FIRST HALF 2012 REPORT

(1)

FIRST HALF 2012 REPORT

FOR THE PERIOD ENDING

JUNE 30, 2012

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2

TABLE OF CONTENTS

Page

Management Discussion and Analysis

Lottomatica Group S.p.A. Profile ... 3

Lottomatica Group ... 5

Management Report ... 8

Significant Developments ... 34

Risks and Uncertainties ... 36

Predictable Developments ... 39

Lottomatica Stock Information ... 40

Tables of Customer Contracts ... 42

Interim Consolidated Financial Statements and Footnotes – June 30, 2012

Statements of Financial Position ... 59

Income Statements and Statements of Comprehensive Income ... 60

Statements of Cash Flows ... 64

Statements of Changes in Equity ... 65

Notes to Financial Statements ... 67

Interim Report of Reconta Ernst & Young S.p.A.,

Independent Public Accounting Firm ... 115

Additional Required Disclosures

Exhibit 3C-

ter

- Certification of the First Half Financial Statements ... 117

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3

LOTTOMATICA GROUP S.p.A. Profile

Company subject to the direction and coordination of De Agostini S.p.A.

Company Name Lottomatica Group - Società per Azioni

Fiscal Code, VAT no. and no. of enrollment

with the Register of enterprises of Rome 08028081001

Share Capital As of June 30, 2012: €183,662,984 authorized ordinary

share capital, €1.00 par value per share; 172,359,721 shares underwritten and paid up

Registered Office Roma - Viale del Campo Boario 56/d

Board of Directors (1)

Chairman (1) Lorenzo PELLICIOLI

C.E.O. (1) Marco SALA

Board Members Pietro BOROLI Paolo CERETTI Alberto DESSY* Marco DRAGO Jaymin PATEL Donatella BUSSO* (2)

Gianmario TONDATO DA RUOS **

* Denotes Independent Directors ** Denotes Lead Independent Director

General Manager (3) Renato ASCOLI

Board of Statutory Auditors : (1)

Chairman Sergio DUCA

Regular Members Angelo GAVIANI

Francesco MARTINELLI

Substitute Members Gian Piero BALDUCCI

Giulio GASLOLI

Umile Sebastiano IACOVINO Guido MARTINELLI

Marco SGUAZZINI VISCONTINI

(4)

4

Independent Auditors Reconta Ernst & Young S.p.A.

Members of the Internal Audit and Alberto DESSY (Chairman) (5)

Compliance Committee (4) Paolo CERETTI (6)

Donatella BUSSO (5)

Members of the Compensation Committee (7) Gianmario TONDATO DA RUOS (Chairman) Paolo CERETTI

Alberto DESSY

Note:

(1) As enacted by the shareholders at a meeting held on April 28, 2011. (2) As enacted by the shareholders at a meeting held on May 9, 2012. (3) As enacted by the Board of Directors at a meeting held on April 28, 2009. (4) As enacted by the Board of Directors at a meeting held on April 29, 2011. (5) As enacted by the Board of Directors at a meeting held on May 9, 2012. (6) As enacted by the Board of Directors at a meeting held on July 28, 2011. (7) As enacted by the Board of Directors at a meeting held on April 29, 2011.

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5

LOTTOMATICA GROUP

Lottomatica Group S.p.A. is one of the leading gaming operators in the world based on total wagers and,

through its subsidiaries, including GTECH Corporation, is a leading provider of lottery and gaming

technology solutions and services worldwide. The Group’s goal is to be the leading commercial operator

and provider of technology in the regulated worldwide gaming markets, by delivering market leading

products and services, with a steadfast commitment to integrity, responsibility and growth. Lottomatica is

listed on the Mercato Telematico Azionario, the Italian screen-based trading system managed by Borsa

Italiana S.p.A. (the "Italian Stock Exchange") under the trading symbol "LTO" and has a Sponsored Level

1 American Depository Receipt (ADR) program listed on the United States over the counter market under

the trading symbol "LTTOY".

In this report, the term "Lottomatica" refers to Lottomatica Group S.p.A., the parent entity, and its

subsidiaries excluding GTECH; the term "GTECH" refers to GTECH Corporation and its subsidiaries;

and the terms "Group", "we", "our" and "us" refer to Lottomatica and all subsidiaries included in this

report.

The Group’s segments are as follows:



The

Italian Operations segment

operates and provides a full range of gaming services, including

online, instant and traditional lotteries, Scratch & Win, sports betting, machine gaming, interactive

skill games and non-lottery commercial transactions.



The

GTECH Lottery segment

operates and provides a full range of services, technology and

products to government sponsored online, instant and traditional lotteries.



The

SPIELO International segment

operates and provides solutions, products and services relating

to video lottery terminals ("VLTs") and associated systems for the government sponsored market and

video and traditional mechanical reel slot machines and systems for the commercial gaming markets.

It also provides digitally-distributed, multi-channel gaming entertainment products and services,

including sports betting, lottery, bingo, poker, casino games and quick games, as well as retail

solutions for the real-time transaction processing and information systems for the sports-betting

market.

The Group has operations in approximately 60 countries worldwide on six continents and had 8,375

employees on June 30, 2012.

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6

Italian Operations Segment

The Italian Operations segment offers all five product lines of the Group: Lottery, Sports Betting,

Machine Gaming, Interactive and Commercial Services.

Lottery

Lottomatica is the sole concessionaire for the Italian Lotto game. Lottomatica manages all the activities

along the lottery value chain, such as collecting wagers through its network, paying out prizes, managing

accounting and other back office functions, running advertising and promotion, operating data

transmission networks and processing centers, training staff, selecting retail locations, providing retailers

with assistance and supplying materials for the game. Lottomatica operates online lotteries and games,

which are conducted through computerized systems in which lottery or gaming terminals are connected to

a central computer system, with games where players select their own numbers, such as Lotto, and

off-line lotteries, with games involving pre-printed paper tickets.

Lottomatica also operates instant lotteries (Scratch & Win game) and traditional lotteries through Lotterie

Nazionali S.r.l., in which it directly and indirectly holds a 51.5% interest.

Sports Betting

Lottomatica has a number of concessions to operate sports and horse betting, and the right to operate

sports betting over the internet. These concessions allow betting in the Republic of Italy on sporting

events (including basketball, soccer, cycling, downhill skiing, cross country skiing, tennis, sailing and

volleyball), motor sports (car and motorcycle racing), and non-sports events connected with the world of

entertainment, music, culture, and current affairs of primary national and international importance.

Machine Gaming

Lottomatica operates in the machine gaming market, including the direct management of amusement with

prize machines ("AWPs") and video lottery terminals ("VLTs") that are installed in various outlets linked

to a central system.

Interactive

Lottomatica provides online skill games such as poker and other board and soft games.

Commercial Services

Leveraging its distribution network and transaction processing experience, Lottomatica offers

high-volume transaction processing of non-lottery commercial transactions such as prepaid cellular telephone

recharges, bill payments, and ticketing for sporting and musical events. Lottomatica also provides

collection and payment services in Italy for the payment of utility bills, local fines and duties and also

collects payments due on behalf of creditors. Additionally, Lottomatica provides a processing and

network service on behalf of third parties, without collecting amounts due. The most significant of these

services are telephone top-ups and digital terrestrial TV cards, payment of car road taxes, fidelity card

services and stamp duty services.

GTECH Lottery Segment

GTECH is the world's leading operator of highly-secure, online lottery transaction processing systems.

GTECH designs, sells and operates a complete suite of lottery-enabled point of sale terminals that are

electronically linked with a centralized transaction processing system that reconciles lottery funds

between the retailer, where a transaction is enabled, and the lottery authority.

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GTECH is also a rapidly growing and technologically advanced instant game supplier. As an end-to-end

provider of instant tickets and related services, GTECH specializes in the fast delivery of high-quality

instant ticket games, operating the industry’s largest, fastest, and highest quality press. In addition to

printing, GTECH provides its customers with instant ticket marketing plans and graphic design,

programming, production, packaging, shipping and delivery services.

GTECH has developed and continues to develop new lottery games, licenses new game brands and

installs a range of new lottery distribution devices, all of which are designed to maintain a strong level of

same store sales growth for its customers. GTECH looks to leverage its technology, distribution and

transaction processing competence to provide commercial and financial transaction processing services

by delivering reliable, secure, high volume transaction processing solutions to financial institutions and

retailers over its existing online lottery networks.

SPIELO International Segment

During the first quarter of 2012, the Group merged its GTECH G2 segment into its SPIELO International

segment. With the convergence between land-based and online gaming, SPIELO International expects to

leverage resources to provide customers with higher-performing content, faster responsiveness and an

increased level of innovation. The combined segments will also be able to deliver a seamless product

offering across different channels for both operators and players.

SPIELO International designs, develops, manufactures and provides top-performing cabinets, games,

systems and software to customers in legal gaming markets throughout the world. SPIELO International

is the world's leading provider of video lottery terminals, central systems and games to government

customers in North America and Europe and is a leading provider of video lottery terminals and games to

operators in the United States. SPIELO International is also a leading provider of video and traditional

mechanical reel slot machines and casino systems to casino operators in Europe, Asia and the Americas

and to Native American casinos in the United States. In addition, SPIELO International provides

amusement with prize machines and games to government customers in Europe.

SPIELO International provides digitally-distributed, multi-channel gaming entertainment products and

services that are delivered across interactive channels as well as retail solutions and information systems

that support real time transaction processing for the sports betting market.

For additional information on the Group, please visit its website at:

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8

MANAGEMENT REPORT

The following management report is provided as a supplement to, and should be read in conjunction with,

the Group’s financial statements and accompanying notes.

In the second quarter of 2012, we experienced single digit growth in revenue, EBITDA and operating

income versus the same quarter of 2011, while net income attributable to owners of the parent grew by

38.3% to €63.8 million in the quarter.

Despite some deterioration in the economies of some of the jurisdictions in which we operate, our results

for the second quarter of 2012 were encouraging in that they underscore the resiliency and sustainability

of our business. As was the case in the first quarter, the sources of our growth continued to diversify. That

is evident within the Italian portfolio as well as geographies outside of Italy.

Revenue growth was led by the performance of the GTECH Lottery segment, which benefited from

favorable foreign exchange impacts and a 7% increase in same store revenue which more than offset the

price compression impacts from contract rebids.

The Spielo International segment’s momentum continued and further solidified its position as the leading

solution provider in the Italian and Canadian machine gaming markets. This segment contributed €71.9

million of revenue to the Group in the second quarter of 2012, achieving a 19.1% increase in service

revenue compared to the same period last year.

Revenue in the Italian Operations segment declined slightly, primarily related to lower revenues from

Lotto attributable to lower late number wagers, lower scratch and win performance, and lower sports

betting revenues resulting from higher payouts. Offsetting these declines was higher revenue from

Machine Gaming, which benefited from a full deployment of VLTs, and an €8.5 million increase in

revenue from Interactive, principally due to an over 400% increase in wagers resulting from the

introduction of new games such as Poker Cash and Casino in July 2011.

Our diversification program in Italy is having a positive impact. VLTs, Interactive and Commercial

Services are driving our growth. In addition, Sports Betting, which was impacted by higher than average

payouts in the past quarter, is also an important element of our growth strategy. The intent of our

investing in diversification over the past few years was to create a better balance between product

categories and we are encouraged by the result.

In addition, the Italian Operations segment has benefited from a cost reduction program. Overall, despite

difficult economic conditions, we have achieved EBITDA growth in the second quarter of 2012 compared

to the same quarter of 2011.

Despite the economic uncertainties in some jurisdictions in which we operate, our diversified product

offerings and geographical footprint provide a natural hedge to help offset the ups and downs of product

categories and local performance. As is evident in our results, growth in the Italian portfolio is coming

from new innovations. And, as Italy deals with the impacts of the current recession, the GTECH Lottery

and Spielo International segments have rebounded making significant and sustaining contributions to

growth.

This was the fundamental justification for the investment we made in acquiring GTECH and its Spielo

subsidiary. Lottomatica Group is a broadly diversified, international business and we are positioned well

to take advantage of a growing gaming sector.

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Presented below are the Group’s key performance indicators (in thousands of euros, except per share

amounts).

2012

2011

€

%

Revenue

742,732

702,635

40,097

5.7

EBITDA

259,654

245,411

14,243

5.8

Operating income

153,009

140,041

12,968

9.3

EBIT

158,971

139,979

18,992

13.6

Net income attributable to owners of the parent

63,838

46,168

17,670

38.3

Diluted earnings per share

0.37

0.27

0.10

37.0

Increase

June 30,

For the three months ended

2012

2011

€

%

Revenue

1,522,994

1,404,709

118,285

8.4

EBITDA

540,015

501,290

38,725

7.7

Operating income

322,552

292,708

29,844

10.2

EBIT

321,675

255,434

66,241

25.9

Net income attributable to owners of the parent

121,463

68,077

53,386

78.4

Diluted earnings per share

0.70

0.40

0.30

75.0

June 30,

December 31,

2012

2011

€

%

Net financial position

2,699,726

2,740,978

(41,252)

(1.5)

Increase

June 30,

For the six months ended

Decrease

Key performance indicator comparisons for the three month periods ended June 30, 2012 and 2011

Consolidated revenue increased 5.7% principally due to revenue growth outside of Italy and favorable

foreign exchange impacts. Revenue growth in the GTECH Lottery segment was primarily attributable to

favorable foreign exchange impacts and a 7% increase in same store revenue, which benefited from the

continued growth of instant ticket sales.

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10

EBITDA and operating income increased €14.2 million and €13.0 million, respectively, driven by the

performance of all business segments, led by higher revenues and profits from the GTECH Lottery

segment, due principally to higher same store revenue.

EBIT increased €19.0 million primarily due to the increase in operating income described above and the

impact of higher unrealized foreign exchange gains on GTECH’s euro-denominated debt.

Key performance indicator comparisons for the six month periods ended June 30, 2012 and 2011

Consolidated revenue increased 8.4% resulting from revenue growth across all business segments, led by

the performance of the GTECH Lottery segment, higher revenue from Machine Gaming in Italy and

favorable foreign exchange impacts. Revenue growth in the GTECH Lottery segment was primarily

attributable to record first quarter jackpot activity in the United States and higher instant ticket sales.

EBITDA increased €38.7 million principally driven by higher revenues and profits from the GTECH

Lottery segment and Machine Gaming in Italy, favorable foreign exchange impacts and a €4.5 million

one-time recovery of a foreign investment.

Operating income increased €29.8 million driven by the performance of all business segments, led by

higher revenues and profits from the GTECH Lottery segment.

EBIT increased €66.2 million principally due to the increase in operating income described above and

prior year unrealized foreign exchange losses on GTECH’s euro-denominated debt that did not recur in

2012.

Net financial position improved by €41.3 million when compared to December 31, 2011, primarily due to

principal and interest payments on existing indebtedness which was funded by cash flows generated from

operating activities.

EBITDA AND EBIT

EBITDA and EBIT are considered alternative performance measures that are not defined measures under

International Financial Reporting Standards ("IFRS") and may not take into account the recognition,

measurement and presentation requirements associated with IFRS. We believe that EBITDA and EBIT

assist in explaining trends in our operating performance, provide useful information about our ability to

incur and service indebtedness, and are commonly used measures of performance by securities analysts

and investors in the gaming industry. EBITDA and EBIT should not be considered as alternatives to

operating income as indicators of our performance or to cash flows as measures of our liquidity. As we

define them, EBITDA and EBIT may not be comparable to other similarly titled measures used by other

companies.

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EBITDA and EBIT are computed as follows:

(thousands of euros)

2012

2011

€

%

Operating income

153,009

140,041

12,968

9.3

Depreciation

61,503

59,137

2,366

4.0

Amortization

44,514

45,204

(690)

(1.5)

Impairment recovery

-

(274)

274

100.0

Other

628

1,303

(675)

(51.8)

EBITDA

259,654

245,411

14,243

5.8

Operating income

153,009

140,041

12,968

9.3

Equity income

140

-

140

-Other income

2,354

630

1,724

>200.0

Other expense

(3,998)

(3,440)

(558)

(16.2)

Foreign exchange gain, net

7,466

2,748

4,718

171.7

EBIT

158,971

139,979

18,992

13.6

For the three months ended

June 30,

Increase (decrease)

2012

2011

€

%

Operating income

322,552

292,708

29,844

10.2

Depreciation

120,306

116,560

3,746

3.2

Amortization

91,710

89,508

2,202

2.5

Impairment recovery

-

(274)

274

100.0

Other

5,447

2,788

2,659

95.4

EBITDA

540,015

501,290

38,725

7.7

Operating income

322,552

292,708

29,844

10.2

Equity income (loss)

139

(53)

192

>200.0

Other income

2,410

797

1,613

>200.0

Other expense

(5,911)

(6,273)

362

5.8

Foreign exchange gain (loss), net

2,485

(31,745)

34,230

107.8

EBIT

321,675

255,434

66,241

25.9

For the six months ended

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12

COMPARISON OF THE THREE MONTH PERIODS ENDED JUNE 30, 2012 AND 2011

Consolidated revenue for the three months ended June 30, 2012 increased 5.7% over the same period last

year as detailed by operating segment below.

2012

2011

€

%

Italian Operations

444,661

451,888

(7,227)

(1.6)

GTECH Lottery

238,284

192,215

46,069

24.0

SPIELO International

71,938

64,973

6,965

10.7

754,883

709,076

45,807

6.5

Elimination of intersegment revenue

(12,224)

(6,505)

(5,719)

(87.9)

Other

73

64

9

14.1

Total revenue

742,732

702,635

40,097

5.7

June 30,

Increase (decrease)

Consolidated revenue includes the following amounts for the Italian Operations segment:

2012

2011

€

%

Lotto

100,268

103,524

(3,256)

(3.1)

Instant tickets

95,480

103,387

(7,907)

(7.6)

Other

828

471

357

75.8

Lottery

196,576

207,382

(10,806)

(5.2)

Machine Gaming

162,212

160,831

1,381

0.9

Sports Betting

31,277

38,962

(7,685)

(19.7)

Commercial Services

33,675

32,293

1,382

4.3

Interactive

20,921

12,420

8,501

68.4

Total revenue

444,661

451,888

(7,227)

(1.6)

June 30,

Increase (decrease)

The Italian Operations segment comprises all Italian license related activities including our exclusive

concessionaires (lotteries) and multi-provider concessionaires such as sports betting and pools, horse

betting and pools, machine gaming, online poker and other skill games, and transaction processing of

non-lottery commercial transactions.

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A portion of revenue from the Italian Operations segment is derived from the Lotto concession under

which Lottomatica manages all of the activities along the lottery value chain including collecting wagers,

paying out prizes, managing accounting and other back-office functions, running advertising and

promotions, operating data transmission networks and processing centers, training staff, providing

retailers with assistance and supplying materials for the game. Revenues are typically based on a

percentage of wagers. For the Lotto game, this percentage of wagers decreases as the total wagers

increase during an annual period.

An analysis of the performance during the three months ended June 30, 2012 for each product line and

service reported within the Italian Operations segment as compared to the same period last year is

described below.

Lotto

Lotto revenue in the three months ended June 30, 2012 decreased 3.1% compared to the same period in

2011 due to a corresponding decrease in core and late number wagers as detailed below. The decrease in

core wagers was partially offset by higher wagers from the Lotto options game "10 and Lotto".

(millions of euros)

2012

2011

Wagers

%

Core wagers

1,444.9

1,460.8

(15.9)

(1.1)

Wagers for late numbers

108.7

150.0

(41.3)

(27.5)

1,553.6

1,610.8

(57.2)

(3.6)

June 30,

Decrease

Instant tickets

Instant ticket revenue in the three months ended June 30, 2012 decreased 7.6% compared to the same

period in 2011 principally due to lower instant ticket sales as detailed below. The decrease in instant

ticket sales was primarily due to lower sales of €5 tickets.

2012

2011

Amount

%

Total tickets sold (in millions)

534.0

614.4

(80.4)

(13.1)

Total sales (in millions)

€ 2,433.2

€ 2,638.5

(€ 205.3)

(7.8)

Average price point

€ 4.56

€ 4.29

€ 0.27

6.3

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14

Machine Gaming

Machine Gaming revenue in the three months ended June 30, 2012 increased 0.9% over the same period

in 2011 primarily driven by a 12.5% increase in wagers and the deployment of additional VLTs as

detailed below. The increase in revenue occurred despite an increase in the VLT tax (that began January

1, 2012) from 2% to 4% of wagers, which is net against revenue.

2012

2011

Amount

%

(millions of euros)

VLT wagers

1,881.7

1,571.8

309.9

19.7

AWP wagers

1,106.3

1,083.2

23.1

2.1

Total wagers

2,988.0

2,655.0

333.0

12.5

(Installed at the end of June)

VLTs installed

10,005

6,626

3,379

51.0

AWP machines installed

63,668

53,008

10,660

20.1

Total machines installed

73,673

59,634

14,039

23.5

June 30,

Increase

Sports Betting

Sports betting revenue in the three months ended June 30, 2012 decreased 19.7% compared to the same

period in 2011 due to a higher payout percentage and a decrease in sports pool wagers as detailed below.

As of June 30, 2012, our market share (in terms of total wagers) with respect to fixed odds sports betting

operations was 20.8% (21.3% during the same period of 2011) with 1,207 fixed odds sports betting and

445 sports pool points of sale locations operational.

(millions of euros)

2012

2011

Wagers

%

Fixed odds sports and horse betting wagers

197.9

190.7

7.2

3.8

Sports pool wagers

11.1

17.2

(6.1)

(35.5)

209.0

207.9

1.1

0.5

June 30,

Increase (decrease)

Commercial Services

Commercial Services revenue in the three months ended June 30, 2012 increased 4.3% over the same

period in 2011 principally due to a higher number of transactions processed.

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15

Interactive

Interactive revenue in the three months ended June 30, 2012 increased 68.4% over the same period in

2011 principally driven by an increase in skill game wagers resulting from the introduction of new games

such as Poker Cash and Casino in July 2011, as detailed below.

(millions of euros)

2012

2011

Wagers

%

Skill game wagers

572.4

107.6

464.8

>200.0

June 30,

Increase

Consolidated revenue includes the following amounts for the GTECH Lottery segment:

2012

2011

€

%

Service revenue

United States

138,414

106,355

32,059

30.1

International

77,816

71,673

6,143

8.6

216,230

178,028

38,202

21.5

Product sales

United States

7,250

4,238

3,012

71.1

International

14,804

9,949

4,855

48.8

22,054

14,187

7,867

55.5

Total revenue

United States

145,664

110,593

35,071

31.7

International

92,620

81,622

10,998

13.5

238,284

192,215

46,069

24.0

June 30,

Increase

GTECH Lottery revenue is principally comprised of service revenue which is derived primarily from

long-term lottery service contracts. These contracts generally provide compensation to GTECH based

upon a percentage of a lottery's gross online and instant ticket sales. These percentages vary depending on

the size of the lottery and the scope of services provided to the lottery. GTECH Lottery product sale

revenue is derived primarily from the sale of new online lottery systems, new software, instant tickets,

and lottery terminals and equipment in connection with the expansion of existing lottery systems.

GTECH’s product sale revenue from period to period may not be comparable due to the size and timing

of product sale transactions.

GTECH has developed and continues to develop new lottery games, licenses new game brands and

installs a range of new lottery distribution devices, all of which are designed to maintain a strong level of

same store sales growth for its customers.

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16

Service revenue

United States lottery service revenue in the three months ended June 30, 2012 increased 30.1% over the

same period in 2011. This growth was primarily due to the strengthening US dollar against the euro, a

6.5% increase in same store revenue, and the reimbursement of certain operating expenses that Northstar

Lottery Group, LLC receives from the Illinois Lottery (which commenced in July 2011). Same store

revenue benefited from the continued growth of instant ticket sales, principally in California, Illinois and

Texas.

International lottery service revenue in the three months ended June 30, 2012 increased 8.6% over the

same period in 2011 primarily due to a 7.3% increase in same store revenue, fluctuations in foreign

currency exchange rates against the euro, and the positive impact from the Czech Republic customer

post-bankruptcy. These increases were partially offset by contract rate changes.

Product sales

Product sale revenue fluctuates from year to year due to the mix, volume and timing of product sale

transactions. Product sale revenue in the three months ended June 30, 2012 increased €7.9 million over

the same period in 2011 principally due to the sale of the first of three phases of an interactive gaming

system to our customer in Switzerland and terminals to our customers in Turkey and Massachusetts. No

individually material product sales were recorded in the three months ended June 30, 2011.

Consolidated revenue includes the following amounts for the SPIELO International segment:

2012

2011

€

%

Service revenue

45,849

38,499

7,350

19.1

Product sales

26,089

26,474

(385)

(1.5)

Total revenue

71,938

64,973

6,965

10.7

June 30,

Increase (decrease)

The €7.4 million increase in service revenue was principally due to intersegment software revenue related

to the development of the Italian poker platform, higher revenues from the Italian VLT market associated

with the deployment of additional VLTs, and fluctuations in foreign currency exchange rates against the

euro.

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17

Consolidated operating costs

2012

2011

€

%

Raw materials, services and other costs

374,756

368,977

5,779

1.6

Personnel

134,270

113,135

21,135

18.7

Depreciation

61,503

59,137

2,366

4.0

Amortization

44,514

45,204

(690)

(1.5)

Impairment recovery

-

(274)

274

100.0

Capitalization of internal construction costs -

labor and overhead

(25,320)

(23,585)

(1,735)

(7.4)

Total operating costs

589,723

562,594

27,129

4.8

Percentage of total revenue

79.4%

80.1%

June 30,

Increase (decrease)

The €27.1 million increase in consolidated operating costs was principally due to higher variable costs

related to the increase in revenue in the GTECH Lottery segment, along with higher costs related to the

weakening euro against the US dollar.

The Group’s worldwide employees are comprised of the following personnel:

June 30,

December 31,

2012

Personnel Description

2012

2011

Average

Executives

441

432

441

Middle Management

1,149

1,114

1,131

All Other Permanent Employees

6,516

6,369

6,465

Employees with Temporary Employment Contracts

269

117

178

8,375

8,032

8,215

Number of employees

(18)

18

Foreign exchange gain, net

Foreign exchange gains and losses are classified as realized (cash) or unrealized (non-cash) as follows:

2012

2011

€

%

Cash foreign exchange gain (loss)

(932)

574

1,506

>200.0

Non-cash foreign exchange gain

8,398

2,174

(6,224)

>200.0

7,466

2,748

(4,718)

(171.7)

June 30,

Increase (decrease)

Non-cash foreign exchange gain

Non-cash foreign exchange gain was comprised of the following:

2012

2011

€

%

GTECH euro denominated debt

10,111

(6,789)

(16,900)

>200.0

Intragroup loan (euro denominated)

-

9,093

100.0

Other

(1,713)

(130)

1,583

>200.0

8,398

2,174

(6,224)

>200.0

June 30,

Increase (decrease)

GTECH borrows in euro to better match the Group’s liabilities with euro denominated cash flows. As of

June 30, 2012 and 2011, €165.0 million and €435.0 million, respectively of euro borrowings were

outstanding under GTECH’s €500 million Revolving Facility A which resulted in non-cash foreign

exchange gains (losses) due to fluctuations in the US dollar to euro exchange rate.

Intragroup loan

In connection with the refinancing of €2.65 billion of Group debt in December 2010, Lottomatica loaned

€150 million to GTECH. Management determined that this loan would be replaced with capital.

Accordingly, the €9.1 million non-cash foreign exchange gain recorded to foreign exchange in the

consolidated income statement during the second quarter of 2011 was the reversal of the non-cash foreign

exchange loss recorded to foreign exchange in the consolidated income statement during the first quarter

of 2011 which was reclassified to other comprehensive income.

(19)

19

Interest expense

2012

2011

€

%

Capital Securities

(16,133)

(16,090)

43

0.3

2009 Notes (due 2016)

(9,662)

(9,691)

(29)

(0.3)

2010 Notes (due 2018)

(6,912)

(6,908)

4

0.1

Facilities

(4,647)

(6,756)

(2,109)

(31.2)

Other

(1,957)

(2,535)

(578)

(22.8)

(39,311)

(41,980)

(2,669)

(6.4)

June 30,

Increase (decrease)

(20)

20

COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 2012 AND 2011

Consolidated revenue for the six months ended June 30, 2012 increased 8.4% over the same period last

year as detailed by operating segment below.

2012

2011

€

%

Italian Operations

926,444

911,775

14,669

1.6

GTECH Lottery

475,782

381,774

94,008

24.6

SPIELO International

141,127

132,819

8,308

6.3

1,543,353

1,426,368

116,985

8.2

Elimination of intersegment revenue

(20,501)

(21,789)

1,288

5.9

Other

142

130

12

9.2

Total revenue

1,522,994

1,404,709

118,285

8.4

June 30,

Increase

Consolidated revenue includes the following amounts for the Italian Operations segment:

2012

2011

€

%

Lotto

202,850

217,353

(14,503)

(6.7)

Instant tickets

198,117

210,193

(12,076)

(5.7)

Other

1,474

1,022

452

44.2

Lottery

402,441

428,568

(26,127)

(6.1)

Machine Gaming

331,497

297,083

34,414

11.6

Sports Betting

79,489

97,705

(18,216)

(18.6)

Commercial Services

66,287

61,361

4,926

8.0

Interactive

46,730

27,058

19,672

72.7

Total revenue

926,444

911,775

14,669

1.6

June 30,

Increase (decrease)

An analysis of the performance during the six months ended June 30, 2012 for each product line and

service reported within the Italian Operations segment as compared to the same period last year is

described below.

(21)

21

Lotto

Lotto revenue in the first six months of 2012 decreased 6.7% compared to the same period in 2011 due to

lower late number wagers, which was partially offset by higher core wagers, as detailed below. The

increase in core wagers was principally due to higher wagers from the Lotto options game "10 and Lotto".

(millions of euros)

2012

2011

Wagers

%

Core wagers

2,931.3

2,898.4

32.9

1.1

Wagers for late numbers

195.9

462.6

(266.7)

(57.7)

3,127.2

3,361.0

(233.8)

(7.0)

June 30,

Increase (decrease)

Instant tickets

Instant ticket revenue in the first six months of 2012 decreased 5.7% compared to the same period in 2011

principally due to lower instant ticket sales as detailed below. The decrease in instant ticket sales was

primarily due to lower sales of €5 tickets.

2012

2011

Amount

%

Total tickets sold (in millions)

1,104.4

1,220.6

(116.2)

(9.5)

Total sales (in millions)

€ 5,052.8

€ 5,370.9

(€ 318.1)

(5.9)

Average price point

€ 4.58

€ 4.40

€ 0.18

4.1

(22)

22

Machine Gaming

Machine Gaming revenue in the first six months of 2012 increased 11.6% over the same period in 2011

primarily driven by a 23.2% increase in wagers and the deployment of additional VLTs as detailed below.

The increase in revenue occurred despite an increase in the VLT tax (that began January 1, 2012) from

2% to 4% of wagers, which is net against revenue.

2012

2011

Amount

%

(millions of euros)

VLT wagers

3,895.2

2,762.5

1,132.7

41.0

AWP wagers

2,249.8

2,224.1

25.7

1.2

Total wagers

6,145.0

4,986.6

1,158.4

23.2

(Installed at the end of June)

VLTs installed

10,005

6,626

3,379

51.0

AWP machines installed

63,668

53,008

10,660

20.1

Total machines installed

73,673

59,634

14,039

23.5

June 30,

Increase

Sports Betting

Sports betting revenue in the first six months of 2012 decreased 18.6% compared to the same period in

2011 due to a higher payout percentage and a decrease in wagers as detailed below.

(millions of euros)

2012

2011

Wagers

%

Fixed odds sports and horse betting wagers

435.7

466.3

(30.6)

(6.6)

Sports pool wagers

23.7

38.1

(14.4)

(37.8)

459.4

504.4

(45.0)

(8.9)

June 30,

Decrease

Commercial Services

Commercial Services revenue in the first six months of 2012 increased 8.0% over the same period in 2011

principally due to a higher number of transactions processed.

(23)

23

Interactive

Interactive revenue in the first six months of 2012 increased 72.7% over the same period in 2011

principally driven by an increase in skill game wagers resulting from the introduction of new games such

as Poker Cash and Casino in July 2011, as detailed below.

(millions of euros)

2012

2011

Wagers

%

Skill game wagers

1,162.2

225.0

937.2

>200.0

June 30,

Increase

Consolidated revenue includes the following amounts for the GTECH Lottery segment:

2012

2011

€

%

Service revenue

United States

286,262

217,124

69,138

31.8

International

151,183

142,890

8,293

5.8

437,445

360,014

77,431

21.5

Product sales

United States

10,534

6,103

4,431

72.6

International

27,803

15,657

12,146

77.6

38,337

21,760

16,577

76.2

Total revenue

United States

296,796

223,227

73,569

33.0

International

178,986

158,547

20,439

12.9

475,782

381,774

94,008

24.6

June 30,

Increase

Service revenue

United States lottery service revenue in the first six months of 2012 increased 31.8% over the same period

in 2011 primarily due to a 10.8% increase in same store revenue, the strengthening US dollar against the

euro, and the reimbursement of certain operating expenses that Northstar Lottery Group, LLC receives

from the Illinois Lottery (which commenced in July 2011). Same store revenue benefited by extraordinary

jackpot activity in the first quarter of 2012, and the continued growth of instant ticket sales, principally in

California, Illinois and Texas.

International lottery service revenue in the first six months of 2012 increased 5.8% over the same period

in 2011 primarily due to a 7.7% increase in same store revenue, fluctuations in foreign currency exchange

rates against the euro, and the positive impact from the Czech Republic customer post-bankruptcy. These

increases were partially offset by contract rate changes.

(24)

24

Product sales

Product sale revenue fluctuates from year to year due to the mix, volume and timing of product sale

transactions. Product sale revenue in the first six months of 2012 increased €16.6 million over the same

period in 2011 principally due to the sale of terminals to customers in Turkey and Massachusetts, the sale

of the first of three phases of an interactive gaming system to our customer in Switzerland, and higher

instant ticket sales. No individually material product sales were recorded in the first six months of 2011.

Consolidated revenue includes the following amounts for the SPIELO International segment:

2012

2011

€

%

Service revenue

85,908

75,435

10,473

13.9

Product sales

55,219

57,384

(2,165)

(3.8)

Total revenue

141,127

132,819

8,308

6.3

June 30,

Increase (decrease)

The €10.5 million increase in service revenue was principally due to intersegment software revenue

related to the development of the Italian poker platform, higher revenues from the Italian VLT market

associated with the deployment of additional VLTs, and fluctuations in foreign currency exchange rates

against the euro.

The €2.2 million decline in product sale revenue was principally due to lower intersegment sales of VLTs

to the Italian Operations segment, partially offset by software sales to customers in the Italian AWP

market.

Consolidated operating costs

2012

2011

€

%

Raw materials, services and other costs

769,088

719,503

49,585

6.9

Personnel

263,713

230,696

33,017

14.3

Depreciation

120,306

116,560

3,746

3.2

Amortization

91,710

89,508

2,202

2.5

Impairment recovery

-

(274)

274

100.0

Capitalization of internal construction costs -

labor and overhead

(44,375)

(43,992)

(383)

(0.9)

Total operating costs

1,200,442

1,112,001

88,441

8.0

Percentage of total revenue

78.8%

79.2%

(25)

25

The €88.4 million increase in consolidated operating costs was principally due to higher variable costs

related to the increase in revenue in the GTECH Lottery segment, higher costs related to the expansion of

the VLT market in Italy, the impact of higher variable compensation related to the improved performance

of the Group, and higher costs related to the weakening euro against the US dollar.

The Group devotes substantial resources on research and development expenditures, recognizing €35.6

million and €28.2 million of related expense in the six months ended June 30, 2012 and 2011,

respectively.

Foreign exchange gain (loss), net

Foreign exchange gains and losses are classified as realized (cash) or unrealized (non-cash) as follows:

2012

2011

€

%

Cash foreign exchange gain (loss)

(575)

1,035

1,610

155.6

Non-cash foreign exchange gain (loss)

3,060

(32,780)

(35,840)

(109.3)

2,485

(31,745)

(34,230)

(107.8)

June 30,

Increase (decrease)

Non-cash foreign exchange gain (loss)

Non-cash foreign exchange gain (loss) was comprised of the following:

2012

2011

€

%

4,763

(30,128)

(34,891)

(115.8)

Other

(1,703)

(2,652)

(949)

(35.8)

3,060

(32,780)

(35,840)

(109.3)

June 30,

Decrease

GTECH borrows in euro to better match the Group’s liabilities with euro denominated cash flows. As of

June 30, 2012 and 2011, €165.0 million and €435.0 million, respectively of euro borrowings were

outstanding under GTECH’s €500 million Revolving Facility A which resulted in non-cash foreign

exchange gains (losses) due to fluctuations in the US dollar to euro exchange rate.

(26)

26

Interest expense

2012

2011

€

%

Capital Securities

(32,054)

(32,011)

43

0.1

2009 Notes (due 2016)

(19,591)

(19,377)

214

1.1

2010 Notes (due 2018)

(13,821)

(13,814)

7

0.1

Facilities

(9,444)

(13,175)

(3,731)

(28.3)

Other

(4,013)

(5,340)

(1,327)

(24.9)

(78,923)

(83,717)

(4,794)

(5.7)

June 30,

Increase (decrease)

The decrease in interest expense was principally due to lower average debt balances.

Weighted Average Diluted Shares

Weighted average diluted shares during the first six months of 2012 totaled 172.3 million shares, an

increase of 0.3 million shares over the same period of the prior year, primarily due to the issuance of

shares under stock award plans that vested in June 2012.

Income Taxes

The Group's effective income tax rate during the first six months of 2012 was 42.3% compared to 47.5%

during the same period of the prior year. The rate decrease was principally due to the increase in pre-tax

income coupled with lower levels of expiring state tax loss carryforwards and un-benefitted foreign tax

losses.

(27)

27

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION

The Group’s objective is to maintain adequate liquidity and flexibility through the use of cash generated

from operating activities and bank facilities. We believe our ability to generate cash from operations to

reinvest in our business is one of our fundamental financial strengths and combined with our committed

borrowing capacity, we expect to meet our financial obligations and operating needs in the foreseeable

future. We expect to use cash generated primarily from operating activities to meet contractual

obligations. Our growth is expected to be financed through a combination of cash generated from

operating activities, existing sources of committed liquidity, access to capital markets, and other sources

of capital. Our corporate debt ratings of Baa3 from Moody’s Investors Service and BBB- from Standard

and Poor’s Ratings Services contribute to our ability to access capital markets at attractive prices.

Maintaining our investment-grade credit rating remains a top priority of the Group.

Summary Statements of Cash Flows

2012

2011

Net cash flows from operating activities

378,761

420,415

Purchases of systems, equipment and other assets related to contracts

(91,481)

(193,514)

Realized gain (loss) on net investment hedge

2,736

(7,631)

Cash proceeds related to impairment recovery

4,455

-Other investing activities, net

(6,664)

(11,760)

Net cash flows used in investing activities

(90,954)

(212,905)

Dividends paid

(122,220)

-Interest paid

(119,762)

(93,358)

Net proceeds from (payments on) debt

(43,215)

91,967

Return of capital - non-controlling interest

(34,562)

(8,000)

Dividends paid - non-controlling interest

(30,076)

(38,420)

Cash paid on interest rate swaps

(15,901)

(16,465)

Capital increase - Northstar Lottery Group, LLC

-

7,038

Other financing activities, net

(2,328)

(7,616)

Net cash flows used in financing activities

(368,064)

(64,854)

Net cash flows

(80,257)

142,656

June 30,

(28)

28

Analysis of Cash Flows

During the first six months of 2012, we generated €378.8 million of net cash flows from operating

activities, a decrease of €41.7 million from the same period of the prior year primarily due to an

adjustment in the second quarter of 2012 that moved €49.3 million from cash and cash equivalents into

other current assets on the consolidated balance sheet and an equivalent amount of prepaid card liabilities

from current financial liabilities to accounts payable. The adjustment resulted from an April 2012 banking

law change in Italy clarifying the nature of some assets and liabilities in the electronic money business.

This accounting adjustment had no impact on net financial position but impacted cash and cash

equivalents.

Investing activities

The €91.5 million of capital additions for systems, equipment and other assets were principally related to

spending in Italy for Machine Gaming and Lotto, as well as spending on lottery systems in Texas, Illinois,

Missouri and Luxembourg.

The €4.5 million of cash proceeds related to an impairment recovery of a foreign investment that was

recorded in the fourth quarter of 2011.

Financing activities

During the first six months of 2012, dividends of €122.2 million (€0.71 per share) were paid to our

shareholders for calendar 2011 results. Interest paid of €119.8 million primarily related to the Capital

Securities and the 2010 Notes due 2018. Net payments on debt of €43.2 million were primarily due to

principal payments under GTECH’s €500 million revolving credit facility. We returned €34.6 million of

capital to non-controlling shareholders and paid them €30.1 million of dividends. Cash paid on interest

rate swaps of €15.9 million related to interest rate swaps that expired on June 30, 2012.

At June 30, 2012, we had €110.8 million of cash and cash equivalents on hand.

Our business is capital-intensive. We expect our principal sources of liquidity to be existing cash

balances, cash generated from operations and borrowings under €900 million of committed revolver

facilities. At June 30, 2012, there was €712.9 million of committed undrawn capacity under the revolver

facilities. These facilities have covenants and restrictions including, among other things, requirements

relating to the maintenance of certain financial ratios and limitations on acquisitions and dividends, none

of which are expected to impact the Group’s liquidity or capital resources. At June 30, 2012, we were in

compliance with all applicable covenants.

We currently expect that our cash flow from operations, existing cash, undrawn capacity under existing

borrowing facilities and access to additional sources of capital will be sufficient, for the foreseeable

future, to fund our anticipated working capital and capital expenditure needs, to service our debt

obligations and to fund organic growth. Our strategy is to maintain committed undrawn capacity under

existing borrowing facilities to allow us the flexibility to fund unforeseen investment opportunities.

(29)

29

Summary Statements of Financial Position

June 30,

December 31,

2012

2011

€

%

Systems, equipment and other assets related

to contracts, net

980,854

988,733

(7,879)

(0.8)

Goodwill

3,300,221

3,232,814

67,407

2.1

Intangible assets, net

1,439,592

1,512,251

(72,659)

(4.8)

Other non-current assets

150,323

144,454

5,869

4.1

Total non-current assets

5,870,990

5,878,252

(7,262)

(0.1)

Inventories

185,676

145,578

40,098

27.5

Trade and other receivables, net

775,522

669,759

105,763

15.8

Cash and cash equivalents

110,750

190,675

(79,925)

(41.9)

Other current assets

169,138

122,612

46,526

37.9

Total assets

7,112,076

7,006,876

105,200

1.5

Equity

2,657,361

2,609,155

48,206

1.8

Long-term debt, less current portion

2,590,877

2,613,282

(22,405)

(0.9)

Deferred income taxes

168,413

147,676

20,737

14.0

Non-current financial liabilities

44,830

43,014

1,816

4.2

Other non-current liabilities

105,408

100,100

5,308

5.3

Total non-current liabilities

2,909,528

2,904,072

5,456

0.2

Accounts payable

953,446

821,104

132,342

16.1

Short-term borrowings

14,105

15,589

(1,484)

(9.5)

Current financial liabilities

23,291

102,743

(79,452)

(77.3)

Current portion of long-term debt

146,936

173,483

(26,547)

(15.3)

Income taxes payable

82,253

50,610

31,643

62.5

Other current liabilities

325,156

330,120

(4,964)

(1.5)

Total equity and liabilities

7,112,076

7,006,876

105,200

1.5

Increase (decrease)

The €7.9 million decrease in systems, equipment and other assets related to contracts, net was principally

due to €113.5 million of depreciation which was partially offset by €86.4 million of capital additions and

€21.0 million of foreign currency translation.

The €67.4 million in