SCIENTIFIC GAMES CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) The following Management's Discussion and Analysis ("MD&A") is intended to enhance the reader's understanding of our operations and current business environment. This MD&A should be read in conjunction with the description of our business (Item 1 of this Annual Report on Form 10-K) and our Consolidated Financial Statements and Notes thereto (Item 8 of this Annual Report on Form 10-K).

This MD&A also contains forward-looking statements and should be read in conjunction with the disclosures and information contained under "Forward-Looking Statements" at the beginning of this Annual Report on Form 10-K and "Risk Factors" (Item 1A of this Annual Report on Form 10-K).

As used in this MD&A, the terms "we," "us," "our" and the "Company" mean Scientific Games Corporation together with its consolidated subsidiaries.

Business Overview General We are a global leader in providing customized, end-to-end gaming solutions to lottery and gaming organizations worldwide. Our integrated array of products and services includes instant lottery games, lottery gaming systems, terminals and services, and internet applications, as well as server-based gaming terminals and associated gaming control systems. We also gain access to technology and pursue global expansion through strategic supply agreements, acquisitions and equity investments.

We report our operations in three business segments: Printed Products, Lottery Systems and Gaming. Our revenue is classified as instant tickets revenue, service revenue and sales revenue. Instant tickets revenue includes revenue related to our instant lottery ticket fulfillment and services businesses, including our brand licensing and Properties Plus businesses. Revenue generated from our sales of lottery systems, terminals, gaming terminals, gaming content and phone cards, which sales are typically non-recurring in nature and not subject to multi-year supply agreements, is categorized as sales revenue. All other revenue generated from Lottery Systems (including revenue from the validation of instant tickets and other systems management contracts) and Gaming is classified as service revenue. Certain unallocated expenses managed at the corporate level, comprised primarily of general and administrative costs and other income and expense are not allocated to our reportable segments. See "Business Segment Results" below and Note 2 (Business and Geographic Segments) to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional business segment information.

The discussion below highlights certain key drivers of our business and certain known trends, demands, commitments, events and uncertainties that have affected our recent, and may affect our future, financial and operating performance.

Pending Merger with WMS On January 30, 2013, we entered into a merger agreement with WMS, SGI, and SG California Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Scientific Games ("Merger Sub").

The merger agreement provides for the merger of Merger Sub with and into WMS, with WMS surviving the merger as a wholly owned subsidiary of Scientific Games.

In the merger, each outstanding share of common stock, par value $0.50 per share, of WMS, other than any dissenting shares, restricted shares, shares held by Scientific Games or Merger Sub and WMS treasury shares, will be cancelled and converted into the right to receive $26.00 in cash, without interest (the "Merger Consideration").

At the effective time of the merger, each outstanding WMS stock option granted prior to January 30, 2013 will be cancelled in exchange for the right of the holder to receive a lump sum cash payment equal to the number of shares underlying the WMS stock option multiplied by the excess of the Merger Consideration over the exercise price, if any. In addition, each outstanding award of WMS restricted shares, restricted stock units and phantom units will be cancelled as of the effective time, in exchange for the right of the holder to receive a lump sum cash payment equal to the Merger Consideration multiplied by the number of shares underlying each award, except for certain equity awards that are permitted to be granted by WMS following January 30, 2013 (including employee stock options), which will be converted into equivalent awards of Scientific Games using a customary exchange ratio of WMS' stock price to Scientific Games' stock price on the closing date. As of the effective time, each outstanding award of WMS performance units will be cancelled in exchange for the right of the holder to receive a lump sum cash payment equal to the Merger Consideration multiplied by the number of shares underlying the performance 39 -------------------------------------------------------------------------------- units at the applicable payout percentage, which will be 100% unless the relevant performance targets are met or exceeded as of the effective time, in which case the payout percentage will be determined based on actual performance.

The closing of the merger is subject to customary closing conditions, including approval of the merger by WMS stockholders and approvals by various regulatory authorities. The parties have agreed that receipt of gaming approvals from approximately 50 jurisdictions is a condition to closing of the merger, provided that receipt of gaming approvals from approximately 30 of these jurisdictions will cease to be a condition to closing from and after October 31, 2013. We believe that the approximately 50 jurisdictions include the material jurisdictions from which gaming approvals will be required prior to closing. We believe that the approximately 20 jurisdictions with respect to which approvals are a condition to any closing include the material jurisdictions where we anticipate longer lead times for obtaining approvals. Scientific Games is entitled to a 20 consecutive business day financing marketing period if all gaming approvals are received prior to October 31, 2013.

Under the merger agreement, WMS may not initiate, solicit or knowingly encourage competing proposals or participate in any discussions or negotiations regarding alternative business combination transactions.

The merger agreement contains certain termination rights for both Scientific Games and WMS and further provides that, in connection with termination of the merger agreement under specified circumstances, (i) we may be required to pay to WMS a termination fee of $100.0 million if all the conditions to closing have been met and the merger is not consummated because of a breach by our lenders of their obligations to finance the transaction, (ii) we may be required to pay to WMS a termination fee of $80.0 million if we are unable to obtain the gaming approvals that are conditions to closing prior to the termination date, and (iii) WMS may be required to pay to us a termination fee of $44.3 million under specified circumstances, including, but not limited to, a change in the WMS board's recommendation of the merger or termination of the merger agreement by WMS to enter into a written definitive agreement for a "superior proposal" (as defined in the merger agreement).

In connection with the merger agreement, Scientific Games and SGI entered into a commitment letter with Bank of America, N.A., Credit Suisse AG and UBS AG, Stamford Branch and certain of their respective affiliates, which was subsequently amended and restated on February 19, 2013 to add J.P. Morgan Securities LLC, the Royal Bank of Scotland, Deutsche Bank AG New York Branch, Goldman Sachs Bank USA and HSBC Securities (USA) Inc. and certain of their respective affiliates as additional commitment parties. Pursuant to the commitment letter, the commitment parties have agreed to provide the financing necessary to fund the consideration to be paid pursuant to the terms of the merger agreement (the "Debt Commitment Financing"). The Debt Commitment Financing is anticipated to consist of a senior secured first-lien term loan facility in a total principal amount of $2,300.0 million and a senior secured first-lien revolving credit facility in a total principal amount of $300.0 million. The funding of the Debt Commitment Financing is contingent on the satisfaction of certain conditions set forth in the commitment letter. The merger is not conditioned on our obtaining the proceeds of any financing, including the financing contemplated by the commitment letter.

In connection with the merger, we currently expect to incur regulatory costs, professional fees and other expenses totaling approximately $4.0 million to $6.0 million in the first quarter of 2013, with additional transaction-related fees and expenses anticipated to be incurred throughout the balance of 2013.

For further information regarding this pending acquisition and the Debt Commitment Financing, please see the full text of the merger agreement, a copy of which is filed as exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on February 5, 2013, and the full text of the commitment letter, a copy of which is filed as exhibit 10.68 to this Annual Report on Form 10-K.

Printed Products Retail sales of instant tickets can be a key performance indicator of our instant ticket revenue, although there may not always be a direct correlation between retail sales and our instant ticket revenue due to the type of contract (e.g., PPK versus POS or CSP contracts), the impact of changes in our customer contracts, the performance of our licensed properties business or other factors.

Based on third-party data, our customers' total instant ticket lottery retail sales in the U.S. increased 9.1% for the year ended December 31, 2012 compared to 2011. Most of our U.S. customers reported year-over-year growth in retail sales of instant lottery tickets, which we believe was driven by a variety of factors, including product innovation, better instant ticket product management, prize payout increases, lottery private management and sales of higher price-point tickets. We believe that, as of the date of this Annual Report on Form 10-K, U.S. instant ticket retail sales during the first quarter of 2013 appear to be soft relative to the first quarter of 2012, when U.S. retail sales of instant tickets grew over 12%.

Our licensed game contracts are generally game-specific and therefore short-term and non-recurring. Our instant ticket revenue may be negatively impacted to the extent we are unable to continue to win licensed game-specific or multi-state game contracts. There has been increased interest within the lottery industry in player loyalty programs, which we believe may result in further growth opportunities for our Properties Plus loyalty program, which features players clubs, reward programs, second chance promotional websites and interactive games. During 2012, we commenced new Properties Plus programs for four 40 -------------------------------------------------------------------------------- lotteries for a total of seven active programs as of December 31, 2012. In February 2013, the Maryland lottery signed an agreement with us for a Properties Plus program and we are in active discussions with several other lotteries regarding these programs, both in the U.S. and internationally.

We are the primary supplier of instant lottery tickets for LNS, in which we have a 20% equity investment, which was awarded the concession to be the exclusive operator of the Italian Gratta e Vinci instant ticket lottery beginning on October 1, 2010. Over the life of the concession, we expect that we will supply no less than 80% of LNS' instant ticket production requirements. Retail sales for LNS for the year ended December 31, 2012 declined by approximately 3.8% compared to 2011, which we believe was due in part to a decline in consumer spending related to difficult economic conditions and tax increases in Italy. We also faced challenging year-over-year retail sales comparisons for the year ended December 31, 2012 in light of the strong retail sales performance of the Italian instant ticket lottery during the prior year.

Northstar, in which we have a 20% equity investment, commenced operations as the private manager of the Illinois lottery on July 1, 2011 under the PMA with the State of Illinois. Under our CSP agreement with Northstar, we are responsible for the design, development, manufacturing, warehousing and distribution of instant lottery tickets and are compensated based on a percentage of retail sales. Illinois lottery instant ticket sales increased approximately 22.6% for the year ended December 31, 2012. Our POS-based instant lottery ticket revenue for the year ended December 31, 2012 reflected our CSP agreement with Northstar which commenced on July 1, 2011.

Northstar is entitled to reimbursement on a monthly basis for most of its operating expenses under the PMA, although certain expenses of Northstar associated with managing the lottery are not reimbursable. Northstar is also entitled to receive annual incentive compensation payments from the State to the extent it is successful in increasing the lottery's net income (as defined in the PMA) above specified target levels, subject to a cap of 5% of the applicable year's net income. Northstar will be responsible for payments to the State to the extent such targets are not achieved, subject to a similar cap. The lottery net income targets set forth in Northstar's successful bid for the PMA were $851 million, $950 million, $980 million, $986 million and $1 billion for the five fiscal years ending June 30, 2012, 2013, 2014, 2015 and 2016, respectively, representing a cumulative growth rate in lottery net income over such time period of approximately 49%.

These net income target levels are subject to upward or downward adjustment under certain circumstances in accordance with the terms of the PMA. Northstar may seek downward adjustments to the net income targets in the event certain actions of the State (or the federal government) have a material adverse effect on the lottery's net income and Northstar's ability to receive incentive compensation payments. On November 6, 2012, an arbitrator determined that Northstar is entitled to a $28.4 million downward adjustment to the net income target for the lottery's 2012 fiscal year and a $2.9 million downward adjustment to the net income target for the lottery's 2013 fiscal year. We understand that the State has objected to the arbitrator's determination. As of the date of this Annual Report on Form 10-K, it is unclear if these adjusted net income targets are final or subject to further review or adjustment. Accordingly, as of the date of this Annual Report on Form 10-K, Northstar is unable to estimate, and therefore has not recorded, any amounts in respect of annual incentive compensation or net income shortfall payments for the year ended December 31, 2012.

As U.S. and international jurisdictions increasingly look towards lottery and gaming as a source to grow revenue, we believe there will be continued interest in pursuing an outsourcing model whereby the day-to-day management of lotteries are conducted by a third party, similar to the PMA model in Illinois. To the extent any of our lottery customers enter into a private management agreement, such lottery customer or the private manager may terminate our existing contract(s) with the lottery customer as part of the transition to the private management model. The Indiana lottery recently awarded a private management agreement to one of our competitors. We expect to enter into an instant ticket lottery contract with the manager of the Indiana lottery that is expected to commence in April 2013 following the expiration of our current instant ticket lottery contract with the Indiana lottery.

We recently assisted the Commonwealth of Pennsylvania in its potential procurement of a private management agreement for the Pennsylvania lottery. In light of our role in the process, we did not bid for the private management agreement in Pennsylvania. On January 11, 2013, the Commonwealth issued a notice of award of the private management agreement to a bidder. On February 14, 2013, the Pennsylvania Attorney General rejected the agreement as unlawful. We cannot be certain as to the status of the private management agreement or what the ultimate resolution of this privatization effort will be at this time. Under our current contracts with the Pennsylvania lottery, we are the exclusive provider of instant lottery tickets and lottery systems and services in Pennsylvania through August 2015 and December 2014, respectively.

In December 2012, we formed Northstar New Jersey with GTECH and OMERS to bid to be the private manager for the New Jersey Lottery for a 15-year term. If Northstar New Jersey is selected as the private manager, we expect to own a 17.69% equity interest in the joint venture entity that will execute the private management agreement.

41 -------------------------------------------------------------------------------- Following a strategic review of our global instant lottery ticket business, we commenced a reorganization plan on April 18, 2012 to cease all printing and finishing activities at our Australia facility, and during the second half of 2012 we migrated printing for customers in this region to our other manufacturing facilities. We recorded approximately $5.9 million of employee termination and other restructuring costs associated with the reorganization for the year ended December 31, 2012. Other restructuring costs include approximately $1.3 million resulting from vacating our facility. In addition, we recorded approximately $3.4 million of accelerated depreciation for equipment related to this reorganization. We do not expect to incur additional material costs or accelerated depreciation related to this reorganization.

On June 8, 2012, we acquired 100% of the equity interests of Provoloto for approximately $9.7 million, subject to certain adjustments, including an estimated earn-out payable to the sellers of approximately $2.0 million contingent on the future performance of the acquired business. Provoloto develops and distributes instant lottery tickets and manages instant ticket lotteries for Mexican charities. We expect this acquisition to strengthen our presence in Latin America and create a platform for further expansion in the region. The operating results of Provoloto have been included in our Printed Products segment and have been consolidated in our results of operations since the date of acquisition. The acquisition did not have a material impact on our results of operations in 2012.

On December 12, 2012, the Hellenic Republic Asset Development Fund provisionally awarded the consortium in which we own a 16.5% equity interest a 12-year concession for the exclusive rights to the production, operation and management of instant ticket lotteries in Greece. The consortium is principally comprised of OPAP S.A., Scientific Games and Intralot. The concession will cover current and future instant lotteries which are conducted using physical tickets, as well as internet sales of physical tickets. Operations under the new concession are subject to various regulatory approvals and Greek parliamentary approval. We will be responsible for providing instant lottery ticket marketing services to the lotteries and expect to enter into a supply agreement for the exclusive provision of all instant ticket production and game design services to the consortium. If the award is approved, the consortium will pay an upfront payment of €190 million, of which our portion will be €31.4 million, and will be responsible for a monthly fee to the lotteries equal to a percentage of gross gaming revenue. According to third-party data, in 2011, OPAP generated €4.4 billion in total lottery retail sales in Greece, representing approximately €386 in per capita sales, making it the third largest lottery in the world in terms of per capita sales based on third party data. The instant ticket lottery has been inactive since 2003.

Lottery Systems Retail sales of draw games can be a key performance indicator of our lottery systems service revenue, although there may not always be a direct correlation between retail sales and our lottery systems revenue due to the terms of contract, the impact of changes in our customer contracts or other factors.

Based on third-party data, our Lottery Systems customers' total draw game retail sales in the U.S. increased 9.7% for the year ended December 31, 2012 compared to 2011. Our Lottery Systems service revenue in the U.S. increased 10.1% for the year ended December 31, 2012 compared to 2011 due in part to this improvement in U.S. retail sales. The level of jackpots of the Powerball and Mega Millions multi-state draw lottery games have an impact on U.S. retail sales, and therefore, our service revenue in any given period. We believe that, as of the date of this Annual Report on Form 10-K, U.S. draw game retail sales during the first quarter of 2013 appear to be soft relative to the first quarter of 2012, when U.S. retail sales of draw games grew nearly 16%. In 2011, U.S. lottery directors authorized certain changes to the Powerball game, including an increase in the ticket price to $2, which went into effect on January 15, 2012.

The industry experienced the largest Powerball jackpot in history ($587.5 million) and the largest Mega Millions jackpot in history ($656 million) during the year ended December 31, 2012. Our Lottery Systems service revenue is also impacted by retail sales of instant lottery tickets where we provide instant lottery ticket validation services as part of a lottery systems contract. Our Lottery Systems sales revenue primarily relates to one-time sales of equipment and is non-recurring in nature.

In June 2012, we executed a four-year extension of our contract to provide lottery systems and services, along with instant tickets, to Loteria Electronica in Puerto Rico. In June 2012, we executed a one-year extension of our lottery systems contract with the Maine lottery. In August 2012, Maine issued a lottery systems and instant lottery ticket RFP that we responded to in October 2012. We understand the State is still evaluating the bids it received. The Indiana lottery recently awarded a private management agreement to one of our competitors. We expect that our lottery systems contract with the Indiana lottery will be terminated in connection with the commencement of the private management model in Indiana. On January 11, 2013, we entered into an agreement with the new manager of the Indiana lottery to provide existing lottery systems equipment and services through August 2016 which is expected to commence in April 2013. On February 18, 2013, we executed a five-year extension of our lottery systems contract with the Connecticut lottery.

We are the exclusive instant ticket validation network provider to the CSL. The POS rate we receive under our China instant ticket validation contract decreased by 0.1% in January 2012 and is scheduled to decrease by an additional 0.1% in January 2014, in accordance with the contract.

42 -------------------------------------------------------------------------------- In China, we have seen a recent decline in our instant ticket validation revenue and our joint venture's instant ticket printing revenue as instant ticket retail sales of the CSL decreased approximately 10.0% for the year ended December 31, 2012 compared to 2011. We continue to believe there is sustained consumer demand for lottery products in China, as retail sales of the entire lottery segment grew by 18% in 2012 compared to 2011, but that competition from other lottery products is impacting instant ticket sales. We remain focused on improving sales trends by expanding the lottery retailer network and increasing our involvement in the game selection process. We believe it will take some time for any such actions to take effect. To the extent we are not able to successfully implement these remedial actions and offset our CSL contract rate reductions by retail sales growth, our revenue and profitability may be adversely affected.

On April 7, 2012, we signed a five-year agreement in China to provide sales and distribution management services to the Hubei Sports Lottery. The agreement is similar to the CSP contracts we have with many of our North American and European customers. We expect that these services will assist the Hubei Sports Lottery in achieving higher retail sales and lower operating costs. We expect operations under the contract to commence in 2013.

We entered into a contract, effective in December 2011, to design, implement and administer our AEGIS-Video™ Central Management and Control System (CMCS) for the Illinois Gaming Board. Under the terms of the contract, we will provide real-time communication and control between every licensed video gaming terminal in the State of Illinois, as well as day-to-day management of the CMCS throughout the State. The contract was awarded through a competitive procurement process, has an initial term of six years and may be extended by mutual agreement for up to four additional years. Operations under the contract commenced on October 9, 2012.

On July 19, 2012, we acquired substantially all of the assets of Parspro for approximately $11.8 million. Parspro is a provider of sports betting systems and related products via point of sale terminals, the internet and mobile devices.

The acquired assets include technology that we expect to integrate into our Lottery Systems business and our interactive game platform as part of an expanded service offering to lottery customers. The operating results of Parspro have been included in our Lottery Systems segment and have been consolidated in our results of operations since the date of acquisition. The acquisition did not have a material impact on our results of operations for the year ended December 31, 2012.

Gaming In our U.K. gaming terminal business, our compensation is typically based on gross win (i.e., amount bet less player winnings) generated by our gaming terminals (subject to certain adjustments as may be specified in a particular contract, including adjustments for taxes and other fees). Our Gaming service revenue is therefore impacted by the size of our installed gaming terminal base and the gross win generated by our terminals. Our Gaming sales revenue is generally non-recurring in nature.

Our U.K. LBO contracts generally have initial terms of two to four years with potential extensions. Our gross win per terminal per day increased approximately 5.0% for the year ended December 31, 2012 compared to 2011. We had an installed base of approximately 21,200 and 23,100 LBO gaming terminals in the U.K. as of December 31, 2012 and 2011, respectively. In 2011, we completed the migration of our server-based gaming terminals in the U.K. to a new back-end technology platform and migrated the majority of our server-based gaming terminals outside the U.K. to this technology during 2012. As of June 30, 2011, we completed the installation of approximately 8,000 gaming terminals for the entire Ladbrokes Betting and Gaming Ltd. LBO estate in accordance with the contract awarded to us in 2010. In January 2012, William Hill, a U.K. bookmaker, awarded a contract for the exclusive supply of gaming terminals to its entire LBO estate to one of our competitors. Our contract with William Hill expired in March 2013, resulting in a decrease in deployed gaming terminals of approximately 1,900. The loss of this contract impacted our installed gaming terminal base and our results of operations in 2012. On October 5, 2012, we extended an agreement to continue as the exclusive provider of gaming terminals for Gala Coral, a major U.K.

bookmaker, through December 31, 2017.

On June 7, 2012, we acquired ADS for £3.5 million, subject to certain adjustments. ADS provides maintenance and other services for LBOs in the U.K. We have integrated the acquisition into our existing Gaming business and we expect that the acquisition will allow us to expand the services we provide to our LBO customers. The operating results of ADS have been included in our Gaming segment and have been consolidated in our results of operations since the date of acquisition. The acquisition did not have a material impact on our results of operations for the year ended December 31, 2012.

On September 23, 2011, we completed the acquisition of Barcrest, a leading supplier of gaming content, platforms and systems to gaming operators in the U.K. and continental Europe, including pubs, LBOs, bingo halls and arcades. The acquisition provides us with an expansive library of gaming titles and properties, as well as an existing base of business in 43 -------------------------------------------------------------------------------- interactive gaming in which Barcrest game content is made available through internet, mobile and other digital delivery channels. We had an installed base of approximately 4,800 and 6,100 gaming terminals in our U.K. pub, bingo hall and arcade business as of December 31, 2012 and 2011, respectively. The comparability of our 2012 results of operations with our 2011 results of operations is impacted by the Barcrest acquisition.

In January 2012, following a comprehensive strategic review, we announced our exit from the Barcrest analog terminal business in order to focus our game design and other resources solely on our digital server-based supply model. We also reorganized our pub business in an effort to more effectively capitalize on the Barcrest acquisition. In 2012, we recorded approximately $5.7 million of employee termination and restructuring costs associated with the reorganization.

Other restructuring costs include approximately $1.4 million resulting from vacating facilities. We do not expect to incur additional material costs or accelerated depreciation related to this reorganization. We continue to review strategic alternatives for our pub business.

We continue to seek to expand our server-based gaming terminal business outside the U.K., with current deployments in the Caribbean, Czech Republic, Mexico and Puerto Rico. We had an installed base of approximately 5,100 and 6,500 gaming terminals outside of the U.K. as of December 31, 2012 and 2011, respectively. In April 2012, approximately 1,400 video lottery terminals operated by SNAI in Italy and supplied by Barcrest were deactivated following the erroneous printing of what appeared to be winning jackpot and other tickets. The deactivation of the terminals negatively impacted the Gaming results of operations during 2012.

See "Legal Proceedings" in Item 3 of this Annual Report on Form 10-K for further information In late 2010, the U.K. government announced its intention to change the taxation of gaming machines by replacing the currently applicable amusement machine license duty and the value-added tax with a new machine games duty, or MGD, based on the gross win generated by a gaming machine. In a budget statement issued in March 2012, the U.K. government announced a standard MGD rate of 20% on gross win, effective February 1, 2013. These tax changes may negatively impact our gaming machine customers' businesses and, therefore, could negatively impact our business in 2013.

Competition and Foreign Currency Risk We believe we are likely to continue to experience a highly competitive environment for U.S. and international customer contracts in connection with bids, re-bids, extensions and renewals, which could lead to loss of contracts, rate or volume reductions and additional service requirements in contracts that we win or retain. See the table "Business - Contract Procurement" in Item 1 of this Annual Report on Form 10-K for additional information regarding our customer contracts, including when they may become subject to re-bid, extension, or renewal. Our strategy to mitigate these industry trends includes working with our customers to grow their sales through a variety of methods including launching new products and services, implementing innovative technologies and marketing tools, and expanding retail distribution.

We derived approximately 53% and 52% of our annual revenue from sales to customers outside of the U.S. in 2012 and 2011, respectively and are affected by fluctuations in foreign currency exchange rates, particularly the British Pound Sterling and the Euro. The British Pound Sterling and the Euro represented, respectively, approximately $246 million, or 26.1%, and $65 million, or 6.9%, of our consolidated revenue for the year ended December 31, 2012. Historically, foreign currency fluctuations have impacted our revenue more than our expenses, as a portion of our raw materials, such as paper, ink and point-of-sale terminals are contracted for in U.S. dollars. We also have foreign currency exposure related to certain of our equity investments. Our earnings from our Euro-denominated equity investment in LNS were $17.9 million for the year ended December 31, 2012. Our foreign currency exposure from equity investments denominated in other foreign currencies was not material in the aggregate for the year ended December 31, 2012. When we refer to the impact of foreign currency exchange rate fluctuations, we are referring to the difference between the current period rates and the prior period rates applied to the current period activity.

We manage our foreign currency exchange risks on a global basis by (1) securing payment from our customers in the functional currency of the selling subsidiary when possible, (2) entering into foreign currency exchange or other contracts to hedge the risk associated with certain firm sales commitments, net investments and certain assets and liabilities denominated in foreign currencies and (3) netting asset and liability exposures denominated in similar foreign currencies to the extent possible.

During 2012, we entered into foreign currency forward contracts to hedge a portion of the net investment in one of our subsidiaries that is denominated in Euros. These foreign currency forward contracts are described in Note 14 (Fair Value Measurements) to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Recently Issued Accounting Guidance In May 2011, the Financial Accounting Standards Board (the "FASB") issued guidance to clarify the intent of the application of existing fair value measurement and disclosure requirements and amend certain requirements for measuring fair value or for disclosing information about fair value measurements. The guidance limits the highest-and-best-use measure to 44 -------------------------------------------------------------------------------- non-financial assets, permits certain financial assets and liabilities with offsetting positions in market or counter-party credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts in fair value measurement. Additionally, for fair value measurements categorized within Level 3 of the fair value hierarchy, the new guidance clarifies that quantitative disclosure about unobservable inputs should be disclosed and requires a description of the valuation processes and the sensitivity of the fair value measurements to changes in unobservable inputs and the interrelationships between those inputs. We adopted the guidance on January 1, 2012. The adoption did not have a material impact on our financial statements.

In June 2011, the FASB issued guidance on presentation of comprehensive income.

The guidance eliminates the option to report other comprehensive income and its components in the statement of stockholders' equity. Instead, an entity is required to present net income and other comprehensive income either in one continuous statement or in two separate but consecutive statements. We adopted the guidance on January 1, 2012, resulting in a change in the presentation of comprehensive income for the years ended December 31, 2012, 2011 and 2010.

In February 2013, the FASB issued guidance on presentation of comprehensive income to improve the reporting of reclassifications out of accumulated other comprehensive income. The guidance is effective prospectively for reporting periods beginning after December 15, 2012 and early adoption is permitted. The guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. We adopted the new guidance on January 1, 2013.

In September 2011, the FASB issued guidance on testing goodwill for impairment.

The guidance provides an entity with the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines the fair value of a reporting unit is greater than its carrying amount, then the two-step goodwill impairment test is not required. We adopted the guidance on January 1, 2012. The adoption did not have a material impact on our financial statements.

In July 2012, the FASB issued guidance on testing indefinite-lived intangible assets, other than goodwill, for impairment. The guidance is effective for fiscal years beginning after September 15, 2012 and early adoption is permitted.

The guidance provides an entity with the option to first perform a qualitative assessment to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to perform the currently prescribed quantitative impairment test by comparing the fair value of the asset with the carrying amount. We adopted the guidance on July 1, 2012. The adoption did not have a material impact on our financial statements.

45 -------------------------------------------------------------------------------- CONSOLIDATED RESULTS-(in thousands) Variance (in millions) 2012 2011 2010 2012 vs 2011 2011 vs 2010 Revenue: Instant tickets $ 493,642 $ 493,275 $ 465,090 $ 0.4 - % $ 28.2 6 % Services 352,317 331,701 363,138 20.6 6 % (31.4 ) (9 )% Sales 94,643 53,746 54,271 40.9 76 % (0.5 ) (1 )% Total Revenue 940,602 878,722 882,499 61.9 7 % (3.8 ) - % Operating expenses: Cost of instant tickets (1) 282,548 281,565 270,787 1.0 - % 10.8 4 % Cost of services (1) 181,108 171,374 206,034 9.7 6 % (34.7 ) (17 )% Cost of sales (1) 65,053 38,340 38,045 26.7 70 % 0.3 1 % Selling, general and administrative expenses 188,813 183,022 158,500 5.8 3 % 24.5 15 % Write-down of assets held for sale - - 8,029 - - % (8.0 ) (100 )% Employee termination and restructuring costs 11,502 1,997 602 9.5 476 % 1.4 232 % Depreciation and amortization 173,370 118,603 141,766 54.8 46 % (23.2 ) (16 )% Operating income (loss) 38,208 83,821 58,736 (45.6 ) (54 )% 25.1 43 % Other income (expense): Interest expense (100,008 ) (104,703 ) (101,613 ) 4.7 (4 )% (3.1 ) 3 % Earnings from Equity Investments 28,073 29,391 49,090 (1.3 ) (4 )% (19.7 ) (40 )% Loss on early extinguishment of debt (15,464 ) (4,185 ) (2,932 ) (11.3 ) 270 % (1.3 ) 43 % Other income (expense), net 1,185 (911 ) (8,594 ) 2.1 n/m 7.7 (89 )% (86,214 ) (80,408 ) (64,049 ) (5.8 ) 7 % (16.4 ) 26 % Net income (loss) before income tax expense (48,006 ) 3,413 (5,313 ) (51.4 ) n/m 8.7 (164 )% Income tax expense 14,621 15,983 143,888 (1.4 ) (9 )% (127.9 ) (89 )% Net loss $ (62,627 ) $ (12,570 ) $ (149,201 ) $ (50.0 ) 398 % $ 136.6 (92 )% ________________________________________________________________________________________________________________________________ (1) Exclusive of depreciation and amortization.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Revenue Consolidated revenue reflected increases in each of our categories of revenue and the acquisition of Barcrest, which increased consolidated revenue by $26.9 million. Our instant ticket revenue reflected higher revenue from our U.S. and international POS and CSP contracts driven by increased retail sales, and also reflected higher revenue from our Properties Plus programs. These increases were primarily offset by a decrease in our licensed properties business revenue largely due to challenging year-over-year comparisons in light of the impact of the successful launch of a multi-state licensed game in 2011 and by lower revenue from our U.S. and international PPK contracts principally due to lower sales to LNS, timing of orders and contract revisions. The increase in service revenue reflected higher lottery systems service revenue due in part to larger Powerball and Mega Millions jackpots in 2012 and higher instant ticket validation revenue, as well as higher Gaming service revenue due to the acquisition of Barcrest and an increase in revenue from our U.K. LBO contracts.

Our sales revenue reflected increased equipment sales to U.S. customers, higher hardware and software sales to our international customers and the acquisition of Barcrest. Revenue for the year ended December 31, 2012 also reflected unfavorable foreign currency translation of approximately $8.9 million.

46 -------------------------------------------------------------------------------- Cost of Revenue Consolidated cost of revenue increased in 2012 versus 2011 reflecting the increase in consolidated revenue for the same period. Cost of instant tickets remained consistent with total instant ticket revenue for the same period. The increase in cost of services and cost of sales in 2012 versus 2011 reflected the increase in service and sales revenue and an increase due to the impact of foreign currency translation of approximately $5.3 million.

Selling, General and Administrative ("SG&A") The increase in SG&A reflected approximately $5.4 million of incremental expense from our business acquisitions, higher compensation expense of $5.8 million (including a $2.6 million increase in stock-based compensation expense), a $6.2 million increase in accounts receivable reserves related to certain gaming customers and higher expenses of $2.9 million related to the expansion of our U.K. LBO business. These increases were offset by a decrease of $7.1 million in our accrual for potential incentive compensation related to our Asia-Pacific Plan, a decrease of $5.9 million due to the impact of a customer claim recorded during the year ended December 31, 2011 and an insurance settlement recovered in 2012 related to that claim, and lower professional and advisory fees of $3.0 million. The overall increase in SG&A was also offset by a decrease of approximately $1.0 million due to the impact of foreign currency translation.

Employee Termination and Restructuring Employee termination and restructuring costs of $11.5 million related to our exit from the Barcrest analog AWP business, the reorganization of our pub business in an effort to more effectively capitalize on the Barcrest acquisition and the reorganization of our Australian printing operations.

Depreciation and Amortization Depreciation and amortization increased principally due to $31.9 million of accelerated depreciation expense in our gaming business, including $12.5 million related to the write-down of gaming terminals and software in our pub business and $19.4 million related to a write-down of gaming terminals primarily related to customers transitioning to newer generation terminals. Depreciation and amortization also increased due to the $5.8 million impairment of certain long-lived assets related to underperforming contracts in our lottery systems business, $4.4 million of accelerated depreciation expense related to the write-down of certain development costs in our licensed properties business and $6.8 million of incremental depreciation expense from the acquisition of Barcrest. In addition, we recorded $3.4 million of accelerated depreciation expense related to the reorganization of our Australian printing operations.

These increases were partially offset by a $6.4 million decrease due to accelerated depreciation expense recorded in 2011 related to the replacement of our Gaming business technology platform.

Other Income and Expense Interest expense decreased primarily due to a decline in borrowing costs related to our variable interest rate debt and the expiration of our interest rate swap in October 2011.

Earnings from equity investments decreased due to lower earnings from most of our equity method investments, partially offset by an increase in earnings from RCN.

Loss on early extinguishment of debt increased due to the redemption of our 2016 Notes resulting in a charge of $15.5 million comprised primarily of the redemption premium and the write-off of previously deferred financing costs.

Other expense increased principally due to increases in foreign exchange transaction expenses.

Income Tax Expense Income tax expense was $14.6 million for the year ended December 31, 2012 compared to $16.0 million for the year ended December 31, 2011. The effective income tax rates for the year ended December 31, 2012 and 2011 were (30.5)% and 468.7%, respectively. The income tax expense in 2012 is primarily attributable to income tax expense in our foreign jurisdictions. The effective tax rate for 2012 does not include the benefit of the current year U.S. tax loss as a result of the valuation allowance against our U.S. deferred tax assets.

47 -------------------------------------------------------------------------------- Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Revenue The decrease in our consolidated revenue was principally due to the sale of the Racing Business, which generated $83.8 million in revenue in 2010. The decrease in consolidated revenue was offset by increases in each of our categories of revenue from our core businesses and the acquisition of Barcrest, which increased our consolidated revenue by $14.3 million. The increase in our instant ticket revenue reflected increased revenue from both our U.S. and international businesses driven by increases in retail sales and higher sales of licensed products, including a very successful multi-state game. The decrease in service revenue in 2011 included the impact of $76.0 million in service revenue related to the Racing Business. The decrease in our service revenue was partially offset by increases in our service revenue from international Lottery Systems, the expansion of our U.K. LBO business resulting in increased service revenue and the acquisition of Barcrest. The decrease in our sales revenue in 2011 included the impact of the sale of the Racing Business, resulting in a decrease of $7.8 million which was predominantly offset by increased sales resulting from the acquisition of Barcrest. Our consolidated revenue included a favorable impact of foreign currency translation of $12.0 million.

Cost of Revenues Consolidated cost of revenues decreased in 2011 versus 2010 reflecting the decrease in consolidated revenue for the same period, as well as achievement of our cost reduction and efficiency efforts. Our cost of instant tickets increased 4% in 2011 versus 2010 compared to an increase in instant ticket revenue of 6% for the same period. Cost of services decreased 17% in 2011 versus 2010 compared to a decrease in service revenue of 9% for the same period. Cost of sales increased by 1% in 2011 versus 2010 compared to a 1% decrease in sales revenue for the same period. Cost of revenues increased approximately $7.5 million due to the impact of foreign currency translation.

SG&A The increase in our SG&A reflected increased headcount and incentive compensation expense of $11.1 million relating to support of our strategic growth initiatives and an accrual of $4.3 million for potential compensation related to our Asia-Pacific Plan. The increase also reflected $9.9 million of higher acquisition-related due diligence and advisory fees and expenses related to a customer claim, increase in expense of $2.1 million resulting from the acquisition of Barcrest and an increase of $2.0 million to support expansion of China operations. We also incurred an increase in expense of $2.0 million to support the expansion of the U.K. LBO business, an increase in professional fees of $1.8 million during 2011 primarily related to our financing activities and the impact of foreign currency translation of $1.8 million. The increases were partially offset by lower expenses of $9.3 million due to the sale of the Racing Business, lower costs of $2.2 million as a result of the costs incurred in 2010 related to the Italian instant ticket concession tender that did not repeat and lower stock-based compensation expense of $1.3 million. SG&A also increased approximately $1.8 million due to the impact of foreign currency translation.

Write-down of Assets Held for Sale The write-down of assets held for sale of $8.0 million included in the year ended December 31, 2010 was the result of valuing the held for sale assets of the Racing Business at fair market value less the estimated costs to sell prior to its sale on October 5, 2010.

Employee Termination and Restructuring Costs Employee termination and restructuring costs in 2011 and 2010 were a result of our cost reduction initiatives related to Gaming's migration to a new back-end technology platform and the integration of Barcrest into the Gaming division.

Depreciation and Amortization Expense Depreciation and amortization expenses decreased in 2011 primarily due to the long-lived asset impairments of $17.5 million related to underperforming Lottery Systems contracts and obsolete equipment recorded in 2010 and accelerated depreciation expense from Gaming recorded in 2010 of $8.3 million on existing technology as we migrated to a new platform that did not recur to the same extent in 2011.

Other Income and Expenses Interest expense increased from 2010 to 2011 primarily due to the issuance of our 8.125% senior subordinated notes due 2018 (the "2018 Notes") and the retirement of the 6.25% senior subordinated notes due 2012 in 2010.

48 -------------------------------------------------------------------------------- Loss on early extinguishment of debt of $4.2 million in 2011 was the result of the write-off of deferred financing fees related to the August 25, 2011 credit agreement amendment. Loss on early extinguishment of debt of $2.9 million for the year ended December 31, 2010 was the result of the write-off of debt-related costs related to the purchase of $187.1 million in aggregate principal amount of the Company's 2012 Notes and the prepayment of a portion of the outstanding borrowings under the term loan facilities under the Company's credit agreement.

Earnings from equity investments for 2011 decreased from 2010, which was primarily related to a decline in earnings from our equity investment in LNS of $20.8 million. The Company's share of earnings from LNS is reported on an after-tax basis (it was previously reported on a pre-tax basis under the prior equity investment, Consorzio Lotterie Nazionali ("CLN")) and reflects the amortization of a portion of the upfront fees for the new concession, which together reduced our earnings from our equity investments by approximately $34.8 million. The decrease was partially offset by an increase in earnings from our equity investment in CSG of $4.9 million.

In 2010, we incurred a loss on foreign currency forward contracts related to the Italian instant ticket concession tender of $12.6 million. The foreign currency forward contracts were settled in 2010.

Income Tax Expense Income tax expense was $16.0 million for the year ended December 31, 2011 compared to $143.9 million for the year ended December 31, 2010. The effective income tax rates for the years ended December 31, 2011 and 2010 were 468.7% and (2,708.9)%, respectively. During the year ended December 31, 2010, we recorded a valuation allowance of $149.6 million against our U.S. deferred tax assets. The income tax expense in 2011 was primarily attributable to income tax expense in our foreign jurisdictions. The effective tax rate for 2011 does not include the benefit of the 2011 U.S. pre-tax loss as a result of the valuation allowance against our U.S. deferred tax assets.

49 -------------------------------------------------------------------------------- BUSINESS SEGMENTS RESULTS PRINTED PRODUCTS-(in thousands) Variance (in millions) 2012 2011 2010 2012 vs 2011 2011 vs 2010 Revenue: Instant tickets $ 493,642 $ 493,275 $ 465,090 $ 0.4 - % $ 28.2 6 % Services - - - - - % - - % Sales 11,526 9,664 9,222 1.9 19 % 0.4 5 % Total Revenue 505,168 502,939 474,312 2.2 - % 28.6 6 % Operating expenses: Cost of instant tickets (1) 282,548 281,565 270,787 1.0 - % 10.8 4 % Cost of services (1) - - - - - % - - % Cost of sales (1) 7,569 5,928 6,981 1.6 28 % (1.1 ) (15 )% Selling, general and administrative expenses 45,617 49,269 46,894 (3.7 ) (7 )% 2.4 5 % Employee termination and restructuring costs 5,852 - - 5.9 - % - - % Depreciation and amortization 40,953 32,746 33,303 8.2 25 % (0.6 ) (2 )% Operating income $ 122,629 $ 133,431 $ 116,347 $ (10.8 ) (8 )% $ 17.1 15 % ________________________________________________________________________________________________________________________________ (1) Exclusive of depreciation and amortization.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Revenue The increase in instant ticket revenue reflected higher revenue of $30.6 million from our U.S. and international POS and CSP contracts driven by an increase in retail sales, including from our CSP agreement with Northstar, and the acquisition of Provoloto. Our instant ticket revenue also reflected an increase of $8.1 million from our Properties Plus programs. These increases were primarily offset by an $11.8 million decrease in revenue from our U.S. and international PPK contracts, primarily due to lower sales to LNS, the timing of orders and contract revisions and a $24.4 million decrease in revenue from our licensed properties business largely due to a challenging year-over-year comparison in light of the impact of our successful launch of a multi-state licensed game in 2011. Revenue for the year ended December 31, 2012 also reflected unfavorable foreign currency translation of approximately $2.2 million. Printed Products sales revenue primarily consists of phone card sales.

Operating Income Operating income decreased primarily due to restructuring costs of $5.9 million and higher depreciation expense of $8.2 million comprised of $4.4 million of accelerated depreciation expense related to the write-down of certain development costs in our licensed properties business and $3.4 million of accelerated depreciation expense related to the reorganization of our Australian operations. These decreases in operating income were partially offset by lower SG&A of $3.7 million, which reflected the impact of a customer claim recorded during the year ended December 31, 2011 and an insurance settlement recovered in 2012 related to that claim.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Revenue Analysis Instant ticket revenue reflected higher revenue of $17.1 million from U.S.

customers primarily from our POS and CSP contracts, including our CSP agreement with Northstar, and sales of higher price-point games resulting in higher lottery retail sales. The growth in our U.S. instant ticket revenue in 2011 was also attributable to our successful introduction of our multi-state licensed game in the second quarter of 2011.

50 -------------------------------------------------------------------------------- The increases in the U.S. were offset by lower U.S. PPK contract revenue primarily due to timing of orders as a result of contract revisions and increased competition where we are not the exclusive instant ticket supplier.

Our international revenue increased $5.0 million primarily due to growth in revenue from our European CSP and POS contracts and higher price-point games, offset by a decrease in PPK contract revenue due in part to the loss of our Lotto West contract in 2011. Revenue also increased as a result of favorable foreign currency translation of approximately $6.0 million. Printed Products sales revenue primarily includes phone card sales.

Operating Income Operating income increased in 2011 compared to 2010 due to a higher and more profitable mix of revenue offset by an increase in SG&A expenses primarily due to expenses related to a contract dispute.

LOTTERY SYSTEMS-(in thousands) Variance (in millions) 2012 2011 2010 2012 vs 2011 2011 vs 2010 Revenue: Instant tickets $ - $ - $ - $ - - % $ - - % Services 209,585 205,801 199,439 3.8 2 % 6.4 3 % Sales 62,092 36,528 36,597 25.6 70 % (0.1 ) - % Total Revenue 271,677 242,329 236,036 29.3 12 % 6.3 3 % Operating expenses: Cost of instant tickets (1) - - - - - % - - % Cost of services (1) 113,918 109,016 104,274 4.9 4 % 4.7 5 % Cost of sales (1) 40,275 25,134 25,716 15.1 60 % (0.6 ) (2 )% Selling, general and administrative expenses 26,376 23,713 22,973 2.7 11 % 0.7 3 % Employee termination and restructuring costs - - - - - % - - % Depreciation and amortization 54,474 46,891 64,979 7.6 16 % (18.1 ) (28 )% Operating income 36,634 $ 37,575 $ 18,094 $ (0.9 ) (3 )% $ 19.5 108 % ___________________________________________________________________________________________________________________________ (1) Exclusive of depreciation and amortization.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Revenue The increase in Lottery Systems service revenue reflected higher revenue of $13.0 million from U.S. customers primarily due to larger Mega Millions and Powerball jackpots and higher instant ticket validation revenue. These increases were partially offset by a decline in service revenue from international customers of $6.5 million primarily due to a decrease in instant ticket validation revenue from the CSL. Service revenue also reflected an unfavorable foreign currency translation impact of approximately $2.7 million. The increase in Lottery Systems sales revenue reflected higher equipment sales of $8.2 million to U.S. customers and higher hardware and software sales of $18.8 million to international customers. The increase in Lottery Systems sales revenue was partially offset by an unfavorable foreign currency translation of approximately $1.6 million.

Operating Income Operating income reflected higher revenue offset by long-lived asset impairments of $5.8 million related to underperforming Lottery Systems contracts in the U.S.

and an increase in SG&A of $2.7 million, largely reflecting higher compensation expense in 2012 and the favorable resolution of a legal matter during 2011.

51 -------------------------------------------------------------------------------- Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Revenue Analysis The increase in Lottery Systems service revenue reflected approximately $4.9 million of increased revenue from international customers and service revenue from U.S. customers that was flat year over year. In the U.S., instant ticket validation service revenue increased, offset by the loss of contracts in New Hampshire and Vermont which both ended on June 30, 2010. The increase in international revenue reflected higher instant ticket validation revenues from the CSL of $2.5 million and an increase in service revenue of $2.5 million from other international customers. Revenue also increased approximately $1.7 million as a result of favorable foreign currency translation. Lottery Systems sales revenue was flat in 2011 compared to 2010.

Operating Income Operating income increased primarily due to the $18.1 million of lower depreciation and amortization expense as a result of the long-lived asset impairments recorded in 2010 that did not repeat in 2011.

GAMING-(in thousands) Variance (in millions) 2012 2011 2010 2012 vs 2011 2011 vs 2010 Revenue: Instant tickets $ - $ - $ - $ - - % $ - - % Services 142,732 125,900 163,699 16.8 13 % (37.8 ) (23 )% Sales 21,025 7,554 8,452 13.5 178 % (0.9 ) (11 )% Total Revenue 163,757 133,454 172,151 30.3 23 % (38.7 ) (22 )% Operating expenses: Cost of instant tickets (1) - - - - - % - - % Cost of services (1) 67,190 62,358 101,760 4.8 8 % (39.4 ) (39 )% Cost of sales (1) 17,209 7,278 5,348 9.9 136 % 1.9 36 % Selling, general and administrative expenses 31,659 16,408 20,518 15.3 93 % (4.1 ) (20 )% Write-down of assets held for sale - - 8,029 - - % (8.0 ) (100 )% Employee termination and restructuring costs 5,650 1,997 602 3.7 183 % 1.4 232 % Depreciation and amortization 77,345 38,435 42,983 38.9 101 % (4.5 ) (11 )% Operating (loss) income (35,296 ) $ 6,978 $ (7,089 ) $ (42.3 ) (606 )% 14.1 (198 )% __________________________________________________________________________________________________________________________ (1) Exclusive of depreciation and amortization.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Revenue The increase in Gaming service revenue included $13.4 million from the acquisition of Barcrest. In addition, service revenue from our U.K. LBO customers increased $17.7 million due to an expanded terminal base and higher gross win per terminal per day. These increases were partially offset by the loss of the William Hill contract, $8.2 million of revenue that did not recur primarily due to the closing of the Austrian over-the-counter business in 2011 and unfavorable foreign currency translation of approximately $2.4 million. The increase in sales revenue of $13.5 million reflected the acquisition of Barcrest.

Operating Income Operating income decreased in part due to higher SG&A of $15.3 million including $4.3 million of incremental overhead expense from the acquisition of Barcrest, an increase in accounts receivable reserves of $6.2 million and increased 52 -------------------------------------------------------------------------------- expenses of $2.9 million related to the expansion of our U.K. LBO business.

Employee termination and restructuring costs increased $3.7 million related to the reorganization of our Gaming business. The decrease in operating income also reflected an increase in depreciation and amortization expense of $38.9 million, including $12.5 million related to the write-down of gaming terminals and software in our pub business, $19.4 million due to write-downs of gaming terminals primarily related to customers transitioning to newer generation terminals, $6.7 million of higher depreciation expense related to growth in the Gaming business and incremental depreciation expense of $6.8 million from the acquisition of Barcrest. The increases in depreciation expense were partially offset by $6.4 million of accelerated depreciation expense recorded in 2011 related to the replacement of our Gaming business technology platform. These decreases in operating income were partially offset by higher revenue.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Revenue Analysis The decrease in service revenue was primarily due to the sale of the Racing Business, resulting in a decrease of $76.0 million. The decrease was partially offset by increased revenue of $29.6 million primarily from the expansion of our LBO terminal base, higher gross win per terminal, $6.9 million from the acquisition of Barcrest on September 23, 2011 and higher revenue of $3.2 million due to favorable foreign currency translation. Sales revenue was lower due to a decrease of $7.8 million from the sale of the Racing Business, partially offset by terminal sales to Barcrest customers.

Operating Income Operating income increased in part due to the sale of the Racing Business resulting in a more profitable mix of revenue and a decrease in SG&A costs of $9.3 million. The decrease in SG&A was partially offset by an increase of $4.1 million primarily due to the acquisition of Barcrest and expansion of the LBO business during 2011. Employee termination costs increased in 2011 primarily related to Gaming's migration to a new back-end technology platform and the integration of Barcrest. The write-down of assets held for sale of $8.0 million recorded in 2010 was the result of valuing the held for sale assets of the Racing Business prior to its sale on October 5, 2010. Depreciation expense decreased due in part to the accelerated depreciation and amortization expense in 2010 and impairments of long-lived assets in 2010 related to obsolete equipment.

Critical Accounting Policies The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

The following is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are more fully described in Note 1 (Description of the Business and Summary of Significant Accounting Policies) to our Consolidated Financial Statements. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP, with no need for management's judgment in their application. There are also areas in which management's judgment in selecting an available alternative would not produce a materially different result.

Revenue recognition We recognize revenue when it is realized or realizable and earned. As described below, the determination of when to recognize revenue for certain revenue transactions requires judgment.

Revenue from licensing branded property coupled with a service component whereby we purchase and distribute merchandise prizes on behalf of lottery authorities to identified winners is recognized as a multiple deliverable arrangement. There are typically two deliverables in the arrangement, the license and the merchandising services, which are separate units of accounting. We allocate revenue to the deliverables based on their relative selling prices. Revenue allocated to the license is recognized when the use of the licensed property is permitted, typically when the contract is signed. Revenue allocated to the merchandising services is recognized on a proportional performance method as this method best reflects the pattern in which the obligations of the merchandising services to the customer are fulfilled. A performance measure is used based on total estimated cost allocated to the merchandising services. By accumulating costs for services as they are incurred, and dividing such costs by the total costs of merchandising services (which is estimated based on a budget prior to contract inception), a percentage is determined. The percentage determined is applied to the revenue allocated to the merchandising services and that proportionate amount of revenue is recognized on a monthly basis.

Revenue from the sale of lottery systems that require the production and delivery of terminals and customized software is recognized using the cost-to-cost measure of the percentage-of-completion method of accounting. The percentage- 53 -------------------------------------------------------------------------------- of-completion method recognizes income as work on a contract progresses. The use of the percentage-of-completion method depends on our ability to make reasonably dependable cost estimates for the design, manufacture, and delivery of our products. Estimation of these costs requires the use of judgment. Revenue under percentage-of-completion contracts is recorded as costs are incurred.

Stock-based compensation We measure compensation cost for stock-based awards at fair value and recognize compensation over the service period for awards expected to vest. The fair value of restricted stock units is determined based on the number of shares granted and the quoted price of our common stock and the fair value of stock options are determined using the Black-Scholes valuation model. The estimation of stock-based awards that will ultimately vest requires judgment and, to the extent actual results or updated estimates differs from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results and future changes in estimates may differ substantially from our current estimates.

We may grant certain stock-based awards that are contingent upon the Company achieving certain financial performance targets. Upon determining the performance target is probable, the fair value of the award is recognized over the service period, subject to potential adjustment.

Valuation of long-lived and intangible assets and goodwill We assess the recoverability of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We assess the impairment of goodwill annually or more frequently if events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Factors we consider important that could trigger an impairment review for our long-lived and intangible assets or goodwill include: • significant underperformance relative to expected historical performance or projected future operating results; • significant changes in the manner of use of the acquired assets or the strategy of our overall business; • significant adverse change in the legality of our business ventures or the business climate in which we operate; and • loss of a significant customer.

Long-lived and intangible assets Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the expected net future undiscounted cash flows to be generated by that asset or, for identifiable intangibles with finite useful lives, by determining whether the amortization of the intangible asset balance over its remaining life can be recovered through expected net future undiscounted cash flows. The amount of impairment of other long-lived assets is measured by the amount by which the carrying value of the asset exceeds the fair market value of the asset. Assets held for sale are reported at the lower of the carrying amount or fair market value, less expected costs to sell.

Goodwill We evaluate goodwill for impairment by comparing the carrying value of each reporting unit to its fair value using a quantitative two-step impairment test.

If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired. In the event that the fair value of the reporting unit is less than its carrying value, the amount of the impairment loss will be measured by comparing the implied fair value of goodwill to its carrying value. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

To determine the fair value of each of our reporting units, we applied a number of methodologies consistent with our prior-year approach, including the income approach based on a discounted cash flow ("DCF") analysis and the market approach using implied public and private multiples. Specifically, we applied multiples where comparable companies publicly trade and relevant historical acquisition transactions. In arriving at a valuation of our reporting units, we weighted each of these methodologies equally. Our DCF analysis is based on the present value of two components: the sum of our projected cash flows and a terminal value assuming a perpetual growth rate of 2%. The cash flow estimates are derived from our budget and long-term forecasts prepared for each reporting unit, considering historical results and anticipated future performance. The discount rates used to determine the present value of future cash flows were derived from a weighted average cost of capital analysis ("WACC") utilizing a beta that is derived from the same group of comparable companies used in our multiple analysis. In addition, we gave consideration in the calculation of the WACC for the size and specific industry risks of each of our reporting units.

The discount rate used for each reporting unit ranged from 10% to 12% for 2012 and 12% to 13% for 2011.

54 -------------------------------------------------------------------------------- Due to changes in our management authority structure in 2012, we changed the designation of our Chief Operating Decision Maker ("CODM") as defined under Accounting Standards Codification 350, Intangibles - Goodwill and Other ("ASC 350"). As a result, we determined that we have seven operating segments based on the financial information regularly reviewed by the CODM, which we also determined represent our reporting units as defined under ASC 350. We considered whether additional reporting units exist within an operating segment based on the availability of discrete financial information that is regularly reviewed by segment management, and determined that our seven operating segments equate to our seven reporting units. Our seven reporting units are: Printed Products; Licensed Properties; U.S. Lottery Systems; International Lottery Systems; China Lottery; Video Systems; and Gaming. Previously we had three operating segments and reporting units as of December 31, 2011 and therefore the identification of seven reporting units required the reallocation of the goodwill balance to each reporting unit based on a relative fair value approach in accordance with ASC 350. Our goodwill totaled $801.1 million and $768.4 million as of December 31, 2012 and 2011, respectively. The allocation of goodwill to each reporting unit as of December 31, 2012 is as follows (in millions): Printed Licensed U.S. Lottery International Reporting Unit Products Properties Systems Lottery Systems China Lottery Video Systems Gaming Total Goodwill $ 306.4 $ 21.2 $ 67.6 $ 59.1 $ 64.4 $ 19.7 $ 262.7 $ 801.1 Our annual impairment valuation as of December 31, 2012 produced estimated fair values of equity for all of our reporting units under our old and new structures in excess of the carrying value of equity for all of our reporting units. The estimated fair values of equity for each of our Printed Products, Licensed Properties, International Lottery Systems, China Lottery and Video Systems reporting units were substantially in excess of the carrying value of such reporting unit. Although the estimated fair value of equity for our U.S. Lottery and Gaming reporting units were in excess of the respective carrying value, to illustrate the sensitivity of these reporting units, a decrease in the fair value of equity of more than 25% for our U.S. Lottery Systems or more than 20% for our Gaming reporting unit could potentially result in an impairment of goodwill. The estimate of a reporting unit's fair value requires the use of several assumptions and estimates regarding the reporting unit's future cash flows, growth rates, market comparables and weighted average cost of capital, among others. Significant judgment is required in the forecasting of future operating results, which are used in the preparation of projected cash flows.

Any significant adverse changes in key assumptions about these businesses and their prospects such as changes in our strategy or products, the loss of key customers, regulatory licensing or adverse changes in economic and market conditions may cause a change in the estimation of fair value valuation of our reporting units and could result in an impairment charge that could be material to our financial statements.

Income Taxes and Deferred Income Taxes Income taxes are determined using the liability method of accounting for income taxes. The Company's tax expense includes the U.S. and international income taxes but excludes the provision for U.S. taxes on undistributed earnings of international subsidiaries deemed to be permanently invested.

The Company applies a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.

Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. The Company establishes a valuation allowance for deferred tax assets for which realization is not likely. At December 31, 2012, the Company had a valuation allowance of $241.2 million recorded against the benefit of certain deferred tax assets of foreign and U.S. subsidiaries.

The Company operates within multiple taxing jurisdictions and in the normal course of business is examined in various jurisdictions. The reversal of the accruals is recorded when examinations are completed, statutes of limitation are closed or tax laws are changed.

Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future. The American Taxpayer Relief Act of 2012 (the "Act") was signed into law on January 2, 2013. Because a change in tax law is accounted for in the period of enactment, the provisions of the Act that are expected to impact the Company's 2012 U.S tax return (e.g., the research and experimentation credit) cannot be recognized in the Company's 2012 financial statements and instead will be reflected in the Company's 2013 financial statements. Because the Company has recorded a valuation allowance 55 -------------------------------------------------------------------------------- against the benefit of its U.S net deferred tax assets, we do not expect the provisions of the Act to have a material impact on the Company's 2013 financial statements.

LIQUIDITY, CAPITAL SOURCES AND WORKING CAPITAL Sources of Liquidity At December 31, 2012, our principal sources of liquidity were cash and cash equivalents and amounts available under our revolving credit facility discussed below under "-Credit Agreement and Other Debt." At December 31, 2012, our available cash and cash equivalents and borrowing capacity totaled $315.2 million (including cash and cash equivalents of $109.0 million and availability of $206.2 million under the revolving credit facility) compared to $296.1 million at December 31, 2011 (including cash and cash equivalents of $104.4 million and availability of $191.7 million under the revolving credit facility). There were no borrowings outstanding under our revolving credit facility. However, at December 31, 2012, we had $43.8 million in outstanding letters of credit, which reduces the borrowing capacity under our revolving credit facility. The amount of our available cash and cash equivalents fluctuates principally based on borrowings or repayments under our credit facilities, investments, acquisitions and changes in our working capital position. Our borrowing capacity under the revolving credit facility will depend on outstanding borrowings and letters of credit issued under the revolving credit facility and will depend on our remaining in compliance with the limitations imposed by our credit agreement, including the maintenance of our financial ratios and other covenants. We were in compliance with the covenants under our credit agreement as of December 31, 2012.

We believe that our cash flow from operations, available cash and cash equivalents and available borrowing capacity under our revolving credit facility will be sufficient to meet our liquidity needs for the foreseeable future (excluding the pending WMS transaction, which will require new financing as contemplated by the commitment letter we have entered into in connection with such transaction); however, there can be no assurance that this will be the case. We believe that substantially all cash held outside the U.S. is free from legal encumbrances or similar restrictions that would prevent it from being available to meet the Company's global liquidity needs. The Company's intention is to reinvest undistributed earnings of foreign subsidiaries and current plans do not indicate a need to repatriate earnings of foreign subsidiaries to fund operations in the U.S.

Total cash held by our foreign subsidiaries was $82.8 million as of December 31, 2012. To the extent that a portion of our foreign cash were required to meet liquidity needs in the U.S., we might incur a tax liability, the timing and amount of which would depend on a variety of factors. A significant amount of the cash held by our foreign subsidiaries as of December 31, 2012 could be transferred to the U.S. as repayments of intercompany loans and we have significant foreign tax credit carryovers that would be available to reduce any potential U.S. tax liability.

Our contracts are periodically subject to renewal and there can be no assurance that we will be successful in sustaining our cash flow from operations if our existing contracts are not renewed or are renewed on less favorable terms, or if we are unable to enter into additional contracts. In addition, lottery customers in the United States generally require service providers to provide performance bonds in connection with each lottery contract. As of December 31, 2012, we had arranged for the issuance of a total of $209.8 million of surety bonds in respect of outstanding contracts to which we and/or our subsidiaries are parties. We have reimbursement or indemnification obligations with respect to these bonds in the event that the sureties are required to make payment and, in some cases, such bonds are supported by springing liens, solely on those assets related to the performance of the relevant contractual obligations, that may attach in certain circumstances.

Our ability to obtain performance bonds on commercially reasonable terms is subject to the Company's financial condition and by prevailing market conditions, which may be impacted by economic and political events. Although we have not experienced difficulty in obtaining such bonds to date, there can be no assurance that we will continue to be able to obtain performance bonds on commercially reasonable terms or at all. If we need to refinance all or part of our indebtedness, on or before maturity, or provide letters of credit or cash in lieu of performance bonds, there can be no assurance that we will be able to obtain new financing or to refinance any of our indebtedness, on commercially reasonable terms or at all.

56-------------------------------------------------------------------------------- Cash Flow Summary-A Three Year Comparative Years Ended December 31, 2012 2011 2010 2012 vs 2011 2011 vs 2010 Net cash provided by operating activities $ 156.8 $ 171.1 $ 170.6 $ (14.3 ) $ 0.5 Net cash used in investing activities (141.8 ) (161.1 ) (287.6 ) 19.3 126.5 Net cash (used in) provided by financing activities (10.1 ) (24.6 ) (9.8 ) 14.5 (14.8 ) Effect of exchange rates on cash and cash equivalents (0.2 ) (5.2 ) (9.0 ) 5.0 3.8 Increase (decrease) in cash and cash equivalents $ 4.7 $ (19.8 ) $ (135.8 ) $ 24.5 $ 116.0 Cash flows from operating activities The decrease in net cash provided by operating activities in 2012 was primarily due to a change of approximately $45.1 million of cash used for working capital predominantly due to timing of payments and the start up of a large customer contract in 2011. The decrease was partially offset by our net loss adjusted for non-cash items such as depreciation and amortization, and early extinguishment of debt which resulted in higher cash earnings in 2012 compared to 2011. Cash flows from operating activities also decreased due to lower distributions of earnings of approximately $2.9 million in 2012 compared to 2011.

Cash flow from operating activities in 2011 was relatively consistent with levels in 2010 as working capital and net loss exclusive of non-cash charges were consistent between years.

Cash flows from investing activities The decrease in net cash used in investing activities in 2012 was primarily due to a decrease of $28.1 million of cash used for business acquisitions, a decrease in cash used to invest in our equity method investees of $37.2 million and an increase in distributions of capital from our equity investments of $7.1 million. These decreases were partially offset by increased capital expenditures of $3.6 million, increased wagering system expenditures, including software and intangible expenditures of $15.8 million, primarily due to increased contract capital requirements for our lottery and gaming systems, and an increase in our restricted cash balance of $28.6 million related to our participation in the consortium that was declared the provisional successful bidder for the concession to manage instant ticket lotteries in Greece.

Net cash used in investing activities decreased in 2011. Capital expenditures totaled $8.6 million in 2011 compared to $9.4 million in 2010. Wagering system expenditures, including software and intangible expenditures totaled $83.3 million in 2011, compared to $99.3 million in 2010, primarily due to decreased contract capital requirements for our lottery and gaming systems in 2011 compared to 2010. Our net cash used for equity investments decreased due to our cash investment in LNS of $203.2 million compared to our 2011 cash investments in Northstar and ITL totaling $12.0 million and $23.8 million, respectively. We also received return of capital payments totaling $17.8 million from LNS during 2011. We acquired Barcrest on September 23, 2011 for approximately $48.4 million and we received cash proceeds of $35.9 million from the sale of the Racing Business on October 5, 2010.

Cash flows from financing activities Net cash provided by financing activities increased in 2012 compared to 2011 as a result of an increase in net proceeds from the issuance of long-term debt and a reduction in payments on long-term debt of $84.5 million. The increase in net cash provided by financing activities was offset by share repurchases of $68.5 million and a $2.1 million increase in cash used to satisfy withholding taxes associated with the vesting of restricted stock units.

Net cash used in financing activities in 2011 reflected repayments under the credit agreement discussed below and fees associated with amendments to the credit agreement.

Credit Agreement and Other Debt As of December 31, 2012, our total debt was comprised principally of $559.7 million outstanding under our term loan facilities under the credit agreement discussed below, $250.0 million in aggregate principal amount of the Company's 8.125% senior subordinated notes due 2018 (the "2018 Notes"), $345.9 million in aggregate principal amount of 9.25% senior subordinated notes due 2019 of Scientific Games International, Inc. ("SGI") (the "2019 Notes"), $300.0 million in aggregate principal amount of SGI's 6.250% senior subordinated notes due 2020 (the "2020 Notes") and loans denominated in Chinese 57 -------------------------------------------------------------------------------- Renminbi Yuan ("RMB") totaling RMB 78.0 million (the "China Loans"). On September 19, 2012, SGI redeemed all $200.0 million outstanding 7.875% senior subordinated notes due 2016 (the "2016 Notes") at a redemption price equal to 103.938% of the aggregate principal amount thereof, plus accrued and unpaid interest.

Credit Agreement We are party to a credit agreement, dated as of June 9, 2008, as amended and restated as of February 12, 2010, and amended as of December 16, 2010, March 11, 2011 and as further amended and restated as of August 25, 2011 (as so amended, the "Credit Agreement"), among SGI, as borrower, the Company, as a guarantor, the several lenders from time to time parties thereto and JPMorgan Chase Bank, N.A. ("JPMorgan"), as administrative agent.

The Credit Agreement provides for a $250.0 million senior secured revolving credit facility and senior secured term loan credit facilities under which $559.7 million of term loan borrowings were outstanding as of December 31, 2012.

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. Pursuant to the amendment to the Credit Agreement entered into in August 2011, the scheduled maturity date of a majority of the revolving credit facility commitments and the outstanding term loan was extended from June 9, 2013 to June 30, 2015.

In February 2012, we refinanced the $16.4 million of the revolving credit facility and term loan commitments that were not extended in connection with the amendment to the Credit Agreement entered into in August 2011, and extended the maturity dates of these commitments also to June 30, 2015.

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, prepay or modify certain indebtedness, or create certain liens and other encumbrances on assets.

A summary of the terms of the Credit Agreement, including the applicable financial ratios that the Company is required to maintain under the terms of the Credit Agreement, is included in Note 13 (Long-term and Other Debt) to our Consolidated Financial Statements. We were in compliance with the covenants under the Credit Agreement as of December 31, 2012.

2018 Notes The 2018 Notes issued by the Company bear interest at the rate of 8.125% per annum, which accrues from September 22, 2010 and is payable semiannually in arrears on March 15 and September 15 of each year, commencing on March 15, 2011.

The 2018 Notes mature on September 15, 2018, unless earlier redeemed or repurchased by the Company, and are subject to the terms and conditions set forth in the indenture governing the 2018 Notes dated as of September 22, 2010 (the "2018 Notes Indenture").

We may redeem some or all of the 2018 Notes at any time prior to September 15, 2014 at a price equal to 100% of the principal amount of the 2018 Notes plus accrued and unpaid interest, if any, to the date of redemption plus a "make whole" premium. We may redeem some or all of the 2018 Notes for cash at any time on or after September 15, 2014 at the prices specified in the 2018 Notes Indenture. In addition, at any time on or prior to September 15, 2013, we may redeem up to 35% of the initially outstanding aggregate principal amount of the 2018 Notes at a redemption price of 108.125% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, with the net cash proceeds from one or more equity offerings of the Company.

2019 Notes The 2019 Notes issued by SGI 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 2019 Notes mature on June 15, 2019, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the indenture governing the 2019 Notes dated as of May 21, 2009 (the "2019 Notes Indenture").

SGI may redeem some or all of the 2019 Notes at any time prior to June 15, 2014 at a price equal to 100% of the principal amount of the 2019 Notes plus accrued and unpaid interest, if any, to the date of redemption plus a "make whole" 58 -------------------------------------------------------------------------------- premium calculated as set forth in the 2019 Notes Indenture. SGI may redeem some or all of the 2019 Notes for cash at any time on or after June 15, 2014 at the prices specified in the 2019 Notes Indenture.

2020 Notes On August 20, 2012, SGI issued $300.0 million in aggregate principal amount of its 6.250% Senior Subordinated Notes due 2020 (the "2020 Notes") at a price of 100% of the principal amount thereof 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. The 2020 Notes were issued pursuant to an indenture dated as of August 20, 2012 (the "2020 Notes Indenture").

In February 2013, SGI completed an exchange offer in which all of the unregistered 2020 Notes were exchanged for a like amount of 2020 Notes that have been registered under the Securities Act.

The 2020 Notes bear interest at the rate of 6.250% per annum, which accrues from August 20, 2012 and is payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2013. The 2020 Notes mature on September 1, 2020, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the 2020 Notes Indenture. In connection with the issuance of the 2020 Notes, the Company capitalized financing costs of $6.2 million.

SGI may redeem some or all of the 2020 Notes at any time prior to September 1, 2015 at a price equal to 100% of the principal amount of the 2020 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 2020 Notes at any time on or after September 1, 2015 at the prices specified in the 2020 Notes Indenture. In addition, at any time prior to September 1, 2015, SGI may redeem up to 35% of the initially outstanding aggregate principal amount of the 2020 Notes at a redemption price of 106.250% 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.

2016 Notes On September 19, 2012, SGI redeemed all of our $200.0 million outstanding 2016 Notes at a redemption price equal to 103.938% of the aggregate principal amount thereof, plus accrued and unpaid interest up to, but not including, the redemption date. Bondholders received payment in full consisting of principal in the amount of $200.0 million, redemptive premium of $7.9 million and accrued interest of $4.1 million. In connection with the redemption, the Company recorded a loss on early extinguishment of debt of approximately $15.5 million comprised primarily of the redemption premium and the write-off of previously deferred financing costs.

Other Debt In the first quarter of 2012, we repaid RMB 12.5 million in principal amount of a China loan and the outstanding letter of credit in support of this debt was reduced by $1.0 million. In the second quarter of 2012, we repaid the remaining RMB 166.0 million in principal amount of this China loan and the outstanding letter of credit of $28.2 million in support of this debt was returned.

In May 2012, we entered into a new RMB 60.0 million lending facility with a Chinese bank under which we have borrowed RMB 28.0 million as of December 31, 2012. The facility requires graduated semi-annual principal payments through November 2014. In June 2012, we entered into a one-year RMB 50.0 million term loan with another Chinese bank. A letter of credit in the amount of $6.5 million was issued to support this term loan.

Commitment Letter In connection with the pending merger with WMS, the Company and SGI entered into a commitment letter pursuant to which the lenders party thereto have agreed to provide the Debt Commitment Financing. The Debt Commitment Financing is anticipated to consist of a senior secured first-lien term loan facility in a total principal amount of $2,300 million and a senior secured first-lien revolving credit facility in a total principal amount of $300.0 million. The funding of the Debt Commitment Financing is contingent on the satisfaction of certain conditions set forth in the commitment letter.

Contractual Obligations Our contractual obligations and commercial commitments principally include obligations associated with our outstanding indebtedness, contractual purchase obligations and future minimum operating lease obligations and other long-term liabilities as set forth in the table below as of December 31, 2012: 59 -------------------------------------------------------------------------------- Cash Payments Due By Period In thousands Within Within Within After Total 1 Year 2 - 3Years 4 - 5 Years 5 Years Long-term debt, term loan (1) $ 559,730 $ 6,280 $ 553,450 $ - $ - Long-term debt, 2018 Notes (1) 250,000 - - - 250,000 Long-term debt, 2019 Notes (1) 350,000 - - - 350,000 Long-term debt, 2020 Notes (1) 300,000 - - - 300,000 China loans 12,523 10,101 2,422 - - Capital leases 115 77 35 3 Interest expense (2) 522,655 92,544 173,439 142,875 113,797 Purchase obligations (3) 54,470 51,765 2,705 - - Operating leases (4) 82,050 18,602 30,091 20,897 12,460 Other liabilities (5) 28,694 9,762 10,516 500 7,916 Total contractual obligations $ 2,160,237 $ 189,131 $ 772,658 $ 164,275 $ 1,034,173 ________________________________________________________________________________________________________________________________ (1) See Note 13 (Long-Term and Other Debt) to our Consolidated Financial Statements in this Annual Report on Form 10-K for information regarding long-term and other debt.

(2) Based on rates in effect at December 31, 2012.

(3) Includes, among other contractual obligations, estimated obligations and/or capital commitments in connection with our lottery and gaming contracts.

(4) See Note 12 (Leases) to our Consolidated Financial Statements in this Annual Report on Form 10-K for information regarding our operating leases.

(5) Includes certain other long term liabilities reflected on our Consolidated Balance Sheet as of December 31, 2012 and our current liability related to our licensed properties business license obligation as of December 31, 2012. We have excluded approximately $19.5 million of long-term pension plan and other post retirement liabilities, deferred compensation liabilities of approximately $3.1 million and liability for uncertain tax positions of $2.2 million at December 31, 2012. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.

Periodically, we bid on new lottery systems contracts. Once awarded, these contracts generally require significant upfront capital expenditures for terminal assembly, customization of software, software and equipment installation and telecommunications configuration. Historically, we have funded these upfront costs through cash flows generated from operations, available cash on hand and borrowings under our credit facilities. Our ability to continue to commit to new contracts will depend on, among other things, our then present liquidity levels and/or our ability to borrow at commercially acceptable rates in order to finance the upfront costs. The actual level of capital expenditures will ultimately largely depend on the extent to which we are successful in winning new contracts. Periodically, we elect to upgrade the technological capabilities of older terminals and replace terminals that have exhausted their useful lives. Servicing our installed terminal base requires us to maintain a supply of parts and accessories on hand. We are also required, contractually in some cases, to provide spare parts over an extended period of time, principally in connection with our systems and terminal sale transactions. To meet our contractual obligations and maintain sufficient levels of on-hand inventory to service our installed terminal base, we purchase inventory on an as-needed basis. We presently have no inventory purchase obligations other than in the ordinary course of business.

Under the terms of its PMA with the State of Illinois, Northstar is entitled to receive annual incentive compensation payments to the extent it is successful in increasing the Illinois lottery's net income (as defined in the PMA) above specified target levels, subject to a cap of 5% of the applicable year's net income. Northstar will be responsible for payments to the State to the extent such targets are not achieved, subject to a similar cap. We may be required to make capital contributions to Northstar to fund our pro rata share (i.e., based on our percentage interest in Northstar) of any shortfall payments that may be owed by Northstar to the State under the PMA. Northstar is expected to be reimbursed on a monthly basis for most of its operating expenses under the PMA, although certain expenses of Northstar associated with managing the lottery are not reimbursable.

60-------------------------------------------------------------------------------- In December 2010, the Company adopted the Asia-Pacific Plan. The purpose of the Asia-Pacific Plan is to provide an equitable and competitive compensation opportunity to certain key employees and consultants of the Company who are involved in the Company's business in China (and potentially other jurisdictions in the Asia-Pacific region) (the "Asia-Pacific Business") and to promote the creation of long-term value for the Company's stockholders by directly linking Asia-Pacific Plan participants' compensation under the plan to the appreciation in value of such business. Each participant will be eligible to receive a cash payment following the end of 2014 equal to a pre-determined share of an Asia-Pacific Business incentive compensation pool. The incentive compensation pool will equal a certain percentage of the growth in the value of the Asia-Pacific Business over four years, calculated in the manner provided under the Asia-Pacific Plan and subject to a cap of (1) $35 million, in the event an Asia-Pacific Business liquidity event does not occur by December 31, 2014 or (2) $50 million, in the event an Asia-Pacific Business liquidity event occurs by December 31, 2014. An "Asia-Pacific Business liquidity event" means an initial public offering of at least 20% of the Asia-Pacific Business or a strategic investment by a third-party to acquire at least 20% of the Asia-Pacific Business, in each case, that is approved by the Company. Our accrual recorded in other long-term liabilities related to the Asia-Pacific Plan was $1.9 million and $4.3 million as of December 31, 2012 and 2011, respectively.

On December 12, 2012, the Hellenic Republic Asset Development Fund provisionally awarded the consortium in which we own a 16.5% equity interest a 12-year concession for the exclusive rights to the production, operation and management of instant ticket lotteries in Greece. The consortium is principally comprised of OPAP S.A., Scientific Games and Intralot. Operations under the new concession are subject to various regulatory approvals and Greek parliamentary approval.

Pursuant to our agreement with the consortium, we expect to serve as the exclusive supplier of instant tickets over the term of the concession. If the award is approved, the consortium will pay an upfront payment of €190 million, of which our portion will be €31.4 million, and will be responsible for a monthly fee to the lotteries based on a percentage of gross gaming revenue. As of December 31, 2012, our restricted cash balance includes approximately $29.1 million which will be used to partially fund our portion of the upfront payment upon completion of the approval process. We expect that we would also be responsible for our pro rata share of the consortium's working capital and other capital that may be required in connection with our expected instant ticket contract with the consortium.

In December 2012, we formed Northstar New Jersey with GTECH and OMERS to bid to be the private manager for the New Jersey Lottery for a 15-year term. We have entered into an operating agreement for the formation of Northstar New Jersey Lottery Group, LLC, the entity that we will form with GTECH and OMERS if Northstar New Jersey is selected as the private manager and which will be obligated to pay an upfront fee of $120.0 million to the State of New Jersey upon execution of the private management agreement. Pursuant to our agreement with GTECH and OMERS we will own a 17.69% equity interest in Northstar New Jersey Lottery Group, LLC and will therefore be responsible for approximately $21.2 million, 17.69% of the upfront fee paid to the State. We expect that we would also be responsible for our pro rata share of working capital and other capital requirements of Northstar New Jersey.

On January 30, 2013, we entered into a merger agreement pursuant to which we agreed to acquire WMS for approximately $1.5 billion, plus amounts required to repay the borrowings under our and WMS' existing credit facilities at closing (as of December 31, 2012, $559.7 million was outstanding under our senior secured term loan credit facility and $85.0 million was outstanding under WMS' revolving credit facility). The closing of the merger is subject to customary closing conditions, including approval of the merger by WMS stockholders and other approvals by various authorities. The merger is expected to be completed by the end of 2013.

The merger agreement also contains certain termination rights for both Scientific Games and WMS and further provides that, in connection with termination of the merger agreement under specified circumstances, (i) we may be required to pay to WMS a termination fee of $100 million if all the conditions to closing the merger have been met and the merger is not consummated because of a breach by our lenders of their obligations to finance the transaction and (ii) we may be required to pay to WMS a termination fee of $80 million if we are unable to obtain the gaming approvals that are conditions to closing the merger prior to the termination date. For further details regarding the merger, see Note 23 (Subsequent Events) to our Consolidated Financial Statements in this Annual Report on Form 10-K and the full text of the merger agreement, a copy of which is filed as exhibit 2.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 5, 2013.

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