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 ~~October~~January 31, ~~2013~~2014

[ ] 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 No o

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 ý No o

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

Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

The number of shares outstanding of the registrant’s Common Stock, no par value, as of ~~December~~March 1213, ~~2013~~2014 was 12,962,999.

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INDEX

PART I	FINANCIAL INFORMATION	PAGE
Item 1.	Financial Statements (Unaudited)		3-12
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		13-18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		19
Item 4.	Controls and Procedures		19

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 4.	Mine Safety Disclosures		19
Item 5.	Other Information		19
Item 6.	Exhibits		20
	Signatures

EXHIBIT 31

EXHIBIT 32

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PART I	FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
	October 31,			April 30,
	January 31,			April 30,
	2013			2013
	2014			2013
	(Unaudited)			(1)
ASSETS
Current assets:
Cash and cash equivalents	$	711,~~544~~609		$	7,259
Certificates of deposit		~~498~~249			1,245
Accounts receivable, net of allowance for doubtful accounts of $75		~~3,138~~626			2,054
Deferred cost of revenues		21			132
Inventories		21,~~197~~431			3,665
Deferred income taxes		34-			1,555
Other current assets		~~115~~181			298
Total current assets		1314,~~528~~097			16,208
Equipment, furniture and fixtures, net		~~546~~541			573
Other noncurrent assets		5149			53
Total assets	$	14,~~125~~687		$	16,834
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	~~742~~791		$	2,180
Accrued payroll and related taxes		~~391~~321			384
Warranty reserves		~~338~~218			139
Payable to Parent		202			202
Other current liabilities		~~126~~334			38
Deferred revenues		~~1,252~~785			5,451
Total current liabilities		32,~~051~~651			8,394
Long-term liabilities		12			-
Total liabilities		2,663			8,394
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		(4544,~~296~~346	)		(47,930	)
Total shareholders' equity		1112,~~074~~024			8,440
Total liabilities and shareholders' equity	$	14,~~125~~687		$	16,834

(1) Derived from the consolidated audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2013 filed with the SEC.

See notes to condensed consolidated financial statements

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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Amounts in thousands, except per share amounts)

	Three Months Ended					~~Six~~Nine Months Ended
	October 31,					October 31,
	January 31,					January 31,
	2013		2012			2013		2012
	2014		2013			2014		2013
Revenues:
Sales of products	$	83,~~715~~699	$	21,~~047~~709		$	1619,~~025~~724	$	56,~~060~~769
Services		~~259~~298		~~350~~297			~~715~~1,013		~~627~~924
		8,974		2,397			16,740		5,687
		3,997		2,006			20,737		7,693
Cost of sales:
Cost of product sales		42,~~820~~083		1,~~133~~372			1012,~~746~~829		24,~~850~~222
Cost of services		~~107~~76		~~128~~146			~~238~~314		~~203~~349
		4,927		1,261			10,984		3,053
		2,159		1,518			13,143		4,571
Gross profit		41,~~047~~838		~~1,136~~488			57,~~756~~594		23,~~634~~122
Selling, general and administrative expenses		~~836~~688		~~644~~580			12,~~424~~112		1,~~223~~803
Income from operations		3,211		492			4,332		1,411
Income (loss) from operations		1,150		(92	)		5,482		1,319
Other income:
Interest and dividend income		-		-			1		-
Income before provision for income taxes		3,211		492			4,333		1,411
Income (loss) before provision for income taxes		1,150		(92	)		5,483		1,319
Provision for income taxes		1,247		20			1,699		23
Provision (benefit) for income taxes		200		(3	)		1,899		20
Net income	$	1,964	$	472		$	2,634	$	1,388
Net income (loss)	$	950	$	(89	)	$	3,584	$	1,299
Net income per share:
Net income (loss) per share:
Basic	$	0.1507	$	(0.0401	)	$	0.2027	$	0.1110
Weighted average shares used in computation of net income per share:
Weighted average shares used in computation of net income (loss) per share:
Basic		12,963		12,963			12,963		12,963

See notes to condensed consolidated financial statements

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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Amounts in thousands)

	Six Months Ended October 31,
	Nine Months Ended January 31,
	2013			2012
	2014			2013
Cash flows from operating activities:
Net income	$	23,~~634~~584		$	1,~~388~~299
Adjustments to reconcile net income to net cash (used in) provided by
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		95139			87133
Warranty reserve expense		~~260~~170			7375
Loss on disposal of equipment		25			-
Deferred income taxes		1,~~521~~555			-
Changes in operating assets and liabilities:
Accounts receivable		(1,~~084~~428	)		(~~2,189~~116	)
Costs and estimated earnings in excess of billings on uncompleted contracts		-			~~726~~666
Deferred cost of revenues		~~130~~131			(83	)
Inventories		12,~~468~~234			1,~~124~~089
Other current and noncurrent assets		~~185~~121			41(215	)
Accounts payable		(1,~~438~~389	)		(~~907~~845	)
Billings in excess of costs and estimated earnings on uncompleted contracts		-			453
Accrued payroll and related taxes		(63	)		94
Accrued payroll and related taxes		7			1
Warranty reserves		(91	)		(137	)
Warranty reserves		(61	)		(131	)
Other liabilities		308			(33	)
Other liabilities		88			(29	)
Deferred revenues		(4,666	)		1,721
Deferred revenues		(4,199	)		(36	)
Net cash provided by operating activities		3,486			3,734
Net cash (used in) provided by operating activities		(369	)		593
Cash flows from investing activities:
Proceeds from redemption of certificates of deposit		~~747~~996			250
Additions to equipment, furniture and fixtures		(93132	)		(~~175~~217	)
Net cash provided by investing activities		~~654~~864			7533
Net increase in cash and cash equivalents		~~285~~4,350			~~668~~3,767
Cash and cash equivalents at beginning of period		7,259			2,783
Cash and cash equivalents at end of period	$	711,~~544~~609		$	36,~~451~~550
Supplemental cash flow information:
Cash paid for income taxes	$	73243		$	3743

See notes to condensed consolidated financial statements

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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 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 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.

The Company, through its wholly-owned subsidiary Unisyn Voting Solutions, Inc. (“Unisyn”), has devoted significant resources to developing federally 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 received the 2005 Voluntary Voting System Guidelines (“VVSG”) certification from the United States Election Assistance Commission (“EAC”) for its OpenElect® digital optical scan election system – a 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;
·	Reduce the cost of ballot printing while offering operational efficiencies;
·	Minimal training required for poll workers to set-up and operate; and
·	Minimal voter re-education required.

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. All significant intercompany 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, 2013 filed with the SEC on July 9, 2013. The condensed consolidated balance sheet as of April 30, 2013 has been derived from the audited financial statements included in the Form 10-K for that year.

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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.

Deferred Revenues

Deferred revenues of approximately $~~1.3~~785,000 ~~million~~ as of ~~October~~January 31, ~~2013~~2014 represent prepayments for products and services related to ~~lottery~~the ~~terminals,~~ use of the OpenElect® and PBC voting systems, and other software and technical support services. The Company will recognize the revenues upon the 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 ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014 is as follows:

(Amounts in thousands)
Balance at May 1, 2013	$	139
Additional reserves		~~298~~355
Warranty reserve expense adjustments		(38185	)
Charges incurred		(6191	)
Balance at October 31, 2013	$	338
Balance at January 31, 2014	$	218

Income Taxes

The Company uses the asset and liability method for financial reporting of income taxes. Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and the tax basis of assets and liabilities, and are measured by applying enacted rates and laws to taxable years in which such differences are expected to be recovered or settled. Any changes in tax rates or laws are recognized in the period when such changes are enacted. Valuation allowances have been established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty exists regarding the realizability of the deferred tax assets.

The provisions for income taxes were approximately $~~1.2~~200,000 ~~million~~ and $1.79 million for the three and ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014, respectively. The effective rate was 3934.2273% for ~~2013~~2014, compared to a minimal effective rate for ~~2012~~2013. The increase in the effective rate for ~~2013~~2014 was due to the reversal of a portion of the valuation allowance and recording of a deferred tax asset at April 30, 2013,. ofThis ~~which~~deferred ~~portions~~tax ~~were~~asset was fully recognized in the ~~first~~nine ~~and~~months ~~second~~ended ~~quarters~~January of31, ~~the fiscal year ending~~ 2014.

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Segment Information

The Company reports segment information based on the “management” approach. Under this approach, operating segments are identified in substantially the same manner as they are reported internally and used by the Company’s chief operating decision maker for purposes of evaluating performance and allocating resources.

The Company divides its operations into two operating segments: the gaming business and the voting business. The gaming segment designs and develops computerized wagering systems and terminals for the lottery and pari-mutuel racing industries worldwide. Presently the voting segment generates revenues from the sales of the voting systems and hardware, software licensing, product servicing and software support services.

The Company’s segment information is presented below (in thousands):

	As of and for the Three Months Ended October 31, 2013
	As of and for the Three Months Ended January 31, 2014
	Gaming Business			Voting Business				Totals
Total revenues		$	82,~~661~~944		$	~~313~~1,053			$	83,~~974~~997
Income (loss) from operations			3,707			(496	)			3,211
Income from operations			1,092			58				1,150
Depreciation and amortization			2923			2021				4944
Segment assets			12,~~463~~510			12,~~662~~177				14,~~125~~687
	As of and for the Three Months Ended October 31, 2012
	As of and for the Three Months Ended January 31, 2013
	Gaming Business			Voting Business				Totals
Total revenues		$	1,~~145~~724		$	~~1,252~~282			$	2,~~397~~006
Income from operations			214			278				492
Income (loss) from operations			185			(277	)			(92	)
Depreciation and amortization			2927			1719				46
Segment assets			68,~~830~~214			1,~~964~~942				810,~~794~~156

As of and for the Six Months Ended October 31, 2013

As of and for the Nine Months Ended January 31, 2014

Gaming Business

Voting Business

Totals

Total revenues

1518,~~531~~475

12,~~209~~262

1620,~~740~~737

Income (loss) from operations

45,~~718~~810

(~~386~~328

)

45,~~332~~482

Depreciation and amortization

5578

4061

95139

Segment assets

12,~~463~~510

12,~~662~~177

14,~~125~~687

As of and for the Six Months Ended October 31, 2012

As of and for the Nine Months Ended January 31, 2013

Gaming Business

Voting Business

Totals

Total revenues

35,~~632~~356

2,~~055~~337

57,~~687~~693

Income from operations

1,165

246

1,411

Income (loss) from operations

1,350

(31

)

1,319

Depreciation and amortization

5683

3150

87133

Segment assets

68,~~830~~214

1,~~964~~942

810,~~794~~156

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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 the following:

	October 31,		April 30,
	January 31,		April 30,
	2013		2013
	2014		2013
(Amounts in thousands)
Raw materials and subassemblies	$	1,~~261~~211	$	2,872
Work-in-process		325		33
Finished goods		~~904~~215		760
	$	21,~~197~~431	$	3,665

Equipment, Furniture and Fixtures

Net equipment, furniture and fixtures consisted of the following:

	October 31,			April 30,
	January 31,			April 30,
	2013			2013
	2014			2013
(Amounts in thousands)
Plant and machinery	$	~~822~~661		$	757
Computer equipment		1,~~684~~728			1,662
Leasehold improvement		201			201
Furniture, fixtures and equipment		96			96
Construction in progress		6-			25
		2,809			2,741
		2,686			2,741
Accumulated depreciation and amortization		(2,~~263~~145	)		(2,168	)
Net equipment, furniture and fixtures	$	~~546~~541		$	573

Net Income (Loss) per Share

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

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Major Customers

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

	Three Months Ended October 31,		Six Months Ended October 31,
	Three Months Ended January 31,		Nine Months Ended January 31,
	2013	2012	2013	2012
	2014	2013	2014	2013
Revenue:
From unrelated customers	NoOne ~~individual~~ customer ~~accounted~~from ~~for~~the ~~more~~voting ~~than~~segment 10accounted for 22% of total revenue	One customer from the ~~voting segment accounted for 41% of total revenue and one customer from the~~ gaming segment accounted for 1054% of total revenue	One customer from the gaming segment accounted for 4033% of total revenue	One customer from the voting segment accounted for 2822% of total revenue and one customer from the gaming segment accounted for 1021% of total revenue
From related customers	One customer from the gaming segment accounted for 9572% of total revenue	One customer from the gaming segment accounted for 3630% of total revenue	One customer from the gaming segment accounted for 5256% of total revenue	~~One~~Two ~~customer~~customers from the gaming segment accounted for 5047% of total revenue

Related Party Transactions

During the three months ended ~~October~~January 31, ~~2013~~2014 and ~~2012~~2013, revenues from all related party transactions for the sales of products and services totaled approximately $82.69 million (9673% of total revenue) and $~~909~~646,000 (3832% of total revenue), respectively. Related party revenues for the ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014 and ~~2012~~2013 were approximately $811.87 million (5356% of total revenue) and $3.17 million (5448% of total revenue), respectively. Included in accounts receivable at ~~October~~January 31, ~~2013~~2014 was approximately $~~2.9~~157,000 ~~million~~ from these customers. Descriptions of the transactions with the Company’s related parties in the three and ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014 and ~~2012~~2013 are presented below.

Berjaya Lottery Management (H.K.) Ltd.

In 1996, the Company entered into an agreement to purchase specific inventory on behalf of Berjaya Lottery Management (H.K.) Ltd. (“BLM”), the owner of 71.3% of ILTS’s outstanding voting stock as of ~~October~~January 31, ~~2013~~2014.

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 resulted 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 ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014 and ~~2012~~2013; · There were no accounts receivable balances from BLM as of ~~October~~January 31, ~~2013~~2014 and April 30, 2013; · Liabilities to BLM arising from the sale or use of the BLM inventory, recorded as “Payable to Parent,” were $202,000 as of both ~~October~~January 31, ~~2013~~2014 and April 30, 2013; and · There were no inventory balances held for BLM as of ~~October~~January 31, ~~2013~~2014 and April 30, 2013.

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Sports Toto Malaysia Sdn. Bhd.

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

In January 2013, the Company received from STM, an order valued at approximately $11 million for lottery products. Shipments of these products ~~are~~were ~~to be~~ completed byin the third quarter of fiscal 2014, and the related revenue was recognized.

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

· Revenues of approximately $82.59 million and $811.75 million were recognized on the sale of lottery products and support services during the three and ~~six~~nine months ended ~~October~~January, 31, ~~2013~~2014, respectively. Revenues of $~~871~~609,000 and $12.95 million were recognized on the performance of contract deliverables and support services during the three and ~~six~~nine months ended ~~October,~~January 31, ~~2012~~2013, respectively; · There was no cost of deferred revenues as of ~~October~~January 31, ~~2013~~2014. Cost of deferred revenues in connection with the lottery product order received in January 2013 mentioned above totaled $104,000 as of April 30, 2013; · There was deferred revenue of $~~820~~7,000 on lottery products and software support services as of ~~October~~January 31, ~~2013~~2014, compared to $3.3 million as of April 30, 2013; and · Accounts receivable totaled ~~approximately~~ $~~2.8~~146,000 ~~million~~ as of ~~October~~January 31, ~~2013~~2014, compared to $410,000 as of April 30, 2013.

Philippine Gaming Management Corporation

The Company provides lottery products and software development to Philippine Gaming Management Corporation (“PGMC”), a related party and a subsidiary of BLM.

In addition, the Company provides PGMC with terminal spare parts on an ongoing basis and support services on an as-needed basis.

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

· Revenues recognized on the sale of lottery products during the three and ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014 totaled ~~approximately~~ $617,000 and $6572,000, respectively. Revenues of $32,000 and $1.1 million were recognized on the sale of lottery products during the three and ~~six~~nine months ended ~~October~~January ~~2012~~31, 2013, respectively; · There were no deferred revenue balances as of ~~October~~January 31, ~~2013~~2014 and April 30, 2013; and · There were no accounts receivable balances as of ~~October~~January 31, ~~2013~~2014 and April 30, 2013.

Natural Avenue Sdn. Bhd.

The Company provides Natural Avenue Sdn. Bhd. (“Natural Avenue”), an affiliate of BLM and a related party, with lottery products and support services.

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

· Revenues of $3536,000 and $71107,000 were recognized on the sale of support services and licensing during the three and ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014, respectively. Revenues of $35,000 and $70105,000 were recognized on the sale of support services and licensing during the three and ~~six~~nine months ended ~~October~~January 31, ~~2012~~2013, respectively; · There was deferred revenue of $118,000 as of ~~October~~January 31, ~~2013~~2014. Deferred revenue balance on lottery product licensing totaled $4,000 as of April 30, 2013; and · Accounts receivable was $11,000 as of ~~October~~January 31, ~~2013~~2014, compared to $1,000 as of April 30, 2013.

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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 ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014, the Company incurred services of approximately $51,000 and $~~101~~152,000, respectively, which are shown as part of cost of sales. During the three and ~~six~~nine months ended ~~October~~January 31, ~~2012~~2013, the Company incurred approximately $4065,000 and $80145,000, respectively, which are shown as part of cost of sales.

Fair Value of Financial Instruments

The Company’s material financial instruments consist of its cash and cash equivalents, certificates of deposit, accounts receivable, accounts payable and related party payables. The carrying amounts of the Company’s financial instruments generally approximated their fair values as of ~~October~~January 31, ~~2013~~2014 and April 30, 2013 due to the short-term maturity of the instruments.

Subsequent Events

On January 8, 2014, the Company’s board of directors approved (i) the Company’s reincorporation from California to Delaware by means of a merger with and into a wholly-owned Delaware subsidiary (the “Reincorporation”) and (ii) a subsequent amendment to the surviving company’s certificate of incorporation to effect a 9,245,317-for-1 reverse stock split (the “Reverse Stock Split”) on outstanding shares of common stock. On January 8, 2014 (January 9, 2014 Malaysia Time), Berjaya Lottery Management (H.K.) Limited (“BLM”), the holder of 9,245,317 shares of the Company’s common stock, representing 71.3% of the Company’s outstanding shares of common stock as of that date, approved the Reincorporation and Reverse Stock Split by written consent. Each shareholder holding less than one full share of common stock following the Reverse Stock Split, being every shareholder of the Company other than BLM, will receive a cash payment from the Company for their fractional share interests equal to $1.33 in cash, without interest, for each share of common stock held by such shareholder immediately prior to the Reverse Stock Split. The Reincorporation and the Reverse Stock Split will be effected on or about the date 20 calendar days following the date on which the Company’s Information Statement on Schedule 14C relating to the Reincorporation and Reverse Stock Split is mailed to the Company’s shareholders. Following consummation of the transactions, the Company will promptly terminate its registration and reporting obligations under the Securities Exchange Act of 1934, as amended.

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ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

This report contains certain forward-looking statements. 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 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" and other sections of this report, 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 accordance 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. There have been no material changes to the critical accounting policies outlined in the Company’s annual report on form 10-K for the fiscal year ended April 30, 2013.

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Revenue Recognition

Our revenues are derived primarily from the sales of complete wagering systems, lottery terminals, the OpenElect® and PBC voting systems, other software and software support services. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and the title and risk of loss have been transferred. Service revenues are recognized as the services are rendered, and the related costs of services are recognized on a time and materials basis.

Revenue Recognition for Arrangements with Multiple Deliverables

For multi-element arrangements that include hardware products containing software essential to the hardware product’s functionality, undelivered software elements that relate to the hardware product’s essential software, and undelivered non-software services, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of the selling price (“ESP”). VSOE generally exists only when we sell the deliverable separately and VSOE is the price actually charged for that deliverable. TPE is determined based on competitor prices for similar deliverables when sold separately. ESPs reflect our best estimates of what the selling prices of elements would be if they were sold regularly on a standalone basis.

For sales of hardware products, we provide various hardware components containing software essential to the hardware product’s functionality, and other components depending on the customers’ needs. We allocate revenue to these deliverables using the relative selling price method. Because we have not established VSOE or TPE for the hardware, with essential software, revenue is allocated based on ESPs. Determining ESPs requires management’s judgment. Revenue is recognized upon shipment of the hardware and the related essential software, provided the other conditions for revenue recognition have been met. We also provide software support and product support services on a standalone basis from the sales of the hardware. Amounts allocated to software support and product support services are based on VSOE using hourly or daily billing rates. Revenue is deferred until the services are performed. For annual software licenses, we use VSOE. Amounts allocated to annual software licenses are deferred and recognized on a straight-line basis over the service period, which is typically one year.

We consider multiple factors depending on the unique facts and circumstances related to each deliverable when determining ESPs for deliverables without VSOE or TPE. Key factors considered by the management in developing the ESPs for the hardware include the costs of manufacture and what a customer would reasonably pay based on the features being offered, trends in the ~~market place~~marketplace, size of the territory, and competitive prices. If the facts and circumstances underlying the factors change, including the estimated or actual costs incurred to provide the hardware with the essential software, or should future facts and circumstances lead ~~the~~ management to consider additional factors, our ESP for the hardware with essential software related to future sales could change.

Revenue Recognition for Percentage-of-Completion Method

For our complete wagering and lottery systems, we recognize revenue by using the percentage-of-completion method when the contracts for complete systems fulfill the following criteria:

1.	Contract performance extends over long periods of time;
2.	The software portion involves significant production, modification or customization;
3.	Reasonably dependable estimates can be made on the progress towards completion, contract revenues and contract costs; and
4.	Each element is essential to the functionality of the other elements of the contracts.

Under the percentage-of-completion method, sales and estimated gross profits are recognized as work progresses. Progress toward completion is measured by the ratio of costs incurred to total estimated costs. Revenue and gross profit may be adjusted prospectively for revisions in estimated total contract costs. If the current estimates of total contract revenue and contract cost indicate a loss, a provision for the entire loss on the contract is recorded in the period in which it becomes evident. The total estimated loss includes all costs allocable to the specific contract.

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RESULTS OF OPERATIONS

Revenue Analysis

Three Months Ended

~~Six~~Nine Months Ended

(Amounts in thousands)

~~October~~January 31,

Revenues

~~2013~~2014

~~2012~~2013

Change

~~2013~~2014

~~2012~~2013

Change

Products:

Contracts

83,~~450~~547

1,~~695~~567

61,~~755~~980

1519,~~548~~095

45,~~357~~924

1113,~~191~~171

Spares

~~171~~49

~~174~~54

(35

)

~~199~~248

~~476~~530

(~~277~~282

)

Licensing

94103

~~178~~88

~~(84~~15

)

~~278~~381

~~227~~315

5166

Total Products

83,~~715~~699

21,~~047~~709

61,~~668~~990

1619,~~025~~724

56,~~060~~769

1012,~~965~~955

Services:

Software Support

~~219~~266

~~198~~195

2171

~~440~~706

~~399~~594

41112

Product Servicing and Support

4032

~~152~~102

(~~112~~70

)

~~275~~307

~~228~~330

47(23

)

Total Services

~~259~~298

~~350~~297

~~(91~~1

)

~~715~~1,013

~~627~~924

8889

83,~~974~~997

2,~~397~~006

61,~~577~~991

1620,~~740~~737

57,~~687~~693

1113,~~053~~044

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 could 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 ~~October~~January 31, ~~2013~~2014 was approximately $83.5 million, compared to $1.76 million for the corresponding period in ~~2012~~2013. Higher contract revenue was primarily due to increased sales related to both the gaming and voting segments. For the ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014, contract revenue was approximately $1519.51 million, compared to $45.49 million for the corresponding period in ~~2012~~2013. Significantly higher contract ~~revenues~~revenue ~~were~~was primarily due to lottery product and hardware component sales related to the gaming and totalizator industries. The increase iswas partially offset by ~~the~~completion ~~absence~~ of ~~turnkey~~a lottery ~~system~~contract ~~sales~~ and ~~decreased~~the ~~contract~~absence ~~activities~~of ~~for the~~turnkey ~~voting~~lottery ~~segment~~system sales.

Spares revenue for the three months ended ~~October~~January 31, ~~2013~~2014 remained relatively ~~constant~~flat at $~~171~~49,000, compared to $~~174~~54,000 for the same period in ~~2012~~2013. Spares revenue for the ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014 was $~~199~~248,000, compared to $~~476~~530,000 for the corresponding period in ~~2012~~2013. The decrease was primarily due to lower demand for spare parts from an unrelated customer in the gaming segment. Customers' demand for spare parts fluctuates from period to period.

Licensing revenue for the three months ended ~~October~~January 31, ~~2013~~2014 was $94103,000, compared to $~~178~~88,000 in ~~2012~~2013. ~~Lower licensing revenue was primarily due to decreased contract activities related to the voting segment.~~ For the ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014, licensing revenue was $~~278~~381,000, compared to $~~227~~315,000 for the corresponding period in ~~2012~~2013. The ~~increase~~increases in licensing ~~revenue~~revenues ~~was~~were primarily due to additional executed licensing agreements related to the voting segment. We derive licensing revenue from both voting and lottery contracts.

Software support revenue for the three months ended ~~October~~January 31, ~~2013~~2014 was $~~219~~266,000, compared to $~~198~~195,000 for the same period in ~~2012~~2013. For the ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014, software support revenue was $~~440~~706,000, compared to $~~399~~594,000 in the same period in ~~2012~~2013. ~~The~~Higher ~~increases~~software support revenues were primarily due to ~~higher~~increased fees ~~charged~~ to support a customer in the gaming segment.

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Product servicing and support revenue for the three months ended ~~October~~January 31, ~~2013~~2014 was $4032,000, compared to $~~152~~102,000 for the ~~corresponding~~same period in ~~2012~~2013. ~~The decrease was primarily due to the lower demand of support services from an unrelated customer in the gaming segment and lower demand of support services from customers in the voting segment.~~ For the ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014, product servicing and support revenue was $~~275~~307,000, compared to $~~228~~330,000 for the same period in the prior year. The ~~increase~~decreases ~~was~~were primarily due to ~~higher~~lower demand for support services ~~from an unrelated customer~~ in the voting segment, partially offset by ~~lower~~increased ~~demand for~~ support services from an unrelated customer in the gaming segment.

Related party revenue of approximately $82.69 million accounted for 9673% of total revenue in the three months ended ~~October~~January 31, ~~2013~~2014, compared to $~~909~~646,000 or 3832% of total revenue in the corresponding period in ~~2012~~2013. For the ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014, related party revenue of approximately $811.87 million accounted for 5356% of total revenue, compared to $3.17 million or 5448% of total revenue in the corresponding period in ~~2012~~2013.

Cost of Sales and Gross Profit Analysis

The following table summarizes the cost of sales and gross profit margins as a percentage of total revenues for each of the periods shown:

	Three Months Ended October 31,								Six Months Ended October 31,
	Three Months Ended January 31,								Nine Months Ended January 31,
(Amounts in thousands)	~~2013~~2014				~~2012~~2013				~~2013~~2014				~~2012~~2013
Revenues:
Products	$	83,~~715~~699	9793	%	$	21,~~047~~709	85	%	$	1619,~~025~~724	9695	%	$	56,~~060~~769	8988	%
Services		~~259~~298	37	%		~~350~~297	15	%		~~715~~1,013	45	%		~~627~~924	1112	%
Total revenues	$	83,~~974~~997	100	%	$	2,~~397~~006	100	%	$	1620,~~740~~737	100	%	$	57,~~687~~693	100	%
Cost of sales:
Products	$	42,~~820~~083	5452	%	$	1,~~133~~372	4768	%	$	1012,~~746~~829	6462	%	$	24,~~850~~222	5055	%
Services		~~107~~76	12	%		~~128~~146	67	%		~~238~~314	12	%		~~203~~349	45	%
Total costs of sales	$	42,~~927~~159	5554	%	$	1,~~261~~518	5375	%	$	1013,~~984~~143	6564	%	$	34,~~053~~571	5460	%
Gross profit:
Products	$	31,~~895~~616	4340	%	$	~~914~~337	3817	%	$	56,~~279~~895	3233	%	$	2,~~210~~547	3933	%
Services		~~152~~222	26	%		~~222~~151	98	%		~~477~~699	3	%		~~424~~575	7	%
Total gross profit	$	41,~~047~~838	4546	%	$	~~1,136~~488	4725	%	$	57,~~756~~594	3536	%	$	23,~~634~~122	4640	%

In general, individual contracts are significant in value and certain contracts 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 and fiscal years may not be indicative of trends in gross profit margin.

Overall gross profit margin was 4546% for the three months ended ~~October~~January 31, ~~2013~~2014, compared to 4725% for the corresponding period in ~~2012~~2013. Significantly higher gross profit margin in the third quarter of 2014 was primarily due to increased contract sales activities and low cost structures. For the ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014, overall gross profit margin was 3536% compared to 4640% for the corresponding period in ~~2012~~2013. ~~Higher~~ ~~cost~~Decreased ~~structures~~gross ~~related~~profit toin ~~gaming~~2014 ~~contracts~~was ~~attributed~~primarily due to ~~the~~increased ~~lower~~production ~~gross~~overhead ~~profit~~costs ~~margins~~related into ~~2013~~the ~~compared~~voting ~~to 2012~~segment.

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Selling, General and Administrative

Selling, general and administrative ("SG&A") expenses for the three months ended ~~October~~January 31, ~~2013~~2014 were $~~836~~688,000, compared to $~~644~~580,000 in the same period in ~~2012~~2013. For the ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014, SG&A expenses were $12.41 million, compared to $1.28 million for the corresponding period in ~~2012~~2013. Higher SG&A expenses in ~~2013~~2014 were primarily due to ~~the~~ increased ~~consulting~~legal and ~~legal~~professional fees, and higher expenses incurred for marketing activities related to the voting segment ~~and employee related expenses~~, partially offset by lower ~~trade~~employee ~~show~~related and ~~proposal~~trade ~~activities~~show ~~for both the gaming and voting segments~~expenses.

Income Tax Provision

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Our net working capital as of ~~October~~January 31, ~~2013~~2014 was approximately $1011.54 million.

Contract backlog as of ~~October~~January 31, ~~2013~~2014 was approximately $~~5 million. Of this amount, approximately $~~2.79 million ~~is attributable to a lottery product order from a related customer~~. ~~The~~ ~~remaining~~Contract ~~contract~~ backlog ~~amount of approximately $2.3 million~~ is primarily related to ~~gaming and~~ voting contracts with unrelated customers. As of ~~October~~January 31, ~~2013~~2014, ~~approximately~~ $~~1.1~~536,000 ~~million~~ of the contract backlog has been paid by customers.

Additional sources of cash through ~~October~~January 31, ~~2014~~2015 are expected to be derived from spares, software and technical support and licensing 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 ~~October~~January 31, ~~2014~~2015, there can be no assurance that we will be able to acquire new contracts.

In the highly competitive industries 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 ~~October~~January 31, ~~2014~~2015. 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:

Six Months Ended

Nine Months Ended

October 31,

Increase

January 31,

Increase

2013

2012

(Decrease)

2014

2013

(Decrease)

(Amounts in thousands)

Condensed cash flow comparative:

Operating activities

~~(369~~3,486

)

~~593~~3,734

(~~962~~248

)

Investing activities

~~654~~864

7533

~~579~~831

Net increase in cash and cash equivalents

~~285~~4,350

~~668~~3,767

~~(383~~583

)

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Cash Flow Analysis

Net cash ~~used~~provided inby operating activities was approximately $~~369,000~~3.5 million for the ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014, compared to ~~net cash provided by operating activities of~~ $~~593,000~~3.7 million in ~~2012~~2013. The principal components of the net decrease in cash flow from operations were the decreased deferred revenues and accounts ~~payables, and the increased accounts receivables~~payable. These were partially offset by net income of approximately $23.6 million, a decrease in inventory reflecting shipments, a decrease in deferred income taxes, and a decrease in ~~inventory~~accounts ~~reflecting shipments~~receivable.

Net cash provided by investing activities was $~~654~~864,000 for the ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014, compared to $7533,000 in ~~2012~~2013. The increase in net cash flow from investments was due to the redemption of the matured certificates of deposit. ~~and~~Lower ~~the increase~~capital expenditures incurred in ~~capital~~2014 ~~expenditures~~also ~~related~~attributed to ~~tooling~~the ~~and~~increase ~~computer~~in ~~equipment~~new cash flow from investments.

There were no financing activities during the ~~six~~nine months ended ~~October~~January 31, ~~2013~~2014 or ~~2012~~2013.

Capital Resources

As of ~~October~~January 31, ~~2013~~2014, we did not have outstanding credit facilities.

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

ITEM 4.

CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Principal Executive Officer, who is also our Principal 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 Principal Executive Officer (and Principal 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 Principal Executive Officer (and Principal 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 ~~October~~January 31, ~~2013~~2014 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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

There have been no material changes to the risk factors relating to our business as disclosed in our Form 10-K for the fiscal year ended April 30, 2013 filed with the SEC on July 9, 2013.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable

ITEM 5.

OTHER INFORMATION

Not applicable

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ITEM 6.

EXHIBITS

A. Exhibits

Exhibit Number		Document Description
	31	Certification of the Principal Executive Officer and Principal 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.
	101.INS	XBRL Instance Document
	101.SCH	XBRL Taxonomy Extension Schema Document
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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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: December 12, 2013		INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
Dated: March 13, 2014		INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
	/s/	Jeffrey M. Johnson Jeffrey M. Johnson President (Principal Executive Officer) and Acting Chief Financial Officer (Principal Financial Officer)

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