Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

FORM 10-Q

{Mark One}

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

For the quarterly period ended March 31, 2010

OR

o         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)

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):

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 May 4, 2010:

Class A Common Stock:  94,109,154

Class B Common Stock:  None

Table of Contents

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

INDEX TO FINANCIAL INFORMATION

AND OTHER INFORMATION

THREE MONTHS ENDED MARCH 31, 2010

2

Table of Contents

Forward-Looking Statements

Throughout this Quarterly Report on Form 10-Q we make “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “anticipate,” “could,” “potential,” “opportunity,” or similar terminology. The forward-looking statements contained in this Quarterly Report on Form 10-Q are generally located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” but may be found in other locations as well. These statements are based upon management’s current expectations, assumptions and estimates and are not guarantees of future results or performance. Actual results may differ materially from those projected in these statements due to a variety of risks and uncertainties and other factors, including, among other things: competition; material adverse changes in economic and industry conditions; technological change; retention and renewal of existing contracts and entry into new or revised contracts; availability and adequacy of cash flow to satisfy obligations and indebtedness or future needs; protection of intellectual property; security and integrity of software and systems; laws and government regulation, including those relating to gaming licenses, permits and operations; inability to identify, complete and integrate future acquisitions; inability to benefit from, and risks associated with, our joint ventures and strategic investments and relationships; inability to complete the proposed sale of our racing and venue management businesses; seasonality; inability to enhance and develop successful gaming concepts; dependence on suppliers and manufacturers; liability for product defects; factors associated with foreign operations; influence of certain stockholders; dependence on key personnel; failure to perform on contracts; resolution of pending or future litigation; labor matters; and stock price volatility. Additional information regarding risks and uncertainties and other factors that could cause actual results to differ materially from those contemplated in forward-looking statements is set forth from time to time in our filings with the Securities and Exchange Commission (“SEC”), including under the heading “Risk Factors” in our most recent Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q. Forward-looking statements speak only as of the date they are made, and except for our ongoing obligations under the U.S. federal securities laws, we undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

3

Table of Contents

PART 1.  FINANCIAL INFORMATION

Item 1.  Financial Statements

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of March 31, 2010 and December 31, 2009

(Unaudited, in thousands, except per share amounts)

See accompanying notes to consolidated financial statements

4

Table of Contents

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended March 31, 2010 and 2009

(Unaudited, in thousands, except per share amounts)

See accompanying notes to consolidated financial statements

5

Table of Contents

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2010 and 2009

(Unaudited, in thousands, except per share amounts)

See accompanying notes to consolidated financial statements

6

Table of Contents

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 March 31, 2010, the Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009, and the Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009, 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 March 31, 2010, the results of our operations for the three months ended March 31, 2010 and 2009 and our cash flows for the three months ended March 31, 2010 and 2009 have been made.  Such adjustments are of a normal, recurring nature.

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 2009 Annual Report on Form 10-K.  The results of operations for the period ended March 31, 2010 are not necessarily indicative of the operating results for a full year.

Basic and Diluted Net Income (Loss) Per Share

The following represents a reconciliation of the numerator and denominator used in computing basic and diluted net income (loss) per share available to common stockholders for the three months ended March 31, 2010 and 2009:

The weighted-average diluted common shares outstanding for the three months ended March 31, 2010 excludes the effect of approximately 5,835 weighted-average stock rights outstanding, because their effect would be anti-dilutive.  During the first quarter of 2009, there were no dilutive stock rights or shares related to our 0.75% convertible senior subordinated debentures due 2024 (the “Convertible Debentures”) due to the net loss reported for the period.

The aggregate number of shares that we could be obligated to issue upon conversion of the remaining $9,943 in aggregate principal amount of our Convertible Debentures, is approximately 342.  Our 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 our Convertible Debentures during the term of the bond hedge.

7

Table of Contents

(2) Operating Segment Information

We operate in three segments:  Printed Products Group; Lottery Systems Group; and Diversified Gaming Group.

The following tables represent revenues, cost of revenues, depreciation, amortization, selling, general and administrative expenses and operating income for the three month periods ended March 31, 2010 and 2009, by reportable segments. Corporate expenses, including interest expense, other (income) expense, (gain) loss on early extinguishment of debt, corporate depreciation and amortization and corporate employee termination costs, are not allocated to the reportable segments.

8

Table of Contents

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

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 2009 Annual Report on Form 10-K).

(3) Equity Investments in Joint Ventures

We are a member of Consorzio Lotterie Nazionali (“CLN”), a consortium consisting principally of us, Lottomatica Group 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 expires on May 31, 2010. 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 Group S.p.A. in the lottery operations.  We account for this investment using the equity method of accounting.  For the three months ended March 31, 2010 and 2009, we recorded income of $13,400 and $14,115, respectively, representing our share of the earnings of CLN in each period.  During the second quarter of 2010, we received a cash distribution of approximately $27,800 from CLN.

In October 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 existing concession. Although a maximum of four concessions could have been granted under the terms of the tender, our bidding group was the only group that submitted a bid. Under the terms of the tender, the winning bidding group would be responsible for upfront payments totaling €800,000 (which upfront payments would be evenly divided in the event more than one bidding group was awarded a concession). The new concession would have an initial term of nine years (subject to a performance evaluation during the fifth year) and could be extended by the Monopoli di Stato for an additional nine years.

In November 2009, following a challenge to the tender process by another lottery operator that complained that the terms of the tender process were onerous to non-incumbent bidding groups, an Italian administrative court voided the tender process in a ruling that was appealed by the Italian regulatory authorities and CLN.  In March 2010, the appellate court announced that it upheld the validity of the tender process that had been suspended by the lower administrative court, but struck down a term of the tender that allowed the Monopoli di Stato to have CLN manage existing instant lottery games during a transition period through January 31, 2012. The court remanded the case to the Italian regulatory authorities for further action regarding completion of the tender process. The Italian regulatory authorities revised the tender to conform to the appellate court’s ruling and re-opened the tender process until May 10, 2010.  The terms of the tender process are essentially unchanged and bidding is open to any major European gaming operator that meets the technical specifications set forth in the tender.  The new concession is expected to begin on June 1, 2010, or as soon thereafter as the statutory obligations required by the tender have been met and the contracting process has been completed.

The current members of CLN intend to bid under the re-opened tender process.  In the event our bidding group is awarded the sole concession, we expect that we would be required to make our pro rata share of the upfront payments that would be required of our bidding group, which would be €104,000 payable within 15 days after the award is made and €56,000 payable on or about November 30, 2010.  We incurred additional debt in 2009 in part to provide us with sufficient liquidity to make these upfront payments.  In the event that the Monopoli di Stato awards more than one concession, the foregoing payments would be correspondingly reduced.

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 existing concession or whether other operators will also be awarded a concession.  In addition,

9

Table of Contents

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 new concession, we anticipate that our bidding group will form and capitalize a new vehicle outside the U.S. 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, we cannot predict the final terms of any such definitive agreements (including terms relating to the structure of the vehicle and governance rights) nor can we determine the impact resulting from the structure of the new bid on the timing or amount of foreign taxes we will incur and the resulting foreign tax credits which could impact the Company’s effective tax rate and the valuation of certain of the Company’s deferred tax assets in future periods.

(4) Comprehensive Income (Loss)

The following presents a reconciliation of net income (loss) to comprehensive income (loss) for the three month periods ended March 31, 2010 and 2009:

(5) Inventories

Inventories consist of the following:

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

Credit Agreement

In February 2010, we amended and restated our credit agreement, dated as of June 9, 2008 (as amended and restated, the “Credit Agreement”), among Scientific Games International, Inc. (“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, in order to revise certain financial covenants and provide us with additional operating and financing flexibility so that we can execute on pending and future strategic initiatives, including participation in the Italian instant ticket concession tender process, the proposed sale of our racing and venue management businesses and our strategic transactions with Playtech Limited or its affiliates (“Playtech”).  For additional information regarding the amendments we entered into in February 2010, please refer to our Current Report on Form 8-K filed on February 19, 2010.

The Credit Agreement provides for a $250,000 senior secured revolving credit facility and a $550,000 senior secured term loan credit facility.

10

Table of Contents

The Credit Agreement will terminate on June 9, 2013, provided that the revolving credit facility and the term loan credit facility will both mature on February 7, 2011 unless either:

·                                          no amounts remain outstanding under the 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, including SGI) (the “Global Draw Promissory Notes”) on such date; or

·                                          the sum of the available revolving credit facility commitments plus the unrestricted cash of SGI and the guarantors under the Credit Agreement on such date is not less than the sum of the principal amount of the Global Draw Promissory Notes then outstanding plus $50,000.

The revolving credit facility and the term loan credit facility will both mature on September 15, 2012, unless one of the following conditions is met:

·                                          our 6.25% senior subordinated notes due 2012 (the “2004 Notes”) are refinanced, redeemed or defeased on or prior to such date; or

·                                          the sum of the available revolving credit facility commitments plus the unrestricted cash of SGI and the guarantors under the Credit Agreement on such date is not less than the sum of the principal amount of our 2004 Notes then outstanding plus $50,000.

We expect that we will be able to satisfy the conditions described above and thereby prevent the acceleration of such indebtedness. However, there can be no assurance that we will be able to satisfy those conditions or to repay any accelerated indebtedness under the Credit Agreement, or to repay the Global Draw Promissory Notes in 2011 or our 2004 Notes in 2012.

On March 1, 2010, we had sufficient unrestricted cash and availability under the revolving credit facility to satisfy the liquidity condition in the Credit Agreement related to our Convertible Debentures and thereby prevent the acceleration of borrowings under the Credit Agreement.

Amounts under the revolving credit facility may be borrowed, repaid and re-borrowed by SGI from time to time until maturity. Voluntary prepayments and commitment reductions under the Credit Agreement are permitted at any time in whole or in part, without premium or penalty (other than break-funding costs), upon proper notice and subject to a minimum dollar requirement.

Borrowings under the Credit Agreement bear interest at a rate per annum equal to, at SGI’s option, either (1) a base rate determined by reference to the higher of (a) the prime rate of JPMorgan and (b) the federal funds effective rate plus 0.50%, or (2) a reserve-adjusted LIBOR rate, in each case plus an applicable margin. The applicable margin varies based on the Consolidated Leverage Ratio (as defined below) of the Company from 1.00% to 2.50% above the base rate for base rate loans, and from 2.00% to 3.50% above LIBOR for LIBOR-based loans. Until the delivery of the financial statements required under the Credit Agreement for the fiscal quarter ending June 30, 2010, the applicable margins for base rate loans and LIBOR-based loans will be deemed to be 2.50% and 3.50%, respectively, regardless of the Consolidated Leverage Ratio.

During the term of the Credit Agreement, SGI will pay its lenders a fee, payable quarterly in arrears on the third business day after the last day of each of March, June, September and December and the last day of the revolving commitment period, equal to the product of (1) the available revolving credit facility commitments and (2) either 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 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; provided that, until March 30, 2010, the fee rate shall be deemed to be 0.75% per annum.

The Company and its direct and indirect 100%-owned domestic subsidiaries (other than SGI) have guaranteed the payment of SGI’s obligations under the Credit Agreement. In addition, the obligations under the Credit Agreement are 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 the capital stock (or other equity interests) of all of our direct and indirect 100%-owned domestic subsidiaries and 65% of the capital stock (or other equity interests) of the direct foreign subsidiaries of SGI and the guarantors held by SGI and the guarantors.

11

Table of Contents

The Credit Agreement contains customary covenants, including negative covenants that, among other things, limit the ability of the Company and 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 asset sales, effect a consolidation or merger, sell, transfer, lease or otherwise dispose of all or substantially all assets, or create certain liens and other encumbrances on assets.

In addition, the Credit Agreement requires us to maintain the following financial ratios:

·                  a “Consolidated Leverage Ratio” as at the last day of each fiscal quarter not to exceed the ratio set forth below with respect to such fiscal quarter or with respect to the period during which such fiscal quarter ends:

·                  5.75 to 1.00 (fiscal quarter ended December 31, 2009 through March 31, 2012);

·                  5.50 to 1.00 (fiscal quarter ending June 30, 2012); and

·                  5.25 to 1.00 (fiscal quarter ending September 30, 2012 and thereafter);

“Consolidated Leverage Ratio” means, as of the last day of any period, the ratio of (1) Consolidated Total Debt (defined as the aggregate principal amount of our indebtedness, determined on a consolidated basis and required to be reflected on our balance sheet in accordance with Generally Accepted Accounting Principles (“GAAP”)) on such day, to (2) Consolidated EBITDA (as defined below) for the period of four consecutive fiscal quarters then ended.

·                  a “Consolidated Senior Debt Ratio” as at the last day of each fiscal quarter not to exceed the ratio set forth below with respect to such fiscal quarter or with respect to the period during which such fiscal quarter ends:

·                  2.75 to 1.00 (fiscal quarter ended December 31, 2009 through June 30, 2012); and

·                  2.50 to 1.00 (fiscal quarter ending September 30, 2012 and thereafter);

“Consolidated Senior Debt Ratio” means, as of the last day of any period, the ratio of (1) Consolidated Total Debt (other than our 2004 Notes, our 7.875% senior subordinated notes due 2016 (the “2008 Notes”), our 9.25% senior subordinated notes due 2019 (the “2009 Notes”), our Convertible Debentures and any additional subordinated debt permitted under the Credit Agreement) to (2) Consolidated EBITDA for the period of four consecutive fiscal quarters then ended.

·                  a “Consolidated Interest Coverage Ratio” 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:

·                  2.50 to 1.00 (four consecutive fiscal quarters ending December 31, 2009 and through June 30, 2010); and

·                  2.25 to 1.00 (four consecutive fiscal quarters ending September 30, 2010 and thereafter).

“Consolidated Interest Coverage Ratio” means, for any period, the ratio of (1) Consolidated EBITDA for such period to (2) total cash interest expense with respect to all outstanding debt of the Company and its subsidiaries for such period.

“Consolidated EBITDA” means, for any period, “Consolidated Net Income” (i.e., our consolidated net income (or loss) excluding, among other items, the income (or deficit) of our joint venture entities except to the extent that such income is actually received by us in the form of distributions or payments in respect of loans made by us to such joint venture entities in lieu of equity investments) for such period plus, to the extent reflected as a charge in the statement of such Consolidated Net Income for such period, the sum of:

·                                          income tax expense;

·                                          interest expense, amortization or write-off of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with debt;

12

Table of Contents

·                                          depreciation and amortization expense;

·                                          amortization of intangibles (including goodwill) and organization costs;

·                                          earn-out payments with respect to certain acquisitions that we have made, such as our acquisition of The Global Draw Limited and certain related companies (“Global Draw”), or any “Permitted Acquisitions” (generally, acquisitions of companies that are primarily engaged in the same or related line of business and that become subsidiaries of ours, or acquisitions of all or substantially all of the assets of another company or division or business unit of another company), including any loss or expense with respect to such earn-out payments;

·                                          extraordinary charges or losses determined in accordance with GAAP;

·                                          non-cash stock-based compensation expenses;

·                                          up to $3,000 of expenses, charges or losses resulting from certain Peru investments;

·                                          the non-cash portion of any non-recurring write-offs or write-downs as required in accordance with GAAP;

·                                          advisory fees and related expenses paid to advisory firms in connection with Permitted Acquisitions;

·                                          “Permitted Add-Backs” (i.e., (1) up to $15,000 (less the amount of certain permitted pro forma adjustments to Consolidated EBITDA in connection with material acquisitions) of charges incurred during any 12-month period in connection with (a) reductions in workforce, (b) contract losses, discontinued operations, shutdown expenses and cost reduction initiatives, (c) transaction expenses incurred in connection with potential acquisitions and divestitures, whether or not consummated, and (d) restructuring charges and transaction expenses incurred in connection with certain transaction with Playtech and (2) reasonable and customary costs incurred in connection with amendments to the Credit Agreement);

provided that the foregoing amounts do not include (1) write-offs or write-downs of accounts receivable or inventory and (2) except with respect to Permitted Add-Backs, any write-off or write-down to the extent it is in respect of cash payments to be made in a future period;

·                                          to the extent treated as an expense in the period paid or incurred, certain payments, costs and obligations (up to a specified amount) made or incurred by us, whether directly or indirectly, in connection with any award of a license to operate the instant ticket lottery in Italy, including up-front fees required under the applicable tender process;

·                                          restructuring charges, transaction expenses and shutdown expenses incurred in connection with the disposition of all or part of our racing and venue management businesses, together with up to $7,325 of charges incurred in connection with discontinued operations and cost-reduction initiatives associated with such disposition; and

·                                          up to £5,250 during any four-quarter period of expenses or charges incurred in connection with the payment of license royalties or other fees to Playtech and for software services provided to Global Draw or Games Media Limited by Playtech;

minus, to the extent included in the statement of such Consolidated Net Income for such period, the sum of:

·                                          interest income;

·                                          extraordinary income or gains determined in accordance with GAAP; and

·                                          income or gains with respect to earn-out payments with respect to acquisitions referred to above.

Consolidated EBITDA is subject to certain adjustments in connection with material acquisitions and dispositions as provided in the Credit Agreement.

The Credit Agreement generally requires mandatory prepayments of the term loan credit facility with the net cash proceeds from (1) the incurrence of indebtedness by us (excluding certain permitted debt) and (2) the sale of assets that yields to us net cash proceeds in excess of $5,000 (excluding certain permitted asset sales) or any settlement of or payment in respect of any property or casualty insurance claim or any condemnation proceeding relating to any of our assets.

13

Table of Contents

Under the terms of the Credit Agreement, SGI has the ability, subject to certain terms and conditions, to request additional tranches of term loans or to request an increase in the commitments under the revolving credit facility, or a combination thereof, in a maximum aggregate amount of $200,000 at a later date.

On October 29, 2009, SGI entered into a commitment letter with J.P. Morgan Securities Inc. and JPMorgan, pursuant to which JPMorgan has committed, subject to certain conditions, to provide up to $75,000 of senior secured term loans under one or more incremental term loan facilities pursuant to the Credit Agreement. Any proceeds from borrowings under these incremental term loan facilities would be available to be applied for general corporate purposes, which may include the payment of a portion of potential upfront payment or other obligations in connection with an award of a new Italian instant ticket lottery concession. SGI is not obligated to utilize this commitment or to borrow any amounts thereunder. This commitment expires on June 30, 2010.

We were in compliance with our covenants as of March 31, 2010.

As of March 31, 2010, we had approximately $181,850 available for additional borrowing or letter of credit issuance under our revolving credit facility. There were no borrowings and $68,150 in outstanding letters of credit under our revolving credit facility as of March 31, 2010.  Our ability to borrow under the Credit Agreement will depend on us remaining in compliance with the covenants contained in the Credit Agreement, including the maintenance of the foregoing financial ratios.

Convertible Debentures

As of March 31, 2010 and December 31, 2009, the equity component of our Convertible Debentures was approximately $58,643.  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 March 31, 2010 and December 31, 2009, respectively:

As of March 31, 2010, the remaining discount will be amortized over a period of approximately two months.

The effective interest rate on the liability component of our Convertible Debentures is approximately 6.25% for the three months ended March 31, 2010 and 2009.  The amount of interest cost recognized for the contractual interest coupon during the three months ended March 31, 2010 and 2009 was approximately $19 and $493, respectively.  The amount of interest cost recognized for the amortization of the discount on the liability component of our Convertible Debentures during the three months ended March 31, 2010 and 2009 was approximately $126 and $3,301, respectively.

(7) Derivative Financial Instruments

Effective October 17, 2008, SGI entered into a three-year interest rate swap agreement (the “Hedge”) with JPMorgan.  Under the Hedge, which is designated as a cash flow hedge, SGI pays interest on a $100,000 notional amount of debt at a fixed rate of 3.49% and receives interest on a $100,000 notional amount of debt at the prevailing three-month LIBOR rate.  The objective of the Hedge is to eliminate the variability of cash flows attributable to the LIBOR component of interest expense paid on $100,000 of our variable-rate debt.  As of March 31, 2010 the Hedge was measured at a fair value of $4,102 using Level 2 valuation techniques of the fair value hierarchy and included in other long-term liabilities on the Consolidated Balance Sheet.

Hedge effectiveness is measured quarterly on a retrospective basis using the cumulative dollar-offset approach in which the cumulative changes in the cash flows of the actual swap are compared to the cumulative changes in the cash flows of the hypothetical swap.  The effective portion of the Hedge is recorded in other comprehensive income (loss) and the ineffective portion of the Hedge, if any, is recorded in the Consolidated Statement of Operations.  During the three months ended March 31, 2010 and 2009, we recorded a loss of approximately $34 and $108, respectively in other comprehensive income (loss).  There was no ineffective portion of the Hedge recorded in the Consolidated Statement of Operations. Amounts recorded in other comprehensive income (loss) that were deferred on the effective hedged forecasted transactions are reclassified to earnings when the interest expense related to the hedged item affects earnings.

During the first quarter of 2010, we entered into several short-term forward contracts (the “Forwards”) with various counterparties, which remain outstanding as of March 31, 2010. Under the Forwards, we locked in the price to purchase €80,000

14

Table of Contents

during May 2010. The objective of the Forwards was to mitigate the risk associated with cash payments required to be made by the Company in non-functional currencies.

As of March 31, 2010, the Forwards were measured as liabilities having a fair value of approximately $1,151 using Level 2 valuation techniques of the fair value hierarchy.

During the quarter ended March 31, 2010, we recorded a net loss of approximately $6,705 on forward contracts in our Consolidated Statement of Operations.  The loss on forward contracts is included in “other (income) expense, net.”

(8) Goodwill and Intangible Assets

The following disclosure presents certain information regarding our acquired intangible assets as of March 31, 2010 and December 31, 2009.  Amortizable intangible assets are amortized over their estimated useful lives with no estimated residual values.

The aggregate intangible amortization expense for the three months ended March 31, 2010 and 2009 was approximately $4,300 and $4,800, respectively.

The table below reconciles the change in the carrying amount of goodwill, by reporting segment, for the period from December 31, 2009 to March 31, 2010.  In the first quarter of 2010, we recorded a decrease in goodwill of $20,512 as a result of foreign currency translation.

15

Table of Contents

(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 months ended March 31, 2010 and 2009.

We have a 401(k) plan for U.S.-based employees who are not covered by a collective bargaining agreement.  Effective January 1, 2010,  we increased the matching contributions from 25 cents on the dollar for the first 6% of contributions for a match of up to 1.5% of eligible compensation to 37.5 cents on the dollar for the first 6% of participant contributions for a match of up to 2.25% of eligible compensation.

(10) Income Taxes

The effective tax rates of 26.2% and 287.3%, respectively, for the three months ended March 31, 2010 and 2009 were determined using an estimated annual effective tax rate and after considering any discrete items for such periods.  At March 31, 2009, the Company recorded a valuation allowance of $33,833 against the U.S. deferred tax asset related to pre-2009 foreign tax credit (“FTC”) carry forwards and this valuation allowance caused the effective tax rate for the three months ended March 31, 2009 to be greater than the effective tax rate for the comparable current year period. The effective tax rate for the three months ended March 31, 2010 also includes the benefit of the current year forecasted U.S. tax loss.

Deferred tax assets and liabilities are determined based on the difference between the book and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are recognized if it is more likely than not that the assets will be realized in future years. We establish a valuation allowance for deferred tax assets for which realization is unlikely.  When we establish or reduce the valuation allowance against our deferred tax assets, our income tax expense increases or decreases, respectively, in the period such determination is made.

Pursuant to Financial Accounting Standards Board Accounting Standards Codification 740, Income Taxes (“ASC 740”) when establishing a valuation allowance, the Company considers future sources of taxable income such as “future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards” and “tax planning strategies.” ASC 740 defines a tax planning strategy as “an action that: is prudent and feasible; an enterprise ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused; and would result in realization of deferred tax assets.”

At March 31, 2010, the Company has total U.S. deferred tax assets (net of indefinite long lived assets and FTC carry forwards) of $115,710 consisting of federal net operating loss carry forwards of $8,228, state net operating loss carry forwards of $7,666, various federal and state tax credit carry forwards of $9,722, differences in financial reporting and tax basis for property and equipment of $39,294, share based compensation of $23,612 and other temporary differences of $27,188.  The Company determined it is “more likely than not” that its U.S. deferred tax assets (other than those related to its FTC carry forwards) will reverse against future sources of taxable income.

The Company is in the process of bidding on a new nine-year concession to operate the Italian Gratta e Vinci instant ticket lottery upon expiration of CLN’s existing concession.  If the Company is awarded the new concession, we anticipate that our bidding group will form and capitalize a new vehicle outside the U.S. to hold the concession consistent with the tender requirements.  The Company also entered into a definitive agreement on January 27, 2010 to sell its racing and venue management businesses to Sportech Plc (“Sportech”), which is expected to close in the second quarter of 2010, subject to the satisfaction of certain conditions.  We cannot determine the impact these events may have on the timing or amount of future sources of U.S. taxable income and the related impacts on the Company’s effective tax rate until the transactions close. In the event that estimates of U.S. future taxable

16

Table of Contents

income decreases as a result of the prospective new Italian concession or the sale of the racing and venue management businesses, or other possible future events, we may be required to establish a valuation allowance against that portion of our U.S. deferred tax assets that we then determine are “more likely than not” to not be realized and thereby to reduce the recorded amount of the deferred tax assets to the amount of the tax benefits we believe we will be able to use prior to their expiration dates.

At December 31, 2009, the Company had a deferred tax asset related to its FTC carry forward of $54,848.  The Company has and will continue to explore tax planning strategies to use all of its FTC carry forwards, but at December 31, 2009, the Company established a valuation allowance of $43,665 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 “more likely than not” that the foreign taxes generated in 2010 will not be realized in full against its U.S. tax liability during the FTC carry forward period.  As a result, the Company’s 2010 annual effective income tax rate will be greater than the federal statutory rate because of the valuation allowance established against the deferred tax asset for the FTC generated in 2010.

(11) Stockholders’ Equity

The following demonstrates the change in the number of shares of Class A common stock outstanding during the three months ended March 31, 2010 and during the fiscal year ended December 31, 2009:

(12) Stock-Based Compensation

As of March 31, 2010, we had approximately 2,650 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 the three months ended March 31, 2010 is presented below:

The weighted-average grant date fair value of options granted during the three months ended March 31, 2010 was $7.95.  For the three months ended March 31, 2010 and 2009, we recognized equity-based compensation expense of approximately $1,900 and $4,800, respectively, related to the vesting of stock options and the related tax benefit of approximately $600 and $1,600, respectively.

As of March 31, 2010, we had unearned compensation of approximately $15,900 relating to stock option awards that will be amortized over a weighted-average period of approximately two years.

17

Table of Contents

Restricted Stock Units

A summary of the changes in RSUs outstanding under our equity-based compensation plans during the three months ended March 31, 2010 is presented below:

For the three months ended March 31, 2010 and 2009, we recognized equity-based compensation expense of approximately $5,200 and $6,400 related to the vesting of RSUs and the related tax benefit of approximately $2,000 and $2,500, respectively.  As of March 31, 2010, we had unearned compensation of approximately $31,900 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, our 2008 Notes and our 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 March 31, 2010 and December 31, 2009 and for the three months ended March 31, 2010 and 2009. 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, our 2008 Notes, our 2009 Notes, our Convertible Debentures and our 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.

18

Table of Contents

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

March 31, 2010