10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

Form 10-Q

{Mark One}

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

For the quarterly period ended June 30, 2005

OR

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

Commission File number:  0-13063

SCIENTIFIC GAMES CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	81-0422894
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

750 Lexington Avenue, New York, New York 10022

(Address of principal executive offices)

(Zip Code)

(212) 754-2233

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports 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 ý    No o

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of August 4, 2005:

Class A Common Stock:  89,652,185

Class B Common Stock:  None

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND OTHER INFORMATION

THREE MONTHS ENDED JUNE 30, 2005

PART I.	FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements:
			Balance Sheets as of December 31, 2004 and June 30, 2005
			Statements of Income for the Three Months Ended
			June 30, 2004 and 2005
			Statements of Income for the Six Months Ended
			June 30, 2004 and 2005
			Condensed Statements of Cash Flows for the
			Six Months Ended June 30, 2004 and 2005
			Notes to Consolidated Financial Statements
Item 2.		Management’s Discussion and Analysis of Financial
			Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures About Market Risk
Item 4.		Controls and Procedures
PART II.	OTHER INFORMATION
Item 1.		Legal Proceedings
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.		Defaults Upon Senior Securities
Item 4.		Submission of Matters to a Vote of Security Holders
Item 5.		Other Information
Item 6.		Exhibits

2

PART I.  FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share amounts)

	December 31, 2004			June 30, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	66,120		52,646
Short-term investments	52,525			8,650
Accounts receivable, net of allowance for doubtful accounts of $4,818 and $5,328 at December 31, 2004 and June 30, 2005, respectively	105,789			119,771
Inventories	28,062			34,768
Prepaid expenses, deposits and other current assets	41,799			43,444
Total current assets	294,295			259,279
Property and equipment, at cost	544,387			578,825
Less accumulated depreciation	272,961			287,915
Net property and equipment	271,426			290,910
Goodwill, net	311,931			338,547
Operating right, net	14,020			14,020
Other intangible assets, net	80,182			76,190
Other assets and investments	120,169			121,825
Total assets	$	1,092,023		1,100,771
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term debt	$	4,370		5,468
Accounts payable	40,923			37,850
Accrued liabilities	96,999			76,836
Interest payable	879			1,161
Total current liabilities	143,171			121,315
Other long-term liabilities	41,780			46,246
Long-term debt, excluding current installments	606,508			583,478
Total liabilities	791,459			751,039
Commitments and contingencies
Stockholders’ equity:
Class A common stock, par value $0.01 per share, 199,300 shares authorized, 88,414 and 89,474 shares outstanding at December 31, 2004 and June 30, 2005, respectively	884			895
Class B non-voting common stock, par value $0.01 per share, 700 shares authorized, none outstanding	—			—
Additional paid-in capital	405,755			416,293
Accumulated losses	(108,628		)	(62,849	)
Treasury stock, at cost	(9,403		)	(9,556	)
Accumulated other comprehensive income	11,956			4,949
Total stockholders’ equity	300,564			349,732
Total liabilities and stockholders’ equity	$	1,092,023		1,100,771

See accompanying notes to consolidated financial statements.

3

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended June 30, 2004 and 2005

(Unaudited, in thousands, except per share amounts)

	2004			2005
Operating revenues:
Services	$	147,570		160,867
Sales	30,542			36,557
	178,112			197,424
Operating expenses (exclusive of depreciation and amortization shown below):
Services	77,644			87,432
Sales	20,755			25,503
Amortization of service contract software	1,597			1,898
	99,996			114,833
Gross profit	78,116			82,591
Selling, general and administrative expenses	28,427			25,725
Depreciation and amortization	13,806			15,221
Operating income	35,883			41,645
Other deductions:
Interest expense	7,807			6,812
Other (income) expense, net	(384		)	377
	7,423			7,189
Income before income tax expense	28,460			34,456
Income tax expense	8,952			9,692
Net income	19,508			24,764
Convertible preferred stock dividend	1,982			—
Net income available to common stockholders	$	17,526		24,764
Basic and diluted net income per share:
Basic net income available to common stockholders	$	0.28		0.28
Diluted net income available to common stockholders	$	0.21		0.27
Weighted average number of shares used in per share calculations:
Basic shares	63,153			89,207
Diluted shares	90,757			92,142

See accompanying notes to consolidated financial statements.

4

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Six Months Ended June 30, 2004 and 2005

(Unaudited, in thousands, except per share amounts)

	2004		2005
Operating revenues:
Services	$	289,203	316,621
Sales	74,374		65,359
	363,577		381,980
Operating expenses (exclusive of depreciation and amortization shown below):
Services	153,529		172,681
Sales	51,411		45,777
Amortization of service contract software	3,031		3,521
	207,971		221,979
Gross profit	155,606		160,001
Selling, general and administrative expenses	54,347		53,453
Depreciation and amortization	27,566		28,073
Operating income	73,693		78,475
Other deductions:
Interest expense	15,197		13,222
Other expense, net	224		776
	15,421		13,998
Income before income tax expense	58,272		64,477
Income tax expense	18,343		18,698
Net income	39,929		45,779
Convertible preferred stock dividend	3,964		—
Net income available to common stockholders	$	35,965	45,779
Basic and diluted net income per share:
Basic net income available to common stockholders	$	0.58	0.51
Diluted net income available to common stockholders	$	0.44	0.50
Weighted average number of shares used in per share calculations:
Basic shares	62,548		88,913
Diluted shares	90,384		92,047

See accompanying notes to consolidated financial statements.

5

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2004 and 2005

(Unaudited, in thousands)

	2004			2005
Cash flows from operating activities:
Net income	$	39,929		45,779
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	30,597			31,594
Change in deferred income taxes	5,205			9,604
Tax benefit from exercise of employee stock options	—			5,636
Changes in operating assets and liabilities, net of effects of acquisitions	(21,337		)	(46,547	)
Change in short-term investments	2,325			43,875
Other	1,052			4,980
Total adjustments	17,842			49,142
Net cash provided by operating activities	57,771			94,921
Cash flows from investing activities:
Capital expenditures	(10,573		)	(11,878	)
Wagering systems expenditures	(21,139		)	(31,555	)
Change in other assets and liabilities, net	(836		)	(19,017	)
Business acquisitions, net of cash acquired	(1,709		)	(24,774	)
Net cash used in investing activities	(34,257		)	(87,224	)
Cash flows from financing activities:
Net repayments under revolving credit facility	—			(22,500	)
(Proceeds) payments on long-term debt, net	(1,231		)	397
Dividends paid	(3,964		)	—
Net proceeds from issuance of common stock	3,828			4,903
Net cash used in financing activities	(1,367		)	(17,200	)
Effect of exchange rate changes on cash and cash equivalents	1,611			(3,971	)
Increase (decrease) in cash and cash equivalents	23,758			(13,474	)
Cash and cash equivalents, beginning of period	37,198			66,120
Cash and cash equivalents, end of period	$	60,956		52,646
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	15,153		10,786
Income taxes	$	17,831		384

See accompanying notes to consolidated financial statements.

6

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

Notes to Consolidated Financial Statements

(1)Consolidated Financial Statements

Basis of Presentation

The consolidated balance sheet as of June 30, 2005, the consolidated statements of income for the three and six months ended June 30, 2004 and 2005, and the consolidated condensed statements of cash flows for the six months ended June 30, 2004 and 2005, have been prepared by Scientific Games Corporation (together with its consolidated subsidiaries, “we” or the “Company”) without audit.  In the opinion of management, all adjustments necessary to present fairly the consolidated financial position of the Company at June 30, 2005 and the results of its operations for the three and six months ended June 30, 2004 and 2005 and its cash flows for the six months ended June 30, 2004 and 2005 have been made.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2004 Annual Report on Form 10-K.  The results of operations for the period ended June 30, 2005 are not necessarily indicative of the operating results for the full year.

The Company has reclassified $39,850 of Auction Rate Securities from Cash and cash equivalents to Short-term investments at June 30, 2004.  The cash flows from these investments are presented as operating cash flows for all periods presented.

Basic and Diluted Net Income Per Share

The following represents a reconciliation of the numerator and denominator used in computing basic and diluted net income per share available to common stockholders for the three and six months ended June 30, 2004 and 2005:

	Three Months Ended June 30,			Six Months Ended June 30,
	2004		2005	2004	2005
Income (numerator)
Net income available to common stockholders (basic)	$	17,526	24,764	35,965	45,779
Add back preferred stock dividend	1,982		—	3,964	—
Income before preferred dividend available to common stockholders (diluted)	$	19,508	24,764	39,929	45,779
Shares (denominator)
Basic weighted average common shares outstanding	63,153		89,207	62,548	88,913
Effect of dilutive securities-stock options, warrants, preferred shares and deferred shares	27,604		2,935	27,836	3,134
Diluted weighted average common shares outstanding	90,757		92,142	90,384	92,047
Basic and diluted per share amounts
Basic net income per share available to common stockholders	$	0.28	0.28	0.58	0.51
Diluted net income per share available to common stockholders	$	0.21	0.27	0.44	0.50

7

The aggregate number of shares that the Company could be obligated to issue upon conversion of its $275,000 0.75% convertible senior subordinated debentures due 2024 (the “Convertible Debentures”), which the Company sold in December 2004, is approximately 9,450. The Convertible Debentures provide for net share settlement upon exercise, and the Company has purchased a bond hedge to mitigate the potential dilution from conversion. Such shares were excluded from the three and six months ended June 30, 2005 calculations as they were anti-dilutive.  (See Note 9 to the Consolidated Financial Statements for the year ended December 31, 2004 in the Company’s 2004 Annual Report on Form 10-K.)

Stock-Based Compensation

The Company has chosen to continue to account for stock-based compensation using the intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”.  Accordingly, no stock compensation expense has been recognized for a majority of its stock-based compensation plans.  Had the Company elected to recognize compensation cost based on the fair value of the stock options at the date of grant under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) as amended by SFAS No.148, “Accounting for Stock-Based Compensation Transition and Disclosure, an Amendment of FASB Statement No. 123” (“SFAS 148”), such costs would have been recognized ratably over the vesting period of the underlying instruments and the Company’s net income and net income per share would have changed to the pro forma amounts indicated in the table below:

	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2005			2004			2005
Net income available to common stockholders as reported	$	17,526		$	24,764		$	35,965		$	45,779
Add: Stock-based compensation expense included in reported net income, net of related tax effects	47			51			94			103
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(1,314		)	(2,152		)	(2,508		)	(4,024		)
Pro forma net income available to common stockholders	$	16,259		$	22,663		$	33,551		$	41,858
Net income available to common stockholders per basic share:
As reported	$	0.28		0.28			$	0.58		0.51
Pro forma	$	0.26		0.26			$	0.55		0.48
Net income available to common stockholders per diluted share:
As reported	$	0.21		0.27			$	0.43		0.50
Pro forma	$	0.20		0.25			$	0.42		0.46

8

(2)Acquisitions

In April 2005, the Company acquired the remaining 35% minority interest in Scientific Games Latin America S.A. (“SGLA”), a supplier of lottery tickets, pre-paid phone cards and promotional games in Latin America.  The Company originally acquired a 65% interest in SGLA in June 2002.  Pursuant to the April 2005 transactions, the Company paid approximately $19,600 for the purchase price of the minority interest and additional amounts of approximately $4,300 for the balance of the purchase price for the 2002 acquisition, repayment of a prior loan to the minority shareholders, and the minority shareholders’ pro-rata share of dividends.

The excess of the additional purchase price over the fair value of the net assets acquired was recorded as goodwill. The operating results of SGLA have been included in the Company’s operating income since the initial acquisition of the 65% interest in 2002, with the minority portion of such earnings included as a deduction in “Other expense”. In the second quarter of 2005, this deduction ceased.

On December 31, 2004, the Company acquired all of the outstanding shares of Printpool Honsel GmbH (“Honsel”), a German company which is the supplier of instant tickets to all of the 16 state operated lotteries in Germany and sells other lottery products, such as bet slips and paper rolls, to customers in approximately 25 countries.  The purchase price was approximately $21,000 in cash and additional amounts of up to approximately $10,500 in cash upon achievement of certain performance levels over the next five years. The operating results of Honsel have been included in the Company’s consolidated operating results since January 1, 2005.  Had the operating results of Honsel been included as if the transaction had been consummated on January 1, 2004, the Company’s pro forma operating results for the three and six months ended June 30, 2004 would not have been materially different from the actual reported results.  The preliminary estimate of goodwill of approximately $12,400 from the acquisition of Honsel is not deductible for tax purposes. Additionally, other assets and liabilities acquired in the transaction, such as certain intangible assets, property and equipment, current assets and liabilities and debt were included in the preliminary purchase price allocation.

9

(3)Business Segments

The following tables represent revenues, profits, depreciation, amortization, and capital expenditures for the three and six months ended June 30, 2004 and 2005, and assets at June 30, 2004 and 2005, by business segment.  Corporate expenses, interest expense and other (income) expense are not allocated to business segments.

	Three Months Ended June 30, 2004
	Lottery Group		Pari- Mutuel Group	Venue Management Group	Telecommunications Products Group	Totals
Service revenues	$	109,740	21,307	16,523	—	147,570
Sales revenues	15,797		1,778	—	12,967	30,542
Total revenues	125,537		23,085	16,523	12,967	178,112
Cost of service	54,745		10,871	12,028	—	77,644
Cost of sales	9,798		1,024	—	9,933	20,755
Amortization of service contract software	853		744	—	—	1,597
	65,396		12,639	12,028	9,933	99,996
Gross profit	60,141		10,446	4,495	3,034	78,116
Selling, general and administrative expenses	16,165		1,969	1,194	1,435	20,763
Depreciation and amortization	9,893		2,489	507	705	13,594
Segment operating income	$	34,083	5,988	2,794	894	43,759
Unallocated corporate expense						7,876
Consolidated operating income						$	35,883
Capital and wagering systems expenditures	$	9,976	1,974	326	148	12,424

10

	Three Months Ended June 30, 2005
	Lottery Group		Pari- Mutuel Group	Venue Management Group	Telecommunications Products Group	Totals
Service revenues	$	126,330	18,496	16,041	—	160,867
Sales revenues	19,563		3,519	—	13,475	36,557
Total revenues	145,893		22,015	16,041	13,475	197,424
Cost of service	63,181		11,972	12,279	—	87,432
Cost of sales	12,874		2,288	—	10,341	25,503
Amortization of service contract software	1,285		613	—	—	1,898
	77,340		14,873	12,279	10,341	114,833
Gross profit	68,553		7,142	3,762	3,134	82,591
Selling, general and administrative expenses	13,886		2,416	702	1,382	18,386
Depreciation and amortization	10,654		2,838	487	952	14,931
Segment operating income	$	44,013	1,888	2,573	800	49,274
Unallocated corporate expense						7,629
Consolidated operating income						$	41,645
Capital and wagering systems expenditures	$	15,624	3,420	553	548	20,145

11

	Six Months Ended June 30, 2004
	Lottery Group		Pari- Mutuel Group	Venue Management Group	Telecommunications Products Group	Totals
Service revenues	$	217,034	40,350	31,819	—	289,203
Sales revenues	45,362		2,467	—	26,545	74,374
Total revenues	262,396		42,817	31,819	26,545	363,577
Cost of service	109,755		20,865	22,909	—	153,529
Cost of sales	30,045		1,433	—	19,933	51,411
Amortization of service contract software	1,646		1,385	—	—	3,031
	141,446		23,683	22,909	19,933	207,971
Gross profit	120,950		19,134	8,910	6,612	155,606
Selling, general and administrative expenses	32,727		3,808	2,198	2,917	41,650
Depreciation and amortization	19,400		5,309	997	1,438	27,144
Segment operating income	$	68,823	10,017	5,715	2,257	86,812
Unallocated corporate expense						13,119
Consolidated operating income						$	73,693
Assets at June 30, 2004	$	567,715	86,572	34,403	45,318	734,008
Unallocated assets at June 30, 2004						238,395
Consolidated assets at June 30, 2004						$	972,403
Capital and wagering systems expenditures	$	24,437	6,307	662	306	31,712

12

	Six Months Ended June 30, 2005
	Lottery Group		Pari- Mutuel Group	Venue Management Group	Telecommunications Products Group	Totals
Service revenues	$	249,721	36,527	30,373	—	316,621
Sales revenues	33,094		3,876	—	28,389	65,359
Total revenues	282,815		40,403	30,373	28,389	381,980
Cost of service	127,070		22,341	23,270	—	172,681
Cost of sales	22,203		2,703	—	20,871	45,777
Amortization of service contract software	2,258		1,263	—	—	3,521
	151,531		26,307	23,270	20,871	221,979
Gross profit	131,284		14,096	7,103	7,518	160,001
Selling, general and administrative expenses	29,500		5,457	1,576	2,886	39,419
Depreciation and amortization	19,576		5,042	971	1,919	27,508
Segment operating income	$	82,208	3,597	4,556	2,713	93,074
Unallocated corporate expense						14,599
Consolidated operating income						$	78,475
Assets at June 30, 2005	$	716,893	77,552	35,388	63,256	893,089
Unallocated assets at June 30, 2005						207,682
Consolidated assets at June 30, 2005						$	1,100,771
Capital and wagering systems expenditures	$	35,919	5,497	833	1,184	43,433

The following table provides a reconciliation of consolidated operating income to the consolidated income before income tax expense for each period:

	Three Months Ended June 30,				Six Months Ended June 30,
	2004			2005	2004		2005
Reported consolidated operating income	$	35,883		41,645	$	73,693	78,475
Interest expense	7,807			6,812	15,197		13,222
Other (income) expense, net	(384		)	377	224		776
Income before income tax expense	$	28,460		34,456	$	58,272	64,477

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(4)Income Tax Expense

The effective income tax rate for the three and six months ended June 30, 2005 of approximately 28.1% and 29.0%, respectively, differed from the federal statutory rate of 35% due to benefits from expanded business outside the United States, the 2004 debt restructuring and increasing research and development activities. The effective income tax rate for the three and six months ended June 30, 2004 was approximately 31.5%, which differed from the federal statutory rate of 35% due primarily to benefits from the realization of foreign tax credits and the implementation of the extra-territorial income exclusion regime.  On October 22, 2004, the American Jobs Creation Act (“the Act”) was signed into law.  The Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividend received deduction for certain dividends from controlled foreign corporations.  As of June 30, 2005 the Company has decided not to repatriate any qualifying earnings under the Act.

(5)Comprehensive Income

The following presents a reconciliation of net income to comprehensive income for the three and six month periods ended June 30, 2004 and 2005:

	Three Months Ended June 30,					Six Months Ended June 30,
	2004			2005		2004		2005
Net income	$	19,508		24,764		$	39,929	45,779
Other comprehensive income (loss):
Foreign currency translation	(617		)	(5,262	)	767		(8,652	)
Unrealized gain on investments	715			1,656		727		1,645
Unrealized gain on Canadian dollar hedges	—			—		1,107		—
Other comprehensive income (loss)	98			(3,606	)	2,601		(7,007	)
Comprehensive income	19,606			21,158		42,530		38,772

(6)Inventories

Inventories consist of the following:

	December 31, 2004		June 30, 2005
Parts and work-in-process	$	18,655	22,487
Finished goods	9,407		12,281
	$	28,062	34,768

Point of sale terminals manufactured by the Company may be sold to customers or included as part of a long-term wagering system contract. Parts and work-in-process includes costs for equipment expected to be sold. Costs incurred for equipment associated with specific wagering system contracts not yet placed in service are classified as construction in progress in property and equipment.

14

(7)Accrued Liabilities

Accrued liabilities consist of the following:

	December 31, 2004		June 30, 2005
Compensation and benefits	$	26,135	16,738
Customer advances	4,579		2,245
Deferred revenue	3,192		8,345
Accrued contract costs	10,958		9,954
Other	52,135		39,554
	$	96,999	76,836

(8)Debt

At June 30, 2005, the Company had approximately $218,451 available for borrowing under the Company’s revolving credit facility, which was entered into in December 2004, as part of the Company’s senior secured credit facility (the “2004 Facility”).  There were no borrowings outstanding under the revolving credit facility, but approximately $31,549 in letters of credit were issued and outstanding at June 30, 2005.  At December 31, 2004, the Company’s available borrowing capacity under the revolving credit facility was $199,900.  At June 30, 2005, there was $99,500 in outstanding Term Loans under the 2004 Facility.

The Credit Agreement governing the 2004 Facility (the “Credit Agreement”) contains certain covenants that, among other things, limit the Company’s ability, and the ability of certain of the Company’s subsidiaries, to incur additional indebtedness, pay dividends or make distributions or certain other restricted payments, purchase or redeem capital stock, make investments or extend credit, engage in sale-leaseback transactions, consummate certain asset sales, effect a consolidation or merger, sell, transfer, lease or otherwise dispose of all or substantially all assets, or create certain liens and other encumbrances on assets.  Additionally, the Credit Agreement contains the following financial covenants that are computed quarterly on a rolling four-quarter basis as applicable:

•A maximum Consolidated Leverage Ratio of 3.75, which will be reduced according to the terms of the 2004 Credit Agreement on July 1, 2006, from which date until December 2009 the ratio shall be 3.50.  Consolidated Leverage Ratio means the ratio of (x) the aggregate stated balance sheet amount of the Company’s indebtedness determined on a consolidated basis in accordance with GAAP as of the last day of the fiscal quarter for which such determination is being made to (y) Consolidated EBITDA for the four consecutive fiscal quarters ended on the last day of the fiscal quarter for which such determination is being made.

•A minimum Consolidated Fixed Charge Coverage Ratio of 1.00 until December 2009.  Consolidated Fixed Charge Coverage Ratio means, as of any date of determination, the ratio computed for the Company’s four most recent fiscal quarters of (x) Consolidated EBITDA to (y) the sum of (i) total interest expense less non-cash amortization costs included in interest expense, (ii) scheduled payments of principal on indebtedness, (iii) capital expenditures and (iv) all income taxes paid in cash.

•A maximum Consolidated Senior Debt Ratio of 2.00, which will be reduced according to the terms of the 2004 Credit Agreement on July 1, 2006, from which date until December 2009 the ratio shall be 1.75.  Consolidated Senior Debt Ratio means the ratio of (x) the aggregate stated balance sheet amount of the Company’s indebtedness, less the amount of the Company’s 12 1/2% senior subordinated notes (the “2000 Notes”), the Company’s 6.25% senior subordinated notes due 2012 (the “2004 Notes”) and the Convertible Debentures determined on a consolidated basis in accordance with GAAP as of the last day of the fiscal quarter for which such determination is being made to (y) Consolidated EBITDA for the four consecutive fiscal quarters ended on the last day of the fiscal quarter for which such determination is being made.

15

For purposes of the foregoing limitations, Consolidated EBITDA means the sum of (i) consolidated net income, (ii) consolidated interest expense with respect to all outstanding indebtedness, (iii) provision for taxes based on income, (iv) total depreciation expense, (v) total amortization expense and (vi) certain adjustments, in each case for the period being measured, all of the foregoing as determined on a consolidated basis for the Company and its subsidiaries in accordance with GAAP.

The Company was in compliance with its loan covenants as of June 30, 2005.

(9)Goodwill and Intangible Assets

The following disclosure presents certain information regarding the Company’s acquired intangible assets as of December 31, 2004 and June 30, 2005.  Amortizable intangible assets are being amortized over their estimated useful lives, as indicated below, with no estimated residual values.

Intangible Assets	Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization	Net Balance
Balance at December 31, 2004
Amortizable intangible assets:
Patents	15	$	4,221	477	3,744
Customer lists	14	20,175		7,597	12,578
Customer service contracts	15	3,781		1,331	2,450
Licenses	15	10,377		3,315	7,062
Lottery contracts	5	31,802		7,910	23,892
		70,356		20,630	49,726
Non-amortizable intangible assets:
Tradename		32,574		2,118	30,456
Connecticut off-track betting system operating right		22,339		8,319	14,020
		54,913		10,437	44,476
Total intangible assets		$	125,269	31,067	94,202
Balance at June 30, 2005
Amortizable intangible assets:
Patents	15	$	4,656	559	4,097
Customer lists	14	19,453		8,286	11,167
Customer service contracts	15	3,384		1,310	2,074
Licenses	15	11,955		5,137	6,818
Lottery contracts	5	32,200		10,622	21,578
		71,648		25,914	45,734
Non-amortizable intangible assets:
Tradename		32,574		2,118	30,456
Connecticut off-track betting system operating right		22,339		8,319	14,020
		54,913		10,437	44,476
Total intangible assets		$	126,561	36,351	90,210

16

The aggregate intangible amortization expense for the six-month periods ended June 30, 2004 and 2005 was approximately $5,600 and $5,300, respectively.

The table below reconciles the change in the carrying amount of goodwill, by reporting unit, which is the same as business segment, for the period from January 1, 2005 to June 30, 2005.  In 2005, the Company recorded (a) a $2,927 increase in goodwill in connection with the acquisition of certain assets and the assumption of certain liabilities from Promo-Travel International, Inc. in February 2005, (b) a $20,680 increase in goodwill related to the acquisition of the remaining 35% minority interest in SGLA in April 2005, (c) an $87 increase for the acquisition of an off-track betting operation in June 2005 and (d) a $2,922 increase in goodwill associated with the Honsel acquisition.

Goodwill	Lottery Group		Pari- mutuel Group	Venue Management Group	Telecommunications Products Group	Totals
Balance at December 31, 2004	$	311,444	487	—	—	311,931
Additions:	26,529		—	87	—	26,616
Balance at June 30, 2005	$	337,973	487	87	—	338,547

(10)Pension Plans

The Company has two funded defined benefit pension plans. It has a defined benefit plan for its U.S. based union employees. Retirement benefits under this plan are based upon the number of years of credited service, up to a maximum of 30 years for the majority of the employees.  It also has a defined benefit plan for U.K. based employees.  Retirement benefits under the U.K. plan are based on an employee’s average compensation over the two years preceding retirement.  The Company’s policy is to fund the minimum contribution permitted by the respective regulatory authorities.  The Company estimates that the amount to be funded in year 2005 will be approximately $2,500.

In connection with its U.S. based collective bargaining agreements, the Company participates with other companies in a defined benefit pension plan covering union employees. The Company expects to make payments to the multi-employer plan of approximately $250 during the year ending December 31, 2005.

The Company has a 401(k) plan covering all U.S. based employees who are not covered by a collective bargaining agreement. Company contributions to the plan are at the discretion of the Company’s Board of Directors.  The Company has a 401(k) plan for all union employees which does not provide for Company contributions.

The Company has an unfunded nonqualified Supplemental Executive Retirement Plan (the “SERP”) and an unfunded nonqualified Deferred Compensation Plan. The SERP provides for retirement benefits for certain senior executives according to a formula based on each participant’s compensation and years of service with the Company, and the Deferred Compensation Plan permits salary and bonus deferrals and does not provide for Company contributions.

17

The following table sets forth the combined amount of net periodic benefit cost recognized for the three and six month periods ended June 30, 2004 and 2005:

	Three Months Ended June 30,					Six Months Ended June 30,
	2004			2005		2004			2005
Components of net periodic pension benefit cost:
Service cost	$	1,026		813		$	1,701		1,627
Interest cost	641			787		1,282			1,575
Expected return on plan assets	(448		)	(626	)	(896		)	(1,251	)
Actuarial loss	295			420		590			839
Net amortization and deferral	13			16		27			32
Amortization of prior service costs	192			192		384			384
Net periodic cost	$	1,719		1,602		$	3,088		3,206

(11)Stockholders’ Equity

At June 30, 2005, the Company had a total of 2,000 shares of preferred stock, $1.00 par value, authorized for issuance, including 229 authorized shares of Series A Convertible Preferred Stock and 1 authorized share of Series B Preferred Stock. No shares of preferred stock are currently outstanding.

In August 2004, holders of all of the Company’s then outstanding Series A Convertible Preferred Stock and Series B Preferred Stock were issued an aggregate of 23,832 shares of the Company’s Class A Common Stock in connection with their conversion, representing a conversion price of $5.56 per share. Prior to conversion, the Series A Convertible Preferred Stock required dividend payments at a rate of 6% per annum. Prior to 2004, we satisfied the dividend requirement using additional shares of convertible preferred stock.  In 2004 the Company paid the dividends in cash totaling $3,964.

(12)Litigation

On May 9, 2005, Scientific Games Royalty Corporation, a wholly-owned indirect subsidiary of Scientific Games Corporation, filed suit against GTECH Corporation in Federal District Court of Delaware alleging patent infringement of the Company’s group participation multiplier patents, U.S. Patent Nos. 6,648,753 and 6,692,354.  These patents apply to online lottery games that have an optional bonus wager as a feature of the game.  In the event that a player wins a prize in the base game and has chosen to make the bonus wager, all of the player’s prizes in the base game, with the exception of the jackpot amount, may be multiplied by a randomly selected multiplier.  The Company believes that GTECH currently provides such games that infringe the Company’s applicable patents in various jurisdictions in the United States.  The Company’s lawsuit seeks damages and other relief for such infringement.

On or about April 6, 2005, the Company was served with a complaint in the Texas state court action captioned GTECH Holdings Corporation and GTECH Corporation v. Scientific Games International, Inc. previously described in our Annual Report on Form 10-K for the year ended December 31, 2004.  The Company continues to believe that the plaintiffs’ claims lack merit and intends to contest them vigorously.

18

(13)Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries

The Company conducts substantially all of its business through its domestic and foreign subsidiaries.  The 2004 Notes, the Convertible Debentures and the 2004 Facility are fully, unconditionally and jointly and severally guaranteed by substantially all of the Company’s wholly owned domestic subsidiaries (the “Guarantor Subsidiaries”).

Presented below is condensed consolidating financial information for (i) Scientific Games Corporation (the “Parent Company”), which includes the activities of Scientific Games Management Corporation, (ii) the Guarantor Subsidiaries and (iii) the wholly owned foreign subsidiaries and the non-wholly owned domestic and foreign subsidiaries (the “Non-Guarantor Subsidiaries”) as of December 31, 2004 and June 30, 2005 and for the three and six months ended June 30, 2004 and 2005.  The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of the Parent Company, Guarantor Subsidiaries and Non-Guarantor Subsidiaries, assuming the guarantee structure of the 2004 Facility, the Convertible Debentures and the 2004 Notes were in effect at the beginning of the periods presented.  Separate financial statements for Guarantor Subsidiaries are not presented based on management’s determination that they would not provide additional information that is material to investors.

The condensed consolidating financial information reflects the investments of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting.  Corporate interest and administrative expenses have not been allocated to the subsidiaries.

19

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2004

(unaudited, in thousands)

	Parent Company			Guarantor Subsidiaries	Non- Guarantor Subsidiaries		Eliminating Entries		Consolidated
ASSETS
Cash and cash equivalents	$	34,979		14,987	16,154		—		66,120
Short-term investments	52,525			—	—		—		52,525
Accounts receivable, net	—			73,236	32,592		(39	)	105,789
Inventories	—			18,245	10,425		(608	)	28,062
Other current assets	11,778			17,310	12,681		30		41,799
Property and equipment, net	5,093			206,331	60,633		(631	)	271,426
Investment in subsidiaries	771,987			187,019	(36,563	)	(922,443	)	—
Goodwill	183			297,000	14,748		—		311,931
Intangible assets	—			79,303	14,899		—		94,202
Other assets	53,095			59,522	15,777		(8,225	)	120,169
Total assets	$	929,640		952,953	141,346		(931,916	)	1,092,023
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current installments of long-term debt	$	1,000		—	3,370		—		4,370
Current liabilities	8,672			91,503	37,426		1,200		138,801
Long-term debt, excluding current installments	603,645			—	2,863		—		606,508
Other non-current liabilities	(5,486		)	30,503	16,699		64		41,780
Intercompany balances	(124,873		)	108,969	17,948		(2,044	)	—
Stockholders’ equity	446,682			721,978	63,040		(931,136	)	300,564
Total liabilities and stockholders’ equity	$	929,640		952,953	141,346		(931,916	)	1,092,023

20

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2005

(unaudited, in thousands)

	Parent Company			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminating Entries		Consolidated
ASSETS
Cash and cash equivalents	$	29,454		(4,986	)	28,177		1		52,646
Short-term investments	8,650			—		—		—		8,650
Accounts receivable, net	—			94,304		25,506		(39	)	119,771
Inventories	—			25,295		9,898		(425	)	34,768
Other current assets	5,599			18,289		19,526		30		43,444
Property and equipment, net	4,816			216,822		69,902		(630	)	290,910
Investment in subsidiaries	810,470			187,458		(35,913	)	(962,015	)	—
Goodwill	183			300,015		38,349		—		338,547
Intangible assets	—			75,935		14,275		—		90,210
Other assets	46,651			61,158		19,829		(5,813	)	121,825
Total assets	$	905,823		974,290		189,549		(968,891	)	1,100,771
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current installments of long-term debt	$	1,000		—		4,468		—		5,468
Current liabilities	3,107			78,498		34,159		83		115,847
Long-term debt, excluding current installments	581,145			—		2,333		—		583,478
Other non-current liabilities	144			29,881		16,215		6		46,246
Intercompany balances	(133,575		)	84,527		48,363		685		—
Stockholders’ equity	454,002			781,384		84,011		(969,665	)	349,732
Total liabilities and stockholders’ equity	$	905,823		974,290		189,549		(968,891	)	1,100,771

21

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED STATEMENT OF INCOME

Three Months Ended June 30, 2004

(unaudited, in thousands)

	Parent Company			Guarantor Subsidiaries		Non- Guarantor Subsidiaries	Eliminating Entries		Consolidated
Operating revenues	$	—		144,597		41,330	(7,815	)	178,112
Operating expenses	—			79,144		27,087	(7,832	)	98,399
Amortization of service contract software	—			1,497		100	—		1,597
Gross profit	—			63,956		14,143	17		78,116
Selling, general and administrative expenses	7,664			16,164		4,602	(3	)	28,427
Depreciation and amortization	212			11,080		2,514	—		13,806
Operating income (loss)	(7,876		)	36,712		7,027	20		35,883
Interest expense	7,420			296		1,243	(1,152	)	7,807
Other (income) expense	(277		)	(1,588	)	327	1,154		(384	)
Income (loss) before equity in income of subsidiaries, and income taxes	(15,019		)	38,004		5,457	18		28,460
Equity in income of subsidiaries	40,324			—		—	(40,324	)	—
Income tax expense	5,797			1,126		2,029	—		8,952
Net income	$	19,508		36,878		3,428	(40,306	)	19,508

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED STATEMENT OF INCOME

Three Months Ended June 30, 2005

(unaudited, in thousands)

	Parent Company			Guarantor Subsidiaries	Non- Guarantor Subsidiaries	Eliminating Entries		Consolidated
Operating revenues	$	—		152,056	49,657	(4,289	)	197,424
Operating expenses	—			81,653	35,471	(4,189	)	112,935
Amortization of service contract software	—			1,868	30	—		1,898
Gross profit	—			68,535	14,156	(100	)	82,591
Selling, general and administrative expenses	7,227			14,052	4,466	(20	)	25,725
Depreciation and amortization	290			11,483	3,448	—		15,221
Operating income (loss)	(7,517		)	43,000	6,242	(80	)	41,645
Interest expense	6,357			154	301	—		6,812
Other (income) expense	(227		)	472	99	33		377
Income (loss) before equity in income of subsidiaries, and income taxes	(13,647		)	42,374	5,842	(113	)	34,456
Equity in income of subsidiaries	45,322			—	—	(45,322	)	—
Income tax expense	6,911			1,642	1,139	—		9,692
Net income (loss)	$	24,764		40,732	4,703	(45,435	)	24,764

22

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED STATEMENT OF INCOME

Six Months Ended June 30, 2004

(unaudited, in thousands)

	Parent Company			Guarantor Subsidiaries		Non- Guarantor Subsidiaries	Eliminating Entries		Consolidated
Operating revenues	$	—		298,499		75,170	(10,092	)	363,577
Operating expenses	—			164,410		50,656	(10,126	)	204,940
Amortization of service contract software	—			2,832		199	—		3,031
Gross profit	—			131,257		24,315	34		155,606
Selling, general and administrative expenses	12,697			33,009		8,647	(6	)	54,347
Depreciation and amortization	422			22,179		4,965	—		27,566
Operating income (loss)	(13,119		)	76,069		10,703	40		73,693
Interest expense	14,574			515		2,382	(2,274	)	15,197
Other (income) expense	(552		)	(2,947	)	1,447	2,276		224
Income (loss) before equity in income of subsidiaries, and income taxes	(27,141		)	78,501		6,874	38		58,272
Equity in income of subsidiaries	79,825			—		—	(79,825	)	—
Income tax expense	12,755			3,049		2,539	—		18,343
Net income	$	39,929		75,452		4,335	(79,787	)	39,929

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED STATEMENT OF INCOME

Six Months Ended June 30, 2005

(unaudited, in thousands)

	Parent Company			Guarantor Subsidiaries	Non- Guarantor Subsidiaries		Eliminating Entries		Consolidated
Operating revenues	$	—		293,998	94,761		(6,779	)	381,980
Operating expenses	—			159,159	66,074		(6,775	)	218,458
Amortization of service contract software	—			3,488	33		—		3,521
Gross profit	—			131,351	28,654		(4	)	160,001
Selling, general and administrative expenses	13,866			30,300	9,327		(40	)	53,453
Depreciation and amortization	565			20,755	6,753		—		28,073
Operating income (loss)	(14,431		)	80,296	12,574		36		78,475
Interest expense	12,554			261	407		—		13,222
Other (income) expense	(504		)	627	(28	)	681		776
Income (loss) before equity in income of subsidiaries, and income taxes	(26,481		)	79,408	12,195		(645	)	64,477
Equity in income of subsidiaries	85,703			—	—		(85,703	)	—
Income tax expense	13,443			2,879	2,376		—		18,698
Net income (loss)	$	45,779		76,529	9,819		(86,348	)	45,779

23

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2004

(unaudited, in thousands)

	Parent Company			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminating Entries		Consolidated
Net income	$	39,929		75,452		4,335		(79,787	)	39,929
Depreciation and amortization	422			25,011		5,164		—		30,597
Deferred income taxes	6,221			(791	)	(225	)	—		5,205
Equity in income of subsidiaries	(79,825		)	—		—		79,825		—
Changes in operating assets and liabilities, net of effects of acquisitions	(6,655		)	(10,495	)	(2,070	)	208		(19,012	)
Other non-cash adjustments	1,135			(106	)	23		—		1,052
Net cash provided by (used in) operating activities	(38,773		)	89,071		7,227		246		57,771
Cash flows from investing activities:
Capital and wagering systems expenditures	(53		)	(26,152	)	(5,507	)	—		(31,712	)
Business acquisitions, net of cash acquired	—			(1,709	)	—		—		(1,709	)
Other assets and investments	(29		)	(1,002	)	(1,476	)	1,671		(836	)
Net cash provided by (used in) investing activities	(82		)	(28,863	)	(6,983	)	1,671		(34,257	)
Cash flows from financing activities:
Net payments on long-term debt	(2,519		)	(654	)	1,942		—		(1,231	)
Net proceeds from issuance of common stock	3,828			1,709		—		(1,709	)	3,828
Preferred stock dividends	(3,964		)	—		—		—		(3,964	)
Other, principally intercompany balances	53,485			(56,327	)	3,050		(208	)	—
Net cash provided by (used in) financing activities	50,830			(55,272	)	4,992		(1,917	)	(1,367	)
Effect of exchange rate changes on cash	923			(22	)	710		—		1,611
Increase (decrease) in cash and cash equivalents	12,898			4,914		5,946		—		23,758
Cash and cash equivalents, beginning of period	25,443			(4,473	)	16,228		—		37,198
Cash and cash equivalents, end of period	$	38,341		441		22,174		—		60,956

24

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2005

(unaudited, in thousands)

	Parent Company			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminating Entries		Consolidated
Net income	$	45,779		76,529		9,819		(86,348	)	45,779
Depreciation and amortization	565			24,243		6,786		—		31,594
Deferred income taxes	9,240			(791	)	1,155		—		9,604
Equity in income of subsidiaries	(85,703		)	—		—		85,703		—
Changes in operating assets and liabilities, net of effects of acquisitions	49,982			(38,050	)	(8,966	)	(2	)	2,964
Other non-cash adjustments	1,776			3,184		20		—		4,980
Net cash provided by (used in) operating activities	21,639			65,115		8,814		(647	)	94,921
Cash flows from investing activities:
Capital and wagering systems expenditures	(45		)	(29,186	)	(14,202	)	—		(43,433	)
Business acquisitions, net of cash acquired	—			(4,094	)	(20,680	)	—		(24,774	)
Other assets and investments	815			(11,238	)	(9,643	)	1,049		(19,017	)
Net cash provided by (used in) investing activities	770			(44,518	)	(44,525	)	1,049		(87,224	)
Cash flows from financing activities:
Net payments on long-term debt	(22,500		)	—		397		—		(22,103	)
Net proceeds from issuance of common stock	4,903			—		1,089		(1,089	)	4,903
Preferred stock dividends	—			—		—		—		—
Other, principally intercompany balances	(10,116		)	(32,434	)	64,336		(21,786	)	—
Net cash provided by (used in) financing activities	(27,713		)	(32,434	)	65,822		(22,875	)	(17,200	)
Effect of exchange rate changes on cash	(221		)	315		(26,538	)	22,473		(3,971	)
Increase (decrease) in cash and cash equivalents	(5,525		)	(11,522	)	3,573		—		(13,474	)
Cash and cash equivalents, beginning of period	34,979			6,536		24,604		1		66,120
Cash and cash equivalents, end of period	$	29,454		(4,986	)	28,177		1		52,646

25

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

Background

The following discussion addresses our financial condition as of June 30, 2005 and the results of our operations for the three and six months ended June 30, 2005, compared to the corresponding periods in the prior year. This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2004, included in our 2004 Annual Report on Form 10-K.

We operate in four business segments: Lottery Group, Pari-mutuel Group, Venue Management Group and Telecommunications Products Group. Our Lottery Group provides instant tickets and related services and lottery systems. Instant ticket and related services includes ticket design and manufacturing as well as value-added services, including game design, sales and marketing support, inventory management and warehousing and fulfillment services. Additionally, this division provides lotteries with over 80 licensed brand products, including NASCAR®, Mandalay Bay®, National Basketball Association®, Harley-Davidson®, Wheel-of-Fortune®, Hasbro®, Corvette® and The World Series of Poker®.  This division also includes promotional instant tickets and pull-tab tickets that we sell to both lottery and non-lottery customers. Our lottery systems business includes the supply of transaction processing software for the accounting and validation of both instant ticket and online lottery games, point-of-sale terminal hardware sales, central site computers and communication hardware sales, and ongoing support and maintenance services for these products. This business also includes software and hardware and support services for sports betting and operation of credit card processing systems.

On December 31, 2004, we acquired Printpool Honsel GmbH (“Honsel”), a German company which is the supplier of instant lottery tickets to all of the 16 state operated lotteries in Germany and sells other lottery products, such as bet slips and paper rolls, to customers in approximately 25 countries.  We expect that our acquisition of Honsel will enable us to further expand into the European lottery market.

In April 2005, we acquired the remaining 35% minority interest in Scientific Games Latin America S.A. (“SGLA”), a supplier of lottery tickets, pre-paid phone cards and promotional games in Latin America.  We originally acquired a 65% interest in SGLA in June 2002.

Our Pari-mutuel Group is comprised of our North American and international on-track, off-track and inter-track pari-mutuel wagering services, simulcasting and communications services, and telephone and internet account wagering systems, as well as sales of pari-mutuel systems and equipment.

Our Venue Management Group is comprised of our Connecticut off-track betting operations, which include 11 off-track betting facilities and telephone account wagering for customers in 26 states, our Maine off-track betting facility and our on-track and off-track betting operations in the Netherlands, which consist of four on-track and 28 off-track betting operations.

Our Telecommunications Products Group is comprised of our prepaid cellular phone cards business.

The first and fourth quarters of the calendar year traditionally comprise the weakest season for our pari-mutuel wagering business. As a result of inclement weather during the winter months, a number of racetracks do not operate and those that do operate often experience missed racing days. This adversely affects the amounts wagered and our corresponding service revenues. Wagering and lottery equipment sales and software license revenues usually reflect a limited number of large transactions, which do not recur on an annual basis. Consequently, revenues and operating results can vary substantially from period to period as a result of the timing of revenue recognition for major equipment sales and software licensing transactions. In addition, instant ticket and prepaid phone card sales may vary depending on the season and timing of contract awards, changes in customer budgets, inventory ticket levels, lottery retail sales and general economic conditions.

Operating results may also vary significantly from period to period depending on the addition or disposition of business units in each period.

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Results of Operations: See Note 3—Business Segments

Three Months Ended June 30, 2005 compared to Three Months Ended June 30, 2004

Revenue Analysis

For the quarter ended June 30, 2005, revenues of $197.4 million were up $19.3 million or 11% as compared to the prior year quarter, due to a $13.3 million or 9% increase in service revenue coupled with a $6.0 million or 20% increase in sales revenue.

The increase in service revenue in the quarter ended June 30, 2005 is primarily attributable to a $16.6 million or 15% increase in service revenues in the Lottery Group resulting from continued strong sales of instant lottery tickets and licensed game properties, partially offset by the loss of approximately $7.9 million of revenues on the Florida lottery contract which ended in January 2005. Pari-mutuel Group service revenues decreased $2.8 million, reflecting lower wagering and the loss of the New York Racing Association contract. Venue Management Group service revenues decreased $0.5 million due to lower wagering, in part because of the smoking ban instituted in Connecticut in the second quarter of 2004.

The $6.0 million increase in sales revenue in the quarter ended June 30, 2005 is primarily attributable to a $3.8 million increase in the Lottery Group mainly due to the addition of Honsel from the beginning of fiscal year 2005, a $1.7 million increase in system and equipment sales in the Pari-mutuel Group, and a $0.5 million improvement in revenues in the Telecommunications Products Group.

Gross Profit Analysis

Gross profit of $82.6 million for the quarter ended June 30, 2005 increased $4.5 million as compared to the corresponding period in 2004, due to a $3.2 million increase in service revenue margins coupled with a $1.3 million improvement in sales revenue gross margins. Gross margins were 42% in 2005 and 44% in 2004. The $8.4 million increase in the Lottery Group gross profit related mostly to higher service revenues. The $3.8 million decrease in services revenue margins in the Pari-mutuel Group reflects lower service revenues and increases in operating costs. Venue Management Group gross profit decreased $0.7 million as a result of lower service revenues and higher operating costs. Telecommunications Products Group gross profit increased $0.1 million from the prior year as a result of higher sales revenues.

Expense Analysis

Selling, general and administrative expenses of $25.7 million for the quarter ended June 30, 2005 were $2.7 million lower than in the corresponding period in 2004.  This decrease is primarily due to decreases in sales and marketing costs, compensation and professional service fees.

Depreciation and amortization expense, including amortization of service contract software, of $17.1 million for the quarter ended June 30, 2005 increased $1.7 million from the corresponding period in 2004.  Interest expense of $6.8 million for the quarter ended June 30, 2005 decreased $1.0 million from 2004, primarily reflecting the benefits of the debt restructuring completed in December 2004.

Income Tax Expense

Income tax expense of $9.7 million for the quarter ended June 30, 2005 increased $0.7 million from 2004. The financial statement income tax provision was 28.1% in 2005 and 31.5% in 2004. The lower effective rate in 2005 is due to benefits from expanded business outside the United States, the 2004 debt restructuring and increasing research and development activities.

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Six Months Ended June 30, 2005 compared to Six Months Ended June 30, 2004

Revenue Analysis

For the six months ended June 30, 2005, revenues of $382.0 million were up $18.4 million or 5% as compared to the comparable period in the prior year, due to a $27.4 million or 9% increase in service revenue partially offset by a $9.0 million or 12% decrease in sales revenue.

The increase in service revenue in the six months ended June 30, 2005 is primarily attributable to a $32.7 million or 15% increase in service revenues in the Lottery Group resulting from continued strong sales of instant lottery tickets and licensed game properties, partially offset by approximately $14.0 million of lower revenues on the Florida lottery contract which ended in January 2005. Pari-mutuel Group service revenues decreased $3.8 million, reflecting lower wagering and the loss of the New York Racing Association contract. Venue Management Group service revenues decreased $1.4 million due to lower wagering, in part because of the smoking ban instituted in Connecticut in the second quarter of 2004.

The $9.0 million decrease in sales revenue in the six months ended June 30, 2005 as compared to the corresponding period in the prior year is primarily attributable to a $12.3 million decrease in the Lottery Group relating to non-recurring systems and equipment sales in the first quarter of 2004 partially offset by the addition of Honsel from the beginning of fiscal year 2005, a $1.4 million increase in system and equipment sales in the Pari-mutuel Group, and a $1.8 million improvement in revenues in the Telecommunications Products Group, due primarily to higher sales volume, partially offset by lower prices.

Gross Profit Analysis

Gross profit of $160.0 million for the six months ended June 30, 2005 increased $4.4 million as compared to the corresponding period in the corresponding period in 2004, due to a $7.8 million increase in service revenue margins partially offset by a $3.4 million decrease in sales revenue gross margins. Gross margins were 42% in 2005 and 43% in 2004. The $10.3 million increase in the Lottery Group gross profit related mostly to higher service revenues. The $5.2 million decrease in services revenue margins in the Pari-mutuel Group reflects the result of lower service revenues and increases in operating costs. Venue Management Group gross profit decreased $1.8 million as a result of lower service revenues and higher operating costs. Telecommunications Products Group gross profit increased $0.9 million as a result of higher sales revenues.

Expense Analysis

Selling, general and administrative expenses of $53.5 million for the six months ended June 30, 2005 were $0.9 million lower than in 2004.  This decrease is primarily due to decreased compensation and professional service fees.

Depreciation and amortization expense, including amortization of service contract software, of $31.6 million for the six months ended June 30, 2005 increased $1.0 million from the corresponding period in 2004.  Interest expense of $13.2 million for the six months ended June 30, 2005 decreased $2.0 million from 2004, primarily reflecting the benefits of the debt restructuring completed in December 2004.

Income Tax Expense

Income tax expense of $18.7 million for the six months ended June 30, 2005 increased $0.4 million from 2004. The financial statement income tax provision was 29.0% in 2005 and 31.5% in 2004. The lower effective rate in 2005 is due to benefits from expanded business outside the United States, the 2004 debt restructuring and increasing research and development activities.

Critical Accounting Policies

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in Note 1 to our 2004 Annual Report on Form 10-K. Critical accounting policies are those that require application of management’s most difficult, subjective, or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies for us include revenue recognition on percentage of completion contracts related to lottery development projects and pari-mutuel systems software development projects, capitalization of software development costs, evaluation of the recoverability of assets, the

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assessment of litigation and contingencies, accounting for stock-based compensation, accounting for derivative instruments and hedging activities, and accounting for income and other taxes. Actual results could differ from estimates.

Liquidity, Capital Resources and Working Capital

As of June 30, 2005, our senior secured credit facility (the “2004 Facility”) consists of a $250.0 million revolving credit facility due 2009 and a $99.5 million Term Loan B due 2009. The 2004 Facility contains certain financial covenants which are described below. At June 30, 2005, approximately 18% of our debt, representing approximately $103.4 million of indebtedness, was in variable rate instruments. Consequently, we are exposed to fluctuations in interest rates. The effect of a 0.125% change in interest rates associated with our unhedged variable rate debt will result in a change of approximately $0.1 million per year in our interest expense, assuming no change in our outstanding borrowings.

Our financing arrangements as of June 30, 2005 impose certain limitations on our and our subsidiaries’ operations.

The credit agreement governing the 2004 Facility (the “2004 Credit Agreement”) contains certain covenants that, among other things, limit our ability, and the ability of certain of our subsidiaries, to incur additional indebtedness, pay dividends or make distributions or certain other restricted payments, purchase or redeem capital stock, make investments or extend credit, engage in certain transactions with affiliates, engage in sale-leaseback transactions, consummate certain assets sales, effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all or substantially all assets, and create certain liens and other encumbrances on assets.  Additionally, the 2004 Credit Agreement contains the following financial covenants, which are computed quarterly on a rolling four-quarter basis as applicable:

• A maximum Consolidated Leverage Ratio of 3.75, which will be reduced according to the terms of the 2004 Credit Agreement on July 1, 2006, from which date until December 2009 the ratio shall be 3.50.  Consolidated Leverage Ratio means the ratio of (x) the aggregate stated balance sheet amount of our indebtedness determined on a consolidated basis in accordance with GAAP as of the last day of the fiscal quarter for which such determination is being made to (y) Consolidated EBITDA for the four consecutive fiscal quarters ended on the last day of the fiscal quarter for which such determination is being made.

• A minimum Consolidated Fixed Charge Coverage Ratio of 1.00 until December 2009. Consolidated Fixed Charge Coverage Ratio means, as of any date of determination, the ratio computed for our four most recent fiscal quarters of (x) Consolidated EBITDA to (y) the sum of (i) total interest expense less non-cash amortization costs included in interest expense, (ii) scheduled payments of principal on indebtedness, (iii) capital expenditures and (iv) all income taxes paid in cash.

• A maximum Consolidated Senior Debt Ratio of 2.00, which will be reduced according to the terms of the 2004 Credit Agreement on July 1, 2006, from which date until December 2009 the ratio shall be 1.75. Consolidated Senior Debt Ratio means the ratio of (x) the aggregate stated balance sheet amount of our indebtedness, less the amount of the 2000 Notes, the 2004 Notes and the Convertible Debentures, determined on a consolidated basis in accordance with GAAP as of the last day of the fiscal quarter for which such determination is being made to (y) Consolidated EBITDA for the four consecutive fiscal quarters ended on the last day of the fiscal quarter for which such determination is being made.

For purposes of the foregoing limitations, Consolidated EBITDA means the sum of (i) consolidated net income, (ii) consolidated interest expense with respect to all outstanding indebtedness, (iii) provisions for taxes based on income, (iv) total depreciation expense, (v) total amortization expense and (vi) certain adjustments, in each case for the period being measured, all of the foregoing as determined on a consolidated basis for us and our subsidiaries in accordance with GAAP. Although we were in compliance with our loan covenants at June 30, 2005 and expect to continue to remain in compliance over the next 12 months, no assurances can be provided that we will be able to do so or that we will be able to continue to meet the covenant requirements beyond 12 months.

At June 30, 2005, we had outstanding letters of credit of $31.5 million, but no outstanding borrowings under the revolving credit facility, leaving us with a total availability of $218.5 million as compared to $199.9 million at December 31, 2004. Our ability to borrow under the 2004 Facility will depend on our remaining in compliance with the limitations imposed by our lenders, including the maintenance of the specified financial covenants. Presently we have not sought and, therefore, do not have any other financing commitments.

Our contractual obligations and commercial commitments principally include obligations associated with our outstanding indebtedness and future minimum operating lease obligations.

In August 2004, the holders of our Series A Convertible Preferred Stock converted all outstanding shares into shares of our Class A Common Stock and we redeemed their holdings of our Series B Preferred Stock for a nominal amount.  Prior to conversion, our Series A Convertible Preferred Stock required dividend payments at a rate of 6% per annum. Prior to 2004, we satisfied the dividend requirement using additional shares of convertible preferred stock.  From March 2004 until conversion in August 2004, we paid the dividend in cash.

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Our pari-mutuel wagering and online lottery systems service contracts require us to, among other things, maintain the central computing system and related hardware in efficient working order, provide added software functionality upon request, provide on-site computer operators, and furnish necessary supplies. Our primary expenditures associated with these services are personnel and related costs, which are expensed as incurred and are included in Operating Expenses Services in the consolidated statements of income. Historically, the revenues we derive from our pari-mutuel wagering and lottery systems service contracts have exceeded the direct costs associated with fulfilling our obligations thereunder. We expect that we will continue to realize positive cash flow and operating income as we extend or renew existing service contracts. We also expect that we will enter into new contracts that are accretive to our cash flow. In addition, through advancements in technology, we are continually deploying more efficient and cost effective methods for manufacturing and delivering our products and services to our customers. We expect that technological efficiencies will continue to positively impact our future cash flows and operating results. We are not party to any other material short-term or long-term obligations or commitments pursuant to these service contracts.

Periodically, we bid on new pari-mutuel and online lottery contracts. Once awarded, these contracts generally require significant up-front capital expenditures for terminal assembly, customization of software, software and equipment installation and telecommunications configuration. Historically we have funded these up-front costs through cash flows generated from operations, available cash on hand and borrowings under our credit facilities. Our ability to continue to procure new contracts will depend on, among other things, our then present liquidity levels and/or our ability to borrow at commercially acceptable rates to finance the initial up front costs. Once operational, long-term service contracts have been accretive to our operating cash flow. For fiscal 2005, we anticipate that capital expenditures and software expenditures could be approximately $95.0 million. However, the actual level of expenditures in fiscal year 2005 and beyond will ultimately largely depend on the extent to which we are successful in winning new contracts.  Furthermore, our pari-mutuel wagering network consists of approximately 26,000 wagering terminals. Periodically, we elect to upgrade the technological capabilities of older terminals and replace terminals that have exhausted their useful lives. We presently have no commitments to replace our existing terminal base, and our obligation to upgrade the terminals is discretionary. Servicing our installed terminal base requires that we maintain a supply of parts and accessories on hand. We are also required, contractually in some cases, to provide spare parts over an extended period of time, principally in connection with our systems and terminal sale transactions. To meet our contractual obligations and maintain sufficient levels of on-hand inventory to service our installed base, we purchase inventory on an as-needed basis. We presently have no inventory purchase obligations, other than in the ordinary course of business.

At June 30, 2005, our available cash, short-term investments and borrowing capacity totaled $279.8 million compared to $318.6 million at December 31, 2004. The amount of our available cash and short-term investments fluctuates principally based on the timing of collections from our customers, cash expenditures associated with new and existing pari-mutuel wagering and lottery systems contracts, borrowings or repayments under our credit facilities and changes in our working capital position. The decrease in our available cash from the December 31, 2004 level principally reflects the net cash provided by operating activities for the six months ended June 30, 2005 of $94.9 million, offset by wagering and other capital expenditures of $62.5 million, acquisition related payments of $24.8 million and $22.5 million of payments on long-term debt.  The $94.9 million of net cash provided by operating activities is derived from $97.6 million of net cash provided by operations less $2.7 million used to fund changes in working capital, net of the change in short-term investments. The working capital changes occurred principally from decreases in short-term investments, offset by increases in accounts receivable, inventories and other current assets and decreases in accounts payable and accrued liabilities. Capital expenditures of $11.9 million in the first half of 2005 are slightly higher than similar expenditures totaling $10.6 million in the corresponding period in 2004. Wagering system expenditures, including software expenditures, totaled $38.4 million in the first half of 2005 compared to $27.2 million in the corresponding period in 2004. This increase is primarily due to the new lottery contracts in Puerto Rico and Colorado. Cash flow from financing activities principally reflects the repayments of borrowings under our 2004 Facility.

We believe that our cash flow from operations, available cash and available borrowing capacity under the 2004 Facility will be sufficient to meet our liquidity needs, including anticipated capital expenditures, for the foreseeable future; however, we cannot assure you that this will be the case. While we are not aware of any particular trends, our contracts periodically renew and we cannot assure you that we will be successful in sustaining our cash flow from operations through renewal of our existing contracts or through the addition of new contracts. In addition, lottery customers in the United States generally require service providers to provide performance bonds in connection with each state contract. Our ability to obtain performance bonds on commercially reasonable terms is subject to prevailing market conditions, which may be impacted by economic and political events. Although we have not experienced any difficulty obtaining such bonds, we cannot assure you that we will continue to be able to obtain performance bonds on commercially reasonable terms or at all. While we are not aware of any reason to do so, if we need to refinance all or part of our indebtedness, on or before maturity, or provide letters of credit or cash in lieu of performance bonds, we cannot assure you that we will be able to obtain new financing or to refinance any of our indebtedness, on commercially reasonable terms or at all.

Further, the terms of the indenture governing our Convertible Debentures give holders the right to convert the Convertible Debentures when the market price of our Class A Common Stock exceeds a defined target market price.  The terms of the indenture require us to pay cash for the face amount of the Convertible Debentures which have been presented for conversion, with the value of the difference between the stated conversion price and the prevailing market price payable by our issuance of additional shares of our Class A Common Stock.

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We cannot assure you that we will have sufficient available cash to pay for the Convertible Debentures presented to us for conversion nor can we assure you that we will be able to refinance all or a portion of the converted Convertible Debentures at that time.

Impact of Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”).  SFAS 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance requires measurement and recognition of compensation expense based on the grant-date fair value of the entity’s equity instruments (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period).  SFAS 123(R) allows for two different methods of transition, the modified prospective and modified retrospective.  We are currently evaluating consolidated financial statement impact of the two methods of transition, as well as a valuation technique to adopt for estimating fair value. SFAS 123(R) is effective as of the first interim period or annual reporting period that begins after June 15, 2005.  In April 2005, the Securities and Exchange Commission (the “SEC”) amended the compliance date of SFAS 123(R), which will allow companies to implement SFAS 123(R) at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005.  We intend to adopt SFAS 123(R) in the first quarter of 2006.

In March 2005, the FASB issued Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143” (“SFAS 143”). FIN 47 clarifies the term conditional asset retirement obligation as used in SFAS 143 and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. The types of asset retirement obligations that are covered by FIN 47 are those for which an entity has a legal obligation to perform an asset retirement activity; however the timing and/or method of settling the obligation are conditional on a future event that may or may not be within the control of the entity.  FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than fiscal years ending after December 15, 2005. We are currently evaluating the impact of FIN 47 on our financial statements.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement that does not include specific transition provisions. To enhance comparability of prior period financial statements, SFAS 154 requires that changes in accounting principle be retrospectively applied. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We currently believe that adoption of the provisions of SFAS No. 154 will not have a material impact on our financial statements.

In July 2005, the FASB issued FASB Staff Position No. APB18-1, “Accounting by an Investor for Its Proportionate Share of Accumaulated Other Comprehensive Income of an Investee Accounted for under the Equity Method In Accordance with APB Opinion No. 18 upon loss of Significant Influence” (“APB 18”).  APB 18 requires that an investor’s proportionate share or an investee’s equity adjustments for other comprehensive income should be offset against the carrying value of the investment at the time significant influence is lost.  APB 18 is effective as of the first reporting period beginning after July 12, 2005.  We are currently evaluating the impact of APB 18 on our financial statements.

Recent Developments

On August 4, 2005 we announced that we had been awarded a four-year extension from the Kentucky Lottery Corporation worth $20 million.  The agreement commences on October 1, 2005 and includes a provision to convert to a cooperative services model wherein we are paid on a percent of sales basis.

On July 17, 2005 we announced that we had completed a five-year deal to supply simulcast services at Tote Investments Racing Service simulcast centers on the island of Barbados.  The estimated value is $5 million over the five-year term of the agreement.

On July 7, 2005 we announced that we had been awarded the instant lottery ticket and services contract for the California State Lottery.  The contract is valued at $33 million over an initial term of four years.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Our products and services are sold to a diverse group of customers throughout the world. As such, we are subject to certain risks and uncertainties as a result of changes in general economic conditions, sources of supply, competition, foreign exchange rates, tax reform, litigation and regulatory developments. The diversity and breadth of our products and geographic operations mitigate the risk that adverse changes from any single event would materially affect our financial position.

Additionally, as a result of the diversity of our customer base, we do not consider ourselves exposed to concentration of credit risks. These risks are further minimized by setting credit limits, ongoing monitoring of customer account balances, and assessing of the customers’ financial strengths.

Inflation has not had an abnormal or unanticipated effect on our operations. Inflationary pressures would be significant to our business if raw materials used for instant lottery ticket production, prepaid phone card production or terminal manufacturing are significantly affected. Available supply from the paper and electronics industries tends to fluctuate and prices may be affected by supply.

For fiscal 2004 and the first half of 2005, inflation was not a significant factor in our results of operations, and we were not impacted by significant pricing changes in our costs, except for personnel related expenditures. We are unable to forecast the prices or supply of substrate, component parts or other raw materials for the balance of 2005, but we currently do not anticipate any substantial changes that will materially affect our operating results.

In certain limited cases, our lottery contracts with our customers contain provisions to adjust for inflation on an annual basis, but we cannot be assured that this adjustment would cover raw material price increases or other costs of services. While we have long-term and generally satisfactory relationships with most of our suppliers, we also believe alternative sources to meet our raw material and production needs are available.

In the normal course of business, we are exposed to fluctuations in interest rates and equity market risks as we seek debt and equity capital to sustain our operations. At June 30, 2005, approximately 82% of our debt was in fixed rate instruments. We consider the fair value of all financial instruments to be not materially different from their carrying value at year-end. The following table provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted-average interest rates by expected maturity dates.  (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity, Capital Resources and Working Capital”.)

Principal Amount by Expected Maturity – Average Interest Rate

June 30, 2005

(dollars in thousands)

	Twelve Months Ended June 30,															Fair
	2006			2007		2008		2009		2010		Thereafter		Total		value
Long-term debt:
Fixed interest rate	$	875		865		552		519		7,758		475,000		485,569		508,200
Interest rate	4.83		%	4.82	%	4.64	%	4.66	%	12.39	%	3.07	%	3.20	%
Variable interest rate	$	4,593		1,009		1,010		1,010		95,511		244		103,377		104,123
Average interest rate	5.30		%	5.09	%	5.09	%	5.09	%	5.08	%	6.20	%	5.09	%

In 2003, we entered into derivative contracts to hedge part of our foreign currency exposure with respect to future cash receipts under our contract with the Ontario Lottery Commission. These instruments, which had been designated as cash flow hedges, were all settled during the three months ended March 31, 2004 and we recorded a credit to other comprehensive income of $1.1 million for the change in the fair value of these foreign exchange instruments prior to settlement.

We are also exposed to fluctuations in foreign currency exchange rates as the financial results of our foreign subsidiaries are translated into U.S. dollars in consolidation. Assets and liabilities outside the United States are primarily located in the United Kingdom, Germany, the Netherlands, France, Austria and Chile. Our investments in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term investments. Accordingly, we do not hedge these net investments. Translation gains and losses historically have not been material. We manage our foreign currency exchange risks on a global basis by one or more of the following: (i) securing payment from our customers in U.S. dollars, when possible, (ii) utilizing borrowings denominated in foreign currency, and (iii) entering into foreign currency exchange contracts. In addition, a significant portion of the cost attributable to our foreign operations is incurred in the local currencies. We believe that a 10% adverse change in foreign currency exchange rates would not have a significant adverse effect on our net earnings or cash flows. We may, from time to time, enter into foreign currency exchange or other

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contracts to hedge the risk associated with certain firm sales commitments, anticipated revenue streams and certain assets and liabilities denominated in foreign currencies.

Our cash and cash equivalents and short-term investments are in high-quality securities placed with a wide array of financial institutions with high credit ratings. This investment policy limits our exposure to concentration of credit risks.

Forward-Looking Statements

Throughout this Quarterly Report on Form 10-Q we make “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate,” or the negatives thereof, variations thereon or similar terminology. The forward-looking statements contained in this Quarterly Report on Form 10-Q are generally located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” but may be found in other locations as well. These forward-looking statements generally relate to plans and objectives for future operations and are based upon management’s reasonable estimates of future results or trends. Although we believe that the plans and objectives reflected in or suggested by such forward-looking statements are reasonable, such plans or objectives may not be achieved.

Actual results may differ from projected results due, but not limited, to unforeseen developments, including developments relating to the following:

•economic, competitive, demographic, business and other conditions in our domestic and international markets;

•changes or developments in the laws, regulations or taxes in the gaming and lottery industries;

•actions taken or omitted to be taken by third parties, including customers, suppliers, competitors, members and shareholders, as well as legislative, regulatory, judicial and other governmental authorities;

•changes in business strategy, capital improvements, development plans, including those due to environmental remediation concerns, or changes in personnel or their compensation, including federal, state and local minimum wage requirements;

•the availability and adequacy of our cash flow to satisfy our obligations, including our debt service obligations and our need for additional funds required to support capital improvements, development and acquisitions;

•an inability to renew or early termination of our contracts;

•an inability to engage in future acquisitions;

•the loss of any license or permit, including the failure to obtain an unconditional renewal of a required gaming license on a timely basis; and

•resolution of any pending or future litigation in a manner adverse to us.

Forward-looking statements speak only as of the date they are made, and except for our ongoing obligations under the U.S. Federal Securities Laws, we undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.  Actual future results may be materially different from what we expect.

Item 4.  Controls and Procedures

As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2004, we concluded that, as of December 31, 2004, our disclosure controls and procedures were not effective in alerting management prior to the end of a reporting period to all material information required to be included in our periodic filings with the SEC because we identified that we had a material weakness in the design of internal controls over financial reporting because we had insufficient personnel resources and technical accounting expertise within the accounting function to resolve non-routine or complex accounting matters, such as the treatment of our minority equity interest in an incorporated Italian consortium in 2004.

As of June 30, 2005, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based upon that evaluation, we concluded that our disclosure controls and procedures are still not effective in alerting management prior to the end of a reporting period to all material information required to be included in our periodic filings with the SEC because, although we have implemented remediations

33

designed to address the previously identified material weakness in the design of internal controls over financial reporting, such changes have not been in effect for a sufficient period of time to allow for testing and validation. Therefore, we continue to identify that we had a material weakness in the design of internal controls over financial reporting.

We are in the process of remediating this weakness. Subsequent to December 31, 2004, we changed the design of internal controls over non-routine and complex accounting matters through the re-assignment of responsibilities for certain accounting personnel, the identification of an outside resource at a recognized professional services company that we can consult with on complex issues, the formation of two internal management accounting committees, comprised of financial managers from each division of certain of our significant subsidiaries and other senior corporate accounting staff, which are responsible for reviewing all non-routine and complex accounting matters and preparing formal reports on their conclusions, and conducting quarterly reviews and discussions of all non-routine and complex accounting matters with our registered independent public accountants. We believe we have substantially addressed the identified weakness through the change in the design of our internal controls, and subject to confirmation of the effectiveness of our implementation of these remediation measures, anticipate that the material weakness should be remediated prior to the end of fiscal 2005.  We are continuing to evaluate additional controls and procedures which we can implement and may add additional accounting personnel during fiscal 2005 to enhance our technical accounting resources. We do not anticipate that the cost of this remediation effort will be material to our financial statements.

There was no material change in our internal control over financial reporting in the quarter ended June 30, 2005.

34

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

Six Months Ended June 30, 2005

PART II.  OTHER INFORMATION

Item 1.      Legal Proceedings

On May 9, 2005, Scientific Games Royalty Corporation, a wholly-owned indirect subsidiary of Scientific Games Corporation, filed suit against GTECH Corporation in Federal District Court of Delaware alleging patent infringement of our group participation multiplier patents, U.S. Patent Nos. 6,648,753 and 6,692,354.  These patents apply to online lottery games that have an optional bonus wager as a feature of the game.  In the event that a player wins a prize in the base game and has chosen to make the bonus wager, all of the player’s prizes in the base game, with the exception of the jackpot amount, may be multiplied by a randomly selected multiplier.  We believe that GTECH currently provides such games that infringe our applicable patents in various jurisdictions in the United States.  Our lawsuit seeks damages and other relief for such infringement.

On or about April 6, 2005, we were served with a complaint in the Texas state court action captioned GTECH Holdings Corporation and GTECH Corporation v. Scientific Games International, Inc. previously described in our Annual Report on Form
10-K for the year ended December 31, 2004.  We continue to believe that the plaintiffs’ claims lack merit and intend to contest them vigorously.

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

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
April, 2005	—	—		—	N/A
May, 2005	14,798	$	23.27	—	N/A
June, 2005	6,045	$	25.20	—	N/A

(1)    Pursuant to elections made by employees under the Company's equity incentive programs during the second quarter of 2005, a total of 14,798 shares with a market value of $23.27 per share were withheld by the Company to satisfy the withholding taxes associated with the vesting of restricted stock awards and a total of 6,045 shares with a market value of $25.20 per share were surrendered to the Company in connection with an employee stock option exercise.

Item 3.      Defaults Upon Senior Securities

None.

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

The Annual Meeting of our stockholders was held on June 14, 2005 to elect nine directors, to ratify the appointment of Deloitte & Touche LLP as independent registered public accountants for the fiscal year ending December 31, 2005 and to approve an amendment and restatement of our 2003 Incentive Compensation Plan to, among other things, increase the number of shares available for awards by 2,000,000 shares.  All matters put before the stockholders were approved as follows:

		For	Withheld
Proposal 1	Election of Directors
	Peter A. Cohen	83,073,056	1,881,570
	Howard Gittis	69,158,654	15,795,972
	Colin J. O’Brien	83,890,387	1,064,239
	Ronald O. Perelman	82,373,836	2,580,790
	Barry F. Schwartz	82,918,435	2,036,191
	Eric M. Turner	84,008,455	946,171
	A. Lorne Weil	81,803,915	3,150,711
	Sir Brian G. Wolfson	82,499,375	2,455,251
	Joseph R. Wright, Jr.	83,358,317	1,596,309

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		For	Against	Abstain	Broker Non-Votes
Proposal 2	Ratification of Appointment of Independent Registered Public Accountants	82,431,218	2,510,372	13,036	—
Proposal 3	Approval of Amendment and Restatement of the 2003 Incentive Compensation Plan	61,955,807	5,818,434	45,145	17,135,240

Item 5.      Other Information

None.

Item 6.      Exhibits

Exhibits
10.1	Employment Agreement, dated as of July 1, 2005 by and between the Company and Michael Chambrello.
10.2	Employment Inducement Stock Option Grant Agreement dated July 1, 2005 between the Company and Michael Chambrello.
10.3	Employment and Severance Benefits Agreement, dated as of November 19, 2002 by and between Scientific Games Inernational, Inc. and Steven M. Saferin (with an effective date of January 17, 2003).
10.4	2003 Incentive Compensation Plan, as amended and restated.
31.1	Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1	Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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.

	SCIENTIFIC GAMES CORPORATION
	(Registrant)
	By:	/s/ DeWayne E. Laird
	Name:	DeWayne E. Laird
	Title:	Vice President and Chief Financial Officer
		(principal financial and accounting officer)
Dated:    August 9, 2005

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INDEX TO EXHIBITS

Exhibit Number	Description
10.1	Employment Agreement, dated as of July 1, 2005 by and between the Company and Michael Chambrello.
10.2	Employment Inducement Stock Option Grant Agreement dated July 1, 2005 between the Company and Michael Chambrello.
10.3	Employment and Severance Benefits Agreement, dated as of November 19, 2002 by and between Scientific Games International, Inc. and Steven M. Saferin (with an effective date of January 17, 2003).
10.4	2003 Incentive Compensation Plan, as amended and restated.
31.1	Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1	Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-10.1

Exhibit 10.1

EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT (this “Agreement”) is made as of July 1, 2005 (the “Effective Date”), by and between SCIENTIFIC GAMES CORPORATION (“SGC”), a Delaware corporation or any affiliate thereof, as indicated on the signature page (the “Company”) and Michael Chambrello (“Executive”).

1.Employment; Term.  The Company hereby agrees to employ Executive, and Executive hereby accepts employment with the Company, in accordance with and subject to the terms and conditions set forth herein. The term of employment of Executive under this Agreement (the “Term”) shall be the period commencing on the Effective Date and ending on June 30, 2008, as may be extended in accordance with this Section 1 and subject to earlier termination in accordance with Section 5. The Term shall be extended automatically without further action by either party by one additional year (added to the end of the Term), and then on each succeeding annual anniversary thereafter, unless either party shall have given written notice to the other party prior to the date which is one hundred twenty (120)  days prior to the date upon which such extension would otherwise have become effective electing not to further extend the Term, in which case Executive’s employment shall terminate on the date upon which such extension would otherwise have become effective, unless earlier terminated in accordance with Section 5.

2.Offices and Duties.

(a)During the Term, Executive will serve as President and Chief Operating Officer for the Company, and will serve as an officer or director of any subsidiary or affiliate of the Company if elected to any such position by the shareholders or by the Board of Directors of the Company or any subsidiary or affiliate, as the case may be. In such capacities, the Executive shall perform such duties and shall have such responsibilities as are normally associated with such positions, including without limitation primary responsibility for the day to day operations of the Company, reporting to the Chief Executive Officer of the Company.  Executive understands that the Chief Executive Officer shall have primary responsibility for activities of the Company relating to corporate finance, mergers and acquisitions, corporate legal affairs, strategic planning, and the like.  Subject to Section 5(d), Executive’s functions, duties and responsibilities are subject to reasonable changes as the Company may in good faith determine after consultation with Executive.

(b)The Executive hereby agrees to accept such employment and election to any such offices and to render the services described above. Throughout the Term, Executive agrees to: (i) devote all of Executive’s business effort, time, attention, energy, and skill to Executive’s positions with the Company (subject to the Company’s policies with respect to vacations and absences); (ii) faithfully, loyally, and industriously perform such duties; (iii) comply with all of the Company’s policies and procedures, as

well as all applicable law and regulations, that are known or should be known to Executive; (iv) comply with all reasonable requests, instructions and regulations made by the Company; and (v) travel for business purposes to the extent necessary or appropriate in the performance of Executive’s duties. Executive may serve on the boards of a reasonable number of business entities, trade associations, charitable organizations, and similar entities with the prior consent of the Board of Directors provided that such service does not materially interfere with Executive’s performance of his duties hereunder.

3.Compensation.

(a)Base Salary.  During the Term the Company shall pay Executive a base salary (the “Base Salary”) at the initial rate of $750,000 per annum, payable biweekly (except to the extent deferred under a deferred compensation plan) and subject to all withholdings that are legally required or are agreed to by Executive.  Such salary shall be adjusted as of January 1st of each year, beginning with January 1, 2006, based on the New York area Consumer Price Index, with 2005 as the base year.  In the event that the Company, in its sole discretion, from time to time determines to increase the Base Salary beyond the CPI adjustment, such increased amount (together with any CPI adjustment) shall, from and after the effective date of the increase, constitute the “Base Salary” for purposes of this Agreement.

(b)Incentive Compensation.  Executive shall have the opportunity annually to earn incentive compensation in amounts determined by the Compensation Committee of the Board of SGC (the “Compensation Committee”) in accordance with the applicable incentive compensation plan of the Company as in effect from time to time, provided that such Incentive Compensation shall be paid no later than March 14 of the year following the end of the calendar year in which such fiscal year ends.  Under such plan, Executive shall have the opportunity to earn up to 75% of Base Salary as incentive compensation at Target Opportunity (“Target Bonus”) and up to 150% of Base Salary as incentive compensation at Maximum Opportunity.  Any such incentive compensation shall be pro rated for any portion of a fiscal year to which this agreement pertains, including 2005.

(c)Initial Stock Option Grant.  Executive shall be granted 1,000,000 stock options as of the Effective Date at an exercise price equal to 100% of the fair market value of the common stock of SGC at the date of grant in the form and subject to the terms and conditions set forth in Exhibit C hereto.

(d)Eligibility for Annual Equity Awards.  Executive shall be eligible to receive an annual stock option or other equity award, in the sole discretion of the SGC Compensation Committee, in accordance with the applicable plans and programs for senior executives of the Company and subject to the Company’s right to at any time amend or terminate any such plan or program, so long as any such change does not adversely affect any accrued or vested interest under any such plan or program.

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4.Benefits.

(a)The Company shall reimburse Executive for all reasonable and necessary travel, business entertainment and other business expenses incurred by Executive in connection with the performance of Executive’s duties under this Agreement, on a timely basis upon submission by Executive of vouchers therefore in accordance with the Company’s standard procedures.

(b)Executive shall be entitled to participate, without discrimination or duplication, in any and all medical insurance, group health, disability, life, accidental death, dismemberment insurance, 401(k) or other retirement, deferred compensation, profit sharing, stock ownership and such other plans and programs which are made generally available by the Company to its other senior executives in accordance with the terms of such plans and programs and subject to the Company’s right to at any time amend or terminate any such plan or program. Executive shall be entitled to paid vacation, holidays, and any other time off in accordance with the Company’s policies in effect from time to time.

(c)In addition, Executive shall be entitled during the Term to the benefits and perquisites identified in Exhibit D to this Agreement.

5.Termination.  Executive’s employment hereunder may be terminated prior to the end of the Term under the following circumstances:

(a)Death; Total Disability.  Executive’s employment hereunder shall terminate upon Executive’s death, and the Company may terminate Executive’s employment hereunder in the event of Executive’s “Total Disability.” For purposes of this Agreement, “Total Disability” shall mean Executive’s (a) becoming eligible to receive benefits under any long-term disability insurance program or (b) failure to perform the duties and responsibilities contemplated under this Agreement for a period of more than 180 days during any consecutive 12-month period due to physical or mental incapacity or impairment.

(b)Termination by the Company for Cause.  The Company may terminate Executive’s employment hereunder for Cause upon written notice (as described below) to Executive referring to this Section 5(b). For purposes of this Agreement, the term “Cause” shall mean (i) gross neglect by the Executive of the Executive’s duties hereunder; (ii) conviction (including conviction on a nolo contendere plea) of the Executive of any felony; (iii) conviction (including conviction on a nolo contendere plea) of the Executive of any non-felony crime or offense involving the property of the Company or any of its subsidiaries or affiliates or evidencing moral turpitude; (iv) willful misconduct by the Executive in connection with the performance of the Executive’s duties hereunder; (v) intentional breach by the Executive of any material provision of this Agreement; or (vi) any other willful or grossly negligent conduct on the part of the Executive which would make the Executive’s continued employment by the Company materially prejudicial to the best interests of the Company.  Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and

3

until there shall have been delivered to Executive written notice setting forth in reasonable detail the facts and circumstances claimed as the basis for termination of Executive’s employment and, with respect to clauses (i), (iv), (v), and (vi) hereof, Executive shall have failed to cure such Cause within thirty days after receiving such notice.

(c)Termination by the Company Without Cause.  The Company may terminate Executive’s employment hereunder at any time, without Cause, for any reason or no reason.

(d)Termination by Executive for Good Reason.  Executive may terminate Executive’s employment hereunder for Good Reason (as defined below) if the Company has failed to cure the event or condition constituting Good Reason within thirty days after the Executive gives written notice to the Company setting forth in reasonable detail the facts and circumstances allegedly constituting Good Reason and specifically referencing this Section 5(d). For purposes of this Agreement, “Good Reason” shall mean that without Executive’s prior written consent, any of the following shall have occurred within ninety days prior to the delivery of such notice:  (i) a material change, adverse to Executive, in Executive’s positions, titles, offices, or duties as provided in Section 2, except, in such case, in connection with the termination of Executive’s employment for Cause, Total Disability or death; (ii) an assignment of any significant duties to Executive which are inconsistent with Executive’s positions or offices held under Section 2; (iii) a decrease in Base Salary or material decrease in Executive’s incentive compensation opportunities provided under this Agreement; and (iv) any other failure by the Company to perform any material obligation under, or breach by the Company of any material provision of, this Agreement.

(e)Termination by Executive for Other than Good Reason.  Executive may terminate Executive’s employment hereunder for any reason or no reason upon 30 days’ prior written notice to the Company referring to this Section 5(e); provided, however, that a termination of Executive’s employment by reason of death, Total Disability or Good Reason shall not constitute a termination by Executive for other than Good Reason pursuant to this Section 5(e).

6.Compensation Following Termination Prior to the End of the Term.  In the event that Executive’s employment hereunder is terminated prior to the end of the Term, Executive shall be entitled only to the following compensation and benefits:

(a)Standard Termination Payments.  Following termination of Executive’s employment for any reason, in addition to such other amounts provided for pursuant to Sections 6(b) through (e) below, the Company shall pay the following amounts, and make the following other benefits available, to Executive (collectively, the “Standard Termination Payments”):

(i)Any accrued but unpaid Base Salary (as determined pursuant to Section 3(a)) for services rendered to the date of termination payable within 30 days of termination;

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(ii)All vested nonforfeitable amounts owing or accrued at the date of termination under benefit plans, programs, and arrangements set forth or referred to in Section 4 hereof in which Executive theretofore participated will be paid under the terms and conditions of such plans, programs, and arrangements (and agreements and documents thereunder);

(iii)Except as provided in Section 7.6, all stock options and other stock awards will be governed by the terms of the plans and programs under which the options or other awards were granted; and

(iv)Reasonable business expenses and disbursements incurred by Executive prior to such termination will be reimbursed in accordance with Section 4(a).

(b)Termination by Reason of Death.  In the event that Executive’s employment is terminated prior to the expiration of the Term by reason of Executive’s death, the Company shall pay the following amounts, and make the following other benefits available, to Executive:

(i)The Standard Termination Payments (as defined in Section 6(a));

(ii)A lump sum payment equal to 6 months of Executive’s Base Salary, payable within 30 days of termination;

(iii)If Incentive Compensation for the prior fiscal year has not been paid, a lump sum payment of any Incentive Compensation Executive would have received for such year but for such termination of employment, payable as and when such Incentive Compensation would have been payable under Section 3(b); and

(iv)In lieu of any Incentive Compensation for the year in which such termination of employment occurs, payment of an amount equal to (A) the highest annual Incentive Compensation paid to Executive in respect of the two most recent fiscal years of the Company or, if Executive was not employed during the prior fiscal year, Executive’s Target Bonus for the then-current fiscal year, but in any event not more than 100% of Executive’s Base Salary as of the date of termination, multiplied by (B) a fraction the numerator of which is the number of days Executive was employed in the year of termination and the denominator of which is the total number of days in the year of termination, payable as and when such Incentive Compensation would otherwise have been payable under Section 3(b).

(c)Termination by Reason of Total Disability.  In the event that Executive’s employment is terminated prior to the expiration of the Term by reason of Total Disability pursuant to Section 5(a), the Company shall pay the following amounts, and make the following other benefits available, to Executive:

(i)The Standard Termination Payments (as defined in Section 6(a));

5

(ii)Continued payment of the Base Salary for a period of twelve (12) months following termination, provided such amounts shall be reduced by any disability payments provided to Executive as a result of any disability plan sponsored by the Company or its affiliates providing benefits to Executive, if the payments to Executive hereunder and thereunder would exceed one hundred percent (100%) of Executive’s Base Salary;

(iii)If Incentive Compensation for the prior fiscal year has not been paid, a lump sum payment of any Incentive Compensation Executive would have received for such year but for such termination of employment, payable as and when such Incentive Compensation would have been payable under Section 3(b);

(iv)In lieu of any Incentive Compensation for the year in which such termination of employment occurs, payment of an amount equal to (A) the highest annual Incentive Compensation paid to Executive in respect of the two most recent fiscal years of the Company or, if Executive was not employed during the prior fiscal year, Executive’s Target Bonus for the then-current fiscal year, but in any event not more than 100% of Executive’s Base Salary as of the date of termination, multiplied by (B) a fraction the numerator of which is the number of days Executive was employed in the year of termination and the denominator of which is the total number of days in the year of termination, payable as and when such Incentive Compensation would otherwise have been payable under Section 3(b).

(v)If Executive elects to continue medical coverage under the Company’s group health plan in accordance with COBRA, the Company shall pay the monthly premiums for such coverage for a period of eighteen (18) months.

(d)Termination by the Company for Cause; Termination by Executive for Other than Good Reason.  In the event that Executive’s employment is terminated by the Company for Cause pursuant to Section 5(b) or by Executive for other than Good Reason pursuant to Section 5(e), the Executive shall be entitled to receive the Standard Termination Payments (as defined in Section 6(a)).

(e)Termination by the Company Without Cause or by Executive For Good Reason.  In the event that Executive’s employment is terminated by the Company without Cause pursuant to Section 5(c) or by Executive for Good Reason pursuant to Section 5(d), the Company shall pay the following amounts, and make the following other benefits available, to Executive:

(i)The Standard Termination Payments (as defined in Section 6(a));

(ii)The Base Salary for a period of twenty-four (24) months following termination in equal installments in accordance with the Company’s standard payroll practices, provided, however, that no payments shall be made until six months after the termination of Executive’s employment with the Company and the first payment

6

shall be equal to the aggregate amount that would have been paid during such six-month period;

(iii)Payment of an amount equal to the Severance Bonus Basis (as defined below) multiplied by two (the “Severance Bonus Pay”).  For purposes of this Agreement, “Severance Bonus Basis” shall mean (A) the greater of (I) Executive’s Incentive Compensation for the prior fiscal year and (II) Executive’s Incentive Compensation for the most recent fiscal year ending more than twelve months prior to such termination of employment, or (B) if Executive was not employed during the prior fiscal year, Executive’s Target Bonus for the then-current fiscal year; provided, however, that the Severance Bonus Basis shall not in any event be more than 100% of Executive’s Base Salary as of the date of termination.  The Severance Bonus Pay shall be payable in equal installments in accordance with the Company’s standard payroll practices, provided, however, that no payments shall be made until six months after the termination of Executive’s employment with the Company and the first payment shall be equal to the aggregate amount that would have been paid during such six-month period;

(iv)If Incentive Compensation for the prior fiscal year has not been paid, a lump sum payment of any Incentive Compensation Executive would have received for such year but for such termination of employment, payable as and when such Incentive Compensation would have been payable under Section 3(b);

(v)In lieu of any Incentive Compensation for the year in which such termination of employment occurs, payment of an amount equal to (A) the highest annual Incentive Compensation paid to Executive in respect of the two most recent fiscal years of the Company or, if Executive was not employed during the prior fiscal year, Executive’s Target Bonus for the then-current fiscal year, but in any event not more than 100% of Executive’s Base Salary as of the date of termination, multiplied by (B) a fraction the numerator of which is the number of days Executive was employed in the year of termination and the denominator of which is the total number of days in the year of termination, payable as and when such Incentive Compensation would otherwise have been payable under Section 3(b).

(vi)If Executive elects to continue medical coverage under the Company’s group health plan in accordance with COBRA, the Company shall pay the monthly premiums for such coverage for a period of eighteen (18) months.

Notwithstanding the foregoing, if a reduction in Base Salary or other level of compensation or benefit was a basis for Executive’s termination for Good Reason, the Base Salary or other level of compensation in effect before such reduction shall be used to calculate payments or benefits under this Section 6(e).

(f)Termination Upon or Subsequent to the Expiration of the Term.  In the event that Executive’s employment is terminated upon or subsequent to the expiration of the Term, the Executive shall be entitled to receive the Standard Termination Payments (as defined in Section 6(a)) plus any Incentive Compensation Executive would have received for such year but for such termination of employment,

7

payable as and when such Incentive Compensation would have been payable under Section 3(b), provided that if Executive’s employment is terminated upon or subsequent to the expiration of the Term following the Company giving notice pursuant to Section 1 electing not to further extend the Term, the Executive shall be entitled to receive the payments and benefits payable pursuant to Section 6(e) following a Termination by the Company Without Cause.

(g)No Obligation to Mitigate.  The Executive shall have no obligation to mitigate or offset damages pursuant to this Section 6.

(h)No Other Benefits or Compensation.  Except as may be provided under this Agreement, under any other written agreement between Executive and the Company, or under the terms of any plan or policy applicable to Executive, Executive shall have no right to receive any other compensation from the Company, or to participate in any other plan, arrangement or benefit provided by the Company, with respect to any future period after such termination or resignation.

(i)Release of Employment Claims; Compliance with Section 7.  Executive agrees, as a condition to receipt of any termination payments and benefits provided for in Section 6 (other than the Standard Termination Payments), that Executive will execute a general release agreement, in a form reasonably satisfactory to the Company, releasing any and all claims arising out of Executive’s employment (other than enforcement of this Agreement) and Executive will not in the future seek employment at the Company.  The Company’s obligation to make any termination payments and benefits provided for in Section 6 (other than the Standard Termination Payments) shall immediately cease if Executive willfully and materially breaches Section 7.1(a) (other than the first sentence thereof), 7.1(b), 7.2 (other than the first and penultimate sentences of 7.2(a)), 7.3, 7.4, or 7.8.

(j)Change in Control.

(i)In the event Executive’s employment is terminated by the Company without Cause pursuant to Section 5(c) or by Executive for Good Reason pursuant to Section 5(d) and the termination occurs upon or within two years immediately following a “Change in Control,” in lieu of receiving the payments described in 6(e), and subject to the provisions of Section 6(i), Executive shall receive a lump sum payment equal to the sum of:

(A)Three times the Base Salary; and

(B)Three times the Severance Bonus Basis (as defined in Section 6(e)(iii));

(C)In lieu of any Incentive Compensation for the year in which such termination of employment occurs, payment of an amount equal to (A) the highest annual Incentive Compensation paid to Executive in respect of the two most recent fiscal years of the

8

Company or, if Executive was not employed during the prior fiscal year, Executive’s Target Bonus for the then-current fiscal year, but in any event not more than 100% of Executive’s Base Salary as of the date of termination, multiplied by (B) a fraction the numerator of which is the number of days Executive was employed in the year of termination and the denominator of which is the total number of days in the year of termination; and

(D)If Incentive Compensation for the prior fiscal year has not been paid, a lump sum payment of any Incentive Compensation Executive would have received for such year but for such termination of employment.

In addition, if Executive elects to continue medical coverage under the Company’s group health plan in accordance with COBRA, the Company shall pay the monthly premiums for such coverage for a period of eighteen (18) months following such termination.

(ii)In the event Executive’s employment is terminated by the Company without Cause pursuant to Section 5(c) or by Executive for Good Reason pursuant to Section 5(d) and the termination occurs “In Anticipation of a Change in Control” and the “Change in Control” actually occurs within six (6) months after the termination, unless the relevant facts and circumstances clearly demonstrate that the possibility that such “Change in Control” would occur was remote as of the date of such termination, Executive shall receive a lump sum payment equal to the sum of the amounts in Section 6(k)(i), less any amounts already paid to Executive pursuant to Section 6(e).

(iii)For purposes of this Section 6(k), a “Change in Control” shall be deemed to have occurred if:

(A)Any “person” as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as used in sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13 (d) of the Exchange Act but excluding SGC and any subsidiary or affiliate and any employee benefit plan sponsored or maintained by SGC or any subsidiary or affiliate (including any trustee of such plan acting as trustee), directly or indirectly, becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of securities of SGC representing at least 40% of the combined voting power of SGC’s then-outstanding securities;

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(B)The stockholders of SGC approve a merger, consolidation, recapitalization, or reorganization of SGC, or a reverse stock split of any class of voting securities of SGC, or the consummation of any such transaction if stockholder approval is not obtained, other than any such transaction which would result in at least 60% of the total voting power represented by the voting securities of SGC or the surviving entity outstanding immediately after such transaction being beneficially owned by persons who together beneficially owned at least 80% of the combined voting power of the voting securities of SGC outstanding immediately prior to such transaction; provided that, for purposes of this Section 6(k)(iii)(B), such continuity of ownership (and preservation of relative voting power) shall be deemed to be satisfied if the failure to meet such 60% threshold is due solely to the acquisition of voting securities by an employee benefit plan of SGC or such surviving entity or of any subsidiary of SGC or such surviving entity;

(C)The stockholders of SGC or the Company, as applicable, approve a plan of complete liquidation of SGC or the Company, an agreement for the sale or disposition by SGC or the Company of all or substantially all of its assets (or any transaction having a similar effect), or SGC sells all or substantially all of the stock of the Company to any person or entity other than an affiliate of SGC; or

(D)During any period of two consecutive years, individuals who at the beginning of such period constitute the Board, together with any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in Subsection (A), (B), or (C) hereof) whose election by the Board of Directors of SGC or nomination for election by SGC’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (the “Continuing Directors”), cease for any reason to constitute at least a majority of the Board of Directors of SGC.

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(iv)For purposes of this Section 6(k), a termination shall be considered “In Anticipation of a Change in Control” if the termination occurs after:

(A)the issuance of a proxy statement by SGC with respect to an election of directors for which there is proposed one or more directors who are not recommended by the Board of Directors of SGC or its nominating committee, where the election of such proposed director or directors would result in a “Change in Control”; or

(B)the announcement by any person of an intention to take actions which might reasonably result in a “Change in Control,”

and the “Change in Control” actually occurs within six (6) months after the termination unless the relevant facts and circumstances clearly demonstrate that the possibility that a “Change in Control” would occur was remote as of the date of such termination.

(v)Notwithstanding the foregoing provisions of this Section 6(k), if any payment or right accruing under this Agreement (without application of this subsection), either alone or together with other payments or rights accruing to Executive from the Company or its affiliate (the “Total Payments”) would constitute a “parachute payment” as defined in Section 280G of the Internal Revenue Code (the “Code”) and regulations thereunder, such payment or right shall be reduced to the largest amount or greatest right that will result in no portion of the amount payable or right accruing under this Agreement being subject to an excise tax under Section 4999 of the Code or being disallowed as a deduction under Section 280G of the Code, provided that Executive may elect by written notice to the Company that no such reduction occur if after reduction for any applicable federal excise tax imposed by Section 4999 of the Code and federal income tax imposed by the Code, the Total Payments accruing to Executive would be greater than the amount of the Total Payments as reduced (if applicable) pursuant to this subsection after reduction for federal income taxes.  Executive shall cooperate in good faith with the Company in providing the necessary information for making a determination of the applicability of Section 280G.

7.Noncompetition; Nonsolicitation; Nondisclosure; etc.

7.1Noncompetition; Nonsolicitation.

(a)Executive acknowledges the highly competitive nature of the Company’s business and that access to the Company’s confidential records and proprietary information renders Executive special and unique within the Company’s industry. In consideration of the amounts that may hereafter be paid to Executive pursuant to this Agreement (including, without limitation, Sections 3, 4 and 6), Executive agrees that during the Term (including any extensions thereof) and during the Covered

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Time (as defined in Section 7.1(e)), Executive, alone or with others, will not, directly or indirectly, engage (as owner, investor, partner, stockholder, employer, employee, consultant, advisor, director or otherwise) in any Competing Business. For purposes of this Section 7, “Competing Business” shall mean any business (a) involving design and production of instant lottery tickets and the management of related marketing and distribution programs, manufacture, sale, operation or management of on-line lottery systems (Lotto-type games), development and commercialization of licensed and other proprietary game entertainment for all lottery product channels, provision of wagering (whether pari-mutuel (pooled) or otherwise) and venue management services for racetracks and off-track betting facilities; production of prepaid cellular phone cards, or any other business in which the Company or its affiliates is then or was within the previous twenty-four months engaged or in which the Company, to Executive’s knowledge, intends to engage during the Term or the Covered Time (as defined below); (b) in which the Executive was engaged or involved (whether in an executive or supervisory capacity or otherwise) on behalf of the Company or with respect to which the Executive has obtained proprietary or confidential information; (c) anywhere in the United States or in any other geographic area in which such business was conducted or planned to be conducted by the Company.

(b)In further consideration of the amounts that may hereafter be paid to Executive pursuant to this Agreement (including, without limitation, Sections 3, 4 and 6), Executive agrees that during the Term (including any extensions thereof) and during the Covered Time Executive shall not, directly or indirectly, without the Company’s approval, (i) solicit or attempt to induce any of the employees, agents, consultants or representatives of the Company to terminate his, her, or its relationship with the Company; (ii) solicit or attempt to induce any of the employees, agents, consultants or representatives of the Company to become employees, agents, consultants or representatives of any other person or entity; (iii) solicit or attempt to induce any customer, vendor or distributor of the Company to curtail or cancel any business with the Company; or (iv) hire any person who, to Executive’s actual knowledge, is, or was within 180 days prior to such hiring, an employee of the Company.

(c)Executive agrees that upon the earlier of Executive’s (i) negotiating during the Term (including any extensions thereof) with any Competitor (as defined below) concerning the possible employment of Executive by the Competitor, (ii) responding (other than for the purpose of declining) during the Term (including any extensions thereof) to an offer of employment from a Competitor, or (iii) becoming employed by a Competitor during the Term or the Covered Time, Executive will provide copies of Section 7 of this Agreement to the Competitor and promptly provide reasonable notice to the Company of such circumstances.  Executive further agrees that the Company may provide notice to a Competitor of Executive’s obligations under this Agreement. For purposes of this Agreement, “Competitor” shall mean any entity (other than the Company, its subsidiaries or affiliates) that engages, directly or indirectly, in the United States in any Competing Business.

(d)Executive understands that the restrictions in this Section 7.1 may limit Executive’s ability to earn a livelihood in a business similar to the business of the

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Company but nevertheless agrees and acknowledges that the consideration provided under this Agreement (including, without limitation, Sections 3, 4 and 6) is sufficient to justify such restrictions. In consideration thereof and in light of Executive’s education, skills and abilities, Executive agrees that Executive will not assert in any forum that such restrictions prevent Executive from earning a living or otherwise should be held void or unenforceable.

(e)For purposes of this Section 7.1, “Covered Time” shall mean the period beginning on the date of termination of Executive’s employment (the “Date of Termination”) and ending twelve months after the Date of Termination.

7.2Proprietary Information; Inventions.

(a)Executive acknowledges that during the course of Executive’s employment with the Company Executive necessarily will have (and during any employment by the Company prior to the Term has had) access to and make use of proprietary information and confidential records of the Company. Executive covenants that Executive shall not during the Term or at any time thereafter, directly or indirectly, use for Executive’s own purpose or for the benefit of any person or entity other than the Company, nor otherwise disclose to any individual or entity, any such proprietary information, unless such disclosure has been authorized in writing by the Company or is otherwise required by law. The term “proprietary information” means: (a) the software products, programs, applications, and processes utilized by the Company; (b) the name and/or address of any customer or vendor of the Company or any information concerning the transactions or relations of any customer or vendor of the Company with the Company; (c) any information concerning any product, technology, or procedure employed by the Company but not generally known to its customers or vendors or competitors, or under development by or being tested by the Company but not at the time offered generally to customers or vendors; (d) any information relating to the Company’s computer software, computer systems, pricing or marketing methods, sales margins, cost of goods, cost of material, capital structure, operating results, borrowing arrangements or business plans; (e) any information identified as confidential or proprietary in any line of business engaged in by the Company; (f) any information that, to Executive’s actual knowledge, the Company ordinarily maintains as confidential or proprietary; (g) any business plans, budgets, advertising or marketing plans; (h) any information contained in any of the Company’s written or oral policies and procedures or manuals; (i) any information belonging to customers, vendors or any other person or entity which the Company, to Executive’s actual knowledge, has agreed to hold in confidence; and (j) all written, graphic, electronic data and other material containing any of the foregoing. Executive acknowledges that information that is not novel or copyrighted or patented may nonetheless be proprietary information. The term “proprietary information” shall not include information generally known or available to the public or generally known or available to the industry or information that becomes available to Executive on an unrestricted, non-confidential basis from a source other than the Company or its directors, officers, employees, or agents (without breach of any obligation of confidentiality of which Executive has actual knowledge at the time of the relevant disclosure by Executive).

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(b)Executive agrees that all processes, technologies and inventions (collectively, “Inventions”), including new contributions, improvements, ideas and discoveries, whether patentable or not, conceived, developed, invented or made by Executive during the Term (and during any employment by the Company prior to the Term) shall belong to the Company, provided that such Inventions grew out of the Executive’s work with the Company or any of its subsidiaries or affiliates, are related in any manner to the business (commercial or experimental) of the Company or any of its subsidiaries or affiliates or are conceived or made on the Company’s time or with the use of the Company’s facilities or materials. Executive shall further:  (a) promptly disclose such Inventions to the Company; (b) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign countries; (c) sign all papers necessary to carry out the foregoing; and (d) give testimony in support of the Executive’s inventorship. If any Invention is described in a patent application or is disclosed to third parties, directly or indirectly, by the Executive within two years after the termination of the Executive’s employment by the Company, it is to be presumed that the Invention was conceived or made during the Term. Executive agrees that Executive will not assert any rights to any Invention as having been made or acquired by Executive prior to the date of this Agreement, except for Inventions, if any, disclosed in Exhibit A to this Agreement.

7.3Confidentiality and Surrender of Records.  Executive shall not during the Term or at any time thereafter (irrespective of the circumstances under which Executive’s employment by the Company terminates), except as required by law, directly or indirectly publish, make known or in any fashion disclose any confidential records to, or permit any inspection or copying of confidential records by, any individual or entity other than in the course of such individual’s or entity’s employment or retention by the Company, nor shall Executive retain, and will deliver promptly to the Company, any of the same following termination of Executive’s employment hereunder for any reason or upon request by the Company. For purposes hereof, “confidential records” means those portions of correspondence, memoranda, files, manuals, books, lists, financial, operating or marketing records, magnetic tape, or electronic or other media or equipment of any kind in Executive’s possession or under Executive’s control or accessible to Executive which contain any proprietary information. All confidential records shall be and remain the sole property of the Company during the Term and thereafter.

7.4Nondisparagement.  Executive shall not, during the Term and thereafter, disparage in any material respect the Company, any affiliate of the Company, any of their respective businesses, any of their respective officers, directors or employees, or the reputation of any of the foregoing persons or entities. Likewise, the Company agrees that it shall use its best efforts to ensure that the directors, the Chief Executive Officer, and senior officers of the Company who report to the Chief Executive Officer or the Chief Operating Officer do not disparage in any material respect the Executive.  Notwithstanding the foregoing, nothing in this Agreement shall preclude Executive or the Company representatives from making truthful statements that are required by applicable law, regulation or legal process.

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7.5No Other Obligations.  Executive represents that Executive is not precluded or limited in Executive’s ability to undertake or perform the duties described herein by any contract, agreement or restrictive covenant. Executive covenants that Executive shall not employ the trade secrets or proprietary information of any other person in connection with Executive’s employment by the Company without such person’s authorization.

7.6Forfeiture of Outstanding Options.  The provisions of Section 6 notwithstanding, if a court of competent jurisdiction or an arbitrator determines that Executive willfully and materially failed to comply with any restrictive covenant under Section 7.1(a) (other than the first sentence thereof), 7.1(b), 7.2 (other than the first sentence of 7.2(a)), 7.3, 7.4, or 7.8, all options (whether granted prior to, contemporaneous with, or subsequent to this Agreement) to purchase Common Stock granted by the Company and held by Executive or a transferee of Executive shall be immediately forfeited and cancelled; provided however, that Executive’s ability to exercise such options shall be suspended during the pendency of such court or arbitration proceeding.

7.7Enforcement.  Executive acknowledges and agrees that, by virtue of Executive’s position, services and access to and use of confidential records and proprietary information, any violation by Executive of any of the undertakings contained in this Section 7 would cause the Company immediate, substantial and irreparable injury for which it has no adequate remedy at law. Accordingly, Executive agrees and consents to the entry of an injunction or other equitable relief by a court of competent jurisdiction restraining any violation or threatened violation of any undertaking contained in this Section 7. Executive waives posting of any bond otherwise necessary to secure such injunction or other equitable relief. Rights and remedies provided for in this Section 7 are cumulative and shall be in addition to rights and remedies otherwise available to the parties hereunder or under any other agreement or applicable law.

7.8Cooperation with Regard to Litigation.  Executive agrees to cooperate reasonably with the Company, during the Term and thereafter (including following Executive’s termination of employment for any reason), by being available to testify on behalf of the Company in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative. In addition, except to the extent that Executive has or intends to assert in good faith an interest or position adverse to or inconsistent with the interest or position of the Company, Executive agrees to cooperate reasonably with the Company, during the Term and thereafter (including following Executive’s termination of employment for any reason), to assist the Company in any such action, suit, or proceeding by providing information and meeting and consulting with the Board or its representatives or counsel, or representatives or counsel to the Company, in each case, as reasonably requested by the Company. The Company agrees to pay (or reimburse, if already paid by Executive) all reasonable expenses actually incurred in connection with Executive’s cooperation and assistance including, without limitation, reasonable fees and disbursements of counsel, if any, chosen by Executive if Executive reasonably determines in good faith, on the advice of counsel, that the Company’s counsel may not ethically represent Executive in connection with such action, suit or proceeding due to

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actual or potential conflicts of interests.  If the amount of time required for Executive to provide such cooperation exceeds three days during any calendar year, then the Company shall pay Executive $3,750 per day that Executive spends at least four hours providing such assistance.

7.9Survival.  The provisions of this Section 7 shall survive the termination of the Term and any termination or expiration of this Agreement.

7.10 Company.  For purposes of this Section 7, references to the “Company” shall include both the Company and each subsidiary and/or affiliate of the Company.

8.Indemnification.  During the Term of this Agreement and all periods after the expiration of this Agreement or termination of Executive’s employment for any reason, the Company shall indemnify Executive to the full extent permitted under the Company’s Certificate of Incorporation or By-Laws and pursuant to any other agreements or policies in effect from time to time. To the extent permitted under the Company’s Certificate of Incorporation and By-Laws and applicable law, the Company shall advance expenses for which indemnification may be claimed as such expenses are incurred, subject to any requirement that Executive provide an undertaking to repay such advances if it is ultimately determined that Executive is not entitled to indemnification; provided, however, that any determination required to be made with respect to whether Executive’s conduct complies with the standards required to be met as a condition of indemnification or advancement of expenses under applicable law and the Company’s Certificate of Incorporation, By-Laws, or other agreement, shall be made by independent counsel mutually acceptable to Executive and the Company (except to the extent otherwise required by law). Any provision contained herein notwithstanding, this Agreement shall not limit or reduce, and the Company hereby agrees to provide to Executive, any and all rights to indemnification Executive would otherwise have, to the full extent permitted under applicable law. In addition, the Company will maintain directors’ and officers’ liability insurance in effect and covering acts and omissions of Executive. For purposes of this Section 8, references to the “Company” shall include both the Company and each of its subsidiaries and/or affiliate for which Executive has acted, acts or will in the future act in any capacity. The provisions of this Section 8 shall survive the termination of the Term and any termination or expiration of this Agreement.

9.Notices.  Whenever under this Agreement it becomes necessary to give notice, such notice shall be in writing, signed by the party or parties giving or making the same, and shall be served on the person or persons for whom it is intended or who should be advised or notified, by Federal Express or other similar overnight service or by certified or registered mail, return receipt requested, postage prepaid and addressed to such party at the address set forth below or at such other address as may be designated by such party by like notice:

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To the Company:

Scientific Games Corporation

750 Lexington Avenue

New York, NY  10022

Attention: General Counsel

with a copy to:

Kramer Levin Naftalis & Frankel LLP

1177 Avenue of the Americas

New York, NY  10036

Attention:  Howard Rothman, Esq.

To Executive:

Michael Chambrello

504 Mount Vernon Road

Plantsville, CT  06479

with a copy to:

Outten & Golden

3 Park Avenue, 29th Floor

New York, NY  10016

Attention:  Wayne Outten, Esq.

10.Assignability; Binding Effect.  Neither this Agreement nor the rights or obligations hereunder of the parties hereto shall be transferable or assignable by Executive, except in accordance with the laws of descent and distribution and as specified below. The Company may assign this Agreement and the Company’s rights and obligations hereunder, and shall assign this Agreement and such rights and obligations, to any Successor (as hereinafter defined) which, by operation of law or otherwise, continues to carry on substantially the business of the Company (or a business unit of the Company for which Executive provided services) prior to the event of succession, and the Company shall, as a condition of the succession, require such Successor to agree in writing to assume the Company’s obligations and be bound by this Agreement. For purposes of this Agreement, “Successor” shall mean any person that succeeds to, or has the practical ability to control, the Company’s business directly or indirectly, by merger or consolidation, by purchase or ownership of voting securities of the Company or all or substantially all of its assets or those relating to a particular business unit of the Company to which Executive provides services, or otherwise. The Company may also assign this Agreement and the Company’s rights and obligations hereunder to any affiliate of the Company, provided that upon any such assignment the Company shall remain liable for the obligations to Executive hereunder. This Agreement shall be binding upon and inure to the benefit of Executive, Executive’s heirs, executors, administrators, and

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beneficiaries, and shall be binding upon and inure to the benefit of the Company and its successors and assigns.

11.Complete Understanding; Amendment; Waiver.  This Agreement constitutes the complete understanding between the parties with respect to the employment of Executive and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof, and no statement, representation, warranty or covenant has been made by either party with respect thereto except as expressly set forth herein. Exhibit B lists all existing agreements and understandings which shall be terminated as of the Effective Date. This Agreement shall not be modified, amended or terminated except by a written instrument signed by each of the parties. Any waiver of any term or provision hereof, or of the application of any such term or provision to any circumstances, shall be in writing signed by the party charged with giving such waiver. Waiver by either party of any breach hereunder by the other party shall not operate as a waiver of any other breach, whether similar to or different from the breach waived. No delay by either party in the exercise of any rights or remedies shall operate as a waiver thereof, and no single or partial exercise by either party of any such right or remedy shall preclude other or further exercise thereof.

12.Severability.  If any provision of this Agreement or the application of any such provision to any person or circumstances shall be determined by any court of competent jurisdiction to be invalid or unenforceable to any extent, the remainder of this Agreement, or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid or unenforceable, shall not be affected thereby, and each provision hereof shall be enforced to the fullest extent permitted by law. If any provision of this Agreement, or any part thereof, is held to be invalid or unenforceable because of the scope or duration of or the area covered by such provision, the parties hereto agree that the court making such determination shall reduce the scope, duration and/or area of such provision (and shall substitute appropriate provisions for any such invalid or unenforceable provisions) in order to make such provision enforceable to the fullest extent permitted by law and/or shall delete specific words and phrases, and such modified provision shall then be enforceable and shall be enforced. The parties hereto recognize that if, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants contained in this Agreement, then that invalid or unenforceable covenant contained in this Agreement shall be deemed eliminated from these provisions to the extent necessary to permit the remaining separate covenants to be enforced. In the event that any court determines that the time period or the area, or both, are unreasonable and that any of the covenants is to that extent invalid or unenforceable, the parties hereto agree that such covenants will remain in full force and effect, first, for the greatest time period, and second, in the greatest geographical area that would not render them unenforceable.

13.Survivability.  The provisions of this Agreement which by their terms call for performance subsequent to termination of Executive’s employment hereunder, or of this Agreement, shall so survive such termination, whether or not such provisions expressly state that they shall so survive.

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14.Governing Law; Arbitration.

(a)Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be wholly performed within that State, without regard to its conflict of laws provisions.

(b)Arbitration.  Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in New York, New York by three arbitrators in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association in effect at the time of submission to arbitration; provided, however, that the Company shall be entitled to commence an action in any court of competent jurisdiction to enforce any provision of Section 7.  The prevailing party in any proceeding arising under or in connection with this Agreement shall be awarded its costs and reasonable attorneys’ fees incurred in connection with such proceeding. Judgment may be entered on the arbitrators’ award in any court having jurisdiction. For purposes of entering such judgment or seeking enforcement of Section 7, the Company and Executive hereby consent to the jurisdiction of any or all of the following courts: (i) the United States District Court for the Southern District of New York; (ii) any of the courts of the State of New York; or (iii) any other court having jurisdiction. The Company and Executive hereby waive, to the fullest extent permitted by applicable law, any objection which either may now or hereafter have to such jurisdiction and any defense of inconvenient forum. The Company and Executive hereby agree that a judgment upon an award rendered by the arbitrators may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.

15.Titles and Captions.  All paragraph titles or captions in this Agreement are for convenience only and in no way define, limit, extend or describe the scope or intent of any provision hereof.

[Remainder of Page Intentionally Left Blank]

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IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement on                       , to be deemed effective as of the date first above written.

SCIENTIFIC GAMES CORPORATION

By:

Name:

Title:

EXECUTIVE

Name: Michael Chambrello

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EXHIBIT A

LIST OF PRE-EXISTING INVENTIONS OF EXECUTIVE

None.

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EXHIBIT B

LIST OF PRE-EXISTING AGREEMENTS
BETWEEN EXECUTIVE AND THE COMPANY

None.

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EXHIBIT C

FORM OF STOCK OPTION AGREEMENT

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EXHIBIT D

ADDITIONAL BENEFITS AND/OR PERQUISITES

SERP.  During the term, Executive shall be entitled to participate in the Scientific Games Corporation Supplemental Executive Retirement Plan, as amended and restated effective November 1, 2003 (“SERP”) in accordance with its terms, subject to the Company’s right to at any time amend or terminate any such plan or program, provided that Executive’s benefits under the SERP shall be no greater than $500,000 per annum.

Housing Allowance.  Executive shall receive a monthly housing allowance of $5,000 for expenses relating to apartments used by Executive in New York City and Atlanta, Georgia, to be paid as directed by Executive.

Commutation Allowance.  Executive shall be paid a monthly commutation allowance of $2,500.

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EX-10.2

EXHIBIT 10.2

SCIENTIFIC GAMES CORPORATION

INDUCEMENT STOCK OPTION GRANT AGREEMENT

FOR MICHAEL CHAMBRELLO

THIS AGREEMENT, made as of the 1st day of July, 2005, between SCIENTIFIC GAMES CORPORATION (the “Company”) and MICHAELCHAMBRELLO(the “Participant”).

WHEREAS, the Compensation Committee (the “Committee”) administers the Company’s equity incentive compensation programs and is authorized to grant stock options and other awards, including to newly hired employees; and

WHEREAS, the Participant was granted the option evidenced by this Agreement as of the date hereof as an inducement to the Participant to become an employee of the Company as of that date;

NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto hereby agree as follows.

1.Grant of Options. Pursuant to, and subject to, the terms and conditions set forth herein, the Participant is hereby granted an option (the “Option”) to purchase 1,000,000 shares of the Company’s Class A Common Stock, $.01 par value per share (the “Common Stock”).  The Option does not constitute an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code of 1986.

2.Grant Date.  The Grant Date of the Option granted hereby is July 1, 2005.

3.Definitions.  For purposes of this Agreement, the following terms shall be defined as set forth below:

(a)“Beneficiary” means the person, persons, trust, or trusts which may be designated by the Participant in a written beneficiary designation filed with the Committee to receive the benefits specified hereunder upon the Participant’s death. If, upon the Participant’s death, there is no designated Beneficiary or surviving designated Beneficiary, then the term Beneficiary means the person, persons, trust, or trusts entitled by will or the laws of descent and distribution to receive such benefits.

(b)“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, including rules thereunder and successor provisions and rules thereto.

(c)“Fair Market Value” means the fair market value of Common Stock, as determined by the Committee or under procedures established by the Committee. Unless otherwise determined by the Committee, the Fair Market Value of Common Stock shall be the average of the high and low sales prices of the Common Stock on a given date or, if there are no sales on that date, on the latest previous date on which there were sales, reported for composite transactions in securities listed on the principal trading market on which the Common Stock is then listed.

4.Vesting Dates. This Option shall vest and become exercisable in the following cumulative installments:

Number of Shares	Dates
333,333	July 1, 2006
333,333	July 1, 2007
333,334	July 1, 2008 (the “Last Vesting Date”)

5.Exercise Price. The exercise price per share of each share with respect to which this Option is granted is $27.01, which is not less than the Fair Market Value of a share of Common Stock on the Grant Date.

6.Expiration Date; Effect of Termination of Employment.

(a)Subject to the provisions of this Agreement and the Employment Agreement between the Participant and the Company, dated as of July 1, 2005 (the “Employment Agreement”), the Option granted hereby shall expire on July 1,

2015 (the “Expiration Date”).

(b)Subject to the provisions of this Agreement and the Employment Agreement, in the event the employment of the Participant is terminated:

(i)for any reason other than for “Cause” (as defined in the Employment Agreement) or due to the Participant’s death or permanent disability (as defined in the Company’s long-term disability plan), the Option, to the extent that it was exercisable immediately prior to the time of termination of employment, shall remain exercisable until the earlier of (x) the close of business on the 90th day after termination of employment and (y) the Expiration Date, and the Option, to the extent that it was not exercisable immediately prior to the time of termination of employment, shall expire at the close of business on the date of termination of employment;

(ii)due to the Participant’s death or disability, the Option, to the extent that it was exercisable immediately prior to death or termination of employment, shall remain exercisable by the Participant or the Participant’s executor or administrator or Beneficiary (as the case may be) until the earlier of (x) the first anniversary of the Participant’s death or termination of employment and (y) the Expiration Date, and the Option, to the extent that it was not exercisable immediately prior to death or termination of employment, shall expire at the close of business on the date of death or termination of employment; or

(iii)for “Cause,” the Option shall expire at the commencement of business on the date of termination of employment.

7.Method of Exercise. The Option shall be exercisable in whole or in part by delivering notice to the Company’s principal office in the manner specified by the Company. Payment for shares of Common Stock purchased upon the exercise of the Option shall be made on the effective date of such exercise either: (i) in cash, by certified check, bank cashier’s check or wire transfer; or (ii) in such other form as shall be acceptable to the Committee. Certificates for shares of Common Stock purchased upon the exercise of an Option shall be issued in the name of the Participant or his Beneficiary, as the case may be, and delivered to the Participant or his Beneficiary, as the case may be, as soon as practicable following the effective date of exercise of the Option.

8.Administration.

(a)Authority of the Committee.  The Committee has full and final authority, in each case subject to and consistent with the provisions of this Agreement, to administer the Option, determine all matters relating to the Option, construe and interpret the Option and this Agreement and correct defects, supply omissions, or reconcile inconsistencies therein, and to make all other decisions and determinations as the Committee may deem necessary or advisable for the administration of the Option.  The Committee shall retain full power and discretion to accelerate, waive or modify, at any time, any term or condition of the Option that is not mandatory under this Agreement.

(b)Limitation of Liability.  The Committee and each member thereof shall be entitled to, in good faith, rely or act upon any report or other information furnished to him or her by any executive officer, other officer or employee of the Company or a subsidiary, the Company’s independent auditors, consultants, or any other agents assisting in the administration of the Option or this Agreement.  Members of the Committee and any officer or employee of the Company or a subsidiary acting at the direction or on behalf of the Committee shall not be personally liable for any action or determination taken or made in good faith with respect to the Option, and shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action or determination.

9.General Provisions.

(a)Compliance with Legal and Other Requirements.  The Company may, to the extent deemed necessary or advisable by the Committee, postpone the issuance or delivery of Common Stock or payment of other benefits under the Option until completion of such registration or qualification of such Common Stock or other required action under any federal or state law, rule, or regulation, listing or other required action with respect to any stock exchange or automated quotation system upon which the Common Stock or other securities of the Company are listed or quoted, or compliance with any other obligation of the Company, as the Committee may consider appropriate, and may require the Participant to make such representations, furnish such information and comply with or be subject to such other conditions as the Company may consider appropriate in connection with the issuance or delivery of Common Stock or payment of other benefits in compliance with applicable laws, rules, and regulations, listing requirements, or other obligations.

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(b)Transferability.  The Option may not be pledged, hypothecated or otherwise encumbered or subject to any lien, obligation or liability of the Participant to any party, or assigned or transferred by the Participant otherwise than by will or the laws of descent and distribution, and the Option shall be exercised during the lifetime of the Participant only by the Participant or, if the Participant is incapacitated, by his guardian or legal representative. In the event that the Option is exercised by the Participant’s guardian or legal representative, the exercise of the Option shall not be effective unless and until the Company has received evidence satisfactory to it as to the authority of such guardian or legal representative. A Beneficiary or other person claiming any rights under the Agreement from or through the Participant shall be subject to all terms and conditions of this Agreement except as otherwise determined by the Committee, and to any additional terms and conditions deemed necessary or appropriate by the Committee.

(c)Adjustments.  In the event that any dividend or other distribution (whether in the form of cash, Common Stock, or other property), recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, liquidation, dissolution or other similar corporate transaction or event affects the Common Stock such that an adjustment is determined by the Committee to be appropriate hereunder then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of shares of Common Stock or other securities subject to or deliverable in respect of the outstanding Option and (ii) the exercise price, grant price or purchase price relating to the Option, and/or make provision for payment of cash or other property in respect of the Option.

(d)Limitation on Rights Conferred.  Neither this Agreement nor any action taken hereunder shall be construed as (i) giving the Participant the right to continue in the employ or service of the Company or a subsidiary, (ii) interfering in any way with the right of the Company or a subsidiary to terminate the Participant’s employment or service at any time, (iii) giving the Participant any claim to be granted any award under any option or benefit Plan or to be treated uniformly with other participants and employees, or (iv) conferring on the Participant any of the rights of a stockholder of the Company unless and until the Participant is duly issued or transferred shares of Common Stock in accordance with the terms of the Option.

(e)Fractional Shares.  No fractional shares of Common Stock shall be issued or delivered pursuant to the Option.  The Committee shall determine whether cash or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.

10.Taxes. The Company and any subsidiary is authorized to withhold from the Option, any payment relating to the Option, including from a distribution of Common Stock, or any payroll or other payment to the Participant, amounts of withholding and other taxes due or potentially payable in connection with the Option, and to take such other action as the Committee may deem advisable to enable the Company and the Participant to satisfy obligations for the payment of withholding taxes and other tax obligations relating to the Option.  This authority shall include authority to withhold or receive Common Stock or other property and to make cash payments in respect thereof in satisfaction of a Participant’s tax obligations, either on a mandatory or elective basis in the discretion of the Committee.

11.Securities Matters.  The exercise of the Option granted hereby shall be effective only at such time as counsel to the Company shall have determined that the issuance and delivery of shares of Common Stock pursuant to such exercise is in compliance with all applicable laws, regulations of governmental authority and requirements of any securities exchange on which shares of Common Stock are traded. The Committee may, in its sole discretion, defer the effectiveness of any exercise of the Option in order to allow the issuance of shares of Common Stock pursuant thereto to be made pursuant to registration or an exemption from registration or other methods for compliance available under federal or state securities laws. The Committee shall inform the Participant in writing of its decision to defer the effectiveness of the exercise of the Option. During the period that the effectiveness of the exercise of the Option has been deferred, the Participant may, by written notice, withdraw such exercise and obtain the refund of any amount paid with respect thereto.

12.Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any party hereto upon any breach or default of any party under this Agreement, shall impair any such right, power or remedy of such party, nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring, nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring.  Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in a writing signed by such party and shall be effective only to the extent specifically set forth in such writing.

13.Integration. This Agreement, and the other documents referred to herein or delivered pursuant hereto which form a part hereof, and the Employment Agreement contain the entire understanding of the parties with respect to its subject matter.  There are no restrictions, agreements, promises, representations, warranties, covenants or undertakings with

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respect to the subject matter hereof other than those expressly set forth herein and in the Employment Agreement.  This Agreement and the Employment Agreement supersede all prior agreements and understandings between the parties with respect to its subject matter.

14.Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware, without regard to the provisions governing conflict of laws.

15.Participant Acknowledgment.  The Participant hereby acknowledges that all decisions, determinations and interpretations of the Committee in respect of this Agreement and the Option shall be final and conclusive.

IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its duly authorized officer, and the Participant has signed this Agreement on his own behalf, thereby representing that he has carefully read and understands this Agreement, as of the day and year first written above.

SCIENTIFIC GAMES CORPORATION
By:
	Martin E. Schloss
	Vice President, General Counsel and Secretary
PARTICIPANT:
MichaelChambrello

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EX-10.3

Exhibit 10.3

EMPLOYMENT AND SEVERANCE BENEFITS AGREEMENT

[The following Employment and Severance Benefits Agreement between Scientific Games International, Inc. and Steven M. Saferin was entered into as of November 19, 2002, effective January 17, 2003.  Mr. Saferin became an executive officer of Scientific Games Corporation on June 14, 2005 and, at such date, had a base salary rate of $350,000 per annum, which has been increased over time from the initial rate of $250,000 stated in the Agreement.]

This Agreement is made and entered into as of 19^th day of November, 2002, by  and between SCIENTIFIC GAMES INTERNATIONAL, INC., a Delaware corporation (hereinafter called the “Company”), and STEVEN M. SAFERIN (hereinafter called “Executive”).

W I T N E S S E T H:

WHEREAS, at the date of consummation of the tender offer (“Commencement Date”) contemplated under that certain Agreement and Plan of Merger dated November 19, 2002 (the “Merger Agreement”), by and among the Company, Blue Suede Acquisition Co. and MDI Entertainment, Inc. (“MDI”), MDI shall become a majority-owned direct subsidiary of the Company;

WHEREAS, at the effective date of the Merger contemplated under the Merger Agreement, MDI shall become a wholly owned direct subsidiary of the Company; and

WHEREAS, the Company desires to obtain, and the Executive desires to provide, the services of Executive to the Company beginning at the Commencement Date.

NOW, THEREFORE, in consideration of the mutual covenants and obligations hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows:

1.EMPLOYMENT; TERM.

As of the Commencement Date, upon the terms and conditions set forth herein, the Company hereby employs Executive and Executive hereby accepts employment with the Company in the position of Senior Vice President-MDI for the Company and President and Chief Executive Officer of MDI.  The term of Executive’s employment is subject to termination by the Company at any time without cause upon sixty (60) days’ written notice, subject to Executive’s right to receive the applicable payments and other severance benefits from and to the extent described herein.  Except as otherwise provided herein, Executive may terminate his employment with the Company upon sixty (60) days’ prior written notice or such shorter period as the Company may allow.  If Executive terminates this Agreement voluntarily, except pursuant to Section 9, he shall not be entitled to any severance pay or severance benefits, but shall be entitled to all other consideration, compensation and reimbursement otherwise due to him under the terms of this Agreement but only through the date of such termination.  Subject to Section 24 hereof, the term of this Agreement shall be from the Commencement Date through December 31, 2005.  The parties agree that a failure to renew this Agreement for a term beyond December 31, 2005 by either party shall not act as or constitute an early termination of this Agreement, with or without cause, or a constructive termination by either party and shall not give rise to any rights to severance or other compensation hereunder. The Company’s obligations to provide Executive with remuneration, salary or any other benefits described herein shall cease, in the case of a

non-renewal, as of December 31, 2005, except as to (i) payments due hereunder at December 31, 2005 or becoming due thereafter for periods ending on or before December 31, 2005, and (ii) payments that may become due pursuant to the indemnification obligations under Section 5(a) of this Agreement.

2.DUTIES.

(a)In his position as Senior Vice President-MDI and, so long as the Company maintains the separate corporate existence of MDI (or otherwise maintains MDI as a distinct operating division), in his position as President and Chief Executive Officer of MDI, Executive shall manage and oversee the day-to-day operations of MDI, subject to the direction of the Board of Directors of the Company and MDI, respectively.  In his position as Senior Vice President-MDI for the Company, Executive shall also have direct reporting authority to the Chief Executive Officer of Scientific Games Corporation, the parent of the Company (“Parent”) and the Company.  Executive also shall report to such officer of the Company as shall be designated by the Chief Executive Officer of the Company.  During the term of this Agreement, but only so long as the Company maintains the separate corporate existence of MDI, the Company shall nominate and cause Executive to be elected as a member of the Board of Directors of MDI.  Executive shall participate directly in and be responsible for the timely creation, modification and amendment of all operating and financial plans, budgets and projections, and marketing strategies relating to MDI or its business (collectively, the “Business Plans”), subject to the review and approval of such Business Plans by the Board of Directors of MDI and the Chairman of the Company.

(b)During the term of this Agreement, Executive also shall perform such other duties and shall have such other responsibilities with the Company and MDI as are normally associated with the positions set forth in Section 1 and as otherwise may be reasonably assigned to the Executive from time to time by or upon the authority of the Board of Directors of MDI or the Chairman of the Company.

(c)Executive acknowledges that, as an officer of the Company, he may, from time to time, be assigned other duties and responsibilities by the Company consistent with his seniority and position as an officer of the Company so long as such duties and responsibilities would not, without Executive’s consent which shall not unreasonably be refused, (i) materially increase Executive’s workload without a commensurate reduction in his workload with respect to the business operations of MDI, and (ii) materially and significantly change his overall responsibilities with the Company.  Subject to the foregoing and Section 9(a), Executive’s functions, duties and responsibilities are subject to reasonable changes as the Company may in good faith determine.

(d)In addition to his other express duties set forth in this Agreement, throughout the term of his employment under this Agreement, Executive shall, in all capacities: (i) diligently perform such duties and fulfill such responsibilities as are normally associated with such positions and with such other positions as otherwise may be assigned to the Executive from time to time in accordance with this Agreement; (ii) serve the Company and MDI to the best of his ability in the capacities described hereunder or assumed pursuant hereto and devote all of his

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business effort, time, attention, energy, and skill to the duties of employment hereunder (subject to (A) the policies of the Company with respect to vacations and absences due to illness, government services, sabbaticals, etc. and (B) Executive’s right to make and supervise investments on a personal or family basis (including trusts, funds and investment entities in which Executive or members of his family have an interest) so long as these activities do not result in any material deviation from Executive’s duty to devote his full business effort, time, attention, energy and skill to his duties or materially interfere with the performance of his duties hereunder or violate any noncompetition or other fiduciary obligations Executive has to Company or any of its Affiliates); (iii) faithfully, loyally, and industriously perform his duties; (iv) diligently follow and implement all lawful management policies and decisions of the Company, MDI, Parent and any other Affiliates of Company that are made known to him or are otherwise generally disseminated to employees or executive officers of the Company; (v) comply with all of the policies, procedures and regulations of the Company, MDI, and Parent that are generally applicable to and generally disseminated to employees, executive officers or management of the Company, as well as all applicable law and regulations; (vi) comply with all reasonable and lawful requests and instructions made by the Company, MDI or Parent; (vii) provide such explanations, information and assistance as the Company, MDI or Parent may reasonably require; and (viii) travel for business purposes to the extent reasonably necessary or appropriate in the performance of his duties.  Executive acknowledges that he has received and familiarized himself with the policies and procedures of the Company and its Parent as set forth in the Standard Operating Procedures Manual for the Company (the “Company Manual”).

(e)Executive acknowledges that Parent has determined that, as of the Commencement Date, Executive will not be an “Executive Officer” of Parent for purposes of Section 16(b) of the Securities Exchange Act.  Executive further acknowledges that such determination is subject to review from time to time by Parent and that such status is subject to change either as a result of changes in Parent, the Company or MDI, or in the Executive’s duties with any of them or in applicable rules and regulations.

3.SITUS OF EXECUTIVE AND MDI.

Executive shall render his services hereunder initially from offices located in Fort Worth, Texas until his relocation to Atlanta, Georgia or its proximate vicinity (including Alpharetta, Georgia).  Until the operations of MDI are relocated from Fort Worth, Texas to the Company’s headquarters in Alpharetta, Georgia, MDI shall provide such resources as are reasonably necessary to support Executive in performing his duties consistent with his residence and MDI’s operations in Fort Worth, Texas.  Executive acknowledges that MDI and its operations shall be relocated to the Company’s headquarters in Alpharetta, Georgia as promptly as is commercially practicable.  Upon the relocation of Executive’s primary residence or the operations of MDI to Atlanta, Georgia or proximate vicinity (including Alpharetta, Georgia), Executive shall be provided with an executive office at the Company’s headquarters in Alpharetta, Georgia.

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4.COMPENSATION.

As compensation to the Executive for performance of the services required hereunder and as consideration for his execution and delivery of this Agreement, the Company shall pay or provide, as applicable, to him or cause to be paid or provided, as applicable, to him, and the Executive agrees to accept, the following salary and other compensation and benefits:

(a)Salary.  The Executive shall receive an initial base salary, payable in accordance with the Company’s normal procedures, which need not be made more frequently than in equal monthly installments, at the rate of $250,000 per annum, hereinafter referred to as “Base Salary”).  The Executive’s Base Salary shall be reviewed periodically and may be increased by the Company from time to time and the Executive’s Base Salary shall be increased each year by an amount equal to the percentage increases in base salary generally provided to the executive officers of the Company.

(b)Benefit Plans.  The Executive shall be offered and shall be permitted to participate in disability, medical, dental, hospitalization, health, life and accident insurance plans upon terms and conditions and at coverage levels and coverage scope (including spouses and dependents) substantially equivalent, taken as a whole, to those from time to time then generally available to executive officers of the Company.  The Executive also shall be entitled during the term of his employment under this Agreement and thereafter to participate in any retirement, savings or other plans of the Company (or any similar plans of Parent in which executives of the Company generally are eligible to participate) upon terms and conditions substantially equivalent, taken as a whole, from time to time generally available to all executive officers of the Company.

(c)Bonus Plans.  Executive shall be eligible for calendar year 2003 and thereafter to be considered for annual performance bonuses of up to 50% of his Base Salary based on the attainment of performance objectives established by the Board of Directors of the Company and Executive’s contributions to the attainment of those objectives.  Such bonuses, if any, shall be awarded and payable in accordance with the Company’s management incentive plans applicable to executive officers of the Company.  The criteria for such bonus shall be based upon substantially the same criteria as annual cash bonuses generally awarded to executive officers of the Company, which may take into account intrinsic differences in job duties and responsibilities.  Any actual bonus award shall be in such amount and payable in such manner, and otherwise be on such terms, as are determined by the Board of Directors of the Company in good faith.  The Company agrees that after the Closing of the Offer, Executive is entitled to receive a bonus of $125,000 for services provided to MDI in 2002 prior to, and in connection with, the Offer.  The Company agrees that such bonus shall be payable by the Company following the Closing of the Offer, contingent upon the Closing of the Offer.  Such bonus shall be inclusive of all bonuses Executive shall be entitled to receive, with respect to 2002, from MDI or the Company and its Affiliates.  Executive agrees such bonus will be reduced by the amount of any other bonus from either MDI or the Company paid after the date of this Agreement in or with respect to the year 2002. Executive represents and warrants that he has not and will not receive any other bonus from MDI for 2002.

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(d)Reimbursement of Expenses.  The Company shall pay, or reimburse Executive in accordance with the Company’s prevailing corporate policy, for reasonable business travel, continuing education, and other expenses incurred by Executive in performing his duties under this Agreement in accordance with and subject to corporate policy and applicable Internal Revenue Service regulations.

(e)Stock Options.  Executive shall be eligible to be considered for an annual grant of stock options entitling the Executive to purchase shares of Parent common stock.  The criteria for such awards shall be based upon substantially the same criteria as option grants generally awarded to executive officers of Parent, which may take into account intrinsic differences in job duties and responsibilities.

(f)Transportation Allowance.  The Executive shall be entitled to a transportation allowance on the basis of substantially the same criteria as is generally employed with respect to executive officers of the Company.  The Company shall furnish an annual transportation allowance in an amount equal to that furnished to executive officers of the Company, which amount is $16,536 as of the date of this Agreement.  Such initial transportation allowance shall be increased annually in the same amount of increase as is generally granted to all executive officers of the Company.  The transportation allowance shall be payable in equal monthly installments and pro rated for any partial year.

(g)Vacation.  Executive shall be entitled to vacation time and to days off for religious and personal reasons in accordance with the Company’s policy for its executive officers based on credited years of service as set forth in the Company Manual, after giving effect to Executive’s employment with MDI as provided in Section 3(i);

(h)Relocation Assistance.  In connection with Executive’s relocation of his residence to Atlanta, Georgia or the proximate vicinity, including Alpharetta, Georgia (“Atlanta Metropolitan Area”), the Company will, for such relocation, reimburse Executive for the following, which Executive acknowledges may be taxable to Executive:

(i)usual and customary expenses incurred if Executive sells his home himself or through a broker; however, reimbursement for the broker’s commission (if Executive utilizes the services of a broker) may not exceed six (6) percent of the sales proceeds;

(ii)difference between the cost basis of Executive’s current Fort Worth, Texas home (including documented improvements) and the actual sales price of such home not to exceed $50,000; provided, however, that this subsection (ii) shall only apply with respect to a sale made within one (1) year of the Commencement Date and so long as Executive has used his reasonable best efforts to sell his home at prevailing market prices;

(iii)reasonable expenses incurred in moving furniture, normal household goods and personal belongings to the new location and incidental expenses related to the move;

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(iv)reasonable expenses (including travel and hotel) while house-hunting, including four trips to the new location with Executive’s spouse and children;

(v)reasonable and customary closing costs incurred in buying Executive’s new home; and

(vi)reasonable temporary living expenses incurred while awaiting occupancy in Executive’s new dwelling.

(i)Tenure Considerations.  For purposes of determining Executive’s rights and entitlements under any provision of this Section 4, his tenure with and service to MDI or its subsidiaries during all periods prior to the Commencement Date shall be given full consideration and weight from and to the extent generally permitted by the terms of any benefit plan and applicable law; provided, however, that no such tenure or service need be recognized with respect to any employee benefit plan if it would result in any disqualification of any employee benefit plan, result in any determination that any employee benefit plan is “top heavy” or result in any other material adverse effect on any employee benefit plan or the participants therein.

(j)Stock Options.  The Company will recommend to the Compensation Committee of Parent that Executive be granted, as of the Commencement Date, options to acquire 100,000 shares of the Class A Common Stock of Parent; such options to be awarded pursuant to a stock option award agreement of Parent containing the same terms as are generally applicable to other executive officers of the Company.

(k)No Additional Compensation for Services in Multiple Capacities.  The remuneration and benefits set forth in this Section 4 shall be the only compensation payable to Executive with respect to his employment hereunder, and Executive shall not be entitled to receive any compensation in addition to that set forth in this Section 4 for any services rendered by him in any capacity to the Company or any Affiliate of the Company unless agreed to in writing by the Company or such Affiliate of the Company.  The Company may change, or discontinue any such benefits; provided, however, that so long as any benefit is made available to corporate officers or employees generally, such benefit will be extended to Executive on substantially the same terms such benefit is made available to other executive officers or employees as a whole.

5.INDEMNITY, PROFESSIONAL AND OFFICERS LIABILITY INSURANCE.

(a)Indemnity.  The Company agrees to indemnify and save harmless Executive from all liability and costs incurred (including reasonable attorney’s fees and disbursements) as a consequence of claims by third parties, whether or not derivatively on behalf of the Company, resulting from or growing out of (i) Executive’s status as, or as a result of his having been an officer or director of the Company or any Affiliate of Parent, in each case, from and after the date hereof, or (ii) the performance bonds issued prior to the date of this Agreement and set forth on Schedule “A” hereto (the “Performance Bonds”) in each case, to the full extent permitted by law.  Executive represents and warrants that no claim or demand has been asserted or, to his knowledge, has been threatened to be asserted with respect to such Performance Bonds.

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In no event shall the terms, provisions and conditions of the indemnity provided for hereunder be less than the same as those presently provided for under the Articles of Incorporation and By-Laws of the Company to the extent permitted by law.  Said terms, provisions and conditions of indemnity shall remain an independent, contractual obligation of the Company to Executive from and after the date hereof regardless of how the Company might hereafter amend or change its Articles of Incorporation or By-Laws to provide for different terms, conditions and provisions of indemnity for other officers and directors of the Company.  In the event the Company should amend its Articles of Incorporation or By-Laws to provide for different terms, conditions and provisions of indemnity after the effective date hereof, Executive shall be notified in writing of the change.  Executive shall thereafter have thirty (30) days to elect in writing to accept the changed conditions of indemnity as a modification to the Company’s contractual obligation hereunder or to continue under the terms of indemnity as provided for herein.  The Company’s agreement to provide indemnity hereunder shall survive the termination of this contract regardless of the cause of termination. Subject to applicable law, the Company shall advance, promptly as incurred, reasonable fees and disbursements of counsel for Executive in defending Executive against any claims for which the Company would be so required to indemnify Executive; provided (i) Executive shall otherwise comply with such mandatory requirements of Delaware law as may be required for such indemnification, and (ii) Executive shall cause his counsel to cooperate fully in good faith with such requests as the Company or its counsel may reasonably make in order to endeavor to minimize such legal fees, but consistent with providing an adequate defense of Executive.

(b)Officers and Directors’ Liability Insurance.  The Company agrees to provide, or cause Parent to provide, at no expense to the Executive, insurance insuring Executive in his capacity as an officer and/or director of the Company (and/or as an officer or director of any controlled Affiliates of the Parent for which Executive serves in such capacities) as a consequence of claims arising out of Executive’s service as an officer and/or director of the Company and/or as an officer or director of any Affiliates of Parent for which Executive serves in such capacities as may be specified from time to time, in each case, from and after the date of this Agreement in such form and amount substantially equal to that presently maintained by Parent for or covering executive officers of the Company or in such other form and amount as Parent may, from time to time, determine are reasonable and appropriate.  It is expressly agreed that this obligation to provide insurance is not intended to require insurance for, or intended to cover, prior acts at MDI which are the subject of a separate obligation under the terms of the Merger Agreement.

6.TERMINATION OF EMPLOYMENT BY COMPANY FOR CAUSE.

(a)The Company may terminate Executive’s employment at any time for “Cause” (as defined below), but only after a written notice in form and substance, as approved by the Chief Executive Officer of the Company or the Chief Executive Officer of Parent, and materially complying with Section 6(b) below (a “Termination Notice”) shall be delivered to Executive and any applicable cure period prescribed below has passed.

(b)The Termination Notice shall (i) set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment (the

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“Statement of Cause”); and (ii) if applicable, stating that Executive has right to cure and any time period by which such cure must occur.

(c)For purposes of this Agreement:

(i)“Cause” shall mean: (a) plea of guilty or nolo contendere or conviction of Executive of a felony or plea of guilty or nolo contendere or conviction of Executive of any other crime involving moral turpitude (excluding for the avoidance of doubt, minor traffic offenses); (b) the commission of an act or acts of dishonesty on the part of Executive when such acts are intended to result, directly or indirectly, in substantial wrongful gain or substantial wrongful personal enrichment of Executive at the expense of the Company or any of its Affiliates; (c) the engaging by Executive in misconduct materially injurious to the Company or any of its Affiliates with respect to which (1) Executive knew or reasonably should have known that such conduct likely would result in more than de minimis financial injury to the Company or any of its Affiliates, and (2) such conduct actually results in more than de minimis injury to the Company or any of its Affiliates; (d) the engaging by Executive in wrongful conduct which is reasonably likely to have a material adverse effect on an application or existing license issued by any governmental entity or on the likelihood that any Governmental Entity will issue a Gaming Approval to the Parent or any of its Affiliates, where such conduct cannot be halted or cured in a manner which will prevent such material adverse effect; (e) Executive is expressly precluded from having any continuing interest in or relationship with the one or more of the Company or any of its Affiliates as a condition to, or the continued validity of, any Gaming Approval by any Government Entity; (f) intoxication with alcohol or drugs while on the business of the Company or any of its Affiliates during regular business hours, except in cases where alcohol is served at sanctioned office functions, such as holiday parties; (g) a knowing or reckless violation by Executive of any law, rule or regulation in the course of performance of any duties hereunder that would reasonably be deemed to cause harm, or reasonably be deemed likely to cause harm to the Company or the controlled Affiliates of Parent; (h) an act of disloyalty to the Company or any of its Affiliates by Executive which is detrimental to any material extent or in any material manner to the welfare of the Company or any of its Affiliates; (i) the willful failure or refusal of Executive to follow the reasonable directives of the Board of Directors of the Company or MDI or of the Chief Executive Officer of the Company or its Parent; (j) any intentional or reckless conduct by Executive which constitutes a material violation of the policies of the Company or any of its Affiliates that are made known to him; (k) any intentional or reckless conduct by Executive which causes Parent or any of its Affiliates to violate any law, rule or regulation applicable to Parent or any of its Affiliates; (l) if, at any time beginning two (2) years after the Commencement Date, Executive’s material or substantial failure in the reasonable good faith opinion of the Company, to adequately and properly perform Executive’s job duties, following notice and an opportunity to cure if such conduct is reasonably susceptible to cure; (m) any material breach by Executive of any representation or warranty of Executive contained in this Agreement following notice and an opportunity to cure if such conduct is reasonably susceptible to cure.

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(ii)“Gaming Laws” shall mean any Federal, state, local or foreign statute, ordinance, rule, regulation, permit, consent, registration, qualification, finding of suitability, approval, license, judgment, order, decree, injunction or other authorization, including any condition of limitation placed thereon, governing or relating to the current or contemplated lottery and other gaining activities and operations of Company or any of the controlled Affiliates of Parent.

(iii)“Governmental Entity” shall mean a court, arbitral tribunal, administrative agency or commission or other governmental or other regulatory authority or agency.

(d)In the event Executive shall be terminated for Cause, Executive shall be entitled to all salary actually earned prior to termination, pay for all vacation accrued prior to termination, all stock options vested prior to or vesting upon termination, all bonuses vested prior to or vesting upon termination, all restricted shares vested prior to or vesting upon termination and reimbursements of all allowable expenses incurred prior to the termination.  No other severance pay or other consideration would be owing in the event of termination pursuant to this Section 6 for Cause.

7.TERMINATION OF EMPLOYMENT IN THE EVENT OF EXECUTIVE’S DISABILITY.

(a)Executive and the Company agree that Executive may not reasonably be expected to be able to perform his duties and the essential functions of his office if Executive shall have been permanently disabled (as defined below) or absent from his duties with the Company, or not otherwise be performing the duties of his office due to physical or mental illness, in each case, on a full-time basis for one hundred eighty (180) business days in the time periods specified below.  Accordingly, if, in the reasonable, good faith opinion of the Board, as a result of Executive’s incapacity due to physical or mental illness, (i) Executive shall have been permanently disabled, within the meaning of the applicable disability policy then maintained for the benefit of Executives of the Company (and the insurance company shall not have disputed such determination), or (ii) if no such disability policy shall be in force and effect covering Executive, (A) Executive shall have been absent from his duties with the Company on a full time basis for one hundred eighty (180) consecutive business days or for shorter periods aggregating one hundred eighty (180) business days during any 52-week period, and, within thirty (30) days after written notice of intent to terminate is given by the Company, Executive shall not have returned to the full time performance of his duties or (B) Executive shall be entitled to disability retirement benefits under the federal Social Security Act, then Executive’s employment shall be terminated for “Disability.”

(b)If Executive’s employment is terminated for Disability, then Executive shall not be entitled to receive severance benefits under this Agreement and Executive shall be compensated pursuant to the provisions of this Section 7 as follows: (i) Executive’s Base Salary shall continue at the level as provided in Section 4(a) for a period of twelve (12) months from the date of termination and the Company shall pay all vacation benefits accrued to the date of termination; (ii) all disability, life, medical and dental insurance provided by the Company to

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Executive, his spouse and dependents prior to termination shall continue for a period of twelve (12) months from the date of such termination; and (iii) Executive shall also be entitled to retain all stock options vested prior to or vesting upon termination, all unpaid non-performance-based bonuses which are vested prior to or vesting upon termination, together with that pro rata portion of any performance based bonus (whether or not vested) for the then-current fiscal year prorated to date of termination (based upon performance against target through the date of termination for disability), all restricted stock vested prior to or vesting upon termination, reimbursement of all allowable expenses incurred prior to the date of termination and all other benefits vested prior to or vesting upon termination for disability.

(c)Payments of Base Salary under this Section 7 shall be reduced by any disability payments provided Executive as a result of any disability plan sponsored by the Company or its Affiliates providing benefits to Executive, if the payments to Executive hereunder and thereunder would exceed one hundred percent (100%) of Executive’s Base Salary.

(d)Executive’s employment shall not be terminable under this Section 7 if Executive is absent from his duties upon a bona fide leave of absence granted by the Company other than pursuant to physical or mental illness.

8.TERMINATION OF EMPLOYMENT IN THE EVENT OF DEATH DURING EMPLOYMENT.

(a)If Executive dies during the term of this Agreement, the Company shall pay to the last beneficiary designated by the Executive by written notice to the Company or, failing such designation, to Executive’s estate, compensation which would otherwise be payable to Executive pursuant to this Agreement up to the end of the month in which his death occurs.  The compensation payable under this Section 8 also shall include all stock options vested prior to or vesting upon termination, all unpaid non-performance based bonuses which are vested prior to or vesting upon termination, together with the portion of any performance-based bonus (whether or not vested) for the then-current fiscal year prorated to the date of death (based upon performance against target through the date of death), all restricted stock and all other benefits vested prior to or vesting upon termination, reimbursement of all expenses accrued prior to Executive’s death, and all other benefits vested prior to or vesting upon Executive’s death.

(b)The Executive shall have the right to name, from time to time, any one person as beneficiary hereunder or, with the consent of the Board of Directors of the Company, he may make other forms of designation of beneficiary or beneficiaries. The Executive’s designated beneficiary or personal representative, as the case may be, shall accept the payments provided for in this Section 8 in full discharge and release of the Company of and from any further obligations under this Agreement (other than to pay compensation or benefits which accrued prior to the date of such termination).

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9.TERMINATION OF EMPLOYMENT WITHOUT CAUSE OR IN CONNECTION WITH CONSTRUCTIVE TERMINATION.

(a)Should the Company (i) change the office and position Executive holds with the Company, other than to a higher or equivalent office and position to which Executive agrees, such agreement not to be unreasonably withheld, (ii) so long as the Company maintains the separate corporate existence of MDI, (iii) change the office held by Executive with MDI, so long as the Company maintains the separate corporate existence of MDI (or otherwise maintains MDI as a distinct operating division), (iv) so long as the Company maintains the separate corporate existence of MDI, fail to elect Executive to the Board of Directors of MDI, (v) make any reduction in Executive’s Base Salary, (vi) adversely change the methodology (taken as a whole) pursuant to which Executive’s bonus is determined or make any other material adverse change in any of Executive’s employee benefits (other than any such benefit which is immaterial or inconsequential or any change which is required by law), (vii) make such change or changes as would, taken as a whole, result in a material diminution in the functions, duties and responsibilities of Executive’s position as an officer of the Company or, so long as the Company maintains the separate corporate existence of MDI (or otherwise maintains MDI as a distinct operating division), in the functions, duties and responsibilities of Executive’s position as an officer of MDI, or (viii) materially reduce the seniority of the person or persons within the Company to whom Executive reports as of the date hereof (for the avoidance of doubt, recognizing, however, that no such changes shall have occurred as a result of the change in the status of MDI to that of a wholly-owned, direct or indirect subsidiary of Company as a result of the Merger, or, subsequent to the Merger to that of a division of the Company, including, without limitation, for the avoidance of doubt, the reconstitution of the Board of Directors of MDI in a customary or appropriate manner for a subsidiary corporation or the elimination or diminution of those functions, duties or responsibilities associated with various positions at (1) a public company which are assumed by a parent company in a consolidated group of companies, or (2) at a company which becomes a division of another company), or (vi) breach this Agreement in any material respect which is not cured within thirty (30) days after written notice from Executive to the Company (collectively, a “Constructive Termination”), then Executive shall have sixty (60) days from the consummation of the event or period described above to deliver to the Company written notice that his employment has been constructively terminated (a “Constructive Termination Notice”) and his employment hereunder shall then terminate on the 60^th day after such Constructive Termination Notice has been delivered.  Any such Constructive Termination Notice shall automatically constitute Executive’s resignation from all positions with the Company, Parent, and all controlled Affiliates of Parent, whether as an officer, director or employee.

(b)In the event of a Constructive Termination and Executive’s resignation from all positions with the Company and its Affiliates, or any termination of Executive from his position with MDI without Cause (other then in the event of Executive’s resignation, death or disability), the Company shall pay to Executive as severance benefits under this Section 9:

(i)a lump sum on the first regularly scheduled payroll date following the Date of Termination, in an amount equal to the sum of (a) Executive’s full Base Salary through the Date of Termination to the extent such Base Salary has not previously been paid through such date, at the rate in effect at the time written notice of termination is given and (b) any bonus or awards theretofore made to Executive which have not yet been paid to Executive.

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(ii)no later than ninety (90) days following the end of the fiscal year in which the Date of Termination occurs, that pro rata portion of any bonus or award which would have been payable to Executive had Executive remained in employment with the Company during the entire year in which the Date of Termination occurred; and

(A)if such termination without cause or constructive termination occurs after the date of this Agreement, but on or prior to the date of the first (1^st) anniversary thereof, a sum each month for a period of three (3) years after the Date of Termination equal to one-twelfth (1/12^th) of Executive’s Base Salary then in effect;

(B)if such termination without cause or constructive termination occurs after the date of the first (1^st) anniversary of this Agreement, but on or before the date of the second (2nd) anniversary thereof, a sum each month for a period of two (2) years after the Date of Termination, equal to one twelfth of Executive’s Base Salary then in effect; and

(C)if such termination without cause or constructive termination occurs after the date of the second (2nd) anniversary of this Agreement but on or before the date of the third (3rd) anniversary thereof, a sum each month for a period of one (1) year after the Date of Termination, equal to one twelfth of Executive’s Base Salary then in effect.

(c)As a further severance benefit, the Company, at its expense, shall maintain in full force and effect, for the continued benefit of Executive, his spouse and dependents until the earliest of (i) during the applicable period in which severance is being paid under Section 9(b)(iii) (the “Severance Payment Period”), (ii) eighteen months after Executive’s Date of Termination if at such time Executive is uninsurable under the Company’s life, accident, medical and dental insurance plans, or (iii) the date Executive becomes entitled to participate in similar plans, programs or arrangements provided by Executive’s subsequent employer:  all life, accident, medical and dental insurance benefit plans and programs or arrangements in which Executive was entitled to participate immediately prior to the Date of Termination provided that Executive’s continued participation is possible under the general terms and provisions of such plans and programs.  In the event that Executive’s participation in such plan or program is legally or contractually barred, the Company shall use commercially reasonable efforts to provide Executive for a period of not less than the Severance Period (eighteen (18) months if the reason Executive’s participation is barred is that Executive is uninsurable) following Executive’s Date of Termination, with benefits substantially similar to those which Executive would have been entitled to receive under such plans and programs or, if it is commercially unreasonable for the Company to do so, then the Company will pay to Executive in a lump sum an amount of cash equal to the cost to the Company of previously providing to Executive the benefits provided to Executive under Section 4(b) (but which it is commercially unreasonable for the Company to provide or cause to be provided) for the period specified or if Executive’s benefits can be

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continued by a COBRA election, and Executive makes such election, then the Company shall pay the amount of increased premiums arising as a result of such election.  In no event shall the Company’s liability under this Section 9(c) exceed the sum of applicable COBRA premiums for such benefits plus $25,000.

(d)For the avoidance of doubt, Executive expressly acknowledges and agrees that all amounts payable or distributable under that certain Escrow and Shareholder’s Agreement between Executive and Company and the Escrow Agent thereunder, dated as of an even date herewith, do not constitute compensation or other remuneration to Executive for any purpose under this Agreement.

10.LEGAL FEES; MITIGATION OF DAMAGES; SET OFF.

(a)The Company shall reimburse such costs, legal fees and expenses as may be reasonably incurred by Executive in contesting or disputing any such termination, or in seeking to obtain or enforce any right or benefit provided by this Agreement if Executive is successful in any material respect in connection with enforcing any of Executive’s rights or the Company’s obligations under this Agreement in such dispute.

(b)The amount of any payment by the Company provided for in this Agreement shall be reduced by any compensation earned by Executive as the result of employment by another employer after the Date of Termination through December 31, 2005 or if the term of this Agreement is extended, through the then current expiration date of this Agreement.  The Company and its subsidiaries and Affiliates shall have the right to set off payments owed to Executive under this Agreement against amounts owed or claimed to be owed by the Executive to any of such persons under this Agreement or otherwise, in each case, to the maximum extent permitted by law.

11.SUCCESSORS; BINDING AGREEMENT.

(a)The Company will use commercially reasonable efforts to cause any successor (whether direct or indirect, by purchaser, merger, consolidation or otherwise) to the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place.  Failure of the Company to obtain such agreement shall constitute a material breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if such succession had not occurred, except that for purposes of implementing the foregoing, the date of which any such succession becomes effective shall be deemed the Date of Termination.  As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 11 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law.

(b)This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs,

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distributees, devisees and legatees.  If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive’s devisee, legatee, or other designee or, if there be no such designee, to Executive’s estate.

12.NOTICE.

All notices and other communications to be given or otherwise to be made to any party to this Agreement shall be deemed to be sufficient if contained in a written instrument delivered in person or duly sent by certified mail or by a recognized national courier service, postage or charges prepaid, (a) to the Company at 1500 Bluegrass Lakes Parkway, Alpharetta, Georgia 30004, (b) to the Executive, at the address set forth on the last page of this Agreement, or (c) to such other replacement address as may be designated in writing by the addressee to the addressor, or if no such address is given, or if such address is different from that set forth on the last page of this Agreement, then to the address last given by Executive to Company for payroll purposes.

13.NO OUTSTANDING INDEBTEDNESS; TERMINATION OF OLD EMPLOYMENT AGREEMENT.

(a)Executive shall cause his Second Amended and Restated Employment Agreement between Executive and Media Drop-In Productions, Inc., dated August 8, 1997, as amended by the First Amendment to such agreement dated September 21, 1998 (the “Old Employment Agreement”) to be terminated as of the Commencement Date (i) such that no compensation shall be due to him except for (A) Executive’s accrued but unpaid regular salary up until the Commencement Date, and (B) any reimbursement of accrued but unpaid expenses not to exceed $3,000, and (ii) under terms whereby no additional rights to future payments or other compensation shall inure to Executive, whether as a result of the termination of Executive’s Old Employment Agreement, the Merger Agreement, or the transactions contemplated thereby or hereby, including, without limitation, any rights arising from, or as a result of, a change in control of MDI.  Executive warrants and represents there are no other agreements between Executive and his controlled Affiliates or his immediate family members pursuant to which Executive, such controlled Affiliates or such immediate family members of Executive are entitled to any compensation from MDI or any of its controlled Affiliates, except for that certain Amended and Restated Agreement between Media Drop-In Productions, Inc. and 1010 Productions, Inc. dated as of August 8, 1994, as amended by that certain first amendment thereto dated as of October, 2002.  In particular, Executive shall waive and by this Agreement does hereby further waive all rights to any compensation, including, without limitation, any bonus or other payment under, or in lieu of, the Old Employment Agreement, including, without limitation, the “2% of gross revenue” bonus contemplated thereunder, except (i) for ordinary salary due under the terms of the Old Employment Agreement as of the Commencement Date and documented expenses as of the Commencement Date reasonably incurred and which are consistent with past corporate practice of MDI and its subsidiaries, and (ii) the $125,000 bonus permitted to be paid by MDI pursuant to Section 4(c) hereof.  Executive represents and warrants that, except as contemplated by the preceding sentence, no compensation due to him under his Old Employment Agreement has been deferred or not otherwise paid in the ordinary course of business of MDI.  Executive further

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warrants and represents that no indebtedness is owed by the Company to him or any member of his immediate family under any loan, note or other similar agreements.

(b)To the extent that any applicable state or federal law, rule or regulation confers upon Executive any greater benefit or right than that set forth in this Agreement, such law, rule or regulation shall control in lieu of the provisions hereof relating to such benefit or right.

14.VALIDITY; SEVERABILITY.

The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.  If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom.  Furthermore, in lieu of such illegal, invalid, or unenforceable provision, there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and still be legal, valid or enforceable.  It is acknowledged that any payment which may be made by the Company to Executive under this Agreement is in the nature of employment and/or severance and not a penalty payment.  Should the obligation to make any payment hereunder be held to be void or voidable as a penalty by a final non-appealable judgment, this Agreement shall be deemed to provide an obligation on the part of the Executive to render such consulting services as the Company may reasonably request during the period of and in exchange for such payments as would otherwise have been made by the Company as severance benefits and the parties agree such payments shall constitute reasonable compensation for the value of Executive’s services during such period.

15.CONFIDENTIALITY AND RELATED COVENANTS.

(a)The term “Confidential Information” as used in this Agreement, shall mean and include any information, data and know-how relating to the business of Parent and its controlled Affiliates that is disclosed to Executive by Parent or any of its controlled Affiliates, including the Company, or known by him as a result of his relationship with Parent or any of its controlled Affiliates, including the Company, and not generally within the public domain (whether constituting a trade secret or not and whether in tangible form or intangible form) or which the Parent or its controlled Affiliates, including the Company, have taken reasonable measures to protect, including, without limitation, the following:  business methods, business plans, data bases, computer programs, designs, models, operating procedures, financial information; supply and service information; marketing information; personnel information; customer information; customer product, research and development operations, game, branding, and pricing strategies (including prices, costs, sales and terms), processes, techniques; and all other information with respect to any corporate affairs that Parent or any of its controlled

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Affiliates treat or have agreed to treat as confidential, whether owned, developed or possessed by the Parent or its controlled Affiliates, including the Company.

(b)During the term of his employment under this Agreement, and thereafter during the Severance Payment Period (but, in no event, longer than two (2) years after the term of this Agreement), the Executive will not use or disclose, furnish or make accessible to anyone any Confidential Information, except (i) in the course of performing his duties for the Company or its Affiliates, (ii) with the Company’s express written consent, (iii) to the extent that any such information generally is in the public domain other than as a result of his breach of any of his obligations hereunder, or (iv) where required to be disclosed by court order, subpoena or other government process.

(c)Notwithstanding anything to the contrary contained in this Section 15, in the event that the Executive is required to disclose any Confidential Information by court order or decree or in compliance with the rules and regulations of a governmental agency or in compliance with law, the Executive will provide the Company with prompt notice of such required disclosure so that the Company may seek an appropriate protective order and/or waive the Executive’s compliance with the provisions of this Section 15.  If, in the absence of a protective order or the receipt of a waiver hereunder, the Executive is advised by his counsel that such disclosure is necessary to comply with such court order, decree, rule, regulation or law, he may disclose such information without liability hereunder.

16.DEDUCTIONS AND WITHHOLDING.

The Executive agrees that the Company and/or its subsidiaries or affiliated companies shall withhold from any and all compensation required to be paid to the Executive pursuant to this Agreement all Federal, state, local and/or other taxes which the Company determines are required to be withheld in accordance with applicable statutes and/or regulations from time to time in effect.

17.ENTIRE AGREEMENT; GOVERNING LAW; AMENDMENT; WAIVER.

At the Commencement Date, this Agreement sets forth the entire understanding of the parties and supersedes all prior agreements or understandings, whether written or oral, with respect to the subject matter hereof, with respect to Company and its Affiliates on the one hand and Executive on the other hand, including any prior employment or severance benefit agreement, including the Old Employment Agreement.  No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement.  The validity, interpretation construction and performance of this Agreement shall be governed by the laws of the State of Delaware without giving effect to the conflict of laws principles thereof, and any applicable federal laws of the United States of America.  No terms, conditions, warranties, other than those contained herein, and no amendments or modifications hereto shall be binding unless made in writing and signed by the parties hereto.  No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and the Chief Executive Officer of the Company or such executive of the

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Company as may be specifically designated by the Chief Executive Officer of the Company.  No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

18.BINDING EFFECT.

This Agreement shall extend to and be binding upon and inure to the benefit of the parties hereto, their respective successors and assigns; provided, however, that neither party shall have the right to assign, transfer or convey this Agreement.

19.TITLES.

Titles of the headings herein are used solely for convenience and shall not be used for interpretation or construing any word, section, clause, paragraph, or provision of this Agreement.

20.COUNTERPARTS.

This Agreement may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute one and the same Agreement.  Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement.

21.ENFORCEMENT.

The provisions of this Agreement may be enforced by all legal and equitable remedies available to the parties including specific performance and injunction.  Nothing herein shall be construed as prohibiting either party from pursuing any other remedies available to it, including recovery of damages.

22.CERTAIN DEFINITIONS.

“Affiliates” has the meaning set forth in Rule 12b-2 of the Securities Exchange Act of 1934, as amended.

“Board” means the Board of Directors of the Company.

“Securities Exchange Act” means the Securities Exchange Act of 1934, as amended and the rules and regulation promulgated thereunder.

23.CONSTRUCTION.  Each of the parties has agreed to the use of the particular language of the provisions of this Agreement and all attached exhibits, and any questions of doubtful interpretation shall not be resolved solely by any rule or interpretation against the draftsman but rather in accordance with the fair meaning thereof.

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24.SPECIAL TERMINATION.  Notwithstanding the term set forth in Section 1 of this Agreement, in the event the Merger Agreement terminates for any reason prior to the consummation of the Offer contemplated thereby, this Agreement shall automatically terminate as of the date of the termination of the Merger Agreement (the “Special Termination Date”) without further obligation on the part of any party hereto.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first written above.

SCIENTIFIC GAMES INTERNATIONAL, INC.

By:

Its:

EXECUTIVE

STEVEN M. SAFERIN

(PRINT NAME)

4041 Shadow Drive

Fort Worth, Texas  76116

(ADDRESS FOR NOTICE)

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SCHEDULE A

Loss Payee	Amount of Bond
State of Wisconsin	$	200,000

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EX-10.4

Exhibit 10.4

SCIENTIFIC GAMES CORPORATION

2003 Incentive Compensation Plan

As Amended and Restated

1

SCIENTIFIC GAMES CORPORATION

2003 Incentive Compensation Plan, As Amended and Restated

Section
1.	Purpose
2.	Definitions
3.	Administration
	(a)	Authority of the Committee
	(b)	Manner of Exercise of Committee Authority
	(c)	Limitation of Liability
4.	Shares Available Under the Plan
	(a)	Number of Shares Available for Delivery
	(b)	Share Counting Rules
5.	Eligibility; Per-Person Award Limitations
	(a)	Grants to Eligible Persons
	(b)	Annual Per-Person Award Limitations
6.	Specific Terms of Awards
	(a)	General
	(b)	Options
	(c)	Stock Appreciation Rights
	(d)	Restricted Stock
	(e)	Deferred Stock
	(f)	Bonus Stock and Awards in Lieu of Obligations
	(g)	Dividend Equivalents
	(h)	Other Stock-Based Awards
7.	Performance Awards, Including Annual Incentive Awards
	(a)	Performance Awards Generally
	(b)	Performance Awards Granted to Covered Employees
	(c)	Annual Incentive Awards Granted to Designated Covered Employees
	(d)	Exemptions from Section 16(b) Liability
8.	Certain Provisions Applicable to Awards
	(a)	Stand-Alone, Additional, Tandem, and Substitute Awards
	(b)	Term of Awards
	(c)	Form and Timing of Payment under Awards; Deferrals
	(d)	Additional Award Forfeiture Provisions
	(e)	Exemptions from Section 16(b) Liability

Section
9.	Change in Control
	(a)	Effect of “Change in Control”
	(b)	Definition of “Change in Control”
	(c)	Definition of “Change in Control Price”
10.	General Provisions
	(a)	Compliance with Legal and Other Requirements
	(b)	Limits on Transferability; Beneficiaries
	(c)	Adjustments
	(d)	Taxes
	(e)	Changes to the Plan and Awards
	(f)	Limitation on Rights Conferred under Plan
	(g)	Unfunded Status of Awards; Creation of Trusts
	(h)	Certain Limitations on Awards to Ensure Compliance with Section 409A
	(i)	Certain Limitations Relating to Accounting Treatment of Awards
	(j)	Nonexclusivity of the Plan
	(k)	Payments in the Event of Forfeitures; Fractional Shares
	(l)	Awards to Participants Outside the United States
	(m)	Governing Law
	(n)	Preexisting Plan
	(o)	Plan Effective Date and Termination

SCIENTIFIC GAMES CORPORATION

2003 Incentive Compensation Plan

As Amended and Restated as of June 14, 2005

1.Purpose.  The purpose of this 2003 Incentive Compensation Plan, as amended and restated (the “Plan”), is to assist Scientific Games Corporation, a Delaware corporation (the “Company”), and its subsidiaries in attracting, retaining, motivating and rewarding executives, directors, employees, and other persons who provide services to the Company and/or its subsidiaries, to provide for equitable and competitive compensation opportunities, to encourage long-term service, to recognize individual contributions and reward achievement of Company goals, and promote the creation of long-term value for stockholders by closely aligning the interests of participants with those of stockholders.  The Plan authorizes stock-based and cash-based performance incentives for participants, to encourage such persons to expend their maximum efforts in the creation of stockholder value. The Plan is also intended to qualify certain compensation awarded under the Plan for tax deductibility under Section 162(m) of the Internal Revenue Code to the extent deemed appropriate by the Committee which administers the Plan.

2.Definitions.  For purposes of the Plan, the following terms shall be defined as set forth below, in addition to such terms defined in Section 1 hereof:

(a)“Annual Incentive Award” means a type of Performance Award granted to a Participant under Section 7(c) representing a conditional right to receive cash, Stock or other Awards or payments, as determined by the Committee, based on performance in a performance period of one fiscal year or a portion thereof.

(b)“Award” means any award of an Option, SAR (including Limited SAR), Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of another award, Dividend Equivalent, Other Stock-Based Award, or Performance Award (including an Annual Incentive Award) together with any other right or interest granted to a Participant under the Plan.

(c)“Beneficiary” means the person, persons, trust, or trusts which have been designated by a Participant in his or her most recent written beneficiary designation filed with the Committee to receive the benefits specified under the Plan upon such Participant’s death or to which Awards or other rights are transferred if and to the extent permitted under Section 10(b) hereof.  If, upon a Participant’s death, there is no designated Beneficiary or surviving designated Beneficiary, then the term Beneficiary means person, persons, trust, or trusts entitled by will or the laws of descent and distribution to receive such benefits.

(d)“Beneficial Owner” shall have the meaning ascribed to such term in Rule 13d-3 under the Exchange Act and any successor to such Rule.

(e)“Board” means the Company’s Board of Directors.

(f)“Change in Control” means Change in Control as defined with related terms in Section 9 of the Plan.

(g)“Change in Control Price” means the amount calculated in accordance with Section 9(c) of the Plan.

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(h)“Code” means the Internal Revenue Code of 1986, as amended from time to time, including regulations thereunder and successor provisions and regulations, proposed regulations and other applicable guidance or pronouncement of the Department of the Treasury and Internal Revenue Service.

(i)“Committee” means the Compensation Committee of the Board of Directors, the composition and governance of which is established in the Committee’s Charter as approved from time to time by the Board and other corporate governance documents of the Company.  No action of the Committee shall be void or deemed to be without authority due to the failure of any member, at the time the action was taken, to meet any qualification standard set forth in the Committee Charter or this Plan.

(j)“Covered Employee” means a person designated by the Committee as likely to be a “covered employee,” as defined under Code Section 162(m), with respect to a specified fiscal year or other performance period.

(k)“Deferred Stock” means a conditional right, granted to a Participant under Section 6(e) hereof, to receive Stock, at the end of a specified deferral period.

(l)“Dividend Equivalent” means a conditional right, granted to a Participant under Section 6(g), to receive cash, Stock, other Awards, or other property equal in value to dividends paid with respect to a specified number of shares of Stock, or other periodic payments.

(m)“Effective Date” means the date of approval of the Plan by stockholders of the Company.

(n)“Eligible Person” means each executive officer and other officer or full-time employee of the Company or of any subsidiary, including each such person who may also be a director of the Company, each non-employee director of the Company, each other person who provides substantial services to the Company and/or its subsidiaries and who is designated as eligible by the Committee, and any person who has been offered employment by the Company or a subsidiary or affiliate, provided that such prospective employee may not receive any payment or exercise any right relating to an Award until such person has commenced employment with the Company or a subsidiary.  An employee on leave of absence may be considered as still in the employ of the Company or a subsidiary for purposes of eligibility for participation in the Plan.

(o)“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, including rules thereunder and successor provisions and rules thereto.

(p)“Fair Market Value” means the fair market value of Stock, Awards, or other property as determined in good faith by the Committee or under procedures established by the Committee.  Unless otherwise determined by the Committee, the Fair Market Value of Stock shall be the average of the high and low sales prices of Stock on a given date or, if there are no sales on that date, on the latest previous date on which there were sales, reported for composite transactions in securities listed on the principal trading market on which Stock is then listed.  Fair Market Value relating to the exercise price or grant price of any Non-409A Option or SAR shall conform to requirements under Code Section 409A.

(q)“409A Awards” means Awards that constitute a deferral of compensation under Code Section 409A and regulations thereunder.  “Non-409A Awards” means Awards other than 409A Awards; an Award granted before January 1, 2005 which is eligible for “grandfathering” under Code Section 409A (generally such an Award must be vested before January 1, 2005 in order to be grandfathered) constitutes a Non-409A Award unless the Committee instead designates it as a 409A Award.  Although the Committee retains authority under the Plan to grant Options, SARs and Restricted Stock on terms that will qualify those Awards as 409A Awards, Options, SARs exercisable for Stock, and Restricted Stock will be Non-409A Awards

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(with conforming terms, as provided in Section 10(h)) unless otherwise expressly specified by the Committee.

(r)“Incentive Stock Option” or “ISO” means any Option intended to be and designated as an incentive stock option within the meaning of Code Section 422 or any successor provision thereto that may be granted to Eligible Persons who are employees.

(s)“Limited SAR” means a conditional right granted to a Participant under Section 6(c) hereof.

(t)“Option” means a conditional right, granted to a Participant under Section 6(b) hereof, to purchase Stock or other Awards at a specified price during specified time periods.

(u)“Other Stock-Based Awards” means Awards granted to a Participant under Section 6(h) hereof.

(v)“Participant” means a person who has been granted an Award under the Plan which remains outstanding, including a person who is no longer an Eligible Person.

(w)“Performance Award” means a conditional right, granted to a Participant under Section 7, to receive cash, Stock or other Awards or payments, as determined by the Committee, based upon performance criteria specified by the Committee.

(x)“Preexisting Plan” mean the Company’s 1997 Incentive Compensation Plan, as amended and restated.

(y)“Restricted Stock” means Stock granted to a Participant under Section 6(d) hereof, that is subject to certain restrictions and to a risk of forfeiture.

(z)“Rule 16b-3” means Rule 16b-3, as from time to time in effect and applicable to the Plan and Participants, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act.

(aa)“Stock”  means the Company’s Class A Common Stock, $.01 par value, and such other securities as may be substituted (or resubstituted) for Stock pursuant to Section 10(c) hereof.

(bb)“Stock Appreciation Rights” or “SAR” means a conditional right granted to a Participant under Section 6(c) hereof.

3.Administration.

(a)Authority of the Committee.  Except as otherwise provided below, the Plan shall be administered by the Committee.  The Committee shall have full and final authority, in each case subject to and consistent with the provisions of the Plan, to select Eligible Persons to become Participants, grant Awards, determine the type, number, and other terms and conditions of, and all other matters relating to, Awards, prescribe Award agreements (which need not be identical for each Participant) and rules and regulations for the administration of the Plan, construe and interpret the Plan and Award agreements and correct defects, supply omissions, or reconcile inconsistencies therein, and to make all other decisions and determinations as the Committee may deem necessary or advisable for the administration of the Plan.  The foregoing notwithstanding, the Board shall perform the functions of the Committee for purposes of granting Awards under the Plan to non-employee directors, and may perform any function of the Committee under the Plan

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for any other purpose (subject to Nasdaq Marketplace Rule 4350(c)(3)), including for the purpose of ensuring that transactions under the Plan by Participants who are then subject to Section 16 of the Exchange Act in respect of the Company are exempt under Rule 16b-3.  In any case in which the Board is performing a function of the Committee under the Plan, each reference to the Committee herein shall be deemed to refer to the Board, except where the context otherwise requires.  Any action of the Committee shall be final, conclusive and binding on all persons, including the Company, its subsidiaries, Participants, Beneficiaries, transferees under Section 10(b) hereof, or other persons claiming rights from or through a Participant, and stockholders.

(b)Manner of Exercise of Committee Authority.  The Committee may act through subcommittees, including for purposes of perfecting exemptions under Rule 16b-3 or qualifying Awards under Code Section 162(m) as performance-based compensation, in which case the subcommittee shall be subject to and have authority under the charter applicable to the Committee, and the acts of the subcommittee shall be deemed to be acts of the Committee hereunder. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee.  The Committee may delegate to officers or managers of the Company or any subsidiary or affiliate, or committees thereof, the authority, subject to such terms as the Committee shall determine, to perform such functions, including administrative functions, as the Committee may determine, to the fullest extent permitted under Section 157 and other applicable provisions of the Delaware General Corporation Law.  The Committee may appoint agents to assist it in administering the Plan.

(c)Limitation of Liability.  The Committee and each member thereof, and any person acting pursuant to authority delegated by the Committee, shall be entitled, in good faith, to rely or act upon any report or other information furnished by any executive officer, other officer or employee of the Company or a subsidiary or affiliate, the Company’s independent auditors, consultants or any other agents assisting in the administration of the Plan.  Members of the Committee, any person acting pursuant to authority delegated by the Committee, and any officer or employee of the Company or a subsidiary or affiliate acting at the direction or on behalf of the Committee or a delegee shall not be personally liable for any action or determination taken or made in good faith with respect to the Plan, and shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action or determination.

4.Shares Available Under the Plan.

(a)    Number of Shares Available for Delivery.  Subject to adjustment as provided in Section 10(c) hereof, the total number of shares of Stock reserved and available for delivery in connection with Awards under the Plan shall be 8.5 million plus the number of shares that, under the Preexisting Plan, remain available at the Effective Date or thereafter would become available under the terms of the Preexisting Plan.  Any shares of Stock delivered under the Plan shall consist of authorized and unissued shares or treasury shares.

(b)    Share Counting Rules.  The Committee may adopt reasonable counting procedures to ensure appropriate counting, avoid double counting (as, for example, in the case of tandem or substitute awards) and make adjustments if the number of shares of Stock actually delivered differs from the number of shares previously counted in connection with an Award.  Shares subject to an Award that is canceled, expired, forfeited, settled in cash or terminated or settled without delivery of the full number of shares subject to such Award to the Participant will again be available for Awards, and shares withheld in payment of the exercise price or taxes relating to an Award and shares equal to the number surrendered in payment of any exercise price or taxes relating to an Award shall be deemed to constitute shares not delivered to the Participant and shall be deemed to again be available for Awards under the Plan; provided, however, that shares shall not become available under this Section 4(b) in an event that would constitute a “material amendment” of the

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Plan subject to shareholder approval under Marketplace Rule 4350(i) and other applicable rules of the Nasdaq National Market.  For purposes of determining the number of Shares that become available as of the Effective Date under the Preexisting Plan, the share counting rules of the Preexisting Plan will apply, and the share counting rules of this Plan shall thereafter apply with respect to awards that remain outstanding under the Preexisting Plan and Awards granted under this Plan.  In addition, in the case of any Award granted in substitution for an award of a company or business acquired by the Company or a subsidiary or affiliate, shares issued or issuable in connection with such substitute Award shall not be counted against the number of shares reserved under the Plan, but shall be available under the Plan by virtue of the Company’s assumption of the plan or arrangement of the acquired company or business.  This Section 4(b) shall apply to the number of shares reserved and available for ISOs only to the extent consistent with applicable regulations relating to ISOs under the Code.  Because shares will count against the number reserved in Section 4(a) upon delivery (or later vesting) and subject to the share counting rules under this Section 4(b), the Committee may determine that Awards may be outstanding that relate to more shares than the aggregate remaining available under the Plan, so long as Awards will not result in delivery and vesting of shares in excess of the number then available under the Plan.

5.Eligibility; Per-Person Award Limitations.

(a)Grants to Eligible Persons.  Awards may be granted under the Plan only to Eligible Persons.

(b)Annual Per-Person Award Limitations.  In each calendar year during any part of which the Plan is in effect, an Eligible Person may be granted Awards under each of Sections 6(b), 6(c), 6(d), 6(e), 6(f), 6(g), and 6(h) (including Performance Awards under Section 7 based on Awards authorized by each referenced subsection) relating to a number of shares of Stock up to his or her Annual Limit.  A Participant’s Annual Limit, in any year during any part of which the Participant is then eligible under the Plan, shall equal 1.5 million shares plus the amount of the Participant’s unused Annual Limit relating to the same type of Award as of the close of the previous year, subject to adjustment as provided in Section 10(c).  In the case of a cash-denominated Award for which the limitation set forth in the preceding sentence would not operate as an effective limitation satisfying Treasury Regulation 1.162-27(e)(4) (including a cash Performance Award under Section 7), an Eligible Person may not be granted Awards authorizing the earning during any calendar year of an amount that exceeds the Participant’s Annual Limit, which for this purpose shall equal $3 million plus the amount of the Participant’s unused cash Annual Limit as of the close of the previous year (this limitation is separate and not affected by the number of Awards granted during such calendar year subject to the limitation in the preceding sentence).  For this purpose, (i) ”earning” means satisfying performance conditions so that an amount becomes payable, without regard to whether it is to be paid currently or on a deferred basis or continues to be subject to any service requirement or other non-performance condition, and (ii) a Participant’s Annual Limit is used to the extent a cash amount or number of shares may be potentially earned or paid under an Award, regardless of whether such amount or shares are in fact earned or paid.

6.Specific Terms of Awards.

(a)General.  Awards may be granted on the terms and conditions set forth in this Section 6.  In addition, the Committee may impose on any Award or the exercise thereof, at the date of grant or thereafter (subject to Sections 10(e) and 10(h)), such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including terms requiring forfeiture of Awards in the event of termination of employment by the Participant and terms permitting a Participant to make elections relating to his or her Award.  The Committee shall retain full power and discretion to accelerate, waive or modify, at any time, any term or condition of an Award that is not mandatory under the Plan.  The Committee shall require the payment of lawful consideration for an Award to the extent necessary to satisfy

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the requirements of the Delaware General Corporation Law, and may otherwise require payment of consideration for an Award except as limited by the Plan.

(b)Options.  The Committee is authorized to grant Options to Participants on the following terms and conditions:

(i)Exercise Price.  The exercise price per share of Stock purchasable under an Option shall be determined by the Committee, provided that such exercise price shall be not less than the Fair Market Value of a share of Stock on the date of grant of such Option except as provided under Section 6(f) or 8(a) hereof.  In addition, in connection with a merger, consolidation or reorganization of the Company or any of its subsidiaries, the Committee may grant Options with an exercise price per share less than the market value of the Common Stock on the date of grant if such Options are granted in exchange for, or upon conversion of, options to purchase capital stock of any other entity which is a party to such merger, consolidation or reorganization.

(ii)Time and Method of Exercise.  The Committee shall determine the time or times at which or the circumstances under which an Option may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the methods by which such exercise price may be paid or deemed to be paid, the form of such payment (subject to Section 10(h) and (i)), including, without limitation, cash, Stock (including Stock deliverable upon exercise, if such withholding will not result in additional accounting expense to the Company), other Awards or awards granted under other plans of the Company or any subsidiary or affiliate, or other property (including through broker-assisted “cashless exercise” arrangements, to the extent permitted by applicable law), and the methods by or forms in which Stock will be delivered or deemed to be delivered in satisfaction of Options to Participants (including, to the extent permitted under Code Section 409A, deferred delivery of shares as mandated by the Committee, with such deferred shares subject to any vesting, forfeiture or other terms as the Committee may specify).

(iii)ISOs.  The terms of any ISO granted under the Plan shall comply in all respects with the provisions of Code Section 422.  Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to ISOs (including any SAR in tandem therewith) shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify either the Plan or any ISO under Code Section 422, unless the Participant has first consented to the change that will result in such disqualification.  ISOs may be granted only to employees of the Company or any of its subsidiaries.  To the extent that the aggregate Fair Market Value (determined as of the time the Option is granted) of the Stock with respect to which ISOs granted under this Plan and all other plans of the Company and any subsidiary are first exercisable by any employee during any calendar year shall exceed the maximum limit (currently, $100,000), if any, imposed from time to time under Code Section 422, such Options shall be treated as Options that are not ISOs.

(c)Stock Appreciation Rights.  The Committee is authorized to grant SARs to Participants on the following terms and conditions:

(i)Right to Payment.  A SAR shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of exercise (or, in the case of a “Limited SAR,” the Fair Market Value determined by reference to the Change in Control Price, as defined under Section 9(c) hereof) over (B) the grant price of the SAR as determined by the Committee, which grant price shall be not less than the Fair Market Value of a share of Stock on the date of grant of such SAR..

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(ii)Other Terms.  The Committee shall determine, at the date of grant or thereafter, the term of each SAR, provided that in no event shall the term of an SAR exceed a period of ten years from the date of grant, the time or times at which and the circumstances under which an SAR may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the method of exercise, method of settlement, form of consideration payable in settlement, method by or forms in which Stock will be delivered or deemed to be delivered to Participants, whether or not an SAR shall be in tandem or in combination with any other Award, whether or not the SAR will be a 409A Award or Non-409A Award (cash SARs will in all cases be 409A Awards), and any other terms and conditions of any SAR.  Limited SARs that may only be exercised in connection with a Change in Control, termination of service following a Change in Control, or other event as specified by the Committee may be granted on such terms, not inconsistent with this Section 6(c), as the Committee may determine.  SARs and Limited SARs may be either freestanding or in tandem with other Awards.  The Committee may require that an outstanding Option be exchanged for an SAR exercisable for Stock having vesting, expiration, and other terms substantially the same as the Option, so long as such exchange will not result in additional accounting expense to the Company.

(d)Restricted Stock.  The Committee is authorized to grant Restricted Stock to Participants on the following terms and conditions:

(i)Grant and Restrictions.  Restricted Stock shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service requirements), in such installments or otherwise, as the Committee may determine at the date of grant or thereafter.  Except to the extent restricted under the terms of the Plan and any Award agreement relating to the Restricted Stock, a Participant granted Restricted Stock shall have all of the rights of a stockholder, including the right to vote the Restricted Stock and the right to receive dividends thereon (subject to any mandatory reinvestment or other requirement imposed by the Committee).  During the restricted period applicable to the Restricted Stock, subject to Section 10(b) below, the Restricted Stock may not be sold, transferred, pledged, hypothecated, margined, or otherwise encumbered by the Participant.

(ii)Forfeiture.  Except as otherwise determined by the Committee, upon termination of employment during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company; provided that the Committee may provide, by rule or regulation or in any Award agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock shall be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Restricted Stock.

(iii)Certificates for Stock.  Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine.  If certificates representing Restricted Stock are registered in the name of the Participant, the Committee may require that such certificates bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock, that the Company retain physical possession of the certificates, and/or that the Participant deliver a stock power to the Company, endorsed in blank, relating to the Restricted Stock.

(iv)Dividends and Splits.  As a condition to the grant of an Award of Restricted Stock, the Committee may require that any cash dividends paid on a share of Restricted Stock be automatically reinvested in additional shares of Restricted Stock or applied to the purchase of additional Awards

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under the Plan.  Unless otherwise determined by the Committee, Stock distributed in connection with a Stock split or Stock dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Stock or other property has been distributed.

(e)Deferred Stock.  The Committee is authorized to grant Deferred Stock to Participants, which are rights to receive Stock at the end of a specified deferral period, subject to the following terms and conditions:

(i)    Award and Restrictions.  Settlement of an Award of Deferred Stock shall occur upon expiration of the deferral period specified for such Deferred Stock by the Committee (or, if permitted by the Committee, as elected by the Participant).  In addition, Deferred Stock shall be subject to such restrictions (which may include a risk of forfeiture) as the Committee may impose, if any, which restrictions may lapse at the expiration of the deferral period or at earlier specified times (including based on achievement of performance goals and/or future service requirements), separately or in combination, in installments or otherwise, as the Committee may determine.

(ii)   Forfeiture.  Except as otherwise determined by the Committee, upon termination of employment during the applicable deferral period or portion thereof to which forfeiture conditions apply (as provided in the Award agreement evidencing the Deferred Stock), all Deferred Stock that is at that time subject to deferral (other than a deferral at the election of the Participant) shall be forfeited; provided that the Committee may provide, by rule or regulation or in any Award agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Deferred Stock shall be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Deferred Stock.  Deferred Stock subject to a risk of forfeiture may be called “restricted stock units” or otherwise designated by the Committee.

(iii)    Dividend Equivalents.  Unless otherwise determined by the Committee at date of grant, Dividend Equivalents on the specified number of shares of Stock covered by an Award of Deferred Stock shall be either (A) paid with respect to such Deferred Stock at the dividend payment date in cash or in shares of unrestricted Stock having a Fair Market Value equal to the amount of such dividends, or (B) deferred with respect to such Deferred Stock and the amount or value thereof automatically deemed reinvested in additional Deferred Stock, other Awards or other investment vehicles, as the Committee shall determine or permit the Participant to elect.

(f)Bonus Stock and Awards in Lieu of Obligations.  The Committee is authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu of obligations of the Company or a subsidiary or affiliate to pay cash or deliver other property under the Plan or under other plans or compensatory arrangements, subject to such terms as shall be determined by the Committee.

(g)Dividend Equivalents.  The Committee is authorized to grant Dividend Equivalents to a Participant, entitling the Participant to receive cash, Stock, other Awards, or other property equivalent to all or a portion of the dividends paid with respect to a specified number of shares of Stock.  Dividend Equivalents may be awarded on a free-standing basis or in connection with another Award.  The Committee may provide that Dividend Equivalents shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional Stock, Awards, or other investment vehicles, and subject to restrictions on transferability, risks of forfeiture and such other terms as the Committee may specify.

(h)Other Stock-Based Awards.  The Committee is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that may be denominated or payable in, valued in whole or in

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part by reference to, or otherwise based on, or related to, Stock, as deemed by the Committee to be consistent with the purposes of the Plan, including, without limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable into Stock, purchase rights for Stock, Awards with value and payment contingent upon performance of the Company or any other factors designated by the Committee, and Awards valued by reference to the book value of Stock or the value of securities of or the performance of specified subsidiaries.  The Committee shall determine the terms and conditions of such Awards.  Stock delivered pursuant to an Award in the nature of a purchase right granted under this Section 6(h) shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, cash, Stock, other Awards, or other property, as the Committee shall determine.

7.Performance Awards, Including Annual Incentive Awards

(a)Performance Awards Generally.  The Committee is authorized to grant Performance Awards on the terms and conditions specified in this Section 7.  Performance Awards may be denominated as a cash amount, number of shares of Stock, or specified number of other Awards (or a combination) which may be earned upon achievement or satisfaction of performance conditions specified by the Committee.  In addition, the Committee may specify that any other Award shall constitute a Performance Award by conditioning the right of a Participant to exercise the Award or have it settled, or the timing thereof, upon achievement or satisfaction of such performance conditions as may be specified by the Committee.  The Committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions, and may exercise its discretion to reduce or increase the amounts payable under any Award subject to performance conditions, except as limited under Sections 7(b) and 7(c) in the case of a Performance Award intended to qualify as “performance-based compensation” under Code Section 162(m).

(b)Performance Awards Granted to Covered Employees.  If the Committee determines that a Performance Award to be granted to an Eligible Person who is designated by the Committee as a Covered Employee should qualify as “performance-based compensation” for purposes of Code Section 162(m), the grant, exercise and/or settlement of such Performance Award shall be contingent upon achievement of a preestablished performance goal and other terms set forth in this Section 7(b).

(i)    Performance Goals Generally.  The performance goal for such Performance Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee consistent with this Section 7(b).  The performance goal shall be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations thereunder (including Treasury Regulation 1.162-27 and successor regulations thereto), including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being “substantially uncertain.” The Committee may determine that such Performance Awards shall be granted, exercised and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise and/or settlement of such Performance Awards.  Performance goals may differ for Performance Awards granted to any one Participant or to different Participants.

(ii)   Business Criteria.  One or more of the following business criteria for the Company, on a consolidated basis, and/or for specified subsidiaries or affiliates or other business units or lines of business of the Company shall be used by the Committee in establishing performance goals for such Performance Awards: (1) earnings per share (basic or fully diluted); (2) revenues; (3) earnings, before or after taxes, from operations (generally or specified operations), before or after interest expense, depreciation, amortization, incentives, or extraordinary or special items; (4) cash flow, free cash flow, cash flow return on investment (discounted or otherwise), net cash provided by operations, or cash flow in excess of cost of capital; (5) return on net assets, return on assets, return on investment, return

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on capital, return on equity; (6) economic value created; (7) operating margin or operating expense; (8) net income; (9) Stock price or total stockholder return; and (10) strategic business criteria, consisting of one or more objectives based on meeting specified market penetration, geographic business expansion goals, new products, ventures or facilities, cost targets, internal controls, compliance, customer satisfaction and services, human resources management, supervision of litigation and information technology, and goals relating to acquisitions or divestitures of subsidiaries, affiliates, joint ventures or facilities.  The targeted level or levels of performance with respect to such business criteria may be established at such levels and in such terms as the Committee may determine, in its discretion, including in absolute terms, as a goal relative to performance in prior periods, or as a goal compared to the performance of one or more comparable companies or an index covering multiple companies.

(iii)    Performance Period; Timing for Establishing Performance Goals; Per-Person Limit.  Achievement of performance goals in respect of such Performance Awards shall be measured over a performance period of up to one year or more than one year, as specified by the Committee.  A performance goal shall be established not later than the earlier of (A) 90 days after the beginning of any performance period applicable to such Performance Award or (B) the time 25% of such performance period has elapsed.  In all cases, the maximum Performance Award of any Participant shall be subject to the limitation set forth in Section 5(b).

(iv)  Performance Award Pool.  The Committee may establish a Performance Award pool, which shall be an unfunded pool, for purposes of measuring performance of the Company or a business unit in connection with Performance Awards.  The amount of such Performance Award pool shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 7(b)(ii) during the given performance period, as specified by the Committee in accordance with Section 7(b)(i).  The Committee may specify the amount of the Performance Award pool as a percentage of any of such business criteria, a percentage thereof in excess of a threshold amount, or as another amount which need not bear a strictly mathematical relationship to such business criteria.

(v)   Settlement of Performance Awards; Other Terms.  Settlement of such Performance Awards shall be in cash, Stock, other Awards or other property, in the discretion of the Committee.  The Committee may, in its discretion, increase or reduce the amount of a settlement otherwise to be made in connection with such Performance Awards, but may not exercise discretion to increase any such amount payable to a Covered Employee in respect of a Performance Award subject to this Section 7(b).  Any settlement which changes the form of payment from that originally specified shall be implemented in a manner such that the Performance Award and other related Awards do not, solely for that reason, fail to qualify as “performance-based compensation” for purposes of Code Section 162(m).  The Committee shall specify the circumstances in which such Performance Awards shall be paid or forfeited in the event of termination of employment by the Participant or other event (including a Change in Control) prior to the end of a performance period or settlement of such Performance Awards; any resulting payments need not qualify as performance-based compensation under Section 162(m) if the authorization of such non-qualifying payments would not otherwise disqualify the Performance Award apart from the termination or change in control.

(c)    Annual Incentive Awards Granted to Designated Covered Employees.  The Committee may grant a Performance Award in the form of an Annual Incentive Award to an Eligible Person who is designated by the Committee as likely to be a Covered Employee.  Such Annual Incentive Award will be intended to qualify as “performance-based compensation” for purposes of Code Section 162(m), and therefore its grant,

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exercise and/or settlement shall be contingent upon achievement of preestablished performance goals and shall comply with the other requirements set forth in Section 7(b).

(d)    Written Determinations.  Determinations by the Committee as to the establishment of performance goals, the amount potentially payable in respect of Performance Awards, the level of actual achievement of the specified performance goals relating to Performance Awards and the amount of any final Performance Award shall be recorded in writing in the case of Performance Awards intended to qualify under Section 162(m).  Specifically, the Committee shall certify in writing, in a manner conforming to applicable regulations under Section 162(m), prior to settlement of each such Award granted to a Covered Employee, that the performance objective relating to the Performance Award and other material terms of the Award upon which settlement of the Award was conditioned have been satisfied.

8.Certain Provisions Applicable to Awards.

(a)    Stand-Alone, Additional, Tandem, and Substitute Awards.  Subject to Section 10(e), Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any subsidiary or affiliate, or any business entity to be acquired by the Company or a subsidiary or affiliate, or any other right of a Participant to receive payment from the Company or any subsidiary or affiliate; provided, however, that a 409A Award may not be granted in tandem with a Non-409A Award.  Awards granted in addition to or in tandem with other Awards or awards may be granted either as of the same time as or a different time from the grant of such other Awards or awards.  Subject to Sections 10(h) and (i), the Committee may determine that, in granting a new Award, the in-the-money value or fair value of any surrendered Award or award may be applied to reduce the exercise price of any Option, grant price of any SAR, or purchase price of any other Award.

(b)    Term of Awards.  The term of each Award shall be for such period as may be determined by the Committee; provided that in no event shall the term of any Option or SAR exceed a period of ten years (or, in the case of an ISO, such shorter term as may be required under Code Section 422).

(c)    Form and Timing of Payment under Awards; Deferrals.  Subject to the terms of the Plan (including Sections 10(h) and (i)) and any applicable Award agreement, payments to be made by the Company or a subsidiary upon the exercise of an Option or other Award or settlement of an Award may be made in cash, Stock, other Awards, or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis.  The settlement of any Award may be accelerated in the discretion of the Committee or upon occurrence of one or more specified events (in addition to a Change in Control, subject to Sections 10(h) and (i)).  Installment or deferred payments may be required by the Committee (subject to Section 10(e) of the Plan, including the consent provisions thereof in the case of any deferral of an outstanding Award not provided for in the original Award agreement) or permitted at the election of the Participant on terms and conditions established by the Committee.  Payments may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents or other amounts in respect of installment or deferred payments denominated in Stock.  Any payment deferred pursuant to this Section 8(c) shall represent only an unfunded, unsecured promise by the Company to pay the amount credited thereto to the Participant in the future.  In the case of any 409A Award that is vested and no longer subject to a risk of forfeiture (within the meaning of Code Section 83) and deferred at the election of the Participant, such Award will be distributed to the Participant, upon application of the Participant, if the Participant has had an unforeseeable emergency within the meaning of Code Sections 409A(a)(2)(A)(vi) and 409A(a)(2)(B)(ii), in accordance with Section 409A(a)(2)(B)(ii).

11

(d)    Additional Award Forfeiture Provisions.  The Committee may condition a Participant’s right to receive a grant of an Award, to exercise the Award, to retain Stock acquired in connection with an Award, or to retain the profit or gain realized by a Participant in connection with an Award, including cash received upon sale of Stock acquired in connection with an Award, upon compliance by the Participant with specified conditions relating to non-competition, confidentiality of information relating to the Company, non-solicitation of customers, suppliers, and employees of the Company, cooperation in litigation, non-disparagement of the Company and its officers, directors and affiliates, and other restrictions upon or covenants of the Participant, including during specified periods following termination of employment or service to the Company.

(e)    Exemptions from Section 16(b) Liability.  With respect to a Participant who is then subject to the reporting requirements of Section 16(a) of the Exchange Act in respect of the Company, the Committee shall implement transactions under the Plan and administer the Plan in a manner that will ensure that each transaction with respect to such a Participant is exempt from liability under Rule 16b-3 or otherwise not subject to liability under Section 16(b), except that this provision shall not limit sales by such a Participant, and such a Participant may elect to engage in other non-exempt transactions under the Plan.  The Committee may authorize the Company to repurchase any Award or shares of Stock deliverable or delivered in connection with any Award (subject to Section 10(i)) in order to avoid a Participant who is subject to Section 16 of the Exchange Act incurring liability under Section 16(b).  Unless otherwise specified by the Participant, equity securities or derivative securities acquired under the Plan which are disposed of by a Participant shall be deemed to be disposed of in the order acquired by the Participant.

9.Change in Control.

(a)Effect of “Change in Control.”    In the event of a “Change in Control,” the following provisions shall apply unless otherwise provided in the Award agreement:

(i)    Any Award carrying a right to exercise that was not previously exercisable and vested shall become fully exercisable and vested as of the time of the Change in Control;

(ii)   If any optionee holds an Option immediately prior to a Change in Control that was not previously exercisable and vested in full throughout the 60-day period preceding the Change in Control, he shall be entitled to elect, during the 60-day period following the Change in Control, in lieu of acquiring the shares of Stock covered by the portion of the Option that was not vested and exercisable within such 60-day period, to receive, and the Company shall be obligated to pay, in cash the excess of the Change in Control Price over the exercise price of such Option, multiplied by the number of shares of Stock covered by such portion of the Option;

(iii)  The restrictions, deferral of settlement, and forfeiture conditions applicable to any other Award granted under the Plan shall lapse and such Awards shall be deemed fully vested as of the time of the Change in Control, except to the extent of any waiver by the Participant and subject to applicable restrictions set forth in Section 10(a) hereof; and

(iv)  With respect to any outstanding Award subject to achievement of performance goals and conditions under the Plan, such performance goals and other conditions will be deemed to be met if and to the extent so provided by the Committee in the Award agreement relating to such Award.

The foregoing notwithstanding, any benefit or right provided under this Section 9 in the case of any non-409A Award shall be limited to those benefits and rights permitted under Code Section 409A, and any benefit or right provided under this Section 9 that would result in a distribution of a 409A Award at a time or

12

in a manner not permitted by Section 409A shall be limited to the extent necessary so that the distribution is permitted under Section 409A.  For this purpose, the distribution of a 409A Award (i) triggered by a Change in Control will remain authorized if the Change in Control also constitutes a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company, within the meaning of Code Section 409A(a)(2)(A)(v), and (ii) triggered by a termination of employment with or service to the Company or a subsidiary following a Change in Control by a specified employee, within the meaning of Code Section 409A(a)(2)(B)(i), will remain authorized to occur six months after such termination.

(b)Definition of “Change in Control.”    A “Change in Control” shall mean the occurrence of any of the following:

(i)    when any “person” as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d) of the Exchange Act but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing at least 40% percent (or such greater percentage as the Committee may specify in connection with the grant of any Award) of the combined voting power of the Company’s then-outstanding securities; or

(ii)   the occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a subsidiary by merger or otherwise or for the purchase by an entity other than the Company or a subsidiary of substantially all of the assets of the Company.

(c)Definition of “Change in Control Price.”    The “Change in Control Price” means an amount in cash equal to the higher of (i) the amount of cash and fair market value of property that is the highest price per share paid (including extraordinary dividends) in any transaction triggering the Change in Control, or (ii) the highest Fair Market Value per share at any time during the 60-day period preceding the Change in Control.

10.General Provisions.

(a)    Compliance with Legal and Other Requirements.  The Company may, to the extent deemed necessary or advisable by the Committee and subject to Section 10(h), postpone the issuance or delivery of Stock or payment of other benefits under any Award until completion of such registration or qualification of such Stock or other required action under any federal or state law, rule, or regulation, listing or other required action with respect to any stock exchange or automated quotation system upon which the Stock or other securities of the Company are listed or quoted, or compliance with any other obligation of the Company, as the Committee may consider appropriate, and may require any Participant to make such representations, furnish such information and comply with or be subject to such other conditions as it may consider appropriate in connection with the issuance or delivery of Stock or payment of other benefits in compliance with applicable laws, rules, and regulations, listing requirements, or other obligations.  The foregoing notwithstanding, in connection with a Change in Control, the Company shall take or cause to be taken no action, and shall undertake or permit to arise no legal or contractual obligation, that results or would result in any postponement of the issuance or delivery of Stock or payment of benefits under any Award or the imposition of any other conditions on such issuance, delivery or payment, to the extent that such postponement or other condition would represent a greater burden on a Participant than existed on the 90th day preceding the Change in Control.

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(b)    Limits on Transferability; Beneficiaries.  No Award or other right or interest of a Participant under the Plan shall be pledged, hypothecated or otherwise encumbered or subject to any lien, obligation or liability of such Participant to any party, or assigned or transferred by such Participant otherwise than by will or the laws of descent and distribution or to a Beneficiary upon the death of a Participant, and such Awards or rights that may be exercisable shall be exercised during the lifetime of the Participant only by the Participant or his or her guardian or legal representative, except that Awards and other rights (other than ISOs and SARs in tandem therewith) may be transferred for estate planning purposes to one or more Beneficiaries or other transferees during the lifetime of the Participant, and may be exercised by such transferees in accordance with the terms of such Award, but only if and to the extent such transfers are permitted by the Committee pursuant to the express terms of an Award agreement (subject to any terms and conditions which the Committee may impose thereon).  A Beneficiary, transferee, or other person claiming any rights under the Plan from or through any Participant shall be subject to all terms and conditions of the Plan and any Award agreement applicable to such Participant, except as otherwise determined by the Committee, and to any additional terms and conditions deemed necessary or appropriate by the Committee.

(c)    Adjustments.  In the event that any large, special and non-recurring dividend or other distribution (whether in the form of cash or property other than Stock), recapitalization, forward or reverse split, Stock dividend, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, liquidation, dissolution or other similar corporate transaction or event affects the Stock such that an adjustment is determined by the Committee to be appropriate or, in the case of any outstanding Award, necessary in order to prevent dilution or enlargement of the rights of the Participant, then the Committee shall, in such equitable manner as it may determine, adjust any or all of (A) the number and kind of shares of Stock which may be delivered in connection with Awards granted thereafter, (B) the number and kind of shares of Stock by which annual per-person Award limitations are measured under Section 5(b), (C) the number and kind of shares of Stock subject to or deliverable in respect of outstanding Awards and (D) the exercise price, grant price or purchase price relating to any Award or, if deemed appropriate, the Committee may make provision for a payment of cash or property to the holder of an outstanding Option (subject to Section 10(i)).  In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards (including Performance Awards and performance goals and any hypothetical funding pool relating thereto) in recognition of unusual or nonrecurring events (including, without limitation, events described in the preceding sentence, as well as acquisitions and dispositions of businesses and assets) affecting the Company, any subsidiary or affiliate or other business unit, or the financial statements of the Company or any subsidiary or affiliate, or in response to changes in applicable laws, regulations, accounting principles, tax rates and regulations or business conditions or in view of the Committee’s assessment of the business strategy of the Company, any subsidiary or affiliate or business unit thereof, performance of comparable organizations, economic and business conditions, personal performance of a Participant, and any other circumstances deemed relevant; provided that no such adjustment shall be authorized or made if and to the extent that the existence of such authority (A) would cause Options, SARs, or Performance Awards granted under Section 7 to Participants designated by the Committee as Covered Employees and intended to qualify as “performance-based compensation” under Code Section 162(m) and regulations thereunder to otherwise fail to qualify as “performance-based compensation” under Code Section 162(m) and regulations thereunder, or (B) would cause the Committee to be deemed to have authority to change the targets, within the meaning of Treasury Regulation 1.162-27(e)(4)(vi), under the performance goals relating to Options or SARs granted to Covered Employees and intended to qualify as “performance-based compensation” under Code Section 162(m) and regulations thereunder; and provided further, that adjustments to Non-409A Awards will be made only to the extent permitted under 409A.

(d)    Taxes.  The Company and any subsidiary is authorized to withhold from any Award granted, any payment relating to an Award under the Plan, including from a distribution of Stock, or any payroll or other payment to a Participant, amounts of withholding and other taxes due or potentially payable in connection with any Award, and to take such other action as the Committee may deem advisable to enable the Company

14

and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award.  This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of a Participant’s tax obligations, either on a mandatory or elective basis, in the discretion of the Committee, or in satisfaction of other tax obligations if such withholding will not result in additional accounting expense to the Company.  Other provisions of the Plan notwithstanding, only the minimum amount of Stock deliverable in connection with an Award necessary to satisfy statutory withholding requirements will be withheld, unless withholding of any additional amount of Stock will not result in additional accounting expense to the Company.

(e)    Changes to the Plan and Awards.  The Board may amend, alter, suspend, discontinue, or terminate the Plan or the Committee’s authority to grant Awards under the Plan without the consent of stockholders or Participants, except that any amendment or alteration to the Plan shall be subject to the approval of the Company’s stockholders not later than the annual meeting the record date for which is at or following the date of such Board action if such stockholder approval is required by any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Stock may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other such changes to the Plan to stockholders for approval; provided that, without the consent of an affected Participant, no such Board action may materially and adversely affect the rights of such Participant under any previously granted and outstanding Award.  (For this purpose, actions that alter the timing of federal income taxation of a Participant will not be deemed material unless such action results in an income tax penalty on the Participant.)  The Committee may waive any conditions or rights under, or amend, alter, suspend, discontinue, or terminate any Award theretofore granted and any Award agreement relating thereto; provided that the Committee shall have no authority to waive or modify any Award term after the Award has been granted to the extent the waived or modified term would be mandatory under the Plan for any Award newly granted at the date of the waiver or modification; and provided further, that, without the consent of an affected Participant, no such Committee action may materially and adversely affect the rights of such Participant under such Award.  Without the prior approval of stockholders, the Committee will not amend or replace previously granted Options in a transaction that constitutes a “repricing.” For this purpose, a “repricing” means: (1) amending the terms of an Option after it is granted to lower its exercise price, except pursuant to Section 10(c) hereof; (2) any other action that is treated as a repricing under generally accepted accounting principles; and  (3) canceling an Option at a time when its strike price is equal to or greater than the fair market value of the underlying Stock, in exchange for another Option, Restricted Stock, or other equity, unless the cancellation and exchange occurs in connection with a merger, acquisition, spin-off or other similar corporate transaction.  A cancellation and exchange described in clause (3) of the preceding sentence will be considered a repricing regardless of whether the Option, Restricted Stock or other equity is delivered simultaneously with the cancellation, regardless of whether it is treated as a repricing under generally accepted accounting principles, and regardless of whether it is voluntary on the part of the Option holder.

(f)    Limitation on Rights Conferred under Plan.  Neither the Plan nor any action taken hereunder shall be construed as (i) giving any Eligible Person or Participant the right to continue as an Eligible Person or Participant or in the employ or service of the Company or a subsidiary, (ii) interfering in any way with the right of the Company or a subsidiary to terminate any Eligible Person’s or Participant’s employment or service at any time, (iii) giving an Eligible Person or Participant any claim to be granted any Award under the Plan or to be treated uniformly with other Participants and employees, or (iv) conferring on a Participant any of the rights of a stockholder of the Company unless and until the Participant is duly issued or transferred shares of Stock in accordance with the terms of an Award.

(g)    Unfunded Status of Awards; Creation of Trusts.  The Plan is intended to constitute an “unfunded” plan for incentive and deferred compensation.  With respect to any payments not yet made to a Participant or

15

obligation to deliver Stock pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company; provided that the Committee may authorize the creation of trusts and deposit therein cash, Stock, other Awards or other property, or make other arrangements to meet the Company’s obligations under the Plan.  Such trusts or other arrangements shall be consistent with the “unfunded” status of the Plan unless the Committee otherwise determines with the consent of each affected Participant.  The trustee of such trusts may be authorized to dispose of trust assets and reinvest the proceeds in alternative investments, subject to such terms and conditions as the Committee may specify and in accordance with applicable law.

(h)    Certain Limitations on Awards to Ensure Compliance with Section 409A.  For purposes of this Plan, references to an Award term or event (including any authority or right of the Company or a Participant) being “permitted” under Section 409A mean, for a 409A Award, that the term or event will not cause the Participant to be liable for payment of interest or a tax penalty under Section 409A and, for a Non-409A Award, that the term or event will not cause the Award to be treated as subject to Section 409A.  Other provisions of the Plan notwithstanding, the terms of any 409A Award and any Non-409A Award, including any authority of the Company and rights of the Participant with respect to the Award, shall be limited to those terms permitted under Section 409A, and any terms not permitted under Section 409A shall be automatically modified and limited to the extent necessary to conform with Section 409A.  For this purpose, other provisions of the Plan notwithstanding, the Company shall have no authority to accelerate distributions relating to 409A Awards in excess of the authority permitted under Section 409A, any distribution subject to Section 409A(a)(2)(A)(i) (separation from service) to a “key employee” as defined under Section 409A(a)(2)(B)(i), shall not occur earlier than the earliest time permitted under Section 409A(a)(2)(B)(i), and any authorization of payment of cash to settle a Non-409A Award shall apply only to the extent permitted under Section 409A for such Award.  Non-409A Awards that are “grandfathered” under Section 409A and that, but for such grandfathered status, would be deemed 409A Awards shall be subject to the terms and conditions of the Plan as amended and restated as of May 5, 2005 other than Sections 6(b)(ii) and 6(c)(ii), provided that if any provision adopted by amendment to the Plan or an Award Agreement after October 3, 2004, would constitute a material modification of a grandfathered Non-409A Award, such provision will not be effective as to such Award unless so stated by the Committee in writing with specific reference to this last sentence of Section 10(h).

(i)    Certain Limitations Relating to Accounting Treatment of Awards.  At any time that the Company is accounting for stock-denominated Awards (other than SARs) under Accounting Principles Board Opinion 25 (“APB 25”), the Company intends that, with respect to such Awards, the compensation measurement date for accounting purposes shall occur at the date of grant or the date performance conditions are met if an Award is fully contingent on achievement of performance goals, unless the Committee specifically determines otherwise.  Therefore, other provisions of the Plan notwithstanding, in order to preserve this fundamental objective of the Plan, if any authority granted to the Committee hereunder or any provision of the Plan or an Award agreement would result, under APB 25, in “variable” accounting or a measurement date other than the date of grant or the date such performance conditions are met with respect to such Awards, if the Committee was not specifically aware of such accounting consequence at the time such Award was granted or provision otherwise became effective, such authority shall be limited and such provision shall be automatically modified and reformed to the extent necessary to preserve the accounting treatment of the award intended by the Committee, subject to Section 10(e) of the Plan.  This provision shall cease to be effective if and at such time as the Company elects to no longer account for equity compensation under APB 25.

(j)    Nonexclusivity of the Plan.  Neither the adoption of the Plan by the Board nor its submission to the stockholders of the Company for approval shall be construed as creating any limitations on the power of

16

the Board or a committee thereof to adopt such other incentive arrangements as it may deem desirable including incentive arrangements and awards which do not qualify under Code Section 162(m).

(k)    Payments in the Event of Forfeitures; Fractional Shares.  Unless otherwise determined by the Committee, in the event of a forfeiture of an Award with respect to which a Participant paid cash or other consideration, the Participant shall be repaid the amount of such cash or other consideration.  No fractional shares of Stock shall be issued or delivered pursuant to the Plan or any Award.  The Committee shall determine whether cash, other Awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.

(l)    Awards to Participants Outside the United States.  The Committee may modify the terms of any Award under the Plan made to or held by a Participant who is then resident or primarily employed outside of the United States in any manner deemed by the Committee to be necessary or appropriate in order that such Award shall conform to laws, regulations, and customs of the country in which the Participant is then resident or primarily employed, or so that the value and other benefits of the Award to the Participant, as affected by foreign tax laws and other restrictions applicable as a result of the Participant’s residence or employment abroad shall be comparable to the value of such an Award to a Participant who is resident or primarily employed in the United States.  An Award may be modified under this Section 10(l) in a manner that is inconsistent with the express terms of the Plan, so long as such modifications will not contravene any applicable law or regulation or result in actual liability under Section 16(b) for the Participant whose Award is modified.

(m)    Governing Law.  The validity, construction and effect of the Plan, any rules and regulations under the Plan, and any Award agreement shall be determined in accordance with the Delaware General Corporation Law, the contract and other laws of the State of New York without giving effect to principles of conflicts of laws, and applicable federal law.

(n)    Preexisting Plan.  Upon stockholder approval of the Plan as provided under Section 10(o), no further grants of Awards will be made under the Preexisting Plan.

(o)    Plan Effective Date and Termination.  The Plan was adopted by the Board of Directors on April 24, 2003 and became effective upon its approval by the Company’s stockholders on June 23, 2003.  This amendment and restatement of the Plan shall be effective upon its approval by the Company’s stockholders by the affirmative vote of the holders of a majority of the voting securities of the Company entitled to be cast in person or by proxy at the Company’s 2005 annual meeting of stockholders.(1) Unless earlier terminated by action of the Board of Directors, the Plan will remain in effect until such time as no Stock remains available for delivery under the Plan and the Company has no further rights or obligations under the Plan with respect to outstanding Awards under the Plan; provided, however, that no new Awards may be granted more then ten years after the date of the latest approval of the Plan by stockholders of the Company.

(1) The amendment and restatement of the Plan was approved by the Company’s stockholders on June 14, 2005.

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, A. Lorne Weil, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Scientific Games Corporation;

2.Based on my knowledge, this 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 report;

3.Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2005

/s/  A. LORNE WEIL

A. Lorne Weil

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, DeWayne E. Laird, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Scientific Games Corporation;

2.Based on my knowledge, this 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 report;

3.Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2005

/s/  DEWAYNE E. LAIRD

DeWayne E. Laird

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Scientific Games Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, A. Lorne Weil, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

/s/ A. LORNE WEIL

A. Lorne Weil

Chief Executive Officer

August 9, 2005

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Scientific Games Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, DeWayne E. Laird, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

/s/ DEWAYNE E. LAIRD

DeWayne E. Laird

Chief Financial Officer

August 9, 2005