Edgar Filing: INTERNATIONAL GAME TECHNOLOGY

igt_10q-040211.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended April 2, 2011

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

For the transition period from ____ to ____

Commission File Number 001-10684

International Game Technology

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

9295 Prototype Drive, Reno, Nevada 89521

(Address of Principal Executive Offices)(Zip Code)

Registrant’s Telephone Number, Including Area code: (775) 448-7777

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer [X]	Accelerated filer [ ]	Non-accelerated filer [ ]	Smaller reporting company [ ]
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

The number of shares outstanding of each of the registrant’s classes of common stock, as of May 6, 2011:

299.9 million shares of common stock at $.00015625 par value.

TABLE OF CONTENTS

GLOSSARY OF TERMS AND ABBREVIATIONS (as used in this document)		3

PART I – FINANCIAL INFORMATION

Item 1.	Unaudited Consolidated Interim Financial Statements	4
	CONSOLIDATED INCOME STATEMENTS	5
	CONSOLIDATED BALANCE SHEETS	6
	CONSOLIDATED STATEMENTS OF CASH FLOWS	7
	NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
	FORWARD LOOKING STATEMENTS	31
	OVERVIEW	32
	CONSOLIDATED RESULTS – A Year Over Year Comparative Analysis	35
	BUSINESS SEGMENT RESULTS – A Year Over Year Comparative Analysis	39
	LIQUIDITY AND CAPITAL RESOURCES	41
	RECENTLY ISSUED ACCOUNTING STANDARDS	44
	CRITICAL ACCOUNTING ESTIMATES	44

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44

Item 4.	Controls and Procedures	45

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3.	Defaults Upon Senior Securities	51

Item 4.	(Removed and Reserved)	51

Item 5.	Other Information	51

Item 6.	Exhibits	52

GLOSSARY OF TERMS AND ABBREVIATIONS (as used in this document)

Fiscal dates--as presented:

Fiscal dates--actual:

	March 31, 2011		April 2, 2011
	March 31, 2010		April 3, 2010
	September 30, 2010		October 2, 2010


Abbreviation/term	Definition
Anchor	Anchor Gaming
ARS	auction rate securities
ASU	Accounting Standards Update
5.5% Bonds	5.5% fixed rate notes due 2020
7.5% Bonds	7.5% fixed rate notes due 2019
bps	basis points
CCSC	Colorado Central Station Casino
CEO	chief executive officer
CFO	chief financial officer
CLS	China LotSynergy Holdings, Ltd.
DCF	discounted cash flow
DigiDeal	DigiDeal Corporation
EBITDA	earnings before interest, taxes, depreciation, and amortization
EPA	Environmental Protection Agency
EPS	earnings per share
ERISA	Employee Retirement Income Security Act
FASB	Financial Accounting Standards Board
GAAP	generally accepted accounting principles
IGT, we, our, the Company	International Game Technology and its consolidated entities
IP	intellectual property
IRS	Internal Revenue Service
LIBOR	London inter-bank offering rate
MDA	management’s discussion and analysis of financial condition and results of operations
Notes	3.25% convertible notes due 2014
OSHA	Occupational Safety & Health Administration
pp	percentage points
R&D	research and development
sbX™	IGT’s complete server-based player experience management solution
SEC	Securities and Exchange Commission
SIP	2002 Stock Incentive Plan
UK	United Kingdom
US	United States
UTBs	unrecognized tax benefits
VIE	variable interest entity
WAP	wide area progressive
*	not meaningful (in tables)

PART I – FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Interim Financial Statements

CONSOLIDATED INCOME STATEMENTS		5

CONSOLIDATED BALANCE SHEETS		6

CONSOLIDATED STATEMENTS OF CASH FLOWS		7

SUPPLEMENTAL CASH FLOWS INFORMATION		8

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS		9

1.	BASIS OF PRESENTATION AND CONSOLIDATION	9

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES	9

3.	VARIABLE INTEREST ENTITIES AND AFFILIATES	11

4.	INVENTORIES	12

5.	PROPERTY, PLANT AND EQUIPMENT	12

6.	SHARE-BASED COMPENSATION	12

7.	RECEIVABLES	13

8.	CONCENTRATIONS OF CREDIT RISK	15

9.	GOODWILL AND OTHER INTANGIBLES	15

10.	CREDIT FACILITIES AND INDEBTEDNESS	16

11.	CONTINGENCIES	18

12.	INCOME TAXES	23

13.	EARNINGS PER SHARE	24

14.	OTHER COMPREHENSIVE INCOME	24

15.	FINANCIAL DERIVATIVES	24

16.	FAIR VALUE MEASUREMENTS	26

17.	BUSINESS SEGMENTS	27

18.	DISCONTINUED OPERATIONS	28

19.	SUBSEQUENT EVENTS	30

CONSOLIDATED INCOME STATEMENTS

	Quarters Ended						Six Months Ended
	March 31,						March 31,
	2011			2010			2011			2010
(In millions, except per share amounts)

Revenues
Gaming operations	$	277.6		$	280.1		$	538.3		$	556.8
Product sales		214.7			206.7			418.8			445.1
Total revenues		492.3			486.8			957.1			1,001.9
Costs and operating expenses
Cost of gaming operations		104.7			107.0			200.6			211.0
Cost of product sales		95.6			107.9			188.3			223.2
Selling, general and administrative		92.9			84.7			177.8			172.0
Research and development		51.3			51.1			103.0			96.5
Depreciation and amortization		16.9			18.7			35.1			38.1
Impairment		-			53.1			-			53.1
Total costs and operating expenses		361.4			422.5			704.8			793.9
Operating income		130.9			64.3			252.3			208.0
Other income (expense)
Interest income		13.3			15.4			26.6			31.4
Interest expense		(35.6	)		(39.0	)		(71.0	)		(82.2	)
Other		(1.0	)		0.6			3.2			(0.7	)
Total other income (expense)		(23.3	)		(23.0	)		(41.2	)		(51.5	)
Income from continuing operations before tax		107.6			41.3			211.1			156.5
Income tax provision		38.0			15.6			68.1			55.4
Income from continuing operations		69.6			25.7			143.0			101.1
Income (loss) from discontinued operations, net of tax		-			(25.0	)		0.3			(27.1	)
Net income	$	69.6		$	0.7		$	143.3		$	74.0

Basic earnings (loss) per share
Continuing operations	$	0.23		$	0.08		$	0.48		$	0.34
Discontinued operations		-			(0.08	)		-			(0.09	)
Net income	$	0.23		$	-		$	0.48		$	0.25

Diluted earnings (loss) per share
Continuing operations	$	0.23		$	0.08		$	0.48		$	0.34
Discontinued operations		-			(0.08	)		-			(0.09	)
Net income	$	0.23		$	-		$	0.48		$	0.25

Cash dividends declared per share	$	0.06		$	0.06		$	0.12		$	0.12

Weighted average shares outstanding
Basic		298.4			295.9			298.0			295.5
Diluted		299.9			297.3			299.4			297.7

See accompanying notes

CONSOLIDATED BALANCE SHEETS

	March 31,			September 30,
	2011			2010
(In millions, except par value)
Assets
Current assets
Cash and equivalents	$	305.9		$	158.4
Restricted cash and investment securities		65.4			88.1
Restricted cash and investment securities of VIEs		2.1			2.4
Jackpot annuity investments		49.4			49.5
Jackpot annuity investments of VIEs		15.3			15.6
Accounts receivable, net		318.3			290.3
Current maturities of contracts and notes receivable, net		177.1			184.1
Inventories		106.7			97.6
Deferred income taxes		87.8			84.3
Other assets and deferred costs		157.4			232.1
Total current assets		1,285.4			1,202.4
Property, plant and equipment, net		585.0			586.7
Jackpot annuity investments		287.0			299.1
Jackpot annuity investments of VIEs		59.2			61.7
Contracts and notes receivable, net		133.2			171.9
Goodwill		1,153.0			1,151.6
Other intangible assets, net		179.6			202.1
Deferred income taxes		129.8			136.8
Other assets and deferred costs		170.2			194.7
Total Assets	$	3,982.4		$	4,007.0
Liabilities and Shareholders' Equity
Liabilities
Current liabilities
Accounts payable	$	78.3		$	84.6
Jackpot liabilities, current portion		152.0			179.1
Accrued employee benefits		17.2			23.9
Accrued income taxes		3.3			1.8
Dividends payable		18.0			17.9
Other accrued liabilities		257.8			275.0
Total current liabilities		526.6			582.3
Long-term debt		1,549.1			1,674.3
Jackpot liabilities		374.0			391.8
Other liabilities		148.5			124.3
Total Liabilities		2,598.2			2,772.7
Commitments and Contingencies
Shareholders' Equity
Common stock: $.00015625 par value; 1,280.0 shares authorized; 340.6 and 339.1 issued; 299.4 and 298.1 outstanding		0.1			0.1
Additional paid-in capital		1,508.4			1,473.7
Treasury stock at cost: 41.2 and 41.0 shares		(804.2	)		(802.0	)
Retained earnings		659.2			551.8
Accumulated other comprehensive income		20.7			10.7
Total Equity		1,384.2			1,234.3
Total Liabilities and Shareholders' Equity	$	3,982.4		$	4,007.0

See accompanying notes

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended March 31,	2011			2010
(In millions)
Operating
Net income	$	143.3		$	74.0
Adjustments:
Depreciation and amortization		109.2			120.2
Discounts and deferred issuance costs		22.4			24.3
Share-based compensation		22.9			20.6
Impairment		-			59.8
Excess tax benefits from employee stock plans		(2.8	)		(6.9	)
(Gain) loss on assets sold		(11.9	)		(1.2	)
Other, net		6.2			15.1
Changes in operating assets and liabilities, excluding acquisitions:
Receivables		3.8			25.4
Inventories		(6.2	)		31.9
Other assets and deferred costs		18.1			39.4
Income taxes, net of employee stock plans		50.5			(16.3	)
Accounts payable and accrued liabilities		(35.4	)		(75.2	)
Jackpot liabilities		(56.4	)		(34.4	)
Net operating cash flows		263.7			276.7
Investing
Capital expenditures		(89.3	)		(116.8	)
Proceeds from assets sold		9.2			5.0
Investment securities, net		-			13.1
Jackpot annuity investments, net		26.6			29.3
Changes in restricted cash		23.0			0.2
Loans receivable cash advanced		(0.5	)		(17.7	)
Loans receivable payments received		14.8			3.3
Unconsolidated affiliates, net		16.5			(4.9	)
Business/VIE acquisition/deconsolidation		-			(1.4	)
Net investing cash flows		0.3			(89.9	)
Financing
Debt proceeds		95.0			1,016.5
Debt repayments		(195.0	)		(1,158.4	)
Debt issuance costs		-			(0.1	)
Employee stock plan proceeds		13.9			13.3
Excess tax benefits from employee stock plans		2.8			6.9
Dividends paid		(35.8	)		(35.6	)
Net financing cash flows		(119.1	)		(157.4	)
Foreign exchange rates effect on cash and equivalents		2.6			(4.3	)
Net change in cash and equivalents		147.5			25.1
Beginning cash and equivalents		158.4			146.7
Ending cash and equivalents	$	305.9		$	171.8

See accompanying notes

SUPPLEMENTAL CASH FLOWS INFORMATION

“Depreciation and amortization” reflected in the cash flows statements are comprised of amounts presented separately on the income statements, plus “depreciation and amortization” included in cost of gaming operations, cost of product sales and discontinued operations.

Six Months Ended March 31,	2011			2010
(In millions)

Unconsolidated affiliates
Investment in	$	-		$	(4.9	)
Sales proceeds		16.5			-
Net	$	16.5		$	(4.9	)

Jackpot funding
Change in jackpot liabilities	$	(56.4	)	$	(34.4	)

Jackpot annuity purchases		(3.8	)		(2.6	)
Jackpot annuity proceeds		30.4			31.9
Net change in jackpot annuity investments		26.6			29.3
Net jackpot funding	$	(29.8	)	$	(5.1	)

Capital expenditures
Property, plant and equipment	$	(8.4	)	$	(16.4	)
Gaming operations equipment		(80.2	)		(98.3	)
Intellectual property		(0.7	)		(2.1	)
Total	$	(89.3	)	$	(116.8	)

Payments
Interest	$	37.6		$	47.8
Income taxes		15.7			68.6

Non-cash investing and financing items:
Accrued capital asset additions	$	0.2		$	1.8
Interest accretion for jackpot annuity investments		11.5			12.7

Business acquisitions/purchase price adjustments and VIE deconsolidations
Fair value of assets	$	-		$	(0.8	)
Fair value of liabilities		-			(2.2	)

See accompanying notes

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.	BASIS OF PRESENTATION AND CONSOLIDATION

Our fiscal year is reported on a 52/53-week period ending on the Saturday nearest to September 30 each year. Similarly, our quarters end on the Saturday nearest to the last day of the quarter end month. For simplicity, fiscal periods in this report were presented using the calendar month end as outlined in the table below.

	Period End
	Actual	Presented as
Current quarter	April 2, 2011	March 31, 2011
Prior year quarter	April 3, 2010	March 31, 2010
Prior fiscal year end	October 2, 2010	September 30, 2010

Our consolidated interim financial statements include the accounts of International Game Technology (IGT, we, our, or the Company), including all majority-owned or controlled subsidiaries and VIEs for which we are the primary beneficiary. All appropriate inter-company accounts and transactions have been eliminated.

Our consolidated interim financial statements for the current quarter ended March 31, 2011 have been prepared without audit and certain information and footnote disclosures have been condensed or omitted in conformity with SEC and US GAAP requirements on a basis consistent with the corresponding quarter ended March 31, 2010, and as appropriate, with the audited financial statements for the fiscal year ended September 30, 2010.

Our consolidated interim financial statements include all adjustments of a normal recurring nature necessary to fairly state our consolidated results of operations, financial position, and cash flows for all periods presented. Interim period results are not necessarily indicative of full year results. This quarterly report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended September 30, 2010.

Use of Estimates

Our consolidated interim financial statements are prepared in conformity with US GAAP. 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 for assets, liabilities, revenues, expenses, and related disclosures. Actual results may differ from initial estimates.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Receivables

Allowances for Credit Losses

We maintain allowances for credit losses related to accounts receivable and customer financing where collectability is uncertain. We evaluate the adequacy of our allowances for credit losses on a quarterly basis and consider a number of factors applicable to all of our customer receivables and financing, including customers’ financial condition, historical customer collection experience, receivable aging, economic conditions, legal environment, and regulatory landscape.

Customer Financing

Our customer financing portfolio is comprised of two classes, contracts and notes. Our contracts include extended payment terms granted to qualifying customers for periods from one to five years and are secured by the related products sold. Our notes consist of development financing loans granted to select customers to assist in the funding of new or expanding gaming facilities, generally under terms of one to seven years and are secured by the developed property and/or other assets. Interest income on contracts and notes is recognized at prevailing market rates.

We place an internally assigned risk grade on each contract and note in our customer financing portfolio. Internally assigned risk grades fall into three categories (low, medium, high), based on a number of factors, including customer size, type, financial condition, historical collection experience, account aging, and credit ratings derived from credit reporting agencies and other industry trade reports. The high risk category includes most of our development financing loans in new markets and customers in regions with a history of currency or economic instability, such as South/Central America. Many of our high risk loans are performing according to contract and do not warrant an allowance. Internally assigned risk grades on each contract and note are evaluated on a quarterly basis.

Customer financing is classified as past due when a scheduled payment is not received within 30 days of a payment notice. Initially customer financing with past due payments are collectively evaluated for impairment. Contracts and notes are evaluated individually for impairment (specific reserves) when collectability becomes uncertain due to events and circumstances, such as bankruptcy and tax or legal issues, that cause an adverse change in a customer’s cash flows or financial condition. Accounts placed on specific reserve are simultaneously evaluated for probability of collection, which is used to determine the amount of the specific reserve. All changes in the net carrying amount of our contracts and notes are recorded as adjustments to bad debt expense or impairment.

When collection is deemed unlikely (typically reserved at 50% or greater) during our quarterly review as discussed above, the contract or note is placed on nonaccrual status and interest income is recognized on a cash basis. Uncollectible contracts or notes are written off when all reasonable collection efforts have been exhausted and it is determined that there is minimal chance of any kind of recovery, such as a customer property closure, bankruptcy restructuring or finalization, or other conditions that severely impact a customer’s ability to repay amounts owed.

Recently Adopted Accounting Standards or Updates

Credit Quality of Financing Receivables and Allowances for Credit Losses

At the beginning of fiscal 2011, we adopted accounting standards issued in July 2010 to address the FASB concerns about the sufficiency, transparency, and robustness of credit risk disclosures for financing receivables and the related allowances for credit losses. The required information is designed to enable a better understanding of:

·	the nature of credit risk inherent in our portfolio of financing receivables

·	how credit risk is analyzed to determine the allowances for credit losses

·	changes in and reasons for changes in the allowances for credit losses

These ASU disclosures were effective for our first quarter of fiscal 2011, except for allowance roll-forward disclosures effective with our second quarter of fiscal 2011 and troubled debt restructuring disclosures effective with reporting for our fiscal year ending September 30, 2011. The adoption of this ASU did not and will not have a material impact on our results of operations, financial position, or cash flow. See Note 2 above and Note 7.

Consolidation of Variable Interest Entities

At the beginning of fiscal 2011, we adopted accounting standards issued in June 2009, which require reassessment of our primary beneficiary position in VIE arrangements on an on-going basis and adds further disclosures about our involvement in VIEs. The revised standard also replaces the quantitative-based risks and rewards approach with a qualitative approach focused on determining which enterprise has the power to direct VIE activities that most significantly impact its economic performance and is obligated to absorb losses or has the rights to receive the most significant benefit from the VIE. The adoption of this ASU did not have a material impact on our results of operations, financial position, or cash flows.

Recently Issued Accounting Standards or Updates—Not Yet Adopted

Fair Value Measurement Disclosures

In January 2010, the FASB issued an ASU which will require supplemental disclosures related to purchases, sales, issuances, and settlements of fair value instruments within the Level 3 reconciliation. This ASU will be effective for our first quarter of fiscal 2012 and is not expected to have a material impact on our financial statements.

Accruals for Casino Jackpot Liabilities

In April 2010, the FASB issued an ASU clarifying that jackpot liabilities should not be accrued before they are won if the payout can be avoided. The ASU will be applied prospectively with a cumulative-effect adjustment in retained earnings at the beginning of our first quarter of fiscal 2012. We continue to evaluate the extent to which this guidance will impact our results of operations, financial position, or cash flows.

Troubled Debt Restructuring

In April 2011, the FASB issued an ASU to modify the way creditors identify and disclose troubled debt restructurings. The ASU will be effective for our fiscal year ending September 30, 2011 and must be applied retrospectively to the beginning of fiscal 2011. This ASU is not expected to have a material impact on our financial statements.

3.	VARIABLE INTEREST ENTITIES AND AFFILIATES

Variable Interest Entities

New Jersey regulation requires that annuitized WAP jackpot payments to winners be administered through an individual trust set up for each WAP system. These trusts are VIEs. We determined that IGT was the primary consolidating beneficiary, because these VIE trusts are designed for the sole purpose of administering jackpot payments for IGT WAP winners and IGT guarantees all liabilities of the trusts. The assets of these consolidated VIEs can only be used to settle trust obligations and have been segregated on our balance sheet.

The consolidation of these VIEs primarily increases jackpot liabilities and related assets, as well as interest income and equivalent offsetting interest expense. Consolidated VIE trust assets and equivalent liabilities totaled $76.6 million at March 31, 2011 and $79.7 million at September 30, 2010.

Investments in Unconsolidated Affiliates

China LotSynergy Holdings, Ltd.

During the first quarter of fiscal 2011, we sold our CLS stock investment for net proceeds of $16.5 million and recognized a gain of $4.3 million.

At March 31, 2011, the fair value of our CLS convertible note and default put derivative together totaled $21.4 million. The adjusted cost basis of the note, including the conversion option, totaled $19.8 million. We determined that the conversion option did not qualify as a freestanding derivative requiring bifurcation at March 31, 2011. See Note 15 and Note 16 for additional information about CLS derivatives and fair value assumptions.

4.	INVENTORIES

	March 31,		September 30,
	2011		2010
(In millions)
Raw materials	$	61.2	$	54.5
Work-in-process		4.1		3.9
Finished goods		41.4		39.2
Total	$	106.7	$	97.6

5.	PROPERTY, PLANT AND EQUIPMENT

	March 31,			September 30,
	2011			2010
(In millions)
Land	$	62.7		$	62.7
Buildings		231.0			230.9
Leasehold improvements		15.9			14.6
Machinery, furniture and equipment		293.3			286.0
Gaming operations equipment		810.1			804.9
Total		1,413.0			1,399.1
Less accumulated depreciation		(828.0	)		(812.4	)
Property, plant and equipment, net	$	585.0		$	586.7

6.	SHARE-BASED COMPENSATION

The amount, frequency, and terms of share-based awards may vary based on competitive practices, operating results, and government regulations. SIP grants generally vest over three to five years, either in ratable annual increments or 100% at the end of the vesting period. New shares of IGT common stock are issued upon exercises of stock options, vesting of restricted share units, or restricted share grants. Our current practice is generally to grant restricted share awards in the form of units without dividends. Forfeitures occur primarily when employment is terminated prior to vesting.

At March 31, 2011, 25.5 million shares were available for grant under the IGT SIP. Each restricted share or unit counts as two shares against this allowance beginning January 11, 2011. Unrecognized costs related to share-based awards outstanding at March 31, 2011 totaled $95.9 million and are expected to be recognized over a weighted average period of 1.9 years.

SIP Activity As Of And For The Six Months Ended March 31, 2011

				Weighted Average
						Remaining		Aggregate
				Exercise		Contractual		Intrinsic
Options	Shares			Price		Term		Value
	(thousands)			(per share)		(years)		(millions)
Outstanding at beginning of fiscal year		16,843		$	21.38
Granted		4,671			15.71
Exercised		(573	)		11.37
Forfeited		(999	)		17.54
Expired		(649	)		32.01
Outstanding at end of period		19,293		$	20.14		6.1	$	21.1

Vested and expected to vest		18,817		$	20.24		6.0	$	20.5

Exercisable at end of period		9,468		$	24.05		3.6	$	8.3

				Weighted Average
				Grant		Remaining		Aggregate
				Date		Vesting		Intrinsic
Restricted Shares/Units	Shares			Fair Value		Period		Value
	(thousands)			(per share)		(years)		(millions)
Outstanding at beginning of fiscal year		2,368		$	18.88
Granted		2,584			14.18
Vested		(762	)		20.62
Forfeited		(342	)		16.32
Outstanding at end of period		3,848		$	15.63		2.0	$	62.8

Expected to vest		3,619		$	15.68		2.2	$	59.0

7.	RECEIVABLES

See Note 2 regarding our accounting policies for accounts receivable, customer financing and allowances for credit losses. Our allowances for accounts receivable totaled $22.4 million at March 31, 2011 and $24.6 million at September 30, 2010.

Customer Financing (Contracts and Notes)

	March 31, 2011						September 30, 2010
	Recorded Investment		Allowance		Net		Recorded Investment		Allowance		Net
(In millions)
Current maturities	$	220.8	$	43.7	$	177.1	$	223.9	$	39.8	$	184.1
Non-current		167.5		34.3		133.2		210.5		38.6		171.9
Total	$	388.3	$	78.0	$	310.3	$	434.4	$	78.4	$	356.0

Customer Financing Information At March 31, 2011

Recorded Investment (principal and interest due, net of deferred interest and fees)	Total
(In millions)
Individually evaluated for impairment	$	124.0
Collectively evaluated for impairment		264.3
Total recorded investment	$	388.3

Allowances for Credit Losses	Total
(In millions)

Beginning balance	$	78.4
Charge-offs		(1.0	)
Recoveries		0.4
Provision		0.2
Ending balance	$	78.0

Individually evaluated for impairment	$	64.9
Collectively evaluated for impairment		13.1
Total allowances for credit losses	$	78.0

Age Analysis of Recorded Investment	Contracts		Notes		Total
(In millions)
Past Due:
1-29 days	$	4.7	$	2.0	$	6.7
30-59 days		3.0		1.6		4.6
60-89 days		0.8		1.8		2.6
Over 90 days		6.7		26.3		33.0
Total past due	$	15.2	$	31.7	$	46.9
Current		187.2		154.2		341.4
Total recorded investment	$	202.4	$	185.9	$	388.3

Customer financing recorded investment:
Over 90 days and accruing interest	$	1.7	$	0.1	$	1.8
Nonaccrual status (not accruing interest)		13.1		91.2		104.3

Recorded Investment by Credit Quality Indicator Credit Profile by Internally Assigned Risk Grade	Contracts		Notes		Total
(In millions)
Low	$	53.6	$	0.2	$	53.8
Medium		29.3		1.7		31.0
High (1)		119.5		184.0		303.5
Total recorded investment	$	202.4	$	185.9	$	388.3

(1) See Alabama discussion below.

Impaired loans	Contracts		Notes		Total
(In millions)
Recorded investment	$	9.0	$	91.2	$	100.2
Unpaid principal face		8.9		92.3		101.2
Related allowance		5.4		59.5		64.9
Average recorded investment		10.7		92.6		103.3

Interest income recognized:
Quarter-to-date
Total	$	0.2	$	-	$	0.2
Cash-basis		-		-		-
Year-to-date
Total	$	0.5	$	0.3	$	0.8
Cash-basis		-		0.3		0.3

Alabama Impairment

The legality of electronic charitable bingo in Alabama was challenged during fiscal 2010 and properties where IGT had placed machines remain closed at March 31, 2011. In the second quarter of fiscal 2010, $53.1 million of impairment was recognized related to Alabama charitable bingo market closures, which included note allowances of $47.6 million, accounts receivable allowances of $2.8 million, and gaming operations equipment impairment of $2.7 million. Further Alabama impairment of $8.2 million was recognized in the fourth quarter of fiscal 2010, including note allowances of $4.3 million and equipment impairment of $3.9 million.

At March 31, 2011, the recorded investment of impaired Alabama development financing loans totaled $83.9 million and related allowances totaled $51.9 million. Revenues or interest income related to these assets were recorded on a cash basis since the second quarter of fiscal 2010 as collectability was not reasonably assured.

8.	CONCENTRATIONS OF CREDIT RISK

Our receivables were concentrated in the following legalized gaming regions at March 31, 2011:

North America
Nevada	10	%
Oklahoma	6
Alabama	5
Other (less than 5% individually)	29
	50	%

International
Argentina	24	%
Europe	12
Australia	5
Other (less than 5% individually)	9
	50	%

9.	GOODWILL AND OTHER INTANGIBLES

Goodwill

Activity by Segment	North
For The Six Months Ended March 31, 2011	America		International		Total
(In millions)
Beginning balance	$	1,042.8	$	108.8	$	1,151.6
Accumulated impairment charges		-		-		-
Adjusted goodwill		1,042.8		108.8		1,151.6

Foreign currency/purchase price adjustment		-		1.4		1.4
Ending balance	$	1,042.8	$	110.2	$	1,153.0

Other Intangibles

During the six months ended March 31, 2011, we capitalized $0.7 million of patent legal costs with a weighted average life of 5 years.

	March 31, 2011						September 30, 2010
			Accumulated						Accumulated
	Cost		Amortization		Net		Cost		Amortization		Net
(In millions)
Patents	$	382.6	$	251.3	$	131.3	$	387.3	$	238.8	$	148.5
Developed technology		76.0		50.0		26.0		75.9		46.7		29.2
Contracts		26.2		19.0		7.2		26.2		17.9		8.3
Reacquired rights		13.5		1.6		11.9		13.4		1.0		12.4
Customer relationships		8.8		6.1		2.7		8.8		5.7		3.1
Trademarks		3.5		3.0		0.5		3.5		2.9		0.6
Total	$	510.6	$	331.0	$	179.6	$	515.1	$	313.0	$	202.1

Aggregate amortization expense totaled $11.0 million in the current quarter versus $12.5 million in the prior year quarter, and $23.3 million in the six months ended March 31, 2011 versus $25.2 million for the prior year period.

	2011	2012	2013	2014	2015
(In millions)
Estimated annual amortization	$45.2	$38.4	$35.0	$30.9	$21.9

10.	CREDIT FACILITIES AND INDEBTEDNESS

	March 31,			September 30,
Outstanding debt at	2011			2010
(In millions)
Old Domestic credit facility	$	-		$	100.0
3.25% Convertible Notes		850.0			850.0
7.5% Bonds		500.0			500.0
5.5% Bonds		300.0			300.0
Total principal		1,650.0			1,750.0
3.25% Convertible Notes discount		(109.0	)		(124.1	)
7.5% Bonds discount		(2.4	)		(2.5	)
5.5% Bonds discount		(1.2	)		(1.2	)
7.5% Swap fair value adjustment		15.9			33.9
5.5% Swap fair value adjustment		(4.2	)		18.2
Total outstanding debt, net	$	1,549.1		$	1,674.3

IGT was in compliance with all applicable debt covenants at March 31, 2011. Embedded features of all debt agreements were evaluated and did not require bifurcation at March 31, 2011.

Old Domestic Credit Facility

At March 31, 2011, no amounts were drawn on our domestic revolving credit facility, $1.2 billion was available, $16.7 million was reserved for letters of credit and performance bonds, the interest rate was LIBOR plus 260 bps, and the facility fee was 65 bps.

The size of our domestic credit facility was reduced by $238.0 million concurrent with the maturity of the non-extended portion on December 19, 2010 and by $42.0 million on December 30, 2010 with payment in full of the term loan issued upon conversion of 50% of amounts outstanding on December 19, 2010.

Subsequent to March 31, 2011, the old domestic credit facility was replaced with our new domestic credit facility described below.

New Domestic Credit Facility

On April 14, 2011, we entered into a new unsecured $750.0 million domestic credit facility with a syndicate of banks replacing the old domestic credit facility of $1.2 billion. The new facility provides a $750.0 million revolving line of credit, of which up to $100.0 million is available for letters of credit and up to $50.0 million is available for swingline borrowing. We may request to increase the new facility size by an additional $250.0 million at any time during its term, subject to lenders’ discretion. The new facility matures on April 14, 2016, at which time all amounts outstanding are immediately due and payable.

The new facility interest rates and facility fees are more favorable than those of the old facility and are based on our public debt ratings or our Net Funded Debt to EBITDA ratio, whichever is more favorable to IGT. Net Funded Debt is defined as debt minus any unrestricted cash and investments in excess of $150.0 million. The initial interest rate was LIBOR plus 122.5 bps on borrowings with a facility fee of 27.5 bps at the Baa2/BBB pricing level. Additional debt issuance costs of approximately $4.5 million will be capitalized together with $9.8 million of deferred offering costs remaining from the old facility and amortized to interest expense over the new facility term.

The new domestic credit facility carries no limitations on share repurchases or dividend payments, presuming no event of default. The following new facility covenants are less restrictive than those under the old facility (all terms as defined per the new facility):

·	a minimum ratio of 3.00 adjusted EBITDA to interest expense (interest coverage ratio)

·	a maximum ratio of 3.50 for net funded debt to adjusted EBITDA (net funded debt leverage ratio)

·	certain restrictions on our ability to:

§	pledge the securities of our subsidiaries

§	permit our subsidiaries to incur or guaranty additional debt, or enter into swap agreements

§	incur liens

§	merge with or acquire other companies, liquidate or dissolve

§	sell, transfer, lease or dispose of all or substantially all assets

§	change the nature of our business

The new facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including failure to make timely principal and interest payments or satisfy the covenants. An event of default, if not cured, could cause the entire outstanding borrowings under the credit facility to become immediately due and payable, lenders may cease making loans and/or terminate commitments, and cross default provisions may be triggered in other debt issuances.

Foreign Credit Facilities

At March 31, 2011, $10.4 million was available and nothing was drawn under our revolving credit facility in Australia, which generally renews annually with maturity in February and is guaranteed by the parent company, International Game Technology.

Convertible Debt

	Quarters Ended				Six Months Ended
	March 31,				March 31,
	2011		2010		2011		2010
(In millions)

3.25% Convertible Notes
Contractual interest expense	$	6.9	$	6.9	$	13.8	$	13.8
Discount amortization		7.6		6.9		15.0		13.8
Remaining discount amortization period	3.1 years

2.6% Convertible Debentures
Contractual interest expense	$	-	$	-	$	-	$	3.8
Discount amortization		-		-		-		2.7

Bonds

Interest rate swaps executed in conjunction with our Bonds are described in Note 15.

11.	CONTINGENCIES

Litigation

IGT has been named in and has brought lawsuits in the normal course of business. We do not expect the outcome of these suits, including the lawsuits described below, to have a material adverse effect on our future results of operations, financial position, or cash flows.

Bally

2004 Federal District Court of Nevada

On December 7, 2004, IGT filed a complaint in US District Court for the District of Nevada, alleging that defendants Alliance Gaming Corp., Bally Gaming Int'l, Inc., and Bally Gaming, Inc. infringed six US patents held by IGT: US Patent Nos. 6,827,646; 5,848,932; 5,788,573; 5,722,891; 6,712,698; and 6,722,985. On January 21, 2005, defendants filed an answer denying the allegations in the complaint and raising various affirmative defenses to IGT's asserted claims. Defendants also asserted fourteen counterclaims against IGT, including counterclaims for a declaratory judgment of non-infringement, invalidity, and unenforceability of the asserted patents, and for antitrust violations and intentional interference with prospective business advantage. IGT successfully moved for partial summary judgment on defendants’ counterclaims for intentional interference with prospective business advantage and defendants’ antitrust allegations related to the gaming machine market. IGT denies the remaining allegations.

On May 9, 2007, the Court issued an order construing disputed terms of the asserted patent claims. On October 16, 2008, the Court issued summary judgment rulings finding certain of IGT’s patents, including patents that IGT believes cover bonus wheel gaming machines, invalid as obvious. The rulings also found that Bally was not infringing certain patents asserted by IGT. Bally’s antitrust and unfair competition counterclaims remain pending. On November 7, 2008, the Court issued an order staying the proceedings and certifying the summary judgment and claim construction rulings for immediate appeal.

On December 1, 2008, IGT appealed the rulings to the US Court of Appeals for the Federal Circuit. On January 8, 2009, Bally moved to dismiss the appeal on jurisdictional grounds. On February 2, 2009, the Federal Circuit denied the Bally motion without prejudice to the parties raising jurisdictional issues in their merits briefs. On October 22, 2009, the Federal Circuit affirmed the District Court’s summary judgment rulings. On December 7, 2009, Bally filed a motion to lift the stay and schedule a trial on the remaining issues. At the February 1, 2010 hearing on the motion, the Court indicated that it would revisit earlier motions for summary judgment on the issues not addressed on appeal, including IGT’s motions for summary judgment on Bally’s antitrust and unfair competition counterclaims.

On November 29, 2010, the Court granted summary judgment in favor of IGT on all antitrust and unfair competition counterclaims by Bally and dismissed all other remaining claims. Bally has appealed the grant of summary judgment.

2006 Federal District Court of Delaware

On April 28, 2006, IGT filed a complaint in US District Court for the District of Delaware, alleging that defendants Bally Technologies, Inc., Bally Gaming Int'l, Inc., and Bally Gaming, Inc. infringed nine US patents held by IGT: US Patent Nos. RE 38,812; RE 37,885; 6,832,958; 6,319,125; 6,244,958; 6,431,983; 6,607,441; 6,565,434; and 6,620,046. The complaint alleges that the “BALLY POWER BONUSING™” technology infringes one or more of the claims of the asserted IGT patents. The lawsuit seeks monetary damages and an injunction.

On June 30, 2006, defendants filed an answer denying the allegations in the complaint and raising various affirmative defenses to IGT’s asserted claims. Defendants also asserted twelve counterclaims against IGT, including counterclaims for a declaratory judgment of non-infringement, invalidity, and unenforceability of the asserted patents, antitrust violations, unfair competition, and intentional interference with prospective business advantage. IGT denies these allegations. Pursuant to stipulation of the parties, all claims and counterclaims, except those relating to US Patent Nos. RE 37,885 ("the '885 patent"), RE 38,812 ("the '812 patent"), and 6,431,983, have been dismissed. All proceedings relating to Bally’s antitrust, unfair competition, and intentional interference counterclaims have been stayed.

On April 28, 2009, the court issued a summary judgment ruling finding the '885 and '812 patents valid. The court also ruled that Bally's "Power Rewards" and "ACSC Power Winners" products infringe certain claims of the '885 and '812 patents. The court granted Bally's motion for summary judgment that Bally's "SDS Power Winners" does not infringe the '885 patent and "Power Bank" and "Power Promotions" do not infringe the '983 patent. The court denied Bally's motion for summary judgment that the '983 patent is invalid. The parties have agreed that Bally's counterclaim for a declaratory judgment on invalidity of the '983 patent will be dismissed without prejudice. IGT’s motion for a permanent injunction against Bally’s infringing products was denied.

On April 28, 2010, the court entered an order dismissing without prejudice Bally’s remaining counterclaims (antitrust, unfair competition and intentional interference with business relationships) and entered final judgment in favor of IGT and against the Bally defendants. An appeal from the liability judgment is proceeding. A trial to determine the amount of damages incurred by IGT, and related matters, as a result of Bally's infringement has not yet been scheduled.

Aristocrat

2006 Northern Federal District Court of California

On June 12, 2006, Aristocrat Technologies Australia PTY Ltd. and Aristocrat Technologies, Inc. filed a patent infringement lawsuit against IGT. Aristocrat alleged that IGT willfully infringed US Patent No. 7,056,215, which issued on June 6, 2006. On December 15, 2006, Aristocrat filed an amended complaint, adding allegations that IGT willfully infringed US Patent No. 7,108,603, which issued on September 19, 2006. The IGT products named in the original and amended complaints were the Fort Knox® mystery progressive slot machines. On June 13, 2007, the US District Court for the Northern District of California entered an order granting summary judgment in favor of IGT declaring both patents invalid. The US Court of Appeals for the Federal Circuit reversed this decision on September 22, 2008. IGT’s request for a rehearing was denied on November 17, 2008.

This case recommenced in the District Court and on May 13, 2010, the District Court entered an order granting IGT’s motion for summary judgment of non-infringement. Aristocrat is appealing this judgment. Proceedings on IGT’s claim that Aristocrat committed inequitable conduct in reviving a related patent application are continuing in the District Court. A trial was held the week of April 4, 2011 on the inequitable conduct issues and a decision is pending.

2010 Central Federal District Court of California

On November 15, 2010, IGT filed a complaint in the US District Court for the Central District of California against Aristocrat Leisure Limited of Australia and its US affiliate Aristocrat Technologies, Inc. (collectively “Aristocrat”) seeking a preliminary and permanent injunction and damages for the infringement of US Patent No. 6,620,047 (the “’047 patent”) and US Patent No. RE 39,370 (the “’370 patent”) in violation of 35 U.S.C. section 271.

On January 28, 2011, IGT asserted an additional claim against Aristocrat for infringement of US Patent No 7,063,615 (the “’615 patent”) seeking similar relief. IGT asserts that Aristocrat infringes on the ‘047, the ‘370, and the ‘615 patents in connection with the sale and distribution of gaming devices, including the Viridian WS slot machine, without authorization or license from IGT. Aristocrat has denied infringement, filed various affirmative defenses and counterclaimed for patent invalidity. A pretrial schedule has been set and the case is proceeding. Trial is set for June 12, 2012.

Rice (formerly Piercey) v Atlantic Lotteries

In May 2010, Atlantic Lotteries commenced an action against International Game Technology, VLC, Inc. and IGT-Canada, wholly-owned subsidiaries of International Game Technology, and other manufacturers of video lottery machines in the Supreme Court of New Foundland and Labrador seeking indemnification for any damages that may be awarded against Atlantic Lotteries in a class action suit also filed in the Supreme Court of New Foundland and Labrador. A motion for class certification has been filed by plaintiff but has not yet scheduled for argument. In the interim, plaintiff has filed a motion to preclude the third party defendants from participating on the motion to certify. By a decision and order, dated April 28, 2011, the Court denied plaintiff’s motion to preclude third party defendants from participating on the motion to certify.

Shareholder Actions

Securities Class Action

On July 30, 2009, International Brotherhood of Electrical Workers Local 697 filed a putative securities fraud class action in the US District Court for the District of Nevada, alleging causes of action under Sections 10(b) and 20(a) of the Securities Exchange Act against IGT and certain of its current and former officers and directors. The complaint alleges that between November 1, 2007 and October 30, 2008, the defendants inflated IGT's stock price through a series of materially false and misleading statements or omissions regarding IGT's business, operations, and prospects. In April 2010, plaintiffs filed an amended complaint. In March 2011, defendants’ motion to dismiss that complaint was granted in part and denied in part. The Court found that the allegations concerning statements about the seasonality of game play levels and announcements of projects with Harrah’s and City Center were sufficient to state a claim. Plaintiffs did not state a claim based on the remaining statements about earnings, operating expense, or forward-looking statements about play levels and server-based technology. No pre-trial schedule has been set.

Derivative Actions

Between August 20, 2009 and September 17, 2009, the Company was nominally sued in a series of derivative lawsuits filed in the US District Court for the District of Nevada, captioned Fosbre v. Matthews et al., Case No. 3:09-cv-00467; Calamore v. Matthews et al., Case No. 3:09-cv-00489; Israni v. Bittman, et al., Case No. 3:09-cv-00536; and Aronson v. Matthews et al., Case No. 3:09-cv-00542. Plaintiffs purportedly brought their respective actions on behalf of the Company. The complaints asserted claims against various current and former officers and directors of the Company, for breaches of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and contribution and indemnification. The complaints sought an unspecified amount of damages and allege similar facts as the securities class action lawsuit.

The complaints additionally alleged that certain individual defendants engaged in insider trading and that the director defendants improperly handled Thomas J. Matthews’ resignation as Chief Executive Officer of the Company. The actions were consolidated and subsequently a consolidated derivative complaint was filed in December 2009. Defendants moved to dismiss that complaint. On July 6, 2010, the Court granted the defendants’ motion to dismiss, with leave to amend. After plaintiffs elected not to amend, the court entered judgment in favor of the defendants. The plaintiff in Israni v. Bittman, et al. has appealed.

On September 30, 2009, the Company was nominally sued in a derivative lawsuit filed in the Second Judicial District Court of the State of Nevada, County of Washoe. Plaintiff purportedly filed the action on behalf of the Company. The lawsuit, captioned Kurz et al. v. Hart et al., Case No. cv-0-9-02982, asserted claims against various current and former officers and directors for breach of fiduciary duties and unjust enrichment. The complaint generally made the same allegations as the federal derivative complaints and seeks an unspecified amount of damages. The action was dismissed by stipulation of the parties.

In a letter dated October 7, 2009 to the Company’s Board of Directors, a shareholder made factual allegations similar to those set forth in the above derivative and securities class actions and demanded that the Board investigate, address and remedy the harm allegedly inflicted on IGT. In particular, the letter alleged that certain officers and directors grossly mismanaged the Company by overspending in the area of R&D of server-based game technology despite a looming recession to which the Company was particularly vulnerable; by making or allowing false and misleading statements regarding the Company’s growth prospects and earnings guidance; and by wasting corporate assets by causing the Company to repurchase Company stock at inflated prices. The letter asserts that this alleged conduct resulted in breaches of fiduciary duties and violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5. On July 9, 2010, the shareholder filed a derivative lawsuit filed in the US District Court for the District of Nevada, captioned Sprando v. Hart, et al., Case No. 3:10-cv-00415 and asserting claims similar to those described above. No claims were asserted against the Company, which is a nominal defendant. Motions to dismiss have been filed.

In February 2011, another shareholder sent a demand letter to the Company’s Board of Directors requesting that the Board investigate, address and remedy allegations similar to those set forth in the derivative actions described above. On April 8, 2011, the Company was nominally sued in a derivative complaint filed in the US District Court for the District of Nevada, captioned Arduini v. Hart, et al., Case No. 3:11-cv-00255. The claims and allegations in this complaint are similar to those asserted in the securities class action and derivative actions described above. A motion to dismiss has been filed.

ERISA Actions

On October 2, 2009, two putative class action lawsuits were filed on behalf of participants in the Company’s employee pension plans, naming as defendants the Company, the IGT Profit Sharing Plan Committee, and several current and former officers and directors. The actions, filed in the US District Court for the District of Nevada, are captioned Carr et al. v. International Game Technology et al., Case No. 3:09-cv-00584, and Jordan et al. v. International Game Technology et al., Case No. 3:09-cv-00585. The actions were consolidated. The consolidated complaint (which seeks unspecified damages) asserts claims under the Employee Retirement Income Security Act, 29 U.S.C §§ 1109 and 1132.

The consolidated complaint is based on allegations similar to those in the securities and derivative lawsuits described above, and further alleges that the defendants breached fiduciary duties to Plan Participants by failing to disclose material facts to Plan Participants, failing to exercise their fiduciary duties solely in the interest of the Participants, failing to properly manage Plan assets, and permitting Participants to elect to invest in Company stock. In March 2011, defendants’ motion to dismiss the consolidated complaint was granted in part and denied in part. No pre-trial schedule has been set.

Environmental Matters

CCSC, a casino operation sold by IGT in April 2003, is located in an area that has been designated by the EPA as an active Superfund site because of contamination from historic mining activity in the area. In order for Anchor Coin, an entity IGT acquired in December 2001, to develop the CCSC site, it voluntarily entered into an administrative order of consent with the EPA to conduct soil removal and analysis (a requirement imposed on similarly situated property developers within the region) in conjunction with re-routing mine drainage. The work and obligations contemplated by the agreement were completed by Anchor in June 1998, and the EPA subsequently issued a termination of the order.

The EPA, together with other property developers excluding CCSC, continues remediation activities at the site. While we believe our remediation obligations are complete, it is possible that additional contamination may be identified and we could be obligated to participate in remediation efforts. Under accounting guidance for environmental remediation liabilities, we determined the incurrence of additional remediation costs is neither probable nor reasonably estimable and no liability has been recorded.

OSHA / Wrongful Termination Matter

On July 8, 2004, two former employees filed a complaint with the US Department of Labor, OSHA alleging retaliatory termination in violation of the Sarbanes-Oxley Act of 2002. The former employees allege that they were terminated in retaliation for questioning whether Anchor and its executives failed to properly disclose information allegedly affecting the value of Anchor's patents in connection with IGT's acquisition of Anchor in December 2001. The former employees also allege that the acquired patents were overvalued on the financial statements of IGT. Outside counsel, retained by an independent committee of our Board of Directors, reviewed the allegations and found them to be entirely without merit.

On November 10, 2004, the employees withdrew their complaint filed with OSHA and filed a notice of intent to file a complaint in federal court. On December 1, 2004, a complaint was filed under seal in the US District Court for the District of Nevada, based on the same facts set forth above regarding their OSHA complaint. IGT filed a motion for summary judgment as to all claims in plaintiffs’ complaint. On June 14, 2007, the US District Court for the District of Nevada entered an order granting summary judgment in favor of IGT as to plaintiffs’ Sarbanes-Oxley whistle-blower claims and dismissed their state law claims without prejudice. Plaintiffs’ motion for reconsideration of the District Court’s decision was denied.

Plaintiffs appealed to the US Court of Appeals for the Ninth Circuit. Oral argument was heard on March 12, 2009, and on August 3, 2009, the Ninth Circuit reversed the District Court’s decision. IGT’s motion for summary judgment on plaintiffs’ state law claims was argued on October 22, 2009 and granted in IGT’s favor on December 8, 2009. On April 13, 2010, the District Court granted IGT’s motion to strike the plaintiffs’ jury demand and granted IGT’s motion to retax costs and fees. It denied plaintiffs’ motion for certification and/or reconsideration.

On February 8, 2011, a jury verdict was entered in favor of the plaintiffs as to their Sarbanes-Oxley claims and awarded damages in an amount equal to approximately $2.2 million, which we have accrued. On March 9, 2011, IGT filed its Renewed Motion for Judgment as a Matter of Law and Motion for a New Trial or for Remittitur.

In conjunction with the Anchor acquisition purchase price allocation as of December 31, 2001, IGT used the relief of royalty valuation methodology to estimate the fair value of the patents at $164.4 million. The carrying value of the patents at March 31, 2011 totaled $34.2 million.

Arrangements with Off-Balance Sheet Risks

In the normal course of business, we are party to financial instruments with off-balance sheet risk, such as performance bonds not reflected in our balance sheet. We do not expect any material losses to result from these arrangements and are not dependent on off-balance sheet financing arrangements to fund our operations.

Performance Bonds

Performance bonds outstanding related to certain gaming operations equipment totaled $7.5 million at March 31, 2011. We are liable to reimburse the bond issuer in the event of exercise due to nonperformance.

Letters of Credit

Outstanding letters of credit issued under our domestic credit facility to ensure payment to certain vendors and governmental agencies totaled $9.2 million at March 31, 2011.

IGT Licensor Arrangements

Our sales agreements that include software and IP licensing arrangements may require IGT to indemnify the third-party licensee against liability and damages (including legal defense costs) arising from any claims of patent, copyright, trademark infringement, or trade secret misappropriation. Should such a claim occur, we could be required to make payments to the licensee for any liabilities or damages incurred. Historically, we have not incurred any significant settlement costs due to infringement claims. As we consider the likelihood of incurring future costs to be remote, no liability has been recorded.

Product Warranties

The majority of our products are generally covered by a warranty for periods ranging from 90 days to one year. We estimate accrued warranty costs in the table below based on historical trends in product failure rates and expected costs to provide warranty services.

Six Months Ended March 31,	2011			2010
(In millions)
Balance at beginning of year	$	9.3		$	7.9
Reduction for payments made		(3.3	)		(4.5	)
Accrual for new warranties issued		4.9			4.8
Adjustments for pre-existing warranties		(2.3	)		(0.6	)
Balance at end of period	$	8.6		$	7.6

Self-Insurance

We are self-insured for various levels of workers’ compensation, directors’ and officers’ liability, and electronic errors and omissions liability, as well as employee medical, dental, prescription drug, and disability coverage. We purchase stop loss coverage to protect against unexpected claims. Accrued insurance claims and reserves include estimated settlements for known claims, and actuarial estimates for claims incurred but not reported.

State and Federal Taxes

We are subject to sales, use, income, gaming and other tax audits and administrative proceedings in various US federal, state, local, and foreign jurisdictions. While we believe we have properly reported our tax liabilities in each jurisdiction, we can give no assurance that taxing authorities will not propose adjustments that increase our tax liabilities.

12.	INCOME TAXES

Our provision for income taxes is based on estimated effective annual income tax rates as well as the impact of discrete items, if any, occurring during the quarter. The provision differs from income taxes currently payable because certain items of income and expense are recognized in different periods for financial statement purposes than for tax return purposes. We reduce deferred tax assets by a valuation allowance when it is more likely than not that some or all of the deferred tax assets will not be realized.

Our effective tax rate for the six months ended March 31, 2011 decreased to 32.3% from 35.4% for the same prior year period as a result of the realization of benefits from an increase in the manufacturing deduction and the retroactive reinstatement of the R&D tax credit.

As of March 31, 2011, we had $104.1 million of gross UTBs excluding related accrued interest and penalties of $25.7 million. As of March 31, 2011, $69.2 million of our UTBs, including related accrued interest and penalties, would affect our effective tax rate, if recognized. During the six months ended March 31, 2011, our UTBs increased $20.3 million comprised of $7.7 million related to positions taken during a prior year and $12.6 million related to positions taken during the current year. Also during the six months ended March 31, 2011, related interest and penalties increased $3.0 million.

We are currently under audit by the IRS for amended returns filed for fiscal years 1999 and 2006, as well as our originally filed return for 2009. We are also subject to examination in various state and foreign jurisdictions. We believe we have recorded all appropriate provisions for outstanding issues for all jurisdictions and open years. However, we can give no assurance that taxing authorities will not propose adjustments that increase our tax liabilities.

13.	EARNINGS PER SHARE

	Quarters Ended						Six Months Ended
	March 31,						March 31,
	2011			2010			2011			2010
(In millions, except per share amounts)
Income from continuing operations available to common shares (1)	$	69.6		$	25.7		$	143.0		$	101.1
Basic weighted average shares outstanding		298.4			295.9			298.0			295.5
Dilutive effect of non-participating share-based awards		1.5			1.4			1.4			2.2
Diluted weighted average common shares outstanding		299.9			297.3			299.4			297.7

Basic earnings per share from continuing operations	$	0.23		$	0.08		$	0.48		$	0.34
Diluted earnings per share from continuing operations	$	0.23		$	0.08		$	0.48		$	0.34

Weighted average shares excluded from diluted EPS because the effect would be anti-dilutive:
Share-based awards		16.5			14.3			16.6			10.8
Debentures		-			-			-			0.1
Notes		42.6			42.6			42.6			42.6
Note hedges		(42.6	)		(42.6	)		(42.6	)		(42.6	)
Warrants		42.6			42.6			42.6			42.6

(1) Income from continuing operations available to participating securities was not significant

14.	OTHER COMPREHENSIVE INCOME

	Quarters Ended					Six Months Ended
	March 31,					March 31,
	2011		2010			2011		2010
(In millions)
Net income	$	69.6	$	0.7		$	143.3	$	74.0
Currency translation adjustments		9.3		(5.5	)		9.5		(2.3	)
Investment unrealized gains		1.0		3.4			0.5		9.3
Comprehensive income	$	79.9	$	(1.4	)	$	153.3	$	81.0

15.	FINANCIAL DERIVATIVES

Foreign Currency Hedging

We hedge our net foreign currency exposure related to monetary assets and liabilities denominated in nonfunctional currency. The notional amount of foreign currency contracts hedging this exposure totaled $32.0 million at March 31, 2011 and $26.7 million at September 30, 2010.

In May 2007, we executed five-year forward contracts designated as a fair value hedge to protect a portion of the US dollar value of our Hong Kong dollar investment in the CLS convertible note (See Note 3). In conjunction with the early redemption of our CLS investment negotiated in September 2010, we executed additional contracts which effectively reduced the cumulative amount of forward contracts. The notional amount of foreign currency contracts hedging this exposure totaled $15.0 million for which there was no ineffectiveness during the six months ended March 31, 2011.

Interest Rate Management

In conjunction with our 7.5% Bonds issued in June 2009, we executed $250.0 million notional value of interest rate swaps that exchange 7.5% fixed interest payments for variable rate interest payments at one-month LIBOR plus 342 bps reset two business days before the 15th of each month. On April 18, 2011, we additionally executed $250.0 million notional value interest rate swaps that exchange the remaining fixed interest payments on our 7.5% Bonds for variable rate interest payments based on six-month LIBOR plus 409 bps reset in arrears two business days before June 15 and December 15 each year. All of these swaps terminate on June 15, 2019.

In conjunction with our 5.5% Bonds issued in June 2010, we executed $300.0 million notional value of interest rate swaps that terminate on June 15, 2020. These swaps effectively exchange 5.5% fixed interest payments for variable rate interest payments based on the six-month LIBOR plus 186 bps reset in arrears two business days before June 15 and December 15 each year. These swaps terminate on June 15, 2020.

All of our interest rate swaps are designated fair value hedges against changes in the fair value of a portion of their related bonds. Net amounts receivable or payable under our swaps settle semiannually on June 15 and December 15. Our assessments have determined that our interest rate swaps are highly effective.

Presentation of Derivative Amounts

	March 31,		September 30,
Balance Sheet Location and Fair Value	2011		2010
(In millions)
Non-designated Hedges
Foreign currency contracts: Other assets and deferred costs (current)	$	0.3	$	-
Foreign currency contracts: Other liabilities (current)		1.1		2.2
Designated Hedges
Interest rate swaps: Other assets (noncurrent)	$	16.1	$	52.1
Interest rate swaps: Long-term debt		11.7		52.1

	Quarters Ended						Six Months Ended
	March 31,						March 31,
Income Statement Location and Gain (loss)	2011			2010			2011		2010
(In millions)
Non-designated Hedges
Foreign currency contracts: Other income (expense)	$	0.6		$	0.3		$	1.3	$	0.7
Designated Hedges
Foreign currency contracts: Other income (expense)	$	-		$	0.1		$	-	$	0.1
Interest rate swap - ineffectiveness: Other income (expense)		(0.2	)		(0.3	)		0.3		(0.8	)
Interest rate swap - effectiveness: Interest expense		4.8			2.4			9.4		4.7

16.	FAIR VALUE MEASUREMENTS

Financial Assets (Liabilities) Carried at Fair Value

	Fair Value		Level 1		Level 2		Level 3
(In millions)
March 31, 2011
Money market funds	$	112.4	$	112.4	$	-	$	-
Investments in unconsolidated affiliates		21.4		-