Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x

Revenues for the year ended April 30, 2008 were $13,025,375.

Aggregate market value of voting stock held by non-affiliates of the Registrant as of July 11, 2008 was approximately $1,412,719.

Number of common shares outstanding at July 11, 2008 was 12,962,999.

 
 
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

DOCUMENTS INCORPORATED BY REFERENCE
None.
 
Transitional Small Business Disclosure Format  Yes o   No x


 
 
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.


PART I
     
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
     
PART II
     
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 8A.
ITEM 8B.
     
PART III
     
ITEM 9.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.

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

This report includes forward−looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for forward−looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Report are forward−looking. We use words such as "anticipate," "believe," "expect," “future," "intend" and similar expressions to identify forward−looking statements.  Forward−looking statements reflect management's current expectations, plans or projections and are inherently uncertain. Our actual results may differ significantly from management's expectations, plans or projections.  Readers are cautioned not to place undue reliance on these forward−looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release any revisions to these forward−looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are urged, however, to review the factors set forth in reports that we file from time to time with the Securities and Exchange Commission.


INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.


PART I

ITEM 1. DESCRIPTION OF BUSINESS

The terms “ILTS,” “the Company,” “we,” “our” and “us” refer to International Lottery & Totalizator Systems, Inc. and its consolidated subsidiaries, unless otherwise specified.

Organizational History

ILTS is a leading supplier of computerized wagering systems for the online lottery and pari-mutuel racing industries.  In addition, in recent years, our company has developed a fully integrated, certified end-to-end optical scan voting system consisting of the InkaVote Plus Precinct Ballot Counter (“PBC”) and full-featured Election Management Software that provides precinct tabulation, ballot review and audio voting capability in an integrated compact solution.  We have initiated a strategic alliance with Election Systems & Software, Inc. (“ES&S”) to grant ES&S an exclusive worldwide license to manufacture, sell and sublicense our intellectual property relating to the PBC and PBC software to ES&S’s end customers.

Our company was founded in 1978 and completed an initial public offering in 1981.  Our operations and corporate headquarters are located in Vista, California.

Business Overview

Lottery and Pari-Mutuel Business

We design, manufacture, sell, manage, support, and service computerized wagering systems and terminals for the online lottery and pari-mutuel racing industries worldwide.  Although we are not presently doing so, we have also successfully demonstrated the capability to provide full facilities management services to customer organizations authorized to conduct online lotteries.

Our wagering systems include the following components:

 
·
A central computer installation that is comprised of computer hardware and a commercially available operating system used in conjunction with our proprietary DataTrak application software;
 
·
The Datamark and Intelimark families of point-of-sale terminals; and
 
·
The communication network to interface the terminals to the central computer installation.

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.

The DataTrak online gaming system controls the overall lottery operation.  Although to date it has been sold only in conjunction with our terminals, DataTrak can also be sold as a stand-alone system that will interface to third-party terminals.  Likewise, the terminals can be, and have been, sold separately to interface to a third-party lottery/tote central system.

The point-of-sale, proprietary components of our systems are the Datamark and Intelimark families of ticketing terminals. These terminals are compact, reliable, microprocessor-based units, which scan marksense slips or interpret operator-input data in order to produce a ticket receipt to be retained by the customer. Our newest terminal models use the latest touch screen and scanner technology.  

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

We sell the terminals separately or as part of a turnkey wagering application system, or we will modify a terminal's features or configurations and central system software to meet specific customer requirements.

Using commercially available hardware and software, we design the communication network to interface the DataTrak central system with the wagering terminals to best fit each customer’s specific application.

Our technology can be modified for use in secure transaction-processing applications outside the gaming industry.  Previously, we provided a toll-road ticketing system utilizing automated ticket printers and readers.

Voting Business

In recent years, we have devoted significant resources to developing a certified end-to-end optical scan voting system consisting of the InkaVote Plus Precinct Ballot Counter (“PBC”) and full-featured Election Management Software that provides precinct tabulation, ballot review and audio voting capability in a single compact unit.  These efforts leverage the Company’s extensive experience to develop highly secure, mission-critical solutions that meet all of the Help America Vote Act of 2002 (“HAVA”) and Americans with Disabilities Act (“ADA”) requirements at a much lower cost than direct-recording electronic or touch screen systems.  In addition, the Company’s voting system offers 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;
·
Minimal voter re-education; and
·
Capability to tally results in real time.

Products and Services

Wagering Application Software

The principal component of our wagering system is the DataTrak central system software.  DataTrak controls the operation of the entire system.  It performs the following functions:

 
·
Maintains communication with each point-of-sale terminal;
 
·
Ensures complete security;
 
·
Logs all activity and wagers;
 
·
Populates a commercially available database in real time with high level security;
 
·
Identifies the set of winning tickets using the lottery game draw results;
 
·
Calculates prize pool amounts;
 
·
Allows the use of other third party software products to analyze and compile management data; and
 
·
Provides mission critical fault tolerance.

Development of this software has been an evolutionary process.  We continually incorporate new and improved technologies as they become available in the marketplace.  This allows us to take advantage of the latest technology trends to enhance existing features of our system, and also to provide new distribution channels and operational features so that our customers can reach new or expanding markets.  Since our software architecture is non-proprietary, customers can also utilize third party reporting and analysis software tools of their choice to interface with it.

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

The DataTrak system uses client-server architecture.  This gives customers the advantage of configuring the system economically to meet current requirements, and the ability to expand or contract the system as their operation requires.

In recent years, we have expanded the capability of the DataTrak system to address newly emerging sales channels of our customers.  These alternative sales channels have come about through the emergence of the internet and mobile applications.  The expanded capability is included in our product offering called “DataTrak Anywhere.”  This product allows the use of any or all of the following: Interactive Voice Recognition (“IVR”), Short Messaging Services (“SMS”), and the internet to interface to the DataTrak system.  These methods can be used to place wagers in a number of ways, depending on the availability of each method in a specific locale through:

 
·
An account with the lottery;
 
·
Prepaid card; or
 
·
Post-paid billing.

 Terminals

We have supplied in excess of 50,000 terminal products to the wagering industry since our first unit was sold in 1980. Currently, we have two families of full feature terminals in production: the Datamark and the Intelimark, both of which are:

 
·
Based on PC architecture and utilize commercially available software operating systems;
 
·
Small, lightweight, and highly reliable; and
 
·
Programmed using standard software languages.

Datamark

We have developed many models of Datamark terminals throughout our company’s history.  The current version is the Datamark XClaim terminal, introduced as a low-cost terminal.  Its optical mark reader and thermal printer require little or no adjustments or maintenance.  It is economically priced and extremely easy to use with features that increase operator efficiency and reduce transaction time.  The XClaim can be programmed to meet the specific operating requirements of each individual customer.  A keyboard is provided for operator input and a LCD displays the wagering details.

Intelimark

There are two terminals in the Intelimark family:

 
·
The Intelimark was introduced in 1999 and incorporates commercially available hardware and software from strategic partners.  The Intelimark was designed in concert with Seiko-Epson Corporation, one of the leading providers of point-of-sale terminals in the world.  The Intelimark incorporates a proprietary optical mark reader, and has the option of using a full-color touch screen or traditional keyboard to enter data.

 
·
The Intelimark FLX is a modular touch screen lottery terminal, packaged to offer maximum flexibility for retailer convenience. All components that make up the complete terminal are freestanding modules that can be arranged to meet the unique physical requirements of each retailer location.  Driven by the market demand for enhanced ticket reading capability, the Intelimark FLX is equipped with a high-speed contact image scanner that will accept up to A4 size slips and is capable of character recognition and signature capture.  Its modular design, open architecture and PC-based technology provide a flexible platform that can quickly and economically respond to the dynamic needs of both players and retailers.

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
 
In addition to two families of full feature terminals, we offer a completely portable, battery-powered terminal called the Passport II for mobile applications. This terminal can be equipped with mobile wireless modems to enable true online selling in remote areas or temporary venues where a full-featured terminal is not practical.

Spare Parts

In addition to sales of terminals and central system software and hardware systems, we also realize ongoing revenue from the sale of spare parts for use in the repairs and maintenance of the terminal population.

Software Support Agreements

We offer software maintenance agreements which feature:

 
·
Telephone hot line and e-mail support;
 
·
Standard upgrades and patches; and
 
·
Primary technical support for third party software products purchased through ILTS.

Additionally, we offer software modifications and enhancements to satisfy specific customer requirements.

Voting System Products

The InkaVote Plus optical scan voting system is a unique application consisting of the Precinct Ballot Counter (“PBC”) and the Election Management Software (“EMS”).  It provides a quick and cost-effective path to the replacement of pre-scored card voting systems.  With minimal expense, voting jurisdictions can upgrade to a field-proven optical mark system that eliminates the vagaries and controversies of punch cards and provides a permanent physical record of voter choices.  InkaVote utilizes a newly designed vote recorder that functions exactly the same as the punch card systems.  However, it replaces the punch with the stylus, thereby, eliminating the controversies and maintaining the traditional vote experience. The completed ballot card provides a permanent physical record of voter choices, and accommodates traditional recounting procedures.

Precinct Ballot Counter

The PBC, designed to read and validate ballots, is a precinct based optical scan device which includes a color touch screen operator interface, InkaVote ballot reader and validator, and precinct report printer.  With an integrated ADA compliant voting station, special needs voters may cast their ballots independently and privately through a variety of methods, including wheelchair access, portable voter recorders and audio assistance through earphones and special keyboards.

The PBCs set up is fast and simple with minimal assembly and interface required.  Poll workers need no special knowledge to set up or operate the system.  Election officials can quickly prepare polls and train poll workers.

 

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

Election Management Software
 
The EMS, consisting of the Ballot Data Generator and the Vote Tabulator software applications that work together to perform the following functions:

 
·
Define and configure an election;
 
·
Program the InkaVote Plus PBCs;
 
·
Provide camera ready ballot pages in PDF format;
 
·
Compile and tabulate vote results; and
 
·
Generate required reports.

It provides complete control of each step of the election process from ballot layout to report generation.  It utilizes streamlined menus and prompts to provide maximum flexibility and customization while guiding the user through every step in the process.  The system has multilingual capabilities and supports numerous languages in both standard and audible ballots.  The EMS creates the election specific database from information that can be imported manually and/or from an .XML file.

Product Markets

Revenue from the sale of lottery and horse racing systems is almost exclusively derived from contracts with foreign customers.  As of April 30, 2008, our equipment has been delivered and installed in Australia, Belgium, Brazil, China, Denmark, the Dominican Republic, England, Finland, France, Hong Kong, India, Macau, Malaysia, the Netherlands, Norway, Papua New Guinea, the Philippines, Singapore, Swaziland, Sweden, the Ukraine, and the United States.

Revenue from the licensing of intellectual property rights associated with our voting PBC system and performance of election day support services are derived from our exclusive strategic arrangement with Election Systems & Software, Inc.

Competitive Business Conditions

We compete primarily in the online lottery and horse racing industries by providing high-quality wagering systems and terminals that are reliable, secure and fast.  In addition, we believe that we offer our customers greater flexibility in design and custom options than do our competitors.  The market for online lottery system contracts is highly competitive.  In general, our competitors have significantly greater resources than we do.  Although our sales in the United States have been insignificant, we believe that our company has been a substantial factor in the international marketplace.

Our principal competition for full lottery systems are:

 
·
Lottomatica (an Italian company);
 
·
Scientific Games (a U.S. company); and
 
·
IntraLot (a Greek company).

For terminal sales only, we have numerous competitors in selected markets.  In addition to the foregoing, some of our larger competitors include:

 
·
Wincor-Nixdorf (a German company);
 
·
KEBA, GesmbH & Co. (an Austrian company);
 
·
Sagem (a French company); and
 
·
Olivetti Tecnost (an Italian company).

For the sale of horse racing systems, our main competitor is Scientific Games (a U.S. Company).

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

With respect to the voting industry, Premier Election Solutions is the largest competitor followed by companies such as Hart Intercivic and Sequoia.

Manufacturing Processes

We assemble terminals, repair modules, and supply spare parts from our domestic facility.  During recent years, the design of certain high-production units has been streamlined. This cost saving measure has allowed us to outsource the assembly of these units to local manufacturers while maintaining control over the materials and quality.

In some cases, we have delivered terminal kits to customers who have purchased a license to assemble the terminals at their own location. Extensive training is provided to ensure high quality manufacturing.

Materials and Suppliers

For terminal components and spare parts, we generally have multiple sources, but a limited number of items are available only from a single supplier.  Accordingly, those items could from time to time, be in short supply or on allocation due to their limited availability.

For the year ended April 30, 2008, two vendors accounted for approximately 50%, or 40% and 10% individually, of the Company’s lottery terminals component purchases.  For the year ended April 30, 2007, four vendors accounted for approximately 70% collectively, or 25%, 16%, 16% and 13% individually, of the Company’s lottery terminals component and raw material purchases.

Dependence Upon a Few Customers

Our business to date has been dependent on major contracts from a specific pool of lottery operators.  Failure to obtain new contracts from existing and new customers would have a materially adverse effect on our financial performance.

   
April 30, 2008
April 30, 2007
Revenue:
      
From unrelated customers
One customer accounted for 39% of
total revenue
No customer accounted for more than 10% of total revenue
From related customers
Two customers accounted for 42% of total
revenue or 25% and 17% individually.
One customer accounted for 90% of total revenue

Patents, Trademarks and Licenses

We have three U.S. patents issued on our products.  We believe that our technical expertise, trade secrets and the creative skills of our personnel are of substantially greater importance to our company’s success than the benefits of patent protection.  We typically require customers, employees, licensees, subcontractors, strategic partners, and joint venture partners who have access to proprietary information concerning our products to sign nondisclosure agreements. We rely on such agreements, other security measures, and trade-secret law to protect our proprietary information.

International Lottery & Totalizator Systems, Inc., ILTS, DataTrak and Intertote are registered trademarks of our company.  We have other products that have been trademarked, such as Intelimark, Intelimark FLX, Passport II and DataTrak Anywhere, all mentioned herein.


INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

Regulations

The countries in which we market our products generally have regulations governing lottery or horseracing operations, and the appropriate governing body could restrict or ban operations in these countries.  Any such action could have a material adverse effect on our company.

Foreign countries often impose restrictions on corporations seeking to do business within their borders, including foreign exchange controls, and in some jurisdictions, requirements for domestic manufacturing content.  In addition, laws and legal procedures in these countries may differ from those generally existing in the United States.  Conducting business in these countries may involve additional risks in protecting our business and assets, including proprietary information.  Changes in foreign business restrictions or laws could have a significant impact on our operations.

Research and Development

We are dedicated to ongoing research and development (“R&D”) to take advantage of new technologies, stay competitive in our market, and explore new markets where our core competency can be applied.

For our lottery customers, recent hardware research and development has focused on bringing to production our latest terminal product called the Intelimark FLX.  This product consists of commercially-available modules that can be configured in several ways to meet a variety of specific customer requirements.  The FLX incorporates a wide range of options, including touch screen, flat-panel technology, contact image scanning technology, and high-powered processing capability.

Lottery customers are also benefiting from our continued R&D efforts in the use of wireless terminal technologies using LAN/WAN equipment and cellular devices.  These technologies: Short Messaging Service (“SMS”), and Interactive Voice Response (“IVR”) allow bettors to place bets from any location, rather than at traditional point-of-sale agencies.  This research and development effort has allowed us to implement these technologies into our current product known as Datatrak Anywhere.

In general, we continue to examine other technologies based upon new industry developments, which will increase our customers’ market share.  For example, we have invested resources to expand specific applications to run on the Linux operating system.  These Linux based applications are targeted at products used in both wagering and voting markets.

We continue to dedicate our efforts on developing highly secure and mission-critical voting solutions that meet all of the Help America Vote Act of 2005 (“HAVA”) and American Disabilities Act (“ADA”) which allow any voters to vote, regardless of physical disabilities or language barriers.
 
For the years ended April 30, 2008 and 2007, R&D expenses were $456,000 and $49,000, respectively, none of which were borne by our customers.

Environment Effects

There are no significant capital expenditures required to comply with laws relating to the protection of the environment.

Employees

As of April 30, 2008, we had 36 employees employed on a full-time equivalent basis.  We have no employees that are members of labor unions.  We believe our relationship with our employees is satisfactory.


INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

ITEM 1A. RISK FACTORS

Our business faces risks and uncertainties, including but not limited to, those discussed below and elsewhere in this report. These factors represent risks and uncertainties that could have a material adverse effect on our business, results of operations and financial condition.  Additional risks and uncertainties not presently known to us or that we do not presently consider significant may also impair our business or the trading price of our securities.

If we do not execute on our strategic initiatives, there could be a material adverse effect on our results of operations and financial condition.
The future performance of our business will depend significantly on our ability to execute effectively and implement the strategic initiatives. These initiatives include executing our market strategy including designing products to meet market trends and ensuring that an appropriate infrastructure is in place to meet the needs of customers; continuing to reduce product costs; and further improving the efficiency of operations, including lowering operating costs and enabling higher value services.
 
Successful execution of these initiatives depends on a number of factors including:
 
·
The ability to attract and retain sufficient number of key technical employees and senior management personnel;
 
·
Retaining customers by providing satisfactory levels of support and service for our products;
 
·
Our ability to develop and introduce new products or programs, because of the inherent risks and uncertainties associated with product development, particularly in response to government regulations;
 
·
The identification and introduction of the proper mix or integration of products that will be accepted by the marketplace;
 
·
Our business may be subject to changes in laws, regulations and certification requirements with respect to our products;
 
·
Due to the political nature of our voting business, there is a risk that jurisdictions may decertify our voting products that had previously been certified; and
 
·
The ability of our products and services to differentiate us from our competitors and for us to demonstrate that these products and services result in improved products and reduced costs.

Further, our success will depend upon our ability to maintain proper internal control, enhance the performance of the existing procedures and processes to adequately support our operations, strategies and business objectives.

Changes in domestic and foreign business restrictions or laws could have a significant impact on our operations.
The countries in which we market our products generally have regulations governing lottery or horseracing operations, and the appropriate governing body could restrict or ban operations in these countries.  Any such action could have a material adverse effect on our company.  Foreign countries often impose restrictions on corporations seeking to do business within their borders, including foreign exchange controls, and in some jurisdictions, requirements for domestic manufacturing content.  In addition, laws and legal procedures in these countries may differ from those generally existing in the United States.  Conducting business in these countries may involve additional risks in protecting our business and assets, including proprietary information.  Changes in foreign business restrictions or laws could have a significant impact on our operations.