Edgar Filing: BALLY TECHNOLOGIES, INC.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

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

For the fiscal year ended June 30, 2005

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

For the transition period from to

Commission File Number 0-4281

BALLY TECHNOLOGIES, INC.

(Exact name of registrant as 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. Las Vegas, Nevada 89119

(Address of principal executive offices)

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

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.10 par value per share

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

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

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

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

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

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

BALLY TECHNOLOGIES, INC.
FORM 10-K/A
Year Ended June 30, 2005

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A (“Amendment No. 1”) is being filed to effect a restatement of the previously issued consolidated financial statements of Bally Technologies, Inc. (formerly known as Alliance Gaming Corporation, the “Company”) as of June 30, 2005 and 2004, and for each of the three years in the period ended June 30, 2005 and the unaudited selected quarterly financial data for the fiscal quarters 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 to consolidated financial statements filed with the Securities and Exchange Commission (the “SEC”) on December 30, 2005 (the “Original Filing”). For further discussion regarding the restatement, see Note 2 to consolidated financial 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 of Part I, Items 6, 7, 8 and 9A of Part II and Item 15 of Part IV of the Original Filing to reflect the effects of the restatement. In addition, in accordance with Rule 12b-15 promulgated under the Securities and Exchange Act of 1934, as amended, this Amendment No. 1 also includes updated certifications from our Chief Executive Officer 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 of the Company’s name change, the appointment of Robert C. Caller as the Company’s Chief Financial Officer and the amendment to the Company’s bank loan agreement referenced below, all of the information in this Amendment No. 1 is applicable as of the dates addressed in the Original Filing and does not reflect events occurring after the date of the Original Filing or modify or update disclosures affected by subsequent events. For the convenience of the reader, this Amendment No. 1 sets forth the Original Filing in its entirety, as amended by and to reflect the changes discussed above.

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

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

· That on April 3, 2006, the Company appointed Robert C. Caller as Executive Vice President, Chief Financial Officer and Treasurer; and

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

Except for this filing, we have not amended, and do not intend to amend, any of our periodic reports previously filed with the SEC. Therefore, the consolidated financial statements and other financial information in our previously filed periodic reports for the 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 in designing, manufacturing and distributing traditional and nontraditional gaming machines, having marketed over

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

We were incorporated in Nevada on September 30, 1968, under the name Advanced Patent Technology. In 1983, we changed our name to Gaming and Technology, Inc., and to United Gaming, Inc., in 1988. We became Alliance Gaming Corporation on December 19, 1994. We conduct our gaming operations through directly and indirectly owned subsidiaries. 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 South Bermuda Road, Las Vegas, Nevada 89119; telephone (702) 584-7600. Our internet address is www.ballytech.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available on our website, free of charge, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Copies of our Corporate Governance Guidelines, Code of Ethics and Business Conduct applicable to our officers, directors and employees and the charters for the Audit, Nominating and Corporate Governance and Compensation Committees of our Board of Directors are available on our website by following the links to “Investor Relations” and “Corporate Governance” or upon written request to our Corporate Secretary at the address set forth above.

Acquisitions

On March 2, 2004, we purchased Sierra Design Group (“SDG”), a leading supplier of Class II and Class III gaming devices, systems and technology, for aggregate initial consideration of approximately $126.4 million. The initial purchase price consisted of $108.6 million 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 fees and expenses. In addition, an earn out provision provided for the payment of up to $95.6 million in additional consideration upon certain financial targets being achieved in the subsequent three-year period. In December 2004, the Company 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 the issuance of a subordinated note of $28.0 million. In June 2005, the Company 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 significant technology-based assets including the Alpha Game Engine, as well as positioned us to take advantage of significant opportunities in both the domestic and international markets, from the technology advances in traditional casino style gaming to the Class II environments with central determination features.

On February 19, 2004, we acquired substantially all of the assets and liabilities of MindPlay LLC (“MindPlay”), a leading developer of advanced table game technologies, for aggregate initial consideration of approximately $16.8 million. The initial purchase price included $9 million cash, a $4 million note payable, the assumption of approximately $2 million of debt and the issuance of warrants to purchase 100,000 shares of our common stock which were valued at approximately $0.9 million. In addition, an earn out provision provided for the payment of 10% of gross margin from the sale of MindPlay products in the first seven years subsequent to the acquisition, and 4.25% of gross margin for the next six years, subject to adjustments pursuant to the conditions contained in the sale agreement. The MindPlay technologies are designed to provide data and information to casino operators to improve customer service, to provide

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

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’s distributorship agreements for a wide variety of automated table games and video bingo machines, strategically built on the Company’s focus towards future growth in the U.K. and Europe.

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

Dispositions

During fiscal year 2005 and 2004, we completed the disposition of certain of our “non-core” assets. The dispositions were as follows:

· on October 14, 2004 we completed the sale of our interest in our Louisiana route operations for aggregate consideration of $2 million;

· on June 30, 2004 we completed the sale of our Nevada route operations for aggregate consideration of $105 million;

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

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

Financial Information

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

Bally Gaming and Systems

Overview

The Bally Gaming and Systems business unit consists of three divisions: Gaming Equipment, Systems and Gaming Operations. The following table sets forth the percentages of revenues of Bally Gaming 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	%

Gaming Equipment

We design, manufacture and sell a variety of electronic slot and video gaming machines. Slot machines are normally produced to specific order, configured to a customer’s particular requirements. Customers may also change the game theme of a slot machine by purchasing a “conversion kit” that consists of artwork, reel strips (if applicable) and a computer chip. Gaming machines are differentiated from one another by a number of factors including graphic design and theme, cabinet style and size, pay table, reel type design, betting denomination and minimum/maximum betting amount. Our video gaming machines are designed to offer the player the chance to play a multitude of different games by simulating various card games, video reel-spinning games and keno through a video display. We periodically introduce new games and themes to satisfy customer demand and to compete with our competitors’ product designs. The gaming products created are the result of a comprehensive product development effort which includes extensive testing in-house and on casino floors for reliability and player appeal.

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

· Class I Gaming—Traditional Native American social and ceremonial games; regulated exclusively at the tribal level;

· Class II Gaming—Pull tabs, instant bingo and other games similar to bingo; regulated by individual tribes, with the National Indian Gaming Commission having oversight of the regulatory process; and

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

Each gaming machine contains an operating system, also referred to as a game platform. The machine’s operating system manages the software needed to run the machine. Game platforms are constantly under development or revision to keep pace with the ever increasing complexity of game software. In fiscal year 2005, the Company completed the successful migration from the EVO™ platform to the Linux based Alpha platform and operating system (“Alpha Game Engine”). The Alpha Game Engine is the result of a significant investment in hardware and software engineering since development efforts first began at SDG in 1999. The platform underwent the most extensive pre-launch testing in the Company’s history and now forms the foundation for our new video and mechanical reel-spinning products.

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

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

The Alpha Game Engine is designed for robust game development and incorporates free spin, scatter, bonusing and other advanced game features. The platform is architected for separation of the gaming operating system from the game layer to allow for rapid game development. A standardized game interface allows internal and third-party developers with a secure, easy-to-use programming environment that incorporates an advanced set of development tools.

We have launched proven game themes including Blazing 7s® and Blues Brothers™ on the Alpha Game Engine. In all, we now offer an extensive library of game titles on Alpha in Class III and Class II markets. Pursuant to license agreements, we also offer certain game titles developed by WMS Industries, Inc. (“WMS”), Aristocrat Leisure Limited (“Aristocrat”), Konami Co. Ltd. (“Konami”), which we place in certain jurisdictions pursuant to those license agreements.

Technological advances, development of new entertaining games, new sound and visual features and changing preferences of casino patrons are the main factors that lead to the replacement of gaming machines, which typically have a useful life of 5 to 7 years.

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

We also sell used gaming machines, as well as parts for existing machines. Generally we acquire the used machines we sell as trade-ins toward the purchase of new gaming equipment. While a small secondary market exists in the United States, used machines are typically resold into the international market. Some used equipment is reconditioned for direct sale, but much is sold in container lots on 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.

Total revenue from the Gaming Equipment division totaled $202.8 million, $223.3 million and $170.0 million for the years ended June 30, 2005, 2004 and 2003, respectively.

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

Systems

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

· Slot Monitoring: Our slot monitoring products are comprised of hardware consisting of micro controller based printed circuit boards installed within the slot machines as well as card readers, displays and keypads which provide casinos the ability to track player gaming activity through our casino management systems and monitor employee access to slot machines, internally developed firmware that provides access to the slot machines’ and players’ activity data gathered by the micro controller hardware; and internally developed slot monitoring business applications that manage certain slot machine activity, including security events, revenue, expenses and other financial reporting metrics.

· Casino Management: Our casino management systems are composed of various hardware and software products that provide casino operators patron loyalty solutions comparable to frequent guest programs offered in other leisure industries; table games accounting including the calculation of all revenue and expense related items; and cage and credit accountability for all extensions of credit and cage cash balancing functions.

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

We market our system product solutions through Bally Gaming and Systems under the broad categories of Bally CMS® (Casino Management Systems), Bally SMS® (Slot Management Systems) and Bally TMS® (Table Management Systems). These categories include the product lines consisting of SDS, ACSC, CMP, CMS, MCC and MindPlay.

Our Systems division 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.

During fiscal year 2004, we completed the acquisition of MindPlay. During fiscal year 2003, we completed the acquisitions of MCC and HSC. See “—General-Acquisitions” above.

Gaming Operations

Our Gaming Operations division offers three general types of games that are placed in casinos or other permissible gaming locations. The three general types of games are: those that are linked on a proprietary wide-area progressive system, those that operate on a proprietary near-area progressive system and those that are non-linked niche games, which are games that generally offer more complex features than traditional slot machines such as bonus rounds. These gaming machines earn recurring revenues and cash flows for us rather than being sold on a one-time basis. Rather than being sold, such games are often more profitable for us as a result of the recurring nature of the revenue, but they do require us to invest capital in the cost of manufacturing the gaming machines, purchasing signs and seating, and at times acquiring certain intellectual property rights.

Wide-Area Progressive Systems: We received regulatory approval from the Nevada Gaming Control Board of our wide-area progressive jackpot system named “Thrillions™” in November 1998. The Thrillions™ system was designed to allow patrons playing nickel, quarter and dollar machines to compete for the same progressive jackpot, with the odds of winning the jackpot being proportional to the amount wagered. We also operate separate wide-area progressives in Nevada, Mississippi and Native American lands, as well as through a separate third-party trust arrangement in Atlantic City, New Jersey. We utilize certain web-based technologies, such as virtual private networks to monitor wide-area progressives operating in non-domestic markets. We have a total of 1,660 units deployed on our wide-area progressive networks as of June 30, 2005.

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

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

Non-Linked Games: We also offer a variety of non-linked daily fee games. These games have been marketed under such titles as Playboy (Playboy and Rabbit Head Design are marks of Playboy and used under license by Bally Gaming, Inc.), Monte Carlo™, Saturday Night Live™ and others, all of which are approved in most major gaming markets. We also earn recurring revenues from 798 devices deployed at horseracing facilities under agreements with the Delaware State Lottery Commission. As of June 30, 2005, we had a total installed base of daily fee games totaling 8,804 units.

Bally Gaming and Systems is also a provider of video lottery type terminal devices at race tracks in the state of New York. Through the competitive bidding process, Bally Gaming and SDG were each awarded approximately 25% of the initial terminals installed. The financial model for this market requires the manufacturer to build, deploy and maintain the terminals in return for a share of the net win generated by the terminals. The first games were installed at the Saratoga race track in January 2004, and have since been followed by installations at four additional tracks, totaling 2,953 games for the Company. Additional installations at Aqueduct and Yonkers may occur in the late spring or summer of 2006.

Additionally, we have a base of centrally determined games operating primarily in Washington, Florida, Alabama, and Oklahoma. With the exception of Oklahoma, these games generally have been sold to the customer, and we retain a daily fee for the central determination software license. Participation lease arrangements are still most prevalent in Oklahoma. As of June 30, 2005, the installed base for the centrally determined games totaled 18,885 units and full participation fee units 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 believe that providing games and systems with high entertainment value and that are preferred by the casino patron is key to meeting the demands of casinos. We believe that the use of technology is accelerating, and this trend could give newer gaming machines and systems that incorporate such technology a competitive advantage over older gaming machines and systems. Total spending on research and development by the Bally Gaming and Systems business unit was approximately $43.4 million, $36.6 million and $20.0 million during the years ended June 30, 2005, 2004 and 2003, respectively. The increase in research and development spending for these years is a reflection of the competitive landscape and the need to continue to develop next generations of gaming product and systems.

We develop our products for both the domestic and international market. Our product development process for games includes both hardware and software. Major areas of hardware development include cabinet style, electronic capability, printer capability, and coin and currency handling. Hardware development efforts are focused on player appeal, product reliability and ease of maintenance. Development cycles for hardware can range from a few days for simple enhancements to more than a year for new electronics or new mechanical packages.

The software development process for new games, which includes graphics development, is continuous and requires significant allocations of human resources. Creativity in software development is an important element in product differentiation. Ideas for new models are generated internally and from customers and other third parties, many of whom have entered into strategic relationships with us.

All new or modified hardware and software are designed to satisfy all applicable testing standards. Typically, new products require regulatory approval for most North American jurisdictions. However, many jurisdictions outside North America do not require approval. For Nevada, new gaming machine platforms must be filed with the state gaming laboratory which tests the products for at least two to three months before a mandatory 30 to 60 day field test is conducted in a casino. The Nevada State Gaming Control Board and the Nevada Gaming Commission must each approve new product platforms at their monthly, public meetings. The process in Nevada for modifications of existing products or casino associated equipment is similar to that for new platforms, except a field test is usually not required and the Nevada State Gaming Control Board staff can approve the product administratively. Each jurisdiction that requires regulatory approval of new products has its own filing requirement and process. Once products are approved by the gaming regulators, customers may require a 30-90-day field trial of the product in their casinos with the right to return the product at any time during the field trial period. We do not recognize revenue until the customer ends the field trial and accepts the gaming machines.

Product development for casino enterprise systems also includes hardware and software. The major areas of hardware development include micro controller circuit board design and programming, as well as user interface devices such as card readers, keypads and displays. We have developed a modular and extendible hardware and software architecture, which focuses development on achieving greater functionality, product reliability, and ease of maintenance for the casino operator, and greater ease of use for the player. In addition, the architecture allows customers to upgrade existing components or add new components with minimal impact. Development cycles for hardware can vary between a few months for minor revisions to more than a year for major design changes or changes made by various slot machine manufacturers with which our products must be physically integrated. Software development results in periodic product releases that include new features that extend or enhance the casino enterprise systems; periodic maintenance releases that enable casino operators to correct problems or improve the usability of the system; and documentation needed to install and use the system.

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

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

Product Markets

We believe that the domestic installed base of traditional Class III gaming devices now exceeds 725,000 units. Nevada has the largest installed base, totaling approximately 200,000 units as of June 30, 2005.

The gaming industry continues to expand in international markets. Our primary international markets are Europe, Canada, Latin America and, to a lesser extent, the Far East and the Caribbean. We conduct our

business in Canada through our staff based in the United States. We also distribute gaming machines, manufactured by Bally Gaming, through direct and indirect subsidiaries: Bally Gaming UK, from our sales office in Wigan, England principally to customers in Europe and Russia; Bally Gaming de Puerto Rico, Inc., principally to customers in Puerto Rico; and Bally Gaming and Systems, SA, in Montevideo, Uruguay and its branches in Peru and Argentina, principally to customers in South America.

Presently, Class II gaming devices are marketed to certain Native American gaming markets. We believe the domestic installed base of Class II gaming devices is approximately 31,000 units.

The primary markets for casino enterprise systems are the United States and, to a lesser extent, Canada, Latin America, Europe and the Caribbean. Markets for systems within the United States include traditional land-based casinos concentrated in Nevada, Atlantic City, New Jersey, Native American casinos and riverboats and dockside casinos. Our domestic market for casino enterprise systems is new casinos and existing or new customers who either acquire casinos with a competitor’s system which we replace with our system, or expand their casino floors or upgrade their hardware or software to a new product release. Unlike the United States market, where most jurisdictions require the implementation of systems, few international markets have done so. Management believes, however, that the international market for such systems is increasing, and if that expansion occurs, our Systems’ sales to such markets are likely to increase accordingly.

Sales and Marketing

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

Bally Gaming 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 certain jurisdictions. The agreements with distributors generally specify minimum purchases and generally provide that we may terminate the agreement if certain performance standards are not met. These independent distributors generated approximately, 31%, 25% and 25% of new gaming machine unit sales for the years ended June 30, 2005, 2004, and 2003, respectively.

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

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

For casino enterprise system sales we generally offer limited financing terms, normally less than one-year, for sales of new installations. Most sales, however, are invoiced on a net 30-day basis.

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

Customers

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

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

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

The demand for casino enterprise systems is driven by regulatory requirements in each applicable jurisdiction and by casino operators’ competitive need to properly track machine and player activity and, to establish and compile individual machine and player profitability and other demographic information. These features enable casinos to develop or enhance marketing strategies. Revenues for casino enterprise systems are derived from selling products to new or existing customers. For the year ended June 30, 2005, the ten largest casino enterprise system customers, which include certain multi-site casino operators that have corporate agreements, accounted for approximately 50.9% of game monitoring unit sales revenues, with the largest single customer accounting for 9.7% of game monitoring unit sales revenues.

Future growth of Bally Gaming and Systems will be based on continued penetration in the international markets, further expansion in the established and emerging markets, as well as continued development efforts to provide customers with new and innovative hardware and software product offerings.

Assembly Operations

Bally Gaming and Systems’ primary facility, located in Las Vegas, was completed in 1990. The facility, which we own, was constructed specifically for the design, assembly and distribution of gaming equipment. The 150,000-square foot facility was designed to meet fluctuating product design demands and volume requirements. Management believes the facility enables Bally Gaming and Systems to increase production without significant capital expenditures.

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

Competition

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

The North American market is dominated by a single competitor, International Game Technology (“IGT”). IGT has substantially more financial resources, products and intellectual property than nearly all of its competitors and many of our customers derive a significant portion of their gaming revenues using IGT products. Some of our other competitors currently include GTech, Aristocrat, WMS, Atronic and Konami.

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

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

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

Casino Operation

Rainbow Casino

Our Rainbow Hotel Casino, located in Vicksburg, Mississippi, began operations in July 1994. The facility includes a 33,000-square foot casino, with 890 gaming devices and 12 table games as well as a 310-seat buffet-style restaurant and 20,000-square foot conference 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 of Vicksburg. The Vicksburg casino market generated approximately $252 million in gaming revenue in the twelve months ended June 30, 2005, representing a growth rate of approximately 4%.

We are the general partners of Rainbow Casino Vicksburg Partnership, L.P. (“RCVP”), the limited partnership that operates the Rainbow Casino. The limited partner, Rainbow Corporation, an unaffiliated third party, is entitled to receive 10% of the net available cash flows after debt service and other items, as defined in the limited partnership agreement, which amount increases to 20% of such amount for 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 the hurricane. Play levels have subsequently returned to levels at or above those of the pre-hurricane period.

Sales and Marketing

The Rainbow Casino targets the mid-level gaming customers in the Vicksburg market. We promote the casino primarily through direct mail and special promotional events.

Competition

The operation of casinos is a highly competitive business and gaming of all types is available throughout Mississippi in numerous locations. The principal competitive factors in the industry include the quality and location of the facility, the nature and quality of the amenities and customer services offered, and the implementation and success of marketing programs. The Rainbow Casino faces substantial direct competition for gaming customers from the three other gaming facilities in Vicksburg, as well as other gaming operations throughout Mississippi. One additional gaming site in Vicksburg is currently being pursued by Lakes Gaming, however the timing of opening and potential impact on the market is not yet known.

Discontinued Operations

Route Operations

Nevada Operations: In June 2004, we sold our Nevada route operations to Century Gaming, Inc., a privately held route operator based in Montana. We received approximately $100 million in cash and the assumption by Century Gaming of approximately $5 million in debt. We reported a gain on the sale before income taxes of $15.3 million, or $9.1 million after tax. During fiscal year 2005, we incurred a litigation charge and we settled certain indemnity claims 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 sold our interest in our Louisiana route operations to Churchill Downs Incorporated and received proceeds of approximately $2 million and realized a gain of $1.3 million or $0.8 million, net of tax.

Rail City Casino

In May 2004, the Company sold its Rail City Casino, a 20,000 square-foot facility located between the cities of Reno and Sparks in 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 $23.1 million, 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 a third party equity investor for $16.5 million in cash, and recorded a loss on sale totaling $25.4 million. During fiscal year 2004 and 2005 the Company negotiated with the German tax authorities to resolve several tax related matters. See Note 5 to our consolidated financial statements, Discontinued Operations, included in this Annual Report on Form 10-K/A.

Patents, Copyrights and Trade Secrets

We rely on a combination of patents, copyrights, trade secrets, trademarks and proprietary information to maintain and enhance our competitive position. We have been a long standing participant in the development of intellectual property in our industry. We have been granted patents have patent applications pending in United States as well as many foreign countries. The expiration dates of these patents vary and are based on their filing and issuances dates. We intend to continue to actively file for patent protection, where reasonable, within and outside the United States. We also seek protection for a large number of our products by filing for copyrights and trademarks in the United States and various foreign countries. Under permission or contract with third parties, we also sell products covered by independently filed copyrights and trademarks. Typically, these contracts require us to pay royalties to the licensing party. Royalty expense is included in cost of gaming and systems in our consolidated financial statements in this report.

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

Employees and Labor Relations

As of June 30, 2005, we and our subsidiaries employed approximately 1,640 individuals worldwide. These employees are not covered by collective bargaining agreements. We believe we have satisfactory relationships with our employees.

Gaming Regulations and Licensing

General. The manufacturing and distribution of gaming machines and the operation of gaming facilities are subject to extensive federal, state, local, and foreign regulations. Although the laws and regulations of the various jurisdictions in which we operate and may expand our gaming operations vary in their technical requirements and are subject to amendment from time to time, virtually all of these jurisdictions require licenses, permits, documentation of qualification, including evidence of financial stability, and other forms of approval for companies engaged in the manufacture and distribution of gaming machines and the operation of gaming facilities, as well as the individual licensing of officers, directors, major stockholders and key personnel of such companies.

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

Nevada. The ownership and operation of casino gaming facilities in Nevada are subject to (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (the “Nevada Act”); and (ii) various local ordinances and regulations. Our gaming, manufacturing, and distributing operations (collectively referred to as “gaming machine operations”) are subject to the licensing and regulatory control of the Nevada State Gaming Control Board (the “Nevada Board”), the Nevada Gaming Commission (the “Nevada Commission”), the Clark County Liquor and Gaming Licensing Board (the “Clark County Board”), and various other county and city regulatory agencies, all of which are collectively referred to as the “Nevada Gaming Authorities.”

The laws, regulations, and supervisory procedures of the Nevada Gaming Authorities are based on declarations of public policy concerned with, among other things: (i) the prevention of unsavory and unsuitable persons from having any involvement with gaming; (ii) the strict regulation of all persons, locations, practices, associations and activities related to the operation of licensed gaming establishments and the manufacture and distribution of gaming machines, cashless wagering systems and associated equipment; (iii) the establishment and maintenance of responsible accounting practices and procedures; (iv) the maintenance of effective control over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record-keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (v) the prevention of cheating and fraudulent practices; and (vi) providing a source of state and local revenues through taxation and licensing fees. A change 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 a publicly traded corporation (a “Registered Corporation”). Our direct and indirect subsidiaries that manufacture or distribute gaming devices or conduct gaming operations at various locations (collectively, the “Nevada Subsidiaries”) are required to be licensed by the Nevada Gaming Authorities. The licenses held by the Nevada Subsidiaries require periodic payments of fees and taxes and are not transferable. We, through our registered intermediary companies (individually an “Intermediary Company” and collectively the “Intermediary Companies”), have been found suitable to own the stock of the Nevada Subsidiaries, each of which is a corporate licensee (individually a “Corporate Licensee” and collectively the “Corporate Licensees”) under the terms of the Nevada Act. As a Registered Corporation, we are required to periodically submit detailed financial and operating reports to the Nevada Gaming Authorities and furnish any other information the Nevada Gaming Authorities may require. No person may become a stockholder of or receive any percentage of the profits from the Corporate Licensees without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company, the Intermediary Companies, and the Corporate Licensees have obtained from the Nevada Gaming Authorities the various registrations, findings of suitability, approvals, permits, and licenses required to engage in gaming activities, gaming machine operations, and in the manufacture and distribution of gaming devices for use or play in Nevada or for distribution outside of Nevada.

All gaming machines and cashless wagering systems manufactured, sold, or otherwise distributed for use or play in Nevada or for distribution outside of Nevada must be manufactured by licensed manufacturers and distributed or sold by licensed distributors. All gaming machines manufactured for use or play in Nevada must be approved by the Nevada Commission before they are distributed or exposed for play. The approval process for gaming machines and cashless wagering systems includes rigorous testing by the Nevada Board, a field trial, and a determination as to whether the gaming machines or cashless wagering systems meet strict technical standards set forth in the regulations of the Nevada Commission. Associated equipment (as defined in the Nevada Act) must be administratively approved by the chairman of the Nevada Board before it is distributed in Nevada.

The Nevada Gaming Authorities may investigate any individual who has a material relationship or material involvement with us, the Intermediary Companies or the Corporate Licensees to determine whether that individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors, and key employees of the Company and the Intermediary Companies who are actively and directly involved in the licensed activities of the Corporate Licensees are or may be required to be licensed or found suitable by the Nevada Gaming Authorities. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities, and in addition to their authority to deny an application for a finding of suitability or licensing, the Nevada

Gaming Authorities have jurisdiction to disapprove a change in a corporate position. The Nevada Gaming Authorities may deny an application for licensing or finding of unsuitability for any cause they deem reasonable.

If the Nevada Gaming Authorities were to find an officer, director, or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Intermediary Companies, the Corporate Licensees, or us, the companies involved would have to sever all relationships with that person. In addition, the Nevada Commission may require the Intermediary Companies, the Corporate Licensees or us to terminate the employment of any person who refuses to file appropriate applications. Licensing and suitability determinations are not subject to judicial review in Nevada.

We and the Corporate Licensees are required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities, and similar financing transactions by the Corporate Licensees must be reported to or approved by the Nevada Commission.

If it were determined that a Corporate Licensee had violated the Nevada Act, the licenses it holds could be limited, conditioned, suspended, or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, the Company, the Intermediary Companies, the Corporate Licensees, and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Limitation, conditioning, or suspension of the gaming licenses of the Corporate Licensees could, and revocation of any gaming license would, materially adversely affect the gaming-related operations of the Company.

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

The Nevada Act requires any person who acquires more than 5% of any class of a Registered Corporation’s voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of any class of a Registered Corporation’s voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the chairman of the Nevada Board mails written notice requiring such filing. Under certain circumstances, an “institutional investor,” as defined in the Nevada Act, that acquires more than 10%, but not more than 15% (19% if such additional ownership results from a stock repurchase program conducted by the Registered Corporation, subject to certain conditions), of a class of a Registered Corporation’s voting securities may apply to the Nevada Commission for a waiver of finding of suitability if the institutional investor holds the securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the Board of Directors of the Registered Corporation, any change in the corporate charter, bylaws, management, policies, or operations of the Registered Corporation or any of its gaming affiliates, or any other action the Nevada Commission finds to be inconsistent with holding the Registered Corporation’s voting securities for investment purposes only. Activities that are not deemed to be inconsistent with holding voting securities for investment purposes include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in the Registered Corporation’s management, policies, or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with investment-only intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership, or trust, it

must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation.

Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Nevada Commission or the chairman of the Nevada Board may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. We are subject to disciplinary action if, after we receive notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company, the Intermediary Companies, or the Corporate Licensees, we (i) pay that person any dividend or interest upon voting securities of the Company; (ii) allow that person to exercise, directly or indirectly, any voting right conferred through securities held by that person; (iii) pay remuneration in any form to that person for services rendered or otherwise; or (iv) fail to pursue all lawful efforts to require such unsuitable person to relinquish his or her voting securities, including, if necessary, the immediate purchase of said voting securities for cash at fair market value. Additionally, the Clark County Board has taken the position that it has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license.

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

We are required to maintain in Nevada a current stock ledger, which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. We are also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to impose a requirement that a Registered Corporation’s stock certificates bear a legend indicating that the securities are subject to the Nevada Act. The Nevada Commission previously imposed this requirement on the Company but removed it in June 2004.

We may not make a public offering of our securities without the prior approval of the Nevada Commission if the securities or proceeds there from are intended to be used to construct, acquire, or finance gaming facilities in Nevada or to retire or extend obligations incurred for such purposes. In addition, (i) a Corporate Licensee may not guarantee a security issued by a Registered Corporation pursuant to a public offering without the prior approval of the Nevada Commission; and (ii) restrictions on the transfer of an equity security issued by a Corporate Licensee or Intermediary Company and agreements not to encumber such securities are ineffective without the prior approval of the Nevada Commission.

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

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

The Nevada Legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities, and corporate defense tactics affecting Nevada corporate gaming licensees and Registered Corporations that are affiliated with those operations may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse affects of these business practices on Nevada’s gaming industry and to promote Nevada’s policy to: (i) assure the financial stability of corporate gaming licensees and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before a Registered Corporation can make exceptional repurchases of voting securities above the current market price (commonly called “greenmail”) and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Registered Corporation’s board of directors in response to a tender offer made directly to the Registered Corporation’s stockholders for the purpose of acquiring control of the Registered Corporation.

License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the licensees conduct their operations. Depending upon the particular fee or tax involved, these fees and taxes are payable, either monthly, quarterly, or annually and are based on either (i) a percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of games operated. An excise tax is also paid by the Corporate Licensees engaged in casino operations on charges for admission to any facility where certain forms of live entertainment are provided. The Corporate Licensees that hold gaming device route operator licenses or manufacturer or distributor licenses also pay certain fees to Nevada.

Any person who is licensed, required to be licensed, registered, required to be registered, or who is under common control with such persons (collectively, “Licensees”), and who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada Board and thereafter maintain a $25,000 revolving fund to pay the expenses of investigation by the Nevada Board of the Licensee’s participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operations who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability.

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

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

The laws, regulations and supervisory procedures of Mississippi and the Mississippi Commission are based on declarations of public policy that are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and safeguarding of assets and revenues, providing for reliable record keeping and requiring the filing of periodic reports with the Mississippi Commission; (iv) the prevention of cheating and fraudulent practices; (v) providing a source of state and local revenues through taxation and licensing fees; and (vi) ensuring that gaming licensees, to the extent practicable, employ Mississippi residents. The regulations are subject to amendment and interpretation by the Mississippi Commission. We believe our compliance with the licensing procedures and regulatory requirements of the Mississippi Commission will not affect the marketability of our securities. Changes in Mississippi law or regulations may limit 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 Mississippi gaming operations.

The Mississippi Act provides for legalized dockside gaming in each of the fourteen counties that border the Gulf Coast or the Mississippi River, but only if the voters in the county have not voted to prohibit gaming in that county. Currently, dockside gaming is permissible in nine of the fourteen eligible counties in the state, and gaming operations have commenced in seven counties. Under Mississippi law, gaming vessels must be located on the Mississippi River or on navigable waters in eligible counties along the Mississippi River, or in the waters of the State of Mississippi lying south of the state in eligible counties along the Mississippi Gulf Coast. The Mississippi Act permits unlimited stakes gaming on permanently moored vessels on a 24-hour basis and does not restrict the percentage of space that may be utilized for gaming.

The Mississippi Act permits substantially all traditional casino games and gaming devices. The Company, RCVP, Bally Gaming, Inc. (“BGI”), and their affiliates are subject to the licensing and regulatory control of the Mississippi Commission. We are registered under the Mississippi Act as a publicly traded corporation (a “Registered Corporation”) and holding company of RCVP and BGI. As a Registered Corporation, we are required periodically to submit detailed financial and operating reports to the Mississippi Commission and furnish any other information the Mississippi Commission may require. If we are unable to continue to satisfy the registration requirements of the Mississippi Act, we and our affiliates cannot own or operate gaming facilities or continue to act as a manufacturer and distributor in Mississippi. No person may become a stockholder of, or receive any percentage of profits from, a licensed subsidiary of a Registered Corporation or a holding company without first obtaining licenses and approvals from the Mississippi Commission. We and our affiliates have obtained the necessary licenses and approvals from the Mississippi Commission. RCVP must maintain a gaming license from the Mississippi Commission to operate a casino in Mississippi and BGI must maintain a manufacturer and distributor license from the Mississippi Commission to manufacture and distribute gaming products and a wide-area progressive operator license to operate its progressive slot system. Such licenses are issued by the Mississippi Commission subject to certain conditions, including continued compliance with all applicable state laws and regulations.

There are no limitations on the number of licenses that may be issued in Mississippi. Gaming and manufacturer and distributor licenses are not transferable, are issued for a three-year period (and may be renewed for two additional three-year periods) and must be renewed or continued thereafter. In June 2003, RCVP was granted a three-year renewal of its gaming license by the Mississippi Commission, and BGI was granted three-year renewals of its manufacturer and distributor license and its wide-area progressive operator license.

Certain of our officers and employees and the officers, directors, and certain key employees of our licensed subsidiaries must be found suitable or be licensed by the Mississippi Commission. We believe we have obtained, applied for, or are in the process of applying for all necessary findings of suitability with respect to such persons affiliated with us, RCVP or BGI, although the Mississippi Commission, in its discretion, may require additional persons to file applications for findings of suitability. In addition, any person having a material relationship or involvement with us may be required to be found suitable, in which case those persons must pay the costs and fees associated with such investigation. The Mississippi Commission may deny an application for a finding of suitability for any cause it deems reasonable. Changes in certain licensed positions must be reported to the Mississippi Commission. In addition to its authority to deny an application for findings of suitability, the Mississippi Commission can disapprove a change in a licensed position. The Mississippi Commission has the power to require the Company and its registered or licensed subsidiaries to suspend or dismiss officers, directors and other key employees or sever relationships with other persons who refuse to file appropriate applications or whom the authorities find unsuitable to act in such capacities.

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

The Mississippi Commission has adopted a regulation which provides that under certain circumstances, an “institutional investor,” as defined in the regulation, which acquires more than 10%, but not more than 15%, of a Registered Corporation’s voting securities may apply to the Mississippi Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes only unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Registered Corporation, any change in the Registered Corporation’s corporate charter, bylaws, management, policies or operations of the Registered Corporation or any of its gaming affiliates, or any other action which the Mississippi Commission finds to be inconsistent with holding the Registered Corporation’s voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes include: (i) voting on all matters voted on by the stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause

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

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

We may be required to disclose to the Mississippi Commission on request the identities of the holders of any of our debt or other securities. In addition, under the Mississippi Act, the Mississippi Commission may in its discretion require the holders of any debt security of a Registered Corporation to file an application, be investigated, and be found suitable to own the debt security if the Mississippi Commission has reason to believe that the ownership would be inconsistent with the declared policies of the state of Mississippi. Although the Mississippi Commission generally does not require the individual holders of obligations such as notes to be investigated and found suitable, the Mississippi Commission retains the discretion to do so for any reason, including but not limited to a default or where the holder of the debt instrument exercises a material influence over the gaming operations of the entity in question. Any holder of debt securities required to apply for a finding of suitability must pay all investigative fees and costs of the Mississippi Commission in connection with the investigation. If the Mississippi Commission determines that a person is unsuitable to own a debt security, then the Registered Corporation may be sanctioned, including the loss of its approvals, if without the prior approval of the Mississippi Commission it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by the unsuitable person in connection with those securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction.

RCVP and BGI must maintain in Mississippi a current ledger with respect to the ownership of their equity securities, and we must maintain a current list of stockholders in the principal office of RCVP, which list must reflect the record ownership of each outstanding share of any class of our equity securities. The ledger and stockholder lists must be available for inspection by the Mississippi Commission at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Mississippi Commission. A failure to make such disclosure may be grounds for finding the record holder unsuitable. We must also render maximum assistance in determining the identity of the beneficial owner.

The Mississippi Act requires that the certificates representing securities of a Registered Corporation bear a legend indicating that the securities are subject to the Mississippi Act and the regulations of the Mississippi Commission. We have received from the Mississippi Commission a waiver of this legend requirement. The Mississippi Commission has the power to impose additional restrictions on the holders of our securities at any time.

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

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

Under the regulations of the Mississippi Commission, a Mississippi gaming subsidiary may not guarantee a security issued by an affiliated company pursuant to a public offering, or pledge its assets to secure payment or performance of the obligations evidenced by the security issued by the affiliated company, without the prior approval of the Mississippi Commission. A pledge of the stock of a Mississippi gaming subsidiary and the foreclosure of such a pledge are ineffective without the prior approval of the Mississippi Commission. Moreover, restrictions on the transfer of an equity security issued by a Mississippi gaming subsidiary and agreements not to encumber such securities are ineffective without the prior approval of the Mississippi Commission.

Changes in control of the Company through merger, consolidation, acquisition of assets, management or consulting agreements, or act or conduct by a person by which he or she obtains control, may not occur without the prior approval of the Mississippi Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Mississippi Commission in a variety of stringent standards prior to assuming control of the Registered Corporation. The Mississippi Commission may also require controlling stockholders, officers, directors, and other persons having a material relationship or involvement with the entity proposing to acquire control to be investigated and licensed as part of the approval process relating to the transaction.

The Mississippi legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and other corporate defense tactics that affect corporate gaming licensees in Mississippi and Registered Corporations may be injurious to stable and productive corporate gaming. The Mississippi Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Mississippi’s gaming industry and to promote Mississippi’s policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs.

Approvals are, in certain circumstances, required from the Mississippi Commission before a Registered Corporation may make exceptional repurchases of voting securities (such as repurchases that treat holders differently) in excess of the current market price and before a corporate acquisition opposed by management may be consummated. Mississippi’s gaming regulations also require prior approval by the Mississippi Commission of a plan of recapitalization proposed by a Registered Corporation’s board of directors in response to a tender offer made directly to the stockholders for the purpose of acquiring control of the Registered Corporation.

Neither we nor any of our subsidiaries may engage in gaming activities in Mississippi while also conducting gaming operations outside of Mississippi without approval of the Mississippi Commission. The Mississippi Commission may require determinations that, among other things, there are means for the Mississippi Commission to have access to information concerning the out-of-state gaming operations of the Company and its affiliates. We have previously obtained a waiver of foreign gaming approval from the Mississippi Commission for operations in other states and will be required to obtain the approval or a waiver of such approval from the Mississippi Commission prior to engaging in any additional future gaming operations outside of Mississippi.

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

license of the subsidiary. In addition, we, the licensed subsidiary, and the persons involved could be subject to substantial fines for each separate violation. Because of such violations, the Mississippi Commission could seek to appoint a supervisor to operate our casino facilities. Limitation, conditioning or suspension of any gaming license or approval or the appointment of a supervisor could (and revocation of any gaming license or approval would) materially adversely affect us and RCVP’s gaming operations or BGI’s manufacturer, distributor, and wide-area progressive operations, as the case may be.

License fees and taxes, computed in various ways depending on the type of gaming involved, are payable to the State of Mississippi and to the counties and cities in which a licensed gaming subsidiary’s operations are conducted. Depending on the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly, or annually and are based on (i) a percentage of the gross gaming revenues received by the casino operation; (ii) the number of gaming devices operated by the casino; or (iii) the number of table games operated by the casino. The license fee payable to the State of Mississippi is based upon “gaming revenues” (generally defined as gross revenues less payouts to customers as winnings), and equals 4% of gaming revenues of $50,000 or less per month, 6% of gaming revenues that exceed $50,000 but 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 credit against our Mississippi income tax liability paid for the year. The gross revenue fee imposed by the City of Vicksburg, Mississippi, where RCVP’s casino operations are located, equals approximately 4% of gaming revenues.

The Mississippi Commission’s regulations require as a condition of licensing or license renewal that an existing licensed gaming establishment’s plan include a 500-car parking facility in close proximity to the casino complex and infrastructure facilities that amount to at least 25% of the casino cost. We believe the Rainbow Casino is in compliance with this requirement. The Mississippi Commission adopted a change to this regulation increasing the infrastructure requirement to 100%; however, the regulation grandfathers existing licensees and applies only to new casino projects and casinos that are not operating at the time of acquisition or purchase by new owners.

In recent years, certain anti-gaming groups proposed the adoption, through the initiative and referendum process, of certain amendments to the Mississippi Constitution that would prohibit gaming in the state. The proposals were declared illegal by the Mississippi courts on constitutional and procedural grounds. The latest ruling was appealed to the Mississippi Supreme Court, which affirmed the decision of the lower court. If another such proposal were to be offered and if a sufficient number of signatures were to be gathered to place a legal initiative on the ballot, it is possible 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 a ballot or the likelihood of such an initiative being approved by the voters, if such an initiative were passed and gaming were prohibited in Mississippi, it would have a significant adverse effect on us and our Mississippi gaming operations.

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

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

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

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

Louisiana. The manufacturing, distribution, servicing, and operation of gaming devices (“Devices”) in Louisiana are subject to the Louisiana Gaming Control Law and the rules and regulations promulgated thereunder (the “Louisiana Act”). Licensing and regulatory control is maintained by a single gaming control board for the regulation of gaming in Louisiana. This Board, created on May 1, 1996, is called the Louisiana Gaming Control Board (the “Louisiana Board”) and oversees all licensing for all forms of legalized gaming in Louisiana (including all regulatory enforcement, and supervisory authority that exists in the state as to gaming on Native American lands). The Louisiana State Police within the Department of Public Safety and Corrections (the “Division”) performs the investigative functions for the Louisiana Board. The laws and regulations of Louisiana are based on policies of maintaining the health, welfare, and safety of the general public and protecting the gaming industry from elements of organized crime, illegal gambling activities, and other harmful elements, as well as protecting the public from illegal and unscrupulous gaming to ensure the fair play of devices.

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

The Louisiana Board may deny, impose a condition on, or suspend or revoke a permit, renewal, or application for a permit for violations of any rules and regulations of the Louisiana Board or any violations of the Louisiana Act. In addition, fines for violations of gaming laws or regulations may be levied against the Louisiana Permitee and the persons involved for each violation of the gaming laws. The permit is deemed a pure and absolute privilege and issuance, condition, denial, suspension or revocation of a permit is at the discretion of the Louisiana Board under the provisions of the Louisiana Act. A permit is not property or a protected interest under the Louisiana constitution.

The Division has the authority to conduct overt and covert investigations of any person involved directly or indirectly in the gaming industry in Louisiana. These investigations have extended to information regarding a prospective permitee’s and his or her spouse’s immediate family and relatives and their affiliations with certain organizations or other business entities. The investigation may also extend to any person who has or controls more than a 5% ownership of, or interest in income or profits in, an applicant for or holder of a license or who is a key employee or who has the ability to exercise significant influence over the permitee. All persons or entities investigated must meet all suitability requirements and qualifications for a permitee. The Louisiana Board may deny an application for permitting for any cause it may deem reasonable. The applicant for permitting must pay a filing fee, which applies to the cost of the investigation.

Federal Registration. The operating subsidiaries of the Company that are involved in the manufacture, sale, distribution, or operation of gaming machines are required to register annually with the Attorney General of the United States. All currently required filings have been made.

From time to time, certain legislators have proposed the imposition of a federal tax on gross gaming revenues. No specific proposals for the imposition of such a federal tax are currently pending. However, no assurance can be given that such a tax will not be imposed in the future. Any such tax could have a material adverse effect on our businesses, financial conditions, or results of operations.

Additional Jurisdictions. We, in the ordinary course of our business, routinely consider business opportunities to expand our gaming operations into additional jurisdictions. Although the laws and regulations of the various jurisdictions in which we operate or into which we may expand our gaming operations vary in their technical requirements and are subject to amendment from time to time, virtually all of those jurisdictions require licenses, permits, documentation of qualification, including evidence of financial stability, and other forms of approval for companies engaged in the manufacture, distribution and operation of gaming machines as well as for the officers, directors, major stockholders, and key personnel of such companies.

We and our key personnel have obtained, or applied for, 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. We and the holders of our securities may be subject to the provisions of the gaming laws of each jurisdiction where we or our subsidiaries are licensed or are 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 regulatory authorities within each such state, as well as Australian, Canadian, and other foreign gaming jurisdictions in which BGI and its subsidiaries are licensed or conduct business.

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

ITEM 2. PROPERTIES

The following 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

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 with respect to the foregoing rental properties.

The following 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 the Las Vegas, NV property, each of the properties listed below is utilized in our Casino 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 facilities are suitable for our needs and we have no future expansion plans that would make these properties inadequate.

ITEM 3. LEGAL PROCEEDINGS

Litigation

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

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

sales of stock by insiders. The complaints sought damages in unspecified amounts. The federal district court granted the plaintiffs’ unopposed motions to consolidate the cases and to appoint a lead counsel and a lead plaintiff, and the plaintiffs filed a consolidated complaint, all as is customary in such cases. Alliance and the other defendants have moved for summary judgment, and the motion is being briefed. Alliance believes the lawsuits are without merit and intends to vigorously defend itself and its officers. In addition, in July 2004, two derivative lawsuits were filed in Nevada state court against the members of the board of directors and the officers listed above. The Company is named as a nominal defendant in the derivative lawsuits as the claims are purportedly asserted for the benefit of Alliance. These lawsuits assert claims for breach of fiduciary duty and waste of corporate assets arising out of the same events as those giving rise to the class actions described above, and seek injunctive relief and damages in unspecified amounts. These two cases were consolidated, and Alliance 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 the matter is pending. Management believes the plaintiffs’ lawsuit to be without merit. The Company will continue to pursue all available legal defenses.

In August 2004, Shuffle Master, Inc. sued the Company in the United States District Court for the District of Nevada, alleging infringement of various patents in connection with the Company’s MindPlay product line and seeking injunctive relief and damages in unspecified amounts. In June 2005, it was announced that IGT had acquired an interest in the patents at issue in the case, and thereafter IGT joined the case as a plaintiff. The Company is vigorously defending against the lawsuit, which is in the discovery phase. Management believes the plaintiffs’ lawsuit to be without merit. The Company will continue to pursue all available legal defenses.

In September 2004, a United States District Court jury in the District of Nevada entered a $7.4 million verdict against the Company in a suit filed by Action Gaming, Inc., and IGT. The suit alleged that the multi-hand video poker game deployed by the Company’s former subsidiary, United Coin Machine Co. (“United Coin”), infringed the plaintiffs’ patents. The district court ruled on summary judgment that the game does not infringe the patents. However, the court left to the jury the question whether the use of “autohold,” a specific, optional feature 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 the game with the autohold option enabled did infringe under the doctrine of equivalents and awarded damages accordingly. The feature has been disabled on all affected games in the field, and the decision permits continued deployment of the game as long as the autohold feature is not included. The Company is pursuing various remedies and has posted a cash bond totaling $7.7 million to stay payment of the judgment and accrued interest pending appeal. The cash bond is included in other non-current assets and the accrued liability is included in accrued liabilities in the accompanying balance sheet. This amount has been accrued and the expense for this charge is included in discontinued operations in the accompanying statement of operations.

On December 7, 2004, IGT filed a patent infringement lawsuit against Alliance in the United States District Court for the District of Nevada. The complaint asserts that Alliance’s wheel-based games, such as Monte Carlo and Cash For Life, and its iView products infringe on patents held by IGT, and seeks injunctive relief and damages in unspecified amounts. Alliance believes IGT’s claims are without merit and is vigorously defending itself against the lawsuit. As part of its defense, Alliance has asserted counterclaims against IGT, including claims that IGT’s patents are invalid as well as several claims that IGT has engaged in anti-competitive conduct in violation of state and federal antitrust laws. By its counterclaims, Alliance is seeking damages and other relief from IGT. The litigation is in the discovery phase and no trial date has been set.

In February 2005, the SEC initiated an informal inquiry and requested documents and information regarding matters related to the 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 same general areas that were addressed in the informal inquiry. Management is cooperating fully with the SEC in this matter.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

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

Our common stock is listed on the New York Stock Exchange (the “NYSE”) under the symbol “AGI”. The following table sets forth the high and low closing bid price of 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 or paid cash dividends on our common stock. Our bank loan agreement materially limits our ability pay dividends on our common stock. We intend to follow a policy of retaining earnings to finance growth of our business and do not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of future dividends on our common stock will be at the sole discretion of our Board of Directors and will depend on our profitability, our ability to pay dividends under the terms of our bank credit agreement, as discussed in Item 7, Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Risk Factors, and our financial condition, capital requirements, statutory and contractual restrictions, future prospects and other factors the Board of Directors deems relevant.

Equity Compensation Plans

The following table sets forth information as of June 30, 2005 with respect to our equity compensation plans that provide for the issuance of options to purchase 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

(1) Rights include grants for Restricted Stock and Restricted Stock Units.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data for the fiscal years ended June 30, 2005, 2004 and 2003 has been derived from the consolidated 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 the financial information presented below for the years ended June 30, 2005, 2004, 2003 and 2002 reflects the restatements as described in Note 2 to consolidated financial statements. The Selected Financial Data should be read in conjunction with:

· Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations;

· Item 8 Financial Statements and Supplementary Data;

· Note 2 to consolidated financial statements, Restatement of Previously Issued Financial Statements; and

· Note 22 to consolidated financial 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		)

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

(2) The Company has recorded the following significant items affecting comparability of operating income (loss):

· During the fiscal year ended June 30, 2005, we recorded severance charges totaling $3.7 million (see Note 16 to consolidated financial statements, Severance Charges), certain impairment charges of $3.6 million (see Note 17 to consolidated financial statements, Impairment Charges), inventory impairment charges of $26.4 million (see Note 18 to consolidated financial statements, Inventory Impairment Charges), and a charge of $0.6 million related to an amendment to our bank loan agreement (see Note 11 to consolidated financial statements, Long-Term Debt).

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

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

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

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Certain matters in this Annual Report on Form 10-K/A and our other filings with the SEC, including, without limitation, certain matters discussed in this Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act, and are subject to the safe harbor created thereby. Those statements reflect the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things, future events and financial trends affecting the Company.

Forward-looking statements are typically identified by the words “believes,” “expects,” “anticipates” and similar expressions. In addition, any statements that refer to expectations or other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and that matters referred to in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the impact of competition and uncertainties concerning such matters as the Company’s ability to service debt, product development, customer financing, sales to non-traditional gaming markets, foreign operations, dependence on key personnel, the ability to integrate future acquisitions, strict regulation by gaming authorities, the outcome of pending litigation matters including the pending securities class actions, gaming taxes, currency fluctuations and market risk. Certain of these factors are discussed in the “Risk Factors” section below. The Company undertakes no obligation to publicly update or revise these forward-looking statements because of new information, future events or otherwise.

Restatements to the Consolidated Financial Statements

First Restatement

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

Our review process included an assessment of our accounting methods and practices as well as our previously reported financial information. This process, conducted by third party consultants and internal accountants under the direction of our senior management and with the oversight of the Audit Committee of the Board of Directors, consisted of a review of our sales contracts, account reconciliations, financial information, and certain transactions. Our review determined that the accounting errors in our previously reported financial information and the failure to prevent or detect them in our financial reporting process were, in part, attributable to material weaknesses in our internal control over financial reporting. The material weaknesses are described in “—Internal Control Over Financial Reporting” in Item 9A, Controls and Procedures.

The adjustments recorded in connection with the First Restatement resulted in a decrease in:

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

(ii) cost of sales and other operating expenses of $1.9 million and $9.9 million in fiscal years 2004 and 2003, respectively; and

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

We also recorded an adjustment to change the classification of certain certificates of deposit with maturities beyond 90 days 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 the classification of certain jackpot reserve cash accounts from cash and cash equivalents to restricted cash totaling $15.6 million as of June 30, 2004.

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

Second Restatement

In April 2006, management identified additional transactions for which revenue had been recognized on the sale of gaming devices prior to their physical delivery to customer locations and reported the discrepancies 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 these matters. The consultant also reviewed e-mail communications from certain Company personnel for key terms related to revenue recognition criteria, such as delivery, acceptance, etc. The initial findings from the third party investigation resulted in the expansion of the scope of management’s review to all jurisdictions in which certain internal forms were utilized to evidence the requisite delivery and acceptance criteria under our revenue recognition policy.

The scope of our internal review also included the review of revenue recognition practices of certain transactions recorded in fiscal years 2005, 2004, 2003 and 2002. The internal testing included, but was not limited to, the review of transactions for the use of internal forms used to evidence delivery and acceptance and the use of interim storage prior to the ultimate physical delivery to customer locations.

After completion of the investigation and our internal review, on August 8, 2006, the Audit Committee of the Board of Directors concluded there were material errors in our previously reported financial information as presented in the Original Filing, and consequently, that a restatement 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 in Note 22 to consolidated financial statements was required (the “Second Restatement,” and collectively with the First Restatement, the “Restatements”).

We also determined that interest earned on trade accounts receivable that was included in gaming and system revenue should have been reported as interest income, as well as corrected the recorded value of certain grants of restricted stock units to reflect the fair market value on their date of grant.

The adjustments recorded 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) in cost 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) in income 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 of interest earned on trade accounts receivable from gaming and system revenues to interest income of $2.1 million, $2.0 million and $2.0 million in fiscal years 2005, 2004 and 2003, respectively.

A more detailed discussion of the effects of the Restatements discussed above can be found in Note 2 to consolidated financial statements, Restatement of Previously Issued Financial Statements and is presented in summary detail below.

The following is a reconciliation of income (loss) from continuing operations as originally reported to the restated amounts reported in the consolidated financial 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

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

In connection with the Restatements, deferred revenues as 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’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the Restatements.

Internal Control Over Financial Reporting

We have identified material weaknesses in our internal control over financial reporting which are described in Item 9A, Controls and Procedures that contributed to both the First Restatement and the Second Restatement. Each of these material weaknesses also results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result, we have assessed that our internal control over financial reporting was not effective as of June 30, 2005.

We are in the process of developing and implementing measures to address these material weaknesses. The key issues identified by management during its assessment were the high level of turnover of certain of our key finance and accounting personnel during fiscal 2005, our inability to timely replace departed key personnel and the misinterpretation by management of certain complex accounting and tax issues. We are making progress in the implementation of measures to remediate our material weaknesses as discussed under the caption “Remediation Plan” in Item 9A, Controls and Procedures; however, there can be no assurance as to when the satisfactory implementation of these measures will be completed. Furthermore, we are in process of evaluating our internal control over financial reporting as of June 30, 2006. There can be no assurances that the material weaknesses described in Item 9A, Control and Procedures were cured as of such date, or that we will not identify additional material weaknesses as a result of such evaluation. Until such measures are fully implemented, we will continue to incur the expenses and management burdens associated with the additional resources required to prepare our consolidated financial statements.

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

Our Business

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

We derive our revenues from the following four sources:

Gaming Equipment—Sale of gaming machines

Systems—Sales of computerized monitoring systems and related recurring hardware and software maintenance revenue

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

Casino Operations—Operation of the Rainbow Casino

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our most critical accounting estimates include valuations utilized in asset impairment tests, acquisition accounting, revenue recognition, allowance for doubtful accounts, capitalized costs, inventory valuation and deferred tax reserves. These judgments are subject to an inherent degree of uncertainty. There can be no assurance that the actual results will not differ from our estimates. Additional information regarding our significant accounting policies is presented below.

Revenue recognition

Our Gaming Equipment and Systems revenue are recognized in accordance with the provisions of Statement of Position (“SOP”) No. 97-2 and are generally recognized when:

· Persuasive evidence of an arrangement exists

· Delivery has occurred

· The vendors’ fee is fixed or determinable

· Collectibility is probable

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

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

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

The majority of our software license arrangements is non-perpetual and includes software license updates and product support which are recognized ratably over the term of the arrangement, typically one year. Software license updates provide customers with rights to unspecified software product upgrades, maintenance and patches released during the term of the support period. The majority of our customers purchase both software and hardware maintenance and product support when they purchase the systems. In addition, substantially all customers renew these maintenance agreements annually. Revenue from multi-year licensing arrangements are accounted for as subscriptions, with billings recorded as unearned revenue and recognized as revenue ratably over the billing coverage period, generally one year.

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

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

Inventories

Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. Cost elements included for work-in-process and finished goods consist of raw materials, freight, direct labor and manufacturing overhead. Given the size of the account balance, and the subjective nature of “market” values, management has determined that inventories represent critical accounting policies. Accordingly we regularly review inventory quantities and quality and record charges for both obsolete products and products that may have become impaired for a variety of reasons, including changes in technology, customer preferences and product demand. Additional valuation charges could result in the future as a result of these factors.

Property, plant and equipment and leased gaming equipment

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

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

Given the changes in technology, customer preferences and product demand, we regularly review and evaluate the recoverability of our investment in such assets, as well as the estimated useful lives used to depreciate these assets. There is the potential for acceleration of future depreciation, or even an asset write-down, if such factors were determined to have an adverse impact on our ability to realize our full investment in such assets.

Intangible assets, including goodwill

We review goodwill and other intangible assets for impairment annually and whenever events or circumstances indicate carrying value may not be recoverable or warrant a revision to the estimated remaining useful life in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, and SFAS No. 142, Goodwill and other Intangible Assets. Intangible assets primarily consist of acquisition-related software and trademarks, which are amortized over three to thirteen years, and goodwill which is not amortized. Some of the intangibles represent products that have been deployed such as SDG’s central-determination games and others that are just now being deployed such as MindPlay’s table game technology. The success or failure of such products and their ability to generate future cash flows will have a significant impact on the timing of amortization expense and/or write-downs in those future periods.

Impairment of Long-lived Assets

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

Jackpot Liabilities

We recognize a liability for jackpots not yet won and jackpot expense for the cost to fund jackpots in the future. Jackpots are payable in either equal installments over a 20-year period or immediately in the case of instant win progressive jackpots. Winners may elect to receive a single payment for the present value of a jackpot discount at applicable interest rates in lieu of annual installments.

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

Allowances For Doubtful Accounts

Allowances for doubtful accounts are maintained at levels determined by our management to adequately provide for collection losses. In determining estimated losses, management considers economic conditions, the activity in gaming markets, the financial condition of customers, changes in technology and other factors which management believes are relevant.

Capitalized Costs

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

We incur significant regulatory approval costs for our products. Such costs are capitalized once technological feasibility has been established and are amortized generally over three years reflective of the estimated product life cycle. Product testing costs related to projects that are discontinued are expensed when such determination is made. Fees incurred for such regulatory approvals totaled approximately

$8.9 million and $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, we capitalized a total of $2.0 million and $4.8 million respectively that was directly attributable to products, and amortization expense for previously capitalized amounts totaled $0.9 million and $0.8 million respectively.

Given the subjective nature of such capitalized costs, we have instituted a strict review process that includes a full review of the costs incurred and the nature and prospects of the related product. After costs are capitalized, they are monitored to ensure that they are earning revenues through product sales. Future write-offs are possible if such products do not produce adequate cash flows.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Taxes on income of our foreign subsidiaries are provided at the tax rates applicable to the tax jurisdictions in which they are located.

The recoverability of certain deferred tax assets is based in part on estimates of future income and the timing of temporary differences, and the failure to fully realize such deferred tax assets could result in a higher tax provision in future periods. Our net 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 issued accounting pronouncements

In December 2004, the FASB issued SFAS No. 123R (revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R requires recognition of share-based compensation in the financial statements beginning with our fiscal quarter ended September 30, 2005. We will continue to compute compensation expense for stock options using the Black-Scholes valuation model, and will utilize the modified prospective method for adoption of SFAS 123R.

In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment (“SAB No. 107”), to provide interpretive guidance on SFAS No. 123R valuation methods, assumptions used in valuation models, and the interaction of SFAS No. 123R with existing SEC guidance. SAB No. 107 also requires the classification of stock compensation expense in the same financial statement line as cash compensation, and will therefore impact our cost of gaming equipment and systems, casino operations (and related gross profits and margins), research and development costs, and selling, general and administrative expenses.

We estimate that the expensing of stock options will reduce 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 million options in June 2005 (see Note 1 to the consolidated financial statements).

See Note 1 to the consolidated financial statements, Description of Business and Summary of Significant Accounting Principles, for a description of other recently issued accounting pronouncements which are relevant to the Company but which we believe will not have a material impact on the Company.

Results Of Operations

Our results 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 Systems revenue represents approximately 89.2%, 89.0% and 85.7% of total revenues for the fiscal years ended June 30, 2005, 2004 and 2003, respectively. Casino Operations revenue represents approximately 10.8%, 11.0% and 14.3% of total revenue for the fiscal years ended June 30, 2005, 2004 and 2003, respectively. Further descriptions of the fluctuations between fiscal year ends are discussed in depth under each respective segment disclosure below.

Bally Gaming Equipment and Systems

Through our Bally Gaming Equipment and Systems segment we are one of the leading providers of technology to the gaming industry. The gaming industry has been moving to games which use ticket-in ticket-out (“TITO”) technology over the last several years, thereby reducing coin handling costs and 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 of the rapid adoption of TITO capable games during the preceding years. In addition, during fiscal year 2005, there were fewer new casino openings and there were no new domestic markets that opened.

We believe that fiscal year 2006 will represent an opportunity for modest revenue growth for our Gaming Equipment and Gaming Operations divisions. Our expectation is based on our belief that the majority of casino operators will not return to their traditional buying patterns for replacement games during fiscal year 2006, the domestic market expansion opportunities remain uncertain and several of the international market opportunities that we are currently pursuing will likely not impact our financial results until fiscal year 2007 and beyond. The aftermath of Hurricane Katrina will negatively impact our wide-area and daily fee revenues throughout fiscal year 2006. However, we anticipate that the negative impact of Hurricane Katrina on our Gaming Equipment and Gaming Operations divisions may be offset by sales to properties as they reopen during fiscal year 2006 and beyond.

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

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

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

The summary financial results and operating statistics for Bally Gaming Equipment and 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	%		—

Fiscal 2005 vs. Fiscal 2004

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

Gaming Equipment. Gaming Equipment revenue decreased by $20.5 million or 9% primarily due to the decrease in domestic new unit sales to 11,301 units sold in fiscal year 2005 as compared to 14,213 units sold in the prior fiscal year. This decrease in total units sold reflects the general casino industry reduction in new unit purchases which followed the rapid pace of ticket-in ticket-out game replacements which occurred over the prior two years. In addition, the Company’s legacy video products did not perform as well as competitor products, which led to the Company’s decision to move to the new Alpha Game Engine. During 2005, there were very few new casino openings in the United States. The decrease in domestic new unit sales was partially offset by a 8% increase in international new unit sales from 2,595 in fiscal year 2004 to 2,796 in the current fiscal year 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 markets will likely expand in coming years, and will be an important source of revenues for us. We will continue to dedicate research and development to developing products for foreign markets.

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

· A decrease in new property installations in the current year. In the current year, new property installations represented approximately $18.5 million of systems revenue compared to $31.0 million in the prior fiscal year. The decrease in new property installations resulted from the above mentioned slowdown following the TITO system upgrades in the prior two years, and the reduced number of new casino openings during the current year.

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

The decrease in new property installations was partially offset by an increase in recurring hardware and software maintenance revenue of 22% or $4.8 million to $26.9 million due to the larger base of installed units.

Gaming Operations. Gaming Operations revenue increased 66% for fiscal year 2005 compared to fiscal year 2004 due to the following:

· An increase in revenue of $40.1 million or 337% to $52.0 million from centrally determined linked games due to a full year of revenue compared to four months in the prior year due to the acquisition of SDG in March 2004.

· An increase in the installed base of games and the benefits of certain Class II enhancements, such as the “One System,” for which we are generating additional daily fee revenue.

· An increase in daily fee games placements of 10% and an increase in average revenue per day for both wide-area progressives and Monte Carlo daily fee games.

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

Selling, general and administrative expense increased 29% primarily as a result of the following:

· The addition of Class II and central determination operations for a full year in fiscal year 2005.

· An increase in legal expense of approximately $4.0 million resulting from higher patent and litigation costs.

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

· Severance charges of $3.0 million for reductions in the workforce both domestically and in 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 result of the increased investment in the development of the Alpha Engine System and related game content, and sustaining development of multiple existing game platforms and systems.

Depreciation and amortization expense increased as a result of the increase in acquisition-related intangible assets and the increased base of wide-area and daily fee games.

Fiscal 2004 vs. Fiscal 2003

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

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

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

· Higher domestic new unit sales due to increased sales of TITO games and sales to several new casinos which opened during the year.

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

· Increased sales to multi-property operators resulting from displacements of competitor systems which occurred as certain casinos were acquired by larger multi-property operators.

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

· Recurring hardware and software maintenance revenue increased by 23% to $20.7 million for the fiscal year, resulting from the larger base of installed units, which now stands at approximately 276,000.

Gaming Operations. Gaming Operations revenue increased 42% for fiscal year 2004 compared to the prior fiscal year due to an increase of 221% in the installed base of daily-fee games deployed, which increased to 7,985 units installed. This increase is primarily a result of the launch of the New York Lottery operations and the acquisition of SDG.

Gross Margin improved to 53% as a result of higher margin systems sales and gaming operations revenue, as a proportion of total sales.

Selling, general and administrative expenses increased 38% 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 Lottery resulting in increases in all operating expense categories except bad debt expense. In addition, selling, general and administrative expenses also increased as a result of higher legal costs related to the protection of our intellectual property rights and higher payroll and payroll related costs primarily in our customer service departments.

Research and development costs increased primarily as a result of increased headcount and reflect the additional costs incurred to expand our product offerings.

Depreciation and amortization increased as a result of increased capital expenditures and an increase in acquisition related intangible assets.

Casino Operations

Our Rainbow Casino is one of four casinos currently operating in the Vicksburg, Mississippi market. Our casino primarily draws customers from within a 75-mile radius surrounding Vicksburg, which includes Jackson, Mississippi. We believe that fiscal year 2006 will represent a year of modest revenue growth for our casino. While a number of properties located on the gulf coast sustained heavy damage, our casino was not damaged during the 2005 hurricanes season. Although it was temporarily closed, we reopened the property for business within four days of Hurricane Katrina once power was restored to the general area. While the play levels at our casino have generally increased following the reopening, we anticipate that the play level may return to a more typical level once the Gulf coast casinos reopen.

The summary of our financial results and operating statistics for our Casino Operation 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 fiscal year 2005 compared to the prior year in a market that grew 3.9% for the year with the majority of the increase in the fourth quarter of fiscal year 2005 due to completion of capital improvement projects in the Vicksburg market.

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

The overall selling, general and administrative expenses remained relatively stable year over year as a percentage of revenue. We plan on increasing these expenses marginally in fiscal year 2006 in order to attract players following Hurricane Katrina.

Depreciation and amortization expense increased $0.5 million resulting from additional capital expenditures relating to new game replacements.

Fiscal 2004 vs. Fiscal 2003

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

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

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

Depreciation and amortization expense increased 28% for the fiscal year 2004 period resulting from additional capital improvements made to the Rainbow Casino late in fiscal year 2003 relating to the remodeling project.

Parent Company

The summary financial results of Bally Technologies, Inc., our parent entity, are set forth below. These results also include certain other income and expenses 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

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

· Increase in payroll and related expense during the fiscal year 2005, primarily due to restricted stock unit amortization totaling $2.1 million and a $0.6 million charge for severance benefits resulting from reorganization, offset by a decrease in salaries and wages of $1.0 million due to reduced corporate headcount and for certain personnel reassigned to the gaming equipment and systems segment.

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

· Increase in professional fees of $1.4 million related to Sarbanes-Oxley compliance. We expect these additional costs to continue into fiscal year 2006.

· Minority interest increased as a result of the consolidation of certain variable interest entities.

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

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

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

applied to certain deferred tax assets. The effective rate for fiscal year 2006 is expected to be between 35% and 38%.

Fiscal 2004 vs. Fiscal 2003

General and administrative expenses increased in fiscal year 2004 compared to the prior fiscal year primarily as a result of:

· Increase in general corporate legal costs resulting from the class action lawsuit and related matters.

· Increase in general liability and director and officer insurance costs resulting from market conditions.

Total other expense increased as a result of the September 2003 refinancing of our credit facilities. The refinancing charge of $12.3 million was partially offset by decreases in our net interest expense as a result of the lower interest rates achieved in the refinancing.

Significant Items Affecting Comparability

Certain significant items affect the comparability of financial statements from the fiscal years ended June 30, 2005, 2004 and 2003. These items are discussed below.

Inventory and asset write-downs: We perform detailed inventory valuation procedures at least quarterly. This process includes examining the carrying values of new and used gaming devices, parts and ancillary equipment in comparison to the current fair market values for such equipment (less costs to sell or dispose). Some of the factors involved in this analysis include the overall levels of our inventories, the current and projected sales levels for such products, the projected markets for such products both domestically and internationally, the costs required to sell the products including refurbishment costs and importation costs for international shipments, and the overall projected demand for products once the next generation of products are scheduled for release.

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

The decision to move our gaming devices to the new video platform, the targeting of used equipment for non-domestic markets, and the consolidation of certain warehouses all led to accelerated disposals of legacy products. This process has required continual updating of estimates for the net realizable value of inventories due to the subjectivity involved in projecting sales volumes, used game sales values, refurbishment costs, and customer demand in non-domestic jurisdictions. As a result of our ongoing analysis of inventory valuations, we have taken a series of inventory and related asset write-downs totaling $26.4 million during fiscal year 2005, which included a charge of $4.4 million in the fourth quarter. We continue to hold a significant number of used gaming devices, therefore there can be no assurances that further write-downs will not occur in subsequent periods.

Impairment charges: We entered into an agreement during fiscal year 2004 to provide a development loan to a Native American tribe to further their pursuit of developing a gaming facility. The amounts advanced under the terms of the loan totaled $1.5 million, and we are not obligated for any additional advances. In March 2005, the tribe received an adverse court ruling that we believe materially impairs the tribe’s ability to pay the loan, and we therefore recorded an impairment charge for the full amount of the loan.

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

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

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

Refinancing and loan amendment charges: During fiscal year 2005, we amended our bank loan agreement. The fee incurred for the amendment totaled approximately $1.0 million, and resulted in a charge of $0.6 million to write off a portion of the previously capitalized fees.

During fiscal year 2004, we initiated a tender offer for all of our outstanding 10% Senior Subordinated Notes due 2007, which we refer 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 $12.3 million, which included a $5.0 million charge of the early extinguishment of the senior subordinated notes, $7.0 million for the write off of deferred financing costs, and $0.3 million in fees and expenses.

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

Discontinued Operations

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

On June 30, 2004, we completed the sale of United Coin to Century Gaming, Inc. and received approximately $100 million in cash 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 from our Bally Gaming and Systems business unit over a five-year period. United Coin revenue 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. In fiscal year 2004, we reported a gain on the sale before income taxes of $15.3 million, or $9.1 million after tax. During fiscal year 2005, the gain on sale was adjusted for charges incurred for an adverse outcome in a patent infringement case and the resolution of certain sale related liabilities, the sum of which totaled $6.3 million net of tax, which is included in the discontinued operations section of the statement of operations for the fiscal year ended June 30, 2005.

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

On July 18, 2003, we sold Bally Wulff wall machine 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. Bally Wulff reported an operating loss of $40.6 million on revenues of $60.2 million for fiscal year 2003.

The Louisiana route operations were sold in October 2004 and had revenues totaling $17.0 million 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

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

Recent Developments

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

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

We carry both property and business interruption insurance which will serve to offset some of the losses indicated above. At this time we are actively working with our insurance providers to assess losses and associated recoveries, but anticipate the full claim cycle will cover an extended period of time. Therefore, we cannot reasonably estimate the net proceeds to be recovered in connection with these losses.

Initial indications are that the casinos in the Biloxi and Gulfport areas will need to be rebuilt and will not open for a protracted period of time. Some casinos may decide not to rebuild. Casinos in New Orleans may need major reconstruction and, given the devastation in the area, may be closed for months. Casinos outside of these areas may also need some restoration, but others have reopened for business, although their business may be at lower than historical levels.

For the September 2005 quarter, the impact on our Gaming Operations division as a result of the hurricane is estimated to be less than $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 affected area, with an associated gross margin of $0.9 million. Our balance sheet exposure for accounts receivable and net book value of games placed in affected casinos is approximately $1.9 million.

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

Financial Condition

Liquidity

As of June 30, 2005, we had $33.2 million in cash and 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 and cash equivalents at June 30, 2005 includes approximately $2.7 million of cash utilized in our Casino Operations that is held in vaults, cages or change banks. Additionally, pursuant to various state gaming regulations, certain cash accounts totaling approximately $13.4 million as of June 30, 2005, are maintained to ensure availability of funds to pay wide-area progressive jackpot awards which are classified as restricted cash on the consolidated balance sheets. In addition, we purchase U.S. Treasury Strip Securities for the benefit of jackpot winners who elect to receive annual or weekly installment payments. These securities are included in restricted long-term investments in the accompanying consolidated 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 refinancing transaction whereby we entered into a new $275.0 million term loan and a $125.0 million revolving credit facility. We used the proceeds from the refinancing transaction to (1) repay an aggregate of approximately $188.0 million outstanding under our existing term

loan, (2) repurchase the $150 million aggregate amount of our senior subordinated notes, and (3) pay $5.0 million in transaction fees and expenses. The fees and expenses were capitalized and are being 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 the first year, and a six-year maturity. The revolving credit facility commitment decreases 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 to fund 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 is amortized 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 loan agreement governing the term loan and the revolving credit facility required that we use approximately 50% of the net proceeds from the disposition of these assets to reduce the term loan and revolving credit facility principal balances on a pro rata basis. As a result, in August, 2004, we made a payment to permanently reduce the term loan by $31.6 million, and paid down the revolving credit facility from $70.0 million to zero.

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

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

In October 2006, we executed an amendment to our bank loan agreement, which, among other things, (i) extended the due date for the delivery of the our audited financial statements for the fiscal year ended June 30, 2006, to December 31, 2006, (ii) provided that we will deliver our quarterly reports 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 million of certain cash charges, and (iv) clarified that the definition of EBITDA includes interest income on trade receivables. We paid an administrative fee of $964,000 in exchange for the concessions granted under the amendment. There can be no assurances we will be able to comply with the amended covenants. See “Risk Factors” below for a discussion of the risks associated with our non-compliance with certain of our debt covenants under the bank loan agreement.

We are in compliance with our financial covenants under the bank loan agreement, which consist of a leverage ratio, a fixed charges coverage ratio, and a minimum EBITDA (as that term is defined in the bank loan agreement) ratio. The leverage ratio is computed as total average debt outstanding during the quarter divided by the trailing 12 months EBITDA excluding certain cash and non-cash charges, and is further adjusted to remove EBITDA from discontinued operations at the time those operations are sold. The Company’s leverage ratio as of June 30, 2005 was 4.6 times versus the covenant maximum of 4.75 times.

Cash flows from operating activities are derived primarily from the cash receipts from the sale of goods and services, the operation of wide-area progressive systems, lease payments, and monthly cash receipts from maintenance agreements for our casino systems customers. In addition, we generate cash through our casino operations. We utilize our cash to 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 current operating activities and the availability under the revolving credit facility should provide us with sufficient capital resources and liquidity. Although the leverage 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 our ability to generate adequate levels of EBITDA, as described above. At June 30, 2005, we had no material commitments for capital expenditures.

Working Capital

The following table presents the components of consolidated working capital at June 30, 2005 and 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		)