UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

{Mark One}

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

For the quarterly period ended September 30, 2009

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

For the transition period from to

Commission file number: 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 required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The registrant has the following number of shares outstanding of each of the registrant’s classes of common stock as of November 6, 2009:

Class A Common Stock: 92,785,148

Class B Common Stock: None

Table of Contents

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of September 30, 2009 and December 31, 2008

(Unaudited, in thousands, except per share amounts)

	September 30,			December 31,
	2009			2008
ASSETS
Current assets:
Cash and cash equivalents	$	213,078		$	140,639
Accounts receivable, net of allowance for doubtful accounts of $6,072 and $6,465 as of September 30, 2009 and December 31, 2008, respectively	212,410			212,487
Inventories	75,758			75,371
Deferred income taxes, current portion	14,684			14,360
Prepaid expenses, deposits and other current assets	67,190			68,921
Total current assets	583,120			511,778
Property and equipment, at cost	1,072,057			1,016,767
Less accumulated depreciation	(506,869		)	(441,288		)
Property and equipment, net	565,188			575,479
Goodwill, net	777,540			657,211
Intangible assets, net	113,760			120,946
Other assets and investments	297,057			317,039
Total assets	$	2,336,665		$	2,182,453

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Debt payments due within one year	$	138,767		$	43,384
Accounts payable	55,561			64,635
Accrued liabilities	162,552			152,665
Total current liabilities	356,880			260,684
Deferred income taxes	34,576			33,809
Other long-term liabilities	87,991			96,048
Long-term debt, excluding current installments	1,189,449			1,196,083
Total liabilities	1,668,896			1,586,624

Commitments and contingencies

Stockholders’ equity:
Class A common stock, par value $0.01 per share, 199,300 shares authorized, and 92,765 and 92,601 shares outstanding as of September 30, 2009 and December 31, 2008, respectively	928			926
Additional paid-in capital	649,771			628,356
Accumulated earnings	68,321			58,059
Treasury stock, at cost, 3,130 and 2,608 shares held as of September 30, 2009 and December 31, 2008, respectively	(48,126		)	(42,586		)
Accumulated other comprehensive income	(3,125		)	(48,926		)
Total stockholders’ equity	667,769			595,829
Total liabilities and stockholders’ equity	$	2,336,665		$	2,182,453

See accompanying notes to consolidated financial statements.

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended September 30, 2009 and 2008

(Unaudited, in thousands, except per share amounts)

	Three Months Ended September 30,
	2009			2008
Operating revenues:
Services	$	222,023		$	265,430
Sales	17,123			26,505
	239,146			291,935
Operating expenses:
Cost of services (exclusive of depreciation and amortization)	127,773			157,480
Cost of sales (exclusive of depreciation and amortization)	10,513			17,257
Selling, general and administrative expenses	38,861			41,937
Depreciation and amortization	32,049			36,487
Operating income	29,950			38,774
Other (income) expense:
Interest expense	22,736			20,920
Equity in earnings of joint ventures	(14,180		)	(13,356		)
Early extinguishment of debt	(550		)	—
Other income, net	(27		)	(818		)
	7,979			6,746
Income before income taxes	21,971			32,028
Income tax expense	6,865			9,862
Net income	$	15,106		$	22,166

Basic and diluted net income per share:
Basic net income per share	$	0.16		$	0.24
Diluted net income per share	$	0.16		$	0.23

Weighted-average number of shares used in per share calculations:
Basic shares	92,727			92,841
Diluted shares	94,028			94,626

See accompanying notes to consolidated financial statements.

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Nine Months Ended September 30, 2009 and 2008

(Unaudited, in thousands, except per share amounts)

	Nine Months Ended September 30,
	2009			2008
Operating revenues:
Services	$	650,615		$	764,044
Sales	44,249			90,867
	694,864			854,911
Operating expenses:
Cost of services (exclusive of depreciation and amortization)	377,678			440,394
Cost of sales (exclusive of depreciation and amortization)	30,898			63,808
Selling, general and administrative expenses	119,479			138,003
Employee termination costs	3,920			2,772
Depreciation and amortization	93,453			106,099
Operating income	69,436			103,835
Other (income) expense:
Interest expense	62,940			55,745
Equity in earnings of joint ventures	(44,758		)	(48,612		)
(Gain) loss on early extinguishment of debt	(4,594		)	2,960
Other income, net	(1,013		)	(1,513		)
	12,575			8,580
Income before income taxes	56,861			95,255
Income tax expense	46,599			30,672
Net income	$	10,262		$	64,583

Basic and diluted net income per share:
Basic net income per share	$	0.11		$	0.69
Diluted net income per share	$	0.11		$	0.68

Weighted-average number of shares used in per share calculations:
Basic shares	92,577			92,933
Diluted shares	93,859			94,588

See accompanying notes to consolidated financial statements.

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2009 and 2008

(Unaudited, in thousands, except per share amounts)

	Nine Months Ended September 30,
	2009			2008
Cash flows from operating activities:
Net income	$	10,262		$	64,583

Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	93,453			106,099
Change in deferred income taxes	34,350			1,489
Stock-based compensation	25,903			24,348
Non-cash interest expense	11,234			13,184
Undistributed equity in earnings of joint ventures	(13,778		)	(24,248		)
(Gain) loss on early extinguishment of debt	(4,594		)	2,960
Changes in current assets and liabilities, net of effects of acquisitions
Accounts receivable	4,144			(41,319		)
Inventories	2,070			(5,211		)
Accounts payable	(8,701		)	553
Accrued liabilities	(23,743		)	(16,368		)
Other current assets and liabilities	45,432			11,078
Other	(38		)	4,297
Net cash provided by operating activities	175,994			141,445

Cash flows from investing activities:
Capital expenditures	(9,135		)	(10,886		)
Wagering systems expenditures	(44,870		)	(119,327		)
Other intangible assets and software expenditures	(26,040		)	(33,711		)
Change in other assets and liabilities, net	3,611			(1,826		)
Business acquisitions, net of cash acquired	(89,453		)	(3,174		)
Net cash used in investing activities	(165,887		)	(168,924		)

Cash flows from financing activities:
Net repayments under revolving credit facility	—			(158,000		)
Proceeds from issuance of long-term debt	259,658			797,243
Payment on long-term debt	(183,632		)	(447,069		)
Payment of financing fees	(11,535		)	(15,085		)
Purchases of treasury stock	(5,539		)	(18,017		)
Net proceeds from issuance of common stock	2,191			3,020
Net cash provided by financing activities	61,143			162,092
Effect of exchange rate changes on cash and cash equivalents	1,189			(2,246		)
Increase in cash and cash equivalents	72,439			132,367
Cash and cash equivalents, beginning of period	140,639			29,403
Cash and cash equivalents, end of period	$	213,078		$	161,770

See accompanying notes to consolidated financial statements.

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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 September 30, 2009, the Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008, have been prepared by Scientific Games Corporation and are unaudited. When used in these notes, the terms “we,” “us,” “our” and “Company” refer to Scientific Games Corporation and all entities included in our consolidated financial statements unless otherwise specified or the context otherwise indicates. In the opinion of management, all adjustments necessary to present fairly our consolidated financial position as of September 30, 2009, the results of our operations for the three and nine months ended September 30, 2009 and 2008 and our cash flows for the nine months ended September 30, 2009 and 2008 have been made. Management has evaluated subsequent events through the date of financial statement issuance on November 9, 2009.

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 have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Current Report on Form 8-K filed on May 18, 2009 (which retrospectively adjusted portions of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 to reflect a change in accounting principle to reflect our adoption, effective January 1, 2009, of new Financial Accounting Standards Board (“FASB”) guidance on accounting for convertible debt instruments that may be settled in cash upon conversion). The results of operations for the period ended September 30, 2009 are not necessarily indicative of the operating results for a full year.

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 nine months ended September 30, 2009 and 2008:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
Income (numerator)
Net income	$	15,106	$	22,166	$	10,262	$	64,583

Shares (denominator)
Weighted-average basic common shares outstanding	92,727		92,841		92,577		92,933
Effect of dilutive securities-stock rights	1,301		1,785		1,282		1,649
Effect of dilutive shares related to convertible debentures	—		—		—		6
Weighted-average diluted common shares outstanding	94,028		94,626		93,859		94,588

Basic and diluted per share amounts
Basic net income per share	$	0.16	$	0.24	$	0.11	$	0.69
Diluted net income per share	$	0.16	$	0.23	$	0.11	$	0.68

The weighted-average diluted common shares outstanding for the three and nine months ended September 30, 2009 excludes the effect of approximately 5,774 and 6,470 weighted-average stock rights outstanding, respectively, because their effect would be anti-dilutive. The weighted-average diluted common shares outstanding for the three and nine months ended September 30, 2008 excludes the effect of approximately 3,744 and 3,563 weighted-average stock rights outstanding, respectively, because their effect would be anti-dilutive.

The aggregate number of shares that we could be obligated to issue upon conversion of the remaining $99,191 in aggregate principal amount of our 0.75% convertible senior subordinated notes due 2024 (the “Convertible Debentures”), is approximately 3,409. The Convertible Debentures provide for net share settlement upon conversion. In December 2004, we purchased a bond hedge to mitigate the potential dilution from conversion of the Convertible Debentures during the term of the bond hedge.

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

(2) Operating Segment Information (continued)

The following tables represent revenues, profits, depreciation, amortization and selling, general and administrative expenses for the three and nine month periods ended September 30, 2009 and 2008, by reportable segments. Corporate expenses, including interest expense, other income, and depreciation and amortization, are not allocated to the reportable segments.

	Three Months Ended September 30, 2009
	Printed Products Group		Lottery Systems Group		Diversified Gaming Group		Totals
Service revenues	$	117,744	$	52,343	$	51,936	$	222,023
Sales revenues	3,035		13,144		944		17,123
Total revenues	$	120,779	$	65,487	$	52,880	$	239,146

Cost of services (exclusive of depreciation and amortization)	$	69,897	$	26,741	$	31,135	$	127,773
Cost of sales (exclusive of depreciation and amortization)	2,199		7,733		581		10,513
Selling, general and administrative expenses	11,768		8,169		5,614		25,551
Depreciation and amortization	8,216		11,452		12,209		31,877
Segment operating income	$	28,699	$	11,392	$	3,341	$	43,432
Unallocated corporate costs							13,482
Consolidated operating income							$	29,950

	Three Months Ended September 30, 2008
	Printed Products Group		Lottery Systems Group		Diversified Gaming Group		Totals
Service revenues	$	147,142	$	62,354	$	55,934	$	265,430
Sales revenues	7,431		15,072		4,002		26,505
Total revenues	$	154,573	$	77,426	$	59,936	$	291,935

Cost of services (exclusive of depreciation and amortization)	$	91,459	$	32,597	$	33,424	$	157,480
Cost of sales (exclusive of depreciation and amortization)	4,423		11,581		1,253		17,257
Selling, general and administrative expenses	14,330		6,860		5,449		26,639
Depreciation and amortization	9,276		15,409		11,519		36,204
Segment operating income	$	35,085	$	10,979	$	8,291	$	54,355
Unallocated corporate costs							15,581
Consolidated operating income							$	38,774

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

(2) Operating Segment Information (continued)

	Nine Months Ended September 30, 2009
	Printed Products Group		Lottery Systems Group		Diversified Gaming Group		Totals
Service revenues	$	340,616	$	159,414	$	150,585	$	650,615
Sales revenues	9,776		31,088		3,385		44,249
Total revenues	$	350,392	$	190,502	$	153,970	$	694,864

Cost of services (exclusive of depreciation and amortization)	$	202,608	$	83,511	$	91,559	$	377,678
Cost of sales (exclusive of depreciation and amortization)	6,728		22,027		2,143		30,898
Selling, general and administrative expenses	34,141		23,042		17,283		74,466
Employee termination costs	2,016		125		433		2,574
Depreciation and amortization	24,095		32,882		35,959		92,936
Segment operating income	$	80,804	$	28,915	$	6,593	$	116,312
Unallocated corporate costs							45,530
Corporate employee termination costs							1,346
Consolidated operating income							$	69,436

	Nine Months Ended September 30, 2008
	Printed Products Group		Lottery Systems Group		Diversified Gaming Group		Totals
Service revenues	$	421,153	$	178,332	$	164,559	$	764,044
Sales revenues	24,648		47,335		18,884		90,867
Total revenues	$	445,801	$	225,667	$	183,443	$	854,911

Cost of services (exclusive of depreciation and amortization)	$	249,650	$	92,429	$	98,315	$	440,394
Cost of sales (exclusive of depreciation and amortization)	16,309		38,352		9,147		63,808
Selling, general and administrative expenses	45,088		25,742		19,493		90,323
Employee termination costs	2,772		—		—		2,772
Depreciation and amortization	28,728		45,765		30,774		105,267
Segment operating income	$	103,254	$	23,379	$	25,714	$	152,347
Unallocated corporate costs							48,512
Consolidated operating income							$	103,835

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

(2) Operating Segment Information (continued)

The following table provides a reconciliation of segment operating income to consolidated income before income taxes for each period:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Reported segment operating income	$	43,432		$	54,355		$	116,312		$	152,347
Unallocated corporate costs	(13,482		)	(15,581		)	(45,530		)	(48,512		)
Corporate employee termination costs	—			—			(1,346		)	—
Consolidated operating income	29,950			38,774			69,436			103,835
Interest expense	(22,736		)	(20,920		)	(62,940		)	(55,745		)
Equity in income of joint ventures	14,180			13,356			44,758			48,612
Gain (loss) on early extinguishment of debt	550			—			4,594			(2,960		)
Other income, net	27			818			1,013			1,513
Income before income taxes	$	21,971		$	32,028		$	56,861		$	95,255

In evaluating financial performance, we focus on operating income as a segment’s measure of profit or loss. Operating income is income before interest income, interest expense, equity in earnings of joint ventures, corporate expenses and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies (see Note 1 of our Notes to Consolidated Financial Statements in our Current Report on Form 8-K, filed on May 18, 2009).

(3) Equity Investments in Joint Ventures

We are a member of Consorzio Lotterie Nazionali (“CLN”), a consortium consisting principally of us, Lottomatica S.p.A, and Arianna 2001, a company owned by the Federation of Italian Tobacconists. The consortium holds a concession from the Italian Monopoli di Stato to be the exclusive operator of the Italian Gratta e Vinci instant lottery. The concession commenced in mid-2004 and has an initial term of six years with a six-year extension option at the option of the Monopoli di Stato. Under our contract with CLN, we supply instant lottery tickets, game development services, marketing support, the instant ticket management system and systems support. We also participate in the profits or losses of CLN as a 20% equity owner, and assist Lottomatica S.p.A in the lottery operations. We account for this investment using the equity method of accounting. For the three and nine months ended September 30, 2009, we recorded income of $11,235 and $37,812, respectively, representing our share of the earnings of CLN in each period. For the three and nine months ended September 30, 2008, we recorded income of $12,015 and $42,977, respectively, representing our share of the earnings of CLN for the indicated periods. During the second quarter of 2009, we received a cash distribution of approximately $28.0 million from CLN.

On October 12, 2009, the members of CLN tendered for a new concession to operate the Gratta e Vinci instant ticket lottery upon the termination of CLN’s current concession. Although a maximum of four concessions can be granted by the terms of the tender, we understand that our bidding group was the only group to submit a bid. The concession, anticipated to begin in June 2010, will have an initial term of nine years (subject to a performance evaluation during the fifth year) and may be extended by the Monopoli di Stato for an additional nine years. Pricing for the new concession is set at 11.9% of retail sales, inclusive of retailer commissions of 8.0%, compared to the current tiered pricing structure, which averaged 12.1% of retail sales in the second quarter of 2009 inclusive of retailer commissions of 8.0% and a value-added tax (“VAT”). The new rate is exclusive of VAT; however VAT will be charged on the operating expenses of the concessionaire.

A non-bidding third party filed a request with the TAR Lazio (Rome Administrative Court) seeking the suspension and annulment of the tender. We understand that the request claims that the tender is discriminatory and that it unlawfully limits competition. The request to suspend the tender was denied in hearings on October 14 and October 28, 2009. Another hearing has been scheduled for November 11, 2009 to address the request for annulment. We currently expect the results of the tender to be published in mid-November 2009. In the event that the request for annulment is granted, we cannot predict what actions, if any, the Italian government or Monopoli di Stato will take, including potentially passing new legislation, amending the tender procedures, issuing new tender procedures or exercising its option to extend CLN’s current concession.

In the event that our bidding group is the sole bidding group to be awarded a concession, our bidding group would be obligated to make upfront payments of €520,000 and €280,000 on or about November 30, 2009 and November 30, 2010, respectively. We would be responsible for our pro rata share of these payments (which would be €104,000 and €56,000, respectively, assuming our ownership interest in the entity that holds the concession remains at 20%). In conjunction with the submission of its bid, our bidding group provided bank guarantees to support a €40,000 bid guarantee and a €75,000 performance guarantee. We guaranteed our pro rata share of these guarantees through the issuance of €23,000 of letters of credit under our revolving credit facilities.

There can be no assurance that our bidding group will be awarded a concession to continue to operate the instant ticket lottery following the termination of CLN’s current concession or whether other operators will also be awarded a concession. In addition, there can be no assurance that we will continue to supply instant lottery tickets and/or other services under any future arrangements. In the event that our bidding group is awarded a concession, we anticipate that our bidding group will form and capitalize a new vehicle to hold the concession consistent with the tender requirements. We have entered into a memorandum of understanding with our current CLN partners with respect to the formation and governance of any new concession vehicle on terms substantially similar to the terms governing CLN. However, we cannot guarantee that we will be able to enter into definitive governing agreements, nor can we predict the final terms of any such definitive agreements (including terms relating to the structure of the vehicle and governance rights).

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

(4) Comprehensive Income

The following presents a reconciliation of net income to comprehensive income for the three and nine month periods ended September 30, 2009 and 2008:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009		2008			2009		2008
Net income	$	15,106	$	22,166		$	10,262	$	64,583
Other comprehensive income (loss):
Foreign currency translation gain (loss)	5,343		(40,808		)	43,651		(22,180		)
Gain on derivative financial instruments	1,349		—			2,150		—
Unrealized loss on investments	—		—			—		(181		)
Other comprehensive income	6,692		(40,808		)	45,801		(22,361		)
Comprehensive income	$	21,798	$	(18,642	)	$	56,063	$	42,222

(5) Inventories

Inventories consist of the following:

	September 30,		December 31,
	2009		2008
Parts and work-in-process	$	29,351	$	36,449
Finished goods	46,407		38,922
	$	75,758	$	75,371

Point of sale terminals we manufacture may be sold to customers or included as part of long-term wagering system contracts. 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 and are not depreciated.

(6) Long-Term Debt

On May 21, 2009, Scientific Games International, Inc. (“SGI”) issued $225,000 in aggregate principal amount of its 9.25% Senior Subordinated Notes due 2019 (the “2009 Notes”) at an issue price of 96.823% of the principal amount. The 2009 Notes were issued pursuant to an indenture dated as of May 21, 2009 (the “2009 Notes Indenture”) among SGI, as issuer, the Company, as a guarantor, the Company’s subsidiary guarantors party thereto and The Bank of Nova Scotia Trust Company of New York, as trustee.

The 2009 Notes bear interest at the rate of 9.25% per annum, which accrues from May 21, 2009 and is payable semiannually in arrears on June 15 and December 15 of each year, commencing on December 15, 2009. The 2009 Notes mature on June 15, 2019, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the 2009 Notes Indenture.

SGI may redeem some or all of the 2009 Notes at any time prior to June 15, 2014 at a price equal to 100% of the principal amount of the 2009 Notes plus accrued and unpaid interest, if any, to the date of redemption plus a “make whole” premium. SGI may redeem some or all of the 2009 Notes for cash at any time on or after June 15, 2014 at the prices specified in the 2009 Notes Indenture. In addition, at any time on or prior to June 15, 2012, SGI may redeem up to 35% of the initially outstanding aggregate principal amount of the 2009 Notes at a redemption price of 109.25% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, with the net cash proceeds contributed to the capital of SGI from one or more equity offerings of the Company. Additionally, if a holder of the 2009 Notes is required to be licensed, qualified or found suitable under any applicable gaming laws or regulations and that holder does not become so licensed or qualified or is not found to be suitable, then SGI will have the right to, subject to certain notice provisions set forth in the 2009 Notes Indenture, (1) require that holder to dispose of all or a portion of those Notes or (2) redeem the 2009 Notes of that holder at a redemption price calculated as set forth in the 2009 Notes

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

(6) Long-Term Debt (continued)

Indenture. If the Company or SGI experiences specific kinds of changes in control or the Company or any of its restricted subsidiaries sells certain of its assets, then SGI must offer to repurchase the 2009 Notes on the terms set forth in the 2009 Notes Indenture.

The 2009 Notes are unsecured senior subordinated obligations of SGI and are subordinated to all of SGI’s existing and future senior debt, rank equally with all of SGI’s existing and future senior subordinated debt and rank senior to all of SGI’s future debt that is expressly subordinated to the 2009 Notes. The 2009 Notes are structurally subordinated to all of the liabilities of the Company’s non-guarantor subsidiaries.

The 2009 Notes are guaranteed on an unsecured senior subordinated basis by the Company and all of its 100%-owned domestic subsidiaries (other than SGI). The guarantees of the 2009 Notes are subordinated to all of the guarantors’ existing and future senior debt, rank equally with all of their existing and future senior subordinated debt, and rank senior to all of their future debt that is expressly subordinated to the guarantees of the 2009 Notes. The 2009 Notes are structurally subordinated to all of the liabilities of the Company’s non-guarantor subsidiaries.

The 2009 Notes Indenture contains certain covenants that, among other things, limit the Company’s ability, and the ability of certain of its 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, or create certain liens and other encumbrances on assets.

The 2009 Notes Indenture contains events of default customary for agreements of its type (with customary grace periods, as applicable) and provides that, upon the occurrence of an event of default arising from certain events of bankruptcy or insolvency with respect to the Company or SGI, all outstanding Notes will become due and payable immediately without further action or notice. If any other type of event of default occurs and is continuing, then the trustee or the holders of at least 25% in principal amount of the then outstanding Notes may declare all the 2009 Notes to be due and payable immediately.

The 2009 Notes were issued in a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended, (the “Securities Act”) and to persons outside the United States under Regulation S under the Securities Act. In connection with the issuance of the 2009 Notes, SGI, the Company, the Company’s subsidiary guarantors party thereto, and J.P. Morgan Securities Inc., Banc of America Securities LLC, Credit Suisse Securities (USA) LLC and Goldman, Sachs & Co., as representatives for the initial purchasers listed therein, entered into a registration rights agreement, dated May 21, 2009 (the “Registration Rights Agreement”). Under the Registration Rights Agreement, SGI and the guarantors agreed, for the benefit of the holders of the 2009 Notes, that they will file with the Securities and Exchange Commission (the “SEC”) within 90 days after the date the 2009 Notes were issued, and use their commercially reasonable efforts to cause to become effective, a registration statement relating to an offer to exchange the 2009 Notes for an issue of SEC-registered notes (the “2009 Exchange Notes”) with terms identical to the 2009 Notes (except that the 2009 Exchange Notes will not be subject to restrictions on transfer or to any increase in annual interest rate as described below).

On September 17, 2009, the Company filed a Registration Statement with the SEC under Form S-4 pursuant to which SGI, offered to exchange all outstanding 2009 Notes that are validly tendered and not validly withdrawn for an equal principal amount of 2009 Exchange Notes that are, subject to specified conditions, freely transferable. The exchange offer was launched on September 15, 2009 and expired at 5:00 p.m., New York City time, on October 26, 2009.

On May 7, 2009, the Company entered into an agreement with the principal selling shareholder and key management of Global Draw Limited (“Global Draw”) related to the earn-out and contingent bonuses that were payable to them in connection with the Company’s 2006 acquisition. Based on the performance of the business, the total amount payable was determined to be approximately £60,600 of which approximately £30,500 was paid in May 2009. Approximately £28,100 of the total amount payable

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

(6) Long-Term Debt (continued)

was deferred under the terms of two-year, senior unsecured promissory notes issued by certain of the Company’s foreign subsidiaries (and guaranteed by the Company and certain of its U.S. subsidiaries). The earn-out balance of approximately £2,000 was paid in September 2009.

The promissory note issued to the principal selling shareholder, which was executed on May 7, 2009 by Scientific Games Luxembourg Finance S.a.r.l. (“SGLF”), an indirect 100%-owned subsidiary of the Company, has a principal amount of approximately £26,000 and bears simple interest at the rate of 6.90% per annum, which interest is payable quarterly in arrears on the last day of March, June, September and December of each year, commencing on June 30, 2009. The note matures on May 7, 2011. Although not required to do so (except in connection with an event of default as described below), SGLF may repay all or a portion of the principal amount of the note at any time prior to maturity without premium or penalty. The note is a senior unsecured obligation of SGLF and is guaranteed on a joint and several basis by the Company and certain of its 100%-owned domestic subsidiaries (including SGI). Such guaranty represents “senior debt” as that term is defined in the indentures governing the Company’s 6.25% Senior Subordinated Notes due 2012 (the “2004 Notes”), the Convertible Debentures, SGI’s 7.875% Senior Subordinated Notes due 2016 (the “2008 Notes”) and the 2009 Notes.

If an event of default under the note shall occur and be continuing, the holder of the note may declare the principal amount of, and accrued interest on, the note to be immediately due and payable. An “event of default” under the note shall occur if (1) SGLF shall fail to pay the then unpaid principal amount under the note within 15 days after the maturity date or any interest payment that is due and payable within 15 days after the applicable interest payment date, or (2) an “event of default” (as defined in the Credit Agreement (as defined below)) shall occur and be continuing and, as a result thereof, the amounts owing under the Credit Agreement immediately become due and payable.

The terms of the promissory notes issued to key management of Global Draw and the related guaranties are substantially identical to the note and guaranties described above, except that one of the notes was issued by a different foreign subsidiary of the Company.

On March 27, 2009, we and our 100%-owned subsidiary, SGI, entered into an amendment (the “First Amendment”) to the credit agreement, dated as of June 9, 2008 (the “Credit Agreement”), among SGI, as borrower, the Company, as guarantor, the several lenders from time to time parties thereto and JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent The purpose of the First Amendment was to provide the Company with additional operating and financing flexibility.

Under the First Amendment, (i) up to approximately $18,800 in certain charges incurred and reserves created in the fourth quarter of 2008, (ii) up to $15,000 of certain charges that may be incurred during the 12-month period commencing on March 1, 2009, including charges in connection with cost-reduction initiatives, and (iii) certain costs and fees incurred in connection with the First Amendment, will be added back to “Consolidated EBITDA” for purposes of calculating the “Consolidated Leverage Ratio” and the “Consolidated Senior Debt Ratio” (as such terms are defined under the Credit Agreement). In addition, for purposes of determining the Consolidated Leverage Ratio and the Consolidated Senior Debt Ratio as of any date prior to the earliest date on which any of the holders of Convertible Debentures may require the Company to repurchase their Convertible Debentures (currently June 1, 2010) (the “Convertible Debentures Repurchase Date”) neither (i) the earn-out payable with respect to the Company’s acquisition of Global Draw nor (ii) the principal amount of any unsecured promissory notes that may be issued in order to defer payment of up to the equivalent of $60,000 of such earn-out (provided that, among other terms of such promissory notes, no principal payment thereon is required prior to September 30, 2010), will be included as “Indebtedness” in the calculation of “Consolidated Total Debt” (as such terms are defined in the Credit Agreement). Accordingly, the promissory notes described above that were issued to the principal selling shareholder and key management of Global Draw will not be included as Indebtedness in the calculation of Consolidated Total Debt for purposes of determining the Consolidated Leverage Ratio and the Consolidated Senior Debt Ratio prior to the Convertible Debenture Repurchase Date.

In conjunction with the promissory notes issued to defer payment of a portion of the Global Draw earn-out, the revolving credit facility and the term loan facility under the Credit Agreement will mature (if earlier than the date that would otherwise apply under the terms of the Credit Agreement) on February 7, 2011 unless on such date no such promissory notes remain outstanding or the sum of the aggregate available revolving commitments under the Credit Agreement plus unrestricted cash and cash equivalents of SGI and the guarantors under the Credit Agreement is not less than $50,000 in excess of the amount required to repay in full such outstanding promissory notes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

(6) Long-Term Debt (continued)

Company of shares of its capital stock (other than disqualified stock), or the issuance of “Permitted Additional Senior Indebtedness” or “Permitted Additional Subordinated Debt”, or Indebtedness under the “Incremental Facilities” (as such terms are defined in the Credit Agreement), and (ii) any “Asset Sales” (as defined in the Credit Agreement) (up to an aggregate of $125,000 of net cash proceeds) with respect to which a reinvestment notice is timely given (provided that the Debenture Reserve Amount will (A) not exceed the outstanding principal amount of the Convertible Debentures, (B) be reduced to zero on the Convertible Debentures Repurchase Date and (C) to the extent the Debenture Reserve Amount is increased as a result of Assets Sales, will be decreased if and to the extent that term loans under the Credit Agreement are prepaid in lieu of reinvesting the net cash proceeds there from pursuant to a reinvestment notice). The 2009 Notes constitute “Permitted Additional Subordinated Debt” and, as such, the net cash proceeds from the issuance of such notes will be included in the “Debenture Reserve Amount” to the extent permitted under the First Amendment.

The First Amendment increased each of the interest rates set forth in the pricing grid in the Credit Agreement by 0.25% such that, depending upon the Consolidated Leverage Ratio, the interest rate will vary from 2.00% to 3.00% above LIBOR for eurocurrency loans, and 1.00% to 2.00% above the higher of (i) the prime rate or (ii) the Federal Funds Effective Rate plus 0.50% for base rate loans. Notwithstanding the foregoing, from the Effective Date (as defined in the Credit Agreement) until September 30, 2009, the applicable margin for eurocurrency loans was deemed to be 3.00% and the applicable margin for base rate loans was deemed to be 2.00%.

In connection with the First Amendment, SGI agreed to pay an aggregate of approximately $2,800 in fees to consenting lenders and the administrative agent.

On September 30, 2009, the Company and SGI entered into a second amendment (the “Second Amendment”) to the Credit Agreement. The primary purpose of the Second Amendment was to facilitate our ability to participate in the recently announced competitive tender process for a license to sell instant lottery tickets under the Gratta e Vinci lottery in Italy.

The Second Amendment provides that certain payments, costs and obligations made or incurred by any of the Company or its subsidiaries, whether directly or indirectly, in connection with any award of a license to operate the instant ticket lottery (the “Italian Concession”), including any up-front fee required under the tender process (collectively, “Italian Concession Obligations”), will be permitted, subject to certain limitations, under the Credit Agreement covenant restricting “Investments” (as defined in the Credit Agreement) (to the extent such Italian Concession Obligations are deemed to be Investments under the Credit Agreement). Certain “Guarantee Obligations” (as defined in the Credit Agreement) incurred by any of the Company or its subsidiaries in respect of certain Italian Concession Obligations will be permitted under the Credit Agreement covenant restricting Indebtedness. In addition, the Second Amendment provides that certain Italian Concession Obligations paid or incurred in an applicable period will be added back to the definition of Consolidated EBITDA to the extent such Italian Concession Obligations are treated as an expense in the period paid or incurred.

The Second Amendment provides further that, in lieu of any required prepayment of term loans under the Credit Agreement, the net cash proceeds from any Asset Sale or “Recovery Event” (as defined in the Credit Agreement) may, during the 12-month reinvestment period, be applied to make or incur any Investment to fund or satisfy any Italian Concession Obligations not yet made or satisfied (or, under certain circumstances, may be deemed to apply to any Investment that is made or incurred to fund or satisfy Italian Concession Obligations already funded or satisfied).

In addition, pursuant to the Second Amendment, we will be required to maintain the following revised financial ratios during the following relevant periods:

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· a Consolidated Leverage Ratio as at the last day of each fiscal quarter no more than the ratio set forth below with respect to such fiscal quarter or with respect to the period during which such fiscal quarter ends:

· 4.25 to 1.00 (fiscal quarter ended June 30, 2008 through September 30, 2009);

· 4.75 to 1.00 (fiscal quarter ended December 31, 2009 through December 31, 2010);

· 4.50 to 1.00 (fiscal quarter ended March 31, 2011 through December 31, 2011);

· 4.25 to 1.00 (fiscal quarter ended March 31, 2012 through September 30, 2012); and

· 4.00 to 1.00 (fiscal quarter ending December 31, 2012 and thereafter);

· a Consolidated Senior Debt Ratio as at the last day of each fiscal quarter no more than the ratio set forth below with respect to such fiscal quarter or with respect to the period during which such fiscal quarter ends:

· 2.50 to 1.00 (fiscal quarter ended June 30, 2008 through September 30, 2009);

· 2.75 to 1.00 (fiscal quarter ended December 31, 2009 through December 31, 2010); and

· 2.50 to 1.00 (fiscal quarter ended March 31, 2011 and thereafter);

· a “Consolidated Interest Coverage Ratio” (as defined in the Credit Agreement) for any period of four consecutive fiscal quarters of not less than the ratio set forth below with respect to such period or with respect to the period during which such four consecutive fiscal quarters ends:

· 3.50 to 1.00 (four consecutive fiscal quarters ending on or prior to September 30, 2009); and

· 3.00 to 1.00 (four consecutive fiscal quarters ending December 31, 2009 and thereafter).

Pursuant to the Second Amendment, certain additional dispositions will be permitted under the Credit Agreement covenant restricting “Dispositions,” including, subject to certain limitations, dispositions pursuant to certain permitted investments such as permitted investments in “Non-Guarantor Subsidiaries,” joint ventures and “Permitted Acquisitions” (as such terms are defined in the Credit Agreement).

The interest rates set forth in the pricing grid in the Credit Agreement will be unchanged, except that, pursuant to the Second Amendment, an interest rate level will be added to the top of the grid such that, if the Consolidated Leverage Ratio as of the most recent determination date is equal to or greater than 4.25 to 1 (and, in any event, for the six-month period beginning on September 30, 2009), the interest rate will be 3.25% above LIBOR for eurocurrency loans, and 2.25% above the higher of (i) the prime rate or (ii) the Federal Funds Effective Rate plus 0.50% for base rate loans.

The Second Amendment also provides that the commitment fee rate payable in respect of the available revolving credit facility commitments under the Credit Agreement will be (i) 0.50% per annum if the Consolidated Leverage Ratio as of the most recent determination date is less than 4.25 to 1.00 or (ii) 0.75% per annum if the Consolidated Leverage Ratio as of the most recent determination date is greater than or equal to 4.25 to 1.00 (and, in any event, for the six-month period beginning on September 30, 2009).

In connection with the Second Amendment, SGI agreed to pay an aggregate of approximately $2,800 in fees to consenting lenders and the administrative agent.

On September 30, 2009, we had $201,408 of availability under our revolving credit facility. There were no borrowings and $48,592 in outstanding letters of credit under our revolving credit facility as of September 30, 2009.

We were in compliance with our debt covenants as of September 30, 2009.

The Company may, from time to time, seek to retire or purchase its outstanding debt in open market purchases, in privately negotiated transactions, or otherwise. Any such retirement or purchase of debt may be funded by cash flows from operations, borrowings or other sources and will depend upon prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material. During the three and nine months ended September 30, 2009, we repurchased approximately $43,188 and $174,591, respectively, in aggregate principal amount of our Convertible Debentures for approximately $42,369 and $166,372, respectively, in cash under our previously announced Convertible Debenture repurchase program. During the three and nine months ended September 30, 2009, we recognized a gain on early extinguishment of debt of approximately $550 and $4,239, respectively, from the Convertible Debenture repurchase program. During the nine months ended September 30, 2009, we repurchased approximately $12,925 in aggregate principal amount of our 2004 Notes for approximately $12,396 in cash under our previously announced 2004 Notes repurchase program. During the nine months ended September 30, 2009, we recognized a gain on early extinguishment of debt of approximately $355 from the 2004 Notes repurchase program.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

(6) Long-Term Debt (continued)

The adoption of the New Convertible Debt Guidance had the following effect on our Consolidated Statements of Operations for the three and nine months ended September 30, 2008:

	Three Months Ended							Nine Months Ended
	September 30, 2008							September 30, 2008
	Previously		As		Effect of			Previously		As		Effect of
	Reported		Adjusted		Change			Reported		Adjusted		Change

Interest expense	$	17,659	$	20,920	$	3,261		$	45,962	$	55,745	$	9,783
Income tax expense	9,879		9,862		(17		)	30,725		30,672		(53		)
Net income	25,410		22,166		(3,244		)	74,313		64,583		(9,730		)
Basic net income per share	$	0.27	$	0.24	$	(0.03	)	$	0.80	$	0.69	$	(0.11	)
Diluted net income per share	$	0.27	$	0.23	$	(0.04	)	$	0.79	$	0.68	$	(0.11	)

The adoption of the New Convertible Debt Guidance had the following effect on our Consolidated Balance Sheet as of December 31, 2008:

	December 31, 2008
	Previously		As		Effect of
	Reported		Adjusted		Change

Other assets and investments	$	317,818	$	317,039	$	(779	)
Long-term debt, excluding current installments	1,216,264		1,196,083		(20,181		)
Additional paid-in capital	561,202		628,356		67,154
Accumulated earnings	105,811		58,059		(47,752		)

As of January 1, 2008, the cumulative effect of the change in accounting principle on accumulated earnings and additional paid-in capital was approximately $34,800 and $67,200, respectively.

The adoption of the New Convertible Debt Guidance had the following effect on our Consolidated Statement of Cash Flows for the nine months ended September 30, 2008:

	Nine Months Ended September 30, 2008
	Previously		As		Effect of
	Reported		Adjusted		Change

Cash flows from operating activities:
Net income	$	74,313	$	64,583	$	(9,730	)
Change in deferred income taxes	1,542		1,489		(53		)
Non-cash interest expense	3,401		13,184		9,783

As of September 30, 2009 and December 31, 2008, the equity component of the Convertible Debentures under the New Convertible Debt Guidance was approximately $62,234 and $68,592, respectively. The following represents the principal amount of the liability component, the unamortized discount, and the net carrying amount of our convertible debt instruments as of September 30, 2009 and December 31, 2008, respectively:

	September 30,			December 31,
	2009			2008
Principal	$	99,191		$	273,782
Unamortized discount	(3,439		)	(20,181		)
Net carrying amount	$	95,752		$	253,601

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

(8) Goodwill and Intangible Assets

The following disclosure presents certain information regarding our acquired intangible assets as of September 30, 2009 and December 31, 2008. Amortizable intangible assets are amortized over their estimated useful lives with no estimated residual values.

Intangible Assets	Gross Carrying Amount		Accumulated Amortization			Net Balance
Balance as of September 30, 2009
Amortizable intangible assets:
Patents	$	12,117	$	(3,506	)	$	8,611
Customer lists	29,774		(17,004		)	12,770
Customer service contracts	3,994		(2,770		)	1,224
Licenses	63,917		(39,515		)	24,402
Intellectual property	18,694		(15,924		)	2,770
Lottery contracts	31,212		(30,678		)	534
	159,708		(109,397		)	50,311
Non-amortizable intangible assets:
Trade name	37,827		(2,118		)	35,709
Connecticut off-track betting system operating right	36,059		(8,319		)	27,740
	73,886		(10,437		)	63,449
Total intangible assets	$	233,594	$	(119,834	)	$	113,760

Balance as of December 31, 2008
Amortizable intangible assets:
Patents	$	11,563	$	(2,871	)	$	8,692
Customer lists	28,772		(14,044		)	14,728
Customer service contracts	3,892		(2,505		)	1,387
Licenses	60,237		(32,615		)	27,622
Intellectual property	17,057		(11,425		)	5,632
Lottery contracts	27,926		(27,498		)	428
	149,447		(90,958		)	58,489
Non-amortizable intangible assets:
Trade name	37,285		(2,118		)	35,167
Connecticut off-track betting system operating right	35,609		(8,319		)	27,290
	72,894		(10,437		)	62,457
Total intangible assets	$	222,341	$	(101,395	)	$	120,946

The aggregate intangible amortization expense for the three and nine months ended September 30, 2009 was approximately $4,400 and $13,600, respectively. The aggregate intangible amortization expense for the three and nine months ended September 30, 2008 was approximately $6,900 and $21,800, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

(8) Goodwill and Intangible Assets (continued)

The table below reconciles the change in the carrying amount of goodwill, by reporting segment, for the period from December 31, 2008 to September 30, 2009. In 2009, we recorded (a) a $86,937 increase in goodwill associated with the final purchase price adjustment in accordance with the Global Draw earn-out, and (b) an increase in goodwill of $33,392 as a result of foreign currency translation.

Goodwill	Printed Products Group		Lottery Systems Group		Diversified Gaming Group		Totals
Balance as of December 31, 2008	$	324,245	$	190,341	$	142,625	$	657,211
Adjustments	3,999		2,554		113,776		120,329
Balance as of September 30, 2009	$	328,244	$	192,895	$	256,401	$	777,540

(9) Pension and Other Post-Retirement Plans

We have defined benefit pension plans for our U.S.-based union employees, our U.K.-based union employees, and certain Canadian-based employees (the “U.S. Plan,” the “U.K. Plan” and the “Canadian Plan,” respectively). Retirement benefits under the U.S. Plan are based upon the number of years of credited service up to a maximum of 30 years for the majority of the employees. Retirement benefits under the U.K. Plan are based on an employee’s average compensation over the two years preceding retirement. Retirement benefits under the Canadian Plan are generally based on the number of years of credited service. Our policy is to fund the minimum contribution permissible by the respective tax authorities.

The following table sets forth the combined amount of net periodic benefit cost recognized for the three and nine months ended September 30, 2009 and 2008.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Components of net periodic pension benefit cost:
Service cost	$	371		$	713		$	1,114		$	1,964
Interest cost	1,052			1,366			3,156			3,079
Expected return on plan assets	(888		)	(1,440		)	(2,665		)	(3,487		)
Amortization of actuarial losses	119			280			357			758
Amortization of prior service costs	11			11			32			32
Net periodic cost	$	665		$	930		$	1,994		$	2,346

We have a 401(k) plan for U.S.-based employees who are not covered by a collective bargaining agreement. Effective February 28, 2009, we reduced the matching contributions from 50 cents to 25 cents on the dollar for the first 6% of participant contributions for a match of up to 1.5% of eligible compensation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

(10) Income Taxes

The effective tax rates of 31.2% and 82.0%, respectively, for the three and nine months ended September 30, 2009 were determined using an estimated annual effective tax rate. The effective tax rate for the three and nine months ended September 30, 2009 includes the impact of a valuation allowance against the deferred tax asset related to foreign tax credits and the release of certain FIN 48 reserves related to tax settlements in the third quarter. The effective tax rates of 30.8% and 32.2%, respectively, for the three and nine months ended September 30, 2008 were determined using an estimated annual effective tax rate, which was less than the federal statutory rate of 35% due to lower tax rates applicable to earnings from operations outside the United States.

At December 31, 2008, the Company had a deferred tax asset for its foreign tax credit (“FTC”) carry forward of approximately $40,400. The Company has and will continue to explore tax planning strategies to use all of its FTC but at March 31, 2009, the Company established a valuation allowance of approximately $33,833 against the FTC deferred tax asset to reduce the asset to the net amount management estimates is “more likely than not” to be realized.

Further, the Company determined it is not “more likely than not” that the foreign taxes generated in 2009 will be realized in full against its U.S. tax liability during the FTC carry forward period. As a result, the Company’s 2009 annual effective income tax rate is greater than the federal statutory rate because of the valuation allowance established against the deferred tax asset for a portion of the FTC generated in 2009.

(11) Stockholders’ Equity

The following demonstrates the change in the number of shares of Class A common stock outstanding during the three months ended September 30, 2009 and during the fiscal year ended December 31, 2008:

	Three Months	Twelve Months
	Ended	Ended
	September 30,	December 31,
	2009	2008
Shares outstanding as of beginning of period	92,642	93,414
Shares issued as part of equity-based compensation plans and the ESPP, net of restricted stock units surrendered for taxes	123	655
Shares repurchased into treasury stock	—	(1,468	)
Shares outstanding as of end of period	92,765	92,601

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

(12) Stock-Based Compensation

As of September 30, 2009, we had approximately 3,266 shares available for grants of equity awards under our equity-based compensation plans.

Stock Options

A summary of the changes in stock options outstanding under our equity-based compensation plans during 2009 is presented below:

	Number of Options		Weighted Average Remaining Contract Term (Years)	Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Options outstanding as of December 31, 2008	7,378		6.0	$	21.03	$	21,516
Granted	850			12.23
Exercised	(23	)		5.88		146
Canceled	(115	)		22.89
Options outstanding as of March 31, 2009	8,090		6.0	$	20.12	$	10,927
Granted	30			12.41
Exercised	(193	)		8.31		1,750
Canceled	(309	)		26.10
Options outstanding as of June 30, 2009	7,618		5.9	$	20.14	$	18,891
Granted	10			17.82
Exercised	(89	)		11.85		—
Canceled	(197	)		25.33
Options outstanding as of September 30, 2009	7,342		5.8	$	20.10	$	18,650

Options exercisable as of September 30, 2009	4,299		4.2	$	18.22	$	15,728

The weighted-average grant date fair value of options granted during the three months ended September 30, 2009, June 30, 2009 and March 31, 2009 was $9.08, $6.00 and $5.74, respectively. For the three and nine months ended September 30, 2009, we recognized equity-based compensation expense of approximately $2,900 and $10,700, respectively, related to the vesting of stock options and the related tax benefit of approximately $850 and $3,140, respectively. For the three and nine months ended September 30, 2008, we recognized equity-based compensation expense of approximately $3,800 and $11,300, respectively, related to the vesting of stock options and the related tax benefit of approximately $1,100 and $3,300, respectively.

As of September 30, 2009, we had unearned compensation of approximately $20,200 relating to stock option awards that will be amortized over a weighted-average period of approximately two years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

(12) Stock-Based Compensation (continued)

Restricted Stock Units

A summary of the changes in RSUs outstanding under our equity-based compensation plans during 2009 is presented below:

	Number of Restricted Stock		Weighted Average Grant Date Fair Value Per Share
Non-vested units as of December 31, 2008	1,673		$	28.30
Granted	973		$	12.06
Vested	(273	)	$	28.16
Canceled	(13	)	$	26.24
Non-vested units as of March 31, 2009	2,360		$	21.88
Granted	68		$	14.55
Vested	(177	)	$	29.59
Canceled	(9	)	$	18.66
Non-vested units as of June 30, 2009	2,242		$	21.00
Granted	13		$	17.95
Vested	(55	)	$	31.75
Canceled	(35	)	$	21.24
Non-vested units as of September 30, 2009	2,165		$	20.74

For the three and nine months ended September 30, 2009, we recognized equity-based compensation expense of approximately $4,300 and $15,100, respectively, related to the vesting of RSUs and the related tax benefit of approximately $1,330 and $4,700, respectively. For the three and nine months ended September 30, 2008, we recognized equity-based compensation expense of approximately $4,300 and $12,900, respectively, related to the vesting of RSUs and the related tax benefit of approximately $1,200 and $3,800, respectively. As of September 30, 2009, we had unearned compensation of approximately $31,500 relating to RSUs that will be amortized over a weighted-average period of approximately two years.

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

We conduct substantially all of our business through our domestic and foreign subsidiaries. SGI’s obligations under the Credit Agreement, the 2008 Notes and the 2009 Notes are fully and unconditionally and jointly and severally guaranteed by Scientific Games Corporation (the “Parent Company”) and our 100%-owned domestic subsidiaries other than SGI (the “Guarantor Subsidiaries”). Our 2004 Notes and our Convertible Debentures, which were issued by the Parent Company, are fully and unconditionally and jointly and severally guaranteed by our 100%-owned domestic subsidiaries, including SGI.

Presented below is condensed consolidating financial information for (i) the Parent Company, (ii) SGI, (iii) the 100%-owned Guarantor Subsidiaries other than SGI and (iv) the 100%-owned foreign subsidiaries and the non-100%-owned domestic and foreign subsidiaries (the “Non-Guarantor Subsidiaries”) as of September 30, 2009 and December 31, 2008 and for the three and nine months ended September 30, 2009 and 2008. 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, SGI, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries assuming the guarantee structures of the Credit Agreement, the 2008 Notes, the 2009 Notes, the Convertible Debentures and the 2004 Notes were in effect at the beginning of the periods presented.

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.

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2009

	Parent Company		SGI		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated
Assets
Cash and cash equivalents	$	133,086	$	144	$	—	$	84,620	$	(4,772	)	$	213,078
Accounts receivable, net	—		83,056		40,970		88,384		—			212,410
Inventories	—		31,649		14,784		29,325		—			75,758
Other current assets	30,818		11,927		8,947		30,182		—			81,874
Property and equipment, net	2,016		188,281		118,086		256,805		—			565,188
Investment in subsidiaries	554,868		604,676		7,222		209,699		(1,376,465		)	—
Goodwill	—		273,656		74,453		429,431		—			777,540
Intangible assets	—		44,321		57,757		11,682		—			113,760
Intercompany balances	284,661		—		83,093		—		367,754			—
Other assets	25,989		151,752		13,357		112,060		(6,101		)	297,057
Total assets	$	1,031,438	$	1,389,462	$	418,669	$	1,252,188	$	(1,755,092	)	$	2,336,665

Liabilities and stockholders’ equity
Current installments of long-term debt	$	95,752	$	5,500	$	—	$	37,515	$	—		$	138,767
Current liabilities	41,830		56,494		42,124		82,451		(4,786		)	218,113
Long-term debt, excluding current installments	187,075		954,241		—		48,133		—			1,189,449
Other non-current liabilities	39,012		9,735		14,884		58,930		6			122,567
Intercompany balances	—		136,486		—		231,255		(367,741		)	—
Stockholders’ equity	667,769		227,006		361,661		793,904		(1,382,571		)	667,769
Total liabilities and stockholders’ equity	$	1,031,438	$	1,389,462	$	418,669	$	1,252,188	$	(1,755,092	)	$	2,336,665

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2008

	Parent Company		SGI		Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated
Assets
Cash and cash equivalents	$	62,948	$	204	$	—	$	79,016		$	(1,529	)	$	140,639
Accounts receivable, net	—		85,395		45,032		82,060			—			212,487
Inventories	—		28,877		16,909		30,010			(425		)	75,371
Other current assets	27,063		19,403		7,337		29,478			—			83,281
Property and equipment, net	2,294		185,560		133,024		255,201			(600		)	575,479
Investment in subsidiaries	421,781		278,500		2,264		(931		)	(701,614		)	—
Goodwill	—		273,656		74,453		309,102			—			657,211
Intangible assets	—		44,774		61,036		15,136			—			120,946
Intercompany balances	562,105		—		—		—			(562,105		)	—
Other assets	45,266		165,601		15,042		97,230			(6,100		)	317,039
Total assets	$	1,121,457	$	1,081,970	$	355,097	$	896,302		$	(1,272,373	)	$	2,182,453

Liabilities and stockholders’ equity
Current installments of long-term debt	$	—	$	5,500	$	—	$	37,884		$	—		$	43,384
Current liabilities	24,537		49,065		48,699		96,534			(1,535		)	217,300
Long-term debt, excluding current installments	453,601		740,375		—		2,107			—			1,196,083
Other non-current liabilities	47,490		9,971		16,821		55,569			6			129,857
Intercompany balances	—		239,744		96,393		225,966			(562,103		)	—
Stockholders’ equity	595,829		37,315		193,184		478,242			(708,741		)	595,829
Total liabilities and stockholders’ equity	$	1,121,457	$	1,081,970	$	355,097	$	896,302		$	(1,272,373	)	$	2,182,453

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended September 30, 2009

	Parent Company			SGI			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Eliminating Entries			Consolidated

Operating revenues	$	—		$	96,954		$	34,334		$	108,864	$	(1,006	)	$	239,146
Cost of services and cost of sales (exclusive of depreciation and amortization)	—			29,301			55,038			54,971		(1,024		)	138,286
Selling, general and administrative expenses	12,211			13,014			3,931			9,689		16			38,861
Depreciation and amortization	172			9,347			8,031			14,499		—			32,049
Operating income	(12,383		)	45,292			(32,666		)	29,705		2			29,950
Interest expense	5,122			16,231			5			1,378		—			22,736
Other income	(879		)	38,264			(58,879		)	6,735		2			(14,757		)
Income (loss) before equity in income of subsidiaries, and income taxes	(16,626		)	(9,203		)	26,208			21,592		—			21,971
Equity in income of subsidiaries	36,512			25,176			—			—		(61,688		)	—
Income tax expense	4,780			2			4			2,079		—			6,865
Net income	$	15,106		$	15,971		$	26,204		$	19,513	$	(61,688	)	$	15,106

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended September 30, 2008

	Parent Company			SGI			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Eliminating Entries			Consolidated

Operating revenues	$	—		$	129,920		$	43,030		$	120,228	$	(1,243	)	$	291,935
Cost of services and cost of sales (exclusive of depreciation and amortization)	—			77,857			29,770			68,338		(1,228		)	174,737
Selling, general and administrative expenses	14,776			12,924			4,294			9,958		(15		)	41,937
Depreciation and amortization	283			12,486			7,833			15,885		—			36,487
Operating income	(15,059		)	26,653			1,133			26,047		—			38,774
Interest expense	7,893			12,082			10			935		—			20,920
Other income	(18,714		)	24,099			(28,446		)	8,887		—			(14,174		)
Income (loss) before equity in income of subsidiaries, and income taxes	(4,238		)	(9,528		)	29,569			16,225		—			32,028
Equity in income of subsidiaries	26,047			27,516			—			—		(53,563		)	—
Income tax expense	(357		)	6,527			116			3,576		—			9,862
Net income	$	22,166		$	11,461		$	29,453		$	12,649	$	(53,563	)	$	22,166

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME

Nine Months Ended September 30, 2009

	Parent Company			SGI			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Eliminating Entries			Consolidated

Operating revenues	$	—		$	297,829		$	97,726		$	302,053	$	(2,744	)	$	694,864
Cost of services and cost of sales (exclusive of depreciation and amortization)	—			87,692			165,408			158,242		(2,766		)	408,576
Selling, general and administrative expenses	41,250			37,504			11,394			29,303		28			119,479
Employee termination costs	1,346			1,546			433			595		—			3,920
Depreciation and amortization	517			26,996			24,874			41,066		—			93,453
Operating income	(43,113		)	144,091			(104,383		)	72,847		(6		)	69,436
Interest expense	19,875			39,530			44			3,491		—			62,940
Other income	(29,193		)	104,124			(133,543		)	8,254		(7		)	(50,365		)
Income (loss) before equity in income of subsidiaries, and income taxes	(33,795		)	437			29,116			61,102		1			56,861
Equity in income (loss) of subsidiaries	86,889			44,234			—			—		(131,123		)	—
Income tax expense	42,832			(14		)	126			3,655		—			46,599
Net income	$	10,262		$	44,685		$	28,990		$	57,447	$	(131,122	)	$	10,262

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME

Nine Months Ended September 30, 2008

	Parent Company			SGI		Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Eliminating Entries			Consolidated

Operating revenues	$	—		$	386,155	$	121,816		$	350,167	$	(3,227	)	$	854,911
Cost of services and cost of sales (exclusive of depreciation and amortization)	—			221,873		80,730			204,816		(3,217		)	504,202
Selling, general and administrative expenses	45,884			42,424		12,675			37,070		(50		)	138,003
Employee termination costs	—			2,772		—			—		—			2,772
Depreciation and amortization	832			38,160		23,608			43,499		—			106,099
Operating income	(46,716		)	80,926		4,803			64,782		40			103,835
Interest expense	38,631			15,169		40			1,905		—			55,745
Other income	(31,525		)	62,651		(85,429		)	7,098		40			(47,165		)
Income (loss) before equity in income of subsidiaries, and income taxes	(53,822		)	3,106		90,192			55,779		—			95,255
Equity in income of subsidiaries	132,308			85,057		—			—		(217,365		)	—
Income tax expense	13,903			9,637		410			6,722		—			30,672
Net income	$	64,583		$	78,526	$	89,782		$	49,057	$	(217,365	)	$	64,583

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2009

	Parent Company			SGI			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated
Net cash provided by operating activities	$	(28,988	)	$	54,155		$	73,462		$	77,365		$	—		$	175,994
Cash flows from investing activities:
Capital and wagering systems expenditures	—			(22,016		)	(5,384		)	(26,605		)	—			(54,005		)
Business acquisitions, net of cash acquired	—			—			(897		)	(88,556		)	—			(89,453		)
Other assets and investments	86			(143,961		)	(12,461		)	(239,747		)	373,654			(22,429		)
Net cash provided by (used in) investing activities	86			(165,977		)	(18,742		)	(354,908		)	373,654			(165,887		)

Cash flows from financing activities:
Net proceeds (payments) on long-term debt	(179,125		)	213,726			—			41,425			—			76,026
Net proceeds from stock issue	2,191			(3,074		)	139,989			236,739			(373,654		)	2,191
Purchase of treasury stock	(5,539		)	—			—			—			—			(5,539		)
Payment of financing fees	—			(11,535		)	—			—			—			(11,535		)
Other, principally intercompany balances	281,515			(87,355		)	(197,950		)	3,790			—			—
Net cash provided by (used in) financing activities	99,042			111,762			(57,961		)	281,954			(373,654		)	61,143

Effect of exchange rate changes on cash	—			—			—			1,189			—			1,189

Increase (decrease) in cash and cash equivalents	70,140			(60		)	(3,241		)	5,600			—			72,439
Cash and cash equivalents, beginning of period	62,949			204			(1,528		)	79,014			—			140,639
Cash and cash equivalents, end of period	$	133,089		$	144		$	(4,769	)	$	84,614		$	—		$	213,078

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine months Ended September 30, 2008

	Parent Company			SGI			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated
Net cash provided by operating activities	$	(22,013	)	$	(7,995	)	$	121,552		$	56,118		$	(6,217	)	$	141,445

Cash flows from investing activities:
Capital and wagering systems expenditures	(690		)	(32,490		)	(9,233		)	(87,800		)	—			(130,213		)
Business acquisitions, net of cash acquired	—			—			(2,980		)	(194		)	—			(3,174		)
Other assets and investments	962			(4,769		)	(38,004		)	(15,365		)	21,639			(35,537		)
Net cash provided by (used in) investing activities	272			(37,259		)	(50,217		)	(103,359		)	21,639			(168,924		)

Cash flows from financing activities:
Net proceeds (payments) on long-term debt	(602,000		)	747,242			—			46,932			—			192,174
Net proceeds from stock issue	(5,309		)	3,818			(2,319		)	28,736			(21,906		)	3,020
Purchase of treasury stock	(18,017		)	—			—			—			—			(18,017		)
Payment of financing fees	—			(15,085		)	—			—			—			(15,085		)
Other, principally intercompany balances	741,910			(690,392		)	(68,748		)	15,230			2,000			—
Net cash provided by (used in) financing activities	116,584			45,583			(71,067		)	90,898			(19,906		)	162,092

Effect of exchange rate changes on cash	—			—			—			(907		)	(1,339		)	(2,246		)

Increase (decrease) in cash and cash equivalents	94,843			329			268			42,750			(5,823		)	132,367
Cash and cash equivalents, beginning of period	955			(119		)	(268		)	28,835			—			29,403
Cash and cash equivalents, end of period	$	95,798		$	210		$	—		$	71,585		$	(5,823	)	$	161,770

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

The following discussion addresses the results of operations of Scientific Games Corporation (together with its consolidated subsidiaries, “we,” “us,” “our” or the “Company” unless otherwise specified or the context otherwise requires), for the three and nine months ended September 30, 2009, 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, 2008 included in our Current Report on Form 8-K filed on May 18, 2009.

The first and fourth quarters of the calendar year traditionally comprise the weakest season for our Diversified Gaming segment. 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. Additionally, the fourth quarter is the weakest quarter for Global Draw Limited (“Global Draw”) due to reduced wagering during the holiday season. 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 of our Lottery Systems Group can vary substantially from period to period as a result of the timing of revenue recognition for major equipment sales and software licensing transactions and the size of the jackpots of lottery games such as Powerball® and Mega Millions during the relevant period. In addition, Printed Products sales may vary depending on the season and timing of contract awards, changes in customer budgets, changes in the way that we price our contracts, inventory ticket levels, lottery retail sales and general economic conditions.

Background

We operate in three business segments: Printed Products Group, Lottery Systems Group and Diversified Gaming Group. Our revenues consist of two major components: services revenues and sales revenues.

Printed Products Group

We provide instant lottery tickets and related services. Instant ticket and related services include 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 access to a licensed property portfolio, including Deal or No Deal™, Major League Baseball®, National Basketball Association, Harley-Davidson®, Wheel-of-Fortune®, Monopoly™, Corvette® and World Poker Tour®. This division also includes promotional instant tickets and pull-tab tickets that we sell to both lottery and non-lottery customers.

We are a manufacturer of prepaid phone cards, which entitle cellular phone users to a pre-specified value of airtime. Prepaid phone cards offer consumers a cost-effective way to purchase cellular airtime, without requiring phone companies to extend credit or consumers to commit to contracts. Prepaid phone cards utilize the same secure process that we employ in the production of instant lottery tickets.

In 2007, we entered into an arrangement to sell instant lottery tickets directly to the China Sports Lottery between March and December in 2008. During 2008, we recorded approximately $40.2 million in revenues from the China Sports Lottery as a result of this temporary arrangement. Beginning in 2009, the China Sports Lottery began purchasing instant lottery tickets through our joint venture, CSG Lottery Technology (Beijing) Co. Ltd., (“CSG”), in which we have a 49% interest.

Lottery Systems Group

Our lottery systems business includes the supply of transaction processing software for the accounting and validation of 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 the operation of credit card processing systems.

Diversified Gaming Group

Our Diversified Gaming Group provides services and systems to private and public operators in the wide area gaming markets and in the pari-mutuel wagering industry. Our product offering includes server-based gaming machines, video lottery terminals (“VLTs”), monitor games, wagering systems for the pari-mutuel racing industry, sports betting systems and services and Great Britain regulated Category C Amusement With Prize (“AWP”) and Skill With Prize (“SWP”) terminals. Business units within the Diversified Gaming Group include Global Draw, a leading supplier of gaming terminals, systems and monitor games to licensed bookmakers, primarily in the U.K., Austria and Mexico; Scientific Games Racing LLC, a leading worldwide supplier of computerized systems for pari-mutuel wagering; Games Media Limited (“Games Media”), our AWP and SWP terminal supplier to U.K. pub operators; and our pari-mutuel gaming operations in Connecticut, Maine and the Netherlands.

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Results of Operations

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

The following analysis compares the results of operations for the quarter ended September 30, 2009 to the results of operations for the quarter ended September 30, 2008.

Overview

Revenue Analysis

For the quarter ended September 30, 2009, total revenue was $239.1 million compared to $291.9 million for the quarter ended September 30, 2008, a decrease of $52.8 million or 18%. Our service revenue for the quarter ended September 30, 2009 was $222.0 million compared to $265.4 million for the quarter ended September 30, 2008, a decrease of $43.4 million, or 16%. The decrease was primarily attributable to instant lottery tickets now being sold in China by our joint venture rather than by us directly ($12.8 million), the impact of revised terms of previously announced lottery contract awards ($11.9 million), the loss of the South Carolina, West Virginia and South Dakota online lottery contracts ($3.5 million), a decrease in our licensed property revenues ($6.2 million), decreased sales of instant lottery tickets internationally and domestically ($3.9 million), lower dollars wagered, or handle, in our pari-mutuel business ($2.2 million) and the negative impact of foreign exchange rates ($7.8 million), partially offset by an increase in the sale of instant lottery tickets in Italy and the United Kingdom ($3.7 million) and increased service revenue from Global Draw and Games Media ($3.3 million).

Our sales revenue for the quarter ended September 30, 2009 was $17.1 million compared to $26.5 million for the quarter ended September 30, 2008, a decrease of $9.4 million or 35%. The decrease was primarily due to lower phone card sales revenue in the quarter ($4.3 million), lower hardware and software sales in Lottery Systems and Diversified Gaming ($6.4 million) and the negative impact of foreign exchange rates.

Expense Analysis

Cost of services of $127.8 million for the quarter ended September 30, 2009 was $29.7 million or 19% lower than for the quarter ended September 30, 2008. The decrease was primarily due to instant lottery tickets now being produced in China by our joint venture rather than by us directly ($12.2 million), lower costs associated with our licensed properties business ($5.2 million), savings related to the Company’s Profitability Improvement Program ($4.4 million), our exit from the Mexico online lottery contract ($2.3 million), the loss of our South Carolina, West Virginia and South Dakota online lottery contracts ($2.5 million), lower costs associated with decreased revenue from our pari-mutuel and venue management business ($1.6 million) and the impact of foreign exchange rates ($4.3 million).

Cost of sales of $10.5 million for the quarter ended September 30, 2009 was $6.8 million or 39% lower than for the quarter ended September 30, 2008 primarily due to lower costs in our phone card business as a result of lower sales in the quarter and lower costs associated with decreased Lottery Systems and Diversified Gaming hardware and software sales.

Selling, general and administrative expense of $38.9 million for the quarter ended September 30, 2009 was $3.0 million or 7% lower than for the quarter ended September 30, 2008. The decrease was primarily attributable to reduced incentive compensation costs, savings realized from our Profitability Improvement Program ($2.5 million) and the favorable impact of foreign exchange rates.

Depreciation and amortization expense of $32.0 million for the quarter ended September 30, 2009 decreased $4.5 million or 12% from the quarter ended September 30, 2008 primarily due to decreased depreciation and amortization on our new Pennsylvania online lottery contract and decreased depreciation and amortization from the Mexico, Oklahoma, South Carolina, West Virginia and South Dakota online lottery contracts, partially offset by increased depreciation from our domestic pari-mutuel business.

Interest expense of $22.7 million for the quarter ended September 30, 2009 increased $1.8 million or 9% from the quarter ended September 30, 2008, primarily attributable to increased borrowings from the issuance of the 2009 Notes, partially offset by decreased borrowings from the repurchase of debt during the third quarter of 2009 and a decline in LIBOR rates.

Equity in earnings of joint ventures primarily reflects our share of the earnings of CLN in connection with the operation of the Italian Gratta e Vinci instant lottery, our share of the earnings of CSG, our share of the earnings of Roberts Communications Network, LLC (“RCN”) and our interest in Guard Libang. For the quarter ended September 30, 2009, our share of CLN’s income totaled $11.2 million compared to $12.0 million in the quarter ended September 30, 2008. The decrease in income for the quarter ended September 30, 2009 primarily reflects the negative impact of foreign exchange rates and lower retail sales. For the quarter ended September 30, 2009 our share of the earnings of CSG was $1.5 million; there was no comparable amount in 2008. For the quarters ended September 30, 2009 and 2008, our share of the earnings of RCN was $0.9 million and $1.0 million, respectively. For the quarters ended September 30, 2009 and 2008, our share of

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the earnings of Guard Libang was $0.6 million and $0.5 million respectively.

Income tax expense was $6.9 million for the quarter ended September 30, 2009 compared to $9.9 million for the quarter ended September 30, 2008. The effective income tax rates for the quarters ended September 30, 2009 and 2008 were 31.2% and 30.8%, respectively. The effective tax rate for the three months ended September 30, 2009 includes the impact of the release of certain FIN 48 reserves associated with tax settlements in the quarter. The effective tax rate for the quarter ended September 30, 2008 was less than the U.S. federal statutory rate of 35% due to lower tax rates applicable to earnings on operations outside the United States.

Segment Overview

Printed Products

For the quarter ended September 30, 2009, total revenue for Printed Products was $120.8 million compared to $154.6 million for the quarter ended September 30, 2008, a decrease of $33.8 million or 22%. For the quarter ended September 30, 2009, service revenue for Printed Products was $117.7 million compared to $147.1 million in the corresponding period in the prior year, a decrease of $29.4 million or 20%. The decrease was primarily attributable to instant lottery tickets now being sold in China by our joint venture rather than by us directly ($12.8 million), the impact of the revised terms of previously announced lottery contract awards ($5.4 million), the loss of our cooperative services contract with Ohio, decreased licensed property revenues ($6.2 million), decreased sales of instant lottery tickets internationally and domestically ($3.9 million) and the negative impact of foreign exchange rates ($2.8 million). The decrease was partially offset by an increase in the sale of instant lottery tickets in Italy and the United Kingdom ($3.7 million).

Printed Products sales revenue for the quarter ended September 30, 2009 was $3.0 million compared to $7.4 million for the quarter ended September 30, 2008, a decrease of $4.4 million or 59%. The decrease was primarily the result of lower phone card sales revenue in the quarter ($4.3 million).

Cost of services of $69.9 million for the quarter ended September 30, 2009 was $21.6 million or 24% lower than for the quarter ended September 30, 2008. The decrease was primarily due to instant lottery tickets now being produced in China by our joint venture rather than by us directly ($12.2 million), lower costs associated with our licensed properties business ($5.2 million), the loss of our cooperative services contract with Ohio, lower costs associated with the decreased sales of instant lottery tickets, savings related to the Company’s Profitability Improvement Program and the impact of foreign exchange rates ($2.5 million).

Cost of sales of $2.2 million for the quarter ended September 30, 2009 was $2.2 million or 50% lower than for the quarter ended September 30, 2008 primarily due to lower costs in our phone card business as a result of lower sales in the quarter.

Selling, general and administrative expense of $11.8 million for the quarter ended September 30, 2009 was $2.5 million or 17% lower than for the quarter ended September 30, 2008. The decrease was primarily attributable to reduced incentive compensation costs, savings realized from our Profitability Improvement Program ($0.9 million) and the impact of foreign exchange rates.

Depreciation and amortization expense of $8.2 million for the quarter ended September 30, 2009 decreased $1.1 million or 12% compared to the quarter ended September 30, 2008, primarily due to reduced depreciation and amortization from our domestic and international contracts.

Lottery Systems

For the quarter ended September 30, 2009, total revenue for Lottery Systems was $65.5 million compared to $77.4 million for the quarter ended September 30, 2008, a decrease of $11.9 million or 15%. Lottery Systems service revenue for the quarter ended September 30, 2009 was $52.3 million compared to $62.4 million for the quarter ended September 30, 2008, a decrease of $10.1 million or 16%. The decrease was primarily due to the revised terms of our online lottery contracts ($6.5 million), the loss of the South Carolina, West Virginia and South Dakota online lottery contracts ($3.5 million) and the impact of foreign exchange rates.

Lottery Systems sales revenue for the quarter ended September 30, 2009 was $13.1 million compared to $15.1 million for the

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quarter ended September 30, 2008, a decrease of $2.0 million or 13%. The decrease was primarily due to lower sales of Lottery Systems hardware and software in 2009 ($4.3 million), partially offset by increased sales of lottery terminals to Italy ($3.3 million).

Cost of services of $26.7 million for the quarter ended September 30, 2009 was $5.9 million or 18% lower than for the quarter ended September 30, 2008. The decrease was primarily due to our exit from the Mexico online lottery contract ($2.3 million) and the loss of our South Carolina, West Virginia and South Dakota online lottery contracts ($2.5 million).

Cost of sales of $7.7 million for the quarter ended September 30, 2009 was $3.9 million or 34% lower than for the quarter ended September 30, 2008, primarily due to fewer lottery hardware and software sales in 2009.

Selling, general and administrative expense of $8.2 million for the quarter ended September 30, 2009 was $1.3 million or 19% higher than for the quarter ended September 30, 2008. The increase was primarily attributable to a favorable adjustment made to internal labor allocation rates in 2008 and increased hardware engineering expenses, partially offset by reduced incentive compensation costs and savings realized from our Profitability Improvement Program.

Depreciation and amortization expense of $11.5 million for the quarter ended September 30, 2009 decreased $3.9 million or 25% compared to the quarter ended September 30, 2008, primarily due to decreased depreciation and amortization on our new Pennsylvania online lottery contract and decreased depreciation and amortization from the Mexico, Oklahoma, South Carolina, West Virginia and South Dakota online lottery contracts.

Diversified Gaming

For the quarter ended September 30, 2009, total revenue for Diversified Gaming was $52.9 million compared to $59.9 million for the quarter ended September 30, 2008, a decrease of $7.0 million or 12%. Diversified Gaming service revenue for the three months ended September 30, 2009 was $51.9 million compared to $55.9 million for the quarter ended September 30, 2008, a decrease of $4.0 million or 7%. The decrease in service revenue was primarily due to lower handle in our pari-mutuel and venue management business ($2.2 million) and the negative impact of foreign exchange rates, partially offset by increased service revenue from Global Draw and Games Media ($3.3 million).

Diversified Gaming sales revenue for the quarter ended September 30, 2009 was $0.9 million compared to $4.0 million for the quarter ended September 30, 2008, a decrease of $3.1 million or 78%. The decrease was primarily due to decreased sales from Games Media reflecting the expected decline in sales of analog AWP terminals as a result of the roll-out of digital AWP terminals, which are being deployed under revenue participation agreements ($0.2 million), lower sales from Global Draw ($2.3 million) and the negative impact of foreign exchange rates.

Cost of services of $31.1 million for the quarter ended September 30, 2009 was $2.3 million or 7% lower than for the quarter ended September 30, 2008. The decrease was primarily due to lower costs associated with decreased revenue from our pari-mutuel and venue management business ($1.6 million), lower costs from Global Draw and the impact of foreign exchange rates ($1.5 million), partially offset by costs from increased service revenue from Games Media.

Cost of sales of $0.6 million for the quarter ended September 30, 2009 was $0.7 million or 54% lower than for the quarter ended September 30, 2008, primarily due to reduced sales from Games Media and Global Draw.

Selling, general and administrative expense of $5.6 million for the quarter ended September 30, 2009 was $0.2 million or 4% higher than for the quarter ended September 30, 2008. The increase was primarily due to increased costs from Global Draw and from our domestic pari-mutuel business, partially offset by lower costs from Games Media.

Depreciation and amortization expense of $12.2 million for the quarter ended September 30, 2009 increased $0.7 million or 6% from the quarter ended September 30, 2008, primarily due to increased depreciation from Games Media and from our domestic pari-mutuel business.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

The following analysis compares the results of operations for the nine months ended September 30, 2009 to the results of operations for the nine months ended September 30, 2008.

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Overview

Revenue Analysis

For the nine months ended September 30, 2009, total revenue was $694.9 million compared to $854.9 million for the nine months ended September 30, 2008, a decrease of $160.0 million or 19%. Our service revenue for the nine months ended September 30, 2009 was $650.6 million compared to $764.0 million for the nine months ended September 30, 2008, a decrease of $113.4 million, or 15%. The decrease was primarily attributable to instant lottery tickets now being sold in China by our joint venture rather than by us directly ($25.2 million), the revised terms of previously announced lottery contract awards ($43.8 million), the loss of the South Carolina, West Virginia and South Dakota online lottery contracts, decreased licensed property revenues ($15.5 million), lower handle in our pari-mutuel and venue management business ($8.9 million) and the negative impact of foreign exchange rates ($31.6 million). The decrease was partially offset by increased revenue from instant ticket validation services in China ($7.8 million) and increased service revenue from Global Draw and Games Media ($13.1million).

Our sales revenue for the nine months ended September 30, 2009 was $44.2 million compared to $90.9 million for the nine months ended September 30, 2008, a decrease of $46.7 million or 51%. The decrease was primarily the result of lower phone card sales revenue ($12.9 million), decreased Lottery Systems and Diversified Gaming hardware and software sales in 2009 ($29.5 million) and the negative impact of foreign exchange rates ($7.7 million).

Expense Analysis

Cost of services of $377.7 million for the nine months ended September 30, 2009 was $62.7 million or 14% lower than for the nine months ended September 30, 2008. The decrease was primarily due to instant lottery tickets now being produced in China by our joint venture rather than by us directly ($23.2 million), lower costs associated with our licensed properties ($8.2 million), savings related to the Company’s Profitability Improvement Program ($11.4 million), the loss of our South Carolina, West Virginia and South Dakota online lottery contracts ($2.5 million), decreased costs from the Mexico online contract ($6.2 million), lower costs associated with decreased revenue from our pari-mutuel and venue management business ($5.9 million) and the impact of foreign exchange rates, partially offset by increased costs related to China ($1.9 million) and increased costs associated with increased service revenue from Global Draw and Games Media ($5.1 million).

Cost of sales of $30.9 million for the nine months ended September 30, 2009 was $32.9 million or 52% lower than for the nine months ended September 30, 2008 primarily due to lower costs in our phone card business as a result of lower sales revenue, fewer Lottery Systems hardware and software sales, reduced sales from Games Media and Global Draw and the impact of foreign exchange rates.

Selling, general and administrative expense of $119.5 million for the nine months ended September 30, 2009 was $18.5 million or 13% lower than for the nine months ended September 30, 2008. The decrease was primarily attributable to reduced incentive compensation costs ($6.2 million), savings realized from our Profitability Improvement Program ($6.8 million) and the favorable impact of foreign exchange rates offset by costs associated with a property tax settlement.

Employee termination costs of $3.9 million for the nine months ended September 30, 2009 were a result of our cost reduction initiatives. Employee termination costs of $2.8 million for the nine months ended September 30, 2008 were a result of the restructuring of our phone card business in the U.K.

Depreciation and amortization expense of $93.5 million for the nine months ended September 30, 2009 decreased $12.6 million or 12% from the nine months ended September 30, 2008 primarily due to decreased depreciation and amortization on our new Pennsylvania online lottery contract and decreased depreciation and amortization from the Oklahoma and Mexico online lottery contracts, partially offset by increased depreciation from Global Draw, Games Media and our domestic pari-mutuel business.

Interest expense of $62.9 million for the nine months ended September 30, 2009 increased $7.2 million or 13% from the nine months ended September 30, 2008, primarily attributable to increased borrowings from the 2009 Notes and the June 2008 debt refinancing, partially offset by decreased borrowings from the repurchase of debt during 2009 and a decline in LIBOR rates.

Equity in earnings of joint ventures primarily reflects our share of the earnings from the CLN, our share of the earnings from CSG, our share of the earnings of RCN and our interest in Guard Libang. For the nine months ended September 30, 2009, our share of CLN’s income totaled $37.8 million compared to $43.0 million in the nine months ended September 30, 2008. The decrease in income for the nine months ended September 30, 2009 primarily reflects the negative impact of foreign exchange rates. For the nine months ended September 30, 2009 and 2008, our share of the earnings of CSG was $2.9 million and $0.0 million respectively. For the nine months ended September 30, 2009 and 2008, our share of the earnings of RCN was $2.2 million and $2.9 million, respectively. For the nine months ended September 30, 2009 and 2008, our share of the earnings of Guard Libang was $2.3 million and $2.8 million respectively.

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Income tax expense was $46.6 million for the nine months ended September 30, 2009 compared to $30.7 million for the nine months ended September 30, 2008. The effective income tax rates for the nine months ended September 30, 2009 and 2008 were 82.0% and 32.2%, respectively. The effective rate for the nine months ended September 30, 2009 includes the impact of a valuation allowance against the deferred tax asset related to foreign tax credits. The effective tax rate for the nine months ended September 30, 2008 was less than the U.S. federal statutory rate of 35% due to lower tax rates applicable to earnings on operations outside the United States.

Segment Overview

Printed Products

For the nine months ended September 30, 2009, total revenue for Printed Products was $350.4 million compared to $445.8 million for the nine months ended September 30, 2008, a decrease of $95.4 million or 21%. For the nine months ended September 30, 2009, service revenue for Printed Products was $340.6 million compared to $421.2 million in the corresponding period in the prior year, a decrease of $80.6 million or 19%. The decrease was primarily attributable to instant lottery tickets now being sold in China by our joint venture rather than by us directly ($25.2 million), the impact of the revised terms of previously announced lottery contract awards ($25.1 million), decreased licensed property revenues ($15.5 million) and the negative impact of foreign exchange rates ($12.4 million), partially offset by an increase in the sale of instant lottery tickets in Italy and the United Kingdom ($3.7 million).

Printed Products sales revenue for the nine months ended September 30, 2009 was $9.8 million compared to $24.6 million for the nine months ended September 30, 2008, a decrease of $14.8 million or 60%. The decrease was primarily the result of lower phone card sales revenue ($12.9 million) and decreased sales in Germany due to the closing of the Honsel facility in the first quarter of 2008 ($1.3 million).

Cost of services of $202.6 million for the nine months ended September 30, 2009 was $47.1 million or 19% lower than for the nine months ended September 30, 2008. The decrease was primarily due to instant lottery tickets now being produced in China by our joint venture rather than by us directly ($23.2 million), lower costs associated with our licensed properties ($8.2 million), savings related to the Company’s Profitability Improvement Program and the impact of foreign exchange rates.

Cost of sales of $6.7 million for the nine months ended September 30, 2009 was $9.6 million or 59% lower than for the nine months ended September 30, 2008 primarily due to lower costs in our phone card business as a result of lower sales, the decline of sales in Germany and the impact of foreign exchange rates.

Selling, general and administrative expense of $34.1 million for the nine months ended September 30, 2009 was $11.0 million or 24% lower than for the nine months ended September 30, 2008. The decrease was primarily attributable to reduced incentive compensation costs, savings realized from our Profitability Improvement Program and the impact of foreign exchange rates.

Employee termination costs of $2.0 million for the nine months ended September 30, 2009 were a result of our cost reduction initiatives. Employee termination costs of $2.8 million for the nine months ended September 30, 2008 were a result of our restructuring of phone card manufacturing in the U.K.

Depreciation and amortization expense of $24.1million for the nine months ended September 30, 2009 decreased $4.6 million or 16% compared to the nine months ended September 30, 2008, primarily due to reduced depreciation and amortization from our domestic and international contracts.

Lottery Systems

For the nine months ended September 30, 2009, total revenue for Lottery Systems was $190.5 million compared to $225.7 million for the nine months ended September 30, 2008, a decrease of $35.2 million or 16%. Lottery Systems service revenue for the nine months ended September 30, 2009 was $159.4 million compared to $178.3 million for the nine months ended September 30, 2008, a decrease of $18.9 million or 11%. The decrease was primarily due to the revised terms of our online lottery contracts ($19.8 million), the loss of the South Carolina, West Virginia and South Dakota online lottery contracts ($6.2 million) and the negative impact of foreign exchange rates ($2.4 million), partially offset by increased revenue from instant ticket validation services in China ($7.8 million) and the improved rate on the Puerto Rico online contract.

Lottery Systems sales revenue for the nine months ended September 30, 2009 was $31.1 million compared to $47.3 million for the nine months ended September 30, 2008, a decrease of $16.2 million or 34%. The decrease was primarily due to decreased Lottery Systems hardware and software sales in 2009 ($16.5 million) and the negative impact of foreign exchange rates ($3.4 million), partially offset by increased terminal sales to Italy.

Cost of services of $83.5 million for the nine months ended September 30, 2009 was $8.9 million or 10% lower than for the

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nine months ended September 30, 2008. The decrease was primarily due to decreased costs from the Mexico online lottery contract ($6.2 million) and the loss of our South Carolina, West Virginia, and South Dakota online lottery contracts ($4.2 million), partially offset by increased costs associated with the new Connecticut online contract ($1.8 million) and increased costs related to China.

Cost of sales of $22.0 million for the nine months ended September 30, 2009 was $16.4 million or 43% lower than for the nine months ended September 30, 2008, primarily due to fewer Lottery Systems hardware and software sales in 2009 and the impact of foreign exchange rates, partially offset by increased costs from terminal sales to Italy.

Selling, general and administrative expense of $23.0 million for the nine months ended September 30, 2009 was $2.7 million or 11% lower than for the nine months ended September 30, 2008. The decrease was primarily attributable to reduced incentive compensation costs and savings realized from our Profitability Improvement Program ($2.8 million).

Employee termination costs of $0.1 million for the nine months ended September 30, 2009 were a result of our cost reduction initiatives.

Depreciation and amortization expense of $32.9 million for the nine months ended September 30, 2009 decreased $12.9 million or 28% compared to the nine months ended September 30, 2008, primarily due to decreased depreciation and amortization on our new Pennsylvania online lottery contract and decreased depreciation and amortization from the Mexico and Oklahoma online lottery contracts.

Diversified Gaming

For the nine months ended September 30, 2009, total revenue for Diversified Gaming was $154.0 million compared to $183.4 million for the nine months ended September 30, 2008, a decrease of $29.4 million or 16%. Diversified Gaming service revenue for the nine months ended September 30, 2009 was $150.6 million compared to $164.6 million for the nine months ended September 30, 2008, a decrease of $14.0 million or 9%. The decrease in service revenue was primarily due to lower handle in our pari-mutuel and venue management business ($8.9 million) and the negative impact of foreign exchange rates ($16.9 million), partially offset by increased service revenue from Global Draw and Games Media ($13.1 million).

Diversified Gaming sales revenue for the nine months ended September 30, 2009 was $3.4 million compared to $18.9 million for the nine months ended September 30, 2008, a decrease of $15.5 million or 82%. The decrease was primarily due to the absence of a Global Draw content sale from 2008 ($2.4 million), decreased sales from Games Media reflecting the expected decline in sales of analog AWP terminals as a result of the roll-out of digital AWP terminals ($6.3 million), which are being deployed under revenue participation agreements, lower sales from Global Draw, the negative impact of foreign exchange rates ($3.8 million) and a one-time sale of pari-mutuel terminals in 2008 ($1.1 million).

Cost of services of $91.6 million for the nine months ended September 30, 2009 was $6.7 million or 7% lower than for the nine months ended September 30, 2008. The decrease was primarily due to lower costs associated with decreased revenue from our pari-mutuel and venue management business ($5.9 million) and the impact of foreign exchange rates ($7.0 million), partially offset by increased costs associated with increased service revenue from Global Draw and Games Media ($7.9 million).

Cost of sales of $2.1 million for the nine months ended September 30, 2009 was $7.0 million or 77% lower than for the nine months ended September 30, 2008, primarily due to reduced sales from Games Media and Global Draw.

Selling, general and administrative expense of $17.3 million for the nine months ended September 30, 2009 was $2.2 million or 11% lower than for the nine months ended September 30, 2008 ($3.4 million). The decrease was primarily due to the absence of the Global Draw employee earn-out bonus which was accrued in part in the nine months ended September 30, 2008 and lower costs from Games Media and our domestic pari-mutuel business, partially offset by an increase in costs from Global Draw and costs associated with a property tax settlement.

Employee termination costs of $0.4 million for the nine months ended September 30, 2009 were a result of our cost reduction initiatives.

Depreciation and amortization expense of $36.0 million for the nine months ended September 30, 2009 increased $5.2 million or 17% from the nine months ended September 30, 2008, primarily due to increased depreciation from Global Draw, Games Media and our domestic pari-mutuel business.

Critical Accounting Policies

There have been no material changes to our critical accounting policies from those discussed under the caption “Critical Accounting Policies” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Current Report on Form 8-K filed on May 18, 2009.

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Liquidity, Capital Resources and Working Capital

On May 21, 2009, Scientific Games International, Inc. (“SGI”) issued $225.0 million in aggregate principal amount of its 9.25% Senior Subordinated Notes due 2019 (the “2009 Notes”) at an issue price of 96.823% of the principal amount. The 2009 Notes were issued pursuant to an indenture dated as of May 21, 2009 (the “2009 Notes Indenture”) among SGI, as issuer, the Company, as a guarantor, the Company’s subsidiary guarantors party thereto and The Bank of Nova Scotia Trust Company of New York, as trustee.

On November 5, 2009, SGI issued an additional $125.0 million aggregate principal amount of its 2009 Notes at an issue price of 101.5% of the principal amount of the notes. The additional 2009 Notes were issued pursuant to the 2009 Notes Indenture and are equal in right of payment with, of the same series as, and vote as a single class on any matter submitted to the holders of, the 2009 Notes issued in May 2009.

On May 7, 2009, the Company entered into an agreement with the principal selling shareholder and key management of Global Draw related to the earn-out and contingent bonuses that were payable to them in connection with the Company’s 2006 acquisition. Based on the performance of the business, the total amount payable was determined to be approximately £60.6 million, of which approximately £30.5 million was paid in May 2009. Approximately £28.1 million of the total amount payable was deferred under the terms of two-year, senior unsecured promissory notes issued by certain of the Company’s foreign subsidiaries (and guaranteed by the Company and certain of its U.S. subsidiaries). The earn-out balance of approximately £2.0 million was paid in September 2009.

The promissory note issued to the principal selling shareholder, which was executed on May 7, 2009 by Scientific Games Luxembourg Finance S.a.r.l. (“SGLF”), an indirect 100%-owned subsidiary of the Company, has a principal amount of approximately £26 million and bears simple interest at the rate of 6.90% per annum, which interest is payable quarterly in arrears on the last day of March, June, September and December of each year, commencing on June 30, 2009. The note matures on May 7, 2011. Although not required to do so (except in connection with an event of default as described below), SGLF may repay all or a portion of the principal amount of the note at any time prior to maturity without premium or penalty. The note is a senior unsecured obligation of SGLF and is guaranteed on a joint and several basis by the Company and certain of its 100%-owned domestic subsidiaries (including SGI). Such guaranty represents “senior debt” as that term is defined in the indentures governing the Company’s 6.25% Senior Subordinated Notes due 2012 (the “2004 Notes”), the Convertible Debentures and SGI’s 7.875% Senior Subordinated Notes due 2016 and the 2009 Notes.

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payable.

On March 27, 2009, we and our 100%-owned subsidiary, SGI, entered into an amendment (the “First Amendment”) to the credit agreement, dated as of June 9, 2008 (the “Credit Agreement”), among SGI, as borrower, the Company, as guarantor, the several lenders from time to time parties thereto and JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent. The purpose of the First Amendment was to provide the Company with additional operating and financing flexibility.

Under the First Amendment, (i) up to approximately $18.8 million in certain charges incurred and reserves created in the fourth quarter of 2008, (ii) up to $15.0 million of certain charges that may be incurred during the 12-month period commencing on March 1, 2009, including charges in connection with cost-reduction initiatives, and (iii) certain costs and fees incurred in connection with the First Amendment, will be added back to “Consolidated EBITDA” for purposes of calculating the “Consolidated Leverage Ratio” and the “Consolidated Senior Debt Ratio” (as such terms are defined under the Credit Agreement). In addition, for purposes of determining the Consolidated Leverage Ratio and the Consolidated Senior Debt Ratio as of any date prior to the earliest date on which any of the holders of Convertible Debentures may require the Company to repurchase their Convertible Debentures (currently June 1, 2010) (the “Convertible Debentures Repurchase Date”) neither (i) the earn-out payable with respect to the Company’s acquisition of Global Draw nor (ii) the principal amount of any unsecured promissory notes that may be issued in order to defer payment of up to the equivalent of $60.0 million of such earn-out (provided that, among other terms of such promissory notes, no principal payment thereon is required prior to September 30, 2010), will be included as “Indebtedness” in the calculation of “Consolidated Total Debt” (as such terms are defined in the Credit Agreement). Accordingly, the promissory notes described above that were issued to the principal selling shareholder and key management of Global Draw will not be included as Indebtedness in the calculation of Consolidated Total Debt for purposes of determining the Consolidated Leverage Ratio and the Consolidated Senior Debt Ratio prior to the Convertible Debenture Repurchase Date.

In conjunction with the promissory notes issued to defer payment of a portion of the Global Draw earn-out, the revolving credit facility and the term loan facility under the Credit Agreement will mature (if earlier than the date that would otherwise apply under the terms of the Credit Agreement) on February 7, 2011 unless on such date no such promissory notes remain outstanding or the sum of the aggregate available revolving commitments under the Credit Agreement plus unrestricted cash and cash equivalents of SGI and the guarantors under the Credit Agreement is not less than $50.0 million in excess of the amount required to repay in full such outstanding promissory notes.

Under the First Amendment, for purposes of determining the Consolidated Leverage Ratio as of any date of determination prior to the earlier of the Convertible Debentures Repurchase Date and the date the Convertible Debentures are redeemed in full, unrestricted cash and cash equivalents of SGI and the guarantors up to the “Debenture Reserve Amount” at such determination date will be netted against the then outstanding principal amount of the Convertible Debentures (and Consolidated Total Debt will be thereby reduced to the extent of such netting). The “Debenture Reserve Amount” is an amount equal to the net cash proceeds received by SGI or the guarantors after the date of the First Amendment and prior to the Convertible Debentures Repurchase Date from (i) the issuance by the Company of shares of its capital stock (other than disqualified stock), or the issuance of “Permitted Additional Senior Indebtedness” or “Permitted Additional Subordinated Debt” or Indebtedness under the “Incremental Facilities” (as such terms are defined in the Credit Agreement), and (ii) any “Asset Sales” (as defined in the Credit Agreement) (up to an aggregate of $125.0 million of net cash proceeds) with respect to which a reinvestment notice is timely given (provided that the Debenture Reserve Amount will (A) not exceed the outstanding principal amount of the Convertible Debentures, (B) be reduced to zero on the Convertible Debentures Repurchase Date and (C) to the extent the Debenture Reserve Amount is increased as a result of Assets Sales, will be decreased if and to the extent that term loans under the Credit Agreement are prepaid in lieu of reinvesting the net cash proceeds therefrom pursuant to a reinvestment notice). The 2009 Notes constitute “Permitted Additional Subordinated Debt” and, as such, the net cash proceeds from the issuance of such notes will be included in the “Debenture Reserve Amount” to the extent permitted under the First Amendment.

The First Amendment increased each of the interest rates set forth in the pricing grid in the Credit Agreement by 0.25% such that, depending upon the Consolidated Leverage Ratio, the interest rate will vary from 2.00% to 3.00% above LIBOR for eurocurrency loans, and 1.00% to 2.00% above the higher of (i) the prime rate or (ii) the Federal Funds Effective Rate plus 0.50% for base rate loans. Notwithstanding the foregoing, from the Effective Date until September 30, 2009, the applicable margin for eurocurrency loans was deemed to be 3.00% and the applicable margin for base rate loans was deemed to be 2.00%.

In connection with the First Amendment, SGI agreed to pay an aggregate of approximately $2.8 million in fees to consenting lenders and the administrative agent.

Our Credit Agreement is secured by a first priority, perfected lien on (1) substantially all the property and assets (real and personal, tangible and intangible) of the Company and its direct and indirect 100%-owned domestic subsidiaries and (2) 100% of our interest in the capital stock (or other equity interests) of all of our direct and indirect 100%-owned domestic subsidiaries and 65% of our interest in the capital stock (or other equity interests) of the first-tier foreign subsidiaries of SGI and the guarantors.

On September 30, 2009, the Company and SGI entered into a second amendment (the “Second Amendment”) to the Credit Agreement.

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The primary purpose of the Second Amendment was to facilitate our ability to participate in the recently announced competitive tender process for a license to sell instant lottery tickets under the Gratta e Vinci lottery in Italy. The Second Amendment provides that certain payments, costs and obligations made or incurred by any of the Company or its subsidiaries, whether directly or indirectly, in connection with any award of a license to operate the instant ticket lottery (the “Italian Concession”), including any up-front fee required under the tender process (collectively, “Italian Concession Obligations”), will be permitted, subject to certain limitations, under the Credit Agreement covenant restricting “Investments” (as defined in the Credit Agreement) (to the extent such Italian Concession Obligations are deemed to be Investments under the Credit Agreement). Certain “Guarantee Obligations” (as defined in the Credit Agreement) incurred by any of the Company or its subsidiaries in respect of certain Italian Concession Obligations will be permitted under the Credit Agreement covenant restricting Indebtedness. In addition, the Second Amendment provides that certain Italian Concession Obligations paid or incurred in an applicable period will be added back to the definition of Consolidated EBITDA to the extent such Italian Concession Obligations are treated as an expense in the period paid or incurred.