SCIENTIFIC GAMES CORP (Form: 10-Q, Received: 08/14/2002 17:48:21)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2002

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

Commission File number: 0-13063

SCIENTIFIC GAMES CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

81-0422894
(I.R.S. Employer Identification No.)

750 Lexington Avenue, New York, New York 10022
(Address of principal executive offices)
(Zip Code)

(212) 754-2233
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of August 13, 2002:

Class A Common Stock: 57,452,925

Class B Common Stock: None

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION

THREE MONTHS ENDED JUNE 30, 2002

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements:
	Balance Sheets as of December 31, 2001 and June 30, 2002	3
	Statements of Operations for the Three Months Ended June 30, 2001 and 2002	4
	Statements of Operations for the Six Months Ended June 30, 2001 and 2002	5
	Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2002	6
	Notes to Consolidated Financial Statements	7-26
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27-39
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	40
Item 2.	Changes in Securities and Use of Proceeds	40
Item 6.	Exhibits and Reports on Form 8-K	41

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

				December 31, 2001			June 30, 2002
				(Audited)			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	12,649		6,828
	Restricted cash				708		770
	Accounts receivable, net of allowance for doubtful accounts				50,410		53,094
	Inventories				19,547		28,660
	Prepaid expenses, deposits and other current assets				14,829		13,444

		Total current assets			98,143		102,796

Property and equipment, at cost					364,837		386,176
	Less accumulated depreciation				168,049		185,932

		Net property and equipment			196,788		200,244

Goodwill, net					195,255		198,890
Other intangible assets, net					60,169		58,620
Other assets and investments					51,597		51,112

			Total assets	$	601,952		611,662

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current installments of long-term debt			$	9,437		12,258
	Accounts payable				26,632		27,675
	Accrued liabilities				51,118		45,620
	Interest payable				8,381		8,516

			Total current liabilities		95,568		94,069

Deferred income taxes					28,568		25,443
Other long-term liabilities					23,440		25,960
Long-term debt, excluding current installments					430,298		420,622

			Total liabilities		577,874		566,094

Commitments and contingencies					—		—
Stockholders' equity:
	Convertible preferred stock, par value $1.00 per share, 2,000 shares authorized, 1,220 and 1,256 shares outstanding at December 31, 2001 and June 30, 2002, respectively				1,220		1,256
	Class A common stock, par value $0.01 per share, 99,300 shares authorized, 41,203 and 43,063 shares outstanding at December 31, 2001 and June 30, 2002, respectively				412		431
	Class B non-voting common stock, par value $0.01 per share, 700 shares authorized, none outstanding				—		—
	Additional paid-in capital				275,510		281,833
	Accumulated losses				(242,545	)	(230,638	)
	Treasury stock, at cost				(135	)	(1,418	)
	Accumulated other comprehensive loss				(10,384	)	(5,896	)

		Total stockholders' equity			24,078		45,568

		Total liabilities and stockholders' equity		$	601,952		611,662

See accompanying notes to consolidated financial statements.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2001 and 2002
(Unaudited, in thousands, except per share amounts)

		2001			2002
Operating revenues:
	Services	$	91,640		96,760
	Sales		20,933		17,507

			112,573		114,267

Operating expenses (exclusive of depreciation and amortization shown below):
	Services		57,948		55,237
	Sales		12,014		11,676
	Amortization of service contract software (Note 1)		1,065		1,214

			71,027		68,127

Total gross profit			41,546		46,140
Selling, general and administrative expenses			14,021		15,753
Depreciation and amortization			12,503		9,669

Operating income			15,022		20,718

Other deductions:
	Interest expense		12,708		11,561
	Other income		(63	)	(161	)

			12,645		11,400

Income before income tax expense			2,377		9,318
Income tax expense			437		962

Net income			1,940		8,356
Convertible preferred stock paid-in-kind dividend			1,744		1,851

Net income available to common stockholders		$	196		6,505

Basic and diluted net income per share:
	Basic net income available to common stockholders	$	—		0.15

	Diluted net income available to common stockholders	$	—		0.12

Weighted average number of shares used in per share calculations:
	Basic shares		40,209		43,048

	Diluted shares		44,441		71,983

Pro forma net income available to common stockholders excluding amortization of goodwill and intangible assets with indefinite lives, net of tax benefit		$	2,864

Pro forma diluted net income per share available to common stockholders, excluding amortization of goodwill and intangible assets with indefinite lives, net of tax benefit		$	0.06

See accompanying notes to consolidated financial statements.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2001 and 2002
(Unaudited, in thousands, except per share amounts)

		2001			2002
Operating revenues:
	Services	$	179,680		189,263
	Sales		45,001		31,976

			224,681		221,239

Operating expenses (exclusive of depreciation and amortization shown below):
	Services		116,061		108,486
	Sales		26,721		20,914
	Amortization of service contract software (Note 1)		1,957		2,423

			144,739		131,823

Total gross profit			79,942		89,416
Selling, general and administrative expenses			28,646		30,113
Depreciation and amortization			25,219		18,866

Operating income			26,077		40,437

Other deductions:
	Interest expense		26,288		23,012
	Other (income) expense		181		(229	)

			26,469		22,783

Income (loss) before income tax expense			(392	)	17,654
Income tax expense			105		2,093

Net income (loss)			(497	)	15,561
Convertible preferred stock paid-in-kind dividend			3,443		3,654

Net income (loss) available to common stockholders		$	(3,940	)	11,907

Basic and diluted net income (loss) per share:
	Basic net income (loss) available to common stockholders	$	(0.10	)	0.28

	Diluted net income (loss) available to common stockholders	$	(0.10	)	0.21

Weighted average number of shares used in per share calculations:
	Basic shares		40,186		42,546

	Diluted shares		40,186		74,041

Pro forma net income available to common stockholders excluding amortization of goodwill and intangible assets with indefinite lives, net of tax benefit		$	1,395

Pro forma diluted net income per share available to common stockholders, excluding amortization of goodwill and intangible assets with indefinite lives, net of tax benefit		$	0.03

See accompanying notes to consolidated financial statements.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2001 and 2002
(Unaudited, in thousands)

				2001			2002
Cash flows from operating activities:
	Net income (loss)			$	(497	)	15,561

	Adjustments to reconcile net income (loss) to cash provided by operating activities:
		Depreciation and amortization			27,176		21,289
		Non-cash interest expense			1,191		1,225
		Changes in operating assets and liabilities			(256	)	(14,752	)
		Other			(796	)	(902	)

			Total adjustments		27,315		6,860

Net cash provided by operating activities					26,818		22,421

Cash flows from investing activities:
	Capital expenditures				(3,616	)	(6,628	)
	Wagering systems expenditures				(18,855	)	(6,888	)
	Business acquisition, net of cash acquired				—		(4,104	)
	Increase in other assets and liabilities				(4,839	)	(4,372	)

Net cash used in investing activities					(27,310	)	(21,992	)

Cash flows from financing activities:
	Net borrowings (repayments) under lines of credit				5,900		(4,250	)
	Payments on long-term debt				(2,968	)	(4,401	)
	Proceeds from the issuance of common stock				121		1,273

Net cash provided by (used in) financing activities					3,053		(7,378	)

Effect of exchange rate changes on cash					(872	)	1,128

Increase (decrease) in cash and cash equivalents					1,689		(5,821	)
Cash and cash equivalents, beginning of period					6,488		12,649

Cash and cash equivalents, end of period				$	8,177		6,828

Supplemental disclosure of cash flow information:
	Cash paid (recovered) during the period for:
		Interest paid		$	27,809		22,000

		Net income taxes		$	(409	)	(1,126	)

	Non-cash financing activity during the period:
		Convertible preferred stock paid-in-kind dividends		$	3,443		3,654

See accompanying notes to consolidated financial statements.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share amounts)

(1) Consolidated Financial Statements

Basis of Presentation

The consolidated balance sheet as of June 30, 2002 and the consolidated statements of operations for the three and six months ended June 30, 2001 and 2002, and the consolidated statements of cash flows for the six months then ended, have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present fairly the financial position of the Company at June 30, 2002 and the results of its operations for the three and six months ended June 30, 2001 and 2002 and its cash flows for the six months ended June 30, 2001 and 2002 have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's 2001 Annual Report on Form 10-K. The results of operations for the period ended June 30, 2002 are not necessarily indicative of the operating results for the full year.

Certain items in prior period's financial statements have been classified to conform with the current year presentation. The consolidated statements of operations reflect the reclassification of "amortization of service contract software" as a component of operating expenses, which amounts had been included in depreciation and amortization in previous filings.

Basic and Diluted Net Income (Loss) Per Share

The following represents a reconciliation of the numerator and denominator used in computing basic and diluted net income (loss) per share for the three and six months ended June 30, 2001 and 2002:

	Three Months Ended June 30,			Six Months Ended June 30,
	2001		2002	2001		2002
Income (loss) (numerator)
Net income (loss)	$	1,940	8,356	(497	)	15,561
Convertible preferred stock paid-in-kind dividend		1,744	1,851	3,443		3,654

Net income (loss) available to common stockholders-basic		196	6,505	(3,940	)	11,907
Add back convertible preferred stock paid-in-kind dividend (1)		—	1,851	—		3,654

Net income (loss) available to common stockholders-diluted	$	196	8,356	(3,940	)	15,561

Shares (denominator)
Basic weighted average common shares outstanding		40,209	43,048	40,186		42,546
Effect of diluted securities-stock options, warrants, convertible preferred shares and deferred shares (2)		4,232	28,935	—		31,495

Diluted weighted average common shares outstanding		44,441	71,983	40,186		74,041

Basic and diluted per share amounts
Basic net income (loss) per share available to common stockholders	$	—	0.15	(0.10	)	0.28

Diluted net income (loss) per share available to common stockholders (2)	$	—	0.12	(0.10	)	0.21

(1): Convertible preferred stock paid-in-kind dividend is not included in the calculation of diluted net income per share in the three months and six months ended June 30, 2002 since the preferred stock is assumed to have been converted.
(2): Potential common shares are not included in the calculation of dilutive net loss per share in the six months ended June 30, 2001 since the inclusion would be anti-dilutive.

At June 30, 2001 and 2002, the Company had outstanding stock options, warrants, Performance Accelerated Restricted Stock Units, convertible preferred stock and deferred shares, which could potentially dilute basic earnings per share in the future. (See Notes 13 and 14 to the Consolidated Financial Statements for the year ended December 31, 2001 in the Company's 2001 Annual Report on Form 10-K.)

(2) Acquisition of Interest in SERCHI

On June 5, 2002 the Company completed the purchase of 65% of the equity of Serigrafica Chilena S.A. ("SERCHI"). Subsequent to the acquisition, the Company changed the name of SERCHI to Scientific Games Latino America S.A. The purchase price was approximately $3,900 in cash and up to $4,355 in cash or stock payable to SERCHI stockholders upon the achievement of certain financial performance levels of SERCHI over the next four years. The acquisition was recorded using the purchase method of accounting and the acquired assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired is currently estimated to be approximately $2,575 and has been recorded as goodwill. The operating results of the SERCHI business have been included in the consolidated statements of operations since the date of acquisition. Had the operating results of SERCHI been included as if the transaction had been consummated on January 1, 2002, the pro forma operating results of the Company for the three and six month periods ended June 30, 2002 would not have been materially different.

(3) Business Segments

The following tables represent revenues, profits, depreciation and capital expenditures for the three and six months ended June 30, 2001 and 2002, and assets at June 30, 2001 and 2002, by business segment. Corporate expenses, interest expense and other (income) deductions are not allocated to business segments.

	Three Months Ended June 30, 2001
	Lottery Group		Pari-Mutuel Group	Venue Management Group	Telecom- munications Products Group	Totals
Service revenues	$	55,548	20,271	15,821	—		91,640
Sales revenues		5,614	4,747	—	10,572		20,933

Total revenues		61,162	25,018	15,821	10,572		112,573

Cost of service		34,899	11,924	11,125	—		57,948
Cost of sales		3,265	2,906	—	5,843		12,014
Amortization of service contract software (Note 1)		339	726	—	—		1,065

Total operating expenses		38,503	15,556	11,125	5,843		71,027

Gross profit		22,659	9,462	4,696	4,729		41,546
Selling, general and administrative expenses		5,889	2,667	620	1,176		10,352
Depreciation and amortization		8,277	2,992	667	491		12,427

Segment operating income		8,493	3,803	3,409	3,062		18,767

Unallocated corporate expense							3,745

Consolidated operating income						$	15,022

Capital and wagering systems expenditures	$	11,266	1,615	172	68		13,121

	Three Months Ended June 30, 2002
	Lottery Group		Pari-Mutuel Group	Venue Management Group	Telecom- munications Products Group	Totals
Service revenues	$	59,446	21,033	16,281	—		96,760
Sales revenues		5,897	1,557	—	10,053		17,507

Total revenues		65,343	22,590	16,281	10,053		114,267

Cost of service		32,550	11,808	10,879	—		55,237
Cost of sales		4,226	811	—	6,639		11,676
Amortization of service contract software (Note 1)		538	676	—	—		1,214

Total operating expenses		37,314	13,295	10,879	6,639		68,127

Gross profit		28,029	9,295	5,402	3,414		46,140
Selling, general and administrative expenses		7,041	2,499	685	1,075		11,300
Depreciation and amortization		5,805	2,872	435	470		9,582

Segment operating income		15,183	3,924	4,282	1,869		25,258

Unallocated corporate expense							4,540

Consolidated operating income						$	20,718

Capital and wagering systems expenditures	$	3,149	2,158	781	594		6,682

	Six Months Ended June 30, 2001
	Lottery Group		Pari-Mutuel Group	Venue Management Group	Telecom- munications Products Group	Totals
Service revenues	$	108,751	39,604	31,325	—		179,680
Sales revenues		8,528	14,421	—	22,052		45,001

Total revenues		117,279	54,025	31,325	22,052		224,681

Cost of service		70,614	23,299	22,148	—		116,061
Cost of sales		5,391	8,906	—	12,424		26,721
Amortization of service contract software (Note 1)		678	1,279	—	—		1,957

Total operating expenses		76,683	33,484	22,148	12,424		144,739

Gross profit		40,596	20,541	9,177	9,628		79,942
Selling, general and administrative expenses		12,782	5,360	1,302	2,546		21,990
Depreciation and amortization		16,521	6,210	1,322	1,014		25,067

Segment operating income		11,293	8,971	6,553	6,068		32,885

Unallocated corporate expense							6,808

Consolidated operating income						$	26,077

Assets at June 30, 2001	$	334,805	227,547	33,346	35,030		630,728

Capital and wagering systems expenditures	$	18,829	2,590	535	517		22,471

	Six Months Ended June 30, 2002
	Lottery Group		Pari-Mutuel Group	Venue Management Group	Telecom- munications Products Group	Totals
Service revenues	$	117,524	40,657	31,082	—		189,263
Sales revenues		7,838	2,967	343	20,828		31,976

Total revenues		125,362	43,624	31,425	20,828		221,239

Cost of service		64,715	22,683	21,088	—		108,486
Cost of sales		5,708	1,213	332	13,661		20,914
Amortization of service contract software (Note 1)		1,121	1,302	—	—		2,423

Total operating expenses		71,544	25,198	21,420	13,661		131,823

Gross profit		53,818	18,426	10,005	7,167		89,416
Selling, general and administrative expenses		13,524	4,337	1,314	2,223		21,398
Depreciation and amortization		11,211	5,681	855	945		18,692

Segment operating income		29,083	8,408	7,836	3,999		49,326

Unallocated corporate expense							8,889

Consolidated operating income						$	40,437

Assets at June 30, 2002	$	312,591	226,732	35,374	36,965		611,662

Capital and wagering systems expenditures	$	7,794	3,499	945	1,278		13,516

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2001			2002		2001		2002
Reportable consolidated operating income	$	15,022		20,718		26,077		40,437
Interest expense		12,708		11,561		26,288		23,012
Other (income) expense		(63	)	(161	)	181		(229	)

Income (loss) before income tax expense	$	2,377		9,318		(392	)	17,654

(4) Comprehensive Income (Loss)

Interest Rate Agreements

Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), as amended by SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities—an amendment of FASB Statement No. 133 , establishes accounting and reporting standards for derivative instruments and hedging activities. It requires entities to record all derivative instruments on the balance sheet at fair value. Changes in the fair value of derivatives are recorded in each period in current operations or other comprehensive income (loss), based on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges is recognized in operations.

Pursuant to the terms of the Company's credit facility, the Company is required to maintain interest rate hedges for a notional amount of not less than $140,000 for a period of not less than two years. In satisfaction of this requirement, the Company entered into three interest rate swap agreements in November 2000 which obligate the Company to pay a fixed LIBOR rate and entitle the Company to receive a variable LIBOR rate on an aggregate $140,000 notional amount of debt. The Company has structured these interest rate swap agreements and intends to structure all such future agreements to qualify for hedge accounting pursuant to the provisions of SFAS 133. Accumulated other comprehensive losses resulting from the changes in fair value of the interest rate hedge instruments were $7,249 and $5,547 at December 31, 2001 and June 30, 2002, respectively. For the six month periods ended June 30, 2001 and 2002, the Company recorded a $2,622 charge and a $1,702 credit, respectively, to other comprehensive income (loss) for the change in fair value of the interest rate hedge instruments.

The following presents a reconciliation of net income (loss) to comprehensive income (loss) for the three and six month periods ended June 30, 2001 and 2002:

		Three Months Ended June 30,					Six Months Ended June 30,
		2001			2002		2001		2002
Net income (loss)		$	1,940		8,356		(497	)	15,561
Other comprehensive income (loss):
	Foreign currency translation		(119	)	3,789		(1,599	)	2,786
	Unrealized gain (loss) on investments		(360	)	(355	)	215		—
	Unrealized gain (loss) on interest rate swap agreements		184		(159	)	(2,622	)	1,702

	Other comprehensive income (loss)		(295	)	3,275		(4,006	)	4,488

Comprehensive income (loss)		$	1,645		11,631		(4,503	)	20,049

(5) Inventories

Inventories consist of the following:

	December 31, 2001		June 30, 2002
Parts and work-in-process	$	10,130	17,176
Finished goods		9,417	11,484

	$	19,547	28,660

Parts and work-in-process include costs for equipment expected to be sold. Costs incurred for equipment associated with specific wagering system service contracts not yet placed in service are classified as construction in progress in property and equipment.

(6) Debt

At June 30, 2002, the Company had approximately $29,188 available for borrowing under the Company's revolving credit facility (the "Facility"). There were approximately $10,500 of borrowings outstanding under the Facility, and approximately $25,312 in letters of credit were issued under the Facility at June 30, 2002. At December 31, 2001, the Company's available borrowing capacity under the Facility was $30,960.

(7) Goodwill and Intangible Assets, Impairment of Long-Lived Assets and Long-lived Assets to be Disposed Of

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 141, Business Combinations ("SFAS 141"), and Statement No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), and in August 2001 the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. The Company adopted the provisions of SFAS 141 upon issuance. SFAS 141 also specifies criteria that

intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS 142 requires, commencing January 1, 2002, that goodwill and intangible assets with indefinite useful lives no longer be amortized. Instead, they will be tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 144. Goodwill and intangible assets acquired by the Company in its business combinations completed before July 1, 2001 continued to be amortized through December 31, 2001.

SFAS 142 requires that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and make any necessary reclassifications in order to conform with the new criteria in SFAS 141 for recognition apart from goodwill. The Company also adopted SFAS 142 and, accordingly, is required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations and to make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company is required to test the intangible asset for impairment within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.

In connection with the transitional goodwill impairment evaluation, SFAS 142 and SFAS 144 require that the Company perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To the extent a reporting unit's carrying amount (as defined in SFAS 142) exceeds its fair value, the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's consolidated statement of operations.

The Company had unamortized goodwill of approximately $195,255 and unamortized identifiable intangible assets in the amount of approximately $60,169 at December 31, 2001, all of which were subject to the transition provisions of SFAS 141 and SFAS 142. In connection with the adoption of SFAS 142, the Company evaluated its intangible assets and determined that its right to operate its Connecticut OTBs and its trade name with net carrying amounts of approximately $11,681 and $30,093, respectively, at December 31, 2001, have indefinite useful lives and, accordingly, the Company ceased amortization as of January 1, 2002. In addition, as required by SFAS 142, the Company reclassified its employee work force intangible asset with a net carrying value of approximately $3,170, net of related deferred tax liabilities, to goodwill effective January 1, 2002. Amortization expense of these intangible assets and goodwill was approximately $16,909 for the year ended December 31, 2001. The Company also evaluated the remaining useful lives of its intangible assets that will continue to be amortized and have determined that no revision to the useful lives will be required. The Company completed its initial impairment review of intangible assets with indefinite useful lives during the first quarter of 2002 with

no material adjustments to the December 31, 2001 balances for these assets. The Company completed its initial impairment review of goodwill during the second quarter 2002 with no material adjustments to the December 31, 2001 balances for these assets. The Company has determined its reporting units to be the same as its reportable segments, and all assets including goodwill have been allocated to the reporting units.

SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"). However, SFAS 144 retains the fundamental provisions of SFAS 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS 144 supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions , for the disposal of a segment of a business. However, SFAS 144 retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in distribution to owners) or is classified as held for sale. SFAS 144 also amends ARB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a temporarily controlled subsidiary. The Company adopted SFAS 144 effective January 1, 2002. The adoption of SFAS 144 for long-lived assets held for sale had no material impact on the Company's consolidated financial statements for the first half of 2002. The provisions of this statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities and therefore, will depend on future actions initiated by management. As a result, the Company cannot determine the potential effects that adoption of SFAS 144 will have on its financial statements with respect to future disposal decisions, if any.

The following disclosure presents certain information on the Company's acquired intangible assets subject to amortization as of December 31, 2001 and June 30, 2002. Amortized intangible assets are being amortized over their estimated useful lives, as indicated below, with no estimated residual values.

Intangible Assets		Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization	Net Balance
Balance at December 31, 2001
Amortizable intangible assets:
	Patents	15	$	915	79	836
	Customer lists	14		14,600	2,324	12,276
	Employee work force	5		7,200	1,917	5,283
	Trade name	20		32,200	2,107	30,093
	Connecticut off-track betting system operating rights	20		20,000	8,319	11,681

Total intangible assets			$	74,915	14,746	60,169

Balance at June 30, 2002
Amortizable intangible assets:
	Patents	15	$	1,002	130	872
	Customer lists	14		14,600	3,218	11,382
	Customer service contracts	15		3,200	947	2,253

				18,802	4,295	14,507

Non-amortizable intangible assets:
	Trade name			32,200	2,107	30,093
	Connecticut off-track betting system operating right			22,339	8,319	14,020

				54,539	10,426	44,113

Total intangible assets			$	73,341	14,721	58,620

The aggregate intangible amortization expense for the six-month period ended June 30, 2002 was approximately $1,036. The estimated intangible asset amortization expense for the year ending December 31, 2002 and for each of the subsequent four years ending December 31, 2006 are $1,921, $1,921, $1,636, $888 and $601, respectively.

The table below reconciles the change in the carrying amount of goodwill, by reporting unit, which is the same as operating segment, for the period from December 31, 2001 to June 30, 2002. The Company recorded a $3,170 increase in goodwill at January 1, 2002 in connection with the reclassification of employee work force intangible assets of $5,283 less related deferred tax liability of $2,113 acquired prior to July 1, 2001 that did not meet the criteria for recognition apart from goodwill under SFAS 141. Goodwill in the amount of $2,253 which was directly related to the value of customer contracts acquired as part of the September 1, 1999 acquisition of Datasport assets and an interest in Datek, was reclassified to intangible assets effective January 1, 2002. Goodwill in the amount of $2,575 was recorded in the second quarter of 2002 in connection with the acquisition of a majority interest in SERCHI.

Goodwill		Lottery Group		Pari-Mutuel Group		Venue Management Group	Telecom- munications Products Group	Totals
Balance at December 31, 2001		$	192,658	2,597		—	—	195,255
Effect of adoption of SFAS 141 and SFAS 142:
	Reclassification of employee workforce intangible asset, net of tax		3,170	—		—	—	3,170
	Reclassification of customer service contract to intangible assets		—	(2,110	)	—	—	(2,110	)
	Record the goodwill acquired in the acquisition of a majority interest in SERCHI		2,575	—		—	—	2,575

Balance at June 30, 2002		$	198,403	487		—	—	198,890

The following table compares pro forma net income (loss) available to common stockholders for the three months and six months ended June 30, 2001, adjusted to reflect the adoption of SFAS 142 on January 1, 2001, to the reported net income for the three months and six months ended June 30, 2002:

		Three Months Ended June 30,				Six Months Ended June 30,
		2001		2002		2001		2002
		Pro Forma		As Reported		Pro Forma		As Reported
Reported net income (loss)		$	1,940	8,356		(497	)	15,561
Convertible preferred stock paid-in-kind dividend			1,744	1,851		3,443		3,654

Reported net income (loss) available to common stockholders			196	6,505		(3,940	)	11,907
Add back:
	Goodwill and related intangible amortization, net of tax benefit		2,668	—		5,335		—

Adjusted net income available to common stockholders		$	2,864	6,505		1,395		11,907

Basic and diluted net income (loss) per share available to common stockholders:
Basic reported net income (loss) per share		$	—	0.15		(0.10	)	0.28
Diluted reported net income (loss) per share			—	0.12		(0.10	)	0.21
Add back:
	Goodwill and related intangible amortization per share, net of tax benefit (basic)		0.07	—		0.13		—
	Goodwill and related intangible amortization per share, net of tax benefit (diluted)		0.06	—		0.13		—

Adjusted basic net income per share		$	0.07	0.15		0.03		0.28

Adjusted diluted net income per share		$	0.06	0.12	(a)	0.03		0.21	(a)

(a): The fully diluted earnings per share calculations for the three months and six months of 2002 assume the preferred shares are converted to common shares and there are no preferred dividends in those periods.

(8) Recent Developments

On July 2, 2002, the Company completed the public offering and sale of 14,375 shares of its Class A Common Stock at $7.25 per share (the "2002 Offering"). The proceeds after underwriter's discounts, before direct offering expenses, to the Company were approximately $98,500. On August 2, 2002, the Company redeemed approximately $52,500 of its 12 ¹ / 2 % Senior Subordinated Notes. The issuance of the 14,375 shares of Class A Common Stock and application of the proceeds to reduce debt are not reflected in the consolidated balance sheet as of June 30, 2002.

The net proceeds from the 2002 Offering were approximately $96,000 after deducting the underwriting discounts and commissions and estimated offering expenses. On August 2, 2002, approximately $52,500 of the net proceeds was used to redeem 35% of the Company's 12 ¹ / 2 % Senior Subordinated Notes. The Company was also required to pay the noteholders a premium of approximately $6,563 in connection with this redemption, which together with related deferred financing costs, will be reflected as extraordinary items in the third quarter. In addition, the Company may use the remaining net proceeds of approximately $36,921 either to repurchase additional 12 ¹ / 2 % Senior Subordinated Notes, or, if market conditions do not so permit, to repay a portion of its senior credit facilities. As of June 30, 2002, there were $52,500 outstanding under the Term A loans and $216,150 outstanding under the Term B loans. If the Company elects to repay the Term A and Term B loans ratably as specified, there would be $45,285 outstanding under the Term A loans and $186,444 outstanding under the Term B loans after such repayments. Under the terms of the Term B loans, however, the lenders have the option to waive their rights to receive prepayments of such loans from proceeds of the 2002 Offering. If all of the Term B lenders waive their rights to receive prepayments, all of the net proceeds will be used to repay the Term A loans, which would then have a balance outstanding of approximately $15,600 following such repayment.

As of June 30, 2002, the annual interest rates on the outstanding Term A loans and Term B loans under the Company's senior credit facilities were 5 ¹ / 8 % and 6 ³ / 16 %, respectively, and the annual interest rate on the senior subordinated notes was 12 ¹ / 2 %. The Term A and Term B loans mature on September 30, 2006 and September 30, 2007, respectively, and the senior subordinated notes mature on August 15, 2010. When the Company repays outstanding principal of the Term A and Term B loans and the senior subordinated notes, it is also required to pay accrued and unpaid interest on the principal amount being repaid or redeemed through the repayment date. The Company intends to pay interest out of its available working capital.

Based on the assumed redemption and repurchases of the Company's 12 ¹ / 2 % Senior Subordinated Notes, and the repayment of the Term A and Term B loans described below, the Company expects to recognize annual interest expense savings of approximately $8,500 to $10,500 per year.

The following table sets forth the Company's actual capitalization as of June 30, 2002, and as adjusted to give effect to the 2002 Offering and the use of proceeds as follows. The first "as adjusted" column below gives effect to the redemption of approximately $52,500 of the Company's 12 ¹ / 2 % Senior Subordinated Notes and the repurchase of an additional approximate $31,837 of the 12 ¹ / 2 % Senior Subordinated Notes, which the Company intends to repurchase from holders within 90 days after completion of the 2002 Offering if such Notes are available at prices the Company considers attractive. The second "as adjusted" column gives effect to the application of the net proceeds from the 2002 Offering to the redemption of approximately $52,500 of the Company's 12 ¹ / 2 % Senior Subordinated Notes (with no repurchase of additional 12 ¹ / 2 % Senior Subordinated Notes) and the repayment of approximately $7,215 of the Term A loans and approximately $29,706 of the Term B loans. This table should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition

and Results of Operations," included in this report on Form 10-Q and the Consolidated Financial Statements and the notes thereto included in the Company's 2001 Annual Report on Form 10-K.

				As of June 30, 2002
				Actual			As Adjusted		As Adjusted
				(unaudited)			(unaudited)		(unaudited)
Cash and cash equivalents				$	6,828		6,828		6,828

	Senior credit facilities:
		Revolving credit facility			10,500		10,500		10,500
		Term A loan			52,500		52,500		45,285
		Term B loan			216,150		216,150		186,444
	12 ¹ / 2 % senior subordinated notes				150,000		65,663		97,500
	Capital leases and other indebtedness				3,730		3,730		3,730

			Total debt		432,880		348,543		343,459

Stockholder's equity (deficit):
	Convertible preferred stock				1,256		1,256		1,256
	Class A common stock				431		574		574
	Additional paid-in-capital				281,833		377,673		377,673
	Accumulated losses				(230,638	)	(245,836)	(a)	(240,236)	(b)
	Treasury stock, at cost				(1,418	)	(1,418	)	(1,418	)
	Accumulated other comprehensive losses				(5,896	)	(5,896	)	(5,896	)

			Total stockholder's equity		45,568		126,353		131,953

			Total capitalization	$	478,448		474,896		475,412

(a): The increase in accumulated losses is the result of the write-off of a preliminary estimate of $3,552 of deferred financing costs, plus the write-off of the $11,646 premium payable upon redemption of $84,337 of the 12 ¹ / 2 % Senior Subordinated Notes. Both items will be accounted for as extraordinary items.
(b): The increase in accumulated losses is the result of the write-off of a preliminary estimate of $3,035 of deferred financing costs due to the redemption of a portion of the 12 ¹ / 2 % Senior Subordinated Notes and the repayment of a portion of the Term A and Term B loans, plus the write-off of the $6,563 premium payable upon redemption of $52,500 of the 12 ¹ / 2 % Senior Subordinated Notes. Both items will be accounted for as extraordinary expenses.

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

The Company conducts substantially all of its business through its domestic and foreign subsidiaries. The Company's 12 ¹ / 2 % Series B Senior Subordinated Notes due 2010 (the "Notes") and Facility issued on September 6, 2000 in connection with the acquisition of Scientific Games Holdings Corp. ("SGHC") are fully, unconditionally and jointly and severally guaranteed by substantially all of the Company's wholly owned domestic subsidiaries (the "Guarantor Subsidiaries").

Presented below is condensed consolidating financial information for (i) Scientific Games Corporation (the "Parent Company"), which includes the activities of Scientific Games Management Corporation, (ii) the Guarantor Subsidiaries and (iii) the wholly owned foreign subsidiaries and the non-wholly owned domestic and foreign subsidiaries (the "Non-Guarantor Subsidiaries") as of December 31, 2001 and June 30, 2002 and for the six months ended June 30, 2001 and 2002. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of the Parent Company, Guarantor Subsidiaries and Non-Guarantor Subsidiaries assuming the guarantee structure of the Notes was in effect at the beginning of the periods presented. Separate financial statements for Guarantor Subsidiaries are not presented based on management's determination that they would not provide additional information that is material to investors.

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

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2001
(in thousands)

			Parent Company			Guarantor Subsidiaries		Non-Guarantor Subsidiaries	Eliminating Entries		Consolidated
ASSETS
	Cash and cash equivalents		$	7,612		(415	)	5,452	—		12,649
	Accounts receivable, net			—		34,322		16,088	—		50,410
	Inventories			—		16,524		3,558	(535	)	19,547
	Other current assets			973		9,344		5,190	30		15,537
	Property and equipment, net			2,159		156,224		38,822	(417	)	196,788
	Investment in subsidiaries			265,521		—		—	(265,521	)	—
	Goodwill			183		192,658		2,414	—		195,255
	Intangible assets			—		54,928		5,241	—		60,169
	Other assets			20,378		44,056		6,487	(19,324	)	51,597

		Total assets	$	296,826		507,641		83,252	(285,767	)	601,952

LIABILITIES AND STOCKHOLDERS' EQUITY
	Current installments of long-term debt		$	9,018		9		410	—		9,437
	Current liabilities			14,999		50,672		19,661	799		86,131
	Long-term debt, excluding current installments			429,917		10		371	—		430,298
	Other non-current liabilities			14,221		32,702		4,356	729		52,008
	Intercompany balances			(195,407	)	169,896		27,154	(1,643	)	—
	Stockholders' equity			24,078		254,352		31,300	(285,652	)	24,078

		Total liabilities and stockholders' equity	$	296,826		507,641		83,252	(285,767	)	601,952

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2002
(unaudited, in thousands)

			Parent Company			Guarantor Subsidiaries		Non-Guarantor Subsidiaries	Eliminating Entries		Consolidated
ASSETS
	Cash and cash equivalents		$	664		(476	)	6,640	—		6,828
	Accounts receivable, net			—		35,590		17,504	—		53,094
	Inventories			—		24,090		5,145	(575	)	28,660
	Other current assets			925		9,148		4,111	30		14,214
	Property and equipment, net			2,044		150,623		48,072	(495	)	200,244
	Investment in subsidiaries			313,880		4,150		—	(318,030	)	—
	Goodwill			183		195,828		2,879	—		198,890
	Intangible assets			—		53,065		5,555	—		58,620
	Other assets			20,617		41,718		5,313	(16,536	)	51,112

		Total assets	$	338,313		513,736		95,219	(335,606	)	611,662

LIABILITIES AND STOCKHOLDERS' EQUITY
	Current installments of long-term debt		$	10,514		9		1,735	—		12,258
	Current liabilities			14,266		45,411		21,326	808		81,811
	Long-term debt, excluding current installments			420,035		6		581	—		420,622
	Other non-current liabilities			12,859		31,408		6,951	185		51,403
	Intercompany balances			(164,929	)	143,632		22,949	(1,652	)	—
	Stockholders' equity			45,568		293,270		41,677	(334,947	)	45,568

		Total liabilities and stockholders' equity	$	338,313		513,736		95,219	(335,606	)	611,662

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Three Months Ended June 30, 2001
(unaudited, in thousands)

		Parent Company			Guarantor Subsidiaries		Non-Guarantor Subsidiaries	Eliminating Entries		Consolidated
Operating revenues		$	—		85,879		29,735	(3,041	)	112,573
Operating expenses			—		52,958		19,829	(2,825	)	69,962
Amortization of service contract software (Note 1)			—		965		100	—		1,065

	Gross profit		—		31,956		9,806	(216	)	41,546
Selling, general and administrative expenses			3,669		7,370		3,014	(32	)	14,021
Depreciation and amortization			76		11,045		1,387	(5	)	12,503

	Operating income (loss)		(3,745	)	13,541		5,405	(179	)	15,022
Interest expense			12,637		118		462	(509	)	12,708
Other (income) expense			(489	)	(448	)	434	440		(63	)

Income (loss) before equity in income of subsidiaries and income taxes			(15,893	)	13,871		4,509	(110	)	2,377
Equity in income of subsidiaries			17,833		—		—	(17,833	)	—
Income tax expense (benefit)			—		(1,022	)	1,459	—		437

Net income		$	1,940		14,893		3,050	(17,943	)	1,940

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Three Months Ended June 30, 2002
(unaudited, in thousands)

		Parent Company			Guarantor Subsidiaries		Non-Guarantor Subsidiaries	Eliminating Entries		Consolidated
Operating revenues		$	—		86,166		29,972	(1,871	)	114,267
Operating expenses			—		48,305		20,397	(1,789	)	66,913
Amortization of service contract software (Note 1)			—		1,114		100	—		1,214

	Gross profit		—		36,747		9,475	(82	)	46,140
Selling, general and administrative expenses			4,451		8,720		2,585	(3	)	15,753
Depreciation and amortization			87		7,652		1,934	(4	)	9,669

	Operating income (loss)		(4,538	)	20,375		4,956	(75	)	20,718
Interest expense			11,296		227		348	(310	)	11,561
Other (income) expense			2		(892	)	434	295		(161	)

Income (loss) before equity in income of subsidiaries and income taxes			(15,836	)	21,040		4,174	(60	)	9,318
Equity in income of subsidiaries			24,100		—		—	(24,100	)	—
Income tax expense (benefit)			(92	)	61		993	—		962

Net income		$	8,356		20,979		3,181	(24,160	)	8,356

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Six Months Ended June 30, 2001
(unaudited, in thousands)

		Parent Company			Guarantor Subsidiaries		Non-Guarantor Subsidiaries	Eliminating Entries		Consolidated
Operating revenues		$	—		171,141		61,545	(8,005	)	224,681
Operating expenses			—		107,790		42,737	(7,745	)	142,782
Amortization of service contract software (Note 1)			—		1,757		200	—		1,957

	Gross profit		—		61,594		18,608	(260	)	79,942
Selling, general and administrative expenses			6,656		15,846		6,179	(35	)	28,646
Depreciation and amortization			152		22,309		2,798	(40	)	25,219

	Operating income (loss)		(6,808	)	23,439		9,631	(185	)	26,077
Interest expense			26,193		122		1,054	(1,081	)	26,288
Other (income) expense			(538	)	(1,035	)	690	1,064		181

Income (loss) before equity in income of subsidiaries and income taxes			(32,463	)	24,352		7,887	(168	)	(392	)
Equity in income of subsidiaries			31,341		—		—	(31,341	)	—
Income tax expense (benefit)			(625	)	(1,858	)	2,588	—		105

Net income (loss)		$	(497	)	26,210		5,299	(31,509	)	(497	)

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Six Months Ended June 30, 2002
(unaudited, in thousands)

		Parent Company			Guarantor Subsidiaries		Non-Guarantor Subsidiaries	Eliminating Entries		Consolidated
Operating revenues		$	—		172,697		54,899	(6,357	)	221,239
Operating expenses			—		98,289		37,365	(6,254	)	129,400
Amortization of service contract software (Note 1)			—		2,223		200	—		2,423

	Gross profit		—		72,185		17,334	(103	)	89,416
Selling, general and administrative expenses			8,714		16,329		5,076	(6	)	30,113
Depreciation and amortization			174		14,975		3,723	(6	)	18,866

	Operating income (loss)		(8,888	)	40,881		8,535	(91	)	40,437
Interest expense			22,591		405		657	(641	)	23,012
Other (income) expense			(290	)	(1,271	)	761	571		(229	)

Income (loss) before equity in income of subsidiaries and income taxes			(31,189	)	41,747		7,117	(21	)	17,654
Equity in income of subsidiaries			46,750		—		—	(46,750	)	—
Income tax expense			—		98		1,995	—		2,093

Net income		$	15,561		41,649		5,122	(46,771	)	15,561

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2001
(unaudited, in thousands)

		Parent Company			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries		Consolidated
Net income (loss)		$	(497	)	26,210		5,299		(31,509	)	(497	)
	Depreciation and amortization		152		24,066		2,998		(40	)	27,176
	Equity in income of subsidiaries		(31,341	)	—		—		31,341		—
	Non-cash interest expense		1,191		—		—		—		1,191
	Changes in operating assets and liabilities		(4,787	)	4,043		(1,403	)	1,891		(256	)
	Other non-cash adjustments		133		(1,782	)	853		—		(796	)

Net cash provided by (used in) operating activities			(35,149	)	52,537		7,747		1,683		26,818

Cash flows from investing activities:
	Capital and wagering systems expenditures		(47	)	(18,100	)	(4,370	)	46		(22,471	)
	Other assets and investments		(842	)	(5,437	)	1,343		97		(4,839	)

Net cash used in investing activities			(889	)	(23,537	)	(3,027	)	143		(27,310	)

Cash flows from financing activities:
	Net borrowing under lines of credit		5,900		—		—		—		5,900
	Payments on long-term debt		(2,632	)	(5	)	(524	)	193		(2,968	)
	Proceeds from stock issue		121		—		—		—		121
	Other, principally intercompany balances		32,639		(28,261	)	(2,359	)	(2,019	)	—

Net cash provided by (used in) financing activities			36,028		(28,266	)	(2,883	)	(1,826	)	3,053

Effect of exchange rate changes on cash			57		(850	)	(79	)	—		(872	)

Increase (decrease) in cash and cash equivalents			47		(116	)	1,758		—		1,689
Cash and cash equivalents, beginning of period			867		(50	)	5,671		—		6,488

Cash and cash equivalents, end of period		$	914		(166	)	7,429		—		8,177

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2002
(unaudited, in thousands)

		Parent Company			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries		Consolidated
Net income		$	15,561		41,649		5,122		(46,771	)	15,561
	Depreciation and amortization		174		17,198		3,923		(6	)	21,289
	Equity in income of subsidiaries		(46,750	)	—		—		46,750		—
	Non-cash interest expense		1,225		—		—		—		1,225
	Changes in operating assets and liabilities		(685	)	(13,975	)	514		(606	)	(14,752	)
	Other non-cash adjustments		(222	)	(780	)	100		—		(902	)

Net cash provided by (used in) operating activities			(30,697	)	44,092		9,659		(633	)	22,421

Cash flows from investing activities:
	Capital and wagering systems expenditures		(6	)	(8,643	)	(4,950	)	83		(13,516	)
	Business acquisition, net of cash acquired		—		(4,150	)	46		—		(4,104	)
	Other assets and investments		(786	)	(1,069	)	815		(3,332	)	(4,372	)

Net cash used in investing activities			(792	)	(13,862	)	(4,089	)	(3,249	)	(21,992	)

Cash flows from financing activities:
	Net repayments under lines of credit		(4,250	)	—		—		—		(4,250	)
	Payments on long-term debt		(4,136	)	(4	)	(261	)	—		(4,401	)
	Proceeds from stock issue		1,273		—		—		—		1,273
	Other, principally intercompany balances		31,654		(30,791	)	(4,745	)	3,882		—

Net cash provided by (used in) financing activities			24,541		(30,795	)	(5,006	)	3,882		(7,378	)

Effect of exchange rate changes on cash			—		504		624		—		1,128

Increase (decrease) in cash and cash equivalents			(6,948	)	(61	)	1,188		—		(5,821	)
Cash and cash equivalents, beginning of period			7,612		(415	)	5,452		—		12,649

Cash and cash equivalents, end of period		$	664		(476	)	6,640		—		6,828

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR
THE SIX MONTHS ENDED JUNE 30, 2002

Background

On January 29, 2002, we transferred the listing of our Class A common stock to the Nasdaq National Market from the American Stock Exchange and changed our trading symbol to "SGMS."

The following discussion addresses our financial condition as of June 30, 2002 and the results of our operations for the three and six month periods ended June 30, 2002, compared to the same periods in the prior year. This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2001, included in our 2001 Annual Report on Form 10-K.

We operate in four business segments: Lottery Group, Pari-mutuel Group, Venue Management Group and Telecommunications Products Group. Our Lottery Group provides instant tickets and related services and lottery systems. Instant ticket and related services includes ticket design and manufacturing as well as value-added services, including game design, sales and marketing support, inventory management and warehousing and fulfillment services. In addition, this division includes promotional instant tickets and pull-tab tickets that we sell to both lottery and non-lottery customers. Our lottery systems business includes the supply of transaction processing software for the accounting and validation of both instant ticket and on-line lottery games, point-of-sale terminal hardware sales, central site computers and communication hardware sales, and ongoing support and maintenance services for these products. This product line also includes software and hardware and support service for sports betting and credit card processing systems.

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

Our Venue Management Group is comprised of our Connecticut off-track betting operations, and our Dutch on-track and off-track betting operations.

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

Our revenues are derived from two principal sources: service revenues and sales revenues. Service revenues are earned pursuant to multi-year contracts to provide instant tickets and related services and on-line lottery and pari-mutuel wagering systems and services, or are derived from wagering by customers at facilities we own or lease. Sales revenues are derived from sales of prepaid phone cards and from the sale of wagering systems, equipment, and software licenses.

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

Results of Operations: See "Note 3 Business Segments"

Three Months Ended June 30, 2002 compared to Three Months Ended June 30, 2001

Revenue Analysis

Lottery Group revenue of $65.3 million in the three months ended June 30, 2002 improved $4.2 million from the same period in 2001. A $3.9 million increase in service revenue is attributable to: an incremental $4.9 million growth in our on-line lottery business due to the start-up of the on-line lotteries in Maine and Iowa in July 2001 and the start-up of the South Carolina Educational Lottery in January 2002; $2.9 million growth in our instant ticket lottery business due primarily to the start-up of the South Carolina Educational Lottery. These increases were partially offset by a $2.7 million decrease resulting from the absence of the French lottery business that was sold in the third quarter of 2001, and a $1.5 million reduction in our cooperative services business, principally as a result of the loss of the New York State contract, which had already been awarded to another company when we acquired SGHC, partially offset by continued retail sales growth and the addition of the South Carolina Educational Lottery in January 2002. In the three months ended June 30, 2002, equipment sales increased $0.3 million from the same period in 2001 due to the timing of equipment sales.

Pari-mutuel Group service revenue of $21.0 million in the three months ended June 30, 2002 increased $0.8 million from the same period in 2001 as revenue improvements in the North American racing operations, NASRIN™ services and simulcasting services were partially offset by lower revenues in the French operations. Sales revenue of $1.6 million in the three months ended June 30, 2002 decreased $3.2 million from same period in 2001 due to non-recurring 2001 system and terminal sales contracts.

Venue Management Group service revenue of $16.3 million in the three months ended June 30, 2002 increased $0.5 million from the same period in 2001, primarily reflecting higher Handle related revenue in both the Connecticut OTB and Dutch operations.

Telecommunications Products Group sales revenue of $10.1 million in the three months ended June 30, 2002 was $0.5 million lower than in the same period in 2001, reflecting competitive price reductions which began in the third quarter of 2001, partially offset by a 19% growth in the volume of tickets produced.

Gross Profit Analysis

The total gross profit earned of $46.1 million in the three months ended June 30, 2002 increased $4.6 million from the same period in 2001. This increase included $7.7 million in improved gross margins in the service businesses that resulted primarily from the new lotteries, higher instant ticket sales, and increased North American pari-mutuel revenues. These improvements were partially offset by a $3.1 million decrease in sales margins reflecting the fewer sales of equipment and systems to foreign customers and the price related margin reductions in the Telecommunications Products Group.

The Lottery Group gross profit of $28.0 million, or 43% of revenues, increased $5.4 million in the three months ended June 30, 2002 from $22.6 million, or 37% of revenues, in the same period in 2001. Gross margin improvements were realized as a result of the additions of the Maine and Iowa on-line lotteries in July 2001 and the start-up of the South Carolina Educational Lottery in January 2002, continued retail sales growth at many of our cooperative service customers, and cost reductions in our instant ticket printing business. These margin improvements were partially offset by a reduction in margins due to lower lottery equipment sales and the absence of the French lottery business that was sold in the third quarter of 2001.

Pari-mutuel Group gross profit of $9.3 million, or 41% of revenues, in the three months ended June 30, 2002, decreased $0.2 million from $9.5 million, or 38% of revenues, in the same period in 2001. Of such margin decrease, $1.1 million is primarily attributable to fewer systems and equipment

sales to foreign customers. The margin decrease is partially offset by a $0.6 million margin improvement attributable to the continued growth of the North American operations and the benefits from on-going cost reduction programs.

Venue Management Group gross profit of $5.4 million, or 33% of revenues, in the three months ended June 30, 2002, increased $0.7 million from $4.7 million, or 30% of revenues, in the same period in 2001. This improvement primarily reflects the effect of the new operating agreement in The Netherlands and Handle-related margin improvements in Connecticut.

The Telecommunications Products Group gross profit of $3.4 million, or 34% of revenues, in the three months ended June 30, 2002 decreased $1.3 million from $4.7 million, or 45% of revenues, in the same period in 2001 as a 19% increase in sales volume was offset by competitive price reductions.

Expense Analysis

Selling, general and administrative expenses of $15.8 million in the three months ended June 30, 2002 were $1.8 million higher than in the same period in 2001 primarily as a result of higher expenses for proposals, professional services, and compensation, partially offset by lower expenses due to the sale of the French lottery business in the third quarter of 2001, and cost reductions in the North American pari-mutuel and phone card businesses.

Depreciation and amortization expense of $9.7 million in the three months ended June 30, 2002 decreased $2.8 million from $12.5 million in the same period in 2001. Depreciation expense was $0.5 million higher in the three months ended June 30, 2002 than in the same period in 2001, primarily as a result of higher depreciation on new computer systems and terminals acquired in connection with the start-up of the new on-line lotteries. Amortization expense was $3.3 million lower in the three months ended June 30, 2002 than in the same period in 2001, primarily as a result of the adoption of SFAS 141 and SFAS 142 effective January 1, 2002, and the July 1, 2001 reclassifications of previously estimated acquired intangible assets which were made as a result of the finalization of the SGHC purchase price allocation.

Interest expense of $11.6 million in the three months ended June 30, 2002 decreased $1.1 million from $12.7 million in the same period in 2001 as a result of lower average outstanding debt levels and lower average interest rates.

Income Tax Expense (Benefit)

Income tax expense was $1.0 million in the three months ended June 30, 2002. These expenses primarily reflect foreign and state taxes, partially offset by a $0.4 million reversal of deferred taxes provided in connection with the acquisition of SGHC, as compared to an income tax expense of $0.4 million in the three months ended June 30, 2001. The Company had US based taxable income in 2001 and expects to have US based taxable income in 2002. In the fourth quarter of 2002, the Company will reassess whether its recorded net operating loss valuation allowance of $49.2 million is still appropriate or whether such allowance should be reduced or even eliminated, considering the demonstrated improvement in the Company's financial results. Any such adjustments will be reflected in the results of operations for the fourth quarter of 2002.

Results of Operations: See "Note 3 Business Segments"

Six Months Ended June 30, 2002 compared to Six Months Ended June 30, 2001

Revenue Analysis

Lottery Group revenue of $125.4 million in the six months ended June 30, 2002 improved $8.1 million from the same period in 2001. A $8.8 million increase in service revenue is attributable to: an incremental $10.0 million growth in our on-line lottery business due to the start-up of the on-line

lotteries in Maine and Iowa in July 2001 and the start-up of the South Carolina Educational Lottery in January 2002, $4.1 million growth in our instant ticket lottery business due primarily to the start-up of the South Carolina Educational Lottery and the acquisition of a majority interest in SERCHI. These increases were partially offset by a $5.0 million decrease resulting from the absence of the French lottery business that was sold in the third quarter of 2001 and a $0.7 million reduction in lottery equipment sales.

Pari-mutuel Group service revenue of $40.7 million in the six months ended June 30, 2002 increased $1.1 million from the same period in 2001 as revenue improvements in the North American racing operations, NASRIN™ services and simulcasting services were partially offset by lower service revenues in the French operations and lower revenues in the German racing operations due to a racetrack/bookmaker dispute in the first quarter. Sales revenue of $3.0 million in the six months ended June 30, 2002 decreased $11.5 million from same period in 2001 due to completion in 2001 of a system and terminals sale to our customer in Turkey and non-recurring sales of terminals in 2001 to other foreign customers.

Venue Management Group service revenue of $31.1 million in the six months ended June 30, 2002 was $0.2 million lower than in the same period in 2001, primarily reflecting lower Handle related revenue in the Connecticut OTB operations following the closing of the Milford jai-alai fronton, which decline was mostly offset by the benefit of improved telephone account wagering.

Telecommunications Products Group sales revenue of $20.8 million in the six months ended June 30, 2002 was $1.2 million lower than in the same period in 2001, reflecting continued competitive price reductions which offset a 21% growth in the volume of tickets produced.

Gross Profit Analysis

The total gross profit earned of $89.4 million in the six months ended June 30, 2002 increased $9.5 million from the same period in 2001. This increase included $16.7 million in improved gross margins in the service businesses that resulted primarily from the new lotteries, and higher North American pari-mutuel revenues. These improvements were partially offset by a $7.2 million decrease in sales margins reflecting the fewer sales of equipment and systems to foreign customers and price related margin reductions in the Telecommunications Products Group.

The Lottery Group gross profit of $53.8 million, or 43% of revenues, increased $13.2 million in the six months ended June 30, 2002 from $40.6 million, or 35% of revenues, in the same period in 2001. Gross margin improvements were realized as a result of the additions of the Maine and Iowa on-line lotteries in July 2001 and the start-up of the South Carolina Educational Lottery in January 2002, continued retail sales growth at many of our cooperative service customers, and cost reductions in our instant ticket printing business. These margin improvements were partially offset by a reduction in margins due to lower lottery equipment sales and the sale of the French lottery business in the third quarter of 2001.

Pari-mutuel Group gross profit of $18.4 million, or 42% of revenues, in the six months ended June 30, 2002, decreased $2.1 million from $20.5 million, or 38% of revenues, in the same period in 2001. Of such margin reduction, $3.6 million is primarily attributable to fewer systems and equipment sales to foreign customers, partially offset by $0.8 million margin improvements on continued growth of the North American operations and the benefits from on-going European and North American cost reduction programs.

Venue Management Group gross profit of $10.0 million, or 32% of revenues, in the six months ended June 30, 2002, increased $0.8 million from $9.2 million, or 29% of revenues, in the same period in 2001. This improvement primarily reflects the effect of the new operating agreement in The Netherlands, and expanded telephone account wagering and continued cost controls in our Connecticut operations.

The Telecommunications Products Group gross profit of $7.2 million, or 34% of revenues, in the six months ended June 30, 2002 decreased $2.4 million from $9.6 million, or 44% of revenues, in the same period in 2001 as a 21% increase in sales volume was offset by continued competitive price reductions.

Expense Analysis

Selling, general and administrative expenses of $30.1 million in the six months ended June 30, 2002 were $1.5 million higher than in the same period in 2001 primarily due to higher support costs for the new lotteries, partly offset by reduced expenses as a result of the sale of the French lottery business in the third quarter of 2001.

Depreciation and amortization expense of $18.9 million in the six months ended June 30, 2002 decreased $6.3 million from $25.2 million in the same period in 2001. Depreciation expense was $0.7 million higher in the six months ended June 30, 2002 than in the same period in 2001, primarily as a result of higher depreciation on new computer systems and terminals acquired in connection with the start-up of the new on-line lotteries. Amortization expense was $7.0 million lower in the six months ended June 30, 2002 than in the same period in 2001, primarily as a result of the adoption of SFAS 141 and SFAS 142 effective January 1, 2002, and the July 1, 2001 reclassifications of previously estimated acquired intangible assets which were made as a result of the finalization of the SGHC purchase price allocation.

Interest expense of $23.0 million in the six months ended June 30, 2002 decreased $3.3 million from $26.3 million in the same period in 2001 as a result of lower average outstanding debt levels and lower average interest rates.

Income Tax Expense

Income tax expense was $2.1 million in the six months ended June 30, 2002. The expense primarily reflects foreign and state taxes, partially offset by a $0.8 million reversal of deferred taxes provided in connection with the acquisition of SGHC. The income tax expense of $0.1 million in the six months ended June 30, 2001 primarily reflects federal alternative minimum tax, state taxes and foreign taxes partially offset by a $1.1 million reversal of deferred taxes provided in connection with the acquisition of SGHC and an anticipated recovery of previously paid federal taxes. The deferred tax benefit was reduced in the six months ended June 30, 2002, reflecting the above-mentioned changes in accounting for acquired intangible assets. The Company had US based taxable income in 2001 and expects to have US based taxable income in 2002. In the fourth quarter of 2002, the company will reassess whether its recorded net operating loss valuation allowance of $49.2 million is still appropriate or whether such allowance should be reduced or even eliminated, considering the demonstrated improvement in the Company's financial results. Any such adjustments will be reflected in the results of operations for the fourth quarter of 2002.

Liquidity, Capital Resources and Working Capital

The comments that follow pertain to our financial position at June 30, 2002 and December 31, 2001, and do not reflect the common stock offering completed by us on July 2, 2002 and the application of approximately $96.0 million in proceeds, after expenses, to reduce debt. See "Recent Developments—Completed Stock Offering" below.

In order to finance the acquisition of SGHC and refinance substantially all of our then existing indebtedness, excluding our capital lease and other non-material obligations, we conducted a series of financings in September 2000. As a result, our capital structure changed significantly and, among other things, we became a significantly leveraged company. As a result of the acquisition and debt refinancing, we had total indebtedness including capital lease obligations outstanding of approximately $432.9 million at June 30, 2002 and had total indebtedness of $439.7 million at December 31, 2001. We

have also recorded a substantial increase in 2000 in goodwill and other intangible assets in connection with the SGHC acquisition and a corresponding increase in amortization expense through December 31, 2001.

Our financing arrangements impose certain limitations on our and our subsidiaries' operations, including, at June 30, 2002, the maintenance of:

•: A minimum Consolidated Fixed Charge Coverage Ratio of 1.40 until July 1, 2002, and 1.45 thereafter. Consolidated Fixed Charge Coverage Ratio means, as of any date of determination, the ratio computed for our four most recent fiscal quarters of (x) Consolidated EBITDA to (y) the sum of (i) total interest expense less a majority of the non-cash amortization costs included in interest expense, (ii) all income taxes paid in cash, (iii) scheduled payments of principal on indebtedness and (iv) certain restricted payments. The amounts described in clauses (i) through (iii) are determined on a consolidated basis for us and our subsidiaries in accordance with accounting principles generally accepted in the United States of America, or GAAP.
•: A maximum Consolidated Leverage Ratio of 4.35, which ratio was reduced to 4.10 on July 1, 2002 and will be further reduced on the first day of each calendar quarter through January 1, 2007, from which date the ratio shall be 2.00. Consolidated Leverage Ratio means the ratio of (x) the aggregate stated balance sheet amount of our indebtedness determined on a consolidated basis in accordance with GAAP as of the last day of the fiscal quarter for which such determination is being made to (y) Consolidated EBITDA for the four consecutive fiscal quarters ended on the last day of the fiscal quarter for which such determination is being made.
•: A minimum Consolidated Interest Coverage Ratio of 2.05, which ratio was increased to 2.10 on July 1, 2002 and will be further increased on the first day of each calendar quarter through July 1, 2006, from which date the ratio shall be 3.50. Consolidated Interest Coverage Ratio means the ratio computed for our four most recent fiscal quarters of (x) Consolidated EBITDA to (y) total interest expense less a majority of the non-cash amortization costs included in interest expense.
•: A minimum Consolidated Net Worth of $38.7 million plus an amount equal to 75% of the sum of our adjusted consolidated net income for each fiscal quarter for which adjusted consolidated net income is positive. Consolidated Net Worth means, as of any date of determination, the sum of our capital stock and that of our subsidiaries (including convertible preferred stock), plus our paid-in capital (subject to adjustment) and that of our subsidiaries, determined on a consolidated basis in accordance with GAAP, plus certain adjustments associated with the acquisition of SGHC and the financing thereof. As of June 30, 2002, the minimum Consolidated Net Worth required under this covenant was $43.6 million.

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

Our financing arrangements also restrict our and certain of our subsidiaries' ability to finance future operations or capital needs or to engage in other business activities, by, among other things, limiting our ability to incur additional indebtedness, pay dividends, redeem capital stock, make certain investments, engage in sale-leaseback transactions, consummate certain asset sales, and create certain liens and other encumbrances on our assets. In March 2001, as a result of the financial performance of SGHC prior to its acquisition by us, certain transitional and operational matters occurring through December 31, 2000, and the timing of certain anticipated capital expenditures and associated borrowings in 2001, certain limitations were amended to be less restrictive. Among other changes, the

credit facility was modified so that the planned step-downs in fixed charge coverage ratios and leverage ratios were delayed by up to nine months through September 30, 2002. While we were in compliance with these covenants at June 30, 2002 and expect to continue to remain in compliance over the next 12 months, no assurances can be provided that we will be able to do so or that we will be able to continue to meet the covenant requirements beyond 12 months.

The foregoing description of certain limitations and restrictions imposed by our financing arrangements is a summary only and is not intended to be complete. If you wish to review the limitations and restrictions in their entirety, you should read the documents setting forth our financing arrangements, all of which have been filed as exhibits to our periodic filings with the SEC. Our contractual obligations and commercial commitments principally include obligations associated with our outstanding indebtedness and future minimum operating lease obligations, and they have not changed materially since December 31, 2001.

Our revolving credit facility, which expires in September 2006, provides for borrowings up to $65.0 million to be used for working capital and general corporate purpose loans and for letters of credit. At June 30, 2002, we had outstanding borrowings of $10.5 million and outstanding letters of credit of $25.3 million under this facility leaving us with a total availability of $29.2 million as compared to $31.0 million at December 31, 2001. Our ability to continue to borrow under the revolving credit facility will depend on remaining in compliance with the limitations imposed by our lenders, including maintenance of specified financial covenants. Presently, we have not sought and, therefore, do not have any other financing commitments.

Our convertible preferred stock requires dividend payments at a rate of 6% per annum. To date, we have satisfied the dividend requirement using additional shares of preferred stock. The terms of the convertible preferred stock provide us with the flexibility to satisfy the dividend in cash commencing on September 30, 2002, the date of the ninth quarterly dividend, subject to bank approval. We expect that we will continue to make such payments in-kind.

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

Periodically, we bid on new pari-mutuel and on-line lottery contracts. Once awarded, these contracts generally require significant up-front capital expenditures for terminal assembly, customization of software, software and equipment installation and telecommunications configuration. Historically we have funded these up front costs through cash flows generated from operations, available cash on hand and borrowings under our credit facilities. Our ability to continue to procure new contracts will depend on, among other things, our then present liquidity levels and/or our ability to obtain additional financing at commercially acceptable rates to finance the initial up front costs. Once operational, long

term service contracts have been accretive to our operating cash flow. For fiscal 2002, we anticipate that capital expenditures and software expenditures will be approximately $25 million. However, the actual level of expenditures will ultimately depend on the extent to which we are successful in winning new contracts. The amount of capital expenditures in fiscal 2003 and beyond will largely depend on the extent to which we are successful in winning new contracts. Furthermore, our pari-mutuel wagering network consists of approximately 26,000 wagering terminals. Periodically, we elect to upgrade the technological capabilities of older terminals and replace terminals that have exhausted their useful lives. We presently have no commitments to replace our existing terminal base and our obligation to upgrade the terminals is discretionary. Servicing our installed terminal base requires that we maintain a supply of parts and accessories on hand. We are also required, contractually in some cases, to provide spare parts over an extended period of time, principally in connection with our systems and terminal sale transactions. To meet our contractual obligations and maintain sufficient levels of on-hand inventory quantities to service our installed base, we purchase inventory on an as needed basis. We presently have no inventory purchase obligations.

At June 30, 2002, our available cash and borrowing capacity totaled $36.0 million compared to $43.6 million at December 31, 2001. Our available cash and borrowing capacities fluctuate principally based on the timing of collections from our customers, cash expenditures associated with new and existing pari-mutuel wagering and lottery systems contracts, repayment of our outstanding debt and changes in our working capital position. The decrease in our available cash and borrowing capacity from the levels at December 31, 2001 principally reflects the use of cash on hand to partially fund our wagering systems and other capital expenditures, to reduce accrued liabilities, to make a semi-annual payment of interest accrued on our 12 ¹ / 2 % Senior Subordinated Notes, and to fund the acquisition of a majority interest in SERCHI.

Net cash provided by operating activities was $22.4 million for the six months ended June 30, 2002. Of this amount, $37.2 million was provided from operations and $14.8 million was used as a result of changes in working capital. The working capital changes occurred principally from (i) increases in inventory in anticipation of foreign requirements for equipment, (ii) increases in prepaid assets as a result of the new on-line and instant ticket lottery accounts, and (iii) decreases in accrued liabilities due to payments related to the new lottery accounts and obligations incurred in connection with the acquisition of SGHC. In this period, we invested $13.5 million for wagering systems and capital expenditures, $3.5 million in software expenditures, $4.1 million for a majority interest in SERCHI, repaid $4.4 million of long-term debt, and repaid $4.3 million of revolving credit facility loans. These cash expenditures were funded primarily with net cash provided by operating activities, cash on hand, and $1.3 million proceeds from the issuance of common stock.

A significant portion of our cash flows from operations must be used to pay our interest expense and repay our indebtedness, which will reduce the funds that would otherwise be available to us for our operations and capital expenditures. Interest expense on our outstanding debt was approximately $23.0 million for the six months ended June 30, 2002, including approximately $1.2 million of non-cash charges. Approximately one-third of our debt is in variable rate instruments. Consequently, we are exposed to fluctuations in interest rates. The effect of a 0.125% change in the interest rates associated with our unhedged variable rate debt will result in a change of approximately $187,000 per year in our interest expense assuming no change in our outstanding borrowings. To reduce the risks associated with fluctuations in the market interest rates and in response to the requirements of our credit facility, we entered into three interest rate swap contracts for an aggregate notional amount of $140 million. These interest rate swaps obligate us to pay a fixed LIBOR rate and entitle us to receive a variable LIBOR rate on an aggregate $140 million notional amount of debt thereby creating the equivalent of fixed rate debt until May 30, 2003. We have structured these interest rate swap agreements and we intend to structure future interest rate swap agreements to qualify for hedge accounting pursuant to the provisions of SFAS 133. Changes in the fair value of interest rate swaps designated as hedging instruments that effectively offset the variability of cash flows associated with variable rate credit facility

obligations are reported as a component of stockholders' equity. These amounts are subsequently reclassified into interest expense as a yield adjustment of the hedged credit facility obligation in the same period in which the related interest affects operations.

We believe that our cash flow from operations, available cash and available borrowing capacity under our revolving credit facility will be sufficient to meet our liquidity needs, including anticipated capital expenditures, for the foreseeable future; however, we cannot assure you that this will be the case. While we are not aware of any particular trends, our lottery contracts periodically renew and we cannot assure you that we will be successful in sustaining our cash flow from operations through renewal of our existing contracts or through the addition of new contracts. In addition, lottery customers in the United States generally require service providers to provide performance bonds in connection with each state contract. Because of financial and economic events that have occurred this past year, such as the September 11 attack, the bond market is experiencing unusual contraction, and we cannot assure you that we will continue to be able to obtain performance bonds on commercially reasonable terms or at all. While we are not aware of any reason to do so, if we need to refinance all or part of our indebtedness, including our 12 ¹ / 2 % Senior Subordinated Notes, on or before their maturity, or provide letters of credit or cash in lieu of performance bonds, we cannot assure you that we will be able to obtain new financing or to refinance any of our indebtedness, including our revolving credit facility and our 12 ¹ / 2 % Senior Subordinated Notes, on commercially reasonable terms or at all.

Recent Developments—Completed Stock Offering

On July 2, 2002, we completed the public offering and sale of 14.4 million shares of our Class A Common Stock at $7.25 per share (the "2002 Offering"). The proceeds after underwriter's discounts, before our direct offering expenses, to us were approximately $98.5 million. The application of the proceeds and the issuance of the 14.4 million shares of Class A Common Stock are not reflected in the second quarter results and financial position.

The net proceeds from the 2002 Offering were approximately $96.0 million after deducting the underwriting discounts and commissions and estimated offering expenses. On August 2, 2002, we used approximately $52.5 million of our net proceeds to redeem 35% of our 12 ¹ / 2 % Senior Subordinated Notes. We were also required to pay the noteholders a premium of approximately $6.6 million in connection with this redemption. In addition, we may use the remaining net proceeds of approximately $36.9 million either to repurchase additional 12 ¹ / 2 % Senior Subordinated Notes, or, if market conditions do not so permit, to repay a portion of our senior credit facilities. As of June 30, 2002, there were $52.5 million outstanding under the Term A loans and $216.2 million outstanding under the Term B loans. If the we elect to repay the Term A and Term B loans ratably as specified, there would be $45.3 million outstanding under the Term A loans and $186.4 million outstanding under the Term B loans after such repayments. Under the terms of the Term B loans, however, the lenders have the option to waive their rights to receive prepayments of such loans from proceeds of the offering. If all of the Term B lenders waive their rights to receive prepayments, all of the net proceeds will be used to repay the Term A loans, which would then have a balance outstanding of approximately $15.6 million following such repayment.

As of June 30, 2002, the annual interest rates on the outstanding Term A loans and Term B loans under our senior credit facilities were 5 ¹ / 8 % and 6 ³ / 16 %, respectively, and the annual interest rate on the senior subordinated notes was 12 ¹ / 2 %. The Term A and Term B loans mature on September 30, 2006 and September 30, 2007, respectively, and the senior subordinated notes mature on August 15, 2010.

When we repay outstanding principal of the Term A and Term B loans and the senior subordinated notes, we are also required to pay accrued and unpaid interest on the principal amount being repaid or redeemed through the repayment date. We intend to pay interest out of our available working capital.

Based on the assumed redemption and repurchase of our 12 ¹ / 2 % Senior Subordinated Notes, and the repayment of our Term A and Term B loans, we expect to recognize annual interest expense savings of approximately $8.5 million to $10.5 million per year.

Forward-Looking Statements

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

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

•: the availability and adequacy of our cash flow to satisfy our obligations, including our debt service obligations and our need for additional funds required to support capital improvements, development and acquisitions;
•: economic, competitive, demographic, business and other conditions in our local and regional markets;
•: changes or developments in the laws, regulations or taxes in the gaming and lottery industries;
•: actions taken or omitted to be taken by third parties, including customers, suppliers, competitors, members and shareholders, as well as legislative, regulatory, judicial and other governmental authorities;
•: changes in business strategy, capital improvements, development plans, including those due to environmental remediation concerns, or changes in personnel or their compensation, including federal, state and local minimum wage requirements;
•: an inability to renew or early termination of our contracts;
•: an inability to engage in future acquisitions;
•: the loss of any license or permit, including the failure to obtain an unconditional renewal of a required gaming license on a timely basis; and
•: resolution of any pending or future litigation in a manner adverse to us.

Actual future results may be materially different from what we expect. We will not update forward-looking statements even though our situation may change in the future.

Impact of Recently Issued Accounting Standards

In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This Statement amends FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, and it applies to all entities. We are required to adopt SFAS 143, effective for calendar year 2003. We do not expect the adoption of SFAS 143 to have a material impact on our future consolidated operations or financial position, as we are now constituted.

In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 updates, clarifies and simplifies existing accounting pronouncements. SFAS 145 rescinds Statement 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion 30 will now be used to classify those gains and losses because Statement 4 has been rescinded. Statement 44 was issued to establish accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980. Because the transition has been completed, Statement 44 is no longer necessary.

SFAS 145 amends Statement 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This amendment is consistent with the FASB's goal of requiring similar accounting treatment for transactions that have similar economic effects. SFAS 145 also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. We are required to adopt SFAS 145, effective for calendar year 2003. We are currently evaluating the impact that the adoption of SFAS 145 will have on our consolidated operations and financial position.

In July 2002, the FASB issued Statement No. 146 , Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 will spread out the reporting of expenses related to restructurings initiated after 2002 because a commitment to a plan to exit an activity or dispose of long-lived assets will no longer be enough to record a liability for the anticipated costs. Instead, companies will record exit and disposal costs when they are "incurred" and can be measured at fair value, and they will subsequently adjust the recorded liability for changes in estimated cash flows. We are required to adopt SFAS 146, prospectively for exit or disposal activities initiated after December 31, 2002. We do not expect the adoption of SFAS 146 to have a material impact on our future consolidated operations or financial position, as we are now constituted.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our products and services are sold to a diverse group of customers throughout the world. As such, we are subject to certain risks and uncertainties as a result of changes in general economic conditions, sources of supply, competition, foreign exchange rates, tax reform, litigation and regulatory developments. The diversity and breadth of our products and geographic operations mitigate the risk that adverse changes in any event would materially affect our financial position. Additionally, as a result of the diversity of our customer base, we do not consider ourselves exposed to concentration of credit risks. These risks are further minimized by setting credit limits, ongoing monitoring of customer account balances, and assessment of the customers' financial strengths.

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

For fiscal 2001, inflation was not a significant factor in our results of operations, and we were not impacted by significant pricing changes in our costs, except for personnel related expenditures. We are unable to forecast the prices or supply of substrate, component parts or other raw materials in 2002, but we currently do not anticipate any substantial changes that will materially affect our operating results.

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

In the normal course of business, we our exposed to fluctuations in interest rates and equity market risks as we seek debt and equity capital to sustain our operations. At December 31, 2001, approximately one-third of our debt was in fixed rate instruments. We consider the fair value of all financial instruments to be not materially different from their carrying value at year-end. The following table provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted-average interest rates by expected maturity dates. On July 2, 2002 the Company completed the 2002 Offering and used approximately $52.5 million of the net proceeds to redeem a portion of the Company's 12 ¹ / 2 % Senior Subordinated Notes. See "Recent Developments—Completed Stock Offering."

Principal Amount by Expected Maturity—Average Interest Rate
Expected Maturity Date (dollars in thousands)
June 30, 2002

	2002			2003		2004		2005		2006		There after		Total		Fair value
Long-term debt:
Fixed interest rate	$	—		—		—		—		—		150,000		150,000		168,750
Interest rate		—		—		—		—		—		12.5	%	12.5	%
Variable interest rate	$	4,850		11,950		14,950		17,200		75,100		155,100		279,150		279,350
Average interest rate		5.36	%	5.32	%	5.28	%	5.26	%	6.07	%	6.17	%	5.99	%

In November 2000, to reduce the risks associated with fluctuations in market interest rates and in response to requirements in the Facility (see Note 9 to the Consolidated Financial Statements for the year ended December 31, 2001 in our 2001 Annual Report on Form 10-K), we entered into three interest rate swap contracts for an aggregate notional amount of $140.0 million. The following table provides information about our derivative financial instruments. The table presents notional amounts and weighted-average swap rates by contractual maturity dates. We do not hold any market risk instruments for trading purposes.

Notional Amount by Expected Maturity—Average Swap Rate
Expected Maturity Date (dollars in thousands)
June 30, 2002

	2002		2003		2004	2005	2006	There after	Total		Fair value
Interest rate swaps:
Fixed to variable	$	—	140,000		—	—	—	—	140,000		134,453
Receive 3-month LIBOR		—	6.52	%	—	—	—	—	6.52	%

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

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

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
Three Months Ended June 30, 2002

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

No significant changes have occurred with respect to legal proceedings as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 (the "2001 Form 10-K") or its Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (the "March 31 Form 10-Q"), except as described below.

The 2001 Form 10-K contained disclosure concerning pending and/or threatened litigation among the Company's subsidiary Scientific Games International ("SGI"), Empresa Colombiana de Recursos para la Salud, S.A. ("Ecosalud"), an agency of the Colombian government, and Wintech de Colombia S.A. ("Wintech"), an entity (now liquidated) in which SGI owned a minority interest and which formerly operated the Colombian national lottery under contract with Ecosalud. On July 1, 1993, Ecosalud adopted resolutions declaring, among other things, that the contract was in default and asserted various claims for compensation and penalties against Wintech, SGI and other shareholders of Wintech. Litigation is pending in Colombia concerning various claims among Ecosalud, Wintech and SGI, relating to the termination of the contracts with Ecosalud.

In July 2002, a Colombian appellate tribunal ruled against SGI's motion to dismiss Ecosalud's pending lawsuit against SGI. While SGI's motion is subject to further appeal to the Colombian Council of State, the highest appellate level court with jurisdiction over this matter, the proceeding in the lower court, which is in an early stage, will continue during the pendency of the appeal.

As previously disclosed, although the Company believes that any potential losses arising from Ecosalud's claims against SGI and Wintech will not result in a material adverse effect on its consolidated financial position or results of operations, it is not feasible to predict the final outcome, and there can be no assurance that these claims might not be finally resolved adversely to the Company or result in material liability.

The March 31 Form 10-Q contained disclosure concerning a class action suit filed on behalf of public stockholders of MDI Entertainment, Inc. against multiple parties, including the Company and MDI, to enjoin the Company's then proposed acquisition of MDI. On May 8, 2002, the Company and MDI announced that they had mutually and amicably terminated negotiations with respect to that contemplated acquisition. The class action suit was subsequently dismissed upon the filing of a notice of dismissal by the plaintiffs.

Item 2. Changes in Securities and Use of Proceeds

In connection with certain waivers and consents by holders of the Company's Series A Preferred Stock relating to the Company's public offering of 14,375,000 shares of Class A Common Stock in June 2002, the Company agreed to designate a new series of 2,000 shares of preferred stock, par value $1.00 per share, as Series B Preferred Stock, and in July 2002 to issue an aggregate of 1,237.604 shares of Series B Preferred Stock, pro rata, to the holders of the Series A Preferred Stock. The Series B Preferred Stock has voting rights that, together with the voting rights of the Series A Preferred Stock, effectively reduce the aggregate ownership percentage of Series A Preferred Stock (on an "as-converted" basis) that the holders are required to maintain in order to elect directors of the Company. The threshold for electing four directors was effectively reduced from 25% to 22.5% and the threshold for electing three directors was effectively reduced from 20% to 17.5%. The issuance of the Series B Preferred Stock did not affect the existing 10% and 5% thresholds for electing two directors and one director, respectively. The Series B Preferred Stock does not pay dividends and has a liquidation preference of no more than $2,000 in the aggregate.

Issuance of shares of Series B Preferred Stock to holders of the Series A Preferred Stock constitutes a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended, under Section 4(2) thereof.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Stockholders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

		(a)		Exhibits
		4.1		Certificate of Designations, Preferences, and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of Series B Preferred Stock of the Company, filed with the Secretary of State of the State of Delaware on July 1, 2002.
		4.2		Supplemental Stockholders Agreement, by and among the Company, Cirmatica Gaming S.A. and such persons as may become a party thereto from time to time, dated as of June 26, 2002.
		10.1		Amended and Restated Employment Agreement, dated as of November 1, 2000, by and between the Company and A. Lorne Weil (as further amended and restated, executed July 25, 2002).
		10.2		Third Amendment, dated as of January 16, 2002 (executed on June 25, 2002), to the Amended and Restated Credit Agreement among the Company, DLJ Capital Funding, Inc., Lehman Commercial Paper Inc., DLJ Capital Funding, Inc., as Administrative Agent, Syndication Agent, Lead Arranger and Sole Book Running Manager, Lehman Commercial Paper Inc., as Documentation Agent, and Lehman Brothers Inc., as Co-Arranger, dated as of October 6, 2000 (incorporated by reference to Exhibit 10.1 to the Company's Amendment No. 3 to Registration Statement on Form S-3, filed on June 25, 2002).
		99.1		Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
		99.2		Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
		(b)		Reports on Form 8-K

A current report on Form 8-K was filed on June 20, 2002 (the "June 2002 Form 8-K"), regarding the Company's purchase of 65% of the equity of Serigrafica Chilena S.A. ("SERCHI"). The purchase price was $3.9 million in cash paid at closing and up to an additional $4.4 million in cash or stock payable to SERCHI stockholders upon the achievement of certain financial performance levels of SERCHI over the next four years.

In the June 2002 Form 8-K, the Company undertook to file, on Form 8-K/A within 60 days of the date the June 2002 Form 8-K was required to be filed, financial statements of SERCHI and pro forma financial information giving effect to the Company's purchase of 65% of the equity of SERCHI, if such financial statements and pro forma financial information were required to be filed. The Company has determined that such financial statements and pro forma financial information are not required to be filed and, accordingly, the Company will not file a Form 8-K/A amending the June 2002 Form 8-K.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		SCIENTIFIC GAMES CORPORATION (Registrant)
		By:		/s/ DEWAYNE E. LAIRD Name: DeWayne E. Laird Title: Vice President & Chief Financial Officer (principal financial and accounting officer)

Dated: August 14, 2002

INDEX TO EXHIBITS

(a) Exhibit Number		Description
4.1		Certificate of Designations, Preferences, and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of Series B Preferred Stock of the Company, filed with the Secretary of State of the State of Delaware on July 1, 2002.
4.2		Supplemental Stockholders Agreement, by and among the Company, Cirmatica Gaming S.A. and such persons as may become a party thereto from time to time, dated as of June 26, 2002.
10.1		Amended and Restated Employment Agreement, dated as of November 1, 2000, by and between the Company and A. Lorne Weil (as further amended and restated, executed July 25, 2002).
10.2		Third Amendment, dated as of January 16, 2002 (executed on June 25, 2002), to the Amended and Restated Credit Agreement among the Company, DLJ Capital Funding, Inc., Lehman Commercial Paper Inc., DLJ Capital Funding, Inc., as Administrative Agent, Syndication Agent, Lead Arranger and Sole Book Running Manager, Lehman Commercial Paper Inc., as Documentation Agent, and Lehman Brothers Inc., as Co-Arranger, dated as of October 6, 2000 (incorporated by reference to Exhibit 10.1 to the Company's Amendment No. 3 to Registration Statement on Form S-3, filed on June 25, 2002).
99.1		Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
99.2		Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

Item 4. Submission of Matters to a Vote of Stockholders

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES
INDEX TO EXHIBITS

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Exhibit 4.1

CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS OF PREFERRED
STOCK AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS THEREOF

OF

SERIES B PREFERRED STOCK

OF

SCIENTIFIC GAMES CORPORATION

Pursuant to Section 151 of the
General Corporation Law of the State of Delaware

Scientific Games Corporation, a Delaware corporation (the " Corporation "), certifies that pursuant to the authority contained in its Certificate of Incorporation (the " Certificate of Incorporation ") and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation duly adopted the following resolution, which resolution remains in full force and effect on the date hereof:

RESOLVED, that there is hereby established a series of authorized preferred stock having a par value of $1.00 per share, which series shall be designated as "Series B Preferred Stock" (" Series B Preferred Stock "), shall consist of 2,000 shares and shall have the following voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof, as follows:

1 Certain Definitions.

Unless the context otherwise requires, the terms defined in this Section 1 shall have, for all purposes of this resolution, the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural).

" Business Day " shall mean a day other than a Saturday or Sunday or a bank holiday in New York.

" Common Stock " shall mean the Class A Common Stock, par value $0.01 per share, of the Corporation.

" Director " shall mean a member of the Corporation's Board of Directors.

" Holder " shall mean the record holder of any shares of Series B Preferred Stock, including any fractional shares thereof, as shown on the books and records of the Corporation.

" Junior Stock " shall mean the Common Stock, the Corporation's Class B Nonvoting common stock and any other series of common or preferred stock established by the Board of Directors of the Corporation that by its terms is junior to the Series B Preferred Stock, as to either redemption payments or the distribution of assets upon liquidation, dissolution or winding up, or both.

" Liquidation Preference " shall mean $1.00 per share of Series B Preferred Stock.

" Redemption Price " shall mean a price equal to the Liquidation Preference.

" Senior Stock " shall mean the Series A Preferred Stock and any other series of preferred stock established by the Board of Directors of the Corporation that by its terms is senior to the Series B Preferred Stock, as to either redemption payments or the distribution of assets upon liquidation, dissolution or winding up, or both.

" Series A Certificate " shall mean the Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of Series A Preferred Stock.

" Series A Preferred Stock " shall mean the Series A Convertible Preferred Stock, par value $1.00, of the Corporation.

2 Dividends.

(a) The Holders shall be not entitled to receive dividends on their shares of Series B Preferred Stock.

(b) The Corporation and each Holder acknowledge and agree that it is intended that the Series B Preferred Stock not constitute "preferred stock" within the meaning of Section 305 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder, and neither the Corporation nor the Holders shall treat the Series B Preferred Stock as such.

3 Distributions Upon Liquidation, Dissolution or Winding Up.

(a) In the event of any voluntary or involuntary liquidation, dissolution or other winding up of the affairs of the Corporation, after required payments and distributions are made to the holders of Senior Stock and before any payment or distribution shall be made to the holders of Junior Stock, the Holders of Series B Preferred Stock shall be entitled to be paid out of the assets of the Corporation in cash or property at its fair market value as determined by the Board of Directors of the Corporation the Liquidation Preference per share. Except as provided in this Section 3(a), Holders of Series B Preferred Stock shall not be entitled to any distribution in the event of liquidation, dissolution or winding up of the affairs of the Corporation.

(b) If, upon any such liquidation, dissolution or other winding up of the affairs of the Corporation, the assets of the Corporation shall be insufficient to permit the payment in full of the Liquidation Preference per share, then the assets of the Corporation shall be ratably distributed among the Holders of Series B Preferred Stock in proportion to the full amounts to which they would otherwise be respectively entitled if all amounts thereon were paid in full. Neither the consolidation or merger of the Corporation into or with another corporation or corporations, nor the sale, lease, transfer or conveyance of all or substantially all of the assets of the Corporation to another corporation or any other entity shall be deemed a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this Section 3.

4 Redemption by the Corporation.

(a) Upon the redemption of the Series A Preferred Stock by the Corporation in accordance with Section 4 of the Series A Certificate, the Corporation shall concurrently redeem all, but not less than all, of the outstanding shares of Series B Preferred Stock on payment of the Redemption Price for each share of Series B Preferred Stock to be redeemed.

(b) Upon the conversion of the Series A Preferred Stock by any holder thereof in accordance with Section 5 of the Series A Certificate, the Corporation shall concurrently redeem, and such holder shall be deemed to have irrevocably surrendered for redemption at such time, that number of shares of Series B Preferred Stock owned by such holder equal to the product of (i) the total number of shares of Series B Preferred Stock owned by such holder immediately prior to such redemption and (ii) a fraction, the numerator of which is the number of shares of Series A Preferred Stock being converted

by such holder and the denominator of which is the total number of shares of Series A Preferred Stock owned by such holder immediately prior to such conversion. Such holder shall have the right to receive from the Corporation the Redemption Price for each share of its Series B Preferred Stock so redeemed. From and after the date of redemption pursuant to this Section 4(b), such holder shall not be entitled, with respect to the shares of Series B Preferred Stock so redeemed, to exercise any of the rights of the Holders of Series B Preferred Stock, except the right to receive the Redemption Price.

(c) On September 6, 2005, the Corporation shall automatically redeem each share of Series B Preferred Stock on payment of the Redemption Price for each share of Series B Preferred Stock to be redeemed.

(d) Before redeeming any shares of Series B Preferred Stock pursuant to Section 4(a) or Section 4(c), the Corporation shall mail by overnight courier and fax to each person who, at the date of such mailing and fax, shall be a registered Holder of shares of Series B Preferred Stock to be redeemed, notice of the intention of the Corporation to redeem such shares held by such registered Holder. Such notice shall be mailed and faxed to the last address of such Holder as it appears on the records of the Corporation, or in the event of the address of any such Holder not appearing on the records of the Corporation, then to the last address of such Holder known to the Corporation, at least forty-five (45) days before the date specified for redemption. Such notice shall set out the Redemption Price and the date on which the redemption is to take place. On or after the date so specified for redemption, the Corporation shall pay or cause to be paid the Redemption Price to the registered Holders of the shares of Series B Preferred Stock on presentation and surrender of the certificates for the shares of Series B Preferred Stock so called for redemption at the registered office of the Corporation or at such other place or places as may be specified in such notice, and the certificates for such shares of Series B Preferred Stock shall thereupon be cancelled, and the shares of Series B Preferred Stock represented thereby shall thereupon be redeemed. From and after the date specified for redemption in such notice, the Holders of the shares of Series B Preferred Stock called for redemption shall not be entitled to exercise any of the rights of the Holders thereof, except the right to receive the Redemption Price, unless payment of the Redemption Price shall not be made by the Corporation in accordance with the foregoing provisions, in which case the rights of the Holders of such shares shall remain unaffected.

(e) No Series B Preferred Stock may be redeemed except with funds legally available for the payment of the Redemption Price.

(f) All shares of Series B Preferred Stock redeemed pursuant to this Section 4 shall be retired and shall be restored to the status of authorized and unissued shares of preferred stock, without designation as to series, and may thereafter be reissued as shares of any series of preferred stock.

5 Conversion .

The Series B Preferred Stock shall not be convertible into shares of Common Stock or any other series or class of capital stock of the Corporation.

6 Voting Rights.

(a) The Holders shall not be entitled to any voting rights with respect to the Series B Preferred Stock except as hereinafter provided in this Section 6 or as otherwise provided by law.

(b) The affirmative consent of the Holders that own more than fifty percent (50%) of the then outstanding shares of Series B Preferred Stock (voting as a single class), given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for authorizing, effecting or validating:

(i) any amendment, alteration or repeal of any of the provisions of this Certificate of Designations of Series B Preferred Stock (this " Certificate of Designations "); or

(ii) any decision, or the entering into of any agreement, commitment or arrangement, to effect the foregoing;

and, except to the extent otherwise required by applicable law, no vote of any other class or series of stock, whether voting separately as a class or series or together with any or all other classes or series of stock, shall be required for any action described in clause (i) or clause (ii) above.

(i) one (1) Director for so long as the Holders own in the aggregate shares of Series A Preferred Stock having the right to convert into a number of shares of Common Stock that (x) equals or exceeds twenty-two and one-half percent (22 ¹ / 2 %) of the sum of (i) the number of shares of Common Stock outstanding plus (ii) the number of shares of Common Stock into which or for which all outstanding securities of the Corporation convertible into or exercisable or exchangeable for Common Stock (including, without limitation, the Series A Preferred Stock) may be converted, exercised or exchanged (such sum, the " Fully Diluted Equity ") and (y) is less than twenty-five percent (25%) of the Fully Diluted Equity; or

(ii) one (1) Director for so long as the Holders own in the aggregate shares of Series A Preferred Stock having the right to convert into a number of shares of Common Stock that (x) equals or exceeds seventeen and one-half percent (17 ¹ / 2 %) of the Fully Diluted Equity and (y) is less than twenty percent (20%) of the Fully Diluted Equity.

(d) If a Director so elected by the Holders of Series B Preferred Stock shall cease to serve as a Director for any reason before his or her term expires, the Holders may, by written consent or at a special meeting of the Holders called as provided above, elect a successor to hold office for the unexpired term of the Director whose place shall be vacant.

7 Transferability.

(a) Except as provided in Section 7(b), a Holder may not transfer shares of Series B Preferred Stock.

(b) A Holder may transfer shares of Series B Preferred Stock only upon such Holder's concurrent transfer, to the same transferee, of shares of Series A Preferred Stock and only if such Holder concurrently transfers to such transferee of Series A Preferred Stock that number of shares of Series B Preferred Stock equal to the product of (i) the total number of shares of Series B Preferred Stock owned by such Holder immediately prior to such transfer and (ii) a fraction, the numerator of which is the number of shares of Series A Preferred Stock such Holder is then transferring to such transferee and the denominator of which is the total number of shares of Series A Preferred Stock owned by such Holder immediately prior to such transfer. If a Holder transfers any shares of Series A Preferred Stock, such Holder shall also concurrently transfer to the transferee of such Series A Preferred Stock that number of shares of Series B Preferred Stock equal to the product of (y) the total number of shares of Series B Preferred Stock owned by such Holder immediately prior to such transfer and (z) a fraction, the numerator of which is the number of shares of Series A Preferred Stock such Holder is then transferring to such transferee and the denominator of which is the total number of shares of Series A Preferred Stock owned by such Holder immediately prior to such transfer.

(c) Any transfer or attempted transfer of Series B Preferred Stock not made in accordance with this Section 7 shall be voidable by the Company, and the Company shall not be obligated to treat the transferee as a holder of the shares of the Series B Preferred Stock subject to such purported transfer and shall not record such purported transfer on its books, and the transferee shall have no rights as a holder of Series B Preferred Stock under this Certificate of Designations or otherwise. If a Holder purports to transfer shares of Series B Preferred Stock in violation of this Section 7, such Holder

thereby forfeits its voting rights as a holder of Series B Preferred Stock provided by Section 6 with respect to the number of shares of Series B Preferred Stock purported to be transferred until such time, if any, as such Holder shall have fully rescinded such purported transfer and rendered null and void any and all effects or purported effects thereof. If a Holder fails to transfer shares of Series B Preferred Stock in violation of this Section 7, such Holder thereby forfeits its voting rights as a holder of Series B Preferred Stock provided by Section 6 with respect to the number of shares of Series B Preferred Stock that such Holder has so failed to transfer until such time, if any, as (i) such Holder shall have fully rescinded the transfer of the shares of Series A Preferred Stock requiring the transfer of shares of Series B Preferred Stock that was not effected, and rendered null and void any and all effects or purported effects thereof or (ii) such Holder transfers the shares of Series B Preferred Stock in accordance with this Section 7 required to be so transferred.

8 Issuance.

(a) The Corporation may issue Series B Preferred Stock in any amount, including any fraction of a share thereof. When used in this Certificate of Designations, "shares of Series B Preferred Stock" means "shares or fractional shares of Series B Preferred Stock".

(b) The Corporation shall issue shares of Series B Preferred Stock only to holders of Series A Preferred Stock.

(c) Shares of Series B Preferred Stock by the Corporation shall initially be issued proportionately to the holders of Series A Preferred Stock, whereby the Corporation shall issue to each holder of Series A Preferred Stock that number of shares of Series B Preferred Stock equal to the product of (i) the total number of shares of Series B Preferred Stock issued in such initial issuance and (ii) a fraction, the numerator of which is the number of shares of Series A Preferred Stock owned by such holder immediately prior to such issuance and the denominator of which is the total number of shares of Series A Preferred Stock outstanding immediately prior to such issuance.

(d) If the Corporation, at any time subsequent to the initial issuance of Series B Preferred Stock, issues additional shares of Series A Preferred Stock (other than as dividends paid in kind on the shares of Series A Preferred Stock then outstanding), the Corporation shall concurrently issue to the recipient of such additional shares of Series A Preferred Stock that number of shares of Series B Preferred Stock equal to the product of (i) the total number of shares of Series B Preferred Stock outstanding immediately prior to such issuance and (ii) a fraction, the numerator of which is the number of shares of Series A Preferred Stock the Corporation is then issuing to such recipient and the denominator of which is the total number of shares of Series A Preferred Stock outstanding immediately prior to such issuance.

(e) Except as set forth in this Section 8, the Corporation shall not issue shares of Series B Preferred Stock.

9 Ranking.

With regard to rights to receive redemption payments and distributions upon liquidation, dissolution or winding up of the Corporation, the Series B Preferred Stock shall rank (x) junior to the Senior Stock and (y) senior to the Common Stock and any other Junior Stock, whether now existing or issued by the Corporation after the date of this Certificate of Designations.

10 Exclusion of Other Rights.

Except as may otherwise be required by law, the shares of Series B Preferred Stock shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this Certificate of Designations and in the Certificate of Incorporation.

11 Headings of Subdivisions.

The headings of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof.

12 Severability of Provisions.

If any voting powers, preferences and relative, participating, optional and other special rights of the Series B Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution are invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series B Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional and other special rights of Series B Preferred Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of Series B Preferred Stock and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special rights of Series B Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein.

13 Record Holders.

The Corporation and the transfer agent for the Series B Preferred Stock may deem and treat the Holder of any shares of Series B Preferred Stock as the true and lawful owner thereof for all purposes, and neither the Corporation nor the transfer agent shall be affected by any notice to the contrary.

14 Notice.

Except as may otherwise be provided for herein, all notices referred to herein shall be in writing, and all notices hereunder shall be deemed to have been given upon the earlier of receipt of such notice or three (3) Business Days after the mailing of such notice if sent by registered mail (unless first-class mail shall be specifically permitted for such notice under the terms of this Certificate of Designations) with postage prepaid, addressed: if to the Corporation, to its offices at 750 Lexington Avenue, 25 ^th Floor, New York, NY 10022, Attention: Secretary and General Counsel, or to an agent of the Corporation designated as permitted by this Certificate of Designations, or, if to any Holder of the Series B Preferred Stock, to such Holder at the address of such Holder of the Series B Preferred Stock as listed in the stock record books of the Corporation (which may include the records of any transfer agent for the Series B Preferred Stock); or to such other address as the Corporation or Holder, as the case may be, shall have designated by notice similarly given.

IN WITNESS WHEREOF, the Corporation has caused this certificate to be duly executed by Martin E. Schloss, its Secretary, this 1st day of July, 2002.

		SCIENTIFIC GAMES CORPORATION
		By:	Name: Martin E. Schloss Title: Secretary

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Exhibit 4.1

CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF OF SERIES B PREFERRED STOCK OF SCIENTIFIC GAMES CORPORATION

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Exhibit 4.2

SUPPLEMENTAL
STOCKHOLDERS'
AGREEMENT

by and among

Cirmatica Gaming, S.A.,
a Spanish corporation,

Scientific Games Corporation,
a Delaware corporation
and
Such Persons as may become a party hereto from time to time.

Dated: June 26, 2002

SUPPLEMENTAL STOCKHOLDERS' AGREEMENT

This SUPPLEMENTAL STOCKHOLDERS' AGREEMENT, dated as of June 26, 2002 (this " Agreement "), by and among Scientific Games Corporation, a Delaware corporation (the " Company "), Cirmatica Gaming, S.A., a company organized under the laws of Spain (" Cirmatica "), and such other parties that may become a party hereto after the date hereof.

RECITALS

A. The Company and Cirmatica are each a party to that certain Stockholders' Agreement dated September 6, 2000 (the " 2000 Stockholders' Agreement ").

B. In connection with an increase in the share capital of the Company, the Company and Cirmatica desire to enter into this Agreement (i) to supplement the ownership thresholds contained in the 2000 Stockholders' Agreement with respect to the rights of the stockholders a party to such agreement to designate and have elected and appointed directors to the Board and (ii) to provide for certain restrictions in the transferability of Series B Preferred Stock (as hereinafter defined) that the Company has issued concurrently with the execution and delivery of this Amendment to the holders of the Preferred Stock.

NOW, THEREFORE, in consideration of the mutual agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Certain Definitions . In addition to the terms defined elsewhere herein, the following terms have the following meanings when used herein with initial capital letters:

"Affiliate" means, with respect to any Person or entity (the "referent Person" ), any Person or entity that controls the referent Person, any Person or entity that the referent Person controls, or any Person or entity that is under common control with the referent Person. For purposes of the preceding sentence, the term "control" means the power, direct or indirect, to direct or cause the direction of the management and policies of a Person or entity through voting securities, by contract or otherwise.

"Agreement" means this Supplemental Stockholders' Agreement, as the same may be modified, supplemented or amended from time to time in accordance with its terms.

"Board" has the meaning set forth in Section 3(a) hereof.

"Cirmatica" has the meaning set forth in the preamble to this Agreement.

"Common Stock" means the Class A common stock, par value $0.01 per share, of the Company.

"Company" has the meaning set forth in the preamble to this Agreement.

"Holders" means Cirmatica and any Person that becomes a party to this Agreement pursuant to Section 6 hereof.

"Person" means an individual, corporation, partnership, limited liability company, association, trust and any other entity or organization.

"Regulatory Approval" means all regulatory approvals and findings of suitability or qualification, including any approvals or findings by state governing commissions and gaming regulators, or temporary permits or authorizations, or, if applicable, the expiration of any notice periods with respect thereto, that are necessary for the Holders to own and continue to hold and vote the Series A Preferred Stock, Series B Preferred Stock, Common Stock issuable or issued upon conversion of the Series A Preferred Stock, or any other shares of capital stock of the Company issued as (or issuable upon the conversion of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such issued or issuable shares of Common Stock and elect or designate for election at least four (or seven, if applicable) directors to the Board.

"Series A Certificate of Designations" means the Certificate of Designations of the Company relating to the Series A Preferred Stock.

"Series A Preferred Stock" means the Series A Convertible Preferred Stock, par value $1.00 per share, of the Company.

" Series B Certificate of Designations " means the Certificate of Designations of the Company relating to the Series B Preferred Stock.

" Series B Preferred Stock " means the Series B Preferred Stock, par value $1.00 per share, of the Company.

"2000 Stockholders' Agreement" has the meaning set forth in the Recitals to this Agreement.

2. Effect of Agreement . This Agreement is intended to provide additional rights to the parties hereto in addition to any rights such parties may have pursuant to the 2000 Stockholders' Agreement. This Agreement is intended to be consistent with the 2000 Stockholders' Agreement, and nothing contained in this Agreement shall be interpreted to amend, supersede or rescind the 2000 Stockholders' Agreement or any term or provision thereof.

3. Board of Directors .

(a) The Holders and the Company acknowledge that, pursuant to the Series B Certificate of Designations, the Holders holding Series B Preferred Stock shall be entitled to collectively elect one (1) director of the Company upon substantially the same terms, and under the same circumstances, as set forth below. To preserve the rights of the Holders to have their representatives on the Board in the event that any or all of the shares of Series B Preferred Stock are redeemed upon the conversion of the corresponding Series A Preferred Stock into Common Stock, the Holders and the Company agree to the following provisions relating to the Board. Subject to the Series A Certificate of Designations, the Series B Certificate of Designations, Section 4(b)(ii) of the 2000 Stockholders' Agreement and Section 3(b) of this Agreement, the Board of Directors of the Company (the " Board ") shall consist of ten (10) directors, and the Holders shall have the right to designate and have elected and appointed:

(i) one (1) director for so long as the Stockholders (as defined in the 2000 Stockholders' Agreement) beneficially own in the aggregate shares of Common Stock plus shares of Series A Preferred Stock having the right to convert into a number of shares of Common Stock that (x) equals or exceeds twenty-two and one-half percent (22 ¹ / 2 %) of the sum of (i) the number of shares of Common Stock outstanding plus (ii) the number of shares of Common Stock into which or for which all outstanding securities of the Company convertible into or exercisable or exchangeable for Common Stock (including, without limitation, the Series A Preferred Stock) may be converted, exercised or exchanged (such sum, the " Fully Diluted Equity ") and (y) is less than twenty-five percent (25%) of the Fully Diluted Equity; or

(ii) one (1) director for so long as the Stockholders (as defined in the 2000 Stockholders' Agreement) beneficially own in the aggregate shares of Common Stock plus shares of Series A Preferred Stock having the right to convert into a number of shares of Common Stock that (x) equals or exceeds seventeen and one-half percent (17 ¹ / 2 %) of the Fully Diluted Equity and (y) is less than twenty percent (20%) of the Fully Diluted Equity;

provided , however , that if the Company shall have failed to comply with any provision of Section 3(a) of this Agreement, then for as long as such failure continues, the number of directors on the Board shall be increased to a number that is equal to three (3) more than the then current number of directors, and the Holders shall have a right to designate and have elected and appointed immediately by the Board by resolution or, if specified by the Holders, at the next annual meeting of the stockholders or at any special meeting, three (3) additional directors to the Board, regardless of the number of shares of Common Stock, Series A Preferred Stock and Series B Preferred Stock then held by the Holders;

provided , however , that such voting rights with respect to three additional directors shall not vest if voting rights with respect to three additional directors shall have vested in the Stockholders (as defined in the 2000 Stockholders' Agreement) pursuant to Section 4(b) of the 2000 Stockholders' Agreement, and in no event shall the number of directors be increased by more than three additional directors in the aggregate pursuant to this Agreement and the 2000 Stockholders' Agreement.

(b) Whenever such voting rights with respect to three additional directors pursuant to Section 3(a) shall have vested, such rights may be exercised by written consent of the Holders then holding a majority of the outstanding shares of Common Stock and shares of Common Stock that would be issued upon the conversion of the Series A Preferred Stock then held by the Holders or at a special meeting of the Holders, called as hereinafter provided, or at any annual meeting of stockholders held for the purpose of electing directors. Such right of the Holders to designate three additional directors may be exercised until the Company has cured any such failure, at which time the right of the Holders to elect such number of directors shall cease, the term of such three additional directors previously elected pursuant to Section 3(a) shall thereupon terminate, and the authorized number of directors shall thereupon return to the number of authorized directors otherwise in effect, but subject always to the same provisions for the renewal and divestment of such special voting rights as provided in Section 3(a).

(c) At any time when such voting rights with respect to the designation of three additional directors shall have vested in the Holders pursuant to Section 3(a) and if such right shall not already have been initially exercised by written consent or otherwise, a proper officer of the Company shall, upon the written request of any Holder, addressed to the Secretary of the Company, call a special meeting of Holders. Such meeting shall be held at the earliest practicable date upon the notice required for annual meetings of stockholders at the place for holding annual meetings of stockholders of the Company or if none at a place designated by the Secretary of the Company. If such meeting shall not be called by the proper officers of the Company within thirty (30) days after the personal service of such written request upon the Secretary of the Company, or within thirty (30) days after mailing the same, within the United States, by registered mail, addressed to the Secretary of the Company at its principal office (such mailing to be evidenced by the registry receipt issued by the postal authorities), then the Holders of record of ten percent (10%) of the outstanding shares of Common Stock and shares of Common Stock that would be issued upon conversion of the Series A Preferred Stock then held by all Holders may designate in writing a Holder to call such meeting at the expense of the Company, and such meeting may be called by such Person so designated upon the notice required for annual meeting of stockholders and shall be held at the place for holding annual meetings of the Company or, if none, at a place designated by such Holder. Any Holder that would be entitled to vote at such meeting shall have access to the stock books of the Company for the purpose of causing a meeting of stockholders to be called pursuant to the provisions of this Section 3(a). Notwithstanding the provisions of this Section 3(a), no such special meeting shall be called if any such request is received less than 90 days before the date fixed for the next ensuing annual or special meeting of stockholders.

(d) If a director so elected by the Holders shall cease to serve as a director for any reason before his or her term expires (other than in the event that the Holders are no longer entitled to designate such a director pursuant to the terms of this Agreement), or shall not receive or retain Regulatory Approval for service as a director, the Holders may by written consent or at a special meeting of the Holders called as provided above, elect a successor to hold office for the unexpired term of the director whose place shall be vacant.

(e) The Company shall at all times exercise all authority under applicable law and use its best efforts to cause the directors designated by the Holders for election to the Board to be nominated as Board members by the nominating committee of the Company as provided below or otherwise. The Company shall, if necessary to permit the Holders' designees to be elected to the Board, (i) cause the

Holders' designees to be included in the slate of designees recommended by the Board to the Company's stockholders for election as directors at each annual meeting of the stockholders of the Company (or at any special meeting held for the election of directors) and (ii) use its best efforts to cause the election of the Holders' designees at such annual or special meeting, including soliciting proxies in favor of the election of such Persons.

4. Restrictions on Transferability .

(a) Except as provided in Section 4(b), a Holder may not transfer shares of Series B Preferred Stock.

(c) If a Holder transfers any shares of Series A Preferred Stock, such Holder shall also concurrently transfer to the transferee of such Series A Preferred Stock that number of shares of Series B Preferred Stock equal to the product of (y) the total number of shares of Series B Preferred Stock owned by such Holder immediately prior to such transfer and (z) a fraction, the numerator of which is the number of shares of Series A Preferred Stock such Holder is then transferring to such transferee and the denominator of which is the total number of shares of Series A Preferred Stock owned by such Holder immediately prior to such transfer.

(d) Any transfer or attempted transfer of Series B Preferred Stock not made in accordance with this Section 4 shall be voidable by the Company, and the Company shall not be obligated to treat the transferee as a holder of the shares of the Series B Preferred Stock subject to such purported transfer and shall not record such purported transfer on its books, and the transferee shall have no rights as a holder of Series B Preferred Stock under the Series B Certificate of Designations, this Agreement or otherwise. If a Holder purports to transfer shares of Series B Preferred Stock in violation of this Section 4, such Holder thereby forfeits its voting rights as a holder of Series B Preferred Stock provided by Section 6 of the Series B Certificate of Designations and by this Agreement with respect to the number of shares of Series B Preferred Stock purported to be transferred until such time, if any, as such Holder shall have fully rescinded such purported transfer. If a Holder fails to transfer shares of Series B Preferred Stock in violation of this Section 4, such Holder thereby forfeits its voting rights as a holder of Series B Preferred Stock provided by Section 6 of the Series B Certificate of Designations and by this Agreement with respect to the number of shares of Series B Preferred Stock that such Holder has so failed to transfer until such time, if any, as (y) such Holder shall have fully rescinded the transfer of the shares of Series A Preferred Stock requiring the transfer of shares of Series B Preferred Stock that was not effected, or (z) such Holder transfers the shares of Series B Preferred Stock in accordance with this Section 7(b) required to be so transferred.

5. Tax Matters . The Company and each Holder acknowledge and agree that it is intended that the Series B Preferred Stock not constitute "preferred stock" within the meaning of Section 305 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder, and neither the Company nor the Holders shall treat the Series B Preferred Stock as such.

6. Binding Effect; Successor and Assigns; Joinder .

(a) The provisions of this Agreement shall be binding upon and accrue to the benefit of the parties hereto and their respective heirs, legal representatives, successors and, assigns. Subject to the

restrictions set forth in Section 4 hereof, each of the Holders may transfer or assign, in whole or in part, any of its rights and obligations hereunder to any Person; provided that such transferee executes and delivers a counterpart copy of this Agreement to the Company and each of the Holders thereby agreeing to be bound by the terms and provisions set forth herein.

(b) Any Person who is or becomes a holder of Series A Preferred Stock may agree to become and shall be deemed a party to this Agreement upon the execution of a joinder agreement, upon the execution of which such holder of Series A Preferred Stock shall have all rights, and shall observe all the obligations, applicable to a Holder as set forth in this Agreement; provided that if such Person is a party to that certain Voting Agreement, dated September 6, 2000 (the "Voting Agreement"), upon such Person becoming a party hereto, such Person shall be deemed to have amended Section 2(a) of the Voting Agreement so that reference to the right of Cirmatica to designate the persons who will serve as the director designees of the Holders pursuant to the 2000 Stockholder's Agreement and the Series A Certificate of Designations shall also confer such rights to Cirmatica with respect to the right to designate the persons who will serve as the director designees of the Holders pursuant to the Series B Certificate of Designations and this Agreement. Accordingly, the definition of Holders shall include reference to such joining party.

7. Amendment .

This Agreement may be amended only by a written instrument signed by the parties hereto.

8. Applicable Law .

The laws of the State of New York shall govern the interpretation, validity and performance of the terms of this Agreement.

9. Notices .

All notices, requests, demands and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given when received, if personally delivered; when transmitted, if transmitted by telecopy, upon receipt of telephonic or electronic confirmation; the day after it is sent, if sent for next day delivery to a domestic address by recognized overnight delivery service ( e.g. , Federal Express); and upon receipt, if sent by certified or registered mail, return receipt requested. In each case notice shall be sent to:

(a)

If to the Company, addressed to:

Scientific Games Corporation
750 Lexington Avenue
25 ^th Floor
New York, NY 10022
Attn: Secretary and General Counsel
Telecopy: (212) 754-2372

with a copy to:

Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, NY 10022
Attn: Peter Smith, Esq.
Telecopy: (212) 715-8000

(b)

If to Cirmatica, addressed to:

Cirmatica Gaming, S.A.
Rambla De Catalunya 16, 4 ^o , 2a
Barcelona, Spain
Attention: Antonio Pisanelli
Telecopy: (01139) 02 621 3241

With a copy to:

Lottomatica S.p.A.
via di Porta Latina, 8
00179 Rome, Italy
Attention: Rosario Bifulco
Telecopy: (01139) 0670453122

Latham & Watkins
99 Bishopsgate
London EC2M 3XF
Attention: Michael S. Immordino, Esq.
Richard Trobman, Esq.
Telecopy: (01144) 2073744460

or at such other address as the party shall have specified by notice in writing to the other parties in accordance with this Section 9.

10. Representations and Warranties .

The Company represents and warrants to Cirmatica that (a) the Company has all requisite power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby, (b) the execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action on the part of the Company, (c) this Agreement has been duly executed and delivered by the Company and is a legal, valid and binding obligation of such party, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws and equitable principles now or hereafter in effect and affecting the rights and remedies of creditors generally, and (d) neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will violate, conflict with or result in a default or a breach under the Company's organizational documents or any agreement, contract instrument or other arrangement to which the Company is bound or to which its securities is subject.

11. Headings .

The headings in this Agreement are for convenience of reference only and will not control or affect the meaning or construction of any provisions hereof.

12. Entire Agreement .

This Agreement, the Series B Certificate of Designations, the 2000 Stockholders' Agreement and the Series A Certificate of Designations constitute the entire agreement among the parties with respect to the subject matter hereof and thereof. This Agreement and the Series B Certificate of Designations, the 2000 Stockholders' Agreement and the Series A Certificate of Designations supersede all prior agreements and understandings, both oral and written, among the parties with respect to the subject matter hereof and thereof. This Agreement and the Series B Certificate of Designations, the 2000 Stockholders' Agreement and the Series A Certificate of Designations is not intended to confer upon any Person other than the parties hereto and thereto and their respective permitted assigns any rights or remedies hereunder or thereunder, except as expressly provided herein and therein. If it becomes necessary or appropriate to execute and deliver a separate or additional instrument(s) in order to carry

out the purposes and intent of this Agreement, the Company and each Holder agree to execute and deliver such further instrument(s) and to perform any additional acts as may be necessary or appropriate in order to carry out the intent of the parties.

13. Severability .

The invalidity or unenforceability of any provisions of this Agreement in any jurisdiction will not affect the validity, legality or enforceability of the remainder of this Agreement in such jurisdiction or the validity, legality or enforceability of this Agreement, including any such provision, in any other jurisdiction, it being intended that all rights and obligations of the parties hereunder will be enforceable to the fullest extent permitted by law.

14. Counterparts .

This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

15. Remedies .

The parties hereby acknowledge and agree that money damages would not be adequate compensation for the damages that a party would suffer by reason of a breach of this Agreement or a failure of any other party to perform any of its obligations under this Agreement. Therefore, each party hereto agrees that in addition to and without limiting any other remedy or right it may have, the non-breaching part will have the right to an injunction, temporary restraining order or other equitable relief in any court of competent jurisdiction enjoining any such breach and enforcing specifically the terms and provisions hereof.

(Signature page follows.)

IN WITNESS WHEREOF, the parties have executed this Supplemental Stockholders' Agreement as of the date first above written.

		CIRMATICA GAMING, S.A.
		By:	Name: Title:
		SCIENTIFIC GAMES CORPORATION
		By:	Name: Title:

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Exhibit 4.2

SUPPLEMENTAL STOCKHOLDERS' AGREEMENT
SUPPLEMENTAL STOCKHOLDERS' AGREEMENT
RECITALS

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Exhibit 10.1

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

Table of Contents

		Page
1.	Termination of Existing Employment Agreements	1
2.	Employment; Term	1
3.	Offices and Duties	1
4.	Compensation	2
5.	Benefits	3
6.	Termination	4
7.	Compensation Following Termination Prior to the End of the Term	7
8.	Excise Tax Restoration Payment	11
9.	Offsets; Withholding	11
10.	Noncompetition; Nonsolicitation; Nondisclosure; etc	11
	10.1 Noncompetition; Nonsolicitation.	11
	10.2 Proprietary Information	13
	10.3 Confidentiality and Surrender of Records	13
	10.4 Nondisparagement	13
	10.5 No Other Obligations	14
	10.6 Forfeiture of Outstanding Options	14
	10.7 Enforcement	14
	10.8 Cooperation with Regard to Litigation	15
	10.9 Survival	15
	10.10 Company	15
11.	Insurance for the Company's Benefit	15
12.	Indemnification	15
13.	Notices	16
14.	Assignability; Binding Effect	17
15.	Complete Understanding; Amendment; Waiver	17
16.	Severability	17
17.	Survivability	18
18.	Governing Law; Arbitration; Expenses; Interest	18
	18.1 Governing Law	18
	18.2 Arbitration	18
	18.3 Reimbursement of Expenses in Enforcing Rights	19
	18.4 Interest on Unpaid Amounts	19
19.	Reimbursement of Expenses of Executive in Negotiating Agreement	19
20.	Titles and Captions	19

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is made as of the 1st day of November, 2000 (the "Effective Date"), by and between SCIENTIFIC GAMES CORPORATION, a Delaware corporation formerly known as Autotote Corporation (the "Company"), and A. Lorne Weil ("Executive").

W I T N E S S E T H:

WHEREAS, Executive has been employed by the Company pursuant to an Employment Agreement dated as of November 1, 1997, as amended by the letter agreement dated September 10, 1998 and the Amendment to Employment Agreement dated as of September 1, 2000 (the "Old Agreement"); and

WHEREAS , the Company desires to continue to employ Executive with the Company, and Executive wishes to continue to serve the Company, in the capacities and on the terms and conditions set forth in this Agreement; and

WHEREAS , the Company and Executive desire that this Agreement, amended and restated as of November 1, 2000, replace and supersede the Old Agreement;

NOW, THEREFORE , in consideration of the premises and the mutual benefits to be derived herefrom and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Termination of Existing Employment Agreements. As of the Effective Date, all existing employment agreements between the parties, whether oral or written, including the Old Agreement, are hereby terminated, except as provided in Section 12.

2. Employment; Term. The Company hereby agrees to employ Executive, and Executive hereby accepts continued employment with the Company, in accordance with and subject to the terms and conditions set forth herein. The term of employment of Executive under this Agreement (the "Term") shall be the period commencing on the Effective Date and ending on December 31, 2004, and any period of extension thereof in accordance with this Section 2, subject to earlier termination in accordance with Section 6. The Term shall be extended automatically without further action by either party by one additional year (added to the end of the Term) first on December 31, 2004 (extending the Term to December 31, 2005) and then on each succeeding December 31 thereafter, unless either party shall have given written notice to the other party prior to the June 30 preceding the date upon which such extension would become effective electing not to further extend the Term, in which case Executive's employment shall terminate on the date upon which such extension would otherwise have become effective, unless earlier terminated in accordance with Section 6; provided, however, that any termination pursuant to this Section 2 shall be subject to and without limitation of or prejudice to Executive's rights with respect to (i) a termination for Good Reason pursuant to Section 6(e)(viii), or (ii) a termination without Cause pursuant to Section 6(g), as applicable.

3. Offices and Duties.

(a) During the Term, Executive shall serve as Chairman of the Board, President and Chief Executive Officer of the Company and shall report solely to the Board of Directors of the Company (the "Board"). Executive agrees to serve during the Term as a member of the Board, and of any Board committee to which the Board may elect him.

(b) Executive shall perform such duties and responsibilities and have such authority as are customary for the chairman of the board, president and chief executive officer of a publicly held corporation of the size, type, and nature of the Company as they may exist from time to time, but in no event shall such duties, responsibilities and authority be reduced from those of Executive at the Effective Date.

(c) Executive shall devote his full business time and attention and best efforts to his positions with the Company without commitment to other business endeavors, except that so long as such activities do not preclude or render unlawful Executive's employment by the Company or otherwise materially inhibit the performance of his duties under this Agreement or materially impair the business of the Company or its subsidiaries, Executive (i) may make personal investments which are not in conflict with his duties to the Company and manage personal and family financial and legal affairs, (ii) may continue to serve on any board of directors on which he is known by the Board to be serving on the Effective Date, as specified in Schedule A hereto, (iii) may undertake public speaking engagements, and (iv) may serve as a director of (or hold a similar position with) any other organization.

(d) Executive shall be the highest-ranking executive of the Company.

4. Compensation.

(a) Base Salary. During the Term the Company shall pay Executive a base salary (the "Base Salary") at the initial rate of $750,000 per annum, payable biweekly (except to the extent deferred under a deferred compensation plan) and subject to all withholdings that are legally required or are agreed to by Executive. The Base Salary shall be increased annually on each January 1 during the Term by a percentage of the Base Salary then in effect equal to the percentage increase, if any, during the preceding twelve months in the Consumer Price Index for the Greater New York area. In no event shall the Base Salary be reduced.

(b) Incentive Compensation. Executive shall have the opportunity annually to earn incentive compensation in amounts determined by the Compensation Committee of the Board (the "Committee") in accordance with the applicable plan(s) of the Company as in effect from time to time; provided, however, that (i) Executive shall have the opportunity to earn annually up to 100% of the Base Salary as incentive compensation pursuant to, and subject to the terms and conditions of, the Company's Management Incentive Compensation Plan as in effect from time to time (provided, however, that if no Management Incentive Compensation Plan is in effect at any relevant time, or if such plan, as in effect at any relevant time, does not provide a reasonable opportunity for Executive to earn annually up to 100% of the Base Salary as incentive compensation, then the Company shall provide such reasonable opportunity to Executive independently of such plan, and provided further that Executive may in the discretion of the Committee or the Board receive additional incentive compensation); and (ii) Executive's annual opportunity for incentive compensation shall, for each year, be on terms and conditions at least as favorable to Executive as the most favorable terms and conditions for incentive compensation offered to any other employee of the Company for such year. Any incentive compensation payable to Executive shall be paid in accordance with the Company's usual practices with respect to payment of incentive compensation to its other senior executives (except to the extent deferred under a deferred compensation plan). To accommodate the change in the Company's fiscal year end from October 31 to December 31, the first annual period during the Term for purposes of Executive's incentive compensation shall be the fourteen-month period from the Effective Date through December 31, 2001, and Executive's annual opportunity for incentive compensation based on Base Salary for such first annual period of the Term, ending December 31, 2001, shall be determined with reference to the Base Salary (as determined in accordance with the terms hereof) payable in respect of such fourteen-month period. Notwithstanding anything to the contrary herein or in any plan, policy or program of the Company, any other compensation or benefit to which Executive is entitled that is based on a fiscal year of the Company shall be computed for fiscal year 2001 so that the months of November and December 2000 are included in such computation for the benefit of Executive, except to the extent (if any) that (i) such months previously had been reflected in a computation of such compensation or benefit, or (ii) inclusion of such months would otherwise result in a duplication or overlap of such compensation or benefit or the computation thereof; provided, however, that if, in the case of clause (i) or (ii) above, the amount or value of such

compensation or benefit in respect of such months (or portion thereof) as so computed is less than what the amount or value of such compensation or benefit would be for such months (or portion thereof) if such months (or portion thereof) had been included in the computation of such compensation or benefit for fiscal year 2001, then the amount or value of such compensation or benefit for fiscal year 2001 shall be increased by the amount of such difference (it being understood that, for the computation of any compensation or benefit which is based on a comparison between amounts with respect to a given reference period, including, without limitation, for purposes of Section 5(h) of this Agreement, the amounts to be compared shall each be computed for the same reference period).

(c) Executive Compensation Plans. Executive shall be entitled during the Term to participate, without discrimination or duplication, in the Company's supplemental executive retirement plan and all other executive compensation plans and programs which are made generally available by the Company to its other senior executives (including, without limitation, any stock option plans, performance share plans, management incentive plans, deferred compensation plans, and supplemental retirement plans) in accordance with the terms of such plans and programs and subject to the Company's right to at any time amend or terminate any such plan or program; provided, however, that Executive shall be eligible to participate in such executive compensation plans and programs on terms and conditions at least as favorable to Executive as the most favorable terms and conditions offered to any other employee of the Company.

5. Benefits.

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

(b) Executive shall be entitled to participate, without discrimination or duplication, in any and all medical insurance, group health, disability, life, accidental death, dismemberment insurance, pension, retirement, profit sharing, stock ownership and other insurance, benefit, fringe benefits and perquisite plans and programs which are made generally available by the Company to its other senior executives; provided, however, that Executive shall be eligible to participate in such insurance, benefit, fringe benefit and perquisite plans and programs on terms and conditions at least as favorable to Executive as the most favorable terms and conditions offered to any other employee of the Company. The Company, in its sole discretion, may at any time amend or terminate any such plans or programs; provided, however, that:

(i) At all times during the Term, such plans and programs in effect, in the aggregate, shall provide Executive with benefits and compensation substantially no less favorable than is provided by the Company to Executive under such plans and programs as of the Effective Date;

(ii) The Company shall provide Executive with long-term disability insurance and benefits substantially no less favorable (including any required contributions by Executive) than such insurance and benefits in effect on the Effective Date; and

(iii) The Company shall provide Executive with Company-paid group and individual term life insurance providing a death benefit no less than that provided under Company-paid insurance in effect on the Effective Date.

(c) If the Company adopts an equity investment program permitting executives to elect to forego salary, annual incentive, other bonuses, annual option opportunities under long-term incentive plans, or other specified compensation or benefits in exchange for a grant of stock options, restricted stock or other equity or non-equity awards or benefits, Executive will be eligible to participate in such program on terms no less favorable than the terms of participation of any other employee of the Company.

(d) Executive shall be entitled to participate in the Company's deferred compensation plan in accordance with the terms of such plan and subject to the Company's right to at any time amend or terminate any such plan.

(e) Executive shall be entitled to paid vacation, holidays, and any other time off in accordance with the Company's policies in effect from time to time.

(f) The Company will use its best efforts to file with the Securities and Exchange Commission and thereafter maintain the effectiveness of one or more registration statements registering under the Securities Act of 1933, as amended, the offer and sale of shares by the Company to Executive pursuant to stock options or other equity-based awards granted to Executive under Company plans. All outstanding stock options then held by Executive shall become fully vested and non-forfeitable (i) upon the occurrence of any of the events described in clauses (i) through (vii) of Section 6(e) and the Company's failure to cure such event within thirty (30) days after its receipt of notice thereof from Executive, (ii) in the event that during any period of three consecutive months, individuals who at the beginning of such period constitute the Board cease for any reason (except action by any stockholder of the Company) to constitute at least one-third ( ¹ / 3 ) of the Board, or (iii) upon the failure (except solely by reason of Executive's own actions) of the Board or the Company to approve or effectively seek to implement, in all material respects, any material strategic plan or initiative for the Company, that, in any such case, has been proposed in writing in good faith by Executive (provided that upon such vesting the period of time afforded to the Company, pursuant to Section 6(e), to otherwise cure any conduct alleged to constitute Good Reason within the meaning of such Section 6(e) shall be extended from thirty (30) days to ninety (90) days).

(g) Executive shall be deemed to have commenced employment with the Company on August 1, 1990, for purposes of calculating Executive's period of service under this Agreement except to the extent, if any, that any provision of this Agreement specifically credits Executive with a longer period of service for purposes of such provision.

(h) For purposes of computing the "Retirement Benefit" or equivalent payment or benefit due to Executive under any SERP (as defined in Section 7(a) below) in which Executive participates during the Term, or any payment or benefit under Section 7 of this Agreement in lieu of any SERP benefit or payment, the "Final Average Compensation" or equivalent reference compensation amount, in the case of Executive, shall, notwithstanding the terms of such SERP, be the higher of (x) such amount as otherwise determined pursuant to the terms of the SERP or (y) an amount equal to the sum of (i) Executive's then-current Base Salary immediately prior to termination plus (ii) such then-current Base Salary multiplied by (A) the sum of the Incentive Compensation Percentages for each of the Reference Years divided by (B) 3; where (X) "Incentive Compensation Percentage" for a Reference Year means the percentage expressed by dividing the aggregate incentive compensation and bonuses paid to Executive in such Reference Year by Executive's Base Salary in such Reference Year, and (Y) "Reference Year" means each of the three consecutive calendar years with the highest Incentive Compensation Percentages during the period of ten calendar years immediately preceding termination.

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

(a) Death; Total Disability. Executive's employment hereunder shall terminate upon Executive's death, and the Company may terminate Executive's employment hereunder in the event of Executive's "Total Disability." For purposes of this Agreement, "Total Disability" shall mean Executive's failure to perform the duties and responsibilities contemplated under this Agreement for a period of more than 180 days during any consecutive 12-month period, due to physical or mental incapacity or impairment as determined by a physician or physicians selected by the Company and reasonably acceptable to Executive unless, within 30 days after Executive has received written notice from the Company of a proposed termination due to such failure (as determined in accordance with the foregoing provisions of

this sentence) which notice shall include a copy of the findings of such physician or physicians and shall refer to this Section 6(a), Executive shall have returned to the full performance of his duties hereunder and shall have presented to the Company a written certificate of Executive's good health by a physician selected by Executive and reasonably acceptable to the Company.

(b) Retirement. Executive may terminate his employment hereunder upon retirement at or after age 65 or at or after age 55 following at least 10 years of full-time employment with the Company ("Normal Retirement") or prior to such age upon approval by the Committee ("Approved Early Retirement"), in each case upon forty-five (45) days' prior written notice to the Company referring to this Section 6(b).

(c) Termination by the Company for Cause. The Company may terminate Executive's employment hereunder for Cause at any time upon written notice to Executive referring to this Section 6(c). For purposes of this Agreement, the term "Cause" shall mean Executive's gross misconduct (as defined herein) or willful and material breach of Section 10.1(a) (other than the first sentence thereof), 10.1(b), 10.2 (other than the first and penultimate sentences thereof), 10.3, 10.4, or 10.8. For purposes of this definition, "gross misconduct" shall mean (i) Executive's conviction in a court of law of a felony under applicable federal or state law that was committed while Executive was employed by the Company, or (ii) Executive's willful and continued failure substantially to perform his material duties under this Agreement or any act or omission on the part of Executive not requested or approved by the Board constituting willful malfeasance or gross negligence in the performance of Executive's material duties under this Agreement. For purposes of this Agreement, an act or failure to act on Executive's part shall be considered "willful" if it was done or omitted to be done by him not in good faith and shall not include any act or failure to act resulting from any physical or mental incapacity or impairment of Executive. Executive may not be terminated for Cause unless and until there shall have been delivered to him, within ninety (90) days after the Board (A) had actual knowledge of conduct or an event allegedly constituting Cause and (B) had reason to believe that such conduct or event could be grounds for termination for Cause, a copy of a resolution duly adopted by the Board by a vote of Directors constituting a majority of the Board (excluding Executive) at a meeting of the Board which a quorum is present and which is called and held for such purpose (after giving Executive reasonable notice of the specific grounds for such termination and, except if a felony conviction is the grounds for termination, 30 days to correct such grounds, and affording Executive and his counsel the opportunity to be heard before the Board) finding that, in the good faith opinion of the Board, Executive was guilty of conduct constituting Cause (the "Cause Resolution").

If, within 30 days of Executive's receipt of notice of his termination for Cause, Executive in good faith files a claim in arbitration disputing the termination for Cause, Executive shall, during the pendency of the arbitration, be considered a suspended employee of the Company and be entitled to receive compensation and benefits under this Agreement as if he had not been terminated. If the arbitration panel finds that the Company had Cause to terminate Executive's employment, Executive shall, within 5 days of the arbitration award, repay any amounts provided to him by the Company in respect of periods commencing after his termination, including but not limited to salary continuation and the value of all benefits provided to Executive in respect of periods commencing after his termination, in excess of any amounts to which he was entitled under this Agreement upon a termination for Cause. If the arbitration panel finds that the Company did not have Cause to terminate Executive's employment: (x) Executive's employment shall be deemed to have been terminated without Cause as of the date which is 90 days after the date of notice of his termination for Cause; and (y) any amounts paid to Executive by the Company in respect of periods commencing after 90 days following the date of the notice of his termination for Cause, including but not limited to salary continuation and the value of all benefits provided to Executive, shall be credited against amounts owed to Executive under Section 7(c) of this Agreement.

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

(e) Termination by Executive for Good Reason. Executive may terminate his employment hereunder for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: without Executive's prior written consent, (i) a material change, adverse to Executive, in Executive's positions, titles or offices as set forth in Section 3, or status rank, nature of responsibilities, or authority within the Company, or removal of Executive from, or failure to nominate, reappoint or reelect Executive as the Chairman of the Board, or as a member of any Board committee on which he has served during the Term (except if required by a change in law, accounting rule, or the rules of any national securities exchange or automated quotation system on which the Company's securities may be listed or quoted), including a failure of the Board or stockholders to take such actions (notwithstanding their legal right to do so), except, in such case, in connection with the termination of Executive's employment for Cause, Total Disability, Normal Retirement or Approved Early Retirement, or death, (ii) an assignment of any significant duties to Executive which are inconsistent with his positions or offices held under Section 3, (iii) a decrease in Base Salary or other compensation or in any compensation opportunities or a material decrease in the aggregate benefits provided under this Agreement, (iv) any other failure by the Company to perform any material obligation under, or breach by the Company of any material provision of, this Agreement, (v) a relocation of the Corporate Offices of the Company more than 35 miles from the latest location of such offices prior to such relocation, (vi) any failure to secure the agreement of any successor corporation or other entity to the Company to fully assume the Company's obligations under this Agreement in a form reasonably acceptable to Executive, (vii) any attempt by the Company to terminate Executive for Cause which does not result in a valid termination for Cause, except where (x) valid grounds for Cause exist but are corrected as permitted under Section 6(c) or (y) the Company, prior to 35 days after Executive's receipt of a copy of the Cause Resolution, revokes the Cause Resolution, takes any and all other steps reasonably necessary to retract its allegations of Cause and fully restore Executive to active employment in accordance with the terms of this Agreement, effective immediately prior to the adoption of the Cause Resolution, and pays (or reimburses Executive for) any costs and expenses reasonably incurred by Executive in connection with such attempted termination, and (viii) the failure of the parties to agree in writing at the end of the Term (or any extension thereof) to the terms of Executive's continued employment where only Executive, and not the Company, has given notice electing not to further extend the Term pursuant to the last sentence of Section 2. Executive shall not be considered to have terminated for Good Reason unless Executive shall have provided the Company with written notice of the specific reasons for such termination within ninety (90) days after he has actual knowledge of the event that is the basis for such termination and (except in the case of a termination pursuant to clause (vii) or (viii) of the preceding sentence) affords the Company at least thirty (30) days to cure the alleged conduct.

(f) Termination by Executive for Other than Good Reason. Executive may terminate his employment hereunder for any reason or no reason upon thirty (30) days' prior written notice to the Company referring to this Section 6(f); provided, however, that a termination of Executive's employment by reason of death, Total Disability, Normal or Early Retirement, or Good Reason shall not constitute a termination by Executive for other than Good Reason pursuant to this Section 6(f).

(g) Termination Upon the Company's Failure to Extend the Term. An election by the Company not to extend the Term pursuant to Section 2 hereof shall be deemed for all purposes of this Agreement (including, without limitation, for purposes of Sections 7(c) and 10.1(a) hereof) to be a termination of Executive's employment hereunder by the Company without Cause as of the date of expiration of the Term.

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

(a) Termination by Reason of Death, Normal Retirement, or Approved Early Retirement. In the event that Executive's employment is terminated prior to the expiration of the Term by reason of Executive's death, pursuant to Section 6(a), or by reason of his Normal Retirement or Approved Early Retirement pursuant to Section 6(b), the Company shall pay the following amounts, and make the following other benefits available, to Executive (or Executive's spouse or estate, as the case may be):

(i) Any accrued but unpaid Base Salary (as determined pursuant to Section 4(a)) for services rendered to the date of termination;

(ii) All vested, nonforfeitable amounts owing or accrued at the date of termination under any compensation and benefit plans, programs, and arrangements set forth or referred to in Sections 4(b), 4(c), and 5 (including any earned and vested annual incentive compensation and long term incentive award but excluding any incentive compensation under Section 4(b) for the year of termination) in which Executive theretofore participated, to be paid in accordance with the terms and conditions of such plans, programs, and arrangements (and agreements and documents thereunder);

(iii) In lieu of any incentive compensation under Section 4(b) for the year of termination, an amount equal to the amount of annual incentive compensation payable to Executive assuming achievement of the maximum performance targets for such year, multiplied by a fraction the numerator of which is the number of days Executive was employed in the year of termination and the denominator of which is the total number of days in the year of termination;

(iv) Stock options held by Executive at termination, if not then vested and exercisable, will become fully vested and exercisable at the date of such termination, and any such options which were granted on or after November 1, 1997 (that is, the Effective Date of the Old Agreement) shall remain exercisable until the earlier of three years after the date of such termination or the scheduled expiration date, and, in other respects, all such options shall be governed by the plans and programs and the agreements and other documents pursuant to which such options were granted;

(v) All deferred stock awards, and all deferral arrangements under any deferred compensation plan, will be settled in accordance with the plans and programs under which the awards were granted or governing the deferral including, if so permitted by the plans or programs, Executive's duly executed deferral election forms or the terms of any mandatory deferral;

(vi) Reasonable business expenses and disbursements incurred by Executive prior to such termination will be reimbursed in accordance with Section 5(a);

(vii) If Executive's employment terminates due to his Normal Retirement or Approved Early Retirement, Executive may elect continued participation after termination in the Company's health and medical coverage for himself and his spouse and dependent children after such coverage would otherwise end until such time as Executive becomes eligible for Medicare; provided, however, that in the event of such election, Executive shall pay the Company each year an amount equal to the then-current annual COBRA premium being paid (or payable) by any other former employee of the Company;

(viii) Executive shall be entitled to designate (and change, to the extent permitted under applicable law) a beneficiary or beneficiaries to receive any compensation or benefits payable hereunder following Executive's death;

(ix) In lieu of any payments and benefits under any supplemental executive retirement plan or substantially similar plan (a "SERP") in which Executive participated during the Term, Executive shall be entitled to receive the greater of: (y) all payments and benefits to which Executive otherwise would have been entitled under the SERP (computed in accordance with Section 5(h) hereof); and (z) all payments and benefits to which Executive otherwise would have been entitled under the SERP (computed in accordance with Section 5(h) hereof) if Executive had 15 years of service with the Company. Such payments and benefits shall be payable in a lump sum or in equal installments, as determined by Executive in his discretion, in accordance with the terms and conditions of the SERP; provided, however, that Executive shall not be entitled to receive payments in installments unless at least 12 months prior to the date of the termination of his employment, he elected to receive payments in installment form under the SERP. If Executive receives such payment(s) under this Section 7(a)(ix), Executive shall forfeit all rights under the SERP, and the SERP shall have no force and effect with respect to Executive;

Provided, however, that Executive will be entitled to the benefit of any terms of plans or agreements applicable to Executive which are more favorable than those specified in this Section 7(a).

Amounts payable under (i), (ii), (iii), and (vi) above will be paid as promptly as practicable after termination of Executive's employment; provided, however, that, to the extent that the Company would not be entitled to deduct any such payments (other than those under (i) above) under Internal Revenue Code Section 162(m), such payments shall be made at the earliest time that the payments would be deductible by the Company without limitation under Section 162 (m) (unless this provision is waived by the Company).

(b) Termination by the Company for Cause; Termination by Executive for Other than Good Reason. In the event that Executive's employment is terminated by the Company for Cause pursuant to Section 6(c) or by Executive for other than Good Reason pursuant to Section 6(f), the Company shall pay the following amounts, and make the following other benefits available, to Executive:

(i) Any accrued but unpaid Base Salary (as determined pursuant to Section 4(a)) for services rendered to the date of termination;

(ii) All vested nonforfeitable amounts owing or accrued at the date of termination under any compensation and benefit plans, programs, and arrangements set forth or referred to in Sections 4(b), 4(c), and 5 hereof (including any earned and vested annual incentive compensation) in which Executive theretofore participated will be paid under the terms and conditions of such plans, programs, and arrangements (and agreements and documents thereunder);

(iii) Except as provided in Section 10.6, all stock options and deferred stock awards will be governed by the terms of the plans and programs under which the options or awards were granted;

(iv) Non-forfeitable amounts credited to any deferral account of Executive under deferral arrangements referred to in Section 5(d) hereof at the date of termination will be settled in accordance with the plans and programs under which the awards were granted or governing the deferral including, if so permitted by the plans or programs, Executive's duly executed deferral election forms or the terms of any mandatory deferral; and

(v) Reasonable business expenses and disbursements incurred by Executive prior to such termination will be reimbursed, in accordance with Section 5(a).

Amounts payable under (i), (ii), and (v) above will be paid as promptly as practicable after termination of Executive's employment; provided, however, that, to the extent that the Company would not be entitled to deduct any such payments under Internal Revenue Code Section 162(m), such payments shall be made at the earliest time that the payments would be deductible by the Company without limitation under Section 162(m) (unless this provision is waived by the Company).

(c) Termination by Reason of Total Disability; Termination by the Company Without Cause; Termination by Executive For Good Reason. In the event that Executive's employment is terminated by reason of Total Disability pursuant to Section 6(a), or by the Company without Cause pursuant to Section 6(d) or 6(g), or by Executive for Good Reason pursuant to Section 6(e), the Company shall pay the following amounts, and make the following other benefits available, to Executive:

(i) A lump sum cash payment in an amount equal to three times the sum of (x) Executive's then-current Base Salary at the rate payable in accordance with Section 4(a) hereof, at the date of termination plus (y) the Severance Annual Incentive Amount (as defined below), will be paid to Executive; provided, however, that Executive may elect to receive the amount payable under this Section 7(c)(i) in equal monthly installments over the 36 months following termination, without interest, in lieu of receiving a lump sum cash payment. For purposes of this Section 7(c)(i) and Section 7(c)(iv), the "Severance Annual Incentive Amount" shall be the greater of (1) the average annual incentive compensation paid to Executive for the three years immediately preceding the year of termination or (2) the annual incentive compensation payable to Executive upon achievement of the maximum performance targets for the year of termination;

(ii) The unpaid portion of Base Salary at the rate payable, in accordance with Section 4(a) hereof, at the date of termination, pro rated through such date of termination, will be paid;

(iii) All vested, nonforfeitable amounts owing or accrued at the date of termination under any compensation and benefit plans, programs, and arrangements set forth or referred to in Sections 4(b) and 5(a) and 5(c) hereof (including any earned and vested annual incentive compensation) in which Executive theretofore participated will be paid under the terms and conditions of such plans, programs, and arrangements (and agreements and documents thereunder);

(iv) In lieu of any annual incentive compensation under Section 4(b) for the year in which Executive's employment terminated (unless otherwise payable under (iii) above), Executive will be paid an amount equal to (X) the Severance Annual Incentive Amount as defined in Section 7(c)(i), multiplied by (Y) a fraction the numerator of which is the number of days Executive was employed in the year of termination and the denominator of which is the total number of days in the year of termination;

(v) Stock options held by Executive at termination, if not then vested and exercisable, will become fully vested and exercisable at the date of such termination, and any such options which were granted on or after November 1, 1997 or, if previously granted, were not "in the money" as of November 1, 1997 shall remain exercisable until the scheduled expiration date, and, in other respects, all such options shall be governed by the plans and programs and the agreements and other documents pursuant to which such options were granted;

(vi) Deferred stock held by Executive at termination will become fully vested and non-forfeitable, and shall be settled upon such termination, without regard to any stated period of deferral otherwise remaining in respect of such amounts;

(vii) Executive shall be entitled to receive an amount equal to the amount accrued under any deferred compensation plan or agreement in effect at the date of termination in which Executive is a participant or party, less required withholding taxes under Section 9, as promptly as practicable following such date of termination; the amount paid under this Section 7(c)(vii) shall be equal to Executive's account balance on the date of the termination of Executive's employment if the deferred compensation amount is in the form of an account balance or, if the deferred compensation amount is not in the form of an account balance, the present value of the deferred compensation on the date of the termination of Executive's employment, calculated using a discount rate (the "Discount Rate") equal to the yield, at the time of determination, for U.S. Treasury securities having a maturity of thirty years; if Executive elects to receive payment under

this Section 7(c)(vii), Executive shall forfeit all rights under any such deferred compensation plan or agreement, and such deferred compensation plan or agreement shall have no force and effect with respect to Executive;

(viii) Reasonable business expenses and disbursements incurred by Executive prior to such termination will be reimbursed, in accordance with Section 5(a);

(ix) For (A) a period of 3 years after such termination other than due to Total Disability or (B) the period from termination due to Total Disability until Executive attains age 65, Executive shall continue to participate in all employee and executive benefit plans, programs, and arrangements under Section 5 providing health, medical, disability and life insurance benefits in which Executive was participating immediately prior to termination, the terms of which allow Executive's continued participation, as if Executive had continued in employment with the Company during such period or, if such plans, programs, or arrangements do not allow Executive's continued participation, Executive shall receive a cash payment equivalent on an after-tax basis to the value of the additional benefits Executive would have received under such plans, programs, and arrangements in which Executive was participating immediately prior to termination, as if Executive had received credit under such plans, programs, and arrangements for service and age with the Company during such period following Executive's termination as provided in clause (A) or (B) above (as applicable), with such benefits payable by the Company at the same times and in the same manner as such benefits would have been received by Executive under such plans (it being understood that the value of any insurance-provided benefits will be based on the premium cost to Executive, which shall not exceed the highest risk premium charged by a carrier having an investment grade or better credit rating);

(x) In lieu of any payments and benefits under any SERP in which Executive participated during the Term, Executive shall be entitled to receive the greater of: (y) all payments and benefits to which Executive otherwise would have been entitled under the SERP (computed in accordance with Section 5(h) hereof); and (z) all payments and benefits to which Executive otherwise would have been entitled under the SERP if Executive had 15 years of service with the Company (computed in accordance with Section 5(h) hereof). Such payments and benefits shall be payable in a lump sum or in equal installments, as determined by Executive in his discretion, in accordance with the terms and conditions of the SERP; provided, however, that Executive shall not be entitled to receive payments in installments unless at least 12 months prior to the date of the termination of his employment, he elected to receive payments in installment form under the SERP; if Executive receives such payment(s) under this Section 7(c)(x), Executive shall forfeit all rights under the SERP, and the SERP shall have no force and effect with respect to Executive;

Provided, however, that if the Company terminates Executive's employment without Cause and does not provide Executive with at least 90 days' prior written notice of such termination, the date of Executive's termination for all purposes of this Agreement except Section 7(c)(viii) shall be the 90th day after Executive received written notice from the Company of the termination; and

Provided further that Executive will be entitled to the benefit of any terms of plans or agreements applicable to Executive which are more favorable than those specified in this Section 7(c). Except as otherwise expressly provided above, amounts payable under this Section 7(c), will be paid as promptly as practicable after termination of Executive's employment, and in no event more than 30 days after such termination.

Notwithstanding the foregoing, if a reduction in Base Salary or other level of compensation or benefit was a basis for Executive's termination for Good Reason, the Base Salary or other level of compensation in effect before such reduction shall be used to calculate payments or benefits under this Section 7(c).

(d) No Obligation to Mitigate. Executive shall not be required to seek other employment or otherwise to mitigate Executive's damages upon any termination of employment; provided, however, that, to the extent Executive receives from a subsequent employer health or other insurance benefits substantially similar to the benefits referred to in Section 5, any such benefits to be provided by the Company to Executive following the Term shall be correspondingly reduced.

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

(f) Release of Employment Claims. Executive agrees, as a condition to receipt of any termination payments and benefits provided for in Section 7 (other than compensation and benefits earned through the date of termination), that he will execute a general release agreement, in a form reasonably satisfactory to the Company, releasing any and all claims arising out of Executive's employment (other than enforcement of this Agreement)

8. Excise Tax Restoration Payment. Notwithstanding anything to the contrary in this Agreement, in the event that any payment or distribution of any type to or for the benefit of Executive made by the Company, by any of its affiliates, by any person who acquires ownership or effective control or ownership of a substantial portion of the Company's assets (within the meaning of section 280G of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the "Code")) or by any affiliate of such person, whether paid or payable or distributed or distributable pursuant to the terms of an employment agreement or otherwise (the "Total Payments"), would be subject to the excise tax imposed by section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive an additional payment (an "Excise Tax Restoration Payment") in an amount that shall fund the payment by Executive of any Excise Tax on the Total Payments as well as all income taxes imposed on the Excise Tax Restoration Payment, any Excise Tax imposed on the Excise Tax Restoration Payment and any interest or penalties imposed with respect to taxes on the Excise Tax Restoration or any Excise Tax.

9. Offsets; Withholding. Amounts required to be paid by the Company to Executive pursuant to this Agreement shall not be subject to offset except for any amounts that are owed to the Company by Executive due to his receipt of funds as a result of his fraudulent activity. The foregoing and other provisions of this Agreement notwithstanding (but without limiting the terms of Section 8), all payments to be made to Executive under this Agreement, including under Section 7, or otherwise by the Company will be subject to required withholding taxes and other legally required deductions.

10. Noncompetition; Nonsolicitation; Nondisclosure; etc.

10.1 Noncompetition; Nonsolicitation.

(a) Executive acknowledges the highly competitive nature of the Company's business and that access to the Company's confidential records and proprietary information renders him special and unique within the Company's industry. In consideration of the amounts that may hereafter be paid to Executive pursuant to this Agreement (including, without limitation, Sections 4 and 7), Executive agrees that during the Term (and any extensions thereof) and during the Covered Time (as defined in Section 10.1(e)), Executive, alone or with others, will not, directly or indirectly, engage (as owner, investor, partner, stockholder, employer, employee, consultant, advisor, director or otherwise) in any business in which he has been directly engaged on behalf of the Company, or which he has supervised as an executive thereof, during the last two years prior to such termination, or was engaged in by the Company with Executive's actual knowledge or planned by the Company with Executive's actual

knowledge at the time of such termination, in any geographic area in which such business was conducted or planned to be conducted (a "Competing Business"); provided, however, that this Section 10.1(a) shall not restrict Executive from engaging in (and the term "Competing Business" shall not include) any business in which the Company no longer engages or plans to engage; provided further that this Section 10.1(a) shall not apply if Executive terminates his employment for Good Reason pursuant to clause (i), (ii), (iii), (iv), (v), (vi), or (vii) of Section 6(e) or if Executive's employment is terminated by the Company without Cause; and provided further that activities of the Company, or activities engaged in by Executive for or on behalf of the Company, are not restricted by this Section 10.1(a) and shall not constitute a "Competing Business." Ownership of (i) the securities of any entity for which a Competing Business represents less than 10% of net sales or net income (as determined in accordance with generally accepted accounting principles) for the most recent fiscal year (or if such entity has not completed a fiscal year, net sales or net income projected for its first fiscal year) or (ii) not more than two percent of the equity securities of any company having securities listed on an exchange or regularly traded in the over-the-counter market shall not, of itself, be deemed inconsistent with this Section 10.1(a). Nothing herein shall require Executive to sell or otherwise dispose of any securities of any entity if the acquisition of such securities did not violate the terms of this Section 10.1(a) at the time of such acquisition.

(b) In further consideration of the amounts that may hereafter be paid to Executive pursuant to this Agreement (including, without limitation, Sections 4, 5, and 7), Executive agrees that during the Term (including any extensions thereof) and during the Covered Time he shall not, directly or indirectly, (i) solicit or attempt to induce any of the employees, agents, consultants or representatives of the Company to terminate his, her, or its relationship with the Company; (ii) solicit or attempt to induce any of the employees, agents, consultants or representatives of the Company to become employees, agents, consultants or representatives of any other person or entity; (iii) solicit or attempt to induce any customer, vendor or distributor of the Company to curtail or cancel any business with the Company; or (iv) hire any person who, to Executive's actual knowledge, is, or was within 180 days prior to such hiring, an employee of the Company.

(c) During the Term (including any extensions thereof) and during the Covered Time, Executive agrees that upon the earlier of Executive's (i) negotiating with any Competitor (as defined below) concerning the possible employment of Executive by the Competitor, (ii) responding to (other than for the purpose of declining) an offer of employment from a Competitor, or (iii) becoming employed by a Competitor, (x) Executive will provide copies of Section 10 of this Agreement to the Competitor, and (y) in the case of any circumstance described in (i) or (ii) above occurring during the Covered Time, and in the case of any circumstance described in (iii) above occurring during the Term or during the Covered Time, Executive will promptly provide notice to the Company of such circumstances. Executive further agrees that the Company may provide notice to a Competitor of Executive's obligations under this Agreement. For purposes of this Agreement, "Competitor" shall mean any entity (other than the Company) that engages, directly or indirectly, in the United States in any Competing Business.

(d) Executive understands that the restrictions in this Section 10.1 may limit his ability to earn a livelihood in a business similar to the business of the Company but nevertheless agrees and acknowledges that the consideration provided under this Agreement (including, without limitation, Sections 4, 5, and 7) is sufficient to justify such restrictions. In consideration thereof and in light of Executive's education, skills and abilities, Executive agrees that he will not assert in any forum that such restrictions prevent him from earning a living or otherwise should be held void or unenforceable.

(e) For purposes of this Section 10.1, "Covered Time" shall mean the period beginning on the date of termination of Executive's employment (the "Date of Termination") and ending twenty-four months after the Date of Termination; provided, however, that if Executive terminates his employment for Good Reason pursuant to clause (viii) of Section 6(e), "Covered Time" shall mean for purposes of

Section 10.1(a) the period beginning on the Date of Termination and ending six months after the Date of Termination.

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

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

10.4 Nondisparagement. Executive shall not, during the Term and thereafter, disparage in any material respect the Company, any affiliate of the Company, any of their respective businesses, any of their respective officers, directors or employees, or the reputation of any of the foregoing persons or entities. Notwithstanding the foregoing, nothing in this Agreement shall preclude

Executive from making truthful statements that are required by applicable law, regulation or legal process or are reasonably required to describe the conduct, decisions, or policies of the Company or any of its affiliates, or their respective businesses, officers, directors or employees.

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

10.6 Forfeiture of Outstanding Options. The provisions of Section 7 notwithstanding, if Executive willfully and materially fails to comply with any restrictive covenant under Section 10.1(a) (other than the first sentence thereof), 10.1(b), 10.2 (other than the first and penultimate sentences thereof), 10.3, 10.4, or 10.8, all options to purchase Common Stock granted by the Company and then held by Executive or a transferee of Executive shall be immediately forfeited and thereupon such options shall be cancelled. Notwithstanding the foregoing, Executive shall not forfeit any option (i) unless there shall have been delivered to him, within ninety (90) days after the Board (A) had knowledge of conduct or an event allegedly constituting grounds for such forfeiture and (B) had reason to believe that such conduct or event could be grounds for such forfeiture, a copy of a resolution duly adopted by the Board by a vote of Directors constituting a majority of the Board (excluding Executive) at a meeting of the Board in which a quorum is present and which is called and held for such purpose (after giving Executive reasonable notice specifying the nature of the grounds for such forfeiture and not less than 30 days to correct such grounds and affording Executive and his counsel the opportunity to be heard before the Board) finding that, in the good faith opinion of the Board, Executive has engaged and continues to engage in conduct set forth in this Section 10.6 which constitutes grounds for forfeiture of Executive's options; and (ii) if, within 30 days following his receipt of such resolution, Executive commences an arbitration proceeding in accordance with Section 18.2 disputing such grounds, in which case such forfeiture shall be tolled pending the resolution of Executive's claim and shall not occur if the arbitration panel finds that the Company is not entitled to cause the forfeiture.

If the arbitration panel finds that the Company is entitled to cause the forfeiture of Executive's options, Executive shall be required to forfeit such options immediately. If any option is exercised after delivery of the Board's notice of forfeiture and if such forfeiture subsequently occurs pursuant to the foregoing terms of this Section 10.6, Executive shall be required to return to the Company all shares acquired upon such exercise; provided further that if Executive has sold any shares he acquired upon such exercise, Executive shall pay to the Company an amount equal to the difference between the aggregate sale price of the shares sold and the aggregate exercise price paid by Executive for such shares. Any such forfeiture shall apply to such options notwithstanding any term or provision of any option agreement. If the Board or the arbitration panel finds that the Company is not entitled to cause a forfeiture for which a notice is given to Executive, the Company shall pay (or reimburse, if already paid by Executive) all expenses actually incurred by Executive in connection with such attempted forfeiture.

10.7 Enforcement. Executive acknowledges and agrees that, by virtue of his position, services and access to and use of confidential records and proprietary information, any violation by him of any of the undertakings contained in this Section 10 would cause the Company immediate, substantial and irreparable injury for which it has no adequate remedy at law. Accordingly, Executive agrees and consents to the entry of an injunction or other equitable relief by a court of competent jurisdiction restraining any violation or threatened violation of any undertaking contained in this Section 10. The Company agrees and consents to the entry of an injunction or other equitable relief by a court of competent jurisdiction restraining the Company from making any defamatory statements, whether orally or in writing, relating to alleged violations or threatened

violations by Executive of any undertaking contained in this Section 10. Executive and the Company each waive posting of any bond otherwise necessary to secure such injunction or other equitable relief. Rights and remedies provided for in this Section 10 are cumulative and shall be in addition to rights and remedies otherwise available to the parties hereunder or under any other agreement or applicable law. Subject to Section 18.3, the Company shall bear all costs and expenses arising in connection with any enforcement pursuant to this Section 10.7.

10.8 Cooperation with Regard to Litigation. Except to the extent that Executive has or intends to assert in good faith an interest or position adverse to or inconsistent with the interest or position of the Company, Executive agrees to cooperate reasonably with the Company, during the Term and thereafter (including following Executive's termination of employment for any reason), by making himself reasonably available to testify on behalf of the Company in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, and reasonably to assist the Company in any such action, suit, or proceeding, by providing information and meeting and consulting with the Board or its representatives or counsel, or representatives or counsel to the Company, in each case, as reasonably requested by the Company. The Company agrees to pay (or reimburse, if already paid by Executive) all expenses actually incurred in connection with Executive's cooperation and assistance including, without limitation, reasonable fees and disbursements of counsel, if any, chosen by Executive if Executive reasonably determines in good faith, on the advice of counsel, that it is appropriate that Executive be separately represented by his own counsel in such proceeding. Without limiting the foregoing, after the expiration of this Agreement or the termination of Executive's employment by the Company for any reason, such cooperation and assistance shall not require Executive to forgo or significantly interrupt any professional or personal commitment that he reasonably deems significant or to take any action (including, without limitation, travel to, attendance at or preparation for any meeting, deposition or other proceeding or event of any type) that, in his reasonable judgment, could impair his ability to perform the responsibilities of, or could jeopardize the continuation of, his then current employment, or would otherwise impose any undue burden on Executive.

10.9 Survival. The provisions of this Section 10 shall survive the termination of the Term and any termination or expiration of this Agreement.

10.10 Company. For purposes of this Section 10, references to the "Company" shall include both the Company and each subsidiary of the Company.

11. Insurance for the Company's Benefit. The Company may at any time and for the Company's own benefit (or for the benefit of a lender to the Company) apply for and take out life, health, accident or other insurance covering Executive, either independently or together with others, in any amount which the Company may deem to be in its best interests. The Company shall own all rights in such insurance and proceeds thereof and Executive shall not have any right, title or interest therein. Executive shall assist the Company at the Company's expense in obtaining and maintaining any such insurance by submitting to reasonable and customary medical examinations and preparing, signing and delivering such applications and other documents as reasonably may be required.

12. Indemnification. During the Term of this Agreement and all periods after the expiration of this Agreement or termination of Executive's employment for any reason, the Company shall indemnify Executive to the full extent permitted under the Company's Certificate of Incorporation or By-Laws and pursuant to any other agreements or policies in effect from time to time; provided, however, that Executive shall at all times have at least all rights to indemnification by the Company as are provided in the Company's Certificate of Incorporation or By-Laws or pursuant to other agreements in effect on or immediately prior to the Effective Date, and the Company shall also advance expenses for which indemnification may be ultimately claimed as such expenses are incurred to the fullest extent permitted under applicable law, subject to any requirement that Executive provide an undertaking to repay such

advances if it is ultimately determined that Executive is not entitled to indemnification; provided, however, that any determination required to be made with respect to whether Executive's conduct complies with the standards required to be met as a condition of indemnification or advancement of expenses under applicable law and the Company's Certificate of Incorporation, By-Laws, or other agreement, shall be made by independent counsel mutually acceptable to Executive and the Company (except to the extent otherwise required by law). After the Effective Date, the Company shall not amend its Certificate of Incorporation or By-Laws or any agreement in any manner which adversely affects the rights of Executive to indemnification thereunder. Any provision contained herein notwithstanding, this Agreement shall not limit or reduce, and the Company hereby agrees to provide to Executive, any and all rights to indemnification to the full extent permitted under applicable law. In addition, the Company will maintain directors' and officers' liability insurance in effect and covering acts and omissions of Executive during the Term and for a period of six years thereafter on terms substantially no less favorable than those in effect on the Effective Date. The indemnification rights made available to Executive pursuant to this Section 12 shall at all times be at least as favorable to Executive as the indemnification rights made available at such times to any other employee of the Company. For purposes of this Section 12, references to the "Company" shall include both the Company and each of its subsidiaries for which Executive has acted, acts or will in the future act in any capacity. The provisions of this Section 12 shall survive the termination of the Term and any termination or expiration of this Agreement.

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

To the Company:

Scientific Games Corporation
750 Lexington Avenue
25th Floor
New York, New York 10022
Attention: General Counsel

With a copy to:

Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, NY 10022
(212) 715-9100
Attention: Peter G. Smith, Esq.

To Executive:

A. Lorne Weil
51 East 90th Street
Penthouse B
New York, New York 10128

With a copy to:

Hogan & Hartson L.L.P.
885 Third Avenue
New York, New York 10022
Attention: Andrew J. Trubin, Esq.

If the parties by mutual written agreement supply each other with telecopier numbers for the purposes of providing notice by facsimile, such notice shall also be proper notice under this Agreement and shall be deemed given on the next business day after the date on which successful and complete transmission is confirmed by the receiving facsimile machine or otherwise confirmed in writing on behalf of the recipient. In the case of Federal Express or other similar overnight service, such notice or advice shall be effective on the next business day after it is sent, and, in the cases of certified or registered mail, shall be effective 5 days after deposit into the mails by delivery to the U.S. Postal Service.

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

15. Complete Understanding; Amendment; Waiver. This Agreement constitutes the complete understanding between the parties with respect to the employment of Executive and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof (including the Old Agreement), except as provided in Section 12, and no statement, representation, warranty or covenant has been made by either party with respect thereto except as expressly set forth herein. This Agreement shall not be modified, amended or terminated except by a written instrument signed by each of the parties. Any waiver of any term or provision hereof, or of the application of any such term or provision to any circumstances, shall be in writing signed by the party charged with giving such waiver. Waiver by either party of any breach hereunder by the other party shall not operate as a waiver of any other breach, whether similar to or different from the breach waived. No delay by either party in the exercise of any rights or remedies shall operate as a waiver thereof, and no single or partial exercise by either party of any such right or remedy shall preclude other or further exercise thereof.

16. Severability. If any provision of this Agreement or the application of any such provision to any person or circumstances shall be determined by any court of competent jurisdiction to be invalid or unenforceable to any extent, the remainder of this Agreement, or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid or unenforceable, shall not be affected thereby, and each provision hereof shall be enforced to the fullest extent permitted by law. If any provision of this Agreement, or any part thereof, is held to be invalid or unenforceable because of the scope or duration of or the area covered by such provision, the parties hereto agree that the court making such determination shall reduce the scope, duration and/or area of

such provision (and shall substitute appropriate provisions for any such invalid or unenforceable provisions) in order to make such provision enforceable to the fullest extent permitted by law and/or shall delete specific words and phrases, and such modified provision shall then be enforceable and shall be enforced. The parties hereto recognize that if, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants contained in this Agreement, then that invalid or unenforceable covenant contained in this Agreement shall be deemed eliminated from these provisions to the extent necessary to permit the remaining separate covenants to be enforced. In the event that any court determines that the time period or the area, or both, are unreasonable and that any of the covenants is to that extent invalid or unenforceable, the parties hereto agree that such covenants will remain in full force and effect, first, for the greatest time period, and second, in the greatest geographical area that would not render them unenforceable. To the extent that a court of competent jurisdiction determines that Executive willfully and materially breached Section 10.1(a) (other than the first sentence thereof), 10.1(b), 10.2 (other than the first and penultimate sentences thereof), 10.3, 10.4, or 10.8, the Company's obligations to make payments hereunder shall immediately be limited to the amounts, if any, remaining to be paid pursuant to Section 7(b) to the extent not theretofore paid, provided that the Company's obligations to make such greater payments shall immediately be reinstated in the event that the determination of such court is overturned or reversed by any higher court.

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

18. Governing Law; Arbitration; Expenses; Interest.

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

18.2 Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in New York, New York by three arbitrators in accordance with the rules of the American Arbitration Association in effect at the time of submission to arbitration; provided, however, that the Company shall be entitled to commence an action in any court of competent jurisdiction to enforce Section 10, in part or in its entirety . Judgment may be entered on the arbitrators' award in any court having jurisdiction. For purposes of entering such judgment or seeking enforcement of Section 10, the Company and Executive hereby consent to the jurisdiction of any or all of the following courts: (i) the United States District Court for the Southern District of New York; (ii) any of the courts of the State of New York or the State of Delaware; or (iii) any other court having jurisdiction. The Company and Executive further agree that any service of process or notice requirements in any such proceedings shall be satisfied if the rules of such court relating thereto have been substantially satisfied. The Company and Executive hereby waive, to the fullest extent permitted by applicable law, any objection which either may now or hereafter have to such jurisdiction and any defense of inconvenient forum. The Company and Executive hereby agree that a judgment upon an award rendered by the arbitrators may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Subject to Section 18.3, the Company shall bear all costs and expenses arising in connection with any arbitration proceeding pursuant to this Section 18.2. Notwithstanding any provision in this Section 18, Executive shall be entitled to seek in any court of competent jurisdiction specific performance of Executive's right (which is hereby acknowledged and agreed to by the Company) to be paid all compensation, benefits and other amounts required to be paid during the pendency of any dispute or controversy arising under or in connection with this Agreement, which, to the extent such amounts are paid by the Company (or, in the case of a termination of Executive's employment by the Company without Cause, are so paid in respect of periods commencing after 90 days following the date of such termination) shall be credited against

the total amounts otherwise finally determined to be owed to Executive pursuant to this Agreement.

18.3 Reimbursement of Expenses in Enforcing Rights. All reasonable costs and expenses (including, without limitation, reasonable fees and disbursements of counsel) incurred by Executive in seeking to interpret this Agreement or enforce rights pursuant to this Agreement shall be paid by the Company on behalf of Executive (or, if already paid by Executive, reimbursed to Executive by the Company) as such costs and expenses are incurred. If any claim of Executive is found to be frivolous by a final, nonappealable determination of the arbitration panel or court hearing the claim, Executive shall reimburse the Company within 30 days of such determination for all amounts paid by the Company under this Section 18.3 in connection with the claim.

18.4 Interest on Unpaid Amounts. Any amounts that have become payable pursuant to the terms of this Agreement or any decision by arbitrators or judgment by a court of law pursuant to this Agreement but which are not timely paid shall bear interest at the prime rate in effect at the time such payment first becomes payable, as quoted by the Company's principal bank.

19. Reimbursement of Expenses of Executive in Negotiating Agreement. All reasonable costs and expenses (including, without limitation, reasonable fees and disbursements of counsel) incurred by Executive in connection with the negotiation, preparation, execution, or delivery of this Agreement shall be paid on behalf of Executive (or, if already paid by Executive, reimbursed to Executive) promptly by the Company.

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

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

		SCIENTIFIC GAMES CORPORATION
		By:	Name: Title:
			A. Lorne Weil

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Exhibit 10.1

AMENDED AND RESTATED EMPLOYMENT AGREEMENT
Table of Contents
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
W I T N E S S E T H

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Exhibit 99.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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

(1): The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2): The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ A. LORNE WEIL A. Lorne Weil Chief Executive Officer August 14, 2002

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Exhibit 99.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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Exhibit 99.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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

(1): The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2): The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ DEWAYNE E. LAIRD DeWayne E. Laird Chief Financial Officer August 14, 2002

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Exhibit 99.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002