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FORM 10-K
United States
Securities and Exchange Commission

Washington, D.C. 20549

For the Fiscal Year Ended September 30, 2003

OR

Commission File Number 001-10684

International Game Technology

(Exact name of registrant as specified in its charter)

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:

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

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 X No ___

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 31, 2003:

$6,813,784,065

The number of shares outstanding of each of the registrant’s classes of common stock, as of November 30, 2003:

346,216,568 shares of Common Stock, $.00015625 Par Value

Table of Contents      

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Part I

Item 1.      Business

COMPANY OVERVIEW

International Game Technology is recognized as a world leader in the design, development, manufacturing, distribution and sales of computerized gaming machines and systems products in all jurisdictions where gaming is legal. Currently, we operate in two lines of business: product sales and proprietary gaming.

International Game Technology principally served the United States (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 United Kingdom (UK) and through third party manufacturers in Japan and Canada. We currently maintain sales offices in various locations across the US, Australia, Europe, Japan, Latin America, New Zealand, South Africa and the UK.

During fiscal 2003, we divested certain non-core businesses acquired in connection with our December 30, 2001 acquisition of Anchor Gaming, including our slot route operations in Nevada, two casinos in Colorado, our pari-mutuel systems operations, and our online lottery system operations.

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 subsidiaries: I.G.T.-Argentina S.A. (IGT-Argentina); I.G.T. Australia Pty. Limited (IGT-Australia); International Game Technology (NZ) Ltd. (IGT-NZ); IGT do Brazil Ltda. (IGT-Brazil); IGT-Europe B.V. (IGT-Europe); IGT-Iceland Ltd. (IGT-Iceland); IGT-Japan K.K. (IGT-Japan); IGT-UK Limited (Barcrest); International Game Technology-Africa Pty. Limited (IGT-Africa); International Game Technology S.R. Ltda. (IGT-Peru); Sodak Gaming, Inc. (Sodak), and Silicon Gaming, Inc. (Silicon); VLC, Inc. (VLC); IGT OnLine Entertainment Systems, Inc. (OES) sold in November 2003.

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. Our principal executive offices are located at 9295 Prototype Drive, Reno, Nevada 89521; our telephone number is (775) IGT-7777; our website is 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 of our Audit, Compensation, Nominating and Corporate Governance Committees are also available on our website. This information can be mailed in print form to any shareholder upon request.

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.

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STRATEGIC ACQUISITIONS AND DIVESTITURES

As part of our efforts to increase shareholder value, we have complemented our internal resources through strategic acquisitions of businesses that:

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

Additionally, we have divested operations that we determined were not a strategic fit with our core business strategy. Following the summary table of our significant acquisitions below is a brief overview of our latest acquisitions and divestitures. The acquisition cost noted in the table includes the purchase price and significant debt assumed.

Acres

On October 27, 2003, IGT completed the acquisition of Acres Gaming (Acres), a software development company serving the gaming industry worldwide. Under the terms of the agreement, IGT paid $11.50 in cash for each outstanding share of Acres common stock for an aggregate purchase price of approximately $125.0 million.

Acres provides bonusing and cashless gaming products, as well as a full suite of integrated casino management systems through its Acres Bonusing™, Acres Cashless™ and Acres Advantage™ product lines. Its patented technology enables casino operators to increase patron loyalty by differentiating the casino property in an increasingly competitive environment.

We expect this business combination will provide us the ability to:
   o          utilize the Acres gaming systems technology to develop more integrated gaming systems products
   o          increase our competitive marketing capacity
   o          position IGT as the leading global provider of casino gaming systems

Anchor

On December 30, 2001, we completed the acquisition of Anchor Gaming (Anchor), our partner in the Spin For Cash Joint Venture (JV) since 1996. Since the acquisition, we have focused our efforts on the successful integration of the two entities by combining our complementary resources to develop new games more effectively for the benefit of our customers. We have assimilated the personnel and physical resources of the two companies to improve our mix of game design, productivity and customer service.

Divestitures

We determined that certain operations acquired with Anchor were not a strategic fit with our core business and committed to a divestiture plan. These operations were reclassified as discontinued operations for all periods presented. We ceased depreciation and amortization for discontinued operations upon committing to the divestiture plan.

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BUSINESS SEGMENTS

IGT operates principally in two lines of business: Product Sales and Proprietary Gaming. See Note 18 of our Consolidated Financial Statements for revenues and financial results of our business segments.

Product Sales

Revenues in our product sales segment are generated from the sale of gaming machines, systems, parts, conversion kits, content fees, equipment and services. This segment comprised 50% of total revenues and earnings of unconsolidated affiliates in fiscal 2003, 48% in fiscal 2002 and 61% in fiscal 2001.

Domestically, we manufacture a broad range of gaming machines, consisting of traditional spinning reel slot machines, video gaming machines, government sponsored terminals and other video gaming devices. In the international markets, we target the Amusement With Prize (AWP), casino style, private club, gaming hall and government sponsored video gaming machine markets. For our domestic and certain international markets, we offer hundreds of recognized game themes. We typically sell our machines directly or through distributors to our customers, and in certain circumstances finance the sale or lease of the equipment.

In the domestic gaming market, IGT holds an estimated 70% share of the installed base of gaming machines. We believe our market share is the result of our commitment to innovation, game design, and advanced technology in our games and systems; our extensive patent and theme library; our manufacturing capacity; and the combined efforts of our compliance, sales and customer service teams which allow us to have a presence in all major domestic gaming jurisdictions. During fiscal 2003, the top selling video and reel machines were Dragon’s Gold™, Kenny Rogers®, The Gambler®, Money Storm®, Tabasco®, Triple Double Stars™, Triple Double Wild Cherry™ and Uncle Sam®. New introductions planned for 2004 include, but are not limited to, Wild Taxi™, That Girl™, Monster Mansion™, Freedom Stars™, and Joe’s Yard Games™.

In addition to gaming machines, we offer a variety of gaming systems products to our customers. These systems products and services enhance the players’ gaming experience and provide operational efficiencies for our customers. The acquisition of Acres complements and strengthens our current suite of gaming systems products by providing casino-wide, integrated applications that offer slot monitoring, patron management, cage, credit and table games management, visual analysis and cashless wagering modules. These modules can be purchased and installed individually or as an integrated system. The combination of Acres and IGT gaming systems will enhance our leadership position in systems, with over 50% of all gaming machines attached to an IGT system.

The following table presents our gaming products sold as a percentage of consolidated product sales revenues for the last three fiscal years. Other gaming products is comprised of pachisuro games, equipment and service.

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Proprietary Gaming

Revenues in our proprietary gaming segment are of a recurring nature based on the lease of gaming machines and equipment under customer participation agreements. This segment comprised 50% of our total revenues and earnings of unconsolidated affiliates in fiscal 2003, 52% in fiscal 2002 and 39% in fiscal 2001.

We distribute our proprietary games under a broad spectrum of recurring revenue pricing arrangements including:
   o          wide area progressive (WAP) systems
   o          stand alone participation and flat fee
   o          equipment leasing and rental
   o          hybrid pricing or premium products that include a recurring fee attached to a for-sale game

WAP games differ from stand alone and hybrid games in that they are electronically linked, inter-casino systems that connect gaming machines to a central computer, allowing the system to build a progressive jackpot with every wager until a player hits the top award winning combination. The operation of linked progressive systems varies among jurisdictions as a result of different gaming regulations. Participating casinos pay a percentage of the coin-in either directly to IGT or a trust to oversee and fund the progressive jackpot. Funding of the jackpots also differs by jurisdiction but is generally administered by IGT.

We also distribute certain proprietary games under joint venture agreements or strategic marketing alliances with other gaming companies. The purpose of these strategic alliances is to combine the game development efforts or licensed intellectual property rights of other companies with IGT’s systems technology, manufacturing, distribution and marketing expertise.

We continually provide innovation and enhanced player appeal to our proprietary games consistent with product lines that are sold directly to the casinos. This is accomplished through the introduction of feature rich games with second event bonusing and by incorporating popular themes such as Wheel of Fortune®, Megabucks®, Regis’ Cash Club™, The Price is Right™ and $1,000,000 Pyramid™. New themed product introductions planned for fiscal year 2004 include, but are not limited to, Animal House™, Dilbert™, Drew Carey™, Elizabeth Taylor™, M*A*S*H™, Rodney Dangerfield™,and The Dating Game™. Extensions of the current installed base include the TV Hits™ series with The Beverly Hillbillies™, Bubbling Crude™, and The Twilight Zone®.

As a developer and leader in this segment, we recognize that all games, including our proprietary games, have a finite lifecycle. Due to the intense competition and accelerated pace of proprietary games introduced into the market each year, the lifecycle of these games can vary significantly. As a result, IGT systematically replaces games experiencing declining play levels with new games and extensions of existing brands.

At September 30, 2003, we distributed proprietary games in 18 domestic jurisdictions and selected international locations including Italy, Iceland and South Africa. Domestically, we hold an estimated 70% share of the total installed base of the recurring revenue games. IGT owned games are carried in our property, plant and equipment under gaming operations equipment. Casino owned games are primarily comprised of machines sold under hybrid pricing or premium product arrangements that include a recurring fee attached to a for-sale game.

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PRODUCT DEMAND

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

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PRODUCT DEVELOPMENT

IGT’s standing as a leader in the global gaming market is built largely on our ability to develop and design platforms and related games that people want to play combined with our innovative systems to improve casino operations and profitability. Our emphasis and investment in research and development (R&D) has allowed us to maintain our leadership position in the industry. We have five design centers located worldwide, in addition to our primary development team located in Nevada. These strategically located centers provide us with a local presence and access to our customers, allowing us to respond to market needs and preferences in a timely manner. Over 900 employees worldwide are dedicated 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 for continuing operations totaled $94.9 million during fiscal 2003, $77.9 million in fiscal 2002 and $62.5 million in fiscal 2001.

We are a prominent designer and provider of games, platforms and systems to 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 technology timeline demonstrates these development efforts.

Games

We combine the development of creative designs and technological advancements with our entertainment license library and patented intellectual property to provide gaming machines with a high degree of player appeal.

In fiscal 2003, domestically we introduced more than 90 new game themes addressing the spinning reel, video and video poker markets. All new games are subject to regulatory approval across the jurisdictions we service. Using MegaTest™, our online computerized testing and monitoring system, we evaluate and forecast acceptance of new products in order to quickly identify the more popular gaming concepts. The MegaTest™ system uses a central computer system to monitor the performance of games placed in a representative sample of casinos throughout Nevada. The MegaTest™ program allows us to test games in a relatively short time span, resulting in a quicker release of higher performing games.

In international markets, our strategy is to respond to developing markets with local presence, customized games, new product introductions and local production where feasible or required. In Australia, two separate design teams create innovative games for the club and casino markets. In Japan, our engineering department continues to develop new technologies for the pachisuro market. Our UK Barcrest group designs games for the UK and European AWP markets, as well as games for the US casino market that add top box bonus features to our domestic platforms.

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Platforms

Our Intel based 80960 platform development includes: the Game King® video platform, which offers a single or multi-game format with a touchscreen monitor utilizing the iGame-Plus™ interactive video games with animated graphics and secondary bonusing features; the Vision Series®, a spinning reel slot combined with a full color liquid crystal display; and the S2000™ spinning reel platform which combines one of the broadest game libraries with upgraded processor boards and an enhanced sound package. Multi-line, multi-coin video based 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 older games.

During fiscal 2003, we introduced a new line of spinning reel games that include a 4-reel series with a bonus round or a 5-reel series. This diversification in the spinning reel segment, coupled with our themes provided our customers with another set of games for their casino floors. As a result, demand for our S2000™product line increased.

The VLC 8800™ 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 domestic video lottery control systems. This platform offers a multi-game format with Multi-Denomination™ and second screen bonus features. We are working with our customers as we transition from this 8800 platform to the next generation based on our 80960 Intel processor board platform. We have service level agreements for 8800 platform games through 2005 and maintenance through 2010.

In fiscal 2002, we introduced our latest platform, the pc-based Advanced Video Platform (AVP™) that provides improved graphic capabilities such as full screen live streaming videos and animations with bright vivid colors along with an enhanced stereo sound system. The AVP™ processor greatly expands the storage capacity allowing space for complex bonusing features. Recently we introduced our new Reel Touch™ Series machine, which offers added features, including an interactive touchscreen display for bonus games placed above a 5-reel spinning slot. In conjunction with this machine we also introduced our EZ Touch™ touchpad, which allows players to change the game’s denomination at the touch of a button.

We are internally developing central determination games, related systems and terminals. This technology applies to video lottery markets such as the New York racinos and the Native American Class II market.

Systems

Our casino management system software supports our comprehensive family of IGT Gaming Systems™ (IGS™) products. This system software includes integrated or stand-alone modules providing casino 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.

Our EZ Pay™ Ticket-in Ticket-out (TITO) system provides slot machines with the capability of accepting tickets, enabling players to move from one machine to another without the inconvenience of handling coins. Casinos have the option to use both coin hoppers and ticket-in machines connected to the EZ Pay™ system. This technology works with both IGT and competitors’ slot systems and integrates into casinos’ existing systems and internal controls, while meeting the regulatory requirements of each gaming jurisdiction. Our one-wire configuration is referred to as the Integrated Voucher System™ (IVS™). This provides our EZ Pay™ software application with the ability to communicate with IGT’s own and other vendors’ slot systems or the casinos’ current systems, using the existing casino floor network. IGT was the first to introduce TITO systems and continues to lead the industry with over 50% of the TITO systems installed. We have tested and installed our EZ Pay™ system in many of the largest casino properties and have received regulatory approvals in a majority of domestic gaming jurisdictions.

The growing popularity of the low denomination multi-line, multi-coin gaming machines has had a significant impact on the evolution of TITO technology. Because of the volume of coins handled and paid out by these types of games and the associated casino costs, these games are excellent candidates for the TITO technology, such as EZ Pay™. All of our new games will be in a Multi-Denomination™ format that can be readily adapted for use with our EZ Pay™ system or other TITO systems.

We continue to expand upon the functionality of TITO and EZ Pay™ with additional system updates and enhancements. Wireless validation terminals expand the level of customer convenience by providing properly equipped floor attendants with the ability to validate tickets, print receipts and pay customers on the casino floor. EZ Pay™ Ticket Redemption Stations™ provide another convenient way for players to redeem cash-out tickets. Using the automated ticket redemption device’s high security, electronically controlled coin and currency hopper, players can redeem cash-out tickets right on the casino floor. We anticipate that future developments will include EZ Pay™ promotional tickets that can be loaded with credits and sent out to attract new customers or reward valued players.

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Acres Bonusing™ technology enables the design and delivery of bonuses and other promotions directly to players at the point and time of play. The Acres Advantage™ suite of applications provides operators with a fully integrated casino management system solution. Built on the Microsoft Windows SQL platform, Acres Advantage™ provides the instantaneous information needed for management decision-making.

We provide video gaming central control systems to government entities. Our central control systems incorporate sophisticated technology and are designed with features intended to appeal to the concerns of the operator, including security of communications, central control of gaming machines on the system, the compatibility of our central control system with gaming machines made by other manufacturers, economy of operation due to the ability to use a dial-up format (as opposed to requiring dedicated lines), on-demand generation of reports and audits, the capability of transferring funds electronically and the flexibility to meet the needs of markets of various sizes, accommodate regulatory changes and adapt to new game designs and features.

Our product development process is not complete until our compliance teams have ensured that each game, product or system meets all of the requirements in each jurisdiction, domestic or international. We conduct business in over 250 jurisdictions worldwide with over 100 people employed in the areas of regulatory and product compliance.

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 have obtained patent rights protection covering many of our products and have a significant number of US and foreign patent applications pending. Our portfolio contains over 350 active domestic and foreign patents. The subject matter of these patents and patent applications include 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 wide spread 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 register our copyrights and trademarks in the US and in multiple countries, where applicable.

Our ability to enforce our patents, copyrights, trademarks and other intellectual property is subject to general litigation risks. When we seek to enforce our rights, we are often subject to claims that the intellectual property right is invalid, or is licensed to the party against whom we are asserting a claim. 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.

PRODUCT MARKETS

We market our gaming products to legalized gaming jurisdictions around the world. While our most significant markets are domestic, we continue to pursue additional opportunities in international areas. The opportunities, challenges and our successes, vary across these jurisdictions. A review of the various markets is provided below.

Domestic

In the last decade, the growing popularity of gaming as a leisure activity has influenced demand in North America, resulting in expansion in existing markets and legalization in new markets. The introduction of riverboat gaming in the Midwest during the early 1990s, the expansion of Native American casino gaming and the growth in the Canadian and non-casino government sponsored gaming markets contributed to this market expansion and provided IGT with significant growth opportunities. As a result, the installed base of gaming machines has increased from an estimated 184,000 machines in 1991 to approximately 724,000 machines in 2003.

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Based on information provided by various gaming agencies and internal information, we have compiled the following table of the estimated total domestic gaming machine installed base by jurisdiction as of September 2003.

We anticipate further domestic gaming expansion. Maryland, Massachusetts, Michigan, Ohio and Pennsylvania are evaluating possible legislation that would approve gaming at racetracks and possibly at non-racetrack locations as well. Maine voters approved an initiative to allow slot machines at two racetracks. States with existing gaming operations such as California and New York continue to expand their offerings with new locations opening with a significant number of machines. The New York Lottery will begin an 18-month rollout of approximately 19,000 video lottery terminal (VLT) machines at racetracks in December 2003. Indiana recently approved a new gaming riverboat.

Casino Markets

Nevada

Nevada is the largest and most established domestic gaming market with approximately 100 casinos and various smaller gaming venues with an estimated 210,000 gaming machines. The large mega-resort casinos are concentrated on the Las Vegas strip. Other primary markets include the Las Vegas locals or “off-strip” market, Laughlin, Reno and Lake Tahoe.

Given its mature nature, Nevada is one of the most competitive markets in which we conduct business. Nevada faces continuing pressure from expanding tribal casinos in California and Arizona. Going into 2004, the major Nevada casino operators have experienced improved business conditions and higher play levels in Las Vegas and expectations are for continued improved conditions. In fiscal 2003, IGT sales to Nevada increased as compared to fiscal 2002, due to ongoing TITO initiatives with major operators such as MGM/Mirage and Park Place Entertainment.

Atlantic City

The Atlantic City market consists of 13 large casinos that are concentrated in a mature boardwalk area and marina district. This market includes approximately 44,000 gaming machines. In July 2003, the Borgata Hotel Casino and Spa (a joint venture between Boyd Gaming and MGM/Mirage Resorts) opened with an all cashless slot floor of approximately 3,600 machines. This represents the first new casino property to open in this jurisdiction in the past twelve years. We experienced a strong increase in fiscal 2003 in both new and replacement demand to this market due to the Borgata opening and TITO initiatives in Atlantic City.

Native American

Native American gaming differs from the traditional casino market in that it is regulated under the Indian Gaming Regulatory Act of 1988, which permits specific types of gaming. Pursuant to these regulations, permissible gaming devices are denoted as “Class III Gaming” which requires, as a condition to implementation, that the Native American tribe and the state government in which the Native American lands are located to enter into a compact governing the terms of the proposed gaming. We distributed machines to Native American tribes who have negotiated compacts with their states and have received federal approval.

In addition to Class III gaming, Class II terminals allow the player to participate in a bingo game generated from a central determination system. Technological aids are allowed to display the bingo game outcomes. The National Indian Gaming Commission (NIGC) and various federal courts have provided some clarification and direction with technical specifications and regulatory considerations for Class II products. We have committed resources to Class II game development.

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Since 1990, IGT has distributed machines through Sodak Gaming, Inc. (Sodak) to authorized Native American casinos. At present, there are approximately 148 sovereign tribes operating over 190 casinos, in 17 states. Sodak maintained a distributor relationship with us until we acquired the company in September 1999. Sodak provides financing for product sales and, in some instances, has participated in the development, equipping and financing of Native American gaming ventures.

Native American expansion continued during fiscal 2003. New facilities opened in the existing jurisdictions of Arizona, California and New Mexico. Arizona voters approved an expansion in November 2002 that increased by 3,000 the number of machines in this market. Idaho and New York were two new Native American jurisdictions that commenced in fiscal 2003, with compacted Class III facilities. Further expansion is anticipated in New York, as the tribes develop the remaining approved casinos. In Wisconsin, renegotiated compacts will allow the casinos an opportunity to increase the number of machines in their facilities.

Regional

Riverboat style gaming began in Iowa in 1991 and is currently operating in Illinois, Indiana, Iowa, Louisiana, Mississippi and Missouri. The regional market also includes the land-based casinos in Detroit and Colorado, as well as sales to cruise ships. The regional market in 2003 went through a period of stability, with only one new casino opening at Louisiana Downs. IGT has seen strong TITO related replacement sales as operators continue to focus on streamlining and reducing the cost of their operations. Replacement sales are also driven by heightened competition as the regional markets are maturing with little new supply.

Public Gaming

IGT provides both VLTs and casino style gaming machines and systems on a for-sale or a lease participation basis to government sponsored jurisdictions. VLTs are machines that usually have limited bet amounts and prize payouts, as controlled by state lottery regulations. In domestic public gaming jurisdictions (except Montana), VLTs are connected to a central control system overseen by state regulators, which is often the state lottery. Many of these machines are located in racetracks or in licensed bars with limits on the number of machines that can be offered in any given location. Currently there are nine US states that have authorized various forms of video lottery gaming, namely Delaware, Louisiana, Montana, New Mexico, New York, Oregon, South Dakota, Rhode Island and West Virginia. In Delaware and Rhode Island, we have long-term lease arrangements to place proprietary games at racetracks.

Growth in this public gaming market will be driven by the addition of VLTs, under a revenue sharing agreement, at racetracks in New York. The State of New York awarded IGT approximately 25% of the machines to be installed in racetracks, a market estimated at 19,000 machines. The implementation is estimated to begin during the second quarter of fiscal 2004 and will continue over a 12 to18 month period. Future potential expansions into other states will likely include public gaming markets with machines placed at racetracks under the control of the state lottery.

Canada

The Canadian casino market operates under the auspices of the government controlled lottery corporations and experienced steady growth during the past year. There are over 60 casinos in Canada with an approximate installed base of 40,000 gaming machines.

The public gaming market in Canada consists of approximately 39,000 machines installed within the provinces of Alberta, Manitoba, Quebec and Saskatchewan. The Atlantic Lottery Corporation (ALC) is the exclusive agent in the provinces of New Brunswick, Newfoundland, Nova Scotia and Prince Edward Island. These machines are VLTs similar to those offered in US public gaming markets and are principally located in bars and taverns.

Canada represents a significant replacement market over the next few years. In fiscal 2003, IGT sold over 11,000 new and replacement games to the provincial lotteries of Quebec, Saskatchewan, British Columbia and Alberta. We expect new machine sales to British Columbia as the provincial lottery has increased the limit of games allowed in casinos and approvals have been given to put in machines at racetracks, most notably in the city of Vancouver where slots had not previously been permitted. Other provinces are also considering expanding gaming through new casino facilities located in major urban areas. While we expect continued replacement sales in Canada, the units will be lower in future years, as the remaining provinces are smaller markets.

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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 leverage off the design and manufacturing experiences we have in domestic markets, while addressing each international market’s unique customer and regulatory environment. Our international subsidiaries currently service markets in Australia, New Zealand, Europe, Japan, Latin America, South Africa and the UK. We maintain local manufacturing in the UK and a third-party manufacturer in Japan. All other international gaming machines are fabricated, in whole or kit form, at our Reno facility.

Our success in international markets comes from innovative game design. Our challenges in international markets come from addressing each individual gaming jurisdiction’s regulatory environment. Our management team focuses on communication between the domestic and international personnel to effectively meet the opportunities and challenges of these markets.

Internationally, the prospects for additional gaming in various jurisdictions continue to improve. Proposals to change regulatory restrictions on gaming are currently being discussed by the UK government. Las Vegas style casinos are expected to open in Macau next year. We anticipate diverse countries such as Japan, Mexico, Taiwan, and Thailand are all seeing increased popular support for legalizing casinos as a means of increasing tourism.

United Kingdom

We established a manufacturing, sales, marketing and distribution operation in Manchester, England with our acquisition of Barcrest Limited in March 1998. Barcrest manufactures and sells low-payout AWP club machines and top box products. An AWP machine is a skill-based game for amusement that is limited to low payout cash prizes, typically under $45. Barcrest is a leading UK manufacturer of AWP games, selling to both the UK and continental European markets.

Our success in this market is built around access to three separate design centers that focus on new products in the UK, along with design centers in The Netherlands and Spain that provide game design for other European markets. Barcrest’s markets are primarily replacement driven, dominated by pubs and licensed betting offices that demand regular releases of new machines. To meet this demand, new products are launched in the UK every four to six weeks.

Proposed changes to modernize the 1968 Gaming Act in the UK may provide increased opportunities for IGT and Barcrest. The most significant proposed change, if made, would liberalize the UK’s casino laws, allowing for an increase in the number of casinos and the number of machines in casinos. In order to prepare for this opportunity, we established a separate division, known as IGT-UK Casino, with offices in the Midlands region. The UK government is presently discussing the potential measures and legislation could be proposed during 2005.

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 to all gaming areas in this market. We source gaming product “kits” from Nevada for final assembly in Sydney, Australia.

The regulatory environment in Australia and New Zealand continued to create uncertainty with operators and manufacturers during fiscal 2003. A limit on the number of gaming machines exists in most jurisdictions and significant gaming tax increases have been proposed in the largest jurisdiction of New South Wales, Australia. The Australian and New Zealand state and federal governments have pursued a number of policies aimed at a wide range of “harm minimization” measures, specifically targeting gaming machines. While not all of the measures have been legislated at this time, the uncertainty created for operators may continue to have an adverse effect on the demand for gaming machines in Australia and New Zealand.

Europe, Middle East and Africa

In 1992, we opened our office in The Netherlands to service the European, Middle Eastern and North African markets. In these regions, gaming is prevalent in casinos and non-casino environments such as pubs and arcades. Within the European markets, casino style gaming machines compete with AWP machines, which we sell exclusively through our Barcrest office. We currently anticipate moderate growth in the European installed base, and our sales to this market will be a mix of replacement sales and new business.

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Japan

We established an office in 1990 that serves the Japanese market with engineering, sales, and administration from our head office in Tokyo and a development and logistics office in Osaka. We increased our product development efforts in the past year, shortening the gap between new game introductions. However, the regulatory environment in Japan has become more restrictive causing increased pressure on manufacturers to limit machine sales and game volatility.

Latin America

We sell and lease casino style gaming equipment to many legalized gaming jurisdictions in Latin America through our offices in Argentina, Florida and Peru. The economic environment of this region has become more stable in the last year.

South Africa

Our office in Midrand, Gauteng, South Africa services the gaming markets located in South Africa, Sub-Saharan Africa and the Indian Ocean Islands. Casino gaming in South Africa is governed under their National Gambling Act, which allowed for the allocation of 40 casino licenses between each of the nine provinces in South Africa in 1996. We have pursued product sales and licensing in South Africa since the inception and are currently ranked second in market share. This market has been slow to develop, but we continue to maintain our presence and pursue additional customers. In addition, this group has begun to pursue more African opportunities outside of South Africa and has seen modest successes so far.

Other International Markets

We have an International Markets group in Reno that supports product sales to military bases and to other legal gaming markets around the world that are not directly supported by an international subsidiary. During fiscal 2003, the sale of 560 machines to the Kang Wan Land Casino in South Korea was coordinated through this group.

COMPETITION

The market for gaming machines and proprietary systems is intensely competitive. The principal method of competition is product development. A library of strong performing games and intellectual property can be a competitive advantage. Other methods of competition include quality and breadth of sales and service organizations, financial strength of the manufacturer, and pricing.

Product Sales

US and foreign manufacturers that compete with IGT in the domestic casino style gaming machine market include Aristocrat Leisure Limited (Aristocrat); Bally Gaming Inc., a subsidiary of Alliance Gaming Corp. (Alliance); Atronic Casino Technology, Ltd. (Atronics); Mikohn; Konami Co. Ltd. (Konami); Shuffle Master; Sigma Game, Inc. (Sigma); Sierra Design Group, soon to be purchased by Alliance; Spielo, recently acquired by GTECH; Universal Distributing, Inc.; and WMS Industries (WMS). All have developed casino products and are either authorized to sell products or are in the licensing process in many US gaming jurisdictions.

There are several competitors for the international markets including Aristocrat, Atronics, Aruze, (formerly known as Universal), Bally, Cirsa Group, Franco Gaming, Ltd., a division of Recreativos Franco, Konami, Stargames, Ainsworth Gaming Technology and Novomatic Industries.

In the accounting and player tracking systems product market, our casino data management system competes with products offered by Bally, Aristocrat, and several other systems manufacturers.

Proprietary Gaming

IGT’s competitors in the progressive systems market are Bally, Aristocrat and Atronics. Our competitors in the stand-alone recurring revenue market are Bally, WMS, Aristocrat, Mikohn, Shuffle Master, Sigma and Atronics. We provide substantial marketing and advertising support for our proprietary gaming products and compete on the basis of our extensive infrastructure, popular brand names, product appeal, jackpot awards, player loyalty and technical and marketing experience.

OPERATIONAL OVERVIEW

Manufacturing and Suppliers

We manufacture gaming machines in the US, the UK and through manufacturing relationships with third parties in Canada and Japan. The manufacturing operations primarily involve the assembly of electronic components, cables, harnesses, video monitors and prefabricated parts purchased from outside sources. We also operate a cabinet manufacturing and silkscreen facility in the US. We have a broad base of material suppliers and utilize multi-sourcing practices to ensure component availability.

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Domestic manufacturing has been ISO 9002 certified since 1996. The Reno facility has 736,000 square feet devoted to manufacturing, warehousing, shipping and receiving. During fiscal 2003, we expanded our capacity by adding a ninth production line.

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 $430.7 million at October 31, 2003 and $150.6 million at October 31, 2002. For the same periods, our proprietary gaming backlog orders totaled approximately 10,400 units and 4,800 units. We reasonably expect to fill our backlog within fiscal 2004.

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 300 sales personnel in various domestic and international locations.

IGT uses distributors for sales to specific markets including Canada, the Caribbean, France, Germany, Japan, South Korea, Louisiana, New Jersey, New Mexico, New Zealand, Peru, Spain, and The Netherlands. IGT’s agreements with distributors do not specify minimum purchases but generally provide that IGT may terminate the distribution agreement if certain performance standards have not been satisfied.

In October 2003, we modified our distributor relationship in Louisiana such that our distributor will provide VLT products to their video poker industry and we have assumed direct sales support of all gaming machine products. In January 2004, we will assume direct sales responsibility for our products to New Mexico racino customers.

Customer Service

We consider customer service an important aspect of our overall marketing strategy and a key factor that differentiates 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 domestically and up to a 180-day warranty service internationally for our gaming machines. We employ more than 950 trained service personnel for customer assistance and maintain 30 customer service support centers domestically in all the major domestic gaming jurisdictions and internationally in Argentina, Australia, Japan, New Zealand, Peru, 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 Technical Assistance Center (TAC). The TAC is a fully staffed facility providing 24-hour telephone support to all types of casino system customers. The TAC 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 each jurisdiction, domestic and international. These efforts also ensure that we obtain the necessary approvals and licenses. Through our efforts we are able to successfully sell and market our products worldwide, while providing our customers with the assurance that our products work properly and meet jurisdictional requirements. We hold over 600 gaming licenses worldwide.

Information Systems

In fiscal 2003, we completed a three-tiered Enterprise Resource Planning (ERP) technology infrastructure solution designed to support our short and long-term growth. Completed modules include the accounting, finance, human resources, payroll, production and manufacturing operations, sales and distribution modules for our Nevada manufacturing facility and our operations in Europe. We are currently in the process of expanding our implementation to our other operations worldwide.

EMPLOYEES

As of September 30, 2003, we employed approximately 5,300 total employees, including approximately 3,800 in domestic operations, 800 internationally and 700 in discontinued operations. We believe we have favorable relationships with our employees.

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RESPONSIBLE GAMING

We continue to be an industry leader in addressing and attempting to minimize problem gambling. We partnered with other companies in the gaming industry to raise awareness of problem gaming, and we work to educate the public and our employees about its symptoms and consequences. To stress our commitment to raising an awareness of this problem, we have dedicated internal resources to coordinate with the industry and its trade groups to organize awareness events, distribute educational materials and organize contributions for the research of problem gaming. In virtually every casino in the US and Canada, there are posted advisories and telephone numbers for patrons to call if they or someone they know needs help, as well as literature for patrons to read about problem gaming.

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 licenses, permits, findings of suitability, documentation of qualification including evidence of financial stability and/or other required approvals for companies who manufacture and distribute gaming equipment, as well as the 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 casinos or 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 localized staff members and legal resources with local knowledge to assist in keeping us in compliance with local regulatory laws. The local staff communicates regularly with our corporate headquarters Compliance department to ensure that none of our licenses in any jurisdiction are put in jeopardy.

The nature of the industry and our worldwide operations make this process very time consuming and requires extensive resources. The process helps assure both regulators and investors that all of our operations maintain the highest levels of integrity and avoid any appearances 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 (Commission), the State Gaming Control Board (GCB), 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.

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Our subsidiaries that conduct 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 with regard to 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, 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, which acquires 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 which 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.

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The Commission has the power to investigate any person who holds our debt or equity securities. The Clark County Liquor and Gaming Licensing Board, which has 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, which may be examined 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 2001, 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.

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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 Federal Gambling Devices Act of 1962 (the Act) 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 the Act. Violation of the Act may result in seizure and forfeiture of the equipment, as well as other penalties. Subsidiaries of International Game Technology involved in the manufacture and transportation of gaming devices are required to register annually. We have complied with the registration requirements of the 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 (IGRA) provides the framework for federal and state control over all gaming on Native American lands and is administered by the NIGC and the Secretary of the US Department of the Interior. The NIGC has authority to issue regulations governing tribal gaming activities, approve tribal ordinances for regulating gaming, and approve management agreements for gaming facilities, conduct investigations and monitor tribal gaming generally. The IGRA is subject to interpretation by the NIGC and may be subject to judicial and legislative clarification or amendment. The IGRA 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, which have 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 have received federal approval.

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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 Australia, Europe, Japan, Latin America, the Middle East, New Zealand, South Africa, and the UK. We have obtained the required licenses to manufacture and distribute our products in the various foreign jurisdictions where we do business.

Discontinued Operations

The Colorado casinos were regulated by the Colorado Limited Gaming Control Commission and the Colorado Division of Gaming.

Our lottery systems were operated under legislative authorization of each respective jurisdiction. Policy and management decisions of lottery operations in the US are generally governed by a commission appointed by the governor or other official of each state with the day-to-day operations of the lottery administered by a director appointed either by the governor or lottery commission.

Our operations in live and simulcast wagering systems for pari-mutuel wagering facilities were subjected to extensive state regulatory and licensing requirements similar to those that were applicable to our online lottery businesses.

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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:

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:

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

Demand for our products and placement of our proprietary games would be adversely affected by:

   o          a reduction in the growth rate of new and existing markets
   o          delays of scheduled openings of newly constructed or planned casinos
   o          reduced levels of gaming play on our gaming systems or weakened customer demand for our gaming machines as a
               result of declines in travel activity, “jackpot fatigue,” or customer capital expenditures
   o          a decrease in the desire of established gaming properties to upgrade machines,
               resulting in a decline in the demand for replacement machines
   o          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:

   o          unfavorable public referendums or anti-gaming legislation
   o          unfavorable legislation affecting or directed at manufacturers or gaming operators,
               such as referendums to increase taxes on gaming revenues
   o          adverse changes in or findings of non-compliance with applicable governmental gaming regulations
   o          delays in approvals from regulatory agencies
   o          a limitation, conditioning, suspension or revocation of any of our gaming licenses
   o          unfavorable determinations or challenges of suitability by gaming regulatory authorities
               with respect to our officers, directors or key employees

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Our intellectual property rights are subject to risks, including:

   o          potential inability to obtain and maintain patents, trademarks and copyrights to protect our
               newly developed games and technology
   o          competitors’ infringement upon our existing trademarks, patents and copyrights
   o          approval of competitors’ patent applications that may restrict our ability to compete effectively

Our business is vulnerable to changing economic conditions, including:

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

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

   o          increasing our vulnerability to general adverse economic and industry conditions
   o          limiting our ability to obtain additional financing to fund future working capital, capital expenditures,
               acquisitions and other general corporate requirements
   o          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
   o          limiting our flexibility in planning for, or reacting to, changes in our business and the industry
   o          disadvantaging us compared to competitors with less indebtedness

Our business operations are subject to other risks, including:

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

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Item 2.      Properties

We believe that the following properties are suitable to our business and adequate for our current and near-term needs.

Corporate Headquarters

Our largest manufacturing facility and corporate headquarters is located in Reno, Nevada, where we built a facility of more than 1.1 million square feet to house our manufacturing, cabinet production, engineering, and administrative personnel. This facility supports production for all domestic markets as well as Australia, Europe and other international areas. We also maintain leased warehousing facilities in Reno totaling 117,000 square feet.

Domestic Sales and Service

Our largest sales and service office is located in Las Vegas, Nevada, where we lease approximately 402,000 square feet in warehousing, sales and administration facilities. Additionally, we lease approximately 252,000 square feet of warehousing and sales and service properties throughout the US to support each significant gaming market. Our Sodak subsidiary, which supports our Native American gaming markets, owns a 94,000 square foot building in Rapid City, South Dakota. We also own an 80,000 square foot building in Bozeman, Montana, which is currently held for sale.

International

Our most significant international properties include facilities in the UK and Australia. Barcrest owns 122,000 square feet and leases 93,000 square feet to support manufacturing and administrative functions in the UK. We lease 85,000 square feet in New South Wales, Australia for subassembly, sales and administration. All other properties used in international operations total 131,000 square feet.

Item 3.      Legal Proceedings

IGT has been named in and has brought lawsuits in the normal course of business. Management does not expect the outcome of these suits to have a material adverse effect on our financial position or results of future 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

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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. All stock prices have been restated to reflect our four-for-one stock split in June 2003.

There were approximately 2,934 record holders of IGT’s common stock and the closing price was $34.69 as of November 28, 2003.

We declared quarterly cash dividends of $0.075 per share in June 2003, $0.10 per share in September 2003, and $0.10 per share in December 2003.

IGT’s transfer agent and registrar is:

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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

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Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements have been 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 the reported amounts and related disclosures. Actual results may differ from initial estimates.

IGT’s critical accounting policies that require management to make subjective or complex judgments about matters that are inherently uncertain relate to our jackpot liabilities and expenses, intangible assets and goodwill, income taxes, bad debt expense and inventory. These areas of our accounting estimates are the most sensitive to material change from external factors.

Jackpot Liabilities and Expenses

IGT recognizes a liability for jackpots not yet won and jackpot expense for the cost to fund these jackpots in the future. Jackpots are generally payable in equal installments over a 20 to 26 year period or immediately in the case of our instant win progressive jackpots. Winners may elect to receive a single-payment for the present value of a jackpot discounted at applicable interest rates in lieu of annual installments. Interest rates eligible for use in the single-payment calculation vary by jurisdiction and are impacted by market forces and other economic conditions. The most recent history pattern indicates that approximately 85% of winners will elect the single-payment option. We fund jackpot installment payments through qualifying US government or agency securities. To calculate the present value of our outstanding progressive jackpot liabilities, we use current market prime, treasury, and agency rates weighted based on the historical single-payment election ratio. We believe this calculation provides the best estimate of our cost to fund jackpots.

Additionally, we estimate our current liabilities for jackpots not yet won based on our historical experience with winners’ payment elections, in conjunction with the theoretical projected number of jackpots expected to hit within one year. Changes in future winners’ payment elections could impact the allocation of our jackpot liabilities between current and non-current liabilities. Our jackpot expense totaled $259.3 million for fiscal 2003, $203.8 million for fiscal 2002, and $78.8 million in fiscal 2001. Although the majority of material changes to jackpot expense relate to market interest rate trends (see Item 7a, Market Risk) and the volume of slot play, changes in our estimates and assumptions regarding the number of jackpot winners who may elect single-payments in the future could impact our gaming operations jackpot expense and gross profit. Because current year single-payment funding rates have been essentially the same as installment funding rates during fiscal 2003, if we changed our estimate of winners expected to elect the single-payment option by 10%, our jackpot expense for fiscal year 2003 would not have change materially.

Intangible Assets and Goodwill

We assign estimated useful lives to our intangible assets based on the period of time the asset is expected to contribute directly or indirectly to future cash flows. We consider certain factors when assigning useful lives such as legal, regulatory and contractual provisions, as well as the effects of obsolescence, demand, competition, and other economic factors. We are required to use judgment and make estimates to determine the useful lives of intangible assets.

We amortize our intangible assets with finite lives to reflect the pattern in which the economic benefits for the assets will be consumed based on projected revenues. Intangible assets with an increasing revenue stream are amortized using the straight-line method. Intangible assets with a declining revenue stream are amortized on an accelerated basis.

We evaluate the carrying value of our intangible assets and goodwill for impairment at least annually in August or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Indicators that could trigger an impairment review include changes in legal, regulatory, or economic factors, market conditions or operational performance. Impairment is measured as the difference between the carrying amount and the fair value of the intangible assets and is recognized as a component of income from operations.

While we believe that our estimates of future revenues and cash flows are reasonable, different assumptions could materially affect our assessment of useful lives and fair values. Changes in assumptions may cause modifications to our estimates for amortization or impairment, thereby impacting our results of operations. If the estimated lives of our intangible assets were to decrease based on the factors mentioned above, the most significant impact would be on amortization expense.

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Amortization expense totaled $25.0 million for fiscal 2003 and $21.5 million for fiscal 2002. We estimated that a 10% decrease in the estimated remaining useful lives would have increased amortization expense by $1.8 million for fiscal 2003 and $1.9 million for fiscal 2002.

Income Taxes

For financial reporting, we use estimates and judgments to determine our current tax liability, as well as those taxes deferred until future periods. Net deferred and accrued income taxes represent significant assets and liabilities to IGT. In accordance with the liability method of accounting for income taxes as specified in Statement of Financial Accounting Standards (SFAS) 109, Accounting for Income Taxes, we recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns.

Adjustments to deferred taxes are determined based upon the changes in differences between the book basis 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 also involves estimating our current tax position in each 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 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 whether and 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 tax benefits being recognized in the current period. If our estimated tax liabilities were 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 the valuation of deferred tax assets and liabilities and affect the overall effective tax rate and impact the tax provision. Accordingly, we believe that the estimate related to our provision for income taxes is critical to our financial results.

Bad Debt Expense

We maintain an allowance for doubtful accounts related to our accounts, contracts, and notes receivable that we have deemed to have a high risk of collectibility. We analyze historical collection trends, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment patterns when evaluating the adequacy of our allowance for doubtful accounts. While our estimates for these matters are reliable and calculated with due care, if we changed our assumptions and estimates, our bad debt expense could change, which would impact our income from operations.

Inventory

We regularly review inventory quantities on hand and record charges for excess and obsolete inventory, based primarily on our estimated forecast of product demand and production requirements. 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 our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we may need to record additional charges for inventory obsolescence, which would have a negative impact on our gross profit.

We could be required to increase our inventory charges and our gross margins could be adversely affected if there were to be an unexpected and significant decrease in demand for our products, or if there were a higher occurrence of inventory obsolescence because of changes in technology or customer requirements. 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.

RECENTLY ISSUED ACCOUNTING STANDARDS

IGT keeps abreast of new generally accepted accounting principles (GAAP) and disclosure reporting requirements issued by the Financial Accounting Standards Board (FASB), Securities and Exchange Commission (SEC) and other standard setting agencies. Recently issued accounting standards affecting our financial results are described in Note 1 of our Consolidated Financial Statements.

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OVERALL OPERATING RESULTS

Fiscal 2003 vs Fiscal 2002

IGT achieved record financial results in fiscal 2003, posting gains in both segments. The most significant growth was in product sales, primarily related to increased domestic replacement demand. The inclusion of Anchor and the consolidation of the JV for three additional months in fiscal 2003 compared to fiscal 2002 contributed to these improvements, primarily in proprietary gaming.

Earnings per share for all periods presented reflected the four-for-one common stock split approved by our Board of Directors in June 2003. Additionally, we declared cash dividends during fiscal 2003 of $0.075 per share in June 2003 and $0.10 per share in September 2003.

Income from continuing operations for fiscal 2002 included reductions of $12.6 million, net of tax, or $0.03 per diluted share, for charges related to certain litigation settlements and $13.2 million, net of tax, or $0.04 per diluted share for losses on early debt retirement. Excluding the effect of these charges, income from continuing operations improved 34% and earnings per diluted share from continuing operations increased 32% in fiscal 2003 compared to fiscal 2002.

Discontinued operations related to various Anchor operations divested subsequent to acquisition. See Note 2 of our Consolidated Financial Statements.

Fiscal 2002 vs Fiscal 2001

IGT also achieved record financial results in fiscal 2002 compared to fiscal 2001. We posted gains in both segments, with the more predominant increase in proprietary gaming for fiscal 2002. The inclusion of Anchor and the consolidation of the JV for the nine months in fiscal 2002 contributed significantly to these improvements.

Our operating income margin declined to 30% in fiscal 2002 from 33% in fiscal 2001 primarily due to the consolidation of JV gross revenues for nine months in fiscal 2002. In the first quarter of fiscal 2002 and the full fiscal year 2001, the JV revenues were recorded net of expenses in earnings of unconsolidated affiliates.

Fiscal 2002 as presented above reflected the reclassification of extraordinary items to “other expense” in income from continuing operations in accordance with the adoption of SFAS 145 at the beginning of fiscal 2003. See Note 1 of our Consolidated Financial Statements.

Excluding the effect of charges related to certain litigation settlements and losses on early debt retirement noted above, income from continuing operations improved 30% and earnings per diluted share from continuing operations increased 14% in fiscal 2002 compared to fiscal 2001.

Foreign operations

Approximately 11% of our total revenues and earnings of unconsolidated affiliates in fiscal 2003 were derived outside of North America, compared to 14% in fiscal 2002, and 16% in fiscal 2001. Our foreign operations have declined in their proportionate share of consolidated revenues primarily due to increased domestic revenues related to the Anchor acquisition and increased replacement demand.

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Operating Expenses

The inclusion of Anchor’s operations for twelve months in fiscal 2003 and nine months in fiscal 2002 contributed to increases in all operating expense categories except bad debts. Fiscal 2003 operating expenses also increased as the result of:

   o         higher employee benefit costs including group insurance and performance based incentives
   o         increased salaries and wages, predominantly in sales and product development
   o         legal costs related to protection of our intellectual property rights
   o         severance costs of $3.6 million associated with the closing of a former Anchor facility in Bozeman, Montana and staffing
              reductions in Australia
   o         our ongoing investment in R&D

Fiscal 2003 bad debt expense was reduced by the partial recovery of receivables previously reserved for in fiscal 2002 related to economic instability and currency devaluation in Argentina in December 2001. We have restructured all of our significant Argentine receivables affected by the devaluation.

Fiscal 2002 operating expenses increased over 2001 as the result of:

   o          legal costs related to protection of intellectual property rights
   o          amortization of Anchor’s finite lived intangibles acquired totaling $21.7 million
   o          additional costs to update our internal systems with an ERP solution
   o          our ongoing investment in R&D

At the beginning of fiscal 2002, we adopted SFAS 142, Goodwill and Other Intangible Assets, reducing annual amortization by approximately $3.7 million related to previously acquired goodwill.

Other Income (Expense) and Taxes

Other expense, net, decreased in fiscal 2003 primarily due to favorable changes in foreign currency rates. Increased interest expense in fiscal 2003 related to the issuance of zero-coupon convertible debentures in January 2003 was offset by decreased interest expense resulting from senior note repurchases in fiscal 2002 of $373.0 million principal amount.

The fluctuation in other expense, net, for fiscal 2002 resulted from:

   o      legal settlement charges of $20.2 million primarily related to a dispute with a former gaming machine distributor
   o      losses on early debt retirement totaling $21.2 million, mainly due to our repurchase of Anchor's
           senior notes in July 2002

Operation of our WAP systems games resulted in interest income accretion from annuity investments purchased to fund installment jackpot payments and interest expense accrued on related jackpot liabilities at the same rate earned on the investments. Therefore, interest income and expense related to funding installment-based jackpot payments are similar and increase at approximately the same rate based on the growth in total jackpot winners electing installment payments. Interest income and expense related to WAP systems annuities totaled $23.1 million in fiscal 2003, $21.6 million in fiscal 2002, and $17.1 million in fiscal 2001.

The fluctuation in our effective income tax rate was based primarily on changes to the geographic mix of estimated annual taxable income. We estimate our income tax rate will be approximately 37.5% for fiscal 2004.

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BUSINESS SEGMENT RESULTS

IGT’s segment profit reflects income from continuing operations before tax, including an applicable allocation of operating expenses, as well as other income and expense. Prior year amounts have been reclassified to conform to the current management view and presentation. See Note 18 of our Consolidated Financial Statements.

Product Sales

Improvements in segment profit from product sales in fiscal 2003 and fiscal 2002 related primarily to sales volume growth and increased gross profit margins, partially offset by increased operating costs.

Worldwide Product Sales

Fiscal 2003 growth in product sales worldwide was driven by increased domestic replacement shipments and greater sales of new and expansion machines.

The fiscal 2003 increase in product sales gross margin to 49% from 43% in fiscal 2002 was attributed to:

We expect our product sales gross margins to run approximately 50% in fiscal 2004, depending on the mix of geography and products.

Fiscal 2002 worldwide product sales revenues and gross profit growth were driven by increased replacement shipments. The improvement in product sales gross margins in fiscal 2002 was attributed to ongoing operational efficiencies and lower component costs.

Domestic Product Sales

Fiscal 2003 domestic unit shipments increased due to strong growth in replacement sales, which increased to 58,000 machines. Shipments of machines to new or expanding properties were also up 14% to 25,900 units in fiscal 2003 compared to 2002. These volume improvements related to:

We expect IGT’s innovations in slot technology, such as Multi-Denomination™ and EZ Pay™ TITO, as well as our leadership in game design and the broad based acceptance of cashless technologies, to continue to stimulate replacement demand for our gaming machines. Several major casino resorts have committed to multi-year replacement programs to exchange existing slot machines for our EZ Pay™ systems and TITO equipped machines throughout their properties nationwide.

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We anticipate increases in US replacement machine sales in fiscal 2004 will offset expected reductions in unit sales into the Canadian public gaming markets.

Additionally, fiscal 2003 domestic average sales prices improved over the prior year related to:

Fiscal 2002 domestic replacement units increased 8%. Overall domestic shipments declined slightly from fiscal 2001 as the result of fewer shipments to new or expanded properties in Nevada and California, partially offset by increases across all other North American jurisdictions.

International Product Sales

Fiscal 2003 international machine shipments declined from fiscal 2002 due primarily to lower sales in Australia and Japan, both impacted by restrictive gaming regulations. These declines were partially offset by:

Fiscal 2003 gross profit from international product sales was up 19% over the prior year despite fewer shipments reflecting:

Fiscal 2002 international unit shipments increased 9% over fiscal 2001 due to improvements across all international markets, except Latin America and South Africa.

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Proprietary Gaming

Growth in proprietary gaming segment profit in fiscal 2003 and fiscal 2002 was primarily the result of increased revenues and gross profits, partially offset by additional operating expenses.

Fiscal 2003 improvements in proprietary gaming revenues and gross profits compared to the prior year were driven by: