REDWOOD SHORES, Calif. – Engineers at PureDepth Inc. spent years developing tools for helping the military plot 3-D maps of war zones, eventually licensing top-secret technology to the U.S. Air Force and Navy.

But the Silicon Valley startup hit the jackpot in October when it inked a deal with International Game Technology Inc., the world’s largest maker of slot machines.

Industry experts say a realistic digital video display is the final hurdle that will completely digitize one-armed bandits. The new displays by PureDepth and others – set to debut later this year – could profoundly change the $85 billion U.S. gambling industry and how it’s regulated.

When high-tech slots are in place, programmers will be able to control nearly every aspect of the game – cost, payout, even the images that line up on the pay line. Casino operators will be able to make changes in real time through back-end servers that talk to computer chips inside the slot machines.

“This is the last piece of the puzzle,” financial analyst Aimee Marcel Remey, who follows the gaming industry for Jefferies & Co. “These new systems are so different from the slots out there now. You feel like it’s an exact science, every time you pull.”

At Hollywood Slots in Bangor, Maine, Assistant General Manager Steven Lambert said Friday that he doubts the new technology will be approved and available before the opening of the company’s expanded facility, currently under construction. The new Hollywood Slots will feature a hotel, restaurants, parking garage and other amenities and is slated to open in 2008.

But Lambert said that some of the 1,000 machines on the premises when the facility opens will be designed to accommodate the new gaming technology when it becomes available.

Hollywood Slots, technically known as a “racino” because of its affiliation with the nearby Bangor Raceway horseracing track, is Maine’s only slots facility.

If the Beach Boys are playing the Luxor in Las Vegas, next-generation slots could display images of band members instead of cherries, numbers or other symbols. If band members’ faces line up, an embedded printer could spit out front-row tickets.

Or suppose the penny slots area at a tribal casino empties out around 7 p.m., when big spenders arrive. With a few key strokes, programmers could change the minimum bet to $1 and offer a progressive jackpot with all slots in the house – or even with thousands of machines statewide.

“If the NASCAR folks are coming to Vegas, they could change the fruits to cars,” said Fred Angelopoulos, CEO of Redwood Shores-based PureDepth, founded in 1999. “You can start thinking outside the box, literally.”

Without digital displays and servers, employees would have to manually close out meters, change glass, change reel strips and physically relocate and remove machines.

Digital slots, however, are vulnerable to the same bugs and malfunctions that plague personal computers. Regulators say they’ll be seductive targets for hackers, who have been trying to rig games for decades.

In 2000, a programmer in Edmonton, Alberta, found a software glitch that let him regularly win $500 or more on some video poker machines. The maker of the machines – WMS Industries Inc. – estimated the incident cost at least $1 million and sued the man, who threatened to publish the flaw online.

The Nevada Gaming Control Board, which sets the pace for regulators nationwide, adopted new rules last year for digital machines. The board must approve all software modifications – even pictures on reels. The approval process takes up to 30 days.

The board employs 11 experts in computer science, electronic security and wireless networking. It will double the number of these specialists by late 2007 and build a new research facility to deal with an expected profusion of digital slot machines, said Mark Clayton, who heads the board’s technology division.

Executives at the top three manufacturers acknowledge that networked slot machines are a seductive target for hackers and are reluctant to call them hack-proof for fear of inviting challenges from would-be invaders. Instead, they’re working with regulators to reduce the potential damage if such an attack occurred.

Roughly half the 835,000 slot machines nationwide have video displays and many are networked, but industry officials acknowledge that most are flops, lacking the visceral “clunk-clunk-clunk” of wheels hitting the pay line.

Video slots with an authentic feel are the holy grail for manufacturers.

PureDepth searched for a mechanical alternative to the traditional optical tricks for fooling the eyes and brain into seeing depth. Such tricks – fancy versions of 3-D glasses – induced nausea and headaches and were rejected by casino operators, who stuck with mechanical reels or flat video displays with no depth.

With the cost of liquid crystal displays dropping, engineers at PureDepth’s lab in New Zealand decided to house two or more LCDs in one physical unit to create depth – a deceptively simple idea protected with 45 patents and roughly 70 patents pending.

Reno, Nev.-based IGT is hoping to debut the first machines with PureDepth’s multilayer video display in November at the Global Gaming Expo in Las Vegas. The company won’t say how much they’ll cost, but they’ll be more than mechanical reel machines, which cost up to $15,000.

A different approach on a 3-D video slot system will debut next month, when Waukegan, Ill.-based WMS is expected to introduce a “Monopoly Super Money Grab” slot machine. Its hybrid display features a mechanical reel behind a video display that activates when the pay line hits certain combinations.

Traditional three- and five-reel slots have a finite number of combinations, but adding a video layer allows programmers to exponentially expand the possibilities.

“The mathematics drive the game, and the more mathematics you can derive, the more combinations you can create,” said Larry Pacey, senior vice president of product development at WMS, which developed the patented technology with Tokyo-based Pachinko powerhouse Aruze Corp.

One thing that’s unlikely to change in the new era of digital slots: the slim odds of winning big.

“Let’s be honest: Everything about a casino design is meant to play on the player’s psychology,” said Jeffrey Allen, director of business development for Las Vegas-based Bally Technologies Inc., another top slot machine maker. “Why else would there be no clocks and comfortable chairs and subdued lights?”

Ed Rogich, an IGT vice president, said players who tested video display prototypes earlier this year could hardly tell the difference between them and manual reels. That’s a good sign: Many old-school gamblers prefer low-tech slots.

Earlier this month at Cache Creek Casino in Brooks, Margaret Spence criticized the present version of video slots and wistfully recalled the days of old-fashioned reels.

“I still miss pulling that old lever, and I miss that big tub of money that would fill up with coins when you hit the jackpot,” said Spence, 71, a Concord resident who currently favors $1 “Blazing 7s” machines. “The video machines seem like a waste of time – like a video game.”

BDN reporter Meg Haskell contributed to this report.