Edgar Filing: INTERNATIONAL GAME TECHNOLOGY

igt_10q-123111.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended December 31, 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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

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

Yes [X] No [ ]

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

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

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

Yes [ ] No [X]

The number of shares outstanding of each of the registrant’s classes of common stock, as of February 3, 2012:

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

TABLE OF CONTENTS

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

PART I – FINANCIAL INFORMATION

Item 1.	Unaudited Consolidated Interim Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38

Item 4.	Controls and Procedures	38

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	46

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

Fiscal dates--actual:		Fiscal dates--as presented:
December 31, 2011		December 31, 2011
January 1, 2011		December 31, 2010
October 1, 2011		September 30, 2011

Abbreviation/term	Definition
Anchor	Anchor Gaming
ASU	Accounting Standards Update
5.5% Bonds	5.5% fixed rate notes due 2020
7.5% Bonds	7.5% fixed rate notes due 2019
bps	basis points
CCSC	Colorado Central Station Casino
CEO	chief executive officer
CFO	chief financial officer
CLS	China LotSynergy Holdings, Ltd.
DCF	discounted cash flow
DDI	Double Down Interactive LLC
EBITDA	earnings before interest, taxes, depreciation, and amortization
Entraction	Entraction Holding AB
EPA	Environmental Protection Agency
EPS	earnings per share
ERISA	Employee Retirement Income Security Act
ERP	enterprise resource planning
Exchange Act	Securities Exchange Act of 1934, as amended
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
IT	Information technology
LatAm	Mexico and South/Central America
LIBOR	London inter-bank offered rate
MDA	management’s discussion and analysis of financial condition and results of operations
MLD®	Multi-layer-display
Notes	3.25% convertible notes due 2014
OSHA	Occupational Safety & Health Administration
pp	percentage points
R&D	research and development
SEC	Securities and Exchange Commission
SIP	2002 Stock Incentive Plan
UK	United Kingdom
US	United States
UTBs	unrecognized tax benefits
VIE	variable interest entity
WAP	wide area progressive
*	not meaningful (in tables)

PART I – FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Interim Financial Statements
CONSOLIDATED INCOME STATEMENTS		5
CONSOLIDATED BALANCE SHEETS		6
CONSOLIDATED STATEMENTS OF CASH FLOWS		7

SUPPLEMENTAL CASH FLOWS INFORMATION		8

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS		9

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES	9

2.	VARIABLE INTERESTS AND AFFILIATES	10

3.	RECEIVABLES	11

4.	CONCENTRATIONS OF CREDIT RISK	12

5.	INVENTORIES	13

6.	PROPERTY, PLANT AND EQUIPMENT	13

7.	GOODWILL AND OTHER INTANGIBLES	13

8.	FAIR VALUE MEASUREMENTS	14

9.	FINANCIAL DERIVATIVES	15

10.	CREDIT FACILITIES AND INDEBTEDNESS	16

11.	CONTINGENCIES	17

12.	INCOME TAXES	22

13.	EMPLOYEE BENEFIT PLANS	23

14.	EARNINGS PER SHARE	24

15.	OTHER COMPREHENSIVE INCOME	24

16.	BUSINESS SEGMENTS	24

17.	DISCONTINUED OPERATIONS	25

18.	SUBSEQUENT EVENTS	26

CONSOLIDATED INCOME STATEMENTS

	Quarter Ended
	December 31,
	2011			2010
(in millions, except per share amounts)
Revenues
Gaming operations	$	264.6		$	252.9
Product sales		180.9			198.3
Total revenues		445.5			451.2
Costs and operating expenses
Cost of gaming operations		104.2			94.1
Cost of product sales		89.4			87.7
Selling, general and administrative		89.7			82.2
Research and development		46.9			48.9
Depreciation and amortization		15.4			18.1
Total costs and operating expenses		345.6			331.0
Operating income		99.9			120.2
Other income (expense)
Interest income		12.0			13.4
Interest expense		(30.0	)		(35.4	)
Other		(2.8	)		4.3
Total other income (expense)		(20.8	)		(17.7	)
Income from continuing operations before tax		79.1			102.5
Income tax provision		28.8			29.7
Income from continuing operations		50.3			72.8
Income (loss) from discontinued operations, net of tax		(1.0	)		0.9
Net income	$	49.3		$	73.7

Basic earnings (loss) per share
Continuing operations	$	0.17		$	0.25
Discontinued operations		-			-
Net income	$	0.17		$	0.25

Diluted earnings (loss) per share
Continuing operations	$	0.17		$	0.25
Discontinued operations		(0.01	)		-
Net income	$	0.16		$	0.25

Cash dividends declared per share	$	0.06		$	0.06

Weighted average shares outstanding
Basic		297.3			297.6
Diluted		299.0			298.8

See accompanying notes

CONSOLIDATED BALANCE SHEETS

	December 31,			September 30,
	2011			2011
(In millions, except par value)
Assets
Current assets
Cash and equivalents	$	484.7		$	460.0
Restricted cash and investment securities		101.4			89.6
Restricted cash and investment securities of VIEs		1.2			2.4
Jackpot annuity investments		48.2			48.7
Jackpot annuity investments of VIEs		14.1			14.5
Accounts receivable, net		285.9			320.1
Current maturities of contracts and notes receivable, net		173.4			167.1
Inventories		96.1			73.0
Deferred income taxes		68.7			97.1
Other assets and deferred costs		133.9			137.4
Total current assets		1,407.6			1,409.9
Property, plant and equipment, net		553.7			552.1
Jackpot annuity investments		272.6			271.8
Jackpot annuity investments of VIEs		51.4			52.8
Contracts and notes receivable, net		119.3			126.4
Goodwill		1,231.2			1,231.4
Other intangible assets, net		158.8			170.4
Deferred income taxes		101.0			84.6
Other assets and deferred costs		257.9			255.0
Total Assets	$	4,153.5		$	4,154.4
Liabilities and Shareholders' Equity
Liabilities
Current liabilities
Accounts payable	$	100.2		$	103.0
Jackpot liabilities, current portion		147.8			143.0
Accrued employee benefits		9.7			38.9
Accrued income taxes		2.1			3.2
Dividends payable		17.9			17.8
Other accrued liabilities		204.3			228.8
Total current liabilities		482.0			534.7
Long-term debt		1,657.1			1,646.3
Jackpot liabilities		359.9			365.4
Other liabilities		165.9			163.2
Total Liabilities		2,664.9			2,709.6
Commitments and Contingencies
Shareholders' Equity
Common stock: $.00015625 par value; 1,280.0 shares authorized; 342.9 and 341.9 issued; 298.0 and 297.4 outstanding		0.1			0.1
Additional paid-in capital		1,555.7			1,542.5
Treasury stock at cost: 44.9 and 44.4 shares		(861.9	)		(855.2	)
Retained earnings		795.2			763.8
Accumulated other comprehensive income		(2.9	)		(8.8	)
Total IGT Shareholders' Equity		1,486.2			1,442.4
Noncontrolling Interests		2.4			2.4
Total Equity		1,488.6			1,444.8
Total Liabilities and Shareholders' Equity	$	4,153.5		$	4,154.4

See accompanying notes

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended December 31,	2011			2010
(in millions)
Operating
Net income	$	49.3		$	73.7
Adjustments:
Depreciation and amortization		54.6			55.1
Discounts and deferred issuance costs		10.0			11.0
Share-based compensation		8.2			11.7
Net loss on disposal and impairment		1.5			-
Excess tax benefits from employee stock plans		(1.8	)		(1.7	)
Other non-cash items		3.5			(5.5	)
Changes in operating assets and liabilities, excluding acquisitions:
Receivables		30.2			18.6
Inventories		(22.3	)		(13.9	)
Accounts payable and accrued liabilities		(57.0	)		(54.8	)
Jackpot liabilities		(5.9	)		(22.9	)
Income taxes, net of employee stock plans		(7.0	)		23.7
Other assets and deferred costs		1.5			7.4
Net operating cash flows		64.8			102.4
Investing
Capital expenditures		(49.2	)		(42.3	)
Proceeds from assets sold		17.0			2.2
Jackpot annuity investments, net		6.8			10.3
Changes in restricted cash		(10.7	)		5.5
Loans receivable cash advanced		-			(0.5	)
Loans receivable payments received		7.4			7.4
Proceeds from unconsolidated affiliates		-			16.5
Net investing cash flows		(28.7	)		(0.9	)
Financing
Debt proceeds		-			50.0
Debt repayments		-			(130.0	)
Employee stock plan proceeds		6.9			3.8
Excess tax benefits from employee stock plans		1.8			1.7
Share repurchases		(4.4	)		-
Dividends paid		(17.8	)		(17.9	)
Net financing cash flows		(13.5	)		(92.4	)
Foreign exchange rates effect on cash and equivalents		2.1			1.2
Net change in cash and equivalents		24.7			10.3
Beginning cash and equivalents		460.0			158.4
Ending cash and equivalents	$	484.7		$	168.7

See accompanying notes

SUPPLEMENTAL CASH FLOWS INFORMATION

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

Three Months Ended December 31,	2011			2010
(in millions)
Jackpot funding
Change in jackpot liabilities	$	(5.9	)	$	(22.9	)
Jackpot annuity purchases		(5.4	)		(2.4	)
Jackpot annuity proceeds		12.2			12.7
Net change in jackpot annuity investments		6.8			10.3
Net jackpot funding	$	0.9		$	(12.6	)
Capital expenditures
Property, plant and equipment	$	(9.8	)	$	(1.4	)
Gaming operations equipment		(39.0	)		(40.6	)
Intellectual property		(0.4	)		(0.3	)
Total	$	(49.2	)	$	(42.3	)
Payments
Interest	$	28.6		$	35.1
Income taxes		31.8			4.3
Non-cash investing and financing items:
Accrued capital asset additions	$	0.4		$	2.3
Interest accretion for jackpot annuity investments		5.2			5.7

See accompanying notes

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

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

	Period End
	Actual	Presented as
Current quarter	December 31, 2011	December 31, 2011
Prior year quarter	January 1, 2011	December 31, 2010
Prior year end	October 1, 2011	September 30, 2011

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

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

Our consolidated interim financial statements include all adjustments of a normal recurring nature necessary to fairly state our consolidated results of operations, financial position, and cash flows for all periods presented. Interim period results are not necessarily indicative of full year results. This Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended September 30, 2011.

Unless otherwise indicated in this report:

references to years relate to our fiscal years ending September 30

dollar amounts in tables are presented in millions, except EPS and par value

current refers to the quarter ended December 31, 2011

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

Use of Estimates

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

Restricted Cash and Investments

We are required by gaming regulation to maintain sufficient reserves in restricted accounts to be used for the purpose of funding payments to WAP jackpot winners. Restricted amounts are based primarily on the jackpot meters displayed to slot players and vary by jurisdiction. Compliance with restricted cash and investments requirements for jackpot funding is reported to the gaming authorities in various jurisdictions.

Additionally, restricted cash and investments included online player deposits of $12.8 million at December 31, 2011 and $14.5 million at September 30, 2011. Escrow funds of $14.6 million designated for the acquisition of noncurrent assets were also included at December 31, 2011.

Recently Adopted Accounting Standards or Updates

Fair Value Measurements

At the beginning of 2012, we adopted accounting standards issued in January 2010 that require separate disclosure of purchases, sales, issuances, and settlements of fair value instruments within the Level 3 reconciliation. The adoption of this ASU did not have a material impact on our financial statements.

Accruals for Casino Jackpot Liabilities

At the beginning of 2012, we adopted accounting standards issued in April 2010, clarifying that jackpot liabilities should not be accrued before they are won if the payout can be avoided. This ASU did not have a material impact on our financial statements.

Recently Issued Accounting Standards or Updates—Not Yet Adopted

Qualitative Goodwill Impairment Assessment

In September 2011, the FASB issued an ASU to simplify the annual goodwill impairment test by allowing an entity to first assess qualitative factors, considering the totality of events and circumstances, to determine that there is greater than 50% likelihood that the carrying amount of a reporting unit is less than its fair value. If so, then the two-step impairment test is not required. The ASU will be effective for our 2013 first quarter and we are currently evaluating whether we will adopt early, as permitted. This ASU is not expected to have a material impact on our financial statements.

Presentation of Other Comprehensive Income

In June 2011, the FASB issued an ASU to require other comprehensive income, including income reclassification adjustments, to be presented with net income in one continuous statement or in a separate statement consecutively following net income. In December 2011, the requirement to disclose the income reclassification adjustments by component was deferred indefinitely. This ASU will be effective for our 2013 first quarter and is not expected to have a material impact on our financial statements.

Fair Value Measurements

In May 2011, the FASB issued an ASU to amend fair value measurement to achieve convergence between US GAAP and IFRS. Effective for our 2012 second quarter, this ASU changed some fair value measurement principles and disclosure requirements, but is not expected to have a material impact on our financial statements.

Offsetting Assets and Liabilities

In December 2011, the FASB issued an ASU to require new disclosures associated with offsetting financial instruments and derivative instruments on the balance sheet that will enable users to evaluate the effect on an entity’s financial position. This ASU will be effective for our 2014 first quarter, but is not expected to have a material impact on our financial statements.

2. VARIABLE INTERESTS AND AFFILIATES

Variable Interest Entities

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

The consolidation of these VIEs primarily increases jackpot liabilities and related assets, as well as interest income and equivalent offsetting interest expense. Consolidated VIE trust assets and equivalent liabilities totaled $66.7 million at December 31, 2011 and $69.7 million at September 30, 2011.

Investments in Unconsolidated Affiliates

China LotSynergy Holdings, Ltd.

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

The fair value of our CLS convertible note, including the default put, totaled $9.3 million at December 31, 2011 and September 30, 2011. The adjusted cost basis of the note, including the conversion option derivative that did not require bifurcation, totaled $9.0 million at December 31, 2011 and $8.9 million at September 30, 2011. The fair value of the default put, accounted for as a current free standing derivative, was $0.3 million at December 31, 2011 and $0.4 million at September 30, 2011.

See Note 8 and 9 for additional information about related fair value assumptions and derivatives.

3. RECEIVABLES

Accounts Receivable

Allowances for Credit Losses		December 31, 2011				September 30, 2011
Total		$	17.4			$	17.6

Customer Financing (Contracts and Notes)

	December 31, 2011		September 30, 2011
Recorded Investment (principal and interest due, net of deferred interest and fees)
Individually evaluated for impairment	$	104.5	$	104.2
Collectively evaluated for impairment		258.3		260.7
Total	$	362.8	$	364.9

Allowances for Credit Losses
Individually evaluated for impairment	$	57.8	$	58.6
Collectively evaluated for impairment		12.3		12.8
Total	$	70.1	$	71.4

Reconciliation of Allowances for Credit Losses
For The Three Months Ended December 31,	2011			2010
Beginning balance	$	71.4		$	78.4
Charge-offs		-			(0.5	)
Recoveries		-			0.1
Provisions		(1.3	)		(0.3	)
Ending balance	$	70.1		$	77.7
Current	$	43.2		$	40.2
Non-current	$	26.9		$	37.5

	December 31, 2011						September 30, 2011
Age Analysis of Recorded Investment	Contracts		Notes		Total		Contracts		Notes		Total
Past Due:
1-29 days	$	4.1	$	1.8	$	5.9	$	5.3	$	2.0	$	7.3
30-59 days		2.2		1.8		4.0		2.0		1.8		3.8
60-89 days		0.9		1.8		2.7		1.2		1.8		3.0
Over 90 days		8.2		36.3		44.5		6.3		31.0		37.3
Total past due	$	15.4	$	41.7	$	57.1	$	14.8	$	36.6	$	51.4
Total current		195.8		109.9		305.7		188.1		125.4		313.5
Grand total	$	211.2	$	151.6	$	362.8	$	202.9	$	162.0	$	364.9

Over 90 days and accruing interest	$	3.0	$	0.1	$	3.1	$	2.6	$	0.1	$	2.7
Nonaccrual status (not accruing interest)		27.8		84.0		111.8		24.2		84.0		108.2

	December 31, 2011						September 30, 2011
Recorded Investment by Credit Quality Indicator Using Credit Profile by Internally Assigned Risk Grade	Contracts		Notes		Total		Contracts		Notes		Total
Low	$	47.4	$	-	$	47.4	$	43.9	$	-	$	43.9
Medium		27.3		0.3		27.6		25.8		0.3		26.1
High*		136.5		151.3		287.8		133.2		161.7		294.9
Total recorded investment	$	211.2	$	151.6	$	362.8	$	202.9	$	162.0	$	364.9
* includes $84.0 of impaired Alabama notes receivable

Impaired loans	December 31, 2011						September 30, 2011
	Contracts		Notes		Total		Contracts		Notes		Total
Recorded investment	$	3.0	$	84.0	$	87.0	$	5.2	$	84.0	$	89.2
Unpaid principal face		2.9		85.2		88.1		5.1		85.2		90.3
Related allowance		1.9		55.8		57.7		2.8		55.8		58.6
Average recorded investment		4.1		87.7		91.8		8.8		87.6		96.4

Interest income recognized on impaired loans	December 31, 2011						December 31, 2010
	Contracts		Notes		Total		Contracts		Notes		Total
Quarter-to-date:
Total	$	-	$	-	$	-	$	0.3	$	0.3	$	0.6
Cash-basis		-		-		-		-		0.3		0.3

4. CONCENTRATIONS OF CREDIT RISK

Receivables By Legal Gaming Region At December 31, 2011
Nevada	8	%
Alabama	5
Oklahoma	5
Canada	4
Other (less than 4% individually)	26
North America	48	%

Argentina	26	%
Europe	7
Australia	5
Other (less than 4% individually)	14
International	52	%

5. INVENTORIES

	December 31,		September 30,
	2011		2011
Raw materials	$	53.0	$	44.1
Work-in-process		2.2		2.4
Finished goods		40.9		26.5
Total	$	96.1	$	73.0

6. PROPERTY, PLANT AND EQUIPMENT

	December 31,			September 30,
	2011			2011
Land	$	62.7		$	62.6
Buildings		233.9			232.8
Leasehold improvements		17.6			17.3
Machinery, furniture and equipment		257.7			248.6
Gaming operations equipment		818.9			812.9
Total		1,390.8			1,374.2
Less accumulated depreciation		(837.1	)		(822.1	)
Property, plant and equipment, net	$	553.7		$	552.1

7. GOODWILL AND OTHER INTANGIBLES

Goodwill

Activity By Segment	North
For the Three Months Ended December 31, 2011	America		International			Total
Beginning balance	$	1,042.8	$	188.6		$	1,231.4
Foreign currency adjustments		-		(0.2	)		(0.2	)
Ending balance	$	1,042.8	$	188.4		$	1,231.2

Other Intangibles

During the quarter ended December 31, 2011, $0.4 million of patent legal costs were capitalized with a weighted average life of 4.5 years.

	December 31, 2011						September 30, 2011
			Accumulated						Accumulated
Ending Balances	Cost		Amortization		Net		Cost		Amortization		Net
Patents	$	383.2	$	277.9	$	105.3	$	382.8	$	270.5	$	112.3
Developed technology		80.2		49.1		31.1		86.9		54.0		32.9
Contracts		23.4		19.3		4.1		25.5		19.5		6.0
Reacquired rights		13.4		2.4		11.0		13.4		2.1		11.3
Customer relationships		13.6		6.8		6.8		14.2		6.9		7.3
Trademarks		1.6		1.1		0.5		2.1		1.5		0.6
Total	$	515.4	$	356.6	$	158.8	$	524.9	$	354.5	$	170.4

	Quarters Ended
	December 31,				Future Annual Estimates
Aggregate Amortization	2011		2010		2012		2013		2014		2015		2016
	$	10.6	$	12.2	$	43.0	$	37.4	$	32.5	$	23.2	$	15.2

8. FAIR VALUE MEASUREMENTS

Financial Assets (Liabilities) Carried at Fair Value

	Fair
	Value			Level 1		Level 2			Level 3
December 31, 2011
Money market funds	$	79.2		$	79.2	$	-		$	-
Investments in unconsolidated affiliates		9.3			-		-			9.3
Derivative assets		93.3			-		93.3			-
Derivative liabilities		(95.9	)		-		(95.9	)		-

September 30, 2011
Money market funds	$	76.9		$	76.9	$	-		$	-
Investments in unconsolidated affiliates		9.3			-		-			9.3
Derivative assets		90.8			-		90.8			-
Derivative liabilities		(93.2	)		-		(93.2	)		-

Reconciliation of Items Carried at Fair Value Using Significant Unobservable Inputs (Level 3)

	Three Months Ended December 31,
	2011			2010
	Investments in Unconsolidated Affiliates			Investments in Unconsolidated Affiliates
Beginning balance	$	9.3		$	21.3
Gain (loss) included in:
Other income (expense) - other		(0.1	)		(0.6	)
Other comprehensive income		(0.2	)		-
Interest accretion		0.3			0.6
Ending balance	$	9.3		$	21.3

Net change in unrealized gain (loss) included in earnings related to instruments still held	$	(0.1	)	$	(0.6	)

Valuation Techniques and Balance Sheet Presentation

Money market funds were primarily money market securities valued based on quoted market prices in active markets.

Investments in unconsolidated affiliates were valued using quoted market prices when available or DCF models incorporating market participant assumptions for credit quality and market interest rates and a Black-Scholes or integrated lattice model with assumptions for stock price volatility and default recovery rates. These investments were presented as a component of other assets, current at December 31, 2011 and noncurrent at December 31, 2010. See Note 2.

Derivative assets and liabilities were valued using quoted forward pricing from bank counterparties, LIBOR credit default swap rates for non-performance risk, and net settlement amounts where appropriate. These are presented primarily as components of other assets, other liabilities, and notes payable. See Note 9.

Financial Assets (Liabilities) Not Carried at Fair Value

	Carrying			Fair			Unrealized
	Value			Value			Gain		Loss
December 31, 2011
Jackpot investments	$	386.3		$	456.0		$	69.7	$	-
Contracts & notes receivable		292.7			284.2			-		8.5
Jackpot liabilities		(507.7	)		(525.8	)		-		18.1
Debt		(1,561.3	)		(1,917.7	)		-		356.4

September 30, 2011
Jackpot investments	$	387.8		$	458.9		$	71.1	$	-
Contracts & notes receivable		293.5			294.6			1.1		-
Jackpot liabilities		(508.4	)		(521.6	)		-		13.2
Debt		(1,553.1	)		(1,879.5	)		-		326.4

Valuation Techniques and Balance Sheet Presentation

Jackpot investments were valued based on quoted market prices.

Contracts and notes receivable were valued using DCF incorporating expected payments and current market interest rates relative to the credit risk of each customer.

Jackpot liabilities were valued using DCF models incorporating estimated funding rates, future payment timing, and IGT's nonperformance credit risk.

Debt was valued using quoted market prices or dealer quotes, when available, for the identical financial instrument when traded as an asset in an active market. Otherwise, fair value was determined using DCF models of expected payments on outstanding borrowings at current borrowing rates. Carrying values above excluded swap adjustments and equity components of convertible debt.

9. FINANCIAL DERIVATIVES

Foreign Currency Hedging

The notional amount of foreign currency contracts hedging our exposure related to monetary assets and liabilities denominated in nonfunctional currency totaled $8.3 million at December 31, 2011and $13.9 million at September 30, 2011.

In May 2007, we executed five-year forward contracts designated as fair value hedges to protect a portion of the US dollar value of our Hong Kong dollar investment in the CLS convertible note (See Note 2). In conjunction with the early redemption of this CLS investment negotiated in September 2010, we executed additional contracts which effectively reduced the cumulative amount of forward contracts. The notional amount of these foreign currency contracts totaled $6.4 million and there was no ineffectiveness during the three months ended December 31, 2011 and 2010.

Interest Rate Management

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

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

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

Presentation of Derivative Amounts

	December 31,		September 30,
Balance Sheet Location and Fair Value	2011		2011
Non-designated Hedges
Foreign currency contracts: Other assets and deferred costs (current)	$	-	$	0.4
Foreign currency contracts: Other accrued liabilities		0.1		-
Designated Hedges
Interest rate swaps: Other assets and deferred costs (noncurrent)		93.3		90.4
Interest rate swaps: Long-term debt		95.8		93.2

	Quarters Ended
	December 31,
Income Statement Location and Gain (loss)	2011		2010
Non-designated Hedges
Foreign currency contracts: Other income (expense)	$	0.5	$	0.7
Designated Hedges
Interest rate swap - ineffectiveness: Other income (expense)		0.3		0.5
Interest rate swap - effectiveness: Interest expense		5.9		4.6

10. CREDIT FACILITIES AND INDEBTEDNESS

Total Outstanding debt

	December 31,			September 30,
	2011			2011
Credit facilities	$	-		$	-
3.25% Convertible Notes		850.0			850.0
7.5% Bonds		500.0			500.0
5.5% Bonds		300.0			300.0
Total principal debt obligations		1,650.0			1,650.0
Discounts:
3.25% Convertible Notes		(85.4	)		(93.5	)
7.5% Bonds		(2.2	)		(2.3	)
5.5% Bonds		(1.1	)		(1.1	)
Swap fair value adjustments:
7.5% Bonds		63.2			61.8
5.5% Bonds		32.6			31.4
Total outstanding debt, net	$	1,657.1		$	1,646.3

IGT was in compliance with all debt covenants and embedded features did not require bifurcation at December 31, 2011.

Domestic Credit Facility

At December 31, 2011, no amounts were outstanding under our domestic credit facility, $729.0 million was available, and $21.0 million was reserved for letters of credit and performance bonds.

Foreign Credit Facilities

At December 31, 2011, $10.2 million was available and no amounts were outstanding under our IGT-Australia subsidiary revolving credit facility, which generally renews annually with maturity in February and is guaranteed by the parent company, International Game Technology.

3.25% Convertible Notes

Quarters Ended December 31,	2011		2010
Contractual interest expense	$	6.9	$	6.9
Discount amortization		8.1		7.4
Remaining discount amortization period	2.4 years

Bonds

Interest rate swaps executed in conjunction with our Bonds are described in Note 9.

11. CONTINGENCIES

Litigation

IGT has been named in and has brought lawsuits in the normal course of business. With respect to the legal proceedings and claims described below, the Company has determined, based on current knowledge, that the amount or range of reasonably possible losses, including reasonably possible losses in excess of amounts already accrued, is not reasonably estimable with respect to certain matters and that the aggregate amount or range of such losses that are estimable would not have a material adverse effect on the Company’s future results of operations, financial position, or cash flows.

Bally

2004 Federal District Court of Nevada

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

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

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

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

2006 Federal District Court of Delaware

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

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

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

On April 28, 2010, the court entered an order dismissing without prejudice Bally’s remaining counterclaims (antitrust, unfair competition and intentional interference with business relationships) and entered final judgment in favor of IGT and against the Bally defendants.

On October 6, 2011, the United States Federal Circuit Court of Appeals affirmed the judgment in favor of IGT and against Bally. A trial to determine the amount of damages incurred by IGT, and related matters, as a result of Bally's infringement has not yet been scheduled.

Aristocrat

2006 Northern Federal District Court of California

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

This case recommenced in the District Court and on May 13, 2010, the District Court entered an order granting IGT’s motion for summary judgment of non-infringement. Aristocrat appealed this judgment. Proceedings on IGT’s claim that Aristocrat committed inequitable conduct in reviving the ‘215 patent application continued in the District Court. A trial was held the week of April 4, 2011 on that inequitable conduct issue, and that claim was dismissed on May 6, 2011.

IGT and Aristocrat entered into an agreement, effective September 30, 2011, settling the lawsuit. On October 6, 2011, the parties filed a letter with the court advising the court that, in accordance with the parties’ resolution of several disputes between them, the case will be concluded by dismissal with prejudice following the final resolution of the pending appeal of the judgment of non-infringement. In connection with the settlement, IGT was granted an irrevocable paid-up license to the Aristocrat patents that were the subject of the litigation and related patents.

2010 Central Federal District Court of California

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

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

IGT and Aristocrat entered into an agreement, effective September 30, 2011, settling the lawsuit and on October 4, 2011, the court entered an order dismissing the lawsuit. In connection with the settlement, IGT granted Aristocrat a non-exclusive license to certain IGT patents.

Rice (formerly Piercey) v Atlantic Lotteries

On May 11, 2010, Atlantic Lottery Corporation commenced an action against International Game Technology, VLC, Inc. and IGT-Canada, wholly-owned subsidiaries of International Game Technology, and other manufacturers of video lottery machines in the Supreme Court of New Foundland and Labrador seeking indemnification for any damages that may be awarded against Atlantic Lottery Corporation in a class action suit also filed in the Supreme Court of New Foundland and Labrador. In December 2011, the plaintiff filed a motion seeking leave to substitute a new plaintiff in place of Rice and to make certain amendments to plaintiff’s statement of claim. In January 2012, Atlantic Lottery Corporation filed a motion to dismiss the action for abuse of process. These motions are scheduled to be heard on February 28, 2012. A motion for class certification was filed by the plaintiff, and arguments on the motion are expected to be scheduled for hearing in April 2012.

Shareholder Actions

Securities Class Action

On July 30, 2009, International Brotherhood of Electrical Workers Local 697 filed a putative securities fraud class action in the US District Court for the District of Nevada, alleging causes of action under Sections 10(b) and 20(a) of the Exchange Act against IGT and certain of its current and former officers and directors. The complaint alleges that between November 1, 2007 and October 30, 2008, the defendants inflated IGT's stock price through a series of materially false and misleading statements or omissions regarding IGT's business, operations, and prospects. In April 2010, plaintiffs filed an amended complaint. In March 2011, defendants’ motion to dismiss that complaint was granted in part and denied in part. The Court found that the allegations concerning statements about the seasonality of game play levels and announcements of projects with Harrah’s and City Center were sufficient to state a claim. Plaintiffs did not state a claim based on the remaining statements about earnings, operating expense, or forward-looking statements about play levels and server-based technology.

The parties have reached an agreement to settle this action. On February 1, 2012, at the direction of the Court, the plaintiffs filed a Notice of Pending Settlement. The parties are in the process of documenting a settlement agreement which requires judicial approval in order for the settlement to take effect.

Derivative Actions

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

The complaints additionally alleged that certain individual defendants engaged in insider trading and that the director defendants improperly handled Thomas J. Matthews’ resignation as Chief Executive Officer of the Company. The actions were consolidated and subsequently a consolidated derivative complaint was filed in December 2009. Defendants moved to dismiss that complaint. On July 6, 2010, the Court granted the defendants’ motion to dismiss, with leave to amend. After plaintiffs elected not to amend, the court entered judgment in favor of the defendants. The plaintiff in Israni v. Bittman, et al. appealed to the US Court of Appeals for the Ninth Circuit. The appeal was argued and submitted on October 13, 2011.

In a letter dated October 7, 2009 to the Company’s Board of Directors, a shareholder made factual allegations similar to those set forth in the above derivative and securities class actions and demanded that the Board investigate, address and remedy the harm allegedly inflicted on IGT. In particular, the letter alleged that certain officers and directors grossly mismanaged the Company by overspending in the area of R&D of server-based game technology despite a looming recession to which the Company was particularly vulnerable; by making or allowing false and misleading statements regarding the Company’s growth prospects and earnings guidance; and by wasting corporate assets by causing the Company to repurchase Company stock at inflated prices. The letter asserts that this alleged conduct resulted in breaches of fiduciary duties and violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5. On July 9, 2010, the shareholder filed a derivative lawsuit in the US District Court for the District of Nevada, captioned Sprando v. Hart, et al., Case No. 3:10-cv-00415 and asserting claims similar to those described above. No claims were asserted against the Company, which is a nominal defendant. On July 25, 2011, the Court granted the Company’s motion to dismiss with prejudice. Plaintiff then appealed to the US Court of Appeals for the Ninth Circuit.

In February 2011, another shareholder sent a letter to the Company’s Board of Directors requesting that the Board investigate allegations similar to those set forth in the derivative actions described above and bring a lawsuit against various of the Company’s current or former officers and directors. In response the Board of Directors formed a litigation committee comprised of disinterested outside directors and assisted by outside counsel to investigate and evaluate the allegations raised in this letter. At the conclusion of this investigation, the committee concluded and recommended that it would not be in the best interests of the Company or its shareholders to pursue the proposed claims. The Board considered and accepted this recommendation and the Company informed the shareholder of the Board’s resolution in September 2011.

On April 8, 2011, the Company was nominally sued in a derivative complaint filed in the US District Court for the District of Nevada, captioned Arduini v. Hart, et al., Case No. 3:11-cv-00255. The claims and allegations in this complaint are similar to those asserted in the securities class action and derivative actions described above. A motion to dismiss has been filed.

ERISA Actions

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

The consolidated complaint is based on allegations similar to those in the securities and derivative lawsuits described above, and further alleges that the defendants breached fiduciary duties to plan participants by failing to disclose material facts to plan participants, failing to exercise their fiduciary duties solely in the interest of the participants, failing to properly manage plan assets, and permitting participants to elect to invest in Company stock. In March 2011, defendants’ motion to dismiss the consolidated complaint was granted in part and denied in part. Discovery is proceeding.

Environmental Matters

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

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

OSHA / Wrongful Termination Matter

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

In conjunction with the Anchor acquisition purchase price allocation as of December 31, 2001, IGT used the relief of royalty valuation methodology to estimate the fair value of the patents at $164.4 million. The carrying value of the patents at December 31, 2011 totaled $25.0 million.

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

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

On February 8, 2011, a jury verdict was entered in favor of the plaintiffs as to their Sarbanes-Oxley claims and plaintiffs were awarded damages in an amount equal to approximately $2.2 million. On March 9, 2011, IGT filed a Renewed Motion for Judgment as a Matter of Law and Motion for a New Trial or for Remittitur. On May 24, 2011, the Court denied these motions, and on May 27, 2011, the Court entered an amended judgment for prejudgment interest of approximately $1.3 million, attorneys’ fees of approximately $1.0 million, and court costs of approximately $132,000. IGT filed a notice of appeal to the US Court of Appeals for the Ninth Circuit on June 21, 2011, which is pending. On July 1, 2011 plaintiffs filed a notice of cross appeal.

Arrangements with Off-Balance Sheet Risks

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

Performance Bonds

Performance bonds outstanding related to certain gaming operations equipment totaled $12.1 million at December 31, 2011. We are liable to reimburse the bond issuer in the event of exercise due to our nonperformance.

Letters of Credit

Outstanding letters of credit issued under our domestic credit facility to ensure payment to certain vendors and governmental agencies totaled $8.9 million at December 31, 2011.

IGT Licensor Arrangements

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

Self-Insurance

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

State and Federal Taxes

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

Product Warranties

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

Three Months Ended December 31,	2011			2010
Beginning balance	$	6.2		$	9.3
Reduction for payments made		(1.6	)		(1.4	)
Accrual for new warranties issued		2.5			2.4
Adjustments for pre-existing warranties		(2.0	)		(0.5	)
Ending balance	$	5.1		$	9.8

12. INCOME TAXES

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

Our effective tax rate for the three months ended December 31, 2011 increased to 36.4% from 29% for the same prior year period. The prior year effective tax rate was positively impacted by an increase in the manufacturing deduction and the retroactive reinstatement of the R&D tax credit. The current year effective tax rate was negatively impacted by losses in foreign jurisdictions for which there is no associated tax benefit.

At December 31, 2011, our gross UTBs totaled $121.5 million, excluding related accrued interest and penalties of $21.8 million. At December 31, 2011, $78.2 million of our UTBs, including related accrued interest and penalties, would affect our effective tax rate if recognized. During the three months ended December 31, 2011, our UTBs increased $5.1 million and related interest and penalties increased $1.7 million.

We are currently under audit by the IRS for amended returns filed for 1999, 2006 and 2007, as well as our originally filed returns for 2008 and 2009. We are also subject to examination in various state and foreign jurisdictions. We believe we have recorded all appropriate provisions for outstanding issues for all jurisdictions and open years. However, we can give no assurance that taxing authorities will not propose adjustments that increase our tax liabilities.

13. EMPLOYEE BENEFIT PLANS

Share-based Compensation

SIP As Of And For The Three Months Ended December 31, 2011

				Weighted Average
						Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
	(thousands)			(per share)		(years)		(millions)
Outstanding at beginning of fiscal year		15,245		$	18.85
Granted		294			16.21
Exercised		(543	)		11.93
Forfeited		(110	)		16.87
Expired		(817	)		27.77
Outstanding at end of period		14,069		$	18.56		6.6	$	21.5

Vested and expected to vest		13,696		$	18.63		6.5	$	20.9

Exercisable at end of period		8,152		$	20.55		5.2	$	10.2

				Weighted Average
				Grant		Remaining		Aggregate
				Date		Vesting		Intrinsic
Restricted Shares/Units	Shares			Fair Value		Period		Value
	(thousands)			(per share)		(years)		(millions)
Outstanding at beginning of fiscal year		3,388		$	15.26
Granted		2,544			15.16
Vested		(599	)		17.92
Forfeited		(48	)		15.54
Outstanding at end of period		5,285		$	14.92		2.0	$	90.9

Expected to vest		4,870		$	14.92		2.0	$	83.8

Other Information
Shares available for future grant	25.4	million
Unrecognized costs for outstanding awards	$100.2	million
Weighted average future recognition period	2.0	years

14. EARNINGS PER SHARE

	Quarter Ended
	December 31,
	2011			2010
Income from continuing operations available to common shares	$	50.3		$	72.8
Basic weighted average shares outstanding		297.3			297.6
Dilutive effect of non-participating share-based awards		1.7			1.2
Diluted weighted average common shares outstanding		299.0			298.8

Basic earnings per share from continuing operations	$	0.17		$	0.25
Diluted earnings per share from continuing operations	$	0.17		$	0.25

Weighted average shares excluded from diluted EPS because the effect would be anti-dilutive:
Share-based awards		12.6			16.4
Notes		42.6			42.6
Note hedges		(42.6	)		(42.6	)
Warrants		42.6			42.6

15. OTHER COMPREHENSIVE INCOME

	Quarters Ended
	December 31,
	2011			2010
Net income	$	49.3		$	73.7
Currency translation adjustments		6.1			0.2
Investment unrealized gains (losses)		(0.2	)		(0.5	)
Comprehensive income	$	55.2		$	73.4

16. BUSINESS SEGMENTS

We view our business in the following two operating segments:

· North America includes our operations associated with customers located in the US and Canada

· International includes our operations associated with customers located in all other jurisdictions

Certain income and expenses related to company-wide initiatives are managed at the corporate level and not allocated to any operating segment. We do not recognize inter-company revenues or expenses upon the transfer of gaming products between operating segments. Segment accounting policies are consistent with those of our consolidated financial statements and segment profit is measured on the basis of operating income.

Our business segments are designed to allocate resources within a framework of management responsibility. Operating costs from one segment may benefit other segments. Realignment of our business development and administrative functions, as well as discontinued operations result in ongoing changes to segment allocations. Elements pertaining to prior periods’ operating income presented below were recast accordingly.

Business Segments Financial Information

	Quarters Ended
	December 31,
	2011			2010
NORTH AMERICA
Revenues	$	322.6		$	351.8
Gaming operations		219.6			218.0
Product sales		103.0			133.8
Gross profit		184.2			210.0
Gaming operations		130.1			134.0
Product sales		54.1			76.0
Operating income		92.4			113.4

INTERNATIONAL
Revenues	$	122.9		$	99.4
Gaming operations		45.0			34.9
Product sales		77.9			64.5
Gross profit		67.7			59.4
Gaming operations		30.3			24.8
Product sales		37.4			34.6
Operating income		32.2			29.2

CORPORATE (unallocated)
Operating expenses	$	(24.7	)	$	(22.4	)

CONSOLIDATED
Revenues	$	445.5