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Article by DailyStocks_admin    (10-09-08 03:48 AM)

The Daily Magic Formula Stock for 10/09/2008 is International Game Technology. According to the Magic Formula Investing Web Site, the ebit yield is 12% and the EBIT ROIC is 75-100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

GENERAL
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 preeminent supplier of gaming products to the world, maintaining a wide array of entertainment inspired gaming product lines and targeting gaming markets in all legal jurisdictions worldwide. We are committed to providing quality gaming products at competitive prices, designed to increase the potential for operator profits by serving players better.
International Game Technology was incorporated in Nevada in December 1980 to acquire the gaming licensee and operating entity, IGT, and to facilitate our initial public offering. Principally serving the United States (US) gaming markets when founded, we expanded into jurisdictions outside the US in 1986. In addition to our main US production facilities in Nevada, we manufacture gaming products in the United Kingdom (UK) and through a third party manufacturer in Japan. We currently maintain sales offices in various gaming jurisdictions around the world.

Unless the context indicates otherwise, references to “International Game Technology,” “IGT,” “we,” “our,” or “the Company” includes International Game Technology and its consolidated subsidiaries and variable interest entities (VIEs). Italicized text in this document with an attached superscript trademark or copyright notation indicates trademarks of IGT or its licensors. For more information about our trademark and copyright ownership information, please visit our website, www.IGT.com.

Through the Investor Relations link on our website, we make available free of charge, as soon as reasonably practical after such information has been filed or furnished to the Securities and Exchange Commission (SEC), our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act and proxy statements on Schedule 14A. Our corporate governance guidelines and charters for our Audit, Compensation, and Nominating and Corporate Governance Committees are also available on our website. This information will be mailed in print form free of charge to any shareholder upon request.

BUSINESS SEGMENTS
We derive our revenues from the distribution of electronic gaming equipment and network systems, related services and licensing of intellectual property (IP). Operating results reviewed by our chief decision maker encompass all revenue sources within each geographical customer region. We currently view our business in two operating segments, each incorporating all types of revenues.
ª North America consists of our operations in the US and Canada, comprising 77% of consolidated revenues in fiscal 2007 and 79% in 2006 and 2005.

ª International encompasses all other IGT operations worldwide, comprising 23% of consolidated revenues in fiscal 2007 and 21% in 2006 and 2005.
Additionally, certain income and expenses related to company-wide initiatives are managed at the corporate level and not allocated to an operating segment. Other segment and financial information contained in BUSINESS SEGMENT RESULTS of our management discussion and analysis (MDA) and Note 18 of our Consolidated Financial Statements is incorporated here by this reference.
PRODUCTS
We provide a broad range of electronic gaming equipment and network systems, as well as related services, parts, game theme conversions, and IP licensing.
ª Traditional casino-style slot machines determine the game play outcome at the machine, encompassing:
s classic physical reel slots

s video poker slots

s video reel slots
s Class III, a regulatory classification for a traditional casino-style slot machine used in tribal jurisdictions
ª Wide area progressive (WAP) jackpot systems link machines across several casinos within a designated jurisdiction

ª Central determination system (CDS) machines are connected to a central server which determines the game outcome, including:
s video lottery terminals (VLT) for government sponsored applications

s electronic or video bingo machines

s Class II, a regulatory classification for electronic bingo systems used in tribal jurisdictions
ª Amusement With Prize (AWP) games, popular in Europe, incorporate limited payouts with features that allow players to exercise an element of skill and strategy
ª Pachisuro machines or pachislots distributed in Japan are a smaller, simpler variation of American slots, featuring low payouts

ª IGT Mariposa ä integrated casino customer relationship management (CRM) solutions feature fully integrated marketing and business intelligence systems which provide analytical, predictive, and management tools to maximize casino operational effectiveness

ª MP Series ä Multi-Player suite provides community-style gaming on a common display, especially useful in jurisdictions where live table games, such as roulette or baccarat, are not allowed

ª Digideal ä electronic table games include live dealer hosted configurations with digital cards and live chips or virtual chips/electronic credits, as well as a fully virtual platform that can be approved as a slot game, providing table-like gaming for slot only or limited table jurisdictions
We supply our gaming products directly to the customer or through distributors in certain jurisdictions. We also offer equipment contract financing for qualified customers and development financing loans to select customers for new or expanding gaming facilities.

REVENUE STREAMS
We have two revenue streams — gaming operations and product sales.
Gaming operations generate recurring revenues by providing customers with our proprietary gaming products, services or IP under a variety of participation or fixed daily/monthly fee billing arrangements. Gaming operations comprised 52% of consolidated revenues in fiscal 2007 and 50% in 2006 and 2005. See Note 1 of our Consolidated Financial Statements for additional information regarding pricing arrangements and revenue recognition.
A number of factors influence gaming operations revenues and gross margins, including the number and type of machines in service, levels of play (which are somewhat dependent on casino seasonal trends), and variations in pricing arrangements. Gross margins also include the cost of funding progressive jackpot payments to winners, which is subject to interest rate volatility. We monitor the productive life cycle of our proprietary games and systematically replace units experiencing declining play levels with newer games.
We place games under recurring revenue arrangements in over 100 gaming jurisdictions worldwide. The IGT installed base of gaming machines recorded on our balance sheet as part of property, plant and equipment includes casino operations and lease operations units. IGT casino operations units are comprised of traditional casino, Class III, Class II, and other higher yielding gaming machines. IGT lease operations units consist of VLT and other lower yielding gaming machines. Casino owned units are machines sold that also provide a recurring royalty fee.

Product Sales include the sale of gaming machines, network systems, parts, game theme conversion kits, related equipment, services, and IP licensing. Product sales comprised 48% of consolidated revenues in 2007 and 50% in 2006 and 2005. As our gaming products become more systems-centric in nature, we anticipate a growing portion of sales from non-machine products. Non-machine revenues (including network systems with related licensing fees, parts and conversions, as well as other miscellaneous royalty fees and services) collectively comprised 30% of product sales in fiscal 2007, 29% in 2006, and 26% in 2005.

PRODUCT DEMAND
A number of factors drive demand for our gaming products.
We believe customer strategies to upgrade casino floors with newer games and technologies that combine higher yields with cost savings, convenience, and other benefits drive replacement sales. New or emerging technology that provides operators with a favorable return on investment has the ability to accelerate a machine replacement cycle. This technology may come in the form of new gaming machine cabinets with more processing power or new features having a positive impact on player appeal and/or operator profits.
Casino expansion or new casino openings generate new product demand and stimulate replacement demand at neighboring casinos, which upgrade in order to remain competitive. New jurisdictions establishing legalized gaming also create product demand, contributing to significant growth in the installed base of gaming machines during the past few decades. Finally, a gaming equipment supplier’s reputation for consistently delivering and supporting quality products will encourage operators to select them over others.
STRATEGIC ACQUISITIONS
As part of our ongoing efforts to create shareholder value, we complement our internal resources through strategic alliances and business acquisitions that:
ª offer opportunities to diversify our geographic reach

ª expand our product lines and customer base

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

Additional information about current year acquisitions is contained in Note 5 of our Consolidated Financial Statements. WagerWorks provided additional opportunities to expand the distribution of content across new channels and mediums. Acres Gaming further positioned us as a leading global provider of casino gaming systems. Anchor Gaming helped to grow our business presence by allowing us to consolidate all activities of the Spin For Cash Joint Venture and afforded us opportunities to further integrate complementary resources, most significantly the Wheel of Fortune Ò brand and patents.

PRODUCT DEVELOPMENT
The vision behind IGT product development is to serve players better by utilizing the power of networked gaming, information technology, game design, and services to maximize the potential for operator profitability. The foundation of our business model is built on the creation and delivery of game content through integrated casino systems solutions to machine platforms. Our product innovation reflects the anticipation of consumer needs, as well as customer feedback and market trends.
We support our product development efforts through a considerable emphasis and investment in research and development (R&D) of future technology, which we believe enables IGT to maintain a leadership position in the industry. We dedicate over 1,500 employees worldwide to product development in various disciplines from hardware, software and firmware engineering to game design, video, multimedia, graphics and sound. Our investment in R&D totaled $202.2 million in fiscal 2007, $188.5 million in 2006, and $138.4 million in 2005.
Our primary development facilities are located in Nevada, and we have several design centers strategically located worldwide, allowing us to quickly respond to unique market needs and local player preferences. IGT global design centers provide local community presence, customized products, and regional production where beneficial or required. Our UK facility designs and configures AWP and casino games. Our Japan team designs IGT pachisuro games in conjunction with a third party manufacturer. Two teams in Australia design club and casino products. In addition, our corporate R&D group, IGT Labs, is also dedicated to establishing strategic partnerships with key technology providers.
During fiscal 2007, we began a World Game Platform initiative to unify and standardize our technology, design, and development across all global markets. We anticipate reducing time and cost to market by having standardized development worldwide enabling content delivery through uniform technologies. We believe this initiative will facilitate development and deployment of games into any combination of gaming markets, including both thick (processing at the machine) and thin (processing at the server) client-server environments.

Games
We combine the 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 continue to expand our game libraries, emphasizing development of game content to address changing consumer preferences and other market trends. Our objective is to develop games that incorporate exciting winning combinations, and appealing graphics and sound.
We actively develop new themes for video reel and video poker, as well as enhance our classic spinning reel products with popular multi-line, multi-coin configurations. We make ongoing efforts to upgrade and optimize our proprietary flagship theme games, such as Wheel of Fortune Ò , Megabucks Ò , and Star Wars ä , with theme refreshers and innovative features to enhance play. Our games are invented primarily by employee designers and artists. Although not materially dependent on third party developers, we find they can provide added sources of creative ideas and game content.
Using our Product Performance Testing system, we evaluate and forecast the acceptance of new products to quickly identify the more popular gaming concepts. A central computer monitors the performance of games placed in several key casino locations that provide a representative sampling. This system results in a quicker release of higher performing games incorporating market-tested concepts.
Fiscal 2007 highlights
Through our global design facilities, we developed just under 1,000 game themes, including those for traditional gaming environments and unique versions customized for video lottery, CDS, Class II, and international markets. We remain a leader in spinning reel and video poker games in North America, but competition is intense in all categories. We are vigorously competing in video game development and continue designing innovative spinning reel and poker games.
We launched additional group play products offering community rounds where multiple players can participate in the same bonus for added player interaction and high-stakes player attraction. Group player offerings introduced in fiscal 2007 include Indiana Jones ä and Ancient Chinese Secret ä . In fiscal 2008, we plan to introduce Wheel of Fortune Ò Super Spin ä Five-Station ä , a smaller version of our popular Wheel of Fortune Ò Super Spin ä , eBay ä and The Price is Right Ò Multi-Station ä .
We continued the expansion of our winning multi-level progressive (MLP) games that provide more frequent lower level progressive jackpots. The recent introduction of our 5-reel Wheel of Fortune Ò MLP in Nevada and Native America jurisdictions has been well received. This game allows players to buy-up to different bonus levels, a feature designed to increase the average wager. We plan to continue developing future MLP products, adding WAP features and group play options.
We further developed our MP Series ä of interactive, multi-player station gaming products. The MP Series ä product is comprised of several individual stations connected to a central control device and is available in numerous modular configurations based on operator preferences. We also expanded the MP Series ä product suite this year with the addition of Digideal ä electronic table games. We expect multi-player and electronic table games will become increasingly important, especially in jurisdictions that do not allow live versions of table games. We plan to introduce Baccarat and Roulette themes in the MP Series ä during the first half of fiscal 2008 and anticipate other game themes to follow in the future.
Under arrangements to facilitate development of Walker Digital casino innovations, we initiated our first product collaboration with Guaranteed Play ä , a creative new method of wagering game play. Instead of one wager at a time, Guaranteed Play ä patrons have the option of purchasing multiple hands of poker or spins of slot play at a fixed price in advance. We introduced Guaranteed Play ä Poker in limited markets during the latter half of fiscal 2007 and expect a wider release to follow in early fiscal 2008. We anticipate future product offerings will integrate Guaranteed Play ä through our server-based network ( sb ä ) to give operators the ability to package slot play with other promotional offerings.

Network Systems
Games and network systems continue to converge as markets increasingly require this synergy for regulatory purposes, and operators rely more and more on systems to manage game performance and player preferences. As we develop and integrate gaming systems, we recognize networks have the power to dramatically change the appearance and improve the usefulness of gaming systems. Limited gaming networks currently include IGT Advantage ä casino management systems, EZ Pay Ò ticket systems, CDS, and WAP systems.
Focusing on a more comprehensive enterprise-wide network systems solution, our ongoing server-based gaming (sb ä ) development is designed to provide IGT customers with tools to more efficiently manage the casino floors and deliver exciting new gaming experiences to players. We believe widespread adoption of sb ä will require implementation of an open architecture that allows distribution of features and applications across multiple gaming manufacturers’ platforms and devices. We are committed to leading the networked gaming transformation through collaboration with the Gaming Standards Association (GSA) to support and implement industry standard protocols enabling a seamless interface with a variety of platforms. In January 2008, we plan to open the IGT Global Technology Center and Interoperability Center, a facility open to manufacturers, strategic partners, and system integrators for compatibility and performance testing of their GSA protocol products, with an emphasis on third-party interface integration assessments.
At the same time, we are focusing significant development efforts on network applications and features providing an enhanced player experience at the machine. Our customers indicate it is important for sb ä to have features beyond operational efficiencies and game download functionality. We believe the acceptance of server-based gaming also depends on its ability to change the player’s experience on the casino floor and offer new ways for casinos to market to their players. In our view, applications that help casinos retain players and create additional revenue opportunities will motivate the operator to implement sb ä enterprise-wide. We are engineering these features now, and expect to demonstrate for operators and regulators the security, efficiency and revolutionary player and casino marketing features this technology can provide.
Our business partners at sb ä pilot properties are testing the initial operational aspects of IGT’s sb ä system and providing valuable feedback to ensure we design products that meet their business needs and regulatory requirements. Five commercial field trials of our server-based system are currently underway in California, Nevada, Michigan and Missouri. The information gathered in the past year from these pilots has enabled IGT to identify issues associated with integration of different machine platforms, slot accounting and player tracking systems. During the first half of fiscal 2008, we plan to upgrade our field trials to the next phase with GSA protocols.
We will continue combining the power of the network with server-based applications, casino transactional systems, and business intelligence software, and unique new gaming products. Toward these efforts, we acquired the Mariposa software, which provides IGT with data mining technology and predictive modeling. This tool is designed to enable the casino to improve profitability by managing and targeting its activities according to projected customer behaviors.
Additionally, we continue supporting and enhancing our IGT Advantage ä Casino System, a suite of traditional casino management software providing operators with real-time information in the areas of slot machine performance, patron management, table game reporting and analysis, along with cage and credit data. This system suite features EZ Pay Ò Ticketing, as well as direct player marketing systems such as Bonusing ä and NexGen Ò interactive multi-media displays.
We continually adapt game content for video lottery CDS. Our CDS features include cross property bingo draws, game software downloading, remote game configuration, full accounting and performance reports, virtual private networks and ticket-in/ticket-out (TITO) compatibility.
Platforms
Platforms are the means by which players interact with the games, and we support several in order to maximize our game distribution reach. The challenge of platform development is in determining how to effectively use a wide range of technologies to satisfy global markets with the right features, cost points, and delivery dates. The ultimate goal is ensuring that our content can be deployed through a number of different channels, including traditional gaming platforms, as well as wireless networks, and the internet.
We serve evolving gaming markets with strength and flexibility. Multi-line, multi-coin video games are currently among the most popular games on the casino floor. In response to this trend, our products employ advanced technology enhancing entertainment and communication features, while retaining many of the familiar and popular features of legacy games.

CEO BACKGROUND

Robert A. Bittman , 53, has served on our board of directors since May 2000. Mr. Bittman has been IGT’s Executive Vice President, Product Strategy since 2003, and he was IGT’s Executive Vice President, Product Development from 1996 to 2003. Mr. Bittman majored in Systems Analysis at New York University, and Psychology at Queens College and the University of Nevada, Reno. Positions previously held with IGT include:

* Vice President of Marketing
* Director of Marketing
* Marketing Research Analyst

Prior to his tenure with IGT, Mr. Bittman worked for Caesar’s Tahoe in all phases of slot operations management, including two years as Director of Slot Operations.

Richard R. Burt , 60, has served on our board of directors since December 2001, when we acquired Anchor Gaming, and is a member of the Audit and Nominating and Corporate Governance Committees. Mr. Burt has been a Senior Director at Kissinger McLarty Associates in Washington D.C. since April 2007, and he was Chairman of Diligence, Inc. from 2001 to 2007. Mr. Burt holds a BA in Government from Cornell University and an MA in International Relations from Tufts University. Mr. Burt also currently serves as:

* Founder and Chairman of IEP Advisors, Inc. in Washington D.C.
* Director of UBS Mutual Funds
* Trustee of Deutsche Bank’s Closed-End Germany Funds Group
* Director of EADS North America
* Member of Alfa Asset Management (Moscow International Advisory Council)

Positions held previously include:

* Director of the Protective Group, Miami Lakes, FL
* Member of the Textron Corporation’s International Advisory Council
* Trustee of Deutsche Scudder (New York) Mutual Funds
* Director of Hollinger International Inc.
* Director of Archer Daniels Midland (ADM)
* Chairman of the Board of Weirton Steel, Inc.
* Director and Vice Chairman of Anchor Gaming
* Director and Chairman of Powerhouse Technologies, Inc.
* Partner in McKinsey & Co.
* Chief Negotiator in Strategic Arms Reduction Talks (START) with the Former Soviet Union
* U.S. Ambassador to the Federal Republic of Germany
* Assistant Secretary of State for European and Canadian Affairs
* Director of Politco-Military Affairs


Patti S. Hart , 51, has served on our board of directors since June 2006 and is a member of the Audit and Compensation Committees. Ms. Hart was the Chairman and Chief Executive Officer of Pinnacle Systems, Inc. from 2004 to 2005, and of Excite@Home, Inc. from 2001 to 2002. Ms. Hart holds a BS in Marketing and Economics from Illinois State University. Ms. Hart is also a member of the boards of directors for:

* Korn/Ferry International, Inc.
* Spansion LLC
* Lin TV Corp.

Positions held previously include:

* Chairman and Chief Executive Officer of Telocity, Inc.
* President & COO, Long Distance Division, Sprint Corporation
* President, Sprint Business Services Group, Sprint Corporation
* President, Sales & Marketing, Sprint Business Services Group, Sprint Corporation
* Vice President, Sprint Business Services Group
* Area Vice President and General Manager, National & Major Accounts, Sprint, Inc.
* Director, Alternate Distribution, Strategic Planning, InteCom, Inc.
* Consultant, United Technologies Corporation

Former board affiliations:

* EarthLink, Inc.
* Excite@Home, Inc.
* Mariner Networks
* Pinnacle Systems, Inc.
* Plantronics, Inc.
* Telocity, Inc.
* Vantive Corporation
* Pharmaceutical Product Development

Leslie S. Heisz , 46, has served on our board of directors since June 2003 and is a member of the Audit and Nominating and Corporate Governance Committees. Ms. Heisz has been Managing Director of Lazard Frères & Co. LLC since 2004, and she was Senior Advisor of Lazard Frères & Co. LLC from 2003 to 2004. Ms. Heisz holds a BS degree from the University of California at Los Angeles (UCLA) and an MBA from the UCLA Anderson School of Management. Ms. Heisz is also a member of the boards of directors for:

* Eldorado Resorts LLC
* Ingram Micro Inc.

Positions held previously include:

* Managing Director and Director of Dresdner Kleinwort Wasserstein (and its predecessor, Wasserstein Perella & Co.)
* Vice President and Associate with Salomon Brothers Inc.
* Senior Consultant and Consultant at Price Waterhouse

Robert A. Mathewson , 43, has served on our board of directors since December 2003 and is a member of the Compliance Committee. Since 1992, Mr. Mathewson has been President of RGC Inc., a private investment company, and he was Vice President of Business Development for Televoke, Inc. from 1999 to 2000. Mr. Mathewson holds a BA in Economics and an MBA from the University of California at Berkeley and a Juris Doctorate from University of California Hastings College of the Law. Mr. Mathewson is also a member of the board of directors for FelCor Lodging Trust.

Thomas J. Matthews , 42, was appointed to our board of directors in December 2001 and was named Chairman in March 2005. Mr. Matthews has been IGT’s President and Chief Executive Officer since 2003, and he was IGT’s Chief Operating Officer from 2001 to June 2007. Mr. Matthews held a number of key positions at Anchor Gaming from 1994 until it was acquired by IGT in December 2001, including President, Chief Executive Officer and Chairman of the Board. He previously served as President of Global Gaming Distributors, Inc. until it was acquired by Anchor Gaming in 1994. Mr. Matthews holds a BS in Finance from the University of Southern California.

Robert Miller , 62, has served on our board of directors since January 2000 and is a member of the Compensation and Compliance Committees. Since July 2005, he has been a principal of Dutko Worldwide, a multi-disciplinary government affairs and strategy management firm, and he was a partner at the Jones Vargas law firm from 1999 to 2005. Mr. Miller holds a Juris Doctorate from Loyola Law School, Los Angeles. Mr. Miller is also a member of the boards of directors for:

* Newmont Mining Corporation
* Zenith National Insurance Corp.
* Wynn Resorts, Ltd.

Positions held previously include:

* Governor of the State of Nevada
* Lieutenant Governor of the State of Nevada
* Clark County District Attorney
* Las Vegas Township Justice of the Peace
* First legal advisor for the Las Vegas Metropolitan Police Department
* Clark County Deputy District Attorney
* Uniformed Commissioned Officer for the Clark County Sheriff’s Department and the Los Angeles County Sheriff’s Department

Frederick B. Rentschler , 68, has served on our board of directors since May 1992 and is a member of the Compensation and the Nominating and Corporate Governance Committees. Before his retirement in 1991, Mr. Rentschler was President and Chief Executive Officer of Northwest Airlines. Mr. Rentschler received his undergraduate degree from Vanderbilt University and an MBA from Harvard University. He was also awarded a Doctor of Laws, causa honoris, from the University of Wyoming. Mr. Rentschler also currently serves as:

* Member of the Board of Trustees for Vanderbilt University, Nashville, Tennessee
* Emeritus trustee of the Salk Institute in La Jolla, California
* Emeritus trustee of the Scottsdale Health Care Systems in Arizona

Positions held previously include:

* President and Chief Executive Officer of Beatrice Company
* President and Chief Executive Officer of Beatrice U.S. Foods
* President and Chief Executive Officer of Hunt-Wesson, Inc.
* President of Armour-Dial

MANAGEMENT DISCUSSION FROM LATEST 10K
OVERVIEW
The following MDA is intended to enhance the reader’s understanding of our company 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 well-diversified offering of quality products and services at competitive prices that are designed to increase the potential for operator profits by serving players better.
In fiscal 2007 we achieved the highest annual revenues in company history at $2.6 billion, largely attributable to growth in our gaming operations installed base reaching a record 59,200 machines in service at September 30, 2007. We operate in two segments, North America and International, with certain unallocated company-wide income and expenses managed at the corporate level. International operations continue to be a growing contributor with operating income up 44% in fiscal 2007. See the BUSINESS SEGMENT RESULTS below and Note 18 of our Consolidated Financial Statements for additional segment information and financial results.
We are dedicated to generating financial growth by continuing to focus on the three cornerstones of our success: product development, market development and capital deployment. We invest more in product development than any of our principal competitors and believe this helps us deliver the broadest gaming product lines across the most markets. Our current development efforts reflect our forward thinking and will support the near term evolution of the gaming floor. This includes the expansion of our business model beyond machine sales toward a more systems-centric, networked gaming environment. Our new World Game Platform initiative, started in fiscal 2007, will unify and standardize our development efforts worldwide. We believe our sb ä applications will be commercially available beginning in 2009 and will further differentiate IGT gaming products by offering operators new ways to engage and interact with players, as well as the ability to market cross-functional products and player conveniences.
We are dependent, in part, on new market opportunities to generate growth. Some of these opportunities may come from political action as governments look to gaming to provide tax revenues in support of public programs and view gaming as a key driver for tourism. We continue to expand our footprint globally, especially in emerging markets in Asia and Latin America. Our ongoing initiatives to enhance growth in new areas of gaming include financing customer construction or expansion. In April 2007 we agreed to provide $80.0 million in development financing and $40.0 million in equipment financing over the next five years to gaming operators in Argentina.
We are able to return value to our shareholders and reinvest in our business because of our ability to generate substantial operating cash flows, the highest ever in fiscal 2007 at $821.5 million. During fiscal 2007 we returned $1.3 billion to our shareholders through dividends and share repurchases. We consider strategic business combinations, investments, and alliances to expand our geographic reach, product lines and customer base. During fiscal 2007, we invested $105.6 million in China LotSynergy Holdings, Ltd. (CLS) for developing opportunities in the China lottery, $31.2 million in electronic table games with Digideal and $21.9 million in VCAT for the Mariposa CRM software. See Notes 2 and 5 of our Consolidated Financial Statements for additional information about these investments.
While domestic replacement sales are expected to remain at historically low levels in the upcoming year, we anticipate benefiting from growth in new or expanding domestic markets beginning in the second half of fiscal 2008. We also anticipate revenues will be driven by our growing gaming operations installed base, network systems sales, and machine sales as casino operators begin to upgrade platforms to capitalize on networked functionality and new features. We also expect to benefit from further gaming expansion outside of North America and new content distribution channels enabled by network systems and table gaming initiatives. We will continue server-based gaming development, working with our competitors and customers to ensure the future is powered by an open network that enables products from multiple suppliers to work together without the need for additional programming or interfaces.

RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2007, the Financial Accounting Standards Board (FASB) proposed FASB Staff Position (FSP) APB 14-a, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) . If approved, FSP APB 14-a will require IGT, as an issuer of convertible debt that may be wholly or partially settled in cash, to separately account for the liability and equity components of the convertible debt instrument and recognize additional interest expense at our nonconvertible debt borrowing rate. If the FSP is issued as drafted, it will be effective for IGT’s fiscal 2009 and will require retrospective application. We are currently evaluating the proposed FSP and it may result in higher interest expense related to our Debentures for all periods presented.
We adopted Statement of Financial Accounting Standards (SFAS) 123R, Share-Based Payment , in fiscal 2006 and recognized share-based compensation in our financial statements. See CONSOLIDATED OPERATING RESULTS below for a discussion of the impact to operating results in fiscal 2006, as well as Notes 1 and 4 of our Consolidated Financial Statements for additional information regarding our share-based compensation.
See Note 1 of our Consolidated Financial Statements for 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, observance of known 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 understanding and evaluating 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.
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 $1.1 billion at September 30, 2007 and September 30, 2006. The last three annual goodwill impairment tests indicate the fair value of each reporting unit is substantially in excess of its carrying value.
In determining the fair value of our reporting units, we apply the income approach using the discounted cash flow (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 set of comparable gaming companies, considering the size and specific risks of each 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 $245.5 million at September 30, 2007 and $257.0 million at September 30, 2006.
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 $104.6 million at September 30, 2007 and $136.5 million at September 30, 2006.
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
Only a portion of our recurring revenue arrangements incorporate an IGT paid WAP jackpot 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:
ª variations in slot play (i.e. jackpot life cycles and slot play patterns)

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

ª interest rate movements

ª 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.
Our jackpot liabilities increased to $643.1 million at September 30, 2007 compared to $546.7 million at September 30, 2006 primarily due to trust reconsolidations (see Note 2 of our Consolidated Financial Statements for additional information about the trusts). Jackpot expense totaled $164.7 million for fiscal 2007, $184.9 million for fiscal 2006 and $258.5 million in fiscal 2005. Fluctuations in fiscal 2007 and 2006 resulted from variations in slot play, fewer WAP units in service and interest rate movements. Additionally, jackpot expense declined significantly during fiscal 2006 due the implementation of lower base jackpot systems as discussed in BUSINESS SEGMENT RESULTS later. See Note 1 of our Consolidated Financial Statements for additional 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 could be required to increase our inventory provisions. Inventory management remains an area of focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times versus the risk of inventory obsolescence because of rapidly changing technology and customer requirements. Our inventories totaled $144.8 million at September 30, 2007 and $162.1 million at September 30, 2006.
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 have a negative impact on gross profit. In fiscal 2005, our assessment of estimated salvage values resulted in technological obsolescence charges of $41.6 million in cost of gaming operations due to expected future releases of more advanced cabinet and game designs.
Share-based Compensation
We account for share-based compensation in accordance with SFAS 123R. Under the fair value recognition provisions, we estimate share-based compensation at the award grant date and recognize expense over the service period. Option valuation models require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the fair value estimate. Judgment is required in estimating stock price volatility, forfeiture rates, expected dividends, and expected terms that options remain outstanding. See Notes 1 and 4 of our Consolidated Financial Statements for additional information regarding these assumptions.
Income Taxes
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, as well as income tax payment timing. We adjust deferred taxes based on changes in the difference between the book and tax basis of our assets and liabilities, measured by future tax rates we estimate will apply when these differences are expected to reverse. This process involves estimating our current tax position in each federal, state, and foreign jurisdiction, as well as making judgments as to whether our taxable income in future periods will be sufficient to fully recover any deferred tax assets. We 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 based on our estimation of future taxable income in each jurisdiction. 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.
The calculation of our tax liabilities also involves dealing with uncertainties in the application of complex tax regulations. We accrue reserves for potential tax contingencies quarterly based on a comprehensive review of our global tax positions. These reserves are adjusted as necessary and released after matters are resolved with certain tax authorities or upon the closure of tax years subject to tax audit. Reserves for these tax matters are included on our balance sheet as a component of accrued income taxes. If payment of these amounts proves to be unnecessary, the reversal of liabilities could result in the recognition of a future tax benefit. If our tax liabilities are understated, a charge to our tax provision would result.
Additionally, we are currently evaluating the impact of the guidance issued in June 2006 under FASB Interpretation 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 , effective for IGT at the beginning of fiscal year 2008.
Net deferred tax assets totaled $208.8 million at September 30, 2007 and $136.6 million at September 30, 2006 and accrued income taxes totaled $49.5 million at September 30, 2007 and $36.1 million at September 30, 2006.

Fiscal 2007 vs Fiscal 2006
Consolidated total revenue and gross profit improvements over the prior year are predominantly due to continuing growth in gaming operations. Total gross profit also benefited from a more favorable product sales mix. Total gross margin increases are the combined result of a greater mix of gaming operations, as well as margin improvements in gaming operations and product sales discussed below. Additionally, earnings per share (EPS) was positively impacted by share repurchases.
Significant items affecting comparability include:
ª current year gains of $17.0 million from our Gulf Coast hurricane insurance settlement and $5.8 million from the sale of a company airplane

ª prior year 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 are primarily the result of growth in our installed base of recurring revenue machines. Year-over-year lease operations units grew primarily in Mexico and New York, while casino operations placements grew most significantly in Florida, Oklahoma and California.
Gross margin improvements are 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. Stand-alone units generate lower revenues and gross profit per unit with no jackpot expense, typically resulting in higher margins. Gaming operations margins may also vary with changes in interest rates affecting jackpot expense. (See BUSINESS SEGMENT RESULTS below).
Consolidated Product Sales
Total product sales revenues are comparable to the prior year with North America declines offset by international sales growth, primarily in Japan. Gross profit and margin improvement is due to a greater mix of higher margin non-machine revenues, mostly from machine systems sales which increased 14% over the prior year. During fiscal 2007, IGT systems installations increased by approximately 100, with over 720 systems worldwide. Product sales margins fluctuate depending on the geographical mix and types of products sold.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Consolidated Gaming Operations



Despite continued growth in our installed base of recurring revenue machines, 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 central determination system (CDS) units which generally provide lower revenues and gross profit per unit compared to wide area progressive (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, year to date gross profit and margin were adversely affected by 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 same prior year periods 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 quarter by nearly 100, with 790 systems installed worldwide as of June 30, 2008. Product sales margins are expected to continue to fluctuate depending on the geographic mix and types of products sold.

Operating expenses were impacted during the periods by:



ª additional staffing costs of $9.1 million during the quarter and $18.2 million year to date in support of sales and development initiatives

ª unfavorable fluctuations in bad debt provisions of $6.4 million for the quarter and $13.0 million for the first nine months related to credit concerns on certain notes and contracts



Comparability for the nine months was also affected by prior year gains of $12.0 million from the Gulf Coast hurricane business interruption insurance settlement and $5.8 million from the sale of a company airplane.

WAP interest income and expense related to previous jackpot winners accrete at approximately the same rate. WAP interest income also includes earnings on restricted cash and investments held for future winners.



The fluctuation in other income (expense) for the quarter and year to date period was primarily attributable to higher interest expense resulting from increased borrowings under our credit facility compared to fiscal 2007. In addition, interest income was down for the year to date period due to lower investment balances and interest rates compared to the same period of fiscal 2007.



Our current year tax provision includes additional amounts related to unrecognized tax benefits in connection with the adoption of FIN 48, as well as discrete items affecting the rate. Our future effective tax rates may continue to be volatile due to changes in uncertain tax positions.

WAP interest income and expense related to previous jackpot winners accrete at approximately the same rate. WAP interest income also includes earnings on restricted cash and investments held for future winners.



The fluctuation in other income (expense) for the quarter and year to date period was primarily attributable to higher interest expense resulting from increased borrowings under our credit facility compared to fiscal 2007. In addition, interest income was down for the year to date period due to lower investment balances and interest rates compared to the same period of fiscal 2007.



Our current year tax provision includes additional amounts related to unrecognized tax benefits in connection with the adoption of FIN 48, as well as discrete items affecting the rate. Our future effective tax rates may continue to be volatile due to changes in uncertain tax positions.

See MDA–CRITICAL ACCOUNTING ESTIMATES–Jackpot Liabilities and Expenses in our Annual Report on Form 10-K for the year ended September 30, 2007 for additional details regarding the factors affecting jackpot expense.



North America Product Sales



Product sales revenues and gross profit improved during the quarter mainly due to increased systems and IP royalties. Machine revenues reflect an increase in the mix of our premium-priced Advanced Video Platform ( AVP® ), which offset the effect of fewer units sold compared to the third quarter of fiscal 2007. The decline in gross margin for the quarter is primarily attributable to the increased share of AVP® machines which provide higher gross profit, but lower margins.



Product sales revenues and gross profit were down year to date primarily due to fewer units on low replacement demand, partially offset by higher IP royalties and systems sales. The decline in gross margin relates to a higher mix of AVP® sales.



Unit shipments continued to be affected by low replacement demand, but new unit shipments increased during the quarter due to new and expanded casinos in several jurisdictions. New unit shipments were 8,600 during the third quarter of fiscal 2008 compared to 6,400 in the prior year quarter and 15,000 during the first nine months of fiscal 2008 versus 16,800 in fiscal 2007. Replacement sales consisted of 3,600 units during the current quarter compared to 6,400 in the third quarter of fiscal 2007 and 11,100 during the first nine months of fiscal 2008 compared to 17,900 in the same prior year period.

International operating results declined for the quarter as a result of fewer unit sales. Declines in Japan and the UK during the current nine months were offset by a favorable mix of product sales and continued growth in gaming operations. Revenues significantly benefited during the current quarter and nine months from favorable exchange rates. Total gross margin increased during the periods as improvements in product sales outweighed gaming operations declines. Operating income for the current periods included higher operating expenses, primarily staffing costs and bad debt provisions.



Improved gaming operations revenues during the current periods were primarily the result of increased internet gaming revenues and a growing international installed base. Gaming operations gross profit and margins were negatively impacted by a higher contribution from units with lower revenue and gross profit yields, as well as $5.1 million in technological obsolescence charges during the nine month period.

Product sales revenues and gross profit were down during the quarter due to fewer unit shipments, primarily in Japan. During the first nine months of fiscal 2008, we realized improvements in product sales gross profit compared to the prior year as increased sales volume and improved product mix in our higher-priced, higher-margin casino markets more than offset declines in unit shipments in the lower-priced, lower-margin markets of Japan and the UK. Additionally, non-machine sales increased substantially as compared to the first nine months of fiscal 2007 with increased sales of parts and systems. Margin improvement was attributable to the favorable mix of non-machine sales, as well as fewer low margin units sold in Japan.



LIQUIDITY AND CAPITAL RESOURCES



Sources of Liquidity



At June 30, 2008, our principal sources of liquidity were cash and equivalents and cash from operations. Other sources of capital include, but are not limited to, the issuance of public or private placement debt, bank credit facilities and the issuance of equity securities. Based on past performance and current expectations, we believe our cash and equivalents, cash from operations and available bank credit facilities will satisfy our working capital needs, capital expenditures, and other liquidity requirements associated with our existing operations for the foreseeable future.



Restricted cash and investments, as well as jackpot annuity investments are amounts available only for funding jackpot winner payments. Unrestricted cash and equivalents and marketable securities are summarized below.

CONF CALL

Patrick Cavanaugh

Good morning everyone and welcome. Joining me today are T.J. Matthews, our Chairman and Chief Executive Officer and Danny Siciliano, our Chief Accounting Officer and Treasurer.

Before we begin I’d like to note that during this earnings call certain statements and responses to questions may contain forward-looking information including forecasts of future financial performance and estimates of amounts not yet determined, the potential for growth of existing and the opening of new markets and products, play levels for our install base of recurring revenue games as well as our future prospects and proposed new products, services, developments or business strategies. Actual results could differ materially from those projected or reflected in our forward-looking statements and reported results should not be considered an indication of future performance. IGT’s future financial condition and results of operation as well as any forward-looking statements are subject to change and to inherent known and unknown risks and uncertainties. IGT does not intend and undertakes no obligation to update our forward-looking statements including any comments regarding our earnings expectations to reflect future events or circumstances.

All forward-looking statements made in this conference reflect IGT’s current analysis of existing trends and information and represent IGT’s judgment only as of today. You should not assume later in the quarter or year that the comments we made today are still valid. Actual results may differ materially from current expectations based on a number of factors affecting IGT’s businesses including unfavorable changes to regulations or problems with the obtaining or maintaining these licenses or approvals, a decrease in popularity of our recurring revenue games or unfavorable changes in player or operator preferences, for general decline in play levels, decreases in interest rates which in turn increase our costs or jackpots, slow growth in the number of new casinos or the rate of replacement of existing gaming machines, failure to successfully develop and manage frequent introductions in innovative products.

More information on factors that could affect IGT’s future business and financial results or cause us not to achieve our forecasts are included in our most recently annual report on Form 10-K and other public filings made with the Securities and Exchange Commission.

During this call today references may be made to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as a reconciliation of these measures to the comparable GAAP results n our 8-K filed with the SEC today a copy of which can be found on our website at www.IGT.com. This call, the webcast of this call and its replay are the property of IGT. It is not for re-broadcast or use by any other party without the prior written consent of IGT. If you do not agree with these terms, please disconnect now. By remaining on the line you agree to be bound by these terms.

With that being said, I’ll move on to a discussion of the quarter’s results. Earlier this morning we reported for the third quarter of fiscal 2008 net income in the third income totaled $180 million or $0.35 per diluted share compared to $136 million or $0.41 per diluted share in the prior year quarter. Given the current operating environment we are pleased with our Q3 results which are the second best in the company's history in terms of revenues and gross profits. These results were primarily driven by strong domestic new unit demand and a record contribution from our Latin American subsidiary and strong non-machine sales during the quarter.

Going over some of the more specific details, first starting with gaming operations, our gaming operations business generated revenues of $334 million in the quarter which was down 2% both sequentially and year-over-year. Gross margins were 61% for the quarter versus 62% in the prior year. Our install base ended the third quarter at 59,200 units up 1,000 units year-over-year and 500 units sequentially. We earned an average of $62 in revenue per unit per day versus 66 in the prior year quarter and 64 sequentially. The decrease in revenue per unit both year-over-year and sequentially is due to lower play levels resulting from the current operating environment and the growing mix of lower yield in stand-alone and lease operations units.

Historically our third quarter has realized an average yield growth of 3% to 4% compared to our second quarter due to more favorable seasonal play levels. Similar to what we saw in the second quarter we believe yield under performance can be attributed to the unfavorable economic environment as well as ships in our install base mix. Major markets across the country reported significant year-over-year declines in gaming revenue and those affects flowed through to the revenues from our gaming operations machines. The mix of games within our install base is shifted toward more stand-alone and leased base models which generally carry fixed or lower daily fees.

In the casino operations sector of our install base we ended the quarter at 39,700 units up 100 units from last year but consistent with the sequential quarter. In the lease operations sector our install base totaled 19,500 units at quarter end up 900 units year-over-year and 500 units sequentially. The growth was mostly attributable to installations in our install base in the UK. Taking into account lower interest rates and current market expectations for rates game ops gross margins are projected to trend between 58% and 61% with fluctuations based on the timing of jackpots, interest rates and the mix of games in our install base. Given the current environment we expect growth in our install base over the next quarters will mostly come from our international lease operations sector mainly the UK and Mexico.

Moving into product sales, product sales revenue totaled $344 million for the quarter compared to $365 million in the prior year. Worldwide we shipped 20,200 machines during the quarter down from prior year shipments of 36,900. Domestically we saw continued low levels of replacement demand but a pick up in new capacity. Part of this quarter’s lower level of replacement demand was in an internal decision based on manufacturing capacity and a prioritization of new or expansions put in the queue ahead of replacement so we hope that in Q4 we could see an up tick in replacement demand. Internationally fewer shipments in Japan and the UK were partially offset by stronger shipments into Latin America.

Non-machine revenues comprised gaming systems, gaming conversions tables, parts and intellectual property fees come in at $115 million for the quarter or 34% of total product sales for the quarter compared to $92 million and 25% of total product sales in the prior year quarter. This was the second best quarter ever for non-machine sales revenue which was driven by the growth in our Advantage Gaming System sales and intellectual property fees. Average revenue per unit for the quarter was $17,000 compared to $9,900 in the prior year quarter. The 72% increase was driven by the increased share of revenues from non-machine sources, stronger realized sales prices related to the mix of APB sales plus a lighter mix of sales into our lower priced Japan and UK markets.

Product sales gross margins were 54% up 300 basis points from the prior quarter driven by fewer machines shipped into lower priced markets of Japan and the UK and strength in non-machine revenues which have historically generated margins North of 70% in most periods. Going forward we expect product sales margins to slightly decrease to the range of 50% to 53%, margins will fluctuate as IGT realizes additional box demand relative to non-box revenues and depending on the mix of games sold in Japan and the UK.

Going into more detail on the breakdown of product sales, domestic versus international, first domestically, product sales revenues totaled $233 million on volume of 12,200 units for current quarter compared to $213 million and 12,800 units in prior year quarter. Domestic replacement shipments totaled 3,600 units for the quarter down from 6,400 units in last year’s quarter. Due to numerous casino openings and expansion new unit shipments were 8,600 units for the quarter up 2,200 from last year’s quarter and 6,300 from the preceding quarter. Domestic non-machine revenues totaled $87 million in the quarter an increase of 28% from the prior year’s quarter. Higher sales were driven by a number of new installations of IGT’s Advantage Systems and an increase in our intellectual property fees. Domestic average revenue per unit was $19,100 compared to $16,600 in the prior year quarter. Sales of machines utilized in our AVP platform reached 66% of total North American machines shipped during the third quarter. AVP machines are premium priced products that generally sells for $2,000 to $3,000 more than our Legacy platforms due to the increased cost associated with the additional technology included in the unit. We anticipate the mix of AVP machines will comprise even a greater share of our machine sales in future quarters as our Legacy platforms are slowly phased out.

International product sales revenue totaled $111 million on volume of 8,000 units compared to $152 million and 24,100 units in prior year quarter. We did not release a new game in Japan during the quarter while last year’s third quarter saw 14,900 units sold into the Japanese market. Latin American shipments increased nicely over the prior year quarter due to demand from Argentina but saw modest reductions in Japan and all other international casino markets in the UK. International non-machine sales were $28 million up 20% over the prior year quarter. The increase was driven mostly by increased parts [inaudible] in demand. International average revenue per unit totaled $13,900 up 121% over $6,300 realized in the prior year quarter. Average revenue per unit increase was mainly driven by fewer low price machine ship into Japan and the UK as well as our higher non-machine sales.

Product sales will continue to fluctuate quarterly depending on the geographic mix of sales and the mix of non-machine revenues. We anticipate new and expansion unit sales to moderate in the next three quarters based on what we see in new property openings during this period. With our previously announced six new products utilizing the AVP platform now approved and being shipped we expect a moderate pick up in replacement demand in the fourth quarter of 2008 and into 2009.

Moving on to operating expenses, total operating expenses were $201 million compared to $180 million in the prior year quarter. SG&A inclusive of bad debt totaled $123 million an increase of $17 million over Q3 last year. We realized higher staffing related costs associated with sales and administration headcount, bad debt provision totaled a net expense this year of $4 million compared to a net credit last year of $2 million in prior year quarter. R&D expense totaled $58 million for the quarter up from $51 million in the prior year as we continue to invest more heavily in product innovations and our server based gaming initiatives.

Depreciation and amortization within operating expenses totaled $19 million for the quarter down from $22 million in the prior year quarter. Total depreciation and amortization inclusive of depreciation on game ops machine is recognized in our cost of goods sold for game operations was $64 million for the quarter down from $66 million in the prior year quarter. All in lower amortization expense was partially offset by higher depreciation as a result of our 1,000 unit increase in game ops install base and the completion of our Las Vegas campus. Operating expenses in total were 30% of revenue due to the current quarter compared to 26% of revenue in the prior year quarter. Our target range for operating expense has been 25% to 28% of revenues depending on quarterly fluctuation and demand with the goal to maintain if not exceed 30% operating income margins. Accordingly we have undertaken an organizational review of our cost structure to ensure that we can achieve this goal.

Other income and expense net in the third quarter increased $5 million over the prior year primarily due to higher interest expense related to the additional borrowings on our line of credit. During the quarter our tax rate came in at 40%. The rate remains at elevated levels as a result of implementing FIN 48 and some discreet one-time tax items totaling $3 million excluding interest and penalties. We anticipate our book tax rate to remain between 39% and 40% as we continue to see the affects of the implementation of FIN 48 which will drive more volatility in our book tax rate than has historically been seen.

Moving on to a discussion of the balance sheet and cash flows, cash equivalents and short term investments inclusive of restricted amounts totaled $382 million at June 30th compared to $401 million at September 30th, 2007. Debt stood at $2 billion at June 30th compared to $1.5 billion at the end of fiscal 2007. The undrawn capacity on our $2.5 billion line of credit totaled $1.4 billion at June 30th. The increase in debt is directly related to the company’s stock repurchase authorization. In the quarter we repurchased 8.1 million shares for an aggregate cost of $266 million or $32.96 per share. Additionally from June 30th through yesterday we repurchased 6.5 million shares at an aggregate cost of $158 million or $24.18 per share. Our outstanding share count stood at 306.4 million at June 30th and was 299.9 million as of yesterday. We have 12.9 million shares remaining under our stock repurchase authorization as of July 16th.

For the nine month period ended June 30th, 2008 IGT deployed back to shareholders a total of $606 million through share buy backs and dividends. IGT will remain prudent in its capital deployment as we continue to find ways to support our business and acquire important technologies and intellectual property that will enhance our portfolio of product offerings. Working capital totaled $779 million compared to $596 million at the end of fiscal 2007. Average day sales outstanding of 85 days and inventory turns at 2.9 times. Inventories have increased $49 million since the end of 2007 as we begin ramping up for the delivery of new products in Q4 and into fiscal 2009.

In the first three quarters of the year IGT generated $361 million in cash from operations down from $565 million in last year’s comparable period. The decrease is primarily attributable to lower net income, changes in working capital and additional prepayments made to secure long term licensing rights to recognize brands which help favorably differentiate our products in the marketplace. Capital expenditures for the first nine month of the year totaled $222 million compared to $260 million in the prior year. The decrease is mainly attributable to the prior year purchase of a corporate aircraft and the Las Vegas campus cost. Cap ex is expected to continue to trend in the quarterly range of $60 to $75 million.

That concludes my prepared remarks regarding the quarter. I will now turn the call over to T.J. for his closing remarks.

Thomas J. Matthews

Good morning to everyone on the call. Before we open the line to questions I have a few comments that regard our business and our outlook here at IGT. As Pat mentioned the third quarter was the second best quarter in IGT’s history for revenues and gross profit with last year’s third quarter being the record for both. We accomplished this despite significantly lower volumes of machines shipped worldwide due to some weak replacement demand both in the United States and in Japan. Continued revenue weakness has also been seen in key US gaming jurisdictions and it obviously weighs on our results in game operations. As we continue to focus on generating increased financial efficiency we consolidate margins of 57% despite the lingering impact of much lower interest rates. We had non-machine sales that continue to provide a growing stream of high margin revenues that included six new installations of IGT’s Advantage Systems during the quarter including both at the new racetracks and Indiana and we continue to opportunistically reduce our share count. We’re now down to less than 300 million shares outstanding today which is an over 10% reduction to the share count in Q3 of 07.

The marketplace however has conditions that reflect competitive pressures and the operators are rationalizing their spending. Most are still buying but pricing effects are going to be felt in our recurring revenue products with some additional pricing pressure in the for sale market as our customers have an unprecedented amount of gaming machine choices to invest their own increasingly competitive market.

That said we had a good quarter in terms of our market share on orders over 100 units both new and replacement with approximately 54%. Though disappointing that this doesn’t compare to the 56% of floor share that we have as a result in the latest census I think it does go to serve the point that we’ve made oftentimes before that our new and expansion unit share is largely in tact and our issue is replacement. At this 510,000 previously sold IGT slot machines in the marketplace and they work and so it’s up to us to figure out new features and new functionality for us to be able to offer a reason to the casino operator to replace that product. There is no effort more important in doing that than our server based gaming efforts. This week the Barona Casino in California went live with our new version of 3.0 and this is the first version of our live field trial to fully utilize the GSA standards.

We still believe that the industry is going to grow and that that growth is healthy despite this gaming revenue slowdown. There may be some projects that are postponed or altogether cancelled but still our view to being able to see new and expansion units this past quarter and certainly again in the back half of 2009 is very good. We had numerous casino openings this quarter that’ll continue, we had new capacity growth in key markets such as California, Nevada, Florida, Pennsylvania, we have potential new markets such as Maryland and Massachusetts, there is really no change to our expectations that we will get to a million gaming devices in North America by 2010. International growth prospects especially in Asia look stronger than ever.

The issue for the quarter that weighed a little bit down on the results was that despite having a good quarter from a revenue and a margin standpoint we acknowledge that operating expenses are not at optimal levels. We are reviewing expenses company wide, as Pat had reflected. The goal here is to have 30% operating income margins. If we aren’t going to have the revenue growth breakout that we were hoping for this year and next and still waiting until 2010 for material SB impact then we need to manage expenses in a much more prudent, careful way so that we can keep it at fairly percentage of revenue range and we’ll make sure that we continue to undertake measures necessary to do that.

Our goal is to only to align ourselves financially with our business levels but to ensure that we continue to deliver innovative, industry leading products in a manner that maximize their financial returns to the shareholders. It does mean that there’s going to be certain projects that are near and dear and kept at probably high levels of funding especially within that R&D segment.

That brings us to the topic of guidance and the fact is that these conditions that we’ve seen in the marketplace are looking like they’re going to continue for the foreseeable future, they’re unprecedented. We’ve never really seen gaming play levels fall across all markets as we have in the first half of this year. If that continues that’s going to probably weigh a little bit on our game ops business and it’s probably also going to affect some amount of casino spend activity whether it relates to cap ex or op ex. So we at least need to be making sure that we’re paying attention to whether or not there is any change behavior in that regard. While we were able to return to our prior trend levels after that difficult second quarter that we reported we really don’t expect that we’re going to meaningfully build upon these results until the market conditions improve.

The result, I think our guidance for the next three quarters needs to be a range of $0.30 to $0.35. This range is not going to contemplate any efficiency measures we are able to implement over the period and it is likely that we’re going to be able to revisit our guidance on future earnings calls if visibility to future marketplace conditions improves and as I said in the back half of 2009 we know there’s new and expansion unit demand should make those results the kind of results that we can have maybe a slight improvement in the guidance that we’re giving here.

I want to thank you for your interest in IGT and I want to open the line for questions.

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