $ | (121,088 | ) | (78 | )% |
| Restricted cash                                      |       | 13,421                          |       | 15,590     |       | (2,169                       | )          | (14 | )% |
| Accounts and notes receivable, net                   |       | 97,679                          |       | 126,212    |       | (28,533                      | )          | (23 | )% |
| Inventories                                          |       | 63,523                          |       | 63,285     |       | 238                          |       | — | % |
| Deferred tax assets, net                             |       | 30,884                          |       | 22,571     |       | 8,313                        |       | 37 | % |
| Other current assets                                 |       | 33,034                          |       | 33,300     |       | (266                         | )          | (1 | )% |
| Assets of discontinued operations held for sale      |       | —                          |       | 4,442      |       | (4,442                       | )          | (100 | )% |
| Total current  assets                                |       | $                               | 271,711    |       | $          | 419,658                      |       | $ | (147,947 | ) | (35 | )% |
| Current  Liabilities:                                |       |                            |       |       |       |                         |       |   |   |
| Accounts payable                                     |       | $                               | 36,807     |       | $          | 37,515                       |       | $ | (708 | ) | (2 | )% |
| Accrued liabilities                                  |       | 43,838                          |       | 48,900     |       | (5,062                       | )          | (10 | )% |
| Deferred revenue                                     |       | 40,962                          |       | 48,030     |       | (7,068                       | )          | (15 | )% |
| Jackpot liabilities                                  |       | 13,025                          |       | 12,075     |       | 950                          |       | 8 | % |
| Taxes payable                                        |       | 1,752                           |       | 5,718      |       | (3,966                       | )          | (69 | )% |
| Current maturities of long-term debt                 |       | 10,163                          |       | 5,866      |       | 4,297                        |       | 73 | % |
| Liabilities of discontinued operations held for sale |       | —                          |       | 4,337      |       | (4,337                       | )          | (100 | )% |
| Total current  liabilities                           |       | 146,547                         |       | 162,441    |       | (15,894                      | )          | (10 | )% |
| Net working  capital                                 |       | $                               | 125,164    |       | $          | 257,217                      |       | $ | (132,053 | ) | (51 | )% |

 

For the year ended June 30,2005, our net working capital declined $132.1 million. The $121.1 milliondecrease in cash and cash equivalents was most significantly impacted by ouruse of $101.6 million in proceeds from the sale of United Coin and Rail City topay down the term loan and revolving credit facility in accordance with thebank loan agreement, as discussed above, as well as cash used to deploywide-area and daily-fee gaming devices.

Thedecrease in working capital was also affected by:

·       Anet decrease in accounts and notes receivable relating to the early payments bycertain significant customers, as well as our lower revenue levels in thesecond half of fiscal year 2005, which were caused by the transition to the newAlpha Game Engine and a reduction in purchases by casinos following the TITOplacements over the preceding two years.

·       Anet decrease in inventory, which resulted from inventory obsolescence(non-cash) charges of $26.4 million. Excluding such charges, inventoryincreased $12.3 million during fiscal year 2005 due to the build up ofinventory related to our new products being introduced.

·       Adecrease in other assets, primarily as a result of: a decrease in refundabledeposits of $1.7 million and a decrease in prepaid insurance and royalties, allof which were offset by a $2.2 million increase in trial games.

·       A decrease in accruedliabilities, primarily as a result of:  (i) a$7.1 million decrease in deferred revenue related to transactions involving thedelivery of games and systems not meeting the revenue recognition requirementsof SOP No. 97-2 in fiscal 2004 that were subsequently recognized infiscal 2005, (ii) a decrease of approximately $4.0 million in divesturerelated accruals for the sale of United Coin, (iii) a $4.2 million decreasein payroll and payroll related accruals, and 

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(iv) a $1.9 milliondecrease in royalty accrual due to lower sales, all of which were partiallyoffset by a $7.4 million increase in patent litigation accruals.

***Cash Flow***

Duringthe year ended June 30, 2005, cash flows provided by operating activitiesof continuing operations totaled $52.1 million as a result of:

·       Areported net loss of $(22.6) million, which includes certain non-cash inventoryand asset impairment charges totaling $30.0 million, primarily resulting fromthe writedown of certain legacy products to net realizable value due primarilyto the introduction of the Alpha Game Engine.

·       Anincrease in inventory of $12.3 million, primarily resulting from the build upof inventory related to our new products being introduced.

·       Adecrease in accounts and notes receivables of $32.8 million, primarilyresulting from a decrease in fourth quarter sales of $35.4 million from fiscal2004 to 2005, that was primarily related to the strategic shift to our new AlphaGame Engine sales which began late in the June 2005 quarters.

·       Adecrease in accounts payable, accrued liabilities, and deferred revenue jackpotliabilities of $22.1 million, due primarily to timing of payments to vendorsand lower levels of purchases due to the lower fourth quarter sales levelsdiscussed above.

Duringthe year ended June 30, 2005, cash flows used in investing activities ofcontinuing operations totaled $65.1 million as a result of:

·       Capitalexpenditures of $12.4 million.

·       Costsincurred to deploy additional leased gaming devices totaling $40.6 million.

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

·       SDGearn out buyout of $12.0 million, described in Note 4 to consolidated financialstatements, Business Combinations.

Duringthe year ended June 30, 2005, cash used in financing activities ofcontinuing operations totaled $108.1 million as a result of:

·       Ourpay down of the term loan and revolving credit facility of $101.6 milliondiscussed above.

·       Principalpayments on other long term debt totaling $6.3 million.

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

·       $1.0 million in cash usedto pay the fees and expenses related to the amendment of the bank loanagreement amendment discussed above.

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**Contractual Commitments**

We arecommitted to make future payments pursuant to various contracts and agreements.A summary of those contractual obligations existing as of June 30, 2005,is as follows:

| ** **                        | ** **   | **2006**           | ** **   | **2007**     | ** **   | **2008**     | ** **   | **2009**     | ** **   | **2010**     | ** **   | **Total**    | ** **   |
|-----------------------------------|--------------|--------------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|
| ** **                        | ** **   | **(in 000s)** | ** **   |
| Debt:                             | *** *** | *** ***       | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Term loan  facility(a)            |         | $                  | 3,500        |         | $            | 3,500        |         | $            | 3,500        |         | $            | 3,500        |         | $ | 300,882 |   | $ | 314,882 |   |
| Revolving credit  facility(b)     |         | —             |         | —       |         | —       |         | —       |         | —       |         | —       |         |
| Subordinated debt(c)              |         | 2,800              |         | 2,800        |         | 2,800        |         | 2,800        |         | 2,800        |         | 14,000       |         |
| Other debt                        |         | 3,863              |         | 372          |         | 2,000        |         | —       |         | —       |         | 6,235        |         |
| Estimated interest  payments(d)   |         | 22,344             |         | 21,773       |         | 21,267       |         | 20,772       |         | 20,559       |         | 106,715      |         |
|                              |         | 32,507             |         | 28,445       |         | 29,567       |         | 27,072       |         | 324,241      |         | 441,832      |         |
| Other commitments:                |         |               |         |         |         |         |         |         |         |         |         |         |         |
| Net minimum  rentals              |         | 2,641              |         | 2,278        |         | 1,512        |         | 1,114        |         | 407          |         | 7,952        |         |
| MindPlay earn-out(e)              |         | —             |         | —       |         | —       |         | —       |         | —       |         | —       |         |
| Purchase  commitments(f)          |         | —             |         | —       |         | —       |         | —       |         | —       |         | —       |         |
| Employment  agreements(g)         |         | 980                |         | 980          |         | 245          |         | —       |         | —       |         | 2,205        |         |
| Kirkland  consulting agreement(h) |         | 600                |         | 600          |         | 300          |         | —       |         | —       |         | 1,500        |         |
| Total commitments                 |         | $                  | 36,728       |         | $            | 32,303       |         | $            | 31,624       |         | $            | 28,186       |         | $ | 324,648 |   | $ | 453,489 |   |

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(a)           The term loan facility requires principalpayments of $3.5 million per year with the balance due in 2010.

(b)          There are currently no amounts outstanding onthe $75.0 million revolving credit facility.

(c)           InDecember 2004, we agreed to terminate the SDG earn out for $40.0 million,of which $12.0 million was paid in cash and $28.0 million in the form of anunsecured promissory note. In June 2005, $14.0 million of the principalbalance of the unsecured promissory note was extinguished through the issuanceof approximately 1.0 million shares of common stock.  The remaining $14.0 million outstanding as of June 30,2005 is payable over the subsequent five years.

(d)          Ourdebt is virtually all variable rate (tied to LIBOR); therefore, we computed theestimated future interest payments for our total debt outstanding based on theaverage interest rate in effect as of June 30, 2005 of 6.77%.

(e)           Pursuantto the MindPlay purchase agreement, we are obligated to make certain contingentearn-out payments to the former principals of MindPlay, amounts that cannotcurrently be estimated.

(f)             Exceptin certain rare instances, Bally Gaming and Systems is not required by itssuppliers to enter into quarterly commitments for products.

(g)           Wehave employment agreements with most of our employees with positions of VicePresident or above. These agreements generally provide for an initial rate ofpay and the terms of the severance benefits generally range from three totwelve months salary continuation with similar non-compete periods. Almost allsuch agreements contain language that the employee is still an “at will”employee, and as such can be terminated at anytime subject to the individualtermination provisions. The only multi-year arrangement is with RichardHaddrill, our CEO effective October 1, 2004, which covers a three-yearterm, with a base salary of $980,000. Only Mr. Haddrill’s compensation isreflected in the table above.

(h)          Pursuantto an Advisory Agreement with Kirkland Investment Corporation (100% owned byJoel Kirschbaum who is a director of Alliance, and therefore treated as arelated-party) dated July 1, 2004, we agreed to pay Kirkland $600,000annually for a period of 3.5 years for consulting services.

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Our long-term debt isvirtually all floating rate and therefore future interest payments will beimpacted by future LIBOR rate changes as well as the balance of debtoutstanding in those future periods. Interest payments for fiscal year 2005totaled $17.5 million.

The payment obligations inthe above table are based on the contractually scheduled due dates. The onlypayment acceleration that could be demanded of us would generally be in theevent of a default under the bank credit agreement that was not cured withinthe provisions set forth in that agreement.

**Off Balance Sheet Arrangements**

We do not have any offbalance sheet arrangements.

***Risk Factors***

Investing in our commonstock involves risks. Prospective investors in our common stock shouldcarefully consider, among other things, the following factors and otherinformation contained in this document, including our financial statements andthe notes to those statements, prior to making an investment decision. We haveidentified the following important factors that could cause actual results todiffer materially from those projected in any forward-looking statements we maymake from time to time.

**Thegaming industry is intensely competitive. We face competition from a number ofcompanies, some of which have greater resources, and if we are unable tocompete effectively, our business could be negatively impacted.**

*Bally Gaming and Systems*

Competition among gamingmachine manufacturers is based on, among other things, competitive customerpricing and financing terms, appeal to the player, product quality and havingan extensive distribution and sales network. There are a number of established,well-financed and well-known companies producing machines thatcompete with each Bally Gaming and Systems product line in each of the BallyGaming and Systems markets. While there are a number of competitors in thefield, a single competitor, IGT, dominates the domestic market for gamingmachines. In addition, certain technology-oriented companies recentlyentered or may soon enter the gaming machine market. Certain of these competitorshave access to greater capital resources than we do, and as a result, may bebetter positioned to compete in the marketplace.

The casino enterprise systems market iscrowded, with IGT, Aristocrat, Acres Gaming, Inc., MIS and, to a lesserextent, Konami and Mikohn Gaming Corporation, comprising the competition. Thecompetition is intense due to the number of providers, as well as the limitednumber of casinos and jurisdictions in which they operate. Pricing, productfeature and function, accuracy and reliability are all main factors indetermining a provider’s success in selling its system.

*Casino Operations*

The principal competitivefactors in the casino operations industry include the quality and location ofthe facility, the nature and quality of the amenities and customer servicesoffered, and the implementation and success of marketing programs. Our RainbowCasino in Vicksburg, Mississippi faces intense direct competition from othergaming facilities serving the Vicksburg market. As the overall size of thepotential customer base is limited, competition from casinos in nearbylocations may further dilute the market from which Vicksburg casinos draw mostof their patrons. Moreover, additional potential gaming sites remain in andaround Vicksburg. Some of these sites may be closer to larger populationcenters and, if developed, may enjoy a competitive advantage over our casino.

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**Our success in the gaming industry depends in largepart on our ability to develop innovative products and systems; i**fwe fail to keep pace with rapid change in product design, manufacturing andmarketing strategies our business could be negatively impacted.

Ourrevenues depend on the earning power and life span of our games. Newer gamestend to have a shorter life than more traditional games, and as a result, weface pressure to design and deploy successful games to maintain our revenuestream and to remain competitive. Our future success depends to a large extentupon our ability to continue to design, manufacture and market technologicallysophisticated and entertaining products that achieve high levels of playeracceptance. However, our ability todevelop new and innovative products could be adversely affected by:

·       adecline in the popularity of our gaming products with players,

·       alack of success in developing new products, services or systems,

·       aninability to roll out new games, services or systems on schedule as a result ofdelays in connection with    regulatoryproduct approval in the applicable jurisdictions, or otherwise,

·       anincrease in the popularity of competitors’ games, and

·       a negative change in thetrend of consumer acceptance of our newest systems innovations including ourAlpha Game Engine and our MindPlay System.

**Thecompetitive contract terms required in non-traditional gaming markets mayaffect our futurerevenues.**

Management believes thatcustomer leasing and financing terms have become increasingly importantcompetitive factors for the company in non-traditional markets such as Class IIand other Native American jurisdictions. We sometimes are required to grantextended payment terms on gaming machines, systems and other gaming equipmentto gain entry into a developing market that we would not otherwise extend. Whilethe product normally collateralizes these financings, in an event of default,the resale value of the collateral may be considerably less than the amountfinanced. Accordingly, we have greater exposure to fluctuations in thefinancial condition of our customers in emerging markets than has historicallybeen the case in the established markets.

**The unpredictable growth of non-traditional gamingmarkets may affect our business and prospects.**

The continued growth ofnon-traditional gaming markets for electronic gaming machines, systemsand other gaming equipment depends heavily on the public’s acceptance of gamingin these markets, as well as the ongoing development of the regulatory approvalprocess by national and local governmental authorities. A portion of our growthis directly tied to our ability to access these new markets. We cannot predictwhich new jurisdictions or markets, if any, will approve the operation ofelectronic gaming machines, the timing of any such approval, the public’sacceptance of our gaming machines in these markets or our market share orprofitability in these markets.

**Wemay not be able to attract or retain the management or employees necessary toremain competitive inour industry.**

The competition forqualified personnel in the gaming industry is intense. Our future successdepends on the retention and continued contributions of our key management,finance, marketing, and staff personnel, many of whom would be difficult orimpossible to replace. Our success is also tied to our ability to recruitadditional key personnel in the future. We cannot assure you that we will beable to retain our current personnel or recruit any additional key personnelrequired. In addition, we do not have employment agreements with many membersof our senior management. The loss of services of any of our personnel couldhave a material adverse effect on our business, financial condition, results ofoperations and prospects.

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**Thegaming industry is heavily regulated and changes in regulation by gamingauthorities may adverselyimpact our ability to operate the business.**

Themanufacture and distribution of gaming machines and the conduct of gamingoperations are subject to extensive federal, state, local and foreignregulation by various gaming authorities. Our ability to continue to operate incertain jurisdictions could be adversely affected by:

·       unfavorablepublic referendums,

·       unfavorablelegislation affecting or directed at manufacturers or gaming operators, such asreferendums to increase taxes on gaming revenues,

·       adversechanges in or finding of non-compliance with applicable governmental gamingregulations,

·       delaysin approvals from regulatory agencies,

·       alimitation, conditioning, suspension or revocation of any of our gaminglicenses, and

·       unfavorabledeterminations or challenges of suitability by gaming regulatory authoritieswith respect to our officers, directors, major stockholders or key personnel.

Although the laws, rules andregulations of the various jurisdictions in which we operate vary in theirtechnical requirements, virtually each jurisdiction requires licenses, permits,qualification documentation, including evidence of integrity and financialstability, and other forms of approval to engage in gaming operations or themanufacture and distribution of gaming machines. Our officers, directors, majorstockholders and key personnel are also subject to significant regulatoryscrutiny. In the event that gaming or governmental authorities determine thatany person is unsuitable to act in such capacity with respect to the company,we could be required to terminate our relationship with such person. To ourknowledge, the Company and our key personnel have obtained, or applied for, allgovernment licenses, registrations, findings of suitability, permits andapprovals necessary to conduct their respective activities in the variousjurisdictions that we operate. However, there can be no assurance thoselicenses, registrations, findings of suitability, permits or approvals will berenewed in the future, or that new forms of approval necessary to operate inemerging or existing markets will be given.

**Gaming operators are subject to additional taxes andfees that could change at any time.**

The gaming industry istypically subject to significant taxation and fee assessment in addition tothose corporate and state income taxes generally assessed on businessoperations. These additional taxes and fees are subject to increase at anytime, and may be materially increased either prospectively or retroactively. Therecan be no assurance as to future changes in taxation and fee assessment on thegaming industry. Any material increase could adversely affect our ability tooperate our business.

**Ourintellectual property protections may be insufficient to properly safeguard ourtechnology; expensesincurred with respect to protecting and defending intellectual property rightscould adversely affect our business.**

The gaming industry isconstantly employing new technologies in both new and existing markets. We relyon a combination of patent and other technical security measures to protect ourproducts, and continue to file for patents protecting such technologies. Notwithstandingthese safeguards, our competitors may still be able to obtain our technology orto imitate our products. Furthermore, others may independently develop productssimilar or superior to ours.

Competitors and otherthird parties may infringe on our intellectual property rights, or may allegethat we have infringed on their intellectual property rights. We may incursignificant litigation expenses protecting our intellectual property ordefending our use of intellectual property, reducing our ability to fundproduct initiatives. These expenses could have an adverse effect on our futurecash flow and results of operations. We are currently subject to litigationregarding patent infringement which, if resolved adverse to the 

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Company, could havematerial impact on our business. Litigation can also divert management focusfrom running the day-to-day operations of the business. There can be no assurancesthat certain of our products, including those with currently pending patentapplications, will not be determined to have infringed upon an existing thirdparty patent.

**Weare currently subject to securities and derivative litigation, the unfavorableoutcome of which mighthave a material adverse effect on our business.**

A number of federal classaction lawsuits and state derivative lawsuits have been filed against us,including certain of our current and former officers, alleging violations ofsecurities laws. We strongly believe that these lawsuits are without merit andare vigorously defending them and have notified our applicable insurers. Wecannot, however, determine with certainty the outcome or resolution of theseclaims or the timing of their ultimate resolution. In addition to the expenseand burden incurred in defending these lawsuits and any damages that we maysuffer, our management’s efforts and attention may be diverted from theordinary business operations in order to address these claims. If the finalresolution of any of these lawsuits is unfavorable to us, our financialcondition, results of operations, cash flows and liquidity might be materiallyadversely affected if our existing insurance coverage is unavailable orinadequate to resolve the matter.

**Therestatement may subject us to actions or additional litigation which could havean adverse effect on ourbusiness, results of operations, financial condition and liquidity.**

In the First Restatementwe restated our originally issued consolidated financial statements as of June 30,2004, and for the fiscal years ended June 30, 2004 and 2003. In the SecondRestatement, included in this Amendment No. 1, we are restating ourpreviously issued consolidated financial statements as of June 30, 2005and 2004 and for each of the three years in the period ended June 30, 2005.The Restatements may result in additional scrutiny in our ongoing SECinvestigation or to new regulatory actions or civil litigation which couldrequire us to pay fines or other penalties or damages and could have an adverseeffect on our business, results of operations, financial condition andliquidity. The Restatements may also result in negative publicity and we maylose or fail to attract and retain key customers, employees and managementpersonnel as a result of these matters.

In some jurisdictions,audited financial statements must be filed with the gaming regulatoryauthorities. The late filing of our Annual Report on Form 10-K forthe fiscal year ended June 30, 2006 could generate inquiries fromregulators, including possible disciplinary action. However, the Company hasbeen keeping regulators informed of the situation and has received noindication that any disciplinary action will be filed in any jurisdiction.

**Ongoing SEC investigations could adversely affect us.**

The SEC had beenconducting an informal inquiry into certain matters surrounding the allegationsrelating to the securities class action litigation and our methods of revenuerecognition. On August 18, 2005, the SEC issued a formal order ofinvestigation with respect to these matters. In accordance with its normalpractice, the SEC has not advised us when its investigation may be concluded,and we are unable to predict the outcome of this investigation. While we arecooperating fully with the investigation, adverse developments in connectionwith the investigation, including any expansion of the scope of theinvestigation, could negatively impact us and could divert the efforts andattention of our management team from our ordinary business operations. Inconnection with any SEC investigation, it is possible that we will be requiredto, among other things, pay fines, consent to injunctions on future conduct,further restate our financial statements or suffer other penalties, any ofwhich could have a material adverse effect on our business.

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**We have materialweaknesses in our internal controls over financial reporting, which couldadversely affect our ability to report our financial condition, results ofoperations and cash flows accurately.**

As required by Section 404 of the Sarbanes-OxleyAct of 2002, management has conducted an assessment of our internal controlover financial reporting. In performing our assessment management identifiedmaterial weaknesses in our internal control over financial reporting andconcluded that our internal control over financial reporting was not effectiveas of June 30, 2005. For a detailed description of these materialweaknesses, see Item 9A, Controls and Procedures.

Material weaknesses in ourinternal control over financial reporting could adversely impact our ability toprovide timely and accurate financial information. We have taken and willcontinue to take certain measures to strengthen our internal controls, as setforth under Item 9A, Controls and Procedures. However, additional work remainsto be done to address the identified material weaknesses. If we areunsuccessful in implementing or following our remediation initiatives plan, orfail to update our internal controls as our business evolves, or to integrateacquired businesses into our controls system, we may not be able to reportaccurately our financial condition, results of operations or cash flows ormaintain effective disclosure controls and procedures. If we are unable toreport financial information accurately or maintain effective disclosure controlsand procedures, we could be subject to, among other things, an additional SECenforcement action, additional securities litigation and a general loss ofinvestor confidence, any one of which by itself could adversely affect ourbusiness and prospects.

**We face increasedcosts and have extensive work remaining to remediate the material weaknesses inour internal control over financial reporting.**

We have extensive workremaining to remediate the identified material weaknesses in our internalcontrol over financial reporting. This work has extended into the 2006 fiscalyear and will continue until we are able to remediate the material weaknesseswe have identified. These matters have required, and will continue to require,a significant amount of management time and a significant commitment ofexternal resources. The costs of these efforts are substantial and could have amaterial adverse impact on the Company’s financial performance. We expect thatthey will continue to do so in future periods.

**Certain consequencesof our reporting situation under the federal securities laws may adverselyaffect our financial condition and results of operations, including our abilityto raise capital.**

Our failure to meet the reporting requirements of thefederal securities laws affects our ability to access the capital markets. Weare restricted in our ability to make any registered offering of securitiesuntil we can present our most recent financial statements. We are alsoineligible to use “short-form” registration that allows us to incorporate byreference our Form 10-K, Form 10-Q and other SEC reportsinto our registration statements, or shelf registration until we have filed allof our periodic reports in a timely manner for a period of twelve months.

We are also ineligible to use Form S-8until we have prepared and filed all of our delinquent periodic reports. We useForm S-8 to register grants of equity compensation to our employees,including grants in the form of options and restricted stock. Theunavailability of Form S-8 reduces our flexibility in grantingoptions and restricted stock to our employees.

In addition, the NYSE hasbroad power to commence delisting proceedings for violations of its rules andmay do so at any time. Because we are late in making our SEC filings, the NYSEcould commence delisting proceedings against the Company; however, they havenot indicated an intention to do so.

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**Consumer spending onleisure activities is affected by changes in the economy and consumer tastes,as well as other factors that are difficult to predict and beyond our control.**

We cannot assure you thatdemand for our products or services will remain constant. Consumers’willingness to spend money on leisure activities such as gaming is affected bychanges in the economy and consumer tastes, both of which are both difficult topredict and beyond our control. Continued adverse developments affectingeconomies throughout the world, including a general tightening of theavailability of credit, increasing interest rates, increasing energy costs,acts of war or terrorism, natural disasters, declining consumer confidence orsignificant declines in the stock market could lead to a further reduction indiscretionary spending on leisure activities adversely affecting our business.

**Internationaloperations, unfavorable political developments, weak foreign economies andother foreign risks may negatively impact our financial condition and resultsof operations.**

Our business isdependent on international markets as a portion of our revenues. As of June 30,2005, Bally Gaming and Systems had $16.8 million of receivables, or 17% of ourtotal receivables, from customers in foreign countries. We expect thatreceivables with respect to foreign sales will continue to account for aportion of our total revenues. As a result, our business in these markets issubject to a variety of risks, including:

·       recessionsin foreign economies;

·       theadoption and expansion of trade restrictions;

·       expropriation,nationalization and limitation on repatriation of earnings;

·       currencyexchange fluctuations;

·       reducedprotection of intellectual property rights in some countries;

·       longerreceivables collection periods and greater difficulty in collecting accountsreceivable;

·       difficultiesin managing foreign operations;

·       social,political and economic instability;

·       unexpectedchanges in regulatory requirements;

·       actsof war and terrorism;

·       abilityto finance foreign operations;

·       changesin consumer tastes and trends;

·       tariffsand other trade barriers;

·       actsof war or terrorism; and

·       U.S.government requirements for export.

There can be no assurancesthat any of these international developments, or others, would not adverselyaffect our financial condition and results of operation.

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**Our bank loan agreementimposes significant restrictions and failure to comply with these restrictionscould result in the acceleration of a substantial portion of our debt, which wemay not be able to repay or refinance.**

Our bank loanagreement contains a number of covenants that, among other things, restrict ourability and certain of our subsidiaries to:

·       disposeof assets,

·       incuradditional indebtedness and issue preferred stock,

·       paydividends or make other distributions,

·       enterinto certain acquisitions,

·       repurchaseequity interests or subordinated indebtedness,

·       issueor sell equity interests of our subsidiaries, and

·       engagein mergers or consolidations or certain other transactions with subsidiariesand affiliates.

In addition, the bank loan agreement requires us tomaintain compliance with certain financial ratios, including certain leverageratios. Our ability to comply with such ratios, meet our debt serviceobligations or reduce our total debt is dependent upon our future performance,which may be affected by events beyond our control. There can be no assurancethat we will be able to comply with such restrictions and limitations, or thatthey will not adversely affect our ability to finance our future operations orcapital needs, or engage in other business activities that would otherwise bein the company’s interest.

A breach of any of thesecovenants or our inability to comply with the required financial ratios couldresult in a default under the bank loan agreement. In the event of any suchdefault, the lenders could elect to declare all borrowings outstanding underthe bank loan agreement, together with any accrued interest and other fees, tobe due and payable, as well as require us to apply all available cash to repaythe amounts. If we were unable to repay the indebtedness upon its acceleration,the lenders could proceed against the underlying collateral. There can be noassurance that our assets would be sufficient to repay the amount in full, orthat we would be able to borrow sufficient funds to refinance the indebtedness.

**Virtually all ofour debt is subject to variable interest rates; rising interest rates couldnegatively impact our business.**

Certain borrowings underour bank loan agreement bear interest at a variable rate. In addition, we mayincur other variable rate indebtedness in the future. Carrying indebtednesssubject to variable interest rates makes the Company more vulnerable toeconomic and industry downturns, as well as reduces our flexibility inresponding to changing business and economic conditions. Increases in interestrates on this indebtedness would increase our interest expense, which couldadversely affect our cash flow, our ability to service our debt and togenerally grow the business.

**Current borrowings,as well as potential future financings, may substantially increase our currentindebtedness.**

No assurance can begiven that we will be able to generate the cash flow necessary to permit us tomeet our fixed charges and payment obligations with respect to our debt. Wecould be required to incur additional indebtedness to meet these fixed chargesand payment obligations. Should we incur additional debt, among other things,such increased indebtedness could:

·       adverselyaffect our ability to expand the business, market our products and make investmentsand capital expenditures;

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·       adverselyaffect the cost and availability of funds from commercial lenders, debtfinancing transactions and other sources; and

·       createcompetitive disadvantages compared to other companies with lower debt levels.

Any inability of us toservice our fixed charges and payment obligations, or incurrence of additionaldebt, would have an adverse effect on our cash flows, results of operations andbusiness generally.

**An inability tomaintain sufficient liquidity could negatively affect expected levels ofoperations and new product development.**

Future revenue may not besufficient to meet operating, product development and other cash flowrequirements. Sufficient funds to service our debt and maintain new productdevelopment efforts and expected levels of operations may not be available, andadditional capital, if and when needed by us, may not be available on termsacceptable to us. If we cannot obtain sufficient capital on acceptable termswhen needed, we may not be able to carry out our planned product developmentefforts and level of operations, which could harm our business.

**Our financialresults vary from quarter to quarter, which could negatively impact ourbusiness.**

Various factorsaffect our quarterly operating results, some of which are not within ourcontrol. These factors include, among others:

·       thefinancial strength of the gaming industry;

·       consumer’swillingness to spend money on leisure activities;

·       thetiming and introduction of new products and services;

·       themix of products and services sold;

·       thetiming of significant orders from and shipments to customers;

·       productand service pricing and discounts;

·       thetiming of acquisitions of other companies and businesses or dispositions; and

·       generaleconomic conditions.

These and other factorsare likely to cause our financial results to fluctuate from quarter to quarter.Based on the foregoing, we believe that quarter-to-quarter comparisons of ourresults of operations may not be meaningful. In addition, such fluctuationscould cause us to be unable to comply with the financial ratios in our bankloan agreement.

**Certain marketrisks may affect our business, results of operations and prospects.**

In the normal course of our business, we are routinelysubjected to a variety of market risks, examples of which include, but are notlimited to, interest rate movements, collectibility of receivables andrecoverability of residual values on leased assets. Further, some of our payorsmay experience financial difficulties, or may otherwise not pay accountsreceivable when due, resulting in increased write-offs. Although we do notanticipate any material losses in these risk areas, no assurances can be madethat material losses will not be incurred in these areas in the future.

Our strategic plan, involving growth through theacquisition of other companies, may not succeed.

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Our strategic planinvolves, in part, growth through the acquisition of other companies. Suchgrowth involves a number of risks, including:

·       thedifficulties related to combining previously separate businesses;

·       thesubstantial diversion of management’s attention from day-to-day operations;

·       theassumption of liabilities of an acquired business, including unforeseenliabilities;

·       thefailure to realize anticipated benefits, such as cost savings and revenueenhancements;

·       thedilution of existing stockholders due to the issuance of equity securities,utilization of cash reserves, or incurrence of debt in order to fund theacquisitions;

·       thepotentially substantial transaction costs associated with acquisitions; and

·       thedifficulties related to assimilating the products, personnel and systems of anacquired business and to integrating distribution and other operationalcapabilities.

We have adopted a shareholder rights plan, which,together with provisions in our restated articles of incorporation and Nevadalaw, could discourage or prevent a potential takeover of our company that mightotherwise result in you receiving a premium over the market price for yourcommon stock.

We adopted a shareholder rights plan pursuant to whichwe distributed one right for each outstanding share of common stock held bystockholders of record as of March 12, 1998. Because the rights maysubstantially dilute the stock ownership of a person or group attempting atake-over of us without the approval of our Board of Directors, even if such achange in control would result in our stockholders receiving a premium fortheir shares, the plan could make it more difficult for a third party toacquire us, or a significant percentage of our outstanding capital stock,without first negotiating with our Board of Directors. Additionally, ourrestated articles of incorporation permit our Board of Directors to issuespecial shares from time to time, with such rights and preferences as theyconsider appropriate. Our Board of Directors could authorize the issuance ofspecial shares with terms and conditions and under circumstances that couldhave an effect of discouraging a takeover or other transaction.

As a Nevada corporation,we are also subject to certain provisions of the Nevada General Corporation Lawthat have anti-takeover effects and may inhibit a non-negotiated merger orother business combination. These provisions are intended to encourage anyperson interested in acquiring us to negotiate with, and to obtain the approvalof, our Board of Directors in connection with such a transaction. However,certain of these provisions may discourage a future acquisition of the Company,including an acquisition in which the stockholders might otherwise receive apremium for their shares. As a result, stockholders who might desire toparticipate in such a transaction may not have the opportunity to do so.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

*Currency RateFluctuations*

Revenues and results ofoperations derived from our non-U.S. subsidiaries are denominated in theirlocal currencies and are affected by changes in the relative values of non-U.S.currencies and the U.S. dollar. Most of the currencies in countries in which wehave foreign operations have strengthened versus the U.S. dollar, whichresulted in assets and liabilities denominated in local currencies beingtranslated into more dollars. The Company does not currently utilize hedginginstruments.

*Market risks*

During the normal course of our business, we areroutinely subjected to a variety of market risks, examples of which include,but are not limited to, interest and currency rate movements, collectibility ofaccounts 

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and notes receivable, and recoverability of residualvalues on leased assets. We constantly assess these risks and have establishedpolicies and practices designed to protect against the adverse effects of theseand other potential exposures. Although we do not anticipate any materiallosses in these risk areas, no assurances can be made that material losses willnot be incurred in these areas in the future.

We have performed a sensitivity analysis of ourfinancial instruments, which consist of our cash and cash equivalents and debt.We have no derivative financial instruments. In performing the sensitivityanalysis, we define risk of loss as the hypothetical impact of changes in themarket interest rates or currency exchange rates on earnings.

The results of thesensitivity analysis at June 30, 2005 are as follows:

*Interest Rate Risk*

We had total debt ofapproximately $335.1 million, consisting primarily of the $314.9 million termloan under our senior credit facilities and the $14.0 million subordinated loanand other debt at approximately $6.2 million. The interest rate for the termloan is reset every six months. If the LIBOR rates were to increase or decreaseby 100 basis points, with all other factors remaining constant, earnings woulddecrease or increase by approximately $3.4 million on a pre-tax basis.

*Foreign CurrencyExchange Rate Risk*

Our foreign subsidiariesgenerally use their domestic currency as their functional currency. A 10%fluctuation in the exchange rates of these currencies against the U.S. dollarwould result in a corresponding change in earnings reported in the consolidatedgroup of approximately $0.6 million.

*Estimates*

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

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**RESTATEMENTS TO THECONSOLIDATED FINANCIAL STATEMENTS**

As described in Note 2 to consolidated financialstatements, Restatement of Previously Issued Financial Statements, we haverestated our previously issued consolidated financial statements as of June 30,2005 and 2004, and for each of the three years in the period ended June 30,2005 and our previously reported unaudited selected quarterly financial datawithin such periods presented in Note 22 to consolidated financial statements,Selected Quarterly Financial Data (Unaudited).

Our consolidated financialstatements, including the notes thereto, and supplementary financialinformation are listed in Item 15, Exhibits and Financial Statement Schedules,and are included after the signature page beginning at page F-1.

**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

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**ITEM 9A.**        CONTROLSAND PROCEDURES

**Disclosure Controlsand Procedures**

As required by Rule 13a-15(b) promulgated under theExchange Act, our management, with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, evaluated the design and operatingeffectiveness as of June 30, 2005 of our disclosure controls andprocedures, as defined in Rule 13a-15(e) promulgated under theExchange Act. Based on this evaluation our Chief Executive Officer and ChiefFinancial Officer concluded that, because of the deficiencies in our internalcontrol over financial reporting described below, as of June 30, 2005 ourdisclosure controls and procedures were not effective.

Notwithstanding management’s assessmentthat our internal control over financial reporting was ineffective as of June 30,2005 and the material weaknesses described below, we believe that theconsolidated financial statements included in this Annual Report on Form 10-Kcorrectly present our financial condition, results of operations and cash flowsfor the fiscal years covered thereby in all material respects.

**Internal ControlOver Financial Reporting**

**Management’s Reporton Internal Control Over Financial Reporting**

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as defined in Rule 13a-15(f) promulgatedunder the Exchange Act. Internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of an issuer’s financial statements for externalpurposes in accordance with accounting principles generally accepted in theUnited States of America (“GAAP”). Internal control over financial reportingincludes policies and procedures that:

·       pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of an issuer’s assets;

·       providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with GAAP, and that an issuer’sreceipts and expenditures are being made only in accordance with authorizationsof its management and directors; and

·       providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of an issuer’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also, the applicationof any evaluation of effectiveness to future periods is subject to the riskthat controls may become inadequate because of changes in conditions, or thatcompliance with the policies or procedures may deteriorate.

As required by Rule 13a-15(c) promulgatedunder the Exchange Act, our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofour internal control over financial reporting as of June 30, 2005.Management’s assessment was based on criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission in *Internal Control—Integrated Framework* (“COSO”).Our assessment identified deficiencies that were determined to be materialweaknesses.

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. Because of the material weaknessesdescribed below, management concluded that our internal control over financialreporting was not effective as of June 30, 2005.

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The specificmaterial weaknesses identified by management as of June 30, 2005 are describedas follows:

·       **Inadequate staffing and training in finance andaccounting:  **Management has identified two broad issues relatedto our finance and accounting staff. First, accounting personnel did not havean adequate understanding of the complex rules over revenue recognitionand how the application of those rules applied to our evolving business inrecent years. This issue contributed to the majority of the dollar amount andnumber of financial statement adjustments required to fiscal year end 2005 aswell the need for the restatement of the previously issued financial statements.Second, a high level of turnover of key finance and accounting personnel infiscal year 2005, a year in which we were integrating the SDG acquisition,resulted in certain controls not operating effectively as of June 30, 2005.As a result of these two issues, our finance and accounting staff was, in somecases, inadequately trained and, in fiscal year 2005, understaffed. Theseweaknesses resulted in material adjustments to fiscal year end 2005 andcontributed to the First Restatement of the consolidated financial statements,described under Note 2 to consolidated financial statements, due to: (i) misinterpretationof certain accounting literature, (ii) lack of understanding andinterpretation of customer contracts, (iii) untimely application ofaccounting principles, (iv) improper classification of certain balancesheet and income statement items and (v) untimely performance of the yearend evaluation of obsolete inventory and fixed asset reserves.

Additionally, thismaterial weakness contributed to the Second Restatement of the consolidatedfinancial statements described under Note 2 to consolidated financialstatements.

·       **Ineffective controls related to the preparation ofcertain account analyses, account summaries and account reconciliations:  **Certaincontrols designed to ensure timely preparation, review and approval of certainaccount analyses and reconciliations did not operate effectively. Specifically,certain reconciliations in areas including accounts receivable, accruedliabilities, other current assets, and property, plant and equipment were notperformed in a timely manner. In certain circumstances we did not adequatelyfollow up or resolve the reconciliation of certain items. These weaknessesresulted in material adjustments to fiscal year end 2005 and contributed to theFirst Restatement of the consolidated financial statements.

Additionally,this material weakness contributed to the Second Restatement of theconsolidated financial statements.

·       **Inadequate controls related to revenue recognition:  **Wedid not have appropriate internal controls related to the recognition ofrevenue for game and system sales, including the lack of a comprehensivecontract administration function to address the operating, legal, financial andaccounting ramifications of game and system revenue contracts. Our controlswere not adequate to capture and analyze the terms and conditions of allcontracts to ensure the proper recording of revenue contracts with standard andnon-standard terms, including FOB destination provisions, extended paymentterms and other contractual arrangements that can affect the timing and amountof revenue to be recognized. Certain of our revenue transactions are accountedfor in accordance with the AICPA’s Statement of Position 97-2, “*Software Revenue Recognition*” (“SOP No. 97-2”),as amended, which includes complex revenue recognition criteria that were notalways adequately assessed. These weaknesses were the result of a materialdeficiency in the design of internal control over financial reporting andresulted in material adjustments to our 2005 consolidated financial statementsdiscovered during our year-end close process and contributed to the FirstRestatement of the consolidated financial statements as follows:

(i)             decreasein gaming and systems revenues by $6.0 million $8.5 million and $23.2 millionin fiscal years 2005, 2004 and 2003, respectively; and

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(ii)         decrease in cost of sales by $4.2 million,$2.9 million and $9.9 million in fiscal years 2005, 2004 and 2003, respectively.

Additionally,this material weakness contributed to the Second Restatement of the consolidatedfinancial statements.

·       **Inadequate controls related to inventory valuation:  **TheCompany did not design and implement sufficient controls related to thevaluation of inventory. As a result inventory, prior to year-end adjustmentswas not stated at the lower of cost or market value due to the following: (i) certainmanufacturing labor and overhead costs were not charged to inventory because wedid not accurately assess the purchase price variance associated with the useof standard costs within our accounting systems, (ii) the restocking ofexcess inventory pulled for work orders was not always properly identified andremoved from the bill of materials and (iii) certain packaging materialshad not always been properly charged to cost of sales. This weakness resultedin material adjustments to fiscal year end 2005 and contributed to the FirstRestatement of the consolidated financial statements. The net effect of theseadjustments increased cost of goods sold by $1.9 million, $0.7 millionand $0.6 million for the fiscal years ended June 30, 2005, 2004 and 2003respectively.

Additionally,this material weakness contributed to the Second Restatement of the consolidatedfinancial statements.

·       **Ineffective controls related to income taxes:  **Ourpolicies and procedures did not include adequate review of certain complexincome tax issues, resulting in material deficiencies in the operatingeffectiveness of internal control over financial reporting. These deficienciesresulted in an adjustment of our effective tax rate resulting from theestablishment of reserves for certain tax credits, and additional U.S. andforeign deferred tax expense related to our foreign operations. Certainadjustments were also required in the First Restatement for deferred taxesrelated to a prior acquisition totaling $8.3 million as of June 30, 2004.

·       **Ineffective controls at the entity level:  **As evidenced by the materialweaknesses described above, and management’s final assessment of our internalcontrols, we have determined that our entity-level controls related tothe control environment, risk assessment, monitoring function and disseminationof information and communication activities did not operate effectively,resulting in a material weakness in each COSO component. Such entity levelcontrols, and a comprehensive monitoring of internal controls by the internalaudit function, are part of the framework to ensure that the designed system ofinternal control is operating effectively to ensure that significanttransactions are adequately identified, recorded and disclosed.

Additionally,this material weakness contributed to the Second Restatement of theconsolidated financial statements.

Our independent registeredpublic accounting firm, Deloitte & Touche LLP, has issued anattestation report on management’s assessment of our internal control overfinancial reporting which is set forth below.

**Changes in InternalControl**

Based on the evaluationrequired by Rule 13a-15(d) of the Exchange Act, there were nochanges to our internal control over financial reporting during the fiscalquarter ended June 30, 2005 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

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**Remediation Plan**

We are including information in this Annual Report on Form 10-K/Awith respect to our internal control over financial reporting for the periodsubsequent to June 30, 2005, in order to provide readers with a currentunderstanding of the identified material weaknesses, as well as how they arebeing addressed as part of our remediation plan.

Subsequent to June 30,2005, we have undertaken, extensive work to remediate the material weaknessesidentified in our internal control over financial reporting described above,including developing the specific remediation initiatives described below. Theimplementation of these initiatives was a priority for us in fiscal 2006 andcontinues to be a priority in fiscal 2007. We have begun implementing theactions described below with respect to the identified material weaknesses;however, there can be no assurances as to when the implementation of theseinitiatives will be completed. Furthermore, we are in process of evaluating ourinternal control over financial reporting as of June 30, 2006. There canbe no assurances that the material weaknesses described above were cured as ofsuch date, or that we will not identify additional material weaknesses as aresult of such evaluation. Until such initiatives are implemented, we willcontinue to incur the expenses and management burdens associated with theadditional resources required to prepare our consolidated financial statements.

*Inadequate Staffingand Training in Finance and Accounting*

*Inadequate *Staffing.**   Wehave focused intensive efforts on improving the overall level and quality ofour staffing in a number of finance and accounting areas related to theidentified material weaknesses, including the tax and revenue departments. Theseefforts have resulted in the creation of several new positions, as well as thehiring of a number of key employees. To this point, we have filled thefollowing positions: Chief Financial Officer, Vice President/CorporateController, Vice President of Corporate Accounting, Director of FinancialReporting and a Tax Manager.

*Inadequate *Training.**   Wehave held a number of internal meetings with our sales staff to review ourrevenue recognition policies and procedures. Our goal is to provide the salesstaff with a better understanding of the applicable accounting rules, theconsistency in contractual language that is required, as well as the newcontract administration procedures discussed below under “—Inadequate ControlsRelated to Revenue Recognition—Contract Administration.” We are also educatingthe sales department as to certain standard sales contracts discussed below andwith respect to the types of contractual language that has been reviewed andpre-approved by members of the legal and finance departments.

Additionally, the financeand accounting department continues to encourage and pay for all personnel whoenroll in Continuing Professional Education, as well as for any college andmaster’s level courses that relate to their respective job functions.

*Ineffective Controls related to the Preparation ofCertain Account Analyses, Account Summaries and Account Reconciliations*

As a result of the adjustments made with respect tocertain balance sheet accounts for the fiscal year ended June 30, 2005, wedetermined a more detailed review for these accounts was necessary inconnection with our quarterly account reconciliation process. The Companycompleted a thorough review of balance sheet accounts to determine whether thesupporting schedules were adequately prepared and/or reviewed, and that theyincluded adequate supporting documentation.

The finance and accountingdepartment has also developed a spread sheet management process to ensure thatvarious departments are working from the same schedules thereby reducing thelikelihood of errors from using outdated files stored on individual computers.

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*Inadequate ControlsRelated to Revenue Recognition*

In addition to the additional internal training of oursales staff discussed above, we have also taken the following actions toremediate the issues previously identified with respect to inadequate controlsrelated to revenue recognition.

*Internal *Review of All Game Sale Transactions.**   Managementhas implemented a procedure to review each game and system sale transaction forcompliance with AICPA Statement of Position No. 97-2, *Software Revenue Recognition*. The initialrevenue recognition determination is made by the revenue department, and isthen reviewed by a member of our finance department at a director or higherlevel. In addition, our Chief Financial Officer reviews both randomly selectedcontracts, as well as those related to large and/or complex transactions.

*Outside *Review of Game Sale Transactions.**   Weengaged an outside consultant to assist us in performing additional reviewprocedures for revenue transactions during fiscal 2006. The scope of theconsultant’s review was designed to ensure a comprehensive review of all largetransactions, as well as certain types of transactions that have previouslyresulted in adjustments to the timing of revenue recognition. The outsideconsultant’s scope also included reviewing a sample of contracts from thegeneral population for proper revenue recognition.

We have also reviewed certain complex transactions andnew proposed contracts with our consultants to identify any accounting issuesprior to the final contract execution.

*Implementation *of Standard Sales Contract.**   Aspart of the pre-review processes, discussed above under “—InternalReview of All Game Sale Transactions,” we have created a standard contract fordomestic game sales. This contract was introduced to the sales force in draftform in January 2006, and was implemented in February 2006. We arealso reviewing our system sales contracts and international sales contracts todetermine the feasability of developing standardized contracts for all thosemarkets.

*Contract *Administration.*  *We have designed amultiple step action plan to develop a contract administration process that iswell defined, well understood and efficient in its operation. Our previouscontract administration process could not be relied upon to produce consistentlyprepared contracts as documents could be edited by a number of individuals atanytime prior to execution.

Beginning in September 2005, we implemented PhaseI of our plan which required each sales contract to follow the contractapproval flow chart process. Phase I includes a review of all terms andconditions of each contract, and requires formal sign off as well as executionof the sales agreement by certain levels of management based on a predeterminedapproval process. We have also established procedures that will now requireapproval by our Chief Executive Officer for certain contracts. The contract isthen returned to the sales person for delivery and sign off by the customer. Anyfurther edits would then be re-reviewed by members of our finance andaccounting department to gauge their accounting impact to ensure proper revenuerecognition.

In February 2006, we began Phase II of ourprocess and hired a Contract Administrator. Phase II of the contractadministration process involves the establishment of a Contract Administratorposition, and related enhanced policies and procedures. This individual reportsdirectly to the legal department. Members of our Senior Management team have agreedto certain contractual terms that have been defined as “standard” and,consequently, we developed standard game sales contracts discussed above under “—*Implementation of Standard Sales Contract*.” If the draftcontract uses these standard terms, it will receive only limited review by ourfinance and accounting department. If the contract goes beyond these standardterms, then the Contract Administrator must follow a newly created decisiontree which involves review and approval by various members of the finance andlegal departments, depending on the issue identified.

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Phase III of the process introduces a new contractmanagement and work flow software to better manage the decision tree and trackcontract approvals.

*Quarterly *Certifications.**   Wehave expanded our quarterly Sarbanes-Oxley certification procedures anddisclosure controls. In addition to the internal certifications we previouslyrequired from the Executive Vice President of each business division and theVice President/Corporate Controller, our process now requires internalsub-certifications from all sales directors and Vice Presidents, including theExecutive Vice President of Sales. These additional internal sub-certificationsinclude a number of representations regarding the various signatories’respective duties and responsibilities.

*Inadequate ControlsRelated to Inventory Valuation*

We have taken the following actions to remediate theissues previously identified with respect to our inadequate controls related toinventory valuation.

*Expanded *review by Senior Management.*  *Members of our seniormanagement team have met with members of the manufacturing management team,cycle counters, and warehouse supervisors, as well as performed expandedreviews of the supporting schedules prepared by the cost accounting manager inregards to inventory valuation, and have selected various accounts foradditional analysis. We have also filled the new role of Accounting Manager—Inventory.This individual’s entire focus will be on inventory related issues.

*Game *Inventory—Live Data.*  *The Company’s intra-netsite is in the process of being upgraded to include real time data for gameinventory; both for new and used games. This upgrade has allowed for increasedaccounting for the game inventory, as well as greater awareness by a greaternumber of individuals of the inventory levels and the availability of certainfinished goods.

*Negative *Bill of Materials.**   Weidentified an issue regarding the accounting for excess inventory that wasissued with respect to work orders but was subsequently restocked. Ultimately,the manufacturing system will be programmed to perform these entriesautomatically; however, until the programming is complete, we will continue tomake manual adjustments with respect thereto.

*Physical *Inventories.*  *We utilize a perpetualinventory system with a substantial portion of our inventory being subjected todaily cycle counts. Management performed added physical counts during fiscalyear 2006 and the Inventory Accounting Manager and members of the cycle countteams visited certain of our offsite warehouses to perform additional detailedphysical counts and tests during fiscal 2006. We will continue to performadditional detailed physical counts at our offsite warehouses during fiscal2007.

*Quarterly *Adjustments ofPurchase Price Variances.*  *Our Vice President/Corporate Controller and ourInventory Accounting Manager are performing quarterly analyses of any purchaseprice variances that may occur when there is a deviation from our standardprices and are making the necessary adjustments to properly value our cost ofsales, inventory and fixed assets.

*IneffectiveControls Related to Income Taxes*

We have increased ourinternal capabilities in the income tax area with the addition of our VicePresident/Corporate Controller and Manager of Tax, as well as with thecontinued assistance of third party consultants. We also perform significantinternal reviews of our income tax provision each quarter. We continue to usethe services of large local law firms and accounting firms in foreignjurisdictions in order to ensure that we are in compliance with local tax laws.We are also performing an annual R&D tax study and consulting with anationally recognized accounting firm on certain transfer pricing studies aswell.

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*IneffectiveControls at the Entity Level*

We have taken the following actions to remediate theissues previously identified with respect to our ineffective controls at theentity level.

*IT *Systems.**   Wecontinue to address areas of our IT system that require additional investment.Consultants from the IT Systems provider (MAPICS) have been engaged to performa review of our current usage of our system, and the cost benefits of upgradesthat are available.

*Control *Environment.**   TheNominating and Corporate Governance Committee has begun the search for a fullyindependent new board member, who will also qualify as an Audit Committeefinancial expert under the rules of the SEC. A search consultant has beenengaged and we have initiated the search.

*Internal *Audit.**   Inaddition to the personnel changes discussed above, we have hired a new VicePresident to head our Internal Audit department. This individual led ourSarbanes-Oxley testing for fiscal year 2006 as well coordinated efforts withthe outside firm we hired in the 2005 compliance effort. To better utilize theresources of the outside firm during fiscal year 2007 and 2006, several changeshave been made to its engagement, including changing the protocols andpersonnel on the engagement team.

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders of BallyTechnologies, Inc.Las Vegas, Nevada

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting, that Bally Technologies, Inc. and Subsidiaries (the “Company”)did not maintain effective internal control over financial reporting as of June 30,2005, because of the effect of the material weaknesses identified in management’sassessment based on criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (“COSO”). The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

A material weaknessis a significant deficiency, or combination of significant deficiencies, thatresults in more than a remote likelihood that a material misstatement of theannual or interim financial statements will not be prevented or detected. Thefollowing material weaknesses have been identified and included in management’sassessment:

·       **Inadequate staffing and training in finance andaccounting:  **Accounting personnel did not have an adequateunderstanding of certain rules over revenue recognition and how those rules appliedto its business. Additionally, the Company experienced a high level of turnoverof key finance and 

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accounting personnel infiscal year 2005 and an inability to recruit and retain qualified finance andaccounting staff. As a result, the Company’s finance and accounting staff wasinadequately trained and understaffed. These weaknesses resulted in materialadjustments to the Company’s consolidated financial statements for the yearended June 30, 2005 and contributed to the initial restatement of the 2004and 2003 consolidated financial statements in the Company’s Annual Report on Form 10-Kfor the fiscal year ended June 30, 2005 (the “First Restatement”) filed inDecember 2005 (the “Original Filing”) due to: (i) misinterpretationof certain accounting literature, (ii) lack of understanding andinterpretation of customer contracts, (iii) untimely application ofaccounting principles, (iv) improper classification of certain balancesheet and income statement items and (v) untimely performance of the yearend evaluation of obsolete inventory and fixed asset reserves.

Additionally,this material weakness contributed to the subsequent restatement of thepreviously reported consolidated financial statements filed in this AmendmentNo.1 to the Company’s Annual Report on Form 10-K (the “SecondRestatement”) as discussed in Note 2.

·       **Ineffective controls related to the preparation ofcertain account analyses, account summaries and account reconciliations:  **Certaincontrols designed to ensure timely performance, review and approval of certainaccount analyses and reconciliations did not operate effectively. Specifically,certain reconciliations in areas including accounts receivable, accruedliabilities, other current assets, and property, plant and equipment were notperformed in a timely manner. In certain circumstances the Company did notproperly resolve reconciling items. These weaknesses resulted in materialadjustments to the Company’s consolidated financial statements for the yearended June 30, 2005 and contributed to the First Restatement of the consolidatedfinancial statements.

Additionally,this material weakness contributed to the Second Restatement of the previouslyreported consolidated financial statements.

·       **Inadequate controls related to revenue recognition:  **TheCompany did not have appropriate internal controls related to the recognitionof revenue for game and system sales, including the lack of a comprehensivecontract administration function to address the operating, legal, financial andaccounting ramifications of game and system revenue contracts. The Company’scontrols were not adequate to capture and analyze the terms and conditions ofall contracts to ensure the proper recording of revenue contracts with standardand non-standard terms, including FOB destination provisions, extended paymentterms and other contractual arrangements that can affect the timing and amountof revenue to be recognized. Certain revenue transactions are accounted for inaccordance with the AICPA’s Statement of Position 97-2, “*Software Revenue Recognition*” (SOP No. 97-2),which includes complex revenue recognition criteria that were not adequatelyassessed. These weaknesses were the result of a material deficiency in thedesign of internal control over financial reporting, and resulted in materialadjustments to the consolidated financial statements for the fiscal year ended June 30,2005 and contributed to the First Restatement of the consolidated financialstatements.

Additionally,this material weakness contributed to the Second Restatement of the previouslyreported consolidated financial statements.

·       **Inadequate controls related to inventory valuation:  **TheCompany did not design and implement sufficient controls related to thevaluation of inventory. As a result inventory, prior to year end adjustments,was not stated at the lower of cost of market value due to the following: (i) certainmanufacturing labor and overhead costs were not charged to inventory becausethe Company did not accurately assess the purchase price variance associatedwith the use of standard costs within the accounting systems, (ii) therestocking of excess inventory pulled for work orders was not always properlyidentified and removed from the bill of materials and (iii) certainpackaging materials had 

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not always been properlycharged to cost of sales. This weakness resulted in material adjustments to theCompany’s consolidated financial statements for the year ended June 30,2005 and contributed to the First Restatement of the consolidated financialstatements.

Additionally,this material weakness contributed to the Second Restatement of the previouslyreported consolidated financial statements.

·       **Ineffective controls related to income taxes:  **TheCompany’s policies and procedures did not include adequate review of certaincomplex income tax issues, resulting in material deficiencies in the operatingeffectiveness of internal control over financial reporting. These deficienciesresulted in an adjustment of the effective tax rate resulting from theestablishment of reserves for certain tax credits, additional U.S. and foreigndeferred tax expense related to foreign operations, and adjustments to deferredtaxes related to a prior acquisition and contributed to the First Restatementof the consolidated financial statements.

·       **Ineffective controls at the entity level:  **As evidenced by the materialweaknesses described above, the Company determined that entity-level controlsrelated to the control environment, risk assessment, monitoring function anddissemination of information and communication activities did not operateeffectively, resulting in material weaknesses in each COSO component. Suchentity level controls, and a comprehensive monitoring of internal controls bythe internal audit function, are part of the framework to ensure that that thedesigned system of internal control is operating effectively to ensure thatsignificant transactions are adequately identified, recorded and disclosed.

Additionally,this material weakness contributed to the Second Restatement of the previouslyreported consolidated financial statements.

These material weaknesses were considered indetermining the nature, timing, and extent of audit tests applied in our auditof the consolidated financial statements as of and for the year ended June 30,2005 of the Company and this report does not affect our report on suchconsolidated financial statements.

In our opinion, management’s assessment that theCompany did not maintain effective internal control over financial reporting asof June 30, 2005, is fairly stated, in all material respects, based on thecriteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission . Also in our opinion, because of the effect of thematerial weaknesses described above on the achievement of the objectives of thecontrol criteria, the Company has not maintained effective internal controlover financial reporting as of June 30, 2005, based on the criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated financial statements as of and for the year ended June 30,2005 of the Company and our report dated December 29, 2005 (October 30,2006 as to the effects of the restatement discussed in Note 2 under the caption“Second Restatement” and the last paragraph in Note 11) expressed anunqualified opinion on those consolidated financial statements.

DELOITTE & TOUCHELLPLas Vegas, NevadaDecember 29, 2005 (October 30, 2006 as to the effects of the materialweaknesses in connection with the “Second Restatement” discussed in Management’sReport on Internal Control over Financial Reporting)

**ITEM 9B.**       OTHERINFORMATION

None

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**PART III**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

**Directors,Executive Officers and Other Significant Employees**

Thename, age, present principal occupation or employment and five-yearemployment history of each of our directors and executive officers is set forthbelow. No director or executive officer is related by blood, marriage oradoption to any other director or executive officer.
| Name               | ** ** | ** ** | ** ** | **Age**                                                                      | ** ** | **Position with the Company** |
|--------------------|------------|------------|------------|------------------------------------------------------------------------------|------------|-------------------------------|
| Richard Haddrill   |       | 52         |       | Director, President,  Chief Executive Officer                                |
| Jacques André |       | 68         |       | Director                                                                     |
| Anthony DiCesare   |       | 43         |       | Director                                                                     |
| Joel Kirschbaum    |       | 54         |       | Director                                                                     |
| Stephen Race       |       | 56         |       | Director                                                                     |
| David Robbins      |       | 46         |       | Director, Chairman of  the Board of Directors                                |
| Kevin Verner       |       | 47         |       | Director                                                                     |
| Steven Des Champs  |       | 40         |       | Senior Vice President,  Chief Financial Officer                              |
| Mark Lipparelli    |       | 40         |       | Executive Vice President  of Operations                                      |
| Mark Lerner        |       | 56         |       | Senior Vice President for Law and Government,  Secretary and General Counsel |
| Robert Luciano     |       | 47         |       | Chief Technology Officer                                                     |
| Robert Miodunski   |       | 54         |       | President and Chief  Executive Officer(1)                                    |
| Robert Saxton      |       | 52         |       | Executive Vice  President, Gaming, and Treasurer                             |
| Ramesh Srinivasan  |       | 45         |       | Executive Vice President, Bally Systems Division                             |

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(1)          Mr. Miodunskiresigned as President and Chief Executive Officer of the Company effective asof September 30, 2004, pursuant to the Separation and Consulting Agreementdated as of June 30, 2004, more fully described below under Item 11,Executive Compensation.

**Biographies**

***Richard Haddrill.******  ***Mr. Haddrill, age 52, became adirector in April 2003 and, effective October 1, 2004, was appointedChief Executive Officer of the Company. Prior to becoming Chief ExecutiveOfficer of the Company, Mr. Haddrill most recently completed five years asCEO of Manhattan Associates, Inc., a leader in software solutions to thesupply chain industry throughout the world. During his tenure at Manhattan, thecompany expanded its product offerings and market share, more than tripledrevenues to almost $200 million and increased its share price more than eightfold. Mr. Haddrill previously served as President and CEO for PowerhouseTechnologies, Inc., a successful technology and gaming company from September 1996until June 1999, when Powerhouse was acquired by Anchor Gaming, a publiclytraded gaming company that was acquired by IGT in 2001. Mr. Haddrillcurrently serves as Vice Chairman of Manhattan Associates, Inc., andpreviously served on the board of directors of Danka Business Products, adigital imaging systems products provider and services producer until October 2004,and Outlooksoft, a provider of corporate performance management solutions untilJune 2005.

***David Robbins.******  ***Mr. Robbins, age 46,initially served as a director for the Company from July 1994 to September 1997and as Chairman of the Board of Directors of the Company from February 1997to September 1997. Mr. Robbins received a B.S. in Economics from theWharton School of the University of Pennsylvania and a J.D. from the New YorkUniversity School of Law. Mr. Robbins was also licensed as a certifiedpublic accountant (inactive status) in the state of New York. From 1984 through2004, he practiced corporate, securities and real estate law at various lawfirms, as an associate, partner and of counsel. From 1993 through the present, Mr. Robbinsinvested in various private equity and other 

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investment opportunities, and since January 1996has managed funds for private investors, including private investmentpartnerships that invest in public securities and a private equity investmentpartnership. In addition to serving on the Company’s Board, Mr. Robbinspreviously served on the board of directors of Medisys, plc, a health carediagnostics company. Mr. Robbins has served as an assistant adjunctprofessor of law at the Benjamin N. Cardozo Law School, where he taught coursesin corporate finance, securities and real estate.

***Jacques André.******  ***Mr. André, age 68, became a director in August 1996.Mr. André was a Vice President of A.T. Kearney Executive Search, aglobal management consulting firm from October 2002 until February 2005.Mr. André was a partner with Ray & Berndtson, Inc. aninternational executive search firm, from 1975 until 2002.

***Anthony DiCesare.******  ***Mr. DiCesare, age 43,became a director in July 1994. Mr. DiCesare was employed by KirklandInvestment Corporation (“KIC”), which was the sole general partner ofKirkland-Ft. Worth Investment Partners, L.P., an investment partnership, from April 1991to July 1994. Mr. DiCesare served as Executive Vice President—Developmentof the Company from July 1994 through June 1997. He has been apersonal investor since 1997.

***Joel Kirschbaum.******  ***Mr. Kirschbaum, age 54, became adirector in July 1994 and served as Chairman of the Board of Directors ofthe Company from July 1994 to March 1995. Mr. Kirschbaum is thesole stockholder, director and officer of KIC. Previously, he worked atGoldman, Sachs & Co. for 13 years, during the last six of which he wasa General Partner.

***Stephen Race.****  *Mr. Race, age 56, became a director in June 2005.From 1999 to 2004, Mr. Race worked with a variety of private equity groupsanalyzing leveraged buyout opportunities in consumer branded goods andservices, and with venture capital groups on financial restructuring ofselected portfolio companies, often serving as acting chief executive officer. Mr. Racealso served as interim CEO to restructure and sell a troubled dot com. From1995 to 1998, Mr. Race served as CEO of Microprose, Inc., a NASDAQvideo game company. From 1993 to 1995, Mr. Race served as President of thedivision of SONY Computer Entertainment responsible for development and launchof the PlayStation video game. Prior to that time, Mr. Race provided abroad range of management counsel primarily in the areas of marketing,strategic planning, mergers and acquisitions, and new business development. In1990, Mr. Race served as General Manager of Reebok at the time ofintroduction and launch of the “PUMP” athletic footwear technology. Mr. Racealso previously served as Chairman and CEO of Homestar International, ExecutiveVice President and one of the founders of Worlds of Wonder, Inc., and asVice President of Marketing and Communications, International Division, ofAtari, Inc. Mr. Race holds degrees in economics and energy managementfrom the University of Pennsylvania and an M.B.A. from the Wharton GraduateSchool of Finance and Commerce.

***Kevin Verner.******  ***Mr. Verner, age 47,became a director in April 2001. From 1997 to 2000, Mr. Verner heldvarious positions with WMS Industries, Inc., and WMS Gaming, the last ofwhich was Chief Operating Officer. Prior to his employment at WMS, Mr. Vernerwas Vice President of New Business Development at R.J. Reynolds Tobacco Co.,where he held various marketing and senior management positions for sixteenyears. Mr. Verner is currently a consultant and provides interimmanagement to early-stage companies to include financial planning, securing ofseed funding, management recruitment and development of operating budgets andpro forma financial projections. Mr. Verner is also a CEO advisor forChicago venture fund Alpha Capital Fund III and provides consultation onenterprise valuation and due diligence for consumer products investments.

***Steven Des Champs.******  ***Mr. Des Champs, age40, was appointed Chief Financial Officer in March 2005, succeeding Mr. RobertSaxton in this position. Mr. Des Champs re-joined the Company in February 2000as Vice President—Finance, was promoted to Chief Accounting Officer in August 2000and Senior Vice President in October 2002. The Company previously employedMr. Des Champs in the capacity of 

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Director of Finance from October 1995 to November 1998.From December 1998 to January 2000, Mr. Des Champs was the ChiefFinancial Officer for PDS Financial, a provider of lease financing for thegaming industry.

***Mark Lipparelli.*****  **Mr. Lipparelli, age 40, joined the Companyas Executive Vice President of Bally Systems in 2002. Mr. Lipparellicurrently serves as Executive Vice President of Operations, a position heassumed in March 2005. As head of Operations, he oversees Manufacturing,Intellectual Property, Strategic Planning, Product Compliance, Human Resourcesand Information Technology. Previously, Mr. Lipparelli served as ExecutiveVice President and then President of Shuffle Master, Inc., a gaming supplycompany. Prior to joining Shuffle Master, Mr. Lipparelli was ChiefFinancial Officer of Camco, Inc., a retail chain holding company. From1998 to 2000, he was Senior Vice President of Entertainment Systems for BallyGaming and Systems. Mr. Lipparelli also previously served as VicePresident of Finance for Casino Data Systems and worked for the Nevada StateGaming Control Board from 1988 to 1993.

***Mark Lerner.******  ***Mr. Lerner, age 56,joined the Company in December 1996 as Assistant General Counsel. A formerdeputy attorney general for the Nevada Gaming Commission and State of NevadaGaming Control Board, Mr. Lerner has been practicing law since 1980.Before joining Alliance he was general counsel to Becker Gaming, Inc., aLas Vegas gaming company. From 1987 to 1994, Mr. Lerner practiced law atJones, Jones, Close & Brown (now Jones Vargas), a prominent Las Vegascommercial and litigation law firm.

***Robert Luciano.******  ***Mr. Luciano, age 47,joined the Company in March 2004 as Chief Technology Officer in connectionwith the Company’s acquisition of SDG. Mr. Luciano founded SDG in 1996 asa research, development and consulting company focusing on the gaming industry.Prior to founding SDG, Luciano was employed by IGT in the position of VicePresident of Advanced Engineering. Prior to joining IGT, Mr. Luciano heldseveral engineering positions with a variety of companies including Soabar, adivision of Avery International, and Mobil Oil Corporation.

***Robert Miodunski.******  ***Mr. Miodunski*,*age 54*,*joined the Company in March 1994 and served as, among other things, adirector beginning in February 2000 and Chief Executive Officer beginningin April 2001 until he resigned from both positions effective September 30,2004. Commencing January 1, 2005, Mr. Miodunski began serving as aconsultant to the Company. From January 1991 to March 1994, Mr. Miodunskiwas President of Mulholland-Harper Company, a sign manufacturing andservice company. From 1984 through 1990, Mr. Miodunski held variouspositions with Federal Signal Company, the last of which was Vice President andGeneral Manager of the Midwest Region of the Sign Group. Mr. Miodunski waselected to Alliance’s Board of Directors in February 2000.

***Robert Saxton.*****  **Mr. Saxton, age 52, joined the Company in July 1982as Corporate Controller. Mr. Saxton became a Vice President of United Coinin 1987 and was elected Vice President—Casino Operations of Alliance Gaming in December 1993,and Senior Vice President—Casino Group in June 1996. In March 2000, Mr. Saxtonwas appointed Chief Financial Officer and Treasurer of the Company, and in December 2003was promoted to Executive Vice President. In March 2005, Mr. Saxtonwas appointed Executive Vice President of Bally Gaming. In this capacity, Mr. Saxtonis responsible for the daily management of Gaming Operations, Customer Service,and Domestic & International Sales in the Games Division of BallyGaming, Inc. He continues to serve as Treasurer of the Company and since1994 has served as President of Rainbow Casino located in Vicksburg,Mississippi.

***Ramesh Srinivasan.******  ***Mr. Srinivasan, age45, joined the Company in March 2005 as Executive Vice President of BallySystems. From 1998-2005, Mr. Srinivasan was an Executive Vice President,Senior Vice President and Vice President for Manhattan Associates, and brings astrong blend of technical and customer experiences to the Company. Mr. Srinivasanis responsible for system sales, services and product development.

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**Audit Committee ofthe Board of Directors**

The Audit Committee of theBoard of Directors is comprised of Messrs. Jacques André, David Robbinsand Kevin Verner. The composition of the Audit Committee was changed as of October 27,2004 to comply with the corporate governance requirements of the NYSE withrespect to the independence, financial literacy and financial expertise ofAudit Committee members. The Board of Directors has determined that Mr. Robbinsis an audit committee financial expert, pursuant to Item 401(h) ofRegulation S-K. The Board of Directors made this determination based on Mr. Robbins’qualifications and business experience, as briefly described above under “—Biographies.”

**Code of Ethics**

We amended our Code ofEthics and Business Conduct in October, 2005 for our chief executive, chieffinancial and principal accounting officers, as well as our directors (the “Codeof Ethics”). In the event we make any amendment to, or grant any waiver from, aprovision of the Code of Ethics that applies to the principal executiveofficer, principal financial officer or principal accounting officer thatrequires disclosure under applicable SEC rules, we intend to disclose suchamendment or waiver and the reasons therefore on our website www.ballytech.com.The full text of the Code of Ethics is available by following links to “InvestorRelations” and “Corporate Governance” on our website www.ballytech.com, or uponwritten request to us. Requests should be addressed to: Bally Technologies,Inc., 6601 South Bermuda Road, Las Vegas,Nevada 89119, Attention: Corporate Secretary.

**Section 16(a) BeneficialOwnership Reporting Compliance**

Section 16(a) ofthe Exchange Act requires our directors and executive officers and persons whoown more than 10 percent of a registered class of our equity securities to filewith the SEC and the NYSE initial reports of ownership and reports of changesin ownership of our common stock and other of our equity securities. Theseindividuals are required by the SEC’s regulations to furnish us with copies ofall Section 16(a) reports filed by such persons. To our knowledge,based solely on our review of the copies of such reports furnished to us, all Section 16(a) filingrequirements applicable to the our directors, executive officers and greaterthan ten percent beneficial owners were complied with on a timely basis duringthe fiscal year ended June 30, 2005, except that (i) on October 18,2005, a Form 3 was filed on behalf of Mr. Ramesh Srinivasan, anexecutive officer of Bally Gaming, reporting Mr. Srinivasan’s ownership of11,000 shares of common stock, 1,000 shares of restricted stock, and options topurchase 300,000 shares of common stock on March 9, 2005, and (ii) onJuly 27, 2005, a Form 3 and Form 4 were filed on behalf ofStephen M. Race, a director, reporting Mr. Race’s appointment to the Boardof Directors on June 30, 2005 and the award of stock options to purchase50,000 shares of common stock in connection therewith, respectively.

**ITEM 11.**         EXECUTIVECOMPENSATION

**Report on ExecutiveCompensation**

As of the end ofthe fiscal year ended June 30, 2005, the Compensation Committee consistedof Messrs. Jacques André, David Robbins and Kevin Verner, each of whom isan independent director. The composition of the Compensation Committee waschanged as of October 27, 2004, to comply with the corporate governancerequirements of the NYSE with respect to the independence of CompensationCommittee members. The Compensation Committee’s duties and responsibilities areset forth in a formal charter adopted by the Board of Directors and include,among others things:

·       Reviewand approve executive compensation philosophy.

·       Approveall executive compensation plans and structures.

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·       Approveannual and long-term incentive performance metrics, as well as determine andapprove payouts.

·       Approvecompensation for the Company’s management executive committee, consisting ofcertain members of senior management, as well as senior management of theCompany’s subsidiaries.

·       Approveplan payouts to the members of the management executive committee that areoutside of approved parameters.

·       Recommendapproval for all management incentive plans, including stock options, to theBoard of Directors, and approve new change-in-control or special retentionplans.

·       Approvebonus criteria, incentives, including stock options and payouts foremployee-directors.

***GeneralCompensation Philosophy.***   The Compensation Committee’s general philosophy hasbeen, and continues to be, providing a compensation package to attract andretain the most highly qualified executive officers while providing incentivesto create stockholder value. To accomplish this objective, the CompensationCommittee varies total cash compensation based on the Company’s performance inachieving the financial and non-financial objectives, and aligns long-termincentive compensation closely with the stockholder’s interests. However, theCompensation Committee believes that it will continue to be constrained bycompetitive factors as there continues to be demand from competing businessesto attract and retain management talent of the type the Company desires torecruit.

The Compensation Committee believes as a generalmatter, but particularly with respect to senior executive officers, that themost effective method of compensation, and the method that most closely alignsmanagement’s interest with those of the Company’s stockholders, is long-termcompensation tied to the creation of stockholder value. Thus, it has been theCompany’s policy where feasible and consistent with competitive marketconditions, and unless otherwise obligated by contract, to attempt to limitbase cash compensation while providing incentives for management to increasestockholder value. The Company hopes to achieve this goal of focusing onlong-term compensation through the use of stock options and, where appropriate,restricted stock and restricted stock units. The Compensation Committeebelieves this compensation philosophy has the greatest probability of achievingsignificant returns to stockholders.

Pearl Meyer & Partners, a Clark ConsultingPractice, has also been retained to advise the Compensation Committee onmatters relating to executive compensation. Pearl Meyer & Partners wasengaged by and reports directly to the Compensation Committee.

***Base Salaries.***   Basesalary levels are the fixed portion of an executive’s compensation package. TheCompensation Committee annually reviews and determines the base salaries ofmembers of senior management, except as limited by contractual obligation.Where adjustable, salary levels reflect a combination of factors, includingcompetitive pay levels, the executive’s experience and tenure, and the Company’soverall annual budget for merit increases and the executive’s individualperformance. In each case, the Compensation Committee takes into account theresults achieved by the executive, his or her future potential, scope ofresponsibilities and experience, and competitive salary practices. However, theCompany’s compensation formulas for certain executives’ salaries during thefiscal year ended June 30, 2005, were largely determined based onpre-existing contractual arrangements in place from the previous fiscalperiods.

***Bonuses.***   Annualperformance bonuses are tied to the Company’s overall performance, as well asthe performance of each executive and of his or her area of responsibility. TheCompensation Committee sets certain financial and operational objectives thatare designed to promote key Company initiatives, such as achievement ofspecific strategic, operational or financial tasks or targets, includingBusiness Unit performance, operating income and EPS, which the Board ofDirectors believes will result in increases in stockholder value. As a resultof the Company’s performance on many of these metrics during fiscal year 

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2005, the Company did not pay any cash bonuses for thefiscal year ended June 30, 2005, other than as contractually obligatedwith respect to one executive officer and bonuses paid to two executiveofficers early in fiscal 2005 in connection with a transaction occurring infiscal 2004.

***Long-TermCompensation.***   Long-termcompensation is provided by stock options and, from time to time whenappropriate, restricted stock or restricted stock units. The CompensationCommittee believes that long-term compensation tied to stockholder value shouldconstitute a significant portion of an executive’s compensation as options areintended to provide long-term compensation specifically tied to increases inthe price of the Company’s common stock. Options are granted at the marketprice of the Company’s common stock on the date of grant, and providecompensation only to the extent the market price of the common stock increasesbetween the date of grant and the date the option is exercised. Restrictedstock and restricted stock units also tie compensation to the long term appreciationof the Company’s common stock by restricting the holders’ ability to receiveand/or dispose of the related shares of common stock.

The total number of options granted in each year,which may vary, is tied to a number of factors including, but not limited to,overall Company performance, individual performance of the executive, andcompetitive and retention considerations.

The Compensation Committee continues to review itsoverall long-term incentive structure in light of the shifting competitive and regulatoryenvironment. The Compensation Committee, with input from senior management andoutside consultants, may decide to make changes to the long-term compensationprogram in the future.

***401(k) Plan.***   TheCompany offers a 401(k) plan. Employees are eligible to participate aftercompletion of six months of service. Employees may defer from 1% to 25% ofeligible earnings up to the IRS maximum of $14,000 for 2005. Participatingemployees who have attained age 50 are allowed to contribute an extra $3,000 inthe 401(k) plan as “catch-up” contributions. Employee contributions are100% vested. Participants hired before November 1, 2001, are 100% vestedin both employee and employer contributions. For participants hired on or afterNovember 1, 2001, employer-matching contributions become vested based on afive-year vesting schedule, to vest 20% per year, for each year of service. TheCompany, on a discretionary basis, may make matching contributions at the endof each quarter. Matching contributions may be made each pay period in lieu ofeach quarter. The current match is 50% of the participant’s contribution up to6% of employee compensation. BallyTechnologies, Inc. may make a discretionary Profit Sharing contribution to the401(k) plan each year.

***Chief ExecutiveOfficer Compensation.***   Effective as of September 30,2004, Mr. Miodunski resigned as President and Chief Executive Officer ofthe Company, at which time Mr. Haddrill assumed responsibility for bothpositions. On June 30, 2004, Mr. Haddrill and the Company enteredinto an Employment Agreement (the “Haddrill Agreement”) pursuant to which Mr. Haddrillbegan serving as the Company’s Chief Executive Officer as of October 1,2004. Mr. Haddrill’s annual salary as President and Chief ExecutiveOfficer is $980,000, as provided for in the Haddrill Agreement. Mr. Haddrill’scontract does not provide for an annual cash bonus; therefore, Mr. Haddrilldid not receive a cash bonus for fiscal year 2005. Additionally, during fiscalyear 2005 Mr. Haddrill was awarded a stock option grant covering 430,000shares of common stock which vest as set forth under “—Option/SAR Grants inLast Fiscal Year.” Of the 430,000 shares, vesting of 95,000 was accelerated asdescribed below under “—Acceleration of Option Vesting*.”*  Mr. Haddrillwas also granted $1,900,000 in restricted stock during fiscal year 2005pursuant to the Haddrill Agreement which vest on October 1, 2010;provided, however, that the vesting will be accelerated to 50% of the totalaward on each of October 1, 2005, and October 1, 2006, if the Companyattains certain strategic and/or financial measures, which are to be mutuallyagreed to by the Board of Directors and Mr. Haddrill. Measures establishedfor the first 50% addressed the near-term and longer-term strategic positioningof the Company’s technology platforms, game content and human and financial 

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assets. The Board of Directors has determined that Mr. Haddrillachieved these objectives, and the first 50% have accordingly accelerated as ofOctober 1, 2005.

Pursuant to his employment agreement and hisSeparation and Consulting Agreement, Mr. Miodunski received a salary of$250,000 during fiscal year 2005 through December 31, 2004, including thethree months of fiscal year 2005 that he served as President and ChiefExecutive Officer. Mr. Miodunski did not receive a bonus for fiscal year2005 in respect of his service as President and Chief Executive Officer;however, pursuant to the terms of his Separation and Consulting Agreement, Mr. Miodunskireceived a bonus of $1,000,000 for the successful sale of United Coin on June 30,2004, $500,000 of which was paid in July 2004 and $500,000 of which ispayable in twenty-four monthly installments beginning January 1, 2005. Inaddition, pursuant to the Separation and Consulting Agreement, Mr. Miodunskiwill receive $250,000 annually for services as a consultant to the Board ofDirectors for four years.

***Acceleration ofOption Vesting.***   On June 13,2005, the Board of Directors approved a resolution accelerating the vesting andexerciseability of all outstanding, unvested stock options granted to employeeswith an exercise price equal to or greater than $15.00 per share. Thisaccelerated vesting will affect options for approximately 2,400,000 shares ofthe Company’s common stock, including an aggregate of 500,000 options held by Mr. Haddrill.All performance-based vesting criteria were also eliminated with respect to the500,000 options held by Mr. Haddrill. In order to prevent unintendedpersonal benefits to individuals resulting from the accelerated vesting ofoptions, sales of the shares of the Company’s common stock acquired uponexercise of any such options referenced above will be restricted in a mannersuch that the sales restrictions parallel the vesting requirements previouslyapplicable to such options. The decision to accelerate vesting of theseunderwater stock options was made primarily to avoid recognizing compensationexpense in the Company’s future income statements upon the Company’s adoptionof SFAS No. 123R effective on July 1, 2005. Because the optionsubject to the acceleration of vesting were “underwater”, the Company believesthat these options may not be offering a sufficient incentive to employees whencompared to the potential future compensation expense that the Company wouldincur under SFAS 123R.

***Deductibility of Compensation Under Internal RevenueCode Section 162(m).***   Section 162(m) ofthe Internal Revenue Code of 1986, as amended (the “Tax Code”) places a limitof $1,000,000 on the amount of compensation that Alliance may deduct in any oneyear with respect to its CEO and each of the next four most highly compensatedexecutive officers. If the Company were to seek and obtain approval fromstockholders for certain performance-based compensation, then such compensationwould not be subject to the deduction limitation.
| Respectfully submitted, |
|-------------------------|
| COMPENSATION  COMMITTEE |
| Kevin Verner,  Chairman |
| Jacques André      |
| David Robbins           |

 

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**SummaryCompensation Table***

Thefollowing table sets forth the compensation paid or to be paid by the Companyto its chief executive officer, former chief executive officer and the fourother most highly compensated executive officers receiving over $100,000 peryear (collectively, the “Named Executive Officers”) for services rendered inall capacities to the Company during the fiscal year ended June 30, 2005,2004 and 2003.

|                                                  | ** ** | ** ** | ** ** | **Annual Compensation**           | ** ** | **Long-Term Compensation** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------------------------------------|------------|---------------------------------|------------|------------|------------|
| **Name & Principal Position** | ** ** | ** ** | ** ** | **Fiscal  Year  Ended  June 30,** | ** ** | **Salary**                      | ** ** | **Bonus**  | ** ** | **Restricted  Stock Awards**(1) | ** ** | **Securities  Underlying  Options**(2) | ** ** | **All  Other  Compensation(3)** | ** ** |
| Richard Haddrill(4)                              |       |       | 2005       |                                   |       | $                               | 701,077    |       | $          | — |   |   | $ | 2,073,718 | (5) |   |   | 430,000 |   |   |   | $ | 342,970 | (6) |   |
| President and Chief                              |       |       | 2004       |                                   |       | —                          |       | —     |       |   | 6,498,835 | (7) |   |   | 600,000 |   |   |   | 60,000 | (6) |   |
| Executive Officer                                |       |       | 2003       |                                   |       | —                          |       | —     |       |   | — |   |   |   | 50,000 |   |   |   | 10,000 | (6) |   |
| Steven Des Champs                                |       |       | 2005       |                                   |       | 240,000                         |       | 20,000     |       |   | — |   |   |   | 100,000 |   |   |   | 7,634 |   |   |
| Sr. Vice President, Chief                        |       |       | 2004       |                                   |       | 237,308                         |       | 116,000    |       |   | — |   |   |   | 25,000 |   |   |   | 5,996 |   |   |
| Accounting and Chief Financial Officer           |       |       | 2003       |                                   |       | 237,308                         |       | 192,500    |       |   | — |   |   |   | 22,500 |   |   |   | 5,387 |   |   |
| Robert Saxton                                    |       |       | 2005       |                                   |       | 370,000                         |       | —     |       |   | — |   |   |   | 50,000 |   |   |   | 9,108 |   |   |
| Executive Vice President                         |       |       | 2004       |                                   |       | 357,307                         |       | 279,240    |       |   | — |   |   |   | 50,000 |   |   |   | 6,328 |   |   |
| and Treasurer                                    |       |       | 2003       |                                   |       | 333,000                         |       | 350,000    |       |   | — |   |   |   | 50,000 |   |   |   | 5,700 |   |   |
| Mark Lerner                                      |       |       | 2005       |                                   |       | 235,000                         |       | 20,000     |       |   | — |   |   |   | 25,000 |   |   |   | 9,106 |   |   |
| Sr. Vice President and                           |       |       | 2004       |                                   |       | 232,308                         |       | 94,000     |       |   | — |   |   |   | 25,000 |   |   |   | 6,307 |   |   |
| General Counsel                                  |       |       | 2003       |                                   |       | 223,650                         |       | 168,750    |       |   | — |   |   |   | 22,500 |   |   |   | 5,250 |   |   |
| Robert Luciano                                   |       |       | 2005       |                                   |       | 250,000                         |       | 50,000     |       |   | — |   |   |   | 600,000 |   |   |   |   |   |   |
| Chief Technology Officer                         |       |       | 2004       |                                   |       | 57,692                          |       | 49,500     | (9)        |   | — |   |   |   |   |   |   |   |   |   |   |
| Robert Miodunski(8)                              |       |       | 2005       |                                   |       | 250,000                         |       | 500,000    |       |   | — |   |   |   | — |   |   |   | 284,290 | (9) |   |
| Former Chief Executive                           |       |       | 2004       |                                   |       | 478,846                         |       | 465,000    |       |   | — |   |   |   | 100,000 |   |   |   | 6,375 |   |   |
| Officer                                          |       |       | 2003       |                                   |       | 450,000                         |       | 522,000    |       |   | — |   |   |   | 100,000 |   |   |   | 5,500 |   |   |
|                                                  |            |            |            |                                        |            |                                 |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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*                    As used in thetables provided under the caption “Executive Compensation,” the character “—”is used to represent zero.

(1)          Constitutes grants ofRestricted Stock Units (“RSUs”). Per the requirements of Regulation S-Kitem 402(b)(2)(iv)(A), dollar value calculated by multiplying the closingmarket price of our common stock on the date of grant by the number of sharesawarded. The closing price of our common stock on December 22, 2004 and June 30,2004, the dates of grant, were $13.25 and $17.16, respectively. See footnotes 5and 7 below grading the terms of the RSU grants.

(2)          All grants made pursuantto the Company’s Amended and Restated 2001 Long Term Incentive Plan.

(3)          Unless indicatedotherwise, “All Other Compensation” represents contributions made by theCompany to the Company’s 401(k) Plan.

(4)          Mr. Haddrill beganserving as the Company’s President and Chief Executive Officer on October 1, 2004.

(5)          On December 22,2004, the Company issued to Mr. Haddrill 156,507 RSUs. The number of RSUsgranted was determined by dividing $1,900,000 by the average per share closingprice of our common stock on the NYSE for the 20 business days prior to thedate of grant. The 156,507 RSUs had an aggregate value of $2,194,228.14 on June 30,2005, based on the per share closing price of our common stock on the NYSE of$14.02. In accordance with the Haddrill Agreement, the vesting of 

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50% of the award wasaccelerated to October 1, 2005, as a result of the Board of Director’sdetermination that the Company achieved certain strategic and/or financialobjectives for the nine month period ending on October 1, 2005 (see “—ChiefExecutive Officer Compensation” above). In addition, the vesting of theremaining 50% is subject to acceleration as of October 1, 2006. VestedRSUs represents Mr. Haddrill’s right to receive an equivalent number ofshares of our common stock as follows: (i) 75% of the shares of commonstock represented by the vested RSUs shall be issued to Mr. Haddrill (1) onthe later of (a) October 1, 2007 or (b) the first date on whichsuch payment or any portion thereof is no longer subject to the limits of Section 162(m) ofthe Internal Revenue Code (the “Code”) in which case that portion of thepayment that is no longer subject to such limits shall be issued to Mr. Haddrillat the time such limits become inapplicable, or (2) in the event that Mr. Haddrill’semployment with the Company is terminated prior to October 1, 2007, on thefirst date in which such payment or any portion thereof is no longer subject tothe limits of Section 162(m) of the Code in which case that portionof the payment that is no longer subject to such limits shall be issued to Mr. Haddrillat the time such limits become inapplicable, and (ii) 25% of the shares ofcommon stock represented by the vested RSUs shall be issued to Mr. Haddrill(1) on the later of (a) October 1, 2008 or (b) the firstdate on which such payment or any portion thereof is no longer subject to thelimits of Section 162(m) of the Code in which case that portion ofthe payment that is no longer subject to such limits shall be issued to Mr. Haddrillat the time such limits become inapplicable, or (2) in the event that Mr. Haddrill’semployment with the Company is terminated prior to October 1, 2008, on thefirst date in which such payment or any portion thereof is no longer subject tothe limits of Section 162(m) of the Code in which case that portionof the payment that is no longer subject to such limits shall be issued to Mr. Haddrillat the time such limits become inapplicable. No dividends will be paid on theRSUs unless and until the underlying shares of common stock have been issued inMr. Haddrill’s name as described above. Except as described below under “—Employmentand Severance Arrangements—Haddrill Agreement,” all unvested RSUs shall beimmediately forfeited if Mr. Haddrill ceases to serve as the Company’sChief Executive Officer.

(6)          Amount represents$337,136 paid in moving and relocation expenses and $5,654 in contributionsmade by the Company to the Company’s 401(k) Plan. Prior to his appointmentas Chief Executive Officer, Mr. Haddrill received compensation as a boardmember totaling $60,000 and $10,000 for the fiscal years ended June 30,2004 and 2003, respectively.

(7)          On June 30, 2004,the Company issued to Mr. Haddrill 377,030 RSUs. The number of RSUsgranted was determined by dividing $6,500,000 by the average per share closingprice of our common stock on the NYSE for the 20 business days prior to thedate of grant. The 377,030 RSUs had an aggregate value of $5,285,960.60 on June 30,2005, based on the per share closing price of our common stock on the NYSE of$14.02. The RSUs vest in one-third equal installments on each of October 1,2005, October 1, 2006 and October 1, 2007 provided that Mr. Haddrillis continuously employed by the Company as Chief Executive Officer until eachsuch vesting date, except as otherwise provided in Mr. Haddrill’semployment agreement, as described below under “—Employment and SeveranceArrangements—Haddrill Employment Agreement.” Vested RSUs represents Mr. Haddrill’sright to receive an equivalent number of shares of our common stock as follows:(i) 75% of the shares represented by the vested RSUs shall be issued to Mr. Haddrill(1) on the later of (a) October 1, 2007 or (b) the first dateon which such payment or any portion thereof is no longer subject to the limitsof section 162(m) of the Code in which case that portion of the paymentthat is no longer subject to such limits shall be issued to Mr. Haddrillat the time such limits become inapplicable, or (2) in the event that theHaddrill Agreement is terminated, on the first date in which such payment orany portion thereof is no longer subject to the limits of Section 162(m) ofthe Code in which case that portion of the payment that is no longer subject tosuch limits shall be issued to Mr. Haddrill at the time such limits becomeinapplicable, and (ii) 25% of the shares represented by the vested RSUsshall be issued to Mr. Haddrill (1) on the later of (a) October 1,2008 or (b) the first date on which such payment or 

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any portion thereof is nolonger subject to the limits of section 162(m) of the Code in which casethat portion of the payment that is no longer subject to such limits shall beissued to Mr. Haddrill at the time such limits become inapplicable, or (2) inthe event that the Haddrill Agreement is terminated, on the first date in whichsuch payment or any portion thereof is no longer subject to the limits of Section 162(m) ofthe Code in which case that portion of the payment that is no longer subject tosuch limits shall be issued to Mr. Haddrill at the time such limits becomeinapplicable. No dividends will be paid on the RSUs unless and until theunderlying shares of common stock have been issued in Mr. Haddrill’s name.Except as described below under “—Employment and Severance Arrangements—HaddrillEmployment Agreement,” all unvested RSUs shall be immediately forfeited if Mr. Haddrillceases to serve as the Company’s Chief Executive Officer.

(8)          Mr. Miodunskiresigned as President and Chief Executive Officer of the Company effective asof September 30, 2004, pursuant to the Separation and Consulting Agreementdated as of June 30, 2004, described below under “—Employment andSeverance Agreements—Miodunski Separation and Consulting Agreement.”

(9)          Amountrepresents $250,000 paid pursuant to Mr. Miodunski’s Separation andConsulting Agreement described below under “—Employment and SeveranceAgreements—Miodunski Separation and Consulting Agreement,” $5,769 incontributions made by the Company to the Company’s 401(k) Plan, and$28,521 which was paid for accrued vacation.

**Employment and Severance Arrangements**

***Haddrill EmploymentAgreement.******  ***On June 30, 2004, Mr. Haddrilland the Company entered into the Haddrill Agreement, pursuant to which Mr. Haddrillbegan serving as the Company’s Chief Executive Officer as of October 1,2004. The term of the Haddrill Agreement continues until October 1, 2007,unless earlier terminated or extended, as provided for in the HaddrillAgreement. Mr. Haddrill receives a base annual salary of $980,000,participation in the Company’s benefit programs for corporate officers andother perquisites. If Mr. Haddrill’s employment is terminated by theCompany without cause or by Mr. Haddrill for good cause (as defined in theHaddrill Agreement), Mr. Haddrill will receive severance pay in an amountequal to his base salary for one year from the date of termination or until theexpiration of the term of the Haddrill Agreement, whichever occurs first. Further,Mr. Haddrill shall be entitled to retain the rights granted under theRSUs, provided that the vesting of the RSUs shall be pro rated through thetwelve-month period following the month in which the termination occurs, andthe sales restrictions on the stock options granted pursuant to the HaddrillAgreement shall lapse as to a pro rata portion of such options through the dateof termination. Upon a Change in Control of the Company, as defined in theHaddrill Agreement, Mr. Haddrill will receive a payment of $980,000 andwill be entitled to retain all of the RSUs and stock options granted pursuantto the Haddrill Agreement, all of which will vest immediately upon the Changein Control, and the sale restrictions on the stock options will immediatelylapse. The Haddrill Agreement also contains certain non-compete provisions.

The Haddrill Agreement was amended as of December 22,2004. The December 22, 2004 amendment provided for, among other things, agrant of an additional 300,000 stock options and $1,900,000 in RSUs.

The Haddrill Agreement, as amended, was amended for asecond time, effective as of June 13, 2005 (the “Second Amendment”). TheSecond Amendment documented the terms and conditions of the acceleration of Mr. Haddrill’sstock options approved by the Board of Directors on June 13, 2005, asdescribed below under “—Acceleration of Option Vesting,” and clarified theterms of Mr. Haddrill’s RSUs to comply with Section 409A of theInternal Revenue Code.

***MiodunskiSeparation and Consulting Agreement.******  ***On June 30,2004, Mr. Miodunski and the Company entered into a Separation andConsulting Agreement pursuant to which Mr. Miodunski resigned as Presidentand Chief Executive Officer effective September 30, 2004. Pursuant to theagreement, 

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Mr. Miodunski received a $1,000,000 bonus for thesuccessful sale of United Coin, $500,000 of which was paid in July 2004and $500,000 which is payable in twenty-four monthly installments beginning January 1,2005. In addition, pursuant to the agreement, Mr. Miodunski will receive$250,000 annually for services as a consultant to the Board of Directors for aperiod of four years.

***Des ChampsEmployment Agreement.***   On January 28,2000, Mr. Des Champs and the Company entered into a letter agreement whichgenerally provides for a base salary, which is currently set at $290,000 peryear, participation in the Company’s compensation programs for corporateofficers, participation in the Company’s cash bonus program at amountsdetermined by the Board of Directors and severance benefits of six months’ basesalary if Mr. Des Champs is terminated without cause, including as aresult of or subsequent to a change in control.

***Lerner EmploymentAgreement.******  ***On August 15, 2000, Mr. Lernerand the Company entered into a letter agreement which generally provides for abase salary, which is currently set at $235,000 per year, participation in theCompany’s compensation programs for corporate officers, participation in theCompany’s cash bonus program at amounts determined by the Board of Directorsand severance benefits of six months’ base salary if Mr. Lerner isterminated without cause, including as a result of or subsequent to a change incontrol.

***Luciano EmploymentAgreement.***   On March 2, 2004, Mr. Lucianoand the Company entered into a letter agreement which generally provides for abase salary, which is currently set at $250,000 per year, an annual bonus of$50,000, participation in Bally’s Management Incentive Program (“MIP”) at thebusiness unit head level in an amount determined by the Board of Directors, andif Mr. Luciano is terminated without cause, severance benefits under theMIP in an amount determined by annualizing the amount Mr. Luciano wouldhave received in respect of the number of full months served in the fiscal yearin which Mr. Luciano is terminated.

On April 13, 2005, Mr. Lucianoand the Company entered into an amendment to the letter agreement providingfor, among other things, the grant of 600,000 stock options on July 1,2005. The amendment also provides that if Mr. Luciano is terminatedwithout cause, any stock options granted to Mr. Luciano that have vestedat the time of termination shall remain outstanding and exercisable until thefirst anniversary of the date of termination, but in no event beyond theoriginal term of such options.

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**Option/SAR Grantsin Last Fiscal Year**

Thefollowing table relates to options granted to the Named Executive Officersduring the fiscal year ended June 30, 2005.

|                   | ** ** | **Individual Grants** | ** ** | **Potential Realizable  Value at Assumed  Annual Rates of Stock  Price Appreciation for  Option Term(a)** | ** ** |
|-------------------|------------|----------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Name**          | ** ** | ** **                 | ** ** | **Number of  Securities  Underlying  Options /SARS  Granted**                                                                                | ** ** | **% of Total  Options/SARS Granted  to Employees  in Fiscal Year** | ** ** | **Exercise  Price** | ** ** | **Expiration  Date** | ** ** | **5%** | ** ** | **10%** | ** ** |
| Richard Haddrill  |       |                       | 35,000     | (b)                                                                                                                                                    |       |   | 0.92 | % |   |   | $ | 14.77 |   |   |   | 6/13/15 |   |   | 325,108 |   | 823,886 |   |
|                   |       |                       | 95,000     | (c)                                                                                                                                                    |       |   | 2.50 | % |   |   | 17.16 |   |   |   | 10/27/14 |   |   | — |   | 653,979 |   |
|                   |       |                       | 300,000    | (d)                                                                                                                                                    |       |   | 7.88 | % |   |   | 13.35 |   |   |   | 12/22/14 |   |   | 2,518,723 |   | 6,382,939 |   |
| Steven Des Champs |       |                       | 25,000     | (e)                                                                                                                                                    |       |   | 0.66 | % |   |   | 13.86 |   |   |   | 8/17/14 |   |   | 217,912 |   | 552,232 |   |
|              |       |                       | 75,000     | (e)                                                                                                                                                    |       |   | 1.97 | % |   |   | 11.16 |   |   |   | 1/18/15 |   |   | 526,385 |   | 1,333,963 |   |
| Robert Saxton     |       |                       | 50,000     | (e)                                                                                                                                                    |       |   | 1.31 | % |   |   | 13.86 |   |   |   | 8/17/14 |   |   | 435,825 |   | 1,104,464 |   |
|                   |       |                       | 40,000     | (f)                                                                                                                                                    |       |   | 1.05 | % |   |   | 11.29 |   |   |   | 3/04/15 |   |   | 284,009 |   | 719,734 |   |
| Mark Lerner       |       |                       | 25,000     | (e)                                                                                                                                                    |       |   | 0.66 | % |   |   | 13.86 |   |   |   | 8/17/14 |   |   | 217,912 |   | 552,232 |   |
| Robert Luciano    |       |                       | 600,000    | (g)                                                                                                                                                    |       |   | 15.75 | % |   |   | 11.16 |   |   |   | 1/18/15 |   |   | 4,211,079 |   | 10,671,700 |   |
| Robert Miodunski  |       |                       | —     |                                                                                                                                                   |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |
|                   |            |                            |            |                                                                                                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           Amounts shown in these columns are derived bymultiplying the exercise price by the annual appreciation rates shown(compounded for the term of the options), multiplying this product by thenumber of shares of common stock covered by the options, and subtracting theaggregate exercise price of the options. The dollar amounts set forth underthis heading are the result of calculations at the 5 percent and 10 percentrates set by the SEC, and are not intended to forecast possible futureappreciation, if any, of the price of a share of common stock.

(b)           On June 13, 2005 each director of the Companyreceived a grant of 35,000 fully vested options at an exercise price of $14.77per share of common stock.

(c)            On June 13, 2005 the Company accelerated thevesting of these options such that they were fully vested as of June 13,2005. See**“—Employment andSeverance Arrangements—Haddrill Employment Agreement” above and “—Accelerationof Option Vesting” below.

(d)          Options vest as follows: (i) 200,000 in one-thirdequal installments on each of October 1, 2005, October 1, 2006 and October 1,2007 provided that Mr. Haddrill is continuously employed by the Company asChief Executive Officer until each such vesting date, (ii) 100,000 on October 1,2007 provided that Mr. Haddrill is continuously employed by the Company asChief Executive Officer through such date, each except as otherwise provided inMr. Haddrill’s employment agreement, as described above under “—Employmentand Severance Arrangements—Haddrill Employment Agreement.”

(e)           Options vest in three equal installments on the first,second and third anniversaries of the date of grant.

(f)             Options vest in two equal installments on the first andsecond anniversaries of the date of grant.

(g)           Options vest in five equal installments onthe first, second, third, fourth and fifth anniversaries of the date of grant.

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**Aggregated OptionExercises in Last Fiscal Year and Fiscal Year-End Option Values**

Thefollowing table reflects the options exercised during the fiscal year ended asof, and outstanding options held by the Named Executive Officers at, June 30,2005:

| **Name**          | ** ** | ** **        | ** ** | **Shares  Acquired on  Exercise** | ** ** | **Value  Realized** | ** ** | **Number of Unexercised  Options at  June 30, 2005** | ** ** | **Value of Unexercised In-the-  Money Options at  June 30, 2005 (a)** | ** ** |
|-------------------|------------|-------------------|------------|----------------------------------------|------------|---------------------|------------|-------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| **Exercisable**   | ** ** | **Unexercisable** | ** ** | **Exercisable**                        | ** ** | **Unexercisable**   |
| Richard Haddrill  |       |              | —     |                                   |       | —              |       |                                                                          | 780,000    |                                                                                                          |       |   | 300,000 |   |   |   | $ | — |   |   |   | $ | 201,000 |   |   |
| Steven Des Champs |       |              | —     |                                   |       | —              |       |                                                                          | 47,503     |                                                                                                          |       |   | 100,000 |   |   |   | 2,026 |   |   |   | 218,500 |   |   |
| Robert Saxton     |       |              | 20,004     |                                   |       | $                   | 115,073    |                                                                          |       | 133,335                                                                                                       |       |   |   | 90,000 |   |   |   | 9,000 |   |   |   | 117,200 |   |   |
| Mark Lerner       |       |              | —     |                                   |       | —              |       |                                                                          | 47,503     |                                                                                                          |       |   | 25,000 |   |   |   | 2,026 |   |   |   | 4,000 |   |   |
| Robert Luciano    |       |              | —     |                                   |       | —              |       |                                                                          | —     |                                                                                                          |       |   | 600,000 |   |   |   | — |   |   |   | 1,716,000 |   |   |
| Robert Miodunski  |       |              | —     |                                   |       | —              |       |                                                                          | 200,008    |                                                                                                          |       |   | — |   |   |   | 9,002 |   |   |   | — |   |   |
|                   |            |                   |            |                                        |            |                     |            |                                                                               |            |                                                                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           Representsthe amount by which the market value of the underlying stock at June 30,2005 ($14.02 per share) exceeds the aggregate exercise price of the options.

**Acceleration ofOption Vesting**

On June 13, 2005, theBoard of Directors approved a resolution accelerating the vesting andexerciseability of all outstanding, unvested stock options granted to employeeswith an exercise price equal to or greater than $15.00 per share. Thisaccelerated vesting affected options for approximately 2,400,000 shares of theCompany’s common stock, including an aggregate of 500,000 options granted to Mr. Haddrillpursuant to the Haddrill Agreement. All performance-based vesting criteria werealso eliminated with respect to such 500,000 options of Mr. Haddrill. Salesof the shares of common stock acquired upon exercise of any such optionsreferenced above are restricted in a manner such that the sales restrictionsparallel the vesting requirements previously applicable to such options. Thedecision to accelerate vesting of these underwater stock options was madeprimarily to avoid recognizing compensation expense in the Company’s futurestatements of operations upon the Company’s adoption of SFAS No. 123Reffective on July 1, 2005. Because the options subject to the accelerationvesting were “underwater”, the Company believes that these options may not beoffering a sufficient incentive to employees when compared to the potentialfuture compensation expense that the Company would incur under SFAS 123R.

**Directors’Compensation**

***Arrangements withDirectors.******  ***Directors of the Company who are alsoemployees are generally not separately compensated for their services asdirectors. Except as set forth below under “—Other Arrangements” with respectto Messrs. Robbins and Kirschbaum, and excluding Mr. DiCesare, eachnon-management director receives $50,000 per year plus $5,000 per year for eachcommittee on which each non-management director serves, except that thechairman of each committee receives $10,000 for such committee service. Eachnew non-employee director receives a grant of options to purchase 50,000 sharesof common stock upon appointment to the Board of Directors as well. Additionally,on June 13, 2005 each director received a fully vested option to purchase35,000 shares of common stock at an exercise price of $14.77 per share. Alloptions granted to directors of the Company remain outstanding for the fullterm, whether or not the director continues to be a director of the Company,unless the director resigns or is removed as a director before the expirationof the term the director is serving at the time of the grant, in which eventthe options expire 60 days after resignation or removal. Directors are alsoreimbursed for their reasonable out-of-pocket expenses incurred on Companybusiness. The Company may grant both employee and non-employee directorsadditional cash compensation and options as time commitments, responsibilitiesand other circumstances may warrant.

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***Director’s ShareOwnership Guidelines.*****  **TheBoard adopted a formal share ownership policy and guidelines for non-managementdirectors on October 26, 2004. The guidelines specify that eachnon-management director shall acquire and hold common stock valued at twice theannual base compensation paid to the director at the time of the director’s appointmentor election to the board. The policy further provides that purchases under thepolicy be made within three years of the director’s appointment, election oradoption date of the policy with the director holding at least that amount ofstock during the director’s tenure.

On January 8, 2004, each director was grantedoptions to purchase 195,000 shares of common stock at an exercise price of$24.65 per share. Effective June 13,2005, the Board of Directors approved a resolution accelerating the vesting andexerciseability of all outstanding, unvested options granted to directors on January 8,2004. All performance-based vesting criteria were also eliminated with respectto such options. Directors may not sell any of the shares of stock acquiredupon exercise of these options before January 8, 2008.

***Other Arrangements.******  ***Effective July 1,2004, the Company entered into an agreement with Mr. Robbins in which heagreed to serve as the Chairman of the Board of Directors and as a member ofthe Office of the Chairman for a period of three and one-half years. Pursuantto this agreement Mr. Robbins receives total fees of $325,000 per year forsuch services.

Effective July 1,2004, the Company entered into an agreement with Mr. Kirschbaum in whichhe agreed to serve as a member of the Office of the Chairman for a period ofthree and one-half years. Pursuant to this agreement Mr. Kirschbaumreceives fees of $100,000 per year for such services.

**CompensationCommittee Interlocks and Insider Participation**

During the fiscal yearended June 30, 2005, Messrs. André, Haddrill, Kirschbaum, Robbins andVerner served on the Compensation Committee of the Board of Directors. EffectiveOctober 27, 2005, in response to the new requirements for the CompensationCommittee to consist of only independent board members, the composition of thecommittee was changed to be comprised of Messrs. André, Robbins and Verner.Mr. Haddrill began serving as the Company’s President and Chief ExecutiveOfficer on September 30, 2004. Mr. Kirschbaum is the solestockholder, director and officer of KIC, which, effective July 1, 2004,was party to an Advisory Services Agreement with the Company which calls forthe Company to pay KIC $600,000 annually for advisory and related services fora period of three and one-half years.

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**Stock Performance Graph**

Thefollowing graph compares the Company’s cumulative total stockholder return onits common stock for the five years ending June 30, 2005, with cumulativetotal return, assuming reinvestment of dividends, of (i) the S&P 500, (ii) theRussell 2000 and (iii) an index of peer companies the Company believes arecomparable in terms of their lines of business. The company peer group consistsof IGT, Progressive Gaming International Corporation, Shuffle Master and WMS Gaming.The presentation assumes a $100 investment on June 30, 2000, the lasttrading day prior to the end of the Company’s 2000 fiscal year. The Company hasnot paid any dividends during the applicable period.

**Comparisonof 60 Month Cumulative Return**

| ** **  | ** ** | **6/00** | ** ** | **6/01** | ** ** | **6/02** | ** ** | **6/03** | ** ** | **6/04** | ** ** | **6/05** | ** ** |
|-------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| BYI         |       | $        | 100        |     | $          | 1,610.70 |       | $        | 2,047.58   |     | $          | 3,102.54 |       | $ | 2,815.42 |   | $ | 2,300.45 |   |
| S&P 500 |       | 100      |       | 85.10    |       | 69.85    |       | 70.03    |       | 83.41    |       | 88.68    |       |
| Russell 200 |       | 100      |       | 100.60   |       | 91.93    |       | 90.42    |       | 120.59   |       | 131.98   |       |
| Peer group  |       | 100      |       | 230.40   |       | 186.35   |       | 329.34   |       | 513.72   |       | 410.87   |       |
|             |            |          |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |  |

 

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**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

**Beneficial Ownership**

Thefollowing table sets forth certain information as of December 6, 2005,with respect to the beneficial ownership of common stock, which constitutes ouronly outstanding class of voting securities, by (i) each person who, toour knowledge, beneficially owned more than 5% of the outstanding common stock,(ii) each director, (iii) the Named Executive Officers and (iv) allof our executive officers and directors as a group. Except as indicated,beneficial ownership includes the sole power to vote and to dispose of thesecurities in question. The mailing address for each of the beneficial ownerslisted below is c/o Bally Technologies, Inc., 6601 South Bermuda Road, LasVegas, Nevada 89119, unless noted otherwise.

| ** **                                       | ** ** | **Amount of Beneficial** | ** ** | **Percent of** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|---------------------|------------|
| **Beneficial Owner**                        | ** ** | ** **                         | ** ** | **Ownership**       | ** ** | **Class** | ** ** |
| Alfred Wilms(1)                                  |       |                               | 3,832,892  |                |       |   | 7.35 | % |   |
| Jacques André                               |       |                               | 363,572    | (2)                 |       |   |   | * |   |
| Steve Des Champs                                 |       |                               | 74,180     | (3)                 |       |   |   | * |   |
| Anthony DiCesare                                 |       |                               | 272,728    | (4)                 |       |   |   | * |   |
| Richard Haddrill                                 |       |                               | 1,152,927  | (5)                 |       |   | 2.18 | % |   |
| Joel Kirschbaum                                  |       |                               | 2,455,602  | (6)                 |       |   | 4.63 | % |   |
| Mark Lerner                                      |       |                               | 55,836     | (7)                 |       |   |   | * |   |
| Robert Luciano                                   |       |                               | 1,448,313  | (8)                 |       |   | 2.77 | % |   |
| Robert Miodunski                                 |       |                               | 200,008    | (9)                 |       |   |   | * |   |
| Stephen Race                                     |       |                               | 50,000     | (10)                |       |   |   | * |   |
| David Robbins                                    |       |                               | 642,148    | (11)                |       |   | 1.22 | % |   |
| Robert L. Saxton                                 |       |                               | 200,004    | (12)                |       |   |   | * |   |
| Kevin Verner                                     |       |                               | 310,000    | (13)                |       |   |   | * |   |
| All executive officers  and directors as a group |       |                               | 7,540,066  | (14)                |       |   | 13.37 | % |   |
|                                                  |            |                                    |            |                     |            |  |  |  |  |  |  |

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                 * Less than 1%

       (1) Mr. Wilms’ mailing address is 2, St. Jansvliet, bus 6-2000Antwerp, Belgium. Information with respect to Mr. Wilms’ beneficialownership of common stock was taken from Schedule 13D dated January 6,2004.

       (2) Includes 36,428 shares of common stock owned and 327,144 shares ofcommon stock subject to options that are currently exercisable or will becomeexercisable within 60 days.

       (3) Includes 2,000 shares of common stock owned and 72,180 shares ofcommon stock subject to options that are currently exercisable or will becomeexercisable within 60 days.

       (4) Represents shares of common stock subject to options that arecurrently exercisable or will become exercisable within 60 days.

       (5) Includes 69,000 shares of common stock owned, 203,930 restrictedstock units that are currently vested or will have been vested within 60 daysand 879,997 shares of common stock subject to options that are currentlyexercisable or will become exercisable within 60 days.

       (6) Includes 1,530,390 shares of common stock owned and 925,212 sharesof common stock subject to options that are currently exercisable or willbecome exercisable within 60 days.

       (7) Represents shares of common stock subject to options that arecurrently exercisable or will become exercisable within 60 days.

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       (8) Includes 1,328,313 shares of common stock owned and 120,000 sharesof common stock subject to options that are currently exercisable or willbecome exercisable within 60 days.

       (9) Represents shares of common stock subject to options that arecurrently exercisable or will become exercisable within 60 days.

(10) Represents shares of common stock subject to options that arecurrently exercisable or will become exercisable within 60 days.

(11) Includes 87,144 shares of common stock owned and 555,004 shares ofcommon stock subject to options that are currently exercisable or will becomeexercisable within 60 days.

(12) Includes 50,004 shares of common stock owned and 150,000 shares ofcommon stock subject to options that are currently exercisable or will becomeexercisable within 60 days.

(13) Includes 10,000 shares of common stock owned and 300,000 shares ofcommon stock subject to options that are currently exercisable or will becomeexercisable within 60 days.

(14) Includes 4,182,357 shares of common stocksubject to options that are currently exercisable or will become exercisablewithin 60 days.

**Equity CompensationPlans**

The information requiredby this Item 12 with respect to our equity compensation plans is set forthabove under Item 5, Market for Registrant’s Common Equity, Related ShareholderMatters and Issuer Purchases of Equity Securities—Equity Compensation Plans.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Kirschbaum, a director of the Company, is thesole stockholder, director and officer of KIC, which, effective July 1,2004, was party to an Advisory Services Agreement with the Company which callsfor the Company to pay KIC $600,000 annually for advisory and related servicesfor a period of three and one-half years.

In December 2004, we settled the earn out relatedto the acquisition of SDG with the former shareholders of SDG for an aggregateamount of $40 million consisting of a one-time cash payment of $12.0 millionand the issuance of $28.0 million in subordinated debt. Mr. Luciano, theCompany’s Chief Technology Officer, was the primary shareholder of SDG.Mr. Luciano received approximately $7.4 million in cash and $17.2 millionin subordinated debt in connection with the settlement. On June 28, 2005,the Company converted an aggregate of $14.0 million in subordinated debt andaccrued interest thereon into approximately 1.0 million shares of common stock.Mr. Luciano received 881,841 of the approximately 1.0 million shares ofcommon stock The remaining $14.0 million insubordinated debt payable in connection with the settlement to the former SDGshareholders, including Mr. Luciano, is payable in annual installmentsthrough 2009. At the Company’s discretion, the note principal and accruedinterest thereon can be paid in cash, or can be converted into shares of theCompany’s common stock using the average stock price for the 20 business daysprior to the delivery of such shares.

We also lease a warehouseand office facility from an entity owned by Mr. Luciano. Rental paymentsfor the fiscal years ended June 30, 2005 and 2004 totaled $412,000 and$103,000, respectively.

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**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

**Fees paid toRegistered Public Accounting Firm**

Thefollowing table presents the aggregate fees billed by Deloitte &Touche LLP, our principal Independent Registered Public Accounting Firm, forservices provided during fiscal years 2005 and 2004:

| ** **             | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Audit fees             |       | $        | 3,077,160  |     | $          | 332,400 |   |
| Audit-related  fees(1) |       | 158,115  |       | 154,218  |       |
| Tax fees(2)            |       | 673,523  |       | 680,147  |       |
| All other fees(3)      |       | —   |       | 20,600   |       |
| Total Fees             |       | $        | 3,908,798  |     | $          | 1,187,365 |   |

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(1)          Consists primarily offees paid for accounting and auditing consultation services, audits of theCompany’s employee benefits plans and services related to Sarbanes-Oxleyreadiness.

(2)          Consists primarily offees paid for tax compliance and preparation services and tax consultationrelating to the acquisition or disposition of certain subsidiaries.

(3)          Consists primarily offees paid for consultation regarding stock compensation and other matters.

The Audit Committeereviews and approves all services to be provided by Deloitte & ToucheLLP. The Audit Committee has considered the effect of non-audit servicesprovided by Deloitte & Touche LLP on Deloitte & Touche LLP’sindependence, and does not believe that such independence has been impaired orotherwise compromised.

**Pre-Approval Policy**

Pursuant to the Audit Committee’s pre-approvalpolicies and procedures for certain audit and non-audit services, the Company’sexternal auditor cannot be engaged to provide any audit and non-audit servicesto the Company unless the engagement is pre-approved by the Audit Committee incompliance with the Sarbanes-Oxley Act of 2002. The audit, audit related, taxand other fees and services described above were pre-approved by the AuditCommittee for 2005 and 2004.

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**PART IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

Documents filed aspart of this Annual Report on Form 10-K/A:

1.                 FinancialStatements:

·       Report of IndependentRegistered Public Accounting Firm

·       Consolidated Balance Sheets as of June 30,2005 (restated) and 2004 (restated)

·       Consolidated Statements ofOperations for the Years Ended June 30, 2005 (restated), 2004 (restated)and 2003 (restated)

·       Consolidated Statements of Stockholders’Equity  for the Years Ended June 30,2005 (restated), 2004 (restated) and 2003 (restated)

·       Consolidated Statements of Cash Flows forthe Years Ended June 30, 2005 (restated), 2004 (restated) and 2003(restated)

·       Notes to consolidatedfinancial statements

2.                 FinancialStatement Schedules:  Not applicable.

3.                 Exhibits:
| Exhibit   Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **Description** |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 2.1              |       | Amended and Restated  Stock Purchase Agreement by and among Alliance Gaming Corporation, Sierra  Design Group, and Robert Luciano, as Trustee for the Robert Luciano Family  Trust, dated March 2, 2004, filed on March 12, 2004 as  Exhibit 2.1 to the Current Report on Form 8-K of Alliance  Gaming Corporation, and incorporated herein by reference. |
| 2.2*             |       | Amendment  No. 1, dated December 30, 2004, to the Amended and Restated Stock  Purchase Agreement, dated March 2, 2004, by and among Alliance Gaming  Corporation, Sierra Design Group, and Robert Luciano, as Trustee for the  Robert Luciano Family Trust.                                                                                                    |
| 2.3              |       | Agreement and  Plan of Merger by and among Alliance Gaming Corporation, APT Games, Inc.,  United Coin Machine Co., and Century Gaming, Inc. dated May 4,  2004, filed on July 6, 2004 as Exhibit 2.1 to the Current Report on  Form 8-K of Alliance Gaming Corporation, and incorporated herein  by reference.                             |
| 3.1              |       | Restated Articles  of Incorporation of Alliance Gaming Corporation, as amended, filed on  May 7, 2004 as Exhibit 4.6 to the Registration Statement on  Form S-8 (File No. 333-115271) of Alliance Gaming  Corporation, and incorporated herein by reference.                                                                                              |
| 3.2*             |       | Bylaws of  Alliance Gaming Corporation.                                                                                                                                                                                                                                                                                                                                       |
| 4.1              |       | Rights Agreement  dated as of March 9, 1998 between Alliance Gaming Corporation and  American Stock Transfer & Trust Company, filed on March 10,  1998 as Exhibit 1 to the Registration Statement on Form 8-A  of Alliance Gaming Corporation, and incorporated herein by reference.                                                             |
| 4.2*             |       | First Amendment to  Rights Agreement dated as of September 15, 1998 between Alliance Gaming  Corporation and American Stock Transfer & Trust Company.                                                                                                                                                                                                           |

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| 10.1   |   | Loan Agreement, dated as  of September 5, 2003 among Alliance Gaming Corporation, the various  lenders named therein, Bank of America, N.A. as Administrative Agent, CIBC  World Markets Corp., as Syndication Agent and Wells Fargo Bank, N.A., as  Documentation Agent, filed On September 12, 2003 as Exhibit 99.2 to  the Current Report on Form 8-K of Alliance Gaming Corporation, and  incorporated herein by reference.                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2*  |   | Amendment  No. 1 dated February 18, 2004 to Loan Agreement, dated as of  September 5, 2003 among Alliance Gaming Corporation, the various lenders  named therein, Bank of America, N.A. as Administrative Agent, CIBC World  Markets Corp., as Syndication Agent and Wells Fargo Bank, N.A., as  Documentation Agent.                                                                                                                                                           |
| 10.3   |   | Amendment  No. 2 dated December 10, 2004 Loan Agreement, dated as of  September 5, 2003 among Alliance Gaming Corporation, the various lenders  named therein, Bank of America, N.A. as Administrative Agent, CIBC World  Markets Corp., as Syndication Agent and Wells Fargo Bank, N.A., as  Documentation Agent, filed on December 15, 2004 as Exhibit 10.1 to  the Current Report on Form 8-K of Alliance Gaming Corporation, and  incorporated by reference. |
| 10.4   |   | Alliance Gaming  Corporation 1996 Long Term Incentive Plan, filed on August 21, 1997 with  the Registration Statement on Form S-8 (File No. 333-34077)  of Alliance Gaming Corporation, and incorporated herein by reference.                                                                                                                                                                                                                                                   |
| 10.5*  |   | Restricted Stock  Agreement by and between Alliance Gaming Corporation and Richard Haddrill,  dated as of June 30, 2004.                                                                                                                                                                                                                                                                                                                                                                  |
| 10.6*  |   | Stock Option  Agreement by and between Alliance Gaming Corporation and Richard Haddrill,  dated as of June 30, 2004.                                                                                                                                                                                                                                                                                                                                                                      |
| 10.7*  |   | Stock Option  Agreement by and between Alliance Gaming Corporation and Richard Haddrill,  dated as of October 27, 2004.                                                                                                                                                                                                                                                                                                                                                                   |
| 10.8   |   | Alliance Gaming  Corporation Amended and Restated 2001 Long Term Incentive Plan, filed on  November 2, 2004 as Exhibit 4.1 to Post Effective Amendment  No. 1 to Registration Statement on Form S-8 (File  No. 333-115271) of Alliance Gaming Corporation, and incorporated  herein by reference.                                                                                                                                                                     |
| 10.9*  |   | Restricted Stock  Agreement by and between Alliance Gaming Corporation and Richard Haddrill,  dated as of December 22, 2004.                                                                                                                                                                                                                                                                                                                                                              |
| 10.10  |   | Amendment  No. 1 to the Alliance Gaming Corporation Amended and Restated 2001 Long  Term Incentive Plan, filed on January 15, 2005 as Exhibit 4.2 to  the Registration Statement on Form S-8 (File No. 333-122064)  of Alliance Gaming Corporation, and incorporated herein by reference.                                                                                                                                                                             |
| 10.11* |   | Form of  Stock Option Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.12* |   | Form of  Director Stock Option Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.13* |   | Form of  Director Stock Option Agreement dated June 13, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.14* |   | Casino Management  Agreement, dated as of October 28, 1993, among Rainbow Casino  Partnership -Vicksburg, L.P., Mississippi Ventures, Inc. and The Rainbow  Casino Corporation.                                                                                                                                                                                                                                                                                                      |
| 10.15* |   | Second Amended  and Restated Agreement of Limited Partnership, dated as of  March 29,1995, by and between United Gaming Rainbow and The Rainbow  Casino Corporation.                                                                                                                                                                                                                                                                                                                      |

95

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| 10.16  |   | Amended and Restated  Trademark License Agreement dated July 8, 1992, by and between Bally  Gaming International, Inc. and Bally Manufacturing Corporation, filed on  July 9, 1992 as Exhibit 10(i)(d) to the Registration Statement  on Form S-1 (File No. 33-48347) of Bally Gaming  International, Inc., and incorporated herein by reference.                                              |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.17* |   | Second Amendment  to Trademark License Agreement and Settlement Agreement, dated March 31,  1995, by and between Bally Entertainment Corporation and Bally Gaming  International, Inc. and Bally Gaming, Inc.                                                                                                                                                                                                           |
| 10.18  |   | Third Amendment  to Trademark License Agreement and Settlement Agreement dated May 10,  1996, by and between Bally Entertainment Corporation, Alliance Gaming  Corporation and BGII Acquisition Corp., filed on May 29, 1996 as  Exhibit 10.77 to Amendment No. 2 to the Registration Statement on  Form S-2 (File No. 333-02145) of Alliance Gaming  Corporation, and incorporated herein by reference. |
| 10.19  |   | Agreement between  Alliance Gaming Corporation and David Robbins dated July 1, 2004, filed  on July 6, 2004 as Exhibit 10.3 to the Current Report on  Form 8-K of Alliance Gaming Corporation, and incorporated herein  by reference.                                                                                                                                                                              |
| 10.20  |   | Advisory Services  agreement between Alliance Gaming Corporation and Kirkland Investment  Corporation dated July 1, 2004, filed on July 6, 2004 as  Exhibit 10.5 to the Current Report on Form 8-K of Alliance  Gaming Corporation, and incorporated herein by reference.                                                                                                                                          |
| 10.21* |   | Prepayment  Agreement, dated as of June 28, 2005 by and among Alliance Gaming  Corporation, Robert Luciano, Jr. and Robert Luciano, Jr. as trustee  of the Robert Luciano Family Trust dated February 27, 1995.                                                                                                                                                                                                    |
| 10.22  |   | Employment  Agreement between Alliance Gaming Corporation and Richard Haddrill, dated as  of June 30, 2004, filed on July 6, 2004 as Exhibit 10.1 to the  Current Report on Form 8-K of Alliance Gaming Corporation, and  incorporated herein by reference.                                                                                                                                                        |
| 10.23  |   | Amendment dated  December 22, 2004, to the Employment Agreement by and between Alliance  Gaming Corporation and Richard Haddrill, filed on February 9, 2005 as  Exhibit 10.40 to the Quarterly Report on Form 10-Q for the  quarter ended December 31, 2004, and incorporated herein by reference.                                                                                                            |
| 10.24* |   | Second Amendment  to Employment Agreement by and between Alliance Gaming Corporation and  Richard Haddrill, effective as of June 13, 2005.                                                                                                                                                                                                                                                                                        |
| 10.25  |   | Amended and  Restated Employment Agreement, effective April 24, 2001, between  Alliance Gaming Corporation and Robert L. Miodunski, filed on  September 27, 2001 as Exhibit 10.30 to the Annual Report on  Form 10-K for the fiscal year ended June 30, 2001, and  incorporated herein by reference.                                                                                                          |
| 10.26  |   | Separation and  Consulting Agreement dated as of June 30, 2004 by and between Alliance  Gaming Corporation and Robert L. Miodunski, filed on July 6, 2004 as  Exhibit 10.2 to the Current Report on Form 8-K of Alliance  Gaming Corporation, and incorporated herein by reference.                                                                                                                                |
| 10.27* |   | Employment  Agreement dated January 28, 2000 between Alliance Gaming Corporation and  Steve Des Champs.                                                                                                                                                                                                                                                                                                                           |
| 10.28  |   | Employment  Agreement dated August 15, 2000 between Alliance Gaming Corporation and  Mark Lerner, filed on September 26, 2002 as Exhibit 10.35 to the  Annual Report on Form 10-K for the fiscal year ended June 30,  2002 of Alliance Gaming Corporation, and incorporated herein by reference.                                                                                                              |

96

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| 10.29* |   | Employment Agreement dated  March 2, 2004 between Alliance Gaming Corporation and Robert Luciano.                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------|
| 10.30* |   | Amendment dated  April 13, 2005 to Employment Agreement between Alliance Gaming  Corporation and Robert Luciano.       |
| 10.31* |   | Executive  Employment Agreement dated March 9, 2005 by and between Alliance Gaming  Corporation and Ramesh Srinivasan. |
| 21#    |   | Subsidiaries of  the Registrant                                                                                             |
| 23.1#  |   | Consent of  Deloitte & Touche LLP, Independent Registered Public Accounting Firm                                   |
| 31.1#  |   | Certification of  Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a).                          |
| 31.2#  |   | Certification of  Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a).                          |
| 32.1#  |   | Certification of  the Chief Executive Officer pursuant to 18 U.S.C. Section 1350.                                      |
| 32.2#  |   | Certification of the Chief  Financial Officer pursuant to 18 U.S.C. Section 1350.                                      |

----

*                    Filed as an Exhibit oflike number to the  Annual Report on Form 10-Kfor the fiscal year ended June 30, 2005 of the Company, and incorporatedherein by reference.

#                 Filed herewith.

97

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
| BALLY TECHNOLOGIES,  INC. | DATED: October 31, 2006                                       |
|---------------------------|--------------------------------------------------------------------|
| By                        | /s/ RICHARD M. HADDRILL                                            |   |
|                      | Richard M. Haddrill                                                |
|                      | *Chief Executive Officer*                                          |
|                      | *(Principal Executive Officer)*                                    |
| By                        | /s/ ROBERT C. CALLER                                               |   |
|                      | Robert C. Caller                                                   |
|                      | *Executive Vice President, Chief Financial Officer  and Treasurer* |
|                      | *(Principal Financial and  Accounting Officer)*                    |
|                           |                                                                    |  |  |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.
|                         | **Name** | ** **                                              | ** **                                             | ** **             | **Title**              | ** ** | ** ** | ** ** | **Date** | ** ** |   |
|-------------------------|----------|---------------------------------------------------------|--------------------------------------------------------|------------------------|------------------------|------------|------------|------------|----------|------------|--------|
| /s/ RICHARD M. HADDRILL |     | Chief Executive  Officer                                |                                                   | October 31,  2005 |
| Richard M. Haddrill     |     | (Principal Executive  Officer), and Director            |                                                   |                   |                   |
| /s/ ROBERT C. CALLER    |     |                                                    | Executive Vice  President, Chief Financial Officer and |                   | October 31,  2006 |       |
| Robert C. Caller        |     | Treasurer (Principal  Financial and Accounting Officer) |                                                   |                   |                   |
| /s/ JACQUES ANDRÉ  |     |                                                    | Director                                               |                   | October 31,  2006 |       |
| Jacques André      |     |                                                    |                                                   |                   |                   |
| /s/ STEPHEN RACE        |     |                                                    | Director                                               |                   | October 31,  2006 |       |
| Stephen Race            |     |                                                    |                                                   |                   |                   |
| /s/ DAVID ROBBINS       |     |                                                    | Director and  Chairman of the Board                    |                   | October 31,  2006 |       |
| David Robbins           |     |                                                    |                                                   |                   |                   |
| /s/ KEVIN VERNER        |     |                                                    | Director                                               |                   | October 31,  2006 |       |
| Kevin Verner            |     |                                                    |                                                   |                   |                   |
|                         |          |                                                         |                                                        |                        |                        |            |            |            |          |            |        |  |  |  |  |  |  |  |  |  |

 

 

98

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders of BallyTechnologies, Inc.:Las Vegas, Nevada

We have audited the accompanying consolidated balancesheets of Bally Technologies, Inc. and Subsidiaries (the “Company”)(formerly known as Alliance Gaming Corporation) as of June 30, 2005 and2004, and the related consolidated statements of operations, stockholders’equity, and cash flows for each of the three years in the period ended June 30,2005. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of BallyTechnologies, Inc. and Subsidiaries as of June 30, 2005 and 2004, andthe results of their operations and their cash flows for each of the threeyears in the period ended June 30, 2005 in conformity with accountingprinciples generally accepted in the United States of America.

As discussed in Note 2 to consolidated financial statementsthe accompanying consolidated financial statements have been restated.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of June 30, 2005, based on the criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission, and our report dated December 29,2005 (October 30, 2006 as to the effects of the material weaknesses inconnection with the “Second Restatement” discussed in Management’s Report onInternal Control over Financial Reporting) expressed an unqualified opinion onmanagement’s assessment of the effectiveness of the Company’s internal controlover financial reporting and an adverse opinion on the effectiveness of theCompany’s internal control over financial reporting because of materialweaknesses.

DELOITTE & TOUCHE LLPLas Vegas, NevadaDecember 29, 2005 (October 30,2006 as to the effects of the restatement discussed in Note 2 under the caption“Second Restatement” and the last paragraph in Note 11)

F-1

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**BALLYTECHNOLOGIES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                             | ** ** | **June 30,**                                         | ** ** | **June 30,**                                         | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2005**                                                  | ** ** | **2004**                                                  | ** ** |
| ** **                                                                                                             | ** ** | ** (As restated,   see Note 2)** | ** ** | ** (As restated,   see Note 2)** | ** ** |
| ** **                                                                                                             | ** ** | **(in 000s, except share amounts)**   | ** ** |
| ASSETS                                                                                                                 |       |                                                      |       |                                                      |       |   |   |   |   |
| Current assets:                                                                                                        |       |                                                      |       |                                                      |       |   |   |   |   |
| Cash and cash equivalents                                                                                              |       |                                                      | $          | 33,170                                                    |       |   |   | $ | 154,258 |   |   |
| Restricted cash                                                                                                        |       |                                                      | 13,421     |                                                      |       |   | 15,590 |   |   |
| Accounts and notes receivable, net of allowances for  doubtful accounts of $10,340 and $9,035                          |       |                                                      | 97,679     |                                                      |       |   | 126,212 |   |   |
| Inventories                                                                                                            |       |                                                      | 63,523     |                                                      |       |   | 63,285 |   |   |
| Deferred tax assets, net                                                                                               |       |                                                      | 30,884     |                                                      |       |   | 22,571 |   |   |
| Other current assets                                                                                                   |       |                                                      | 33,034     |                                                      |       |   | 33,300 |   |   |
| Assets of discontinued operations held for sale                                                                        |       |                                                      | —     |                                                      |       |   | 4,442 |   |   |
| Total current assets                                                                                                   |       |                                                      | 271,711    |                                                      |       |   | 419,658 |   |   |
| Long-term investments (restricted)                                                                                     |       |                                                      | 10,060     |                                                      |       |   | 2,528 |   |   |
| Long-term receivables , net of allowance for doubtful  accounts of $11 and $12                                         |       |                                                      | 7,450      |                                                      |       |   | 18,132 |   |   |
| Leased gaming equipment, net of accumulated  depreciation of $42,495 and $24,903                                       |       |                                                      | 51,850     |                                                      |       |   | 52,813 |   |   |
| Property, plant and equipment, net of accumulated  depreciation of $40,548 and $29,123                                 |       |                                                      | 66,811     |                                                      |       |   | 69,160 |   |   |
| Goodwill                                                                                                               |       |                                                      | 161,444    |                                                      |       |   | 127,672 |   |   |
| Intangible assets, net of accumulated amortization of  $17,356 and $11,472                                             |       |                                                      | 49,451     |                                                      |       |   | 57,729 |   |   |
| Deferred tax assets, net                                                                                               |       |                                                      | 16,548     |                                                      |       |   | 13,987 |   |   |
| Other assets, net                                                                                                      |       |                                                      | 19,609     |                                                      |       |   | 12,248 |   |   |
| Total assets                                                                                                           |       |                                                      | $          | 654,934                                                   |       |   |   | $ | 773,927 |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                              |       |                                                      |       |                                                      |       |   |   |   |   |
| Current liabilities:                                                                                                   |       |                                                      |       |                                                      |       |   |   |   |   |
| Accounts payable                                                                                                       |       |                                                      | $          | 36,807                                                    |       |   |   | $ | 37,515 |   |   |
| Accrued liabilities                                                                                                    |       |                                                      | 43,838     |                                                      |       |   | 48,900 |   |   |
| Deferred revenue                                                                                                       |       |                                                      | 40,962     |                                                      |       |   | 48,030 |   |   |
| Jackpot liabilities                                                                                                    |       |                                                      | 13,025     |                                                      |       |   | 12,075 |   |   |
| Income taxes payable                                                                                                   |       |                                                      | 1,752      |                                                      |       |   | 5,718 |   |   |
| Current maturities of long-term debt, including  $6,006 and $1,218 owed to related parties                             |       |                                                      | 10,163     |                                                      |       |   | 5,866 |   |   |
| Liabilities of discontinued operations held for sale                                                                   |       |                                                      | —     |                                                      |       |   | 4,337 |   |   |
| Total current liabilities                                                                                              |       |                                                      | 146,547    |                                                      |       |   | 162,441 |   |   |
| Long-term debt, net of current maturities, including  $13,200 and $5,218 owed to related parties                  |       |                                                      | 324,954    |                                                      |       |   | 423,089 |   |   |
| Other liabilities                                                                                                      |       |                                                      | 6,931      |                                                      |       |   | 6,092 |   |   |
| Total liabilities                                                                                                      |       |                                                      | 478,432    |                                                      |       |   | 591,622 |   |   |
| Minority interest                                                                                                      |       |                                                      | 479        |                                                      |       |   | 1,326 |   |   |
| 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;  52,649,000 and 51,426,000 shares issued and outstanding  |       |                                                      | 5,268      |                                                      |       |   | 5,145 |   |   |
| Treasury stock at cost, 526,000 and 513,000 shares                                                                     |       |                                                      | (665       | )                                                         |       |   | (501 | ) |   |
| Deferred compensation (restricted stock units)                                                                         |       |                                                      | (6,689     | )                                                         |       |   | (6,500 | ) |   |
| Additional paid-in capital                                                                                             |       |                                                      | 212,182    |                                                      |       |   | 194,040 |   |   |
| Accumulated other comprehensive income                                                                                 |       |                                                      | 1,219      |                                                      |       |   | 1,524 |   |   |
| Accumulated deficit                                                                                                    |       |                                                      | (35,304    | )                                                         |       |   | (12,741 | ) |   |
| Total stockholders’ equity                                                                                        |       |                                                      | 176,023    |                                                      |       |   | 180,979 |   |   |
| Total liabilities  and stockholders’ equity                                                                       |       |                                                      | $          | 654,934                                                   |       |   |   | $ | 773,927 |   |   |

 

See accompanying notes to consolidated financial statements.

F-2

----

**BALLY TECHNOLOGIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                                                               | ** ** | **Year Ended June 30,**                           | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2005**                                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                               | ** ** | **(As restated,  see Note 2)**                    | ** ** | **(As restated,  see Note 2)** | ** ** | **(As restated,  see Note 2)** | ** ** |
| ** **                                                                               | ** ** | **(in 000s, except per share amounts)** | ** ** |
| Revenues:                                                                                |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Gaming equipment and systems                                                             |       |                                                             | $          | 431,070 |   |   |   | $ | 424,327 |   |   |   | $ | 306,319 |   |   |
| Casino operations                                                                        |       |                                                             | 52,037     |   |   |   | 52,280 |   |   |   | 50,945 |   |   |
|                                                                                     |       |                                                             | 483,107    |   |   |   | 476,607 |   |   |   | 357,264 |   |   |
| Costs and expenses:                                                                      |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Cost of gaming equipment and systems                                                     |       |                                                             | 241,486    |   |   |   | 192,751 |   |   |   | 143,933 |   |   |
| Cost of casino operations                                                                |       |                                                             | 18,727     |   |   |   | 20,043 |   |   |   | 21,208 |   |   |
| Selling, general and administrative                                                      |       |                                                             | 156,275    |   |   |   | 124,041 |   |   |   | 94,867 |   |   |
| Research and development costs                                                           |       |                                                             | 43,366     |   |   |   | 36,615 |   |   |   | 19,955 |   |   |
| Restructuring charges                                                                    |       |                                                             | 3,654      |   |   |   | — |   |   |   | — |   |   |
| Impairment charges                                                                       |       |                                                             | 3,599      |   |   |   | — |   |   |   | — |   |   |
| Depreciation and amortization                                                            |       |                                                             | 20,451     |   |   |   | 14,321 |   |   |   | 10,934 |   |   |
|                                                                                     |       |                                                             | 487,558    |   |   |   | 387,771 |   |   |   | 290,897 |   |   |
| Operating income  (loss)                                                                 |       |                                                             | (4,451     | ) |   |   | 88,836 |   |   |   | 66,367 |   |   |
| Other income  (expense):                                                                 |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Interest income                                                                          |       |                                                             | 3,401      |   |   |   | 4,263 |   |   |   | 2,204 |   |   |
| Interest expense                                                                         |       |                                                             | (18,321    | ) |   |   | (17,934 | ) |   |   | (25,645 | ) |   |
| Loss on extinguishment of debt                                                           |       |                                                             | (564       | ) |   |   | (12,293 | ) |   |   | — |   |   |
| Other, net                                                                               |       |                                                             | 565        |   |   |   | (460 | ) |   |   | 413 |   |   |
| Income (loss) from continuing operations before  income taxes and minority interest |       |                                                             | (19,370    | ) |   |   | 62,412 |   |   |   | 43,339 |   |   |
| Income tax expense (benefit)                                                             |       |                                                             | (5,192     | ) |   |   | 21,104 |   |   |   | 15,354 |   |   |
| Minority interest                                                                        |       |                                                             | (3,731     | ) |   |   | (2,309 | ) |   |   | (2,009 | ) |   |
| Income (loss)  from continuing operations                                                |       |                                                             | (17,909    | ) |   |   | 38,999 |   |   |   | 25,976 |   |   |
| Income (loss) from discontinued operations, net of  income taxes                         |       |                                                             | (4,654     | ) |   |   | 40,889 |   |   |   | (17,638 | ) |   |
| Net income (loss)                                                                        |       |                                                             | $          | (22,563 | ) |   |   | $ | 79,888 |   |   |   | $ | 8,338 |   |   |
| Basic earnings  (loss) per share:                                                        |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                                                                    |       |                                                             | $          | (0.35 | ) |   |   | $ | 0.78 |   |   |   | $ | 0.53 |   |   |
| Discontinued operations                                                                  |       |                                                             | (0.09      | ) |   |   | 0.82 |   |   |   | (0.36 | ) |   |
| Total                                                                                    |       |                                                             | $          | (0.44 | ) |   |   | $ | 1.60 |   |   |   | $ | 0.17 |   |   |
| Diluted earnings (loss)  per share:                                                      |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                                                                    |       |                                                             | $          | (0.35 | ) |   |   | $ | 0.76 |   |   |   | $ | 0.52 |   |   |
| Discontinued operations                                                                  |       |                                                             | (0.09      | ) |   |   | 0.80 |   |   |   | (0.36 | ) |   |
| Total                                                                                    |       |                                                             | $          | (0.44 | ) |   |   | $ | 1.56 |   |   |   | $ | 0.16 |   |   |
| Weighted average  shares outstanding:                                                    |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                    |       |                                                             | 51,114     |   |   |   | 50,113 |   |   |   | 49,153 |   |   |
| Diluted                                                                                  |       |                                                             | 51,114     |   |   |   | 51,248 |   |   |   | 50,139 |   |   |

 

See accompanying notes to consolidated financial statements.

F-3

----

**BALLY TECHNOLOGIES,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITYFOR THE YEARS ENDED JUNE 30, 2005, 2004, AND 2003**

| ** **                                                                              | ** ** | **Common Stock** | ** ** | **Series E  Special** | ** ** | **Treasury** | ** ** | **Deferred** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated**        | ** ** | **Total  Stockholders’** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|--------------|------------|--------------|------------|-------------------------|------------|---------------------------------------|------------|------------------------|------------|-------------------------------|------------|
| ** **                                                                              | ** ** | **Shares**            | ** ** | **Dollars**                | ** ** | **Stock**    | ** ** | **Stock**    | ** ** | **Compensation**        | ** ** | **Capital**                           | ** ** | **Income (loss)** | ** ** | **Deficit**                   | ** ** | **Equity** | ** ** |
| ** **                                                                              | ** ** | **(in 000s)**         | ** ** |
| Balances at June 30, 2002, as previously  reported                                 |       |                  | 49,227     |                       |       |         | $          | 4,927        |       |                    |       | $                                     | 12         |                   |       |                          | $          | (501 | ) |   |   | $ | — |   |   |   | $ | 157,866 |   |   |   | $ | (19,364 | ) |   |   | $ | (96,954 | ) |   |   | $ | 45,986 |   |   |
| Prior period adjustment (see Note 2)                                                    |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (4,013 | ) |   |   | (4,013 | ) |   |
| Balances at June 30, 2002 (As restated, see Note  2)                               |       |                  | 49,227     |                       |       |         | 4,927      |         |       |                    | 12         |                                  |       |                   | (501       | )                             |       |   | — |   |   |   | 157,866 |   |   |   | (19,364 | ) |   |   | (100,967 | ) |   |   | 41,973 |   |   |
| Net income (As restated, see Note 2)                                                    |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 8,338 |   |   |   | 8,338 |   |   |
| Foreign currency translation adjustment                                                 |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | 8,760 |   |   |   | — |   |   |   | 8,760 |   |   |
| Reversal of foreign currency translation adjustments  for Bally Wulff (see Note 4) |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | 11,891 |   |   |   | — |   |   |   | 11,891 |   |   |
| Total comprehensive income (As restated, see Note  2)                              |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 28,989 |   |   |
| Shares issued upon exercise of stock options                                            |       |                  | 706        |                       |       |         | 69         |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | 2,487 |   |   |   | — |   |   |   | — |   |   |   | 2,556 |   |   |
| Tax benefit of employee stock option exercises                                          |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | 2,914 |   |   |   | — |   |   |   | — |   |   |   | 2,914 |   |   |
| Balances at June 30, 2003 (As restated, see Note  2)                               |       |                  | 49,933     |                       |       |         | 4,996      |         |       |                    | 12         |                                  |       |                   | (501       | )                             |       |   | — |   |   |   | 163,267 |   |   |   | 1,287 |   |   |   | (92,629 | ) |   |   | 76,432 |   |   |
| Net income (As restated, see Note 2)                                                    |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 79,888 |   |   |   | 79,888 |   |   |
| Foreign currency translation adjustment                                                 |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | 237 |   |   |   | — |   |   |   | 237 |   |   |
| Total comprehensive income (As restated, see Note  2)                              |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 80,125 |   |   |
| Restricted stock units issued                                                           |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | (6,500 | ) |   |   | 6,500 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Restricted shares issued upon acquisition of Sierra  Design Group (“SDG”)     |       |                  | 662        |                       |       |         | 66         |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | 11,883 |   |   |   | — |   |   |   | — |   |   |   | 11,949 |   |   |
| Additional paid-in capital upon issuance of warrants                                    |       |                  |       |                       |       |         |       |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | 886 |   |   |   | — |   |   |   | — |   |   |   | 886 |   |   |
| Shares issued upon exercise of options                                                  |       |                  | 831        |                       |       |         | 83         |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | 7,205 |   |   |   | — |   |   |   | — |   |   |   | 7,288 |   |   |
| Tax benefit of employee stock option Exercises                                          |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | 4,299 |   |   |   | — |   |   |   | — |   |   |   | 4,299 |   |   |
| Balances at June 30, 2004 (As restated, see Note  2)                               |       |                  | 51,426     |                       |       |         | 5,145      |         |       |                    | 12         |                                  |       |                   | (501       | )                             |       |   | (6,500 | ) |   |   | 194,040 |   |   |   | 1,524 |   |   |   | (12,741 | ) |   |   | 180,979 |   |   |
| Net loss (As restated, see Note 2)                                                      |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (22,563 | ) |   |   | (22,563 | ) |   |
| Foreign currency translation adjustment                                                 |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | (305 | ) |   |   | — |   |   |   | (305 | ) |   |
| Total comprehensive loss                                                                |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (22,868 | ) |   |
| Restricted stock units issued (As restated, see Note  2)                           |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | (2,314 | ) |   |   | 2,314 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Restricted stock amortization (As restated, see Note  2)                                |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | 2,125 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2,125 |   |   |
| Repurchase of shares for treasury                                                       |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | (164       | )                             |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (164 | ) |   |
| Shares issued upon exercise of stock  Options                                           |       |                  | 199        |                       |       |         | 21         |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | 1,097 |   |   |   | — |   |   |   | — |   |   |   | 1,118 |   |   |
| Shares issued upon the partial retirement of  subordinated note                         |       |                  | 1,024      |                       |       |         | 102        |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | 14,209 |   |   |   | — |   |   |   | — |   |   |   | 14,311 |   |   |
| Tax benefit of employee stock option Exercises                                          |       |                  | —     |                       |       |         | —     |         |       |                    | —     |                                  |       |                   | —     |                          |       |   | — |   |   |   | 522 |   |   |   | — |   |   |   | — |   |   |   | 522 |   |   |
| Balances at  June 30, 2005 (As restated, see Note 2)                               |       |                  | 52,649     |                       |       |         | $          | 5,268        |       |                    |       | $                                     | 12         |                   |       |                          | $          | (665 | ) |   |   | $ | (6,689 | ) |   |   | $ | 212,182 |   |   |   | $ | 1,219 |   |   |   | $ | (35,304 | ) |   |   | $ | 176,023 |   |   |

 

See accompanying notes to consolidated financial statements.

F-4

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**BALLY TECHNOLOGIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                                | ** ** | **Fiscal Years Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                | ** ** | **(As restated,  see Note 2)**       | ** ** | **(As restated,  see Note 2)** | ** ** | **(As restated,  see Note 2)** | ** ** |
| ** **                                                                                | ** ** | **(in 000s)**                                  | ** ** |
| Cash flows from operating activities:                                                     |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                         |       |                                                | $          | (22,563 | ) |   |   | $ | 79,888 |   |   |   | $ | 8,338 |   |   |
| Income (loss) from  discontinued operations                                               |       |                                                | 4,654      |   |   |   | (40,889 | ) |   |   | 17,638 |   |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                                            |       |                                                | 47,750     |   |   |   | 31,401 |   |   |   | 20,420 |   |   |
| Stock-based compensation                                                                  |       |                                                | 2,125      |   |   |   | — |   |   |   | — |   |   |
| Tax benefit of employee  stock option exercise                                            |       |                                                | 522        |   |   |   | 4,299 |   |   |   | 2,914 |   |   |
| Loss on extinguishment of  debt                                                           |       |                                                | 564        |   |   |   | 12,293 |   |   |   | — |   |   |
| Deferred income taxes                                                                     |       |                                                | (6,075     | ) |   |   | 19,310 |   |   |   | 13,146 |   |   |
| Provision for losses on  receivables                                                      |       |                                                | 5,134      |   |   |   | 1,753 |   |   |   | 825 |   |   |
| Operating activities of  discontinued operations                                          |       |                                                | (4,172     | ) |   |   | 2,587 |   |   |   | 6,758 |   |   |
| Inventory and other  assets write-downs                                                   |       |                                                | 30,015     |   |   |   | — |   |   |   | 38,728 |   |   |
| Other                                                                                     |       |                                                | 3,323      |   |   |   | 1,239 |   |   |   | 884 |   |   |
| Change in operating asset and liabilities, net of  effects of business acquired:          |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Purchase of appeal bond                                                                   |       |                                                | (7,361     | ) |   |   | — |   |   |   | — |   |   |
| Accounts and notes  receivable                                                            |       |                                                | 32,754     |   |   |   | (19,044 | ) |   |   | (49,174 | ) |   |
| Inventories                                                                               |       |                                                | (12,278    | ) |   |   | (8,943 | ) |   |   | 1,486 |   |   |
| Other current assets                                                                      |       |                                                | (179       | ) |   |   | (4,800 | ) |   |   | (10,359 | ) |   |
| Accounts payable                                                                          |       |                                                | (876       | ) |   |   | 7,382 |   |   |   | 7,278 |   |   |
| Accrued liabilities,  deferred revenue and jackpot liabilities                            |       |                                                | (21,199    | ) |   |   | 25,528 |   |   |   | 11,351 |   |   |
| Net cash provided by  operating activities                                                |       |                                                | 52,138     |   |   |   | 112,004 |   |   |   | 70,233 |   |   |
| Cash flows from investing activities:                                                     |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Additions to property,  plant, and equipment                                              |       |                                                | (12,430    | ) |   |   | (11,840 | ) |   |   | (9,759 | ) |   |
| Additions to leased  gaming equipment                                                     |       |                                                | (40,589    | ) |   |   | (38,109 | ) |   |   | (21,357 | ) |   |
| Settlement of acquisition  related contingency                                            |       |                                                | (12,000    | ) |   |   | — |   |   |   | — |   |   |
| Acquisitions, net of cash  acquired                                                       |       |                                                | —     |   |   |   | (123,495 | ) |   |   | (11,528 | ) |   |
| Additions to other  long-term assets                                                      |       |                                                | (2,157     | ) |   |   | (14,956 | ) |   |   | (3,671 | ) |   |
| Restricted cash and  investments                                                          |       |                                                | 116        |   |   |   | (2,776 | ) |   |   | (8,193 | ) |   |
| Investing activities of  discontinued operations                                          |       |                                                | —     |   |   |   | (16,001 | ) |   |   | (11,975 | ) |   |
| Proceeds from sale of net  assets discontinued operations                                 |       |                                                | 1,911      |   |   |   | 155,212 |   |   |   | — |   |   |
| Net cash used in  investing activities                                                    |       |                                                | (65,149    | ) |   |   | (51,965 | ) |   |   | (66,483 | ) |   |
| Cash flows from financing activities:                                                     |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Capitalized debt issuance  costs                                                          |       |                                                | (1,053     | ) |   |   | (6,954 | ) |   |   | — |   |   |
| Premium paid on early  redemption of debt                                                 |       |                                                | —     |   |   |   | (5,399 | ) |   |   | — |   |   |
| Proceeds from issuance of  long-term debt                                                 |       |                                                | —     |   |   |   | 350,000 |   |   |   | — |   |   |
| Debt extinguished in  refinancing                                                         |       |                                                | —     |   |   |   | (337,625 | ) |   |   | — |   |   |
| Net change in revolving  credit facility                                                  |       |                                                | (70,000    | ) |   |   | 70,000 |   |   |   | — |   |   |
| Pay down of term loan due  to sale of net assets of discontinued operations               |       |                                                | (31,618    | ) |   |   | — |   |   |   | — |   |   |
| Reduction of long-term  debt                                                              |       |                                                | (6,336     | ) |   |   | (3,485 | ) |   |   | (4,735 | ) |   |
| Purchase of treasury  shares                                                              |       |                                                | (164       | ) |   |   | — |   |   |   | — |   |   |
| Financing activities of  discontinued operations                                          |       |                                                | —     |   |   |   | (4,186 | ) |   |   | (2,998 | ) |   |
| Proceeds from exercise of  stock options and warrants                                     |       |                                                | 1,118      |   |   |   | 7,288 |   |   |   | 2,556 |   |   |
| Net cash (used in)  provided by financing activities                                      |       |                                                | (108,053   | ) |   |   | 69,639 |   |   |   | (5,177 | ) |   |
| Effect of exchange rate  changes on cash                                                  |       |                                                | (24        | ) |   |   | 174 |   |   |   | 286 |   |   |
| Cash and cash equivalents:                                                                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Increase (decrease) for  year                                                             |       |                                                | (121,088   | ) |   |   | 129,852 |   |   |   | (1,141 | ) |   |
| Balance, beginning of  year                                                               |       |                                                | 154,258    |   |   |   | 24,406 |   |   |   | 25,547 |   |   |
| Balance, end of year                                                                      |       |                                                | $          | 33,170 |   |   |   | $ | 154,258 |   |   |   | $ | 24,406 |   |   |

 

See accompanying notes to consolidated financial statements

F-5

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**1.**                 DESCRIPTIONOF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Bally Technologies, Inc. (“Bally” or the “Company”)(formerly known as Alliance Gaming Corporation), a Nevada corporation, is adiversified, worldwide gaming company that (i) designs, manufactures anddistributes gaming machines and computerized monitoring systems for gamingmachines and (ii) owns and operates one casino.

During fiscal years 2004 and 2005, the Companydisposed of several businesses including its Nevada and Louisiana routeoperations, its Bally Wulff business in Germany and its Rail City Casinooperation. Accordingly, these businesses have been classified as discontinuedoperations for all periods presented (see Note 5).

In fiscal year 2004, theCompany completed the acquisitions of Crown Gaming, LTD (“Crown”), MindPlay LLC(“MindPlay”) and Sierra Design Group (“SDG”) (see Note 4).

*Principles ofpresentation and consolidation*

The accompanying consolidated financial statementsinclude the accounts of Bally Technologies, Inc., and its wholly owned andpartially owned, controlled subsidiaries. All significant intercompany accountsand transactions have been eliminated in consolidation.

The Company is the general partner of Rainbow CasinoVicksburg Partnership (“RCVP”), the partnership that operates the RainbowCasino. Pursuant to transactions consummated in March 1995, the RainbowCorporation, which was the former general partner of RCVP, became a limitedpartner entitled to receive 10% of the net available cash flows after debtservice and other items, as defined (which amount increases to 20% of suchamount when annual revenues exceed $35.0 million but only on such incrementalamount), payable quarterly through December 31, 2010. The Company holdsthe remaining economic interest in the partnership.

The Company consolidates RCVP and records minorityinterest expense to reflect the portion of the earnings of RCVP attributable tothe minority shareholders.

The Company alsoconsolidates certain Atlantic City progressive trusts in accordance withFinancial Accounting Standards Board (“FASB”) Interpretation No. 46R (“FIN”),*Consolidation of Variable Interest Entities*(“VIE’s”) which addresses consolidation by a business enterprise of variableinterest entities that either: (1) do not have sufficient equityinvestment at risk to permit the entity to finance its activities withoutadditional subordinated financial support or (2) will hold a significantvariable interest in, or have significant involvement with, an existing VIE.For the fiscal year 2005, the Company consolidated $5.5 million in revenues and$6.1 million in related expenses, as well as $5.8 million total assets andliabilities, primarily consisting of restricted cash accounts and restrictedinvestments (included in other assets in the consolidated balance sheet) andrelated jackpot liabilities.

*Reclassifications*

Certain reclassificationshave been made to prior year financial statements to conform to the currentyear presentation. The most significant reclassification was depreciation onleased gaming equipment which has been reclassified from depreciation andamortization to cost of gaming equipment, and systems, totaling $17.1 millionand $9.5 million for the fiscal years ended June 30, 2004 and 2003,respectively.

*Cash and cashequivalents*

Cash equivalents consistof**highly liquid debt instrumentspurchased with an original maturity of three months or less at the date ofpurchase and are carried at cost, which approximates market value. Cash and 

F-6

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cash equivalents also includescash utilized in Casino Operations which is held in vaults, cages or changebanks which totaled $2.7 million and $2.1 million at June 30, 2005 and2004, respectively.

*Restricted cash*

The Company maintainsjackpot reserve accounts totaling approximately $13.4 million and $15.6 millionat June 30, 2005 and 2004, respectively, to ensure availability of fundsto pay wide-area progressive jackpot awards, which are classified as restrictedcash.

*AccountsReceivable, Notes Receivable and Allowance for Doubtful Accounts*

Accounts and notesreceivable are stated at face amounts less an allowance for doubtful accounts.The Company evaluates its receivables and establishes the allowance fordoubtful accounts based on a combination of factors including but not limitedto customer circumstances, credit conditions and a history of write-offs andcollections. The Company’s receivables are considered past due if payments havenot been received within agreed upon invoice terms. With regard to notesreceivable, interest income is recognized ratably over the life of the notereceivable.

*Inventories*

Inventories are stated atthe lower of cost, determined on a first in, first out basis, or market. Costelements included in work-in-process and finished goods include raw materials,freight, direct labor and manufacturing overhead. Inventories consist of thefollowing: 

| ** **      | ** ** | **As of June 30,** | ** ** |
|-----------------|------------|-----------------------------------|------------|
| ** **      | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| ** **      | ** ** | **(in 000s)**                | ** ** |
| Raw materials   |       | $                                 | 15,975     |   | $ | 26,963 |   |
| Work-in-process |       | 5,690                             |       | 3,324 |   |
| Finished goods  |       | 41,858                            |       | 32,998 |   |
| Total           |       | $                                 | 63,523     |   | $ | 63,285 |   |

 

The Company recordedinventory write-downs totaling approximately $26.4 million during the yearended June 30, 2005. These charges are classified in cost of gamingequipment and systems in the consolidated statements of operations.

*Restrictedlong-term investments*

The Company purchases U.S.Treasury Strip Securities for the benefit of jackpot winners who elect toreceive annual or weekly installment payments. These securities are held tomaturity and recorded at cost plus interest accretion to date in accordancewith FASB Statement of Financial Accounting Standards (“SFAS”) No. 115, *Accounting for Certain Investments in Debt and Equity Securities.*Suchsecurities are included in**restrictedlong-term investments in the consolidated balance sheets, and totaled $10.1million and $2.5 million as of June 30, 2005 and 2004, respectively.

*Other currentassets*

Deferred costs are chargedto cost of gaming equipment and systems when the related deferred revenue isrecognized. Prepaid and deferred royalties consist mainly of royalty andlicense fees paid for the use of third party trade names, celebrity likenesses,content, and other intellectual property rights. Royalties are expensed to costof gaming equipment and systems over the estimated period of expectedconsumption based on forecasted sales and placement schedules ranging from oneto five years. If a pattern cannot be reliably determined, such costs areexpensed using the straight-line method over the contract life. The 

F-7

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Company also evaluates therealization of capitalized amounts and any portions deemed unrealizable arecharged to cost of gaming equipment and systems (see Note 8).

*Property, plant andequipment and leased gaming equipment*

Property, plant and equipment is stated at cost and depreciatedover the estimated useful lives or lease term, if less, using the straight linemethod as follows: buildings and improvements, 28 to 40 years; gamingequipment, 4 to 7 years; furniture, fixtures and equipment, 3 to 7 years; andleasehold improvements, 5 to 10 years. Leased gaming equipment is stated atcost and depreciated over its estimated useful life ranging from 2 to 4 years. Inthe June 30, 2005 fiscal year, the Company evaluated the useful life ofits leased games and reduced the lives on all games to two years and recordedthe change in estimate prospectively.

Property, plant andequipment and leased gaming equipment consist of the following:

| ** **                            | ** ** | **2005**           | ** ** | **2004** | ** ** |
|---------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                            | ** ** | **(in 000s)** | ** ** |
| Land and land  improvements           |       | $                  | 19,335     |     | $          | 19,086 |   |
| Buildings and  leasehold improvements |       | 34,710             |       | 29,937   |       |
| Gaming equipment                      |       | 29,421             |       | 28,439   |       |
| Furniture,  fixtures and equipment    |       | 23,893             |       | 20,821   |       |
| Less accumulated  depreciation        |       | (40,548            | )          | (29,123  | )          |
| Property, plant and equipment, net    |       | $                  | 66,811     |     | $          | 69,160 |   |
| Leased gaming equipment               |       | $                  | 94,345     |     | $          | 77,716 |   |
| Less accumulated  depreciation        |       | (42,495            | )          | (24,903  | )          |
| Leased gaming  equipment, net         |       | $                  | 51,850     |     | $          | 52,813 |   |

 

*Depreciation andAmortization Expense*

For the fiscal years endedJune 30, 2005, 2004 and 2003, depreciation and amortization expensetotaled $47.8 million, $31.4 million and $20.4 million, respectively. Of theseamounts, $27.3 million, $17.1 million and $9.5 million of depreciation andamortization expense were classified as cost of gaming equipment and systems inthe consolidated statements of operations.

*Impairment ofLong-Lived Assets*

The Company reviews long-lived assets for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. Recoverability of long-lived assets aremeasured by a comparison of the carrying amount of an asset to future net cashflows expected to be generated by the asset, undiscounted and without interest.If such assets are considered to be impaired, the impairment to be recognizedis measured by the amount by which the carrying amount of the assets exceedsthe fair value of the assets. For assets held for sale, the Company carriessuch assets at fair value less estimated costs to sell.

In July 2001, the Company adopted SFAS No. 142*“Goodwill and Other Intangible Assets”*,which requires companies to cease amortizing goodwill and certain intangibleassets with indefinite useful lives. Instead, goodwill and intangible assetsdeemed to have indefinite useful lives are to be reviewed for impairmentannually based on the difference between the carrying amount and the fair valueof the assets.

The Company evaluates thecarrying value of goodwill for impairment annually during the fourth quarter ofeach fiscal year or whenever events or changes in circumstances indicate thatthe carrying value of goodwill may not be recoverable. Indicators that couldtrigger an impairment review include changes in legal, regulatory, or economicfactors, market conditions or operational performance. Impairment is 

F-8

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measured as the differencebetween the carrying amount and the fair value of the goodwill and isrecognized as a component of income from operations.

*Other IntangibleAssets*

Intangible assets consistprimarily of acquisition-related software and trademarks, which are amortizedover 3 to 13 years (see Note 7).

*Jackpot Liabilitiesand Expenses*

The Company recognizes aliability for jackpots not yet won and jackpot expense for the cost to fundjackpots in the future. Jackpots are payable either in equal installments over20 years, or immediately in the case of instant win progressive jackpots. Winnersmay elect to receive a single payment for the present value of a jackpotdiscounted at applicable interest rates in lieu of annual installments. Interestrates eligible for use in the single payment calculation vary by jurisdictionand are impacted by market forces and other economic conditions.

*Use of Estimates*

The preparation of theconsolidated financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from thoseestimates.

*Revenue recognition*

The Company derives revenues from the followingsources: 1) sale of gaming machines (Gaming Equipment), 2) sales ofcomputerized monitoring systems and related recurring hardware and softwaremaintenance revenue (Systems), 3) operation of wide-area progressive systems,and lease of gaming machines (Gaming Operations revenue) and 4) CasinoOperations.

Gaming and systemsrevenue is recognized in accordance with the provisions of SOP No. 97-2,as amended, and is recognized when all of the following have been satisfied:

·       Persuasiveevidence of an arrangement exists;

·       Deliveryhas occurred;

·       Thevendors’ fee is fixed or determinable; and

·       Collectibilityis probable.

The Company sells gaming machines and computerizedmonitoring systems either through credit terms of 120 days or less or withcredit terms that may extend up to five years under contracts of sale securedby the related equipment, with interest recognized at market rates. The Companyperformed a review of contracts, with extended payment terms in excess of 6months, to determine whether there was sufficient history to conclude that theCompany has a history of collecting under the original payment terms. TheCompany concluded that sufficient history existed for extended payment termcontracts of 24 months or less. Accordingly, revenue is recorded in accordancewith the terms of sale for contracts with terms of 24 months or less, or ascash is received for contracts with payment terms in excess of 24 months.

The Company also sells gaming devices underarrangements in which there are multiple elements, as that term is defined inSOP No. 97-2. Contracts may contain multiple elements such as acombination of gaming devices, central site monitoring equipment, systemssoftware, license fees and training.  The

F-9

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Company allocates revenue to each element based uponits fair value as determined by “vendor specific objective evidence.”  Vendor specific objective evidence of fairvalue for all elements of an arrangement is based upon the normal pricing anddiscounting practices for those products and services when sold separately. Inaddition, software license updates and product support services are measured bythe renewal rate offered to the customer.

The Company recognizes revenue when the product isdelivered or over the period in which the service is performed and defersrevenue for any undelivered elements. Revenue in respect of product that hasbeen held at Company controlled locations is deferred until the product isphysically delivered to a customer controlled location. If the Company cannotobjectively determine the fair value of any undelivered elements included inthe arrangement, all revenues are deferred until all of the elements aredelivered and services have been performed, or until fair value can objectivelybe determined for any remaining undelivered element.

The majority of the Company’s software licensearrangements are non-perpetual and include software license updates and productsupport which are recognized ratably over the term of the arrangement,typically one year. Software license updates provide customers with rights tounspecified software product upgrades, maintenance and patches released duringthe term of the support period.  Themajority of the Company’s customers purchase both software and hardwaremaintenance and product support when they purchase the systems. In addition,substantially all customers renew these maintenance agreements annually.  Revenue from multi-year licensing arrangementsare accounted for as subscriptions, with billings recorded as unearned revenueand recognized as revenue ratably over the billing coverage period, generallyone year.

The gaming operation division earns recurring revenuethat consists of the operation of wide-area progressive jackpot systems andrevenues from gaming machines placed in casinos on a daily lease or rentalbasis. Revenue from these sources is recognized based on the contractual termsof the participation or rental agreements and is generally based on a share ofmoney wagered, a share of the net winnings, or on a fixed daily rental ratebasis.

In accordance withindustry practice, gaming revenues in our casino operations are recognized asthe net win from gaming machine operations, which is the difference betweencoins and currency deposited into the machines and payments to customers.

*CapitalizedRegulatory Approval Costs*

In accordance with SFAS No. 86, *Accounting for the Costs of Computer Software to be Sold, Leased, orOtherwise Marketed,* internally generated software development costsassociated with new products and significant enhancements to existing softwareproducts are expensed as incurred until technological feasibility has beenestablished.

Bally Gaming and Systems incurs significant regulatoryapproval costs for its products. Such costs are capitalized once technologicalfeasibility has been established and are amortized generally over three yearsreflective of the estimated product life cycle. Product testing costs relatedto projects that are discontinued are expensed when such determination is made.Fees incurred for such regulatory approvals totaled approximately $8.9 millionand $8.5 million for the fiscal years ended June 30, 2005 and 2004,respectively. Of these amounts incurred, during the fiscal years ended June 30,2005 and 2004, the Company capitalized a total of $2.0 million and $4.8 millionrespectively that was directly attributable to products and amortizationexpense for previously capitalized amounts that totaled $0.9 million and $0.8million respectively.

The Company has a reviewprocess which includes a full review of the costs incurred and the nature andprospects of the related product. After costs are capitalized, they aremonitored to ensure that they are 

F-10

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earning revenues throughproduct sales. Future write-offs are possible if such products do not produceadequate cash flows.

*Promotionalallowances*

The Company accounts forpromotional allowances and other cash based incentives in accordance withEmerging Issues Task Force (“EITF”) Issue 00-22, “Accounting for ‘Points’and certain other Time-Based or Volume-Based Sales Incentive Offers, and OffersFor Free Products or Service to be Delivered in the Future.” EITF 00-22requires that sales incentives such as cash rewards provided to player clubmembers be recorded as a reduction of revenue rather than as an operatingexpense. These incentives totaled $3.2 million, $3.8 million and $3.7 millionfor the years ended June 30, 2005, 2004 and 2003, respectively.

*Allowances ForDoubtful Accounts*

Allowances for doubtfulaccounts are maintained at levels determined by the Company’s management toadequately provide for collection losses. In determining estimated losses, theCompany’s management considers economic conditions, the activity in gamingmarkets, the financial condition of customers, changes in technology and otherfactors which management believes are relevant.

*Advertising costs*

The Company expensesadvertising costs as incurred, which totaled $12.2 million, $11.3 million and$10.0 million for the fiscal years ended June 30, 2005, 2004 and 2003,respectively.

*Warranty expense*

Gaming devices are typically sold with a 90-dayparts and labor warranty. For system sales, the Company provides severalafter-sales, value-added services to customers including customer educationprograms, a 24-hour customer service telephone hot-line, an Internet website for technical support, field service support programs, and spare partsprograms. Historical warranty expense as a percentage of Gaming and Systemssegment revenues has been less than 1%, and is charged to cost of sales. Warrantyexpense is calculated using historical statistical data, and totaled $1.0million, $1.7 million and $0.9 million for the fiscal years ended June 30,2005, 2004 and 2003, respectively.

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The activity in theaccrued warranty account, which is included in accrued liabilities on thebalance sheet, is as follows:

| ** **                         | ** ** | **2005**           | ** ** | **2004** | ** ** |
|------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                         | ** ** | **(in 000s)** | ** ** |
| Balance at  beginning of year      |       | $                  | 508        |     | $          | 344 |   |
| Warranty costs  incurred           |       | (813               | )          | (2,319   | )          |
| Accrual for new  warranties issued |       | 794                |       | 2,483    |       |
| Balance at end of year             |       | $                  | 489        |     | $          | 508 |   |

 

*Research anddevelopment*

Research and developmentcosts are charged to expense as incurred.

*Deferred Revenue*

Deferred revenue consistsof amounts collected or billed in excess of recognizable revenue (see Note 9).

*Foreign currencytranslation*

The functional currency ofthe Company’s foreign subsidiaries is their local currency. Assets andliabilities of foreign operations are translated into U.S. dollars at the rateof exchange at the end of the period, and the income and expense accounts aretranslated at the average rate of exchange for the period. Translationadjustments are reflected as a separate component of stockholders’ equity.Gains and losses on foreign currency transactions are included in theaccompanying consolidated statements of operations.

*Fair value offinancial instruments*

The fair value of afinancial instrument is the amount at which the instrument could be exchangedin a current transaction between willing parties, other than in a forced saleor liquidation. The carrying amounts reflected in the accompanying consolidatedbalance sheets for cash equivalents, receivables, investment to fund jackpotliabilities, accounts payable, jackpot liabilities, accrued liabilities andvariable rate long-term debt approximate their respective fair values.

*Income taxes*

Income taxes are accountedfor under the asset and liability method. Deferred tax assets and liabilitiesare recognized for the future tax consequences attributable to differencesbetween the financial statement carrying amounts of assets and liabilities andtheir respective tax bases. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton deferred tax assets and liabilities of a change in tax rates is recognizedin the period that includes the enactment date. Taxes on income of the Company’sforeign subsidiaries are provided at the tax rates applicable to the taxjurisdictions in which they are located.

*Stock-basedcompensation*

The Company accounts for its stock-basedemployee compensation awards in accordance with Accounting Principles BoardOpinion No. 25, *Accounting for StockIssued to Employees* (“APB No. 25”). Under APB No. 25,since the exercise price of the Company’s employee stock options equals orexceeds the market price on date of grant, no compensation expense isrecognized. The Company recognizes compensation expense for the amortization ofcertain restricted stock units.

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In accordance with SFAS No. 123, *Accounting for Stock-Based Compensation* (“SFASNo. 123”), the Company has continued to account for employee stock-basedcompensation under APB No. 25, and discloses historical pro-forma netincome (loss) and earnings (loss) per share that would have resulted from theuse of the fair value method.

Under the fair valuemethod, compensation costs are measured using an options pricing model and areamortized over the estimated life of the option, which is generally three tofive years, with option forfeitures accounted for at the time of theforfeiture, and all amounts are reflected net of tax. The following tablepresents the Company’s reported historical net income (loss) which includes theamortization of restricted stock units (see Note 13), adjusted for the proforma effect assuming an after-tax charge for stock-based compensation:

| ** **                                      | ** ** | **Year Ended June 30,**                        | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | **(in 000s, except per share data)** | ** ** |
| Reported net  income (loss)                     |       | $                                                             | (22,563    | ) | $ | 79,888 |   | $ | 8,338 |   |
| Reported  stock-based compensation, net of tax  |       | 1,615                                                         |       | — |   | — |   |
| Pro forma  stock-based compensation, net of tax |       | (25,147                                                       | )          | (5,377 | ) | (3,384 | ) |
| Pro forma net income (loss)                     |       | $                                                             | (46,095    | ) | $ | 74,511 |   | $ | 4,954 |   |
| Earnings (loss) per  share:                     |       |                                                          |       |   |   |   |   |
| Basic—as reported                          |       | $                                                             | (0.44      | ) | $ | 1.60 |   | $ | 0.17 |   |
| Basic—pro forma                            |       | $                                                             | (0.90      | ) | $ | 1.49 |   | $ | 0.10 |   |
| Diluted—as reported                        |       | $                                                             | (0.44      | ) | $ | 1.56 |   | $ | 0.16 |   |
| Diluted—pro forma                          |       | $                                                             | (0.90      | ) | $ | 1.45 |   | $ | 0.10 |   |

 

On June 13, 2005, the Company accelerated thevesting of unvested stock options held by the Company’s employees, officers anddirectors with an exercise price of $15.00 or higher. This accelerated vestingaffected options for approximately 2.4 million shares of the Company’s commonstock and resulted in a pro forma after tax effect of $13.4 million, which isreflected in the table above for fiscal year 2005. The Company imposed salesrestrictions on shares acquired upon exercise of these options that parallelthe vesting requirements of the original options.

SFAS No. 123R waseffective beginning with the Company’s quarter ended September 30, 2005,which will require all share-based payments to Company employees, includinggrants of employee stock options, to be recognized in the Company’s financialstatements based on their fair values.

*Recently issuedaccounting pronouncements*

In March 2005, the SEC issued SAB No. 107, to provide interpretive guidance onSFAS No. 123R valuation methods, assumptions used in valuation models, andthe interaction of SFAS No. 123 with existing SEC guidance. SAB No. 107also requires the classification of stock compensation expense in the samefinancial statement line as cash compensation, and will therefore impact costof gaming equipment and systems, casino operations (and related gross profitsand margins), research and development costs, and selling, general andadministrative expenses. The Company estimates that the expensing of stockoptions will reduce the net income for the fiscal year 2006 by approximately$4.1 million (or $0.08 per share) for the unvested options outstanding as of June 30,2005. This amount excludes the accelerated vesting of approximately 2.4 millionoptions in June 2005 (see Note 1 to consolidated financial statements).

In December 2004, the FASB issued FASB StaffPosition (“FSP”) No. 109-1, *Application of SFAS No. 109,Accounting for Income Taxes, to the Tax Deduction on Qualified ProductionActivities provided by the American Jobs Creation Act of 2004* (“FSP No. 109-1”).FSP No. 109-1 states that the qualified production activitiesdeduction should be accounted for as a special deduction in accordance withSFAS No. 109. This 

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statement was effective upon issuance. The adoption ofthis statement had no material impact on the Company’s results of operations,financial position or cash flows.

In December 2004, the FASB issued FSP No. 109-2,*Accounting and Disclosure Guidance for the ForeignEarnings Repatriation Provision within the American Jobs Creation Act of 2004*(“FSP No. 109-2”). FSP No. 109-2 allows enterprisestime beyond the financial reporting period of enactment to evaluate the effectof the Act on its plan for reinvestment or repatriation of foreign earnings forpurposes of applying SFAS No. 109. This statement was effective uponissuance. The adoption of this statement had no material impact on the resultsof operations, financial position or cash flows.

In December 2004, the FASB issued SFAS No. 123Rthat focuses primarily on accounting for transactions in which an entityobtains employee services in share-based payment transactions. Beginning withthe quarterly period that begins July 1, 2005, the Company will berequired to expense the fair value of employee stock options and similar awards.Because the recording of non-cash stock option expense involves equity-basedcompensation transactions, the adoption of this statement will have no effecton the Company’s cash position.

In November 2004, the FASB issued SFAS No. 151revising Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, which clarifies theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, wasted material (spoilage). This statement is effective for inventorycosts incurred during fiscal years beginning after June 15, 2005. TheCompany does not believe this accounting pronouncement will have a materialimpact on its financial condition or results of operations.

In December 2004, theFASB issued SFAS No. 153, *Exchanges of Nonmonetary Assets* (“SFASNo. 153”), amending APB Opinion No. 29. APB Opinion No. 29treated nonmonetary exchanges of similar productive assets as an exception fromfair value measurement. SFAS No. 153 replaces this exception with ageneral exception from fair value measurement for exchanges of nonmonetaryassets that do not have commercial substance. Nonmonetary exchanges havecommercial substance if the future cash flows of an entity are expected tochange significantly as a result of the exchange. This statement is effectivefor nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,2005. The Company anticipates no material impact on the Company’s results ofoperations, financial position or cash flows as a result of adopting thisstatement.

**2.**                 RESTATEMENTOF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

**First Restatement**

In connection with the year-end closing process forthe year ended June 30, 2005, the Company identified accounting errorsthat required adjustment to the Company’s originally issued consolidatedfinancial statements as of June 30, 2004 and for the fiscal years ended June 30,2004 and 2003 (the “First Restatement”).

These errors relatedprimarily to revenue recognition, accounting for inventory costs and othermiscellaneous items as discussed below.

*Revenue Recognition*

The Company identified instances where the timing oramount of revenue recognized was not in accordance with SOP No. 97-2.The Company determined that certain requirements of SOP No. 97-2were not met in a number of instances and therefore, revenue with respect tocertain transactions was recognized prematurely. In accounting for thesetransactions, the Company has determined that it (1) should have deferredthe revenue and related cost of sales, (2) should have reflected certaingoods shipped as consigned inventory until later periods and (3) shouldnot have recognized certain accounts receivable until later periods.

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The specific circumstanceswhich resulted in adjustments are as follows:

*Persuasive evidenceof an arrangement exists*

The Company identified onetransaction for which $5.7 million in revenue was recognized in the fiscalquarter ended December 31, 2004 at the time the games were shipped to acustomer based on a signed sales-type lease agreement. Subsequently, thecustomer negotiated a fixed price payment with a cash discount and otherconcessions. These facts and circumstances called into question whether theoriginal agreement provided adequate evidence of an arrangement that wassufficiently definitive to support recognition of revenue in December 2004.The Company has concluded that there was not persuasive evidence of anarrangement at that time, and therefore the revenue should have been deferreduntil the cash was received in July 2005.

*Delivery hasoccurred*

The Company identified instances in which revenue wasrecognized for sales at the time the product was shipped to customers when theshipping terms stated or implied that risk of loss and/or title did nottransfer until the goods were delivered to the customer’s location. In suchcircumstances, recognition of revenue should have been deferred until the timethe products reached the customer’s location and therefore the revenue that hadpreviously been recorded in connection with these transactions was adjusted tobe recorded in subsequent accounting periods when the delivery criteria was met.The net effect of these adjustments reduced revenue by $(12.1) million and$(0.4) million for the fiscal years ended June 30, 2004 and 2003,respectively

The Company alsoidentified instances in the Systems division where certain standard salesagreements contained contractual terms creating a non-perpetual softwarelicense rather than a perpetual license. The Company determined that in suchcircumstances, revenue for non-perpetual software licenses should not have beenrecognized as of the acceptance date, but rather should have been deferred andrecognized ratably over the twelve-month period from the date of acceptance,rather than in full as of the acceptance date and therefore the revenue thathad previously been recorded in connection with these transactions was adjustedto be recorded in the appropriate periods. The net effect of these adjustmentswas to defer revenue and record it over a twelve-month period for suchcontracts reduced revenues by $(6.0) million and $(4.1) million for the fiscalyear ended June 30, 2004 and 2003, respectively.

*The vendors’ fee isfixed or determinable and collectibility is probable*

The use of extended payment terms in a softwarelicensing arrangement may indicate that the fee is not fixed or determinableand collectibility is not probable. TheCompany identified instances where revenue was recorded upon delivery of bothsystems and gaming products to customers under contracts that contained paymentterms in excess of 24 months. At the time the sales were recorded the Companydid not have sufficient historical evidence of collections made under extendedcontracts with terms beyond 24 months, as required under SOP No. 97-2,and therefore should not have concluded that collectibility was probable. TheCompany has concluded it should have deferred revenue on all contracts with extendedpayment terms in excess of 24 months, and recorded revenue upon receipt ofpayment from the customer and therefore the revenue that had previously beenrecorded in connection with these transactions was adjusted to be recorded insubsequent accounting periods when payment was received. The net effect ofthese adjustments increased (decreased) revenues by $15.0 million and $(19.8)million for the fiscal years ended June 30, 2004 and 2003, respectively.

In addition, the Companyidentified instances in which revenue was recognized at the time product wasshipped to customers who either were thinly capitalized or were new customersto the Company for which creditworthiness was not sufficiently established. Pursuantto SOP No. 97-2 collectibility must be 

F-15

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determined to be “probable”at the time of delivery in order for revenue to be recognized, and therefore,in such circumstances recognition of revenue should have been deferred untilpayment from the customer was received. Therefore revenue that had previouslybeen recorded for these transactions was adjusted to be recorded in subsequentperiods when payment was received. The net effect of these adjustments reducedrevenue by $(6.6) million for the year ended June 30, 2004.

*Inventory*

In certain circumstances,standard versus actual raw material variances were recorded in cost of salesrather than as adjustments to inventory and fixed assets. As a result,adjustments have been made to adjust the standard costs to actual costs,resulting in corrections to the carrying value of certain finished goods andfixed assets and related cost of sales and depreciation expense. The net effectof these adjustments increased cost of goods sold by $0.7 million and $0.6million for the fiscal years ended June 30, 2004 and 2003, respectively.

*Other MiscellaneousAdjustments*

The Company identified additional net deferred taxassets totaling $9.3 million that were not recorded in the original purchaseaccounting for an acquisition completed in fiscal year 2004. In addition, theCompany determined that it should have established valuation allowances againstcertain deferred tax assets that were recorded in connection with acquisitionsin fiscal year 2004. The adjustments increased the Company’s net deferred taxassets as of June 30, 2004 by approximately $8.3 million, with acorresponding decrease in goodwill. The Company also recorded other purchaseaccounting adjustments, resulting in a net reduction in goodwill as of June 30,2004 of approximately $1.0 million.

The Company recorded an adjustment to change theclassification of certificates of deposit with maturities beyond 90 days whenpurchased from cash and cash equivalents to other current assets, totaling $3.1million as of June 30, 2004, and an adjustment to change the classificationof certain jackpot reserve cash accounts from cash and cash equivalents torestricted cash totaling $15.6 million as of June 30, 2004.

The Company also determined that it should havepresented the cash flows from discontinued operations within the respectivecategories of operating, investing and financing activities in its statementsof cash flows, rather than as one separate line item. The statements of thecash flows were also adjusted for the change in the classification of thejackpot reserve cash accounts to restricted cash.

The Company alsodetermined that certain balance sheet account reconciliations were notperformed timely and therefore necessary adjustments were not identified orrecorded timely. The Company has completed the account reconciliations and madethe corresponding corrections to the financial statements. The net pre-taxeffect of such adjustments was less than $0.1 million in each of the fiscalyears ended June 30, 2004 and 2003, respectively.

**Second Restatement**

Subsequentto the issuance of the consolidated financial statements for the year ended June 30,2005 management identified additional errors in the Company’s previouslyissued consolidated financial statements as of June 30, 2005 and 2004 andfor each of the three years in the period ended June 30, 2005 (the “SecondRestatement”).

*Revenue Recognition*

The Company identifiedadditional instances in which revenuewas recognized on the sale of goods prior to their physical delivery tocustomer locations and therefore, had not met the criteria of revenuerecognition. Furthermore, the Company determined that certain requirements ofSOP No. 97-2 were not met in a 

F-16

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number of instances andrevenue with respect to certain transactions was not recognized in theappropriate period. In accounting for these transactions the Company hasdetermined that it should have deferred the revenue and related cost of salesuntil the revenue recognition requirements of SOP 97-2 were met.

*The specific circumstances whichresulted in adjustments are as follows:*

*Persuasive evidenceof an arrangement exits*

The Company identified anumber of transactions for which certain conditions under the terms of theoriginal agreement were not met or for which an agreement could not be found,calling into question whether the original agreement or lack thereof, providedadequate evidence of an arrangement that was sufficiently definitive to supportrevenue recognition. The Company concluded there was not persuasive evidence ofan arrangement and, consequently, has adjusted these transactions to berecorded on a cash basis.  The neteffects of these adjustments increased (decreased) revenues by $1.0 million,$(4.3) million and $0.4 million for the fiscal years ended June 30, 2005,2004 and 2003, respectively.

*Delivery hasoccurred*

Upon review of additional documentation, it wasdetermined that certain transactions that had previously been accounted for ona bill and hold basis, resulting in revenue recognition prior to the physicaldelivery of goods to the customer, did not satisfy all of the applicable billand hold criteria under SAB No. 104. As a result, the revenue on thesetransactions was adjusted to coincide with the physical delivery of goods tothe customer.

The Company also identified additional instances whererevenue was recognized on the sale of goods prior to their physical delivery tocustomer locations and, therefore, the risk of loss and/or title had not passedto the customer. The Company has determined recognition of revenue should havebeen deferred until the time the devices reached the customer’s location andhas adjusted the revenue that had been recorded in connection with thesetransactions to be recorded in subsequent accounting periods when the deviceswere physically delivered to customer locations.

The net effects of theseadjustments increased (decreased) revenues by $2.6 million, $3.8 million and $(4.4)million for the fiscal years ended June 30, 2005, 2004 and 2003,respectively.

Additionally, the Company identified other adjustmentsthat impacted gaming and system revenue which decreased revenue by $(2.4)million, $(1.3) million and $(0.1) million for the fiscal years ended June 30,2005, 2004 and 2003, respectively.  Thenature of these adjustments primarily related to proper recording of productreturns and adjustments to deferred revenue computations.

*Inventory*

The Company identified additionalcircumstances where the calculation used to determine the standard versusactual raw material variances was in error. As a result, adjustments have beenmade to adjust the standard costs to actual costs, resulting in corrections tothe carrying value of certain finished goods and fixed assets and related costof sales and depreciation expense. The net effect of these adjustmentsincreased (decreased) cost of goods sold by $(1.4) million, $(1.1) million and$0.9 million for the fiscal years ended June 30, 2005, 2004 and 2003,respectively.

*Other MiscellaneousAdjustments*

The Company determined that is should have recordedthe value of restricted stock units based on the closing price of its commonstock on the date of grant and not the average closing price for the 20business days prior to the date of grant. An adjustment was recorded to reflectthe fair market value and related 

F-17

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stock compensation expense during the fiscal yearended June 30, 2005 based on the closing price of the Company’s common stockon the respective dates of grant of the restricted stock units.

Additionally, the Company determined that interestearned on trade accounts receivable should have been recorded as interestincome rather than revenue and recorded an adjustment to change theclassification of these amounts to interest income totaling $2.1 million $2.0million and $2.0 million in fiscal years 2005, 2004 and 2003, respectively.

The following is areconciliation of income from continuing operations as previously reported, tothe restated amounts, by category discussed above, net of tax: 

| ** **                                                        | ** ** | **Year ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                        | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                        | ** ** | **(in 000s)**                     | ** ** |
| Income (loss)  from continuing operations, as originally reported |       | $                                      | (20,317    | ) | $ | 43,625 |   | $ | 37,162 |   |
| First Restatement                                                 |       |                                   |       |   |   |   |   |
| Revenue recognition adjustments, net                              |       | —                                 |       | (3,405 | ) | (8,624 | ) |
| Inventory adjustments, net                                        |       | —                                 |       | (441 | ) | (420 | ) |
| Other miscellaneous adjustments, net                              |       | —                                 |       | (32 | ) | (6 | ) |
| Income (loss)  from continuing operations, as previously restated |       | (20,317                                | )          | 39,747 |   | 28,112 |   |
| Second Restatement                                                |       |                                   |       |   |   |   |   |
| Revenue recognition adjustments, net                              |       | 1,298                                  |       | (1,846 | ) | (1,408 | ) |
| Inventory adjustments, net                                        |       | 902                                    |       | 706 |   | (557 | ) |
| Other miscellaneous adjustments, net                              |       | 208                                    |       | 392 |   | (171 | ) |
| Income (loss) from  continuing operations, as currently restated  |       | $                                      | (17,909    | ) | $ | 38,999 |   | $ | 25,976 |   |

 

The Restatements also resulted in a reduction ofretained earnings as of June 30, 2002 of $4.0 million.

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Thefollowing is a summary of the effects of the restatements on the accompanyingconsolidated financial statements.

| ** ** | ** ** | **Year Ended June 30,** | ** ** |
|------------|------------|----------------------------------------|------------|
| ** ** | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** ** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **As  Previously  Reported**           | ** ** | **Second  Restatement** | ** ** | **As  Restated** | ** ** | **As  Originally  Reported** | ** ** | **First  Restatement** | ** ** | **Second  Restatement** | ** ** | **As  Restated** | ** ** | **As  Originally  Reported** | ** ** | **First  Restatement** | ** ** | **Second  Restatement** | ** ** | **As  Restated** | ** ** |
| ** ** | ** ** | **(in 000s, except per  share data)**  | ** ** |
|            |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| *Statement of Operations* |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|---------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Revenue:                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| Gaming  equipment & systems                                                |   |   | $       | 431,993 |   |   |   | $      | (923   | )      |    |   | $      | 431,070 |    |   |   | $      | 436,596 |   |   |   | $      | (8,468 | )      |   |    | $      | (3,801 | )      |    |   | $      | 424,327 |    |   |   | $      | 335,436 |   |   |   | $       | (23,169 | )      |   |   | $ | (5,948 | ) |   |   | $ | 306,319 |   |   |
|-------------------------------------------------------------------------------------|--------|--------|---------|---------|--------|--------|--------|--------|--------|--------|---------|--------|--------|---------|---------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|---------|---------|--------|--------|--------|---------|--------|--------|--------|---------|---------|--------|--------|--------|---|--------|---|--------|--------|---|---------|--------|--------|
| Casino operations                                                                   |   |   | 52,037  |    |   |   | — |   |   |   | 52,037  |   |   |    | 52,280  |   |   |   | —  |   |   |   | — |   |   |   | 52,280  |   |   |   | 50,945  |   |   |    | —  |   |   |   | —  |   |   |   | 50,945  |    |   |
| Total revenue                                                                       |   |   | 484,030 |    |   |   | (923   | )      |   |   | 483,107 |   |   |    | 488,876 |   |   |   | (8,468  | )      |   |   | (3,801 | )      |   |   | 476,607 |   |   |   | 386,381 |   |   |    | (23,169 | )      |   |   | (5,948  | )      |   |   | 357,264 |    |   |
| Cost of gaming equipment &  systems                                        |   |   | 243,730 |    |   |   | (2,244 | )      |   |   | 241,486 |   |   |    | 177,586 |   |   |   | 15,204  |   |   |   | (39    | )      |   |   | 192,751 |   |   |   | 144,352 |   |   |    | 373     |   |   |   | (792    | )      |   |   | 143,933 |    |   |
| Depreciation and amortization(1)                                                    |   |   | 20,570  |    |   |   | (119   | )      |   |   | 20,451  |   |   |    | 31,565  |   |   |   | (17,161 | )      |   |   | (83    | )      |   |   | 14,321  |   |   |   | 20,462  |   |   |    | (9,512  | )      |   |   | (16     | )      |   |   | 10,934  |    |   |
| Selling, general & administrative expense                                  |   |   | 156,106 |    |   |   | 169    |   |   |   | 156,275 |   |   |    | 124,345 |   |   |   | 74      |   |   |   | (378   | )      |   |   | 124,041 |   |   |   | 95,432  |   |   |    | (722    | )      |   |   | 157     |   |   |   | 94,867  |    |   |
| Operating income (loss)                                                             |   |   | (5,722  | )       |   |   | 1,271  |   |   |   | (4,451  | )      |   |    | 98,722  |   |   |   | (6,585  | )      |   |   | (3,301 | )      |   |   | 88,836  |   |   |   | 84,972  |   |   |    | (13,308 | )      |   |   | (5,297  | )      |   |   | 66,367  |    |   |
| Interest income                                                                     |   |   | 1,340   |    |   |   | 2,061  |   |   |   | 3,401   |   |   |    | 2,253   |   |   |   | —  |   |   |   | 2,010  |   |   |   | 4,263   |   |   |   | 220     |   |   |    | —  |   |   |   | 1,984   |   |   |   | 2,204   |    |   |
| Interest expense                                                                    |   |   | 18,201  |    |   |   | 120    |   |   |   | 18,321  |   |   |    | 17,934  |   |   |   | —  |   |   |   | — |   |   |   | 17,934  |   |   |   | 25,645  |   |   |    | —  |   |   |   | —  |   |   |   | 25,645  |    |   |
| Other income (expense), net                                                         |   |   | 565     |    |   |   | — |   |   |   | 565     |   |   |    | (521    | )      |   |   | (73     | )      |   |   | 134    |   |   |   | (460    | )      |   |   | 180     |   |   |    | 218     |   |   |   | 15      |   |   |   | 413     |    |   |
| Income (loss) from continuing operations before  income taxes and minority interest |   |   | (22,582 | )       |   |   | 3,212  |   |   |   | (19,370 | )      |   |    | 70,227  |   |   |   | (6,658  | )      |   |   | (1,157 | )      |   |   | 62,412  |   |   |   | 59,727  |   |   |    | (13,090 | )      |   |   | (3,298  | )      |   |   | 43,339  |    |   |
| Income tax expense (benefit)                                                        |   |   | (6,510  | )       |   |   | 1,318  |   |   |   | (5,192  | )      |   |    | 24,293  |   |   |   | (2,780  | )      |   |   | (409   | )      |   |   | 21,104  |   |   |   | 20,556  |   |   |    | (4,040  | )      |   |   | (1,162  | )      |   |   | 15,354  |    |   |
| Minority interest                                                                   |   |   | (4,245  | )       |   |   | 514    |   |   |   | (3,731  | )      |   |    | (2,309  | )      |   |   | —  |   |   |   | — |   |   |   | (2,309  | )      |   |   | (2,009  | )      |   |    | —  |   |   |   | —  |   |   |   | (2,009  | )       |   |
| Income (loss) from continuing operations                                            |   |   | (20,317 | )       |   |   | 2,408  |   |   |   | (17,909 | )      |   |    | 43,625  |   |   |   | (3,878  | )      |   |   | (748   | )      |   |   | 38,999  |   |   |   | 37,162  |   |   |    | (9,050  | )      |   |   | (2,136  | )      |   |   | 25,976  |    |   |
| Net income (loss)                                                                   |   |   | (24,971 | )       |   |   | 2,408  |   |   |   | (22,563 | )      |   |    | 84,514  |   |   |   | (3,878  | )      |   |   | (748   | )      |   |   | 79,888  |   |   |   | 19,523  |   |   |    | (9,049  | )      |   |   | (2,136  | )      |   |   | 8,338   |    |   |
| Basic earnings  (loss) per share:                                                   |   |   |    |    |   |   |   |   |   |   |    |   |   |    |    |   |   |   |    |   |   |   |   |   |   |   |    |   |   |   |    |   |   |    |    |   |   |   |    |   |   |   |    |    |   |
| Continuing operations                                                               |   |   | $       | (0.40   | )      |   |   | $      | 0.05   |   |    |   | $      | (0.35   | )       |   |   | $      | 0.87    |   |   |   | $      | (0.08  | )      |   |    | $      | (0.01  | )      |    |   | $      | 0.78    |    |   |   | $      | 0.76    |   |   |   | $       | (0.19   | )      |   |   | $ | (0.04  | ) |   |   | $ | 0.53    |   |   |
| Discontinued operations                                                             |   |   | (0.09   | )       |   |   | — |   |   |   | (0.09   | )      |   |    | 0.82    |   |   |   | —  |   |   |   | — |   |   |   | 0.82    |   |   |   | (0.36   | )      |   |    | —  |   |   |   | —  |   |   |   | (0.36   | )       |   |
| Total                                                                               |   |   | $       | (0.49   | )      |   |   | $      | 0.05   |   |    |   | $      | (0.44   | )       |   |   | $      | 1.69    |   |   |   | $      | (0.08  | )      |   |    | $      | (0.01  | )      |    |   | $      | 1.60    |    |   |   | $      | 0.40    |   |   |   | $       | (0.19   | )      |   |   | $ | (0.04  | ) |   |   | $ | 0.17    |   |   |
| Diluted earnings (loss)  per share:                                                 |   |   |    |    |   |   |   |   |   |   |    |   |   |    |    |   |   |   |    |   |   |   |   |   |   |   |    |   |   |   |    |   |   |    |    |   |   |   |    |   |   |   |    |    |   |
| Continuing operations                                                               |   |   | $       | (0.40   | )      |   |   | $      | 0.05   |   |    |   | $      | (0.35   | )       |   |   | $      | 0.85    |   |   |   | $      | (0.08  | )      |   |    | $      | (0.01  | )      |    |   | $      | 0.76    |    |   |   | $      | 0.74    |   |   |   | $       | (0.18   | )      |   |   | $ | (0.04  | ) |   |   | $ | 0.52    |   |   |
| Discontinued operations                                                             |   |   | (0.09   | )       |   |   | — |   |   |   | (0.09   | )      |   |    | 0.80    |   |   |   | —  |   |   |   | — |   |   |   | 0.80    |   |   |   | (0.36   | )      |   |    | —  |   |   |   | —  |   |   |   | (0.36   | )       |   |
| Total                                                                               |   |   | $       | (0.49   | )      |   |   | $      | 0.05   |   |    |   | $      | (0.44   | )       |   |   | $      | 1.65    |   |   |   | $      | (0.08  | )      |   |    | $      | (0.01  | )      |    |   | $      | 1.56    |    |   |   | $      | 0.38    |   |   |   | $       | (0.18   | )      |   |   | $ | (0.04  | ) |   |   | $ | 0.16    |   |   |

----

(1)                Depreciation for leased gaming equipment has beenreclassified to cost of gaming equipment and systems (see Note 1).

F-19

----

| ** **                                     | ** ** | **As of June 30,**      | ** ** |
|------------------------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | **As  Previously  Reported** | ** ** | **Second  Restatement** | ** ** | **As  Restated** | ** ** | **As  Originally  Reported** | ** ** | **First  Restatement** | ** ** | **Second  Restatement** | ** ** | **As  Restated** | ** ** |
| ** **                                     | ** ** | **(in 000s)**           | ** ** |
| *Balance Sheet*                                |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                     |       | $                            | 33,170     |   |   | $ | — |   |   | $ | 33,170 |   | $ | 172,726 |   |   | $ | (18,468 | ) |   |   | $ | — |   |   | $ | 154,258 |   |
| Restricted cash                                |       | 13,421                       |       |   | — |   |   | 13,421 |   | — |   |   | 15,590 |   |   |   | — |   |   | 15,590 |   |
| Accounts and  notes receivable, net            |       | 99,430                       |       |   | (1,751 | ) |   | 97,679 |   | 129,779 |   |   | (1,462 | ) |   |   | (2,105 | ) |   | 126,212 |   |
| Inventories                                    |       | 62,920                       |       |   | 603 |   |   | 63,523 |   | 61,135 |   |   | 2,145 |   |   |   | 5 |   |   | 63,285 |   |
| Current deferred  tax assets, net              |       | 29,192                       |       |   | 1,692 |   |   | 30,884 |   | 20,054 |   |   | (452 | ) |   |   | 2,969 |   |   | 22,571 |   |
| Other current  assets                          |       | 27,439                       |       |   | 5,595 |   |   | 33,034 |   | 12,420 |   |   | 16,535 |   |   |   | 4,345 |   |   | 33,300 |   |
| Total current  assets                          |       | 265,572                      |       |   | 6,139 |   |   | 271,711 |   | 396,114 |   |   | 18,330 |   |   |   | 5,214 |   |   | 419,658 |   |
| Property, plant and equipment, net             |       | 66,036                       |       |   | 775 |   |   | 66,811 |   | 68,845 |   |   | — |   |   |   | 315 |   |   | 69,160 |   |
| Goodwill                                       |       | 161,444                      |       |   | — |   |   | 161,444 |   | 136,989 |   |   | (9,317 | ) |   |   | — |   |   | 127,672 |   |
| Long-term  deferred tax assets, net            |       | 16,622                       |       |   | (74 | ) |   | 16,548 |   | — |   |   | 14,020 |   |   |   | (33 | ) |   | 13,987 |   |
| Total assets                                   |       | 648,094                      |       |   | 6,840 |   |   | 654,934 |   | 750,654 |   |   | 17,777 |   |   |   | 5,496 |   |   | 773,927 |   |
| Accrued liabilities                            |       | 43,239                       |       |   | 599 |   |   | 43,838 |   | 49,145 |   |   | (730 | ) |   |   | 485 |   |   | 48,900 |   |
| Deferred revenue                               |       | 31,293                       |       |   | 9,669 |   |   | 40,962 |   | 2,324 |   |   | 35,311 |   |   |   | 10,395 |   |   | 48,030 |   |
| Income taxes  payable                          |       | 1,752                        |       |   | — |   |   | 1,752 |   | 7,233 |   |   | (1,515 | ) |   |   | — |   |   | 5,718 |   |
| Total current  liabilities                     |       | 136,279                      |       |   | 10,268 |   |   | 146,547 |   | 118,495 |   |   | 33,066 |   |   |   | 10,880 |   |   | 162,441 |   |
| Total liabilities                              |       | 468,164                      |       |   | 10,268 |   |   | 478,432 |   | 548,525 |   |   | 32,217 |   |   |   | 10,880 |   |   | 591,622 |   |
| Minority interest                              |       | 993                          |       |   | (514 | ) |   | 479 |   | 1,326 |   |   | — |   |   |   | — |   |   | 1,326 |   |
| Deferred compensation (restricted stock units) |       | (6,563                       | )          |   | (126 | ) |   | (6,689 | ) | (6,500 | ) |   | — |   |   |   | — |   |   | (6,500 | ) |
| Additional  paid-in  capital                   |       | 211,994                      |       |   | 188 |   |   | 212,182 |   | 194,040 |   |   | — |   |   |   | — |   |   | 194,040 |   |
| Retained earnings  (accumulated deficit)       |       | (32,328                      | )          |   | (2,976 | ) |   | (35,304 | ) | 7,083 |   |   | (14,440 | ) |   |   | (5,384 | ) |   | (12,741 | ) |
| Total stockholders’  equity               |       | 178,937                      |       |   | (2,914 | ) |   | 176,023 |   | 200,803 |   |   | (14,440 | ) |   |   | (5,384 | ) |   | 180,979 |   |
|                                                |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-20

----

| ** **                              | ** ** | **Year Ended June 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                              | ** ** | **As  Previously  Reported**           | ** ** | **Second  Restatement** | ** ** | **As  Restated** | ** ** | **As  Originally  Reported** | ** ** | **First  Restatement** | ** ** | **Second  Restatement** | ** ** | **As  Restated** | ** ** | **As  Originally  Reported** | ** ** | **First  Restatement** | ** ** | **Second  Restatement** | ** ** | **As  Restated** | ** ** |
| ** **                              | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(in 000s)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Statement of Cash Flows                 |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash flowsfrom operating activities     |       | 52,138                                 |       | - |   | 52,138 |   | 110,261 |   | 1,743 |   | - |   | 112,004 |   | 38,148 |   | 32,085 |   | - |   | 70,233 |   |
| Cash flows from  investing activities   |       | (65,149                                | )          | - |   | (65,149 | ) | (32,819 | ) | (19,146 | ) | - |   | (51,965 | ) | (46,315 | ) | (20,168 | ) | - |   | (66,483 | ) |
| Cash flows from  financing activities   |       | (108,053                               | )          | - |   | (108,053 | ) | 73,826 |   | (4,187 | ) | - |   | 69,639 |   | (2,179 | ) | (2,998 | ) | - |   | (5,177 | ) |
| Cash flows from discontinued operations |       | -                                      |       | - |   | - |   | (17,600 | ) | 17,600 |   | - |   | - |   | 17,144 |   | (17,144 | ) | - |   | - |   |

 

**3.**                 EARNINGSPER SHARE

The Company calculates earnings per share inaccordance with SFAS No. 128, *Earnings Per Share*.Basic earnings per share are computed by dividing reported earnings by theweighted average number of common shares outstanding during the period. Dilutedearnings per share reflect the additional dilution from all potentiallydilutive securities such as stock options. For fiscal years 2004 and 2003, alloutstanding options with an exercise price lower than the market price at thetime of grant have been included in the calculation of diluted earnings pershare. For fiscal year 2005, no outstanding options were included in thecalculation of earnings per share as the effect would have been anti-dilutivedue to the net loss reported.

Certainsecurities do not have a dilutive effect because their exercise price exceedsthe fair market value of the underlying stock. Such securities are excludedfrom the diluted earnings per share calculation and consist of the following:

| ** **    | ** ** | **Year ended June 30,** | ** ** |
|---------------|------------|----------------------------------------|------------|
| ** **    | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **    | ** ** | **(in 000s)**                     | ** ** |
| Stock options |       | 4,738                                  |       | 1,498 |   |   | 862 |   |   |
| Warrants      |       | 100                                    |       | 100 |   |   | — |   |   |
|          |       | 4,838                                  |       | 1,598 |   |   | 862 |   |   |

 

As of June 30, 2005, the Company has certainrestrictive stock units and debt outstanding which is potentially convertibleinto common stock, the potential dilution from which have not been included inthe diluted earnings per share computation due to the reported loss for fiscalyear 2005.

F-21

----

Thefollowing computation of basic and diluted earnings (loss) per share fromcontinuing operations and discontinued operations and income (loss) applicableto common shares for all periods presented is as follows:

| ** **                                               | ** ** | **Year ended June 30,**                           | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                               | ** ** | **(in 000s, except per share amounts)** | ** ** |
| Income (loss) from continuing operations                 |       | $                                                                | (17,909    | ) | $ | 38,999 |   | $ | 25,976 |   |
| Income (loss)  from discontinued operations              |       | (4,654                                                           | )          | 40,889 |   | (17,638 | ) |
| Net income (loss)                                        |       | $                                                                | (22,563    | ) | $ | 79,888 |   | $ | 8,338 |   |
| Weighted average common shares outstanding               |       | 51,114                                                           |       | 50,113 |   | 49,153 |   |
| Effect of  dilutive securities                           |       | —                                                           |       | 1,135 |   | 986 |   |
| Weighted average  common and dilutive shares outstanding |       | 51,114                                                           |       | 51,248 |   | 50,139 |   |
| Earnings (loss)  per basic share:                        |       |                                                             |       |   | ** ** | ** ** | ** ** |
| Income (loss)  from continued operations                 |       | $                                                                | (0.35      | ) | $ | 0.78 |   | $ | 0.53 |   |
| Income (loss)  from discontinued operations              |       | (0.09                                                            | )          | 0.82 |   | (0.36 | ) |
| Net income (loss)                                        |       | $                                                                | (0.44      | ) | $ | 1.60 |   | $ | 0.17 |   |
| Earnings (loss)  per diluted share:                      |       |                                                             |       |   |   |   |   |
| Income (loss)  from continued operations                 |       | $                                                                | (0.35      | ) | $ | 0.76 |   | $ | 0.52 |   |
| Income (loss)  from discontinued operations              |       | (0.09                                                            | )          | 0.80 |   | (0.36 | ) |
| Net income (loss)                                        |       | $                                                                | (0.44      | ) | $ | 1.56 |   | $ | 0.16 |   |

 

**4.**                 BUSINESSCOMBINATIONS

Under the purchase methodof accounting, the total purchase price is allocated to the net tangible andintangible assets based upon their estimated fair market values as of the dateof the acquisitions. The allocation of the purchase price to goodwill andintangibles is based on final valuation of net assets (including inventory andproperty, plant and equipment) and is based upon management’s estimates,including independent third-party valuations when necessary.

***SIERRA DESIGN GROUP (“SDG”)***

On March 2, 2004, the Company purchased SDG, asupplier of Class II and Class III gaming devices, systems andtechnology, for aggregate initial consideration of approximately $126.4 million.The initial purchase price consisted of $108.6 million cash, 662,000 shares ofcommon stock valued at $11.9 million, the assumption of approximately $8million of debt and certain transaction fees and expenses. In addition, an earnout provision provided for the payment of up to $95.6 million in additionalconsideration upon certain financial targets being achieved in the subsequentthree-year period. In December 2004, the Company and the sellingshareholders renegotiated the earn out for a fixed amount of $40 million,consisting of a one-time cash payment of $12 million and the issuance of asubordinated note of $28 million. In June 2005, the Company extinguished$14 million of the note and accrued interest thereon, by issuing approximately1.0 million shares of common stock to the note holders. The Company believesthat the acquisition of SDG in March 2004 will position the Company to takeadvantage of significant opportunities in both the domestic and internationalmarkets, from the technology advances in traditional casino style gaming to theClass II environments with central determination features. (see Note 12).

F-22

----

Thefollowing intangible assets of SDG are being amortized on a straight-line basisusing the following estimated lives:

| ** **      | ** ** | **Years** | ** ** |
|-----------------|------------|-----------|------------|
| Contracts       |       |      | 10         |   |   |
| Core technology |       |      | 8          |   |   |
| Trademark       |       |      | 5          |   |   |

 

Thefair values assigned to the SDG assets and liabilities acquired in fiscal year2004 (prior to the settlement of the earn out) were as follows:

| ** **                      | ** ** | **(in 000s)** | ** ** |
|---------------------------------|------------|--------------------|------------|
| Assets:                         |       |               |       |
| Cash                            |       | $                  | 1,189      |   |
| Accounts receivable             |       | 6,949              |       |
| Inventories                     |       | 12,834             |       |
| Deposits                        |       | 1,576              |       |
| Other current assets            |       | 2,233              |       |
| Property, plant and equipment   |       | 22,071             |       |
| Other assets                    |       | 678                |       |
| Deferred tax assets             |       | 16,717             |       |
| Notes receivable                |       | 103                |       |
| Investment in sales-type leases |       | 8,241              |       |
| Contracts                       |       | 12,320             |       |
| Core technology                 |       | 5,445              |       |
| Trademark                       |       | 5,708              |       |
| Goodwill(a)                     |       | 55,674             |       |
| Total assets acquired           |       | 151,738            |       |
| Liabilities:                    |       |               |       |
| Customer deposits               |       | 4,973              |       |
| Accounts payable                |       | 6,110              |       |
| Accrued liabilities             |       | 10,558             |       |
| Notes payable                   |       | 3,704              |       |
|                            |       | 25,345             |       |
| Total Purchase  Price           |       | $                  | 126,393    |   |

----

(a)           Substantially all ofgoodwill is non-deductible for tax purposes.

Thepurchase price paid for SDG consists of the following:     

| ** **                                                 | ** ** | **(in 000s)** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|
| Cash paid to SDG  stockholders                             |       | $                  | 29,846     |   |
| Fair value of  restricted common stock issued              |       | 11,949             |       |
| Other  consideration payable                               |       | 1,350              |       |
| Transaction fees  and expenses                             |       | 4,740              |       |
| Subtotal                                                   |       | 47,885             |       |
| SDG debt owed to  third parties                            |       | 5,688              |       |
| Pre-acquisition  loans from Bally to SDG forgiven by Bally |       | 72,820             |       |
| Acquisition cost                                           |       | $                  | 126,393    |   |

 

F-23

----

Thefollowing unaudited pro forma financial information is presented as if the SDGacquisition had been completed at the beginning of the periods presented below:

| ** **                                             | ** ** | **June 30,**                                            | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------|------------|
| ** **                                             | ** ** | **2004**                                                     | ** ** | **2003**          | ** ** |
| ** **                                             | ** ** | **(in 000s, except per  share amounts)** | ** ** |
| Total revenue                                          |       | $                                                            | 538,226    |              | $          | 463,396 |   |
| Income from  continuing operations before income taxes |       | 35,903                                                       |       | 34,577            |       |
| Income from  continuing operations                     |       | 23,269                                                       |       | 19,721            |       |
| Earnings per  share from continuing operations         |       |                                                         |       |              |       |
| Basic                                                  |       | $                                                            | 0.46       |              | $          | 0.40 |   |
| Diluted                                                |       | $                                                            | 0.45       |              | $          | 0.39 |   |

 

***MINDPLAY***

On February 19, 2004, the Company acquiredsubstantially all of the assets and liabilities of MindPlay LLC (“MindPlay”), aleading developer of advanced table game technologies, for aggregate initialconsideration of approximately $16.8 million. The initial purchase priceincluded $9 million cash, a $4 million note payable, the assumption ofapproximately $2 million of debt and the issuance of warrants to purchase100,000 shares of the Company’s common stock which were valued at approximately$0.9 million. In addition, an earn out provision provided for the payment of10% of gross margin from the sale of MindPlay products in the first seven yearssubsequent to the acquisition, and 4.25% of gross margin for the next sixyears, subject to adjustments pursuant to the conditions contained in the saleagreement. The MindPlay technologies are designed to provide data andinformation to casino operators to improve customer service, to provideenhanced security and to increase profitability by lowering the cost ofoperation and enhancing the casino patron experience. As part of theacquisition, the Company acquired a number of patents acquired, which itbelieves will enable it to introduce a series of new table game products thatcan potentially redefine the market with the advances of automation and newgaming features to attract and retain table game players.

Thefair values assigned to the MindPlay assets and liabilities acquired are asfollows:

| ** **                    | ** ** | **(in 000s)** | ** ** |
|-------------------------------|------------|--------------------|------------|
| Assets:                       |       |               |       |
| Cash                          |       | $                  | 22         |   |
| Accounts receivable           |       | 41                 |       |
| Inventories                   |       | 110                |       |
| Property, plant and equipment |       | 143                |       |
| Other Assets                  |       | 43                 |       |
| Patents                       |       | 9,470              |       |
| Other intangible assets       |       | 1,015              |       |
| Goodwill                      |       | 6,414              |       |
| Total assets acquired         |       | 17,258             |       |
| Liabilities:                  |       |               |       |
| Customer deposits             |       | 467                |       |
| Total Purchase Price          |       | $                  | 16,791     |   |

 

Intangible assets arebeing amortized over their estimated remaining life ranging from 3 to 15 years.

F-24

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***CROWN GAMING***

On December 31, 2003, Bally acquired 100% of theassets of U.K.-based Crown Gaming from Crown Leisure Limited. The acquisition,which includes Crown’s distributorship agreements for a wide variety ofautomated table games and video bingo machines, strategically builds on theCompany’s focus towards future growth projected in England. The total cash consideration was $3.9million, including approximately $2.0 million that was used to repay assumednotes payable.

Thefair values assigned to the Crown assets and liabilities are as follows:

| ** **             | ** ** | **(in 000s)** | ** ** |
|------------------------|------------|--------------------|------------|
| Tangible Assets:       |       |               |       |   |   |
| Inventories            |       |               | $          | 2,064 |   |   |
| Other assets           |       |               | 661        |   |   |
| Intangible assets      |       |               | 659        |   |   |
| Goodwill               |       |               | 335        |   |   |
| Total assets  acquired |       |               | 3,719      |   |   |
| Liabilities:           |       |               |       |   |   |
| Accounts payable       |       |               | 1,295      |   |   |
| Accrued  liabilities   |       |               | 21         |   |   |
| Taxes payable          |       |               | 527        |   |   |
|                   |       |               | 1,843      |   |   |
| Total Purchase Price   |       |               | $          | 1,876 |   |   |

 

Intangible assets arebeing amortized over their estimated remaining life ranging from 3 - 15 years.

**5.**                 DISCONTINUEDOPERATIONS

On October 15, 2004, the Company completed thesale of its interest in Video Services, Inc. (“VSI”) to Churchill DownsIncorporated. The net proceeds received totaled approximately $2.0 million,resulting in a gain of $0.8 million, net of tax, and is included indiscontinued operations in the statement of operations in fiscal year 2005.

On June 30, 2004, the Company completed the saleof United Coin Machine Co. (“United Coin”) to Century Gaming, Inc. andreceived approximately $100 million in cash and the assumption by CenturyGaming of approximately $5 million in debt. The Company reported a gain on thesale before income taxes of $15.3 million, or $9.1 million after tax. During fiscal year 2005, the gain on sale wasadjusted for charges incurred for an adverse outcome in a patent infringementcase (see Note 19) and the resolution of certain sale related liabilities, thesum of which totaled $6.3 million net of tax.

On May 3, 2004, the Company completed the sale ofRail City Casino to The Sands Regent and subsequently received a total of $37.9million in cash. The Company reported a gain on the sale before income taxes of$23.1 million, or $14.3 million after tax.

On June 30, 2003, the Company entered into adefinitive agreement for the sale of Bally Wulff to a third party equityinvestor for $16.5 million in cash. The sale was consummated on July 18,2003. The Company recorded a charge in June 2003 totaling $25.4 million,net of tax, representing the write down of the net carrying value of the BallyWulff assets to the sales price, including the recognition of previouslyrecorded currency translation adjustments totaling $11.9 million. In June 2004,the Company was notified by the buyer of a claim made against the Companypursuant to an indemnity provision contained in the sale agreement. Subsequentto June 30, 2005, the Company has paid a claim totaling $1.7 million. Additionally,the Company has a remaining accrual of $1.2 million for potential taxassessments related to the pre-sale period, which the Company expects to beresolved by June 2006. Pursuant to the sale agreement, the 

F-25

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Company is required to maintain a certificate of depositas collateral for the tax claim discussed above which is included in otherlong-term assets, net. As of June 30, 2005 and 2004 the amount of thedeposit was approximately $1.2 million and $3.4 million, respectively. For theyear ended June 30, 2005, the Company reduced the deposit by approximately$0.5 million and recognized a reduction in tax expense related to discontinuedoperations.

All four business results are presented net ofapplicable income taxes within income from discontinued operations in theaccompanying consolidated statements of operations. The net assets of thebusinesses are classified as assets held for sale in the accompanyingconsolidated balance sheet as of June 30, 2004.

Summaryoperating results for the discontinued operations for United Coin, VSI, RailCity and Bally Wulff are as follows:

| ** **                                  | ** ** | **Year ended June 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                  | ** ** | **(in 000s)**                     | ** ** |
| Net revenues                                |       | $                                      | 4,514      |   | $ | 257,142 |   | $ | 298,739 |   |
| Asset impairment  charges                   |       | —                                 |       | — |   | 38,728 |   |
| Operating income  (loss)                    |       | 358                                    |       | 30,668 |   | (26,576 | ) |
| Income tax  expense (benefit)               |       | (3,350                                 | )          | 26,319 |   | (8,665 | )(a) |
| Income (loss) from  discontinued operations |       | $                                      | (4,654     | )(b) | $ | 40,889 | (c) | $ | (17,638 | ) |

----

(a)           Includes a net deferredtax benefit totaling $13.4 million, which was recorded for the sale of BallyWulff.

(b)          Includes the $6.3million after tax charge referred to above related to the sale of United Coin,offset by the gain on sale of VSI.

(c)           Includes a gain on saleof Rail City of $23.1 million and a gain on the sale of United Coin of $15.3million.

Thefollowing schedule reflects the net assets held for sale, included in theaccompanying consolidated balance sheets consisting of VSI as of June 30,**2004:

| ** **                            | ** ** | **(in 000s)** | ** ** |
|---------------------------------------|------------|--------------------|------------|
| Cash and cash  equivalents            |       |               | $          | 3,543 |   |   |
| Accounts and  contracts receivable    |       |               | 89         |   |   |
| Other current  assets                 |       |               | 66         |   |   |
| Property, plant  and equipment        |       |               | 696        |   |   |
| Other                                 |       |               | 48         |   |   |
| Total assets                          |       |               | 4,442      |   |   |
| Current liabilities                   |       |               | 4,321      |   |   |
| Long-term  liabilities                |       |               | 16         |   |   |
| Total liabilities                     |       |               | 4,337      |   |   |
| Net assets of  discontinued operation |       |               | $          | 105 |   |   |

 

**6.**                 RECEIVABLES

The Gaming Equipment and Systems business unit grantscustomers payment terms under contracts of sale. These contracts are generallyfor terms of six months to five years, with interest at prevailing rates, andare generally collateralized by the related equipment sold, although the valueof such equipment, if repossessed, may be less than the receivable balanceoutstanding. Contracts with terms beyond 24 months are deferred and revenue isrecognized as the payments are received. The total receivables outstanding as 

F-26

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of June 30, 2005, net of bad debt allowancetotaled approximately $105.1 million, substantially all of which is scheduledto be received within one year.

Thefollowing table represents the activity for each of the fiscal years ended June 30,2005, 2004 and 2003 for each of the valuation reserve and allowance accounts:

| ** **                        | ** ** | **Balance at  Beginning of  Year** | ** ** | **Additions** | ** ** | **Net  Write-offs/  (Recoveries)** | ** ** | **Balance at  End of  Year** | ** ** |
|-----------------------------------|------------|----------------------------------------------|------------|---------------|------------|------------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **(in 000s)**                           | ** ** |
| Allowance for  doubtful accounts: |       |                                         |       |          |       |                               |       |                                   |       |   |   |   |   |   |   |   |   |
| Year ended  June 30, 2005    |       |                                         | $          | 9,035         |       |                               |       | $                                      | 5,134      |   |   |   | $ | 3,829 |   |   |   | $ | 10,340 |   |   |
| Year ended  June 30, 2004    |       |                                         | $          | 6,417         |       |                               |       | $                                      | 1,753      |   |   |   | $ | (865 | ) |   |   | $ | 9,035 |   |   |
| Year ended June 30,  2003    |       |                                         | $          | 8,436         |       |                               |       | $                                      | 825        |   |   |   | $ | 2,844 |   |   |   | $ | 6,417 |   |   |

 

F-27

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**7.**                 GOODWILLAND OTHER INTANGIBLE ASSETS 

In accordance with its accounting policy, during thefourth quarter of fiscal 2005, the Company evaluated the carrying value ofgoodwill and other intangible assets and determined that no impairment existedas of that measurement date. 

Intangible assetsexcluding discontinued operations consist of the following:

| ** **                             | ** ** | **Wt.**                         | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **   | ** ** | ** **   | ** ** | ** **       | ** ** | ** **   | ** ** |
|----------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|--------------|------------|--------------|------------|------------------|------------|--------------|------------|
| ** **                             | ** ** | **Avg.**                        | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
| ** **                             | ** ** | **Useful**                      | ** ** | **Gross**                   | ** ** | ** **                  | ** ** | **Net**      | ** ** | **Gross**    | ** ** | ** **       | ** ** | **Net**      | ** ** |
| ** **                             | ** ** | **Life**                        | ** ** | **Carrying**                | ** ** | **Accumulated**             | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated**  | ** ** | **Carrying** | ** ** |
| ** **                             | ** ** | **(Years)**                     | ** ** | **Amount**                  | ** ** | **Amortization**            | ** ** | **Amount**   | ** ** | **Amount**   | ** ** | **Amortization** | ** ** | **Amount**   | ** ** |
| ** **                             | ** ** | **(dollars in 000s)** | ** ** |
| Computer software                      |       |                            | 3          |                        |       | $                           | 9,021      |         |       | $            | (3,463     | )                |       | $            | 5,558      |   | $ | 8,963 |   |   | $ | (1,498 | ) |   | $ | 7,465 |   |
| Computer software  from acquisitions   |       |                            | 9          |                        |       | 11,700                      |       |         | (4,680     | )            |       | 7,020            |       | 11,700       |       |   | (3,380 | ) |   | 8,320 |   |
| License rights                         |       |                            | 3-5        |                        |       | 1,338                       |       |         | (506       | )            |       | 832              |       | 2,745        |       |   | (1,979 | ) |   | 766 |   |
| Capitalized  regulatory approval costs |       |                            | 3          |                        |       | 4,068                       |       |         | (1,703     | )            |       | 2,365            |       | 4,767        |       |   | (833 | ) |   | 3,934 |   |
| CRM software  systems                  |       |                            | 5          |                        |       | 3,300                       |       |         | (1,785     | )            |       | 1,515            |       | 3,039        |       |   | (1,046 | ) |   | 1,993 |   |
| PLM software  systems                  |       |                            | 5          |                        |       | 1,843                       |       |         | (410       | )            |       | 1,433            |       | 1,585        |       |   | — |   |   | 1,585 |   |
| Trademarks                             |       |                            | 5          |                        |       | 1,404                       |       |         | (574       | )            |       | 830              |       | 1,404        |       |   | (288 | ) |   | 1,116 |   |
| Trademarks  (indefinite life)          |       |                            | —     |                        |       | 5,284                       |       |         | —     |         |       | 5,284            |       | 5,284        |       |   | — |   |   | 5,284 |   |
| Patents                                |       |                            | 13         |                        |       | 9,470                       |       |         | (971       | )            |       | 8,499            |       | 9,470        |       |   | (243 | ) |   | 9,227 |   |
| Non-compete  agreements                |       |                            | 6          |                        |       | 275                         |       |         | (61        | )            |       | 214              |       | 275          |       |   | (15 | ) |   | 260 |   |
| Customer  relationships                |       |                            | 5          |                        |       | 740                         |       |         | (197       | )            |       | 543              |       | 740          |       |   | (49 | ) |   | 691 |   |
| Core technology                        |       |                            | 8          |                        |       | 5,445                       |       |         | (907       | )            |       | 4,538            |       | 5,445        |       |   | (227 | ) |   | 5,218 |   |
| Contracts                              |       |                            | 10         |                        |       | 12,100                      |       |         | (1,621     | )            |       | 10,479           |       | 12,100       |       |   | (411 | ) |   | 11,689 |   |
| Other intangibles                      |       |                            | 7          |                        |       | 819                         |       |         | (478       | )            |       | 341              |       | 1,684        |       |   | (1,503 | ) |   | 181 |   |
| Total                                  |       |                            |       |                        |       | $                           | 66,807     |         |       | $            | (17,356    | )                |       | $            | 49,451     |   | $ | 69,201 |   |   | $ | (11,472 | ) |   | $ | 57,729 |   |

 

Amortization expense totaled $8.6 million, $5.8million and $3.2 million for the fiscal years ended June 30, 2005, 2004and 2003, respectively. Computer software amortization expense totaled $3.7million, $2.9 million and $1.8 million for the fiscal years ended June 30,2005, 2004 and 2003, respectively. 

Future amortizationof intangible assets is scheduled as follows:

| **Years ending June 30,** | ** ** | ** ** | ** ** | **(in 000s)** | ** ** |
|------------------------------------------|------------|------------|------------|--------------------|------------|
| 2006                                     |       | $          | 9,056      |               |
| 2007                                     |       | 7,639      |       |
| 2008                                     |       | 5,401      |       |
| 2009                                     |       | 4,886      |       |
| 2010                                     |       | 4,673      |       |
| Thereafter                               |       | 12,512     |       |
| Total                                    |       | $          | 44,167     |               |

 

F-28

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*Goodwill*

The changes in the carrying amount of goodwill for theyears ended June 30, 2004 and 2005 are as follows:

| ** **                                            | ** ** | **Total**          | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|
| ** **                                            | ** ** | **(in 000s)** | ** ** |
| Balance as of  June 30, 2003                     |       | $                  | 63,040     |   |
| Goodwill acquired during year                         |       | 62,424             |       |
| Adjustments to  goodwill from prior year acquisitions |       | 1,040              |       |
| Foreign currency  translation adjustment              |       | 1,168              |       |
| Balance as of  June 30, 2004                     |       | 127,672            |       |
| Buyout of the SDG earn out (see Note 4)               |       | 40,000             |       |
| Tax effect of the  buyout of the earn out             |       | (4,070             | )          |
| Adjustments to  goodwill from prior year acquisition  |       | (2,108             | )          |
| Foreign currency  translation adjustment              |       | (50                | )          |
| Balance as of  June 30, 2005                     |       | $                  | 161,444    |   |

 

Adjustments to goodwillduring fiscal year 2004 primarily represent management’s final allocation andassessment based upon independent third-party valuations of the net assets ofacquired companies. Adjustments to goodwill in fiscal year 2005 relateprimarily to adjustments to certain acquisition-related deferred tax assets.

**8.**                 OTHER CURRENT AND LONG-TERM ASSETS 

Other currentassets as of June 30, 2005 and 2004 consist of the following:

| ** **                                   | ** ** | **2005**           | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                   | ** ** | **(in 000s)** | ** ** |
| Deferred costs of  revenues                  |       | $                  | 18,277     |     | $          | 18,200 |   |
| Prepaid expenses                             |       | 4,721              |       | 5,614    |       |
| Games placed on  trial at customer locations |       | 4,822              |       | 2,609    |       |
| Certificates of  deposit                     |       | 2,775              |       | 3,091    |       |
| Refundable deposits                          |       | 1,358              |       | 3,021    |       |
| Other                                        |       | 1,081              |       | 765      |       |
| Total other  current assets                  |       | $                  | 33,034     |     | $          | 33,300 |   |

 

Other long-term assets consist of the following as of June 30,2005 and 2004:

| ** **                                                                                | ** ** | **2005**           | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                                                                | ** ** | **(in 000s)** | ** ** |
| Long-term  deposits                                                                       |       | $                  | 8,289      |     | $          | 615 |   |
| Restricted cash                                                                           |       | 6,253              |       | 5,740    |       |
| Deferred debt  issuance costs (net of accumulated amortization of $2,332 and $1,017) |       | 5,067              |       | 5,893    |       |
| Total other  assets                                                                       |       | $                  | 19,609     |     | $          | 12,248 |   |

 

Deferred costs of revenuerelate primarily to the cost of game and system sales which revenue is requiredto be deferred in accordance with SOP No. 97-2. Long-term deposits as of June 30,2005 include a cash bond of $7.7 million related to a legal judgment (see Note19). Included in other assets as of June 30, 2005 and 2004 is a 5.0million Euro certificate of deposit required pursuant to the sale of BallyWulff (see Note 5).

F-29

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**9.**                 DEFERREDREVENUE

Deferred revenue relatesprimarily to revenue from games and system sales that is required to bedeferred in accordance with SOP No. 97-2. Deferred revenue totaled $41.0million and $48.0 million, as of June 30, 2005 and 2004, respectively. The related deferred cost of such revenue isincluded in other current assets (see Note 8).

**10.**          ACCRUEDAND JACKPOT LIABILITIES 

Accrued liabilitiesand jackpot liabilities as of June 30, 2005 and 2004 consist of thefollowing:

| ** **                               | ** ** | **2005**           | ** ** | **2004** | ** ** |
|------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                               | ** ** | **(in 000s)** | ** ** |
| Payroll and  related costs               |       | $                  | 7,635      |     | $          | 11,874 |   |
| Interest                                 |       | 1,755              |       | 1,265    |       |
| Professional and  consulting fees        |       | 1,824              |       | 2,834    |       |
| Regulatory  approval cost accruals       |       | 944                |       | 652      |       |
| Royalties,  rebates, direct mail coupons |       | 4,929              |       | 6,867    |       |
| Customer deposits                        |       | 8,706              |       | 10,094   |       |
| Acquisition  related accruals            |       | 1,686              |       | 3,807    |       |
| Divestiture  related accruals            |       | 386                |       | 4,377    |       |
| Litigation  accruals (see Note 19)       |       | 7,360              |       | —   |       |
| Severance  accruals (see Note 16)        |       | 1,290              |       | —   |       |
| Other                                    |       | 7,323              |       | 7,130    |       |
| Subtotal                                 |       | 43,838             |       | 48,900   |       |
| Jackpots accrued  not yet awarded        |       | 13,025             |       | 12,075   |       |
| Total accrued  liabilities               |       | $                  | 56,863     |     | $          | 60,975 |   |

 

The Company recognizes a liability for jackpot expensefor the cost to fund these jackpots in the future. Generally winners may electto receive a single lump sum payment or may opt to receive payments in equalinstallments over a specified period of time. The Company currently estimatesthat approximately 70% of winners will elect the single payment option. 

The Company funds jackpotinstallment payments through qualifying U.S. government or agency securities.The present value of the outstanding progressive jackpot liabilities iscomputed based upon the payment stream discounted at the applicable discountrate.

**11.**          LONG-TERMDEBT 

Long-term debt at June 30,2005 and 2004 consisted of the following:

| ** **                               | ** ** | **2005**           | ** ** | **2004** | ** ** |
|------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                               | ** ** | **(in 000s)** | ** ** |
| Term loan  facility                      |       | $                  | 314,882    |     | $          | 350,000 |   |
| Revolving credit  facility               |       | —             |       | 70,000   |       |
| Related party  debt (see Note 12)        |       | 19,206             |       | 6,436    |       |
| Other, generally  unsecured              |       | 1,029              |       | 2,519    |       |
|                                     |       | 335,117            |       | 428,955  |       |
| Less current  maturities                 |       | 10,163             |       | 5,866    |       |
| Long-term debt,  less current maturities |       | $                  | 324,954    |     | $          | 423,089 |   |

 

On September 5, 2003, the Company completed asenior bank debt refinancing transaction (the “Refinancing”) whereby theCompany entered into a new $275 million term loan facility and a $125 million 

F-30

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revolving credit facility. Proceeds from the financingwere used to repay the existing bank term loans totaling approximately $188million, repay the Company’s 10% Senior Subordinated Notes (“Subordinated Notes”),and to pay transaction fees and expenses totaling $5.0 million which have beencapitalized and are being amortized over the remaining term of the loan. Theterm loan has a 1% per year mandatory principal amortization after the firstyear, and a six-year maturity. The revolving credit facility commitmentdecreases ratably over its five-year term to a 60% balloon.

In December 2003, the Company increased the termloan by $75 million, to a total of $350 million outstanding. The proceeds wereused primarily to fund the acquisition of SDG. As a result, the Companyincurred an additional $1.6 million in debt issuance costs, which have beencapitalized and are amortized over the remaining term of the loan. 

As a result of the Refinancing described above, theCompany recorded a pre-tax charge in fiscal year 2004 of $12.3 million, whichincluded a $5.0 million charge for the early extinguishment of the SubordinatedNotes, $7.0 million for the write off of deferred financing costs, and $0.3million in fees and expenses, which is classified as a loss on extinguishmentof debt in the accompanying statement of operations.

As a result of the sale of United Coin and Rail Cityapproximately 50% of the net proceeds (as defined in the loan agreement) wereused to reduce the term loan and revolver principal balances on a pro ratabasis. Accordingly, during fiscal year 2005, the Company used the sale proceedsto reduce the term loan by $31.6 million and used additional excess cashto reduce the balance of the revolver from $70 million to zero.

In December 2004, the Company sought and receivedconsents from a majority of the holders of its bank debt which allowed it tocomplete the buyout of the SDG earn out (including the issuance of a $28.0 millionnote payable to former SDG shareowners), and to increase the maximum allowedleverage ratio to a maximum of 4.75 as of June 30, 2005, declining to 4.50as of September 30, 2005, 4.25 as of March 31, 2006, 4.00 as of September 30,2006, 3.75 as of December 31, 2006 and 3.50 as of September 30, 2004through the term of the loan agreement. The Company agreed to increase the termloan interest rate to LIBOR plus 3.00%, which can be adjusted to LIBOR plus3.00% based on certain criteria and to reduce the revolver commitment to $75million. The fees incurred for the bank amendment totaled $1.0 million, and theCompany recorded a charge of $0.6 million to write off a portion of thepreviously capitalized fees, which is classified as a loss on extinguishment ofdebt. As of June 30, 2005, the Company had $314.9 million outstandingunder its term loan facility with an interest rate of 6.77%, and zerooutstanding under the revolving credit facility.

The bank facility is collateralized by substantiallyall domestic property and is guaranteed by each domestic subsidiary of theCompany, other than the entity that holds the Company’s interest in itsLouisiana and Mississippi operations, and is secured by a Pledge Agreement. Thebank facility contains a number of maintenance covenants and other significantcovenants that, among other things, restrict the ability of the Company and theability of certain of its subsidiaries to dispose of assets, incur additionalindebtedness and 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 engage in certaintransactions with subsidiaries and affiliates, and that otherwise restrictcorporate activities. The Company was in compliance with these covenants as of June 30,2005.

The Company was also in compliance with its financialcovenants consisting of leverage ratio, fixed charges coverage ratio, andminimum EBITDA (as that term is defined in the Loan Agreement). The leverageratio is computed as total average debt outstanding during the quarter dividedby the trailing 12 months EBITDA excluding certain cash and non-cash charges.The Company’s leverage ratio as of June 30, 2005 was 4.6 times versus anamended covenant maximum of 4.75 times. 

F-31

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As a result of the additional time required tocomplete the fiscal 2005 year end closing process, the Company failed todeliver the 2005 audited financial statements and the September 30, 2005interim unaudited internal financial statements to the lenders in a timelymanner, and therefore was not in compliance with certain of its debt covenants.Pursuant to an agreement with the lenders, the default was cured in December 2005by delivering the Company’s 2005 audited financial statements contained in theCompany’s Annual Report on Form 10-K and the unaudited interim financialstatements for the September 2005 quarter. During the default period from November 8,2005 to the delivery of the financial statements in December 2005, theCompany incurred default interest of approximately $0.7 million. 

Maturities oflong-term debt, for each of the five fiscal years ending subsequent to June 30,2005, are as follows:

| **Years ending June 30,** | ** ** | ** ** | ** ** | **(in 000s)** | ** ** |
|------------------------------------------|------------|------------|------------|--------------------|------------|
| 2006                                     |       | $          | 4,157      |               |
| 2007                                     |       | 3,872      |       |
| 2008                                     |       | 3,500      |       |
| 2009                                     |       | 3,500      |       |
| 2010                                     |       | 300,882    |       |
| Total                                    |       | $          | 315,911    |               |

 

In October 2006, theCompany executed an amendment to its bank facility, which, among otherthings, (i) extended the due date for the delivery of the Company’saudited financial statements for the fiscal year ended June 30,2006, to December 31, 2006, (ii) provided that the Company shalldeliver its quarterly reports on Form 10-Q for the Fiscal Quarters endingon September 30, 2005, December 31, 2005 and March 31, 2006 nolater than December 31, 2006, (iii) modified the definition of EBITDAto exclude up to $10 million of certain cash charges, and (iv) clarifiedthat the definition of EBITDA includes interest income on tradereceivables. The Company paid an administrative fee of $964,000 in exchange forthe concessions granted under the amendment. There can be no assurances theCompany will be able to comply with these amended covenants.

**12.**          RELATED PARTY TRANSACTIONS

As discussed inNote 4, the Company completed three acquisitions (MCC, MindPlay and SDG) in thefiscal year 2004. In each acquisition, a portion of the consideration includedsubordinated debt owed to the former principals of each business. The formerprincipals are now employees of the Company, and therefore such debt isconsidered owed to related parties. The interest rates on the outstanding debtrange from a variable rate of LIBOR plus 2% to a fixed rate of 6%. See thetables below for outstanding debt and interest rates as of June 30 2005and 2004, respectively and total interest expense for the years ended June 30,2005, 2004 and 2003, respectively.

| ** **                                   | ** ** | **As of  June 30, 2005** | ** ** | **As of  June 30, 2004** | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | **Interest  Rate**                      | ** ** | **Outstanding  Debt**                   | ** ** | **Interest  Rate** | ** ** | **Outstanding  Debt** | ** ** |
| ** **                                   | ** ** | **(in 000s)**                      | ** ** |
| SDG                                          |       |                                    | 4          | %                                       |       |   | $ | 14,000 |   |   |   | — |   |   |   | $ | — |   |   |
| MindPlay                                     |       |                                    | 6          | %                                       |       |   | 4,000 |   |   |   | 6 | % |   |   | 4,000 |   |   |
| MCC                                          |       |                                    | 6          | %                                       |       |   | 1,206 |   |   |   | 4 | % |   |   | 2,436 |   |   |
|                                         |       |                                    |       |                                    |       |   | 19,206 |   |   |   |   |   |   |   | 6,436 |   |   |
| Less current  maturities                     |       |                                    |       |                                    |       |   | 6,006 |   |   |   |   |   |   |   | 1,218 |   |   |
| Related party debt, less  current maturities |       |                                    |       |                                    |       |   | $ | 13,200 |   |   |   |   |   |   |   | $ | 5,218 |   |   |

 

F-32

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On June 28, 2005, the Company issuedapproximately 1.0 million shares of its common stock in connection with theconversion of $14.0 million of the subordinated debt and accrued interestthereon owed to the former principals of SDG.

The remaining notepayable to the former SDG shareholders of $14.0 million is payable in annualinstallments through 2009. At the Company’s discretion, the note principal andaccrued interest thereon can be paid in cash, or can be converted into sharesof the Company’s common stock using the average stock price for the 20 businessdays prior to the delivery of such shares.

| ** ** | ** ** | **Total Interest Expense**                     | ** ** |
|------------|------------|----------------------------------------------------------|------------|
| ** ** | ** ** | **for the Year Ended June 30,** | ** ** |
| ** ** | ** ** | **  2005  **                         | ** ** | **  2004  ** | ** ** | **  2003  ** | ** ** |
| ** ** | ** ** | **(in 000s)**                                       | ** ** |
| SDG        |       |                                                     | $          | 624 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| MindPlay   |       |                                                     | 241        |   |   |   | 87 |   |   |   | — |   |   |
| MCC        |       |                                                     | 95         |   |   |   | 35 |   |   |   | — |   |   |

 

Accrued interest totaled $0.3 million and $0.1 millionas of June 30, 2005 and 2004, respectively.

Maturities ofrelated party debt, for each of the five fiscal years ending subsequent to June 30,2005, are as follows:

| **Years ending June 30,** | ** ** | ** ** | ** ** | **(in 000s)** | ** ** |
|------------------------------------------|------------|------------|------------|--------------------|------------|
| 2006                                     |       | $          | 6,006      |               |
| 2007                                     |       | 2,800      |       |
| 2008                                     |       | 4,800      |       |
| 2009                                     |       | 2,800      |       |
| 2010                                     |       | 2,800      |       |
| Total                                    |       | $          | 19,206     |               |

 

Pursuant to an Advisory Agreement with KirklandInvestment Corporation (100% owned by Joel Kirschbaum who is a director ofBally, and therefore treated as a related-party) dated July 1, 2004, theCompany agreed to pay Kirkland $600,000 annually for a period of 3.5 years foradvisory and related services.

The Company also leases awarehouse and office facility from an entity owned by Mr. Luciano. Rentalpayments for the fiscal years ended June 30, 2005 and 2004 totaled$412,000 and $103,000, respectively.

**13.**          STOCKHOLDERS’EQUITY, OPTIONS, WARRANTS AND RIGHTS

*Stock Option Plans*

In December 2001, the Company’s shareholdersapproved the 2001 Long-Term Incentive Plan, which has been amended severaltimes (the “2001 Plan”). The 2001 Plan provides for the issuance of up to10,000,000 shares (as amended in fiscal year 2005) of common stock toCompany employees, directors and designated paid consultants and up to 600,000shares of restricted stock or restricted stock units (“RSUs”). Generally,options are granted at the fair value of the Company’s common stock at the dateof grant and are exercisable over five to ten years. The 2001 Plan also allowsfor the issuance of RSUs. A total of 377,030 RSUs were granted on June 30,2004, and an additional 176,507 were issued during fiscal year 2005, as part ofthe employment agreement of the Company’s Chief Executive Officer and 20,000 toanother Company officer.******The RSUsgranted were treated as deferred compensation, and accordingly deferredcompensation of $2.3 million and $6.5 million was recorded in the statement ofstockholders’ equity as of the grant dates for the years ended June 30,2005 and 2004, respectively. Amortization expense for the RSUs totaled $2.1million and zero for the fiscal years end June 30, 2005 and 2004,respectively and is included in selling, general and administration expense inthe accompanying statements of operations.

F-33

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Transactionsinvolving stock options and RSUs are summarized as follows:**

| ** **                   | ** ** | **Options and  RSUs Outstanding** | ** ** |
|------------------------------|------------|---------------------------------------------|------------|
| ** **                   | ** ** | ** **                                  | ** ** | **Weighted** | ** ** |
| ** **                   | ** ** | ** **                                  | ** ** | **Average** | ** ** |
| ** **                   | ** ** | ** **                                  | ** ** | **Exercise** | ** ** |
| ** **                   | ** ** | **Shares**                                  | ** ** | **Price** | ** ** |
| ** **                   | ** ** | **(in millions)**                      | ** ** | ** ** | ** ** |
| Balance,  June 30, 2002 |       |                                        | 3.1        |   |   |   | $ | 5.93 |   |   |
| Granted                      |       |                                        | 1.1        |   |   |   | 16.32 |   |   |
| Exercised                    |       |                                        | (0.7       | ) |   |   | 3.70 |   |   |
| Canceled                     |       |                                        | (0.1       | ) |   |   | 11.40 |   |   |
| Balance,  June 30, 2003 |       |                                        | 3.4        |   |   |   | $ | 9.51 |   |   |
| Granted                      |       |                                        | 2.8        |   |   |   | 22.16 |   |   |
| RSUs granted                 |       |                                        | 0.4        |   |   |   | — |   |   |
| Exercised                    |       |                                        | (0.8       | ) |   |   | 8.74 |   |   |
| Canceled                     |       |                                        | (0.2       | ) |   |   | 18.00 |   |   |
| Balance,  June 30, 2004 |       |                                        | 5.6        |   |   |   | $ | 15.50 |   |   |
| Granted                      |       |                                        | 3.8        |   |   |   | 11.58 |   |   |
| RSUs granted                 |       |                                        | 0.2        |   |   |   | — |   |   |
| Exercised                    |       |                                        | (0.2       | ) |   |   | 5.53 |   |   |
| Canceled                     |       |                                        | (0.7       | ) |   |   | 17.34 |   |   |
| Balance, June 30,  2005 |       |                                        | 8.7        |   |   |   | $ | 13.79 |   |   |

 

| ** **                        | ** ** | ** **             | ** ** | **Weighted**       | ** ** |
|-----------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                        | ** ** | ** **             | ** ** | **Average**        | ** ** |
| ** **                        | ** ** | ** **             | ** ** | **Exercise ** | ** ** |
| ** **                        | ** ** | **Shares**             | ** ** | **Price**          | ** ** |
| ** **                        | ** ** | **(in millions)** | ** ** | ** **         | ** ** |
| Options and RSUs  exercisable at: |       |                   |       |               |       |   |   |   |   |
| June 30, 2003                |       |                   | 2.0        |               |       |   | $ | 6.31 |   |   |
| June 30, 2004                |       |                   | 1.9        |               |       |   | $ | 8.31 |   |   |
| June 30,  2005               |       |                   | 5.2        |               |       |   | $ | 16.12 |   |   |

 

F-34

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At June 30,2005, the range of exercise prices for options outstanding was $0.53 to $33.17.The weighted average remaining contractual life, by range of exercise price,for options and RSUs outstanding and exercisable at June 30, 2005 is asfollows:

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                        | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | ** **                   | ** ** | **Weighted-Avg.  Remaining  Contractual Life** | ** ** | **Weighted-Avg.  Exercise Price** | ** ** | **Shares** | ** ** | **Weighted-Avg.  Exercise Price** | ** ** | **Shares** | ** ** |
| $0.00 - $6.00                               |       |                         | 4.8        |                                                |       |   | $ | 1.61 |   |   |   | 0.8 |   |   |   | $ | 2.25 |   |   |   | 1.1 |   |   |
| $6.01 - $12.00                              |       |                         | 9.4        |                                                |       |   | 11.05 |   |   |   | 2.4 |   |   |   | 10.59 |   |   |   | 0.1 |   |   |
| $12.01 - $17.00                             |       |                         | 8.3        |                                                |       |   | 14.04 |   |   |   | 1.7 |   |   |   | 14.36 |   |   |   | 0.9 |   |   |
| $17.01 - $22.00                             |       |                         | 8.2        |                                                |       |   | 18.82 |   |   |   | 1.6 |   |   |   | 18.81 |   |   |   | 1.6 |   |   |
| $22.01 - $33.17                             |       |                         | 6.5        |                                                |       |   | 24.65 |   |   |   | 1.5 |   |   |   | 24.65 |   |   |   | 1.5 |   |   |
| All Options                                 |       |                         | 7.7        |                                                |       |   | $ | 13.79 |   |   |   | 8.1 |   |   |   | $ | 16.12 |   |   |   | 5.2 |   |   |
| RSUs                                        |       |                         | —     |                                                |       |   | — |   |   |   | 0.6 |   |   |   | — |   |   |   | — |   |   |
|                                        |       |                         |       |                                                |       |   |   |   |   |   | 8.7 |   |   |   |   |   |   |   | 5.2 |   |   |
|                                             |            |                              |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On thedate of grant using the Black-Scholes option-pricing model, the followingassumptions were used to estimate the grant-date fair value of the options inthe periods indicated:

| ** **                                 | ** ** | **Year ended June 30,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-fee interest  rate (weighted average) |       | 3.5                                    | %          | 2.5 | % | 3.5 | % |
| Expected  volatility                       |       | 0.62                                   |       | 0.26 |   | 0.28 |   |
| Expected dividend  yield                   |       | 0                                      | %          | 0 | % | 0 | % |
| Expected life                              |       | 6-7.5 years                            |       | 3-10 years |   | 3-10 years |   |

 

The resulting fair valuesapplied to the options granted were $7.49, $8.86, and $6.19 per share for theyears ended June 30, 2005, 2004 and 2003, respectively.

*Warrants*

In February 2004, theCompany completed the acquisition of substantially all of the assets ofMindPlay. A portion of the consideration consisted of 100,000 stock purchasewarrants with a strike price of $24.69, and a term of 7 years. The warrantswere valued at $886,000, and were included as part of the purchase price.

*Share RepurchasePlan*

In January 1999, theCompany’s Board of Directors approved a share repurchase plan for up to 4.6million shares of its common stock. Under the plan, subject to price and marketconditions, purchases of shares can be made from time to time in the openmarket or in privately negotiated transactions using available cash. During thefiscal years ended June 30, 2005 and 2004, the Company repurchased 13,000shares and zero shares of common stock, respectively.

F-35

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*Shares Reserved*

Thefollowing shares are reserved for options issued and available for issue underthe Company’s stock plans (in millions):

| Stock options and  restricted stock units issued and currently outstanding |   | 8.7  |   |
|----------------------------------------------------------------------------|--------|------|--------|
| Stock options  available for future issuance                               |   | 2.0  |   |
| Warrants                                                                   |   | 0.1  |   |
| Total                                                                      |   | 10.8 |   |

 

*Stockholder RightsPlan*

In February 1998, theCompany’s Board of Directors adopted a Stockholder Rights Plan (“Plan”). ThePlan is designed to preserve the long-term value of the shareholders’investment in the Company. Pursuant to the Plan, each shareholder received adistribution of one Right for each share of the Company’s outstanding commonstock of record on March 12, 1998. Each Right expires on March 12,2008, and entitles the holder to purchase one one-hundredth (1/100) of a shareof a Series F Special Stock for $87.50. Initially the Rights arerepresented by the Company’s common stock certificates and are not exercisable.The Rights become exercisable only after a person or group acquires beneficialownership of 10% or more of the Company’s common stock (or 15% if the acquireris an institutional investor) or publicly announces its intention to commence atender offer that would result in that beneficial ownership level. Undercertain circumstances involving a buyer’s acquisition of 10% of the Company’s commonstock (or 15% in the case of an institutional investor), all Rights holdersexcept the buyer will be entitled to purchase common stock at half price. Ifthe Company is acquired through a merger, after such an acquisition, all Rightsholders except the buyer will be entitled to purchase stock in the buyer athalf price. The Company may redeem the rights at $0.0035 at any time before abuyer acquires 10% (or 15% in the case of an institutional investor) of theCompany’s common stock.

*Special Stock*

The Company’s Articles of Incorporation authorize theissuance of up to 10,000,000 shares of special stock (“Special Stock”). Todate, there have been four series of Special Stock authorized for issuance: theInitial Series, the Series B, the Series E and the Series F. SpecialStock consists of non-voting stock where no holder of the Special Stock shallbe entitled to vote at any meeting of stockholders or otherwise, except as maybe specifically provided by law or as approved by the Board of Directors incertain limited circumstances at the time of the stock issuance. The SpecialStock may be issued from time to time in one or more series, each series havingsuch designations, preferences and relative, participating, optional or otherspecial rights, qualifications, limitations or restrictions as shall be statedand expressed in the resolution providing for the issuance of Special Stock orany series thereof adopted by the Board of Directors.

In June 1996, theCompany issued shares of Series E Special Stock to certain holders of theCompany’s 71⁄2% Convertible Subordinated Debentures (which were retired in 1996)who elected to receive such stock in lieu of receiving common stock. Theholders of shares of Series E Special Stock have no voting rights exceptas required by law. A total of 115 shares of Series E Special Stock remainoutstanding.

F-36

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**14.**          INCOMETAXES

Thecomponents of the Company’s income tax expense (benefit) from continuingoperations for the years ended June 30, 2005, 2004 and 2003 are asfollows:

| ** **                                  | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                  | ** ** | **(in 000s)** | ** ** |
| Current tax  expense (benefit):             |       |               |       |     |       |     |       |
| Federal                                     |       | $                  | 611        |     | $          | (192     | )          | $ | (418 | ) |
| Foreign                                     |       | 999                |       | 683      |       | 1,644    |       |
| State                                       |       | (727               | )          | 1,303    |       | 982      |       |
|                                        |       | 883                |       | 1,794    |       | 2,208    |       |
| Deferred tax expense (benefit):             |       |               |       |     |       |     |       |
| Federal                                     |       | (5,965             | )          | 15,913   |       | 12,773   |       |
| Foreign                                     |       | 229                |       | —   |       | 17       |       |
| State                                       |       | (339               | )          | 3,397    |       | 356      |       |
|                                        |       | (6,075             | )          | 19,310   |       | 13,146   |       |
| Total provision for  (benefit) income taxes |       | $                  | (5,192     | )        | $          | 21,104   |       | $ | 15,354 |   |

 

Areconciliation of the Company’s income tax provision as compared to the taxprovision for continuing operations calculated by applying the statutoryfederal tax rate (35%) to the income (loss) from continuing operations beforeincome taxes for the years ended June 30, 2005, 2004 and 2003 are asfollows:

| ** **                                               | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                               | ** ** | **(in 000s)** | ** ** |
| Computed expected income tax (benefit) expense at  35%   |       | $                  | (6,779     | )        | $          | 21,844   |       | $ | 15,169 |   |
| Partnership  income attributable to minority interest    |       | (1,306             | )          | (808     | )          | (703     | )          |
| Foreign earnings  subject to US tax                      |       | 572                |       | 463      |       | 258      |       |
| Change in  valuation allowance                           |       | 2,149              |       | (1,809   | )          | (943     | )          |
| Net increase in  accrual for potential tax contingencies |       | 3,049              |       | 564      |       | 540      |       |
| State income  taxes, net of federal benefit              |       | (149               | )          | 2,987    |       | 996      |       |
| Tax credits                                              |       | (3,018             | )          | (3,120   | )          | —   |       |
| Other, net                                               |       | 290                |       | 983      |       | 37       |       |
|                                                     |       | $                  | (5,192     | )        | $          | 21,104   |       | $ | 15,354 |   |

 

F-37

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Themajor components of the deferred tax assets and liabilities as of June 30,2005 and 2004 are as follows:

| ** **                                         | ** ** | **2005**           | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                         | ** ** | **(in 000s)** | ** ** |
| Deferred tax  assets:                              |       |               |       |     |       |
| Net operating loss carryforwards                   |       | $                  | 23,789     |     | $          | 19,476 |   |
| Capital loss carryforwards                         |       | 9,025              |       | 8,155    |       |
| Foreign tax credit carryforwards                   |       | 231                |       | —   |       |
| Other tax credits                                  |       | 11,811             |       | 8,457    |       |
| Deferred revenue, net of cost of goods sold        |       | 8,509              |       | 10,527   |       |
| Inventory obsolescence reserves                    |       | 4,050              |       | 2,023    |       |
| Deferred compensation for tax purposes             |       | 4,780              |       | 1,268    |       |
| Financing lease assets                             |       | 1,827              |       | 708      |       |
| Bad debt reserves                                  |       | 4,227              |       | 2,621    |       |
| Accruals not currently deductible for tax purposes |       | 13,471             |       | 12,913   |       |
| Other                                              |       | 2,511              |       | 3,008    |       |
| Total gross  deferred tax assets                   |       | 84,231             |       | 69,156   |       |
| Less: Valuation  allowance                         |       | (11,174            | )          | (8,343   | )          |
| Deferred tax  assets                               |       | $                  | 73,057     |     | $          | 60,813 |   |
| Deferred tax liabilities:                          |       |               |       |     |       |
| Property and equipment                             |       | $                  | 6,677      |     | $          | 12,760 |   |
| Intangible assets                                  |       | 10,811             |       | 6,638    |       |
| Deferred lease revenue                             |       | 5,130              |       | 3,237    |       |
| Other                                              |       | 3,007              |       | 1,620    |       |
| Total gross  deferred tax liabilities              |       | 25,625             |       | 24,255   |       |
| Net deferred tax assets                            |       | $                  | 47,432     |     | $          | 36,558 |   |

 

The Company has not provided income taxes onapproximately $3.0 million of undistributed earnings from certain foreignsubsidiaries. The Company plans to invest the earnings in the foreignsubsidiaries and therefore has not recorded a deferred tax liability associatedwith the undistributed earnings.

In connection with the acquisition of SDG in fiscalyear 2004, the Company recorded net deferred tax assets of $16.7 million and acorresponding decrease to goodwill (see Note 4).

At June 30, 2005, theCompany had net operating loss carryforwards for U.S. federal income taxpurposes of approximately $61.2 million subject to limitations under Section 382of the Internal Revenue Code (“Section 382”). Section 382 limits theamount of losses available per year for use against future taxable income. Basedon the Company’s projections of taxable income, the Company expects to utilize100% of its net operating loss carryforwards. The Company’s net operating losscarryforwards will begin to expire in 2022. At June 30, 2005, the Companyhad $0.2 million in foreign tax credit carryforwards, alternative minimum tax (“AMT”)credit carryforwards of approximately $3.9 million, and a research anddevelopment tax credit carry forward of approximately $7.7 million. Foreign taxcredits have a 100% valuation allowance as the Company does not expect to beable to utilize these credits before their expiration. AMT credits areavailable to be carried forward indefinitely and may be utilized againstregular U.S. corporate tax to the extent it does not exceed computed AMTcalculations. Research and developmental credits have a carry forward period of20 years. The Company expects to utilize all of its AMT and research and developmenttax credits.

F-38

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**15.**          SUPPLEMENTALCASH FLOW INFORMATION

Thefollowing supplemental information is related to the consolidated statements ofcash flows:

| ** **                                                                                           | ** ** | **Year ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                           | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                           | ** ** | **(in 000s)**                     | ** ** |
| Cash paid for  interest                                                                              |       | $                                      | 17,509     |   | $ | 23,967 |   | $ | 25,449 |   |
| Cash paid for  income taxes                                                                          |       | 1,901                                  |       | 4,954 |   | 2,751 |   |
| Non-cash investing and  financing transactions:                                                      |       |                                   |       |   |   |   |   |
| Reclassify  property, plant and equipment to inventory                                               |       | 9,923                                  |       | 7,732 |   | 3,765 |   |
| Notes payable issued in acquisitions                                                                 |       | 28,000                                 |       | 4,000 |   | 8,073 |   |
| Value of  restricted stock issued in partial satisfaction of subordinated debt and  accrued interest |       | 14,312                                 |       | — |   | — |   |
| Value of  restricted stock issued in SDG acquisition                                                 |       | —                                 |       | 11,949 |   | — |   |
| Value of  restricted stock issued to employees                                                       |       | 2,314                                  |       | 6,500 |   | — |   |
| Value of warrants  issued in MindPlay acquisition                                                    |       | —                                 |       | 886 |   | — |   |
| Consolidation of  variable interest entities                                                         |       | 6,044                                  |       | — |   | — |   |
| Deferred taxes/goodwill  adjustments related to SDG acquisition                                      |       | 6,124                                  |       | — |   | — |   |
|                                                                                                      |            |                                        |            |  |  |  |  |  |  |  |

 

**16.**          SEVERANCECHARGES

Duringfiscal year 2005, the Company undertook a review of its operations and reducedits workforce during the September 2004 quarter and the March 2005quarter. As a result of these reductions in workforce, the Company incurredcharges totaling $3.7 million for the year ended June 30, 2005,respectively, which is primarily related to the Gaming and Systems segment. Thebalance of the accrued liability for unpaid severance costs is as follows:

| ** **                               | ** ** | **(in 000s)** | ** ** |
|------------------------------------------|------------|--------------------|------------|
| Beginning balance  at June 30, 2004 |       |               | $          | — |   |   |
| Additions to the  accrual                |       |               | 3,654      |   |   |
| Amounts paid                             |       |               | 2,364      |   |   |
| Ending balance at  June 30, 2005    |       |               | $          | 1,290 |   |   |

 

The workforce reductioncompleted in the March 2005 quarter included a change in the Company’sEuropean distribution operations. The Company has accrued a tax liability of$1.4 million (included in tax expense in the accompanying consolidatedstatement of operations) for the estimated tax obligation resulting from thisrestructuring.

**17.**          IMPAIRMENTCHARGES

The Company entered into an agreement during fiscalyear 2004 to provide a development loan to a Native American tribe to furthertheir pursuit of developing a gaming facility. The amounts advanced under theterms of the loan totaled $1.5 million, and the Company was not obligated forany additional advances. During the quarter ended March 31, 2005, thetribe received an adverse court ruling which the Company believes materiallyimpairs the tribe’s ability to repay the loan. Therefore the Company recordedan impairment charge for the full amount of the loan.

During the quarter ended March 31, 2005, theCompany performed a review of its intellectual property rights for variousvideo games used on certain legacy platforms. This review was triggered by thedeclining sales of these legacy games during fiscal 2005. The Company evaluatedthe carrying value of certain 

F-39

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intellectual property assets and determined thatseveral were no longer recoverable and were therefore deemed to be impaired. Theimpairment charge totaled $1.3 million.

During the quarter ended March 31,2005, the Company evaluated the useful lives and salvage values for its leasedgaming equipment. Based on recent historical data indicating a shortening ofthe average length such games were deployed, the Company reduced thedepreciable life for certain video products to 2 years. The change in theuseful life resulted in an impairment charge of $0.8 million to write-off theundepreciated portion of the game values (down to salvage value) for games atthe end of their 2-year life.

**18.**          INVENTORYIMPAIRMENT CHARGES

The decision to move tothe new video platform, the targeting of used equipment for non-domesticmarkets, and the consolidation of certain warehouses all led to accelerateddisposals of legacy products. This process required updating of estimates forthe net realizable value of inventories due to the subjectivity involved inprojecting sales volumes, used game sales values, refurbishment costs, andcustomer demand in non-domestic jurisdictions. As a result of its ongoinganalysis of inventory valuations, the Company recognized inventory write downstotaling $26.4 million during the year ended June 30, 2005, which areincluded in cost of gaming equipment and systems in the accompanyingconsolidated statements of operations*.*

**19.**          COMMITMENTSAND CONTINGENCIES

*Commitments*

The Company is obligated under several agreements topay certain royalties ranging from approximately $100 to $2,300 per applicablegame depending on the components in the gaming machines. Total royalty expensefor the Company for the years ended June 30, 2005, 2004 and 2003 was $16.7million, $9.4 million and $4.2 million, respectively, and is includedin the cost of Gaming Equipment and Systems in the accompanying consolidatedstatements of operations. In addition, the Company has obtained the rights tocertain game themes and intellectual property that call for payment ofroyalties based on either fixed amounts or variable amounts based on gameperformance. The Company also pays $0.5 million annually for the use of theBally trademark.

TheCompany leases certain office space, equipment, warehouse and repair facilitiesand other property locations under non-cancelable operating leases which aregenerally included in the selling, general and administrative expense. Operatingrental expense for years ended June 30, 2005, 2004 and 2003 was asfollows:

| ** **                        | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                        | ** ** | **(in 000s)** | ** ** |
| Continuing  Operations:           |       |               |       |     |       |     |       |
| Equipment and office space leases |       | $                  | 6,257      |     | $          | 4,953    |       | $ | 4,047 |   |
| Sublease rental income            |       | —             |       | —   |       | (332     | )          |
| ** **                        |       | $                  | 6,257      |     | $          | 4,953    |       | $ | 3,715 |   |

 

| ** **                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Discontinued  Operations:         |       |     |       |     |       |
| Contingent route location leases  |       | $        | 147,062    |     | $          | 132,062 |   |
| Fixed route location leases       |       | 17,326   |       | 18,786   |       |
| Equipment and office space leases |       | 1,170    |       | 2,852    |       |
|                              |       | 165,558  |       | 153,700  |       |
| Sublease rental income            |       | —   |       | (1,812   | )          |
| ** **                        |       | $        | 165,558    |     | $          | 151,888 |   |

 

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During fiscal years 2004 and 2003, the Company hadlocations where the Company operated gaming devices (“Route Location Leases”),which were included in the cost of route operations. Such leases provided forsharing of the net gaming win between the Company and the location owner andwere cancelable at any time by either party. Such leases were part of the netassets sold as part of the disposition of the Company’s Nevada and Louisianaroute operations.

Thecontractual lease commitments for each of the five fiscal years subsequent to June 30,2005 are as flows:

| **Fiscal year ending June 30,** | ** ** | ** ** | ** ** | **(in 000s)** | ** ** |
|-----------------------------------------------------|------------|------------|------------|--------------------|------------|
| 2006                                                |       |       | $          | 2,641              |       |   |
| 2007                                                |       |       | 2,278      |               |       |
| 2008                                                |       |       | 1,512      |               |       |
| 2009                                                |       |       | 1,114      |               |       |
| 2010                                                |       |       | 407        |               |       |
| Total                                               |       |       | $          | 7,952              |       |   |

 

Liabilities for losscontingencies arising from claims, assessments, litigation, fines andpenalties, or other sources are recorded when it is probable that a liabilityhas been incurred and the amount of the liability can be reasonably estimated.

*Litigation*

On September 25, 1995, Bally Gaming International, Inc.,a wholly-owned subsidiary of the Company, was named as a defendant in a classaction lawsuit filed in the United States District Court for the District ofNevada. The plaintiffs filed suit against BGII and approximately 45 other defendants.Each defendant is involved in the gaming business as a gaming machinemanufacturer, distributor or casino operator. The class action lawsuit arisesout of alleged fraudulent marketing and operation of casino video pokermachines and electronic slot machines. The plaintiffs allege that thedefendants have engaged in a course of fraudulent and misleading conductintended to induce people into playing their gaming machines based on a falsebelief concerning how those machines actually operate as well as the extent towhich there is actually an opportunity to win on any given play. The plaintiffsallege that the defendants’ actions constitute violations of the RacketeerInfluenced and Corrupt Organizations Act (RICO) and give rise to claims ofcommon law fraud and unjust enrichment. The plaintiffs are seeking monetarydamages in excess of $1.0 billion. In July 2002 the federal districtcourt denied the plaintiffs’ request for class action certification. In August 2004,the United States Court of Appeals for the Ninth Circuit affirmed the districtcourt’s denial of class action certification, and the plaintiffs did notappeal. Subsequently, two of the four named plaintiffs elected to continuetheir cases as individual, non-class actions. However, in September 2005,the court granted defendants’ motions for summary judgment, resolving allclaims in defendants’ favor without a trial. In October 2005, theplaintiffs appealed the District Court’s granting of summary judgment in favorof the defendants to the Ninth Circuit. Management believes the plaintiffs’lawsuit to be without merit. The Company will continue to pursue all availablelegal defenses.

In June 2004, putative class actions were filedagainst Bally Technologies, Inc. and its officers, Robert Miodunski,Robert Saxton, Mark Lerner, and Steven Des Champs, in the United StatesDistrict Court for the District of Nevada. The nearly identical complaintsalleged violations of the Exchange Act stemming from revised earnings guidance,declines in the stock price, and sales of stock by insiders, and sought damagesin unspecified amounts. The federal district court granted the plaintiffs’unopposed motions to consolidate the cases and to appoint a lead counsel and alead plaintiff, and the plaintiffs filed a consolidated complaint. Bally andthe other defendants have moved for summary judgment, and the motion is beingbriefed. Bally believes the lawsuits are without merit and intends tovigorously defend itself 

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and its officers. In addition, in July 2004 twoderivative lawsuits were filed in Nevada state court against the members of theBoard of Directors and the officers listed above. The Company is named as anominal defendant in the derivative lawsuits as the claims are purportedlyasserted for the benefit of Bally. These lawsuits assert claims for breach offiduciary duty and waste of corporate assets arising out of the same events asthose giving rise to the class actions described above and seek injunctiverelief and damages in unspecified amounts. These two cases were consolidated,and Bally and the other defendants moved to dismiss the case. In February 2005,the state district court granted the defendants’ motion and dismissed the case,and the plaintiffs have appealed the case the Nevada Supreme Court, where thematter is pending. Management believes the plaintiffs’ lawsuit to be withoutmerit. The Company will continue to pursue all available legal defenses.

In August 2004, Shuffle Master, Inc. suedthe Company in the United States District Court for the District of Nevada,alleging infringement of various patents in connection with the Company’sMindPlay product line and seeking injunctive relief and damages in unspecifiedamounts. In June 2005, it was announced that IGT had acquired an interestin the patents at issue in the case, and thereafter IGT joined the case as aplaintiff. The Company is vigorously defending against the lawsuit, which is inthe discovery phase. Management believes the plaintiffs’ lawsuit to be withoutmerit. The Company will continue to pursue all available legal defenses.

In September 2004, a federal district court juryin the District of Nevada entered a $7.4 million verdict against the Company ina suit filed by Action Gaming, Inc., and IGT. The suit alleged that themulti-hand video poker game deployed by the Company’s former subsidiary, UnitedCoin, infringed the plaintiffs’ patents. The district court ruled on summaryjudgment that the game does not infringe the patents. However, the court leftto the jury the question whether the use of “autohold,” a specific, optionalfeature of the game, caused it to infringe under the “doctrine of equivalents,”a doctrine of patent law. After a two-week trial, the jury determined that thegame with the autohold option enabled did infringe under the doctrine ofequivalents and awarded damages accordingly. The feature has been disabled onall affected games in the field, and the decision permits continued deploymentof the game as long as the autohold feature is not included. The Company is pursuingvarious remedies and has posted a cash bond totaling $7.6 million to staypayment of the judgment and accrued interest pending appeal. The cash bond isincluded in other non-current assets and the accrued liability is included inaccrued liabilities in the accompanying balance sheet. This amount has beenaccrued and the expense for this charge is included in discontinued operationsin the accompanying statement of operations in fiscal year 2005.

On December 7, 2004, IGT filed a patentinfringement lawsuit against Bally Technologies, Inc. in the United StatesDistrict Court for the District of Nevada. The complaint asserts that Bally’swheel-based games, such as Monte Carlo and Cash For Life, and its iViewproducts infringe patents held by IGT, and seeks injunctive relief and damagesin unspecified amounts. Bally believes IGT’s claims are without merit and isvigorously defending itself against the lawsuit. As part of its defense, Ballyhas asserted counterclaims against IGT, including claims that IGT’s patents areinvalid as well as several claims that IGT has engaged in anti-competitiveconduct in violation of state and federal antitrust laws. By its counterclaims,Bally is seeking damages and other relief from IGT. The litigation is in thediscovery phase and no trial date has been set.

In February 2005, the SEC initiated an informalinquiry and requested documents and information regarding matters related tothe allegations in the class actions and similar matters. In August 2005,the SEC notified the Company that its investigation had entered a formal phase,and has requested additional information from the Company covering the samegeneral areas that were addressed in the informal inquiry. Management iscooperating fully with the SEC in this matter.

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The Company is also a party to various lawsuitsrelating to routine matters incidental to its business. Management does notbelieve that the outcome of such litigation, including the matters above, inthe aggregate, will have a material adverse effect on its financial position,results of operations or cash flows.

At June 30, 2005, theCompany had no significant material purchase commitments for capitalexpenditures.

*Federal, State andLocal Taxes*

The Company is subject to sales, use, income and othertax audits and administrative proceedings in various federal, state, and localjurisdictions. While the Company believes it has properly recorded its taxliabilities and expenses in each jurisdiction, there is no assurance thattaxing authorities will not propose adjustments that will increase the Company’stax liabilities and expense.

In addition, a degree ofjudgment is required in determining the Company’s effective tax rate and in theevaluation of certain tax positions taken by the Company. The Company establishesreserves when, despite support for the Company’s filing position, a beliefexists that these positions may be challenged by the respective taxjurisdiction. The reserves are adjusted upon the occurrence of external,identifiable events. A change in the Company’s tax reserves could have asignificant impact on its effective tax rate and operating results.

**20.**          SEGMENT AND GEOGRAPHICALINFORMATION

The Company currently operates in two businesssegments: (i) Bally Gaming and Systems which designs, manufactures anddistributes gaming machines and computerized monitoring systems for gamingmachines, and (ii) Casino Operations which owns and operates one regionalcasino. The accounting policies of these segments are consistent with Company’spolicies for the consolidated financial statements.

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Thetable below presents information as to the Company’s revenues, operating income(loss), identifiable assets, capital expenditures and depreciation andamortization by segment:

| ** **                           | ** ** | **Year Ended June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                           | ** ** | **(in 000s)**                     | ** ** |
| Revenues:                            |       |                                   |       |   |   |   |   |
| Gaming Equipment and Systems         |       | $                                      | 431,070    |   | $ | 424,327 |   | $ | 306,319 |   |
| Casino Operations                    |       | 52,037                                 |       | 52,280 |   | 50,945 |   |
| Total revenues                       |       | $                                      | 483,107    |   | $ | 476,607 |   | $ | 357,264 |   |
| Inter-segment  revenues:             |       |                                   |       |   |   |   |   |
| Gaming Equipment and Systems         |       | $                                      | 518        |   | $ | 578 |   | $ | 1,164 |   |
| Casino Operations                    |       | —                                 |       | — |   | — |   |
| Total inter-segment revenues         |       | $                                      | 518        |   | $ | 578 |   | $ | 1,164 |   |
| Gross Profit:                        |       |                                   |       |   |   |   |   |
| Gaming Equipment and Systems         |       | $                                      | 189,584    |   | $ | 231,576 |   | $ | 162,386 |   |
| Casino Operations                    |       | 33,310                                 |       | 32,237 |   | 29,737 |   |
| Total gross profit                   |       | $                                      | 222,894    |   | $ | 263,813 |   | $ | 192,123 |   |
| Operating income  (loss):            |       |                                   |       |   |   |   |   |
| Gaming Equipment and Systems         |       | $                                      | (2,724     | ) | $ | 86,148 |   | $ | 64,274 |   |
| Casino Operations                    |       | 16,775                                 |       | 16,942 |   | 15,306 |   |
| Corporate/other                      |       | (18,502                                | )          | (14,254 | ) | (13,213 | ) |
| Total operating (loss) income        |       | $                                      | (4,451     | ) | $ | 88,836 |   | $ | 66,367 |   |
| Identifiable  assets:                |       |                                   |       |   |   |   |   |
| Gaming Equipment and Systems         |       | $                                      | 550,611    |   | $ | 542,958 |   | $ | 324,318 |   |
| Casino Operations                    |       | 43,094                                 |       | 41,790 |   | 43,399 |   |
| Corporate/other                      |       | 61,229                                 |       | 184,737 |   | 62,831 |   |
| Total identifiable assets            |       | $                                      | 654,934    |   | $ | 769,485 |   | $ | 430,548 |   |
| Goodwill:                            |       |                                   |       |   |   |   |   |
| Gaming Equipment and Systems         |       | $                                      | 161,444    |   | $ | 127,672 |   | $ | 63,040 |   |
| Casino Operations                    |       | —                                 |       | — |   | — |   |
| Corporate/other                      |       | —                                 |       | — |   | — |   |
| Total goodwill                       |       | $                                      | 161,444    |   | $ | 127,672 |   | $ | 63,040 |   |
| Capital  expenditures:               |       |                                   |       |   |   |   |   |
| Gaming Equipment and Systems         |       | $                                      | 6,942      |   | $ | 8,396 |   | $ | 3,589 |   |
| Casino Operations                    |       | 4,325                                  |       | 2,716 |   | 6,068 |   |
| Corporate/other                      |       | 1,163                                  |       | 728 |   | 102 |   |
| Total capital expenditures           |       | $                                      | 12,430     |   | $ | 11,840 |   | $ | 9,759 |   |
| Depreciation and  amortization:      |       |                                   |       |   |   |   |   |
| Gaming Equipment and Systems         |       | $                                      | 15,813     |   | $ | 10,016 |   | $ | 6,474 |   |
| Casino Operations                    |       | 3,296                                  |       | 2,780 |   | 2,174 |   |
| Corporate/other                      |       | 1,342                                  |       | 1,525 |   | 2,286 |   |
| Total  depreciation and amortization |       | $                                      | 20,451     |   | $ | 14,321 |   | $ | 10,934 |   |

 

The Company has operations based primarily in theUnited States with a significant sales and distribution office based in Europe.

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Thetable below presents information as to the Company’s revenues, operating income(loss), identifiable assets capital expenditures and depreciation andamortization by geographic region determined based upon the location of thecustomer:

| ** **                           | ** ** | **Year Ended June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                           | ** ** | **(in 000s)**                     | ** ** |
| Revenues:                            |       |                                   |       |   |   |   |   |
| United States                        |       | $                                      | 456,078    |   | $ | 445,318 |   | $ | 314,417 |   |
| Europe                               |       | 13,314                                 |       | 24,817 |   | 32,617 |   |
| Other foreign                        |       | 13,715                                 |       | 6,472 |   | 10,230 |   |
| Total revenues                       |       | $                                      | 483,107    |   | $ | 476,607 |   | $ | 357,264 |   |
| Gross Margin:                        |       |                                   |       |   |   |   |   |
| United States                        |       | $                                      | 214,333    |   | $ | 251,194 |   | $ | 179,224 |   |
| Europe                               |       | 4,249                                  |       | 10,975 |   | 10,492 |   |
| Other foreign                        |       | 4,312                                  |       | 1,644 |   | 2,407 |   |
| Total gross  margin                  |       | $                                      | 222,894    |   | $ | 263,813 |   | $ | 192,123 |   |
| Operating income  (loss):            |       |                                   |       |   |   |   |   |
| United States                        |       | $                                      | 155        |   | $ | 87,769 |   | $ | 60,701 |   |
| Europe                               |       | (6,863                                 | )          | 1,686 |   | 4,883 |   |
| Other foreign                        |       | 2,257                                  |       | (619 | ) | 783 |   |
| Total operating  income (loss)       |       | $                                      | (4,451     | ) | $ | 88,836 |   | $ | 66,367 |   |
| Identifiable  assets:                |       |                                   |       |   |   |   |   |
| United States                        |       | $                                      | 604,453    |   | $ | 714,219 |   | $ | 377,584 |   |
| Europe                               |       | 33,336                                 |       | 43,661 |   | 41,798 |   |
| Other foreign                        |       | 17,145                                 |       | 11,605 |   | 11,166 |   |
| Total  identifiable assets           |       | $                                      | 654,934    |   | $ | 769,485 |   | $ | 430,548 |   |
| Goodwill:                            |       |                                   |       |   |   |   |   |
| United States                        |       | $                                      | 143,491    |   | $ | 109,498 |   | $ | 47,393 |   |
| Europe                               |       | 17,953                                 |       | 18,174 |   | 15,647 |   |
| Other Foreign                        |       | —                                 |       | — |   | — |   |
| Total goodwill                       |       | $                                      | 161,444    |   | $ | 127,672 |   | $ | 63,040 |   |
| Capital  expenditures:               |       |                                   |       |   |   |   |   |
| United States                        |       | $                                      | 11,283     |   | $ | 11,145 |   | 9,664 |   |
| Europe                               |       | 1,140                                  |       | 684 |   | 90 |   |
| Other foreign                        |       | 7                                      |       | 11 |   | 5 |   |
| Total capital  expenditures          |       | $                                      | 12,430     |   | $ | 11,840 |   | $ | 9,759 |   |
| Depreciation and  amortization:      |       |                                   |       |   |   |   |   |
| United States                        |       | $                                      | 19,098     |   | $ | 13,491 |   | $ | 10,588 |   |
| Europe                               |       | 737                                    |       | 636 |   | 339 |   |
| Other Foreign                        |       | 616                                    |       | 194 |   | 7 |   |
| Total depreciation and  amortization |       | $                                      | 20,451     |   | $ | 14,321 |   | $ | 10,934 |   |

 

**21.**          401(k) PLAN

The Company is the sponsor of the Bally Technologies, Inc.401(k) Savings Plan (the “401(k) Plan”). The 401(k) Plan wasadopted for domestic employees of Bally Technologies, Inc. and all itsdomestic subsidiaries. Employees may enroll in the plan after meeting certainage and length of employment 

F-45

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criteria, and plan participants may defer up to 25% oftheir compensation, up to certain IRS imposed limitations, currently $14,000.

The Company matches 50% of any participants’contributions, up to the first 6% of their compensation (as the term “compensation”is defined in the 401(k) plan document). Company matching contributionstotaled approximately $1.5 million, $0.8 million and $1.0 million for thefiscal years ended June 30, 2005, 2004 and 2003, respectively.

For participants hiredthrough December 31, 2000, employee and employer matching contributionswere 100% vested immediately. For employees hired on or after January 1,2001, vesting of the employer match is on a 20%, 5-year vesting schedule.Employer profit sharing contributions are 100% after the completion of 3 yearsof service.

**22.**          SELECTED QUARTERLYFINANCIAL DATA (UNAUDITED)

The following tables set forth unaudited quarterlyfinancial information for the years ended June 30, 2005 and 2004.

As discussed in Note 2, the unaudited quarterlyinformation for the fiscal quarters ended June 30, 2005 and 2004, March 31,2005 and 2004, December 31, 2004 and 2003, and September 30, 2004 and2003 have been restated. A comparison of originally reported and restatedunaudited quarterly financial information is presented within the tables below:

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| ** **                                                                               | ** ** | **Fiscal Year 2005  Quarterly Results**        | ** **         |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|--------------------|
| ** **                                                                               | ** ** | **September 30,**                                        | ** **         | **December 31,** | ** ** |
| ** **                                                                               | ** ** | **As  Originally  Reported**                                  | ** **         | **First  Restatement** | ** ** | **Second  Restatement** | ** ** | **As  Restated** | ** ** | **As  Originally  Reported** | ** ** | **First  Restatement** | ** ** | **Second  Restatement** | ** ** | **As  Restated** | ** ** |
| ** **                                                                               | ** ** | **(in 000s, except per share data)** | ** **         |
| Statement  of Operations Data:                                                           |       |                                                          |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                                 |       |                                                          | $116,913           |   |   |   | $(6,112 | ) |   |   | $8,840 |   |   |   | $119,641 |   |   |   | $113,702 |   |   |   | $11,848 |   |   |   | $(1,115 | ) |   |   | $124,435 |   |   |
| Cost of gaming equipment, systems and casino  operations                                 |       |                                                          | 55,638             |   |   |   | 1,496 |   |   |   | 2,532 |   |   |   | 59,666 |   |   |   | 57,926 |   |   |   | 13,386 |   |   |   | (750 | ) |   |   | 70,562 |   |   |
| Selling, general and administrative                                                      |       |                                                          | 45,090             |   |   |   | 15 |   |   |   | (31 | ) |   |   | 45,074 |   |   |   | 41,051 |   |   |   | (100 | ) |   |   | (186 | ) |   |   | 40,765 |   |   |
| Income (loss) from continuing operations before  income taxes and minority interest |       |                                                          | (9,757             | ) |   |   | (1,042 | ) |   |   | 6,725 |   |   |   | (4,074 | ) |   |   | (11,274 | ) |   |   | 5,572 |   |   |   | 537 |   |   |   | (5,165 | ) |   |
| Income tax (benefit) expense                                                             |       |                                                          | (3,851             | ) |   |   | (203 | ) |   |   | 2,375 |   |   |   | (1,679 | ) |   |   | (4,879 | ) |   |   | 1,789 |   |   |   | 189 |   |   |   | (2,901 | ) |   |
| Loss from continuing operations                                                          |       |                                                          | (6,405             | ) |   |   | (839 | ) |   |   | 4,350 |   |   |   | (2,894 | ) |   |   | (7,540 | ) |   |   | 3,783 |   |   |   | 348 |   |   |   | (3,409 | ) |   |
| Income (loss) from discontinued operations                                               |       |                                                          | (4,391             | ) |   |   | — |   |   |   | — |   |   |   | (4,391 | ) |   |   | 15 |   |   |   | — |   |   |   | — |   |   |   | 15 |   |   |
| Net loss                                                                                 |       |                                                          | (10,796            | ) |   |   | (839 | ) |   |   | 4,350 |   |   |   | (7,285 | ) |   |   | (7,525 | ) |   |   | 3,783 |   |   |   | 348 |   |   |   | (3,394 | ) |   |
| Diluted loss per share from continuing operations                                        |       |                                                          | $  (0.13 | ) |   |   | $(0.01 | ) |   |   | $0.08 |   |   |   | $  (0.06 | ) |   |   | $  (0.15 | ) |   |   | $  0.08 |   |   |   | $ 0.00 |   |   |   | $  (0.07 | ) |   |
| Diluted loss per share from continuing operations                                        |       |                                                          | (0.08              | ) |   |   | — |   |   |   | — |   |   |   | (0.08 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Diluted loss per  share                                                                  |       |                                                          | $  (0.21 | ) |   |   | $(0.01 | ) |   |   | $0.08 |   |   |   | $  (0.14 | ) |   |   | $  (0.15 | ) |   |   | $  0.08 |   |   |   | $ 0.00 |   |   |   | $  (0.07 | ) |   |

 

| ** **                                                                               | ** ** | **Fiscal Year 2005  Quarterly Results**        | ** **         |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|--------------------|
| ** **                                                                               | ** ** | **March 31,**                                            | ** **         | **June 30,** | ** ** |
| ** **                                                                               | ** ** | **As  Originally  Reported**                                  | ** **         | **First  Restatement** | ** ** | **Second  Restatement** | ** ** | **As  Restated** | ** ** | **As  Originally  Reported** | ** ** | **First  Restatement** | ** ** | **Second  Restatement** | ** ** | **As  Restated** | ** ** |
| ** **                                                                               | ** ** | **(in 000s, except per share data)** | ** **         |
| Statement of Operations  Data:                                                           |       |                                                          |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                                 |       |                                                          | $125,412           |   |   |   | $1,589 |   |   |   | (5,312 | ) |   |   | $121,689 |   |   |   | $120,678 |   |   |   | $ — |   |   |   | $(3,336 | ) |   |   | $117,342 |   |   |
| Cost of gaming equipment, systems and casino  operations                                 |       |                                                          | 62,310             |   |   |   | 8,222 |   |   |   | (3,102 | ) |   |   | 67,430 |   |   |   | 63,479 |   |   |   | — |   |   |   | (924 | ) |   |   | 62,555 |   |   |
| Selling, general and administrative                                                      |       |                                                          | 38,729             |   |   |   | 9 |   |   |   | 131 |   |   |   | 38,869 |   |   |   | 34,966 |   |   |   | — |   |   |   | 255 |   |   |   | 35,221 |   |   |
| Income (loss) from continuing operations before  income taxes and minority interest |       |                                                          | (7,022             | ) |   |   | 612 |   |   |   | (1,240 | ) |   |   | (7,650 | ) |   |   | 329 |   |   |   | — |   |   |   | (2,810 | ) |   |   | (2,481 | ) |   |
| Income tax (benefit) expense                                                             |       |                                                          | (1,480             | ) |   |   | 2,438 |   |   |   | (437 | ) |   |   | 521 |   |   |   | (324 | ) |   |   | — |   |   |   | (809 | ) |   |   | (1,133 | ) |   |
| Loss from continuing operations                                                          |       |                                                          | (6,449             | ) |   |   | (1,826 | ) |   |   | (803 | ) |   |   | (9,078 | ) |   |   | (1,042 | ) |   |   | — |   |   |   | (1,486 | ) |   |   | (2,528 | ) |   |
| Income (loss) from discontinued operations                                               |       |                                                          | (395               | ) |   |   | — |   |   |   | — |   |   |   | (395 | ) |   |   | 117 |   |   |   | — |   |   |   | — |   |   |   | 117 |   |   |
| Net loss                                                                                 |       |                                                          | (6,844             | ) |   |   | (1,826 | ) |   |   | (803 | ) |   |   | (9,473 | ) |   |   | (925 | ) |   |   | — |   |   |   | (1,486 | ) |   |   | (2,411 | ) |   |
| Diluted loss per share from continuing operations                                        |       |                                                          | $  (0.13 | ) |   |   | $(0.03 | ) |   |   | $(0.02 | ) |   |   | $  (0.18 | ) |   |   | $  (0.02 | ) |   |   | $ — |   |   |   | $(0.03 | ) |   |   | $  (0.05 | ) |   |
| Diluted loss per share from continuing operations                                        |       |                                                          | (0.01              | ) |   |   | — |   |   |   | — |   |   |   | (0.01 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Diluted loss per  share                                                                  |       |                                                          | $  (0.14 | ) |   |   | $(0.03 | ) |   |   | $(0.02 | ) |   |   | $  (0.19 | ) |   |   | $  (0.02 | ) |   |   | $ — |   |   |   | $(0.03 | ) |   |   | $  (0.05 | ) |   |

 

F-47

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| ** **                                                                               | ** ** | **Fiscal Year 2004  Quarterly Results**        | ** **              |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------------------|
| ** **                                                                               | ** ** | **September 30,**                                        | ** **              | **December 31,** | ** ** |
| ** **                                                                               | ** ** | **As  Originally  Reported**                                  | ** **              | **First  Restatement** | ** ** | **Second  Restatement** | ** ** | **As  Restated** | ** ** | **As  Originally  Reported** | ** ** | **First  Restatement** | ** ** | **Second  Restatement** | ** ** | **As  Restated** | ** ** |
| ** **                                                                               | ** ** | **(in 000s, except per share data)** | ** **              |
| Statement of  Operations Data:                                                           |       |                                                          |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                                 |       |                                                          | $101,223                |   |   |   | $(4,884 | ) |   |   | $(1,024 | ) |   |   | $95,315 |   |   |   | $108,631 |   |   |   | $11,768 |   |   |   | $(5,045 | ) |   |   | $115,354 |   |   |
| Cost of gaming equipment, systems and casino  operations                                 |       |                                                          | 38,240                  |   |   |   | 1,067 |   |   |   | (768 | ) |   |   | 38,539 |   |   |   | 43,664 |   |   |   | 9,239 |   |   |   | (2,772 | ) |   |   | 50,131 |   |   |
| Selling, general and administrative                                                      |       |                                                          | 29,065                  |   |   |   | — |   |   |   | (429 | ) |   |   | 28,636 |   |   |   | 21,548 |   |   |   | 209 |   |   |   | 11 |   |   |   | 21,768 |   |   |
| Income (loss) from continuing operations before  income taxes and minority interest |       |                                                          | 3,600                   |   |   |   | (2,802 | ) |   |   | 669 |   |   |   | 1,467 |   |   |   | 23,203 |   |   |   | 5,797 |   |   |   | (1,662 | ) |   |   | 27,338 |   |   |
| Income tax (benefit) expense                                                             |       |                                                          | 1,266                   |   |   |   | (981 | ) |   |   | 236 |   |   |   | 521 |   |   |   | 8,444 |   |   |   | 2,029 |   |   |   | (585 | ) |   |   | 9,888 |   |   |
| Loss from continuing operations                                                          |       |                                                          | 1,848                   |   |   |   | (1,821 | ) |   |   | 434 |   |   |   | 461 |   |   |   | 14,218 |   |   |   | 3,768 |   |   |   | (1,077 | ) |   |   | 16,909 |   |   |
| Income (loss) from discontinued operations                                               |       |                                                          | 4,180                   |   |   |   | — |   |   |   | — |   |   |   | 4,180 |   |   |   | 4,526 |   |   |   | — |   |   |   | — |   |   |   | 4,526 |   |   |
| Net income (loss)                                                                        |       |                                                          | 6,028                   |   |   |   | (1,821 | ) |   |   | 434 |   |   |   | 4,641 |   |   |   | 18,744 |   |   |   | 3,768 |   |   |   | (1,077 | ) |   |   | 21,435 |   |   |
| Diluted income (loss) per share from continuing  operations                              |       |                                                          | $   0.04 |   |   |   | $(0.04 | ) |   |   | $ 0.01 |   |   |   | $  0.01 |   |   |   | $   0.28 |   |   |   | $  0.07 |   |   |   | $(0.02 | ) |   |   | $   0.33 |   |   |
| Diluted income (loss) per share from continuing operations                               |       |                                                          | 0.08                    |   |   |   | — |   |   |   | — |   |   |   | 0.08 |   |   |   | 0.09 |   |   |   | — |   |   |   | — |   |   |   | 0.09 |   |   |
| Diluted income (loss)  per share                                                         |       |                                                          | $   0.12 |   |   |   | $(0.04 | ) |   |   | $ 0.01 |   |   |   | $  0.09 |   |   |   | $   0.37 |   |   |   | $  0.07 |   |   |   | $(0.02 | ) |   |   | $   0.42 |   |   |

 

| ** **                                                                          | ** ** | **Fiscal Year 2004  Quarterly Results**        | ** **              |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------------------|
| ** **                                                                          | ** ** | **March 31,**                                            | ** **              | **June 30,** | ** ** |
| ** **                                                                          | ** ** | **As  Originally  Reported**                                  | ** **              | **First  Restatement** | ** ** | **Second  Restatement** | ** ** | **As  Restated** | ** ** | **As  Originally  Reported** | ** ** | **First  Restatement** | ** ** | **Second  Restatement** | ** ** | **As  Restated** | ** ** |
| ** **                                                                          | ** ** | **(in 000s, except per share data)** | ** **              |
| Statement of  Operations Data:                                                      |       |                                                          |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                            |       |                                                          | $116,239                |   |   |   | $(4,477 | ) |   |   | $1,426 |   |   |   | $113,188 |   |   |   | $162,783 |   |   |   | $(10,875 | ) |   |   | $ 842 |   |   |   | $152,750 |   |   |
| Cost of gaming equipment, systems and casino  operations                            |       |                                                          | 46,702                  |   |   |   | 3,005 |   |   |   | 1,800 |   |   |   | 51,507 |   |   |   | 69,023 |   |   |   | 1,893 |   |   |   | 1,701 |   |   |   | 72,617 |   |   |
| Selling, general and administrative                                                 |       |                                                          | 30,198                  |   |   |   | 36 |   |   |   | 21 |   |   |   | 30,255 |   |   |   | 43,534 |   |   |   | (171 | ) |   |   | 19 |   |   |   | 43,382 |   |   |
| Income (loss) from continuing operations before  income taxes and minority interest |       |                                                          | 19,197                  |   |   |   | (3,367 | ) |   |   | 130 |   |   |   | 15,960 |   |   |   | 24,227 |   |   |   | (6,286 | ) |   |   | (294 | ) |   |   | 17,647 |   |   |
| Income tax (benefit) expense                                                        |       |                                                          | 6,234                   |   |   |   | (1,180 | ) |   |   | 49 |   |   |   | 5,103 |   |   |   | 8,349 |   |   |   | (2,648 | ) |   |   | (109 | ) |   |   | 5,592 |   |   |
| Loss from continuing operations                                                     |       |                                                          | 12,241                  |   |   |   | (2,187 | ) |   |   | 81 |   |   |   | 10,135 |   |   |   | 15,319 |   |   |   | (3,639 | ) |   |   | (186 | ) |   |   | 11,494 |   |   |
| Income (loss) from discontinued operations                                          |       |                                                          | 1,593                   |   |   |   | — |   |   |   | — |   |   |   | 1,593 |   |   |   | 30,590 |   |   |   | — |   |   |   | — |   |   |   | 30,590 |   |   |
| Net income (loss)                                                                   |       |                                                          | 13,834                  |   |   |   | (2,187 | ) |   |   | 81 |   |   |   | 11,728 |   |   |   | 45,908 |   |   |   | (3,639 | ) |   |   | (185 | ) |   |   | 42,084 |   |   |
| Diluted income (loss) per share from continuing  operations                         |       |                                                          | $   0.24 |   |   |   | $(0.04 | ) |   |   | $0.00 |   |   |   | $   0.20 |   |   |   | $   0.30 |   |   |   | $  (0.07 | ) |   |   | $(0.01 | ) |   |   | $   0.22 |   |   |
| Diluted income (loss) per share from continuing  operations                         |       |                                                          | 0.03                    |   |   |   | — |   |   |   | — |   |   |   | 0.03 |   |   |   | 0.60 |   |   |   | — |   |   |   | — |   |   |   | 0.60 |   |   |
| Diluted income (loss)  per share                                                    |       |                                                          | $   0.27 |   |   |   | $(0.04 | ) |   |   | $0.00 |   |   |   | $   0.23 |   |   |   | $   0.90 |   |   |   | $  (0.07 | ) |   |   | $(0.01 | ) |   |   | $   0.82 |   |   |

 

F-48

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**23.**          SUBSEQUENT EVENTS

In August 2005, a hurricane hit the gulf coast ofMississippi and Louisiana causing substantial damage to the Gulfport andBiloxi, Mississippi area, as well as New Orleans, Louisiana. In September 2005,Louisiana was again impacted by a hurricane that caused additional flooding inNew Orleans as well as other locations in Louisiana.

The Company earns revenue in both Louisiana andMississippi from machine rentals and participations in various casinos thatwere damaged by the hurricanes. In some instances, the machines have beendamaged or destroyed; in other cases, the machines are undamaged, but thecasino is currently closed.

The Company carries both property and businessinterruption insurance which will serve to offset some of the losses indicatedabove. At this time the Company is actively working with its insuranceproviders to assess losses and associated recoveries, but anticipate the fullclaim cycle will cover an extended period of time. Therefore, the Companycannot reasonably estimate the net proceeds to be recovered in connection withthese losses.

The effect of the hurricanes, net of eventualinsurance recoveries, is not expected to have a material impact on thefinancial position of the Company; however it may affect the Company’squarterly results of operations depending on the timing of the insurancerecoveries and the pace at which properties are rebuilt**.**

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