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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended: March 29, 2003
--------------

OR

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

For the transition period from _____ to_____

Commission File Number 001-10684

INTERNATIONAL GAME TECHNOLOGY
(Exact name of registrant as specified in charter)

Nevada 88-0173041
(State of Incorporation) (IRS Employer Identification No.)

9295 Prototype Drive, Reno, Nevada 89521
(Address of principal executive offices)

(775) 448-7777
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
-

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No __
-

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class Outstanding at April 26, 2003
----- -----------------------------
Common Stock
par value $.000625 per share 85,409,147



International Game Technology
Table of Contents



PART I - FINANCIAL INFORMATION

Page
Item 1. Financial Statements:
Unaudited Condensed Consolidated Statements of Income -
Three and Six Months Ended March 29, 2003 and March 30, 2002........................3

Unaudited Condensed Consolidated Balance Sheets -
March 29, 2003 and September 28, 2002 ..............................................5

Unaudited Condensed Consolidated Statements of Cash Flows -
Six Months Ended March 29, 2003 and March 30, 2002..................................7

Notes to Unaudited Condensed Consolidated Financial Statements .........................9

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk ...............................38

Item 4. Controls and Procedures ..................................................................40


PART II - OTHER INFORMATION

Item 1. Legal Proceedings ........................................................................41

Item 2. Changes in Securities.....................................................................41

Item 3. Defaults Upon Senior Securities...........................................................41

Item 4. Submission of Matters to a Vote of Security Holders ......................................41

Item 5. Other Information ........................................................................41

Item 6. Exhibits and Reports on Form 8-K .........................................................42

Signature ...........................................................................................43

Certifications ......................................................................................44





Part I - FINANCIAL INFORMATION

Item 1. Financial Statements

Unaudited Condensed Consolidated Statements of Income


Quarters Ended Six Months Ended
--------------------------- -----------------------------
March 29, March 30, March 29, March 30,
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)

Revenues
Product sales $ 254,529 $ 206,325 $ 495,779 $ 405,930
Gaming operations 274,559 254,961 522,942 356,849
Lottery systems 38,561 34,729 75,600 34,729
---------- ---------- ------------ ---------
Total revenues 567,649 496,015 1,094,321 797,508
---------- ---------- ------------ ---------
Costs and expenses
Cost of product sales 131,775 117,621 257,950 234,724
Cost of gaming operations 127,370 115,763 243,496 163,753
Cost of lottery systems 25,024 23,901 49,579 23,901
Selling, general and administrative 76,165 60,371 141,366 105,679
Depreciation and amortization 13,054 13,786 27,442 19,026
Research and development 23,330 22,618 44,280 38,031
Provision for bad debts 3,961 4,497 7,013 11,013
---------- ---------- ------------ ---------
Total costs and expenses 400,679 358,557 771,126 596,127
---------- ---------- ------------ ---------
Earnings (losses) of unconsolidated affiliates (166) (748) (345) 33,117
---------- ---------- ------------ ---------

Income from operations 166,804 136,710 322,850 234,498
---------- ---------- ------------ ---------
Other income (expense)
Interest income 12,557 12,932 24,673 23,850
Interest expense (29,443) (32,002) (56,292) (57,354)
Gain (loss) on the sale of assets 5 108 (62) 140
Minority interest (69) - (337) -
Other (356) (379) 505 (1,558)
---------- ---------- ------------ ----------
Other expense, net (17,306) (19,341) (31,513) (34,922)
---------- ---------- ------------ ----------

Income from continuing operations before tax 149,498 117,369 291,337 199,576

Provision for income taxes 56,361 44,742 109,834 75,159
---------- ---------- ------------ ---------
Income from continuing operations 93,137 72,627 181,503 124,417




The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.



Unaudited Condensed Consolidated Statements of Income




Quarters Ended Six Months Ended
-------------------------- ------------------------
March 29, March 30, March 29, March 30,
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)


Income from discontinued operations, net of tax 722 1,273 3,943 1,273
Loss on sale of discontinued operations, net of tax (6,745) - (6,745) -
---------- ---------- --------- ---------
Income (loss) from discontinued operations,
net of tax of $(3,644), $900, $(1,695) and $900 (6,023) 1,273 (2,802) 1,273
---------- ---------- --------- ---------

Net income $ 87,114 $ 73,900 $ 178,701 $ 125,690
========== ========== ========= =========

Basic earnings per share
Continuing operations $ 1.09 $ 0.81 $ 2.11 $ 1.53
Discontinued operations (0.07) 0.02 (0.04) 0.02
---------- ---------- --------- ---------
Net income $ 1.02 $ 0.83 $ 2.07 $ 1.55
========== ========== ========= =========

Diluted earnings per share
Continuing operations $ 1.07 $ 0.80 $ 2.07 $ 1.50
Discontinued operations (0.07) 0.01 (0.04) 0.02
---------- ---------- --------- ---------
Net income $ 1.00 $ 0.81 $ 2.03 $ 1.52
========== ========== ========= =========

Weighted average common shares outstanding 85,564 89,293 86,209 81,078

Weighted average common and potential
shares outstanding 87,253 90,989 87,872 82,690




The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.



Unaudited Condensed Consolidated Balance Sheets



March 29, September 28,
2003 2002
- ----------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except shares and par value)


Assets
Current assets
Cash and cash equivalents $ 958,317 $ 421,405
Investment securities, at market value 14,164 13,493
Accounts receivable, net of allowances for
doubtful accounts of $19,552 and $18,272 373,475 311,936
Current maturities of long-term notes and contracts
receivable, net of allowances 74,534 60,710
Inventories, net of allowances for
obsolescence of $27,077 and $24,677
Raw materials 82,982 65,028
Work-in-process 8,880 5,267
Finished goods 60,218 69,552
------------ ------------
Total inventories 152,080 139,847
------------ ------------

Investments to fund liabilities to jackpot winners 40,748 39,932
Deferred income taxes 36,966 3,511
Prepaid expenses and other 41,820 47,018
Assets of discontinued operations held for sale 100,346 172,758
------------ ------------
Total current assets 1,792,450 1,210,610
------------ ------------

Long-term notes and contracts receivable, net of
allowances and current maturities 152,545 136,629
------------ ------------
Property, plant and equipment, at cost
Land 21,578 21,557
Buildings 86,937 85,784
Gaming operations equipment 307,584 285,155
Manufacturing machinery and equipment 178,313 168,985
Leasehold improvements 9,729 9,355
------------ ------------
Total 604,141 570,836
Less accumulated depreciation and amortization (312,876) (283,000)
------------ ------------
Property, plant and equipment, net 291,265 287,836
------------ ------------

Investments to fund liabilities to jackpot winners 332,611 329,802
Deferred income taxes 71,163 82,916
Intangible assets, net 249,821 271,024
Goodwill, net 978,280 967,424
Other assets 50,076 29,577
------------ ------------
$ 3,918,211 $ 3,315,818
============ ============




The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.



Unaudited Condensed Consolidated Balance Sheets


March 29, September 28,
2003 2002
- ----------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except shares and par value)

Liabilities, Minority Interest and Stockholders' Equity
Current liabilities
Current maturities of long-term notes payable and
capital lease obligations $ 8,231 $ 8,519
Accounts payable 62,195 76,837
Jackpot liabilities 180,369 167,097
Accrued employee benefit plan liabilities 44,253 47,156
Accrued interest 29,712 29,998
Accrued income taxes 17,306 45,762
Other accrued liabilities 140,690 121,770
Liabilities of discontinued operations 10,560 13,920
------------ ------------
Total current liabilities 493,316 511,059
------------ ------------

Long-term notes payable and capital lease obligations,
net of current maturities 1,548,232 971,375
Long-term jackpot liabilities 378,209 380,567
Other liabilities 13,675 11,010
------------ ------------
2,433,432 1,874,011
------------ ------------

Minority interest 9,191 8,663
------------ ------------

Commitments and contingencies - -

Stockholders' equity
Common stock, $.000625 par value; 320,000,000 shares
authorized; 174,650,574 and 174,166,938 shares issued 109 109
Additional paid-in capital 1,473,806 1,451,385
Deferred compensation (7,300) (10,748)
Retained earnings 1,706,984 1,528,284
Treasury stock; 89,449,381 and 87,340,612 shares, at cost (1,691,761) (1,530,434)
Accumulated other comprehensive loss (6,250) (5,452)
------------ ------------
1,475,588 1,433,144
------------ ------------
$ 3,918,211 $ 3,315,818
============ ============




The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.



Unaudited Condensed Consolidated Statements of Cash Flows



Six Months Ended
---------------------------------
March 29, March 30,
2003 2002
- ------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)

Cash flows from operating activities
Net income $ 178,701 $ 125,690
---------- ----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 79,633 59,347
Discounts and deferred offering costs 4,199 478
Stock-based compensation 1,843 1,225
Provision for bad debts 7,013 11,013
Provision for inventory obsolescence 9,652 6,529
(Gain) loss on sale of assets 62 (140)
Loss on sale of discontinued operations 10,826 -
(Increase) decrease in operating assets:
Receivables (99,966) 5,077
Inventories (22,162) 19,596
Prepaid expenses and other 11,307 9,172
Other assets (14,558) (392)
Net accrued and deferred income taxes, net of tax
benefit of employee stock plans (39,608) 26,210
Decrease in accounts payable and accrued liabilities (3,030) (28,859)
Earnings of unconsolidated affiliates less than distributions 345 10,233
---------- ----------
Total adjustments (54,444) 119,489
---------- ----------
Net cash provided by operating activities 124,257 245,179
---------- ----------

Cash flows from investing activities
Investment in property, plant and equipment (18,875) (8,175)
Investment in gaming operations equipment (48,022) (25,818)
Proceeds from sale of property, plant and equipment 208 397
Proceeds from sale of other assets - 14,000
Proceeds from sale of discontinued operations 60,491 -
Investment securities:
Purchases - (12,715)
Proceeds - 6,030
Investments to fund liabilities to jackpot winners:
Purchases (10,413) (6,894)
Proceeds 18,326 15,246
Loans receivable:
Cash advanced (11,260) (643)
Payments received 14,345 10,010
Investment in unconsolidated affiliates (400) (440)
Acquisition of businesses - 124,060
---------- ----------
Net cash provided by investing activities 4,400 115,058
---------- ----------





The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.



Unaudited Condensed Consolidated Statements of Cash Flows



Six Months Ended
----------------------------------
March 29, March 30,
2003 2002
- ------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)

Cash flows from financing activities
Long-term debt:
Proceeds 563,620 770
Principal payments (3,178) (99,273)
Jackpot liabilities:
Collections from systems 128,614 73,212
Payments to winners (134,099) (68,075)
Proceeds from shares issued 17,700 57,484
Share repurchases (161,327) (40,268)
---------- ----------
Net cash provided by (used in) financing activities 411,330 (76,150)
---------- ----------

Effect of exchange rate changes on cash and
cash equivalents (3,075) 1,083
---------- ----------

Net increase in cash and cash equivalents 536,912 285,170
Cash and cash equivalents at:
Beginning of period 421,405 364,234
---------- ----------

End of period $ 958,317 $ 649,404
=========== ===========



Supplemental Cash Flow Information

Certain non-cash investing and financing activities described below are not
reflected in the consolidated statements of cash flows. Depreciation and
amortization reflected in the statements of cash flows includes the amounts
presented separately on the statements of income, plus depreciation that is
classified as a component of cost of product sales, cost of gaming operations
and cost of lottery systems.



Six Months Ended
----------------------------------
March 29, March 30,
2003 2002
- ------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)

Tax benefit of employee stock plans $ 6,137 $ 26,897
Payments of interest 40,812 41,566
Payments of income taxes 143,634 37,296
Increase in notes receivable from sale of the Pala
management contract - 63,000

Acquisitions:
Cash acquired - 124,060
Fair value of assets acquired - 1,562,531
Fair value of liabilities assumed - 717,214
Fair value of equity issued, net - 969,377




The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.



Notes to Unaudited Condensed Consolidated Financial Statements


1. Organization, Basis of Presentation and Summary of Significant Accounting
Policies

Organization
International Game Technology is recognized as one of the world leaders in the
development and production of computerized gaming products. We operate in three
lines of business: product sales, proprietary gaming and lottery systems.
Founded in 1980, IGT principally served the gaming industry in the United States
(US). In 1986, we began expanding our business internationally. In addition to
our US production, we currently manufacture our products in the United Kingdom
and through third party manufacturers in Japan, Canada, and Germany. We also
maintain sales offices in selected legalized gaming jurisdictions globally,
including Australia, Europe, Japan, Latin America, New Zealand and South Africa.

Unless the context indicates otherwise, references to "International Game
Technology," "IGT," "we," "our," or "the Company" includes International Game
Technology and our wholly-owned subsidiaries and their subsidiaries. Our
principal executive offices are located at 9295 Prototype Drive, Reno, Nevada
89521; our telephone number is (775) IGT-7777; our Internet address is
www.IGT.com. Through our Internet 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, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act. Italicized text indicates trademarks of IGT or its
licensors. For a complete list of trademark and copyright ownership information,
please visit our website.

Basis of Presentation and Consolidation
Our consolidated financial statements have been prepared pursuant to the rules
and regulations of the SEC and include all adjustments necessary to fairly
present our consolidated results of operations, financial position, and cash
flows for each period presented. Results for interim periods are not necessarily
indicative of results for the full year. This quarterly report should be read in
conjunction with our Annual Report on Form 10-K for the year ended September 28,
2002. Certain prior period amounts have been reclassified to conform to our
current presentation.

Our consolidated financial statements include the accounts of International Game
Technology and all of its wholly-owned and majority-owned subsidiaries, as well
as one company that is not a subsidiary. Although we hold only a 24% interest in
the company that is not a subsidiary, we have effective control because we
maintain 50.1% of the voting power through 2005. All appropriate intercompany
accounts and transactions have been eliminated. The minority interest in the
Colorado Grande Casino has been presented as a component of liabilities of
discontinued operations. We account for investments in 50% or less owned joint
ventures using the equity method. For strategic marketing alliances where no
separate legal entity exists, we recognize all assets, liabilities, revenues and
expenses that we own, owe, earn and incur based on the activities that we
perform on behalf of the alliance.

Critical Accounting Policies

Use of Estimates
Our consolidated financial statements have been prepared in conformity with US
generally accepted accounting principles. Accordingly, we are required to make
estimates, judgments and assumptions that we believe are reasonable based on our
historical experience, contract terms, observance of known trends in our company
and the industry as a whole, and information available from other outside
sources. Our estimates affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On a regular basis, we evaluate our estimates, including those



related to customer programs and incentives, product returns, bad debts,
inventory obsolescence, investments, intangible assets, income taxes, warranty
obligations, long-term contracts, contingencies and litigation. Actual results
may differ from initial estimates.

Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, the
seller's price to the buyer is fixed or determinable, collectibility is
reasonably assured and delivery has occurred.

Product Sales
We generally recognize revenue upon delivery of our products to customers, upon
fulfillment of acceptance terms, if any, when no significant contractual
obligations remain and collection of the related receivable is reasonably
assured. Revenue is reported net of incentive rebates or discounts. Revenue
related to customized research and development contracts is recognized as the
related work is delivered. We recognize license fee revenue from business
affiliates over the term of the associated agreement unless the fee is in
exchange for products delivered or services performed that represent the
culmination of a separate earnings process. Amounts received prior to revenue
recognition are recorded as deferred revenue. Our sales credit terms are
normally 90 days or less. We also grant extended payment terms under contracts
of sale secured by the related equipment sold, generally for terms of one to
five years with interest recognized at prevailing rates.

Revenue from the sale of software and license fee agreements is generally
recognized based on basic and key conditions of each agreement. If software does
not require substantial customization, modification, or production, then as any
other product, revenue can be recognized based on our general revenue
recognition policy. We generally defer recognition of revenue for software
license agreements that include multiple elements until the fair value of the
delivered elements can be fairly established or all essential elements of the
arrangement have been delivered. Software license agreements with post-contract
customer support terms are recognized ratably over the term of the contract
including a proportionate amount of any discount given.

Proprietary Gaming
Our proprietary gaming segment is comprised of our wholly-owned gaming
operations, which includes activities that we perform on behalf of our strategic
marketing alliances for which no separate legal entities exist, as well as our
unconsolidated joint venture activities reported as earnings of unconsolidated
affiliates. Because our joint venture operations are an integral part of our
business and the nature of the products and management are the same, our
earnings of unconsolidated affiliates are included as a component of income from
operations. IGT and Anchor Gaming (Anchor) were 50% partners in our largest
joint venture, The Spin For Cash Wide Area Progressive Joint Venture (JV).
Subsequent to the acquisition of Anchor on December 30, 2001, the activities of
the JV have been consolidated.

We place games in both casinos and government-sponsored gaming markets under a
broad spectrum of recurring revenue pricing arrangements, including wide area
progressive (WAP) systems, stand-alone participation and flat fee, equipment
leasing and rental, as well as hybrid pricing or premium products that include a
product sale and a recurring fee. WAP games differ from stand-alone and hybrid
games in that they are electronically linked, inter-casino systems that connect
gaming machines to a central computer, allowing the system to build a
progressive jackpot with every wager until a player hits the top award winning
combination. WAP game revenues are recognized based on a percentage of coin-in
generated by the game. Revenues from stand-alone games are recognized based on a
percentage of the net win that the game generates or on a flat fee basis with
the passage of time. The operation of linked progressive systems varies among
jurisdictions as a result of different gaming regulations. Participating casinos
pay a percentage of the coin-in either directly to IGT, an administrator, or a
trust to oversee and fund the progressive jackpot. Funding of the jackpots also
differs by jurisdiction but is generally administered by IGT.

Our linked progressive systems in Iowa are operated under a trust consisting of
one member from each Iowa casino operating multi-linked games related to the
trust. As administrator, IGT provides all of the services associated with the
operation of the trust. Fees paid to IGT consist of funds generated by the trust



in excess of the amount necessary to fund the jackpot liabilities. IGT
recognizes revenue based on the trust profits. In Atlantic City, New Jersey, our
linked progressive slot system operations are administered by several trusts
managed by representatives of the participating casinos. Separate trusts exist
for each system linked by a progressive meter. Fees paid to IGT are a function
of each trust's adequate cash flow. We recognize revenues from these trusts
based on estimated collectibility.

Lottery and Pari-mutuel Systems
Revenue from the sale of lottery and pari-mutuel gaming systems equipment and
related parts is generally recognized upon delivery to the customer. Revenues
from sales of lottery and video gaming central site systems (including
customized software and equipment) are recognized using the percentage of
completion method for long-term construction type contracts where costs to
complete the contract can reasonably be estimated. Prior to revenue recognition
on central site systems, costs incurred are applied against progress billings
and recorded as a net accrued liability or other current asset as appropriate.
Systems contract services revenue is recognized as the services are performed.
These long-term contracts require installation and operation of lottery and
pari-mutuel wagering networks and the related revenue is generally based on a
percentage of sales volume, which may fluctuate over the lives of the contracts.
See Note 2 regarding discontinued pari-mutuel operations.

Casino Operations
In accordance with industry practice, we recognize casino gaming revenue as the
net win from casino operations, which is the difference between amounts wagered
and payments made to casino players. Slot route revenue is recognized based on
our share of coins wagered or on our share of net winnings. Revenue excludes the
retail value of complimentary food and beverage furnished gratuitously to
customers. Revenue is also reported net of cash rebates accrued to customers as
part of the casino loyalty programs. See Note 2 regarding discontinued casino
operations.

Jackpot Liabilities and Expenses
IGT, the administrator or the trust, recognizes a liability for jackpots not yet
won and jackpot expense for the cost to fund these jackpots in the future.
Jackpots are generally payable in equal installments over a 20 to 26 year period
or immediately in the case of our instant win progressive jackpots. Winners may
elect to receive the present value of jackpots discounted at applicable interest
rates (lump sum) in lieu of annual installments. Interest rates eligible for use
in the lump sum payment calculation vary by jurisdiction and are impacted by
market forces and other economic conditions. Historically, approximately 80% of
winners have elected the lump sum payment option. Winners that do not elect the
lump sum payment generally receive equal annuity payments over the 20 to 26 year
time horizon. We fund jackpot annuity payments through qualifying US government
or agency securities. To calculate the present value of our outstanding
progressive jackpot liabilities to be paid to future winners, we use current
market prime, treasury, and agency rates weighted based on the 80% historical
lump sum election ratio. We believe this calculation provides the best estimate
of our cost to fund jackpots.

Additionally, we estimate the current portion of our liabilities for jackpots
not yet won based on our historical experience with winners' lump sum elections,
as well as the theoretical projected number of jackpots for the current and
non-current periods. Based on this, we have classified 80% of our jackpot
liabilities as current and 20% as non-current. Changes in future winners'
elections of installment or lump sum payments would impact the allocation of our
jackpot liabilities between current and non-current liabilities.

Fluctuations in applicable interest rates due to changes in market and other
economic conditions directly impact our cost to fund jackpots, and therefore the
gross profit on our gaming operations. If interest rates decline, our cost to
fund jackpots increases, and correspondingly our gross profit declines.

Allowances For Doubtful Accounts and Inventory Reserves
We maintain an allowance for doubtful accounts related to our accounts,
contracts, and notes receivable that we have deemed to have a high risk of
collectibility. We analyze historical collection trends, customer



concentrations, customer creditworthiness, current economic trends and changes
in our customer payment patterns when evaluating the adequacy of our allowance
for doubtful accounts.

Inventories are stated at the lower of cost (first-in, first-out method) or
market value. We regularly review inventory quantities on hand and record
reserves for excess and obsolete inventory based primarily on our estimated
forecast of product demand and production requirements.

Long-lived Assets
We assign estimated useful lives to our long-lived assets, including intangible
assets and prepaid or deferred royalties, based on the period of time the asset
is expected to contribute directly or indirectly to future cash flows. We
consider certain factors when assigning useful lives such as legal, regulatory
and contractual provisions, as well as the effects of obsolescence, demand,
competition, and other economic factors. We are required to use judgment and
make estimates to determine the useful lives of long-lived assets. We have
classified prepaid and deferred royalty costs as current and non-current assets
based on the period of expected consumption related to projected revenues.

We depreciate or amortize our long-lived assets with finite lives to reflect the
pattern in which the economic benefits for the assets will be consumed based on
projected usage and revenues. Intangible assets with an increasing revenue
stream are amortized using the straight-line method. Intangible assets with a
declining revenue stream are amortized on an accelerated basis. We depreciate or
amortize our property, plant and equipment using the straight-line method over
the following useful lives: buildings over 30 to 40 years; gaming operations
equipment over 2 to 7 years; manufacturing machinery and equipment over 2 to 15
years; and leasehold improvements over the lease term. Maintenance and repairs
are expensed as incurred, improvements are capitalized, and gains or losses on
disposal are included in income.

We evaluate the carrying value of our long-lived assets for impairment at least
annually or whenever events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable. Indicators that could
trigger an impairment review include changes in legal, regulatory, or economic
factors, market conditions or operational performance. Impairment is measured as
the difference between the carrying amount and the fair value of the long-lived
assets and recognized as a component of income from operations. While we believe
that our estimates of future revenues and cash flows are reasonable, different
assumptions could materially effect our assessment of useful lives and fair
values. Changes in assumptions may cause modifications to our estimates for
depreciation, amortization, or impairment, thereby impacting our results of
operations.

Stock-based Compensation
On October 1, 1996, we adopted SFAS 123, Accounting for Stock-Based
Compensation, which establishes a fair value based method of accounting for
stock compensation plans with employees and others. As permitted by SFAS 123, we
continue to account for stock-based compensation plans in accordance with the
APB 25 intrinsic value method, which determines the compensation cost of stock
options issued for non-variable plans such as ours as the difference between the
quoted market value at the measurement date and the amount, if any, required to
be paid by employees. Our stock-based compensation plans are predominantly
non-compensatory plans where the option price is equal to or greater than the
trading price of our stock on the date of the option grant and therefore, no
compensation cost is recorded. Our reported results include stock-based
compensation under APB 25 resulting from the modification of outstanding
options, including acquisition conversion modifications, and the issuance of
restricted stock awards. See note 12 for pro forma stock-based compensation
costs that would have been charged to operations had the SFAS 123 fair value
method been applied.

Recently Issued Accounting Standards

SFAS 143
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 143, Accounting for Asset Retirement
Obligations. This statement addresses financial accounting and reporting for



obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement applies to all entities and to
all legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and the normal operation
of a long-lived asset, except for certain obligations of lessees. We adopted
SFAS 143 on September 29, 2002, the beginning of our current fiscal year. The
adoption of this statement did not have a material impact on our results of
operations or financial position.

SFAS 144
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment and
Disposal of Long-Lived Assets. This statement requires one accounting model be
used for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired and broadens the presentation of discontinued
operations to include additional disposal transactions. We adopted SFAS 144 on
September 29, 2002, the beginning of our current fiscal year. The adoption of
this statement did not have a material impact on our results of operations or
financial position.

SFAS 145
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements 4, 44,
and 64, Amendment of FASB Statement 13, and Technical Corrections. SFAS 145
rescinds SFAS 4, Reporting Gains and Losses from Extinguishment of Debt. Under
SFAS 4, all gains and losses from extinguishment of debt were required to be
aggregated, if material, and classified as an extraordinary item, net of related
income tax effect, on the statement of income. SFAS 145 requires all gains and
losses from extinguishment of debt to be classified as extraordinary only if
they meet the criteria of Accounting Principles Board (APB) Opinion 30. We
adopted SFAS 145 on September 29, 2002, the beginning of our current fiscal
year. Accordingly, losses on the extinguishment of debt that were classified as
extraordinary items in prior periods will be reclassified to continuing
operations.

SFAS 146
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. A fundamental conclusion reached by the FASB in this
statement is that an entity's commitment to a plan, by itself, does not create a
present obligation to others that meets the definition of a liability. SFAS 146
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The adoption of this statement did not have a material impact on our
results of operations or financial position.

FIN 45
In November 2002, the FASB issued FASB Interpretation (FIN) 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 expands the disclosures required by
guarantors for obligations under certain types of guarantees. It also requires
initial recognition at fair value of a liability for such guarantees. We adopted
the disclosure requirements of FIN 45 for the quarter ended December 28, 2002
and the liability recognition requirements to all guarantees issued or modified
after December 31, 2002. The adoption of these requirements did not have a
material impact on our results of operations or financial position.

SFAS 148
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. This Statement amends SFAS 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in



both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The disclosure requirements of this statement are effective for our
interim financial statements for the current quarter ended March 2003. See Note
12.

FIN 46
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities (VIEs). FIN 46 establishes standards for determining under what
circumstances VIEs should be consolidated with their primary beneficiary,
including those to which the usual condition for consolidation does not apply.
FIN 46 also requires disclosures about unconsolidated VIEs in which the Company
has a significant variable interest. The consolidation requirements of FIN 46
apply immediately to VIEs created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain disclosure requirements apply to all
financial statements issued after January 31, 2003.

We continue to evaluate the impact of this interpretation on our financial
condition and results of operations. Based on our initial analysis, it is
possible that we may consolidate or disclose information about activities of the
progressive systems trusts in Iowa and New Jersey when the consolidation
requirements become effective for our fourth quarter ending September 2003. Our
linked progressive systems in Iowa and New Jersey are administered by trusts
that collect contribution fees from participating casinos and manage the jackpot
liabilities and payments to winners. At March 29, 2003, these unconsolidated
entities collectively recorded total assets of $174.9 million, total liabilities
of $213.1 million including amounts due to IGT, and total revenues for the six
months ended March 2003 of $67.3 million. We do not believe that consolidation
of these entities will have a material impact to our net income. We are not able
to estimate the maximum exposure to loss as a result of our involvement with
these entities as it is based on future operations of the linked progressive
jackpot systems. Historically, we have incurred no losses as a result of our
involvement in these entities.


2. Acquisitions and Discontinued Operations

Acquisitions
On December 30, 2001, we completed our acquisition of Anchor in a stock for
stock exchange. Anchor shareholders received one share of IGT common stock for
each share of Anchor common stock owned. This acquisition afforded us additional
opportunities to use our complementary resources to develop new games more
effectively for the benefit of our customers. In addition, with Anchor we grew
our business presence in the government-operated public gaming sector and
expanded our business activities into online lottery systems. We believe our
combined resources make us a more effective supplier to the gaming and lottery
industries.

The aggregate purchase price paid for Anchor was $986.9 million, plus the
assumption of Anchor's outstanding debt of $337.0 million, net of discount. The
purchase price included just over 14.9 million outstanding shares of Anchor
common stock, exchanged on a one-for-one basis for IGT shares valued at $59.50
per share, $93.0 million of Anchor stock options assumed by IGT, $3.7 million of
Anchor shares held by IGT prior to the acquisition, and $3.5 million of
transaction costs. For accounting purposes, the $59.50 share price was
determined based on the average closing market prices of IGT's common stock for
the seven trading days ended July 12, 2001, which includes the three trading
days before and after the acquisition announcement on July 9, 2001.

Under the guidance of SFAS 141 we finalized our allocation of the Anchor
acquisition purchase price in December 2002. See Note 5 for the purchase price
allocation to identifiable intangible assets and goodwill. Prior to the Anchor
acquisition, the JV activities were accounted for under the equity method and
its revenues were reflected, net of expenses, as earnings of unconsolidated
affiliates in our statements of income. Subsequent to the acquisition, the JV
activities have been consolidated.



Discontinued Operations
In June 2002, we determined that the casino and route operations acquired with
Anchor were not a strategic fit with our core business and committed to a plan
to sell the two Colorado casinos (Colorado Central Station and Colorado Grande
Casino) and the Nevada slot route acquired with Anchor. In February 2003, we
closed the sale of substantially all of the assets of the Nevada slot route
operations of our subsidiary, Anchor Coin, for a cash price of $60.5 million.
Subsequent to the quarter just ended, on April 22, 2003, we closed the sale of
the two Colorado casinos for a cash price of approximately $84.0 million.

During the current quarter, we additionally committed to a plan to sell the
non-strategic pari-mutuel wagering business purchased with Anchor, United Tote
(UT), and recorded an estimated loss on sale of $10.8 million or $6.7 million,
net of tax, based on preliminary offers from prospective buyers. The UT
operations were previously included as a component of our lottery systems
segment. Accordingly, the casino, route and UT operations have been reclassified
to discontinued operations and assets held for sale in all periods presented. We
ceased depreciation and amortization for our discontinued operations when they
were reclassified as held for sale.

The following table presents our final allocation of the Anchor acquisition
purchase price, including the consolidation of the JV:



Discontinued
Operations
Total Reclass Net
- ----------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)

Cash acquired $ 123,104 $ - $ 123,104
Assets held for sale 77,000 167,621 244,621
Accounts and notes receivable 88,156 (7,588) 80,568
Inventory 18,974 (5,023) 13,951
Property and equipment 153,926 (60,861) 93,065
Investments to fund liabilities to jackpot winners 102,880 - 102,880
Identifiable intangible assets 288,839 (74,769) 214,070
Goodwill 853,614 (16,978) 836,636
Investment in JV (64,758) - (64,758)
Other current assets 27,520 (849) 26,671
Other long-term assets 2,446 (1,553) 893
------------- ----------- ------------
Total assets $ 1,671,701 $ - $ 1,671,701
============= =========== ============

Accounts payable $ 14,370 $ (1,150) $ 13,220
Liabilities of discontinued operations - 9,439 9,439
Notes payable 377,292 - 377,292
Jackpot liabilities 168,610 - 168,610
Other liabilities 142,052 (8,289) 133,763
------------- ----------- ------------
Total liabilities 702,324 - 702,324
------------- ----------- ------------

Deferred compensation (13,973) - (13,973)
Common stock and additional paid-in capital 983,350 - 983,350
------------- ----------- ------------
Total equity 969,377 - 969,377
------------- ----------- ------------
Total liabilities and equity $ 1,671,701 $ - $ 1,671,701
============= =========== ============





The following unaudited pro forma financial information is presented as if the
Anchor acquisition had been effective at the beginning of fiscal 2002:



Six Months Ended
-----------------------------
Actual Pro Forma
March March
2003 2002
------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)

Total revenues $1,094,321 $976,554
Income from continuing operations 181,503 137,632
Income (loss) from discontinued operations (2,802) 1,247
Net Income 178,701 138,879
Earnings per share
Basic $ 2.07 $ 1.57
Diluted $ 2.03 $ 1.54



The results of our discontinued operations are summarized below:


Quarters Ended Six Months Ended
----------------------- ------------------------
March March March March
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)

Net revenue $ 27,475 $ 34,364 $ 62,727 $ 34,364
========= ======== ========= =========

Income before tax $ 1,159 $ 2,173 $ 6,329 $ 2,173
Provision for income taxes 437 900 2,386 900
--------- -------- --------- ---------
Income from discontinued operations, net of tax 722 1,273 3,943 1,273
--------- -------- --------- ---------

Loss on sale of discontinued operations before tax (10,826) - (10,826) -
Income tax benefit 4,081 - 4,081 -
--------- -------- --------- ---------
Loss on sale of discontinued operations, net of tax (6,745) - (6,745) -
--------- -------- ---------- ---------
Income (loss) from discontinued operations,
net of tax $ (6,023) $ 1,273 $ (2,802) $ 1,273
========= ======== ========= =========



Deferred compensation related to discontinued operations totaled $2.8 million at
March 2003 and $2.9 million at September 2002. Deferred tax liabilities related
to discontinued operations totaled $5.1 million at March 29, 2003 and $27.5
million at September 29, 2002. Assets held for sale and liabilities of
discontinued operations were comprised of the following as of:



March September
2003 2002
--------------------------------------------------------------------------------------------------
(Amounts in thousands)

Cash $ 9,055 $ 10,126
Accounts receivable, net 2,790 4,132
Other current assets 5,021 6,475
Property and equipment, net 48,548 59,225
Intangible assets 16,600 71,952
Goodwill 16,978 16,978
Other non-current assets 1,354 3,870
---------- ----------
Total assets of discontinued operations held for sale $ 100,346 $ 172,758
========== ==========

Current liabilities $ 8,916 $ 12,295
Minority interest 1,644 1,625
---------- ----------
Total liabilities of discontinued operations $ 10,560 $ 13,920
========== ==========





3. Notes and Contracts Receivable

The following allowances for doubtful notes and contracts were netted against
current and long-term maturities:



March September
2003 2002
--------------------------------------------------------------------
(Amount in thousands)

Current $ 19,935 $ 22,066
Long-term 12,927 15,062
--------- ---------
$ 32,862 $ 37,128
========= =========



4. Concentrations of Credit Risk

The financial instruments that potentially subject us to concentrations of
credit risk consist principally of cash and cash equivalents and accounts,
contracts, and notes receivable. We maintain cash balances at several financial
institutions in amounts which, at times, may be in excess of the Federal Deposit
Insurance Corporation insurance limits.

Our revenues and resulting receivables are concentrated in specific legalized
gaming regions. Accounts, contracts, and notes receivable by region as a
percentage of total receivables at March 29, 2003 were as follows:


Domestic Region
Native American casinos 38%
Nevada 28
Eastern region 7
Canada 7
New Jersey 5
Other US regions, less than 3% individually 6
---
Total domestic 91
---

International Region
Europe 6
Other international, less than 3% individually 3
---
Total international 9
---

Total 100%
===



5. Intangible Assets and Goodwill

With our commitment to sell UT in March 2003, we reclassified the final Anchor
purchase price allocation to identifiable intangible assets and goodwill as
shown in the table below to reflect the intangible assets of UT in discontinued
operations. In-process research and development (R&D) was charged to expense
immediately subsequent to the acquisition because no future alternative use
existed. The goodwill related to Anchor is not deductible for tax purposes.
Accumulated amortization on intangible assets of discontinued operations totaled
$3.5 million when reclassified to assets held for sale.




Anchor Acquired Intangible Assets and Goodwill
-----------------------------------------------------------------------------------------------
Continuing Discontinued
Operations Operations Total
-----------------------------------------------------------------------------------------------
(Amounts in thousands)

Finite Lived Intangible Assets
Patents $ 166,400 $ - $ 166,400
Contracts 29,560 50,294 79,854
Developed Technology 9,888 127 10,015
Trademarks 7,222 - 7,222
In-Process R&D 1,000 - 1,000
---------- --------- ----------
214,070 50,421 264,491
Indefinite Lived Intangible Assets
Trademarks - 24,348 24,348
---------- --------- ----------

Total Intangible Assets $ 214,070 $ 74,769 $ 288,839
========== ========= ==========

Goodwill $ 836,636 $ 16,978 $ 853,614
========== ========= ==========



In addition to adjustments related to the final Anchor purchase price
allocation, we capitalized $4.0 million of purchased patents and $1.8 million of
patent legal and registration costs with an average life of 9.2 years during the
six months ended March 29, 2003. The following table identifies our intangible
asset balances by category, excluding discontinued operations, as of:




March 2003 September 2002
--------------------------------------- ---------------------------------------
Accumulated Carrying Accumulated Carrying
Cost Amortization Amount Net Cost Amortization Amount Net
- -------------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)

Finite Lived Intangible Assets
Patents $ 248,074 $ 29,948 $ 218,126 $ 242,268 $ 19,178 $ 223,090
Contracts 29,560 9,593 19,967 29,712 7,035 22,677
Developed technology 7,135 1,714 5,421 7,660 731 6,929
Trademarks 10,018 3,711 6,307 10,583 1,955 8,628
---------- -------- ---------- ---------- -------- ----------
Total 294,787 44,966 249,821 290,223 28,899 261,324

Indefinite Lived Assets
Trademarks - - - 9,700 - 9,700
---------- -------- ---------- ---------- -------- ----------

Total Intangible Assets $ 294,787 $ 44,966 $ 249,821 $ 299,923 $ 28,899 $ 271,024
========== ======== ========== ========== ======== ==========





Aggregate amortization expense totaled $7.5 million and $8.3 million for the
current and prior year quarters and $16.1 million and $9.2 million for the
current and prior six month periods. Estimated amortization expense for fiscal
2003 and for each of the four succeeding fiscal years is as follows:

Fiscal Year Amount
------------------------------------------------
(Amounts in thousands)

2003 $ 30,972
2004 31,126
2005 29,183
2006 25,693
2007 23,935


The goodwill allocation by segment below reflects our final Anchor purchase
price adjustments. No goodwill was allocated to the Lottery Systems segment
acquired from Anchor.




Product Proprietary
Sales Gaming Total
-----------------------------------------------------------------------------------------
(Amounts in thousands)


Balance as of September 28, 2002 $ 94,574 $ 872,850 $ 967,424
Adjustments to goodwill 11,353 (670) 10,683
Foreign currency translation adjustment 173 - 173
---------- ---------- ----------
Balance as of March 29, 2003 $ 106,100 $ 872,180 $ 978,280
========== ========== ==========



6. Zero-Coupon Senior Convertible Debentures

In a private offering on January 29, 2003, we issued approximately $969.8
million principal amount at maturity of zero-coupon senior convertible
debentures due January 29, 2033 (Debentures) for gross proceeds of approximately
$575.0 million. Absent a yield adjustment, the Debentures have a yield to
maturity of 1.75%. The yield adjustment feature may require IGT to pay
contingent cash interest on the Debentures at prevailing market rates to be
determined during any six month period commencing on or after January 29, 2006,
if the average closing sale prices of our common stock for specified measurement
periods is less than or equal to 60% of the accreted conversion price of the
Debentures during such specified periods.

The Debentures are convertible into 5.2926 shares of our common stock per $1,000
principal amount at maturity, provided one of the enumerated conversion events
has occurred. The conversion events are: (i) during the specified conversion
periods, the closing price of our common stock is more than 120% of the accreted
conversion price (initially approximately $134 per share) for a specified
period; (ii) the average trading price of the Debentures is less than 95% of the
average closing price of our common stock multiplied by the conversion rate for
a specified period; (iii) our long-term senior debt ratings (or the ratings on
the Debentures, if rated) are reduced to below Ba2 by Moody's and below BB by
Standard & Poors' or ceases to be rated by both rating agencies; (iv) the
Debentures have been called for redemption; and (v) upon the occurrence of
specified corporate events.

On or after January 29, 2006, IGT may repurchase the Debentures for cash equal
to their accreted value plus accrued and unpaid cash interest, if any. Holders
have the right to require IGT to redeem the Debentures for an amount equal to
their accreted value plus accrued and unpaid cash interest, if any, on January
29, 2006, 2008, 2013, 2018, 2023 and 2028. IGT must settle any repurchases on
January 29, 2006 in cash. On any subsequent repurchase dates, IGT may elect to
settle in cash or shares of common stock or a combination thereof.

IGT may also be required to repurchase the Debentures upon the occurrence of
specified change of control events at the accreted value plus accrued and unpaid
cash interest, if any. Upon a change of control, we may elect to settle the



repurchase price in cash or common stock valued at 95% of its average closing
sale price for the five day trading period ending on the third trading day prior
to the repurchase date. IGT's right to pay the repurchase price for Debentures
in common stock upon a repurchase date or upon a change of control is subject to
certain conditions, including the registration under applicable federal and
state securities laws of the shares of common stock to be issued.

IGT entered into a registration rights agreement for the benefit of the holders
of the Debentures agreeing to file and keep effective a registration statement
covering the resale of the Debentures and underlying common stock by the holders
for specified periods of time. If IGT fails to maintain an effective
registration statement for the time periods specified, subject to permitted
exceptions, IGT will be required to pay certain additional cash interest as
liquidated damages until the default under the registration rights agreement is
cured. Such liquidated damages range from 0.25% to 0.50% of the accreted value
of the Debentures plus accrued and unpaid cash interest, if any.


7. Earnings Per Share

The following table shows the reconciliation of basic earnings per share (EPS)
for income from continuing operations to diluted EPS:




Quarters Ended Six Months Ended
----------------------- -------------------------
March March March March
2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)

Income from continuing operations $ 93,137 $ 72,627 $ 181,503 $ 124,417
========= ========= ========== ==========

Weighted average common shares outstanding 85,564 89,293 86,209 81,078
Dilutive effect of stock options outstanding 1,689 1,696 1,663 1,612
--------- --------- ---------- ----------
Weighted average common and potential
shares outstanding 87,253 90,989 87,872 82,690
========= ========= ========== ==========

Basic earnings per share $ 1.09 $ 0.81 $ 2.11 $ 1.53
Diluted earnings per share $ 1.07 $ 0.80 $ 2.07 $ 1.50

Common shares excluded from
diluted EPS because the effect
of option exercise was antidilutive 291 1,866 568 1,041



There were no transactions since the end of the current quarter, which would
have materially changed the number of common shares or potential common shares
outstanding.


8. Income Taxes

Our provision for income taxes is based on estimated effective annual income tax
rates. The provision differs from income taxes currently payable because certain
items of income and expense are recognized in different periods for financial
statement than for tax return purposes.



9. Comprehensive Income

Items of other comprehensive income include cumulative foreign currency
translation adjustments and net unrealized gains and losses on investment
securities. Our total comprehensive income is presented below:




Quarters Ended Six Months Ended
----------------------- ------------------------
March March March March
2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------------
(Amounts in thousands)

Net income $ 87,114 $ 73,900 $ 178,701 $ 125,690
Net change in other comprehensive income (705) (4,900) (798) 26
--------- --------- --------- ---------
Comprehensive income $ 86,409 $ 69,000 $ 177,903 $ 125,716
========= ========= ========= =========



10. Commitments and Contingencies

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

Acres
In February 1999, the JV and Anchor filed an action in US District Court,
District of Nevada against Acres Gaming, Inc. (Acres). The complaint alleges,
among other things, infringement of certain secondary event (bonus features)
patents owned by Anchor and licensed to the JV. Acres responded by filing an
answer and counterclaim against the JV and Anchor. Additionally, Acres filed an
action in Oregon against the JV and Anchor alleging wrongful use of Acres'
intellectual property. On April 21, 2003, the parties reached a confidential
out-of-court settlement resolving the claims and counterclaims. Concurrent with
the settlement of the matter, Acres agreed to license certain of its bonusing
patents to IGT and IGT will pay a royalty advance of $10.0 million to Acres for
these patents as well as other licensing fees.

Bally
On October 31, 2002, Bally Gaming, Inc. filed a complaint in U.S. District Court
for the District of Nevada against IGT and Anchor for declaratory relief seeking
a non-monetary judgment that Bally had not infringed certain patents owned by
IGT or Anchor. IGT moved to dismiss the complaint on January 27, 2003, and that
motion is currently pending before the court.

Collins
In 1994, a lawsuit was filed in South Carolina against IGT by Collins Music Co.
(Collins), a distributor for IGT in South Carolina. In the action, Collins
alleged that IGT agreed, but subsequently failed, to renew a Distributorship
Agreement with Collins. Collins also alleged that equipment sold to it was not
the latest IGT product available to the marketplace. IGT counterclaimed for the
unpaid invoices for machines delivered to Collins, for violations of the South
Carolina Unfair Trade Practices Act, for breach of the Distributorship Agreement
accompanied by fraudulent acts and denied all the other allegations. In August
2001, a jury found that IGT breached its agreement with Collins and awarded
Collins $15.0 million in compensatory damages.

IGT filed motions for post-trial relief that were denied by the trial court. IGT
timely filed its Notice of Appeal. In May 2002, Collins filed a Motion to
Dismiss the IGT appeal. Oral arguments on the motion were held in August 2002
and in September 2002 the Motion to Dismiss was granted by a three-judge panel
of the Court. IGT timely filed a Petition for Rehearing en banc. Rather than
consider the Petition, the South Carolina Court of Appeals requested that the
South Carolina Supreme Court take the case on certification. On February 7,
2003, IGT filed its Petition For A Writ Of Certiorari with the South Carolina
Supreme Court, which was denied on April 24, 2003. On April 29, 2003, IGT filed



a Petition with the South Carolina Court of Appeals seeking further relief that
has not yet been acted upon by that court. Through March 2003, we have accrued
the $15.0 million judgment plus accrued interest of $3.0 million.

Kraft
In July 2001, an individual, Mary Kraft, filed a complaint against IGT, Anchor
and the three operators of casinos in Detroit, Michigan. IGT was never served
with the complaint and was voluntarily dismissed from the litigation. In
September 2001, IGT filed a motion to intervene as a party defendant. The
plaintiff claimed the bonus wheel feature of the Wheel of Fortune(R) and I Dream
of Jeannie(TM) slot machines, which are manufactured, designed and programmed by
IGT and/or Anchor, are deceptive and misleading. Specifically, the plaintiff
alleged that the bonus wheels on these games do not randomly land on a given
dollar amount but are programmed to provide a predetermined frequency of
payouts. The complaint alleged violations of the Michigan Consumer Protection
Act, common law fraud and unjust enrichment and asked for unspecified
compensatory and punitive damages, disgorgement of profits, injunctive and other
equitable relief, and costs and attorney's fees. The Michigan Gaming Control
Board, the administrative agency responsible for regulating the Detroit casinos,
approved the machines and their programs for use. In April 2002, the Court
granted the Summary Disposition filed by IGT and Anchor and dismissed the
Plaintiff's complaint. In May 2002, the plaintiff filed an appeal.

Poulos
Along with a number of other public gaming corporations, IGT is a defendant in
three class action lawsuits: one filed in the US District Court of Nevada,
entitled Larry Schreier v. Caesars World, Inc., et al, and two filed in the US
District Court of Florida, entitled Poulos v. Caesars World, Inc., et al. and
Ahern v. Caesars World, Inc., et al., which have been consolidated into a single
action. The Court granted the defendants' motion to transfer venue of the
consolidated action to Las Vegas. The actions allege that the defendants have
engaged in fraudulent and misleading conduct by inducing people to play video
poker machines and electronic slot machines, based on false beliefs concerning
how the machines operate and the extent to which there is an opportunity to win
on a given play. The amended complaint alleges that the defendants' acts
constitute violations of the Racketeer Influenced and Corrupt Organizations Act,
and also give rise to claims for common law fraud and unjust enrichment, and
seeks compensatory, special, incidental and punitive damages of several billion
dollars. In December 1997, the Court denied the motions that would have
dismissed the Consolidated Amended Complaint or that would have stayed the
action pending Nevada gaming regulatory action. The defendants filed their
consolidated answer to the Consolidated Amended Complaint in February 1998. In
March 2002, the Court directed that certain merits discovery could proceed. In
June 2002, the Court denied the plaintiffs' motion for class certification. An
appeal of that denial was filed timely with the US Court of Appeals for the
Ninth Circuit. On April 30, 2003, the appellants (class plaintiffs) timely filed
their opening brief. The respondent's brief in response is due on or before July
31, 2003.

Guarantees

Liquidated Damages
Our online lottery contracts typically permit termination of the contract by the
lottery authority at any time for material breach or for other specified reasons
and generally contain demanding implementation and performance schedules.
Failure to perform under such contracts may result in substantial monetary
damages. Some of our US lottery contracts contain provisions for significant
liquidated damages related to various incidents such as implementation delays,
system downtime, supply downtime, supply shortages, or degraded systems
performance. Many of our lottery contracts also permit the lottery authority to
terminate the contract upon notice "for convenience" or upon a State's
cessation, in whole or in part, of lottery operations and do not specify the
compensation, if any, to which we would be entitled should such termination
occur. Some of our international customers similarly reserve the right to assess
monetary damages in the event of contract termination or breach. Although such
liquidated damages provisions are customary in the lottery industry and the
actual liquidated damages imposed are sometimes subject to negotiation, such
provisions in our lottery contracts present an ongoing potential for additional
expense. At March 29, 2003, we had $1.6 million accrued for liquidated damages.



Performance Bonds
We had performance bonds outstanding, primarily related to our operation of
several lottery systems and gaming operations, totaling $79.9 million at March
29, 2003. We are liable to reimburse the bond issuer in the event the bond is
exercised as a result of our nonperformance.

Progressive Systems Trusts
Our linked progressive systems in Iowa and New Jersey are administered by trusts
consisting of participating casino members. We have agreed to loan to these
trusts, upon request, and subject to certain limitations, amounts necessary to
meet substantially all obligations of the trusts. Trust obligations are
primarily related to jackpot liabilities. We are not able to estimate the
maximum potential amount of future payments under this guarantee because it is
based on future operations of the linked progressive jackpot systems. Loans to
the trusts have historically been infrequent and short-term in nature. There
were no outstanding loans to the trust at March 29, 2003.

IGT Licensor Arrangements
Our sales agreements that include software and intellectual property licensing
arrangements may provide a clause whereby IGT indemnifies the third party
licensee against liability and damages (including legal defense costs) arising
from any claims of patent, copyright, trademark or trade secret infringement.
Should such a claim occur, we could be required to make payments to the licensee
for any liabilities or damages incurred. We are not able to estimate the maximum
potential amount of future payments under this guarantee because it depends on
the occurrence of future events.

Product Warranties
We accrue for warranty costs based on historical trends in product failure rates
and the expected material and labor costs to provide warranty services. The
majority of our products are generally covered by a warranty for periods ranging
from 90 days to one year. The following table summarizes the activity related to
our product warranty liability for the six months ended March 29, 2003.

----------------------------------------------------------------
(Amounts in thousands)

Beginning balance of warranty liability $ 3,332
Reduction for payments made (906)
Accrual for new warranties issued 3,056
Adjustments for pre-existing warranties (336)
--------
Ending balance $ 5,146
========


Self-Insurance
We are self-insured for various levels of workers' compensation, directors' and
officers' liability, electronic errors and omissions liability, employee
medical, dental, prescription drug, and short-term disability coverage. We also
have stop loss coverage to protect against unexpected claims. Insurance claims
and reserves include accruals of estimated settlements for known claims, as well
as accruals of actuarial estimates of incurred but not reported claims.

State Taxes
We are subject to sales, use, income and other tax audits and administrative
proceedings in various states. While we believe we have properly reported our
tax liabilities in each state, no assurance can be given that state tax
authorities will not propose adjustments that will increase our tax liabilities.
We do not currently expect that the outcome of these tax audits and proceedings



will, either individually or in the aggregate, have a material adverse effect on
our financial position or results of operations.


11. Derivatives and Hedging Activities

With the adoption of SFAS 133 on October 1, 2000, we recognize all derivatives
as either assets or liabilities on the balance sheet at the fair value of the
instruments. Accounting for changes in the fair value of derivatives depends on
the intended use and resulting designation. We use derivative financial
instruments to minimize our market risk exposure resulting from fluctuations in
foreign exchange rates and interest rates. The primary business objective of our
hedging program, as defined in our corporate risk management policy, is to
minimize the impact of transaction, remeasurement, and specified economic
exposures to our net income and earnings per share. The counter parties to these
instruments are major commercial banks and we believe that losses related to
credit risk are remote. We are not party to leveraged derivatives and do not
hold or issue financial instruments for speculative purposes.

We routinely use derivative financial instruments to hedge our net exposure, by
currency, related to our monetary assets and liabilities denominated in
nonfunctional foreign currency. These hedging instruments are subject to
fluctuations in value that are generally offset by the value of the underlying
exposures being hedged. These forward exchange contracts are not designated as
hedging instruments under SFAS 133 and resulting gains or losses are recognized
in current earnings.

From time to time, we enter into sales commitments denominated in foreign
currencies. Our policy is to hedge significant firm commitments denominated in
foreign currency with forward exchange contracts to protect the US dollar value
of the revenues. These forward exchange contracts have been designated as fair
value hedges under SFAS 133 and related gains or losses are included as a
component of the hedged transaction when recorded. Gains and losses related to
the hedge ineffectiveness are recorded in other income or expense. Time value is
excluded from effectiveness testing.

At March 29, 2003, our net foreign currency exposure totaled $48.3 million
related to our monetary assets and liabilities denominated in nonfunctional
foreign currency and $29.6 million for a firm sales commitment denominated in
Canadian dollars. These exposures were hedged with $66.2 million in forward
currency contracts. The hedge for the firm commitment was designated a fair
value hedge under SFAS 133 and there was no hedge ineffectiveness for the six
months ended March 29, 2003. At September 28, 2002, we had net foreign currency
exposure of $31.2 million related to our monetary assets and liabilities
denominated in nonfunctional foreign currency and $52.6 million for a firm sales
commitment denominated in Canadian dollars. These exposures were hedged with
$86.5 million in forward contracts.

Convertible Debentures Yield Adjustment
The yield adjustment feature of our convertible Debentures due January 29, 2033
(See Note 6) requires contingent cash interest payments based on interest rates
that are indexed to, or triggered by, our stock price and is thus considered an
embedded derivative under SFAS 133 requiring bifurcation. However, if an upward
adjustment were anticipated to go into effect, IGT could exercise its redemption
right or the holder could exercise its right to require IGT to purchase the
debentures. Therefore, an investor could be expected to attribute no economic
value to the yield adjustment feature. Accordingly, we have ascribed no value
and recorded no derivative asset or liability for this embedded derivative.



12. Pro Forma Stock-Based Compensation Costs

We have provided the following pro forma financial information reflecting the
difference between compensation cost charged to operations under the APB 25
intrinsic value method and pro forma compensation cost that would have been
charged to operations had the SFAS 123 fair value method been applied to all
awards granted, modified, or settled since the beginning of fiscal 1996, using a
Black-Scholes option pricing model. This valuation model was developed for use
in estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. Option valuation models require the
input of highly subjective assumptions. IGT's employee stock-based compensation
has characteristics significantly different from those of traded options, and
changes in the subjective input assumptions can materially affect the fair value
estimate. In our opinion, the existing models do not necessarily provide a
reliable measure of the fair value of employee stock-based compensation.




Quarters Ended Six Months Ended
--------------------------- ---------------------------
March March March March
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)

Reported net income $ 87,114 $ 73,900 $ 178,701 $ 125,690
Reported stock compensation, net of tax 543 744 1,148 764
Pro forma stock compensation, net of tax (5,205) (5,371) (9,992) (8,691)
--------- --------- ---------- ----------
Pro forma net income $ 82,452 $ 69,273 $ 169,857 $ 117,763
========= ========= ========== ==========

Basic earnings per share:
As reported $ 1.02 $ 0.83 $ 2.07 $ 1.55
Pro forma $ 0.97 $ 0.78 $ 1.96 $ 1.45

Diluted earnings per share:
As reported $ 1.00 $ 0.81 $ 2.03 $ 1.52
Pro forma $ 0.95 $ 0.76 $ 1.93 $ 1.42





13. Business Segments

We currently operate principally in the following three lines of business. The
casino, route and pari-mutuel operations acquired from Anchor have been
reclassified to discontinued operations. See Note 2.

o Product sales encompass the development, manufacturing, marketing,
distribution and sales of computerized gaming products and systems.

o Proprietary gaming operations includes the development, marketing and
placement of WAP systems, stand-alone games, and gaming equipment
leasing. This segment is comprised of our wholly-owned gaming
operations, which includes activities that we perform on behalf of our
strategic marketing alliances, as well as our joint venture activities
reported as earnings of unconsolidated affiliates. Subsequent to the
Anchor acquisition, the JV activities have been consolidated.

o Lottery systems consist of the development, manufacturing, operation
and sale of online lottery systems.

There have been no material changes during the current period in the basis of
measuring the amount of identifiable assets by segment since our last annual
report. See Note 5 for changes to the allocation of goodwill by segment since
our last annual report. The following table presents information on our lines of
business for the current and prior comparable periods. The prior period amounts
have been restated to reflect the reclassification of the casino, route and
pari-mutuel operations to discontinued operations. The prior period amounts have
been restated to conform to the current period presentation. IGT's segment
profit reflects income from continuing operations before tax, including an
applicable allocation of operating expenses, as well as other income and
expenses.




Product Proprietary Lottery Unallocated
Lines of Business Sales Gaming Systems Corporate Consolidated
---------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)

Quarter Ended March 2003
Total revenues $ 254,529 $ 274,559 $ 38,561 $ - $ 567,649
Losses of unconsolidated affiliates - (166) - - (166)
Segment profit (loss) 67,488 99,533 4,665 (22,188) 149,498

Six Months Ended March 2003
Total revenues $ 495,779 $ 522,942 $ 75,600 $ - $ 1,094,321
Losses of unconsolidated affiliates - (345) - - (345)
Segment profit (loss) 132,889 191,774 8,928 (42,254) 291,337

---------------------------------------------------------------------------------------------------------------------------
Quarter Ended March 2002
Total revenues $ 206,325 $ 254,961 $ 34,729 $ - $ 496,015
Losses of unconsolidated affiliates - (748) - - (748)
Segment profit (loss) 43,198 95,255 1,788 (22,872) 117,369

Six Months Ended March 2002
Total revenue $ 405,930 $ 356,849 $ 34,729 $ - $ 797,508
Earnings of unconsolidated affiliates - 33,117 - - 33,117
Segment profit (loss) 80,657 159,075 1,788 (41,944) 199,576





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

Critical Accounting Policies

We believe the following critical accounting policies are the most important and
pervasive accounting policies that we use to portray our financial condition and
results of operations. They require management's most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. These areas of our accounting
policies are the most sensitive to material change from external factors. Please
see Note 1 of our Unaudited Condensed Consolidated Financial Statements for a
full discussion on the application and effects of these critical accounting
policies. Material changes in our estimates affecting comparability of our
financial statements for the periods presented have also been discussed
throughout the body of this management discussion and analysis wherever
applicable.

o Use of Estimates
o Revenue Recognition
o Jackpot Liabilities and Expenses
o Allowances For Doubtful Accounts and Inventory Reserves
o Long-lived Assets

Anchor Acquisition

On December 30, 2001, we completed our acquisition of Anchor Gaming (Anchor),
which resulted in the addition of one new line of business, lottery systems. The
casino, route, and pari-mutuel operations acquired with Anchor have been
reclassified to discontinued operations. The most notable change to our
financial results following the acquisition was the consolidation of the Spin
For Cash Joint Venture (JV). IGT and Anchor had worked together since 1996 as
partners in the JV, which we accounted for under the equity method prior to the
acquisition. Under the equity method, revenues were previously reflected net of
expenses in earnings of unconsolidated affiliates.

Discontinued Operations
In June 2002, we determined that the casino and route operations acquired with
Anchor were not a strategic fit with our core business and committed to a plan
to sell the two Colorado casinos (Colorado Central Station and Colorado Grande
Casino) and the Nevada slot route. In February 2003, we closed the sale of
substantially all of the assets of the Nevada slot route operations of our
subsidiary, Anchor Coin, for a cash price of $60.5 million. Subsequent to the
quarter just ended, on April 22, 2003, we closed the sale of the two Colorado
casinos for a cash price of approximately $84.0 million.

During the current quarter, we additionally committed to a plan to sell the
non-strategic pari-mutuel wagering business, acquired with Anchor, United Tote
(UT), and recorded an estimated loss on the sale based on preliminary offers
from prospective buyers. We expect to close the sale of UT before September
2003. The UT operations were previously included as a component of our lottery
systems segment. Accordingly, the casino, route and UT operations have been
reclassified to discontinued operations and assets held for sale until sold for
all periods presented. We ceased depreciation and amortization for discontinued
operations upon reclassification to assets held for sale.



Results of Operations

We currently operate in three lines of business:
o Product sales encompasses the development, manufacturing, marketing,
distribution and sales of computerized gaming products and systems;
o Proprietary gaming operations includes the development, marketing and
placement of WAP systems, stand-alone games, and gaming equipment
leasing. This segment is comprised of our wholly-owned gaming
operations, which includes activities that we perform on behalf of our
strategic marketing alliances, as well as our joint venture activities
reported as earnings of unconsolidated affiliates; and
o Lottery systems consists of the development, manufacturing, operation
and sale of online lottery systems.

Quarter Ended March 29, 2003 Compared to the Quarter Ended March 30, 2002
Net income for the second quarter of fiscal 2003 increased to $87.1 million or
$1.00 per diluted share up from $73.9 million or $0.81 per diluted share in the
prior year quarter. These results reflected a loss, net of tax, from
discontinued operations of $6.0 million or $0.07 per diluted share for the
current quarter versus net income from discontinued operations of $1.3 million
or $0.01 per diluted share in the prior year quarter. The current quarter
included an estimated loss on the UT sale of $6.7 million, net of tax.

Income from continuing operations for the current quarter grew to $93.1 million
or $1.07 per diluted share compared to $72.6 million or $0.80 per diluted share
for the same quarter last year.

Income from Operations
Current quarter operating income grew 22% to $166.8 million from $136.7 million
in the second quarter of fiscal 2002. This growth was attributable to increased
revenues and improved gross profit across all segments, partially offset by
higher operating expenses. Operating profit margins improved to 29% of revenues
in the second quarter of 2003 compared to 28% in the same quarter last year.

Revenues and Gross Profit
Total revenues and earnings of unconsolidated affiliates for the second quarter
of fiscal 2003 grew 15% to $567.5 million compared to $495.3 million in the
second quarter of fiscal 2002. All segments posted revenue gains in the current
quarter over the same prior year quarter, 23% in product sales, 8% in gaming
operations, and 11% in lottery systems. Total gross profit and earnings of
unconsolidated affiliates improved 19% overall to $283.3 million in the current
second quarter from $238.0 million in the comparable prior year quarter. Current
quarter gross profit increased 38% in product sales, 6% in proprietary gaming
operations, and 25% in lottery systems compared to the second quarter of fiscal
2002.

Product Sales
Revenue from product sales totaled $254.5 million on shipments of 34,800 units
worldwide in the second quarter of fiscal 2003. Comparatively, sales in the
prior year quarter totaled $206.3 million on shipments of 29,500 units. Gross
profit margins on product sales improved to 48% in the current quarter from 43%
in the prior year quarter. Margin improvements resulted primarily from greater
domestic machine volumes and related operational efficiencies, as well as
increased EZ PayTM systems sales and related royalty revenues. In addition,
average sales prices improved 5% over the prior year quarter related to a
slightly greater mix of domestic games and stronger parts and systems revenue.
Looking forward to the remainder of fiscal 2003, we estimate our overall gross
profit margins to range between 46% and 50% depending on geographical and
product mix.

Domestic shipments increased to 19,800 machines in the current quarter compared
to 16,300 machines in the prior year quarter, dominated by replacement sales
comprising 70% of the units sold. Rising domestic replacement demand accounted
for 13,900 units in the second quarter of 2003, up 16% from 12,000 units in the
second quarter of fiscal 2002. Our most significant replacement order sales
during the current quarter were into the Canadian government-operated public
gaming markets, with 4,100 units shipped under the first half of our previously
announced contract with the Quebec Lottery Board, and 1,500 units delivered to
the Saskatchewan Province. New and expansion units also grew during the current



quarter compared to the prior year quarter, predominantly due to shipments into
several different Native American tribal jurisdictions in a number of
geographical locations, including the states of California, Arizona, North
Carolina, South Dakota, and New Mexico. Also, both new and replacement shipments
into the Nevada casino market during the current quarter improved over the same
quarter last year.

International machine shipments for the current second quarter grew to 15,000
units from 13,200 units in the prior year quarter, primarily the result of
increased sales in the UK and Europe, including shipments to new or expanding
casinos in Holland, the Ukraine, Sweden and Portugal. We also shipped 600 games
to the new Kangwon Land Casino in South Korea, a new gaming market.
International gross margins also improved related to increased parts and higher
margin systems revenue and a greater mix of AWP games sold in the UK, which
carry better margins than those sold elsewhere in Europe. Australian market
sales declined, as we continued to feel the impact from stricter regulatory
efforts from government anti-gaming "harm minimization" measures.

Proprietary Gaming
Gaming operations revenues and earnings of unconsolidated affiliates for the
current second quarter increased 8% to $274.4 million from $254.2 million the
prior year quarter. Gross profit from proprietary gaming operations grew 6% to
$147.0 million for the second quarter of fiscal 2003, up from $138.5 million in
the second quarter of 2002. These improvements resulted from increasing our
installed base of recurring revenue machines, as well as enhanced yield per game
resulting from new game introductions and favorable jurisdictional mix. The
current quarter also benefited significantly from increased play related to the
record setting Nevada Megabucks jackpot hit at nearly $40.0 million in late
March 2003. Gross profit margins from proprietary gaming operations in the
current quarter remained consistent with the prior year quarter at 54%.

IGT's installed base of proprietary games, including machines placed in both
casinos and racinos, ended the current quarter at 32,800, up 900 units from the
same quarter last year, and up 300 units from the immediately preceding quarter.
Casino game placements were up 500 units over the prior year, primarily related
to additions in Native American jurisdictions, offset by declines in Nevada and
Atlantic City. Racino game placements were up 400 games over the prior year
primarily related to additional installations in the Delaware
government-operated public gaming market. These gains were partially offset by
the continued managed removal of end-of-life Anchor stand-alone units.

Lottery Systems
Our lottery systems produced revenues of $38.6 million for the second quarter of
fiscal 2003, up 11% from $34.7 million in the prior year quarter. Gross profit
from lottery systems grew 25% to $13.5 million versus $10.8 million in the same
quarter last year. These improvements were primarily the result of our online
lottery system contract with the South Korean Lottery Services, which went live
with Korea's first online lottery in December 2002, with over 5,000 retail
outlets.

Operating Expenses, Other Income and Expense, and Taxes
Operating expenses for the second quarter of fiscal 2003 increased to $116.5
million from $101.3 million in the second quarter of 2002. This increase
primarily related to additional performance based incentive accruals, increased
legal costs related to product compliance and intellectual property protection,
and our ongoing investment in research and development. Operating expenses also
included $3.5 million in the current quarter and $2.9 million in the prior year
quarter to update our internal software systems with an enterprise resource
planning (ERP) solution. Additionally, the current quarter included $3.4 million
in severance costs associated with the transition of a former Anchor facility
from Bozeman, Montana to Reno and efforts to reduce staffing levels in Australia
due to its current restrictive anti-gaming regulatory environment.

Other expense, net, decreased $2.0 million from the same quarter last year to
$17.3 million for the current quarter. This decrease was predominantly due to
additional interest expense included in the prior year quarter on Anchor's
senior notes assumed on acquisition that were repurchased in July 2002.



The fluctuation in our worldwide tax rate to 37.7% in the current quarter
compared to 38.1% in the prior year quarter was primarily related to the Anchor
acquisition. We expect our tax rate for fiscal 2003 to fluctuate between 37.5%
and 38%.

Business Segments Operating Profit (See Note 13 of our Unaudited Condensed
Consolidated Financial Statements) IGT's operating profit by segment reflects
income from continuing operations before tax, including an applicable allocation
of operating expenses, as well as other income and expenses. Our proprietary
gaming segment includes both our wholly-owned gaming operations and our
unconsolidated joint venture activities reported as earnings of unconsolidated
affiliates.

Product sales segment profit for the second quarter of fiscal 2003 increased to
$67.5 million or 27% of related revenues up from $43.2 million or 21% in the
second quarter of fiscal 2002. This improvement related primarily to volume
growth and increased gross profit margins.

Segment profit from our proprietary gaming operations increased to $99.5 million
in the current quarter from $95.3 million in the prior year quarter. As a
percentage of revenue and earnings of unconsolidated affiliates, proprietary
gaming segment profit totaled 36% in the current quarter compared to 37% in the
prior year quarter. This fluctuation resulted primarily from additional
allocated operating expenses related to increased volume.

Current quarter segment profit from lottery systems grew to $4.7 million or 12%
of related revenues up from $1.8 million or 5% in the same quarter last year.
This improvement reflected the commencement of our online lottery contract in
South Korea, which went live in December 2002.

Six Months Ended March 29, 2003 Compared to the Six Months Ended March 30, 2002
Net income for the first half of fiscal 2003 increased to $178.7 million or
$2.03 per diluted share from $125.7 million or $1.52 per diluted share in the
first half of fiscal 2002. These results incorporated a loss, net of tax, from
discontinued operations for the six months just ended of $2.8 million or $.04
per diluted share, including an estimated loss on the UT sale of $6.7 million,
net of tax. The first six months of the prior year included net income from
discontinued operations totaling $1.3 million or $.02 per diluted share.

Income from continuing operations for the first six months of fiscal 2003 grew
to $181.5 million or $2.07 per diluted share compared to $124.4 million or $1.50
per diluted share in the prior year period.

Income from Operations
For the six months just ended, income from operations grew 38% to $322.9 million
from $234.5 million in the first six months of fiscal 2002. Increased revenues
and gross profits across all segments primarily drove this growth. The inclusion
of Anchor and the consolidation of the JV for both quarters in the current six
months versus only the second quarter of the comparable prior year period also
contributed significantly to this improvement. Income from operations as a
percentage of revenues and earnings of unconsolidated affiliates improved to 30%
in the first half of fiscal 2003 versus 28% in the first half of 2002.

Revenues and Gross Profit
Total revenues and earnings of unconsolidated affiliates for the first six
months of fiscal 2003 grew 32% to $1.1 billion compared to $830.6 million for
the first six months of fiscal 2002. All segments posted revenue gains in the
current six month period over the same period last year. Total gross profit and
earnings of unconsolidated affiliates improved to $543.0 million in the current
six months compared to $408.2 million in the prior year period. The inclusion of
Anchor and the consolidation of the JV for six months in the current half-year
period versus only three months of the comparable prior year period also
contributed significantly to this growth.

Product Sales
Revenue from product sales increased to $495.8 million, up 22% over last year,
on shipments of 64,500 units worldwide in the first six months of fiscal 2003.
Comparatively, sales in the first six months of fiscal 2002 totaled $405.9



million on shipments of 61,900 units. Gross profit margins on product sales
improved to 48% in the current six month period from 42% in the comparable prior
year period. The increase in gross profit margin resulted primarily from a
larger proportionate mix of domestic sales, comprising 61% of total unit sales
versus 47% in the prior year period. Increased EZ Pay(TM) systems sales and
related royalty revenues, as well as ongoing operational efficiencies, also
contributed to gross profit improvement. Average sales prices improved 17% in
the current six months compared to the prior year period primarily related to
the greater mix of domestic games combined with fewer lower priced international
units. Looking forward, we estimate our overall gross profit margins will range
between 46% and 50% for the remainder of fiscal 2003, depending on geographical
and product mix.

Domestic shipments increased to 39,100 units in the first six months from 28,800
units in the comparable prior year period. Domestic replacement sales increased
to 25,000 units for the six months just ended, up 34% from 18,600 units in the
same period last year, primarily related to greater demand for our EZ Pay(TM)
ticket-in ticket-out (TITO) technology in the Nevada, New Jersey and Midwestern
markets. In addition, replacement sales for the year have been strong in the
government-operated public gaming markets, namely the Canadian provinces of
Quebec and Saskatchewan. Also contributing to the current year growth were
greater sales of new and expansion machines into the majority of casino markets,
most significantly into various Native American tribal jurisdictions across the
US, as well as Nevada and New Jersey. Major shipments to new casinos during the
current six months included the Seneca in Niagara Falls, the Borgata in Atlantic
City, Dry Creek in California, and the Tuscany and Cannery in Las Vegas.

Our EZ Pay(TM) technology continues to stimulate replacement demand for our
gaming machines as existing slot machines are replaced with our TITO equipped
machines throughout major casino resorts. Several major casino resorts have
committed to replace existing slot machines with our EZ Pay(TM) systems and TITO
equipped machines throughout their properties. Virtually every major
manufacturer of cashless gaming systems and machines is now licensed to use the
cashless patents in the intellectual property package administered by IGT. We
believe this will facilitate casino implementations of cashless technology using
any combination of systems and machines, encourage broader adoption of cashless
technology and continue to stimulate replacement demand.

International machine shipments for the first six months of fiscal 2003 declined
to 25,400 units from 33,100 units in the comparable prior year period, related
primarily to reduced sales in Japan and Australia, partially offset by increased
sales in the UK, Europe, and a new gaming market in South Korea. Sales were
negatively impacted in Japan by the restrictive regulatory environment and in
Australia by on-going government anti-gaming "harm minimization" measures which
is impacting both operators and suppliers across the market.

Proprietary Gaming
Gaming operations revenues and earnings of unconsolidated affiliates for the
first six months increased 34% to $522.6 million from $390.0 million the prior
year period. Gross profit from proprietary gaming operations grew 23% to $279.1
million compared to $226.2 million the prior year period. These improvements
resulted from the inclusion of Anchor and the consolidation of the JV for six
months in the current year period versus three months in the prior year period,
an increase in the installed base of recurring revenue machines, as well as
enhanced yield per game resulting from new game introductions and a favorable
jurisdictional mix.

IGT's installed base of proprietary games, including machines placed in both
casinos and racinos, totaled 32,800 units at March 29, 2003, up 900 units over
the same time last year. Machines placed in casino markets increased 500 units
over last year to end the current period at 28,800 units, primarily related to
additions in Native American jurisdictions, offset by declines in Nevada and
Atlantic City. Racino game placements were up 400 games over the prior year
related to additional installations in the Delaware government-operated public
gaming market. These gains were partially offset by the continued managed
removal of end-of-life Anchor stand-alone units. New games introduced during the
first six months of fiscal 2003 included such popular themes as I Love Lucy(R),
and The Beverly Hillbillies(TM) (our first penny linked progressive video slot
machine) and Family Feud (TM). Lottery systems Our lottery systems produced



revenues of $75.6 million and gross profit of $26.0 million or 34% of revenues
for the first six months of fiscal 2003. With only three months of lottery
systems in the first half of the prior year, lottery systems revenues totaled
$34.7 million and gross profit totaled $10.8 million or 31% of revenues. Current
period revenues and gross profits benefited from increased online sales related
to a large multi-state Powerball jackpot in December 2002 and large Florida
Lotto jackpots, as well as the commencement of our online lottery contract in
South Korea, which went live in early December 2002.

Operating Expenses, Other Income and Expense, and Taxes
Operating expenses increased to $220.1 million for the first six months of
fiscal 2003 from $173.7 million in the comparable prior year period. This
increase related to additional performance based incentive accruals, increased
legal costs related to product compliance and intellectual property protection,
and our ongoing investment in research and development. The inclusion of
Anchor's operations for six months in the current period versus three months in
the prior year period also accounted for increases in all expense categories
except bad debt expense. Bad debt expense in the prior year period included
additional provisions for international receivables related to the currency
devaluation of the Argentine peso. Additionally, the current six months included
$3.4 million in severance costs associated with the transition of a former
Anchor facility from Bozeman, Montana to Reno, NV and efforts to reduce staffing
levels in Australia due to its current restrictive anti-gaming regulatory
environment. Operating expenses also included $5.1 million in the current six
month period and $4.4 million in the comparable prior year period to update our
internal software systems with an ERP solution.

Other expense, net, decreased $3.4 million to $31.5 million for the first six
months of fiscal 2003 compared to the first six months of fiscal 2002. The prior
year period included additional interest expense related to Anchor's senior
notes assumed on acquisition that were repurchased in July 2002 and increased
foreign currency losses related to the devaluation of the Argentine peso.

Our worldwide tax rate remained at 37.7% for the first six months of fiscal
2003, comparable to the prior year period. We expect our tax rate for fiscal
2003 to fluctuate between 37.5% and 38%.

Business Segments Operating Profit (See Note 13 of our Unaudited Condensed
Consolidated Financial Statements) IGT's operating profit by segment reflects
income from continuing operations before tax, including an applicable allocation
of operating expenses, as well as other income and expenses. Our proprietary
gaming segment includes both our wholly-owned gaming operations and our
unconsolidated joint venture activities reported as earnings of unconsolidated
affiliates.

Product sales segment profit for the first six months of fiscal 2003 increased
65% to $132.9 million or 27% of related revenues up from $80.7 million or 20% in
the same period last year. This improvement related primarily to volume growth
and increased gross profit margins, partially offset by increased operating
expenses. The prior year period included additional bad debt provisions for
international receivables related to the currency devaluation of the Argentine
peso.

Segment profit from proprietary gaming operations improved 21% to $191.8 million
in the current six months from $159.1 million in the prior year period. This
improvement resulted from the consolidation of the JV and inclusion of Anchor's
results for six months of the first half of fiscal 2003 versus only three months
in the first half of fiscal 2002, as well as growth in our installed base and
enhanced yield per game. As a percentage of revenue and earnings of
unconsolidated affiliates, proprietary gaming segment profit totaled 37% in the
current six months compared to 41% in the prior year period. This fluctuation
was partially due to our share of the JV activities reflected net of expenses in
earnings of unconsolidated affiliates in the first three months of the prior
half-year period, as well as increased operating expenses in the current period.

Segment profit from lottery systems for the first half of fiscal 2003 totaled
$8.9 million or 12% of related revenues versus $1.8 million or 5% in the first
half of 2002. The prior year period included only three months of activity
versus six months in the current period. The current period also benefited from
increased online sales related to the large Powerball and Florida jackpots, as
well as the South Korean lottery that went live in early December 2002.



Liquidity and Capital Resources

Capital Resources
We have the ability to generate significant cash from operations that allows us
to reinvest in our business. We anticipate that our operating activities will
continue to provide us with cash flows to assist in our business expansion and
to meet our financial commitments. Our sources of capital also include, but are
not limited to, the issuance of public or private placement debt, bank
borrowings, and the issuance of equity securities.

We believe that our available short-term and long-term capital resources are
sufficient to fund our capital expenditures and operating capital requirements,
scheduled debt payments, interest and income tax obligations, strategic
investments and acquisitions, and share repurchases. Our sources of capital
afford us the financial flexibility to target acquisitions of businesses that
offer opportunities to implement our operating strategies, increase our rates of
return, and improve shareholder value.

Cash Flow From Operating Activities
Cash provided by operations in the first six months of fiscal 2003 totaled
$124.3 million compared to $245.2 million in the prior year period. The most
significant fluctuations related to increased sales volumes and payment timing
in receivables, inventories, taxes, accounts payable and accrued liabilities.
Receivables increased related to increased sales volume and machines shipped
late in the period, as well as additional contract financing arrangements with
new casinos in New York, Nevada and California. Cash used for inventories
increased primarily due to anticipated machine demand. Current year taxes paid
were significantly higher than the prior year period, predominantly due to the
Anchor acquisition timing and increased profits.

Cash Flow From Investing and Financing Activities
Net cash provided by investing activities in the first six months of fiscal 2003
totaled $4.4 million compared to $115.1 million in the prior year period. This
fluctuation related primarily to cash balances of Anchor and the JV acquired in
the prior year period. Other significant increases in investing cash related to
proceeds from the sale of discontinued operations, namely the Nevada slot route
operations of Anchor Coin. Current period cash advanced on loans related to new
tribal casino properties in New York and California. Investment in property,
plant and equipment totaled $66.9 million in the current six months compared to
$34.0 million in the prior year period primarily related to increased spending
for gaming operations equipment, as well as upgrades to lottery systems
equipment. Our capital expenditures for the current period included $4.5 million
to update our internal software systems with an ERP solution compared to
$940,000 in the prior year period.

Net cash flow from financing activities provided $411.3 million in the six
months ended March 2003 compared to cash used of $76.2 million in the prior year
period. This fluctuation is primarily due to the $561.4 million net proceeds
from our issuance of zero-coupon senior convertible debentures in the current
period, offset by $161.3 million of stock repurchases. The prior year period
included the repayment of Anchor's senior credit facility immediately subsequent
to acquisition.

Net Cash Flow from Proprietary Progressive Jackpot Systems
WAP games differ from stand-alone and hybrid games in that they are
electronically linked, inter-casino systems that connect gaming machines to a
central computer, allowing the system to build a progressive jackpot with every
wager until a player hits the top award winning combination. Only WAP systems
have related jackpot liabilities and investments to fund future jackpot
payments.



Our proprietary WAP systems provide cash through collections from systems to
fund jackpot liabilities and from maturities of investments purchased to fund
future annual jackpot payments. Cash is used to make payments to jackpot winners
for jackpot liabilities or to purchase investments to fund future jackpot
payments. The purchase of and proceeds from investments to fund jackpot
liabilities are classified as investing activities. Collections from systems to
fund jackpot liabilities and payments to winners are classified as financing
activities. The increased cash flows related to jackpot investments and
liabilities in the current period versus the prior year period are due primarily
to the consolidation of the JV in conjunction with the Anchor acquisition.

Net cash flows from these activities represent timing differences between the
growth in liabilities for jackpots and the actual payments to the winners during
the period. Fluctuations in net cash flows from systems occur based on the
timing of the jackpot cycles and the volume of play across all of our WAP
jackpot systems games. Net cash flows from these activities collectively
provided cash of $2.4 million in the first six months of 2003 and $13.5 million
in the comparable prior year period.

Stock Repurchase Plan
Our Board of Directors authorized IGT's common stock repurchase plan in 1990.
Our remaining share repurchase authorization, as amended, totaled 10.0 million
shares as of April 26, 2003. During the first six months of fiscal 2003, we
repurchased 2.1 million shares for an aggregate price of $161.3 million. We
repurchased no additional shares since March 29, 2003 thru May 9, 2003.

Credit Facilities and Indebtedness
Our domestic and foreign borrowing facilities totaled $274.9 million at March
29, 2003. Of this amount, $5.2 million was drawn with an average interest rate
of 2.38%, $6.2 million was reserved for letters of credit and the remaining
$263.5 million was available for future borrowings. We are required to comply
with certain covenants contained in these agreements, which, among other things,
limit our ability to incur indebtedness, grant liens, make investments,
acquisitions, dispositions, or to pay dividends or make certain other restricted
payments without the written consent of the lenders and require the maintenance
of certain financial ratios. We were in compliance with all applicable covenants
as of March 29, 2003.

Convertible Debentures
In a private offering on January 29, 2003, we issued approximately $969.8
million principal amount at maturity of zero-coupon senior convertible
debentures due January 29, 2033 (Debentures) for gross proceeds of approximately
$575.0 million. Absent a yield adjustment, the Debentures have a yield to
maturity of 1.75%. The yield adjustment feature may require IGT to pay
contingent cash interest on the Debentures at prevailing market rates to be
determined during any six month period commencing on or after January 29, 2006,
if the average closing sale prices of our common stock for specified measurement
periods is less than or equal to 60% of the accreted conversion price of the
Debentures during such specified periods.

The Debentures are convertible into 5.2926 shares of our common stock per $1,000
principal amount at maturity, provided one of the enumerated conversion events
has occurred. The conversion events are: (i) during the specified conversion
periods, the closing price of our common stock is more than 120% of the accreted
conversion price (initially approximately $134 per share) for a specified
period; (ii) the average trading price of the Debentures is less than 95% of the
average closing price of our common stock multiplied by the conversion rate for
a specified period; (iii) our long-term senior debt ratings (or the ratings on
the Debentures, if rated) are reduced to below Ba2 by Moody's and below BB by
Standard & Poors' or ceases to be rated by both rating agencies; (iv) the
Debentures have been called for redemption; and (v) upon the occurrence of
specified corporate events.

On or after January 29, 2006, IGT may repurchase the Debentures for cash equal
to their accreted value plus accrued and unpaid cash interest, if any. Holders
have the right to require IGT to redeem the Debentures for an amount equal to
their accreted value plus accrued and unpaid cash interest, if any, on January
29, 2006, 2008, 2013, 2018, 2023 and 2028. IGT must settle any repurchases on
January 29, 2006 in cash. On any subsequent repurchase dates, IGT may elect to
settle in cash or shares of common stock or a combination thereof.



IGT may also be required to repurchase the Debentures upon the occurrence of
specified change of control events at the accreted value plus accrued and unpaid
cash interest, if any. Upon a change of control, we may elect to settle the
repurchase price in cash or common stock valued at 95% of its average closing
sale price for the five day trading period ending on the third trading day prior
to the repurchase date. IGT's right to pay the repurchase price for Debentures
in common stock upon a repurchase date or upon a change of control is subject to
certain conditions, including the registration under applicable federal and
state securities laws of the shares of common stock to be issued.

IGT entered into a registration rights agreement for the benefit of the holders
of the Debentures agreeing to file and keep effective a registration statement
covering the resale of the Debentures and underlying common stock by the holders
for specified periods of time. If IGT fails to maintain an effective
registration statement for the time periods specified, subject to permitted
exceptions, IGT will be required to pay certain additional cash interest as
liquidated damages until the default under the registration rights agreement is
cured. Such liquidated damages range from 0.25% to 0.50% of the accreted value
of the Debentures plus accrued and unpaid cash interest, if any.


Financial Condition



March September
2003 2002
----------------------------------------------------------------------
(Amounts in millions)

Total assets $ 3,918 $ 3,316
Total liabilities and minority interest 2,443 1,883
Total stockholders' equity 1,475 1,433



Total assets increased $602.4 million during the first six months of fiscal 2003
primarily due to increased cash related to the issuance of the Debentures.

Total liabilities and minority interest increased $559.9 million during the
first six months of fiscal 2003 also primarily related to the issuance of the
Debentures.

Total stockholders' equity increased $42.4 million predominantly related to net
income generated during the current period, offset by treasury stock
repurchases. Additional paid-in capital also increased as the result of employee
stock plans.

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

Liquidated Damages
Our lottery online contracts typically permit termination of the contract by the
lottery authority at any time for material breach or for other specified reasons
and generally contain demanding implementation and performance schedules.
Failure to perform under such contracts may result in substantial monetary
damages. Some of our US lottery contracts contain provisions for significant
liquidated damages related to various incidents such as implementation delays,
system downtime, supply downtime, supply shortages, or degraded systems
performance. Many of our lottery contracts also permit the lottery authority to
terminate the contract upon notice "for convenience" or upon a State's
cessation, in whole or in part, of lottery operations and do not specify the
compensation, if any, to which we would be entitled should such termination
occur. Some of our international customers similarly reserve the right to assess
monetary damages in the event of contract termination or breach. Although such
liquidated damages provisions are customary in the lottery industry and the



actual liquidated damages imposed are sometimes subject to negotiation, such
provisions in our lottery contracts present an ongoing potential for additional
expense. At March 29, 2003, we had $1.6 million accrued for liquidated damages.

Performance Bonds
We had performance bonds outstanding, primarily related to the operation of
several lottery systems and gaming operations, totaling $79.9 million at March
29, 2003. We are liable to reimburse the bond issuer in the event the bond is
exercised as a result of our nonperformance.

IGT Licensor Arrangements
Our sales agreements that include software and intellectual property licensing
arrangements may provide a clause whereby IGT indemnifies the third party
licensee against liability and damages (including legal defense costs) arising
from any claims of patent, copyright, trademark or trade secret infringement.
Should such a claim occur, we could be required to make payments to the licensee
for any liabilities or damages incurred. We are not able to estimate the maximum
potential amount of future payments under this guarantee because it depends on
the occurrence of future events.

Joint Ventures and Alliances
We operate certain proprietary games and gaming related equipment under joint
venture agreements with various gaming or gaming related companies, which are
reported as earnings of unconsolidated affiliates. As of March 29, 2003, we have
one active joint venture of this nature that remained unconsolidated. We also
have strategic marketing alliances for which no separate legal entity exits and
we recognize 100% of the assets, liabilities, revenues and expenses that we own,
owe, earn and incur based on the activities that we perform on behalf of the
alliance.

Progressive Systems Trusts
Our linked progressive systems in Iowa and New Jersey are administered by trusts
consisting of participating casino members. We have agreed to loan to these
trusts, upon request, and subject to certain limitations, amounts necessary to
meet substantially all obligations of the trusts. Trust obligations are
primarily related to jackpot liabilities. We are not able to estimate the
maximum potential amount of future payments under this guarantee because it is
based on future operations of the linked progressive jackpot systems. Loans to
the trusts have historically been infrequent and short-term in nature. There
were no outstanding loans to the trusts at March 29, 2003.

State Taxes
We are subject to sales, use, income and other tax audits and administrative
proceedings in various states. While we believe we have properly reported our
tax liabilities in each state, no assurance can be given that state tax
authorities will not propose adjustments that will increase our tax liabilities.
We do not currently expect that the outcome of these tax audits and proceedings
will, either individually or in the aggregate, have a material adverse effect on
our financial position or results of operations.


Recently Issued Accounting Standards

IGT keeps abreast of new generally accepted accounting principles (GAAP) and
disclosure reporting requirements issued by the Financial Accounting Standards
Board (FASB), Securities and Exchange Commission (SEC) and other standard
setting agencies. Recently issued accounting standards affecting our financial
results are described in Note 1 of our Unaudited Condensed Consolidated
Financial Statements.



Forward Looking Statements and Risk Factors

Risk Factors and Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995

Throughout this Quarterly Report on Form 10-Q we make some "forward looking"
statements, which are not historical facts, but are forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to analyses and other information based on forecasts of
future results and estimates of amounts not yet determinable. These statements
also relate to our future prospects and proposed new products, services,
developments or business strategies. These forward looking statements are
identified by their use of terms and phrases such as "anticipate," "believe,"
"could," "estimate," "expect," "intend," "may," "plan," "predict," "project,"
"will," "continue," and other similar terms and phrases, including references to
assumptions.

Although we believe that the expectations reflected in any of our forward
looking statements are reasonable, actual results could differ materially from
those projected or assumed. Our future financial condition and results of
operations, as well as any forward looking statements, are subject to change and
to inherent known and unknown risks and uncertainties. We do not intend, and
undertake no obligation, to update our forward looking statements to reflect
future events or circumstances. We urge you to carefully review the following
discussion of the specific risks and uncertainties that affect our business.
These include, but are not limited to, the following:

Our success in the gaming industry depends in large part on our ability to
- --------------------------------------------------------------------------
develop innovative products and systems and would be adversely affected by:
- --------------------------------------------------------------------------
o a decline in the popularity of our gaming products with players;
o a lack of success in developing new products;
o an increase in the popularity of competitors' games; and
o a negative change in the trend of consumer acceptance of our newest systems
innovations including ticket-in/ticket-out voucher technology.

Demand for our products, placement of our proprietary games and operation of our
- --------------------------------------------------------------------------------
lottery systems would be adversely affected by:
- ----------------------------------------------
o a reduction in the growth rate of new and existing markets;
o delays of scheduled openings of newly constructed or planned casinos;
o reduced levels of gaming play on our gaming systems or weakened customer
demand for our gaming machines as a result of declines in travel activity
or customer capital expenditures;
o a decrease in the desire of established gaming properties to upgrade
machines, resulting in a decline in the demand for replacement machines;
o a decline in public acceptance of gaming;
o a reduction in lottery sales in jurisdictions where we hold lottery
contracts;
o a loss of or inability to renew lottery contracts; and
o failure to meet implementation and performance obligations of our online
lottery systems operations could subject us to significant liquidated
damage claims.

We operate in a highly regulated industry and our ability to operate in certain
- -------------------------------------------------------------------------------
jurisdictions could be adversely affected by:
- --------------------------------------------
o unfavorable public referendums or anti-gaming legislation;
o unfavorable legislation affecting or directed at manufacturers or operators
of gaming products and systems;
o adverse changes in or findings of non-compliance with applicable
governmental gaming regulations;
o delays in approvals from regulatory agencies;
o a limitation, conditioning, suspension or revocation of any of our
gaming licenses; and
o unfavorable determinations or challenges of suitability by gaming regulatory
authorities with respect to our officers, directors or key employees.



Our intellectual property rights are subject to risks, including:
- ----------------------------------------------------------------
o potential inability to obtain and maintain patents, trademarks and
copyrights to protect our newly developed games and technology;
o competitors' infringement upon our existing trademarks, patents and
copyrights; and
o approval of competitors' patent applications that may restrict our ability
to compete effectively.

Our business is vulnerable to changing economic conditions, including:
- ---------------------------------------------------------------------
o unfavorable changes in economic conditions including those that effect the
relative health of the gaming industry;
o unfavorable changes in state taxation laws or application of such laws
that could reduce our profitability;
o political or economic instability in international markets;
o changes in interest rates causing a reduction of investment income
or in the value of market rate sensitive investments; and
o fluctuations in foreign exchange rates, tariffs and other trade barriers.

Our outstanding Senior Notes, Convertible Debentures and borrowings under credit
- --------------------------------------------------------------------------------
facilities subject us to certain additional risks, including:
- ------------------------------------------------------------
o increasing our vulnerability to general adverse economic and
industry conditions;
o limiting our ability to obtain additional financing to fund future
working capital, capital expenditures, acquisitions and other general
corporate requirements;
o requiring a substantial portion of our cash flow from operations for the
payment of interest on our indebtedness and corporate requirements;
o limiting our flexibility in planning for, or reacting to, changes in our
business and the industry; and
o disadvantaging us compared to competitors with less indebtedness.

Our business operations are subject to other risks, including:
- --------------------------------------------------------------
o the loss or retirement of our key executives or other key employees;
o adverse changes in the creditworthiness of parties with whom we have
receivables or forward currency exchange contracts;
o the loss of tenants on sublet properties no longer used in our operations;
o difficulties integrating parts of the acquired Anchor operations;
o the discovery of facts with respect to legal actions pending against IGT
not presently known to us or determinations by judges, juries or other
finders of fact which do not accord with our evaluation of the possible
liability or outcome of existing litigation;
o increased costs due to reliance on third party suppliers and contract
manufacturers;
o agreements with Native American casinos which may subject us to
sovereign immunity risk; and
o we have been working for some time through several phases of our
enterprise resource planning (ERP) solution for our computer system
procedures and controls; any failures, difficulties or significant delays
in implementing our new information systems could result in material
adverse consequences to our business, including disruption of operations,
loss of information and unanticipated increases in costs.


Item 3. Quantitative and Qualitative Factors about Market Risk

Market Risk
We use derivative financial instruments to minimize our market risk exposure
resulting from fluctuations in foreign exchange rates and interest rates. The
primary business objective of our hedging program, operated pursuant to
documented corporate risk management policies, is to minimize the impact of
transaction, remeasurement, and specified economic exposures to our net income
and earnings per share. The counter parties to these instruments are major
commercial banks and we believe that losses related to credit risk are remote.
We are not party to leveraged derivatives and do not hold or issue financial
instruments for speculative purposes.



Foreign Currency Risk
We routinely use forward exchange contracts to hedge our net exposures, by
currency, related to the nonfunctional currency monetary assets and liabilities
of our operations. In addition, from time to time, we may enter into forward
exchange contracts to establish with certainty the US dollar amount of future
firm commitments denominated in a foreign currency.

At March 29, 2003, our net foreign currency exposure totaled $48.3 million
related to our monetary assets and liabilities denominated in nonfunctional
foreign currency and $29.6 million for a firm sales commitment denominated in
Canadian dollars. These exposures were hedged with $66.2 million in forward
currency contracts. At September 28, 2002, we had net foreign currency exposure
of $31.2 million related to our monetary assets and liabilities denominated in
nonfunctional foreign currency and $52.6 million for a firm sales commitment
denominated in Canadian dollars. These exposures were hedged with $86.5 million
in forward contracts.

Given our foreign exchange position, a 10% percent adverse change in foreign
exchange rates upon which these foreign exchange contracts are based would
result in exchange gains and losses. In all material aspects, these exchange
gains and losses would be fully offset by exchange gains and losses on the
underlying net monetary exposures for which the contracts are designated as
hedges. We do not expect material exchange rate gains and losses from unhedged
foreign currency exposures.

As currency rates change, translation of our foreign currency functional
businesses into US dollars affects year-over-year comparability of equity. We do
not generally hedge translation risks because cash flows from our international
operations are generally reinvested locally. Changes in the currency exchange
rates that would have the largest impact on translating our international net
assets included the Australian dollar, the British pound, the Japanese yen and
the Euro. We estimated that a 10% change in foreign exchange rates would have
impacted reported equity by approximately $3.5 million at March 29, 2003 versus
$3.2 million at September 28, 2002. This sensitivity analysis disregards the
possibility that rates can move in opposite directions and that gains from one
area may or may not be offset by losses from another area.

Interest Rate Risk
Fluctuations in prime, treasury and agency rates due to changes in market and
other economic conditions directly impact our costs to fund jackpots, and
therefore the gross profit in our proprietary gaming operations. If interest
rates decline, our costs increase, and correspondingly our gross profit
declines. We estimated that a 10% decline in interest rates would have reduced
our gross profit by $8.8 million in the first six months of fiscal 2003 and $6.9
million in the comparable prior year period. We do not currently manage this
exposure with derivative financial instruments.

Our outstanding Senior Notes carry interest at fixed rates. If interest rates
increased by 10%, we estimated the fair market value of these notes would have
decreased approximately $16.6 million at March 29, 2003 and $24.2 million at
September 28, 2002.

Convertible Debentures Price Risk
The fair value of our Debentures is sensitive to changes in both our stock price
and interest rates. Assuming interest rates are held constant, we estimated a
10% decrease in our stock price would decrease the fair value of our convertible
debentures by $17.0 million. Assuming our stock price is held constant, we
estimated a 10% increase in interest rates would decrease the fair value of our
convertible debentures by $2.4 million.



Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.

Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based on the
foregoing, our Chief Executive Officer and the Chief Financial Officer concluded
that IGT's disclosure controls and procedures are effective.

Changes in Internal Controls
As a part of the ongoing implementation of our ERP solution, we have updated our
internal controls as necessary to accommodate any modifications to our business
processes or accounting procedures. There have not been any other significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses, and therefore no corrective
actions were taken.



PART II - OTHER INFORMATION

Item 1. Legal Proceedings

For a description of our legal proceedings, see Note 10 of Notes to
Unaudited Condensed Consolidated Financial Statements, which is
incorporated by reference in response to this item.

Item 2. Changes in Securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

(a) On March 3, 2003, IGT held its annual meeting of stockholders.

(b) The following directors were elected to serve until the next
annual meeting: G. Thomas Baker, Neil Barsky, Robert A.
Bittman, Richard R. Burt, Wilbur K. Keating, Charles N.
Mathewson, Thomas J. Matthews, Robert Miller and Frederick B.
Rentschler. These directors constitute all of the directors of
IGT. Voting at the meeting was as follows:



Number of
Shares Voted Number of
For Shares Withheld
------------- ---------------

G. Thomas Baker 72,600,877 4,204,727
Neil Barsky 72,854,894 3,950,710
Robert A. Bittman 72,588,153 4,217,451
Richard R. Burt 72,830,723 3,974,881
Wilbur K. Keating 72,850,507 3,955,097
Charles N. Mathewson 72,591,717 4,213,887
Thomas J. Matthews 72,603,820 4,201,784
Robert Miller 72,173,188 4,632,416
Frederick B. Rentschler 72,919,802 3,885,802



(c) Stockholders ratified the appointment of Deloitte & Touche LLP
as IGT's independent auditors for the fiscal year ending
September 27, 2003. Number of shares voted for Deloitte &
Touche LLP totaled 72.1 million, with 4.2 million shares
withheld and 458,000 abstains.


Item 5. Other Information

None



Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

4.1 Indenture dated as of January 29, 2003 between IGT, any
subsidiary that becomes a party thereto, and the Bank of New
York, as Trustee (incorporated by reference to Exhibit 4.1
to the Registration Statement on Form S-3 (Registration No.
333-103339), as filed with the Securities and Exchange
Commission on February 20, 2003).

4.2 Form of Zero-Coupon Convertible Debentures (incorporated by
reference to Exhibit 4.2 to the Registration Statement on
Form S-3 (Registration No. 333-103339), as filed with the
Securities and Exchange Commission on February 20, 2003).

4.3 Registration Rights Agreement dated as of January 29, 2003
between IGT and Goldman, Sachs & Co., as the Initial
Purchaser (incorporated by reference to Exhibit 4.3 to the
Registration Statement on Form S-3 (Registration No.
333-103339), as filed with the Securities and Exchange
Commission on February 20, 2003).

10.01 Employment Agreement with Maureen Mullarkey, Executive Vice
President, Chief Financial Officer dated January 27, 2003.

99.1 Written statement of G. Thomas Baker pursuant to 18 U.S.C
section 1350, certification to accompany this report
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

99.2 Written statement of Maureen T. Mullarkey pursuant to 18
U.S.C section 1350, certification to accompany this report
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

We filed a current report on Form 8-K dated January 22, 2003
regarding earnings for the first quarter ended December 28,
2002.

We filed current reports on Form 8-K dated January 23, 2003
and February 5, 2003 related to the issuance of zero-coupon
senior convertible debentures in a private offering.



Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



Date: May 13, 2003

INTERNATIONAL GAME TECHNOLOGY

By: /s/ Maureen Mullarkey
---------------------------
Maureen Mullarkey
Executive Vice President,
Chief Financial Officer and
Treasurer



CERTIFICATION

I, G. Thomas Baker certify that:

1. I have reviewed this quarterly report on Form 10-Q of
International Game Technology.

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;

b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):

a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have
indicated in this quarterly report whether there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.


Date: May 13, 2003

/s/ G. Thomas Baker
-----------------------
G. Thomas Baker
Chief Executive Officer



CERTIFICATION

I, Maureen T. Mullarkey, certify that:

1. I have reviewed this quarterly report on Form 10-Q of
International Game Technology.

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;

b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):

a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have
indicated in this quarterly report whether there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.


Date: May 13, 2003

/s/ Maureen T. Mullarkey
------------------------
Maureen T. Mullarkey
Chief Financial Officer