FORM 10-K

United States Securities and Exchange Commission

Washington, D.C. 20549

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

For the Fiscal Year Ended September 30, 2006

OR

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 001-10684

International Game Technology

Nevada (State of Incorporation)		88-0173041 (I.R.S. Employer Identification No.)

9295 Prototype Drive, Reno, Nevada 89521
(Address of principal executive offices)
Registrant’s telephone number, including area code: (775) 448-7777
Registrant’s website: www.IGT.com

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

Title of Each Class Common Stock, Par Value $.00015625		Name of Each Exchange on Which Registered New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if registrant is a well known seasoned issuer (as defined in Rule 405 of the Securities Act).
Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ

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. Yes þ No o

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. þ

Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2) of the Exchange Act: Large accelerated filer þ Accelerated filer o Non-accelerated filer o

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 31, 2006: $11,759,822,192

The number of shares outstanding of each of the registrant’s classes of common stock, as of
December 8, 2006:

335,322,243 shares of common stock at $.00015625 par value

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of our Proxy Statement relating to the 2007 annual shareholders meeting are incorporated
by reference in Part III

 

 

INTERNATIONAL GAME TECHNOLOGY
TABLE OF CONTENTS

				Page
DEFINITIONS				ii
PART I				2
Item 1.	Business			2
Item 1A.	Risk Factors			22
Item 1B.	Unresolved Staff Comments			24
Item 2.	Properties			24
Item 3.	Legal Proceedings			24
Item 4.	Submission of Matters to a Vote of Security Holders			24
PART II				25
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters			25
Item 6.	Selected Financial Data			26
Item 7.	Management’s Discussion and Analysis			27
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk			41
Item 8.	Financial Statements and Supplementary Data			42
	Report of Independent Registered Public Accounting Firm			42
	Consolidated Income Statements			43
	Consolidated Balance Sheets			44
	Consolidated Cash Flows Statement			45
	Consolidated Statements of Stockholder’s Equity and Comprehensive Income			47
	Notes to Consolidated Financial Statements			48
Item 9.	Changes in and Disagreements with Accountants			71
Item 9A.	Controls and Procedures			71
Item 9B.	Other Information			73
Part III				73
Item 10.	Directors and Executive Officers of the Registrant			73
Item 11.	Executive Compensation			73
Item 12.	Security Ownership of Certain Beneficial Owners and Management			73
Item 13.	Certain Relationships and Related Transactions			73
Item 14.	Principal Accountant Fees and Services			73
Part IV				74
Item 15.	Exhibits and Financial Statement Schedules			74
Power of Attorney Signatures				76
EXHIBIT 3.1
EXHIBIT 10.8
EXHIBIT 21
EXHIBIT 23
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

DEFINITIONS, abbreviations or acronyms as used in this Form 10-K

Abbreviation		Definition
Acres		Acres Gaming Incorporated
Anchor		Anchor Gaming
APB		Accounting Principles Board
ARS		Auction Rate Securities
AVP®		Advanced Video Platform
AWP		Amusement with Prize
bps		basis points
CAD$		Canadian dollars
CCSC		Colorado Central Station Casino
CDS		central determination system
Commission		Nevada Gaming Commission
Debentures		Senior Convertible Debentures due January 29, 2033
EITF		Emerging Issues Task Force
EPA		Environmental Protection Agency
EPS		earnings per share
ESPP FAS		Employee Stock Purchase Plan Financial Accounting Standard
FASB		Financial Accounting Standards Board
FIN		FASB Interpretation
FSP		FASB Staff Position
GAAP		generally accepted accounting principles
GCB		State Gaming Control Board
JV		Spin For Cash Joint Venture
MDA		management’s discussion & analysis
MLP		multi level progressive
MPS		multi player station
NDT		The Nevada Department of Taxation
NJ		New Jersey
OES		IGT OnLine Entertainment Systems, Inc. and the lottery systems business of VLC, Inc. collectively
OSHA		Occupational Safety & Health Administration
PGIC		Progressive Gaming International Corporation
pp		percentage points
R&D		research and development
Reg		Regulation
RFID		radio frequency identification
SAB		Staff Accounting Bulletin
sbÔ		server based
SEC		Securities and Exchange Commission
Sega Sammy		Sega Sammy Holdings
SFAS		Statement of Financial Accounting Standards
SG&A		selling, general and administrative
SIP		Stock Incentive Plan
SMI		Shuffle Master, Inc.
TITO		ticket-in/ticket-out
TRO		temporary restraining order
UK		United Kingdom
US		United States
VIE		variable interest entity
VLT		video lottery terminal
WW or WagerWorks		WagerWorks, Inc.
WAP		wide area progressive
*		not meaningful (in tables)

Forward Looking Statements

This Annual Report on Form 10-K contains statements which do not relate to historical or current facts, but are “forward looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to future events or trends, our future prospects and proposed new products, services, developments or business strategies, among other things. These statements can generally (although not always) be identified by their use of terms and phrases such as anticipate, believe, could, would, estimate, expect, intend, may, plan, predict, project, pursue, will, continue, and other similar terms and phrases, as well as the use of the future tense.

Examples of forward looking statements in this report include, but are not limited to, the following categories of expectations about:

	ª		our ability to introduce new products and stimulate replacement demand
	ª		the timing and expected success of new product introductions
	ª		future gaming product developments
	ª		developing or acquiring access to important intellectual property
	ª		our access to new distribution channels
	ª		our market share, competitive advantage, and leadership position
	ª		the advantages offered to our customers by our products
	ª		the current or future installed base in certain markets or overall
	ª		gaming expansion and new market opportunities
	ª		future gross margins
	ª		increasing growth or contributions
	ª		regulatory developments
	ª		critical accounting estimates
	ª		tax exposure and tax rates
	ª		available capital resources
	ª		possible losses from off-balance sheet arrangements

Although we believe as of today that the expectations reflected in any of our forward looking statements are reasonable, actual results could differ materially from those expressed or implied. Our future financial condition and results of operations, as well as any forward looking statements, are subject to change and to inherent known and unknown risks and uncertainties. See Item 1A, Risk Factors, for a discussion of these and other risks and uncertainties. You should not assume later in the year or next year that the forward looking statements in this Annual Report on Form 10-K are still valid. We do not intend, and undertake no obligation, to update our forward looking statements to reflect future events or circumstances.

PART I

Item 1. Business

GENERAL

International Game Technology is a global company specializing in the design, manufacture, and marketing of computerized gaming equipment, systems and services. Our vision is to be the preeminent supplier of gaming products to the world. We strive to maintain a wide array of entertainment inspired gaming product lines, targeting gaming markets in all legal jurisdictions worldwide. We are committed to providing quality gaming products at competitive prices, designed to increase the potential for improving operator profits by serving players better.

International Game Technology was incorporated in Nevada in December 1980 to acquire the gaming licensee and operating entity, IGT, and to facilitate our initial public offering. Principally serving the US gaming markets when founded, we expanded into jurisdictions outside the US in 1986. In addition to our main US production facilities in Nevada, we manufacture gaming products in the UK and through a third party manufacturer in Japan. We currently maintain sales offices in various gaming jurisdictions around the world.

In addition to our 100% ownership of IGT, International Game Technology has the following directly or indirectly wholly-owned operating subsidiaries:

	ª		Acres Gaming Incorporated
	ª		I.G.T. — Argentina S.A.
	ª		I.G.T. (Australia) Pty. Limited
	ª		International Game Technology (NZ) Limited
	ª		IGT Asia, Lda.
	ª		IGT do Brasil LTDA.
	ª		IGT — Canada Inc.
	ª		IGT — Europe B.V.
	ª		IGT — Iceland Ltd.
	ª		IGT — Japan, K.K.
	ª		IGT — Maine, Inc.
	ª		IGT — Mexicana de Juegos, S. de R.L. de C.V.
	ª		IGT — UK Holdings Limited (Barcrest)
	ª		International Game Technology — Africa (Pty) Ltd.
	ª		WagerWorks, Inc.

Unless the context indicates otherwise, references to “International Game Technology,” “IGT,” “we,” “our,” or “the Company” includes International Game Technology and our wholly owned subsidiaries and their subsidiaries. The meanings of certain abbreviations or acronyms used throughout this report are listed for your reference on page ii. Italicized text in this document with an attached superscript trademark or copyright notation indicates trademarks of IGT or its licensors. For more information about our trademark and copyright ownership information, please visit our website.

IGT’s principal corporate executive offices are located at:

9295 Prototype Drive
Reno, Nevada 89521
Telephone: (775) IGT-7777
Website: www.IGT.com

Through the Investor Relations link on our website, we make available free of charge, as soon as reasonably practical after such information has been filed or furnished to the SEC, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act. Our corporate governance guidelines and charters for our Audit, Compensation, and Nominating and Corporate Governance Committees are also available on our website. This information will be mailed in print form free of charge to any shareholder upon request.

BUSINESS SEGMENTS

We derive our revenues in two ways, either from the sale (product sales) or placement (gaming operations) of our gaming products, services or intellectual properties. Operating results reviewed by our chief decision maker encompass all revenue sources within each geographical customer region. We currently view our business in two regional operating segments, each incorporating all types of revenues.

	ª		North America includes our operations in the US and Canada. North America comprised 79% of consolidated revenues in fiscal 2006, 79% in 2005, and 86% in 2004.
	ª		International encompasses our efforts abroad in Asia, Australia, New Zealand, Europe, Japan, Latin America, Russia, South Africa, and the UK. International comprised 21% of consolidated revenues in fiscal 2006, 21% in 2005, and 14% in 2004.

Additionally, certain income and expenses related to company-wide initiatives are managed at the corporate level and not allocated to an operating segment. Additional segment and financial information is contained in BUSINESS SEGMENT RESULTS of our MDA and Note 18 of our Consolidated Financial Statements and is incorporated herein by this reference.

PRODUCTS

We sell or place a broad range of gaming equipment, as well as related parts, conversions, licenses, systems and services.

ª

Traditional casino-style slot machines determine the game play outcome at the machine, encompassing:

	s		classic physical reel slots
	s		video poker slots
	s		video reel slots
	s		Class III, a tribal distinction for a traditional casino-style slot machine

	ª		Wide area progressive (WAP) jackpot systems link machines across several casinos within a designated jurisdiction.
	ª		Central determination system (CDS) machines are connected to a central server which determines the game outcome, including:

	s		video lottery terminals (VLT) for government sponsored applications
	s		electronic or video bingo machines
	s		Class II, a tribal distinction for electronic bingo systems

	ª		Amusement With Prize (AWP) games, popular in Europe, incorporate limited payouts with complex features that allow players to exercise an element of skill and strategy.
	ª		Pachisuro machines or pachislots distributed in Japan are a smaller, simpler variation of American slots, featuring skill stop reels and low payouts.

ª

The IGT Advantageä Casino System is a suite of fully integrated casino management solutions for:

	s		machine accounting
	s		patron management
	s		cage and table accounting
	s		ticket in/ticket out
	s		bonusing (jackpots and promotions)
	s		table game automation

ª

Strategic Marketing Services offer consultation on a variety of casino promotion strategies.

We supply our gaming products directly to the customer or through distributors in certain jurisdictions. We also offer equipment contract financing for qualified customers and development financing loans to select customers for new or expanding gaming facilities.

REVENUE STREAMS

Product Sales revenues are generated from the sale of gaming machines, systems, parts, conversion kits, licenses and royalties, equipment and services. Product sales comprised 50% of consolidated revenues in 2006 and 2005, and 53% in 2004. As our gaming products become more systems centric in nature, an increasing portion of our product sales is derived from non-machine or non-box products, including systems installations, parts, game theme conversions, and royalties or licensing fees.

Product Sales Composition		2006				2005				2004
Machines
Video & Spinning Reel			60	%			54	%			71	%
AWP & Pachisuro			11	%			20	%			10	%
			71	%			74	%			81	%
Non-machine
Gaming Systems			13	%			10	%			9	%
Parts & Conversions			14	%			14	%			9	%
Other fees & services			2	%			2	%			1	%
			29	%			26	%			19	%

Gaming operations revenues are generated from providing customers with our proprietary gaming products, services or intellectual properties under recurring revenue arrangements. This revenue stream comprised 50% of consolidated revenues in fiscal 2006 and 2005, and 47% in 2004. See Note 1 of our Consolidated Financial Statements for additional information regarding pricing arrangements and revenue recognition.

Gaming Operations revenues and gross margin are influenced by a number of factors, including the number and geographic mix of machines placed, play levels and variations in pricing arrangements. Expenses include the cost of funding jackpot payments to winners and this cost is subject to interest rate volatility. In monitoring the productive life cycle of our proprietary games, we systematically replace units experiencing declining play levels with newer games.

We place games under recurring revenue arrangements in over 70 gaming jurisdictions worldwide. IGT owned units below are reflected in our balance sheet as part of property, plant and equipment. Casino operations units include traditional casino, Class III, Class II, and other higher yielding gaming machines. Lease operations units include VLT and other lower yielding gaming machines. Casino owned units are machines sold that also carry an ongoing recurring royalty fee.

September 30,		2006				2005				2004
Gaming operations machines
IGT owned units
Casino operations			36,000				32,000				30,800
Lease operations			13,600				6,800				6,400
IGT installed base			49,600				38,800				37,200
Casino owned units			17,500				17,300				18,000
Total			67,100				56,100				55,200

PRODUCT DEMAND
Demand for our products is driven by a number of factors:

	ª		The replacement of older or obsolete machines
			The replacement cycle in all gaming jurisdictions represents a significant portion of sales in any given year. It is driven primarily by competition in each market to provide players with more entertaining and sophisticated games. We expect future machine replacement sales will be driven by customer strategies to upgrade casino floors with newer games and technologies that combine higher yields with cost savings, convenience, and other benefits. The willingness and ability of operators to invest in new or additional machines is also a factor.
	ª		Casino expansion or new casino openings
			The construction of new casino properties generates product demand, and stimulates replacement machines demand at neighboring casinos, as these casinos may upgrade in order to remain competitive.
	ª		New gaming jurisdictions
			Over the past decade, significant increases in the market installed base of gaming machines were driven by growth in the number of jurisdictions with legalized gaming and the increasing popularity of large theme-based casinos.
	ª		Manufacturer’s reputation and reliability
			Consistent delivery and support of quality products encourages operators to select certain gaming equipment suppliers over others.

STRATEGIC ACQUISITIONS

As part of our ongoing efforts to create shareholder value, we complement our internal resources through strategic alliances and business acquisitions that:

	ª		offer opportunities to diversify our geographic reach
	ª		expand our product lines and customer base
	ª		leverage our technological and manufacturing infrastructure to increase our rates of return
Our more recent business acquisitions include:

Company Acquired		Date		Cost
				(In millions)
WagerWorks, Inc.		August 2005		$	89.1
Assets of Hi-Tech Gaming.com, Ltd.		December 2004			10.3
Acres Gaming Incorporated		October 2003			134.0
Anchor Gaming		December 2001			1,323.9

WagerWorks

We acquired WagerWorks in August 2005 to capitalize on expanding remote gaming opportunities and facilitate the distribution of IGT game content across new channels and mediums such as the internet, mobile devices, and interactive television. WW provides internet gaming technology, content and services designed to enable established consumer oriented companies to leverage their operating expertise and brand equity online. WW does not provide internet gaming services in jurisdictions where it is illegal to do so.

Acres

We completed the acquisition of Acres, a software company specializing in the development of gaming systems technology designed to assist casino operators in increasing patron loyalty, on October 27, 2003. This business combination gave us access to the Acres suite of integrated casino management systems products, enabling us to position IGT as a leading global provider of casino gaming systems.

Games

We combine the elements of math, play mechanics, sound, art and technological advancements with our entertainment license library and patented intellectual property with the goal of providing gaming products with a high degree of player appeal. We continue to expand our game libraries, emphasizing development of game content to address changing consumer preferences and other market trends. We strive to develop games that incorporate exciting winning combinations, and appealing graphics and sound. Additionally in fiscal 2006, we adopted development standards focused on creating more consistent game play, graphics, and sound features in our games intended to expedite time to market.

We actively develop new themes for video reel and video poker, as well as enhancing our classic spinning reel products with popular multi-line multi-coin configurations. We make ongoing efforts to upgrade and optimize our proprietary flagship theme games, such as Wheel of Fortune^®, Megabucks^®, Star Warsâ and The Price is Right^®, with theme refreshers and innovative features to enhance play. Our games are invented primarily by employee designers and artists. Although not materially dependent on third party developers, we find they can provide added sources of creative ideas and game content.

Using our Product Performance Testing system, we evaluate and forecast acceptance of new products to quickly identify the more popular gaming concepts. A central computer monitors the performance of games placed in 35 key casino locations that provide a representative sampling. This system results in a quicker release of higher performing games.

We introduced 190 new games for traditional gaming environments in North America. We also released 260 unique versions of our games to meet the needs of non-traditional video lottery, CDS, Class II and international markets. We remain the North America market leader in spinning reel and video poker games. With fewer barriers to entry and the relative ease of creation, competition remains intense in video games. We are competing vigorously in video game development and continue designing innovative spinning reel and poker games.

We launched our first group play product offering community rounds where multiple players can participate in the same bonus for added multi-player game action and big player attraction. Wheel of Fortuneâ Special Editionä Super Spin™ is a linked progressive game combining the popular theme with nine video slots surrounding a giant bonus wheel. Each player station features an extra wide seat so players can sit with a friend. We plan to further expand game development based on this group play concept.

We expanded on our winning MLP games, which provide a higher hit frequency on lower level progressive jackpots. We recently released our newly designed 5-reel MLP, Red Hot Jackpotsä, in Nevada and Native American markets. This game allows players to buy-up to different bonus levels, a feature designed to increase the average wager. We plan to continue our future MLP offerings, adding WAP features and group play options.

We initiated development of our first interactive “multi-player station” series of gaming products. This product, which is comprised of several individual terminals or stations connected to a central control device, is available in numerous modular configurations based on operator preferences. We expect that multi-player and electronic table games will become increasingly important, with plans to introduce Baccarat and Roulette in the MP Series™ in fiscal 2007 and additional game themes in the future.

Under arrangements to facilitate development of Walker Digital casino innovations, we initiated our first product collaboration with Guaranteed Playä, a creative new method of wagering game play. Instead of one wager at a time, Guaranteed Playä patrons have the option of purchasing several hands of poker or spins of slot play at a fixed price in advance. We plan to introduce Guaranteed Playä Poker during fiscal 2007. We anticipate future product offerings will integrate Guaranteed Playä through our sbä network to give operators the ability to package slot play with other promotional offerings.

Our Barcrest facility supports over 150 AWP game designs per year and new products are launched every four to six weeks. Current year engineering projects focused on the development of video game content and a new European PC based video cabinet set to launch in fiscal 2007.

In Japan, we developed and released two pachisuro games compliant with new Reg-5 requirements. The Reg-5 models, not as popular as less restrictive Reg-4 units, will be required by the end of September 2007, and we are targeting at least one new release per quarter in fiscal 2007.

Networks

Games and networked systems continue to converge, as markets increasingly require this linkage for regulatory purposes, and operators rely more and more on systems to manage game performance and player preferences. As we develop and integrate gaming systems, adapting technologies to fit new markets and player preferences, we recognize networks have the power to dramatically change the appearance and improve the usefulness of gaming systems. Limited gaming networks currently include IGT Advantageä casino management systems, EZ Pay^® ticket systems, CDS, and WAP systems.

Our most recent focus is on providing operators with server based tools to more efficiently manage their slot floors and deliver exciting new gaming experiences to the players. Four commercial field trials of our server based system are currently underway in California, Nevada, Michigan and Missouri. Over the next 18 to 24 months, we intend to continue refining and enhancing the core technology, identifying customer needs, and pursuing development efforts critical to server based game applications, including necessary regulatory approvals.

We continue to support and enhance our IGT Advantageä Casino System, a suite of traditional casino management software products providing operators with real-time information in the areas of slot machine performance, patron management, table game reporting and analysis, along with cage and credit data. This system suite features EZ Pay^® Ticketing, as well as direct player marketing systems such as Bonusing^TM and NexGen^® interactive multi-media displays.

We continue our product integration efforts with PGIC and SMI to create a comprehensive automated table management system, Table iD^TM (formerly known as Intelligent Table System^TM) and extend the value of slot management systems. The first tier marketed as Table Manager™ features upgraded player tracking and table game accounting functions and has been installed in US casinos. The second tier marketed as Chip Manager™, includes RFID automated bet recognition and its first casino installation was in October 2006. The third tier marketed as Game Manager™ adds enhanced game tracking with complete game and player analysis and is planned for commercial introduction in 2007.

Over the past three years, we have introduced IGT game content in several new video or lottery markets by adapting our traditional casino games where the machine determines the outcome to CDS games where the central server determines the outcome. Our CDS features include cross property bingo draws, game software downloading, remote game configuration, full accounting and performance reports, virtual private networks and TITO compatibility. With our extensive game library, we anticipate continued CDS market penetration.

Platforms

Platforms are the means by which players interact with the games, and we support several in order to maximize our game distribution reach. The challenge in platform development is in determining how to effectively use a wide range of technology to satisfy global markets with the right features, cost points, and delivery dates. The ultimate goal is to ensure that our content can be deployed through a number of different channels, including traditional gaming platforms, as well as wireless networks, and the internet.

We strive to serve evolving gaming markets with the strength and flexibility of our distinct platforms. Multi-line, multi-coin video games are currently among the most popular games on the casino floor. In response to this trend, our products employ advanced technology to enhance entertainment and communication features, while retaining many of the familiar and popular features of legacy games.

Our Advanced Video Platformâ is designed to support the next generation of video games. This platform provides improved graphic capabilities such as:

	ª		full screen live streaming videos
	ª		animations with vivid colors
	ª		enhanced stereo sound
	ª		expanded storage capacity, allowing for complex bonus features

To facilitate future server-based gaming applications, the AVP^® incorporates networking capable of supporting Gaming Standards Association communication standards important for the integration of open, casino wide networks and video capabilities to support a service window. Our next generation TrimLineä cabinet, first sold with AVP^® machines in fiscal 2006, also provides enhanced player ergonomics within a reduced machine footprint, enabling operators to better optimize operator floor space.

Our library of games continues to grow as AVP^® transitions to become our standard development platform. We also continue to support traditional platforms including our:

	ª		Game KingÒ video platform using the 80960 processor, offering a single or multi-game format, a touch screen monitor, and interactive video slot games with animated graphics and secondary bonusing features
	ª		S2000Ò and Reel TouchÒ 80960 spinning reel platform, which combines one of our broadest game libraries with upgraded processor boards and an enhanced sound package
	ª		VLC 8800Ô platform which remains widely used in government sponsored markets, with the ability to connect with most major North America video lottery control systems
	ª		Blue Chip platform used in Australia and New Zealand markets
	ª		Barcrest MPU5 AWP platform produced in the UK
	ª		Pachisuro platform used in Japan

Expanding Delivery Channels

We are developing a wireless slot system for play on fully mobile computer tablets within a casino property in response to Nevada legislation passed during fiscal 2006 to allow gaming on portable hand held devices. Recently approved by the Nevada Gaming Commission, we anticipate a casino field trial in fiscal 2007 and product release in fiscal 2008.

During fiscal 2006, we entered the UK interactive television market with the first two games, Elvis^® and Cashino^TM, designed by Barcrest. We also launched seventeen new or updated games on the WagerWorks internet casino platform including premium branded games generating significantly more play than non-branded games. We plan to leverage our collective design facilities worldwide in developing future internet game content, as well as networking technology for remote game management and downloading. We will not, however, provide internet gaming services in jurisdictions where they are not legal.

Intellectual Property

Our patents, trademarks, copyrights and other intellectual property rights are significant assets. We seek to protect our investment in R&D and the unique, distinctive features of our products by perfecting and maintaining our intellectual property rights. We obtain patent protection covering many of our products and have a significant number of US and foreign patent applications pending. Our portfolio contains a significant number of domestic and foreign patents related to a variety of video and electronic gaming equipment and systems, including game designs, bonus and secondary game features, and gaming device components.

Most of our products are marketed under trademarks and copyrights that provide product recognition and promote widespread acceptance. Our products may also contain other content licensed from third parties, such as trademarks, fictional characters, or storylines. We design, manufacture, produce, operate, use, and/or otherwise have permission to exploit certain gaming machines utilizing materials under license from third party licensors. We seek protection for our copyrights and trademarks in the US and various foreign countries, where applicable.

We cannot ensure that:

	ª		others will not infringe upon or develop products in violation of our intellectual property rights
	ª		pending applications for additional intellectual property rights will be granted

Our ability to enforce and maintain patents, copyrights, trademarks and other intellectual property rights is subject to general litigation risks. We are often presented with various defenses when we seek to enforce our rights, including assertions that our intellectual property right being asserted is invalid. In addition, our declaration of intellectual property rights often results in the other party seeking to claim alleged intellectual property rights of its own against us. We describe certain intellectual property litigation in Note 15 of our Consolidated Financial Statements.

MARKET REGIONS

We market our gaming products in legalized gaming jurisdictions around the world. While our most significant markets are in North America, we continue to pursue expanding international markets. Opportunities, challenges and our successes vary across these jurisdictions. In the following discussion, we describe various regional development expectations about market size, timing, and government actions. There can be no assurance that these expectations will be realized or the extent to which IGT will benefit if they are realized.

North America

As an industry leader, we have participated in the growth of North America gaming, beginning in the early 1990’s with Midwest riverboats, through the spread of tribal casinos, and into non-traditional venues such as racetracks (also known as racinos) and bingo parlors. We estimate the market base of gaming machines installed has increased from 184,000 machines in 1991 to 836,000 machines in 2006. Our estimate of the market base of gaming machines installed in North America below is based on internal data and information provided by various gaming agencies.

		Estimated Market Base
September 30,		2006				2005
Traditional			224,000				220,000
Native America Tribal			114,000				110,000
Racino/Lottery			33,000				33,000
US Western			371,000				363,000
Traditional			112,000				127,000
Native America Tribal			103,000				98,000
Racino/Lottery			22,000				23,000
US Central			237,000				248,000
Traditional			62,000				66,000
Native America Tribal			40,000				33,000
Racino/Lottery			37,000				34,000
US Eastern			139,000				133,000
Traditional			51,000				46,000
Racino/Lottery			38,000				39,000
Canadian			89,000				85,000
Total North America			836,000				829,000

Gaming continues to grow in popularity as a leisure activity in North America. This growth is encouraged by the development of newer, more innovative gaming devices, as well as governments looking for new ways to support public operations. Over the past three years, we established a commercial presence in most CDS and Class II markets where we had previously not operated because of regulatory uncertainties. We expect to benefit from further expansion of legalized gambling jurisdictions in fiscal 2007 and 2008. Legislative actions and voter referendums are providing new market opportunities for IGT in:

	ª		Florida and Pennsylvania, from which we have firm orders expected to ship in the first quarter of fiscal 2007
	ª		Washington and California CDS and Class II products
	ª		California with pending tribal state compact negotiations
	ª		Oklahoma with approvals for Instant Bingo games

We continue monitoring gaming legislation under consideration in several other states, including Kansas, Maryland, Massachusetts, New Hampshire and Texas. With our leadership position in traditional and Class III gaming markets and growing presence in CDS and Class II markets, we are well positioned to be a supplier of choice in any potential new markets.

Sales and Service Regions

Our North America sales and service offices are organized into four regions, to better respond to customer needs.

US Western

Representing approximately 44% of gaming devices in the North America market, the western region spans 11 states, including:

	ª		Traditional casino markets in Nevada and Colorado
	ª		Class II and class III markets in California, Arizona, Colorado, Idaho, Oregon, Wyoming and New Mexico
	ª		CDS markets in Washington
	ª		VLT markets in Oregon, Montana and New Mexico

Nevada continues to dominate this region as the largest and most established gaming market in the world, with approximately 195,000 machines in over 250 casinos.

	ª		Las Vegas, Nevada’s largest concentration of gaming, initiated a new wave of expansion in 2005 with the opening of Wynn Las Vegas. This was followed by the Venetian expansion project scheduled to open in 2007, the June 2006 ground breaking of the MGM City Center complex and Wynn’s Encore expansion expected in 2010. Boyd Gaming also announced redevelopment plans for the Stardust property to be known as Echelon Place expected to begin in 2007.
	ª		The Las Vegas off-Strip or locals market experienced new growth in 2006 with the opening of Boyd’s South Coast and Station’s Red Rock Station Casino, as well the Station’s Green Valley Ranch expansion. Other upcoming projects announced include property expansions in North Las Vegas and a major facility in the Southern Hill’s master planned community.
	ª		Northern Nevada continued to show signs of expansion in 2006. In Reno, Station Casinos is progressing with new property plans and the Atlantis Casino Resort is considering adding properties as well as expanding their existing casino property. Additionally, the Reno Peppermill Casino received zoning approval for a new property north of Sparks in Spanish Springs.

California tribal properties continued installation of CDS Class II games in 2006, including a significant expansion at the San Pablo Casino at Lytton Rancheria in the San Francisco Bay Area. In 2006, the Governor of California announced the renegotiation of several tribal state compacts now pending legislative approval. We anticipate approval of these compacts in early 2007 and it may cause other tribes to consider compact renegotiations for facility expansions.

Washington continues with IGT game placements and we anticipate further market expansion in 2007 with seven properties that have applied to open new or expand existing facilities.

Oregon lottery continues with the installation of over 5,000 IGT machines under two contracts awarded in 2006, which are expected to be completed during 2007.

US Central

Spanning 18 states and approximately 28% of North America gaming devices, the central region encompasses:

	ª		riverboats in Illinois, Indiana, Iowa, Louisiana, Mississippi and Missouri
	ª		land based casinos in Michigan and Louisiana
	ª		Class III casinos in Iowa, Kansas, Louisiana, Michigan, Minnesota, Mississippi, North Dakota, South Dakota, and Wisconsin
	ª		Class II and Class III markets in Oklahoma
	ª		racinos in Arkansas
	ª		VLT markets in Louisiana and South Dakota

The largest concentration is in the riverboat jurisdictions and land based casinos with approximately 112,000 machines in 98 locations. The Mississippi Gulf Coast lost 16,000 machines destroyed by hurricane Katrina in August 2005. To date, 10 casinos have reopened with an aggregate of 12,000 machines, while most other affected operators and new operators are expecting to build new facilities over the next two years.

The Iowa Racing Commission granted four additional gaming licenses in May 2005. New openings include:

	ª		the Riverside Casino and Golf Resort in 2006 with 1,100 units
	ª		the Wild Rose Casino in 2006 with 500 units
	ª		two properties scheduled to open in 2007 with 1,500 units

Iowa, Kansas, Louisiana, Michigan, Minnesota, Mississippi, North Dakota, South Dakota, and Wisconsin comprise 126 tribal casino properties with approximately 74,000 Class III gaming devices, with continuing opportunities for TITO conversions and legacy product replacements.

Oklahoma currently contains approximately 35,000 gaming machines. We initiated Class III game installations in fiscal 2005 and our installed base grew from 1,000 to 5,400 units during fiscal 2006. Oklahoma also became the 19^th state to join the IGT Native American Progressive Systems links in 2006 with198 WAP and 66 stand-alone games currently installed.

Arkansas regulations for games of skill were approved by the Racing Commission in August 2006. We expect to begin installing units by the end of calendar 2006 at:

	ª		Southland Park in West Memphis, opening their expanded facility with 800 units
	ª		Oaklawn Park in Hot Springs with an initial 130 units and plans for a larger facility to open 2008

Louisiana and South Dakota anticipate VLT replacements in the near term, while Nebraska, Kansas, and Texas may generate additional opportunities in 2007 and beyond.

US Eastern

Comprising approximately 17% of the North America installed base, the eastern region includes:

	ª		traditional casino markets in Atlantic City, New Jersey and cruise ships
	ª		tribal Class III casinos in Connecticut, New York, and North Carolina
	ª		centrally monitored facilities in Delaware, Maine, New York, Rhode Island, and West Virginia
	ª		Class II CDS facilities in Alabama and Florida
	ª		Pennsylvania when its program starts in fiscal 2007

Atlantic City remains the region’s largest market with approximately 39,000 machines. This market is becoming more competitive as casino ownership concentrates due to mergers and properties update their floors to include more table games and non-gaming amenities. Pinnacle Entertainment recently purchased The Sands, which closed in November 2006 to make way for a major resort casino.

Six new cruise ships were added in fiscal 2006 and nine more are expected to launch in 2007. Each ship carries approximately 200 gaming machines.

New York and Connecticut casinos are in the midst of Class III expansions. New York’s Seneca added 900 machines during fiscal 2006 to its Niagara Casino, is adding a new hotel to its Allegany property and planning a new facility in Buffalo, New York. Foxwoods in Connecticut is expected to open its 1,500 machine expansion in 2008.

New York, Rhode Island, Maine and West Virginia racino markets continue to grow.

	ª		In New York and Rhode Island, we have long-term revenue sharing arrangements in place and continue achieving market share gains at existing facilities through the reallocation process based on quality game performance.
	ª		New York’s addition of Tioga Downs and Yonkers in 2006 and the anticipated opening of Vernon Downs in early fiscal 2007 will bring this market up to approximately 10,000 machines. The New York Aqueduct track opening is not expected until 2008.
	ª		In Rhode Island, we expect the Lincoln Park 1,400 machine expansion to open in April 2007.
	ª		In Maine, we expect the permanent Penn National facility to open in mid 2008. Our machines were installed at the temporary facility in November 2005.
	ª		In West Virginia, we anticipate Charles Town will complete its 800 to 1000 unit expansion in early 2007.

Alabama CDS charitable bingo markets grew in 2006 with expansions at two facilities.

Florida tribal properties continue replacing competitor products with IGT Class II CDS machines. Ongoing Florida tribal compact negotiations will determine if Class III machines will be allowed in this market. If Class III machines are allowed, we anticipate the Florida market could increase by as many as 15,000 units and gradually replace Class II machines. With court decisions upholding the Broward County voter referendum allowing gaming at racetracks, operators announced plans to install 6,000 new games at four facilities beginning early in 2007.

Pennsylvania Gaming Control Board approved regulations and awarded the first five conditional gaming licenses in September 2006 for the 61,000 slot machines in 14 racetrack venues statewide legalized in July 2004. In December, the gaming board is expected to consider whether to distribute seven additional licenses. With IGT shipments in October 2006 and the first casino opening in November 2006, we anticipate approximately 40,000 games will be installed in this market through fiscal 2010.

Canada

Every Canadian province has some form of gaming, which we service with four sales and technical support facilities in Canada. Casinos, racinos and public gaming in Canada make up 11% of the North America market installed base. VLT programs are operated by government lottery corporations in Alberta, Manitoba, Quebec, Saskatchewan, and the four Atlantic provinces. While Canadian markets have stabilized, replacements and expansions provide steady machine, parts, and game software sales.

International

Our International sales and service offices are located to better serve customer needs, address specific regulatory environments, and pursue new and expanding market opportunities outside of North America.

IGT’s presence in international gaming markets commenced in 1986, and we continue to pursue growth opportunities outside of North America. Our goal is to further capitalize on the design and manufacturing experience in North America, while customizing products for unique local and regulatory environments. Our International headquarters, located in the Netherlands, oversees all international operations servicing:

	ª		casino markets in Asia, Europe, Latin America, Russia and South Africa
	ª		club markets in Australia and New Zealand
	ª		AWP markets in the UK and continental Europe
	ª		pachisuro markets in Japan
	ª		US military bases overseas

The outlook for international market expansion continues to improve as support increases for legalized casinos as a means of promoting tourism revenue. We anticipate increased financial contributions from our international operations as these markets continue to grow in significance.

Europe

Our Netherlands office opened in 1992 to service casino markets in continental Europe, the Middle East and North Africa. Casinos and slot halls in these markets compete with non-casino environments such as pubs and arcades. We anticipate moderate growth in Europe’s installed unit base. Replacement units in this market are increasingly driven by cashless solutions such as TITO.

In 2004, we opened a representative office in Moscow to explore market opportunities in Russia and the Commonwealth of Independent States (former Soviet bloc countries). Commercial outlook for fiscal 2007 in Russia is uncertain due to the impact of unfavorable legislative changes.

Latin America

With offices in Argentina, Mexico, and Brazil, we market gaming equipment in several legalized gaming jurisdictions in Latin America. Our office in Mexico was established in conjunction with our entry into the CDS Video Bingo market beginning in fiscal 2005. Mexico’s CDS market continues to expand and we anticipate further CDS development in other Latin America jurisdictions.

South Africa

Our office in Midrand, Gauteng services the gaming markets located in Africa, Sub-Saharan Africa and the Indian Ocean Islands. Casino gaming in South Africa is governed under its 1996 National Gambling Act, allowing for the allocation of up to 40 casino licenses in nine provinces. We introduced WAP games in South Africa during fiscal 2006.

Asia

Our Macau office was established in fiscal 2005 to service the Asia region. Rapid growth is projected in Macau and the surrounding region over the next few years, as countries such as the Philippines, Singapore, Vietnam, and Cambodia consider and implement further gaming expansion and development.

Australia and New Zealand

Australia is one of the largest and most established markets for video gaming products outside of North America. Our offices in Australia and New Zealand provide sales and customer service for casino, club, and hotel gaming. Base or neuter machines manufactured in Reno are shipped to Australia for completion with necessary game development, programming, testing, delivery and installation. Although “harm minimization” continues to be an important political issue in this region, most of the more restrictive gaming measures are fully implemented and our experience indicates operator confidence is returning to the market.

United Kingdom

We established full scale operations in Manchester, England with the acquisition of Barcrest Limited in March 1998. Barcrest is a leading UK manufacturer of AWP games and top box products, servicing markets in both the UK and continental Europe. We added facilities in the Midlands region during fiscal 2002 for casino gaming implementations under the new UK Gambling Act.

Barcrest markets are primarily replacement driven, dominated by pubs, licensed betting offices, bingo halls and arcades that demand regular releases of new machines. Our efforts in this market are built around three design centers focusing on UK products, and one design center focused on products for continental Europe. The UK market installed base is approximately 240,000 units and new games are launched every four to six weeks.

Japan

We have served the gaming market in Japan since 1990 with engineering, development, sales, and administration from our head office in Tokyo and a logistics office in Nagano. Our manufacturing arrangement with Sega Sammy, a Japanese pachislots maker, originated in 2004 is helping to position our company as a more competitive and consistent performer in the pachisuro marketplace. During 2006, Japan began the transition from Reg-4 games to the more restrictive Reg-5 games. All Reg-4 pachisuro machines are required to be removed from the market by the end of September 2007. The market installed base of pachisuro machines is estimated at over 1.8 million units with an estimated 50% average annual turnover.

Internet Gaming

Our internet customer relations are concentrated in the UK and Ireland. We do not provide internet gaming services in jurisdictions where they are not legal.

COMPETITION

The market for gaming machines and systems is highly competitive, constantly evolving and subject to rapid technological change. New product development is a significant driver of competition. Principal competitive factors include:

	ª		product functionality and features
	ª		product architecture and technological innovations
	ª		availability and quality of support
	ª		ease and speed of product implementation
	ª		vendor and product reputation
	ª		knowledge of gaming industry practice
	ª		customer acceptance and player preference

We think we have a global competitive advantage attributable to:

	ª		broad alliances and long history with customers
	ª		the breadth of our gaming products
	ª		a dynamic and diverse library of innovative and strong performing games
	ª		developing systems that enhance operator profitability
	ª		an extensive collection of intellectual properties
	ª		the highest levels of customer service and support
	ª		the financial strength to aggressively invest in research and development
	ª		an extensive, well established infrastructure of sales and manufacturing
	ª		worldwide recognition and geographic diversity

Our competitors include, but are not limited to, the following manufacturers that have developed casino-style gaming products and are either authorized to sell products or are in the licensing process in many US and foreign gaming jurisdictions:

	ª		Ainsworth Gaming Technology
	ª		Aristocrat Leisure Limited
	ª		Aruze, formerly known as Universal
	ª		Bally Technologies, Inc. (formerly Alliance)
	ª		Franco Gaming, Ltd., a division of Recreativos Franco
	ª		Gauselmann Group (Atronics)
	ª		Konami Co. Ltd.
	ª		Lottomatica, (acquired GTech in 2006)
	ª		Multimedia Gaming Inc.
	ª		Novomatic Industries
	ª		Progressive Gaming International Corporation
	ª		Rocket Gaming Systems
	ª		Scientific Games Corporation
	ª		Shuffle Master Inc.
	ª		Unidesa (part of the Cirsa Group)
	ª		Video Game Technologies
	ª		WMS Industries

OPERATIONAL OVERVIEW

Manufacturing and Suppliers

In addition to our main production facility in Reno, Nevada, we manufacture AWP and UK casino products in the UK and pachisuro machines through a third party manufacturer in Japan. AWP and pachisuro machines provide lower game yields due to associated regulatory restrictions and generally have shorter product life cycles. International casino and club gaming machines are fabricated, whole or in kit form, at our Reno facility.

Our manufacturing operations primarily involve the assembly of electronic components, cables, harnesses, video monitors and prefabricated parts purchased from outside sources. We also operate facilities for cabinet manufacturing, silkscreen, and digital design. We have a broad base of material suppliers and utilize multi-sourcing practices to ensure component availability.

Our Reno facility currently devotes approximately 889,000 square feet to product development, manufacturing, warehousing, shipping and receiving. We enlarged our Reno facility with additional space for offices, manufacturing, and a new data center in fiscal 2005. The consolidation of various Las Vegas leased facilities and 830 employees into a new 37-acre central campus began in fiscal 2004 and is estimated to be completed in 2007.

During fiscal 2006, our ISO 9001.2000 manufacturing industry certification was maintained for our Nevada and UK facilities demonstrating our commitment to quality management. The ISO standards represent an international consensus with respect to the design and use of practices intended to ensure ongoing customer satisfaction with consistent delivery of products and services.

We generally carry a significant amount of inventory due to the broad range of products we manufacture. Our production backlog totaled approximately $353.9 million at October 31, 2006 and $442.1 million at October 31, 2005. We reasonably expect to fill this backlog within the next fiscal year.

Sales and Distribution

Our products and services are sold to gaming operators and governmental entities that conduct gaming operations. We market our products through our worldwide network of approximately 290 sales associates. We use third party distributors and agents in certain markets under arrangements that generally do not specify minimum purchases and provide for termination if certain performance standards are not maintained.

Customer Service

We consider customer service an important aspect of our overall marketing strategy and a key factor differentiating us from our competitors. We provide product delivery and services for installation, warranty, after-market technical support, new product training and support, supplemental equipment and spare parts, product retrofit, game conversions, as well as WAP networks and internet casino operations. We employ approximately 1,000 trained personnel in over 50 customer service centers worldwide.

IGT provides access to product information and a direct link for two-way communication between the customer and IGT 24 hours a day, seven days a week. We also offer customers a variety of classes through the IGT Training University to ensure their employees can successfully use our products to their full potential. We provide 24-hour customer support through our website (www.IGT.com) and a fully staffed Global Support Center telephone hotline, with access to a full range of field support engineering resources to resolve technical issues.

Regulatory Compliance

We dedicate over 90 people to regulatory compliance worldwide in order to ensure that IGT products meet requirements in each gaming jurisdiction and that we obtain the necessary approvals and licenses. IGT holds over 340 gaming licenses in over 290 licensed jurisdictions worldwide, as well as 100 or more international jurisdictions not requiring licensure. We submitted almost 47,000 products for regulatory approval during fiscal 2006.

Employees

As of September 30, 2006, we employed approximately 5,200 individuals worldwide, including 4,200 in North America and 1,000 internationally. We believe we have favorable relationships with our employees. IGT is committed to providing employees a stable and rewarding work environment, the opportunity to grow based on their talents, and the opportunity to share in the success of the company, which they make possible.

GOVERNMENT GAMING REGULATION

General

We operate in most legal casino gaming jurisdictions worldwide, as well as in a significant number of legalized lottery jurisdictions. The manufacture and distribution of gaming equipment and related software and the operation of casinos is subject to regulation in these jurisdictions by various regulators at all levels from city and tribal officials along with federal regulatory agencies, with the majority of oversight being provided by each individual state’s gaming regulators. While the regulatory requirements vary from jurisdiction to jurisdiction, the majority of these jurisdictions require:

	ª		licenses and/or permits
	ª		findings of suitability
	ª		documentation of qualification including evidence of financial stability
	ª		other required approvals for companies that manufacture and distribute gaming equipment
	ª		individual suitability of officers, directors, major stockholders and key employees

Various gaming regulatory agencies have issued licenses allowing us to manufacture and distribute our gaming machines and systems. IGT and our key personnel have obtained or applied for all government licenses, permits, registrations, findings of suitability and approvals necessary to maintain compliance with all regulatory agency requirements. Many of the regulations at each level are similar or overlapping; however, we are required to satisfy all conditions individually for each jurisdiction. Laws of the various gaming regulatory agencies serve to protect the public and ensure that gaming related activity is conducted honestly, competitively, and free of corruption. In the jurisdictions where we operate gaming machines, regulatory oversight additionally ensures that the local authorities receive the appropriate amount of tax revenues. As such, our operations’ financial systems and reporting functions must demonstrate high levels of detail and integrity.

In some jurisdictions, regulators not only govern the activities that take place in their particular jurisdiction, but they also oversee activities that occur in other jurisdictions to ensure that the company is in compliance with local standards on a worldwide basis. As a Nevada corporation, we are held responsible by our state regulatory authorities to maintain Nevada standards for all of our operations worldwide. For this reason, in a number of jurisdictions, we employ community staff members and legal resources familiar with local customs who regularly report to our compliance department to assist in keeping us compliant with applicable regulations worldwide.

The nature of the industry and our worldwide operations make this process very time consuming and requires extensive resources. Through this process, we seek to assure both regulators and investors that all our operations maintain the highest levels of integrity and avoid any appearance of improprieties. We have never been denied a gaming related license, nor have our licenses ever been suspended or revoked.

Federal Registration

The Gambling Devices Act of 1962 makes it unlawful for a person to manufacture, transport, or receive gaming machines, gaming devices or components across interstate lines unless that person has first registered with the Attorney General of the US Department of Justice. In addition, gambling device identification and record keeping requirements are imposed by this act. Violation of this act may result in seizure and forfeiture of the equipment, as well as other penalties. Entities involved in the manufacture and transportation of gaming devices are required to register annually. We are confident that we have complied with the registration requirements of this act.

Responsible Gaming

Social responsibility is a cornerstone of IGT’s business philosophy. Our Corporate Responsible Gaming Program continues to gain positive recognition in the US and internationally. New gaming jurisdictions are becoming more cognizant of the importance of social protections as a critical part of any new or expanding gaming initiatives. We dedicate a full time position to the implementation of a formal responsible gaming program that strives to provide protection for vulnerable populations while helping to ensure the future of our business.

We partner with both gaming stakeholders and the community to raise awareness of problem gambling, promote education and research, as well as provide funding for treatment. IGT works closely with public policy makers to formulate sound responsible gaming policies. It is our goal to provide the best gaming entertainment in the world for our customers while endeavoring to create the most effective safety net possible for those individuals who may be adversely affected.

Nevada

The manufacture, sale and distribution of gaming devices in Nevada or for use outside Nevada are subject to extensive state and local laws, regulations and ordinances of the Nevada Gaming Commission, the State Gaming Control Board, and various county and municipal regulatory authorities (collectively referred to as the Nevada gaming authorities). These laws, regulations and ordinances primarily cover the responsibility, financial stability and character of gaming equipment manufacturers, distributors and operators, as well as persons financially interested or involved in gaming operations.

The manufacture, distribution and operation of gaming devices require separate licenses. The laws, regulations and supervisory procedures of the Nevada gaming authorities seek to:

	(i)		prevent unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity
	(ii)		establish and maintain responsible accounting practices and procedures
	(iii)		maintain effective control over the financial practices of licensees, including establishing 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
	(iv)		prevent cheating and fraudulent practices, and
	(v)		provide a source of state and local revenues through taxation and licensing fees.

Changes in these laws, regulations, procedures, and judicial or regulatory interpretations could have an adverse effect on our gaming operations.

Our subsidiaries conducting the manufacture, sale, and distribution of gaming devices in Nevada or for use outside Nevada, as well as the operation of slot machine routes and other gaming activities in Nevada, are each required to be licensed by the Nevada gaming authorities. Our licenses must be renewed periodically and the Nevada gaming authorities have broad discretion regarding such renewals. Licenses are not transferable. Each type of machine we sell in Nevada must first be approved by the Commission and may require subsequent machine modification. Our gaming subsidiaries licensed in Nevada must also report substantially all loans, leases, and sales of securities and similar financing transactions of a material nature to the GCB and/or have them approved by the Commission. We believe we have obtained all required licenses and/or approvals necessary to carry on our business in Nevada.

The Company is registered with the Commission as a publicly traded corporation and is required periodically to submit detailed financial and operating reports to the Commission and to furnish any other information that the Commission may require. No person may become a stockholder of or receive any percentage of profits from our licensed gaming subsidiaries, without first obtaining licenses and approvals from the Nevada gaming authorities.

Our officers, directors and key employees who are actively engaged in the administration or supervision of gaming and/or directly involved in gaming activities of our licensed gaming subsidiaries may be required to file applications with the Nevada gaming authorities and may be required to be licensed or found suitable by them. Officers, directors, and certain key employees of our licensed gaming subsidiaries must file applications with the Nevada gaming authorities and may be required by them to be licensed or found suitable.

In addition, anyone having a material relationship or involvement with us or any of our licensed gaming subsidiaries may be required to be found suitable or licensed and to pay to the GCB all of its investigation costs and fees. The Commission may deny an application for licensure or finding of suitability for any cause deemed reasonable. A finding of suitability is comparable to licensing and both require submission of detailed personal and financial information followed by a thorough background investigation. We must report changes in licensed positions to the Commission. The Commission may disapprove any change in position by one of our officers, directors, or key employees, or require us to suspend or dismiss officers, directors or other key employees and sever relationships with other persons who refuse to file appropriate applications, or whom the Nevada gaming authorities find unsuitable to act in such capacities. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada.

We are required to submit detailed financial and operating reports to the Commission. If the Commission determines that we are in violation of any gaming laws, our gaming licenses can be limited, conditioned, suspended or revoked. In addition, the Company, our licensed gaming subsidiaries and any persons involved may be subject to substantial fines for each separate violation of the gaming laws at the discretion of the Commission. The Commission also has the power to appoint a supervisor to operate our gaming properties and, under certain circumstances, earnings generated during the supervisor’s appointment could be forfeited to the State of Nevada. The limitation, conditioning or suspension of our gaming licenses or the appointment of a supervisor could (and revocation of our gaming licenses would) materially and adversely affect our gaming operations.

The Commission may require any beneficial holder of our voting securities, regardless of the number of shares owned, to file an application, be investigated, and be found suitable, in which case the applicant would be required to pay the costs and fees of the GCB investigation. 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. Any person who acquires more than 5% of the Company’s voting securities must report this to the Commission. Any person who becomes a beneficial owner of more than 10% of our voting securities must apply for a finding of suitability within 30 days after the Chairman of the GCB mails the written notice requiring this finding of suitability.

Under certain circumstances, an institutional investor, as this term is defined in the Nevada gaming regulations, acquiring more than 10% but not more than 15% of our voting securities, may apply to the Commission for a waiver of these finding of suitability requirements, provided the institutional investor holds the voting securities for investment purposes only. An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of its business.

Our voting securities must not be acquired for the purpose of causing, directly or indirectly,

	(i)		the election of a majority of our board of directors,
	(ii)		any change in our corporate charter, bylaws, management, policies or operations, or
	(iii)		any other action the Commission finds to be inconsistent with holding our voting securities for investment purposes only.

The Commission considers voting on all matters voted on by stockholders and the making of financial and other informational inquiries of the type normally made by securities analysts, to be consistent with investment intent.

The Commission has the power to investigate any person who holds our debt or equity securities. The Clark County Liquor and Gaming Licensing Board, with jurisdiction over gaming in the Las Vegas area, may similarly require a finding of suitability of a security holder. The applicant stockholder is required to pay all costs of such investigation. Our bylaws provide for us to pay these costs that are related to our officers, directors or employees.

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 Commission or the Chairman of the GCB may be found unsuitable. The same restrictions apply to a record owner who fails to identify the beneficial owner, if requested to do so. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of our common stock beyond such period of time as may be prescribed by the Commission may be guilty of a criminal offense.

We are subject to disciplinary action and possible loss of our approvals if, after we receive notice that a person is unsuitable to be a stockholder or to have any other relationship with us or any of our licensed gaming subsidiaries, we:

	(i)		pay that person any dividend or interest upon our voting securities,
	(ii)		allow that person to exercise, directly or indirectly, any voting right conferred through securities held by that person,
	(iii)		give 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 voting securities for cash at fair market value.

Additionally, the Clark County authorities have taken the position that they have the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming licensee.

The Commission may, in its discretion, require the holder of our debt securities to file an application, be investigated and be found suitable to own any of our debt securities. If the Commission determines that a person is unsuitable to own any of these securities, then pursuant to the Nevada gaming laws, we can be sanctioned, including the loss of our approvals, if without prior Commission approval, we:

	(i)		pay to the unsuitable person any dividend, interest, or any distribution whatsoever;
	(ii)		recognize any voting right by such unsuitable person in connection with such securities;
	(iii)		pay the unsuitable person remuneration in any form; or
	(iv)		make any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction.

We are required to maintain a current stock ledger in Nevada, subject to examination by the Commission at any time. If any of our 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 Commission. 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 Commission has the power at any time to require our stock certificates to bear a legend indicating that the securities are subject to the Nevada gaming laws and the regulations of the Commission. To date, the Commission has not imposed this requirement on us.

We may not make a public offering of our securities without the prior approval of the Commission if the securities or their proceeds are intended to be used to construct, acquire or finance gaming facilities in Nevada, or retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation, or approval by the Commission or the GCB as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful.

In July 2005, the Commission granted us prior approval to make public offerings for a period of two years, subject to certain conditions (referred to as a shelf approval). The chairman of the GCB may rescind the shelf approval for good cause without prior notice upon the issuance of an interlocutory stop order. The shelf approval does not constitute a finding, recommendation, or approval by the Commission or the GCB as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful.

Changes in control of the Company through merger, consolidation, acquisition of assets or stock, management or consulting agreements or any form of takeover cannot occur without the prior investigation of the GCB and approval of the Commission. Entities seeking to acquire control of us must satisfy the GCB and the Commission in a variety of stringent standards prior to assuming control. The 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 Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and other corporate defense tactics that affect Nevada gaming licensees, and publicly traded corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Commission has established a regulatory scheme to guard against the potentially adverse effects of these business practices upon Nevada’s gaming industry and to further Nevada’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 Commission before we can make exceptional repurchases of voting securities above their current market price and before a corporate acquisition opposed by management, can be consummated. Nevada’s gaming laws and regulations also require prior approval by the Commission if we were to adopt a plan of recapitalization proposed by our board of directors in opposition to a tender offer made directly to our stockholders for the purpose of acquiring control of us.

License fees and taxes are imposed by the Nevada gaming authorities and are payable either quarterly or annually. The fees and taxes are computed in various ways depending on the type of activity involved by our subsidiaries and the cities and counties where our subsidiaries conduct operations. Annual fees are payable to the GCB to renew our licenses as a manufacturer, distributor, and operator of a slot machine route. Nevada law also requires persons providing gaming machines in Nevada to casino customers on a revenue participation basis to pay their proportionate share of the taxes imposed on gaming revenues generated by the participation gaming machines.

Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively referred to as licensees), and who proposes to participate in the conduct of gaming operations outside of Nevada is required to deposit with the GCB, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the GCB of the licensee’s participation in foreign gaming. This revolving fund is subject to increase or decrease at the discretion of the Commission. As a licensee, we are required to comply with certain reporting requirements imposed by the Nevada laws. We are also subject to disciplinary action by the Commission if we knowingly violate any laws of the foreign jurisdiction pertaining to our foreign gaming operation, fail to conduct our foreign gaming operations 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 operation who has been denied a license or finding of suitability in Nevada on the grounds of personal unsuitability.

Native America

Federal law, tribal-state compacts, and tribal gaming regulations govern gaming on Native American lands. The Indian Gaming Regulatory Act of 1988 provides the framework for federal and state control over all gaming on Native American lands and is administered by the National Indian Gaming Commission and the Secretary of the US Department of the Interior. The commission has authority to issue regulations governing tribal gaming activities, approve tribal ordinances for regulating gaming, approve management agreements for gaming facilities, conduct investigations and monitor tribal gaming generally. The act is subject to interpretation by the commission and may be subject to judicial and legislative clarification or amendment.

The act requires that the tribe and the state enter into a written agreement, a tribal-state compact, which governs the terms of the gaming activities. Tribal-state compacts vary from state-to-state and in many cases require equipment manufacturers and/or distributors to meet ongoing registration and licensing requirements. In addition, many Native American tribes, to regulate gaming-related activity on Indian lands, have established tribal gaming commissions. Indian tribes are sovereign in their own government systems, with primary regulatory authority over gaming on land within the tribes’ jurisdictions. IGT distributes gaming equipment to Native American tribes that have negotiated compacts with their states and/or have received federal approval where required.

International

Certain foreign countries permit the importation, sale and operation of gaming equipment in casino and non-casino environments. Some countries prohibit or restrict the payout feature of the traditional slot machine or limit the operation and the number of slot machines to a controlled number of casinos or casino-like locations. Each gaming machine must comply with the individual country’s regulations. Certain jurisdictions require the licensing of gaming machine operators and manufacturers.

We manufacture and supply gaming equipment to various international markets including Africa, Asia, Australia, Europe, Japan, Latin America, New Zealand, and the UK. We have obtained the required licenses to manufacture and distribute our products in the various foreign jurisdictions where we do business.

Internet Gaming

With the acquisition of WagerWorks in August 2005, we provide online gaming content and services for certain jurisdictions. We provide online casino software and services from Alderney in the British Channel Islands, which has a substantial regulatory structure for internet based wagering under the Alderney Gaming Control Commission. Recognizing the legal uncertainties and recent legislative initiatives regarding online gaming in the US, we do not accept wagers from US citizens. We have extensive operational control structures for regulatory compliance encompassing software and game development, computer operations, consumer cash handling, and identity checking.

Item 1A. Risk Factors

We urge you to carefully review the following discussion of the specific risks and uncertainties that affect our business. These include, but are not limited to, the following:

Our ability to operate in our existing markets or expand into new jurisdictions could be adversely affected by changing regulations or problems with obtaining needed licenses or approvals.

We operate only in jurisdictions where gaming is legal. The gaming industry is subject to extensive governmental regulation by US federal, state and local governments, as well as tribal officials or organizations and foreign governments. While the regulatory requirements vary by jurisdiction, most require:

	ª		licenses and/or permits
	ª		findings of suitability
	ª		documentation of qualifications, including evidence of financial stability
	ª		other required approvals for companies who manufacture or distribute gaming equipment and services
	ª		individual suitability of officers, directors, major stockholders and key employees

Any delays in obtaining regulatory approvals needed for expansion within existing markets or into new jurisdictions can negatively affect our opportunities for growth. Further, changes in existing gaming regulations may hinder or prevent us from continuing to operate in those jurisdictions where we currently do business, which would harm our operating results. In particular, the enactment of unfavorable legislation or government efforts affecting or directed at manufacturers or gaming operators, such as referendums to increase gaming taxes or requirements to use local distributors, can have a negative impact on our operations.

Slow growth in the number of new casinos or the rate of replacement of existing gaming machines could limit or reduce our future profits.

Demand for our products is driven substantially by the replacement of existing gaming machines, the establishment of new gaming jurisdictions, and the addition of new casinos or expansion of existing casinos within existing gaming jurisdictions. The establishment or expansion of gaming in any jurisdiction typically requires a public referendum or other legislative action. As a result, gaming continues to be the subject of public debate, and there are numerous active organizations that oppose gaming. Opposition to gaming could result in restrictions on or even prohibitions of gaming operations in any jurisdiction. In addition, the rate of growth in the North American marketplace has diminished. A continued reduction in growth or in the number of gaming jurisdictions or delays in the opening of new or expanded casinos could reduce the demand for our products.

Demand for our products could be adversely affected by changes in player and operator preferences.

As a supplier of gaming machines, we must offer themes and products that appeal to gaming operators and players. If we are unable to anticipate or timely react to any significant changes in player preferences, such as a negative change in the trend of acceptance of our newest systems innovations or jackpot fatigue (declining play levels on smaller jackpots), the demand for our gaming products could decline. Further, our products could suffer a loss of floor space to table games and operators may reduce revenue sharing arrangements, each of which would harm our sales and financial results. In addition, general changes in consumer behavior, such as reduced travel activity and redirection of entertainment dollars to other venues, could result in reduced demand for our products.

Our business is vulnerable to changing economic conditions.

Unfavorable changes in general economic conditions including recession, economic slowdown, or higher fuel or other transportation costs, may reduce disposable income of casino patrons or result in fewer patrons visiting casinos. Such a decline in the relative health of the gaming industry would likely result in a decline in the amount of resources our customers have to purchase our products and services. This may also result in reduced play levels, which could cause our cash flows and revenues from revenue sharing products to decline. Our operating results may be negatively impacted by a decrease in interest rates causing an increase in jackpot expense and a reduction of investment income.

Our success in the competitive gaming industry depends in large part on our ability to develop and manage frequent introductions of innovative products.

The gaming industry is intensely competitive, and many of our competitors have substantial resources and specialize in the development and marketing of their products. Because the gaming industry is characterized by dynamic customer demand and rapid technological advances, we must continually introduce and successfully market new themes and technologies in order to remain competitive and effectively stimulate customer demand. Our customers will accept a new product only if it is likely to increase operator profits more than competitors’ products. There is no guarantee that our new products will attain this market acceptance or that our competitors will not more effectively anticipate or respond to changing customer preferences. In addition, any delays by us in introducing new games on schedule could negatively impact our operating results by providing an opportunity for our competitors to introduce new products and gain market share ahead of us.

Failure to attract, retain and motivate key employees may adversely affect our ability to compete.

Our success depends largely on recruiting and retaining talented employees. The market for qualified executives and highly skilled, technical workers is intensely competitive. The loss of key employees or an inability to hire a sufficient number of technical staff could limit our ability to develop successful products and cause delays in getting new products to market.

We may be unable to protect our intellectual property.

A significant portion of our revenues is generated from products using certain intellectual property rights, and our operating results would be negatively impacted if we were unsuccessful in protecting these rights from infringement. In addition, some of our most popular games and features are based on trademarks, patents and other intellectual property licensed from third parties. The continued success of these games may depend upon our ability to retain or expand these licenses with reasonable terms. We also depend on trade secret law to protect certain proprietary knowledge and have entered into confidentiality agreements with those of our employees who have access to this information. However, there can be no guarantees that our employees will not breach these agreements, and if these agreements are breached it is unlikely that the remedies available to us will be sufficient to compensate us for the damages suffered.

We may be subject to claims of intellectual property infringement or invalidity.

Periodically we receive notification from others claiming that we are infringing their patent, trademark or other intellectual property rights. Regardless of their merit, such claims may cause us to incur significant costs. Responding to these claims could also require us to stop selling or to redesign our products, to pay significant amounts in damages or enter into agreements to pay significant licensing fees or royalties. Additionally, if any of these claims prove successful, it could limit our ability to bring new products to market in the future.

Our gaming machines and online operations may experience losses due to fraudulent activities.

We incorporate security features into the design of our gaming machines and other systems, including those responsible for our online operations, designed to prevent us and our patrons from being defrauded. However, there can be no guarantee that such security features will continue to be effective in the future. If our security systems fail to prevent fraud, our operating results could be adversely affected. Additionally, if third parties breach our security systems and defraud our patrons, the public may lose confidence in our gaming machines and operations.

Our outstanding debt obligations subject us to additional risks.

Our Debentures are currently convertible through mid January 2007. Due to the net settlement feature of our new Debentures, our liquidity could be impacted if a significant number of Debentures are converted. Additionally, our Senior Credit Facility subjects us to a number of financial covenants which could result in an event of default if not complied with. The Senior Credit Facility also includes restrictions that may limit our flexibility in planning for, or reacting to, changes in our business and the industry.

The risks related to operations outside of traditional US law could negatively affect our results.

We operate in many countries outside of the US and tribal jurisdictions with sovereign immunity which subjects us to certain inherent risks including:

	ª		political or economic instability in international markets
	ª		additional costs of compliance with international laws
	ª		tariffs and other trade barriers
	ª		fluctuations in foreign exchange rates
	ª		adverse changes in the creditworthiness of parties with whom we have significant receivables or forward currency exchange contracts

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

We expect our current properties will be adequate for our near-term business needs.

Corporate Headquarters

Our largest manufacturing facility and corporate headquarters are located in Reno, Nevada, where we built our own 1.2 million square foot facility to house our manufacturing, cabinet production, silkscreen, engineering, sales and corporate administrative functions. This facility supports production for North America and all international markets, except Japan and the UK. In fiscal 2005, we completed an expansion of our Reno facility adding more than 100,000 square feet. We also maintain warehousing facilities in Reno totaling 191,000 square feet.

North America

Our largest sales and service office is located in Las Vegas, Nevada, where we lease approximately 448,000 square feet in warehousing, sales and administration facilities. The operating leases for the facilities expire between March 2007 and June 2008. In fiscal 2004, we purchased land and began construction of a new 600,000 square foot Las Vegas campus, primarily to consolidate several leased facilities. This facility is scheduled for completion in 2007. Additionally, we lease approximately 395,000 square feet of warehousing, sales and service facilities throughout the US and Canada to support local market needs.

International

Our most significant international facilities are located in the UK and Australia. We own 149,000 square feet and lease 30,000 square feet under leases expiring through September 2010, which support manufacturing, sales and administrative functions in the UK. We own 12,000 square feet in New Zealand and lease 121,000 square feet in Australia under leases expiring through November 2009, for subassembly, sales and administration. All other properties used for international operations total 263,000 square feet under leases expiring through April 2012.

Item 3. Legal Proceedings

IGT has been named in and has brought lawsuits in the normal course of business. We do not expect the outcome of these suits to have a material adverse effect on our financial position or results of operations. A description of certain of these matters is contained in Note 15 of our Consolidated Financial Statements and is incorporated herein by this reference.

Item 4. Submission of Matters to a Vote of Security Holders

None

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 (NYSE) under the symbol “IGT.” The following table presents the high and low closing prices of our common stock as traded on the NYSE and quarterly cash dividends declared for the last two fiscal years.

		Stock Price				Stock Price				Dividends
		High				Low				Declared
Fiscal 2006
First Quarter		$	31.29			$	25.44			$	0.125
Second Quarter			37.18				30.12				0.125
Third Quarter			39.39				34.71				0.125
Fourth Quarter			42.34				35.48				0.130
Fiscal 2005
First Quarter		$	36.67			$	31.23			$	0.120
Second Quarter			33.87				26.23				0.120
Third Quarter			30.21				24.22				0.120
Fourth Quarter			29.43				26.49				0.125

There were approximately 2,400 record holders of IGT’s common stock and the closing price was $43.75 as of December 1, 2006.

IGT’s transfer agent and registrar is:		The Bank of New York Investor Relations Department PO Box 11258 Church Street Station New York, NY 10286 (800) 524-4458

Share Repurchases

The purpose of our 1990 common stock repurchase authorization, as amended, is to return value to our shareholders and reduce the number of shares outstanding. We may repurchase shares in the open market, in privately negotiated transactions, or under Rule 10b5-1 trading plans, depending on market conditions and other factors. The authorization does not specify an expiration date.

Our fourth quarter repurchases and remaining authorization is summarized below. Shares purchased exclude treasury shares acquired in non-cash transactions related to forfeited stock awards or shares exchanged for options exercised. We repurchased no additional shares after September 30, 2006 through December 8, 2006.

										Total Number of				Maximum Number
		Total				Average				Shares Purchased				of Shares Still
		Number of				Price				as part of a				Available for
		Shares				Paid Per				Publicly				Purchase Under
Periods		Purchased				Share				Announced Plan				the Plan
(In millions, except per share amounts)
July 2 - July 29, 2006			0.2			$	38.02				0.2				17.5
July 30 - August 26, 2006			2.3			$	37.39				2.3				15.2
August 27 - September 30, 2006			3.8			$	40.84				3.8				11.4
Period total			6.3			$	39.49				6.3

Item 6. Selected Financial Data

     The following should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8, Financial Statements and Supplementary Data.

FINANCIAL HIGHLIGHTS

As of and for Years ended September 30,		2006				2005				2004				2003				2002(1)
(In millions, except per share amounts)
Revenues (1)		$	2,511.7			$	2,379.4			$	2,484.7			$	2,128.1			$	1,728.5
Gross profit			1,371.7				1,190.7				1,319.2				1,094.8				842.9
Earnings of unconsolidated affiliates (1)			—				—				—				—				32.5
Operating income			725.1				663.7				814.3				665.9				516.5
Income from continuing operations, net of tax (2,3)			473.6				436.5				429.8				375.3				254.7
Discontinued operations, net of tax (4)			—				—				58.9				15.4				16.5
Net income (2,3,4)			473.6				436.5				488.7				390.7				271.2
Basic earnings per share (2,3)
Continuing operations		$	1.41			$	1.27			$	1.24			$	1.09			$	0.75
Discontinued operations			—				—				0.17				0.05				0.05
Net income			1.41				1.27				1.41				1.14				0.80
Diluted earnings per share (2,3)
Continuing operations		$	1.34			$	1.20			$	1.17			$	1.04			$	0.74
Discontinued operations			—				—				0.15				0.04				0.05
Net income			1.34				1.20				1.32				1.08				0.79
Weighted average shares outstanding
Basic			336.8				343.7				346.8				344.0				338.4
Diluted			355.8				370.2				376.3				366.7				344.2
Cash dividends declared per share		$	0.505			$	0.485			$	0.420			$	0.175			$	—
Cash from operations		$	624.1			$	726.4			$	623.6			$	408.7			$	589.1
Cash from investing			(234.0	)			(215.8	)			364.8				(597.5	)			105.1
Cash from financing (5)			(386.9	)			(525.6	)			(1,121.7	)			420.7				(589.2	)
Capital expenditures (6)			310.5				238.6				210.9				128.6				116.2
Cash used for share repurchases			426.7				354.7				129.8				161.3				249.3
Cash and investment securities (5,8)		$	589.1			$	688.1			$	766.7			$	1,315.6			$	430.2
Working capital			129.1				219.6				949.7				1,133.1				750.6
Total assets			3,902.7				3,864.4				3,873.0				4,185.2				3,315.8
Notes payable, net (current and non-current)(5)			832.4				811.0				791.9				1,552.9				972.0
Jackpot liabilities (current and non-current)(7)			546.7				705.8				719.3				541.1				577.7
Non-current liabilities			614.1				741.1				1,336.4				1,552.7				1,369.4
Stockholders’ equity			2,042.0				1,905.7				1,976.6				1,687.5				1,433.1

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

COMPANY OVERVIEW

The following MDA is intended to enhance the reader’s understanding of International Game Technology, our operations and our present business environment. MDA is provided as a supplement to and should be read in conjunction with our consolidated financial statements and the accompanying notes. Throughout this section, table amounts are presented in millions, except units, and EPS.

Our MDA is organized into the following sections:

	ª		OUR BUSINESS — a general description of our business and operating segments
	ª		OUR FOCUS — a summary of our strategies and opportunities
	ª		RECENTLY ISSUED ACCOUNTING STANDARDS — a discussion of recently issued accounting standards with significance to our business
	ª		CRITICAL ACCOUNTING ESTIMATES — a discussion of accounting policies that require critical judgments and estimates
	ª		CONSOLIDATED OPERATING RESULTS — a comparative analysis of income from continuing operations for the three fiscal years presented in our consolidated financial statements
	ª		BUSINESS SEGMENT RESULTS — a comparative analysis of business segment results for the three fiscal years presented in our consolidated financial statements
	ª		LIQUIDITY AND CAPITAL RESOURCES — a year-over-year comparative analysis of cash flows and capital resources for the three fiscal years presented in our consolidated financial statements
	ª		FINANCIAL CONDITION –- analysis of significant changes in our financial position

OUR BUSINESS

International Game Technology is a global company specializing in the design, manufacture, and marketing of computerized gaming equipment, systems and services. Our vision is to be the preeminent supplier of gaming products to the world. We strive to maintain a wide array of entertainment inspired gaming product lines, targeting gaming markets in all legal jurisdictions worldwide. We are committed to providing quality products at competitive prices, designed to increase the potential for operator profits by serving players better.

Our annual revenues totaled $2.5 billion in fiscal 2006. We derive our revenues in two ways, either from the sale (product sales) and the placement (gaming operations) of gaming products, services or intellectual properties. Operating results reviewed by our chief decision maker encompass all revenue sources within each geographical customer region. We currently view our business in two regional operating segments, each incorporating all types of revenues.

	ª		North America includes our operations in the US and Canada.
	ª		International encompasses our efforts abroad in Asia, Australia, New Zealand, Europe, Japan, Latin America, Russia, South Africa, and the UK.

Additionally, certain income and expenses related to company-wide initiatives are managed at the corporate level and not allocated to an operating segment. See the BUSINESS SEGMENT RESULTS below and Note 18 of our Consolidated Financial Statements for additional segment information and financial results.

OUR FOCUS

We remain dedicated to generating financial growth by continuing to focus on the three cornerstones of our success: product development; market development; and capital deployment.

Product Development

The driving force behind our success is the ability to offer the best games, platforms and systems through dedicated product development efforts and superior customer service. Our surveys indicate we invest a great deal more in product development than our competitors and expect this advantage will help us to deliver the broadest product lines across most markets. We pioneer innovation centered on serving players better by utilizing the power of networked gaming, information technology, game design, and services to maximize the potential for operator profitability.

Our game libraries are perpetually evolving to meet changing player preferences and fit the needs of a variety of global gaming markets. During the year just ended, we introduced the concept of group play with Wheel of Fortune^® Super Spin™ on our AVP^® TrimLineä platform. We plan to further this concept with other multi-player interactive games in the upcoming year. Expansion of low-denomination and MLP games continues to drive incremental growth in our gaming operations installed base. Recently, we have been intensifying our efforts to expand our video game offerings and reducing time to market.

Our server-based design efforts have shifted toward a more comprehensive vision of enterprise-wide casino applications with features beyond operational efficiencies as part of our commitment to lead the industry in the networked gaming transformation. We believe that our applications will help differentiate our products in this area and offer the operator new ways to engage and interact with their players, as well as market cross-functional products and player conveniences. With four commercial field trials under way and our first large scale installation anticipated in fiscal 2008, we expect sbä technology will become more significant in 2009 and 2010.

Our slot systems market share continues to grow, with installations up 23% in fiscal 2006 to finish the year at 627 systems installed worldwide. We expect to bring the third tier of our Table iD™ product to market in fiscal 2007. This product was developed in cooperation with PGIC and ShuffleMaster. Table iD™ will extend IGT’s product reach into the table games area of the casino floor, with the automation of accounting functions, player tracking, and added bonus features.

We continue building our intellectual property portfolio, capitalizing $21.8 million of additions this year. Substantiating the strength of our patents, original IGT patents are frequently cited in later patent applications and applied in other industries. See the Product Development section of Item I. Business for further discussion of our product development efforts.

Market Development

IGT maintains a significant market share and is dependent in part on new market opportunities to generate growth. With industry analysts projecting a modest average annual growth rate through 2010, we have several initiatives directed at enhancing this growth rate and accommodating entry into new areas of gaming. We continue expanding our presence in non-traditional CDS and Class II markets, most significantly in Mexico, as well as Oklahoma, California, Florida, Washington, Alabama, South Africa, and Malta. During fiscal 2006, we more than tripled our CDS installed base to over 14,300 units, up 10,000 from last year.

After a relatively quiet period for new market opportunities in North America, we look forward with cautious optimism to several new markets opening in 2007. Pennsylvania and Arkansas overcame legislative hurdles this year. Two new tracks are scheduled to open in New York, and Florida is expected to expand with race tracks in Broward County and growth in tribal facilities.

Prospects for growth in international markets are favorable. We will continue expanding our presence in Mexico. We expect to realize the benefits of a level playing field in Japan as the market fully transitions to a Reg-5 environment in fiscal 2007. Already an active provider of gaming systems solutions in Macau, we are focused on customized product development to improve our market position.

As has been the case over the past 10 to 15 years, we believe additional US states will continue to evaluate gaming as a viable means for promoting tourism, adding jobs to local economies, and raising tax revenues. Trends appear positive in terms of the public’s acceptance of gaming as a form of entertainment. Similarly, gaming continues expanding in a number of foreign countries, where competition for tourism spending and the need for additional government revenues make gaming a compelling option. See the Regional Markets section of Item I. Business for further discussion of our market development efforts.

Capital Deployment

We generated substantial operating cash flows in fiscal 2006, allowing us to reinvest in our business through capital expenditures and business alliances, as well as generate returns to our shareholders through dividends and share repurchases. See the LIQUIDITY AND CAPITAL RESOURCES section that follows for current share repurchase activity.

We enter into strategic business acquisitions and alliances as part of our ongoing effort to create shareholder value designed to complement our internal resources. We consider businesses that:

	ª		offer opportunities to diversify our geographic reach
	ª		expand our product lines and customer base
	ª		leverage our technological and manufacturing infrastructure to increase our rates of return

During fiscal 2006, we purchased a minority equity interest in Walker Digital’s gaming subsidiary, Casino IP Holdings, LLC, and executed agreements for cooperative product development and marketing. This relationship provides access to an intellectual property portfolio focused on the creative use of casino networks, particularly for player preferences, which we expect will facilitate our server-based product line.

Additionally, we signed an agreement that will permit us to acquire Venture Catalyst Incorporated (VCAT) for an estimated purchase price of $22.0 million. We expect VCAT’s Mariposa software will enhance our ability to provide leading technology and services for casino customer relationship management. The transaction is expected to close in the first half of fiscal 2007 subject to regulatory approvals and VCAT shareholder approval.

RECENTLY ISSUED ACCOUNTING STANDARDS

In the first quarter of fiscal 2006, we adopted SFAS 123R, Share-Based Payment, and recognized share-based compensation in our financial statements. See the CONSOLIDATED OPERATING RESULTS section that follows for a discussion of the impact to operating results for the year and Note 3 of our Consolidated Financial Statements for additional information regarding the adoption of SFAS 123R . See Note 1 of our Consolidated Financial Statements for additional information regarding recently issued accounting standards.

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements were prepared in conformity with accounting principles generally accepted in the US, which require us to make assumptions and estimates about future events and apply judgments that affect reported amounts and disclosures. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates and those differences could be material. We base our estimates on historical experience, current trends in our company, and the industry as a whole, and other factors management considers relevant when preparing our consolidated financial statements.

We consider the following accounting estimates to be the most critical to aid in fully understanding and evaluating our reported financial results and they require us to make difficult, subjective or complex judgments about matters that are inherently uncertain or variable. Senior management has discussed the development, selection and disclosure of the following accounting estimates, considered most sensitive to changes from external factors, with the Audit Committee of our Board of Directors.

Intangible Assets, including Goodwill and Prepaid Royalties

We review goodwill and other intangible assets for impairment annually, and whenever events or circumstances indicate the carrying value may not be recoverable or warrant a revision to the estimated remaining useful life, in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and SFAS 142, Goodwill and Other Intangible Assets.

Our forecasted future cash flows used to test the recoverability or determine the fair value of intangibles are based on assumptions that are consistent with plans used to manage the underlying business. Factors used in our evaluations of potential impairment and fair value require significant judgments about respective estimated useful lives, risk rates, forecasted growth rates, brand history, expected market growth, competitive environment, market share, future business prospects and success of our products. Changes in these estimates and assumptions could materially affect the determination of recoverability or fair value. While we believe that our estimates of future revenues and cash flows are reasonable, different assumptions could materially affect our assessment of useful lives, recoverability and fair values.

Application of the goodwill impairment test requires judgment, including the identification of reporting units, allocation of related goodwill, assignment of corporate shared assets and liabilities to reporting units, and determination of the fair value of each reporting unit. We determine the fair value of our reporting units using the discounted cash flow method, and compared the implied valuation multiples to a group of guideline public companies under the Market approach to test the reasonableness of the discounted cash flow results.

Our goodwill and intangible assets totaled $1.4 billion at September 30, 2006 and September 30, 2005. If the estimated fair value or useful lives of our intangible assets were to decrease, the most significant impact would be an increase to amortization expense and/or impairment, thereby decreasing our results of operations. We recorded no goodwill impairment charges in fiscal years 2006, 2005 or 2004.

We also regularly evaluate the estimated future benefit of prepaid royalties, as well as minimum commitments not yet paid, to determine amounts unlikely to be realized from forecasted sales or placements of our games. If actual or revised forecasts fall below the initial estimate, then we may need to revise the remaining useful life and/or record additional charges. The carrying value of our prepaid and deferred royalties totaled $136.5 million at September 30, 2006 and $99.4 million at September 30, 2005.

Jackpot Liabilities and Expenses

Changes to our estimates for jackpot liabilities and resulting expense primarily relate to variations in the jackpot life cycle, volume of slot play, timing of jackpots won, and market interest rate trends (see Item 7A, Market Risk). The initial progressive meter liability on a new system is deferred and subsequently amortized to jackpot expense as future contribution revenues are generated from slot play. Current and non-current portions of jackpot liabilities, as well as jackpot expense, may also be impacted by changes in our estimates and assumptions regarding the number of future winners who may elect lump sum payout .

Our jackpot liabilities totaled $546.7 million at September 30, 2006 and $705.8 million at September 30, 2005. Jackpot expense totaled $184.9 million for fiscal 2006, $258.5 million in fiscal 2005 and $292.0 million in fiscal 2004. See Note 1 of our Consolidated Financial Statements for additional accounting policies related to jackpot liabilities and expense.

Inventory and Gaming Operations Equipment

The determination of obsolete or excess inventory requires us to estimate the future demand for our products within specific time horizons, generally, one year or less. If we experience a significant unexpected decrease in demand for our products or a higher occurrence of inventory obsolescence because of changes in technology or customer requirements, we could be required to increase our inventory provisions. Inventory management remains an area of focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times versus the risk of inventory obsolescence because of rapidly changing technology and customer requirements. Our inventories totaled $162.1 million at September 30, 2006 and $142.3 million at September 30, 2005.

We are also required to estimate salvage values and useful lives for our gaming operations equipment. Trends in market demand and technological obsolescence may require us to record additional asset charges, which would have a negative impact on gross profit. In fiscal 2005, our assessment of estimated salvage values resulted in technological obsolescence charges of $41.6 million to cost of gaming operations due to expected future releases of more advanced cabinet and game designs.

Share-based Compensation

We began accounting for share-based compensation in accordance with SFAS 123R in the first quarter of fiscal 2006. Under the fair value recognition provisions, we estimate share-based compensation at the award grant date and recognize expense over the service period. Option valuation models require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the fair value estimate. Judgment is required in estimating stock price volatility, forfeiture rates, expected dividends, and expected terms that options remain outstanding. See Note 3 of our Consolidated Financial Statements for additional information regarding the adoption of SFAS 123R.

Income Taxes

Determination of the appropriate amount and classification of income taxes depends on several factors, including estimates of the timing and probability of realization of deferred income taxes, as well as income tax payment timing. We adjust deferred taxes based on the changes in the difference between the book and tax basis of our assets and liabilities, measured by future tax rates we estimate will apply when these differences are expected to reverse. This process involves estimating our current tax position in each federal, state, and foreign jurisdiction, as well as making judgments as to whether our taxable income in future periods will be sufficient to fully recover any deferred tax assets. We establish a valuation allowance to the extent recovery of deferred tax assets is not likely based on our estimation of future taxable income in each jurisdiction.

The calculation of our tax liabilities also involves dealing with uncertainties in the application of complex tax regulations. We recognize potential tax liabilities for anticipated tax audit issues in the US and other jurisdictions based on our estimate of the extent to which additional taxes will be due. If payment of these amounts proves to be unnecessary, the reversal of liabilities could result in the recognition of a future tax benefit. If our tax liabilities are understated, a charge to our tax provision would result. Changes in current tax laws, enacted tax rates, geographic mix or the estimated level of annual taxable income could change our valuation of deferred tax assets and liabilities, which in turn impacts our effective tax rate and tax provision. Additionally, we are currently evaluating the impact of the guidance issued in June 2006 under FIN 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109, effective for IGT at the beginning of fiscal year 2008.

Net deferred tax assets totaled $136.6 million at September 30, 2006 and $93.2 million at September 30, 2005 and accrued income taxes totaled $36.1 million at September 30, 2006 and $14.5 million at September 30, 2005.

CONSOLIDATED OPERATING RESULTS – A Year Over Year Comparative Analysis

														Favorable (Unfavorable)
		2006				2005				2004				06 vs 05								05 vs 04
(In millions except units & EPS)
Total
Revenues		$	2,511.7			$	2,379.4			$	2,484.7			$	132.3				6	%		$	(105.3	)			-4	%
Gross profit			1,371.7				1,190.7				1,319.2				181.0				15	%			(128.5	)			-10	%
Gross margin			55	%			50	%			53	%			5		pp		10	%			(3	)	pp		-6	%
Operating income		$	725.1			$	663.7			$	814.3			$	61.4				9	%		$	(150.6	)			-18	%
Operating margin			29	%			28	%			33	%			1		pp		4	%			(5	)	pp		-15	%
Income from continuing operations		$	473.6			$	436.5			$	429.8			$	37.1				8	%		$	6.7				2	%
Discontinued operations			—				—				58.9				—				—				(58.9	)			*
Net income			473.6				436.5				488.7				37.1				8	%			(52.2	)			-11	%
Diluted earnings per share:
Continuing operations		$	1.34			$	1.20			$	1.17			$	0.14				12	%		$	0.03				3	%
Discontinued operations			—				—				0.15				—				—				(0.15	)			*
Net income			1.34				1.20				1.32				0.14				12	%			(0.12	)			-9	%
Product sales
Machines		$	896.8			$	867.9			$	1,065.3			$	28.9				3	%		$	(197.4	)			-19	%
Non-machine			363.5				313.0				256.0				50.5				16	%			57.0				22	%
Total product sales			1,260.3				1,180.9				1,321.3				79.4				7	%			(140.4	)			-11	%
Gross profit		$	641.7			$	576.6			$	690.1			$	65.1				11	%		$	(113.5	)			-16	%
Gross margin			51	%			49	%			52	%			2		pp		4	%			(3	)	pp		-6	%
Units sold			112,000				141,900				159,200				(29,900	)			-21	%			(17,300	)			-11	%
Gaming operations
Revenues		$	1,251.4			$	1,198.5			$	1,163.4			$	52.9				4	%		$	35.1				3	%
Gross profit			730.0				614.1				629.1				115.9				19	%			(15.0	)			-2	%
Gross margin			58	%			51	%			54	%			7		pp		14	%			(3	)	pp		-6	%
Installed base units			49,600				38,800				37,200				10,800				28	%			1,600				4	%

Fiscal 2006 vs Fiscal 2005

Consolidated operating results improved over the prior year primarily due to a more favorable product sales mix and growth in our gaming operations installed base. EPS was also positively impacted by share repurchases and the exchange of our old Debentures for new Debentures with a net settlement feature in April 2006. See Notes 10 and 14 of our Consolidated Financial Statements for additional information regarding this exchange and the impact on our EPS calculation.

Significant items affecting the comparability of fiscal 2006 to fiscal 2005 included:

	ª		current year R&D charges of $7.2 million after tax related to the buyout of a third party development contract
	ª		prior year salvage value and asset obsolescence charges of $26.6 million after tax
	ª		prior year Gulf Coast hurricane charges of $3.2 million after tax and estimated lost earnings of $6.3 million after tax
	ª		prior year reorganization severance costs of $6.7 million after tax
	ª		prior year income of $6.0 million after tax realized on early loan payoffs

Consolidated Product Sales

Revenues and gross profits grew in the current year driven by an improved mix of premium priced products, including our AVP^® Trimline machines, and record non-machine sales including a 47% increase in gaming systems. Gross margin also increased due to fewer lower margin pachisuro machine sales. We estimate product sales margins will fluctuate between 49% and 51% for fiscal 2007, depending on the geographical mix and types of products sold.

Current year revenue improvement is attributable to our installed base reaching an all time high, with growth in casino and lease operations units, as well as additions from Wager Works. Our expansion into the central determination and Class II markets of Mexico, California, Alabama, Florida, New York, Washington, and South Africa, as well as the emerging instant bingo and poker markets of Oklahoma, is a principal factor in our installed base growth. Gross profit and margin increases are primarily due to lower jackpot expenses and prior year obsolescence charges. Overall performance was strengthened by the continuing success of our low-denomination and MLP games, as well as the more recent community play installations of Wheel of Fortuneâ Super Spin™. We estimate gaming operations margins will trend between 57% and 59% next year, depending on installed base mix, play levels, and interest rate movements. Continued decline in average revenue per device is primarily due to the increasing mix of lower revenue central determination and Class II units.

Fiscal 2005 vs Fiscal 2004

Fiscal 2005 income and EPS from continuing operations grew slightly despite declining unit volumes. Year over year earnings improvements were attributable to increased international contributions, growth in gaming operations revenues and non-machine sales.

In addition to fiscal 2005 items noted above, significant items in fiscal 2004 affecting comparability included:

	ª		early debt redemption losses of $77.0 million after tax
	ª		income tax provision reductions of $13.9 million, primarily related to foreign tax credits
	ª		an additional week related to our 52/53-week fiscal year, primarily affecting gaming operations and operating expenses

Fiscal 2004 discontinued operations related to certain Anchor operations divested subsequent to acquisition are discussed further in Note 4 of our Consolidated Financial Statements.

Consolidated Product Sales

Fiscal 2005 sales were adversely affected by the slowdown in demand for TITO related replacement machines, as well as fewer new market opportunities. Average machine prices declined in fiscal 2005 due to a higher mix of lower priced pachisuro machines. The allocation of fixed costs across lower unit sales volumes also contributed to the fiscal 2005 gross margin decline.

Consolidated Gaming Operations

Revenues improved in fiscal 2005 primarily due to installed base growth, as well as increased play levels resulting from new game introductions and removal of lower performing units. The decrease in fiscal 2005 gross profit is primarily due to technical obsolescence charges related to demand transitions toward our newer platform games and the extra week in 2004. Gross margin decline in 2005 was also attributable to an increasing mix of lower yielding CDS and Class II games, as well as an additional six months of VIE trust revenues and expenses with no gross profit impact.

Operating Expenses

														Favorable (Unfavorable)
		2006				2005				2004				06 vs 05								05 vs 04
(In millions)
Selling, general and administrative		$	375.5			$	318.7			$	311.3			$	(56.8	)			-18	%		$	(7.4	)			-2	%
Research and development			188.5				138.4				129.3				(50.1	)			-36	%			(9.1	)			-7	%
Depreciation and amortization			82.6				69.9				64.3				(12.7	)			-18	%			(5.6	)			-9	%
Total		$	646.6			$	527.0			$	504.9			$	(119.6	)			-23	%		$	(22.1	)			-4	%
Percent of revenues			26	%			22	%			20	%

Operating expenses are increasing as we prepare for anticipated growing markets and pursue developing new technology. Consolidated operating expenses increased in fiscal 2006 compared to 2005 mainly due to:

	ª		additional legal and compliance costs of $17.0 million primarily related to obtaining and protecting intellectual property, as well as regulatory requirements for new products
	ª		additional investment in R&D to support next generation technologies, including $11.3 million related to the buyout of a third party development contract
	ª		SFAS 123R share-based compensation of $35.3 million
	ª		additional WagerWorks operating expenses of $25.0 million, including amortization of acquired intangibles

The increase in consolidated operating expenses in fiscal 2005 over fiscal 2004 is principally the result of:

	ª		higher legal and compliance costs
	ª		additional severance costs of $10.0 million related to several operational reorganization initiatives
	ª		higher R&D costs supporting our commitment to the development of innovative games, platforms and systems
	ª		partially offset by reduced bad debt provisions required to maintain reserves, as a result of a more favorable risk profile on outstanding receivables

Other Income (Expense) and Taxes

															Favorable (Unfavorable)
		2006				2005				2004					06 vs 05								05 vs 04
(In millions)
Interest income		$	65.4			$	77.9			$	59.8				$	(12.5	)			-16	%		$	18.1				30	%
Interest expense			(50.8	)			(58.1	)			(90.5	)				7.3				13	%			32.4				36	%
Loss on debt redemption			—				—				(127.9	)				—				—				127.9				*
Other			7.2				(2.3	)			(2.2	)				9.5				*				(0.1	)			*
Total other income (expense)		$	21.8			$	17.5			$	(160.8	)			$	4.3				*			$	178.3				*
Income tax provisions		$	273.3			$	244.7			$	223.7				$	(28.6	)						$	(21.0	)
Tax rate			36.6	%			35.9	%			34.2	%				(0.7	)	pp						(1.7	)	pp

Fiscal 2005 interest income included $10.2 million in financing fees realized on an early loan payoff. Other income (expense) included a favorable legal settlement of $3.9 million and a $2.1 million gain on the sale of our Rapid City, South Dakota facility in fiscal 2006 versus unfavorable legal settlements in the prior year. The deconsolidation of our NJ VIE trusts in November 2005 also decreased interest income and expense related to jackpot annuities. See Note 1 of our Consolidated Financial Statements for further discussion on the NJ VIE trusts deconsolidation. The fiscal 2004 early debt redemption related to our 2009 and 2004 senior notes reduced interest costs in subsequent years.

Our current year tax rate increased primarily due to the expiration of R&D tax credits and changes in the geographic mix of taxable income. We anticipate an effective tax rate between 36% and 37% in fiscal 2007, depending on potential reinstatement of R&D tax credits and variations in geographic mix. The 2004 tax provision was reduced $13.9 million primarily due to the utilization of foreign income tax credits as a result of changes in our geographic mix of taxable income.

BUSINESS SEGMENT RESULTS – A Year Over Year Comparative Analysis

Operating income for each division reflects applicable operating expenses. See Note 18 of our Consolidated Financial Statements for additional business segment information.

North America

														Favorable (Unfavorable)
		2006				2005				2004				06 vs 05							05 vs 04
(In millions, except units)
Total segment
Revenues		$	1,978.2			$	1,878.9			$	2,137.1			$	99.3			5	%		$	(258.2	)			-12	%
Gross profit			1,122.3				972.4				1,153.2				149.9			15	%			(180.8	)			-16	%
Gross margin			57	%			52	%			54	%			5	pp		10	%			(2	)	pp		-4	%
Operating income		$	747.7			$	639.1			$	842.9			$	108.6			17	%		$	(203.8	)			-24	%
Operating margin			38	%			34	%			39	%			4	pp		12	%			(5	)	pp		-13	%
Product sales
Machines		$	521.2			$	456.9			$	777.7			$	64.3			14	%		$	(320.8	)			-41	%
Non-machine			283.2				252.0				213.4				31.2			12	%			38.6				18	%
Total product sales			804.4				708.9				991.1				95.5			13	%			(282.2	)			-28	%
Gross profit		$	441.2			$	380.3			$	538.2			$	60.9			16	%		$	(157.9	)			-29	%
Gross margin			55	%			54	%			54	%			1	pp		2	%			—		pp		—
Units sold			51,100				50,500				92,500				600			1	%			(42,000	)			-45	%
Gaming operations
Revenues		$	1,173.8			$	1,170.0			$	1,146.0			$	3.8			—			$	24.0				2	%
Gross profit			681.1				592.1				615.0				89.0			15	%			(22.9	)			-4	%
Gross margin			58	%			51	%			54	%			7	pp		14	%			(3	)	pp		-6	%
Installed base units			42,600				37,300				36,400				5,300			14	%			900				2	%