Comprehensive Annual Financial Report for the
Fiscal Year Ended June 30, 2006
Oklahoma Lottery Commission
An Agency of the State of Oklahoma
Prepared by the Staff of the Oklahoma Lottery Commission

Introductory Section:

Oklahoma Lottery
3817 North Santa Fe, Suite 117
Oklahoma City, Oklahoma 73118
January 9, 2007
To the citizens of Oklahoma:
The Oklahoma Lottery (the Lottery) is pleased to provide this Comprehensive Annual Financial Report
(CAFR) for the fiscal year ended June 30, 2006. The Finance Department of the Oklahoma Lottery
prepared this CAFR, which includes its annual financial statements presented in accordance with
accounting principles generally accepted in the United States of America and audited in accordance with
auditing standards generally accepted in the United States of America, to present an overview of the
Oklahoma Lottery. The Oklahoma Lottery, an agency of the State of Oklahoma, commenced operations in
2005 as a business enterprise within the framework of state laws and regulations.
The mission of the Oklahoma Lottery is to implement the public’s mandate to provide supplemental funds
for public education by maximizing the sale of creative and entertaining lottery products. In carrying out
this mission, the Lottery is guided by the principles of efficiency, integrity and customer service.
The CAFR covers financial activity of the Oklahoma Lottery in a single enterprise fund. The report
follows formal standards of the Government Finance Officers Association of the United States and Canada
(GFOA). Government organizations that publish this type of report can be compared to each other because
similar kinds of information are included in the three sections.
This letter of transmittal is designed to complement the management’s discussion and analysis that
accompanies the financial statements and should be read in conjunction with it.

Introductory Section
This section includes this transmittal letter describing the Lottery and its business activities, and the
Oklahoma Lottery organization chart with the names of the principal officials. This section is not audited
because it contains subjective information.

Audited Financial Section
This section contains the Independent Auditors’ Report, management’s discussion and analysis, and the
audited financial statements and the related notes.

Statistical Section
This section covers other relevant financial, economic, and demographic statistical information, including
lottery industry data. This information has not been audited.
Management is responsible for the accuracy and completeness of the presentation, including all disclosures
in the report. To the best of our knowledge, the enclosed information is accurate in all material respects
and is reported in a manner designed to present fairly the financial position, results of operations, and the
cash flows of the Oklahoma Lottery Commission. All disclosures necessary to gain an understanding of
the Lottery’s financial activities have been included.

History of the Lottery
The Oklahoma Lottery Commission was approved by the citizens of Oklahoma upon approval of a voter
referendum authorizing the Oklahoma Education Lottery Act in November 2004. The Oklahoma
Education Lottery Act has been codified as Title 3A, Section 701, et. seq., of the Oklahoma Statutes. The
Lottery was established as an independent state agency to market and sell lottery products. Under the Act,
the Lottery is required to return a minimum of 45% of gross proceeds to prizes, at least 35% to public
education (30% in first two full years of operation), with the remaining amount used for costs of operating
the lottery. The Act specifies that the Lottery is operated and administered by a seven (7) member Board
of Trustees appointed by the Governor, with advice and consent of the Senate. An Executive Director,
who is appointed by the Board of Trustees, administers the day-to-day operations of the lottery.

Under the Act, funds transferred to the Oklahoma Education Lottery Trust Fund are to be utilized as
follows:
A. 45% - Kindergarten through 12th Grade Public Education, including but not limited to
compensation and benefits for public school teachers and support employees, and early childhood
development programs.
B. 45% - Tuition grants, loans and scholarships to citizens of this state to enable such citizens to
attend colleges and universities located within this state, construction of educational, capital outlay
programs and technology for all levels of education, endowed chairs for professors at institutions
and programs & personnel of the Oklahoma School for the Deaf and the Oklahoma School for the
Blind.
C. 5% - Teachers' Retirement System Dedicated Revenue Revolving Fund.
D. 5% - School Consolidation and Assistance Fund.

Ticket sales in Oklahoma began on October 12, 2005 with four instant games (Scratchers). In-state online
games include Pick 3, commenced on November 10, 2005, and more recently Cash 5 begun on September
1, 2006. Powerball began on January 12, 2006 as the Oklahoma Lottery’s first multi-state lottery game.
New Scratcher games are introduced periodically. The Anniversary Raffle game celebrating the Oklahoma
Lottery’s inaugural year began sales on November 10, 2006.

Economic Conditions and Outlook
Oklahoma is an attractive place in which to live and conduct business. The state enjoys a very low cost of
doing business, has a highly skilled and productive work force, enjoys low energy costs and is
geographically well positioned for interstate commercial activity. Oklahoma lies at the crossroads of U.S.
Interstates 35, 40 and 44, three of the nation’s most important transportation and shipping corridors,
allowing state businesses to take advantage of opportunities anywhere in the United States. Oklahoma
boasts high quality education systems with award-winning schools, which are considered models for
career-technology, common, and higher education.
Oklahoma is also known for its abundant resources. The state remains a leading producer of oil and natural
gas, allowing Oklahoma manufacturers to take advantage of some of the lowest energy prices in the nation. Oklahoma is a leading producer of agricultural products, ranking in the top ten in production of wheat,
peanuts, grain sorghum, pecans, rye, hogs and cattle. Oklahomans also enjoy many opportunities for
outdoor recreation and, due to its many man-made reservoirs, Oklahoma has more miles of shoreline than
any other state.
Oklahoma’s economy has made great gains since the economic recession of 2001-2002. Oklahoma was
rated one of the “Top 10 Pro-Business States for 2005” by Pollina Corporate Real Estate. The national
study recognized Oklahoma for its business incentives and economic development efforts.

Here are just a few highlights of Oklahoma’s economy:
• From Oklahoma’s lowest employment after the 2001-2002 Recession, Oklahoma’s economy has
created 95,400 new jobs.
• From the state’s low point, employment growth has totaled 6.6%, which is much higher than the
national 4.6% growth rate in the same time period.
• Over the past year, Oklahoma’s employment growth (1.5%) has continued to outpace national
employment growth (1.4%).
• Oklahoma’s unemployment rate also has remained lower than the national unemployment rate for
ninety-six consecutive months (since October 1998).

Some of the most notable employment announcements taking place in Oklahoma include: 653 jobs being
added in Oklahoma City by Dell, 250 in Bartlesville by ConocoPhillips, 525 in Tulsa by Vidoop, LLC, 250
in Muskogee by Southwinds Manufacturing Homes and 320 new jobs in Ardmore by MG Motors. In
2006, over 11,000 jobs have been announced statewide by manufacturing and service companies. These
companies have also announced almost $1 billion in new investment in the state.
Oklahoma emerged from the revenue shortfall years of FY-2002 and FY-2003 with solid revenue growth
in FY-2004 through FY-2006. Actual revenue collected again exceeded 100% of the estimate and a
deposit of $34.4 million was made into the Rainy Day Fund. This is the second year in a row and only the
second time since the creation of the Rainy Day Fund that the fund balance reached the maximum allowed
by law. The legal maximum is equal to 10% of the prior fiscal year’s general revenue fund appropriations,
or $495.7 million for fiscal year 2006.
Oklahoma is also experiencing record investment revenues as the State Treasurer’s monthly average
investable base has risen from $1.801 billion at the end of FY-2003 to $3.053 billion at the end of FY-
2006. Already for FY-2007, this amount has increased another $250 million to an all time high of $3.353
billion.
Based on our strong state economy, the Oklahoma Lottery expects continued revenue growth in FY-2007
as new products are introduced and our retail base expands. However, a challenge to this growth will be
expanding competition from other gaming venues, most notably horse racing and Indian casinos.
Oklahoma values its Native American culture and history and has worked to maintain good relations with
tribal governments. Oklahoma has entered into compacts with many Oklahoma tribes to direct a portion of
casino gaming revenues to education. As a result, Oklahoma education remains the winner in the
competition for gaming dollars. Offshore internet gaming also threatens to negatively impact lottery
revenue growth. New federal legislation signed into law on October 13, 2006 bans most internet gaming
and makes it a crime to transfer funds out of the country direct to these gaming sites. Still, many gamblers
simply ignore the law, use offshore accounts or non-U.S. payment processors to get around the law.
Accordingly, the overall impact of gaming competition to the Oklahoma Lottery is difficult to quantify or
measure

Lottery Products
The Oklahoma Lottery offers different games in two styles of play, Scratchers and on-line draw style
games. Description of the games follows:

Scratchers – Scratchers are off-line instant games that are played by scratching the latex covering off a
play area to reveal combinations and learning “instantly” whether the ticket is a winner. The Oklahoma
Lottery started Scratcher game sales in October 2005. There are different ways to win Scratcher games,
such as matching two or three like symbols, your score beats their score, or your symbol matches a key
symbol. The odds of winning vary by game and prize level. Information on how to play and odds may be
found on the ticket. Scratcher tickets cost from $1 to $5 with prize levels ranging between $1 and $25,000.
Players have 90 days from the announced end-of-game to claim prizes.

Powerball – Players select 5 out of 55 numbers from the white balls (these can be drawn in any order to
win), then select 1 out of 42 numbers for the red Powerball. Jackpots begin at $15 million and continue to
build (or rollover) until a player(s) matches all six numbers. As with the numbers games, the winning
numbers are selected via a televised drawing. Even though numerous lotteries participate in Powerball, the
amount contributed to Oklahoma Education is the same as all of the other Oklahoma Lottery games – 30%
of sales! Players have 180 days after the draw date to claim prizes.

Powerball Prize Payout Information:

Match 5 white balls and the Powerball you win Grand Prize Jackpot Odds 1 in 146,107,962.00
Match 4 white balls you win $200,000 Odds 1 in 3,563,608.83
Match 4 white balls and the Powerball you win $10,000 Odds 1 in 584,431.85
Match 4 white balls you win $100 Odds 1 in 14,254.44
Match 3 white balls and the Powerball you win $100 Odds 1 in 11,927.18
Match 3 white balls you win $7 Odds 1 in 290.91
Match 2 white balls and the Powerball you win $7 Odds 1 in 745.45
Match 1 white ball and the Powerball you win $4 Odds 1 in 126.88
Match the Powerball you win $3 Odds 1 in 68.96
The Overall odds of winning a prize are 1 in 36.61

If you play Powerplay and win a prize (except the Grand Prize Jackpot), your prize is multiplied by the multiplier number of 2, 3, 4 or 5.

Pick 3 – This daily game was designed to provide very good odds of winning smaller prizes. Players select
a set of three numbers from 0 to 9. Players can try to match the three numbers drawn in the exact order or
in various combinations. Prizes range from $50 - $500. The drawing and winning numbers are aired nightly
on Oklahoma City television stations KOKH-FOX and KOCB-CW. Players have 180 days after the draw date to claim prizes.

Prize Payouts:
Straight $500 - Odds 1 in 1,000
Box 3-Way $160 - Odds 1 in 1,000
Box 6-Way $80 - Odds 1 in 1,000
Front Pair $50 - Odds 1 in 100
Back Pair $50 - Odds 1 in 100

Prize Claim Centers – Lottery winners are able claim prizes of up to $600 at any lottery retailer,
identifiable by the Oklahoma Lottery “Play here” poster shown above. Prizes up to $5000 can be claimed
at any of the fourteen (14) Super Retailers located throughout Oklahoma. Prizes that exceed $5000 must
be claimed at the lottery claim center at the Oklahoma City headquarters. Prizes may also be claimed by
mailing winning tickets to the lottery claim center. A claim form, social security number and two forms of
ID are required for all prizes over $600.

Highlights of Fiscal Year 2006
Millions Contributed to Education
In its inaugural year the Oklahoma Lottery had total sales of $204.8 million with over $68.9 million
provided for education in FY-2006.

Fast Lottery Start-up
The Oklahoma Lottery start up was one of the fastest in the forty-one year history of modern lotteries.
Oklahoma contracted with Scientific Games International on August 22, 2005 as the full service vendor for
both instant and online games. Instant lottery tickets sales were launched 51 days later on October 12,
2005 and the first online lottery began on November 10, 2005.

Lottery Claim Centers Introduced
Claiming prizes become easier for Oklahoma Lottery winners on May 1 with the addition of Authorized
Lottery Claim Centers. Fourteen (14) claim centers are now located through out the state at participating
retailer locations, in addition to the lottery claim center at the Oklahoma City headquarters. The claim
centers are located with existing lottery retailers through a collaborative arrangement that avoids staffing
and facility costs that are typically required. Authorized claim centers are able to disperse prize payouts
over $600, up to and including $5000. Players winning up to $600 can continue to claim prizes at any
authorized Lottery location.

First Powerball Jackpot Winner
One very lucky Oklahoma Lottery player made Oklahoma history on June 17 by winning the $101.8
million Powerball jackpot and becoming the first Powerball jackpot winner from Oklahoma. The winner,
the WJW Investment Trust, through its Trustee, indicated the beneficiaries often play the Oklahoma lottery
and encourage others to do so. They were quoted as saying that “we are proof that you never know when
you might win and you cannot win unless you play.”

Financial Information

Accounting System and Policies
The Oklahoma Lottery operates the Oklahoma Lottery Commission Enterprise Fund, an enterprise fund
that, like a private business, utilizes the full accrual basis of accounting in accordance with accounting
principles generally accepted in the United States of America.

Budgetary Controls
Budgetary control for the Oklahoma Lottery is addressed through its enabling legislation, which provides
specific limitations on operating and administrative expenses. A comprehensive annual budget is prepared
and approved by the Oklahoma Lottery’s Board of Trustees. The budget is prepared on both a cash basis
and a full accrual basis of accounting. It is also prepared in distinct monthly segments to facilitate
comparison to the monthly financial statements. The budget is based on sales forecasts, industry trends,
program proposals, and approved action plans. While the Lottery does not have a legislatively approved
budget, the operating budget is submitted to the Governor and a designated legislative oversight
committee. Actual costs are monitored throughout the year for compliance with the approved budget and
appropriate adjustments are approved if necessary.

An internal control structure has been designed to ensure that assets are protected from loss, theft, or
misuse, and to ensure that the accounting system allows compilation of accurate and timely financial
information. The internal controls are designed to provide reasonable assurance that these objectives are
met.
To enhance controls, management has separated responsibilities and provides approval and oversight for
the following functions: personnel and payroll; purchasing and accounts payable; general ledger and
accounts receivable; cash receipts and cash disbursements; retailer network management and retailer
accounts receivable; and system data processing and system programming. Reviews of operations are
achieved by the following procedures:

Draw verification: An independent certified public accountant (CPA) must witness the draws of Lottery
games, and inspect any equipment used in such draws, before and after each draw.

Lottery Vendor Service Organization (SAS 70) Audit: Scientific Games International (SGI) was contracted
by the Oklahoma Lottery as the vendor for instant and online games. SGI Management contracted the
services of an independent CPA to perform a Statement on Auditing Standards (SAS) No. 70, Service
Organizations, engagement with testing of identified internal controls. The SAS 70 is an internationally
recognized auditing standard developed by the American Institute of Certified Public Accountants
(AICPA). A SAS 70 audit examination is widely recognized, because it represents that a service
organization has been through an in-depth audit of their control activities, which generally include controls
over information technology and related processes.

Internal Audits: The Oklahoma Lottery employs internal audit staff who report directly to the Finance and
Audit Committee of the Board of Trustees. Internal Audit staff annually performs a study and evaluation
of accounting and administrative controls, as directed by the committee.

Other Safeguards and Controls: To ensure the integrity of the Lottery the following measures have been
implemented:

• Specialized security staff.
• Secured facilities and gaming equipment.
• Background checks on retailers, contractors and Lottery employees.
• Lottery tickets with special inks, dyes and security codes.
• Detailed and strict security procedures for game drawings.
• Lottery random number generators are in stand-alone systems and are certified by an independent
firm prior to installation.
• Lottery drawing balls are weighed and measured at periodic intervals to ensure standard
compliance to their established weight and measures.

Employees
The Lottery had 39 full-time employees as of June 30, 2006.
Debt Administration
At the end of FY-2006, the Oklahoma Lottery had no long-term liabilities. However, a line of credit of
$10 million was authorized by the state legislature and extended by J.P. Morgan Chase to the Oklahoma
Lottery. The Oklahoma Lottery borrowed approximately $200,000 in 2005, but has fully repaid this debt
and does not anticipate further borrowing. The State of Oklahoma received a rating of "Aa3" by Moody's
Investors Service and "AA"by both Standard & Poor's Corporation and Fitch Investors Service general
obligation bonds.

Cash Management
Cash due from approximately 2,300 retailers is collected on a weekly basis through an electronic funds
transfer system and deposited into an account held by the State Treasurer. The Oklahoma Lottery earned
$350,751 in interest in FY-2006 that resulted from investments of idle cash under a cash management
program administered by the State Treasurer. State law requires full collateralization of all State Treasurer
bank balances. Generally, the Treasurer promulgates rules that establish the amount of collateral that must
be pledged against deposits. The State Treasurer is required to keep at least 80% of available cash
invested.

Risk Management
The Oklahoma Lottery is self-insured against loss or liability through the state’s risk management program
administered by the Risk Management Division of the Department of Central Services. In general, the
State is "self-insured" for health care claims, workers' compensation, tort liability, vehicle liability, and property losses, with some exceptions for participation in health maintenance organizations and for excess
coverage items. The property loss excess coverage is limited to a maximum loss of $1 billion. The
Oklahoma State and Education Employees' Group Insurance Board provides group health, life, dental and
disability benefits to the State's employees, including Oklahoma Lottery employees and their dependants.
CompSource provides workers' compensation coverage for both public and private sector employees in
Oklahoma.

Future projects

New Lottery Games in FY 2007

Cash 5 – This game commenced on September 1, 2006. The game is designed to have higher prizes than
Pick 3. Players select a set of five numbers from 1 to 36. Winning tickets are those that match any two,
three, four, or all five of the five numbers drawn. There are four prize categories in this game. The top
prize for matching all five numbers is $35,211. It is intended to yield a $25,000 cash payment after
deducting applicable withholding for federal and state taxes. The drawing and winning numbers are aired
every Tuesday and Thursday night on Oklahoma City television stations KOKH-FOX and KOCB-CW.
Players have 180 days after the draw date to claim prizes.

Oklahoma Cash 5 Prize Payout
Match 5 balls - $25,000 Jackpot Prize Cash Payment - Odds 1 in 376,992
Match 4 balls - $500 - Odds 1 in 2,432.2
Match 3 balls - $10 - Odds 1 in 81.1
Match 2 balls - Free Ticket (Easy Pick) - Odds 1 in 8.4

The Jackpot Prize is a fixed amount of $35,211 less applicable Federal and State Tax withholding of $10,211. Each winner will receive a prize check of $25,000 except in the situations where there are more than five (5) jackpot winners in a single drawing: when there are six (6) or more jackpot winners in a single draw the winners will share a pretax total of $200,000 equally. The holder of a winning ticket may win in only one category per $1 play panel and shall be paid the prize in the highest category won. Prizes are approximately 48% of sales.

Anniversary Raffle – One lucky person will win $250,000 during the First Anniversary Raffle, plus two
people will win $50,000 and 300 people will win $500. All from a limited supply of 200,000 $5 tickets
available for sale. Players will also receive a mail-in entry to qualify to win a brand new Oklahoma
Lottery custom-painted Victory Vegas JackpotTM Motorcycle. Tickets will be available for sale from
November 10, 2006 - January 6, 2007

Raffle Prize Matrix
1 Grand Prize Winner of $250,000
2 - $50,000 Winners
300 - $500 Winners
1 Custom Painted Victory Vegas Jackpot Motorcycle

Performance Target
The Oklahoma Lottery plans to transfer more than $83 million to education in FY-2007. To achieve this
goal, a sales target of $243.6 million has been established for the upcoming year.

Leverage Technology
Like most industries, the Oklahoma Lottery intends to use technology to provide effective and efficient
service to its external customers, such as retailers and players, as well as our internal customers. Several
technology projects are underway to achieve this objective. These include enhancements to the current
lottery gaming system, a new sales automation system and an automated drawing system. These systems
will enable us to provide better service and respond quickly to lottery retailers, with lower overall costs.

Independent Audit
Oklahoma statutes require an annual financial audit by an independent CPA. The independent auditors’
report on the Lottery’s financial statements is included in the financial section of this report.

Acknowledgements
This report demonstrates the professionalism and dedicated team effort of Lottery employees. We
appreciate their contribution to the success of this report. The Lottery is committed to providing thorough
and relevant financial information to the public. This CAFR reflects our commitment to meet the highest
standards of accountability and to maintain public trust through the highest ethics and integrity. Due credit
should also be given to our Board of Trustees for their responsiveness and guidance in operating the
Oklahoma Lottery.

Respectfully submitted,

James R. Scroggins
Executive Director

Rollo Redburn
Director of Administration

Stan Van Ostran
Controller

Oklahoma Lottery Commission
Board of Trustees

Cindy Ball, Muskogee
Educator, 2004 Oklahoma Teacher of the Year
2002 Oklahoma Foundation for Excellence Teacher of the Year

George R Charlton, Jr., Tulsa
Businessman and owner: Charlton Investments, Charlton Construction Company,
Charlton Catering and Tulsa – area Subway Sandwich Shops
1989, 1991 Minority Retailer of the Year, 1993 Tulsa Small Businessman of the Year

William Paul, Oklahoma City
Attorney, former senior vice-president Phillips Petroleum,
Former director Oklahoma City Chamber of Commerce, former president American Bar
Association

Ron Norick, Oklahoma City
Businessman, Manager of Norick Investment Company,
Former mayor of Oklahoma City (1987-98)

Thomas F Riley, Jr., Stillwater
Businessman/CPA, executive vice-president/CEO of Chickasaw Telecommunications
Former employee of Price Waterhouse Coopers audit and tax department

Linda Dzialo, Ph.D., LPC Lawton
Educator (retired), former vice-president for student affairs, Cameron University
Deputy Superintendent and former assistant superintendent, principal, counselor and classroom
teacher Lawton Public Schools
President – United Way of Lawton-Ft. Sill

James Orbison, Tulsa
Attorney, former chair of Oklahoma Turnpike Authority,
Former director of Federal Home Loan Bank of Topeka

Financial Section

Indeuendent Auditors' Reoort

The Board of Trustees
Oklahoma Lottery Commission
We have audited the accompanying statement of net assets of the Oklahoma Lottery Commission (the
"OLC"), a component unit of the State of Oklahoma, as of June 30, 2006 and the related statement of
revenues, expenses and changes in net assets and cash flows for the year then ended. These financial
statements are the responsibility of the management of the OLC. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of
America, and the standards applicable to financial audits contained in Government Auditing Standards,
issued by the Comptroller General of the United States of America Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the OLC's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of the OLC as of June 30,2006, and the changes in its net assets and cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United States of America.
Management's Discussion and Analysis is not a required part of the basic financial statements but is
supplementary information required by the Governmental Accounting Standards Board. We have applied
certain limited procedures, which consisted principally.of inquires of management regarding the methods of
measurement and presentation of the required supplementary information. However we did not audit the
information and express no opinion on it.
In accordance with Government Auditing Standards, we have also issued our report dated September I,
2006 on our consideration of the OLC's internal control over financial reporting and our tests of its
compliance with certain provisions of laws, regulations, contracts, grant agreements and other matters. The
purpose of that report is to describe the scope of our testing of internal control over financial reporting and
compliance, and the results of that testing, and not to provide an opinion on the internal control over
financial reporting and compliance. That report is an integral part of an audit performed in accordance with
Government Auditing Standards and should be considered in assessing the results of our audit.

Oklahoma City, Oklahoma
September 1,2006
531 Couch Drive, Suite 200
Oklahoma City, OK 73102-2251
lblephone (405) 239-7961 Facsimile (405) 235-0042

OKLAHOMA LOTTERY COMMISSION
MANAGEMENT’S DISCUSSION AND ANALYSIS
Management of the Oklahoma Lottery Commission (the “OLC”) provides this Management’s Discussion
and Analysis of their financial performance for the readers of the OLC’s financial statements. This
narrative provides an overview of the OLC’s financial activity for the fiscal year ended June 30, 2006.
This analysis is to be considered in conjunction with the financial statements to provide an objective
analysis of the OLC’s financial activities based on facts, decisions, and conditions currently facing
management.

UNDERSTANDING THE LOTTERY’S FINANCIAL STATEMENTS
The OLC, an instrumentality of the State of Oklahoma, is accounted for as an enterprise fund that reports
all assets and liabilities using the accrual basis of accounting, much like a private business entity. In
accordance with accounting principles generally accepted in the United States of America, this report
consists of a series of financial statements, along with explanatory notes to the financial statements. The
financial statements immediately follow this Management’s Discussion and Analysis and are designed to
highlight the OLC’s net assets and changes to those assets resulting from the OLC’s operations.
The most important relationship demonstrated within the OLC’s financial statements is the requirement
that the OLC transfer all net proceeds to the State Treasurer for the Oklahoma Education Lottery Trust
Fund (“OELTF”). Accordingly, the primary focus of these financial statements is determining net
proceeds available for transfer to the OELTF, rather than the change in net assets of the OLC.

FINANCIAL AND ACTIVITY HIGHLIGHTS
The OLC’s net assets increased by $687,147 primarily as a result of the acquisition of capital assets and
payments from retailers which were deposited into the fidelity fund. Revenues from lottery games totaled
$204,843,618. We returned $109,683,136 to winners of lottery games and $12,924,387 was paid to
retailers for commissions and incentives. Other game related expenses were $5,599,134 and operating
expenses were $7,581,846. Transfers made and due to the OELTF were $68,948,959.

FINANCIAL AND ACTIVITY HIGHLIGHTS--Continued
The following table summarizes the OLC’s Statement of Net Assets as of June 30, 2006:

The following table summarizes the OLC’s Statement of Revenues, Expenses and Changes in Net Assets
for the year ended June 30, 2006:

Net proceeds of the OLC must be transferred to the State Treasurer for the OELTF with the following
exceptions: 1) the cost of property and equipment net of depreciation and related debt, and 2) the
Restricted Fidelity Fund, derived from the licensing fees of new retailers, which may be retained by the
OLC up to the budgeted expenses from the fund for the next fiscal year plus $500,000 and used to cover
losses the OLC may experience due to nonfeasance, misfeasance, or malfeasance of a lottery retailer.
Therefore, the net assets of the OLC will never exceed the budgeted expenses from the fund for the next
fiscal year plus $500,000 related to the Restricted Fidelity Fund plus the cost of property and equipment,
net of depreciation and related debt. As of June 30, 2006 the OLC had transferred $44,634,724 related to
operations for the fiscal year ended June 30, 2006. Total transfers made or due to the OELTF were
$68,948,959 from inception to June 30, 2006. As of June 30, 2006 the OLC had transferred $0 in
unclaimed prize funds to the Department of Mental Health and Substance Abuse Services for the
treatment of compulsive gambling disorder and educational programs related to such disorder for the
fiscal year ended June 30, 2006. Total transfers due to the Department of Mental Health and Substance
Abuse Services were $44,600 from inception to June 30, 2006.

The following is a condensed version of the OLC’s Statement of Cash Flows for the year ended June 30,
2006:

POTENTIAL FACTORS IMPACTING FUTURE OPERATIONS

In the early part of fiscal year 2007, the OLC began a new on-line game known as Oklahoma Cash Five.
The new game allows players to select five numbers between one and thirty-six and allows for a higher
top prize payout than the Pick 3 on-line game. The top prize payout for the Oklahoma Cash Five game is
$35,211 or $25,000 after applicable federal and state tax withholdings. Drawings for the Oklahoma Cash
Five game are held twice per week, on Tuesday and Thursday. In addition to the Oklahoma Cash Five
game, the OLC intends to release additional games in fiscal year 2007, including many seasonal instant
scratch-off games.

CONTACTING THE LOTTERY’S FINANCIAL MANAGEMENT

This financial report is designed to provide a general overview of the OLC’s financial activity for all
those interested in the OLC’s operations. Questions concerning any of the information provided in this
report, or requests for additional financial information, should be addressed to the Director of
Administration, Oklahoma Lottery Commission, Rollo Redburn, 405-522-7700, 3817 N. Santa Fe
Oklahoma City, Oklahoma 73118 .

STATEMENT OF NET ASSETS
OKLAHOMA LOTTERY COMMISSION
June 30,2006

ASSETS

LIABILITIES AND NET ASSETS

STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS
OKLAHOMA LOTTERY COMMISSION
Year ended June 30,2006

STATEMENT OF CASH FLOWS
OKLAHOMA LOTTERY COMMISSION
Year ended June 30,2006

OKLAHOMA LOTTERY COMMISSION
Year ended June 30,2006

NOTES TO FINANCIAL STATEMENTS
OKLAHOMA LOTTERY COMMISSION
June 30,2006
NOTE A-REPORTING ENTITY
The Oklahoma Lottery Commission (the "OLC"), was formed by the citizens of Oklahoma upon passage
of a legislative referendum authorizing the Oklahoma Education Lottery Act (the "Act"), codified as
Title 3A, Section 701, et. seq, of the Oklahoma Statutes. The OLC is a component unit of the State of
Oklahoma (the "State") responsible for administering lotteries in accordance with the Act. The Act
established a board of seven trustees appointed by the Governor to oversee operations of the OLC. The
Board of Trustees exercises powers comparable to those of a governing board of an entrepreneurial
organization. The OLC transfers net proceeds as defined by the Act. Therefore, the OLC is reported as a
discretely presented component unit in the State of Oklahoma's Comprehensive Annual Financial Report
("CAFR").
NOTE B-SIGNIFICANT ACCOUNTING POLICIES
Method of Accounting: The OLC is accounted for as an enterprise fund. Enterprise funds are used to
account for activities that are financed and operated in a manner similar to private business enterprises
where the costs of providing lottery games to the general public on a continuing basis are to be financed
through the sale of lottery game tickets. The Act requires that all costs of providing lottery games,
including capital costs, be recovered from the sale of lottery game tickets.
The Governmental Accounting Standards Board ("GASB) is the recognized standard setting body for
generally accepted accounting principles applicable to governmental proprietary activities in the United
States of America. The OLC applies all applicable GASB pronouncements and all applicable Financial
Accounting Standards Board ("FASB") pronouncements issued on or before November 30, 1989 when
not in conflict with GASB pronouncements. In accordance with GASB Statement No. 20, the OLC has
elected not to implement FASB Statements after the applicable date.
Basis of Accounting: The financial statements are prepared using the economic resources measurement
focus and the accrual basis of accounting in accordance with accounting principles generally accepted in
the United States of America. Under this method, revenues are recognized when they are earned and
expenses are recognized when they are incurred.

OKLAHOMA LOTTERY COMMISSION
June 30,2006
NOTE B-SIGNIFICANT ACCOUNTING POLICIES-Continued

Use of Estimates: The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Revenue Recornition: Revenue for on-line games is recognized when tickets are sold to the public by
contracted retailers, except for tickets sold in advance of the draw date for which deferred revenue is
recorded. Revenue for instant games are recognized upon activation of ticket packs for sale by the
retailers.

Commissions: Retailers receive a 6% commission on total sales and 0.75% commission on prizes
cashed.

Prizes: Prize expense for instant ticket games is recorded as an estimate at the time the related revenue is
recognized based on the predetermined prize structure for each game; periodically, the prize expense is
adjusted to reflect amounts actually won. Prize expense for on-line games is recorded at the time the
related revenue is recognized based on the known prizes.

Unclaimed Prizes: Prizes must be claimed within 90 days after the game-end (end of sales) for instant
games and within 180 days after the draw date for on-line games. The first $500,000 of unclaimed prize
money accruing annually shall be transferred to the Department of Mental Health and Substance Abuse
Services for the treatment of compulsive gambling disorder and educational programs related to such
disorder. The OLC had approximately $45,000 in unclaimed prizes at June 30, 2006. This amount was
transferred in July 2006.

Net Assets: The OLC's net assets are classified as follows:
Iinrested in capital assets- This represent's the OLC's total investment in capital assets.
Restricted net assets - expet~dable- This represents cash maintained in the OLC's restricted fidelity
fund.

Gross Proceeds: Gross proceeds, as defined by the Act, consist of all revenue derived from the sale of
lottery game tickets or shares and all other monies derived from the lottery games.

Net Proceeds: Net proceeds, as defined by the Act, consist of all revenue derived from the sale of lottery
game tickets or shares and all other monies derived from the lottery games, less operating expenses and
prizes.

Ooerating Expenses: Operating expenses, as defined by the Act, in the determination of net proceeds,
consist of all costs of doing business including, but not limited to, prizes, commissions, and other
compensation paid to lottery retailers, advertising and marketing costs, rental fees, personnel costs,
capital costs, depreciation of property and equipment and other operating costs.

Cash and Cash Equivalents: The OLC's cash and cash equivalents are considered to be cash on-band and
interest bearing demand deposits held by the Oklahoma State Treasurer.

Retailer Accounts Receivable: Retailer accounts receivable represents lottery proceeds due from
retailers for on-line ticket sales and activated ticket packets for instant games less commissions due to
retailers and prizes paid by the retailers. Lottery proceeds are collected weekly by the OLC from retailer
bank accounts.

Capital Assets, Net: Capital assets, which consist of machinery and equipment are stated at cost less
accumulated depreciation. The OLC capitalizes all property and equipment purchases of $500 or more.
Depreciation is computed using the straight-line method over the estimated useful lives of five to ten
years. When assets are retired or otherwise disposed of, the cost and related accumulated deprecation are
removed from the accounts, and any resulting gain or loss is reflected in the results from operations in the
period of disposal.

Restricted Fidelitv Fund: In accordance with the Act, retailers contribute a fee to a fidelity fund upon
acceptance as a retailer for the OLC. The fund is used to cover losses the OLC may incur due to
misfeasance, nonfeasance or malfeasance of retailers. At the end of the fiscal year, the OLC shall pay to
the Oklahoma Education Lottery Trust Fund ("OELTF') any amount in the restricted fidelity fund which
exceeds the budgeted expenses from the fund for the next fiscal year plus $500,000. At June 30,2006,
no amounts were available for transfer as net proceeds. The fidelity fund is held in a separate account
and appears in the accompanying statement of net assets as restricted fidelity fund cash and expendable
restricted net assets.

Insurance: The OLC is exposed to various risks of loss related to torts; theft of, damage to, and the
destruction of assets; errors and omissions; injuries to employees; and natural disasters. The OLC has
coverage to substantially cover these risks through a self-insured pool for agencies of the State of
Oklahoma. This coverage is administered by the Risk Management Division of the Department of
Central Services for the State of Oklahoma.

Comoensated Absences: Employees earn the right to be compensated during absences for vacation and
compensatoxy time. Unused leave benefits are paid to employees upon separation from service. The cost
of vacation and compensatory time is accrued in the period in which it is earned.

Deposit with MUSL: The OLC has contributed to a set prize reserve fund separately maintained by
Multi-State Lottery ("MUSL") to pay certain prizes associated with Powerball. With certain restrictions,
the OLC's portion of this prize reserve fund is refundable upon termination of the OLC's agreement with
MUSL or upon the disbanding of MUSL. At June 30, 2006, the OLC's portion of the set prize reserve
was approximately $561,000 which was reflected by the OLC as a deposit asset in the accompanying
statement of net assets.

NOTE C-CASH AND DEPOSITS
Custodial credit risk is the risk that in the event of a bank failure, the government's deposits may not be
returned to it. The OLC is not considered to be exposed to custodial credit risk. Although the OLC does
not have a formal deposit policy for custodial credit risk, all of the OLC's hank deposits are held by the
Oklahoma State Treasurer (the "OST"). As required by Oklahoma State Statutes, all hank deposits held
by the OST are insured by Federal Deposit Insurance, collateralized by securities held by the cognizant
Federal Reserve Bank, or invested in U.S. government obligations. At June 30, 2006, the carrying
amount and hank balance of the OLC's deposits with the Oklahoma State Treasurer was approximately
$26,038,000 and $27,033,000, respectively.

NOTE D-CAPITAL ASSETS, NET
The following is a summary of changes in capital assets and accumulated depreciation during fiscal year
2006:

NOTE E--COMPENSATED ABSENCES AND OTHER OBLIGATIONS
Comoensated Absences: The following is a summary of changes in the OLC's liability for compensated
absences during the year ended June 30,2006:

Other Obligations: Senate Bill 228 was passed in March 2005 to provide $500,000 in interest-free
funding to the OLC for start-up costs. The funding is in the form of a promissory note that must be
repaid to the State of Oklahoma prior to June 30, 2007. The $500,000 is reflected in the accompanying
statement of net assets as the liability "Due to the State of Oklahoma".

On August 2005 the OLC secured a $10,000,000 available line of credit to provide additional start-up
funding. Any outstanding principal and interest must be paid in full by the line of credit's scheduled
maturity date in August of 2007. The line of credit has a variable interest rate equal to the LBOR rate
plus 150 basis points and is secured by the OLC's accounts receivable, deposit accounts and revenues.
During the year ended June 30, 2006, the OLC borrowed and repaid $200,000 under the line of credit.
The OLC had no outstanding borrowings against the line of credit as of June 30,2006.

NOTE F-OPERATING LEASES
The OLC has entered into various operating leases for office space and equipment used in its daily
operations. Pursuant to Oklahoma State Statutes, the OLC's operating leases are limited to terms of one
year and must be renewed annually. Accordingly, the OLC has no long-term commitments under the
operating leases as of June 30, 2006. Rent expense under all operating leases was approximately
$124,000 for the year ended June 30,2006.

NOTE G--OKLAHOMA EDUCATION LOTTERY TRUST FUND
In accordance with the Act, all net proceeds of the OLC are to he transferred to the OELTF. Net
proceeds consist of all revenue derived from the sale of lottery game tickets or shares and all other
monies derived from the lottery games less operating expenses and prizes. The following is a
reconciliation of the amounts paid or due to the OELTF as of and for the year ended June 30,2006:

NOTE H-RETIREMENT PROGRAM
The OLC contributes to the Oklahoma Public Employee Retirement System ("OPERS') cost sharing
multiple-employer defined benefit plan. OPERS was established in 1964 by the Oklahoma Legislature
and covers substantially all employees of the State except those covered by six other plans sponsored by
the State and also covers employees of participating counties and local agencies. The plan provides that
all eligible persons, except those specifically excluded, shall become members of OPERS as a condition
of their employment. The supervisory authority for the management and operation of OPERS is its Board
of Trustees.

OPERS offers retirement and disability benefits, cost of living adjustments on an ad-hoc basis, life
insurance benefits and survivor benefits. The Plan's provisions are established under Title 74 of the
Oklahoma Statutes.

The following is a recap of OPERS' mandated contribution rates for fiscal year 2006:

Employee contributions

NOTE H--RETIREMENT PROGRAM--Continued
For the year ending June 30,2006 the OLC's contributions to OPERS were approximately $1 56,000. All
employer contributions were equal to the required contribution rates for the year.
A comprehensive annual financial report containing financial statements and required supplementary
information for the Oklahoma Public Employee Retirement System is issued and publicly available by
writing the Oklahoma Public Employee Retirement System, Post Office Box 53007, Oklahoma City,
Oklahoma 73 152-3007.

NOTE I-CONTINGENCIES
The OLC is subject to litigation in the ordinary course of its operations. In the opinion of the OLC's
management and its legal counsel, the outcome of such litigation will not a material impact on the
financial position or cash flows of the OLC for the year ending June 30,2006.

NOTE J-CONTRACTUAL ARRANGEMENTS
In August 2006 the OLC entered into a contract with Scientific Games International, Inc. ("SGl") to
provide amongst other things, services and equipment to operate its lotteries. Due to Oklahoma State
Statutes, the OLC may not contract for a period longer than one year. However, the contract with SGI
does contain six one-year renewal options which the OLC's Board of T~steesm ay renew annually.
Under the terns of the contract, the OLC pays SGI a fee based on a percentage of the OLC's sales. For
the year ended June 30,2006, the OLC paid SGI approximately $5,600,000.

The OLC is a member of MUSL which consists of 31 state and district lotteries (member lotteries) and
operates the on-line Powerball game. Under the OLC's agreement with MUSL, the OLC must remit 50%
of its Powerball ticket sales less the amount of all non-grand prize winning tickets sold. The OLC is
responsible for paying winning tickets purchased in Oklahoma; therefore, it is able to deduct this amount
from the amount due to MUSL on its Powerball ticket sales. As of June 30, 2006, the OLC owed MUSL
$2,336,442 for Powerball ticket sales and MUSL owed the OLC $1,595,945 for non-grand prize winning
tickets. The OLC has recorded these items at their gross amounts in the accompanying statement of net
assets.

Powerball grand prize winners have the choice of receiving their prize in one lump-sum payment or an annuity payable in 30 annual installments. The OLC had a grand prize winner during fiscal year 2006. The grand prize winner elected the lump-sum payment which totaled $46,276,534. The cash prize, which is funded by MUSL and passed through the OLC to the grand prize winner, had not been received from MUSL by OLC or paid to the grand prize winner by the OLC as of June 30, 2006. Accordingly, a receivable from MUSL and an offsetting prize payable to the grand prize winner is reflected in the accompanying statement of net assets. Subsequent to June 30, 2006, the amount was received from
MUSL and paid to the grand prize winner.

Statistical Section

Oklahoma Lottery Commission
Summary of Operating Indicators
Comprehensive Annual Financial Report
The Oklahoma Lottery Commission commenced operations on October 12, 2005. A
phased start-up began with the sale of instant tickets (Scratchers), followed by Pick 3 in
November 2005 and Powerball in January 2006. At fiscal year end June 30, 2006, we
ended our first fiscal year with over $205 million in total revenue and almost $69 million
in contributions to education. Our largest expense was the payment of prizes to lottery
winners.
Sales of instant tickets were popular and were the top selling class of games, making up
61% of total revenue in FY-2006. Factors that influenced the sale of instant tickets were
game themes, price of tickets, prizes, and number of games offered. The Oklahoma
Lottery Commission offered 15 different instant games during FY- 2006. The one dollar
games made up approximately 50% of the total instant ticket sales.
Online games were also popular, with the Oklahoma Pick 3 game having a consistent
player following. Special promotions, such as the Pick 3 Doubler, which doubled prize
winnings, were used to attract and familiarize new players with the Pick 3 game. The
Doubler also significantly increased sales during promotion periods. Powerball sales
varied based on the value of the jackpot. Several high dollar winners, including
Oklahoma’s first Powerball grand prize winner, helped to promote Powerball sales.
Due to the infancy of the Oklahoma Lottery Commission historical data is not available.
Nevertheless, we provide historical data for other United States lotteries as a benchmark
for Oklahoma’s operations.
All data within the Statistical section, including operating indicators and demographic
data, are unaudited.

Oklahoma Lottery
Net Assets by Component
Operational Fiscal Years

Oklahoma Lottery
Change in Net Assets
Operational Fiscal Years

Oklahoma Lottery
Sales by Product and Other Revenues
Fiscal Year 2006

Oklahoma Lottery
Expenses by Type and Contribution
Fiscal Year

Contributions

Sources of Revenue

Major Sources of Revenue

Total Direct Costs

Total Operating Expenses

Contributions to Education

Revenues by Retailer Category

Oklahoma Lottery Commission
Demographics and Economic Information
1996-2005

Oklahoma Lottery Commission
Demographic Groups

Age

Gender

Source:
Oklahoma Lottery Baseline Survey performed in June 2006 by
Independent Lottery Research, 455 E. Illinois St., Suite 665, Chicago, IL 60611
http://www.ilresearch.net

Household Income

Education

Source:
Oklahoma Lottery Baseline Survey performed in June 2006 by
Independent Lottery Research, 455 E. Illinois St., Suite 665, Chicago, IL 60611
http://www.ilresearch.net

Employment

OKLAHOMA LOTTERY COMMISSION
STATE OF OKLAHOMA
Schedule of Lottery Employees
Fiscal Year Ending June 30, 2006

National Lottery Statistics
North American Association of State and Provincial Lotteries
The following tables:
• Sales by Game for U.S. Lotteries’ Fiscal Year 2005*
• Sales and Profits for U.S. Lotteries’ Fiscal Year 2003 to 2005*

* Oklahoma Lottery Commission commenced operations on October 12, 2005. This data
is presented for informational purposes only.

FY '05 Sales by Product (millions)

* FY ends 3/31     (1) Includes net VLT sales (cash in less cash out)
** FY ends 8/31    (2) Includes Gross VLT sales (cash in)
*** FY ends 9/30   (3) Does not include casino sales or profits
**** FY ends 12/31 (4) No Sales FY '05

FY '03 - '05 Sales and Profits

* FY ends 3/31     (1) Includes net VLT sales (Cash in less cash out) (5) Sales estimated through 9/30/05
** FY ends 8/31    (2) Includes gross VLT sales (Cash in)             (6) Sales/Profits reported through 9/30/05
*** FY ends 9/30   (3) Does not include Casino sales or profits       (7) Sales began 1/20/04 and only reflect 5 months and 12 days of FY '04
**** FY ends 12/31 (4) Source - US Data: US Census Bureau estimate    (8) Sales began March 25, 2004
                                                                      (9) No Sales FY'05




Oklahoma Lottery Commission
3817 N Santa Fe
Oklahoma City, OK 73118
405-522-7700
www.lottery.ok.gov