The following Management's Discussion and Analysis ("MD&A") is intended to enhance the reader's understanding of our operations and current business environment. This MD&A should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the fiscal year ended December 31, 2011 and the "Business" section included in our 2011 Annual Report on Form 10-K.

This MD&A also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be read in conjunction with the disclosures and information contained and referenced under "Forward-Looking Statements" included in this Quarterly Report on Form 10-Q.

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

Business Overview
General
We are a leading global supplier of products and services to lotteries and a leading provider of gaming technology and content to gaming operators worldwide. We also gain access to technology and pursue global expansion through strategic acquisitions and equity investments. We manage and report our operations in three business segments: Printed Products; Lottery Systems; and Gaming. Corporate expenses are not allocated to segments. See "Business Segment Results" below and Note 2 to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional business segment information. The discussion below highlights certain key drivers of our business and certain known trends, demands, commitments, events and uncertainties that have affected our recent financial and operating performance and may affect our performance. Our revenue is classified as instant ticket revenue, service revenue and sales revenue. Instant ticket revenue includes revenue related to our instant ticket fulfillment and services businesses, including our brand licensing and Properties Plus® businesses. Revenue generated from our sales of lottery systems, terminals, gaming machines, gaming content and phone cards, which sales are typically non-recurring in nature and not subject to multi-year supply agreements, is categorized as sales revenue. All other revenue generated from Lottery Systems (including revenue from the validation of instant tickets and other systems management contracts) and Gaming is classified as service revenue. We believe we are likely to continue to experience a highly competitive environment for domestic and international customer contracts in connection with bids, re-bids, extensions and renewals, which could lead to the loss of contracts or rate reductions and additional service requirements in contracts that we win or retain. In 2012, a number of our customer contracts are up for re-bid, extension or renewal. See the table in "Business - Contract Procurement" in Item 1 of our 2011 Annual Report on Form 10-K for additional information regarding our customer contracts. Our strategy to mitigate these industry trends includes working with our customers to grow their sales through a variety of methods including launching new products and services, implementing innovative technologies and marketing tools and expanding retail distribution. We derive approximately 52% of our annual revenue from sales to customers outside of the U.S. and are affected by fluctuations in foreign currency exchange rates. The foreign currencies to which we are most exposed are the British Pound Sterling and Euro. When we refer to the impact of foreign currency exchange rate fluctuations, we are referring to the difference between the relevant period rates and the prior period rates applied to the relevant period activity.
Printed Products
Our Printed Products segment is primarily comprised of our global instant ticket lottery business. We generate revenue from the manufacturing and sale of instant tickets, as well as the provision of value added services such as game design, sales and marketing support, specialty games and promotions, inventory management and warehousing and fulfillment services. We also provide lotteries with cooperative service programs, or CSPs, to help them efficiently and effectively manage and support their operations to achieve higher retail sales and lower operating costs. Moreover, we provide licensed games, promotional entertainment and internet-based services to the lottery industry. Our U.S. instant ticket contracts typically have an initial term of three to five years and frequently include multiple renewal options for additional periods ranging from one to five years,

which our customers have generally exercised in the past. We typically sell our instant lottery tickets for a price per thousand units ("PPK") or for a fee equal to a percentage of the retail sales of the instant lottery tickets ("POS"). Under our CSP contracts we are typically paid on a POS basis. Some international customers purchase instant lottery tickets as needed rather than through multi-game supply contracts.
Retail sales of instant tickets can be a key performance indicator of our instant ticket revenue, although there may not always be a direct correlation between retail sales and our instant ticket revenue due to the type of contract (e.g., PPK versus POS or CSP contracts), the impact of changes in our customer contracts or other factors. Our total instant ticket revenue increased approximately 8.5% for the three months ended March 31, 2012 compared to the same period in 2011. Based on third-party data, our customers' total instant ticket lottery retail sales in the U.S. increased 12.2% for the three months ended March 31, 2012 compared to the same period in 2011. Most of our U.S. customers reported year-over-year growth in retail sales of instant tickets, which we believe was driven by a variety of factors, including lottery private management, product innovation, prize payout increases and sales of higher price-point tickets. Internationally, we also experienced instant ticket revenue growth in the three months ended March 31, 2012 compared to the prior-year period from our POS and CSP contracts, which we believe was due in part to sales of higher price-point tickets.
Our licensed game contracts are generally game-specific and therefore short-term and non-recurring. Our instant ticket revenue may be negatively impacted to the extent we are unable to continue to win licensed game-specific or multi-state game contracts. There has been an increased interest within the lottery industry in player loyalty programs, which we believe may result in growth opportunities for our Properties Plus offering. Recently, we signed an agreement with the North Carolina lottery to provide Properties Plus services and the Iowa Lottery extended its term of their existing Properties Plus program with us. The Tennessee lottery added our Points for Prizes® store to its player loyalty program in February 2012 and achieved record instant ticket sales that month. The Missouri lottery awarded us a Properties Plus contract which is expected to launch in the second half of 2012. Our 2012 results of operations should be positively impacted by these new opportunities.
We are the primary supplier of instant lottery tickets for Lotterie Nazionali S.r.l ("LNS"), which was awarded the concession to be the exclusive operator of the Italian Gratta e Vinci instant ticket lottery beginning on October 1, 2010. LNS succeeded Consorzio Lotterie Nazionali ("CLN"), a consortium comprised of essentially the same group that owns LNS, which held the prior concession. Over the life of the new concession, we expect that we will supply no less than 80% of LNS' instant ticket production requirements. Retail sales for the three months ended March 31, 2012 declined by approximately 4% due to a variety of factors including inclement weather and transit strikes that disrupted deliveries to retailers. We also had challenging year-over-year comparisons, in part due to the mix of products launched in the first three months of 2011, including the formal introduction of the €20 ticket. Under our CSP agreement with Northstar Lottery Group ("Northstar"), the private manager of the Illinois lottery in which we have a 20% equity investment, we are responsible for the design, development, manufacturing, warehousing and distribution of instant lottery tickets and are compensated based on a percentage of retail sales. Illinois lottery instant ticket sales increased approximately 27% for the first nine months of the lottery's fiscal year ending June 30, 2012, which coincides with the commencement of Northstar's private management agreement ("PMA") on July 1, 2011. Our increase in instant ticket revenue for the three months ended March 31, 2012 reflected the commencement of our CSP agreement with Northstar on July 1, 2011.
Northstar is entitled to receive annual incentive compensation payments from Illinois to the extent it is successful in increasing the lottery's net income above specified target levels, subject to a cap of 5% of the applicable year's net income. Northstar will be responsible for payments to Illinois to the extent such targets are not achieved, subject to a similar cap. The lottery net income levels set forth in Northstar's successful bid for the PMA were $851 million, $950 million, $980 million, $986 million and $1 billion for the five fiscal years ending June 30, 2012, 2013, 2014, 2015 and 2016, respectively, representing a compound annual growth rate in lottery net income of approximately 44%, including an approximate 27% increase in lottery net income in the first year. These net income target levels are subject to upward or downward adjustment under certain circumstances in accordance with the terms of the PMA. Northstar is entitled to be reimbursed on a monthly basis for most of its operating expenses under the PMA, although certain expenses of Northstar associated with managing the lottery are not reimbursable. Earnings and cash flows from our equity investment in Northstar may be impacted to the extent the lottery achieves, or fails to achieve, the applicable net income targets and will be impacted to the extent Northstar incurs non-reimbursable expenses. The impact of this equity method investment was not material to our earnings from our equity investments for the three months ended March 31, 2012.
As U.S. states and international jurisdictions increasingly look towards lottery and gaming as a source to grow revenue, we believe they could pursue an outsourcing model whereby the day-to-day management of their lotteries are conducted by a third party, similar to the PMA the Illinois lottery awarded to Northstar.

Following a strategic review of our global Printed Products business, we recently commenced a reorganization plan to cease all printing and finishing activities at our Australia facility during the second half of 2012, and begin printing instant tickets for customers in this region at other Scientific Games' manufacturing plants. We expect to record employee termination costs resulting in cash payments of approximately $4.0 million and other restructuring costs of approximately $1.0 million to $3.0 million during 2012 under this reorganization plan. We currently expect the majority of these charges to be incurred during 2012. In addition, we also expect to record accelerated depreciation expense of approximately $3.5 million during 2012 related to this reorganization.

Lottery Systems

We are a leading provider of customized computer software, software support, equipment and data communication services to lotteries. In the U.S., we typically provide the necessary equipment, software and maintenance services pursuant to long-term contracts that typically have an initial term of at least five years under which we are generally paid a fee equal to a percentage of the lottery's total retail sales. Our U.S. contracts typically contain multiple renewal options that generally have been exercised by our customers in the past. Internationally, we typically sell point-of-sale terminals and/or computer software to lottery authorities and may provide ongoing fee-based systems and software support services.
Based on third-party data, our Lottery Systems customers' total draw game retail sales in the U.S. increased 15.8% in the three months ended March 31, 2012 compared to the same period in 2011. In 2011, U.S. lottery directors authorized certain changes to the Powerball® game, including an increase in the ticket price to $2, which went into effect on January 15, 2012. The industry experienced the third largest Powerball jackpot in history ($336 million) and the largest Mega Millions® jackpot in history ($656 million) during the three months ended March 31, 2012. The level of jackpots of the Powerball and Mega Millions multi-state draw lottery games impact our service revenues. Reflecting this improvement in retail sales, our Lottery System service revenue in the U.S. increased 13.2% for the three months ended March 31, 2012 compared to the same period in 2011. Our Lottery System service revenue is also impacted by retail sales of instant tickets where we provide instant ticket validation services as part of a lottery systems contract. Our Lottery System sales revenue is non-recurring in nature and generated primarily outside the U.S. We are the exclusive instant ticket validation network provider to the China Sports Lottery ("CSL"). Instant ticket retail sales of the CSL increased approximately 0.7% for the three months ended March 31, 2012 compared to the same period in 2011. We believe the relatively flat growth in retail sales is due in part to product mix, limited expansion of the retailer network and challenging year-over-year comparisons. We are focused on accelerating retail sales growth through higher price points, the expansion of the retailer and validation network and new game introductions (including additional tickets with licensed brands). The rate we receive on retail sales under our China instant ticket validation contract decreased by 0.2% in January 2011, decreased by an additional 0.1% in January 2012 and is scheduled to decrease an additional 0.1% in January 2014. To the extent we are not able to continue to offset these rate reductions by retail sales growth, our revenue and profitability from this contract may be adversely affected.
We recently signed an agreement in China to provide value chain management services to the Hubei Sports Lottery similar to the CSPs that we provide to many of our North American and European customers. We expect that these services will assist the Hubei Sports Lottery in achieving higher retail sales and lower operating costs.
We have recently seen an increase in bidding opportunities to provide central monitoring and control systems for video gaming networks, particularly in jurisdictions in North America, as these jurisdictions pursue video lottery terminals ("VLTs") as an opportunity to address budget deficits. We believe that this could be an attractive growth opportunity for the Company in the coming years. On January 3, 2012, we signed a contract to design, implement and administer our sixth generation AEGIS-Video™ Central Communication System (CCS) for the Illinois Gaming Board. Under the terms of the contract, we will provide real-time communication and control between every licensed video gaming terminal in the State of Illinois, as well as day-to-day management of the operation of the CCS and service throughout the State. The contract was awarded through a competitive procurement process, has an initial term of six years and may be extended by mutual agreement up to four additional years. We currently expect that our results of operations will be impacted by this contract to a limited extent in the second half of 2012 and to a greater extent in 2013. Gaming
We are a leading provider of server-based gaming machines and systems and other products and services to operators in the wide area gaming industry. Our Gaming segment supplies server-based gaming machines, systems and game content primarily to bookmakers that operate licensed betting offices ("LBOs") in the U.K. through our Global Draw Limited subsidiary and, increasingly, to gaming operators outside the U.K. The LBO sector of the U.K. gaming industry is highly

competitive and concentrated to approximately four large LBO operators in the U.K. The Gaming segment also includes Barcrest Group Limited ("Barcrest") and Games Media Limited ("Games Media"), leading suppliers of gaming machines, systems and game content to pubs, bingo halls and arcades in the U.K. and continental Europe. We provide many of our Gaming customers with a turnkey offering, which typically includes gaming machines, remote management of game content and management information, central computer systems, secure data communication and field support services. We develop our own game content and supplement our offering with content from third parties.
In 2011, we completed the installation of gaming machines for the entire Ladbrokes LBO estate in accordance with the four-year contract that was awarded to us in 2010. The roll-out of gaming machines for Ladbrokes represented a significant portion of the increase in our installed gaming machine base from March 31, 2011 to March 31, 2012. Our operating results for the three months ended March 31, 2012 reflect an increase in revenue resulting from our higher installed gaming machine base. In addition, our gross win per machine per day increased approximately 5.8% for the three months ended March 31, 2012 when compared to the same period in 2011.
In January 2012, William Hill PLC, a U.K. bookmaker, awarded a contract to one of our principal competitors (currently the supplier for a majority of gaming machines for William Hill) for the sole supply of gaming machines to William Hill's LBOs following the expiration of our gaming machine supply contract with William Hill in March 2012. The loss of this contract will impact our operating results beginning in the second quarter of 2012.
On September 23, 2011, we completed the acquisition of Barcrest, a leading supplier of games, gaming content, gaming platforms and systems to gaming operators and venues in the U.K. and in continental Europe. Barcrest has been integrated with our existing gaming business. The comparability of our 2012 results of operations will be affected by the acquisition.
In January 2012, following a comprehensive strategic review, we announced our exit from the Barcrest analog amusement with prize ("AWP") machine business in order to focus our game design and other resources solely on our digital server-based supply model. We also reorganized Games Media to more effectively capitalize on the Barcrest acquisition. For the three months ended March 31, 2012, we recorded approximately $2.9 million of employee termination and restructuring costs associated with the reorganization. We expect that our operating results for the remainder of 2012 will be impacted by further employee termination and restructuring costs of approximately $2.0 million to $3.0 million related to the reorganization. However, we anticipate realizing cost savings as a result of this action starting in 2012.
In late 2010, the U.K. government announced its intention to change the taxation of gaming machines by introducing a new machine games duty, or MGD, that would replace both the currently applicable amusement machine license duty and value-added tax. Following a comprehensive review of the taxation of gaming machines in the U.K., the government announced the introduction of a new taxation regime based around the gross win generated by a gaming machine. In a budget statement issued in March 2012, the U.K. government announced an MGD rate of 20% on gross win, effective February 1, 2013. The affect of these tax changes may have a negative impact on our business in 2013.
On April 16, 2012, certain video lottery terminals operated by SNAI S.p.a. in Italy and supplied by Barcrest erroneously printed what appeared to be winning jackpot tickets. SNAI has stated, and system data confirms, that no jackpots were actually won on that day. The terminals were deactivated pending a review by the Italian regulatory authority of the cause of the incident and the manner in which the terminals could be reactivated without re-occurrence of the incident. SNAI and Barcrest are working with the Italian regulatory authority in an effort to reactivate the terminals as soon as possible. Although Barcrest received a letter from SNAI expressing its view that this incident breached Barcrest's agreement with SNAI, based on the information currently available to us, we do not believe that Barcrest breached that agreement or that it or we will ultimately incur any material financial liability stemming from the incident. However, we cannot currently predict with certainty the outcome of this matter, including when reactivation of the terminals might be authorized by the Italian regulatory authority.

Recently Issued Accounting Guidance

In May 2011, the Financial Accounting Standards Board ("FASB") issued guidance to amend the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs.

In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity is required to present net income and other comprehensive income either in one continuous statement or in two separate but consecutive statements. The new guidance also requires presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements. However, the effective date pertaining to this requirement was deferred by an update issued by the FASB in December 2011. The Company adopted the new guidance on January 1, 2012 resulting in a change in the presentation of comprehensive income for the three months ended March 31, 2012 and 2011. In September 2011, the FASB issued guidance on testing goodwill for impairment. The new guidance provides an entity with the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines the fair value of a reporting unit is less than its carrying amount, the two-step goodwill impairment test is required. We will apply the new guidance to our December 31, 2012 annual goodwill impairment evaluation.

CONSOLIDATED RESULTS



                                           Three Months Ended              Three Months Ended
                                               March 31,                        March 31,
                                          2012            2011                2012 vs 2011
                                             (in thousands)                   (in millions)
Revenue:
Instant tickets                       $  123,324      $  113,860      $       9.5              8  %
Services                                  90,286          73,747             16.5             22  %
Sales                                     20,965           9,049             11.9            132  %
Total revenue                            234,575         196,656             37.9             19  %
Operating expenses:
Cost of instant tickets (1)               69,963          67,233              2.7              4  %
Cost of services (1)                      45,859          38,922              6.9             18  %
Cost of sales (1)                         16,927           5,690             11.2            197  %
Selling, general and administrative
expenses                                  46,172          39,554              6.6             17  %
Employee termination and
restructuring costs                        2,875               -              2.9              -
Depreciation and amortization             30,518          30,904             (0.4 )           (1 )%
Operating income                          22,261          14,353              7.9             55  %
Other (income) expense:
Interest expense                          24,898          26,455             (1.6 )           (6 )%
Earnings from equity investments          (8,845 )        (9,350 )            0.5             (5 )%
Other                                       (478 )          (994 )            0.5            (52 )%
                                          15,575          16,111             (0.5 )           (3 )%
Net income (loss) before income
taxes                                      6,686          (1,758 )            8.4       N/A
Income tax expense                         4,867           5,174             (0.3 )           (6 )%
Net income (loss)                     $    1,819      $   (6,932 )    $       8.8       N/A

(1) Exclusive of depreciation and amortization.

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

Revenue Analysis

The increase in consolidated revenue reflected higher instant ticket revenue primarily due to an increase in retail sales in the U.S. and certain international jurisdictions where we are compensated based on a percentage of retail sales under CSP and POS contracts. The increase in consolidated service revenue reflected higher Lottery Systems service revenue primarily due to larger Powerball and Mega Millions jackpots and higher instant ticket validation revenue, as well as higher Gaming service revenue due to the expansion of our terminal base, the acquisition of Barcrest and an increase in Global Draw's U.K. gross win per machine per day. Our higher sales revenue reflected increased sales to international Lottery Systems customers and the acquisition of Barcrest.

Operating Expenses

Cost of Revenue

Consolidated cost of revenue increased primarily as a result of higher revenue. Cost of instant tickets increased 4% compare to an increase in instant ticket revenue of 8%. Cost of services increased 18% compare to an increase in services revenue of 22%. The percentage increase in cost of sales was significantly higher than the percentage increase in sales revenue reflecting a less profitable mix of sales revenue primarily related to the liquidation of Barcrest analog machines in connection with an exit from the Barcrest analog AWP business and an $0.8 million write-down of inventory due to a fire at a third-party warehouse during the three months ended March 31, 2012.

Selling, General and Administrative ("SG&A")

The increase in SG&A reflected higher compensation expense of $3.0 million to support our growth initiatives and an increase in stock-based compensation . . .