10-Q

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 January 31, 2010

[ ]           TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________________ to________________________

Commission File Number:  0-10294

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

California	95-3276269
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2310 Cousteau Court Vista, California (Address of principal executive offices) 92081-8346 (Zip Code)

(760) 598-1655

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Yes o Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	ý

(Do not check if a smaller reporting company)

1

Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes o Noý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at March 12, 2010
Common Stock, no par value per share	12,962,999 shares

2

INDEX

PART I	FINANCIAL INFORMATION	PAGE
Item 1.	Financial Statements (Unaudited)	4-12
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13-17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4T.	Controls and Procedures	18
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 5.	Other Information	19
Item 6.	Exhibits	20
	Signatures	21

EXHIBIT 31.1

EXHIBIT 31.2

EXHIBIT 32

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PART I	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(Amounts in thousands)

	January 31, 2010			April 30, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	4,240		$	4,041
Certificates of deposit		1,214			1,803
Accounts receivable, net of allowance for doubtful accounts of $75		205			116
Costs and estimated earnings in excess of billings on uncompleted contracts		-			3
Inventories, net		730			846
Other current assets		391			170
Total current assets		6,780			6,979
Equipment, furniture and fixtures, net		349			415
Other noncurrent assets		74			71
Total assets	$	7,203		$	7,465
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	250		$	328
Billings in excess of costs and estimated earnings on uncompleted contracts		1,820			482
Accrued payroll and related taxes		385			450
Warranty reserves		23			21
Payable to Parent		250			250
Other current liabilities		40			62
Deferred revenues		366			248
Total current liabilities		3,134			1,841
Commitments and contingencies
Shareholders’ equity:
Preferred shares, no par value; 20,000 shares authorized; no shares issued or outstanding		-			-
Common shares, no par value; 50,000 shares authorized; 12,963 shares issued and outstanding		56,370			56,370
Accumulated deficit		(52,301	)		(50,746	)
Total shareholders' equity		4,069			5,624
Total liabilities and shareholders' equity	$	7,203		$	7,465

See notes to condensed consolidated financial statements

4

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Amounts in thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	January 31,						January 31,
	2010			2009			2010			2009
Revenues:
Sales of products	$	910		$	778		$	3,483		$	4,719
Services		174			184			531			416
		1,084			962			4,014			5,135
Cost of sales:
Cost of product sales		674			777			2,789			2,479
Cost of services		9			18			70			80
		683			795			2,859			2,559
Gross profit		401			167			1,155			2,576
Research and development expenses		427			527			1,295			1,582
Selling, general and administrative expenses		421			339			1,430			1,262
Loss from operations		(447	)		(699	)		(1,570	)		(268	)
Other income (expense):
Interest and dividend income		1			17			8			76
Other		-			(4	)		(3	)		(7	)
Loss before income taxes		(446	)		(686	)		(1,565	)		(199	)
Provision for (benefit of) income taxes		(10	)		-			(10	)		-
Net loss	$	(436)		$	(686	)	$	(1,555	)	$	(199	)
Net loss per share:
Basic and diluted	$	(0.04	)	$	(0.05	)	$	(0.12	)	$	(0.01	)
Weighted average shares used in computation of net loss per share:
Basic and diluted		12,963			12,963			12,963			12,963

See notes to condensed consolidated financial statements

5

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Amounts in thousands)

	Nine Months Ended January 31,
	2010		2009
Cash flows from operating activities:
Net loss	$	(1,555)	$	(199)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization		105		162
Warranty reserve expense (adjustments)		11		(382)
Gain on sale of equipment		-		(71)
Changes in operating assets and liabilities:
Accounts receivable		(89)		320
Costs and estimated earnings in excess of billings on uncompleted contracts		3		56
Inventories		116		97
Other current assets		(221)		(5)
Accounts payable		(78)		116
Billings in excess of costs and estimated earnings on uncompleted contracts		1,338		157
Accrued payroll and related taxes		(65)		(2)
Warranty reserves		(9)		(17)
Payable to Parent		-		1
Other liabilities		(22)		(21)
Deferred revenues		118		29
Net cash provided by (used in) operating activities		(348)		241
Cash flows from investing activities:
Purchases of certificates of deposit		(1,214)		(385)
Proceeds from redemption of certificates of deposit		1,803		569
Additions to equipment, furniture and fixtures		(34)		(248)
Additions to intangible asset		(8)		-
Proceeds from sale of equipment		-		71
Net cash provided by investing activities		547		7
Net increase in cash and cash equivalents		199		248
Cash and cash equivalents at beginning of period		4,041		5,049
Cash and cash equivalents at end of period	$	4,240	$	5,297

See notes to condensed consolidated financial statements

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Description of the Business

International Lottery & Totalizator Systems, Inc. (“ILTS” or the “Company,” together with its subsidiary,) designs, manufactures, sells, manages, supports and services computerized wagering systems and terminals for the global online lottery and pari-mutuel racing industries.  The wagering system features include real-time, secure processing of data received from multiple locations, hardware redundancy and complete communications redundancy in order to provide the highest level of fault tolerant operation. In addition, although the Company is not presently doing so, ILTS has demonstrated capability to provide full facilities management services to customer organizations authorized to conduct online lotteries.  The Company is largely dependent upon significant contracts for its revenue, which typically include a deposit upon contract signing and up to six months lead time before delivery of hardware begins.

In recent years, the Company has devoted significant resources in developing certified end-to-end optical scan voting systems and a full-featured Election Management Software that provides precinct tabulation, ballot review and audio voting capability.  In addition to the Inkavote Plus Precinct Ballot Counter (“PBC”) system certified to the National Association of State Election Directors (“NASED”) 2002 Voting System Standards (“VSS”), the Company recently became the first to receive the 2005 Voluntary Voting System Guidelines (“VVSG”) certification from the Election Assistance Commissions (“EAC”) for its OpenElect® digital optical scan election system - the only digital scan voting system built with Java on a streamlined and hardened Linux platform.  As part of a jurisdiction's procurement process, the Company will provide the OpenElect® products’ source code for independent review.

These efforts leverage the Company’s extensive experience to develop highly secure, mission-critical solutions that meet the NASED 2002 VSS and the EAC 2005 VVSG standards. In addition, the Company’s voting systems offer the following features:

•           High level of security and vote encryption to ensure integrity and voter privacy;

•           Electronic and paper audit trails that offer added security and redundancy for recounts;

•           Minimal training for poll workers to set-up and operate; and

•           Minimal voter re-education.

Berjaya Lottery Management (H.K.) Ltd. (“BLM” or the “Parent”) owns 71.3% of the outstanding voting stock of ILTS.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of ILTS and its wholly-owned subsidiary, Unisyn Voting Solutions, Inc.  All significant inter-company accounts and transactions are eliminated in consolidation.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the Securities and Exchange Commission’s (“SEC”) instructions to Form 10-Q.  Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows have been included.

The results of operations for the interim periods shown in this report are not necessarily indicative of the results to be expected for the full year.  The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2009 filed with the SEC on July 8, 2009.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions.  Actual results could differ from those estimates.  Estimates may affect the reported amounts of assets and liabilities and revenues and expenses, and the disclosure of contingent assets and liabilities.

7

Financial Accounting Standard Board Accounting Standards Codification

During the quarter ended October 31, 2009, the Company adopted authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) to the authoritative hierarchy of US GAAP.  The guidance establishes the FASB Accounting Standards Codification (“Codification” or “ASC”) as the source of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with accounting principles generally accepted in the United States.  

Subsequent Events

In accordance with FASB ASC Topic 855, "Subsequent Events," the Company has evaluated subsequent events and transactions for potential recognition or disclosure in the condensed consolidated financial statements through the date of filing of this Form 10-Q.

Deferred Revenues

Deferred revenues of approximately $366,000 as of January 31, 2010 represent prepayments for software products which were related to the use of the PBC voting system and other software and technical support services.  The Company will recognize the revenues upon its fulfillment of the prescribed criteria for revenue recognition.

Warranty Reserves

Estimated warranty costs are accrued as revenues are recognized.  Included in the warranty cost accruals are costs for basic warranties on products sold.  A summary of product warranty reserve activity for the nine months ended January 31, 2010 is as follows:

(Amounts in thousands)
Balance at May 1, 2009	$	21
Additional reserves		40
Warranty reserve expense adjustments		(29)
Charges incurred		(9)
Balance at January 31, 2010	$	23

Segment Information

FASB ASC 280 “Segment Reporting” requires companies to report certain information about operating segments in their condensed consolidated financial statements and establishes standards for related disclosures about products and services, geographic areas and major customers.  FASB ASC 280 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance.

The Company divides its operations into two operating segments: the gaming business and the voting business.  The gaming segment designs, manufactures and manages computerized wagering systems and terminals for the online lottery and pari-mutuel racing industries worldwide.   The voting system business generates licensing revenue, manufacturing and product servicing and support revenue.

8

The Company’s segment information is presented below:

	As of and for the Three Months Ended
	January 31, 2010
	Gaming Business			Voting Business			Totals
Total revenues		$	1,004		$	80		$	1,084
Income (loss) from operations			92			(539)			(447)
Depreciation and amortization			28			5			33
Equipment, furniture and fixtures, net			190			159			349
Deferred revenues			14			352			366
	As of and for the Three Months Ended
	January 31, 2009
	Gaming Business			Voting Business			Totals
Total revenues		$	862		$	100		$	962
Loss from operations			(188)			(511)			(699)
Depreciation and amortization			36			7			43
Equipment, furniture and fixtures, net			285			160			445
Deferred revenues			8			239			247
	As of and for the Nine Months Ended
	January 31, 2010
	Gaming Business			Voting Business			Totals
Total revenues		$	3,750		$	264		$	4,014
Income (loss) from operations			140			(1,710)			(1,570)
Depreciation and amortization			90			15			105
Equipment, furniture and fixtures, net			190			159			349
Deferred revenues			14			352			366
	As of and for the Nine Months Ended
	January 31, 2009
	Gaming Business			Voting Business			Totals
Total revenues		$	4,434		$	701		$	5,135
Income (loss) from operations			648			(916)			(268)
Depreciation and amortization			100			62			162
Equipment, furniture and fixtures, net			285			160			445
Deferred revenues			8			239			247

9

Inventories

Inventories are stated at the lower of cost or the current estimated market values.  Cost is determined using the first-in, first-out method.  Inventories consisted of raw materials and subassemblies totaling approximately $730,000 and $846,000 as of January 31, 2010 and April 30, 2009, respectively.

The Company periodically reviews inventory quantities on hand and records a provision for excess and obsolete inventories based on the following factors:

· Terminal models still currently in the field;

· The average life of the models; and

· The requirement for replacement parts on older models.

Net Income (Loss) per Share

Basic net income (loss) per share is based on the weighted average number of shares outstanding during the period.  

During the three months ended October 31, 2009, the 84,000 options outstanding expired.  Therefore, there were no outstanding options at January 31, 2010.  At January 31, 2009, the effects of the assumed exercise of options to purchase 86,000 shares of the Company’s common stock at the price of $1.00 were not included in the computation of diluted net loss per share amounts because they were anti-dilutive for that purpose.

 Stock Options

Descriptions of the stock option plans are included in Note 9 of the Company’s Annual Report on Form 10-K for the year ended April 30, 2009.  A summary of the status of the Company’s vested stock options for the nine months ended January 31, 2010 is presented below:

(shares in thousands)

Stock Options	Shares		Weighted -Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Options outstanding at May 1, 2009		84	$	1.00	0.48 year		-
Granted		-		-			-
Exercised		-		-			-
Forfeited/expired		(84)		-
Options outstanding at January 31, 2010		-	$	-	-		-

The Company did not grant any stock options or warrants to employees in the year ended April 30, 2009 and the nine months ended January 31, 2010.  There was no share-based compensation expense related to employee stock options recognized during the three and nine months ended January 31, 2010 and 2009.

10

Major Customers

The following table summarizes major customers who individually accounted for more than 10% of revenues for the periods presented.

	Three Months Ended January 31,		Nine Months Ended January 31,
	2010	2009	2010	2009
Revenue:
From unrelated customers	One customer accounted for 21% of total revenue	Two customers accounted for 35% of total revenue	One customer accounted for 16% of total revenue	Two customers accounted for 42% of total revenue
From related customers	Two customers accounted for 64% of total revenue	One customer accounted for 49% of total revenue	One customer accounted for 64% of total revenue	Two customers accounted for 45% of total revenue

Related Party Transactions

During the three months ended January 31, 2010 and 2009, revenues from all related party agreements for sales of products and services totaled approximately $771,000 (71% of total revenue) and $572,000 (59% of total revenue), respectively.  Related party revenues for the nine months ended January 31, 2010 and 2009 were approximately $3.1 million (77% of total revenue) and $2.4 million (47% of total revenue), respectively.  Included in accounts receivable at January 31, 2010 was $181,000 from these customers.  Descriptions of the transactions with the Company’s related parties in the three and nine months ended January 31, 2010 and 2009 are presented below.

Berjaya Lottery Management (H.K.) Ltd.

In 1996, the Company entered into an agreement to purchase specific inventory on behalf of BLM, the owner of 71.3% of ILTS’s outstanding voting stock as of January 31, 2010.  Title to the inventory resides with BLM and is on consignment; therefore, no amounts are reflected in the Company’s condensed consolidated balance sheets for inventory purchased on BLM’s behalf.

Over time, the Company has sold or used portions of the BLM inventory in unrelated third party transactions.  The sale or use of the inventory results in a liability to BLM for the cost of the items utilized.

The financial activities and balances related to BLM were as follows:

•           There were no related party sales to BLM in the three and nine months ended January 31, 2010 and 2009;

•           There were no accounts receivable balances from BLM as of January 31, 2010; and

•           Liabilities to BLM arising from the sale or use of the BLM inventory, recorded as “Payable to Parent,” were $250,000 as of January 31, 2010.

Philippine Gaming Management Corporation

On January 11, 2010, the Company received from Philippine Gaming Management Corporation (“PGMC”), a related party and a subsidiary of BLM, an order valued at approximately $1.8 million for lottery products.  Shipments of these products are expected to begin in the first quarter of fiscal 2011 and complete in the second quarter of fiscal 2011.

On November 16, 2009, the Company executed an agreement with PGMC to provide software product and services valued at approximately $380,000.  The implementation of the software product was completed in the third quarter of fiscal 2010, and the related revenue was recognized.

On March 6, 2009, the Company received from PGMC an order valued at approximately $1.8 million for lottery products. Shipments of these products were completed in the first and second quarters of fiscal 2010, and the related revenue was recognized.

11

In addition, the Company provides terminal spare parts to PGMC on an ongoing basis.

The financial activities and balances related to transactions with PGMC were as follows:

•           Revenues recognized on the sale of lottery products, software and support service during the three and nine months ended January 31, 2010 totaled approximately $489,000 and $2.5 million, respectively.  For the three and nine months ended January 31, 2009, revenues recognized on the shipment of the lottery products totaled approximately $89,000 and $1.7 million, respectively;

•           Billings in excess of costs and estimated earnings relating to the lottery product order dated January 11, 2010 mentioned above totaled $441,000 as of January 31, 2010;

•           There was deferred revenue of $5,000 on software support services as of January 31, 2010; and

•           Accounts receivable from the sale of lottery products and services totaled $48,000 as of January 31, 2010.

Sports Toto Malaysia Sdn. Bhd.

The Company provides lottery products, software development and software support services to Sports Toto Malaysia (“STM”), a related party.  

On January 11, 2010, the Company received from STM an order valued at $255,000 for lottery products.  The products are scheduled for delivery in the fourth quarter of fiscal 2010.

The financial activities and balances related to transactions with STM were as follows:

•           Revenues of $73,000 and $295,000 were recognized on the sale of software support services and lottery products during the three and nine months ended January 31, 2010, respectively.  During the three and nine months ended January 31, 2009, revenues of $467,000 and $633,000 were recognized on the sale of software development, software support services and lottery products, respectively;

•           There was deferred revenue of $9,000 on software support services as of January 31, 2010;

•           Net billings in excess of costs and estimated earnings relating to the abovementioned order dated January 11, 2010 totaled $125,000 as of January 31, 2010; and

•           Accounts receivable totaled $128,000 as of January 31, 2010.

Natural Avenue Sdn. Bhd.

The Company provides Natural Avenue Sdn. Bhd. (“Natural Avenue”), a related party, with lottery and software products, support services and spare parts.  

On December 16, 2009, the Company signed a contract with Natural Avenue for a complete online DataTrak lottery system  valued at approximately $3.6 million.  The contract is scheduled to be completed by the second quarter of fiscal 2011.

The financial activities and balances related to transactions with Natural Avenue were as follows:

•           Revenues of $209,000 and $240,000 were recognized on the performance of software development and sale of support services during the three and nine months ended January 31, 2010, respectively.  During the three and nine months ended January 31, 2009, revenues of $16,000 and $45,000 were recognized on the sale of support services, respectively;

•           Net billings in excess of costs and estimated earnings relating to the abovementioned contract dated December 16, 2009 totaled approximately $1.3 million as of January 31, 2010; and

•           Accounts receivable totaled approximately $5,000 at January 31, 2010.

Sports Toto Computers Sdn. Bhd.

The Company engages Sports Toto Computers Sdn. Bhd. (“STC”), a related party, to provide consulting, programming and other related services to the Company.

During the three and nine months ended January 31, 2010, the Company incurred approximately $47,000 and $130,000, respectively.  For the same periods in 2009, the Company incurred $16,000 and 44,000, respectively.

Recent Accounting Pronouncements

In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective for the Company beginning May 1, 2011, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. We believe adoption of this new guidance will not have a material impact on our financial statements.

12

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

SAFE HARBOR STATEMENT PURSUANT TO SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or the "Securities Act," and Section 21E of the Securities Exchange Act of 1934 or the "Exchange Act." These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results, including those set forth under the heading "Risk Factors" and elsewhere in, or incorporated by reference into, this report. In some cases, you can identify forward looking statements by terms such as "may," "intend," "might," "will," "should," "could," "would," "expect," "believe," "anticipate," "estimate," "predict," "potential," or the negative of these terms. These terms and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. The forward-looking statements in this report are based upon management's current expectations and belief, which management believes are reasonable. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor or combination of factors, or factors we are aware of, may cause actual results to differ materially from those contained in any forward looking statements. You are cautioned not to place undue reliance on any forward-looking statements. These statements represent our estimates and assumptions only as of the date of this report. Except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including, such factors, among others, as dependence on business from foreign customers sometimes located and operated in politically unstable regions, political and governmental decisions as to the establishment of lottery and other wagering industries in which our products are marketed, fluctuations in quarter-by-quarter operating results, market acceptance and market demand for our products and services, pricing, the changing regulatory environment, the effect of our accounting policies, potential seasonality, industry trends, adequacy of our financial resources to execute our business plan, our ability to attract, retain and motivate key technical, marketing and management personnel, and other risks described from time to time in periodic and current reports we file with the United States Securities and Exchange Commission, or the "SEC." You should consider carefully the statements under "Item 1A. Risk Factors" described in our Annual Report on Form 10-K for the year ended April 30, 2009, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements and could materially and adversely affect our business, operating results and financial condition. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements.

CRITICAL ACCOUNTING POLICIES

Use of Estimates

Our condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. Accordingly, we are required to make estimates, judgments and assumptions that we believe are reasonable.  We base our estimates on historical experience, contract terms, observance of known trends in our company and the industry as a whole, and information available from other outside sources.  Estimates affect the reported amounts and related disclosures. Actual results may differ from initial estimates.  The areas most sensitive to estimation are revenue recognition,  inventory valuation, the allowance for doubtful accounts and the deferred tax valuation allowance.

13

RESULTS OF OPERATIONS

Revenue Analysis

	Three Months Ended						Nine Months Ended
(Amounts in thousands)	January 31,						January 31,
Revenues	2010		2009		Change		2010		2009		Change
Products:
Contracts	$	523	$	361	$	162	$	2,372	$	3,098	$	(726)
Spares		387		417		(30)		1,111		1,142		(31)
Licensing		-		-		-		-		479		(479)
Total Products		910		778		132		3,483		4,719		(1,236)
Services:
Software Support		170		168		2		497		334		163
Product Servicing and Support		4		16		(12)		34		82		(48)
Total Services		174		184		(10)		531		416		115
	$	1,084	$	962	$	122	$	4,014	$	5,135	$	(1,121)

Significant fluctuations in period-to-period contract revenue are expected in both gaming and voting industries since individual contracts are generally considerable in value, and the timing of contracts does not occur in a predictable trend. Contracts from the same customer generally may not recur or generally do not recur in the short-term.  Accordingly, comparative results between quarters may not be indicative of trends in contract revenue.

The current domestic and global economic slowdown and tightening of the credit markets may adversely affect our business and financial condition in ways that we cannot reasonably predict.  For the gaming business, due to the tightening of the credit markets, our potential and existing customers may not be able to secure financing for lottery projects which will effectively impact our revenue potential.  For the voting business, various government entities and jurisdictions have experienced severe budget constraints which could compel them to delay or cancel their purchasing decisions, and hence, impact our ability to generate revenue.

Contract revenue for the three months ended January 31, 2010 was $523,000, compared to $361,000 in the same period in 2009.  Third quarter fiscal 2010 revenue was derived from two contracts while third quarter fiscal 2009 revenue was derived from one contract.  For the nine months ended January 31, 2010, contract revenue was $2.4 million, compared to $3.1 million for the corresponding period in 2009.  We generated limited contract sales in fiscal 2010 due to the absence of one lottery contract, compared to the same period in the prior fiscal year.

Spares revenue for the three months ended January 31, 2010 was $387,000, compared to $417,000 for the corresponding period in 2009.  For the nine months ended January 31, 2010 and 2009, spares revenues were approximately $1.1 million.  We derived spares revenue from relatively fewer customers as compared to the same periods in the prior year.  Customer demand for spare parts fluctuates from period to period.

During the three and nine months ended January 31, 2010, we did not generate any licensing revenue due to limited business opportunity. Licensing revenue of $479,000 for the nine months ended January 31, 2009 was related to a prior agreement between ILTS and Election Systems & Software, Inc. (“ES&S”) whereby ILTS granted ES&S an exclusive worldwide license to manufacture, sell and sublicense to ES&S’s end customers ILTS’s intellectual property relating to the PBC and PBC software it designed.   

Software support revenue remained relatively constant at $170,000 for the three months ended January 31, 2010, compared to that of the same period in 2009.  For the nine months ended January 31, 2010, software support revenue was $497,000, compared to $334,000 for the same period in 2009. The increase in software support revenue in 2010 is due to two additional software support agreements with an unrelated customer and a related customer.

14

Product servicing and support revenue for the periods ended January 31, 2010 and 2009 remained relatively insignificant.

Related party revenue of approximately $771,000 accounted for 71% of total revenue in the three months ended January 31, 2010, compared to $572,000 or 59% of total revenue in the corresponding period in 2009.  For the nine months ended January 31, 2010, related party revenue of approximately $3.1 million accounted for 77% of total revenue, compared to $2.4 million or 47% of total revenue in the corresponding period in 2009. 

Cost of Sales and Gross Profit Analysis

	Three Months Ended								Nine Months Ended
	January 31,				January 31,				January 31,				January 31,
(Amounts in thousands)	2010				2009				2010				2009
Revenues:
Products	$	910	84	%	$	778	81	%	$	3,483	87	%	$	4,719	92	%
Services		174	16	%		184	19	%		531	13	%		416	8	%
Total revenues	$	1,084	100	%	$	962	100	%	$	4,014	100	%	$	5,135	100	%
Cost of sales:
Products	$	674	62	%	$	777	81	%	$	2,789	69	%	$	2,479	48	%
Services		9	1	%		18	2	%		70	2	%		80	2	%
Total costs of sales	$	683	63	%	$	795	83	%	$	2,859	71	%	$	2,559	50	%
Gross profit:
Products	$	236	22	%	$	1	-	%	$	694	17	%	$	2,240	44	%
Services		165	15	%		166	17	%		461	12	%		336	6	%
Total gross profit	$	401	37	%	$	167	17	%	$	1,155	29	%	$	2,576	50	%

Individual contracts are generally significant in value and are awarded in a highly competitive bidding process.  The gross profit margin varies from one contract to another, depending on the size of the contract and the competitiveness of market conditions.  Accordingly, comparative results between quarters may not be indicative of trends in gross profit margin.

Overall gross profit margins were at 37% for the three months ended January 31, 2010, compared to 17% for the corresponding period in 2009.  The significant variance is largely attributable to lower profit margins achieved on the sale of certain spare parts in the three months ended January 31, 2009 and increased profit margins on contracts performed in the three months ended January 31, 2010.  For the nine months ended January 31, 2010, overall gross profit margins were at 29%, compared to 50% in the same period in 2009.   The reductions in 2010, partially offset by increased profit margins on the sale of spare parts, are largely due to substantially higher unabsorbed production costs resulting from decreased utilization of labor as there were fewer contract related activities and less research and development efforts expended.  The absence of licensing revenue in 2010 and reduced profit margins on contract sales also contributed to the decline in gross profit margins.  In addition, during the nine months ended January 31, 2009, we recorded warranty reserve expense adjustment of $357,000 to reflect the expiration of our software warranty obligations with one customer.  This adjustment reduced the cost of sales which effectively increased the gross profit margin in 2009.

Research and Development Expenses (“R&D”)

For the three months ended January 31, 2010, R&D expenses were $427,000, compared to $527,000 in the same period in 2009.  For the nine months ended January 31, 2010, R&D expenses were $1.3 million, compared to $1.6 million in the same period in 2009.  We attribute the decreases to the completion of the development of new voting system products.  We anticipate that R&D expenses will continue to decrease considerably in the remaining quarter of fiscal 2010 as we focus our efforts on the marketing and sale of the new voting system.

15

Selling, General and Administrative (“SG&A”)

SG&A expenses for the three months ended January 31, 2010 were $421,000, compared to $339,000 in the same period in 2009.   The variance is primarily attributable to a one-time gain on the sale of certain fixed assets in 2009.  For the nine months ended January 31, 2010, SG&A expenses were $1.4 million, compared to $1.3 million in the same period in 2009.  The increases in SG&A expenses are primarily related to higher personnel costs, the absence of a one-time gain on the sale of certain fixed assets in 2009 and internal labor costs incurred and allocated for compliance work related to the Sarbanes-Oxley requirements, partially offset by lower marketing expenses and legal fees. We anticipate that SG&A expense will remain relatively constant for the remaining quarter of fiscal 2010.

Other Income

Other income in the three and nine months ended January 31, 2010 and 2009 consisted of interest and dividend income.  We derived interest and dividend income from certificates of deposit and cash and cash equivalent balances during the three and nine months ended January 31, 2010 and 2009.  The significant reduction in interest and dividend income is primarily due to reduced yield and return on investments as a result of the financial market conditions and investment vehicles opted.

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Our net working capital at January 31, 2010 was $3.6 million.

Contract backlog at January 31, 2010 was approximately $5.7 million.  Of this amount, approximately $5.5 million will be derived from contracts executed with related customers.  The remaining contract backlog amount of approximately $212,000 relates to a voting contract with an unrelated customer.

Additional sources of cash through January 31, 2011 are expected to be derived from spares, software and technical support revenues.  Uses of cash are expected to be for normal operating expenses and costs associated with contract deliverables.

While we anticipate that we will be successful in obtaining additional product or service contracts to enable us to continue normal operations through January 31, 2011, there can be no assurance that we will be able to acquire new contracts.

In the highly competitive industry in which we operate, operating results may fluctuate significantly from period to period.  We anticipate that our cash flows from operations, expected contract payments and available cash will be sufficient to enable us to meet our liquidity needs through at least January 31, 2011.  Although we are not aware of any particular trends, in the event that we are unable to secure new business, we may experience reduced liquidity or insufficient cash flows.

The following table summarizes our cash flow activities:

	Nine Months Ended
	January 31,		January 31,		Increase
	2010		2009		(Decrease)
(Amounts in thousands)
Condensed cash flow comparative:
Operating activities	$	(348)	$	241	$	(589)
Investing activities		547		7		540
Net increase in cash and cash equivalents	$	199	$	248	$	(49)

Cash Flow Analysis

Net cash used in operating activities was $348,000 for the nine months ended January 31, 2010, compared to net cash provided by operating activities of $241,000 for the same period in 2009.  The primary factors contributing to the variability in the reported cash flow amounts relate to a net loss of $1.6 million incurred in 2010, compared to a net loss of $199,000 in 2009, and down payments remitted to supplier for contract deliverables.  These negative factors were partially offset by a significant increase in contract milestone billings associated with related customer contracts.

Net cash provided by investing activities was $547,000 for the nine months ended January 31, 2010, compared to $7,000 in 2009.  Net cash provided by investing activities in the nine months ended January 31, 2010 resulted primarily from the redemption of matured certificates of deposits.  Capital expenditures amounted to $34,000 in the nine months ended January 31, 2010, compared to $248,000 in 2009.  Higher capital expenditures in 2009 were related to the purchase of test and tooling equipment.

There were no financing activities for the nine months ended in January 31, 2010 or 2009.

Capital Resources

As of January 31, 2010, there were no unused credit facilities.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

17

ITEM 4T. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in SEC Rule 13a-15(e) and 15d-15 (e)) as of the end of the period covered by this report.  Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and (ii) accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

There have not been any changes in the Company’s internal control over financial reporting during the quarter ended January 31, 2010 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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PART II	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS

The Company is currently not a party to any pending legal proceedings, and no such action by or, to the best of its knowledge, against the Company has been threatened as of the date of this report.

ITEM 1A. RISK FACTORS

The discussion of risk factors relating to our business is disclosed in our Form 10-K for the fiscal year ended April 30, 2009 filed with the SEC on July 8, 2009.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable  

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 5. OTHER INFORMATION

Not applicable

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ITEM 6. EXHIBITS

A.          Exhibits

Exhibit Number		Document Description
	31.1	Certification of the Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of the Chief Financial Officer of the Company Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	Certification Pursuant to 18 United States Code Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

20

SIGNATURES

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

Dated:      March 12, 2010		INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
	/s/	Jeffrey M. Johnson Jeffrey M. Johnson
		President
	/s/	T. Linh Nguyen
		T. Linh Nguyen
		Chief Financial Officer and Corporate Secretary

21

EX-31.1

EX-31.2

EXHIBIT 31.2

Certification requirements set forth in Section 302 (a) of the Sarbanes-Oxley Act.

 I, T. Linh Nguyen, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of International Lottery & Totalizator Systems, Inc. (“ILTS”);

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of ILTS as of, and for, the periods presented in this report;

4.    ILTS’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for ILTS and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to ILTS, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   Evaluated the effectiveness of ILTS’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  Disclosed in this report any change in ILTS's internal control over financial reporting that occurred during ILTS’s most recent fiscal quarter (ILTS's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, ILTS's internal control over financial reporting.

5.    ILTS’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to ILTS’s auditors and the audit committee of ILTS’s board of directors (or persons performing the equivalent functions):

(a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect ILTS’s ability to record, process, summarize and report financial information; and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in ILTS's internal control over financial reporting.

Dated: March 12, 2010	/s/	T. Linh Nguyen
		T. Linh Nguyen
		Chief Financial Officer and Corporate Secretary

EX-32

EXHIBIT 32

Certification of the Chief Executive Officer and

the Chief Financial Officer

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of International Lottery & Totalizator Systems, Inc. (the “Company”) hereby certify that:

(i)   the Quarterly Report on Form 10-Q of the Company for the period ended January 31, 2010 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 12, 2010	/s/	Jeffrey M. Johnson
		Jeffrey M. Johnson
		President
	/s/	T. Linh Nguyen
		T. Linh Nguyen
		Chief Financial Officer and Corporate Secretary