##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended May 27, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 1-11250
 
 GTECH Holdings Corporation
  Delaware
(State or other Jurisdiction of
Incorporation or Organization)
    
    05-0450121
(I.R.S. Employer Identification
Number)55 Technology Way, West Greenwich, Rhode Island
(Address of Principal Executive Offices)
    
    02817
(Zip Code)
 
 
  þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
  o þ




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##### 



PageNumberPART I. FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Income Statements
    
    
    4Consolidated Statements of Cash Flows
    
    
    5Consolidated Statement of Shareholders Equity
    
    
    6Notes to Consolidated Financial Statements
    
    
    7-26Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27-40Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    40Item 4.
    
    Controls and Procedures
    
    
    40PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    41Item 1A.
    
    Risk Factors
    
    
    41Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    43Item 6.
    
    Exhibits
    
    
    44SIGNATURES
    
    
    
    
    44EXHIBITSEX-10.1: EMPLOYMENT AGREEMENTEX-10.2: EMPLOYMENT AGREEMENTEX-10.3: STIPULATION OF SETTLEMENTEX-12.1: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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##### Table of Contents



PART 1. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
  
  (Unaudited)May 27,
    
    
    February 25,2006
    
    
    2006(Dollars in thousands)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    185,177
    
    
    $
    235,191Investment securities available-for-sale
    
    
    323,125
    
    
    
    260,725Trade and other receivables, net
    
    
    151,449
    
    
    
    183,561Refundable performance deposit
    
    
    8,000
    
    
    
    8,000Inventories
    
    
    108,539
    
    
    
    88,024Deferred income taxes
    
    
    27,783
    
    
    
    26,398Other current assets
    
    
    55,003
    
    
    
    47,819TOTAL CURRENT ASSETS
    
    
    859,076
    
    
    
    849,718SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS, net
    
    
    731,266
    
    
    
    692,545GOODWILL
    
    
    346,096
    
    
    
    346,096PROPERTY, PLANT AND EQUIPMENT, net
    
    
    108,693
    
    
    
    101,416INTANGIBLE ASSETS, net
    
    
    61,589
    
    
    
    64,212OTHER ASSETS
    
    
    43,789
    
    
    
    45,915TOTAL ASSETS
    
    $
    2,150,509
    
    
    $
    2,099,902LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    78,698
    
    
    $
    93,205Accrued expenses
    
    
    49,123
    
    
    
    46,220Employee compensation
    
    
    23,792
    
    
    
    31,804Advance payments from customers
    
    
    79,287
    
    
    
    63,768Deferred revenue and advance billings
    
    
    31,354
    
    
    
    17,889Income taxes payable
    
    
    64,852
    
    
    
    67,098Taxes other than income taxes
    
    
    16,887
    
    
    
    17,106Short-term borrowings
    
    
    1,748
    
    
    
    Current portion of long-term debt
    
    
    6,326
    
    
    
    9,148TOTAL CURRENT LIABILITIES
    
    
    352,067
    
    
    
    346,238LONG-TERM DEBT, less current portion
    
    
    539,769
    
    
    
    542,259OTHER LIABILITIES
    
    
    114,142
    
    
    
    106,671DEFERRED INCOME TAXES
    
    
    97,765
    
    
    
    99,362COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    SHAREHOLDERS EQUITY:Preferred Stock, par value $.01 per share - 20,000,000 shares authorized,
none issued
    
    
    
    
    
    
    Common Stock, par value $.01 per share - 200,000,000 shares authorized,
127,381,252 and 127,179,225 shares issued and outstanding at May 27, 2006 and
February 25, 2006, respectively
    
    
    1,274
    
    
    
    1,272Additional paid-in capital
    
    
    449,302
    
    
    
    444,810Accumulated other comprehensive loss
    
    
    (33,551
    )
    
    
    (35,662
    )Retained earnings
    
    
    629,741
    
    
    
    594,9521,046,766
    
    
    
    1,005,372TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,150,509
    
    
    $
    2,099,902
  -3-




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##### Table of Contents



(Unaudited)Three Months EndedMay 27,
    
    
    May 28,2006
    
    
    2005(Dollars in thousands, except per share amounts)Revenues:Services
    
    $
    290,175
    
    
    $
    291,364Sales of products
    
    
    25,671
    
    
    
    35,035315,846
    
    
    
    326,399Costs and expenses:Costs of services
    
    
    175,821
    
    
    
    168,917Costs of sales
    
    
    15,051
    
    
    
    21,604190,872
    
    
    
    190,521Gross profit
    
    
    124,974
    
    
    
    135,878Selling, general and administrative
    
    
    39,275
    
    
    
    32,019Research and development
    
    
    10,797
    
    
    
    12,938Operating expenses
    
    
    50,072
    
    
    
    44,957Operating income
    
    
    74,902
    
    
    
    90,921Other income (expense):Interest income
    
    
    4,389
    
    
    
    2,045Equity in earnings of unconsolidated affiliates
    
    
    601
    
    
    
    1,787Other expense
    
    
    (75
    )
    
    
    (1,794
    )Interest expense
    
    
    (7,453
    )
    
    
    (7,265
    )(2,538
    )
    
    
    (5,227
    )Income before income taxes
    
    
    72,364
    
    
    
    85,694Income taxes
    
    
    26,702
    
    
    
    30,850Net income
    
    $
    45,662
    
    
    $
    54,844Basic earnings per share
    
    $
    0.36
    
    
    $
    0.48Diluted earnings per share
    
    $
    0.35
    
    
    $
    0.43Weighted average shares outstanding  basic
    
    
    127,279
    
    
    
    114,646Weighted average shares outstanding  diluted
    
    
    130,436
    
    
    
    129,707Cash dividends declared per common share
    
    $
    0.085
    
    
    $
    0.085
  -4-




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##### Table of Contents



(Unaudited)Three Months EndedMay 27,
    
    
    May 28,2006
    
    
    2005(Dollars in thousands)OPERATING ACTIVITIESNet income
    
    $
    45,662
    
    
    $
    54,844Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    42,008
    
    
    
    42,023Intangibles amortization
    
    
    2,444
    
    
    
    2,485Other amortization
    
    
    430
    
    
    
    156Stock-based compensation expense
    
    
    2,556
    
    
    
    2,523Deferred income taxes
    
    
    (2,982
    )
    
    
    4,372Excess tax benefit from stock option exercises
    
    
    (842
    )
    
    
    3,044Minority interest
    
    
    720
    
    
    
    1,309Equity in earnings of unconsolidated affiliates, net of dividends received
    
    
    266
    
    
    
    (1,787
    )Other
    
    
    1,987
    
    
    
    5,183Changes in operating assets and liabilities:Trade and other receivables, net
    
    
    30,410
    
    
    
    17,820Inventories
    
    
    (20,515
    )
    
    
    13,486Other current assets
    
    
    (6,984
    )
    
    
    (4,631
    )Accounts payable
    
    
    (13,015
    )
    
    
    (32,448
    )Employee compensation
    
    
    (8,984
    )
    
    
    3,188Advance payments from customers
    
    
    15,519
    
    
    
    (192
    )Deferred revenue and advance billings
    
    
    13,465
    
    
    
    (5,101
    )Income taxes payable
    
    
    (1,404
    )
    
    
    11,558Other assets and liabilities
    
    
    1,562
    
    
    
    3,744NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    102,303
    
    
    
    121,576INVESTING ACTIVITIESPurchases of systems, equipment and other assets relating to contracts
    
    
    (80,235
    )
    
    
    (40,562
    )Purchases of available-for-sale investment securities
    
    
    (63,500
    )
    
    
    (85,000
    )Maturities and sales of available-for-sale investment securities
    
    
    1,100
    
    
    
    72,325Purchases of property, plant and equipment
    
    
    (2,986
    )
    
    
    (2,394
    )Decrease in restricted cash
    
    
    
    
    
    
    5,080Other
    
    
    (163
    )
    
    
    296NET CASH USED FOR INVESTING ACTIVITIES
    
    
    (145,784
    )
    
    
    (50,255
    )FINANCING ACTIVITIESDividends paid
    
    
    (10,822
    )
    
    
    (9,770
    )Principal payments on long-term debt
    
    
    (2,553
    )
    
    
    (1,317
    )Proceeds from stock options
    
    
    330
    
    
    
    3,322Excess tax benefit from stock option exercises
    
    
    842
    
    
    
    Purchases of treasury stock
    
    
    
    
    
    
    (32,051
    )Other
    
    
    3,201
    
    
    
    863NET CASH USED FOR FINANCING ACTIVITIES
    
    
    (9,002
    )
    
    
    (38,953
    )Effect of exchange rate changes on cash
    
    
    2,469
    
    
    
    (1,180
    )INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (50,014
    )
    
    
    31,188Cash and cash equivalents at beginning of period
    
    
    235,191
    
    
    
    94,446CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    185,177
    
    
    $
    125,634
  -5-




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AccumulatedAdditional
    
    
    OtherOutstanding
    
    
    Common
    
    
    Paid-in
    
    
    Comprehensive
    
    
    RetainedShares
    
    
    Stock
    
    
    Capital
    
    
    Loss
    
    
    Earnings
    
    
    Total(Dollars in thousands)Balance at February
25, 2006
    
    
    127,179,225
    
    
    $
    1,272
    
    
    $
    444,810
    
    
    $
    (35,662
    )
    
    $
    594,952
    
    
    $
    1,005,372Comprehensive
income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,662
    
    
    
    45,662Other comprehensive
income (loss), net
of tax:Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,863
    
    
    
    
    
    
    
    2,863Unrecognized net
loss on derivative
instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (668
    )
    
    
    
    
    
    
    (668
    )Amortization of
unrecognized gain
on interest rate
locks to interest
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (84
    )
    
    
    
    
    
    
    (84
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,773Cash dividends
declared on common
stock ($0.085 per
share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,873
    )
    
    
    (10,873
    )Shares issued under
employee stock
purchase
and stock award
plans
    
    
    134,464
    
    
    
    2
    
    
    
    363
    
    
    
    
    
    
    
    
    
    
    
    365Shares issued upon
exercise of stock
options
    
    
    37,824
    
    
    
    
    
    
    
    330
    
    
    
    
    
    
    
    
    
    
    
    330Shares issued upon
conversion of
debentures
    
    
    29,739
    
    
    
    
    
    
    
    401
    
    
    
    
    
    
    
    
    
    
    
    401Stock-based
compensation
expense
    
    
    
    
    
    
    
    
    
    
    2,556
    
    
    
    
    
    
    
    
    
    
    
    2,556Excess tax benefit
from stock option
exercises
    
    
    
    
    
    
    
    
    
    
    842
    
    
    
    
    
    
    
    
    
    
    
    842Balance at May 27,
2006
    
    
    127,381,252
    
    
    $
    1,274
    
    
    $
    449,302
    
    
    $
    (33,551
    )
    
    $
    629,741
    
    
    $
    1,046,766
  -6-




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Organization
  Basis of Presentation
      -7-




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##### Table of Contents



May 27,
    
    
    February 25,2006
    
    
    2006(Dollars in thousands)Raw materials
    
    $
    24,788
    
    
    $
    19,465Work in progress
    
    
    41,947
    
    
    
    37,157Inventoried costs related to long-term contracts
    
    
    31,861
    
    
    
    25,606Finished goods
    
    
    9,943
    
    
    
    5,796$
    108,539
    
    
    $
    88,024
       May 27,
    
    
    May 28,2006
    
    
    2005(Dollars in thousands)Balance at beginning of period
    
    $
    1,255
    
    
    $
    1,634Additional reserves
    
    
    77
    
    
    
    84Charges incurred
    
    
    (111
    )
    
    
    (411
    )Other
    
    
    23
    
    
    
    (16
    )Balance at end of period
    
    $
    1,244
    
    
    $
    1,291
  -8-




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May 27,
    
    
    February 25,2006
    
    
    2006(Dollars in thousands)4.75% Senior Notes due October 2010
    
    $
    249,759
    
    
    $
    249,7454.50% Senior Notes due December 2009
    
    
    149,708
    
    
    
    149,6875.25% Senior Notes due December 2014
    
    
    148,870
    
    
    
    148,8371.75% Convertible Debentures due December 2021
    
    
    6,206
    
    
    
    6,615Fair value of interest rate swaps
    
    
    (9,052
    )
    
    
    (6,063
    )Other, due through October 2007
    
    
    604
    
    
    
    2,586546,095
    
    
    
    551,407Less current portion
    
    
    6,326
    
    
    
    9,148$
    539,769
    
    
    $
    542,259
 Credit Facility
   Acquisition
   -9-




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##### Table of Contents



Option to Purchase PolCard Outstanding Equity
     Buyout Percentageof the PolCard
    
    Range ofExercise Date Commencing In
    
    Outstanding Equity
    
    Buyout PriceMay 2007
    
    
    12.6
    %
    
    $
    20 to $30 millionMay 2008
    
    
    6.3
    %
    
    $
    11 to $17 millionMay 2009
    
    
    6.3
    %
    
    $
    13 to $19 million
 Litigation
  -10-




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Performance and Other Bonds
  Total potentialcommitmentsPerformance bonds
    
    $
    260,201Financial guarantees
    
    
    31,485Litigation bonds
    
    
    7,870All other bonds
    
    
    4,968$
    304,524
 Atronic
    - 11 -




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Loxley GTECH Private Limited
  Lottery Technology Services Corporation
   Lottery Technology Enterprises
  - 12 -




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##### Table of Contents



World Headquarters Facility
      Three Months EndedMay 27,
    
    
    May 28,2006
    
    
    2005(Dollars in thousands)Net income
    
    $
    45,662
    
    
    $
    54,844Other comprehensive income (loss), net of taxForeign currency translation
    
    
    2,863
    
    
    
    (5,088
    )Unrecognized net gain (loss) on derivative instruments
    
    
    (668
    )
    
    
    963Amortization of unrecognized gain on interest rate locks to
interest expense
    
    
    (84
    )
    
    
    (83
    )Comprehensive income
    
    $
    47,773
    
    
    $
    50,636
 - 13 -




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
    
    compensation cost for all share-based payments granted prior to
but not yet vested as of February 25, 2006, based on the
grant-date fair value estimate used for SFAS 123 pro forma
disclosure purposes and;
    
    compensation cost for all share-based payments granted subsequent
to February 25, 2006, based on the grant-date fair value estimated
in accordance with SFAS 123R.
   
    
    Income before income taxes was reduced by $1.6 million
    
    Net income was reduced by $1.0 million
    
    Cash flow from operations was reduced by $0.8 million
    
    Cash flow from financing activities was increased by $0.8 million
    
    Basic and diluted earnings per share were reduced by $0.01
   Three MonthsEndedMay 27,2006Selling, general and administrative
    
    $
    2,048Costs of services
    
    
    341Research and development
    
    
    143Costs of sales
    
    
    24$
    2,556
 - 14 -




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Equity Compensation Plans
    - 15 -




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##### Table of Contents



Non-Qualified
Stock Options (Options)
 Stock Option Valuation
  Three MonthsEndedMay 28,2005Options granted
    
    
    984,700Weighted-average exercise price
    
    $
    23.53Weighted-average grant date fair value
    
    $
    7.00Risk-free interest rate
    
    
    4.0
    %Expected volatility
    
    
    34.8
    %Expected dividend yield
    
    
    1.4
    %Expected term (in years)
    
    
    4.5
 Risk-free interest rate
  Expected volatility
  Expected dividend yield
  Expected term
  - 16 -




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##### Table of Contents



Expense Attribution
    Three MonthsEndedMay 28,2005Net income, as reported
    
    $
    54,844Add: Stock-based compensation expense included in reported net income, net of
related tax effects
    
    
    1,615Deduct: Total stock-based compensation expense determined under the fair value
method for all awards, net of related tax effects
    
    
    (2,753
    )Pro forma net income
    
    $
    53,706Basic earnings per share:As reported
    
    $
    .48Pro forma
    
    
    .47Diluted earnings per share:As reported
    
    $
    .43Pro forma
    
    
    .42
 Stock Option Activity
  WeightedWeighted
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Exercise
    
    
    Contractual
    
    
    ValueOutstanding
    
    
    Price
    
    
    Term (in years)
    
    
    (in thousands)Outstanding at February 25, 2006
    
    
    7,709,541
    
    
    $
    14.79Granted
    
    
    
    
    
    
    Exercised
    
    
    (37,824
    )
    
    
    8.72Forfeited or expired
    
    
    (25,000
    )
    
    
    24.33Outstanding at May 27, 2006
    
    
    7,646,717
    
    
    
    14.79
    
    
    6.3
    
    
    $
    147,274Exercisable at May 27, 2006
    
    
    5,406,766
    
    
    $
    11.29
    
    
    5.7
    
    
    $
    123,089Options
vested or expected to vest as of May 27, 2006
    
    
    7,422,722
    
    
    $
    14.54
    
    
    6.3
    
    
    $
    144,837
 - 17 -




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##### Table of Contents



Non-Vested Stock
 Award Valuation
  Expense Attribution
  Award Activity
  WeightedAverageNon-Vested
    
    
    Grant DateStock
    
    
    FairAwards
    
    
    ValueBalance at February 25, 2006
    
    
    666,813
    
    
    $
    23.05Granted
    
    
    
    
    
    
    Vested
    
    
    (109,250
    )
    
    
    21.48Forfeited
    
    
    (6,000
    )
    
    
    24.36Balance at May 27, 2006
    
    
    551,563
    
    
    
    23.34
 Unrecognized Compensation Cost
  WeightedUnrecognized
    
    
    AverageCompensation
    
    
    RemainingCost
    
    
    Vesting Period(in thousands)
    
    
    (in years)Stock options
    
    $
    10,479
    
    
    2.5Non-vested stock awards
    
    
    8,991
    
    
    2.9$
    19,470
  - 18 -




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##### Table of Contents



Three Months EndedMay 27,
    
    
    May 28,2006
    
    
    2005(In thousands, except pershare amounts)Numerator:Net income (Numerator for basic earnings per share)
    
    $
    45,662
    
    
    $
    54,844Effect of dilutive securities:Interest expense on 1.75% Convertible Debentures, net of tax
    
    
    20
    
    
    
    523Numerator for diluted earnings per share
    
    $
    45,682
    
    
    $
    55,367Denominator:Denominator for basic earnings per share  weighted average shares
    
    
    127,279
    
    
    
    114,646Effect of dilutive securities:1.75% Convertible Debentures
    
    
    463
    
    
    
    12,459Employee stock options
    
    
    2,433
    
    
    
    2,463Unvested stock awards and employee stock purchase plan shares
    
    
    261
    
    
    
    139Dilutive potential common shares
    
    
    3,157
    
    
    
    15,061Denominator for diluted earnings per share  adjusted weighted
average shares and assumed conversions
    
    
    130,436
    
    
    
    129,707Basic earnings per share
    
    $
    .36
    
    
    $
    .48Diluted earnings per share
    
    $
    .35
    
    
    $
    .43
   - 19 -




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##### Table of Contents



May 27,
    
    
    May 28,2006
    
    
    2005(Dollars in thousands)Non-cash activities that occurred in connection with the conversion
of our 1.75% Convertible Debentures:Issuance of 29,739 shares of Holdings common stock
    
    $
    409
    
    
    $
    Issuance of 268,218 treasury shares
    
    
    
    
    
    
    3,688Forfeited interest
    
    
    2
    
    
    
    Debt issuance costs
    
    
    (10
    )
    
    
    Reclassification to Shareholders Equity
    
    $
    401
    
    
    $
    3,688Non-cash investment related to our new world headquarters facility
in Providence, RI (see Note 7)
    
    $
    6,597
    
    
    $
    4,315Shares issued under stock award plans
    
    
    1,064
    
    
    
    2,041
     - 20 -




---



##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    EliminatingCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Entries
    
    
    Consolidated(Dollars in thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    109,942
    
    
    $
    75,235
    
    
    $
    
    
    
    $
    185,177Investment securities
available-for-sale
    
    
    
    
    
    
    323,125
    
    
    
    
    
    
    
    
    
    
    
    323,125Trade and other receivables, net
    
    
    
    
    
    
    68,114
    
    
    
    83,335
    
    
    
    
    
    
    
    151,449Due from subsidiaries and
affiliates
    
    
    
    
    
    
    72,800
    
    
    
    
    
    
    
    (72,800
    )
    
    
    Refundable performance deposit
    
    
    
    
    
    
    
    
    
    
    8,000
    
    
    
    
    
    
    
    8,000Inventories
    
    
    
    
    
    
    44,753
    
    
    
    72,311
    
    
    
    (8,525
    )
    
    
    108,539Deferred income taxes
    
    
    
    
    
    
    13,659
    
    
    
    14,124
    
    
    
    
    
    
    
    27,783Other current assets
    
    
    
    
    
    
    16,288
    
    
    
    38,715
    
    
    
    
    
    
    
    55,003Total Current Assets
    
    
    
    
    
    
    648,681
    
    
    
    291,720
    
    
    
    (81,325
    )
    
    
    859,076Systems, Equipment and Other
Assets Relating to Contracts, net
    
    
    
    
    
    
    631,730
    
    
    
    111,488
    
    
    
    (11,952
    )
    
    
    731,266Investment in Subsidiaries and
Affiliates
    
    
    1,046,766
    
    
    
    470,391
    
    
    
    
    
    
    
    (1,517,157
    )
    
    
    Goodwill
    
    
    
    
    
    
    115,981
    
    
    
    230,115
    
    
    
    
    
    
    
    346,096Property, Plant and Equipment, net
    
    
    
    
    
    
    74,505
    
    
    
    34,188
    
    
    
    
    
    
    
    108,693Intangible Assets, net
    
    
    
    
    
    
    18,601
    
    
    
    42,988
    
    
    
    
    
    
    
    61,589Other Assets
    
    
    
    
    
    
    25,281
    
    
    
    18,508
    
    
    
    
    
    
    
    43,789Total Assets
    
    $
    1,046,766
    
    
    $
    1,985,170
    
    
    $
    729,007
    
    
    $
    (1,610,434
    )
    
    $
    2,150,509Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable
    
    $
    
    
    
    $
    44,744
    
    
    $
    33,954
    
    
    $
    
    
    
    $
    78,698Due to subsidiaries and affiliates
    
    
    
    
    
    
    
    
    
    
    72,800
    
    
    
    (72,800
    )
    
    
    Accrued expenses
    
    
    
    
    
    
    26,924
    
    
    
    22,199
    
    
    
    
    
    
    
    49,123Employee compensation
    
    
    
    
    
    
    14,477
    
    
    
    9,315
    
    
    
    
    
    
    
    23,792Advance payments from
customers
    
    
    
    
    
    
    30,149
    
    
    
    49,138
    
    
    
    
    
    
    
    79,287Deferred revenue and advance
billings
    
    
    
    
    
    
    7,569
    
    
    
    23,785
    
    
    
    
    
    
    
    31,354Income taxes payable
    
    
    
    
    
    
    57,333
    
    
    
    7,519
    
    
    
    
    
    
    
    64,852Taxes other than income taxes
    
    
    
    
    
    
    6,812
    
    
    
    10,075
    
    
    
    
    
    
    
    16,887Short-term borrowings
    
    
    
    
    
    
    
    
    
    
    1,748
    
    
    
    
    
    
    
    1,748Current portion of long-term debt
    
    
    
    
    
    
    6,206
    
    
    
    120
    
    
    
    
    
    
    
    6,326Total Current Liabilities
    
    
    
    
    
    
    194,214
    
    
    
    230,653
    
    
    
    (72,800
    )
    
    
    352,067Long-Term Debt, less current
portion
    
    
    
    
    
    
    539,286
    
    
    
    483
    
    
    
    
    
    
    
    539,769Other Liabilities
    
    
    
    
    
    
    91,827
    
    
    
    22,315
    
    
    
    
    
    
    
    114,142Deferred Income Taxes
    
    
    
    
    
    
    92,600
    
    
    
    5,165
    
    
    
    
    
    
    
    97,765Shareholders Equity
    
    
    1,046,766
    
    
    
    1,067,243
    
    
    
    470,391
    
    
    
    (1,537,634
    )
    
    
    1,046,766Total Liabilities and
Shareholders Equity
    
    $
    1,046,766
    
    
    $
    1,985,170
    
    
    $
    729,007
    
    
    $
    (1,610,434
    )
    
    $
    2,150,509
 -21-




---



##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    EliminatingCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Entries
    
    
    Consolidated(Dollars in thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    158,150
    
    
    $
    77,041
    
    
    $
    
    
    
    $
    235,191Investment securities
available-for-sale
    
    
    
    
    
    
    260,725
    
    
    
    
    
    
    
    
    
    
    
    260,725Trade and other receivables, net
    
    
    
    
    
    
    95,894
    
    
    
    87,667
    
    
    
    
    
    
    
    183,561Due from subsidiaries and
affiliates
    
    
    
    
    
    
    75,758
    
    
    
    
    
    
    
    (75,758
    )
    
    
    Refundable performance deposit
    
    
    
    
    
    
    
    
    
    
    8,000
    
    
    
    
    
    
    
    8,000Inventories
    
    
    
    
    
    
    32,329
    
    
    
    63,906
    
    
    
    (8,211
    )
    
    
    88,024Deferred income taxes
    
    
    
    
    
    
    15,418
    
    
    
    10,980
    
    
    
    
    
    
    
    26,398Other current assets
    
    
    
    
    
    
    12,982
    
    
    
    34,837
    
    
    
    
    
    
    
    47,819Total Current Assets
    
    
    
    
    
    
    651,256
    
    
    
    282,431
    
    
    
    (83,969
    )
    
    
    849,718Systems, Equipment and Other
Assets Relating to Contracts, net
    
    
    
    
    
    
    600,437
    
    
    
    104,241
    
    
    
    (12,133
    )
    
    
    692,545Investment in Subsidiaries and
Affiliates
    
    
    1,005,372
    
    
    
    474,696
    
    
    
    
    
    
    
    (1,480,068
    )
    
    
    Goodwill
    
    
    
    
    
    
    115,981
    
    
    
    230,115
    
    
    
    
    
    
    
    346,096Property, Plant and Equipment, net
    
    
    
    
    
    
    67,002
    
    
    
    34,414
    
    
    
    
    
    
    
    101,416Intangible Assets, net
    
    
    
    
    
    
    19,277
    
    
    
    44,935
    
    
    
    
    
    
    
    64,212Other Assets
    
    
    
    
    
    
    27,272
    
    
    
    18,643
    
    
    
    
    
    
    
    45,915Total Assets
    
    $
    1,005,372
    
    
    $
    1,955,921
    
    
    $
    714,779
    
    
    $
    (1,576,170
    )
    
    $
    2,099,902Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable
    
    $
    
    
    
    $
    52,023
    
    
    $
    41,182
    
    
    $
    
    
    
    $
    93,205Due to subsidiaries and affiliates
    
    
    
    
    
    
    
    
    
    
    75,758
    
    
    
    (75,758
    )
    
    
    Accrued expenses
    
    
    
    
    
    
    23,231
    
    
    
    22,989
    
    
    
    
    
    
    
    46,220Employee compensation
    
    
    
    
    
    
    24,084
    
    
    
    7,720
    
    
    
    
    
    
    
    31,804Advance payments from
customers
    
    
    
    
    
    
    19,758
    
    
    
    44,010
    
    
    
    
    
    
    
    63,768Deferred revenue and advance
billings
    
    
    
    
    
    
    9,213
    
    
    
    8,676
    
    
    
    
    
    
    
    17,889Income taxes payable
    
    
    
    
    
    
    66,646
    
    
    
    452
    
    
    
    
    
    
    
    67,098Taxes other than income taxes
    
    
    
    
    
    
    6,409
    
    
    
    10,697
    
    
    
    
    
    
    
    17,106Current portion of long-term debt
    
    
    
    
    
    
    6,615
    
    
    
    2,533
    
    
    
    
    
    
    
    9,148Total Current Liabilities
    
    
    
    
    
    
    207,979
    
    
    
    214,017
    
    
    
    (75,758
    )
    
    
    346,238Long-Term Debt, less current
portion
    
    
    
    
    
    
    542,206
    
    
    
    53
    
    
    
    
    
    
    
    542,259Other Liabilities
    
    
    
    
    
    
    86,173
    
    
    
    20,498
    
    
    
    
    
    
    
    106,671Deferred Income Taxes
    
    
    
    
    
    
    93,847
    
    
    
    5,515
    
    
    
    
    
    
    
    99,362Shareholders Equity
    
    
    1,005,372
    
    
    
    1,025,716
    
    
    
    474,696
    
    
    
    (1,500,412
    )
    
    
    1,005,372Total Liabilities and
Shareholders Equity
    
    $
    1,005,372
    
    
    $
    1,955,921
    
    
    $
    714,779
    
    
    $
    (1,576,170
    )
    
    $
    2,099,902
 -22-




---



##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    EliminatingCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Entries
    
    
    Consolidated(Dollars in thousands)Revenues:Services
    
    $
    
    
    
    $
    194,883
    
    
    $
    95,292
    
    
    $
    
    
    
    $
    290,175Sales of products
    
    
    
    
    
    
    4,175
    
    
    
    21,496
    
    
    
    
    
    
    
    25,671Intercompany sales and fees
    
    
    
    
    
    
    23,649
    
    
    
    12,281
    
    
    
    (35,930
    )
    
    
    
    
    
    
    222,707
    
    
    
    129,069
    
    
    
    (35,930
    )
    
    
    315,846Costs and expenses:Costs of services
    
    
    
    
    
    
    116,485
    
    
    
    60,465
    
    
    
    (1,129
    )
    
    
    175,821Costs of sales
    
    
    
    
    
    
    2,573
    
    
    
    12,478
    
    
    
    
    
    
    
    15,051Intercompany cost of sales
and fees
    
    
    
    
    
    
    30,752
    
    
    
    1,608
    
    
    
    (32,360
    )
    
    
    
    
    
    
    149,810
    
    
    
    74,551
    
    
    
    (33,489
    )
    
    
    190,872Gross profit
    
    
    
    
    
    
    72,897
    
    
    
    54,518
    
    
    
    (2,441
    )
    
    
    124,974Selling, general & administrative
    
    
    
    
    
    
    24,758
    
    
    
    14,517
    
    
    
    
    
    
    
    39,275Research and development
    
    
    
    
    
    
    6,803
    
    
    
    3,994
    
    
    
    
    
    
    
    10,797Operating expenses
    
    
    
    
    
    
    31,561
    
    
    
    18,511
    
    
    
    
    
    
    
    50,072Operating income
    
    
    
    
    
    
    41,336
    
    
    
    36,007
    
    
    
    (2,441
    )
    
    
    74,902Other income (expense):Interest income
    
    
    
    
    
    
    3,861
    
    
    
    528
    
    
    
    
    
    
    
    4,389Equity in earnings of
unconsolidated affiliates
    
    
    
    
    
    
    878
    
    
    
    (277
    )
    
    
    
    
    
    
    601Equity in earnings of
consolidated affiliates
    
    
    45,662
    
    
    
    22,757
    
    
    
    
    
    
    
    (68,419
    )
    
    
    Other expense
    
    
    
    
    
    
    (8
    )
    
    
    (67
    )
    
    
    
    
    
    
    (75
    )Interest expense
    
    
    
    
    
    
    (7,327
    )
    
    
    (126
    )
    
    
    
    
    
    
    (7,453
    )45,662
    
    
    
    20,161
    
    
    
    58
    
    
    
    (68,419
    )
    
    
    (2,538
    )Income before income taxes
    
    
    45,662
    
    
    
    61,497
    
    
    
    36,065
    
    
    
    (70,860
    )
    
    
    72,364Income taxes
    
    
    
    
    
    
    22,692
    
    
    
    13,308
    
    
    
    (9,298
    )
    
    
    26,702Net income
    
    $
    45,662
    
    
    $
    38,805
    
    
    $
    22,757
    
    
    $
    (61,562
    )
    
    $
    45,662
 -23-




---



##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    EliminatingCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Entries
    
    
    Consolidated(Dollars in thousands)Revenues:Services
    
    $
    
    
    
    $
    189,638
    
    
    $
    101,726
    
    
    $
    
    
    
    $
    291,364Sales of products
    
    
    
    
    
    
    9,097
    
    
    
    25,938
    
    
    
    
    
    
    
    35,035Intercompany sales and fees
    
    
    
    
    
    
    48,477
    
    
    
    12,616
    
    
    
    (61,093
    )
    
    
    
    
    
    
    247,212
    
    
    
    140,280
    
    
    
    (61,093
    )
    
    
    326,399Costs and expenses:Costs of services
    
    
    
    
    
    
    114,184
    
    
    
    55,903
    
    
    
    (1,170
    )
    
    
    168,917Costs of sales
    
    
    
    
    
    
    4,738
    
    
    
    16,866
    
    
    
    
    
    
    
    21,604Intercompany cost of sales
and fees
    
    
    
    
    
    
    28,156
    
    
    
    7,833
    
    
    
    (35,989
    )
    
    
    
    
    
    
    147,078
    
    
    
    80,602
    
    
    
    (37,159
    )
    
    
    190,521Gross profit
    
    
    
    
    
    
    100,134
    
    
    
    59,678
    
    
    
    (23,934
    )
    
    
    135,878Selling, general & administrative
    
    
    
    
    
    
    19,495
    
    
    
    12,524
    
    
    
    
    
    
    
    32,019Research and development
    
    
    
    
    
    
    7,883
    
    
    
    5,055
    
    
    
    
    
    
    
    12,938Operating expenses
    
    
    
    
    
    
    27,378
    
    
    
    17,579
    
    
    
    
    
    
    
    44,957Operating income
    
    
    
    
    
    
    72,756
    
    
    
    42,099
    
    
    
    (23,934
    )
    
    
    90,921Other income (expense):Interest income
    
    
    
    
    
    
    1,395
    
    
    
    650
    
    
    
    
    
    
    
    2,045Equity in earnings of
unconsolidated affiliates
    
    
    
    
    
    
    1,289
    
    
    
    498
    
    
    
    
    
    
    
    1,787Equity in earnings of
consolidated affiliates
    
    
    54,844
    
    
    
    26,126
    
    
    
    
    
    
    
    (80,970
    )
    
    
    Other income (expense)
    
    
    
    
    
    
    548
    
    
    
    (2,342
    )
    
    
    
    
    
    
    (1,794
    )Interest expense
    
    
    
    
    
    
    (7,182
    )
    
    
    (83
    )
    
    
    
    
    
    
    (7,265
    )54,844
    
    
    
    22,176
    
    
    
    (1,277
    )
    
    
    (80,970
    )
    
    
    (5,227
    )Income before income taxes
    
    
    54,844
    
    
    
    94,932
    
    
    
    40,822
    
    
    
    (104,904
    )
    
    
    85,694Income taxes
    
    
    
    
    
    
    34,176
    
    
    
    14,696
    
    
    
    (18,022
    )
    
    
    30,850Net income
    
    $
    54,844
    
    
    $
    60,756
    
    
    $
    26,126
    
    
    $
    (86,882
    )
    
    $
    54,844
 -24-




---



##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    EliminatingCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Entries
    
    
    Consolidated(Dollars in thousands)Net cash provided by operating
activities
    
    $
    
    
    
    $
    92,062
    
    
    $
    11,127
    
    
    $
    (886
    )
    
    $
    102,303Investing ActivitiesPurchases of systems, equipment
and other assets relating to
contracts
    
    
    
    
    
    
    (66,477
    )
    
    
    (14,644
    )
    
    
    886
    
    
    
    (80,235
    )Purchases of available-for-sale
investment securities
    
    
    
    
    
    
    (63,500
    )
    
    
    
    
    
    
    
    
    
    
    (63,500
    )Maturities and sales of
available-for-sale investment
securities
    
    
    
    
    
    
    1,100
    
    
    
    
    
    
    
    
    
    
    
    1,100Purchases of property, plant and
equipment
    
    
    
    
    
    
    (2,964
    )
    
    
    (22
    )
    
    
    
    
    
    
    (2,986
    )Other
    
    
    
    
    
    
    
    
    
    
    (163
    )
    
    
    
    
    
    
    (163
    )Net cash used for investing
activities
    
    
    
    
    
    
    (131,841
    )
    
    
    (14,829
    )
    
    
    886
    
    
    
    (145,784
    )Financing ActivitiesDividends paid
    
    
    (10,822
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,822
    )Principal payments on long-term
debt
    
    
    
    
    
    
    
    
    
    
    (2,553
    )
    
    
    
    
    
    
    (2,553
    )Proceeds from stock options
    
    
    330
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    330Tax benefit related to stock award
plans
    
    
    842
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    842Intercompany capital transactions
    
    
    8,425
    
    
    
    (8,425
    )
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    1,225
    
    
    
    
    
    
    
    1,976
    
    
    
    
    
    
    
    3,201Net cash used for financing
activities
    
    
    
    
    
    
    (8,425
    )
    
    
    (577
    )
    
    
    
    
    
    
    (9,002
    )Effect of exchange rate changes
on cash
    
    
    
    
    
    
    (4
    )
    
    
    2,473
    
    
    
    
    
    
    
    2,469Decrease in cash and
cash equivalents
    
    
    
    
    
    
    (48,208
    )
    
    
    (1,806
    )
    
    
    
    
    
    
    (50,014
    )Cash and cash equivalents at
beginning of period
    
    
    
    
    
    
    158,150
    
    
    
    77,041
    
    
    
    
    
    
    
    235,191Cash and cash equivalents at end
of period
    
    $
    
    
    
    $
    109,942
    
    
    $
    75,235
    
    
    $
    
    
    
    $
    185,177
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##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    EliminatingCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Entries
    
    
    Consolidated(Dollars in thousands)Net cash provided by operating
activities
    
    $
    
    
    
    $
    114,574
    
    
    $
    7,941
    
    
    $
    (939
    )
    
    $
    121,576Investing ActivitiesPurchases of systems, equipment
and other assets relating to
contracts
    
    
    
    
    
    
    (34,766
    )
    
    
    (6,735
    )
    
    
    939
    
    
    
    (40,562
    )Purchases of available-for-sale
investment securities
    
    
    
    
    
    
    (85,000
    )
    
    
    
    
    
    
    
    
    
    
    (85,000
    )Maturities and sales of
available-for-sale investment
securities
    
    
    
    
    
    
    72,325
    
    
    
    
    
    
    
    
    
    
    
    72,325Purchases of property, plant and
equipment
    
    
    
    
    
    
    (1,841
    )
    
    
    (553
    )
    
    
    
    
    
    
    (2,394
    )Decrease in restricted cash
    
    
    
    
    
    
    
    
    
    
    5,080
    
    
    
    
    
    
    
    5,080Other
    
    
    
    
    
    
    
    
    
    
    296
    
    
    
    
    
    
    
    296Net cash used for investing
activities
    
    
    
    
    
    
    (49,282
    )
    
    
    (1,912
    )
    
    
    939
    
    
    
    (50,255
    )Financing ActivitiesDividends paid
    
    
    (9,770
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,770
    )Principal payments on long-term
debt
    
    
    
    
    
    
    
    
    
    
    (1,317
    )
    
    
    
    
    
    
    (1,317
    )Proceeds from stock options
    
    
    3,322
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,322Purchases of treasury stock
    
    
    (32,051
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,051
    )Intercompany capital transactions
    
    
    37,264
    
    
    
    (37,264
    )
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    1,235
    
    
    
    (68
    )
    
    
    (304
    )
    
    
    
    
    
    
    863Net cash used for financing
activities
    
    
    
    
    
    
    (37,332
    )
    
    
    (1,621
    )
    
    
    
    
    
    
    (38,953
    )Effect of exchange rate changes
on cash
    
    
    
    
    
    
    5
    
    
    
    (1,185
    )
    
    
    
    
    
    
    (1,180
    )Increase in cash and cash
equivalents
    
    
    
    
    
    
    27,965
    
    
    
    3,223
    
    
    
    
    
    
    
    31,188Cash and cash equivalents at
beginning of period
    
    
    
    
    
    
    23,020
    
    
    
    71,426
    
    
    
    
    
    
    
    94,446Cash and cash equivalents at end
of period
    
    $
    
    
    
    $
    50,985
    
    
    $
    74,649
    
    
    $
    
    
    
    $
    125,634
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##### Table of Contents



Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Overview
  The discussion that follows assumes that the Company continues to operate on a stand alone basis
and does not reflect the potential impact of the proposed acquisition of the Company, which is
described below.
  
    
    Forward-Looking Statements cautionary information about forward-looking statements.
    
    Potential Change in Control of our Company- a description of the potential change in control of our company.
    
    Our Business a general description of our business; growth strategy; Brazil lottery contract and stock-based
compensation.
    
    Operations Review an analysis of our consolidated results of operations for the three month periods ended May 27,
2006 and May 28, 2005 presented in our financial statements. We operate in one business  Transaction Processing, and
we have a single operating and reportable business segment. Therefore, our discussions are not quantified by segment
results.
    
    Liquidity, Capital Resources and Financial Position an analysis of cash flows, financial position, and commitments.
    
    Financial Risk Management and Dividend Policy information about financial risk management; interest rate market risk;
foreign currency exchange rate risk; and our dividend policy.
  Forward-Looking Statements
  
    
    the future prospects for and stability of the lottery industry and other businesses in which we are engaged or expect
to be engaged;
    
    our future operating and financial performance (including, without limitation, expected future growth in revenues,
profit margins and earnings per share);
    
    our ability to secure and protect trademarks and other intellectual property rights;
    
    our ability to retain existing contracts and to obtain and retain new contracts;
    
    competition in the online lottery industry and other businesses in which we are engaged or may engage and the impact of
competition on our revenues and profitability;
    
    our ability to realize the anticipated benefits of our acquisitions; and
    
    the results and effects of legal proceedings and investigations.
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##### Table of Contents




    
    government regulations and other actions affecting the online lottery industry could have a negative effect on our
business, results of operations or prospects;
    
    we may be subject to adverse determinations in legal proceedings in Brazil which could result in substantial monetary
judgments, significant reputational damage and the non-extension of our contract with Caixa Economica Federal, the
Brazilian bank and operator of Brazils National Lottery;
    
    our lottery operations are dependent upon our continued ability to retain and extend our existing contracts and win new
contracts;
    
    slow growth or declines in sales of online lottery goods and services could lead to lower revenues and cash flows;
    
    we derive approximately half of our revenues from jurisdictions outside the United States and are subject to the
economic, political and social instability risks of doing business in these jurisdictions;
    
    our results of operations are exposed to non-United States currency exchange rate fluctuations which could result in
lower revenues, net income and cash flows when such results are translated into U.S. dollar accounts;
    
    we have a concentrated customer base and the loss of any of our larger customers (or lower sales from any of these
customers) could lead to significantly lower revenue;
    
    our quarterly operating results may fluctuate significantly;
    
    we operate in a highly competitive environment and increased competition may cause us to experience lower cash flows or
to lose contracts;
    
    we are subject to substantial penalties for failure to perform under our contracts;
    
    we may not be able to respond to technological changes or to satisfy future technology demands of our customers in
which case we could fall behind our competitors;
    
    if we are unable to manage potential risks related to acquisitions, our business and growth prospects could suffer;
    
    expansion of online lottery and other forms of gaming face opposition which could limit our access to some markets;
    
    our business prospects and future success depend upon our ability to attract and retain qualified employees;
    
    our business prospects and future success rely heavily upon the integrity of our employees and executives and the
security of our systems;
    
    our dependence on certain suppliers creates a risk of implementation delays if the supply contract is terminated or
breached, and any delays may result in substantial penalties;
    
    our non-lottery ventures, which are an increasingly important aspect of our business, may fail, including by reason of
our relative lack of experience in markets outside our core lottery market and, in the case of ventures into the
non-lottery gaming market, the difficulty in obtaining necessary licenses;
    
    if we are unable to protect our intellectual property or prevent its use by third parties, our ability to compete in
the market may be harmed;
    
    third party infringement claims against us could limit or affect our ability to compete effectively;
    
    our systems are subject to network interruption risks which could have a negative impact on the quality of the services
offered by us, which could, in turn, negatively impact consumer demand and result in a decrease in the volume of our
customers sales and consequently our own revenues; and
    
    other risks and uncertainties set forth below and elsewhere in this report, in our fiscal 2006 Annual Report on Form
10-K, and in our subsequent press releases and Forms 10-Q and other reports and filings with the Securities and
Exchange Commission.
 .
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##### Table of Contents



Potential Change in Control of Our Company
   Our Business
 General
   Three MonthsEndedMay 27,
    
    FiscalConsolidated Revenues
    
    2006
    
    2006
    
    2005
    
    2004Lottery
    
    
    83
    %
    
    
    84
    %
    
    
    87
    %
    
    
    91
    %Commercial services
    
    
    9
    %
    
    
    9
    %
    
    
    7
    %
    
    
    7
    %Gaming solutions
    
    
    8
    %
    
    
    7
    %
    
    
    6
    %
    
    
    2
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  -29-




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##### Table of Contents




    
    Part I, Item 1  Certain Factors That May Affect Future Performance  Government regulations and other actions
affecting the online lottery industry could have a negative effect on our business, results of operations or prospects
in our fiscal 2006 Annual Report on Form 10-K;
    
    Part I, Item 3  Legal Proceedings in our fiscal 2006 Annual Report on Form 10-K; and
    
    Note 15 to the Consolidated Financial Statements in our fiscal 2006 Annual Report on Form 10-K.
 Growth Strategy
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##### Table of Contents



Brazil Lottery Contract
     Stock-Based Compensation
   
    
    compensation cost for all share-based payments granted prior to
but not yet vested as of February 25, 2006, based on the
grant-date fair value estimate used for SFAS 123 pro forma
disclosure purposes and;
    
    compensation cost for all share-based payments granted subsequent
to February 25, 2006, based on the grant-date fair value estimated
in accordance with SFAS 123R.
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##### Table of Contents



Operations Review
 Comparison of the three month periods ended May 27, 2006 and May 28,
2005
 Revenues and Gross Margin
 Three Months EndedMay 27,
    
    
    May 28,
    
    
    Change2006
    
    
    2005
    
    
    $
    
    
    %(Dollars in millions)Domestic
    
    $
    154.7
    
    
    $
    143.1
    
    
    $
    11.6
    
    
    
    8.1International (excluding Brazil)
    
    
    75.7
    
    
    
    81.6
    
    
    
    (5.9
    )
    
    
    (7.2
    )Lottery
    
    $
    230.4
    
    
    $
    224.7
    
    
    $
    5.7
    
    
    
    2.5Brazil
    
    
    33.0
    
    
    
    45.6
    
    
    
    (12.6
    )
    
    
    (27.6
    )Commercial services
(excluding Brazil)
    
    
    18.0
    
    
    
    13.1
    
    
    
    4.9
    
    
    
    37.4Gaming solutions
    
    
    8.8
    
    
    
    8.0
    
    
    
    0.8
    
    
    
    10.0Services
    
    $
    290.2
    
    
    $
    291.4
    
    
    $
    (1.2
    )
    
    
    (0.4
    )Sales of products
    
    
    25.7
    
    
    
    35.0
    
    
    
    (9.3
    )
    
    
    (26.6
    )Total revenues
    
    $
    315.9
    
    
    $
    326.4
    
    
    $
    (10.5
    )
    
    
    (3.2
    )Three Months EndedMay 27,
    
    May 28,
    
    Change2006
    
    2005
    
    Percentage PointsService gross margin
    
    
    39.4
    %
    
    
    42.0
    %
    
    (2.6)Product gross margin
    
    
    41.4
    %
    
    
    38.3
    %
    
    3.1
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##### Table of Contents



Operating
Expenses
 Three Months EndedMay 27,
    
    
    May 28,
    
    
    Change2006
    
    
    2005
    
    
    $
    
    
    %(Dollars in millions)SG&A expenses
    
    $
    39.3
    
    
    $
    32.0
    
    
    $
    7.3
    
    
    
    22.8R&D expenses
    
    
    10.8
    
    
    
    12.9
    
    
    
    (2.1
    )
    
    
    (16.3
    )$
    50.1
    
    
    $
    44.9
    
    
    $
    5.2
    
    
    
    11.6Percentage of total revenueSG&A expenses
    
    
    12.4
    %
    
    
    9.8
    %R&D expenses
    
    
    3.4
    %
    
    
    4.0
    %
  Interest
Income
 Three Months EndedMay 27,
    
    
    May 28,
    
    
    Change2006
    
    
    2005
    
    
    $
    
    
    %(Dollars in millions)Interest income
    
    $
    4.4
    
    
    $
    2.0
    
    
    $
    2.4
    
    
    
    >100.0
  Income Taxes
 Liquidity, Capital Resources and Financial Position
 Analysis of Cash Flows
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##### Table of Contents



Financial Position
 May 27,
    
    
    February 25,
    
    
    Change2006
    
    
    2006
    
    
    $
    
    
    %(Dollars in millions)Trade and other receivables, net
    
    $
    151.4
    
    
    $
    183.6
    
    
    $
    (32.2
    )
    
    
    (17.5
    )Inventories
    
    
    108.5
    
    
    
    88.0
    
    
    
    20.5
    
    
    
    23.3Systems, equipment and other
assets relating to contracts, net
    
    
    731.3
    
    
    
    692.5
    
    
    
    38.8
    
    
    
    5.6Accounts payable
    
    
    78.7
    
    
    
    93.2
    
    
    
    (14.5
    )
    
    
    (15.6
    )Employee compensation
    
    
    23.8
    
    
    
    31.8
    
    
    
    (8.0
    )
    
    
    (25.2
    )Advance payments from customers
    
    
    79.3
    
    
    
    63.8
    
    
    
    15.5
    
    
    
    24.3Deferred revenue and advance
billings
    
    
    31.4
    
    
    
    17.9
    
    
    
    13.5
    
    
    
    75.4
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##### Table of Contents



Commitments
 Performance
and Other Bonds
 Total potentialcommitmentsPerformance bonds
    
    $
    260.2Financial guarantees
    
    
    31.4Litigation bonds
    
    
    7.9All other bonds
    
    
    5.0$
304.5
 Master Contract with the Rhode Island Lottery
 -36-




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##### Table of Contents



Acquisition of Atronic
    -37-




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##### Table of Contents



Option to Purchase PolCard Outstanding Equity
    Buyout Percentageof the PolCard

    
    Range ofExercise Date Commencing In
    
    Outstanding Equity

    
    Buyout PriceMay 2007
    
    
    12.6
    %
    
    $
    20 to $30 millionMay 2008
    
    
    6.3
    %
    
    $
    11 to $17 millionMay 2009
    
    
    6.3
    %
    
    $
    13 to $19 million
 Financial Risk Management and Dividend Policy
 Financial Risk Management
 -38-




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##### Table of Contents



Interest Rate Market Risk
  Estimated Fair ValueAt May 27,
    
    
    10% Increase in
    
    
    10% Decrease in2006
    
    
    Interest Rates
    
    
    Interest Rates$250 million of 4.75% Senior Notes
    
    $
    248.0
    
    
    $
    244.0
    
    
    $
    252.2$150 million of 4.50% Senior Notes
    
    
    147.8
    
    
    
    145.6
    
    
    
    149.9$150 million of 5.25% Senior Notes
    
    
    147.3
    
    
    
    142.6
    
    
    
    152.3$6.2 million of 1.75% Convertible
Debentures
    
    
    16.7
    
    
    
    16.7
    
    
    
    16.7The estimated fair values above were determined by an independent investment banker. The values of
the Senior Notes were determined after taking into consideration $225 million of interest rate
swaps as follows:Interest RateEstimated Debt
    
    
    Swaps OutstandingFair Value
    
    
    (notional amount)$250 million of 4.75% Senior Notes
    
    $
    248.0
    
    
    $
    150.0$150 million of 4.50% Senior Notes
    
    
    147.8
    
    
    
    50.0$150 million of 5.25% Senior Notes
    
    
    147.3
    
    
    
    25.0
   Foreign Currency Exchange Rate Risk
  -39-




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##### Table of Contents



Dividend Policy
 
   
   -40-




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##### Table of Contents



LEGAL PROCEEDINGS
 Shareholder Class Action Suits.
  
 RISK FACTORS
  -41-




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##### Table of Contents



UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   (i)
    
    if the sale price of our Common Stock is more than 120% of the conversion price
(approximately $16.50 per share) for at least 20 trading days in a 30 trading-day period prior
to the date of surrender for conversion;(ii)
    
    if, during any period, the credit ratings assigned to the Debentures by Moodys or Standard &
Poors are reduced below Ba1 or BB, respectively, or the credit rating assigned to the
Debentures is suspended or withdrawn by either rating agency;(iii)
    
    if the Debentures have been called for redemption; or(iv)
    
    upon the occurrence of specified corporate transactions.
  Consideration (Dollars of RetiredDate of Notice of Conversion
    
    Debenture Principal Amount)
    
    
    Common Shares IssuedMarch 3, 2006
    

    50,000
    
    

    3,636April 5, 2006
    

    150,000
    
    

    10,909April 6, 2006
    

    209,000
    
    

    15,194
  Securities Act
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##### Table of Contents



SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   1.
    
    Proposal to Adopt the Merger Agreement. At the special meeting, the stockholders of
the Company adopted the merger agreement, and the number of votes cast for, against or
withheld, with respect to adoption of the merger agreement are as follows:
 FOR
    
    AGAINST
    
    ABSTAIN85,369,822
    
    217,435
    
    131,746
 2.
    
    Proposal to Adjourn Special Meeting (If Necessary to Solicit Additional Proxies). At
the special meeting, the stockholders of the Company adopted a proposal to adjourn the special
meeting, if necessary to solicit additional proxies in favor of adoption of the merger
agreement. The number of votes cast for, against, or withheld with respect to this proposal
are as follows:
 FOR
    
    AGAINST
    
    ABSTAIN77,729,925
    
    7,856,653
    
    132,425
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##### Table of Contents



EXHIBITS
  10.1
    
    Employment Agreement, dated May 8, 2006, between GTECH Holdings Corporation, Lottomatica
S.p.A and Cornelia Laverty OConnor.10.2
    
    Employment Agreement, dated May 8, 2006, between GTECH Holdings Corporation, Lottomatica
S.p.A and Donald R. Sweitzer.10.3
    
    Stipulation of Settlement, dated June 2, 2006, between GTECH Holdings Corporation and
plaintiffs in two class action lawsuits.12.1
    
    Computation of Ratio of Earnings to Fixed Charges31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of W. Bruce Turner,
President and Chief Executive Officer of the Company31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of Jaymin B. Patel,
Senior Vice President and Chief Financial Officer of the Company32.1
    
    Certification Pursuant to 18 United States Code Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, of W. Bruce Turner, President and Chief Executive
Officer of the Company32.2
    
    Certification Pursuant to 18 United States Code Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, of Jaymin B. Patel, Senior Vice President and Chief
Financial Officer of the Company
 
   GTECH HOLDINGS CORPORATIONDate: June 29, 2006
    
    By /s/ Jaymin B. PatelJaymin B. Patel, Senior Vice President and ChiefFinancial Officer (Principal Financial Officer)Date: June 29, 2006
    
    By /s/ Robert J. PlourdeRobert J. Plourde, Vice President, CorporateController and Chief Accounting Officer(Principal Accounting Officer)
 -44-