SCIENTIFIC GAMES CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

Form 10-Q

{Mark One}

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

For the quarterly period ended June 30, 2004
OR

[ ] 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 X No

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of August 6, 2004:

Class A Common Stock: 87,153,183

Class B Common Stock: None

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION
THREE MONTHS ENDED JUNE 30, 2004

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements:
	Balance Sheets as of December 31, 2003 and June 30, 2004	3
	Statements of Income for the Three Months Ended June 30, 2003 and 2004	4
	Statements of Income for the Six Months Ended June 30, 2003 and 2004	5
	Condensed Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2004	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	34
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Disclosure	35
Item 6.	Exhibits and Reports on Form 8-K	36

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

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

			December 31, 2003			June 30, 2004
ASSETS
Current assets:
	Cash and cash equivalents		$	79,373		100,806
	Accounts receivable, net of allowance for doubtful accounts of $4,589 and $4,154 at December 31, 2003 and June 30, 2004, respectively			99,639		87,141
	Inventories			26,896		30,905
	Prepaid expenses, deposits and other current assets			31,457		31,059

		Total current assets		237,365		249,911

Property and equipment, at cost				473,610		487,162
	Less accumulated depreciation			244,880		252,710

		Net property and equipment		228,730		234,452

Goodwill, net				308,355		303,772
Operating right, net				14,020		14,020
Other intangible assets, net				77,428		75,388
Other assets and investments				97,091		94,860

		Total assets	$	962,989		972,403

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current installments of long-term debt		$	6,327		7,602
	Accounts payable			34,603		32,552
	Accrued liabilities			117,493		85,153

		Total current liabilities		158,423		125,307

Deferred income taxes				4,595		3,465
Other long-term liabilities				36,983		40,705
Long-term debt, excluding current installments				525,836		523,290

		Total liabilities		725,837		692,767

Commitments and contingencies				—		—
Stockholders' equity:
	Series A convertible preferred stock, par value $1.00 per share, 1,600 shares authorized, 1,325 shares outstanding at December 31, 2003 and June 30, 2004			1,325		1,325
	Series B preferred stock, par value $1.00 per share, 2 shares authorized, 1.238 shares outstanding at December 31, 2003 and June 30, 2004			1		1
	Class A common stock, par value $0.01 per share, 199,300 shares authorized, 61,504 and 63,305 shares outstanding at December 31, 2003 and June 30, 2004, respectively			615		633
	Class B non-voting common stock, par value $0.01 per share, 700 shares authorized, none outstanding			—		—
	Additional paid-in capital			405,957		412,376
	Accumulated losses			(169,649	)	(133,684	)
	Treasury stock, at cost			(6,743	)	(9,262	)
	Accumulated other comprehensive income			5,646		8,247

		Total stockholders' equity		237,152		279,636

		Total liabilities and stockholders' equity	$	962,989		972,403

See accompanying notes to consolidated financial statements.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, 2003 and 2004
(Unaudited, in thousands, except per share amounts)

		2003		2004
Operating revenues:
	Services	$	110,130	147,570
	Sales		18,719	30,542

			128,849	178,112

Operating expenses (exclusive of depreciation and amortization shown below):
	Services		59,886	77,644
	Sales		12,531	20,755
	Amortization of service contract software		1,344	1,597

			73,761	99,996

Total gross profit			55,088	78,116
Selling, general and administrative expenses			19,369	28,427
Depreciation and amortization			9,847	13,806

Operating income			25,872	35,883

Other deductions (income):
	Interest expense		6,172	7,807
	Other (income) expense		72	(384	)

			6,244	7,423

Income before income tax expense			19,628	28,460
Income tax expense			7,058	8,952

Net income			12,570	19,508
Convertible preferred stock dividend			1,895	1,982

Net income available to common stockholders		$	10,675	17,526

Basic and diluted net income per share (See Note 1):
	Basic net income available to common stockholders	$	0.18	0.28

	Diluted net income available to common stockholders	$	0.14	0.21

Weighted average number of shares used in per share calculations:
	Basic shares		59,868	63,153

	Diluted shares		89,228	90,757

See accompanying notes to consolidated financial statements.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, 2003 and 2004
(Unaudited, in thousands, except per share amounts)

		2003			2004
Operating revenues:
	Services	$	215,397		289,203
	Sales		36,670		74,374

			252,067		363,577

Operating expenses (exclusive of depreciation and amortization shown below):
	Services		117,514		153,529
	Sales		24,938		51,411
	Amortization of service contract software		2,611		3,031

			145,063		207,971

Total gross profit			107,004		155,606
Selling, general and administrative expenses			37,711		54,347
Depreciation and amortization			19,628		27,566

Operating income			49,665		73,693

Other deductions (income):
	Interest expense		12,404		15,197
	Other (income) expense		(32	)	224

			12,372		15,421

Income before income tax expense			37,293		58,272
Income tax expense			13,402		18,343

Net income			23,891		39,929
Convertible preferred stock dividend			3,742		3,964

Net income available to common stockholders		$	20,149		35,965

Basic and diluted net income per share (See Note 1):
	Basic net income available to common stockholders	$	0.34		0.58

	Diluted net income available to common stockholders	$	0.27		0.44

Weighted average number of shares used in per share calculations:
	Basic shares		59,660		62,548

	Diluted shares		88,386		90,384

See accompanying notes to consolidated financial statements.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2003 and 2004
(Unaudited, in thousands)

				2003			2004
Cash flows from operating activities:
	Net income			$	23,891		39,929

	Adjustments to reconcile net income to cash provided by operating activities:
		Depreciation and amortization			22,239		30,597
		Change in deferred income taxes			10,095		5,205
		Changes in operating assets and liabilities, net of effects of business acquisitions			(8,596	)	(21,337	)
		Other			1,274		1,052

			Total adjustments		25,012		15,517

Net cash provided by operating activities					48,903		55,446

Cash flows from investing activities:
	Capital expenditures				(5,543	)	(10,573	)
	Wagering systems expenditures				(4,756	)	(21,139	)
	Business acquisition, net of cash acquired				(20,760	)	(1,709	)
	Increase in other assets and liabilities, net				(9,481	)	(836	)

Net cash used in investing activities					(40,540	)	(34,257	)

Cash flows from financing activities:
	Net payments on long-term debt				(3,761	)	(1,231	)
	Proceeds from the issuance of common stock				1,157		3,828
	Preferred stock cash dividends				—		(3,964	)

Net cash used in financing activities					(2,604	)	(1,367	)

Effect of exchange rate changes on cash and cash equivalents					434		1,611

Increase in cash and cash equivalents					6,193		21,433
Cash and cash equivalents, beginning of period					34,929		79,373

Cash and cash equivalents, end of period				$	41,122		100,806

Supplemental disclosure of cash flow information:
	Cash paid during the period for:
		Interest		$	11,796		15,153

		Income taxes, net of refunds		$	2,283		17,831

	Non-cash financing activity during the period:
		Convertible preferred stock paid-in-kind dividends		$	3,742		—

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, 2004, the consolidated statements of income for the three and six months ended June 30, 2003 and 2004, and the consolidated condensed 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 consolidated financial position of the Company at June 30, 2004 and the results of its operations for the three and six months ended June 30, 2003 and 2004 and its cash flows for the six months ended June 30, 2003 and 2004 have been made.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2003 Annual Report on Form 10-K. The results of operations for the periods ended June 30, 2004 are not necessarily indicative of the operating results for the full year.

Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current presentation.

Basic and Diluted Net Income Per Share

The following represents a reconciliation of the numerator and denominator used in computing basic and diluted net income per share available to common stockholders for the three and six months ended June 30, 2003 and 2004:

	Three Months Ended June 30,			Six Months Ended June 30,
	2003		2004	2003	2004
Income (numerator)
Net income available to common stockholders (basic)	$	10,675	17,526	20,149	35,965
Add back preferred stock dividend		1,895	1,982	3,742	3,964

Income before preferred dividend available to common stockholders (diluted)	$	12,570	19,508	23,891	39,929

Shares (denominator)
Basic weighted average common shares outstanding		59,868	63,153	59,660	62,548
Effect of dilutive securities-stock options, warrants, convertible preferred shares and deferred shares		29,360	27,604	28,726	27,836

Diluted weighted average common shares outstanding		89,228	90,757	88,386	90,384

Basic and diluted per share amounts
Basic net income per share available to common stockholders	$	0.18	0.28	0.34	0.58

Diluted net income per share available to common stockholders	$	0.14	0.21	0.27	0.44

At June 30, 2003 and 2004, the Company had outstanding stock options, warrants, Performance Accelerated Restricted Stock Units and Series A Convertible Preferred Stock, which could potentially dilute basic earnings per share in the future. (See Notes 12 and 13 to the Consolidated Financial Statements for the year ended December 31, 2003 in the Company's 2003 Annual Report on Form 10-K.) In August 2004, the holders of all of the outstanding preferred shares of the Company were issued an aggregate of 23,832 shares of Class A common stock in connection with their conversion of the 1,325 shares of Series A Convertible Preferred Stock they then held. The 23,832 newly issued shares of Class A common stock represent approximately 27% of the shares of the Company's common stock outstanding after the conversion and are already reflected in the Company's reported diluted net income per share and similar information.

Stock-Based Compensation

The Company has chosen to continue to account for stock-based compensation using the intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25. Accordingly, no stock compensation expense has been recognized for a substantial majority of its stock-based compensation plans. Had the Company elected to recognize compensation cost based on the fair value of the stock options at the date of grant under SFAS 123, as amended by SFAS 148, such costs would have been recognized ratably over the vesting period of the underlying instruments and the Company's net income and net income per share would have changed to the pro forma amounts indicated in the table below:

		Three Months Ended June 30,					Six Months Ended June 30,
		2003			2004		2003		2004
Net income available to common stockholders as reported		$	10,675		17,526		20,149		35,965
Add: Stock-based compensation expense included in reported net income, net of related tax effects			—		47		—		94
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(999	)	(1,314	)	(1,882	)	(2,508	)

Pro forma net income available to common stockholders		$	9,676		16,259		18,267		33,551

Net income available to common stockholders per basic share:
	As reported	$	0.18		0.28		0.34		0.58

	Pro forma	$	0.16		0.26		0.31		0.55

Net income available to common stockholders per diluted share:
As reported		$	0.14		0.21		0.27		0.43

Pro forma		$	0.13		0.20		0.26		0.42

(2) Acquisitions

On November 6, 2003, the Company acquired IGT OnLine Entertainment Systems, Inc. from International Game Technology (NYSE: IGT) for $143,000 in cash plus expenses and a $10,244 working capital adjustment payment. Upon consummation of the acquisition, the Company changed the name of IGT OnLine Entertainment Systems, Inc. to Scientific Games Online Entertainment Systems, Inc ("OES"). The results of OES have been included in the Company's results of operations from the date of acquisition. OES had annual revenues of approximately $148,818 during its most recent fiscal year ended September 27, 2003 which were reported in the Company's Form 8-K filed on February 4, 2004.

The acquisition of OES strengthens the Company's presence in the lottery industry, expands the Company's geographic presence, broadens its lottery product offerings and accelerates its entrance into

the video lottery systems business. As a result of the acquisition, the Company has contracts to operate online lottery systems in 16 states and throughout the Caribbean, in addition to supporting systems that OES delivered to customers in Korea, Norway, Switzerland and Shanghai. The acquisition also included OES's Advanced Gaming System (AGS) video system contracts in six jurisdictions throughout the world, certain intellectual property and an exclusive license to specific IGT slot brands for both instant and online games. The Company is in the process of allocating the purchase price of OES, including performing a thorough analysis to estimate the fair value of the assets acquired and liabilities assumed, and it expects that a majority of the excess will be allocated to goodwill. Goodwill from the acquisition of OES will be deductible for tax purposes.

The following table presents unaudited pro forma results of operations for the three and six months ended June 30, 2003 as if the acquisition of OES had occurred at the beginning of the periods presented, rather than on the acquisition date of November 6, 2003. These pro forma results have been prepared for comparative purposes and do not purport to be indicative of what would have occurred had the acquisition been consummated on January 1, 2003, or the results that may occur in the future.

	Three Months Ended June 30, 2003		Six Months Ended June 30, 2003
	(unaudited)		(unaudited)
Operating revenues	$	164,598	326,377
Operating income		30,900	61,328
Income before income tax expense		23,197	45,063
Net income		14,770	28,670
Convertible preferred stock dividend		1,895	3,742

Net income available to common stockholders	$	12,875	24,928

Basic net income per share available to common stockholders	$	0.22	0.42

Diluted net income per share available to common stockholders	$	0.17	0.32

(3) Business Segments

The following tables represent revenues, profits, depreciation, amortization, and capital expenditures for the three and six months ended June 30, 2003 and 2004, and assets at June 30, 2003

and 2004, by business segment. Corporate expenses, interest expense and other (income) deductions are not allocated to business segments.

	Three Months Ended June 30, 2003
	Lottery Group		Pari-Mutuel Group	Venue Management Group	Telecom- munications Products Group	Totals
Service revenues	$	72,530	20,775	16,825	—		110,130
Sales revenues		5,511	776	—	12,432		18,719

Total revenues		78,041	21,551	16,825	12,432		128,849

Cost of service		36,970	11,250	11,666	—		59,886
Cost of sales		3,833	469	—	8,229		12,531
Amortization of service contract software		749	595	—	—		1,344

Total operating expenses		41,552	12,314	11,666	8,229		73,761

Gross profit		36,489	9,237	5,159	4,203		55,088
Selling, general and administrative expenses		9,071	3,140	847	1,177		14,235
Depreciation and amortization		5,733	2,793	514	631		9,671

Segment operating income	$	21,685	3,304	3,798	2,395		31,182

Unallocated corporate expense							5,310

Consolidated operating income						$	25,872

Capital and wagering systems expenditures	$	4,046	1,879	311	688		6,924

	Three Months Ended June 30, 2004
	Lottery Group		Pari-Mutuel Group	Venue Management Group	Telecom- munications Products Group	Totals
Service revenues	$	109,740	21,307	16,523	—		147,570
Sales revenues		15,797	1,778	—	12,967		30,542

Total revenues		125,537	23,085	16,523	12,967		178,112

Cost of service		54,745	10,871	12,028	—		77,644
Cost of sales		9,798	1,024	—	9,933		20,755
Amortization of service contract software		853	744	—	—		1,597

Total operating expenses		65,396	12,639	12,028	9,933		99,996

Gross profit		60,141	10,446	4,495	3,034		78,116
Selling, general and administrative expenses		16,165	1,969	1,194	1,435		20,763
Depreciation and amortization		9,893	2,489	507	705		13,594

Segment operating income	$	34,083	5,988	2,794	894		43,759

Unallocated corporate expense							7,876

Consolidated operating income						$	35,883

Capital and wagering systems expenditures	$	9,976	1,974	326	148		12,424

	Six Months Ended June 30, 2003
	Lottery Group		Pari-Mutuel Group	Venue Management Group	Telecom- munications Products Group	Totals
Service revenues	$	143,494	39,705	32,198	—		215,397
Sales revenues		11,558	2,816	—	22,296		36,670

Total revenues		155,052	42,521	32,198	22,296		252,067

Cost of service		73,301	21,998	22,215	—		117,514
Cost of sales		8,318	1,722	—	14,898		24,938
Amortization of service contract software		1,410	1,201	—	—		2,611

Total operating expenses		83,029	24,921	22,215	14,898		145,063

Gross profit		72,023	17,600	9,983	7,398		107,004
Selling, general and administrative expenses		18,304	5,372	1,749	2,391		27,816
Depreciation and amortization		11,406	5,562	1,017	1,278		19,263

Segment operating income	$	42,313	6,666	7,217	3,729		59,925

Unallocated corporate expense							10,260

Consolidated operating income						$	49,665

Assets at June 30, 2003	$	337,449	282,417	35,663	40,279		695,808

Capital and wagering systems expenditures	$	5,768	2,935	610	986		10,299

	Six Months Ended June 30, 2004
	Lottery Group		Pari-Mutuel Group	Venue Management Group	Telecom- munications Products Group	Totals
Service revenues	$	217,034	40,350	31,819	—		289,203
Sales revenues		45,362	2,467	—	26,545		74,374

Total revenues		262,396	42,817	31,819	26,545		363,577

Cost of service		109,755	20,865	22,909	—		153,529
Cost of sales		30,045	1,433	—	19,933		51,411
Amortization of service contract software		1,646	1,385	—	—		3,031

Total operating expenses		141,446	23,683	22,909	19,933		207,971

Gross profit		120,950	19,134	8,910	6,612		155,606
Selling, general and administrative expenses		32,727	3,808	2,198	2,917		41,650
Depreciation and amortization		19,400	5,309	997	1,438		27,144

Segment operating income	$	68,823	10,017	5,715	2,257		86,812

Unallocated corporate expense							13,119

Consolidated operating income						$	73,693

Assets at June 30, 2004	$	567,715	324,967	34,403	45,318		972,403

Capital and wagering systems expenditures	$	24,437	6,307	662	306		31,712

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2004		2003		2004
Reportable consolidated operating income	$	25,872	35,883		49,665		73,693
Interest expense		6,172	7,807		12,404		15,197
Other (income) expense		72	(384	)	(32	)	224

Income before income tax expense	$	19,628	28,460		37,293		58,272

(4) Income Tax Expense

The effective income tax rate for the three and six months ended June 30, 2004 of 31.5% differed from the federal statutory rate of 35% due primarily to benefits from the realization of foreign tax credits and the implementation of the extra-territorial income exclusion regime. The effective income tax rate for the three and six months ended June 30, 2003 was approximately 36%, which differed from the federal statutory rate of 35% due primarily to foreign and state income taxes.

(5) Comprehensive Income

The following presents a reconciliation of net income to comprehensive income for the three and six month periods ended June 30, 2003 and 2004:

		Three Months Ended June 30,					Six Months Ended June 30,
		2003			2004		2003		2004
Net income		$	12,570		19,508		23,891		39,929
Other comprehensive income (loss):
	Foreign currency translation		2,381		(617	)	2,308		767
	Unrealized gain on investments		7		715		876		727
	Unrealized gain (loss) on Canadian dollar hedges		(2,325	)	—		(3,806	)	1,107

	Other comprehensive income (loss)		63		98		(622	)	2,601

Comprehensive income		$	12,633		19,606		23,269		42,530

(6) Inventories

Inventories consist of the following:

	December 31, 2003		June 30, 2004
Parts and work-in-process	$	17,990	19,614
Finished goods		8,906	11,291

	$	26,896	30,905

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.

(7) Accrued Liabilities

Accrued liabilities consist of the following:

	December 31, 2003		June 30, 2004
Compensation and benefits	$	30,364	24,837
Accrued acquisition costs		11,037	8,596
Accrued contract costs		19,985	8,807
Deferred revenue		7,720	6,629
Other		48,387	36,284

	$	117,493	85,153

(8) Debt

At June 30, 2004, the Company had approximately $19,532 available for borrowing under the Company's revolving credit facility, which was entered into on November 6, 2003 as part of the Company's senior secured credit facility (as amended and restated, the "2003 Facility"). There were no borrowings outstanding under the revolving credit facility, but approximately $55,468 in letters of credit were issued and outstanding at June 30, 2004. At December 31, 2003, the Company's available

borrowing capacity under the revolving credit facility was $27,146. At June 30, 2004, there were $460,511 in outstanding Term C Loans under the 2003 Facility.

The Company entered into two amendments to the 2003 Facility in the second quarter of 2004. The first amendment gave the Company the ability to incur up to $300,000 of new convertible indebtedness, provided that such indebtedness was subordinated to the 2003 Facility and that the proceeds of such convertible subordinated indebtedness were used to reduce outstanding Term C Loans. The primary purpose of the second amendment (the "Second Amendment") was to support the Company's reorganization of its international operations. The Second Amendment permits the transfer of ownership or disposition of certain assets and subsidiaries of the Company to other subsidiaries of the Company which would otherwise have been limited by the credit agreement governing the 2003 Facility (as amended and restated, the "Amended Credit Agreement"). The Second Amendment made certain other changes to the 2003 Facility, including a reduction to the interest rate charged on Term C Loans by converting the $460,511 outstanding principal balance of Term C Loans into new term loans (the "Term D Loans") effective July 2, 2004. The Term D Loans contain the same terms and conditions as the Term C Loans except for a 0.25% reduction in the Applicable Margins (as defined in the Amended Credit Agreement) and a pricing grid that provides for a further 0.25% rate reduction should the Consolidated Senior Debt Ratio (as defined in the Amended Credit Agreement) be less than 1.75.

At June 30, 2004, $65,584 of the Company's 12¹/2% senior subordinated notes (the "Notes") was outstanding.

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

The following disclosure presents certain information regarding the Company's acquired intangible assets as of December 31, 2003 and June 30, 2004. Amortizable intangible assets are being amortized over their estimated useful lives, as indicated below, with no estimated residual values.

Intangible Assets		Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization	Net Balance
Balance at December 31, 2003
Amortizable intangible assets:
	Patents	15	$	3,139	291	2,848
	Customer lists	14		15,375	5,984	9,391
	Customer service contracts	15		3,781	1,280	2,501
	Licenses	1-15		3,928	1,136	2,792
	Lottery contracts	1-7.5		31,000	1,186	29,814

				57,223	9,877	47,346

Non-amortizable intangible assets:
	Tradename			32,200	2,118	30,082
	Connecticut off-track betting system operating right			22,339	8,319	14,020

				54,539	10,437	44,102

Total intangible assets			$	111,762	20,314	91,448

Balance at June 30, 2004
Amortizable intangible assets:
	Patents	15	$	3,794	394	3,400
	Customer lists	14		15,375	6,933	8,442
	Customer service contracts	15		3,719	1,403	2,316
	Licenses	1-15		6,101	2,113	3,988
	Lottery contracts	1-7.5		31,802	4,642	27,160

				60,791	15,485	45,306

Non-amortizable intangible assets:
	Tradename			32,200	2,118	30,082
	Connecticut off-track betting system operating right			22,339	8,319	14,020

				54,539	10,437	44,102

Total intangible assets			$	115,330	25,922	89,408

The aggregate intangible amortization expense for the six month periods ended June 30, 2003 and 2004 was approximately $1,091 and $5,608, respectively.

The table below reconciles the change in the carrying amount of goodwill, by reporting unit, which is the same as business segment, for the period from January 1, 2004 to June 30, 2004. In 2004, the Company recorded (a) a $1,190 increase in goodwill in connection with an earnout payment pursuant to the SERCHI purchase agreement and (b) a $5,773 decrease in the OES goodwill which is primarily attributable to a contract termination payment received by the Company from a third party.

Goodwill		Lottery Group			Pari-Mutuel Group	Venue Management Group	Telecom- munications Products Group	Totals
Balance at December 31, 2003		$	307,868		487	—	—	308,355
Adjustments:
	SERCHI earnout payment		1,190		—	—	—	1,190
	Adjustments to OES goodwill		(5,773	)	—	—	—	(5,773	)

Balance at June 30, 2004		$	303,285		487	—	—	303,772

(10) Pension Plans

The Company has two funded defined benefit pension plans. It has a defined benefit plan for its U.S. based union employees. Retirement benefits under this plan are based upon the number of years of credited service up to a maximum of 30 years for the majority of the employees. It also has a defined benefit plan for U.K. based employees. Retirement benefits under the U.K. plan are based on an employee's average compensation over the two years preceding retirement. The Company's policy is to fund the minimum contribution permissible by the respective regulatory authorities.

In connection with its U.S. based collective bargaining agreements, the Company participates with other companies in a defined benefit pension plan covering union employees. The Company expects to make payments to the multi-employer plan of approximately $250 during the year ending December 31, 2004.

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

The Company also has an unfunded, nonqualified Supplemental Executive Retirement Plan (the "SERP"), which is intended to provide supplemental retirement benefits for certain senior executives of the Company. The SERP provides for retirement benefits according to a formula based on each participant's compensation and years of service with the Company.

The following table sets forth the combined amount of net periodic benefit cost recognized for the six month periods ended June 30, 2003 and 2004:

	Three Months Ended June 30,					Six Months Ended June 30,
	2003			2004		2003		2004
Components of net periodic pension benefit cost:
Service cost	$	569		1,026		1,138		1,701
Interest cost		512		641		1,024		1,282
Expected return on plan assets		(371	)	(448	)	(741	)	(896	)
Actuarial loss		185		295		369		590
Net amortization and deferral		14		13		27		27
Amortization of prior service costs		133		192		266		384

Net periodic cost	$	1,042		1,719		2,083		3,088

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

The Company conducts substantially all of its business through its domestic and foreign subsidiaries. The Notes and the 2003 Facility are fully, unconditionally and jointly and severally guaranteed by substantially all of the Company's wholly owned domestic subsidiaries (the "Guarantor Subsidiaries").

Presented below is condensed consolidating financial information for (i) Scientific Games Corporation (the "Parent Company"), which includes the activities of Scientific Games Management Corporation, (ii) the Guarantor Subsidiaries and (iii) the wholly owned foreign subsidiaries and the non-wholly owned domestic and foreign subsidiaries (the "Non-Guarantor Subsidiaries") as of December 31, 2003 and June 30, 2004 and for the three and six months ended June 30, 2003 and 2004. 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 and the 2003 Facility 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. Corporate interest and administrative expenses have not been allocated to the subsidiaries.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2003
(unaudited, in thousands)

			Parent Company			Guarantor Subsidiaries		Non-Guarantor Subsidiaries	Eliminating Entries		Consolidated
ASSETS
	Cash and cash equivalents		$	67,618		(4,473	)	16,228	—		79,373
	Accounts receivable, net			—		77,670		22,008	(39	)	99,639
	Inventories			—		19,716		7,788	(608	)	26,896
	Other current assets			4,686		17,005		9,736	30		31,457
	Property and equipment, net			3,135		171,692		54,534	(631	)	228,730
	Investment in subsidiaries			469,385		184,313		—	(653,698	)	—
	Goodwill			183		304,117		4,055	—		308,355
	Intangible assets			—		86,982		4,466	—		91,448
	Other assets			47,159		49,293		8,940	(8,301	)	97,091

		Total assets	$	592,166		906,315		127,755	(663,247	)	962,989

LIABILITIES AND STOCKHOLDERS' EQUITY
	Current installments of long-term debt		$	5,015		654		658	—		6,327
	Current liabilities			15,615		110,158		25,370	953		152,096
	Long-term debt, excluding current installments			525,664		—		172	—		525,836
	Other non-current liabilities			(3,844	)	31,633		13,689	100		41,578
	Intercompany balances			(203,592	)	189,865		15,524	(1,797	)	—
	Stockholders' equity			253,308		574,005		72,342	(662,503	)	237,152

		Total liabilities and stockholders' equity	$	592,166		906,315		127,755	(663,247	)	962,989

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2004
(unaudited, in thousands)

			Parent Company			Guarantor Subsidiaries	Non-Guarantor Subsidiaries	Eliminating Entries		Consolidated
ASSETS
	Cash and cash equivalents		$	78,191		441	22,174	—		100,806
	Accounts receivable, net			—		63,017	24,163	(39	)	87,141
	Inventories			—		21,962	9,551	(608	)	30,905
	Other current assets			4,246		16,061	10,722	30		31,059
	Property and equipment, net			2,910		176,325	55,848	(631	)	234,452
	Investment in subsidiaries			549,195		186,022	—	(735,217	)	—
	Goodwill			183		298,344	5,245	—		303,772
	Intangible assets			—		85,853	3,555	—		89,408
	Other assets			40,837		54,210	8,074	(8,261	)	94,860

		Total assets	$	675,562		902,235	139,332	(744,726	)	972,403

LIABILITIES AND STOCKHOLDERS' EQUITY
	Current installments of long-term debt		$	4,940		—	2,662	—		7,602
	Current liabilities			3,140		85,223	28,268	1,074		117,705
	Long-term debt, excluding current installments			523,220		—	70	—		523,290
	Other non-current liabilities			(1,562	)	32,239	13,391	102		44,170
	Intercompany balances			(149,968	)	133,643	18,243	(1,918	)	—
	Stockholders' equity			295,792		651,130	76,698	(743,984	)	279,636

		Total liabilities and stockholders' equity	$	675,562		902,235	139,332	(744,726	)	972,403

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF INCOME
Three Months Ended June 30, 2003
(unaudited, in thousands)

		Parent Company			Guarantor Subsidiaries		Non-Guarantor Subsidiaries	Eliminating Entries		Consolidated
Operating revenues		$	—		97,387		33,126	(1,664	)	128,849
Operating expenses			—		52,000		22,018	(1,601	)	72,417
Amortization of service contract software			—		1,245		99	—		1,344

	Gross profit		—		44,142		11,009	(63	)	55,088
Selling, general and administrative expenses			5,284		10,637		3,451	(3	)	19,369
Depreciation and amortization			176		7,500		2,171	—		9,847

	Operating income (loss)		(5,460	)	26,005		5,387	(60	)	25,872
Interest expense			6,031		181		1,054	(1,094	)	6,172
Other (income) expense			87		(1,757	)	650	1,092		72

Income (loss) before equity in income of subsidiaries, and income taxes			(11,578	)	27,581		3,683	(58	)	19,628
Equity in income of subsidiaries			30,287		—		—	(30,287	)	—
Income tax expense			6,139		117		802	—		7,058

Net income		$	12,570		27,464		2,881	(30,345	)	12,570

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF INCOME
Three Months Ended June 30, 2004
(unaudited, in thousands)

		Parent Company			Guarantor Subsidiaries		Non-Guarantor Subsidiaries	Eliminating Entries		Consolidated
Operating revenues		$	—		144,597		41,330	(7,815	)	178,112
Operating expenses			—		79,144		27,087	(7,832	)	98,399
Amortization of service contract software			—		1,497		100	—		1,597

	Gross profit		—		63,956		14,143	17		78,116
Selling, general and administrative expenses			7,664		16,164		4,602	(3	)	28,427
Depreciation and amortization			212		11,080		2,514	—		13,806

	Operating income (loss)		(7,876	)	36,712		7,027	20		35,883
Interest expense			7,420		296		1,243	(1,152	)	7,807
Other (income) expense			(277	)	(1,588	)	327	1,154		(384	)

Income (loss) before equity in income of subsidiaries, and income taxes			(15,019	)	38,004		5,457	18		28,460
Equity in income of subsidiaries			40,324		—		—	(40,324	)	—
Income tax expense			5,797		1,126		2,029	—		8,952

Net income		$	19,508		36,878		3,428	(40,306	)	19,508

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF INCOME
Six Months Ended June 30, 2003
(unaudited, in thousands)

		Parent Company			Guarantor Subsidiaries		Non-Guarantor Subsidiaries	Eliminating Entries		Consolidated
Operating revenues		$	—		194,654		60,226	(2,813	)	252,067
Operating expenses			—		104,889		40,322	(2,759	)	142,452
Amortization of service contract software			—		2,412		199	—		2,611

	Gross profit		—		87,353		19,705	(54	)	107,004
Selling, general and administrative expenses			10,045		20,989		6,683	(6	)	37,711
Depreciation and amortization			365		14,978		4,285	—		19,628

	Operating income (loss)		(10,410	)	51,386		8,737	(48	)	49,665
Interest expense			12,108		332		2,148	(2,184	)	12,404
Other (income) expense			(102	)	(3,095	)	998	2,167		(32	)

Income (loss) before equity in income of subsidiaries, and income taxes			(22,416	)	54,149		5,591	(31	)	37,293
Equity in income of subsidiaries			58,034		—		—	(58,034	)	—
Income tax expense			11,727		204		1,471	—		13,402

Net income		$	23,891		53,945		4,120	(58,065	)	23,891

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF INCOME
Six Months Ended June 30, 2004
(unaudited, in thousands)

		Parent Company			Guarantor Subsidiaries		Non-Guarantor Subsidiaries	Eliminating Entries		Consolidated
Operating revenues		$	—		298,499		75,170	(10,092	)	363,577
Operating expenses			—		164,410		50,656	(10,126	)	204,940
Amortization of service contract software			—		2,832		199	—		3,031

	Gross profit		—		131,257		24,315	34		155,606
Selling, general and administrative expenses			12,697		33,009		8,647	(6	)	54,347
Depreciation and amortization			422		22,179		4,965	—		27,566

	Operating income (loss)		(13,119	)	76,069		10,703	40		73,693
Interest expense			14,574		515		2,382	(2,274	)	15,197
Other (income) expense			(552	)	(2,947	)	1,447	2,276		224

Income (loss) before equity in income of subsidiaries, and income taxes			(27,141	)	78,501		6,874	38		58,272
Equity in income of subsidiaries			79,825		—		—	(79,825	)	—
Income tax expense			12,755		3,049		2,539	—		18,343

Net income		$	39,929		75,452		4,335	(79,787	)	39,929

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2003
(unaudited, in thousands)

		Parent Company			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries		Consolidated
Net income		$	23,891		53,945		4,120		(58,065	)	23,891
	Depreciation and amortization		365		17,390		4,484		—		22,239
	Equity in income of subsidiaries		(58,034	)	—		—		58,034		—
	Changes in operating assets and liabilities		464		(9,318	)	663		(405	)	(8,596	)
	Deferred Income taxes		10,721		(792	)	166		—		10,095
	Other non-cash adjustments		1,134		160		(20	)	—		1,274

Net cash provided by (used in) operating activities			(21,459	)	61,385		9,413		(436	)	48,903
Cash flows from investing activities:
	Capital and wagering systems expenditures		(60	)	(1,255	)	(8,984	)	—		(10,299	)
	Business acquisition, net of cash acquired		—		(20,744	)	(16	)	—		(20,760	)
	Other assets and investments		(1,367	)	(9,653	)	1,530		9		(9,481	)

Net cash used in investing activities			(1,427	)	(31,652	)	(7,470	)	9		(40,540	)

Cash flows from financing activities:
	Payments on long-term debt		(3,331	)	(204	)	(226	)	—		(3,761	)
	Proceeds from stock issue		1,157		—		50		(50	)	1,157
	Other, principally intercompany balances		30,602		(30,066	)	(1,013	)	477		—

Net cash provided by (used in) financing activities			28,428		(30,270	)	(1,189	)	427		(2,604	)

Effect of exchange rate changes on cash			(67	)	(131	)	632		—		434

Increase (decrease) in cash and cash equivalents			5,475		(668	)	1,386		—		6,193
Cash and cash equivalents, beginning of period			25,323		180		9,426		—		34,929

Cash and cash equivalents, end of period		$	30,798		(488	)	10,812		—		41,122

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2004
(unaudited, in thousands)

		Parent Company			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries		Consolidated
Net income		$	39,929		75,452		4,335		(79,787	)	39,929
	Depreciation and amortization		422		25,011		5,164		—		30,597
	Equity in income of subsidiaries		(79,825	)	—		—		79,825		—
	Changes in operating assets and liabilities		(8,980	)	(10,495	)	(2,070	)	208		(21,337	)
	Deferred Income taxes		6,221		(791	)	(225	)	—		5,205
	Other non-cash adjustments		1,135		(106	)	23		—		1,052

Net cash provided by (used in) operating activities			(41,098	)	89,071		7,227		246		55,446

Cash flows from investing activities:
	Capital and wagering systems expenditures		(53	)	(26,152	)	(5,507	)	—		(31,712	)
	Business acquisition, net of cash acquired		—		(1,709	)	—		—		(1,709	)
	Other assets and investments		(29	)	(1,002	)	(1,476	)	1,671		(836	)

Net cash used in investing activities			(82	)	(28,863	)	(6,983	)	1,671		(34,257	)

Cash flows from financing activities:
	Payments on long-term debt		(2,519	)	(654	)	1,942		—		(1,231	)
	Proceeds from stock issue		3,828		1,709		—		(1,709	)	3,828
	Preferred stock cash dividends		(3,964	)	—		—		—		(3,964	)
	Other, principally intercompany balances		53,485		(56,327	)	3,050		(208	)	—

Net cash provided by (used in) financing activities			50,830		(55,272	)	4,992		(1,917	)	(1,367	)

Effect of exchange rate changes on cash			923		(22	)	710		—		1,611

Increase (decrease) in cash and cash equivalents			10,573		4,914		5,946		—		21,433
Cash and cash equivalents, beginning of period			67,618		(4,473	)	16,228		—		79,373

Cash and cash equivalents, end of period		$	78,191		441		22,174		—		100,806

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR
THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2004

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

Background

The following discussion addresses our financial condition as of June 30, 2004 and the results of our operations for the three months and six months ended June 30, 2004, compared to the corresponding periods in the prior year. This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2003, included in our 2003 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 online lottery games, point-of-sale terminal hardware sales, central site computers and communication hardware sales, and ongoing support and maintenance services for these products. This business also includes software and hardware and support services for sports betting and operation of credit card processing systems.

On November 6, 2003, we acquired IGT OnLine Entertainment Systems, Inc. from International Game Technology and changed its name to Scientific Games Online Entertainment Systems, Inc. ("OES"). OES operates online lottery systems in seven states and the Caribbean, and supports systems sold to customers in Korea, Norway, Switzerland and Shanghai. The acquisition also included the Advanced Games System (AGS) video system contracts in six jurisdictions throughout the world, certain intellectual property and an exclusive license to specific IGT slot brands for both instant and online games.

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 the Netherlands on-track and off-track betting operations.

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

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

Operating results may also vary significantly from period to period depending on the addition or disposition of business units in each period. The acquisition of OES in November 2003, which was accounted for as a purchase, affects the comparability of operations from period to period (see Note 2 to the Consolidated Financial Statements).

Results of Operations: See Note 3—Business Segments

Three Months Ended June 30, 2004 compared to Three Months Ended June 30, 2003

Revenue Analysis

For the quarter ended June 30, 2004, revenues of $178.1 million improved $49.3 million or 38% as compared to the prior year quarter, reflecting a $37.4 million or 34% increase in service revenue and a $11.8 million or 63% increase in sales revenue.

The increase in service revenue in the quarter ended June 30, 2004 is primarily attributable to a $37.2 million or 51% increase in service revenues in the Lottery Group, of which $35.1 million is attributable to the addition of OES and the balance of the increase is attributable to improvements in lottery retail sales, reflecting governments' continuing emphasis on lotteries to support government sponsored programs. Pari-mutuel Group service revenues increased $0.5 million reflecting expanded business in Ireland and favorable foreign exchange rates. Venue Management Group service revenues decreased $0.3 million due to less wagering as a result of a smoking ban instituted in Connecticut in the quarter and lower Handle (dollars wagered) in the Netherlands, which was partially offset by favorable foreign exchange rates.

The $11.8 million increase in sales revenue in the quarter ended June 30, 2004 is primarily attributable to a $10.3 million increase in systems and equipment sales in the Lottery Group, coupled with a $1.0 million increase in systems and equipment sales in the Pari-mutuel Group and a $0.5 million improvement in revenues in the Telecommunications Products Group, due primarily to the impact of favorable exchange rates, partially offset by lower prices.

Gross Profit Analysis

Gross profit of $78.1 million for the quarter ended June 30, 2004 increased $23.0 million or 42% as compared to the corresponding period in 2003, reflecting a $19.4 million or 40% improvement in service revenue margins, and a $3.6 million or 58% improvement in sales revenue margins. Gross margins increased to 44% in 2004 from 43% in 2003. Margin improvements related to service revenues as compared to the prior year period were primarily attributable to the Lottery Group as a result of the addition of OES. Increased lottery systems and equipment sales revenue contributed $4.3 million to the increase in gross margin on sales in the Lottery Group for the quarter as compared to 2003. The $0.9 million or 10% improvement in services gross margin in the Pari-mutuel Group reflects the benefits of continued cost reduction efforts. Venue Management Group gross margins decreased $0.7 million or 13% as a result of lower service revenues as described above, coupled with slightly higher operating costs in the quarter. Telecommunications Products Group gross margins decreased $1.2 million or 28% from the prior year, as more favorable exchange rates and increased volume were offset by lower prices.

Expense Analysis

Selling, general and administrative expenses of $28.4 million for the quarter ended June 30, 2004 were $9.1 million or 47% higher than in 2003. This increase is primarily due to the addition of OES.

Depreciation and amortization expense, including amortization of service contract software, of $15.4 million for the quarter ended June 30, 2004 increased $4.2 million or 38% from the corresponding period in 2003, primarily due to the acquisition of OES.

Interest expense of $7.8 million for the quarter ended June 30, 2004 increased $1.6 million or 26% from 2003, primarily as a result of additional borrowings in connection with the acquisition of OES.

Income Tax Expense

Income tax expense of $9.0 million for the quarter ended June 30, 2004 increased $1.9 million or 27% from 2003 as a result of higher earnings. The financial statement income tax provision was 31.5% in 2004 and 36.0% in 2003. The lower effective rate in 2004 primarily reflects the benefits from the realization of foreign tax credits and the implementation of the extra-territorial income exclusion regime.

Six Months Ended June 30, 2004 compared to Six Months Ended June 30, 2003

Revenue Analysis

For the six months ended June 30, 2004, revenues of $363.6 million improved $111.5 million or 44% overall as compared to the prior year period, reflecting a $73.8 million or 34% increase in service revenue and a $37.7 million or 103% increase in sales revenue.

The increase in service revenue in the six months ended June 30, 2004 is primarily attributable to a $73.5 million or 51% increase in service revenues in the Lottery Group, of which $69.5 million is attributable to the addition of OES and the balance of the increase is attributable to improvements in lottery retail sales, reflecting governments' continuing emphasis on lotteries to support government sponsored programs. Pari-mutuel Group service revenues increased $0.6 million reflecting expanded business in Ireland and favorable foreign exchange rates; partially offset by the negative impact of severe winter weather conditions in the northeastern U.S. in the first quarter of 2004. Venue Management Group service revenues decreased $0.4 million as a result of the severe northeast weather in the first quarter of 2004, coupled with a smoking ban instituted in Connecticut in the second quarter of 2004 and lower Handle in the Netherlands, which decline was partially offset by favorable foreign exchange rates.

The $37.7 million increase in sales revenue in the six months ended June 30, 2004 is primarily attributable to a $33.8 million improvement in systems and equipment sales in the Lottery Group, coupled with a $4.2 million improvement in revenues in the Telecommunications Products Group, due primarily to the impact of favorable exchange rates and increased volumes, partially offset by lower prices.

Gross Profit Analysis

Gross profit of $155.6 million for the six months ended June 30, 2004 increased $48.6 million or 45%, reflecting a $37.4 million or 39% improvement in service revenue margins, and a $11.2 million or 96% improvement in sales revenue margins. Gross margins increased from 42% in 2003 to 43% in 2004. Margin improvements related to service revenues as compared to the prior year period were primarily attributable to the Lottery Group as a result of the addition of OES. Increased lottery systems and equipment sales revenue contributed $12.1 million to the increase in gross margin on sales in the Lottery Group for 2004 as compared to 2003. The $1.8 million or 48% improvement in services gross margin in the Pari-mutuel Group reflects the benefits of continued cost reduction efforts. Venue Management Group gross margins decreased $1.1 million or 11% as a result of lower service revenues, as described above, coupled with slightly higher operating costs in the six months. Telecommunications Products Group gross margins decreased $0.8 million or 11% from the prior year, as more favorable exchange rates and increased volume were offset by lower prices.

Expense Analysis

Selling, general and administrative expenses of $54.3 million for the six months ended June 30, 2004 were $16.6 million or 44% higher than in 2003. This increase is primarily due to the addition of OES.

Depreciation and amortization expense, including amortization of service contract software, of $30.6 million for the six months ended June 30, 2004 increased $8.4 million or 38% from 2003, primarily due to the acquisition of OES.

Interest expense of $15.2 million for the six months ended June 30, 2004 increased $2.8 million or 23% from 2003, primarily as a result of additional borrowings in connection with the acquisition of OES.

Income Tax Expense

Income tax expense of $18.3 million for the six months ended June 30, 2004 increased $4.9 million or 37% from 2003 as a result of higher earnings. The financial statement income tax provision was 31.5% in 2004 and 36.0% in 2003. The lower effective rate in 2004 primarily reflects the benefits from the realization of foreign tax credits and the implementation of the extra-territorial income exclusion regime.

Critical Accounting Policies

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in Note 1 to our 2003 Annual Report on Form 10-K. Critical accounting policies are those that require application of management's most difficult, subjective, or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies for us include revenue recognition on percentage of completion contracts related to lottery development projects and pari-mutuel systems software development projects, capitalization of software development costs, evaluation of the recoverability of assets, the assessment of litigation and contingencies, accounting for stock-based compensation, accounting for derivative instruments and hedging activities, and accounting for income and other taxes. Actual results could differ from estimates.

Liquidity, Capital Resources and Working Capital

Our senior credit facility, the 2003 Facility, consists of a $75.0 million revolving credit facility due 2006 and a $460.5 million Term D Loan due 2009. The 2003 Facility contains certain financial covenants which are described below. At June 30, 2004, approximately 88% of our debt, representing approximately $465.3 million of indebtedness, was in variable rate instruments. Consequently, we are exposed to fluctuations in interest rates. The effect of a 0.125% change in interest rates associated with our variable rate debt will result in a change of approximately $0.6 million per year in our interest expense assuming no change in our outstanding borrowings.

Our financing arrangements as of June 30, 2004 impose certain limitations on our and our subsidiaries' operations.

The Amended Credit Agreement governing the 2003 Facility contains certain covenants that, among other things, limit our ability, and the ability of certain of our subsidiaries, to incur additional indebtedness, pay dividends or make distributions or certain other restricted payments, purchase or redeem capital stock, make investments or extend credit, engage in certain transactions with affiliates,

engage in sale leaseback transactions, consummate certain assets sales, effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all or substantially all assets, and create certain liens and other encumbrances on assets. Also, the Amended Credit Agreement governing the 2003 Facility contains the following financial covenants, which are computed quarterly on a rolling four-quarter basis as applicable:

•: A maximum Consolidated Leverage Ratio of 3.50, which will be reduced according to the terms of the Amended Credit Agreement through July 1, 2005, from which date until December 2009 the ratio shall be 3.00. 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 3.50, which will be increased according to the terms of the Amended Credit Agreement through July 1, 2004, from which date until December 2009 the ratio shall be 3.75. 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 non-cash amortization costs included in interest expense.
•: A minimum Consolidated Fixed Charge Coverage Ratio of 1.70, which will be increased according to the terms of the Amended Credit Agreement through July 1, 2006, from which date until December 2009 the ratio shall be 1.85. Consolidated Fixed Charge Coverage Ratio means, as of any date of determination, the ratio computed for our four most recent fiscal quarters of (x) Consolidated EBITDA to (y) the sum of (i) total interest expense less non-cash amortization costs included in interest expense, (ii) scheduled payments of principal on indebtedness, (iii) certain restricted payments and (iv) all income taxes paid in cash.
•: A maximum Consolidated Senior Debt Ratio of 3.00, which will be reduced according to the terms of the Amended Credit Agreement through July 1, 2005, from which date until December 2009 the ratio shall be 2.50. Consolidated Senior Debt Ratio means the ratio of (x) the aggregate stated balance sheet amount of our indebtedness, less the amount of the Notes, determined on a consolidated basis in accordance with GAAP as of the last day of the fiscal quarter for which such determination is being made to (y) Consolidated EBITDA for the four consecutive fiscal quarters ended on the last day of the fiscal quarter for which such determination is being made.

For purposes of the foregoing limitations, Consolidated EBITDA means the sum of (i) consolidated net income, (ii) consolidated interest expense with respect to all outstanding indebtedness, (iii) provisions for taxes based on income, (iv) total depreciation expense, (v) total amortization expense and (vi) certain adjustments, in each case for the period being measured, all of the foregoing as determined on a consolidated basis for us and our subsidiaries in accordance with GAAP. Although we were in compliance with our loan covenants at June 30, 2004 and expect to continue to remain in compliance over the next 12 months, we cannot assure you that we will be able to do so or that we will be able to continue to meet the covenant requirements beyond 12 months.

At June 30, 2004, we had outstanding letters of credit of $55.5 million, but no outstanding borrowings under the revolving credit facility, leaving us with a total availability of $19.5 million as compared to $27.1 million at December 31, 2003. Our ability to borrow under the 2003 Facility will depend on our remaining in compliance with the limitations imposed by our lenders, including the maintenance of the specified financial covenants. Presently we have not sought and, therefore, do not have any other financing commitments.

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

In August 2004, the holders of all of our outstanding Series A Convertible Preferred Stock were issued an aggregate of 23,832,390 shares of our Class A common stock in connection with their conversion of the 1,325,081 shares of Series A Convertible Preferred Stock they then held. The 23,832,390 newly issued shares of Class A common stock represent approximately 27% of the shares of our common stock outstanding after the conversion and are already reflected in our reported diluted net income per share and similar information. Prior to conversion, our Series A Convertible Preferred Stock paid dividends at the rate of 6% per annum. In 2004, we satisfied the dividend requirements with cash. Prior to 2004, we satisfied the dividend requirements by issuing additional shares of Series A Convertible Preferred Stock.

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

Periodically, we bid on new pari-mutuel and online lottery contracts. Once awarded, these contracts generally require significant up-front capital expenditures for terminal assembly, customization of software, software and equipment installation and telecommunications configuration. Historically we have funded these up-front costs through cash flows generated from operations, available cash on hand and borrowings under our credit facilities. Our ability to continue to procure new contracts will depend on, among other things, our then present liquidity levels and/or our ability to borrow at commercially acceptable rates to finance the initial up front costs. Once operational, long term service contracts have been accretive to our operating cash flow. For fiscal 2004, we anticipate that capital expenditures and software expenditures will be approximately $65.0 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 2005 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 to service our installed base, we purchase inventory on an as-needed basis. We presently have no inventory purchase obligations.

At June 30, 2004, our available cash and borrowing capacity totaled $120.3 million compared to $106.5 million at December 31, 2003. Our available cash and borrowing capacity fluctuates principally based on the timing of collections from our customers, cash expenditures associated with new and

existing pari-mutuel wagering and lottery systems contracts, repayment of our outstanding debt and changes in our working capital position. The increase in our available cash and borrowing capacity from the December 31, 2003 level principally reflects the net cash provided by operating activities for the six months ended June 30, 2004 of $55.4 million, partially offset by wagering and other capital expenditures of $31.7 million and acquisition related payouts of $1.7 million.

Of the $55.4 million provided by operations, $21.3 million was used for changes in working capital. The working capital changes occurred principally from income tax payments and decreases in accounts payable and other liabilities and from an increase in inventory, partially offset principally by collections of receivables.

We believe that our cash flow from operations, available cash and available borrowing capacity under the 2003 Facility will be sufficient to meet our liquidity needs, including anticipated capital expenditures, for the foreseeable future; however, we cannot assure you that this will be the case. While we are not aware of any particular trends, our contracts periodically renew and we cannot assure you that we will be successful in sustaining our cash flow from operations through renewal of our existing contracts or through the addition of new contracts. In addition, lottery customers in the United States generally require service providers to provide performance bonds in connection with each state contract. Our ability to obtain performance bonds on commercially reasonable terms is subject to prevailing market conditions, which may be impacted by economic and political events. Although we have not experienced any difficulty obtaining such bonds, we cannot assure you that we will continue to be able to obtain performance bonds on commercially reasonable terms or at all. While we are not aware of any reason to do so, if we need to refinance all or part of our indebtedness, on or before maturity, or provide letters of credit or cash in lieu of performance bonds, we cannot assure you that we will be able to obtain new financing or to refinance any of our indebtedness, on commercially reasonable terms or at all.

Impact of Recently Issued Accounting Standards

In December 2003, the Financial Accounting Standards Board (the "FASB") issued Statement No. 132 (revised 2003) Employers' Disclosures about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106 ("SFAS 132 Amended"). SFAS 132 Amended revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits ("SFAS 87"), and No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106"). SFAS 132 Amended retains the disclosure requirements contained in FASB Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits ("SFAS 132"), which it replaces. It requires additional disclosures to those in the original SFAS 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information is to be provided separately for pension plans and for other postretirement benefit plans. The provisions of SFAS 132 remain in effect until the provisions of SFAS 132 Amended are adopted. Except as noted below, SFAS 132 Amended is effective for us in our year 2003 financial statements. Disclosure of information about foreign plans required by paragraphs 5(d), 5(e), 5(g), and 5(k) of SFAS 132 Amended and disclosure of estimated future benefit payments required by paragraph 5(f) of SFAS 132 Amended are effective for fiscal year 2004.

On March 12, 2003, the FASB added to its agenda a project that will seek to improve the accounting disclosures relating to stock-based compensation. Among other issues, the project on stock-based compensation will address whether to require that the cost of employee stock options be treated as an expense. The FASB plans to start deliberating the key issues on this subject at future public

meetings and issued an Exposure Draft in March 2004 that could become effective in the first quarter of 2005.

Recent Developments

On July 6, 2004, the Massachusetts Lottery awarded us the contract to be its primary supplier of instant tickets and related marketing services. Our current contract with the Massachusetts Lottery is due to expire in August, 2004. The new contract is for an initial term of two years with three one-year options to renew. We anticipate that the contract will generate approximately $20-25 million of revenue over its initial two-year term.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Additionally, as a result of the diversity of our customer base, we do not consider ourselves exposed to concentration of credit risks. These risks are further minimized by setting credit limits, ongoing monitoring of customer account balances, and 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 were significantly affected. Available supply from the paper and electronics industries tends to fluctuate and prices may be affected by supply.

For 2003 and the first six months of 2004, inflation was not a significant factor in our results of operations, and we were not impacted by significant pricing changes in our costs, except for personnel related expenditures. We are unable to forecast the prices or supply of substrate, component parts or other raw materials for the balance of 2004, but we currently do not anticipate any substantial changes that will materially affect our operating results.

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

In the normal course of business, we are exposed to fluctuations in interest rates and equity market risks as we seek debt and equity capital to sustain our operations. At June 30, 2004, approximately 12% of our debt was in fixed-rate instruments. We consider the fair value of all financial instruments not to be materially different from their carrying value at year-end. The following table provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted-average interest rates by expected maturity dates. (See "Liquidity, Capital Resources and Working Capital.")

Principal Amount by Expected Maturity—Average Interest Rate
June 30, 2004
(dollars in thousands)

		2004			2005		2006		2007		2008		Thereafter		Total		Fair value
Long-term debt:
	Fixed interest rate	$	—		—		—		—		—		65,584		65,584		74,792
	Interest rate		—		—		—		—		—		12.5	%	12.5	%
	Variable interest rate	$	5,070		5,187		5,092		4,960		4,748		440,251		465,308		469,014
	Average interest rate		6.09	%	4.26	%	4.20	%	4.14	%	4.09	%	4.09	%	4.12	%

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

We are also exposed to fluctuations in foreign currency exchange rates as the financial results of our foreign subsidiaries are translated into U.S. dollars in consolidation. Assets and liabilities outside the United States are primarily located in the United Kingdom, Germany, the Netherlands, France, Austria and Chile. Our 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.

Forward-Looking Statements

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

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

•: economic, competitive, demographic, business and other conditions in our 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;
•: the availability and adequacy of our cash flow to satisfy our obligations, including our debt service obligations and our need for additional funds required to support capital improvements, development and acquisitions;
•: an inability to renew or early termination of our contracts;
•: an inability to engage in future acquisitions;

•: the loss of any license or permit, including the failure to obtain an unconditional renewal of a required gaming license on a timely basis; and
•: resolution of any pending or future litigation in a manner adverse to us.

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.

Item 4. Controls and Procedures

As required by SEC rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that the design and operation of our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. There were no significant changes to our internal controls over financial reporting during the second quarter of 2004 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting. As with any system of internal controls, there are inherent limitations in the controls we have put in place. Specifically, collusion by two or more employees can override the controls put in place within any organization, and individuals may execute transactions without the proper authority or disclosure.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
Six Months Ended June 30, 2003

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

No significant changes have occurred with respect to legal proceedings as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2003.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Disclosure

	(a) Total Number of Shares Purchased(1)	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Program	(d) Maximum Number of Shares (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Program
April, 2004	90,000	$	21.34	—	N/A
May, 2004	—		—	—	N/A
June, 2004	—		—	—	N/A

(1): The Company permits employees to satisfy the exercise price and/or withholding taxes associated with employee stock options by surrendering shares that have been held for at least six months. During the second quarter of 2004, a total of 90,000 shares with a market value of $21.34 per share were surrendered to the Company in connection with an employee stock option exercise.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Stockholders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

10.1		First Amendment, dated as of April 30, 2004, to the Amended and Restated Credit Agreement dated as of November 6, 2003, among the Company, the several banks and other financial institutions or entities from time to time parties thereto.
10.2		Second Amendment and Consent, dated as of June 30, 2004, to the Amended and Restated Credit Agreement dated as of November 6, 2003, supplemented and as amended by that certain First Amendment, dated as of April 30, 2004, among the Company, the several banks and other financial institutions or entities from time to time parties thereto.
10.3		Employment Agreement, dated as of November 1, 2002, between the Company and DeWayne E. Laird (executed on May 17, 2004).
31.1		Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2		Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1		Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

None.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
Three and Six Months Ended June 30, 2004

SIGNATURES

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

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

Dated: August 9, 2004

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
Three and Six Months Ended June 30, 2004

INDEX TO EXHIBITS

(a) Exhibit Number		Description
10.1		First Amendment, dated as of April 30, 2004, to the Amended and Restated Credit Agreement dated as of November 6, 2003, among the Company, the several banks and other financial institutions or entities from time to time parties thereto.
10.2		Second Amendment and Consent, dated as of June 30, 2004, to the Amended and Restated Credit Agreement dated as of November 6, 2003, supplemented and as amended by that certain First Amendment, dated as of April 30, 2004, among the Company, the several banks and other financial institutions or entities from time to time parties thereto.
10.3		Employment Agreement dated as of November 1, 2002, between the Company and DeWayne E. Laird (executed on May 17, 2004).
31.1		Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2		Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1		Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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