Edgar Filing: INTERNATIONAL GAME TECHNOLOGY

igt_10k-100111.htm

United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended October 1, 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.)

6355 South Buffalo Drive, Las Vegas, Nevada 89113

(Address of Principal Executive Offices)(Zip Code)

Registrant’s Telephone Number, Including Area code: (702) 669-7777

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

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

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

Indicate by check mark if the registrant is a well known seasoned issuer (as defined in Rule 405 of the Securities Act).

Yes [X] No [ ]

Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934

Yes [ ] No [X]

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 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 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 [ ]

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 aggregate market value of voting stock held by non-affiliates of the registrant on April 1, 2011: $4.9 billion.

The number of shares outstanding of each of the registrant’s classes of common stock, as of November 28, 2011:

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

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of our Proxy Statement relating to the 2012 annual shareholders meeting are incorporated by reference in Part III. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended October 1, 2011

TABLE OF CONTENTS

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

PART I

Item 1.	Business	5

Item 1A.	Risk Factors	12

Item 1B.	Unresolved Staff Comments	18

Item 2.	Properties	19

Item 3.	Legal Proceedings	19

Item 4.	(Removed and Reserved)	19

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20

Item 6.	Selected Financial Data	22

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	44

Item 8.	Financial Statements and Supplementary Data	46

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	93

Item 9A.	Controls and Procedures	93

Item 9B.	Other Information	94

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	94

Item 11.	Executive Compensation	94

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	94

Item 13.	Certain Relationships and Related Transactions, and Director Independence	94

Item 14.	Principal Accountant Fees and Services	94

PART IV

Item 15.	Exhibits and Financial Statement Schedules	95

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

Fiscal dates--actual:	Fiscal dates--as presented:
October 1, 2011	September 30, 2011
October 2, 2010	September 30, 2010
October 3, 2009	September 30, 2009
September 27, 2008	September 30, 2008
September 29, 2007	September 30, 2007

Abbreviation/term	Definition

Anchor	Anchor Gaming
ARS	auction rate securities
AsiaPac	Asia, Australia, New Zealand, the Pacific
ASU	Accounting Standards Update
AVP	Advanced Video Platform®
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
CDS	Central determination system
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
EMEA	Europe, the UK, the Middle East, and Africa
Entraction	Entraction Holding AB
EPA	Environmental Protection Agency
EPS	earnings per share
ERISA	Employee Retirement Income Security Act
ESPP	Employee Stock Purchase Plan
FASB	Financial Accounting Standards Board
GAAP	generally accepted accounting principles
IGT, we, our, the Company	International Game Technology and its consolidated entities
IFRS	International Financial Reporting Standards
IP	intellectual property
IRS	Internal Revenue Service
LatAm	Mexico and South/Central America
LIBOR	London inter-bank offered rate
LVGILas Vegas Gaming Internationss	Las Vegas Gaming International
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
PGIC	Progressive Gaming International Corporation
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
VSOE	Vendor specific objective evidence
WAP	wide area progressive
WDG	Walker Digital Gaming, LLC
*	not meaningful (in tables)

FORWARD LOOKING STATEMENTS

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

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

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our ability to successfully introduce new products and their impact on replacement demand

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the timing, features, benefits, and expected continued or future success of new product introductions and ongoing product, marketing, and strategic initiatives

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our expected future financial and operational performance

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our strategic and operational plans (including our objectives for fiscal 2012)

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our leadership position in the gaming industry

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the advantages offered to customers by our anticipated products and product features

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gaming growth, expansion, and new market opportunities

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mergers, acquisitions and divestitures, including the expected benefits of completed acquisitions and expectations for, possible acquisitions of, or investments in, businesses, products, and technologies

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research and development activities, including anticipated benefits from such activities

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fluctuations in future gross margins and tax rates

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increasing product sales or machine placements

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legislative or regulatory developments and related market opportunities

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available capital resources to fund future operating requirements, capital expenditures, payment obligations, acquisitions, and share repurchases

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losses from off-balance sheet arrangements

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financial returns to shareholders related to management of our costs

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the impact of recently adopted accounting pronouncements

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the outcome and expense of litigation

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anticipated increased revenue yields and operating margin if general economic conditions improve

Actual results could differ materially from those expressed or implied in our forward looking statements. Our future financial condition and results of operations, as well as any forward looking statements, are subject to change and to inherent known and unknown risks and uncertainties. See Part 1, Item 1A, Risk Factors, in this report for a discussion of these and other risks and uncertainties. You should not assume at any point in the future that the forward looking statements in this report are still valid. We do not intend, and undertake no obligation, to update our forward looking statements to reflect future events or circumstance.

PART I

Item 1. Business

International Game Technology is a global gaming company specializing in the design, development, manufacture, and marketing of electronic gaming equipment and systems products, including online and mobile solutions for regulated markets. IGT markets a wide array of entertainment-inspired gaming product lines and targets gaming markets in substantially all legal jurisdictions worldwide.

International Game Technology was incorporated in Nevada in December 1980 to facilitate our initial public offering in 1981. Principally serving the US gaming markets when founded, we expanded into jurisdictions outside the US in 1986.

Our fiscal year is reported on a 52/53-week period that ends on the Saturday nearest to September 30. For simplicity, this report presents all fiscal years using the calendar month end as outlined in the table below.

Fiscal Year	Ended		Weeks
	Actual	Presented as
2011	October 1, 2011	September 30, 2011	52
2010	October 2, 2010	September 30, 2010	52
2009	October 3, 2009	September 30, 2009	53
2008	September 27, 2008	September 30, 2008	52
2007	September 29, 2007	September 30, 2007	52

Unless otherwise indicated in this report:

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International Game Technology, IGT, we, our, or the Company refers to International Game Technology and its consolidated entities

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italicized text with an attached superscript trademark or copyright notation indicates trademarks of IGT or its licensors, and additional IGT trademark information is available on our website at www.IGT.com

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references to years relate to our fiscal years ending September 30

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current refers to the fiscal year ended September 30, 2011

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Note refers to the Notes of our Consolidated Financial Statements in Item 8 of this report

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references to EPS are on a diluted basis

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dollar amounts in tables are presented pretax in millions, except EPS

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discussion and analysis relates to results for the current fiscal year as compared with the prior year

BUSINESS SEGMENTS

We derive our revenues from the distribution of electronic gaming equipment, systems, services and licensing. Operating results reviewed by our CEO encompass all revenue sources within each geographical customer region. We currently view our business in two operating segments, North America and International, each incorporating all revenue streams. Unless otherwise noted, prior year amounts throughout this report have been adjusted for operations discontinued during 2011 and 2010, as further described in Note 21.

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North America consists of our operations in the US and Canada, comprising 76% of consolidated revenues from continuing operations in 2011, 75% in 2010, and 81% in 2009.

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International consists of our operations in all other jurisdictions worldwide, comprising 24% of consolidated revenues from continuing operations in 2011, 25% in 2010, and 19% in 2009.

We measure segment profit on the basis of operating income. Certain income and expenses are managed at the corporate level and not allocated to an operating segment. Other segment and financial information contained in our MDA BUSINESS SEGMENT RESULTS and Note 18 is incorporated here by this reference.

REVENUE STREAMS

We have two revenue streams—gaming operations and product sales.

Gaming Operations

Comprising 55% of consolidated revenues in 2011, 56% in 2010, and 57% in 2009, gaming operations generates recurring revenues by providing our customers with proprietary gaming equipment, systems and services. Our gaming operations pricing arrangements are largely variable where casinos pay service fees to IGT based on a percentage of amounts wagered or net win. Variable fee units comprised 81% of our gaming operations installed base at September 30, 2011. Fixed fee pricing arrangements are typically based on a daily or monthly fee. A portion of WAP fees paid to IGT is used for the funding and administration of progressive jackpots. The cost of funding progressive jackpots is subject to interest rate volatility as further described in Note 1, MDA CRITICAL ACCOUNTING ESTIMATES and related risks included in Part I, Item 1A.

Gaming operations revenues are affected by variations in the number and type of machines in service, levels of player wagers, and pricing arrangement terms. Levels of play are dependent on game popularity, casino seasonality trends, economic conditions, and other player preferences. Seasonal trends generally show higher play levels in the spring and summer months and lower in the fall and winter months. We monitor the productive life cycles of our gaming operations machines and systematically replace units experiencing declining play levels with newer games.

The IGT installed base of gaming devices includes both variable fee and fixed fee machines, which are recorded on our balance sheet as part of our property, plant and equipment. Casino-owned units are machines sold that also provide a recurring royalty fee. Gaming operations revenues are generated from the units reflected in the table below, as well as service fees for internet gaming, systems access, game content, and other gaming equipment rentals and leasing.

Gaming Operations Units	2011		2010		2009
IGT owned units - variable fee		43,900		43,400		49,500
IGT owned units - fixed fee		10,000		9,500		8,500
IGT installed base		53,900		52,900		58,000
Casino-owned		17,500		17,900		18,200
Total		71,400		70,800		76,200

Product Sales

Comprising 45% of consolidated revenues in 2011, 44% in 2010, and 43% in 2009, product sales include gaming equipment, systems, services, licensing, and component parts. Non-machine sales are comprised of gaming systems, licensing fees, parts, conversions, and miscellaneous royalty fees and services.

Product Sales Composition	2011			2010			2009
Slot machines		63	%		62	%		62	%
Non-machine		37	%		38	%		38	%
Gaming systems		22	%		22	%		22	%
Parts & conversions		12	%		13	%		13	%
Other fees & services		3	%		3	%		3	%

STRATEGIC BUSINESS ARRANGEMENTS

We complement our internal resources through strategic alliances, investments, and business acquisitions that:

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diversify our geographic reach

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expand our product lines and customer base

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leverage our technological and manufacturing infrastructure to increase our rates of return

In June 2011, we acquired Entraction to advance our position in legalized interactive gaming markets and strengthen our product portfolio to include all major online specialties—poker, bingo, casino, and sports betting. Established in 2000 and based in Stockholm, Sweden, Entraction is a supplier of online gaming products and services with one of the world’s largest legal online poker networks. Our most recent acquisitions and affiliate investments are discussed in Notes 2 and 20.

As a result of continuing evaluation and assessment of our core business strategy, we sold our UK Barcrest Group in September 2011. A discussion of Barcrest and other discontinued operations, as well as material asset losses or impairment recognized during the last three years is contained in our MDA OVERVIEW and CONSOLIDATED RESULTS and Notes 19 and 21.

Risks related to business combinations and investments are described in Part I, Item 1A.

PRODUCTS

We provide a broad range of electronic gaming equipment and systems, as well as related licensing, services, and component parts, under for-sale or recurring revenue sharing arrangements.

Games

We combine elements of math, play mechanics, sound, art, and technological advancements with our library of entertainment licenses and patented IP to provide gaming products with a high degree of player appeal. We continuously expand our game library with new content, popular brands, and appealing bonuses to address player preferences and other market trends.

We offer a wide array of land-based games, as well as online and mobile games, with multi-line and multi-coin configurations.

Land-Based Games	Online & Mobile Games
Premier (MegaJackpots®)	Online
Multi-Level Progressive	MegaJackpots®
Wide-Area Progressive	Slots
Stand-Alone	Table Games
Core	Fixed Odds
Video Reel	Video Poker
Spinning Reel	Multi-Player Poker
Video Poker	Bingo & Keno
Multi-Game (Game King®)	Sports betting
Central System	Mobile
Bingo (Class II)	Slots
CDS	Table Games
VLT	Video Poker
Multi-Player
Electronic Table
Virtual Racing

Cabinet Configurations

Customers can combine our extensive library of games with several gaming machine cabinets designed to maximize functionality, flexibility, and player comfort. Our AVP® machines support server-based gaming networks with G2S open industry standards. Slot machine configurations vary by jurisdiction and may include:

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Stand-alone casino-style slot machines that determine the game play outcome at the machine, known as Class III in tribal jurisdictions

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WAP jackpot systems with machines linked across several casinos

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CDS machines connected to a central server that determines the game outcome, encompassing VLT’s (video lottery terminals) used primarily in government-sponsored applications and electronic or video bingo machines, known as Class II in tribal jurisdictions

Systems

Land-based

IGT systems products include infrastructure and applications for casino management, customer relationship management, player management, and server-based gaming. Our casino and customer relationship management solutions include integrated modules for:

● machine accounting	● bonusing (jackpots and promotions)
● patron management	● table game automation
● cage accounting	● payment processing
● table accounting	● reporting
● ticket-in/ticket-out	● regulatory compliance.

Our player management solutions feature custom player messaging, tournament management, and integrated marketing and business intelligence modules that provide analytical, predictive, and management tools for maximizing casino operational effectiveness. Our server-based solutions enable electronic game delivery and configuration for slot machines, as well as providing casino operators with opportunities to increase profits by enhancing the players’ experience, connecting with players interactively, and creating operational efficiencies.

Online

IGT systems also include a range of solutions comprising infrastructure and applications to deliver legal online wager-based gaming. These systems are primarily focused around management of digital patron wallets, responsible gaming functionality, fraud detection and prevention, patron credentials, customer relationship management, player accounting and analytics.

With these solutions, we deploy a full service platform capable of supporting the main games associated with internet wagering (casino games, sports betting, multi-player poker and bingo). Our online system products are primarily provided as a “white-label” service, which allows operators to provide online products to their players under IGT’s gaming license.

RESEARCH & DEVELOPMENT

We support our product development efforts through a considerable emphasis and investment in the R&D of emerging technology trends, which we believe enables us to maintain a leadership position in the industry. Our product innovation reflects a combination of customer research, design experience and engineering excellence utilizing our game design resources, IP portfolio, and next-generation game development tools. The focus of our product development is to enhance the player experience through interactive networked gaming, information technology, innovative game design, and customer relationship services, thereby maximizing the potential for casino operator profitability.

We dedicate approximately 1,500 employees worldwide to R&D efforts covering multiple engineering disciplines, including hardware, electrical, systems and software. We specialize in progressive creative game development including design, math, graphics and audio. Our primary development facilities are located in Nevada (Reno and Las Vegas), California (San Francisco), China (Beijing), Australia (Sydney), and Sweden (Stockholm). Additional global design centers provide local community presence, customized products, and regional production where beneficial or required.

Our games are created primarily by employee designers, engineers, and artists, augmented by third-party content creators. We also use third-party technologies to improve the yield of our development investment and concentrate increased resources on product differentiation engineering. In anticipation of new market opportunities in regulated interactive online and mobile gaming, we focused additional R&D efforts in this area during 2011. Our investment in R&D from continuing operations totaled $194.7 million in 2011, $189.4 million in 2010, and $193.8 million in 2009.

Intellectual Property

Our IP portfolio of patents, trademarks, copyrights, and other licensed rights are significant to our business. At September 30, 2011, we held approximately 5,600 patents or patent applications and approximately 3,100 trademarks filed and registered worldwide. The weighted average remaining useful life of our capitalized patent costs at September 30, 2011 was approximately 5 years. Our material brand licensing arrangements have various expiration dates through 2019 and commonly contain options to extend.

We seek to protect our investment in R&D and the new and original features of our products by perfecting and maintaining our IP rights. We obtain patent protection covering many of our products and have a significant number of U.S. and foreign patent applications pending. Our portfolio is widely diversified with patents related to a variety of gaming products, including game designs, bonus and secondary game features, device components, and online or mobile functionality.

We market most of our products under trademarks and copyrights that provide product recognition and promote widespread acceptance. We seek protection for our copyrights and trademarks in the US and various foreign countries, where applicable. We use IP assets offensively and defensively to protect our innovation and license it to others under terms designed to promote standardization in the gaming industry. IP litigation is described in Note 13 and related risk factors are described in Part I, Item 1A.

SALES AND MARKETING

We market our products and services in legalized gaming jurisdictions around the world. We have a substantial presence in the US and growing international operations. We promote our products through a worldwide network of sales associates, using third-party distributors and agents in certain markets under arrangements that generally specify no minimum purchase and require specified performance standards be maintained. We offer equipment contract financing for qualified customers and development financing loans to select customers for new or expanding gaming facilities.

As of September 30, 2011, we maintain 60 offices across six continents to respond to customer needs and our Global Support Center is staffed with experts in technical issue resolution. We provide access to product information and 24-hour customer service through our website and offer a variety of customer training designed to ensure success in using our products to their full potential.

North America

The gaming industry installed base in the US and Canada has been relatively flat over the last few years, at just over 900,000 legal gaming devices by our estimates. Growth of legalized gaming is largely driven by new jurisdictions considering gaming tax revenues as a means to address budget shortfalls. Sales or placements of gaming machines are also affected by new openings or expansion of existing gaming properties and the machine replacement cycle, as well as economic conditions. We entered in the Canadian online gaming market in 2011. We continue to monitor potential gaming growth and remain cautiously optimistic about future opportunities.

Changes in existing gaming regulation or new interpretations of existing gaming laws can negatively impact our business by hindering or preventing our continuing operations in certain jurisdictions. See further discussion surrounding regulatory challenges in Alabama in MDA-CONSOLIDATED RESULTS and MDA-BUSINESS SEGMENT RESULTS.

International

Markets outside of the US are expected to grow faster than those in the US, and we are localizing our sales presence in these markets, as we increase scalability and prepare for new opportunities. Our international strategy capitalizes on our North America experience, while customizing products for unique local preferences and regulatory requirements.

Our international gaming markets included the following customer regions at September 30, 2011:

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Europe, the UK, the Middle East, and Africa (EMEA)

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Mexico and South/Central America (LatAm)

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Asia, Australia, New Zealand, the Pacific (AsiaPac)

The pace of online gaming legalization in International markets is increasing with several significant markets currently regulating and introducing licensing regimes for online gaming. Our strategic intent is to enter those regulated markets that offer attractive return characteristics, building on our existing capabilities and those acquired in the Entraction purchase.

In September 2011, we sold our UK Barcrest Group due to changes in our core business strategy. See Note 21 for additional information about discontinued operations.

Risks related to our international operations are described in Part I, Item 1A.

OPERATIONAL OVERVIEW

Manufacturing and Suppliers

In addition to our main production facility in Nevada, we manufacture through third-party manufacturers in China. We also have reconditioning and re-manufacturing processes in our Las Vegas facility for gaming operations fixed assets. Our manufacturing operations primarily involve the configuration and assembly of electronic components, cables, harnesses, video monitors, and prefabricated parts purchased from outside sources. We also operate facilities for silkscreen manufacturing and digital design.

We use a variety of raw materials to manufacture our gaming devices including metals, wood, plastics, glass, electronic components, and LCD screens. We have a broad base of material suppliers and utilize multi-sourcing practices to ensure component availability. We believe the availability of materials used to manufacture our products is adequate and we are not substantially dependent on any single supplier.

We currently devote more than 800,000 square feet in our Reno facility and more than 270,000 square feet in our Las Vegas facility to product development, manufacturing, warehousing, shipping, and receiving. Maintaining our commitment to quality, we maintained our ISO 9001.2008 Quality Management System certification at all of our manufacturing facilities during 2011. In addition, we expanded Advantage and sbX systems certification along with recertifying our ISO 17025:2005 Certification for our Software Quality Engineering Services Department. ISO standards represent an international consensus with respect to the design, manufacture, and use of practices intended to ensure ongoing customer satisfaction with consistent delivery of products and services.

We generally carry a sufficient amount of inventory related to the breadth of our product lines. We reasonably expect to fill our manufacturing product order backlog for both gaming operations and product sales within the next fiscal year. Backlog for gaming operations units totaled 7,485 at October 31, 2011 and 6,945 at October 31, 2010. Backlog for product sales totaled approximately $122.1 million at October 31, 2011 and $134.3 million at October 31, 2010.

Regulatory Compliance

IGT is dedicated to regulatory compliance worldwide to ensure that our products meet requirements in each gaming jurisdiction and that we obtain the necessary approvals and licenses. We conduct business in most jurisdictions where gaming is legal and hold licenses where required.

Employees

As of September 30, 2011, we employed 4,600 individuals worldwide, 3,800 in our North America segment and 800 in our International segment. Our global workforce has been reduced over the past three years as a result of restructuring efforts, including a combination of voluntary and involuntary separation arrangements and discontinued operations.

In light of the lagging economic recovery, we continue to review our costs and organizational structure to maximize efficiency and align expenses with the current and long-term business outlook. For discussion of related restructuring costs and discontinued operations, see Note 19 and 21 and our MDA CONSOLIDATED RESULTS.

COMPETITION AND PRODUCT DEMAND

IGT has been met with increasingly aggressive competition. The market for gaming devices and systems is constantly evolving and technological advances increasingly employ personal computers, mobile communication, and other digital media devices. Our competitors range from small, localized companies to large, multi-national corporations in every jurisdiction in which we conduct business. Our most significant competitors include Aristocrat Leisure Limited, Bally Technologies, Inc., and WMS Industries, Inc.

We believe replacement sales are driven by customer strategies to upgrade casino floors with newer games and technologies that combine higher yields with cost savings, convenience, and other benefits. Emerging technologies that improve operators’ profitability, such as delivery platforms with increased capabilities, game features that increase player appeal, or application modules which increase operator efficiencies, can accelerate the replacement cycle.

New or expanding casinos generate new product demand and stimulate replacement demand at neighboring properties compelled to upgrade their gaming floors to remain competitive. New jurisdictions establishing legalized gaming also create product demand and continue to grow the overall installed base of gaming devices.

We endeavor to create gaming products with superior functionality and features, using innovative architecture and technologies, resulting in a high degree of customer acceptance and player preference. We also strive to maintain an edge in our quality of customer support and efficient product implementation. The breadth of our gaming products and diversity of our innovative game library contribute to our competitive advantage.

We believe IGT also has competitive advantages resulting from broad alliances and a long history with customers, the financial strength to aggressively invest in R&D, and an extensive IP portfolio. Our historically high levels of customer service and support, extensive and well-established infrastructure of sales and manufacturing, worldwide name recognition, and geographic diversity are competitive assets. We believe our reputation for consistently delivering and supporting quality products will encourage operators to select our products and enable us to maintain a substantial market position. Risk factors related to competition are discussed in Part 1, Item 1A.

AVAILABLE INFORMATION

IGT’s principal corporate executive offices are located at:	6355 South Buffalo Drive
	Las Vegas, Nevada 89113
	(702) 669-7777

All reporting information filed with or furnished to the SEC is available free of charge through the Investor Relations link on our website at www.IGT.com as soon as reasonably practicable after we electronically file or furnish such information to the SEC.

Additionally, the following IGT information is available through the Investor Relations link of our website and will be mailed in print form free of charge to any shareholder upon request:

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code of conduct

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corporate governance guidelines

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code of ethics for our principal executive officer and senior financial officers

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conflict of interest guidelines for members of our board of directors

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charters for our Audit, Capital Deployment, Compensation, and Nominating and Corporate Governance Committees

GOVERNMENT GAMING REGULATION

We operate in most legal casino gaming jurisdictions worldwide, as well as in several legalized lottery and online jurisdictions. The manufacture and distribution of gaming equipment, systems, and services, as well as the operation of casinos, is subject to regulation by a variety of local and federal agencies, with the majority of oversight provided by individual state gaming control boards.

While the regulatory requirements vary from jurisdiction to jurisdiction, most require:

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licenses and/or permits

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findings of suitability for the company, as well as individual officers, directors, major shareholders, and key employees

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documentation of qualification, including evidence of financial stability

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specific approvals for gaming equipment manufacturers and distributors

Our operating entities and key personnel have obtained or applied for all required government licenses, permits, registrations, findings of suitability, and approvals necessary to manufacture and distribute gaming products in all jurisdictions where we do business. Although many regulations at each level are similar or overlapping, we must 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. Regulatory oversight additionally ensures that the local authorities receive the appropriate amount of gaming tax revenues. As such, our financial systems and reporting functions must demonstrate high levels of detail and integrity.

Certain regulators not only govern the activities within their jurisdiction, but also monitor our activities in other jurisdictions to ensure that we comply with local standards on a worldwide basis. As a Nevada licensee, state regulatory authorities require us to maintain Nevada standards for all operations worldwide. Violations of laws in one jurisdiction could result in disciplinary action in other jurisdictions. A more detailed description of the regulations to which we are subject is provided in Exhibit 99 of this Annual Report on Form 10-K, incorporated herein by reference.

The nature of the industry and our worldwide operations make this process very time consuming and require extensive resources. We employ additional community staff members and legal resources familiar with local customs in certain jurisdictions to assist in keeping us compliant with applicable regulations worldwide. Through this process, we seek to assure both regulators and investors that all our operations maintain the highest levels of integrity and avoid any appearance of impropriety. We have never been denied a gaming related license, nor have our licenses ever been suspended or revoked.

Risk factors related to gaming regulation are included in Part 1, Item 1A.

Item 1A.

Risk Factors

Our business is vulnerable to changing economic conditions and to other factors that adversely affect the gaming industry, which have negatively impacted and could continue to negatively impact the play levels of our participation games, our product sales, and our ability to collect outstanding receivables.

Demand for our products and services depends largely upon favorable conditions in the gaming industry, which is highly sensitive to players’ disposable incomes and gaming activities. Discretionary spending on entertainment activities could further decline for reasons beyond our control, such as continued negative economic conditions, natural disasters, acts of war or terrorism, transportation disruptions or health epidemics. Any prolonged or significant decrease in consumer spending on entertainment activities could result in reduced play levels on our participation games, causing our cash flows and revenues from a large share of our recurring revenue products to decline. Unfavorable economic conditions have also resulted in a tightening in the credit markets, decreased liquidity in many financial markets, and significant volatility in the credit and equity markets.

A decline in the relative health of the gaming industry and the difficulty or inability of our customers to obtain adequate levels of capital to finance their ongoing operations reduces their resources available to purchase our products and services, which adversely affects our revenues. If we experience a significant unexpected decrease in demand for our products, we could also be required to increase our inventory obsolescence charges.

Furthermore, the extended economic downturn has impacted and could continue to impact the ability of our customers to make timely payments to us which could adversely affect our results of operations. We have, and may continue, to incur additional provisions for bad debt related to credit concerns on certain receivables.

Our ability to operate in our existing land-based or online jurisdictions or expand into new land-based or online jurisdictions could be adversely affected by changing regulations, new interpretations of existing laws, and difficulties or delays in obtaining or maintaining needed licenses or approvals.

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

●

licenses and/or permits

●

findings of suitability

●

documentation of qualifications, including evidence of financial stability

●

other required approvals for companies who manufacture or distribute gaming equipment and services, including but not limited to approvals for new products

●

individual suitability of officers, directors, major shareholders and key employees

Any license, permit, approval or finding of suitability may be revoked, suspended or conditioned at any time. We may not be able to obtain or maintain all necessary registrations, licenses, permits or approvals, or could experience delays related to the licensing process which could adversely affect our operations and our ability to maintain key employees.

To expand into new jurisdictions, we may need to be licensed, obtain approvals of our products and/or seek licensure of our officers, directors, major stockholders, key employees or business partners. If we fail to seek, do not receive or receive a revocation of a license in a particular jurisdiction for our games and gaming machines, hardware or software, we cannot sell or place on a participation or leased basis our products in that jurisdiction. Any delays in obtaining or difficulty in maintaining regulatory approvals needed for expansion within existing markets or into new jurisdictions can negatively affect our opportunities for growth.

Further, changes in existing gaming regulations or new interpretations of existing gaming laws, both with respect to land-based and online gaming activities, may hinder or prevent us from continuing to operate in those jurisdictions where we currently do business, which would harm our operating results. In particular, the enactment of unfavorable legislation or government efforts affecting or directed at manufacturers or gaming operators, such as referendums to increase gaming taxes or requirements to use local distributors, would likely have a negative impact on our operations.

Slow growth in the establishment of new gaming jurisdictions or the number of new casinos, declines in the rate of replacement of existing gaming machines and ownership changes and consolidation in the casino industry could limit or reduce our future profits.

Demand for our products is driven substantially by the establishment of new land-based and/or online gaming jurisdictions, the addition of new casinos or expansion of existing casinos within existing gaming jurisdictions and the replacement of existing gaming machines. The establishment or expansion of gaming in any jurisdiction, whether land-based or online, typically requires a public referendum or other legislative action. As a result, gaming continues to be the subject of public debate, and there are numerous active organizations that oppose gaming. Opposition to gaming could result in restrictions on or even prohibitions of gaming operations or the expansion of operations in any jurisdiction.

In addition, the construction of new casinos or expansion of existing casinos fluctuates with demand, general economic conditions and the availability of financing. The rate of gaming growth in North America has diminished and machine replacements are at historically low levels. Slow growth in the establishment of new gaming jurisdictions or delays in the opening of new or expanded casinos and continued declines in, or low levels of demand for, machine replacements could reduce the demand for our products and our future profits. Because a substantial portion of our sales come from repeat customers, our business could be affected if one or more of our customers is sold to or merges with another entity that utilizes more of the products and services of one of our competitors or that reduces spending on our products or causes downward pricing pressures. Such consolidations could lead to order cancellations, a slowing in the rate of gaming machine replacements, or require our current customers to switch to our competitors’ products, any of which could negatively impact our results of operations.

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

As a supplier of gaming machines, we must offer themes and products that appeal to gaming operators and players. There is constant pressure to develop and market new game content and technologically innovative products. Our revenues are dependent on the earning power and life span of our games. We therefore face continuous pressure to design and deploy new and successful game themes to maintain our revenue and remain competitive. If we are unable to anticipate or react timely to any significant changes in player preferences, such as a negative change in the trend of acceptance of our newest systems innovations or jackpot fatigue (declining play levels on smaller jackpots), the demand for our gaming products and the level of play of our gaming products could decline. Further, our products could suffer a loss of floor space to table games or other more technologically advanced games or operators may reduce revenue sharing arrangements, each of which would harm our sales and financial results. In addition, general changes in consumer behavior, such as reduced travel activity or redirection of entertainment dollars to other venues, could result in reduced demand and reduced play levels for our gaming products.

The gaming industry is intensely competitive. We face competition from a growing number of companies and, if we are unable to compete effectively, our business could be negatively impacted.

Competition among gaming and systems providers, including manufacturers of electronic gaming equipment and systems products is intense. Competition in our industry is primarily based on the amount of profit our products generate for our customers, together with cost savings, convenience, and other benefits. Additionally, we compete on the basis of price and financing terms made available to customers, the appeal of game content and features to the end player, and the features and functionality of our hardware and software products. Our competitors range from small, localized companies to large, multi-national corporations, several of which have substantial resources.

Competition in the gaming industry is intense due to the increasing number of providers, combined with the limited number of operators and jurisdictions in which they operate. This combination of a growing number of providers and a limited number of operators has resulted in an increased focus on price to value. To compete effectively, providers must offer innovative products, with increasing features and functionality benefiting the operators along with game content appealing to the end player, at prices that are attractive to operators.

Obtaining space and favorable placement on casino gaming floors is also a competitive factor in our industry. In addition, the level of competition among equipment providers has increased significantly due to consolidation among casino operators and cutbacks in capital spending by casino operators resulting from the economic downturn and decreased player spend.

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

The gaming industry is characterized by dynamic customer demand and technological advances, both for land-based and online gaming products. As a result, we must continually introduce and successfully market new themes and technologies in order to remain competitive and effectively stimulate customer demand. To remain competitive, we have invested resources towards our research and development efforts to introduce new and innovative games with dynamic features to attract new customers and retain existing customers.

We intend to continue investing resources toward our research and development efforts. There is no assurance that our investments in research and development will lead to successful new technologies or timely new products. We invest heavily in product development in various disciplines from hardware, software, and firmware engineering to game design, video, multimedia, graphics, and sound. Because our newer products are generally more technologically sophisticated than those we have produced in the past, we must continually refine our production capabilities to meet the needs of our product innovation. If we cannot efficiently adapt our manufacturing infrastructure to meet the needs of our product innovations, or if we are unable to make upgrades in our production capacity in a timely manner, our business could be negatively impacted.

Our customers will accept a new product only if it is likely to increase operator profits more than competitors’ products. The amount of operator profits primarily depends on consumer play levels, which are influenced by player demand for our product. There is no certainty that our new products will attain this market acceptance or that our competitors will not more effectively anticipate or respond to changing customer preferences. In addition, any delays by us in introducing new products could negatively impact our operating results by providing an opportunity for our competitors to introduce new products and gain market share ahead of us. For example, our business and results could be adversely affected if we experience delays in our continued deployment of sbX® gaming management systems, or if we do not gain market acceptance for these or other systems that are currently under development.

The risks related to operations in foreign countries and outside of traditional US jurisdictions could negatively affect our results.

We operate in many countries outside of the US and in tribal jurisdictions with sovereign immunity which subjects us to certain inherent risks. A significant portion of our revenues is derived from our International business segment. Developments such as noted below could adversely affect our financial condition and results of operations:

●

social, political or economic instability

●

additional costs of compliance with international laws or unexpected changes in regulatory requirements

●

tariffs and other trade barriers

●

fluctuations in foreign exchange rates outside the US

●

adverse changes in the creditworthiness of parties with whom we have significant receivables or forward currency exchange contracts

●

expropriation, nationalization and restrictions on repatriation of funds or assets

●

difficulty protecting our intellectual property

●

recessions in foreign economies

●

difficulties in maintaining foreign operations

●

changes in consumer tastes and trends

●

acts of war or terrorism

●

US government requirements for export.

We may be unable to protect our IP.

A significant portion of our revenues is generated from products using certain IP rights and our operating results would be negatively impacted if we are unsuccessful in protecting these rights from infringement. In addition, some of our most popular games and features are based on trademarks, patents and other IP licensed from third parties. Our future success may depend upon our ability to obtain, retain and/or expand licenses for popular IP rights with reasonable terms in a competitive market. In the event that we cannot renew and/or expand existing licenses, we may be required to discontinue or limit our use of the games or gaming machines that use the licensed technology or bear the licensed marks.

Our success may depend in part on our ability to obtain trademark protection for the names or symbols under which we market our products and to obtain copyright protection and patent protection of our proprietary technologies, intellectual property and other game innovations. We may not be able to build and maintain goodwill in our trademarks or obtain trademark or patent protection, and there can be no assurance that any trademark, copyright or issued patent will provide competitive advantages for us or that our intellectual properties will not be successfully challenged or circumvented by competitors.

We also rely on trade secrets and proprietary know-how to protect certain proprietary knowledge and have entered into confidentiality agreements with our employees and independent contractors regarding our trade secrets and proprietary information. However, there can be no guarantees that our employees and consultants will not breach these agreements, and if these agreements are breached it is unlikely that the remedies available to us will be sufficient to compensate us for the damages suffered. Additionally, despite various confidentiality agreements and other trade secret protections, our trade secrets and proprietary know-how could become known to, or independently developed by, competitors.

We may be subject to claims of IP infringement or invalidity and adverse outcomes of litigation could unfavorably affect our operating results.

Competitors and others may infringe on our intellectual property rights, or may allege that we have infringed on theirs. Monitoring infringement and misappropriation of intellectual property can be difficult and expensive, and we may not be able to detect infringement or misappropriation of our proprietary rights. We may also incur significant litigation and other expenses protecting our intellectual property or defending our use of intellectual property, reducing our ability to bring new products to market in the future. These expenses could have an adverse effect on our future cash flows and results of operations. Our assessment of current IP litigation could change in light of the discovery of facts not presently known to us or determinations by judges, juries or others that do not agree with our evaluation of the possible liability or outcome of such litigation. If we are found to infringe on the rights of others we could be required to discontinue offering certain products or systems, to pay damages, or purchase a license to use the intellectual property in question from its owner. Litigation can also distract management from the day-to-day operations of the business. There can be no assurances that certain of our products, including those with currently pending patent applications, will not be determined to have infringed upon an existing third party patent.

Business combinations and investments in intellectual properties or affiliates present risk, and we may not be able to realize the financial and strategic goals that were contemplated at the time of the transaction, which could materially affect our financial results.

We have invested and may continue to invest in strategic business combinations and acquisitions of important technologies and IP that we believe will expand our geographic reach, product lines, and/or customer base. We may encounter difficulties in the assimilation of acquired operations, technologies and/or products, or an acquisition may prove to be less valuable than the price we paid. We also may encounter difficulties applying our internal controls to an acquired business. Any of these events or circumstances may have an adverse effect on our business by requiring us to, among other things, record substantial impairment charges on goodwill and other intangible assets, resulting in a negative impact on our operating results.

Moreover, as we continue the process of evaluating our business in conjunction with an assessment of our long-term strategic goals, we will also further evaluate past and potential investments to determine if and how they will fit into our organizational structure going forward. If an event or change occurs in affiliate relationships or agreements associated with business combinations, we may be required to reassess cash flows, recoverability, useful lives, and fair value measurements, which may result in material impairment charges.

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

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

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

Our success depends on our ability to avoid, detect, replicate and correct software and hardware anomalies and fraudulent manipulation of our gaming machines. We incorporate security features into the design of our gaming machines and other systems, including those responsible for our online operations, which are designed to prevent us and our patrons from being defrauded. We also monitor our software and hardware to avoid, detect and correct any technical errors. However, there can be no guarantee that our security features or technical efforts will continue to be effective in the future. If our security systems fail to prevent fraud or if we experience any significant technical difficulties, our operating results could be adversely affected. Additionally, if third parties breach our security systems and defraud our patrons, or if our hardware or software experiences any technical anomalies, the public may lose confidence in our gaming products and operations or we could become subject to legal claims by our customers or to investigation by gaming authorities.

Our gaming machines have experienced anomalies and fraudulent manipulation in the past. Games and gaming machines may be replaced by casinos and other gaming machine operators if they do not perform according to expectations, or may be shut down by regulators. The occurrence of anomalies in, or fraudulent manipulation of, our gaming machines may give rise to claims for lost revenues and related litigation by our customers and may subject us to investigation or other action by gaming regulatory authorities including suspension or revocation of our gaming licenses, or disciplinary action.

Systems, network or telecommunications failures or cyber-attacks may disrupt our business and have an adverse effect on our results of operations.

Any disruption in our network or telecommunications services could affect our ability to operate our games or financial systems, which would result in reduced revenues and customer down time. Our network and databases of business or customer information are susceptible to outages due to fire, floods, power loss, break-ins, cyber-attacks, network penetration, data privacy or security breaches, denial of service attacks and similar events. Despite our implementation of network security measures and data protection safeguards, our servers and computer resources are vulnerable to viruses, malicious software, hacking, break-ins or theft, third-party security breaches, employee error or malfeasance, and other potential compromises. Disruptions from unauthorized access to or tampering with our computer systems in any such event could have a material adverse effect on our business, reputation, operating results and financial condition.

Our outstanding domestic credit facility subjects us to financial covenants which may limit our flexibility.

Our domestic credit facility subjects us to a number of financial covenants, including a minimum ratio of Adjusted EBITDA to interest expense minus interest on jackpot liabilities and a maximum ratio of Net Funded Debt to Adjusted EBITDA. Our failure or inability to comply with these covenants will cause an event of default that, if not cured, could cause the entire outstanding borrowings under our domestic credit facility, 5.5% Bonds, 7.5% Bonds and Notes to become immediately due and payable. In addition, our interest rate under the domestic credit facility can vary based on our public credit rating or our Net Funded Debt to Adjusted EBITDA ratio. Each of these measures may be adversely impacted by unfavorable economic conditions. The domestic credit facility also includes restrictions that may limit our flexibility in planning for, or reacting to, changes in our business and the industry.

Our outstanding Notes subject us to additional risks.

Our Notes issued in May 2009 contain a net settlement feature, which entitles holders to receive cash up to $1,000 per Note and shares for any excess conversion value as determined by the respective governing indentures. Consequently, if a significant number of Notes are converted or redeemed, we would be required to make significant cash payments to the holders who convert or redeem the Notes.

In connection with the offering of the Notes, we entered into additional separate transactions for note hedges and warrant transactions. In connection with these transactions, the hedge counterparties and/or their respective affiliates may enter into various derivative transactions with respect to our common stock and may enter into or unwind various derivative transactions and/or purchase or sell our common stock in secondary market transactions prior to maturity of the Notes. These activities could have the effect of increasing or preventing a decline in, or having a negative effect on, the value of our common stock and could have the effect of increasing or preventing a decline in the value of our common stock during any conversion reference period related to a conversion of the Notes. The warrant transactions could separately have a dilutive effect from the issuance of our common stock pursuant to the warrants.

A decline in and/or sustained low interest rates causes an increase in our jackpot expense which could limit or reduce our future profits.

Changes in prime and/or treasury and agency interest rates during a given period cause fluctuations in jackpot expense largely due to the revaluation of future winner liabilities. When rates increase, jackpot liabilities are reduced as it costs less to fund the liability. However, when interest rates decline or remain low the value of the liability (and related jackpot expense) increases because the cost to fund the liability increases. Our results may continue to be negatively impacted by continuing low interest rates or further declines in interest rates, resulting in increased jackpot expense and a reduction of our investment income, which could limit or reduce our future profits.

New products may be subject to complex and dynamic revenue recognition standards, which could materially affect our financial results.

As we introduce new products and transactions become increasingly complex, additional analysis and judgment is required to account for and recognize revenues in accordance with generally accepted accounting principles. Transactions may include multiple element arrangements and/or software components and applicable accounting principles or regulatory product approval delays could further change the timing of revenue recognition and could adversely affect our financial results for any given period. Fluctuations may occur in our deferred revenues and reflect our continued shift toward more multiple element contracts that include systems and software.

Investments and development financing loans could adversely impact liquidity or cause us to incur loan losses or record a charge to earnings if our investments become impaired.

We invest in and/or provide financing for expansion or construction of gaming locations and other business purposes, including locations abroad. Such investment and financing activities subject us to increased credit risk in certain regions, which could be exacerbated by current unfavorable economic conditions or other political or economic instability in those regions. We monitor our investments and financing activities to assess impairment on a quarterly basis.

We have in the past and may in the future incur losses on these types of investments and loans. Our results of operations, liquidity or financial position may be negatively impacted if we are unable to collect on loans or derive benefit from our investments.

Current environmental laws and regulations, or those enacted in the future, could result in additional liabilities and costs.

The manufacturing of our products may require the use of materials that are subject to a variety of environmental, health and safety laws and regulations (such as climate change legislation). Compliance with these laws could increase our costs and impact the availability of components required to manufacture our products. Violation of these laws may subject us to significant fines, penalties or disposal costs, which could negatively impact our results of operations, financial position or cash flows.

Item 1B.

Unresolved Staff Comments

None

Item 2.

Properties

Our properties consist primarily of facilities worldwide used for manufacturing, engineering, sales, corporate administration, customer service and technical support. We own our corporate headquarters in Las Vegas, Nevada, which serves as our primary sales and service facility. We also own a Reno, Nevada, campus, which serves as our primary manufacturing, engineering and warehousing facility. Additional sales and service facilities worldwide are occupied under leases that expire at various times through 2022.

Square Footage Of Facilities At September 30, 2011

	Approximate Square Footage
	Owned		Leased
(in thousands)
North America (US and Canada)		1,856		411

International
EMEA		149		114
LatAm		-		99
AsiaPac		15		191

We expect our current properties will be adequate for our near-term business needs and the productive capacity of our facilities is substantially utilized. In 2010, we discontinued operations and terminated all facility lease agreements in Japan. See Note 21 for more information regarding discontinued operations.

Item 3.

Legal Proceedings

IGT has been named in and has brought lawsuits in the normal course of business. A description of certain of these matters is contained in Note 13 and incorporated herein by this reference.

Item 4.

(Removed and Reserved)

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed and traded on the New York Stock Exchange under the symbol “IGT.” As of November 28, 2011, there were approximately 2,600 record holders of IGT’s common stock and the closing price was $16.54.

	Quarters
	First		Second		Third		Fourth
2011
Stock price - high	$	17.82	$	19.11	$	18.63	$	19.15
Stock price - low		14.00		15.13		14.86		13.38
Dividends declared		0.06		0.06		0.06		0.06
2010
Stock price - high	$	22.42	$	21.94	$	21.86	$	16.90
Stock price - low		17.53		16.18		15.21		13.65
Dividends declared		0.06		0.06		0.06		0.06

IGT transfer agent and registrar

Wells Fargo Shareowner Services

161 North Concord Exchange

South St. Paul, MN 55075-1139

(800) 468-9716

www.wellsfargo.com/contactshareownerservices

Share Repurchases

The purpose of our common stock repurchase plan, as amended on June 7, 2011 when our Board of Directors authorized repurchases of up to $500.0 million, is to return value to our shareholders by reducing the number of shares outstanding. We use open market or privately negotiated transactions, as well as Rule 10b5-1 trading plans, depending on market conditions and other factors. The authorization does not specify an expiration date.

Periods of 2011 fourth quarter	Total (a) Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as part of a Publicly Announced Plan		Approximate Dollar Value of Shares Still Available for Purchase Under the Plan
July 3 - July 30, 2011		-	$	-		-	$	475.0
July 31 - August 27, 2011		-	$	-		-		475.0
August 28 - October 1, 2011		1.6	$	15.30		-	$	449.9
Total		1.6	$	15.30		-

(a) Includes 40,400 of restricted shares or units tendered by employees at fair value at vesting for tax withholding obligations

Performance Graph

The following graph reflects the cumulative total return (change in stock price plus reinvested dividends) of a $100 investment in our common stock for five fiscal years ended September 30, 2011 relative to the Standard and Poor’s 500 Composite Index and a customized peer group of four companies that includes Bally Technologies, Inc., Scientific Games Corporation, Shuffle Master, Inc., and WMS Industries, Inc.

The following graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any filing by us under the Securities Act of 1933, as amended (the Securities Act), or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. The stock price performance included in this graph is not necessarily indicative of future stock price performance.

	2006		2007		2008		2009		2010		2011
International Game Technology	$	100.00	$	105.17	$	45.94	$	50.95	$	37.07	$	38.21
S&P 500		100.00		116.44		90.85		84.58		93.17		94.24
Peer Group		100.00		129.68		93.23		99.37		86.54		57.16

Item 6.

Selected Financial Data

The following selected financial highlights should be read in conjunction with Item 7, MDA, and Item 8, Financial Statements and Supplementary Data. See Note 21 for additional information about discontinued operations reclassified in the income statement for all periods presented.

As of and for Years Ended September 30,	2011			2010			2009			2008			2007

Revenues	$	1,957.0		$	1,917.2		$	2,018.8		$	2,430.0		$	2,453.3
Gross profit		1,138.4			1,087.3			1,113.6			1,383.4			1,423.5
Operating income		504.9			424.8			332.4			671.7			780.3
Income from continuing operations before tax (1)		427.9			304.9			213.1			578.7			758.8
Income from continuing operations after tax		292.3			219.6			148.7			335.8			480.3
Discontinued operations, net of tax		(8.7	)		(33.6	)		(21.9	)		(7.8	)		12.8
Net income		283.6			186.0			126.8			328.0			493.1

Basic earnings per share
Continuing operations	$	0.98		$	0.73		$	0.50		$	1.09		$	1.45
Discontinued operations	$	(0.03	)	$	(0.11	)	$	(0.07	)	$	(0.03	)	$	0.04
Net income	$	0.95		$	0.62		$	0.43		$	1.06		$	1.49

Diluted earnings per share
Continuing operations	$	0.97		$	0.73		$	0.50		$	1.08		$	1.43
Discontinued operations	$	(0.03	)	$	(0.11	)	$	(0.07	)	$	(0.03	)	$	0.04
Net income	$	0.94		$	0.62		$	0.43		$	1.05		$	1.47

Weighted average shares outstanding
Basic		298.2			296.3			293.8			308.0			330.1
Diluted		299.8			297.8			294.0			310.2			335.7

Cash dividends declared per share	$	0.24		$	0.24		$	0.33		$	0.57		$	0.53

Net operating cash flows	$	612.4		$	591.0		$	547.9		$	486.5		$	821.5
Net investing cash flows		(118.3	)		(117.7	)		(288.4	)		(365.7	)		(296.7	)
Net financing cash flows		(190.8	)		(462.1	)		(381.2	)		(115.2	)		(556.5	)
Capital expenditures (2)		205.1			240.2			257.4			298.2			344.3
Cash used for share repurchases		50.1			-			-			779.7			1,118.3

Cash and short-term investment securities (3)	$	552.0		$	248.9		$	247.4		$	374.4		$	400.7
Working capital		875.2			620.1			609.2			733.4			595.5
Total assets		4,154.4			4,007.0			4,328.1			4,546.9			4,147.8
Debt, net (current and non-current)		1,646.3			1,674.3			2,020.0			2,235.4			1,457.2
Jackpot liabilities (current and non-current)		508.4			570.9			588.1			650.7			643.1
Non-current liabilities		2,174.9			2,190.4			2,640.0			2,881.9			1,960.0
Total equity (4)		1,444.8			1,234.3			1,063.6			928.3			1,496.3

(1)	2010 and 2011 were significantly impacted by impairment and affiliate investment losses. See MDA—Results of Operations for additional information.

(2)	2007 capital expenditures included Las Vegas campus construction.

(3)	Includes restricted amounts.

(4)	2008 equity was significantly reduced by treasury share repurchases.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following MDA is intended to enhance the reader’s understanding of our operations and current business environment from the perspective of our company’s management. MDA is provided as a supplement to, and should be read in conjunction with, our Item 1, Business, and Item 8, Financial Statements and Supplementary Data.

We sometimes refer to the impact of changes in foreign currency exchange rates, which results from translating foreign functional currencies into US dollars, as well as currency transaction remeasurement, for reporting purposes. The impact of foreign currency exchange rate fluctuations represents the difference between current rates and prior period rates applied to current period activity.

OVERVIEW

International Game Technology is a global company specializing in the design, development, manufacture, and marketing of electronic gaming equipment and systems products, including online and mobile solutions for regulated markets. We are a leading supplier of gaming products in substantially all legal jurisdictions worldwide and provide a diverse offering of quality products and services at competitive prices, designed to increase the potential for gaming operator profits by enhancing the player’s experience.

We manage our operations in two geographic business segments, North America and International, with certain unallocated income and expenses managed at the corporate level. See BUSINESS SEGMENT RESULTS below and Note 18 for additional business segment information.

The results for our year ended September 30, 2011 reflect improvement in product sales, as well as gaming operations, resulting in higher overall revenues, gross profit, and operating income compared to last year. Improved operating income was primarily the result of higher product sales volume combined with reduced impairment charges. Current year impairment charges related to corporate assets held for sale, certain underperforming fixed assets, and additional decline in the fair value of our Alabama notes receivable. The prior year impairment charges related to the Alabama charitable bingo market closures. For a more in-depth analysis of our current results, see CONSOLIDATED RESULTS directly following this OVERVIEW.

During 2011, the company focused on the following key objectives:

Revenue Improvement —

Consolidated revenues increased 2% primarily due to improved machines sales in North America, which more than offset International decreases. Replacement machine units shipped grew 27% with the success of promotional customer incentives, refreshed new game titles, and versatile platforms. Favorable product mix and cost efficiencies improved our product sales gross margin. Additionally, with the introduction of our versatile multi-game configurable Universal Slant cabinet, we reduced time-to-market by as much as 50%.

Increased revenue from systems and IP fees contributed to improved product sales gross margin. Our open network strategy is designed to drive the creation of additional sbX® application utilities that will differentiate the next-generation slot floor and compel future game sales.

Consolidated gaming operations yields (average revenue per unit per day) improved overall attributable to higher play levels, most significant in our MegaJackpot® brands, and an increasing mix of newer, better performing game titles. North America gaming operations revenue decline, largely due to facility closures in Alabama during 2010, was nearly offset by International increases. Our gaming operations installed base increased 2% compared to last year due to international growth.

Increase profitability and innovation in our gaming operations line —

We responded to competitive pressure and conservative customer spending in a lagging economic recovery with aggressive product innovation to strengthen our portfolio of products and services. Revitalizing our gaming operations installed base, we increased the velocity of game releases, created common platforms with improved upgrade utility for new games, and increased our content offerings around popular culture themes and brands. Additionally, the implementation of process improvements reduced development time and per-game production costs, contributing to improved gaming operations gross profits.

Efficiency Improvement —

By applying our broad portfolio of products and services globally and expanding the use of standard platforms to leverage our scale, we further optimized efficiency across the company. Consolidated gross margin improved over the prior year periods, reflecting our improved business mix and operating leverage, as well as continued benefits from productivity initiatives.

Part of our broader global strategy included shifting business mix by exiting non-core operations and increasing our presence in higher-value areas. Consistent with this strategy, in September 2011 we sold our UK Barcrest Group to Scientific Games Corporation for approximately $47.0 million, subject to a final working capital adjustment and contingent consideration related to certain existing customer arrangements. See Note 21 for additional information about the sale of the Barcrest Group, as well as Japan and DigiDeal operations discontinued during 2010.

In April 2011, we modified our revolving domestic credit facility with a syndicate of banks at more favorable rates and less restrictive covenants as discussed further below under LIQUIDITY AND CAPITAL RESOURCES—Credit Facilities and Indebtedness. With no outstanding balance on our domestic credit facilities at September 30, 2011, we have more flexibility to invest in strategic opportunities.

Increasing International Presence and Market Penetration —

We reorganized our international organization and increased our sales presence within international markets by broadening the localization of game content and expanding the coverage provided by local sales offices. As markets outside of the US are expected to grow faster than those within the US, we have increased scalability and positioned our International operations for developing opportunities. As we continue to monitor potential for gaming growth, we remain cautiously optimistic about future opportunities over the next few years in LatAm and Asia markets.

Accelerate Interactive Growth —

As a number of jurisdictions around the world consider the legalization of online gaming, our goal is to become a major supplier of interactive online gaming products and services. Toward that goal, we invested $108.2 million in the acquisition of Entraction to advance our position in legalized interactive gaming markets and strengthen our product portfolio to include all major online specialties—poker, bingo, casino, and sports betting. Established in 2000 and based in Stockholm, Sweden, Entraction is a supplier of online gaming products and services with one of the world’s largest legal online poker networks. See Note 20.

Additionally, we expanded our interactive gaming infrastructure in the US and relocated our San Francisco interactive headquarters to a larger facility. We are also aligning our development efforts to capitalize on a growing trend toward converged infrastructure products that integrate land-based casino games with online games.

2012 goals

Our core objectives will remain consistent in 2012 as we look to build on the momentum of our internal operating improvements, enhance the velocity of revenue growth on a global scale, and energize our interactive online and mobile product lines.

RECENTLY ISSUED ACCOUNTING STANDARDS

At September 30, 2011, there were no recently issued accounting standards that are expected to have a significant impact to our financial statements. See Note 1.

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements were prepared in conformity with US GAAP. Accordingly, we are required to make estimates incorporating judgments and assumptions we believe are reasonable based on our historical experience, contract terms, trends in our company and the industry as a whole, as well as information available from other outside sources. Our estimates affect amounts recorded in the financial statements and actual results may differ from initial estimates.

We consider the following accounting estimates to be the most critical to fully understand and evaluate our reported financial results. They require us to make subjective or complex judgments about matters that are inherently uncertain or variable. The following accounting estimates are considered the most sensitive to changes from external factors.

Revenue Recognition

We receive revenues from the distribution of electronic gaming equipment and network systems, as well as licensing and services. Revenues are recognized when all of the following have been satisfied:

●

persuasive evidence of an arrangement exists

●

the price to the customer is fixed and determinable

●

delivery has occurred and any acceptance terms have been fulfilled

●

collection is reasonably assured

Determining whether these requirements have been met may require us to make assumptions and exercise judgment that could significantly impact the timing and amount of revenue reported each period. In addition, we may enter into arrangements which include software and/or multiple elements or deliverables, such as gaming devices bundled with software systems and services. In such cases additional judgments and estimates are necessary to ensure the appropriate amounts of revenue are recorded for a given period. These judgments relate primarily to the allocation of revenues based on VSOE or management’s best estimate of each element’s relative selling price, and may affect the amounts and timing of revenue recorded. If we are unable to establish VSOE for undelivered software and software-related elements, we may be required to defer software revenues in certain arrangements.

The application of our revenue recognition policies and changes in our assumptions or judgments affect the timing and amounts of our revenues and costs. Deferred revenue decreased to $59.1 million at September 30, 2011 from $90.2 million at September 30, 2010, primarily related to the completion of obligations under multi-element contracts. Complex systems and/or multiple element contracts may take several months to complete and deferred revenue may increase as our products evolve toward a more software systems-centric environment.

Goodwill, Other Intangible Assets, Royalties, and Affiliate Investments

Impairment testing for goodwill, other intangibles, affiliate investments and royalties requires judgment, including the identification of reporting units, allocation of related goodwill, assignment of corporate shared assets and liabilities to reporting units, estimated cash flows, and determinations of fair value. While we believe our estimates of future revenues and cash flows are reasonable, different assumptions could materially affect the assessment of useful lives, recoverability and fair value. If actual cash flows fall below initial forecasts, we may need to record additional amortization and/or impairment charges.

Goodwill

We measure and test goodwill for impairment at least annually, or more often if there are indicators of impairment. The fair value of the reporting unit is first compared to its carrying amount including goodwill. If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired. In the event that the fair value of the reporting unit is less than its carrying value, the amount of the impairment loss will be measured by comparing the implied fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess.

Our two reporting units, North America and International, were determined on the basis of customer regions and in accordance with accounting guidance on reporting units. Components below our North America and International business segments were evaluated to have similar economic characteristics and therefore aggregated. In determining the fair value of our reporting units, we apply the income approach using the DCF method and the market approach using the implied valuation multiples (such as enterprise value to revenue, EBITDA and EBIT) of comparable gaming companies, weighting each method’s result equally.

Our DCF analysis is based on the present value of two components: the sum of our five-year projected cash flows and a terminal value assuming a long-term growth rate. The cash flow estimates are prepared based on our business plans for each reporting unit, considering historical results and anticipated future performance based on our expectations regarding product introductions and market opportunities. The discount rates used to determine the present value of future cash flows were derived from the weighted average cost of capital of a group of comparable companies with consideration for the size and specific risks of each IGT reporting unit. The discount rate used for each reporting unit was approximately 12% for 2011 and 2010.

Our goodwill totaled $1.2 billion at September 30, 2011 and 2010. Our 2011 annual goodwill impairment test indicated the fair value of each reporting unit was significantly in excess of its carrying value. Inherent in such fair value determinations are significant judgments and estimates, including assumptions about our future revenues, profitability, cash flows, and long-term growth rates, as well as our operational plans and interpretation of current economic indicators and market valuations.

Changes in our test assumptions from 2010 to 2011 included updated five-year forecasts with reduced growth for both reporting units offset by higher market capitalization. The fair values increased from 2010 for both reporting units, with North America up 21% and International up 2%. The excess of fair value over carrying value for each reporting unit at the 2011 testing date totaled $2.1 billion for North America and $1.8 billion for International.

If our assumptions do not prove correct or economic conditions affecting future operations change, our goodwill could become impaired and result in a material adverse effect on our results of operations and financial position. To illustrate the sensitivity of the fair value calculations on our goodwill impairment test, we modified our 2011 test assumptions to create a hypothetical 50% decrease to the fair values of each reporting unit. The resulting hypothetical excess of fair value over carrying value would be approximately $0.6 billion for each reporting unit, and we would therefore continue to have no impairment.

Other Intangibles

Our portfolio of other intangibles substantially consists of finite-lived patents, contracts, trademarks, developed technology, reacquired rights and customer relationships. We regularly monitor events or changes in circumstances that indicate the carrying value of these intangibles may not be recoverable or require a revision to the estimated remaining useful life. Our other intangibles totaled $170.4 million at September 30, 2011 and $202.1 million at September 30, 2010.

If an event or change occurs that indicates the carrying value might not be recoverable, we estimate cash flows directly associated with the use of the intangible to test recoverability and remaining useful lives based on the forecasted utilization of the asset and expected product revenues. In developing estimated cash flows, we incorporate assumptions regarding changes in legal factors, related industry climate, regulatory actions, contractual factors, operational performance and the company’s strategic business plans, as well as the effects of obsolescence, demand, competition, and other market conditions. When the carrying amount exceeds the undiscounted cash flows expected to result from the use and eventual disposition of a finite-lived intangible asset or asset group, we then compare the carrying amount to its current fair value. We estimate the fair value using prices for similar assets, if available, or more typically using a DCF model. We recognize an impairment loss if the carrying amount is not recoverable and exceeds its fair value.

Royalties

We also regularly evaluate the estimated future benefit of prepaid and deferred royalties to determine if the carrying amount is recoverable from forecasted sales or placements of our games. The carrying value of our prepaid and deferred royalties totaled $62.9 million at September 30, 2011 and $63.0 million at September 30, 2010.

Affiliate investments

Our affiliate investments consist of strategic alliances with other gaming technology companies. We regularly monitor events or changes in circumstances that indicate the carrying value of these affiliate investments may be impaired. Future adverse changes in market conditions or operating results related to these affiliates could impair our ability to recover part or all of an investment, causing us to record impairment or other losses.

During 2011 we sold our CLS stock investment for net proceeds of $16.5 million and recognized a gain of $4.3 million. In September 2010, we modified our relationship with CLS in conjunction with changes to our strategy in China. As part of the modification, we reduced the outstanding note receivable, accelerated payments due to us, eliminated restrictions on our exclusivity and ability to sell CLS shares, and recorded a loss of $20.5 million. In 2009, we recorded losses of $78.0 million related to restructuring our relationship and strategy pertaining to the use of WDG IP rights and $13.3 million related to adverse changes in LVGI’s financial capacity and changes in our business strategy.

See Note 2 for additional information about our affiliate investments.

Jackpot Liabilities and Expenses

A portion of our gaming operations recurring revenue arrangements incorporates IGT paid WAP jackpots for which we recognize corresponding jackpot liabilities and expense. Changes in our estimated amounts for WAP jackpot liabilities and associated jackpot expense are attributable to regular analysis and evaluation of the following factors:

●

variations in slot play (frequency of WAP jackpots and patterns of coin-in driving WAP jackpot growth)

●

volume (number of WAP units in service and levels of coin-in per unit)

●

interest rate movements

●

the size of base WAP jackpots (startup amount) at initial setup or after a WAP win

Interest rates applicable to jackpot funding vary by jurisdiction and are impacted by market factors, as well as winner elections to receive a lump sum payment in lieu of periodic annual payments. Current and noncurrent portions of jackpot liabilities, as well as jackpot expense, may also be impacted by changes in our estimates and assumptions regarding the expected number of future winners who may elect a lump sum payout.

Changes in prime and/or treasury and agency interest rates during a given period cause fluctuations in our jackpot expense largely due to the revaluation of future winner liabilities. The value of the liability (and related jackpot expense) increases when rates decline because it increases the cost to fund the liability. Conversely, when rates increase, jackpot liabilities are reduced as it costs less to fund the liability. Our results may be materially affected by significant changes in interest rates.

Our jackpot liabilities decreased to $508.4 million at September 30, 2011 compared to $570.9 million at September 30, 2010. Consolidated jackpot expense totaled $105.2 million in 2011, $112.1 million in 2010, and $129.3 million in 2009. The decline in jackpot expense for 2011 resulted primarily from decreased WAP units in our installed base.

BUSINESS SEGMENT RESULTS, later in this MDA, provides additional details regarding the fluctuation in jackpot expense. Note 1 summarizes our accounting policies related to jackpot liabilities and expense.

Inventory and Gaming Operations Equipment

The determination of obsolete or excess inventory requires us to estimate the future demand for our products within specific time horizons, generally one year or less. If we experience a significant unexpected decrease in demand for our products or a higher occurrence of inventory obsolescence because of changes in technology or customer requirements, we would recognize additional obsolescence charges.

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. Inventories decreased to $73.0 million at September 30, 2011 from $97.6 million at September 30, 2010, primarily due to cost containment and cycle improvement efforts, as well as the sale of our Barcrest Group (see Note 21).

We also estimate salvage values and useful lives for our gaming operations equipment. Trends in market demand and technological obsolescence may require us to record additional asset charges which would negatively impact gross profit and operating results.

Income Taxes

We conduct business globally and are subject to income taxes in US federal, state, local, and foreign jurisdictions. Determination of the appropriate amount and classification of income taxes depends on several factors, including estimates of the timing and probability of realization of deferred income taxes, reserves for UTBs, and income tax payments.

We record deferred tax assets and liabilities based on temporary differences between the financial reporting and tax basis of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. The ability to realize the deferred tax assets is evaluated through the forecasting of taxable income in each jurisdiction, using historical and projected future operating results, the reversal of existing temporary differences and the availability of tax planning strategies. Net deferred tax assets totaled $181.0 million at September 30, 2011 and $221.1 million at September 30, 2010.

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Changes in tax laws, enacted tax rates, geographic mix or estimated annual taxable income could change our valuation of deferred tax assets and liabilities, which in turn impacts our tax provision. We carefully monitor many factors including the impact of current economic conditions in our valuation of deferred tax assets. At September 30, 2011, our total valuation allowance of $65.5 million primarily consists of investment write-downs, capital losses, net operating losses, and foreign deferred assets. The related deferred tax assets are not expected to be fully realized because we cannot conclude that it is more likely than not that we will earn income of the specific character required to utilize these assets before they expire.

In the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We are required to recognize UTBs taken or expected to be taken in a tax return, when it is “more likely than not” to be sustained upon examination. This assessment further presumes that tax authorities evaluate the technical merits of transactions individually with full knowledge of all facts and circumstances surrounding the issue. The amount recognized in the financial statements is the largest benefit that we believe is more than 50% likely of being realized upon settlement. Changes in facts or information as well as the expiration of statutes of limitations and/or settlements with tax jurisdictions may result in material adjustments to these estimates in the future.

Our income tax provision will be impacted to the extent the final outcome of these tax positions differs from the amount recorded. At September 30, 2011, our UTBs totaled $116.4 million, of which $72.7 million would impact the effective tax rate if recognized. At September 30, 2010, our UTBs totaled $83.8 million, of which $65.6 million would impact the effective tax rate if recognized.

Our tax provision for 2011 was positively impacted by the decrease in UTBs, interest, and penalties as a result of a lapse in the statute of limitations for 2007, an increase in the manufacturing deduction, and the retroactive reinstatement of the R&D tax credit. See Notes 1 and 14 for additional information about our income taxes.

CONSOLIDATED RESULTS – A Year Over Year Comparative Analysis

										Favorable (Unfavorable)
	2011			2010			2009			11 vs 10					10 vs 09
Revenues	$	1,957.0		$	1,917.2		$	2,018.8		$	39.8		2	%	$	(101.6	)	-5	%
Gaming operations		1,073.1			1,074.2			1,143.6			(1.1	)	-			(69.4	)	-6	%
Product sales		883.9			843.0			875.2			40.9		5	%		(32.2	)	-4	%
Machines		558.1			521.3			538.8			36.8		7	%		(17.5	)	-3	%
Non-machine		325.8			321.7			336.4			4.1		1	%		(14.7	)	-4	%
Gross profit	$	1,138.4		$	1,087.3		$	1,113.6		$	51.1		5	%	$	(26.3	)	-2	%
Gaming operations		651.2			642.7			661.0			8.5		1	%		(18.3	)	-3	%
Product sales		487.2			444.6			452.6			42.6		10	%		(8.0	)	-2	%
Gross margin		58	%		57	%		55	%	1		pp	2	%	2 pp			4	%
Gaming operations		61	%		60	%		58	%	1		pp	2	%	2 pp			3	%
Product sales		55	%		53	%		52	%	2		pp	4	%	1 pp			2	%
Units
Gaming operations installed base		53,900			52,900			58,000			1,000		2	%		(5,100	)	-9	%
Fixed		10,000			9,500			8,500			500		5	%		1,000		12	%
Variable		43,900			43,400			49,500			500		1	%		(6,100	)	-12	%
Product sales shipped (1)		35,900			32,700			40,200			3,200		10	%		(7,500	)	-19	%
New		11,400			13,400			22,500			(2,000	)	-15	%		(9,100	)	-40	%
Replacement		24,500			19,300			17,700			5,200		27	%		1,600		9	%
Product sales recognized (2)		37,500			34,700			37,600			2,800		8	%		(2,900	)	-8	%

Operating income	$	504.9		$	424.8		$	332.4		$	80.1		19	%	$	92.4		28	%
Operating margin		26	%		22	%		16	%	4		pp	18	%	6 pp			38	%
Income from continuing operations	$	292.3		$	219.6		$	148.7		$	72.7		33	%	$	70.9		48	%
Discontinued operations (3)		(8.7	)		(33.6	)		(21.9	)		24.9		*			(11.7	)	*
Net income		283.6			186.0			126.8			97.6		52	%		59.2		47	%
EPS
Continuing operations	$	0.97		$	0.73		$	0.50		$	0.24		33	%	$	0.23		46	%
Discontinued operations		(0.03	)		(0.11	)	$	(0.07	)	$	0.08		*		$	(0.04	)	*
Net income	$	0.94		$	0.62		$	0.43		$	0.32		52	%	$	0.19		44	%

(1) includes units where revenues deferred; (2) correlates with revenues recognized; (3) See Note 21

2011 Compared With 2010

Improved operating income was primarily the result of higher product sales volume combined with reduced impairment and restructuring charges (see Operating Expenses section below) and gross margin expansion. Current year impairment charges related to corporate assets held for sale, certain underperforming fixed assets, and additional decline in our Alabama notes receivable. The prior year impairment charges related to the Alabama charitable bingo market closures.

Favorable foreign exchange rates also contributed approximately $27.6 million (largely Australia) to the increase in revenues. Income from continuing operations also benefited from reduced interest costs and favorable net investment gain, partially offset by higher tax provisions.

Discontinued operations (See Note 21)

As part of our strategic realignment of core objectives, we sold our UK Barcrest Group to Scientific Games Corporation for approximately $47.0 million, subject to a final working capital adjustment and contingent consideration related to certain existing customer arrangements. A total loss on the sale was recorded during 2011 of $22.6 million (or $12.6 million after-tax) and the Barcrest Group results were classified in discontinued operations for all periods presented.

During 2010, Japan and DigiDeal results were classified to discontinued operations for all periods presented as a result of closure and divested interests, respectively, in conjunction with changes in our core business strategy.

Consolidated Gaming Operations

Our gaming operations installed base increased 2% compared to last year due to international growth. North America gaming operations revenue decline, largely due to facility closures in Alabama during 2010, was nearly offset by International increases.

Gross profit and margin improved primarily due to increased overall yield (average revenue per unit per day). Yield performance improvement was attributable to higher play levels, most significant in our MegaJackpot® brands, an increasing mix of newer, higher performing game titles, and the removal of lower-yield Alabama and Mexico units. Gross profit and margin also benefited from favorable expenses, including lower jackpot expense, as well as reduced depreciation, casino service costs, and tax and license fees in CDS and lease operations.

Consolidated Product Sales

Product sales revenue growth in 2011 was driven primarily by higher North America replacement units, fueled by increased promotions. Favorable jurisdiction and product mix, as well as cost efficiencies and lower discounts, further improved gross profit and margin.

Deferred revenue decreased $31.1 million during 2011 to $59.1 million at September 30, 2011, primarily related to the completion of obligations under multi-element contracts. During 2011, we shipped 2,400 units for which revenues were deferred and recognized revenues for 4,000 units previously shipped, for a net decrease of 1,600 units in deferred revenue.

2010 Compared With 2009

Increased operating income was largely the result of cost saving initiatives. Revenue declines in both gaming operations and product sales were primarily attributable to fewer new casino openings, additional competitive pressure and lower casino capital spending in an uncertain economy. North America revenue declines were partially offset by International revenue increases. Changes in foreign exchange rates increased revenues by approximately $27.6 million in 2010.

Operating income improvements were also due to lower restructuring and impairment and loss on other assets in 2010. Restructuring charges included in operating expenses related to the reorganization of certain US facilities in 2010 and to our global workforce reduction in 2009. Additionally, 2009 included an extra week due to our 52/53-week accounting year, primarily increasing gaming operations revenues and gross profit, as well as operating expenses.

The early adoption of revenue recognition ASUs for certain software-enable products and multi-element arrangements at the beginning of 2010 resulted in the recognition of $46.4 million of revenues in 2010 that would have been recognized in later periods under the prior accounting guidance.

Consolidated Gaming Operations

Gaming operations revenues and gross profit decreased primarily due to a lower installed base, largely from the closure of certain charitable bingo facilities in Alabama, and the continued shift toward lower price-point machines. Additionally, the extra week in 2009 contributed approximately $22.4 million in consolidated gaming operations revenues and approximately $11.5 million in gross profit.

Gross margins improved due to reduced costs, primarily depreciation, royalties, and jackpot expense. Jackpot expense decreased $17.2 million overall, $17.5 million due to fewer WAP units and $3.8 million due to favorable interest rate effect, partially offset by variations in slot play. See MDA—CRITICAL ACCOUNTING ESTIMATES—Jackpot Liabilities and Expenses for additional information about factors affecting jackpot expense.

Consolidated Product Sales

Product sales revenues and gross profit decreased primarily due to decreased units in North America from fewer new openings, partially offset by increased International units and favorable changes in foreign exchange rates. Gross margin improvement was primarily attributable to reduced material costs and obsolescence.

Deferred revenue decreased $31.8 million during 2010 to $90.2 million at September 30, 2010, primarily related to the completion of obligations under multi-element contracts. During 2010, we shipped 3,700 units for which revenues were deferred and recognized revenues for 5,700 units previously shipped, for a net decrease of 2,000 units in deferred revenue.

Operating Expenses

										Favorable (Unfavorable)
	2011			2010			2009			11 vs 10					10 vs 09
Selling, general and administrative	$	353.3		$	330.4		$	400.7		$	(22.9	)	-7	%	$	70.3	18	%
Research and development		194.7			189.4			193.8			(5.3	)	-3	%		4.4	2	%
Depreciation and amortization		69.7			74.3			77.6			4.6		6	%		3.3	4	%
Restructuring		-			4.7			31.1			4.7		100	%		26.4	85	%
Impairment and loss on other assets		15.8			63.7			78.0			47.9		75	%		14.3	18	%
Total operating expenses	$	633.5		$	662.5		$	781.2		$	29.0		4	%	$	118.7	15	%
Percent of revenues		32	%		35	%		39	%

2011 Compared With 2010

Operating cost increases included development initiatives related to our interactive product line of $12.6 million and $9.4 million for LatAm operations. Higher variable compensation was partially offset by lower bad debt (down $2.2 million) and other cost efficiencies maintained from previous restructuring efforts.

Current year impairment charges related to corporate assets held for sale, certain underperforming fixed assets, and additional decline in our Alabama notes receivable. The prior year impairment charges related to the Alabama charitable bingo market closures. See Note 19 for additional information about these charges.

2010 Compared With 2009

The 2010 decrease in operating expenses was primarily due to reduced restructuring and impairment and loss on other assets, expense reduction efforts and lower bad debt. Bad debt provisions decreased $29.1 million, excluding the Alabama impairment discussed below, as 2009 included higher customer allowances for credit losses resulting from the economic downturn. Additionally, 2009 included an extra week, which added approximately $12.6 million to operating expenses.

Impairment charges of $61.3 million in 2010 related to closures in the Alabama charitable bingo markets due to regulatory challenges, including provisions for credit losses on notes and accounts receivable of $54.7 million and gaming operations equipment impairment of $6.6 million. Additionally, we recognized $2.4 million of impairment related to remaining table assets we held subsequent to the DigiDeal divestiture. Loss on other assets of $78.0 million in 2009 related to WDG IP. See Note 2 for additional information about WDG.

Restructuring charges related primarily to the reorganization of certain US facilities in 2010 and global workforce reductions in 2009. See Note 19 for additional information about these charges.

Other Income (Expense)

										Favorable (Unfavorable)
	2011			2010			2009			11 vs 10					10 vs 09
Interest Income	$	51.2		$	61.1		$	61.6		$	(9.9	)	-16	%	$	(0.5	)	-1	%
WAP investments		22.4			24.9			27.9			(2.5	)	-10	%		(3.0	)	-11	%
Receivables and investments		28.8			36.2			33.7			(7.4	)	-20	%		2.5		7	%
Interest Expense		(130.8	)		(161.7	)		(159.2	)		30.9		19	%		(2.5	)	-2	%
WAP jackpot liabilities		(22.2	)		(24.6	)		(27.4	)		2.4		10	%		2.8		10	%
Borrowings		(79.0	)		(107.4	)		(101.9	)		28.4		26	%		(5.5	)	-5	%
Convertible debt equity discount		(29.6	)		(29.7	)		(29.9	)		0.1		-			0.2		1	%
Other		2.6			(19.3	)		(21.7	)		21.9		113	%		2.4		11	%
Total other income (expense)	$	(77.0	)	$	(119.9	)	$	(119.3	)	$	42.9		36	%	$	(0.6	)	-1	%

2011 Compared With 2010

The favorable variance in total other income (expense) was primarily due to decreased interest expense on lower debt and favorable net gain/loss on investments, derivatives, and foreign currency, partially offset by decreased interest income from customer financing. Other expense included gain of $4.3 million on the sale of our CLS equity investment during 2011 and loss of $20.5 million related to changes in our CLS notes receivable in 2010.

WAP interest income and expense relates to previous jackpot winner liabilities and accretes at approximately the same rate. WAP interest income also includes earnings on restricted cash and investments held for future winner payments.

2010 Compared With 2009

The unfavorable variance in total other income (expense) was primarily due to increased interest expense resulting from higher borrowing costs. Other expense included affiliate investment losses primarily related to changes in our core business strategy of $20.5 million on our CLS notes receivable in 2010 and $15.4 million on LVGI and PGIC in 2009. See Note 2 for additional information about these affiliate investments.

Income Tax Provision

										Favorable (Unfavorable)
	2011			2010			2009			11 vs 10			10 vs 09
Income tax provision	$	135.6		$	85.3		$	64.4		$	(50.3	)	$	(20.9	)
Effective tax rate		31.7	%		28.0	%		30.2	%	(3.7)		pp	2.2		pp

Differences between our effective tax rate and the US federal statutory rate of 35% principally result from the geographical distribution of taxable income, differences between the book and tax treatment of certain items, and changes in uncertain tax positions. See Note 14 for additional information about our income taxes.

2011 Compared With 2010

Our effective tax rate on income from continuing operations increased in 2011, largely due to changes in certain discrete tax items. The 2011 provision included favorable discrete tax items of $7.0 million related to the manufacturing deduction and retroactive reinstatement of the R&D tax credit and $15.1 million resulting from a lapse in the statute of limitations for 2007. The 2010 provision was positively impacted by $36.7 million related to $50.9 million of settlements with tax authorities on the closure of IRS examinations for years 2002 through 2005, partially offset by other changes in uncertain tax positions.

2010 Compared With 2009

Our effective tax rate on income from continuing operations decreased in 2010, largely due to changes in certain discrete tax items. The 2010 provision was positively impacted by $36.7 million, related to $50.9 million of settlements with tax authorities on the closure of IRS examinations for years 2002 through 2005, partially offset by other changes in uncertain tax positions. The 2009 provision was benefited by $17.1 million, including settlements with tax authorities for years 2000 and 2001, partially offset by increases in valuation allowance established against foreign deferred tax assets not likely to be realized.

BUSINESS SEGMENT RESULTS – A Year Over Year Comparative Analysis

Operating income for each regional segment below reflects applicable operating expenses. See Note 18 for additional business segment information.

North America

										Favorable (Unfavorable)
	2011			2010			2009			11 vs 10					10 vs 09
Revenues	$	1,480.3		$	1,428.4		$	1,629.4		$	51.9		4	%	$	(201.0	)	-12	%
Gaming operations		914.1			933.0			1,012.0			(18.9	)	-2	%		(79.0	)	-8	%
Product sales		566.2			495.4			617.4			70.8		14	%		(122.0	)	-20	%
Machines		324.7			268.2			376.9			56.5		21	%		(108.7	)	-29	%
Non-machine		241.5			227.2			240.5			14.3		6	%		(13.3	)	-6	%
Gross profit	$	858.3		$	800.9		$	892.4		$	57.4		7	%	$	(91.5	)	-10	%
Gaming operations		542.8			541.1			578.3			1.7		-			(37.2	)	-6	%
Product sales		315.5			259.8			314.1			55.7		21	%		(54.3	)	-17	%
Gross margin		58	%		56	%		55	%	2		pp	4	%	1		pp	2	%
Gaming operations		59	%		58	%		57	%	1		pp	2	%	1		pp	2	%
Product sales		56	%		52	%		51	%	4		pp	8	%	1		pp	2	%
Units
Gaming operations installed base		40,900			40,900			45,500			-		-			(4,600	)	-10	%
Fixed		7,500			7,100			6,500			400		6	%		600		9	%
Variable		33,400			33,800			39,000			(400	)	-1	%		(5,200	)	-13	%
Product sales shipped		20,900			18,100			26,400			2,800		15	%		(8,300	)	-31	%
New		4,900			5,700			15,600			(800	)	-14	%		(9,900	)	-63	%
Replacement		16,000			12,400			10,800			3,600		29	%		1,600		15	%
Product sales recognized		22,800			18,600			25,800			4,200		23	%		(7,200	)	-28	%
Operating income	$	476.2		$	345.9		$	331.0		$	130.3		38	%	$	14.9		5	%
Operating margin		32	%		24	%		20	%	8		pp	33	%	4		pp	20	%

2011 Compared With 2010

North America operating income improvement was primarily the result of higher product sales volume combined with reduced impairment and restructuring charges (see CONSOLIDATED RESULTS – OPERATING EXPENSES above) and gross margin expansion. Current year impairment charges of $7.9 million related to corporate assets held for sale, and $3.6 million related to additional decline in our Alabama notes receivable. The prior year impairment charges related to the Alabama charitable bingo market closures.

North America gaming operations revenues declined, in part due to facility closures in Alabama during 2010, partially offset by improved yields, up 4%. We maintained our North America installed base, as gains in CDS and MegaJackpot® brand units offset losses in lease operation units. Gross profit and margin improved primarily due to improved yields attributable to higher play levels in our CDS and MegaJackpot® brands, an increasing mix of new, higher performing game titles, and the removal of lower-yield Alabama units. Gross profit and margin also benefited from lower jackpot expense, depreciation and casino service costs.

Product sales revenues improved with increased replacement machines driven by successful promotional programs, as well as higher IP licensing fees, and network systems sales. Gross profit and margin were also favorably impacted by the increased higher-margin systems and IP revenues, lower promotional discounts largely related to the prior year promotions, and reduced nonstandard obsolescence and warranty costs.

2010 Compared With 2009

North America operating income improved during 2010 primarily due to reduced operating costs, which offset revenue decline. The decrease in operating expenses was primarily due to reduced restructuring and impairment and loss on other assets, expense reduction efforts and lower bad debt provisions.

Impairment charges in 2010 included $61.3 million related to Alabama charitable bingo market closures and $2.4 million related to remaining table assets we held subsequent to the DigiDeal divestiture in September 2010. Loss on other assets of $78.0 million in 2009 related to WDG IP. See Note 2 for additional information about WDG. Restructuring charges related primarily to the reorganization of certain US facilities in 2010 and global workforce reductions in 2009. See Note 19 for additional information about these charges. DigiDeal results were classified in discontinued operations for all periods presented, as discussed above under CONSOLIDATED RESULTS and in Note 21.

North America gaming operations revenues and gross profit decreased primarily due to our lower installed base, down largely due to Alabama closures. Approximately $19.0 million of the revenue decrease was attributable to removals and shut-downs in Alabama’s charitable bingo market. Revenues in 2010 included $15.7 million from charitable bingo units in Alabama. Additionally, decreases of $19.1 million in revenues and $9.8 million in gross profit were attributable to the extra week in 2009. The improvement in gaming operations margin was attributable to lower costs, most significantly depreciation, royalties, and jackpot expense.

North America product sales revenues and gross profit decreases were primarily attributable to fewer new/expansion units and lower systems sales. Gross margin improvement was primarily due to reduced material costs and obsolescence.

International

										Favorable (Unfavorable)
	2011			2010			2009			11 vs 10					10 vs 09
Revenues	$	476.7		$	488.8		$	389.4		$	(12.1	)	-2	%	$	99.4		26	%
Gaming operations		159.0			141.2			131.6			17.8		13	%		9.6		7	%
Product sales		317.7			347.6			257.8			(29.9	)	-9	%		89.8		35	%
Machines		233.4			253.1			161.9			(19.7	)	-8	%		91.2		56	%
Non-machine		84.3			94.5			95.9			(10.2	)	-11	%		(1.4	)	-1	%
Gross profit	$	280.1		$	286.4		$	221.2		$	(6.3	)	-2	%	$	65.2		29	%
Gaming operations		108.4			101.6			82.7			6.8		7	%		18.9		23	%
Product sales		171.7			184.8			138.5			(13.1	)	-7	%		46.3		33	%
Gross margin		59	%		59	%		57	%	-		pp	-		2		pp	4	%
Gaming operations		68	%		72	%		63	%	(4)		pp	-6	%	9		pp	14	%
Product sales		54	%		53	%		54	%	1		pp	2	%	(1)		pp	-2	%
Units
Gaming operations installed base		13,000			12,000			12,500			1,000		8	%		(500	)	-4	%
Fixed		2,500			2,400			2,000			100		4	%		400		20	%
Variable		10,500			9,600			10,500			900		9	%		(900	)	-9	%
Product sales shipped		15,000			14,600			13,800			400		3	%		800		6	%
New		6,500			7,700			6,900			(1,200	)	-16	%		800		12	%