FORM 10-K

United States
Securities and Exchange Commission

For the Fiscal Year Ended September 30, 2004

OR

For the transition period from                     to                    

Commission File Number 001-10684

International Game Technology

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. [  ]

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, 2004: $15,948,670,676

The number of shares outstanding of each of the registrant’s classes of common stock, as of November 27, 2004: 346,367,231 shares of Common Stock, $.00015625 Par Value

Table of Contents

i

Part I

Item 1. Business

COMPANY OVERVIEW

International Game Technology is recognized as a leader in the design, development, manufacturing, distribution and sales of computerized gaming machines and systems products in all jurisdictions where gaming is legal. During fiscal 2004, we redefined our business segments under a reorganization of management responsibilities to cover all products in distinct geographical areas. This new structure shifted our focus to managing the business by customer regions encompassing all sources and types of revenue. We currently view our business in two regional operating segments, the North America Division and the International Division, each incorporating all relevant sources of revenues from product sales and gaming operations. We strive to diversify our business with our presence in gaming markets worldwide and the breadth of our product offerings.

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, Canada, Europe, Japan, Latin America, New Zealand, South Africa and the UK.

International Game Technology was incorporated in Nevada in December 1980 to acquire the gaming licensee and operating entity, IGT, and to facilitate our initial public offering. In addition to our 100% ownership of IGT, International Game Technology has the following directly or indirectly wholly-owned subsidiaries:

	ª		Acres Gaming Incorporated (Acres)
	ª		I.G.T.-Argentina S.A. (IGT-Argentina)
	ª		I.G.T. Australia Pty. Limited (IGT-Australia)
	ª		International Game Technology NZ Ltd. (IGT-NZ)
	ª		IGT do Brasil Ltda. (IGT-Brazil)
	ª		IGT-Europe B.V. (IGT-Europe)
	ª		IGT-Iceland Ltd. (IGT-Iceland)
	ª		IGT-Japan K.K. (IGT-Japan)
	ª		IGT-UK Limited (Barcrest)
	ª		International Game Technology-Africa Pty. Limited (IGT-Africa)
	ª		International Game Technology S.R. Ltda. (IGT-Peru)
	ª		Silicon Gaming, Inc. (Silicon)
	ª		VLC, Inc. (VLC)

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 will 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.

1

BUSINESS SEGMENTS

During the fourth quarter of fiscal 2004, we finalized changes to our organizational structure and management responsibilities to cover all products in distinct geographical areas. This reorganization included an evolving realignment of our sales organization, which began with the appointment of our new CEO in October 2003. The new structure shifted our focus to managing the business by customer regions encompassing all sources and types of revenues. Operating results reviewed by our chief decision makers encompass all sources of revenues within specific regions.

We currently view our business in two operating segments, each incorporating all relevant sources of revenues from product sales and gaming operations.

	ª		The North America Division encompasses our operations in the US and Canada, including the IGT Systems group. The North America Division comprised 86% of consolidated revenues in fiscal 2004 and 2002, versus 89% of consolidated revenues in fiscal 2003.
	ª		The International Division oversees our efforts abroad in Australia, New Zealand, Europe, Latin America, South Africa, the UK and Japan. The International Division contributed 14% of consolidated revenues in fiscal 2004 and 2002, versus 11% of total revenues in fiscal 2003.

Our business segments are designed to allocate resources within a framework of management responsibility. Operating costs from one segment may benefit the other segments. We continually evaluate the alignment of our business development and sales organizations for reporting purposes, which may result in changes to segment allocations. Prior year amounts have been reclassified to conform to the current management view and presentation.

The Corporate Division manages certain unallocated income and expenses related to company-wide initiatives, including capital deployment, treasury and cash management, as well as administrative and oversight functions, such as human resources, information systems, and legal. The Corporate Division includes all debt related costs, including interest and losses on early retirements, as well as interest income and gains or losses on investment securities, hedging instruments and other corporate assets. See Note 18 of our Consolidated Financial Statements for revenues and financial results of our business segments.

SOURCES OF REVENUES

We derive revenue from our products in two ways: “product sales” and “gaming operations.”

Product Sales

Product sales revenues are generated from the sale of gaming machines, systems, parts, conversion kits, licenses and royalties, equipment and services. Product sales comprised 53% of consolidated revenues in fiscal 2004, 50% in fiscal 2003 and 48% of consolidated revenues and earnings from unconsolidated affiliates in fiscal 2002.

In North America, 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. Internationally, we target the casino style, private club, gaming hall, government sponsored video gaming machine, Amusement with Prize (AWP), and pachisuro or low payout markets. We sell hundreds of recognized game themes to customers, directly or through distributors, and provide equipment contract financing to qualified customers. We also provide financing loans to select customers for the development of new or expanding gaming facilities.

In the North American gaming market, IGT holds an estimated 68% share of the total market base of installed gaming machines. We believe our market share is the result of our commitment to innovation, game design, and technological advances 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 enabling us to have a presence in all major North America gaming jurisdictions.

During fiscal 2004, our top selling machines included Hexbreaker®, Money Storm®, Kenny Rogers®, Cops and Donuts®, Lucky Larry’s Lobstermania®, Enchanted Unicorn®, Triple Double Stars™, Triple Double Wild Cherry™, Big Times Pay®, Five Star™ and Triple Stars®. New introductions we are planning for 2005 include Sneeki Tiki™, Space for Rent™, Shake Your Booty™, Max Action™, and Stinkin’ Rich™.

2

In addition to gaming machines, we offer a variety of gaming systems products to our customers in relevant gaming markets. Our systems product offerings branded under Advantage Systems™ include Casino, Video Lottery, Class II (Electronic Bingo), Central Determination and Game Server. These systems products and services enhance the players’ gaming experience and provide operational efficiencies for our customers. The acquisition of Acres complemented and strengthened our current suite of gaming systems products by providing casino-wide, integrated applications that offer bonusing, 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 improved our leadership position in systems products, with over 50% of North American casino gaming machines now 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’ includes equipment, license fees, service and other miscellaneous revenues.

Gaming Operations

Gaming operations revenues are generated from our installed base of recurring revenue games. These revenues are of a recurring nature based on the use of our gaming machines and equipment distributed under participation agreements. This revenue stream comprised 47% of our consolidated revenues in fiscal 2004, 50% in fiscal 2003, and 52% of consolidated revenues and earnings from unconsolidated affiliates in fiscal 2002. The North America Division provides approximately 98% of our consolidated gaming operations revenues.

We distribute our recurring revenue games under a variety of pricing arrangements including:

	ª		wide area progressive (WAP) systems
	ª		stand alone participation and flat fee
	ª		equipment leasing and rental

WAP games differ from stand alone 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. Central determination pricing differs from the traditional casino market in that it is weighted toward participation and revenue sharing models.

Growth in gaming operations revenue and gross margin are influenced by a number of factors, such as the number of machines placed, the geographic mix or the pricing arrangements. Gaming operations expenses include the cost of funding jackpot payments to winners, which is subject to interest rate volatility. We began to consolidate the revenues and expenses from our progressive trusts in Iowa and New Jersey due to a change in accounting rules for variable interest entities (VIEs) beginning in the third quarter of fiscal 2004. Although the VIE consolidations had no material impact to gross profit or net income, our quarterly gaming operations gross margin was reduced by approximately 200 basis points.

We continually add new innovation and enhanced player appeal into our proprietary games. 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®, The Price is Right™ and The $1,000,000 Pyramid™. New themed product introductions we are planning for fiscal year 2005 include Star Wars™, Laverne and Shirley™, Drew Carey™, Elizabeth Taylor™, Mickey Mantle™, and Gilligan’s Island™. We also plan to introduce the Fort Knox® line of penny products that include a new mystery progressive feature and player-interactive bonuses.

We recognize that all games, including our proprietary games, have a finite lifecycle. IGT systematically replaces games experiencing declining play levels with new games and extensions of existing brands.

3

We distribute proprietary games in 26 North American jurisdictions and select international locations including Australia, Europe, Iceland, Latin America and South Africa. We hold an estimated 63% share of the total proprietary games installed in North America. IGT owned games are reflected in our balance sheet as part of property, plant and equipment. Casino owned games are primarily comprised of machines sold with a related recurring royalty fee.

PRODUCT DEMAND

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

ª

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

The replacement cycle in all gaming jurisdictions represents a significant portion of sales in any given year. It is driven primarily by competition in each market to provide players with more entertaining and sophisticated games. As new machines are installed, the earnings disparity and casino operators efficiencies between the older and newer units on casino floors widens and the replacement cycle is further stimulated. We expect the introduction of new, more sophisticated interactive games and systems combined with the cost savings, convenience, and other benefits of our advanced platform to continue to stimulate demand for replacement machines. The willingness and ability of operators to invest in new or additional machines is also a factor.

ª

Casino expansion or the addition of new casinos within current gaming markets:

The construction of new casino properties generates product demand in two ways: machines for the new casinos and replacement machines at established casinos. Neighboring casinos tend to upgrade their gaming machines regularly in order to remain competitive.

ª

The establishment of new gaming jurisdictions:

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

ª

Player appeal, price, service, reliability, operational efficiencies, technical capability, financial condition and reputation of the manufacturer:

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

4

STRATEGIC ACQUISITIONS AND DIVESTITURES

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

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

Following the summary table of our significant acquisitions below is a brief overview of our two most recent acquisitions. The acquisition cost noted in the table represents the purchase price including debt assumed.

Acres

On October 27, 2003, we acquired Acres, a systems software development company serving the gaming industry worldwide.

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.

This business combination provides us the ability to:

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

We completed the integration of IGT Systems and Acres in fiscal 2004, including the development efforts, sales, service and operational organizations.

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 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 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.

	ª		In February 2003, we sold the assets of the Anchor Coin Nevada slot route operations for a cash price of $60.5 million. In April 2003, we sold the two Colorado casinos for total cash proceeds of $82.3 million. Collectively, we recognized a gain of $184,000 on these divestitures in fiscal 2003.
	ª		In September 2003, we sold the pari-mutuel wagering business, United Tote (UT), for a cash price of $12.3 million and recorded a loss on sale of $8.9 million, net of tax.
	ª		In November 2003, we sold IGT OnLine Entertainment Systems, Inc. and the lottery systems business of VLC, Inc., collectively referred to as OnLine Entertainment Systems (OES) for cash proceeds of $151.5 million resulting in a gain of $56.8 million, net of tax.

5

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 find entertaining and want to play. This development strategy combined with our innovative systems improves casino operations and profitability. One of our major development achievements in fiscal 2004 was the adaptation of our current platform and systems technologies, allowing us to participate in multiple new markets such as Alabama, New York, Florida and Oklahoma.

Our emphasis and investment in research and development (R&D) has allowed us to maintain our leadership position in the industry. We have six 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 1,100 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 totaled $129.3 million during fiscal 2004, $94.9 million in fiscal 2003 and $77.9 million in fiscal 2002.

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

Our product development process is not complete until our compliance teams ensure that each game, product or system meets all of the requirements in each jurisdiction, North American or international. We conduct business in over 275 jurisdictions worldwide with approximately 100 people employed in the areas of regulatory and product compliance. During fiscal 2004, we presented over 28,000 product submissions worldwide.

Games

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

In fiscal 2004 North American markets, we introduced 125 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 our Wide Area Marketing (WAM) computerized testing and monitoring system, we evaluate and forecast acceptance of new products in order to quickly identify the more popular gaming concepts. The WAM test uses a central computer to monitor the performance of games placed in a representative sample of casinos throughout Nevada. There are approximately 15 test locations in various Northern and Southern Nevada casinos. The WAM test program allows us to test games in a relatively short time span, resulting in a quicker release of higher performing games.

6

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 and game development department continues to create new games for the pachisuro market. Our new manufacturing agreement with Sammy Corporation in Japan will allow us to work with their design team, as we incorporate their platform in our machines. Barcrest, our UK subsidiary, designs games for the UK and European AWP markets. Leveraging off their success in the AWP markets, we established a Barcrest USA design team to develop games that include interactive top boxes for the North American casino markets. At the same time, the proposed changes in UK gaming legislation will allow Barcrest to launch its own casino product into this market. This effort provides an alternative source of innovation for both the market and IGT.

Platforms

Platforms are one method to deliver our games and game content to the consumer and we support several in order to maximize this distribution. As gaming laws evolve and allow for new solutions to be implemented, we continue in our effort to serve new market opportunities through the strength and flexibility of our distinct platforms.

Our Reel Touch™ platform incorporates a PC based computer system with a liquid crystal display and corresponding touch screen for player interactivity and game bonusing. In conjunction with this platform we introduced our EZ Touch™ touchpad, allowing players to change the game’s denomination at the touch of a button. The Video Reel Touch™ platform has become the cornerstone of our Class II markets as we internally develop central determination games, related systems and terminals. The adaptation of this platform allowed us to quickly provide solutions in order to expand into new markets, including Alabama charitable gaming and Native American Class II markets.

Our Advanced Video Platform™ (AVP™) will support our next generation of further enhanced video games. This system provides improved graphic capabilities such as full screen live streaming videos and animations with vivid colors along with an enhanced stereo sound system. AVP™ also greatly expands storage capacity allowing for complex bonusing features. AVP™ continued its evolution over the past year to bring state of the art processing power to our game design efforts.

Our Intel-based 80960 platform development includes: the Game King® video platform, which offers a single or multi-game format with a touch screen monitor using interactive video slot games with animated graphics and secondary bonusing features; 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 2004, we updated processor boards in both the Game King® and S2000™ platforms, improving the overall system performance, graphics resolution, and color spectrum. Additionally, we added Ethernet support for high-speed networking, enabling future game downloading. The updated board in the S2000™ allows for additional reels.

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 North American video lottery control systems. We are working with our customers as we transition from this 8800 platform to the next generation based on our 80960 Intel platform.

7

Systems

Our recently created IGT Systems group is the result of the integration of IGT Gaming Systems and Acres. Machines and systems are converging, as certain markets require the system and games to be linked in order to satisfy the rules and regulations specific to that jurisdiction. The IGT Systems group allows us to develop integrated gaming systems and adapt our technology to new markets. Branded as “IGT Advantage™ Systems”, our product suite includes the following technologies:

IGT Advantage™ Casino System is a suite of traditional casino management software products providing operators with real-time information in the areas of slot machine performance, patron management, reporting and analysis for table games, along with credit and banking data. This system includes the following functionalities.

	ª		EZ Pay™ Ticketing provides slot machines 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 host systems and internal controls, while meeting the regulatory requirements of each gaming jurisdiction. Our one-wire configuration is referred to as the EZ Pay Integrated Voucher System™. 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 host systems, using the existing casino floor network. IGT was the first to introduce ticket-in, ticket-out (TITO) systems in casino gaming and continues to lead the industry with over 50% of the TITO systems installed in North America. 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 North American gaming jurisdictions.
	ª		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 are available in a Multi-Denomination™ format that can be readily adapted for use with our EZ Pay™ system or other TITO systems.
	ª		Bonusing technology enables the design and delivery of bonuses and other promotions directly to players at the point and time of play, right at their favorite game. Built on the Microsoft Windows SQL platform, this system provides the instantaneous information needed for management decision-making. Bonusing modules include: Xtra Credit®, PointPlay®, ReturnPlay®, Lucky Coin ®, Personal Progressives®, Celebration Prizes®, and Multiple Jackpot Time™.
	ª		NexGen™ Touch Screen Display provides operators the ability to communicate with their customers. It uses the latest in multimedia technology to display player and game activity and promote property events and amenities.
	ª		Loyalty Game™ combines the growing popularity of player clubs with a multi-line, multi-coin game. Players use their club cards in this multi-session game to enable unique bonus rounds. This multi-session functionality provides players with an incentive to return to a specific property or any property across the enterprise.

IGT Advantage™ Video Lottery System provides central video gaming control and monitoring systems to government entities. These systems incorporate sophisticated technology and are designed with features intended to appeal to the concerns of the operator. This includes the security of communications, central control of gaming machines on the system, and compatibility with machines made by other manufacturers. Other features include the ability to use a dial-up format, on-demand generation of reports and audits, and the capability of transferring funds electronically. The system provides flexibility to meet the needs of markets of various sizes, accommodate regulatory changes and adapt to new game designs and features.

In addition to these management systems, we create the following systems that can be used to operate games in markets where systems are used to determine game outcomes.

	ª		IGT Advantage™ Class II System provides features that include cross property bingo draws, game software downloads, remote game configuration, full accounting and performance reports, virtual private networks and cashless TITO compatibility. In the very near future, this system will also feature multi-denomination WAPs.
	ª		IGT Advantage™ Central Determination System has many of the same features as our Class II systems and are compliant with the regulations in both the State of Washington and New York.

8

Intellectual Property, Copyrights, Patents and Trademarks

Our intellectual property rights, patents, trademarks and copyrights are significant assets. We seek to protect our investment in R&D and the unique and distinctive features of our products and services by perfecting and maintaining our intellectual property rights. We obtain patent rights protection covering many of our products and have a significant number of US and foreign patent applications pending. Our portfolio contains approximately 700 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 widespread acceptance. Our products may also contain other content licensed from third parties, such as trademarks, fictional characters, or storylines. We design, manufacture, produce, operate, use, and/or otherwise have permission to exploit certain gaming machines utilizing materials under license from third-party licensors. We seek protection for our copyrights and trademarks in the US and various foreign countries, where applicable.

Our ability to enforce and maintain our patents, copyrights, trademarks and other intellectual property is subject to general litigation risks. When we seek to enforce our rights, we are often presented with various defenses, such as the intellectual property right being asserted is invalid. In addition, our declaration of intellectual property rights often results in the other party seeking to claim alleged intellectual property rights of its own against us.

PRODUCT MARKETS

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

North America

The ever-growing popularity of gaming as a leisure activity continues to influence demand in North America, resulting in expansion of existing markets and legalization in new markets. The introduction of riverboat gaming in the Midwest during the early 1990s, the continuing expansion of Native American casino gaming and the growth in the Canadian and non-casino government sponsored gaming markets continues to expand this market and provide IGT with significant growth opportunities. Most recently, the emerging central determination and Class II markets are spurring new growth. As a result, the installed base of gaming machines increased from an estimated 184,000 machines in 1991 to approximately 802,000 machines in 2004.

Based on internal data and information provided by various gaming agencies, we have compiled the following table of the estimated total gaming machines installed in North America by jurisdiction.

⁽¹⁾ Native American installed base now includes Class II and Class III gaming machines.

9

Gaming Expansion

We anticipate further gaming expansion in North America. Pennsylvania passed legislation in fiscal 2004 for gaming machines, a market that could eventually grow to an installed base of over 60,000 machines. Florida voted to change the state constitution to potentially allow for gaming machines in two densely populated counties, subject to local approval and enabling legislation. Oklahoma voters recently approved compacted Class III gaming, where racetracks would be permitted to install approved machines after at least four Oklahoma tribes compacted with the State.

During fiscal 2005, we will continue to monitor legislation as it pertains to gaming in the states of Ohio, Maryland, Massachusetts and Texas. These states are all facing budget deficits in the upcoming year and previously made efforts to legalize machine gaming.

Casino Markets

Nevada

Nevada is the largest and most established gaming market in North America, with approximately 100 casinos and various other smaller gaming venues with an estimated 205,000 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 our most competitive markets. Even in this challenging environment, a number of operators have announced plans that will expand the Las Vegas market in the coming years. Wynn Las Vegas will open its new resort in April 2005. Station Casinos Inc. will expand its local presence in 2006 with the Red Rock Station. Additionally, Boyd Gaming’s South Coast property will make its debut in 2006.

Our fiscal 2004 sales in Nevada increased over fiscal 2003 as a result of replacement demand generated by TITO initiatives with major operators such as Harrah’s Entertainment Inc. and Station Casinos Inc.

Atlantic City

The Atlantic City market consists of 13 large casinos concentrated in a mature boardwalk area and marina district. This market includes approximately 42,000 gaming machines. We experienced a strong increase in fiscal 2004 in replacement demand due to TITO initiatives in Atlantic City. Future anticipated Atlantic City developments include an expansion of the Borgata in fiscal 2006.

Native American

We distribute gaming products to authorized Native American casinos through our Sodak distribution facility in Rapid City, South Dakota. Currently, approximately 220 sovereign tribes operate more than over 350 gaming venues in 28 states.

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

	ª		Class I Gaming – Traditional Native American social and ceremonial games; regulated exclusively at the tribal level.
	ª		Class II Gaming – Bingo, pull-tabs, punch board, tip jars, instant bingo and other games similar to bingo; regulated by individual tribes, with the National Indian Gaming Commission (NIGC) having oversight of the regulatory process.
	ª		Class III Gaming – All forms of casino-style gaming not included under Class I and Class II, including traditional slot machines and table games; governed by compacts negotiated between individual tribes and states.

Pursuant to these regulations, we distribute Class III machines to Native American tribes who negotiated compacts with their states and received federal approval. The estimated Class III Native American market installed base totaled 177,000 machines at the end of fiscal 2004.

We began distributing Class II machines to Native American tribes during the latter half of fiscal 2004. Class II includes the Native American markets in Oklahoma, Florida and various other jurisdictions. The estimated Class II Native American market installed base totaled 47,000 machines at the end of fiscal 2004. We anticipate continued growth from expanding our presence within existing and new gaming facilities planned in both Florida and Oklahoma during fiscal 2005.

10

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, and in total comprises a market of approximately 165,000 machines. We had strong TITO related replacement sales as operators continue to focus on streamlining and reducing the cost of their operations. Expansion opportunities for the near-term include plans for a new casino for French Lick, Indiana, and anticipated new casinos in Mississippi. Longer-term opportunities may include permanent casinos in Detroit and potential additional licenses granted in Illinois, Iowa and Missouri.

Racinos and Lottery

IGT provides both VLTs and casino-style gaming machines and systems on a for-sale or 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 jurisdictions (except Montana), VLTs are connected to a central control system overseen by state regulators, often the state lottery. Many of these machines are located at 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 arrangements to place games at racetracks.

Growth in this market was driven by the addition of VLTs at racetracks in New York. The State of New York began installing VLTs, under revenue sharing agreements in the second quarter of fiscal 2004 with approximately 1,300 units at Saratoga and 1,000 units at the Finger Lakes facility. The Buffalo facility followed in the third quarter with approximately 1,000 units and Monticello with 1,700 units. We were awarded approximately 24% of the machines. The second phase includes Yonkers, Aqueduct and Batavia venues scheduled over the next 12 to 18 months with an additional 10,600 machines.

This market also includes the central determination charitable bingo market in Alabama. Other states may be evaluating enabling legislation allowing similar charitable electronic video bingo products. These products share many of the characteristics of the Class II machines we ship to the Native American markets previously discussed. We will continue to leverage our efforts in developing central determination systems in order to serve new markets that are open to these forms of gaming.

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 44,000 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 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.

In fiscal 2004, we completed contracts with the Manitoba Lottery Corporation and provided machines for a new casino for the Ontario Lottery Corporation. Other provinces are considering expanding casino-style gaming through new casino facilities located in urban areas, most notably in Vancouver and Edmonton. With the completion of the Manitoba Lottery contract, the current replacement market in Canada is essentially finished.

International

IGT’s presence in the international gaming markets began in 1986 and we continue to pursue growth in this area. Our goal is to further leverage our North American markets’ design and manufacturing experiences, while addressing each international market’s unique customer and regulatory environment. We established our International Division headquarters in the Netherlands in 2000, responsible for overseeing all international operations servicing the casino markets in Europe, Latin America, Russia and South Africa, the club markets in Australia and New Zealand, and the AWP and low payout markets in the UK and Japan. Casino and club market gaming machines are fabricated, in whole or kit form, at our Reno facility.

11

The AWP and low payout markets provide lower game economics for all suppliers due to the associated laws and regulations. These unique markets generally require numerous game introductions and short product lifecycles, with lower average sales prices and margins than other international markets. In the UK, we maintain local manufacturing capabilities to serve the AWP market. In Japan, we have a partnership with a third-party manufacturer (Sammy Corporation) to serve the low payout pachisuro market.

Our success in international markets is derived from innovative game design. Our challenges in international markets are the result of addressing each individual gaming jurisdiction’s regulatory environment. Our management team focuses on communication between North America 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. The first Las Vegas style casinos opened in Macau in 2004 and more expansion in this market is anticipated. The gaming market in Russia is also poised for expansion in the upcoming years. Diverse countries such as Singapore, Japan, Mexico, Taiwan, and Thailand are all seeing an increase in popular support for legalizing casinos as a means of increasing tourism. We anticipate our international markets will grow in significance over the next several years and increase their share of overall contribution.

Casino Markets

Europe

In 1992, we opened our office in The Netherlands to service the European, Middle Eastern and North African casino markets. Casinos and slot halls in these markets compete with non-casino environments such as pubs and arcades. We anticipate moderate growth in the European installed based. Our sales to this market will be a mix of new business and replacement sales, the latter being increasingly driven by cashless solutions such as TITO. There is a particular focus to further develop new business in Russia and the Commonwealth of Independent States (former Soviet bloc countries) with plans to open a representative office in Moscow in the near future.

Latin America

We sell and place casino style gaming equipment to many legalized gaming jurisdictions in Latin America, through our offices in Argentina and Florida. The economic environment of this region has become more stable since the devaluation of the Argentine peso in fiscal 2002.

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, allowing for the allocation of 40 casino licenses between each of the nine provinces in South Africa in 1996. We are also pursuing other African opportunities outside of South Africa.

Other International Markets

We have an International Market group in Reno supporting product sales to military bases and other legal gaming markets around the world not directly supported by an international subsidiary.

Club Markets

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 related to the club market. The machines for Australia are manufactured in Reno to a partially completed state. IGT-Australia performs the necessary game development and programming, final test, delivery and installation.

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.

12

AWP and Low Payout Markets

United Kingdom

We established a manufacturing, sales, marketing, distribution, engineering and game development operation in Manchester, England with our acquisition of Barcrest Limited in March 1998. Barcrest manufactures and sells low-payout AWP machines and top box products. An AWP machine is a 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 a design center in The Netherlands that provides 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. The installed base of AWP machines is approximately 250,000 units. 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. The most significant proposed change, if made, would allow 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 IGT-UK Casino group with offices in the Midlands region. In addition, Barcrest has recently increased the size of its manufacturing and distribution facility, with the acquisition of new land, to support additional capacity should the UK gaming legislation come into force. The UK government is presently discussing the potential measures and legislation could be proposed during 2005.

Japan

We established an office in 1990 that serves the Japanese market with engineering, development, sales, and administration from our head office in Tokyo and a logistics office in Nagano. During fiscal 2004, we entered into a manufacturing agreement with Sammy Corporation. We expect this agreement will help position our company to be a more competitive and consistent performer in the Japanese pachisuro marketplace. The installed base of pachisuro machines is estimated at over 1.6 million units. The short product lifecycle of these machines causes them to turn over approximately every two years on average.

COMPETITION

The market for gaming machines and systems is intensely competitive. The principal method of competition is product development. We believe our diverse library of strong performing games and intellectual property is a competitive advantage. Other ways we remain competitive include the quality and breadth of our sales and service organizations, our financial strength, as a manufacturer, and pricing.

US and foreign manufacturers that compete with IGT in gaming markets include, but are not limited to: Ainsworth Gaming Technology; Aristocrat Leisure Limited (Aristocrat); Bally Gaming Inc., a subsidiary of Alliance Gaming Corp. (Alliance); Gauselmann Group (Atronics); Aruze, (formerly known as Universal); Cirsa Group; Franco Gaming, Ltd., a division of Recreativos Franco; Konami Co. Ltd. (Konami); Novomatic Industries; Mikohn; Sierra Design Group, acquired by Alliance; Spielo, acquired by GTECH; Stargames; Universal Distributing, Inc.; WMS Industries (WMS); Multimedia Gaming Inc. (MGAM); and Rocket Gaming Systems. All have developed casino products and are either authorized to sell products or are in the licensing process in many US and foreign gaming jurisdictions.

We provide substantial marketing and advertising support for our gaming products and compete on the basis of our extensive infrastructure, popular brand names, product appeal, jackpot awards, player loyalty, technical expertise and marketing experience.

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.

During fiscal 2004, our domestic operations received ISO 9001.2000 certification covering manufacturing, engineering, systems development, game development and customer service. Our Reno facility has 736,000 square feet devoted to manufacturing, warehousing, shipping and receiving. During fiscal 2004, we began major construction projects in Reno and Las Vegas. The Reno project includes additional office space and a new data center that will be ready for occupancy in early 2005. In Las Vegas we are developing a central campus to consolidate various leased facilities, estimated for completion in 2007.

13

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 $328.6 million at October 31, 2004 and $430.7 million at October 31, 2003. Our backlog orders for proprietary games totaled approximately 5,400 units at October 31, 2004 and 10,400 units at October 31, 2003. We reasonably expect to fill our backlog within fiscal 2005.

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 North America 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.

Customer Service

We consider customer service an important aspect of our overall marketing strategy and a key factor differentiating us from our competitors. Customers are provided product delivery and installation services, warranty services, after-market technical services and new product support services. Equipment spare parts, product retrofit and game conversion services are also provided. We typically provide a 90-day service and parts warranty program in North America and up to a 180-day warranty service internationally for our gaming machines. We employ more than 900 trained customer service personnel in 30 customer service support centers in all major North American gaming jurisdictions and internationally in Argentina, Australia, Japan, New Zealand, South Africa, The Netherlands and the UK.

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

Regulatory Compliance

Our product and regulatory compliance efforts are designed to ensure that each gaming product or system we develop meets the requirements set forth in all gaming jurisdictions worldwide. These efforts also ensure we obtain the necessary approvals and licenses. Through our efforts we are able to successfully sell and market our products worldwide, and provide our customers with the assurance that our products work properly and meet jurisdictional requirements. We hold over 390 gaming licenses worldwide.

Information Systems

In fiscal 2004, we expanded our Enterprise Resource Planning (ERP) solution to support Native American operations and are in the process of implementing this technology in our new IGT Systems group. The Project Systems module was successfully implemented within our Engineering departments to track project resources, timelines and costs.

EMPLOYEES

As of September 30, 2004, we have approximately 4,900 total employees, including approximately 4,100 in North American operations and 800 internationally. We believe we have favorable relationships with our employees.

RESPONSIBLE GAMING

We continue to be an industry leader in addressing and attempting to minimize problem gambling. We partner with other companies in the gaming industry to raise awareness of problem gaming, and 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 dedicate 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.

14

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.

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.

15

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, acquiring more than 10% but not more than 15% of our voting securities, may apply to the Commission for a waiver of these finding of suitability requirements, provided the institutional investor holds the voting securities for investment purposes only. An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of its business. Our voting securities must not be acquired for the purpose of causing, directly or indirectly (i) the election of a majority of our board of directors, (ii) any change in our corporate charter, bylaws, management, policies or operations, or (iii) any other action the Commission finds to be inconsistent with holding our voting securities for investment purposes only. The Commission considers voting on all matters voted on by stockholders and the making of financial and other informational inquiries of the type normally made by securities analysts, to be consistent with investment intent.

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

16

Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Commission or the Chairman of the GCB may be found unsuitable. The same restrictions apply to a record owner who fails to identify the beneficial owner, if requested to do so. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of our common stock beyond such period of time as may be prescribed by the Commission may be guilty of a criminal offense. We are subject to disciplinary action and possible loss of our approvals if, after we receive notice that a person is unsuitable to be a stockholder or to have any other relationship with us or any of our licensed gaming subsidiaries, we (i) pay that person any dividend or interest upon our voting securities, (ii) allow that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) give remuneration in any form to that person, for services rendered or otherwise, or (iv) fail to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities for cash at fair market value. Additionally, the Clark County authorities have taken the position that they have the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming licensee.

The Commission may, in its discretion, require the holder of our debt securities to file an application, be investigated and be found suitable to own any of our debt securities. If the Commission determines that a person is unsuitable to own any of these securities, then pursuant to the Nevada gaming laws, we can be sanctioned, including the loss of our approvals, if without prior Commission approval, we: (i) pay to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognize any voting right by such unsuitable person in connection with such securities; (iii) pay the unsuitable person remuneration in any form; or (iv) make any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction.

We are required to maintain a current stock ledger in Nevada, subject to examination by the Commission at any time. If any of our securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Commission. A failure to make such disclosure may be grounds for finding the record holder unsuitable. We are also required to render maximum assistance in determining the identity of the beneficial owner. The Commission has the power at any time to require our stock certificates to bear a legend indicating that the securities are subject to the Nevada gaming laws and the regulations of the Commission. To date, the Commission has not imposed this requirement on us.

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

In July 2003, the Commission granted us prior approval to make public offerings for a period of two years, subject to certain conditions (referred to as a shelf approval). The chairman of the GCB may rescind the shelf approval for good cause without prior notice upon the issuance of an interlocutory stop order. The shelf approval does not constitute a finding, recommendation, or approval by the Commission or the GCB as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful.

Changes in control of the Company through merger, consolidation, acquisition of assets or stock, management or consulting agreements or any form of takeover cannot occur without the prior investigation of the GCB and approval of the Commission. Entities seeking to acquire control of us must satisfy the GCB and the Commission in a variety of stringent standards prior to assuming control. The Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction.

The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and other corporate defense tactics that affect Nevada gaming licensees, and publicly traded corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Commission has established a regulatory scheme to guard against the potentially adverse effects of these business practices upon Nevada’s gaming industry and to further Nevada’s policy to (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Commission before we can make exceptional repurchases of voting securities above their current market price and before a corporate acquisition opposed by management can be consummated. Nevada’s gaming laws and regulations also require prior approval by the Commission if we were to adopt a plan of recapitalization proposed by our board of directors in opposition to a tender offer made directly to our stockholders for the purpose of acquiring control of us.

17

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 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, 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, with primary regulatory authority over gaming on land within the tribes’ jurisdiction. IGT distributes gaming equipment to Native American tribes who have negotiated compacts with their states and have received federal approval.

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, New Zealand, 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.

18

FORWARD LOOKING STATEMENTS AND RISK FACTORS

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

Throughout this Annual Report on Form 10-K we make some “forward looking” statements, which do not relate to historical or current facts, but are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects and proposed new products, services, developments or business strategies. These statements are identified by their use of terms and phrases such as anticipate, believe, could, would, estimate, expect, intend, may, plan, predict, project, pursue, will, continue, feel, or the negative or other variations thereof, and other similar terms and phrases, including references to assumptions, and include but are not limited to the following:

	ª		expectations about our ability to introduce new games and systems to stimulate the replacement market
	ª		estimates of our market share of the installed base
	ª		estimates about the installed base in North America
	ª		expectations about gaming expansion in North America and International markets
	ª		judgements and assumptions related to our critical accounting estimates
	ª		estimates about our interest expense savings
	ª		estimates about our tax exposure and tax rates
	ª		estimates of expected gross profit margins
	ª		estimates that the replacement market will continue at certain paces
	ª		expectations that our available capital resources will be sufficient to fund our capital expenditures and operating requirements
	ª		don’t expect any material losses from off-balance sheet arrangements
	ª		don’t expect any material foreign exchange rate gain and losses

Although we believe that the expectations reflected in any of our forward looking statements are reasonable, actual results could differ materially from those expressed or implied. Our future financial condition and results of operations, as well as any forward looking statements, are subject to change and to inherent known and unknown risks and uncertainties. We do not intend, and undertake no obligation, to update our forward looking statements to reflect future events or circumstances.

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

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

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

Demand for our products would be adversely affected by:

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

19

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

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

Our intellectual property rights are subject to risks, including:

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

Our business is vulnerable to changing economic conditions, including:

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

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

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

Our business operations are subject to other risks, including:

	ª		the loss or retirement of our key executives or other key employees
	ª		adverse changes in the creditworthiness of parties with whom we have receivables or forward currency exchange contracts
	ª		the discovery of facts or determinations by judges, juries or other finders of facts not presently known to us or not in accordance with our evaluation of possible liability or the outcome of existing litigation related to legal actions pending against IGT
	ª		our ability to timely and cost effectively integrate into our operations the companies that we acquire
	ª		increased costs due to reliance on third party suppliers and contract manufacturers
	ª		agreements with casinos in Native American jurisdictions which may subject us to sovereign immunity risk
	ª		acts of war or terrorist incidents
	ª		continued work through several implementation phases of our company-wide ERP solution for 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

20

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 1.2 million square feet to house our manufacturing, cabinet production, silkscreen, engineering, sales and administrative personnel. This facility supports production for all North America markets as well as our other international markets, except the UK and Japan. We are in the process of completing an expansion of our Reno facility adding more than 100,000 square feet. We also maintain leased warehousing facilities in Reno totaling 204,000 square feet.

North America Sales and Service

Our largest sales and service office is located in Las Vegas, Nevada, where we lease approximately 383,000 square feet in warehousing, sales and administration facilities. These operating leases expire between July 2006 and December 2007. In fiscal 2004, we purchased land and began construction of a new 600,000 square foot Las Vegas campus primarily to consolidate several leased facilities that is scheduled for completion in 2007. Additionally, we lease approximately 292,000 square feet of warehousing and sales and service properties throughout the US to support each significant gaming market. We own a 94,000 square foot building in Rapid City, South Dakota, which supports our Native American gaming markets.

International

Our most significant international properties include facilities in the UK and Australia. We own 149,000 square feet and lease 39,000 square feet under leases expiring between March 2007 and December 2009, to support manufacturing, sales and administrative functions in the UK. We lease 88,000 square feet in New South Wales, Australia under leases expiring between October 2004 and April 2008, for subassembly, sales and administration. All other properties used for international operations total 189,000 square feet, mostly under leases expiring through June 2009.

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

21

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 2,970 record holders of IGT’s common stock and the closing price was $35.48 as of December 1, 2004.

We declared quarterly cash dividends of $0.075 per share in June 2003, $0.10 per share in September 2003, December 2003, March 2004, and June 2004, and $0.12 per share in September 2004. No other dividends were declared during the last two fiscal years.

Stock Repurchases

Under the 1990 IGT common stock repurchase plan, as amended and adjusted for stock splits, our remaining share repurchase authorization totaled 35.8 million at September 30, 2004. The stock repurchase authorization is used to return value to our shareholders and reduce the number of shares outstanding. The shares may be repurchased in the open market or in privately negotiated transactions, depending on market conditions and other factors. Restricted shares forfeited after issuance are also included in shares repurchased at the original grant price. There is no expiration date specified for this plan. Our fourth quarter repurchases are summarized below.

22

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

(1)		The results of Anchor and the consolidation of the JV following the acquisition of Anchor on December 30, 2001 were included for nine months in fiscal 2002 and the full year in fiscal 2003. Prior to the Anchor acquisition, our share of the JV was reflected net of expenses in earnings of unconsolidated affiliates.
(2)		Fiscal 2002 included pretax reductions of: $20.2 million ($12.6 million after tax or $0.03 per diluted share) related to certain litigation settlements; and $21.2 million ($13.2 million after tax or $0.04 per diluted share) for losses on early retirement of debt.
(3)		Fiscal 2000 included pretax gains of: $27.0 million ($17.3 million after tax or $0.05 per diluted share) related to a legal settlement; and $3.2 million ($2.0 million after tax or $0.01 per diluted share) on the sale of Barcrest’s Japanese subsidiary.
(4)		Fiscal 2004 includes pretax reductions of: $127.9 million ($81.4 million after tax or $0.22 per diluted share) for losses on early retirement of debt.
(5)		Fiscal 2004 includes a $13.9 million reduction to the provision for income taxes due to the utilization of foreign income tax credits resulting in an increase of $0.04 per diluted share.
(6)		Certain operations acquired with Anchor were sold or held for sale, and therefore reclassified, including gain/loss on sale, to discontinued operations for all periods presented. Fiscal 2004 includes gain on sale of $56.8 million after tax.
(7)		Shares and per share amounts for all periods presented have been adjusted to reflect the four-for-one stock split effective June 18, 2003.
(8)		Fiscal 2004 includes $969.6 million of principal debt reduction.
(9)		Capital spending has increased progressively since fiscal 2000 predominantly due to additional investments in gaming operations equipment.
(10)		Notes payable is presented net of unamortized discount for all years and interest rate swap fair value adjustments in fiscal 2003.
(11)		Fiscal 2004 jackpot liabilities included an additional $165.2 million related to VIE consolidations.

23

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

COMPANY OVERVIEW

Business Segments

We design, develop, manufacture, distribute and sell computerized gaming machines and system products in all jurisdictions where gaming is legal. Our two primary revenue sources are product sales and gaming operations. We strive to maintain a diversified business strategy with our presence in most worldwide gaming markets and the breadth of our product offerings.

During the fourth quarter of fiscal 2004, we finalized changes to our organizational structure and management responsibilities to cover all products in distinct geographical areas. This reorganization included an evolving realignment of our sales organization, which began with the appointment of our new CEO in October 2003. The new structure shifted our focus to managing the business by customer regions encompassing all sources and types of revenues. Operating results reviewed by our chief decision makers encompass all sources of revenues within specific regions.

We currently view our business in two operating segments, each incorporating all relevant revenues from product sales and gaming operations:

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

Our business segments are designed to allocate resources within a framework of management responsibility. Operating costs from one segment may benefit the other segments. We continually evaluate the alignment of our business development and sales organizations for reporting purposes, which may result in changes to segment allocations. Prior year amounts have been reclassified to conform to the current management view and presentation.

The Corporate Division manages certain unallocated income and expenses related to company-wide initiatives, including capital deployment, treasury and cash management, as well as administrative and oversight functions, such as human resources, information systems, and legal. The Corporate Division includes all debt related costs, including interest and losses on early retirements, as well as interest income and gains or losses on investment securities, hedging instruments and other corporate assets. See Note 18 of our Consolidated Financial Statements for revenues and financial results of our business segments.

Capital Deployment

Our fiscal 2004 capital deployment initiatives included:

	ª		the early redemption of $969.6 million of our outstanding fixed rate senior notes
	ª		cash dividends paid of $138.9 million
	ª		the repurchase of 4.1 million shares for an aggregate price of $129.8 million
	ª		initiation of construction projects for a new Las Vegas campus consolidating several leased facilities and expansion of the Reno facility

We increased our liquidity by nearly $500.0 million as a result of entering into a new $1.5 billion senior credit facility and the subsequent redemption of our senior notes.

Recent Developments

Acres Acquisition

On October 27, 2003, we completed the acquisition of Acres, a systems software development company serving the gaming industry worldwide. Acres provides bonusing and cashless gaming products, as well as a full suite of integrated casino management systems, with patented technology designed to enable casino operators to increase patron loyalty. This strategic business combination provides us the ability to:

	ª		utilize the Acres technology in developing more integrated gaming systems products
	ª		increase our competitive marketing capacity
	ª		position IGT as a leading provider of gaming systems products

During fiscal 2004, we completed the integration of the IGT Systems group with Acres, combining all development efforts, sales, service and operational organizations related to software systems.

24

Effects of Recently Issued Accounting Standards

As the result of adopting Financial Accounting Standards Board Interpretation (FIN) 46, Consolidation of Variable Interest Entities, we consolidated the New Jersey and Iowa progressive trust VIEs. See Note 1 of our Consolidated Financial Statements for information about the adoption of FIN 46. For the last six months of fiscal 2004, we consolidated $23.8 million in revenues and $24.1 million in related expenses of the VIEs, as well as $186.6 million in total assets and liabilities, primarily consisting of jackpot liabilities and related assets. Although the VIE consolidations had no material impact to gross profit or net income, our quarterly gaming operations gross margin was reduced by approximately 2 percentage points (pp).

With the adoption of Emerging Issues Task Force (EITF) 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share (EPS), in our quarter ending December 31, 2004, we will include our outstanding contingently convertible debenture shares in diluted EPS regardless of whether the market price trigger has occurred, as well as restate comparative prior period diluted EPS, to include the effect of our debenture shares since the beginning of our second quarter of fiscal 2003.

These restatements will reduce diluted EPS by approximately $0.01 per diluted share in each quarter, resulting in a reduction of approximately $0.03 for fiscal year 2003 and a reduction of approximately $0.01 for fiscal 2004. Fiscal 2004 diluted EPS was already reduced by $0.03 since our debentures met the conversion criteria for application of the if-converted method under existing accounting rules. See Note 1 of our Consolidated Financial Statements for a discussion of recently issued accounting standards.

25

CRITICAL ACCOUNTING ESTIMATES

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

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

Jackpot Liabilities and Expenses

We estimate our jackpot liability based on the jackpot life cycle, volume of slot play and jackpots won on each system. We also defer jackpot expense for the initial progressive meter liability on a new system. The deferred amounts are subsequently amortized to jackpot expense as the future contribution revenues are generated from the coin-in or slot play.

Our jackpot liabilities totaled $719.3 million at September 30, 2004, including $165.2 million for our VIEs, and $541.1 million at September 30, 2003. We maintain available cash and investments at sufficient levels to fund our jackpot liabilities. We use current market rates weighted according to the historical pattern of winners’ payment elections to calculate the present value of our outstanding progressive jackpot liabilities. We believe this calculation provides the best estimate of our cost to fund future jackpots.

Our jackpot expense totaled $292.0 million for fiscal 2004, including $23.2 million for our VIEs over the last six months, and $259.3 million in fiscal 2003. The majority of material changes to jackpot expense relate to the volume of slot play and market interest rate trends (see Item 7a, Market Risk). Changes in our estimates and assumptions regarding the number of jackpot winners who may elect single-payments in the future could also impact jackpot expense, as well as the estimated current and non-current portions of our jackpot liabilities. See Note 1 of our Consolidated Financial Statements for additional disclosure on our accounting policies.

Intangible Assets, including Goodwill and Prepaid Royalties

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

Application of the goodwill impairment test requires judgment, including the identification of reporting units, allocation of related goodwill, assignment of corporate shared assets and liabilities to reporting units, and determination of the fair value of each reporting unit. We determine the fair value of our reporting units using a combination of the market approach and the income approach. Under the market approach, we estimate the fair value based on review and application of market multiples related to revenues and earnings of similar public companies. Under the income approach, we perform a discounted cash flow analysis to estimate the fair value of each reporting unit using our forecasted future cash flows and application of an appropriate discount rate.

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

Our goodwill and intangible assets totaled $1.3 billion at September 30, 2004 and $1.2 billion at September 30, 2003. If the estimated fair value or useful lives of our intangible assets were to decrease, the most significant impact would be an increase to amortization expense and/or impairment, thereby decreasing our results of operations. We recorded no goodwill impairment charges in fiscal years 2004, 2003, or 2002.

26

We also regularly evaluate the estimated future benefit of prepaid royalties, as well as minimum commitments not yet paid, to determine amounts unlikely to be realized from forecasted sales or placements of our games. If actual or revised forecasts fall below the initial estimate, then we may need to revise the remaining useful life and/or record additional charges. The carrying value of our prepaid and deferred royalties totaled $130.1 million at September 30, 2004 and $50.9 million at September 30, 2003.

Income Taxes

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

The calculation of our tax liabilities also involves dealing with uncertainties in the application of complex tax regulations. We recognize potential tax liabilities for anticipated tax audit issues in the US and other jurisdictions based on our estimate of the extent to which additional taxes will be due. If payment of these amounts proves to be unnecessary, the reversal of liabilities could result in the recognition of a future tax benefit. If our tax liabilities are understated, a charge to our tax provision would result. Changes in current tax laws, enacted tax rates, geographic mix or the estimated level of annual taxable income could change our valuation of deferred tax assets and liabilities, which in turn impacts our effective tax rate and tax provision.

Our net deferred tax assets totaled $85.0 million at September 30, 2004 and $124.7 million at September 30, 2003. Our accrued income taxes totaled $7.5 million at September 30, 2004 and $31.9 million at September 30, 2003.

Bad Debt Expense

We analyze historical collection trends, customer concentrations and creditworthiness, economic trends and anticipated changes in customer payment patterns when evaluating the adequacy of our allowance for doubtful accounts for specific and general risks. Changes in our assumptions and estimates could change our estimated provision for bad debt, thereby impacting our operating income. Our allowances for doubtful accounts, notes, and contracts receivable totaled $68.4 million at September 30, 2004 and $55.0 million at September 30, 2003.

Inventory

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 adjust manufacturing output accordingly, we may need to record additional charges for inventory obsolescence, which would have a negative impact on our gross profit.

If we experience a significant unexpected decrease in demand for our products or a higher occurrence of inventory obsolescence because of changes in technology or customer requirements, we could be required to increase our inventory provisions. Inventory management remains an area of focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times versus the risk of inventory obsolescence because of rapidly changing technology and customer requirements.

Our inventories totaled $165.6 million at September 30, 2004 and $147.1 million at September 30, 2003.

27

CONSOLIDATED OPERATING RESULTS

Fiscal 2004 vs Fiscal 2003

IGT achieved record financial results in the past twelve months on the strength of our development efforts for games, platforms and systems. Fiscal 2004 showed growth in every measure of our business, including record revenues, machines sold, game placements, operating income and earnings per share. In fiscal 2004 earnings per share increased 21%, we declared dividends of $0.42 per share and repurchased 4.1 million shares.

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

	ª		higher volumes in both North America and International markets
	ª		a favorable shift in product mix
	ª		improved pricing realization related to the breadth and depth of our product offerings
	ª		contributions from Acres of $56.0 million in revenues and $32.6 million in gross profit

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

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

Significant items affecting comparability of income from continuing operations and related EPS in fiscal 2004 versus the prior year included:

	ª		a loss on the early redemption of our senior notes due May 2009 totaling $77.0 million after tax, or $0.21 per diluted share
	ª		a reduction to our income tax provision primarily related to the utilization of foreign income tax credits totaling $13.9 million or $0.04 per diluted share
	ª		a reduction of $0.03 per diluted share in the current year related to the effect of applying the if-converted method of accounting for our debentures since first meeting the conversion criteria in the second quarter

Discontinued operations related to various Anchor operations divested subsequent to acquisition. See Note 2 of our Consolidated Financial Statements for information about divestitures and discontinued operations.

28

Fiscal 2003 vs Fiscal 2002

IGT also achieved record financial results in fiscal 2003 compared to fiscal 2002, posting revenue growth in both product sales and gaming operations as a result of:

	ª		growth in worldwide product sales driven by increased replacement shipments in North America and greater sales of new and expansion machines
	ª		the inclusion of Anchor and the consolidation of the JV for three additional months in fiscal 2003 compared to fiscal 2002

Improvements in our consolidated product sales gross margin in fiscal 2003 versus fiscal 2002 were a result of:

	ª		operational efficiencies at our Reno manufacturing facility
	ª		a greater mix of North America units
	ª		increased ARPU

Significant fiscal 2002 items affecting comparability of income from continuing operations and related EPS in fiscal 2003 compared to fiscal 2002 included:

	ª		losses on early debt retirement of $13.2 million, net of tax, or $0.04 per diluted share
	ª		charges of $12.6 million, net of tax, or $0.03 per diluted share related to certain litigation settlements

Operating Expenses

Operating expenses as a percent of revenues remained constant in fiscal 2004 versus 2003 and improved over fiscal 2002.

Fiscal 2004 vs Fiscal 2003

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

	ª		the inclusion of Acres which added $32.2 million in operating expenses, including $10.7 million in amortization expense on acquired intangibles
	ª		additional R&D costs to support our commitment to develop innovative games, platforms and systems, as well as our entry into central determination markets
	ª		higher international selling, general and administrative expenses
	ª		changes in foreign currency exchange rates

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

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

Fiscal 2003 vs Fiscal 2002

Fiscal 2003 operating expenses increased over 2002 primarily as the result of:

	ª		the inclusion of Anchor’s operations for twelve months in fiscal 2003 versus nine months in fiscal 2002 which increased all operating expense categories except bad debt
	ª		increased salaries, wages and employee benefit costs including group insurance and performance based incentives
	ª		severance costs of $3.6 million associated with the closing of a former Anchor facility in Bozeman, Montana and staffing reductions in Australia
	ª		our ongoing investment in R&D

29

Other Income (Expense) and Taxes

Fiscal 2004 vs Fiscal 2003

Other expense, net, for fiscal 2004 increased over the prior year due to:

	ª		a pretax loss of $121.0 million on the early redemption of our 2009 senior notes including corresponding interest rate swaps, partially offset by pretax interest savings of $10.6 million
	ª		a pretax loss of $6.9 million on the early redemption of our 2004 senior notes offset by pretax interest savings of $8.2 million

We expect savings of approximately $22.0 million to $26.0 million in fiscal 2005 as the result of the 2009 senior notes early redemption, net of the costs related to the new $200.0 million five-year term loan and the interest income foregone on excess cash invested.

Interest income related to our WAP systems operations totaled $29.8 million in fiscal 2004, $25.7 million in fiscal 2003 and $25.1 million in fiscal 2002. Interest expense related to our WAP systems operations totaled $26.1 million in fiscal 2004, $23.2 million in fiscal 2003 and $21.7 million in fiscal 2002.

Fiscal 2004 results included a $13.9 million reduction to the provision for income taxes primarily due to the utilization of foreign income tax credits resulting from changes to the geographic mix of estimated annual taxable income. Excluding the $13.9 million reduction, our fiscal 2004 annual tax rate on continuing operations was 36.4%. We currently estimate our income tax rate for fiscal 2005 at 36.5%.

Fiscal 2003 vs Fiscal 2002

Other expense, net, decreased in fiscal 2003 compared to fiscal 2002 due to:

	ª		losses on additional early debt redemptions in fiscal 2002, mainly due to the repurchase of Anchor’s senior notes in July 2002
	ª		legal settlement charges of $20.2 million in “other” expenses in fiscal 2002, primarily related to a dispute with a former gaming machine distributor

30

BUSINESS SEGMENT RESULTS

IGT’s operating segments’ profit reflects income from continuing operations before tax, including applicable operating expenses, and 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 for revenues and financial results of our business segments.

North America Division

Fiscal 2004 vs Fiscal 2003

Fiscal 2004 North America product sales revenues, ARPUs and gross profit improved due to:

	ª		increased replacement units
	ª		increased higher-margin gaming systems related revenues, largely related to Acres, which added $56.0 million in revenues and $32.6 million in gross profit
	ª		stronger pricing realization for machines and parts, including theme conversions and retrofits

Additionally, North America product sales gross profit and margin also increased during the current fiscal year as a result of lower material costs coupled with operational efficiencies due to higher volumes.

Total units shipped in fiscal 2004 increased over fiscal 2003 as a result of:

	ª		continued implementation of our EZ Pay™ TITO technology
	ª		our extensive game theme library spanning spinning reel, video reel and video poker product lines
	ª		large shipments in Nevada, Atlantic City and eastern region casinos, including 13,700 units to multiple Harrah’s properties under existing purchase agreements

These unit increases were partially offset by fewer units shipped into the Canadian provinces of Quebec and Saskatchewan.

North America Division segment profit margin improved in fiscal 2004 compared to fiscal 2003 primarily due to increased gross profit margins and operational efficiencies.

We expect North America product sales gross profit margin to run approximately 55% to 57% in fiscal 2005, on the continued strength of stronger price realization, a greater mix of non-machine related revenues and continued material cost reductions and benefits from expansion within existing gaming markets.

31

At the end of fiscal 2004, we estimated 230,000 machines in the market remained ready candidates for TITO technology. We expect replacement demand in North America to continue over the next few years. However, we expect that the record pace experienced in the current fiscal year will slow down, due in large part to the fact that our largest casino customers have already converted approximately 70% of their slot floors, on average, to cashless gaming machines. Additionally, most Canadian provinces have now fulfilled their replacement programs. We anticipate shipments to new and expanding properties will strengthen in fiscal 2005 as a result of planned new property openings and expansions. See Item 1, Business, for a discussion of our product markets.

Fiscal 2004 North America gaming operations revenues and gross profit increased over fiscal 2003 as a result of:

	ª		growth in our installed base
	ª		improvements in our game placement mix toward more WAP and instant winner games which carry better yields
	ª		increased play levels on WAP games across the majority of the North America gaming markets, resulting from new game introductions and a more favorable jurisdictional mix

Our installed base grew in fiscal 2004 compared to fiscal 2003 as a result of:

	ª		entry into several new markets including New York, Alabama, Oklahoma, and Florida
	ª		growth in the casino market due to placements across various Class II and Class III Native American markets, up 1,500 over the prior year
	ª		1,700 additional racino units placed, largely related to the commencement of video lottery operations at four racetracks in New York, as well as increased placements in Rhode Island and Delaware as a result of strong game performance

While the growth of our North America installed base is dependent on growth in the gaming industry, we also continue to focus on strategies to improve revenue yields centered on managing the types of games and jurisdictions where they are placed. Our installed base of higher yielding WAP games increased 1,000 machines compared to the prior year.

The VIE consolidations increased revenues and expenses for the last six months of fiscal 2004 by $23.8 million and reduced quarterly gross margin by approximately 2 pp. The VIE consolidations had no material impact on gross profit dollars or net income.

Additionally, the extra week in the first quarter of fiscal 2004 contributed approximately $19.9 million in revenues and $11.1 million in gross profit.

We expect our consolidated gaming operations gross margin to fluctuate between 53% and 54% for fiscal 2005 depending on the jurisdictional mix and types of games placed, as well as movements in interest rates.

32

Fiscal 2003 vs Fiscal 2002

Fiscal 2003 North America ARPUs improved over fiscal 2002 related to:

	ª		increased non-machine revenues related to gaming systems installations and related parts, game conversion and content fees
	ª		increased EZ Pay™ related royalty and license fees
	ª		the realization of price increases

Fiscal 2003 North America unit shipments increased compared to fiscal 2002 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 versus fiscal 2002. These volume improvements related to:

	ª		continued demand for our EZ Pay™ TITO technology across all major North America markets
	ª		popularity of IGT games, including spinning reel, video poker and video-simulated spinning reel games
	ª		strong replacement sales in the government-operated public gaming markets, namely the Canadian provinces of Quebec and Saskatchewan
	ª		greater sales of new and expansion machines into a majority of casino markets, most significantly in California, New York, Arizona, Nevada and New Jersey

Fiscal 2003 improvements in North America gaming operations revenues and gross profit compared to fiscal 2002 were driven by:

	ª		contributions of Anchor and the consolidation of the JV included for three additional months in fiscal 2003
	ª		increased WAP play levels and enhanced yields per game resulting from new game introductions and a more favorable jurisdictional mix
	ª		decreased jackpot expense related to interest rate increases in the fourth quarter partially offsetting increased costs related to royalties, preventative maintenance, and other direct operating expenses

The growth in our installed base in fiscal 2003 versus fiscal 2002 was driven by:

	ª		increased casino placements concentrated in California, Arizona, New York and Atlantic City
	ª		increased racino placements in Delaware and Rhode Island
	ª		improvements in our game placement mix toward more WAP and instant winner games which carry better yields

The decline in the North America Division segment profit margin was primarily due to the consolidation of the JV gross revenues for the full fiscal year 2003, and nine months in fiscal 2002. In the first quarter of 2002, the JV revenues were recorded net of expenses in earnings of unconsolidated affiliates.

33

International Division

Fiscal 2004 vs Fiscal 2003

Fiscal 2004 international product sales revenues, ARPU, gross profit and margin increased compared to fiscal 2003 primarily due to:

	ª		increased volumes in Japan and Latin America
	ª		increased volumes in Europe, with shipments to new and expanding casinos in Russia, Slovenia, and Greece
	ª		favorable foreign currency exchange rates
	ª		greater mix of higher margin sales in casino markets
	ª		higher software, conversions and parts sales in Australia

The fiscal 2004 growth in international machine shipments was attributable to strong replacement shipments in Japan and increased sales in Latin America and the European casino markets. In Japan, Nobunaga^TM was our highest selling pachisuro game ever at 18,000 units. These increases were offset by fewer shipments in the UK and Australia.

We expect game introductions on new platforms in Japan during fiscal 2005 as a result of our new partnership with the Sammy Corporation, a manufacturer in the pachisuro market. During fiscal 2004 we entered the expanding Russian market and anticipate that our efforts will gain momentum during fiscal 2005. Over the next five years we also foresee other opportunities for international gaming expansion, including the UK, the Asia Pacific regions (including Macau) and Eastern Europe.

International gaming operations revenues are generated primarily from stand alone recurring revenue units. Fiscal 2004 international gaming operations revenues improved over fiscal 2003 primarily due to increased play levels on increased machine placements in Europe and Latin America and favorable foreign currency exchange rates.

Fiscal 2003 vs Fiscal 2002

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:

	ª		increased sales in Europe, with shipments to new or expanding casinos in Holland, Ukraine, Sweden and Portugal
	ª		increased sales in the UK, due to the popularity of new games
	ª		machines shipped into the new gaming market in South Korea

Fiscal 2003 gross profit and margin from international product sales was up over fiscal 2002 despite fewer shipments reflecting:

	ª		increased sales in the higher margin European casino markets
	ª		increased parts and conversion sales in Australia
	ª		favorable foreign currency exchange rates

Fiscal 2003 growth in gaming operations revenues and gross margin over fiscal 2002 were a result of the growth in our installed base and favorable exchange rates.

Fiscal 2002 gross profit and margin included foreign currency exchange rate losses and additional bad debt provisions recorded for Argentina receivables due to the economic instability and currency devaluation in that country.

34

LIQUIDITY AND CAPITAL RESOURCES

Capital Resources

Our principal source of liquidity is cash generated from our operating activities allowing us to reinvest in our business. Our sources of capital also include, but are not limited to, the issuance of public or private placement debt, bank borrowings under our credit facility and the issuance of equity securities.

We expect that our available capital resources will be sufficient to fund our capital expenditures and operating requirements, payments for scheduled debt, dividends, interest and income tax obligations.

Our working capital decreased to $0.9 billion at September 30, 2004 from $1.1 billion at September 30, 2003, predominantly related to cash used for early debt redemptions. Our working capital statistics for fiscal 2004 compared to the prior year included:

	ª		average days sales outstanding improved to 74 days from 100 days, primarily due to significant note and contract payoffs in the current year
	ª		inventory turns increased to 3.8 from 3.7

Cash Flows Summary

Cash Flows From Operations

Cash generated from operations in fiscal 2004 improved over the prior year primarily as a result of increased net income and the timing of receivable collections, including several customer payoffs of contract financing in fiscal 2004. Fiscal 2004 payments to extend our relationship with Sony Pictures Television Inc. for exclusive rights to licensed properties through 2014 partially offset these increases. Fluctuations in payment timing for income taxes offset payment timing for accounts payable and accrued liabilities.

Fiscal year 2003 cash flows from operating activities declined over fiscal 2002 due to:

	ª		payment timing in receivables, related to higher sales volumes and increased contract financing arrangements with new casinos in New York, Nevada, California, Washington and New Mexico
	ª		increased inventories related to increased product demand
	ª		significantly higher tax payments as the result of increased profits, timing of the Anchor acquisition and sales of discontinued operations
	ª		payments to jackpot winners in excess of collections to fund jackpot liabilities

Cash flows related to jackpot liabilities consist of collections to fund and payments of jackpots for all WAP systems. Payments to winners include both installment based and single payments. In fiscal 2004, we reclassified all periods to present cash flows related to funding jackpots from financing activities to operating activities. See Note 1 of our Consolidated Financial Statements for additional information on these reclassifications and how we account for jackpot liabilities.

Net cash flows related to jackpot liabilities represent timing differences between the growth in liabilities for progressive jackpots and the actual payments to the winners during the period. Fluctuations in net cash flows to fund jackpots reflect variations in the timing of the jackpot life cycles, the pattern of winners’ payment elections, and the volume of slot play across all of our progressive systems games.

The consolidation of the progressive systems trust VIEs in Iowa and New Jersey also contributed to the increased cash flow volumes related to jackpot investments and liabilities in fiscal 2004.

35

Cash Flows From Investing

The fluctuation in net cash flows from investing activities in fiscal 2004 versus fiscal 2003 was primarily related to:

	ª		net cash used to acquire Acres of $109.7 million
	ª		additional capital expenditures
	ª		increased cash advances related to new casino development financing
	ª		initial cash consolidation for VIEs of $47.5 million
	ª		receipt of $46.4 million on the Pala note acquired with Anchor

The fluctuation in net cash from investing activities in fiscal 2003 versus fiscal 2002 was primarily due to:

	ª		fiscal 2003 proceeds from the sale of discontinued operations
	ª		cash balances acquired with Anchor in fiscal 2002
	ª		increased loan advances in fiscal 2003 related to new casino properties in New York and California
	ª		additional capital expenditures in fiscal 2003

Investments to fund jackpots relates only to installment based payments to winners. Purchases of these investments occur for the present value of a jackpot when the player wins and elects installment based payments. Proceeds occur as the investments mature, in equal annual installments over a 20 to 26 year period.

Capital Expenditures

Investment in property, plant and equipment increased in fiscal 2004 over 2003, primarily due to the commencement of construction on our new Las Vegas campus consolidating several leased facilities and expansion of our Reno facility. Spending in fiscal 2004 totaled $22.1 million related to these two projects and we plan to invest an additional $96.1 million over the next three years. We invested $3.8 million in fiscal 2004, $4.5 million in fiscal 2003 and $6.0 million in fiscal 2002 to update our internal software systems with an ERP solution.

Our investment in gaming operations equipment increased in the current twelve months compared to fiscal 2003 due to growth in our installed base and leased units, primarily in various Class III Native American markets, as well as growing markets in Florida, New York, Delaware and Alabama. The recent introduction of our AVP™, also contributed to additional costs in gaming operations equipment.

Fiscal 2004 investment in intellectual property increased over fiscal 2003 primarily due to additional purchased patents related to our ongoing commitment to the development of innovative games, platforms and systems. The comparative prior years were revised to reflect the fiscal 2004 presentation, which classifies investment in intellectual property in investing cash flows.

Cash Flows From Financing

The fluctuation in net cash flows used by financing activities in fiscal 2004 compared to fiscal 2003 was primarily the result of:

	ª		the early redemption of our senior notes due May 2004 and May 2009
	ª		three additional quarters of dividend payments in fiscal 2004
	ª		proceeds of $200.0 million for a new term loan in fiscal 2004 versus the proceeds of $575.0 million from the issuance of our debentures in fiscal 2003
	ª		reduced share repurchases in our fiscal 2004

Fiscal 2003 net cash provided by financing activities increased over fiscal 2002 related primarily to:

	ª		proceeds of $575.0 million from our issuance of zero-coupon convertible debentures in January 2003
	ª		reduced share repurchases in fiscal 2003
	ª		early redemption of senior notes used $368.4 million in fiscal 2002

36

Stock Repurchase Plan

Our Board of Directors authorized IGT’s common stock repurchase plan in 1990. The stock repurchase authorization is used to return value to our stockholders and reduce the number of shares outstanding. Our remaining share repurchase authorization, as amended, totaled 35.8 million shares as of September 30, 2004.

We repurchased 4.1 million shares for an aggregate price of $129.8 million in fiscal 2004, 8.4 million shares for an aggregate price of $161.5 million in fiscal 2003, and 14.6 million shares for an aggregate price of $214.0 million in fiscal 2002. The expected timing and amount of our future share repurchases will vary based upon market conditions, securities law limitations and other factors. See Item 5 Part II for additional information regarding these share repurchases.

Credit Facilities and Indebtedness (See Note 8 of our Consolidated Financial Statements)

Senior Credit Facility

IGT entered into a new $1.5 billion senior credit facility (credit facility) with a syndicate of banks on July 1, 2004, replacing the previous credit facility of $260.0 million. The credit facility is structured in two components both with five year maturities:

	ª		a $1.3 billion revolver, of which $4.0 million was reserved for letters of credit at the end of the current fiscal year
	ª		a $200.0 million term loan, funded on July 15, 2004 in conjunction with the early redemption of our 2009 senior notes

The interest rates applicable to the credit facility are based on our public credit ratings and debt to capitalization ratio. Initially these rates were set at LIBOR plus 60.0 basis points (bps) for both the revolver and the term loan. A facility fee of 15.0 bps applies to the entire credit facility. The effective interest rate on the term loan equaled 2.2 percent at September 30, 2004, and reset to 2.67 percent on October 15, 2004.

Financial covenants for the credit facility, as defined in the agreement, include a maximum leverage ratio of 4:1 and a minimum interest coverage ratio of 3:1. The credit facility agreement also includes certain restrictions on our ability to incur new indebtedness, issue guarantees, make acquisitions or grant liens on our assets.

If IGT is not in compliance with the required covenant ratios, an event of default would occur. If not cured, the default event could cause the entire outstanding borrowings under the credit facility to become immediately due and payable, as well as trigger cross default provisions to other debt issues. We were in compliance with all applicable covenants at September 30, 2004.

Foreign Credit Facilities

Our available foreign revolving credit facilities totaled $24.0 million at September 30, 2004 and are subject to annual renewals in January and July.

Senior Convertible Debentures

In a private offering on January 29, 2003, we issued $969.8 million principal amount at maturity of zero-coupon senior convertible debentures due January 29, 2033 (Debentures) for gross proceeds of $575.0 million. Absent a yield adjustment, the Debentures have a yield to maturity of 1.75%. The yield adjustment feature may require IGT to pay contingent cash interest on the Debentures at prevailing market rates to be determined during any six month period commencing on or after January 29, 2006, if the average closing sale prices of our common stock for specified measurement periods is less than or equal to 60% of the accreted conversion price of the Debentures during such specified periods.

Senior Notes

In February 2004, we redeemed our $400.0 million senior notes due May 2004. On July 16, 2004, we redeemed the $569.6 million principal amount outstanding of our 2009 senior notes. Including the cancellation of corresponding interest rate swaps in fiscal 2004, we recognized losses of approximately $127.9 million or $81.4 million, net of tax, on these early debt retirements.

Anchor’s Long-Term Debt

In fiscal 2002, we retired Anchor’s long-term debt of approximately $337.0 million, net of discount and fully repaid and terminated Anchor’s senior credit facility of $89.5 million. We also repurchased all but $103,000 of Anchor’s 9.875% senior subordinated notes due 2008, primarily in a cash tender offer, recognizing a loss of $20.0 million. The remaining Anchor notes were paid off on October 18, 2004.

37

FINANCIAL CONDITION