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, 2005

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

For the transition period from                      to                     

International Game Technology

(Exact name of registrant as specified in its charter)

Nevada		88-0173041
(State of Incorporation)		(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		Name of Each Exchange on Which Registered
Common Stock, Par Value $.00015625		New York Stock Exchange

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

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

If this report is an annual or transition report, 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 an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No 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, 2005:

$9,159,968,750

The number of shares outstanding of each of the registrant’s classes of common stock, as of December 9, 2005:

336,951,055 shares of Common Stock, $.00015625 Par Value [Open Item]

 

 

INTERNATIONAL GAME TECHNOLOGY
TABLE OF CONTENTS

		Page
DEFINITIONS		ii
PART I			1
Item 1. Business			1
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 Stock and 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			44
Item 8. Consolidated Financial Statements and Supplementary Data			45
Item 9. Changes in and Disagreements with Accountants			78
Item 9A. Controls and Procedures			78
Item 9B. Other Information			80
Part III			80
Item 10. Directors and Executive Officers of the Registrant			80
Item 11. Executive Compensation			80
Item 12. Security Ownership of Certain Beneficial Owners and Management			80
Item 13. Certain Relationships and Related Transactions			80
Item 14. Principal Accountant Fees and Services			80
Part IV			81
Item 15. Exhibits and Financial Statement Schedule			81
Power of Attorney Signatures			83
EXHIBIT 10.21
EXHIBIT 21
EXHIBIT 23
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

DEFINITIONS
Certain abbreviations or acronyms used in this Form 10-K have the following meanings:

Abbreviation		Definition
Acres		Acres Gaming Incorporated
Anchor		Anchor Gaming
APB		Accounting Principles Board
ARB		Accounting Research Bulletin
ARDU		average revenue per day per unit
ARPU		average revenue per unit
ARS		Auction Rate Securities
ASP		average sales price per machine
AVP®		Advanced Video Platform
AWP		Amusement with Prize
CAD$		Canadian dollars
CCSC		Colorado Central Station Casino
CD		compact disk
CDS		central determination system
CIP		construction-in-process
Commission		Nevada Gaming Commission
Debentures		Senior Convertible Debentures due January 29, 2033
DVD		digital video disk
EITF		Emerging Issues Task Force
EPA		Environmental Protection Agency
EPS		earnings per share
ERP		enterprise resource planning
ESPP		Employee Stock Purchase Plan
EU		European Union
FAS		Financial Accounting Standard
FASB		Financial Accounting Standards Board
FIN		FASB Interpretations
FSP		FASB Statement of Position
Friendly Matrix		Friendly Matrix Internet Company LLC
GCB		State Gaming Control Board
GSC		Global Support Center
Hi-Tech		Hi-Tech Gaming.com, Ltd.
JV		Spin For Cash Joint Venture
ITSÔ		Intelligent Table SystemÔ
LCD		liquid crystal display
MDA		management's discussion & analysis
MLP		Multi level progressive
NDT		The Nevada Department of Taxation
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
RSA		restricted stock award
RFID		radio frequency identification
RFP		request for proposal
SAB		Staff Accounting Bulletin
SBÔ		Server Based
SEC		Securities and Exchange Commission
Sega Sammy		Sega Sammy Holdings
SFAS		Statement of Financial Accounting Standards
SMI		Shuffle Master, Inc.
SG&A		selling, general and administrative
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.
WAM		Wide Area Marketing
WAP		wide area progressive
*		not meaningful (in tables)

PART I

Item 1. Business

GENERAL

International Game Technology is a global company specializing in the design, development, manufacturing, distribution and sales of computerized gaming machines and systems products. We strive to maintain a diverse portfolio of gaming products that span a wide range of categories and target customer markets with a variety of games, platforms and systems offered across gaming jurisdictions worldwide.

International Game Technology principally served the US gaming industry when founded in 1980, expanding into jurisdictions outside of the US in 1986. In addition to our US production facility in Reno, Nevada, we also manufacture our products in the UK and through a third party manufacturer in Japan. We currently maintain sales offices in various locations across the US, Asia, Australia, Canada, Europe, Japan, Latin America, New Zealand, Russia, South Africa and the UK.

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. 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 International Game Technology S.R. Ltda.
			ª Silicon Gaming, Inc.
			ª VLC, Inc.
			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.

In this document, italicized text with an attached superscript trademark or copyright notation indicates trademarks of IGT or its licensors. For a complete list of 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, Nominating and Corporate Governance Committees are also available on our website. This information will be mailed in print form 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 and/or intellectual properties. Operating results reviewed by our chief decision makers 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	The North America Division encompasses our operations in the US and Canada, including the IGT Systems group. North America comprised 79% of consolidated revenues in fiscal 2005, 86% in 2004, and 89% in 2003.
		ª	The International Division oversees 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 2005, 14% in 2004, and 11% in 2003.

Additionally, our Corporate Division administers certain unallocated income and expenses related to company-wide initiatives. See the BUSINESS SEGMENT RESULTS in our MDA and Note 18 of our Consolidated Financial Statements for additional segment and financial information.

REVENUES

In North America, we manufacture a broad range of gaming machines, consisting of traditional casino style spinning reel slot machines, video gaming machines, government sponsored terminals and other video gaming devices. Internationally, we target the casino style, private club, gaming hall, government sponsored video, AWP, and pachisuro machine markets. We sell or place hundreds of recognized game themes to customers, directly or through distributors, and provide equipment contract financing to qualified customers. We also provide financing loans to select customers for the development of new or expanding gaming facilities.

In addition to slot machines, we offer a variety of gaming systems products and services directed towards enhancing the players’ gaming experience and providing operational efficiencies for our customers. Our IGT Advantage™ Systems products encompass casino, video lottery, Class II or electronic bingo, central determination and game server applications.

Product Sales

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 2005 and 2003, versus 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, hardware upgrades and game theme conversions, and royalties or licensing fees.

Product Sales Composition		2005				2004				2003
Machines:
Video & Spinning Reel			54	%			71	%			74	%
AWP & Low Payout			20	%			10	%			9	%
			74	%			81	%			83	%
Non-machine:
Gaming Systems			10	%			9	%			6	%
Parts & Conversions			14	%			9	%			10	%
Other fees & services			2	%			1	%			1	%
			26	%			19	%			17	%

Gaming Operations

Gaming operations revenues are generated from providing customers with our proprietary gaming products, services, and/or intellectual properties under recurring revenue arrangements. This revenue stream comprised 50% of consolidated revenues in fiscal 2005, 47% in 2004, and 50% in 2003. The North America Division provides over 97% of consolidated gaming operations revenues. See Note 1 of our Consolidated Financial Statements for additional information regarding pricing arrangements and revenue recognition.

Growth in gaming operations revenues and gross margin are influenced by a number of factors, including the number of machines placed, the geographic mix and variations in pricing arrangements. Gaming operations expenses include the cost of funding jackpot payments to winners, which is subject to interest rate volatility. We strive to continually add innovation and enhanced player appeal to our proprietary games. In monitoring the productive life cycle of our proprietary games, we systematically replace units experiencing declining play levels with newer games and extensions of existing brands.

We place games under recurring revenue arrangements in 50 different North America jurisdictions, including 22 Native American tribal districts, and 18 international locations. IGT owned units in the table below are reflected in our balance sheet under the property, plant and equipment line item. Casino operations units include traditional casino, Tribal Class III and Class II, CDS, and other higher yielding gaming machines. Lease operations units include racino, VLT, and other lower yielding gaming machines. Casino owned units are machines sold that also carry an ongoing recurring royalty fee.

September 30,		2005				2004				2003
Gaming operations machines
IGT owned or proprietary units
Casino operations			32,000				30,800				29,400
Lease operations			6,800				6,400				4,600
IGT installed base			38,800				37,200				34,000
Casino owned units			17,300				18,000				18,800
Grand total			56,100				55,200				52,800

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

ª The replacement of older or obsolete machines due to technological innovations

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. As new machines are installed, the earnings disparity and casino operator’s efficiencies between the older and newer units on casino floors widen and the replacement cycle is further stimulated. We anticipate the introduction of new, more sophisticated interactive games and systems combined with the cost savings, convenience, and other benefits of our advanced platforms will continue to stimulate demand for replacement machines. The willingness and ability of operators to invest in new or additional machines is also a factor.

ª Casino expansion or new casino openings within existing gaming regions

The construction of new casino properties generates product demand for the new casinos, as well as spurring replacement machines at neighboring casinos, which tend to upgrade in order to remain competitive.

ª The establishment of new gaming jurisdictions

Over the past decade, significant increases in the market installed base of gaming machines were driven by the growth in the number of jurisdictions with legalized gaming and the increasing popularity of large theme-based casinos. We believe that our manufacturing capabilities along with our innovative products provide a competitive advantage in providing new casinos with large numbers of machines.

ª Player appeal, price, service, operator efficiencies, technical capability

Entertainment value to the player is the most important feature of our products. Machine design, hardware, software, game features and ease of play also contribute to the earnings power of our gaming machines. All of these features are designed to collectively improve our customers’ return on investment.

ª Manufacturer’s reputation and reliability

A reputable history with customers and brand name recognition, combined with financial strength and extensive infrastructure, encourages operators to select one manufacturer’s product over another.

STRATEGIC ACQUISITIONS

As part of our ongoing efforts to create shareholder value, we complement our internal resources through strategic acquisitions of 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

The acquisition costs in the table below represent the purchase consideration including debt assumed.

Company Acquired		Date		Cost
				(In millions)
WagerWorks, Inc.		August 2005		$	88.1
Hi-Tech Gaming.com, Ltd.		December 2004			10.3
Acres Gaming Incorporated		October 2003			134.0
Anchor Gaming		December 2001			1,323.9
Silicon Gaming, Inc.		March 2001			47.4
Sodak Gaming, Inc.		September 1999			198.9
Barcrest Limited		March 1998			72.9
Olympic Amusement Pty. Limited		March 1998			108.9

WagerWorks

On August 25, 2005, in an all cash merger, we acquired WagerWorks, a provider of internet gaming technology, content and services. WW brings a content portfolio and a strict policy of not conducting business with operators who knowingly process gambling transactions from the US. We anticipate this business combination will enable us to expand the distribution of our game content across new channels and mediums, including the internet, mobile devices, and interactive television.

Hi-Tech

On December 31, 2004, we acquired substantially all of the assets of Hi-Tech, our former distributor of gaming equipment and services in Canada. This acquisition allows us to further develop our Canadian customer relationships, integrating Hi-Tech employees with IGT resources.

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 offered under Acres BonusingÔ, Acres CashlessÔ and Acres AdvantageÔ, as well as enabling us to:

			ª utilize the Acres gaming systems technology to develop more integrated gaming systems products
			ª increase our competitive marketing capability
			ª position IGT as a leading global provider of casino gaming systems

During fiscal 2004, we integrated Acres with the IGT Systems group, inclusive of development, sales, service and operations related to all systems products.

Anchor

On December 30, 2001, we completed the acquisition of Anchor, our JV partner since 1996. We have successfully integrated the two entities, assimilating personnel and physical resources to improve our mix of game design, productivity, and customer service. Certain Anchor operations divested and sold for cash subsequent to acquisition have been reclassified as discontinued operations for all periods presented. See Note 2 of our Consolidated Financial Statements for additional financial information related to these divestitures.

PRODUCT DEVELOPMENT

IGT’s standing as a leader in the global gaming market is built largely on the ability to develop, design, and deliver games that people find entertaining and want to play. This game development strategy combined with our integrated casino management systems work together to improve casino operations and profitability.

Our emphasis and investment in R&D helps us maintain our leadership position in the industry. In addition to our primary development facilities located in Nevada, we have several design centers worldwide. These strategically located centers provide a local presence and access to our customers, allowing us to quickly respond to market needs and preferences. In fiscal 2005, we established a new R&D group with dedicated resources focusing on development of our next generation platforms, games and systems.

We have dedicated over 1,200 employees worldwide to product development in various disciplines from hardware, software and firmware engineering to game design, video, multimedia, graphics and sound. Our investment in R&D totaled $138.4 million in fiscal 2005, $129.3 million in fiscal 2004, and $94.9 million in fiscal 2003.

Our business can be explained as the creation of game content and the delivery of these games to the consumer via platforms and systems. We are a prominent designer of games, platforms and systems in the gaming industry. We accomplish this by anticipating client needs, responding to feedback and marketing trends, and pioneering innovative gaming machines and reliable systems solutions. Our timeline of technology introductions demonstrates these development efforts.

Our product development process is not complete until our Compliance teams ensure that each game, product or system meets all of the requirements in each jurisdiction. IGT conducts business in over 280 jurisdictions worldwide, as well as over 100 international jurisdictions not requiring licensure, with over 80 people dedicated to regulatory and product compliance. During fiscal 2005, we presented over 35,000 product submissions worldwide.

Games

We combine the elements of art, math, sound, play mechanics and technological advancements with our entertainment license library and patented intellectual property to provide gaming machines with a high degree of player appeal. Our continued commitment to the development of industry leading games helps maintain our market share and profitability.

Our games are developed either by employee designers and artists or independent third party developer arrangements, some of which include advanced funding against subsequent royalties to be earned upon the sale or placement of products. Although we are not materially dependent upon third party developers, these relationships provide additional sources of creative ideas and games.

In fiscal 2005, we introduced 172 new game themes for spinning reel, video and video poker in North America. In addition, we modified these games to comply with the guidelines, rules, and regulations for Class II, CDS, international and lottery markets, resulting in over 300 additional game introductions. We remain the North America market leader in traditional spinning reel and video poker games, however, competition is more intense in video games with fewer barriers to entry and the relative ease of creation. We plan to aggressively address the competitive nature of video game development and continue designing innovative spinning reel and poker games.

We successfully introduced multi level progressive games and themes, such as Fort Knox and Party Time!® during the year. MLP games offer players the opportunity to win lower level progressive jackpots with a higher hit frequency. We plan to expand our MLP accomplishments by adding a WAP feature, creating a mystery mega progressive system. We continually add innovation and enhanced player appeal into our proprietary games. With new games and enhancements, we continue to support our flagship themes, including Wheel of Fortune®, Megabucks®, The Price is Right® and more recently, Star Wars™. We also plan to introduce a “community play” or multi player gaming concept with such games as Wheel of Fortune® Special Edition™ Super Spin™ and Ancient Chinese Secret™.

Using our WAM computerized testing and monitoring system, we evaluate and forecast acceptance of new products in order to quickly identify the more popular gaming concepts. The WAM test uses a central computer to monitor the performance of games placed in a representative sample of casinos in key North America gaming jurisdictions. There are approximately 35 test locations that provide us with the best possible sampling of game performance. The WAM test program allows us to test games in a relatively short time span, resulting in a quicker release of higher performing games.

Our international strategy responds to developing markets with community presence, customized products, and local production where feasible or required. Two separate design teams in Australia create innovative games for the club and casino markets. In conjunction with a manufacturing arrangement with Sega Sammy, our engineering and game development team in Japan designs IGT pachisuro games on a Sammy platform. As well as designing AWP games for the UK and continental Europe, our Barcrest UK facility infrastructure supports the newly created UK casino business. Additionally, our Barcrest USA design team develops games with interactive top boxes for North America casino markets.

Platforms

Platforms are one method to deliver our game content, and we support several in order to maximize this distribution. As gaming laws evolve allowing for the implementation of new solutions, we strive to serve new markets with the strength and flexibility of our distinct platforms.

By adapting our platforms and systems technologies, we have directly entered several new CDS video bingo or lottery markets over the past 24 months. CDS machines are connected to a central server that determines the game outcome versus traditional casino games where the outcome is determined within the machine itself. The development of our CDS systems, combined with our library of games, allows IGT access to several new domestic and international jurisdictions. With this experience and our extensive game library, we are confident in our ability to take advantage of anticipated further growth in both domestic and international CDS markets.

Server based gaming development progressed throughout the year from a prototype demonstration system to a market ready product. Our current server based products include capabilities to download games, change game set configurations, create reports, as well as manage users, devices, and wireless communications. The system works seamlessly with both our Intel-based 80960 platform and AVP®. We also began development on the first phase of online game ordering, allowing customers to order games via CD or DVD directly from the IGT website.

We anticipate field trials of our SB™ product during the latter half of fiscal 2006 at several properties. During fiscal 2007, we plan to focus development efforts on integrating existing casino system products with SB™ technology. Ultimately, we believe our SB™ products will not only allow our customers to modify, add and delete games and configurations, but will also provide direct player marketing and communication, create a dynamic floor management system, and offer the next generation of game play features.

AVP® is designed to support our next generation of further enhanced video games. This platform provides improved graphic capabilities such as full screen live streaming videos and animations with vivid colors along with an enhanced stereo sound system. AVP® also greatly expands storage capacity, allowing for complex bonusing features. Our library of AVP® games continues to grow as it transcends into our standard development platform.

Platforms utilizing the 80960 processor include our:

		ª	Game KingÒ video platform, offering a single or multi-game format, a touch screen monitor, and interactive video slot games with animated graphics and secondary bonusing features
		ª	S2000Ô spinning reel platform, which combines one of our broadest game libraries with upgraded processor boards and an enhanced sound package

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. In fiscal 2005, we updated processor boards in Game KingÒ and S2000Ô platforms, improving the overall system performance, graphics resolution, and color spectrum. Additionally, we also added Ethernet support for high-speed networking, enabling future game downloading. The updated S2000Ô processor board also allows for additional reels.

The VLC 8800Ô platform continues to hold a significant market share in the government sponsored public gaming or video lottery markets, as governments replace their older equipment. The 8800s can connect to all the major North America video lottery control systems. We continue working with our customers in transitioning from the 8800 to our 80960 platform.

Cabinets

Our delivery of platforms is supported by the cabinets or hardware that we manufacture for our customers. As our products continue to evolve, cabinets must follow suit in order to provide players with a quality gaming experience. We expect to launch our new TrimLine cabinet powered by AVP® in fiscal 2006. This next generation cabinet provides enhanced player ergonomics and a reduced machine footprint, enabling operators to optimize machine placements.

Our Reel TouchÒ cabinet incorporates an LCD and corresponding touchscreen for player interactivity and game bonusing. This cabinet includes our EZ PlayÔ selectable multi-denominational touchpad allowing players to change the game’s denomination at the touch of a button. The Video Reel TouchÒ cabinet has become the cornerstone of our CDS and Class II games and terminals.

Systems

Our IGT Systems group is the result of the integration of Acres with IGT Gaming Systems. Machines and systems continue to converge, as markets increasingly require that systems and games are linked in order to satisfy regulations, and operators rely more on systems to manage machine performance. The IGT Systems group develops integrated gaming systems and adapts IGT technologies to fit new markets.

Our IGT AdvantageÔ Casino System is a suite of traditional casino management software products providing operators with real-time information in the areas of slot machine performance, patron management, reporting and analysis for table games, along with credit and banking data. Built on the Microsoft Windows SQL platform, this system suite includes many functional features.

	ª	EZ Pay™ Ticket Systems give slot machines the ability to use tickets, enabling players to move from one machine to another without the inconvenience of handling coins. Ticket systems have improved traditional slot floor operations by reducing or eliminating coin hopper fills, simplifying hand pays, promoting selectable-denomination gaming, and ultimately increasing play time and customer service.
	ª	BonusingTM applications are designed to improve game play and manage promotional expenses with rewards and incentives automatically delivered to players at the slot machines during play.
	ª	NexGenÔ touchscreen display provides operators the ability to communicate with their customers, using the latest multimedia technology to display player and game activity, as well as promotions for special events and amenities.
	ª	Loyalty GameÔ combines the growing popularity of player clubs with a multi-line, multi-coin game, where players can use their club cards to activate unique bonus rounds. This multi-session game functionality provides players with added incentive to return to the property or family of related properties.

We have also developed systems for central determination market games. Our CDS and Class II systems provide features that include cross property bingo draws, game software downloading, remote game configuration, full accounting and performance reports, virtual private networks and cashless TITO compatibility.

We are currently developing an automated table management solution, known as Intelligent Table SystemÔ, in conjunction with SMI and PGIC. IGT will provide the system infrastructure that includes player tracking, cage systems interface, patron management, and bonusing. SMI will provide the automatic card shuffler shoes that read cards, plus chip sorters and verifiers. PGIC will contribute the RFID technology for bet recognition and chip tracking. We expect ITSÔ to be available for market in late fiscal 2006.

Intellectual Property, Copyrights, Patents and Trademarks

Our intellectual property rights, patents, trademarks and copyrights are significant assets. We seek to protect our investment in R&D and the unique and distinctive features of our products and services by perfecting and maintaining our intellectual property rights. We obtain patent rights protection covering many of our products and have a significant number of US and foreign patent applications pending. Our portfolio contains approximately 1,000 active domestic and foreign patents. The subject matter of these patents and patent applications includes game designs, bonus and secondary game features, gaming device components, gaming systems, and a variety of other aspects of video and electronic slot machines and associated equipment. We cannot ensure that our intellectual property rights will not be infringed upon or that others will not develop products in violation of our intellectual property rights. Additionally, we cannot be sure that our pending applications for additional intellectual property rights will be granted.

Most of our products are sold 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.

Our ability to enforce and maintain our patents, copyrights, trademarks and other intellectual property is subject to general litigation risks. When we seek to enforce our rights, we are often presented with various defenses, such as the 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.

MARKET REGIONS

We market our gaming products to legalized gaming jurisdictions around the world. While our most significant markets are in North America, we continue to pursue expanding international markets. The opportunities, challenges and our successes vary across these jurisdictions.

North America

Gaming continues to be a popular leisure activity in North America and continued development of newer, more innovative gaming devices fuels this demand. We expect continued opportunities for gaming growth and expansion, as we have witnessed since Midwest riverboat gaming introductions in the early 1990s, more recently with tribal casino expansion, and growth in non-casino venues such as race tracks or racinos and bingo parlors. The emergence of central determination and Class II markets has spurred new growth opportunities in areas IGT was previously unable to capitalize upon due to regulatory uncertainties. We have now developed new CDS and Class II products, opened sales and service facilities in Oklahoma, and established a commercial presence in Alabama.

Despite a more challenging competitive environment in 2005, we continued to hold a leading share of the North America market installed base as a result of our:

		ª	commitment to innovation, game design, and technological advances in our games and systems
		ª	extensive patent and theme library
		ª	manufacturing capacity
		ª	combined team efforts in Compliance, Sales and Customer Service

The market installed base of gaming machines has increased from approximately 184,000 machines in 1991 to 829,000 machines in 2005. Based on internal data and information provided by various gaming agencies, we compiled the following table of the estimated market base of gaming machines installed in North America. Native America includes both Class II and Class III gaming machines. “Traditional” gaming machines below is comprised of non-tribal casino-style installations, including riverboats and cruise ships.

		Estimated Market Base
September 30,		2005				2004
Traditional			220,000				221,000
Native America Tribal			110,000				102,000
Racino/Lottery			33,000				28,000
US Western Region			363,000				351,000
Traditional			127,000				126,000
Native America Tribal			98,000				94,000
Racino/Lottery			23,000				23,000
US Central Region			248,000				243,000
Traditional			66,000				65,000
Native America Tribal			33,000				28,000
Racino/Lottery			34,000				32,000
US Eastern Region			133,000				125,000
Traditional			46,000				44,000
Racino/Lottery			39,000				39,000
Canadian Region			85,000				83,000
Total North America			829,000				802,000

Gaming Expansion

We anticipate expansion of legalized gambling previously forecasted for 2005 and early 2006 will occur in late 2006 through 2008. With recent legislative action and voter referendums, we expect to see new markets opening in both Florida and Pennsylvania in late calendar 2006. We see strong potential for further growth in California due to the popularity of gaming, as well as prospective new and renegotiated tribal state compacts. We anticipate both California and Washington will provide additional opportunities for CDS and Class II expansion, and that Florida and Oklahoma will provide Class II growth. Further expansion in Class II markets may be impacted by the issuance of additional clarification as to what constitutes a Class II device, pending US Department of Justice rulings, and federal legislation currently under consideration.

We continue monitoring gaming legislation under consideration in a number of other states that currently do not allow gaming machines, including Kansas, Maryland, Massachusetts, Ohio and Texas. With our leadership position in traditional Class III gaming markets and expanded CDS and Class II product lines, we believe IGT will be the supplier of choice in any of these potential new markets.

Sales and Service Regions

During the second quarter of fiscal 2005, we organized our North America sales and service groups into regional areas, moving us closer, and further improving responsiveness, to our customers.

US Western Region

With a market installed base of approximately 363,000 gaming machines across 11 states, the western region comprises over 40% of the North America market. Nevada continues to dominate this region as the largest and most established gaming market in the world, with an installed market base of approximately 204,000 machines in 260 casinos.

Nevada’s largest concentration of gaming is located in and around Las Vegas. A major impetus for expansion in Las Vegas occurred with the opening of Wynn Las Vegas in April 2005. The Las Vegas off-Strip or locals market is expected to expand in 2006 with the scheduled openings of Boyd’s South Coast Casino and Station’s Red Rock Station Casino. With extensive restaurant and hotel operations, these two new casinos will be major attractions for Las Vegas locals.

Northern Nevada is also showing signs of expansion. Station Casinos announced plans for two new properties in the Reno area. In addition the Peppermill Casino in Reno announced a major expansion and the possibility of a new property north of Reno.

The competitive landscape in Nevada casinos intensified in 2005. The completed mergers of Harrah’s with Caesars and the MGM Grand with Mandalay Bay resulted in two major casino operators on the Las Vegas Strip. Because of our extensive game library, commitment to R&D, breadth of products, manufacturing capacity, and financial strength, we are confident that IGT will be able to provide the level of service these new mega-operators will demand from a supplier.

During 2005, we completed our first large installation of CDS and Class II games at the San Pablo Casino at Lytton Rancheria in the San Francisco/Oakland area. With no significant new or renegotiated compact tribal growth in fiscal 2005, we only sold approximately 2,000 machines in California as properties grew to their full compacted number of units or replaced older, poorer performing games.

We placed our first CDS games in Washington and also entered the Wyoming market in 2005 with our first Class II installation in this state. We expect that over 5,000 new lottery machines will be placed during 2006 in Oregon, as they replace a majority of their current games and expand their installed base with the introduction of video reel games.

US Central Region

Representing approximately 30% or 248,000 gaming devices in the North America market, the central region spans15 states and encompasses riverboat-style gaming, land-based casino gaming, compacted Class III tribal gaming, Class II tribal gaming and VLT gaming.

The largest concentration of machines is within the so-called riverboat jurisdictions following the course of the Mississippi and Missouri rivers in Illinois, Indiana, Iowa, Louisiana, Michigan, Mississippi and Missouri with approximately 127,000 machines in 91 locations. This total includes approximately 16,000 machines at properties along the Mississippi Gulf Coast that were destroyed by hurricane Katrina in August 2005. While there is still uncertainty regarding plans to rebuild, legislation passed in October 2005 will allow land based gaming within 800 feet of the Mississippi coastline. Most major operators with impacted properties have announced plans for reopening in either rebuilt or temporary facilities in 2006. Several other operators are announcing plans for new facilities in 2007 and 2008.

In 2005, we saw some expansion in the gulf coast region with the opening of Pinnacle Entertainment’s new property, L’Auberge du lac in Lake Charles, Louisiana. The property opened with 1,600 units in May 2005. Another new property, the Hard Rock in Biloxi, Mississippi, was scheduled to open with 1,660 units in August 2005, but the casino was destroyed by hurricane Katrina.

Near-term expansion opportunities include four additional licenses granted by the Iowa Racing Commission in May 2005. The new casino sites are expected to add just over 3,000 units to the total market installed base beginning in 2006 and continuing into 2007.

Approximately 72,000 Class III and Class II gaming devices are installed at 108 tribal casino properties in Iowa, Kansas, Louisiana, Michigan, Minnesota, Mississippi, North Dakota, South Dakota, and Wisconsin. We foresee opportunities for continued TITO conversions and replacement of older legacy products in these locations.

In June 2004, we began distributing Class II devices into Oklahoma, which has a current installed market base of approximately 25,000 gaming machines. Legislation was passed in November 2004 allowing poker and instant bingo for tribes that enter into compacts with the state. Still in the early stages of product introduction at the end of fiscal 2005, IGT had placed 655 CDS units and 375 poker games under revenue sharing arrangements. Due to ambiguous Class II regulation, Oklahoma growth has been slower than originally expected. Higher tax rates recently authorized have also inhibited the introduction of video poker in this market.

Other near-term opportunities in the central region include VLT replacements in Louisiana and South Dakota. In 2007 and beyond, additional opportunities may arise in Arkansas, Kansas and Texas.

US Eastern Region

Comprised of approximately 133,000 gaming machines or approximately 17% of the North America installed base, the eastern region accounted for 20% of North America sales. This region includes:

			ª traditional casino gaming markets in Atlantic City, New Jersey and cruise ships
			ª Native American Class III casinos in Connecticut, New York, and North Carolina
			ª facilities in Delaware, Maine, New York, Rhode Island, and West Virginia monitored by central control systems
			ª Class II/CDS facilities in Alabama and Florida
			ª Pennsylvania when its program starts in 2006 or 2007

Atlantic City remains the region’s largest single market with approximately 42,000 machines. This market is becoming more competitive as casino ownership concentrates due to mergers, properties update their floors to include more table games and non-gaming amenities, and the replacement cycle brought on by TITO is completed. Announced expansion plans include additional slot machines at the Borgata and Harrah’s in 2006. Cruise ships, each carrying approximately 200 machines, expanded with six new ships added in 2005 and another four ships expected to launch in 2006.

In Class III markets, Seneca Niagara casino in New York and Foxwoods in Connecticut are in the midst of Class III machine expansions. Seneca Niagara is adding 900 machines to its floor in late calendar 2005 and Foxwoods’ 1,500 machine expansion is expected to open in late 2006. Seneca is also adding a new hotel to its Seneca Allegany property and planning a new facility in Buffalo, New York.

In racino markets, the New York program continued to expand with the addition of Batavia in 2005. The anticipated opening of facilities at the Yonkers and Aqueduct tracks in late fiscal 2006 and early fiscal 2007 will bring this program to a total of approximately 15,000 machines. IGT gained market share in New York and Rhode Island in 2005 at existing facilities through the reallocation process based on machine performance. Rhode Island racinos both announced expansion plans recently, expecting to add 2,500 machines over the next several years. In both New York and Rhode Island, IGT has long-term revenue sharing agreements in place. IGT installed machines in Penn National’s temporary facility in Maine when it opened in November 2005. The permanent facility with 1,500 machines is expected to open in late 2006.

In the Class II/CDS markets, we continued to replace competitors’ products at Native American properties in Florida and installed our first machines at the new 500 machine Riverside Entertainment Center in Alabama. We expect an 850 machine expansion in the Alabama tribal market in 2006. The Alabama charitable bingo market grew in 2005 with expansions at two facilities.

Broward County, Florida voters have passed a referendum allowing gaming at racetracks. Court decisions have upheld the referendum and several operators have announced plans to install new games as soon as new regulations are finalized. The Florida legislature is convening a December 2005 special session with gaming regulation for slots at tracks on the agenda.

The outcome of ongoing Florida tribal state compact negotiations will determine whether tribal casinos will be allowed to offer Class III machines. Once regulations are promulgated and assuming new compacts are negotiated with the Seminole tribes, we estimate the Florida market could increase by as much as 20,000 games.

The Pennsylvania gaming program, which authorized 61,000 machines at 14 gaming locations across the state, now appears to be a 2007 event. We estimate approximately 40,000 games will initially be installed from 2007 through 2010. The Pennsylvania Gaming Control Board has approved regulations governing facilities and expects to award the first licenses in mid-2006. To date, only one track has announced opening a temporary facility.

Canadian Region

During fiscal 2004, we acquired substantially all of the assets of Hi-Tech, our former distributor of gaming equipment and services in Canada. We now provide direct sales, as well as technical and parts support, for the Canadian Gaming Industry from four Canadian facilities.

Every province within Canada has some form of gaming. Casinos, racinos and public gaming combine for a total installed market base of approximately 85,000 gaming devices or just under 10% of the North America installed base. VLT programs are operated by government lottery corporations in Alberta, Manitoba, Quebec, Saskatchewan, and the four Atlantic provinces.

In 2005, we provided machines for casino openings in Alberta, British Columbia, and Manitoba. Additionally, the Atlantic Lottery Corporation opened its first racino in Charlottetown, Prince Edward Island. While overall growth in Canadian markets has stabilized, replacements combined with ongoing expansions provide for steady machine sales and opportunities in VLT game software.

International

IGT’s presence in the international gaming markets began in 1986, and we continue to pursue growth in this area. Our goal is to further capitalize on our design and manufacturing experiences in North America, while addressing each international locale’s unique customer and regulatory environment. Our International Division 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 mainland Europe
			ª pachisuro market in Japan

Casino and club gaming machines are fabricated, in whole or kit form, at our Reno facility. AWP and pachisuro machines provide lower game economics for all suppliers due to the associated laws and regulations. These unique markets generally require numerous game introductions and short product life cycles and carry lower average sales prices. Certain sales to military bases and other legal gaming markets around the world not directly supported by an international office are supported from our Nevada facilities.

Gaming Expansion

Prospects continue for gaming in various new international jurisdictions. Countries around the world are showing increased support for legalized casinos as a means of increasing tourism. We anticipate increased financial contributions from our international operations, as these markets continue to grow in significance over the next several years.

		ª	The UK government passed new legislation in April 2005 increasing the permitted number of casinos, number of machines per casino, and maximum stakes and prizes per machine.
		ª	Macau opened its first Las Vegas style casinos in 2004 and further growth is anticipated.
		ª	Russia gaming is also projected to develop further in coming years.
		ª	Singapore approved gaming legislation and expects to grant the first operator license in late spring 2006. RFP processes are slated to begin at the end of November 2005 and properties are expected to be operational in 2009.
		ª	Gaming legalization is still under consideration in Taiwan and Thailand.

Europe

Our office in the Netherlands was 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 the Europe market installed base. Our sales to this market are expected to consist of a mix of new and replacement units, the latter being increasingly driven by cashless solutions such as TITO. Focusing on further development of new business in Russia and the Commonwealth of Independent States (former Soviet bloc countries), we opened our Moscow office in December 2004.

Latin America

With offices in Argentina and Mexico, we sell and place casino style gaming equipment in several legalized gaming jurisdictions in Latin America. During fiscal 2005, we established an office in Mexico in conjunction with a significant agreement with a leading live-entertainment company for the distribution of CDS Video Bingo games, which began shipping in the fourth quarter. We plan to develop additional CDS business in other Latin America jurisdictions.

South Africa

Our office in Midrand, Gauteng, South Africa, services the gaming markets located in Africa, Sub-Saharan Africa and the Indian Ocean islands. Casino gaming in South Africa is governed under their National Gambling Act, allowing for the allocation of 40 casino licenses between nine provinces in 1996. We also pursue other Africa opportunities outside of South Africa from this office.

Asia

Our Macau office was established in fiscal 2005 to service the Asia region. Rapid growth is projected in Macau and the surrounding Asia region in the next few years, as countries such as Korea, the Philippines, Singapore, Thailand and Vietnam 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.

Problem gaming and “harm minimization” continues to be an important political issue for governments in Australia and New Zealand. Proposed measures related to further restrictions on the allowable number of gaming machines have created uncertainty for operators and may adversely impact demand in this region.

United Kingdom

We established a manufacturing, sales, marketing, distribution, engineering and game development operation 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. An AWP machine is a game for amusement that is limited to low payout cash prizes, typically under $45.

Our success in this market is built around three design centers focusing on UK products, along with a design center in the Netherlands focused on products for continental Europe. Barcrest markets are primarily replacement driven, dominated by pubs and licensed betting offices that demand regular releases of new machines. The market installed base of AWP machines is approximately 240,000 units. To meet this demand, new products are launched in the UK every four to six weeks.

Additionally, we have established separate new offices in the Midlands region and increased our UK manufacturing capacity in preparation for the implementation of requirements under the new UK Gambling Act.

Japan

We established an office in 1990 that serves the Japan market with engineering, development, sales, and administration from our head office in Tokyo and a logistics office in Nagano. During fiscal 2004, we entered into a manufacturing arrangement with Sega Sammy, which has helped position our company as a more competitive and consistent performer in the pachisuro marketplace. The market installed base of pachisuro machines is estimated at over 1.8 million units. The short product life cycle of these machines causes them to be replaced approximately every two years on average.

Internet Gaming

We acquired WagerWorks in August 2005 to capitalize on the expanding internet gaming market. WW develops, markets and operates an internet gaming solution designed to enable established consumer oriented companies to leverage their operating expertise and brand equity online. Recognizing that the legality of online gambling is unsettled in the United States, WW adheres to a strict operating policy of not conducting business with customers who knowingly process gambling transactions from the US. WW customer relations are based in the UK and Ireland. We anticipate remote gaming will continue to mature in a regulated manner and WW will facilitate the distribution of our game content across new channels and mediums including the internet, mobile devices, and interactive television.

COMPETITION

The market for gaming machines and systems is intensely competitive. The principal method of competition is product development. We are confident that our diverse library of strong performing games and intellectual property provides a strong competitive advantage. Other ways we remain competitive include the quality and breadth of our sales and service organizations, our financial strength as a manufacturer, and pricing. We provide substantial marketing and advertising support for our gaming products and compete on the basis of our extensive infrastructure, popular brand names, product appeal, jackpot awards, player loyalty, technical expertise and marketing experience.

Our competitors include, but are not limited to, the following manufacturers that have developed casino 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 Alliance Gaming Corp (Bally Gaming)
			ª Aristocrat Leisure Limited
			ª Aruze, formerly known as Universal
			ª Cirsa Group
			ª GTech
			ª Gauselmann Group (Atronics)
			ª Franco Gaming, Ltd., a division of Recreativos Franco
			ª Konami Co. Ltd.
			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 Stargames
			ª Video Game Technologies
			ª WMS Industries

OPERATIONAL OVERVIEW

Manufacturing and Suppliers

In addition to our US production facility in Reno, Nevada, we also manufacture our products in the UK and through a third party manufacturer in Japan. 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 in the US. We have a broad base of material suppliers and utilize multi-sourcing practices to ensure component availability.

Our Reno facility has 787,000 square feet currently devoted to manufacturing, warehousing, shipping and receiving. Construction initiated in fiscal 2004 to enlarge our Reno facility with additional space for offices, manufacturing, and a new data center was completed in fiscal 2005. We began the process of consolidating various Las Vegas leased facilities and approximately 800 employees into a new 37-acre IGT central campus in fiscal 2004 and estimate completion in 2007.

During fiscal 2005, our Reno facility maintained the ISO 9001.2000 manufacturing industry certification demonstrating that our quality management is held to the highest industry standards. 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 and to facilitate our capacity to fill customer orders on a timely basis. Our product sales backlog orders totaled approximately $442.1 million at October 31, 2005 and $328.6 million at October 31, 2004. Our backlog orders for proprietary games totaled approximately 8,800 units at October 31, 2005 and 5,400 units at October 31, 2004. We reasonably expect to fill our backlog within fiscal 2006.

Sales and Distribution

Our products and services are sold to gaming operators and governmental entities that conduct gaming operations. We market our products and proprietary systems through our internal sales staff, agents and distributors. We employ approximately 250 sales personnel in various North America and international locations.

We use third party distributors and agents for sales and placements in certain markets. Our distributor agreements do not specify minimum purchases, but generally provide that we may terminate the distribution agreement if certain performance standards have not been satisfied.

Customer Service

We consider customer service an important aspect of our overall marketing strategy and a key factor differentiating us from our competitors. Customers are provided product delivery and installation services, warranty services, after-market technical services and new product support services. Equipment spare parts, product retrofit and game conversion services are also provided. We typically provide a 90-day service and parts warranty program in North America and up to a 180-day warranty service internationally for our gaming machines. We employ more than 900 trained customer service personnel in 34 customer service support centers in all major North America gaming jurisdictions and internationally in Argentina, Australia, Japan, New Zealand, South Africa, the Netherlands and the UK.

We also provide extensive customer education and service through customer product and employee training, technical employee certification programs, videotaped instruction, a 24-hour customer service hotline, newsletters, our website (www.IGT.com), and the Global Support Center. The GSC is a fully staffed facility providing 24-hour telephone support to all types of casino system customers. The GSC has access to a range of field support engineering resources to resolve technical issues. Through these extensive resources, IGT provides a direct link for two-way communication between the customer and IGT and access to product information 24 hours a day, seven days a week.

Regulatory Compliance

Our product and regulatory compliance efforts are designed to ensure that each gaming product or system we develop meets the requirements set forth in all gaming jurisdictions worldwide. These efforts also ensure we obtain the necessary approvals and licenses. Through our efforts we are able to successfully sell and market our products worldwide, and provide our customers with the assurance that our products work properly and meet jurisdictional requirements. We hold over 330 gaming licenses worldwide.

Information Systems

In fiscal 2005, we expanded our ERP solution for the IGT Systems group operations and are in the process of implementing the customer online ordering system to support Server Based Gaming. We also successfully completed the design, construction and move into a new advanced technology data center.

Total Employees

As of September 30, 2005, we employed approximately 5,000 individuals worldwide, including 4,100 in North America and 900 internationally. We believe we have favorable relationships with our employees.

RESPONSIBLE GAMING

Social responsibility is a cornerstone of IGT’s business philosophy. We are the only gaming equipment manufacturer to implement a formal responsible gaming program that strives to provide protection for vulnerable populations while helping to ensure the future of our business. As our markets continue to expand internationally we have extended our responsible gaming efforts into those jurisdictions. We partner with both gaming stakeholders and the problem gambling 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.

GOVERNMENT 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 who 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, the 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 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.

Nevada Regulation

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 either payable 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.

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.

Native American Gaming Regulation

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, tribal gaming commissions have been established by many Native American tribes to regulate gaming-related activity on Indian lands. Indian tribes are sovereign in their own government systems, with primary regulatory authority over gaming on land within the tribes’ jurisdiction. IGT distributes gaming equipment to Native American tribes who have negotiated compacts with their states and/or have received federal approval where required.

International Regulation

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 Regulatory Environment

With the acquisition of WagerWorks in August 2005, we now provide online gaming content and services for certain jurisdictions. This sector is highly regulated, principally with respect to the operation of online casinos, but impacts product development and offering as well. In order to comply with regulations, WW has developed an extensive operational control structure spanning the software and game development process, computer operations, consumer cash handling, and identity checking.

The legality of online gaming in the US is unsettled and therefore, while many competitors take bets from US citizens, WW does not. While it is legal to take bets online from UK citizens the UK does not provide a regulatory framework from which to operate online. WW therefore, operates its online casinos from Alderney in the British Channel Islands, regulated by the Alderney Gaming Control Commission.

FORWARD LOOKING STATEMENTS AND RISK FACTORS

Risk Factors and Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

Throughout this Annual Report on Form 10-K we make some “forward looking” 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 also relate to our future prospects and proposed new products, services, developments or business strategies. These statements are identified by their use of terms and phrases such as anticipate, believe, could, would, estimate, expect, intend, may, plan, predict, project, pursue, will, continue, feel, or the negative or other variations thereof, and other similar terms and phrases, including references to assumptions, and include but are not limited to the following:

			ª expectations about our ability to introduce new products and stimulate replacement demand
			ª estimates of our market share and competitive advantage
			ª estimates about the total market installed base
			ª expectations about gaming expansion and new market opportunities
			ª judgments and assumptions related to our critical accounting estimates
			ª estimates about our tax exposure and tax rates
			ª estimates of expected gross profit margins
			ª estimates about replacement market trends
			ª expectations about our available capital resources
			ª expectations about losses from off-balance sheet arrangements
			ª expectations about foreign exchange rate gain and losses
			ª expectations about incremental future growth through acquisitions
			ª expectations about opportunities to increase profit contribution
			ª expectations about future gaming product developments
			ª expectations about capitalizing on new and expanding market opportunities
			ª expectations about ensuring access to new distribution channels
			ª expectations about gaining access to important intellectual property
			ª expectations regarding impacts to future EPS
			ª expectations regarding regulatory developments

Although we believe 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. We do not intend, and undertake no obligation, to update our forward looking statements to reflect future events or circumstances.

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 success in the gaming industry depends in large part on our ability to develop innovative products and systems and would be adversely affected by:

			ª a decline in the popularity of our gaming products with players
			ª a lack of success in developing new products
			ª an inability to roll out new games on schedule
			ª an increase in the popularity of competitors’ games
			ª a negative change in the trend of consumer acceptance of our newest systems innovations

Our business is vulnerable to changing economic conditions, including:

			ª unfavorable changes in economic conditions including those that affect the relative health of the gaming industry
			ª unfavorable changes in tax laws or application of such laws that could reduce our profitability
			ª political or economic instability in international markets
			ª changes in interest rates causing a reduction of investment income or in the value of market rate sensitive instruments
			ª fluctuations in foreign exchange rates, tariffs and other trade barriers
			ª an inability to effectively hedge our foreign currency exposures

Demand for our products would be adversely affected by:

		ª	reduced growth or continued delays of new market openings and/or existing market expansions
		ª	delays of scheduled openings of newly constructed or planned casinos
		ª	reduced levels of play or weakened customer demand for our gaming machines as a result of declines in travel activity, “jackpot fatigue,” or customer capital expenditures
		ª	a decrease in the desire of established gaming properties to upgrade machines, resulting in a decline in the demand for replacement machines
		ª	uncertain timing for technology upgrades
		ª	loss of casino floor space to table games
		ª	casino operators designing and developing slot machine content
		ª	casino operators developing strategic alliances with competitors
		ª	a decline in public acceptance of gaming

We operate in a highly regulated industry and our ability to operate in certain jurisdictions could be adversely affected by:

		ª	unfavorable public referendums or anti-gaming legislation
		ª	unfavorable legislation affecting or directed at manufacturers or gaming operators, such as referendums to increase taxes on gaming revenues
		ª	adverse changes in or findings of non-compliance with applicable governmental gaming regulations
		ª	delays in legislative actions and/or approvals from regulatory agencies
		ª	a limitation, conditioning, suspension or revocation of any of our gaming licenses
		ª	unfavorable determinations or challenges of suitability by gaming regulatory authorities with respect to our officers, directors or key employees
		ª	customers’ inability to repay IGT development financing loans due to unfavorable legislation, regulation, or regulatory interpretation that impairs their ability to conduct planned gaming operations

Our intellectual property rights are subject to risks, including:

		ª	potential inability to obtain, maintain and protect our patents, trademarks, copyrights or theme licensing rights used competitively in development of our games and technology
		ª	competitors’ infringement upon our existing trademarks, patents and copyrights
		ª	approval of competitors’ patent applications that may restrict our ability to compete effectively

Our outstanding debt obligations subject us to certain additional risks, including:

		ª	increasing our vulnerability to general adverse economic and industry conditions
		ª	limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions and other general corporate requirements
		ª	requiring a substantial portion of our cash flows from operations for the payment of interest on our indebtedness and reducing our ability to use our cash flows to fund working capital, capital expenditures, acquisitions, and general corporate requirements
		ª	limiting our flexibility in planning for, or reacting to, changes in our business and the industry
		ª	disadvantaging us compared to competitors with less indebtedness

Our business operations are subject to other risks, including:

		ª	loss or retirement of our key executives or other key employees
		ª	adverse changes in the creditworthiness of parties with whom we have significant receivables or forward currency exchange contracts
		ª	the discovery of facts or determinations by judges, juries or other finders of facts not presently known to us or not in accordance with our evaluation of possible liability or the outcome of existing litigation related to legal actions pending against IGT
		ª	the timely and cost effective integration of acquired companies into our operations
		ª	increased costs due to reliance on third party suppliers and contract manufacturers
		ª	agreements with casinos in Native America jurisdictions which may subject us to sovereign immunity risk
		ª	acts of war or terrorist incidents
		ª	continued work through several implementation phases of our company-wide ERP solution for computer system procedures and controls; any failures, difficulties or significant delays in implementing or maintaining computer information systems could result in material adverse consequences to our business, including disruption of operations, loss of information and unanticipated increases in costs

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 a facility of more than 1.2 million square feet 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 leased warehousing facilities in Reno totaling 204,000 square feet.

North America Sales and Service

Our largest sales and service office is located in Las Vegas, Nevada, where we lease approximately 364,000 square feet in warehousing, sales and administration facilities. These operating leases expire between July 2006 and December 2007. 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, that is scheduled for completion in 2007. Additionally, we lease approximately 411,100 square feet of warehousing, sales and service facilities throughout the US and Canada to support local market needs. We also own a 94,000 square foot building in Rapid City, South Dakota, which formerly supported Native American gaming markets. With a majority of the Rapid City functions redistributed during 2005, we decided to list this property for sale in the first quarter of fiscal 2006.

International

Our most significant international facilities are located in the UK and Australia. We own 149,000 square feet and lease 42,000 square feet under leases expiring between March 2007 and December 2009, which support manufacturing, sales and administrative functions in the UK. We own 12,000 square feet in New Zealand and lease 138,000 square feet in Australia under leases expiring between October 2006 and April 2008, for subassembly, sales and administration. All other properties used for international operations total 191,000 square feet, mostly under leases expiring between January 2006 and May 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. For a description of certain of these matters, see Note 13 of our Consolidated Financial Statements.

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

None

PART II

Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters

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 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
Fiscal 2004
First Quarter		$	36.96			$	28.09			$	0.100
Second Quarter			45.78				34.65				0.100
Third Quarter			46.82				33.45				0.100
Fourth Quarter			38.17				28.72				0.120

There were approximately 2,863 record holders of IGT’s common stock and the closing price was $29.70 as of December 1, 2005.

IGT’s transfer agent and registrar is:		The Bank of New York
		63 Madison Avenue, 8th Floor
		New York, NY 10016
		(212) 503-4279

Stock Repurchases

Under the 1990 IGT common stock repurchase plan, as amended and adjusted for stock splits, our remaining share repurchase authorization totaled 23.1 million at September 30, 2005. The stock repurchase authorization is used to return value to our shareholders and reduce the number of shares outstanding. The shares may be repurchased in the open market or in privately negotiated transactions, depending on market conditions and other factors. There is no expiration date specified for this plan. Our fourth quarter repurchases are summarized below.

Shares purchased in the table below exclude treasury shares acquired in non-cash transactions related to forfeited stock awards or shares exchanged for options exercised. We repurchased an additional 1.9 million shares between the period October 2, 2005 and December 9, 2005.

										Total Number of				Maximum
										Shares				Number of
		Total								Purchased as				Shares Still
		Number of				Average				Part of a				Available for
		Shares				Price Paid				Publicly				Purchase Under
Periods		Purchased				per Share				Announced Plan				the Plan
July 3, 2005 — July 30, 2005			582,500			$	27.80				582,500				28,208,625
July 31, 2005 — August 27, 2005			3,827,400				27.06				3,827,400				24,381,225
August 28, 2005 — October 1, 2005			1,289,100				26.96				1,289,100				23,092,125
Total			5,699,000				27.12				5,699,000

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, Consolidated Financial Statements.

FINANCIAL HIGHLIGHTS

Years ended September 30,		2005				2004				2003(1)				2002(1)				2001
(In millions, except per share amounts)
Revenues		$	2,379.4			$	2,484.7			$	2,128.1			$	1,728.5			$	1,199.2
Gross profit			1,190.7				1,319.2				1,094.8				842.9				534.9
Earnings of unconsolidated affiliates(1)			—				—				—				32.5				142.6
Operating income			663.7				814.3				665.9				516.5				395.3
Income from continuing operations, net of tax(2,3)			436.5				429.8				375.3				254.7				213.9
Discontinued operations, net of tax(4)			—				58.9				15.4				16.5				—
Net income(2,4)			436.5				488.7				390.7				271.2				213.9
Basic earnings per share(5)
Continuing operations		$	1.27			$	1.24			$	1.09			$	0.75			$	0.72
Discontinued operations			—				0.17				0.05				0.05				—
Net income			1.27				1.41				1.14				0.80				0.72
Diluted earnings per share(5)
Continuing operations		$	1.20			$	1.17			$	1.04			$	0.74			$	0.70
Discontinued operations			—				0.15				0.04				0.05				—
Net income			1.20				1.32				1.08				0.79				0.70
Weighted average shares outstanding(5)
Basic			343.7				346.8				344.0				338.4				295.4
Diluted(6)			370.2				376.3				366.7				344.2				306.1
Cash dividends declared per share(5)		$	0.485			$	0.420			$	0.175			$	—			$	—
Cash from operations		$	726.4			$	623.6			$	408.7			$	589.1			$	273.6
Cash from investing			(215.8	)			364.8				(597.5	)			105.1				(280.1	)
Cash from financing(7)			(525.6	)			(1,121.7	)			420.7				(589.2	)			(32.6	)
Capital expenditures(8)			238.6				210.9				128.6				116.2				103.7
Cash used for share repurchases			354.7				129.8				161.3				249.3				62.8
Cash and short-term investments(7,11)		$	688.1			$	766.7			$	1,315.6			$	430.2			$	377.3
Working capital			219.6				949.7				1,133.1				750.6				596.8
Total assets			3,864.4				3,873.0				4,185.2				3,315.8				1,923.4
Notes payable, net(7,9)			811.0				791.9				1,552.9				972.0				989.8
Jackpot liabilities(10)			705.8				719.3				541.1				577.7				343.6
Stockholders’ equity			1,905.7				1,976.6				1,687.5				1,433.1				296.1
Shares outstanding(5)			338.2				346.1				345.5				347.3				291.7

Item 7. Management’s Discussion and Analysis

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, ASP, ARPU, ARDU, 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, development, manufacturing, distribution and sales of computerized gaming machines and systems products. We strive to maintain a diverse portfolio of gaming products that span a wide range of categories and target customer markets with a variety of games, platforms and systems offered across gaming jurisdictions worldwide.

We had annual revenues of $2.4 billion in fiscal 2005. We derive our revenues in two ways, either from the sale (product sales) or placement (gaming operations) of our gaming products, services and/or intellectual property. Operating results reviewed by our chief decision makers encompass all revenue sources within each geographical customer region. We currently view our business segments in two primary operating divisions, each incorporating all types of revenues:

	ª		The North America Division, encompasses our operations in the US and Canada, including the IGT Systems group
	ª		The International Division oversees our efforts abroad in Asia, Australia, New Zealand, Europe, Japan, Latin America, Russia, South Africa, and the UK

Additionally, our Corporate Division administers certain unallocated income and expenses related to company-wide initiatives. See the BUSINESS SEGMENT RESULTS below and Note 18 of our Consolidated Financial Statements for additional segment information and financial results.

OUR FOCUS

Product Demand

Demand for our products is driven principally by:

	ª		technological innovations that create new, more sophisticated games and/or customer cost savings
	ª		new or expanding gaming properties
	ª		establishment or expansion of legalized gaming jurisdictions
	ª		entertainment value to the player
	ª		manufacturer’s reputation and reliability

Following several consecutive years of record growth, largely related to the TITO replacement cycle, fiscal 2005 was a transitional year. At the end of the current fiscal year, we estimate there were approximately 175,000 total machines that remained unconverted in the marketplace. As we move into fiscal 2006 and beyond the number of replacement units that are sold as a direct result of TITO are anticipated to further decline. We expect that future replacement sales will be driven more by customer desire to update their floor with new games and technology, rather than to replace non-TITO machines. We anticipate an acceleration of this trend as we transition to SB™ technology.

Offsetting the decline in North America machine demand, we anticipate growing contributions from international operations, as well as increased non-machine sales, in part, enabled by our significant share of total gaming devices currently installed on casino floors. Non-machine sales include systems, parts, conversions, and royalties or licensing fees.

Notwithstanding these factors, we remain dependent upon gaming market expansion for growth. Expansion of new markets has been slower to materialize than we previously expected due to delays in legislative actions and/or regulatory approvals. Our business strategies remain focused on:

	ª		the development and expansion of our product offerings
	ª		capitalizing on new and expanding market opportunities
	ª		gaining access to important intellectual property
	ª		strategic acquisitions and alliances to enable development of leading gaming technology
	ª		ensuring access to new distribution channels

Product Development

Our business model is the creation of game content and the delivery to consumers via our platforms and systems. We are a prominent designer of games, platforms and systems for the gaming industry. We accomplish this by anticipating consumer needs, responding to feedback and marketing trends, and pioneering innovative gaming machines and reliable systems solutions. Our product development efforts are supported by a considerable emphasis and investment in research and development, which we expect will enable us to maintain a leadership position in the industry.

We continue to expand our for sale game library emphasizing development of games to address changing consumer preferences and other market trends. We strive to develop games that incorporate innovative and entertaining graphics and appealing sound. We added themes for spinning reel, video poker and incorporated the popular multi-line multi-coin configuration to our video reels. Fiscal 2005 top selling video themes included:

	ª		Carnival of Mystery™ Multiway
	ª		Alien®
	ª		Mystical Mermaid®

We anticipate continued installations into our casino market gaming operations installed base through new video game introductions. We continually add innovation and enhanced player appeal to our proprietary games. This includes introducing new multi level progressives games in addition to new games and enhancements to our flagship themes such as Wheel of Fortune®, Megabucks®, and The Price is Right®. During fiscal 2005, we introduced and placed new units of:

	ª		Fort Knoxâ, a multi-level mystery progressive penny game
	ª		Video Megabucksâ, a penny game on our AVPâ platform with a $10 million starting jackpot
	ª		Star Warsä, offered with a $1 million fixed top award in a linked penny progressive configuration

Demand for these new game themes remains strong and we continue to observe high levels of customer acceptance. We also maintain our strategy to improve gaming operations revenues by managing the types of games and jurisdictions where games are placed.

To date, we have introduced a number of casino-wide integrated products that enhance the players’ gaming experience and provide operational efficiencies for our customers. We are now leveraging off this experience and our CDS technology to move forward in developing gaming products of the future that incorporate innovative features, including server based gaming. We continue to make progress with our server-based gaming initiatives and have commenced the regulatory approval process and anticipate the start of commercial field trials in the near future. As the market shifts toward a more system centric gaming environment, we expect a greater portion of our business will come from non-machine revenues.

During the current fiscal year, we entered into a worldwide product integration agreement with PGIC and SMI to develop a comprehensive, automated table management system known as the ITSÔ, combining complementary capabilities, technologies, and resources of the three companies. A well-implemented casino management and patron loyalty system offers strategic and competitive value to a casino’s slot operations. We view the extension of this technology into the table games area as the next logical phase in the expansion of these products.

In August 2005, we acquired WagerWorks, a provider of internet gaming technology, content and services to capitalize on the expanding internet gaming market. WW adheres to a strict compliance policy designed to ensure that operators offer the company’s products and services to end users in a responsible manner. We anticipate this business combination will facilitate the distribution of our game content across new channels and mediums, including the internet, mobile devices, and interactive television.

Market Opportunities

We market our gaming products to legalized gaming jurisdictions around the world. While our most significant markets are in North America, we continue to pursue additional opportunities in international markets. The opportunities and challenges, and the extent of our successes, vary across these jurisdictions.

We previously estimated that new North America and international markets would materialize during fiscal 2006, but current market dynamics suggest that significant expansion could be delayed until fiscal 2007. Although the timing has been delayed and remains uncertain, we do expect that opportunities will eventually come from new jurisdictions and expansion of existing markets.

We continue to monitor expanding and emerging markets in North America, including California where the potential for new and renegotiated tribal state compacts could spur further expansion. We anticipate major expansion of legalized gambling previously forecasted for 2005 and early 2006 will occur in late 2006 and 2007. With recent legislative action and voter referendums, we expect to see new markets opening in both Florida and Pennsylvania in late calendar 2006. We also monitor gaming legislation in potential new markets in the states of Arkansas, Kansas, Ohio, Maryland, Massachusetts and Texas all showing interest in some form of legalized gaming.

Gaming expansion is ongoing in numerous CDS and Class II markets nationwide. Racino markets in Maine, New York and Rhode Island continue to grow. New York continues to expand their program with anticipated future openings in Yonkers and Aqueduct scheduled for late fiscal 2006 and early fiscal 2007. Our market share of lease operation machines in New York and Rhode Island grew in 2005 through a reallocation process based on our product performance.

The outlook for international market expansion continues to improve with opportunities in Asia, Latin America, Russia, and the UK. We are concentrating our management and development resources toward product localization, so we export a US manufactured product customized for local cultures. With the prospects of new international jurisdictions we anticipate our international markets will continue to grow in significance over the next several years and increase their share of overall contribution.

Competition

The market for gaming machines and systems is intensely competitive principally through new product development. We maintain a global competitive advantage because of our ability to:

	ª		offer a dynamic and diverse library of innovative and strong performing games
	ª		develop and protect our extensive collection of intellectual properties
	ª		provide the highest levels of customer service and support

We also competitively benefit from our:

	ª		financial strength which allows us to aggressively research and develop new products, as well as invest in strategic acquisitions and alliances
	ª		extensive and well established infrastructure of sales, and manufacturing
	ª		worldwide recognition and geographic diversity

We currently hold a significant share of the total gaming devices on North America casino floors. Within that population, our share in spinning reel and video poker machines remains stable, but we are experiencing increased competitive pressure within the video spinning reel gaming machines business. We expect to maintain a leading share of the total population of gaming devices installed over the long-term, despite quarterly fluctuations that will occur from time to time.

The marketplace for recurring revenue units is competitive. We continue to proactively manage our proprietary installed base in order to offer the strongest performing games placed on casino floors. We expect our ability to develop exciting new themes should enable us to maintain a leading market share.

Sales of our IGT Advantage^ä systems are successfully capturing market share because of its value added technology offerings. With a number of significant new IGT Advantage^ä systems contracts, we now have systems relationships with most major gaming operators. At September 30, 2005, 510 IGT slot systems were installed worldwide connecting approximately 272,000 machines, versus 403 systems connecting 246,000 machines at September 30, 2004, and 331 systems connecting 218,000 machines at September 30, 2003.

Capital Deployment

We generated substantial operating cash flows in fiscal 2005, which allowed us to reinvest in our business through capital expenditures and business acquisitions, 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 and dividend 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

In keeping with efforts to diversify and expand, we entered into the following strategic business relationships and acquisitions during fiscal 2005:

	ª		the acquisition of WagerWorks, a provider of internet gaming technology, content and services
	ª		a collaboration with PGIC and SMI for the development and marketing of an automated table management solution, known as Intelligent Table System
	ª		the asset purchase of Friendly Matrix, with several products that we anticipate will enhance functionality in our IGT Advantageä systems
	ª		the asset purchase of Hi-Tech, our former distributor and supplier of gaming equipment and services in Canada

We anticipate these business relationships and acquisitions will facilitate incremental future growth and eventual economies of scale, although they were not material and are not expected to produce near-term earnings accretion. Including amortization of intangibles and in-process R&D, WagerWorks reduced diluted EPS by approximately $0.01 in fiscal 2005 and is expected to be approximately $0.02 dilutive in fiscal 2006. See Note 2 of our Consolidated Financial Statements for additional financial details of the acquisitions.

Hurricane Impact

We suffered damages and losses to our US gulf coast operations in the wake of hurricanes Katrina in August 2005 and Rita in September 2005. Approximately 1,800 gaming operations machines were affected, of which 700 were destroyed or rendered inoperable and 1,100 temporarily shut down, in part due to WAP monitoring sites disabled for a short time. At September 30, 2005, 750 of these gaming operations machines remain out of service.

No determination has been made as to the total amount or timing of insurance payments. We carry comprehensive business interruption and property damage insurance. We are working closely with our insurance carriers, claims adjustors, and consultants to ascertain the full amount of insurance proceeds due to IGT as a result of the damages and losses suffered in the hurricanes. Business interruption insurance recoveries for lost earnings and any property insurance reimbursements over book value will be recorded when realized and all contingencies have been resolved, which may result in future period fluctuations affecting comparability.

RECENTLY ISSUED ACCOUNTING STANDARDS

With the adoption of SFAS 123R, Share-Based Payment, in our quarter ending December 31, 2005, we will recognize share-based compensation in our financial statements. Additionally, the SEC issued SAB 107, Share-Based Payment, providing interpretive guidance on the interaction of SFAS 123R with existing SEC guidance. SAB 107 requires the classification of stock compensation expense to the same financial statement line as cash compensation. We estimate the impact of adopting SFAS 123R will be approximately $0.02 dilutive to quarterly earnings in fiscal 2006 and will impact our cost of product sales and gaming operations, related gross profits and margins, R&D, and SG&A expenses. See Note 1 of our Consolidated Financial Statements for additional information regarding recently issued accounting standards.

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the US. Accordingly, we are required to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our company and the industry as a whole, and information available from other outside sources. Our estimates affect reported amounts and related disclosures. Actual results may differ from initial estimates.

Critical accounting estimates require IGT’s management to make material subjective or complex judgments about matters that are highly uncertain or variable to determine appropriate estimates and assumptions to be used for recording certain financial transactions. These areas of our accounting estimates are also the most sensitive to change from external factors. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors.

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 $705.8 million at September 30, 2005 and $719.3 million at September 30, 2004. Jackpot expense totaled $258.5 million for 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.

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 the 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, 2005 and $1.3 billion at September 30, 2004. 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 2005, 2004 or 2003.

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 $99.4 million at September 30, 2005 and $130.1 million at September 30, 2004.

Income Taxes

Determination of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and probability of realization of deferred income taxes and the timing of income tax payments. 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 be applicable 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.

Our net deferred tax assets totaled $93.2 million at September 30, 2005 and $85.0 million at September 30, 2004. Our accrued income taxes totaled $14.5 million at September 30, 2005 and $7.5 million at September 30, 2004.

Bad Debt Expense

We analyze historical collection trends, customer concentrations and creditworthiness, economic trends and anticipated changes in customer payment patterns when evaluating the adequacy of our allowance for doubtful accounts for specific and general risks. Changes in our assumptions and estimates could change our estimated provision for bad debt, thereby impacting our operating income. Our allowances for doubtful accounts, notes, and contracts receivable totaled $63.2 million at September 30, 2005 and $68.5 million at September 30, 2004.

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 $142.3 million at September 30, 2005 and $165.6 million at September 30, 2004.

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 adjustments due to expected future releases of more advanced cabinet and game designs. We recorded $41.6 million or $26.6 million after-tax to cost of gaming operations related to technological obsolescence and salvage value adjustments in fiscal 2005.

CONSOLIDATED OPERATING RESULTS — A Year Over Year Comparative Analysis

														Favorable (Unfavorable)
		2005				2004				2003				05 vs 04								04 vs 03
(In millions, except units, ASP, ARPU, ARDU & EPS)
Total
Revenues		$	2,379.4			$	2,484.7			$	2,128.1			$	(105.3	)			(4	%)		$	356.6				17	%
Gross profit			1,190.7				1,319.2				1,094.8				(128.5	)			(10	%)			224.4				20	%
Gross margin			50	%			53	%			51	%		(3		) pp			(6	%)		2		pp			4	%
Operating income		$	663.7			$	814.3			$	665.9			$	(150.6	)			(18	%)		$	148.4				22	%
Operating margin			28	%			33	%			31	%		(5		) pp			(15	%)		2		pp			6	%
Income from continuing operations		$	436.5			$	429.8			$	375.3			$	6.7				2	%		$	54.5				15	%
Discontinued operations			—				58.9				15.4				(58.9	)			*				43.5				282	%
Net income			436.5				488.7				390.7				(52.2	)			(11	%)			98.0				25	%
Diluted earnings per share:
Continuing operations		$	1.20			$	1.17			$	1.04			$	0.03				3	%		$	0.13				13	%
Discontinued operations			—				0.15				0.04				(0.15	)			*				0.11				275	%
Net income			1.20				1.32				1.08				(0.12	)			(9	%)			0.24				22	%
Product Sales
Machines		$	867.9			$	1,065.3			$	888.8			$	(197.4	)			(19	%)		$	176.5				20	%
Systems, parts and conversions			313.0				256.0				179.8				57.0				22	%			76.2				42	%
Total product sales			1,180.9				1,321.3				1,068.6				(140.4	)			(11	%)			252.7				24	%
Gross profit		$	576.6			$	690.1			$	523.1			$	(113.5	)			(16	%)		$	167.0				32	%
Gross margin			49	%			52	%			49	%		(3		) pp			(6	%)		3		pp			6	%
Units sold			141,900				159,200				134,800				(17,300	)			(11	%)			24,400				18	%
ASP		$	6,100			$	6,700			$	6,600			$	(600	)			(9	%)		$	100				2	%
ARPU			8,300				8,300				7,900				—				—				400				5	%
Gaming operations
Revenues		$	1,198.5			$	1,163.4			$	1,059.5			$	35.1				3	%		$	103.9				10	%
Gross profit			614.1				629.1				571.7				(15.0	)			(2	%)			57.4				10	%
Gross margin			51	%			54	%			54	%		(3		) pp			(6	%)			—				—
Installed base units			38,800				37,200				34,000				1,600				4	%			3,200				9	%
ARDU		$	87.00			$	88.00			$	88.00			$	(1.00	)			(1	%)			—				—

Fiscal 2005 vs Fiscal 2004

Fiscal 2005 income and EPS from continuing operations grew slightly despite declining product sales volumes in the North America division. Our consolidated results include record international revenues and shipments as a result of the success of the two Japanese pachisuro games released in the current fiscal year and a strong mix of premium products and parts sales in Australia. Additionally, a favorable mix of revenues from systems, parts and game theme conversions and increased gaming operations revenues contributed to current year results. Improved international sales demonstrate our geographic diversity and has compensated for the slowing replacement demand in North America.

Improved operating cash flows enabled us to continue our capital deployment strategy of returning value to our shareholders through dividends and share repurchases. In fiscal 2005 we declared cash dividends of $0.485 per share and repurchased 12.8 million shares.

Significant items affecting comparability of income from continuing operations for the fiscal years included:

	ª		the current year salvage value adjustments and technological obsolescence charges of $26.6 million, after-tax
	ª		the negative impact to earnings from hurricanes Katrina and Rita consisting of approximately $3.2 million, after-tax, of hurricane related expenses and $6.3 million, after-tax, in lost business activity in fiscal 2005
	ª		$6.7 million after-tax for severance costs incurred in the current fiscal year associated with several operational reorganization initiatives
	ª		additional interest income of $6.0 million after-tax in the current year, related to financing fees realized on early loan repayments
	ª		the prior year loss on early redemption of our senior notes due May 2009 totaling $77.0 million, after-tax
	ª		the prior year income tax provisions reduction of $13.9 million, primarily due to utilization of foreign income tax credits
	ª		the additional week in the prior year related to our 52/53-week fiscal year, primarily affecting gaming operations and operating expenses

We incurred considerable damages to our US gulf coast operations as a result of hurricanes Katrina and Rita in August and September 2005. The subsequent closure of gulf coast casinos negatively impacted our operating income results by approximately $14.9 million, pre-tax, comprised of a $9.4 million reduction in gross profit due to lost business activity, $2.8 million for the carrying value of gaming operations assets destroyed, net of minimum insurance recoveries and $2.7 million in additional operating expenses. These charges reduced diluted EPS by approximately $0.026.

Future lost earnings will vary depending on the number of machines that remain out of service and the staggered pace of casino property re-openings. No determination has been made as to the total amount or timing of insurance payments. Business interruption insurance recoveries for lost earnings and any property insurance reimbursements over book value will be recorded when realized and all contingencies have been resolved, which may result in future period fluctuations affecting comparability.

See Note 2 of our Consolidated Financial Statements for additional information concerning the prior year discontinued operations related to certain Anchor operations divested subsequent to acquisition.

Consolidated product sales in fiscal 2005 were and continue to be adversely affected by the slowdown in demand for TITO related replacement machines, as well as fewer new marketplace opportunities. ASPs declined in the current fiscal year due to a higher mix of Japan’s pachisuro machines, which carry lower sales prices and gross margins. Additionally, the allocation of fixed costs across lower domestic sales volumes also contributed to the decrease in consolidated gross margins in the current fiscal year. We estimate our consolidated product sales gross margin will fluctuate between 47% and 51% in fiscal 2006 depending on the geographical mix of product sales.

Consolidated gaming operations revenues grew in the current fiscal year primarily due to increases in our installed base as well as increased play levels resulting from new game introductions and removal of lower performing units. Gross margin in fiscal 2005 was negatively impacted by charges recorded for technical obsolescence, including adjustments to salvage values, of certain gaming operations assets in response to shifting market demand toward newer IGT products that incorporate more innovative features. The decline in ARDU in the current year was primarily due to the increase mix of lower yielding CDS and Class II lease operations units, partially offset by increased play levels.

Additionally, we began the VIE consolidations in April 2004, causing the current year to include an additional six months of VIE revenues and expenses, but no material impact to gross profit. We expect our consolidated gaming operations gross margin will fluctuate between 54% and 56% for fiscal 2006, depending on the jurisdictional mix and types of games placed, as well as movements in interest rates and seasonality.

Fiscal 2004 vs Fiscal 2003

IGT achieved record financial results in fiscal 2004 compared to fiscal 2003, posting revenue growth in both product sales and gaming operations.

The increase in worldwide product sales revenues and gross profit in fiscal 2004 over fiscal 2003 was attributed to:

	ª		higher volumes in both North America and international markets
	ª		a favorable shift in product mix
	ª		improved pricing realization
	ª		contributions from Acres of $56.0 million in revenues and $32.6 million in gross profit

Additionally, product sales gross profit and margin improved during fiscal 2004 as a result of lower material costs coupled with operational efficiencies in our Reno manufacturing facility.

Consolidated gaming operations revenues and gross profit grew in fiscal 2004 compared to fiscal 2003 primarily due to increases in our North America installed base and improvements in the game placement mix leading to higher yields per game placed. One additional week in fiscal 2004 related to the timing of our 52/53-week accounting year added approximately $19.9 million to revenues and $11.1 million to gross profit.

Significant fiscal 2004 items affecting comparability of income from continuing operations in fiscal 2004 versus fiscal 2003 included:

	ª		a loss on the early redemption of our senior notes due May 2009 totaling $77.0 million after tax
	ª		a reduction to our income tax provision primarily related to the utilization of foreign income tax credits totaling $13.9 million

Operating Expenses

														Favorable (Unfavorable)
		2005				2004				2003				05 vs 04				04 vs 03
(In millions)
Selling, general and administrative		$	318.6			$	293.1			$	272.7			$	(25.5	)  (9%)		$	(20.4	)  (7% )
Depreciation and amortization			69.9				64.3				46.7				(5.6	)  (9%)			(17.6	)  (38%)
Research and development			138.4				129.3				94.9				(9.1	)  (7%)			(34.4	)  (36%)
Provision for bad debts			0.1				18.2				14.6				18.1	99%			(3.6	)  (25%)
Total		$	527.0			$	504.9			$	428.9			$	(22.1	)  (4%)		$	(76.0	)  (18%)
Percent of revenues			22	%			20	%			20	%			—	—			—	—

Fiscal 2005 vs Fiscal 2004

Operating expenses increased in the current fiscal year primarily due to:

	ª		additional costs in several SG&A categories, including legal and compliance fees and additional severance costs
	ª		higher R&D costs to support our commitment to develop 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, better collections than expected and lower domestic sales volumes

During the second quarter of fiscal 2005, we initiated several efficiency initiatives involving international operations and a regional reorganization of our North America sales and service groups. As a result, we recognized charges principally consisting of SG&A severance totaling $10.0 million in fiscal 2005.

Fiscal 2004 vs Fiscal 2003

Operating expenses for fiscal 2004 increased over fiscal 2003 primarily due to:

	ª		the inclusion of Acres which added $32.2 million in operating expenses, including $10.7 million in amortization expense on acquired intangibles
	ª		our ongoing investment in R&D which included our entry into central determination markets
	ª		higher international selling, general and administrative expenses
	ª		changes in foreign currency exchange rates

Fiscal 2004 also included approximately $8.0 million in additional operating expenses as a result of the extra week in the first quarter related to the timing of our 52/53-week accounting year.

Recoveries of Latin America receivables reduced bad debt expense in fiscal 2003.

Other Income (Expense) and Taxes

														Favorable (Unfavorable)
		2005				2004				2003				05 vs 04								04 vs 03
(In millions)
Interest income		$	77.9			$	59.8			$	52.9			$	18.1				30	%		$	6.9				13	%
Interest expense			(58.1	)			(90.5	)			(116.8	)			32.4				36	%			26.3				23	%
Loss on redemption of debt			—				(127.9	)			(1.1	)			127.9				*				(126.8	)			*
Other			(2.3	)			(2.2	)			(2.3	)			(0.1	)			*				0.1				*
Other income (expense), net		$	17.5			$	(160.8	)		$	(67.3	)
Provision for income taxes		$	244.7			$	223.7			$	223.3			$	(21.0	)						$	(0.4	)
Tax rate			35.9	%			34.2	%			37.3	%		(1.7		)pp						3.1		pp

Fiscal 2005 vs Fiscal 2004

Total other income (expense), net, improved in the current fiscal year as a result of losses on early debt redemption of our 2009 and 2004 senior notes totaling $127.9 million included in fiscal 2004. The prior year early debt redemption also resulted in decreased interest expense in the current fiscal year. Additionally, interest income in 2005 included $10.2 million in financing fees realized on early loan repayments.

Interest income related to our WAP systems operations totaled $36.1 million in fiscal 2005, $29.8 million in fiscal 2004 and $25.7 million in fiscal 2003. Interest expense related to our WAP systems operations totaled $31.3 million in fiscal 2005, $26.1 million in fiscal 2004 and $23.2 million in fiscal 2003.

Fiscal 2004 results included a $13.9 million reduction to the provision for income taxes primarily due to the utilization of foreign income tax credits resulting from changes in the geographic mix of annual taxable income. Excluding the $13.9 million reduction, our fiscal 2005 annual tax rate decreased to 35.9% from 36.4% in fiscal 2004. We anticipate a range of 36% to 37% for our annual tax rate in fiscal 2006, depending on the geographic mix of operating income.

Fiscal 2004 vs Fiscal 2003

Other expense, net, for fiscal 2004 increased over 2003 due to a pretax loss of $127.9 million on the early redemption of our 2009 and 2004 senior notes, partially offset by pretax interest savings of $18.8 million.

BUSINESS SEGMENT RESULTS — A Year Over Year Comparative Analysis

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

North America Division

														Favorable (Unfavorable)
		2005				2004				2003				05 vs 04								04 vs 03
(In millions, except units, ASP & ARPU)
Total segment
Revenues		$	1,878.9			$	2,137.1			$	1,890.1			$	(258.2	)			(12	%)		$	247.0				13	%
Gross profit			972.4				1,153.2				985.3				(180.8	)			(16	%)			167.9				17	%
Gross margin			52	%			54	%			52	%		(2		) pp			(4	%)		2		pp			4	%
Operating income		$	639.1			$	842.9			$	722.1			$	(203.8	)			(24	%)		$	120.8				17	%
Operating margin			34	%			39	%			38	%		(5		) pp			(13	%)		1		pp			3	%
Product sales
Machines		$	456.9			$	777.7			$	691.5			$	(320.8	)			(41	%)		$	86.2				12	%
Systems, parts and conversions			252.0				213.4				151.4				38.6				18	%			62.0				41	%
Total product sales			708.9				991.1				842.9				(282.2	)			(28	%)			148.2				18	%
Gross profit		$	380.3			$	538.2			$	422.7				(157.9	)			(29	%)			115.5				27	%
Gross margin			54	%			54	%			50	%			—				—			4		pp			8	%
Units sold			50,500				92,500				83,900				(42,000	)			(45	%)			8,600				10	%
ASP		$	9,100			$	8,400			$	8,200			$	700				8	%		$	200				2	%
ARPU			14,100				10,700				10,000				3,400				32	%			700				7	%
Gaming operations
Revenues		$	1,170.0			$	1,146.0			$	1,047.2			$	24.0				2	%		$	98.8				9	%
Gross profit			592.1				615.0				562.6				(22.9	)			(4	%)			52.4				9	%
Gross margin			51	%			54	%			54	%		(3		) pp			(6	%)			—				—
Installed base units			37,300				36,400				33,200				900				2	%			3,200				10	%