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

OVERVIEW

The following MDA is intended to enhance the reader's understanding of our operations and current business environment. 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.

International Game Technology is a global company specializing in the design, manufacture, and marketing of computerized gaming equipment, network systems, licensing, and services. We are a leading supplier of gaming products to the world, providing a diverse offering of quality products and services at competitive prices that are designed to increase the potential for operator profits by serving players better.

Our annual revenues totaled $2.5 billion in fiscal 2008. We operate in two segments, North America and International, with certain unallocated company-wide income and expenses managed at the corporate level. International continues to be a growing contributor at 25% of operating income in fiscal 2008. See BUSINESS SEGMENT RESULTS below and Note 18 of our Consolidated Financial Statements for additional segment information and financial results.

We are currently operating in a difficult domestic environment. The combination of economic uncertainty, lower replacement demand, limited opportunities from new or expanding properties, and improved competition has negatively impacted our North America results. Our gaming operations business has been negatively affected by lower casino play levels which operators have largely attributed to unfavorable economic conditions, as well as declining interest rates which increase jackpot funding costs. In the face of these challenges, we remain focused on strategic initiatives that we believe will maintain our status as a leading provider of innovative gaming products and services.

Our current product development efforts reflect our commitment to the future of gaming industry technology as our business model continues to evolve toward a more systems-centric, networked gaming environment. In support of the networked gaming environment, we released several new machine models during the current year. Initial customer feedback on these models has been positive, and we anticipate replacement demand in fiscal 2009 to exceed 2008 levels. However, the timing and amount of revenues from these releases remains dependent, in part, on our customers' capital spending, which may continue to be adversely impacted by current economic conditions. We remain on track for initial deployment of our sbXä applications in 2009, and expect to realize a meaningful financial benefit from sbXä technology beginning in fiscal 2010 as we further differentiate IGT gaming products by offering operators new ways to engage and interact with players.

We are dependent, in part, on new market opportunities to generate growth. We expect to benefit from a number of new or expansion projects that are currently underway, but the extent and timing of such opportunities remains uncertain due to the difficult credit environment and risk of prolonged economic weakness. The uncertainty and lack of liquidity has led some gaming operators to delay or cancel construction projects; however, we believe market opportunities may develop as credit markets recover and governments consider gaming tax revenues as one means to address budget shortfalls.

In the current year, we saw new openings or expansions in a number of domestic jurisdictions including Indiana, Nevada, Oklahoma, and Pennsylvania. During the first half of the year, California voters approved new tribal compacts for 17,000 additional slot machines, and Florida voters approved 6,000 additional machines for three pari-mutuel facilities in Miami-Dade County. In November 2008, voters in Maryland voted to legalize up to 15,000 gaming machines at five locations in that state. We also expect to benefit from further gaming expansion in international markets, especially in Southeast Asia.

During fiscal 2008 we continued to deploy our capital for strategic business combinations and acquisitions of important technologies and IP. We believe the Cyberview asset purchase and license agreement enabled more immediate access to the fixed odds betting market in the UK, strengthened our IP portfolio and enhanced our sbXä initiatives. Additionally, we anticipate our acquisition of Million-2-1 will establish new markets and channels for our game content in the mobile gaming business.

We will take a prudent and conservative approach to maintaining our available liquidity while credit market conditions and economic conditions remain unfavorable. We continue to focus on reinvesting in our business through our installed base of gaming operations machines, as well as other strategic capital deployment objectives including investments and alliances to expand our geographic reach, product lines, and customer base. We will judiciously deploy our capital to preserve maximum flexibility.

Amid difficult operating conditions, we are conducting a company-wide strategic review of our costs and organizational structure to maximize efficiency and align our expenses with our current and forecasted business outlook. We anticipate that these efforts will result in quarterly cost reductions ranging from $20.0 million to $25.0 million beginning in the second quarter of fiscal 2009. A large part of our cost-cutting measures relates to workforce reductions that we expect to result in additional charges of $16.0 million to $21.0 million during the first quarter of fiscal 2009. As we move forward in this challenging economic and credit environment, we intend to continuously monitor our costs and make adjustments where necessary and feasible to improve our operating efficiency.

RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2008, the FASB issued FSP APB 14-1, Accounting For Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement). This FSP requires that convertible debt instruments that may be settled in cash upon conversion be separated into debt and equity components. Although we are still quantifying the impact, we expect the adoption of this FSP in the first quarter of fiscal 2010 to increase interest expense related to our convertible debentures with a corresponding decrease to diluted EPS.

See Note 1 of our Consolidated Financial Statements for additional information regarding recently issued accounting standards that may impact IGT upon adoption.

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements were prepared in conformity with accounting principles generally accepted in the US. 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. Senior management discussed the development, selection, and disclosure of the following accounting estimates, considered most sensitive to changes from external factors, with the Audit Committee of our Board of Directors.

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:

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persuasive evidence of an arrangement exists

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the price to the customer is fixed and determinable

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delivery has occurred and any acceptance terms have been fulfilled

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no significant contractual obligations remain

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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 multiple elements or deliverables such as gaming devices, software systems, and services. In such cases additional judgments and estimates are necessary to ensure the appropriate amounts of revenue are recorded in a given period. These judgments relate primarily to the allocation of proceeds based on VSOE or third-party evidence of each element's fair value, and may affect the amounts and timing of revenue recorded. If we are unable to establish VSOE for undelivered elements, we may be required to defer all or a portion of the revenues from certain arrangements.

The application of our revenue recognition policies and changes in our assumptions or judgments affect the timing and amounts of our revenues, cost of gaming operations, and cost of product sales. We anticipate an increase in our deferred revenues as we enter into an increasing number of multiple element contracts that include software and more of our product becomes subject to software rules for revenue recognition. Deferred revenue increased to $62.1 million at September 30, 2008 from $28.7 million at September 30, 2007.

Goodwill, Other Intangible Assets, and Royalties

We measure and test goodwill for impairment using the two-step approach under SFAS 142, Goodwill and Other Intangible Assets, at least annually or more often if there are indicators of impairment. If the carrying

amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess. Our goodwill totaled $1.2 billion at September 30, 2008 and $1.1 billion at September 30, 2007. The last three annual goodwill impairment tests indicate the fair value of each reporting unit is in excess of its carrying value.

In determining the fair value of our reporting units, we apply the income approach using the DCF method. We then compare the implied valuation multiples of a group of comparable competitor gaming companies under the market approach to test the reasonableness of our DCF results. The 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 are derived from the weighted average cost of capital of a group of comparable companies, considering the size and specific risks of each IGT reporting unit.

Our portfolio of other intangibles substantially consists of finite-lived patents, contracts, trademarks, developed technology, 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 in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Our other intangibles totaled $248.9 million at September 30, 2008 and $245.5 million at September 30, 2007.

If an event or change occurs, 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.

We also regularly evaluate the estimated future benefit of prepaid and deferred royalties to determine amounts unlikely to be realized from forecasted sales or placements of our games. The carrying value of our prepaid and deferred royalties totaled $195.5 million at September 30, 2008 and $104.6 million at September 30, 2007.

Impairment testing for goodwill, other intangibles, 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.

Jackpot Liabilities and Expenses

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

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variations in slot play (i.e. jackpot life cycles and slot play patterns)

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volume (i.e. number of WAP units in service and coin-in per unit)

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interest rate movements

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the size of base jackpots (i.e. initial amount of the progressive jackpots displayed to players)

Interest rates applicable to jackpot funding vary by jurisdiction and are impacted by market forces, as well as winner elections to receive a lump sum payment in lieu of periodic annual payments. Current and non-current 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 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 such as the 200 bps decline in the prime rate during the second quarter of fiscal 2008.

Our jackpot liabilities increased to $650.7 million at September 30, 2008 compared to $643.1 million at September 30, 2007. Jackpot expense totaled $160.0 million for fiscal 2008, $164.7 million for fiscal 2007, and $184.9 million in fiscal 2006. The decline in jackpot expense for fiscal 2008 resulted from lower volume and variations in slot play partially offset by unfavorable interest rate movements. Fluctuations between fiscal 2007 and 2006 resulted from variations in slot play, fewer WAP units in service, and interest rate movements.

BUSINESS SEGMENT RESULTS, later in this MDA, discusses additional details regarding the fluctuation in jackpot expense. Note 1 of our Consolidated Financial Statements 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. The increase in inventories to $218.3 million at September 30, 2008 from $144.8 million at September 30, 2007 was primarily related to a build-up in support of the recent release of our newer platforms and cabinets.

We are also required to 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.

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 uncertain tax positions, and income tax payment timing.

Deferred income taxes reflect temporary differences between the book and tax basis of our assets and liabilities, measured at tax rates expected to apply when taxes are actually paid or recovered. This process involves estimating our current tax position in each jurisdiction, as well as making judgments as to whether our taxable income in future periods will be sufficient to fully realize any deferred tax assets. 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. 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. Net deferred tax assets totaled $251.3 million at September 30, 2008 and $208.8 million at September 30, 2007.

In the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, during the first quarter of fiscal 2008. This pronouncement provides guidance for recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. Under FIN 48, we may recognize a tax benefit from an uncertain position if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of 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. We consider many factors when evaluating and estimating our tax positions and related benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Our income tax provision may be impacted to the extent that the final outcome of these tax positions differs from amounts recorded. As of September 30, 2008, our net unrecognized tax benefits totaled $87.5 million, $53.4 million of which would impact the effective tax rate if recognized.

The implementation of FIN 48 as of the beginning of fiscal 2008 increased our unrecognized tax benefits and related interest and penalties by $89.9 million, increased deferred tax assets by $55.4 million, and decreased retained earnings by $34.5 million. See Notes 1 and 17 of our Consolidated Financial Statements for additional information about FIN 48 and the impact of adoption.

CONSOLIDATED OPERATING RESULTS - A Year Over Year Comparative Analysis

                                                                             Favorable (Unfavorable)
                           2008          2007          2006               08 vs 07                07 vs 06
(In millions except units & EPS; pp = percentage point)
Revenues                 $ 2,528.6     $ 2,621.4     $ 2,511.7     $   (92.8 )         -4 %   $  109.7        4 %
Gaming operations          1,337.9       1,361.2       1,251.4         (23.3 )         -2 %      109.8        9 %
Product sales              1,190.7       1,260.2       1,260.3         (69.5 )         -6 %       (0.1 )     --
Machines                     794.8         876.0         896.8         (81.2 )         -9 %      (20.8 )     -2 %
Non-machine                  395.9         384.2         363.5          11.7            3 %       20.7        6 %

Gross profit             $ 1,419.1     $ 1,480.8     $ 1,371.7     $   (61.7 )         -4 %   $  109.1        8 %
Gaming operations            778.1         823.0         730.0         (44.9 )         -5 %       93.0       13 %
Product sales                641.0         657.8         641.7         (16.8 )         -3 %       16.1        3 %

Gross margin                    56 %          56 %          55 %           -  pp       --            1  pp    2 %
Gaming operations               58 %          60 %          58 %          (2 )pp       -3 %          2  pp    3 %
Product sales                   54 %          52 %          51 %           2  pp        4 %          1  pp    2 %

Units
Gaming operations
installed base (1)          60,500        60,100        51,200           400            1 %      8,900       17 %
Fixed                       15,700        14,500        12,000         1,200            8 %      2,500       21 %
Variable                    44,800        45,600        39,200          (800 )         -2 %      6,400       16 %
Machines sold               72,700       105,900       112,000       (33,200 )        -31 %     (6,100 )     -5 %

Operating income         $   659.3     $   800.3     $   725.1     $  (141.0 )        -18 %   $   75.2       10 %

Operating margin                26 %          31 %          29 %          (5  )pp     -16 %          2  pp    7 %

Net income               $   342.5     $   508.2     $   473.6     $  (165.7 )        -33 %   $   34.6        7 %

Diluted EPS              $    1.10     $    1.51     $    1.34     $   (0.41 )        -27 %   $   0.17       13 %

(1) Installed base has been revised to reflect additional international units previously excluded based on a change in management's installed base criteria, increasing fiscal years 2008 and 2007 by 900 units and fiscal 2006 by 1,600 units. Gaming operations revenues and gross profit were not affected by this adjustment.

Fiscal 2008 vs Fiscal 2007

Consolidated net income decreased during the current year compared to fiscal 2007 on lower gaming operations play levels amid unfavorable economic conditions and continued weakness in North America replacement sales demand. Comparability was also significantly affected by:

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favorable foreign currency exchange rates' impact on revenues of $43.9 million

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write-downs of investments in unconsolidated affiliates totaling $28.6 million

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interest rate declines unfavorably impacting jackpot expense by $25.3 million

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prior year gains totaling $22.8 million from hurricane insurance settlements and an airplane sale

Consolidated Gaming Operations

Revenues were down compared to the prior year primarily due to lower play levels in North America. Additionally, our installed base growth is increasingly from stand-alone lease and CDS units which generally provide lower revenues and gross profit per unit compared to WAP units. International revenue and gross profit improvements partially offset declines in North America reflecting the increasing geographic footprint of our gaming operations.

In addition, gross profit and margin were adversely affected by unfavorable interest rate impacts on jackpot expense totaling $25.3 million and technological obsolescence charges of $10.4 million related to the transition toward new products, as well as the prior year hurricane property insurance gain of $5.0 million.

Consolidated Product Sales

Total product sales revenues and gross profit were down from the prior year primarily due to fewer machine shipments across most markets. Gross margin improvements were due to a favorable product and jurisdictional mix, including a greater contribution from non-machine sales. IGT increased systems installations from the prior year by 100, with over 820 systems installed worldwide as of September 30, 2008. Product sales margins are expected to continue to fluctuate depending on the geographic mix and types of products sold.

Fiscal 2007 vs Fiscal 2006

Consolidated total revenue and gross profit improvements for fiscal 2007 were predominantly due to growth in gaming operations. Fiscal 2007 revenues included a favorable foreign currency exchange rate impact of $23.0 million. Total gross profit also benefited from a more favorable product sales mix. Total gross margin increases were the combined result of a greater mix of gaming operations, as well as margin improvements in gaming operations and product sales discussed below.

Significant items affecting comparability included:

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fiscal 2007 gains of $17.0 million from our Gulf Coast hurricane insurance settlement and $5.8 million from the sale of a company airplane

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fiscal 2006 R&D charges of $11.3 million related to the buyout of a third-party development contract

Consolidated Gaming Operations

Improved revenues and gross profit were primarily the result of growth in our installed base of recurring revenue machines. The most significant year-over-year unit growth was in Mexico, Oklahoma, Florida, and New York.

Gross margin improvements were mainly due to shifts in the composition of our installed base toward a lesser share of WAP units, reduced jackpot expense due to variations in slot play, and a growing population of stand-alone lease and CDS units. Due to the absence of jackpot expense, stand-alone and CDS units contributed to higher margins despite generally lower revenues and gross profit per unit.

Consolidated Product Sales

Total product sales revenues were comparable to fiscal 2006 with North America
declines offset by international sales growth, primarily in Japan. Gross profit
and margin improvement was due to a greater mix of higher margin non-machine
revenues, mostly from machine systems sales which increased 14% over the prior
year.

Operating Expenses

                                                                        Favorable (Unfavorable)
                            2008         2007         2006           08 vs 07              07 vs 06
   (In millions)
   Selling, general and
   administrative         $  460.1     $  397.9      $ 375.5     $ (62.2 )     -16 %   $ (22.4 )     -6 %
   Research and
   development               223.0        202.2        188.5       (20.8 )     -10 %     (13.7 )     -7 %
   Depreciation and
   amortization               76.7         80.4         82.6         3.7         5 %       2.2        3 %
   Total                  $  759.8     $  680.5      $ 646.6     $ (79.3 )     -12 %   $ (33.9 )     -5 %
   Percent of revenues          30 %         26 %         26 %

Fiscal 2008 vs Fiscal 2007 . . .