North Carol inaEducat ion Lot teryFY 2010 Annual Report

TABLE OF CONTENTS

Commission Chair’s Note ......................................5

Executive Director’s Note ......................................6

Education Lottery’s Mission ..................................8

Jackpot Games .......................................................10

Number Games ......................................................12

Instant Games ........................................................16

Advertising, Marketing & Social Media .............18

Lottery Retailers ...................................................20

By The Numbers ....................................................22

Community Support .............................................24

Financial Information ............................................25

HIGHLIGHTSOF

FY2010 IN FISCAL YEAR 2010, ThE N.C. EDuCATION LOTTERY…

…Madeitslargestcashtransfertoeducation $419,463,000

…Awardedtwomoremajorjackpots $141millionPowerballjackpot $12millionMegaMillionsjackpot

…Paidoutrecordamountinprizestoplayers $840million,about$2.3millionaday

…Supportedresponsibleplaying $1millionforgamblingaddictionprogram $233,000adcampaignonresponsibleplay

…Builtthelargestretailsalesteam 6,212retaillocations

….Achievedhighestsalesever $1.421billioninticketsales

On average, players of theNorth Carolina Education Lottery

won almost $2.3 million a day in prizes in 2010.

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The State Lottery Commission consists of nine members, five appointed by the governor and four by the N.C. General Assembly, of which two are recommend-ed by the speaker of the N.C. House of Representatives, and two by the president pro tem of the N.C. Senate. Commissioners serve five-year terms and can only serve two successive terms. One member must have five years experience in law enforcement, one must be a certified public accountant, and one must have re-tail sales experience as an owner or manager of a sales company. Commission meetings are held once a quarter.

COMMISSIONChAIr’SNOTENCELSTATE LOTTERY COMMISSION

Carla ArchieCharlotteSeniorCounsel,WellsFargo&Co.Appointedby:Gov.MikeEasleyTerm:Jan.9,2009–Aug.31,2011

Norwood ClarkRaleighCPAAppointedby:SenatePresidentProTemMarcBasnightTerm:Aug.6,2008–Aug.31,2013

Bill DowdyRaleighretired,StateBureauofInvestigationAppointedby:Gov.MikeEasleyTerm:Jan.2,2009–Aug.31,2011

Bridget-Anne hampdenCharlottePresidentandCEO,Jhr&AssociatesLLCAppointedby:SenatePresidentProTemMarcBasnightTerm:Sept.22,2005–Aug.31,2012

Judge Marlene hyattWaynesvilleretiredSuperiorCourtJudgeAppointedby:houseSpeakerJoehackneyTerm:Sept.10,2009–Aug.31,2013

Lawrence SpearsRaleighOwnerandBroker,raleighInvestmentrealEstateAppointedby:Gov.BeverlyPerdueTerm:March20,2009–Aug.31,2011

Pamela WhitakerGreensboroPresident,KeyresourcesInc.Appointedby:Gov.MikeEasleyTerm:Feb.18,2008–Aug.31,2012

Robert Farris Jr., ChairmanWilsonAttorney,FarrisandFarris,P.A.Appointedby:Gov.MikeEasleyTerm:Sept.22,2005–Aug.31,2013

Notpictured:Max CogburnAshevilleAttorney,Cogburn&BrazilAppointedby:houseSpeakerJoehackneyTerm:Dec.16,2006–Sept.7,2010resignedtoacceptFederalJudgeship.

I ampleased to report that yourNorthCarolina EducationLot-terycontinuedtoshowstronggrowthinitsfourthfullyearofopera-tionsdespiteourstate’stougheconomictimes.TheEducationLotteryendedtheyearrecordingthehighestsalesandproducingthebiggestreturnever.Salesrosealmost10percent,upto$1.4billion,andwecontributed$419millionincashtoeducation.

Asweapproachourfifthyearanniversary,itisagoodtimetotakealookathowtheEducationLotteryhasbecomeaninstitutioninourstate.Overall,95centsofeverydollarspentonthe lotterystays inNorthCarolina.

About58centsofeverydollarispaidouttoplayerswhowinprizes.Infiscalyear2010,thelotterypaidout$840millioninprizes,onaver-ageabout$2.3millionaday.Wehadsomebigwinnerstoo.FrankGrif-finofAshevillebecameourthirdjackpotwinner,winning$141millionplayingPowerballinFebruary,andinMay,MikeManheimofGreens-boro,becameour fourth, takinghome$12millionplayingournewjackpotgame,MegaMillions.Somestateswithlotterieshaveneverhadajackpotwinner.LuckyNorthCarolinahasalreadyhadfour.

Seven cents of every dollar goes to our retailers. In FY10, thatamountedtomorethan$99millioninsalescommissionstogassta-tions, convenience stores, grocery stores, anddrug stores all acrossourstate.NorthCarolinaretailerscancountonlotterysalesasareli-ablepartoftheirbusiness.WeendedFY10with6,212locationssellinglotterytickets,afourpercentincreasefromtheyearbefore.

Butnothingismoreimportanttousthanincreasingtheamountofmoneyweprovideforeducation.Thirtycentsofeverydollargoestothestate,benefitingfourspecificeducationprograms,includingschoolconstruction,scholarships,MoreatFour,andteachersalaries.

TheNCELcontinuestogethighmarksforthewaywehandlethesecurityofthegamesandthelottery’sfinances.Forthesecondyearinarow,theNCELreceivedaCertificateofAchievementforExcellenceinFinancialReportingandanawardforOutstandingAchievementinPopularAnnualFinancialReportingfromtheGovernmentFinanceOf-ficersAssociationoftheUnitedStatesandCanada.TheNCELnowhasreceivedcleanreviews in fourof fourfinancialauditsandthreeof threesecurityaudits,plusournumerousandcontinuous internalaudits.

Aftertheyearended,wesaidgood-byetoourfirstexecutivedirec-tor,TomShaheen.MuchofthesuccessoftheEducationLotterycanbecreditedtoTom’sleadership.Hebroughtbothasenseoffunandasenseoffairplaytoourlottery.ThankstoTom,we’vegotastrongfoundationtobuildon.

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ExECuTIvEDIrECTOr’SNOTEAlice Garland, deputy executive director for legislative and corporate communications, became acting executive director of the N.C. Education Lottery in August 2010 upon the res-ignation of the NCEL’s first executive director, Tom Shaheen

TherecordsalesandreturnforeducationthattheN.C.EducationLotteryachievedinfiscalyear2010servesasatributetotheleadershipofitsfirstexecutivedirector,

TomShaheen.Tom,theNCEL’sfirstemployee,gotthelotteryupandrunninginrecordtimebackin2006andledourfirstfourandahalfyearsofopera-tions.

Tom’svisionwasthatwehavefuninthisseriousbusinessofraisingmoneyforeducationinNorthCarolina,butthatwekeepconcernforintegrityandsecurityeverpresent.Thankstohis leadership, talentsand lotterysavvy,wemadethishappen.

Tomwassavvyaboutsalesbecausehebeganhislotterycareerinsales.Heunderstood the connection between ticket sales and prize payout for ourinstantgames.Heguideduspatientlyandpurposelytoincreaseprizepayout,astrategythatincreasedoverallsalesandincreasedthereturntoeducation.Infiscalyear2010,salestoppedoutatmorethan$1.4billionandthecashcontributiontoeducationhit$419million.

Tomhadatalentformarketing.HerecognizedtheappealalotteryticketwithNorthCarolinaiconRicFlairwouldhave,negotiatedacontractwithFlair,andtogethertheyproducedahugelypopularinstantticket.Flairappearedinalot-terycommercialandattendedmarketingeventsatfairsandfestivals.PlayerslineduptogetFlair’sautograph.Tom’sintuitionthatthisNorthCarolinaiconwouldpayoffforthelotteryandforeducationprovedsolid.

Asa leader,Tomtaughtusplayersshouldgetthebestvaluetheycouldforeveryentertainmentdollartheyspend.Theprincipleledtothedesignofex-tendedplaygamesandsecondchancedrawingsfornon-winningtickets.Bothincrease a ticket’s value. In FY10, our second chance drawingwinners didparticularlywell.WorldSeriesofPoker®winner,RichardTaylor,oneof7,319originalentrants inthetournament,survivedmultipleroundstowinanad-ditional$31,647ashefinishedasplayerNo.443.ThePriceisRight®secondchancewinner,CraigRoten,wonaboatashecompetedinthenon-broadcastversionoftheshowinLasVegas.

Finally,Tom’snationalleadershiponlotteryissuespaidoffforNorthCarolina.HewasanarchitectoftheplanforPowerballstatesandMegaMillionstatestobegincross-sellingtheirgames.JustfourshortmonthsafterMegaMillionsbe-ganhere,wehadourfirstjackpotwinner,MikeManheim.Afterwatchingthedraw,hiswifeFayesaid,“Baby,Ithinkwewon.”TheManheim’swinwas$12million.Sales fromtheadditionaldrawingseachweekhaveboostedlotteryrevenues.

Alloursuccesses inFY10wouldnothavehappenedwithoutthe great support of our retailers, our staff, and our NCELCommission.AndTom Shaheenwas there for all the action.

NCELSENIOR STAFF

1. Alice Garland ActingExecutiveDirectorandDeputyExecutiveDirector,LegislativeandCorporateCommunications

2. Deborah Doty DeputyExecutiveDirector,ManagementInformationandGamingSystems

3. Bill Jourdain DeputyExecutiveDirector,Finance,AdministrationandSecurity

4. Lou Ann Russell DeputyExecutiveDirector,MarketingandAdvertising

5. Sam hammett DeputyExecutiveDirector,Sales

6. Terri Avery-Fowler Director,Sales

7. Michelle Lassiter Director,Finance

8. Quan Kirk SeniorDirector,LegalServices

9. Margaret Spindola-Bode SeniorDirector,humanresources

10. Tony Chung Director,ManagementInformationSystem

11. Susan Singley Director,Administration

12. Penny Railey Director,Marketing

13. Nikki howard Director,InternalAuditor

14. Joe Norman Director,GamingSystems

15. Walter Ingram, Director,SalesDevelopment

16. Jerry Carter Director,Security

17. Van Denton Director,CorporateCommunications

TheseniorleadershipoftheEducationLotteryconsistsoftheexecutivedirector,fivedeputyexecutivedirectorsandtwelvedirectors.Theleadersineachofthosepositionsarelistedbelowandpicturedfromlefttorightinthephotographabove.

TomShaheen

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ThEEDuCATIONLOTTEry’SMISSIONIncreatingastatelotteryinAugust2005,NorthCarolinadedicateditsproceedstosupportingfourkeypartsofpubliceducation.Fourtimesayear,theN.C.EducationLotterymakestransferstothestatetosupportthefollowingeducationinitiatives.

1.Teachersalaries.Fundsgotoeveryschoolsysteminthestateandaredistributedonaperstudentbasis.Thefunding,administeredbytheN.C.DepartmentofPublicInstruction,sup-portseffortstohaveaclasssizeratioofoneteacherforevery18studentsingradesK-3.

2.MoreatFour.Fundscombinewithgeneraltaxrevenuestosupportapre-schoolacademicprogramforfour-year-oldsjudgedtobeatriskofstartingkindergartenbehindtheirpeers.Thelotterydollars,administeredbytheOfficeofEarlyLearningwithintheN.C.DepartmentofPublicInstruction,coverthecostsofabouthalfthestudentsintheprogram.MoreatFourslotsareawardedtocountiestocovereligiblechildrenwholivethere.

3.Schoolconstruction.FundsaretransferredtothePublicSchoolBuildingCapitalFundandthendistributedtoall100counties.Infiscalyear2009-10,eachcountyreceivedthesameper-pupilshareoftheconstructiondollars.Eachcountydecideshowtouseitsschoolconstruc-tionmoniesunderajointagreementofthelocalschoolboardandcountycommissioners.

4.Collegescholarships.Fundsgotoprovidescholarships toNorthCarolinauniversitiesandcommunitycollegesonafinancialneedbasis.TheprogramisadministeredbytheN.C.StateEducationAssistanceAuthority.Studentsapplyforeducationlotteryscholarshipsbycomplet-ingtheFreeApplicationforFederalStudentAid.AnystudentwhoqualifiesforafederalPellGrantwillreceiveaneducationlotteryscholarship.

Infiscalyear2010,theEducationLotterytransferred$419millionofitsrevenuestosupporttheseprograms.Thetransfersbroughtthetotalamountforeducationsincethestartofthelotteryto$1.556billion.underthelaw,halfofthelotteryproceedsissplitbetweenteachersalariesandMoreatFour,40percentisallocatedtoschoolconstruction,and10percentforcollegescholar-ships.Throughtheendoffiscalyear2009-10,lotteryfundshave:

-Fundedthesalariesof8,077teachersingradesK-3

-Paidfor70,146four-year-oldstoattendtheMoreatFourprogram

-Provided$611millionforschoolconstructionacrossthestate,asourceofrevenuethathashelpedmanycountiesavoidraisingpropertytaxestofundschoolcapitalprojects

-Providedcollegefinancialaidto91,257studentsatstateuniversitiesandcommunitycolleges

“School is expensive…. The North Carolina Education Lottery scholar-ship has made life at school not only easier, but possible. Having a scholarship means that I am

getting to pursue my dreams.”

Drew Perrin, student,UNC School of the Arts,

Winston-Salem, N.C.

Lotteries have a long history in North Carolina as a means to

raise money for public projects. In 1759, proceeds from a lottery were used to build two Anglican

churches in the state. Lottery dollars helped to complete the

construction of South Building at the University of North Carolina

at Chapel Hill in 1801.

ALAMANCE 6,070,412ALExANDEr 1,550,758ALLEGhANy 518,323ANSON 1,231,334AShE 1,135,339AvEry 751,885BEAuFOrT 2,046,965BErTIE 1,060,337BLADEN 1,825,811BruNSWICK 3,607,302BuNCOMBE 7,346,940BurKE 4,319,942CABArruS 8,410,641CALDWELL 3,348,070CAMDEN 507,584CArTErET 2,295,556CASWELL 826,944CATAWBA 6,486,311ChAThAM 2,359,056ChErOKEE 1,066,548ChOWAN 695,997CLAy 426,601CLEvELAND 4,924,132COLuMBuS 3,118,511CrAvEN 3,820,760CuMBErLAND 16,703,379CurrITuCK 931,589DArE 1,345,042DAvIDSON 6,752,064DAvIE 1,923,353DuPLIN 2,631,444DurhAM 8,258,777EDGECOMBE 2,690,910FOrSyTh 13,372,851FrANKLIN 2,089,976GASTON 9,506,625GATES 502,537GrAhAM 398,820GrANvILLE 2,237,173GrEENE 1,022,427GuILFOrD 21,718,581hALIFAx 2,494,817hArNETT 4,878,022hAyWOOD 2,101,285hENDErSON 3,476,333hErTFOrD 1,153,996hOKE 2,764,560hyDE 206,998IrEDELL 6,569,557JACKSON 1,042,924

JOhNSTON 8,064,267JONES 473,339LEE 2,923,344LENOIr 2,710,729LINCOLN 3,056,675MACON 1,383,288MADISON 717,256MArTIN 1,103,196MCDOWELL 1,837,682MECKLENBurG 34,668,029MITChELL 591,385MONTGOMEry 1,508,531MOOrE 2,716,778NASh 4,502,245NEWhANOvEr 7,225,378NOrThAMPTON 913,596ONSLOW 6,892,987OrANGE 4,695,203PAMLICO 498,140PASQuOTANK 1,702,540PENDEr 2,245,677PErQuIMANS 515,069PErSON 1,541,927PITT 6,839,312POLK 821,621rANDOLPh 5,918,285rIChMOND 2,322,952rOBESON 7,918,895rOCKINGhAM 3,751,172rOWAN 5,641,365ruThErFOrD 2,968,221SAMPSON 3,602,026SCOTLAND 2,174,735STANLy 2,976,812STOKES 2,074,327Surry 3,269,903SWAIN 654,803TrANSyLvANIA 954,519TyrrELL 178,206uNION 9,856,265vANCE 2,102,694WAKE 34,283,258WArrEN 764,474WAShINGTON 618,595WATAuGA 1,360,277WAyNE 5,989,714WILKES 3,365,011WILSON 3,217,694yADKIN 1,741,050yANCEy 671,982

COuNTyTOTALS FY10

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The addition of Mega Millions to the lottery’s complement of games netted a

7% increase in jackpot game ticket sales for FY10 compared to the year before,

driving record returns to education.

North Carolina had its largest-ever Powerball jackpot winner, Frank Griffin of Asheville, claim a $141.4 million prize in February 2010. Griffin is the state’s third Powerball jackpot winner.

MEGAMILLIONSJOINS POWERBALL Historywasmadewith the additionofMegaMillions to theNCEL’s complementofgamesonJanuary31,2010.ThemultistategamebearsastrongresemblancetoPowerball,withjackpotsthatcanclimbintothehundredsofmillionsandtwice-weeklydrawings.Be-foretheintroductionofMegaMillions,PowerballhadbeenthesolejackpotgameavailableintheTarHeelState.NorthCarolinabecameoneof23statestobegincross-sellingticketsforthepairofmultistategamesinthefiscalyear.

Whatbetterwaytointroducetheadditionofasecond“heavyweight”totherosterthantodepictthegiantjackpotgamesassumowrestlers?Inthetelevisionspot,wrestlerspaint-edblue(forMegaMillions)andred(forPowerball)werefilmedfacingoffandgearinguptochargeatoneanother.Astheycollide,aboomingvoiceoverexclaimsthatfourchancestowinjackpotprizeseachweekis“mega-powerfun.”

Thecross-sellingprogramhasproventobeawinnerforbeneficiaries,players,andretail-ersalike.CombinedsalesofMegaMillionsandPowerballwerenearly$15milliongreaterforFY10thansalesofPowerballaloneinFY09.Thattranslatedintoa7percentboosttoretailercommissionscomparedtototalsforthepreviousyear.Inturn,theseelevatedfigurescontributedtoincreasedreturnstoeducationandthestrengthoflocalbusinesses.

NEWJACKPOTWINNERS Justmonthsintothecross-saleera,thefirstjackpot-winningMegaMillionsticketinstatehistorywassoldinGreensborofortheMay28drawing.NativeNorthCaroliniansFayeandMikeManheimclaimedtheir$12millionprizeatlotteryheadquartersinRaleigh.AtamediaeventonJuly7,Fayerecountedwhatshesaidtoherhusbandinthemomentsfollowingtheteleviseddrawing:“Baby,Ibelievewewon.”

JustshyoffourmonthsbeforetheManheims’jackpotwin,luckstruckforaretiredfire-fighterfromAsheville–onaPowerballticketworthawhopping$141.4million.WhileFrankGriffin’sgoodfortunestartedwithaticketfortheFeb.6drawing,heandhiswifeLorettadecided theirunexpectedwinwouldbenefit the community for years to come.ThankstotheGriffins’generosity,astate-of-the-artfacility–withapricetagofmorethanhalfamilliondollars–becamepossibleforEnkaHighSchoolinCandler.“ForEnkasoftball,it’sahomerun,”saidFrankFraboniofWLOS-TVinAsheville.“ThePowerballhassnowballedintosomethingspecial.”

AnotherPowerballjackpotwinnerhascommittedaportionofhiswindfalltowardthegreatergood.JeffWilsonofKingsMountainwon$88.1millionintheJune20,2009Pow-erball drawing.TheWilson Family Foundation established a grant to fund amonitoringprogramforindividualsconvictedofalcohol-relatedcrimes.“Itwillallowustomorewidelyemployaproventoolinholdingdefendantsaccountableandimprovingcommunitysafety,”saidMecklenburgTrialCourtAdministratorToddNuccio.

Mega Millions

FY10 Sales: $25,969,303.00

FY10 Prizes: $6,661,940.00

Powerball

FY10 Sales: $198,756,717.00

FY10 Prizes: $187,457,376.00

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ThefirstfullyearofCarolinaPick4resultedin$57,370,252in sales, accounting for roughly 4 percent of total sales inFY10.This figure is in linewith thepartial year sales fromFY09,whichwere$15,793,159inthetwoandahalfmonthsafterthegamelaunched.

CarolinaPick4 isafour-digitgamewhereplayerspickanumber between 0-0-0-0 and 9-9-9-9. Players have theirchoiceofplaying fourdifferentways (Exact,Any, 50/50orCombo)andcanwinfrom$100upto$5,000incashprizes.It isnotunusualtohavetwentyplayersaweekwinatthehighestlevelof$5,000.

TheNCELpaidout1,081$5000topprizesto“CarolinaPick4”winnersinFY10.Atotalof$27,684,600waspaidoutto“CarolinaPick4”players,whichisanaverageof$532,396perweek.

CArOLINAPICK 4

CArOLINAPICK 3 CarolinaPick3isonceagaingivingPowerballstiffcompe-tition for thenumber twoslot inonlinegamesales.Caro-lina Pick 3 sales topped out at $222,777,592. Thiswas a6 percent increase over FY09 and a 51 percent increaseoverFY08.CarolinaPick3salesnowrepresentroughly16percentoftotalsales.

Triplenumbers,aperennialplayerfavorite,hiteighttimesduringtheyear.TheNCELseesaspikeinsalesfollowingev-erytripledigitdrawing,aswellasmoreticketsreachingtheliabilitylimitof$3million.TheDec.25,2009eveningdrawingresultedina5-5-5combinationandpaidoutarecord-setting$2,283,000.

CarolinaPick3andCarolinaPick4playershaveadifferentstyleofplayingfromtheotherthreeonlinegames.CarolinaPick3playersquickpicktheirnumbersonlysixpercentofthetime,CarolinaPick4players11percentofthetimeandCarolinaCash 5 players use quick pick 65 percent of thetime.Asforjackpot-stylegames,Powerballplayersquickpick73percentofthetimeandMegaMillionsplayersquickpick78percentoftheirtickets.

FY10

Pick 3 Sales:$222,777,592

Pick 3 Prizes:$110,440,310

FY10

Pick 4 Sales:$57,370,252

Pick 4 Prizes:$27,684,600

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CArOLINACASh 5 Overall Carolina Cash 5 sales showed a slightincrease over FY09, adding $861,950 for a grandtotalof$60,873,168inFY10.CarolinaCash5repre-sentedfourpercentoftotalsalesfortheNCELthisyear,droppingonepercentfromFY09.

OnehundredandsixplayerswonthetopprizeinFY10with57ofthosewinning$100,000ormore.The top prizewas shared bymultiplewinners 16times.MarkHamlinofCharlottewonthisfiscalyearslargest topprizeof$688,283 in theOct.29,2009drawing. The top prize rolled 11 times to reachthis amount, showing that Carolina Cash 5 getsexcitingfast.TheaveragetopprizewoninFY10was$160,934.

CarolinaCash5drawingsoccurnightlyinconcur-rencewiththeCarolinaPick3andCarolinaPick4drawings.

FY10

Cash 5 Sales:$60,873,168

Cash 5 Prizes: $29,335,273

WRAL-TV in Raleigh is the official lottery draw station. The nightly draw is televised live from the studio.

The mid-day draw is taped and available to players to view at www.wral.com shortly after the draw.

In addition to WRAL, our statewide drawing station network includes WITN-TV in Greenville,

WILM-TV in Wilmington, WXLV-TV in Winston-Salem and WYCW-TV in Western North Carolina.

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FY10 instant ticket sales were up 74% since FY07.

Instant ticketscontinued tobe theNCEL’s largest rev-enuecategoryforFY10at60percentoftotalgamesales.Instantsalesofmorethan$855millionposteda7.1per-cent increaseover FY09 andhelpeddrive a 9.9percentincrease in total sales. Inall,93majorprizesof$100,000to$3millionwereawardedtoinstantwinnersacrossthestatethroughouttheyearaswell.

FY10was a year of firsts for instant tickets and nonewere bigger than the October debut of “$200 MillionExtravaganza”–theheraldof$20gamesinNorthCarolina.Besides offering players a shot at five top prizes of $3millionand tenchances towin$1million, thegame fea-turedthebestoveralloddsofwinningandthelargesttotalpayoutof anyNCELgame todate. Itspopularityamongplayersnettedmorethan$221.4millioninsales,whichinturnshiftedinstantgamepercentagesharesatotherpricepointsfortheyear.

Ticketssuchas“MegaBucks”led$5gamestothelargestshareofannualinstantticketsalesat29percent.Thereturnof“Cash Spectacular” and the introductionof“$500,000Jackpot” pushed the$10 echelon to a 21percent stake.The$20 instant ticketpricepoint– representedentirelyby“$200MillionExtravaganza”–carvedout18percentofsalesonitsown.Thecategorywasroundedoutby$1,$2and$3gameswhichamounted to32percentof instantticketssold.

Theunveilingof“Wooooooo!”–thefirstlotteryticketanywheretofeaturethelikenessofprowrestlerRicFlair- headlined as the year’s most famous first.True to theachievementsofthelegendarygrapplerfromNorthCaro-lina,the$5gamewasalsoatopperformerwithnetsalesofmorethan$15.5million.Otherstandoutgamesontheperformanceindexincludedthe$1game“StockingStuffer”and the $3 game“Match&Win”which yielded sales ofmorethan$5.9millionand$10.2millionrespectively.

Online became the sole mode of entry for second-chancedrawingsinFY10.InNovember,“SuperMonopoly”ushered North Carolina players into an era of playableonline games that represented additional entries into asecond-chance drawing for a single non-winning ticket.Otherbrandedgamesthatattractedsecond-chanceentrieswerereissuesof“MustangFever”and“Harley-Davidson®”aswell asfirst runsof“ThePrice isRight®”and“WorldSeriesofPoker®.”Second-chancedrawingsviaonlineentryproved popularwith players;more than 1.2million suchentriesweremade.

INSTANTTICKETS

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Theexcitementofsportingevents.Thespiritofregionalfestivals.Thepopular-ityof namebrands and socialmediawebsites.NCELmarketing and advertisingelaboratedontraditionalmethodsandleveragedemergingmediumstobringthefunoflotterygamestopeopleacrossthestateinFY10.

ThemostsignificantdevelopmentoftheyeartohighlightwastheadditionofMegaMillionstotheNCEL’scomplementofgames.SimilartoPowerballinmanyways,twodrawingsperweekgiveMegaMillionsplayersthechancetowinmulti-milliondollarjackpots.Television,radioandpointofsalematerialswiththetagline“MoreFunThanOne!”weredisseminatedtointroduceNorthCarolinaplayerstothenewgame.

The campaign to promote“$200Million Extravaganza” –NorthCarolina’sfirst-ever$20game–made“thebig ticket” abighit.Marketingandadvertisingtoutedtheunprecedentedqualitiesthegamehadtoofferplayers:thebestoveralloddsofwinningandthelargestpayoutofanygametodate.ThegamelaunchedonOctober6withfivetopprizesof$3millionandtenchancestowin$1million,plusmillionsofdollarsinotherprizes.

PromotionsrevolvingaroundtheRicFlair-themedscratch-offgameattractedlegionsoffanstotheNCELboothattheClevelandCountyFair,DixieClassicFairandMoreheadCitySeafoodFestival.LinesstretcheddownthestreetandaroundthecorneraspeoplewaitedforhourstogetanautographandphotowiththeprofessionalwrestlinglegendfromCharlotte.Theticket,named“Woooooo!”afterFlair’ssignatureyell,wasthefirst lotterygameanywheretobearthechampion’slegendarylikeness.

Sportspartnershipswerea focusandsuccessyetagain.Manythousandsofsports fansexperienced thebrand inpersonateventsbywayofminor leaguebaseball and hockey games; athletic sponsorships with CIAA basketball,WakeForest and Duke Universities; and professional contests featuring the CarolinaHurricanesandCharlotteBobcats. Inall, theNCEL implemented28eventsandsponsorships,resultinginover145on-sitesaledateopportunitiestoincreaseex-posureandbrandrecognition,aswellasdriveawarenessandknowledgeofgames.

Forathirdstraightyear,theNCELsponsoredtheNorthCarolinaEducationLottery200attheNASCAR®CampingWorldTruckSeries,atCharlotteMotorSpeedway,partof theNASCAR®SprintAll-StarRaceWeekend.Two lucky fanswontheopportunitytoparticipateasthehonorarystarterandgrandmarshalfortherace,andjoinedtheMegaMillionsandPowerballmascotsonpitrow–andonthetrack–beforetheactiongotunderway.

Agreaterselectionofbrandedgameofferingsreliedonexpandedsupportforproductlaunches,secondchancedrawingsandwinnerevents.AtlocationsacrossNorthCarolina,communicationsconductedpresentationswhere“MustangFever”and“Harley-Davidson®”winners accepted the keys to their brand-newwheels.Grandprizewinnersof“ThePriceisRight®”and“WorldSeriesofPoker®”trav-elledtothebrightlightsofLasVegasforchancestowinevenbiggerprizes.

The NCEL began sharing and receiving information with players throughsocialmedia channels to advancebroadermarketing, advertising and communi-cations objectives.Twitter followers got instant updates about where winningticketswererecentlysoldwhileplayerscommented,askedquestions,andwatchedvideosofbigwinners share thedetailsof their good fortuneonFacebook.Theensuingconversationgrewatahealthypace;theNCEL’scombinedsocialmediaaudiencesurpassed6,000bycloseofthefiscalyear.

From the mountains to the coast of North Carolina, 28 events and sponsorships were imple-mented, resulting in over 145 on-site sale date opportunities.

NCELGETTINGThE WORD OuT

facebook.com/nc.educationlotter.org

twitter.com/nc.educationlotter.org

Launching in the fall of 2009, the NCEL’s social media program became a new way to exchange information with the public. More than 6,000 players joined the conversation in the fiscal year.

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OurWINNINGRETAILERS

Cross Road Express, Durham

Cross Road Express may be a small store in square footage, butthanks to theirpositiveattitudeabout theNorthCarolinaEducationLottery, they are very big in sales. Players are greetedby theNCELpointofsaleplasteredservicecounterandlotterydispensersassoonastheyenterthestore.Thelocationstartedsellinglotteryin2007,with12dispensers.Todaytheyhave36dispensersandareoneofthetopsellingretailersinDurham.

Duetotheiroutstandingsales,thelocationrecentlyreceivedanEn-terpriseSeriesMultimediaMonitor,whichisacolorvideoscreenthat,whenattachedtoalicensedNCELterminal,displaysanarrayofplayer-centeredinformation.ThestaffisexcitedtohaveitasanotherPOSop-tionintheirstoreasitallowsregularlotterycustomerstoenjoycheck-ingdailywinningnumbers,dailyjackpotsandviewinggameinformationwithoutstandinginline.

NickDesai,thestore’sowner,doesn’tmisstheopportunitytoaskev-erycustomeriftheywouldliketopurchasealotteryticket.Theyknowtheirplayersbynameandbelievethat,bycashingwinningtickets,theirplayerswillreturnregularlytopurchasegasandotherproducts.Thestorealsopostswinningticketsredeemedintheirlocationsoplayerswillseethemasaluckylocation.AllofCrossRoadExpress’effortsadduptostrongsalesandgreatcustomerrelationships.

rETAILErSPOTLIGhT

ThepartnershipbetweentheNCELand itsretailers is invaluabletothesuccessofthelottery.Thelotteryretailersareonthefrontlineeverydayprovidingtheserviceofsellingtickets,cashingoutwinningticketsunder$600andhelpingplayersunderstandthegames.

One of the key factors behind theNCEL’s record year in ticketsaleswasthegrowthinthenumberofretailersacrossthestate.Thenumberofretailersgrewfrom6,000onJune30,2009to6,212onJune30,2010.Eachnewretaillocationgeneratessaleseachweek,soasthebaseofretailersgrowssodoesthenumberofticketssold.

Retailersreceivea7percentcommissionforsellinglotterytickets.ThetotalcommissionspaidouttoretailersinFY10were$99,339,829.Theaveragecommissionpaidtoretailerswas$15,919.Manyretailersfindthattheirlotterysalesbecomeareliablesourceofrevenuesfortheirbusinesses.

Fiscal year 2010 also brought a technological advance to manyNCEL retailers as the NCEL added a new multimedia display –called Enterprise Series Multimedia Display or “ESMM” for short– capable of showing digital stream-ing content featuring customized lotteryannouncements. More than 3,000 of thedisplayswereinstalledinretailersacrossthestate,withmore scheduled for installationinFY11.

Theslideshowpresentationallowslotteryplayersatretaillocationstoeasilygetsuchinformationas:

• Jackpotamounts

• Winningnumbers

• Newgameannouncements

• Bigwinnerspotlights

• Beneficiaryinformation

• AmberAlerts

Finally, inFY10theNCELbeganaretailer incentiveprogram.Theprogramrewardsretailersforsellingonlinegameticketsthatresultinacertainmonetaryprizethreshold.Incentivesarepari-mutuelandaresharedequallyifthereismorethanonesellingretailer.

1. Rose Mart #14 Wilson

2. Reilly Road BP Amoco Fayetteville

3. Raceway Tarboro

4. Tony’s Friendly Mart #1 Kinston

5. Catamount Travel Center Whittier

6. O’Ryans Quik Stop Roxboro

7. The Food Mart #17 Raleigh

8. Bobby Taylor Oil #2 Fayetteville

9. C Mini Mart #3 Raleigh

10. Ponderosa Exxon Fayetteville

11. Carlton’s Tanglewood Clemmons

12. Fairway One Stop #21 Greensboro

13. Bobby Taylor Oil #4 Fayetteville

14. Church St Convenience Mart Rocky Mount

15. Value Mart Sanford

16. Cigarettes & More Charlotte

17. Kangaroo Express #3077 Rocky Mount

18. Cross Road Express Durham

19. The Border Station Moyock

20. Spring Forest BP/Fiddlestix Raleigh

The NCEL began installations of its first Lottery To Go Machines, or LTGs, in FY2010. The machines are self-service kiosks that dispense instant scratch-off tickets as well as Quick Pick tickets for Powerball, Mega Million and Carolina Cash 5 using a touch screen. Players also can use play slips at the machines to play their own numbers for Carolina Pick 3, Carolina Cash 4, Carolina Cash 5, Powerball and Mega Millions. Players must scan their drivers’ licenses to ensure they are 18 or older before they can buy lottery tickets from the machines. The first LTG was installed on March 30, 2010 in Realo Drugs in Kinston and others were later installed at eight BJ’s Warehouse Clubs and a Walgreens in Maxton.

TOP 20SALESFy10

20 21

5.8%

14.2%

24.2%

40.6%5.8%

14.2%

24.2%

40.6% 15.3%

SALES BY REGION

INSTANT

POWERBALL

MEGA MILLIONS

PICK 3

PICK 4

CASH 5

TOTAL

855,566,067.00 (60.20%)

198,756,717.00 (13.98%)

25,969,303.00 (1.83%)

222,777,592.00 (15.67%)

57,370,252.00 (4.04%)

60,873,168.00 (4.28%)

$1,421,313,099.00

TOTALGREENVILLE

116,264,771.00

21,142,647.00

2,868,250.00

54,981,810.50

13,305,586.50

8,399,435.00

$216,962,500.00

RALEIGH

331,587,068.00

74,043,944.00

9,911,967.00

110,591,203.00

26,531,611.00

23,796,767.00

$576,462,560.00

CHARLOTTE

223,129,941.00

58,978,795.00

7,339,630.00

29,920,696.00

9,169,792.00

15,454,995.00

$343,993,849.00

GREENSBORO

125,137,857.00

30,966,901.00

4,189,172.00

24,008,148.00

7,302,044.50

9,728,641.00

$201,332,763.50

ASHEVILLE

59,446,430.00

13,624,430.00

1,660,284.00

3,275,734.50

1,061,218.00

3,493,330.00

$82,561,426.50

SALES BY CATEGORY

FY10

FY09

FY08

FY07

FY06

TOTAL

1,421,313,099.00

1,293,111,226.00

1,078,179,082.00

885,575,272.50

229,522,331.00

$4,907,701,010.50

RAFFLE

7,369,240.00

10,000,000.00

$17,369,240.00

TOTALCASH 5

60,873,168.00

60,011,218.00

58,516,249.00

36,501,699.00

$215,902,334.00

PICK 4

57,370,252.00

15,793,159.00

$73,163,411.00

PICK 3

222,777,592.00

208,883,766.00

147,158,304.00

89,541,216.50

$668,360,878.50

MEGA MILLIONS

25,969,303.00

$25,969,303.00

POWERBALL

198,756,717.00

209,746,679.00

229,255,174.00

258,967,883.00

27,317,594.00

$924,044,047.00

INSTANT

855,566,067.00

798,676,404.00

635,880,115.00

490,564,474.00

202,204,737.00

$2,982,891,797.00

FY07

$885M

$1.08B

$1.29B

FY08 FY09 FY10

ANNUAL SALES

$1.42B

PERFORMANCE COMPARISION

FY07 FY08 FY09 FY10

$431M

BENEFICIARY FUNDS

$315M

$348M

$413M

FY07 FY08 FY09 FY10

$934M

PRIZES & COMMISSIONS

$514M

$664M

$822M

EXPENSES

FY07 FY08 FY09 FY10

4.13%

4.82%

4.35%

4.25%

BENEFICIARY FUNDS FIGURES ARE INCLUSIVE OF NET REVENUES AND UNCLAIMED PRIZES TO THE STATE. EXPENSES ARE REPRESENTED AS A PERCENTAGE OF TOTAL REVENUE. COMPREHENSIVE DATA FOR THESE CHARTS IS AVILABLE IN THE FINANCIAL SECTION OF THIS ANNUAL REPORT.

22 23

Fy10FINANCIALS

The N.C. Education Lottery has several programs and initia-tives where it uses its resources to help out in the community.Theyinclude:

•Play Responsibly Program. Each lottery ticket carries the playresponsiblymessage andprovides an800number for a state-operated problem gambling hotline. The Education Lotteryprovides$1milliona year to the stateDepartmentofHealthandHumanServicestooperateitsproblemgamblingprogram.TheprogramisopentoanyoneinNorthCarolinawithagam-bling problem.DHHS reports annually to theNorthCarolinaEducation Lottery Commission regarding the use of this pro-gram.TheNCELalsopromotesPlayResponsiblyduringProblemAwarenessWeek.

•Nosales tominoreducationefforts.Salesof lottery tickets tominorsundertheageof18arenotallowedinNorthCarolina.NCEL emphasizes thatmessage to its retail partners throughitssaleseffortsandthroughitspubliccommunicationsinitiatives.Thoseeffortsincludeissuingmediareleaseswithpublicremind-ersaboutthenosalestominorslaw,trainingretailerswhoselllotteryticketstocheckIDsandsupportingtheannualcampaignoftheNationalCouncilonProblemGamblingandtheInterna-tionalCentreforYouthGamblingProblemsandHighRiskBehav-iorsatMcGillUniversitytoemphasizethatlotteryticketsshouldnotbepurchasedasholidaygiftsforminors.

•AmberAlerts. Lottery terminals across the state carryAmberAlertswhenevertheyareissuedaspartoftheNCEL’spartner-shipwiththeN.C.CenterforMissingPersons.Thepartnershipmeansthatmorethan6,200retailerswhoselllotteryticketsgetAmberAlertmessageson their lottery terminals.RetailersareaskedtoprintouttheAmberAlertandpost itattheirstores.Afullscreen,rotatingAmberAlertmessagealsoappearsonthemultimediadisplays atmany lottery retailerswhere customerscanseethem.AmberAlertsalsoarepostedonthehomepageoftheN.C.EducationLottery’swebsite.

COMMuNITyPROGRAMS

Independent Auditors’ ReportTo the CommissionersNorth Carolina Education LotteryRaleigh, North Carolina

We have audited the accompanying statements of net assets of the North Carolina Education Lottery (NCEL), a major

enterprise fund of the State of North Carolina as of June 30, 2010 and 2009, and the related statements of revenues,

expenses and changes in fund net assets and cash flows for the years then ended. These financial statements are the

responsibility of the NCEL’s management. Our responsibility is to express an opinion on these financial statements based

on our audits.

We conducted our audits 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. 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 examining, on a test basis,

evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the ac-

counting principles used and the significant estimates made by management, as well as evaluating the overall financial

statement presentation. We believe that our audits provide a reasonable basis for our opinions.As discussed in Note 2, the financial statements present only the NCEL and do not purport to, and do not, present

fairly the financial position of the State of North Carolina, as of and for the years ended June 30, 2010 and 2009, and

the changes in its financial position and its cash flows for the years then ended in conformity with accounting principles

generally accepted in the United States of America.In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial

position of the NCEL as of June 30, 2010 and 2009, and the respective changes in its financial position and cash flows

for the years then ended in conformity with accounting principles generally accepted in the United States of America.

In accordance with Government Auditing Standards, we have also issued our report dated November 9, 2010 on our

consideration of the NCEL’s internal control over financial reporting and on our tests of its compliance with certain provi-

sions 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 or on 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.

As discussed in the notes to the financial statements, management has recorded certain annuity contracts in the prior

year in which management has determined that the legal liability for the pay out of those contracts still rests with the

NCEL. Accordingly, assets and liabilities for the year ended June 30, 2009 have been restated to properly reflect the an-

nuity contracts.

The 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 inquiries 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.

CHERRY, BEKAERT & HOLLAND, L.L.P.

Raleigh, North CarolinaNovember 9, 2010

24 25

TheShortTermInvestmentportfoliohasthegeneralcharacteristicsofademanddepositaccountinthatparticipantsmaydepositadditionalcashatanytimeandmaywithdrawcashatanytimewithoutpriornoticeorpenalty.AlldepositsarecombinedwithotherStateagenciesandinvestedbytheStateTreasureruntilneededtocoverdisbursements.InvestmentsarelimitedtothoseauthorizedfortheState’sGeneralFund,pursuanttoNCGeneralStatute147-69.1.Interestearnedof$1.48milliononthesebalancesisrecordedasnon-operatingrevenue.Earningsontheaccountsarecreditedonamonthlybasis.TheallocableshareoftherevenuesarisingfromStateTreasurer’sSecuritiesLendingCollateralprogramtransac-tionsarealsoincludedasnon-operatingrevenue.

TheNCEL’sinvestmentincapitalassets,netofaccumulateddepreciationin2010was$1.2millionwhichisapproximately$71,000lowerthan2009.Themajorityofcapitalassetinvestmentswereduringourfirstfullyearofoperationin2007.Theinvestmentincapitalassetsincludesgameequipment,dataprocessingequipment,telephoneequipment,softwareandfixtures.Thecapitalizationofallitemsincludingequipment,computers,andfurniturefollowsNorthCarolina’sOfficeofStateController’spolicies.TheNCELdefinescapitalassetsasassetswithaninitialunitcostof$5,000orgreaterandanestimatedusefullifeoftwoormoreyears.Capitalassetsarecarriedatcostlessaccumulateddepreciation.

AdditionalinformationontheNCEL’scapitalassetscanbefoundinNotes2Fand5Etothefinancialstatements.

TheactivityforcapitalassetsfortheyearendedJune30,2010was(inthousands):

Total LiabilitiesTotalcurrentliabilitiesfortheNCELwere$56millionin2010decreasingby$6.1millionfrom2009.ThereductionincurrentliabilitiesmainlyresultedfromdecreasesintheStateTreasurer’sSecurityLendingCollateral.Currentliabilitiesalsoconsistofannuityinstallmentprizesduetobepaidinthenextfiscalyear,tradepayablestovendors,prizeawardspayable,andotherpayables.

NoncurrentliabilitiesareAccruedPaidTimeOfforCompensatedAbsences.AliabilityisrecordedtoreflectthebalancesforunpaidPaidTimeOff(PTO)earned,whichisprovidedtoemployeesforusewhenevervacation,sickleave,personalleaveorbereavementleaveisrequestedandapproved.CurrentandnoncurrentliabilityforAccruedPaidTimeOffisshownbelowinthousands.

NoncurrentliabilitiesalsoincludesthepresentvalueoftheannuitycontractsthatfundthelongterminstallmentprizesthatareduetoNCELannuityprizewinnersthatwillbepaidafterJune30,2011.

North Carolina Education LotteryManagement’sDiscussion&Analysis-June30,2010&2009

ThefollowingisadiscussionandanalysisofthefinancialperformanceoftheNorthCarolinaLotteryCommission[aka,NorthCarolinaEducationLottery(NCEL)forthefiscalyearsendedJune30,2010,2009and2008andshouldbereadinconjunctionwiththetransmittalletterandthefinancialstatements,includingthefootnotes.Thisreportconsistsofthreeparts:management’sdiscussionandanalysis,thebasicfinancialstatementsandthenotestothefinancialstatements.Includedbelowandonthefollowingpagesarethefinancialhighlights,summaryofcontributionstothestate,andsummaryresultsofoperationsforyearsendedJune30,2010,2009and2008.

Financial highlightsForfiscalyear2010,grossticketsalesagainsurpassed$1billiontotaling$1.421billionrepresentinga$128.2millionincreaseover2009.Totalrevenuesearnedforthestatewere$431million,whichrepresentedanincreaseof$19millionoverfiscalyear2009.Othersignificantfinancialhighlightsincludethefollowing:

• §18C-164(a)requirestheNCELtotransfernetproceedsfromoperationsandanyprioryearsurplustotheStateEducationLottery Fundfourtimesayear.Infiscalyear2010thesumtotalofthesefourcashtransferswas$419.5million,thelargestannualtotalforcash transfersinNCEL’shistory.Totalcashtransfersforfiscalyears2009and2008were$417.3millionand$350.9millionrespectively.• Welaunchedoursecondmulti-stategame,MegaMillionsonJanuary31st.• AwardedjackpotstotwomoreNorthCaroliniansinmulti-stateonlinegames,bringingthetotalnumberofjackpotwinnerstofour.• Awarded$1millionormoretoaNCELplayerforthe77thtime.• Thisyearweincreasedthenumberofretailersto6,267,representinga4%increaseovertheprioryear,andprovidedservicetoour retailersonaregularbasis.• Wecreated42newinstantscratch-offgamesandreleasedthemeverytwotofourweeks.

Overview of the Financial StatementsThisfinancialreportisdesignedtoinformthepublicandotherinterestedpartiesofthefinancialresultsoftheNCELandshowitsaccountabilityinmeetingthelegislatedmandatetogeneratefundstofurtherthegoalofprovidingenhancededucationalopportunities.Accordingly,thefocusofthefinancialstatementsisdeterminingfundsavailableforpaymenttotheState’sEducationLotteryFund.Itisimportanttonotethatmostfinancialstatementbalanceshaveadirectorindirectrelationshiptorevenue.Aslotterysalesincrease,theamountpaidtotheState’sEducationLotteryFundalsoincreases.Similarly,increasesinrevenuesgenerallyresultindirectincreasestocostofsalesincluding,butnotlimitedto,prizeexpense,retailercommissionexpenseandgamingsystemvendorcharges.

TheNCELisamajorenterprisefundoftheprimarygovernmentoftheStateofNorthCarolina.Thefinancialstatementswerepreparedontheaccrualbasisofaccountinginamannersimilartoaprivatebusinessentity.TheprincipaloperatingrevenuesoftheNCELaresalesoflotteryproductsbycontractedretailerstothegeneralplayingpublic.Operatingexpensesincludethecostofprizes,retailercommissions,gamingsystemvendorcharges,personnel,andotheradministrativeexpenses.

IncludedinthisreportaretheStatementsofNetAssetsasofJune30,2010and2009,theStatementsofRevenues,Expenses,andChangesinFundNetAssetsfortheperiodsendedJune30,2010and2009,andtheStatementsofCashFlowsfortheperiodsendedJune30,2010and2009.AsestablishedinHouseBill1023,Section18C-164,theNCELtransfersitsnetassetstotheOfficeofStateBudgetandManagement(OSBM)forcredittotheState’sEducationLotteryFund.EducationLotteryFundsaredistributedbyOSBMinthefollowingmanner:

“(1)Asumequaltofiftypercent(50%)tosupportreductionofclasssizeinearlygradestoclasssizeallotmentsnotexceeding1:18in ordertoeliminateachievementgapsandtosupportacademicprekindergartenprogramsforatriskfouryearoldswhowould otherwisenotbeservedinahigh-qualityeducationprograminordertohelpthosefour-year-oldsbeprepareddevelopmentally tosucceedinschool.(2) Asumequaltofortypercent(40%)tothePublicSchoolBuildingCapitalFundinaccordancewithG.S.115C-546.2.(3) Asumequaltotenpercent(10%)totheStateEducationalAssistanceAuthoritytofundcollegeanduniversityscholarshipsin accordancewithArticle35AofChapter115CoftheGeneralStatutes.”

Total AssetsTotalassetsattheendoffiscalyear2010were$82millioncomparedto$76millionattheendoffiscalyear2009,representinganincreaseof$6million.

Currentassetsdecreasedfrom$62millionin2009to$56millionin2010,representingadecreaseof$6million.ThisdeclineresultedfromadecreaseintheStateTreasurer’sSecurityLendingCollateral,moredetailedinformationcanbefoundinNote2Dinthefinancialstatements.Thedecreasewaspartiallyoffsetbyincreasesinaccountsreceivablein2010from2009.Thisprimarilyrepresentsamountsduefromretailersforsettle-mentofpacksofticketslesscommissionsandprizespaidbytheretailers.Theincreaseisessentiallyduetothetimingoftheendoftheaccountingweekforbillingandcollectionsfromourretailersatyearend.ElectronicFundsTransferisusedtocollectreceivablesweeklyfromretailerbankaccountsthataresetupintrustfortheNCEL.

Currentassetswerealsoaffectedbya$5.5millionincreaseincashandcashequivalentsanda$1.05millionincreaseininvestmentsinannuitycontracts.

Balance Balance Category July 1, 2009 Increases Decreases June 30, 2010

Capital assets, depreciable Furniture $ 29 $ - $ - $ 29 Equipment 2,606 529 (482) 2,653 Motorizedequipment 67 - - 67 Totalcapitalassets,depreciable 2,702 529 (482) 2,749 Less accumulated depreciation for: Furniture 18 5 - 23 Equipment 1,336 564 (465) 1,435 Motorizedequipment 38 14 - 52 Totalaccumulateddepreciation 1,392 583 (465) 1,510

Totalcapitalassets,depreciable,net 1,310 (54) (17) 1,239

Capital assets, net $ 1,310 $ (54 ) $ (17) $ 1,239

Current Long Term Beginning Earned used Ending Liability Portion $ 1,274 $ 1,135 $ 1,316 $ 1,093 $ 65 $ 1,028

26 27

Net Assets and Changes in Net AssetsAsrequiredintheLotteryAct,netrevenuesoftheNCELaretransferredquarterlytotheNCEducationLotteryFundattheOfficeofStateBudgetandManage-ment.Atyearend,NetRevenues/AssetsarezerofortheNCEL.TherearenochangesintheNetAssetsfromyeartoyear.

Currentliabilitiesconsistof“DuetoOtherFunds”intheamountof$18.1million.Thisamountrepresentstheremainingamountofthe“NetRevenues”forFiscalYear2010notyettransferredtotheStateofNorthCarolinaasofJune30,2010,butwillbetransferredtothestateduringFiscalYear2011.Alsoincluded,$45thousanddueotherstateagenciesforservicesprovidedtotheNCEL.AdditionalinformationontheDuetoOtherFundsisfoundinNote6Dtothefinancialstatements.

RevenuesOperatingrevenuesconsistofgrosssales,feesandlicenses.

SalesTotalgrosslotteryticketsalesforthefiscalyear2010wereapproximately$1.421billionascomparedto$1.293billioninfiscalyear2009.Thisrepresentsanincreaseofover$128millionfrom2009and$343millionover2008.

Grossinstantticketsalesincreasedsignificantlyduringfiscalyear2010to$855.6million,up$56.9millionoverfiscalyear2009and$217.7millionoverfiscalyear2008.The7.1%increaseoverfiscalyear2009realizedinfiscalyear2010isattributabletoseveralfactors.TheNCELlauncheditsfirst$20InstantScratch-offmegagame;$200MillionExtravaganza,withaprizepayoutof75%whichgeneratedover$150millioninsalesduringfiscalyear2010.TheNCELreleasedseveralverysuccessfullicensedgamesduringtheyear.TheWorldSeriesofPokerInstantScratch-Offwasin-troducedandprovidedplayersthechancetowinagrandprizetrippackageincludingaseatatthe2010WSOP®MainEvent.TheNCELlauncheditsPriceisRightInstantScratch-Offlicensedgame,whichawardedplayerstheopportunitytotraveltoLasVegasandplayinanun-televisedversionofthepopulargameshow.Inaddition,theNCELpartneredwithformerprofessionalwrestlerandNorthCarolinaiconRicFlairtoreleasethe“Woooo!”InstantScratch-Offgame,whichprovedtobeagreatsuccess.

On-linesalesduringfiscalyear2010grewto$566million,a$71.3millionincreaseoverfiscalyear2009anda$123.4millionincreaseoverfiscalyear2008.On-linesalesbenefitedfromfourjackpotsover$200millionforPowerballduringtheyear.ThelargestsinglesalesdayforPowerballwasAugust19,2009withsalesof$3.8million.TheNCELalsocommencedsellingMegaMillionticketsonJanuary31,2010,withtotalsalesof$25.9millionduring2010.TheCarolinaCash5topprizeexceeded$1millionforthefirsttimeinMarch,resultinginanincreaseinon-linesales.TheNCELlauncheditsnewestdailyonlinegame,CarolinaPick4lastyear,whichhadsalesof$15.8milliontotheendofthefiscalyear.WithCarolinaPick4inplacefortheentireyearin2010itssalesincreasedto$57.3million.

ThefollowingchartdepictsthedistributionofsalesbyproductforthefiscalyearsendingJune30,2010,2009and2008.

NonoperatingRevenuesconsistofinvestmentearningsfromtheShortTermInvestmentFundheldattheStateTreasurer’sOffice,Multi-StateLotteryAssociation(MUSL)dividendsreceived,andproceedsfromthesaleofstart-upandothermarketingmaterialstootherstatelotteries.

ExpensesSection18C-162,NCGeneralStatutesstipulatesnomorethan8%ofthetotalannualrevenuesshallbeallocatedforpaymentofexpensesoftheLottery.Advertisingexpensesshallnotexceed1%ofthetotalannualrevenues.

ThefollowingchartsshowthemajorcomponentsofNCELoperatingexpensesandtransfersasapercentageoftotalrevenuesfortheJune30,2010,2009and2008fiscalyears:

Note: Commissions percentage is calculated based on the percent of Sales (all others calculated based on percentage of Total Revenue) per G.S. 18c; therefore may not equal 100%.

$900,000,000

$800,000,000

$700,000,000

$600,000,000

$500,000,000

$400,000,000

$300,000,000

$200,000,000

$100,000,000

$-

Instant Powerball Mega Pick 3 Cash 5 Pick 4 Raffle Millions

Sales By Game FY 2008 to FY 2010 Comparison

FY 2008

FY 2009

FY 2010

Management’sDiscussion&Analysis-June30,2010&2009(continued)

Allocation of Expenses

FY 2010 FY 2009 FY 2008

28 29

CondensedStatementofNetAssets(inthousands) 2010 2009 2008

ASSETS TotalCurrentAssets $ 55,881 $ 62,068 $ 79,843NoncurrentAssets 26,246 13,728 5,864

TotalAssets 82,127 75,796 85,707 LIABILITIES TotalCurrentLiabilities 56,092 62,147 80,235NoncurrentLiabilities 26,035 13,649 5,472

TotalLiabilities 82,127 75,796 85,707 NET ASSETS InvestedinCapitalAssets 1,239 1,310 1,487unrestrictedNetAssets (1,239) (1,310) (1,487)

Total Net Assets $ - $ - $ -

Prizes,commissionsandgamingvendorchargesalldirectlyrelatetosales.Asexpected,assaleshaveincreasedsohavetheseexpenses.Infis-calyear2010totalgamingexpenseswhichconsistofprizes,retailercommissionsandgamingvendorcharges(gamingsystemservices)totaled$957millionascomparedto$843millionand$681millioninfiscalyears2009and2008respectively.Otheroperatingexpenses,whichconsistofadvertisingandmarketing,salaryandbenefits,professionalfees,rent,maintenance,baddebt,depreciationandgeneraladministrativeexpensesincreasedto$36.6millioninfiscalyear2010ascomparedto$34.1millionand$28.5millioninfiscalyear2009and2008respectively.Otheroperatingexpensesrepresented2.6%,2.7%and2.7%oftotaloperatingrevenuesinfiscalyears2010,2009and2008respectively.

Fromfiscalyear2008tofiscalyear2010,theNCELhasachievedyearoveryearincreasesinrevenuesandtransferstotheState.Thefollowinggraphdepictsthesetrends.

Budget and Economic OutlookOnJune16,2010,theCommissionapprovedtheFiscalYear2011budgetfortheNCELtoprovideaprojected$441milliontotheState’sEduca-tionLotteryFund.Thisprojectedbudgetisa5%increaseoverthefiscalyear2009budgetof$419millionfortransfertotheState’sEducationLotteryFund.TheNCELwillcontinuetomonitorthecurrenteconomicconditionsintheStateofNorthCarolina,anditsimpactonlotteryticketsales.AspertheGeneralAssemblyFiscalResearchDivision:“Thenationiscomingoutofthelongest,sustainedperiodofeconomiccontractionsincethedepressionofthe1930’s.Giventhelengthandseverityoftherecession,onemightexpectarobustrecoverysimilartowhatoccurredcomingoutofthe81-82recession(6%growth).Weareunlikelytoseethattypeofrobustexpansionanytimesoonbecauseofthestructuralproblemsthatsentusintoarecession;housingandfinancial,takemuchlongertocorrectandarehistoricallyfollowedbyamuchslower,prolongedrecoveryphases.”Also“Aquarter-over-quarterimprovementintheeconomyisexpected,albeitataslowrate.Duringthisphaseoftherecoverythecapacityoftheeconomytoabsorbanynewshocksregardlessoftheorigincouldcausethegrowthtostallandpossiblyleadtoanothercon-traction.”Therefore,theNCELhasconstructedaconservativebudgetandsalesforecastfortheupcomingfiscalyear.

AfocusoftheCommissionistoensuresoundoperations,andisapparentinauditsconductedbyoutsidefirms.TheCommissionhasundergoneseveralauditsthisfiscalyear.DelehantyConsultingLLC,anindependentsecurityorganization,conductedourthirdsecurityauditanddeterminedthatthecontrolsdesignedbytheNorthCarolinaEducationLotteryareadequateandoperatingasintended.

Forthefourthconsecutiveyear,theStateAuditorcontractedwithanoutsideCPAfirmtoconductthefiscalyearfinancialaudit,whichresultedinanunqualifiedopinion.

Requests for InformationAnyrequestforinformationaboutthisreportshouldbesenttothePublicInformationOfficerattheNorthCarolinaEducationLottery,2100YonkersRoad,Raleigh,NorthCarolina27604.

$1,600,000,000

$1,400,000,000

$1,200,000,000

$1,000,000,000

$800,000,000

$600,000,000

$400,000,000

$200,000,000

$-

FY 2008 FY 2009 FY2010

FY 2008 to FY 2010 Operating Revenues, Expenses, Net Revenues

& Unclaimed Prizes To The State

Operating Revenue

Prize Expense and Commissions

All Other Expenses

Net Revenues and Unclaimed Prizes to the State

Management’sDiscussion&Analysis-June30,2010&2009(continued)

CondensedStatementofrevenuesandExpenses(inthousands)

2010 2009 2008

Operating Revenues: GrossSales: $ 1,421,313 $ 1,293,111 $ 1,078,179 Less:PrizeTickets (1,309) (9,580) (29,733) Less:Sales/ServiceBadDebt (405) (91) (97) FeesandLicenses 4,859 4,663 4,782

Total Operating Revenues 1,424,458 1,288,103 1,053,131 Operating Expenses: GamingExpenses: LotteryPrizes 835,302 731,690 588,485 retailerCommissions 99,340 90,366 75,371 GamingSystemsServices 22,639 20,599 17,286

Total Gaming Expenses 957,281 842,655 681,142

OtherOperatingExpenses 36,608 34,135 28,504 Total Operating Expenses 993,889 876,790 709,646

Operating Income 430,569 411,313 343,485

Nonoperating Revenues (Expenses): InvestmentEarnings,Nonoperatingrevenue(Expense) andCompulsiveGamblingContribution 1,636 2,616 4,825 NetrevenuesandunclaimedprizestotheState (432,205) (413,929) (348,310)

Total Nonperating Revenue (Expenses) (430,569 ) (411,313 ) (343,485 )Net Income - - - Net Assets $ - $ - $ -

30 31

Statements of Net Assets (in thousands) - June 30, 2010 & 2009

2010 Restated 2009

ASSETS CurrentAssets: CashandCashEquivalents: Cash $ 96 $ 119 PooledCash 38,664 33,124 receivables: Accountsreceivable 6,648 4,919 Interestreceivable 110 138 InvestmentinAnnuityContracts 2,150 1,100 Inventory 209 293 PrepaidItemsandDeferredCharges 198 - StateTreasurer’sSecurityLendingCollateral 7,806 22,375 Total Current Assets 55,881 62,068 NoncurrentAssets: InvestmentinAnnuityContracts 25,007 12,418 CapitalAssets,Depreciable(Net): FurnitureandEquipment 2,749 2,702 AccumulatedDepreciation (1,510) (1,392) Total Capital Assets, Depreciable (Net) 1,239 1,310 Total Assets 82,127 75,796 LIABILITIES CurrentLiabilities: AccountsPayable 26,161 29,406 AccruedPayroll 379 332 OtherPayables 1,321 2,266 AnnuityPrizeAwardPayable 2,150 1,100 AccruedPaidTimeOff-Current 65 43 DuetoOtherFunds 18,127 6,625 ObligationsunderStateTreasurer’sSecurityLendingAgreements 7,889 22,375 Total Current Liabilities 56,092 62,147 NoncurrentLiabilities: AnnuityPrizeAwardPayable 25,007 12,418 AccruedPaidTimeOff 1,028 1,231 Total Liabilities 82,127 75,796 NET ASSETS InvestedinCapitalAssets 1,239 1,310 unrestrictedNetAssets (1,239) (1,310) Total Net Assets $ - $ - SeeNotestotheFinancialStatements.

Statements of Revenues, Expenses and Changes in Fund Net Assets (in thousands)

Years Ending June 30, 2010 & 2009

2010 2009

Operating Revenues: GrossSales $ 1,421,313 $ 1,293,111 Less:PrizeTickets (1,309) (9,580) Sales/ServiceBadDebt (405) (91) FeesandLicenses 4,859 4,663 Total Operating Revenues 1,424,458 1,288,103 Operating Expenses Salaries,Wages,andBenefits 15,299 14,694 LotteryPrizes 835,302 731,690 retailerCommissions 99,340 90,366 retailerIncentive 394 - GamingSystemsServices 22,639 20,599 Advertising 11,792 11,172 Marketing 2,239 1,751 OtherServices 3,555 2,975 Furniture,Fixtures,andEquipment 376 249 Depreciation 583 544 OtherGeneralandAdministrativeExpenses 2,370 2,750 Total Operating Expenses 993,889 876,790 Operating Income 430,569 411,313 Nonoperating Revenues (Expenses): InvestmentEarningsandOtherMiscellaneousrevenue 2,699 4,251 CompulsiveGamblingContribution (1,000) (1,000) unclaimedPrizestoNCEducationLotteryFund (14,894) (19,901) NetrevenuestotheStateofNC (417,311) (394,028) MiscellaneousNonoperatingExpenses (63) (635) TotalNonoperatingrevenues(Expense) (430,569) (411,313) NetIncome - - ChangeinNetAssets - - Net Assets Beginning, July 1 - - Net Assets Ending, June 30 $ - $ - SeeNotestotheFinancialStatements.

32 33

North Carolina Education LotteryNotesToFinancialStatements(inthousands)-June30,2010&2009

NOTE 1 - Organization

TheNorthCarolinaStateLotteryCommission[aka,NorthCarolinaEducationLottery(NCEL)]wascreatedwiththeenactmentofHouseBill1023effectiveAugust31,2005asanindependent,self-supporting,andrevenue-raisingagencyoftheStateofNorthCarolina(theState).TheNCELcommencedoperationsonMarch30,2006withthesaleofinstantscratch-offtickets.InMarch2006,theNCELjoinedtheMulti-StateLotteryAssociation(MUSL)composedofagroupofU.S.lotteriesthatcombinejointlytosellon-linePOWERBALLlotterytickets.POWERBALLsalesbeganonMay30,2006.Additionalon-linegameswereintroducedasfollows:

• CarolinaPick3onOctober6,2006.

• CarolinaCash5onOctober27,2006.

• CarolinaPick3seconddailydraw(MondaythroughSaturday)onMarch31,2008.

• CarolinaPick4onApril17,2009.

• MegaMillionsonJanuary31,2010.

ThepurposeoftheNCEListogeneratefundstofurtherthegoalofprovidingenhancededucationalopportunities,supportschoolconstruc-tion,andfundcollegeanduniversityscholarships.TheoperationsoftheNCELareoverseenbyaninemembercommission,fiveofwhomareappointedbytheGovernorandfourofwhomareappointedbytheGeneralAssembly.

NOTE 2 - Summary Of Significant Accounting Policies

A. Reporting Entity:Forfinancialreportingpurposes,theNorthCarolinaEducationLotteryisamajorenterprisefundoftheprimarygovernmentoftheStateofNorthCarolinaandisreportedassuchintheComprehensiveAnnualFinancialReport(CAFR)oftheState.ThesefinancialstatementsfortheNCELareseparateandapartfromthoseoftheStateofNorthCarolinaanddonotpresentthefinancialpositionoftheStatenorchangesintheState’sfinancialpositionandcashflows.

B. Basis of Presentation:Thefinancialstatementsarepreparedontheaccrualbasisofaccountinginamannersimilartoaprivateenterprise.TheNCELelectedtoapplyallapplicableGovernmentalAccountingStandardsBoard(GASB)pronouncementsaswellasFinancialAccountingStandardsBoard(FASB)pro-nouncementsandAccountingPrinciplesBoard(APB)opinionsissuedonorbeforeNovember30,1989,unlessthosepronouncementsconflictwithorcontradictGASBpronouncements.AspermittedbyGASBStatementNumber20,theNCELelectednottoapplyFASBstatementsorinterpretationsissuedonorafterNovember30,1989,unlessspecificallyadoptedbyGASB.

Asanenterprisefund,theNCELisaccountedforusingthe“economicresources”measurementfocus.Thismeansthatalltheassetsandliabilitiesrelatedtoitsoperationsareincludedonitsstatementofnetassets,anditsoperatingstatementincludesallrevenues(increases)andexpenses(decreases) intotalassets. TheNCELdistinguishesoperatingfromnon-operatingrevenuesandexpenses.OperatingrevenuesandexpensesgenerallyrelatetotheNCEL’sprimaryongoingoperationsofsellinglotteryticketsandredeemingprizes;allrevenuesandexpensesnotmeetingthisdefinitionarereportedasnon-operating.TheprincipaloperatingrevenuesoftheNCELarechargestoretailersforsalesoflotteryproducts.Thesignificantoperatingexpensesincludethecostofprizes,commissions,gamingsystemvendorcharges,personnel,andotheradministrativeexpenses.

C. Cash and Cash Equivalents:Cashandcashequivalentsincluderegionalofficedepositedoperatingfunds,imprestfunds,anddepositsheldbytheStateTreasurerintheStateTreasurer’sShortTermInvestmentportfolio.TheShortTermInvestmentportfoliomaintainedbytheStateTreasurerhasthegeneralcharacteristicsofademanddepositaccountinthatparticipantsmaydepositadditionalcashatanytimeandalsomaywithdrawcashatanytimewithoutpriornoticeorpenalty.

D. State Treasurer’s Securities Lending Collateral:WhiletheNCELdoesnotdirectlyengageinsecuritieslendingtransactions,itdepositscertainfundswiththeStateTreasurer’sShort-TermInvest-mentFundwhichparticipatesinsecuritieslendingactivities.BasedontheStateTreasurer’sallocationofthesetransactions,theNCELrecognizesitsallocableshareoftheassetsandliabilitiesrelatedtothesetransactionsontheaccompanyingfinancialstatementsas“StateTreasurer’sSecuri-tiesLendingCollateral”and“ObligationsUnderStateTreasurer’sSecuritiesLendingAgreements.”TheNCEL’sallocableshareoftheseassetsandliabilitiesisbasedontheNCEL’syearenddepositbalancepertheStateTreasurer’srecords.

BasedontheauthorityprovidedinGeneralStatutes147-69.3(e),theStateTreasurerlendssecuritiesfromitsinvestmentpoolstobrokers-dealersandotherentities(borrowers)forcollateralthatwillbereturnedforthesamesecuritiesinthefuture.TheTreasurer’ssecuritiescustodianmanagesthesecuritieslendingprogram.TheTreasurer’scustodianlentU.S.governmentandagencysecurities,GNMAs,corporatebondsandnotesforcollateral.TheTreasurer’scustodianispermittedtoreceivecash,U.S.governmentandagencysecurities,orirrevocablelettersofcreditascollateralforthesecuritieslent.

Statements of Cash Flows (in thousands) - Year Ended June 30, 2010 & 2009

2010 2009

CASh FLOWS FROM OPERATING ACTIVITIES receiptsfromCustomers $ 1,323,356 $ 1,206,591 PaymentstoEmployeesandFringeBenefits (15,432) (14,644) PaymentsforPrizes,BenefitsandClaims (839,959) (751,430) PaymentstovendorsandSuppliers (42,980) (37,688) Otherreceipts/Payments 13 8 Net Cash Flows Provided by Operating Activities 424,998 402,837 CASh uSED FOR NONCAPITAL FINANCING ACTIVITIES TransferstoStateEducationFund (419,465) (410,868) TransferstoOtherStateAgencies (1,000) (1,000) Total Cash used for Noncapital Financing Activities (420,465 ) (411,868 ) CASh uSED FOR CAPITAL AND RELATED FINANCING ACTIVITIES AcquisitionandConstructionofCapitalAssets (529) (367) ProceedsfromSaleofCapitalAssets 1 - Total Cash used for Capital and Related Financing Activities (528 ) (367 ) CASh PROVIDED FROM INVESTING ACTIVITIES InvestmentEarnings 1,512 3,886 TotalCashProvidedfromInvestingActivities 1,512 3,886 NetIncrease/(Decrease)inCashandCashEquivalents 5,517 (5,512) Cash and Cash Equivalents at Beginning of Year 33,243 38,755 Cash and Cash Equivalents at End of Year $ 38,760 $ 33,243 RECONCILIATION OF OPERATING INCOME TO NET CASh PROVIDED BY OPERATING ACTIVITIES OperatingIncome $ 430,569 $ 411,313 AdjustmentstoreconcileOperatingIncometoCashProvidedby OperatingActivities: DepreciationExpense 583 545 NonoperatingIncome-MuSLDividend 29 7 OtherNonoperatingIncome (16) 1 (Increase)DecreaseinAssets: Accountsreceivable (1,729) 8,809 Inventories 84 617 PrepaidItems (198) - Increase(Decrease)inLiabilities: AccountsPayable (4,157) (18,549) AccruedPayrollandrelatedLiabilities (134) 50 OtherLiabilities (33) 44 Total Cash Provided by Operating Activities $ 424,998 $ 402,837 NONCASh INVESTING, CAPITAL, AND FINANCING ACTIVITIES AssetsAcquiredthroughtheAssumptionofaLiability $ 34,964 $ 35,893 SeeNotestotheFinancialStatements.

34 35

Thecollateralisinitiallypledgedat102percentofthemarketvalueofthesecuritieslent,andadditionalcollateralisrequiredifitsvaluefallstolessthan100percentofthemarketvalueofthesecuritieslent.Therearenorestrictionsontheamountofloansthatcanbemade.SubstantiallyallsecurityloanscanbeterminatedondemandbyeithertheStateTreasurerortheborrower.

TheNCELwasinformedbytheNorthCarolinaOfficeofStateControllerthatanadjustmentwasneededtoinvestmentearningsasaresultofunrealizedlossesinsecuritieslendingcollateral.SecuritieslendingdisclosuresaredeterminedbyGASBStatement28.Duringfiscalyear2009,withtheinvestmentmarketsdownturn,situationsoccurredrelatedtosecuritieslendinginvestmentactivitythatresultedintheStateexperienc-ingunrealizedlossesontheinvestmentofcashcollateralreceivedforsecuritieslent.Thissituationhadneveroccurredpriortofiscalyear2009.ParticipantsinStateinvestmentpoolsbeartheriskofloss.Therefore,eachparticipanthasbeenallocatedashareofthefiscalyear2009unreal-izedloss,andashareofcurrentfiscalyear2010unrealizedloss.TheoverallneteffectofthetransactionswasrecordedasanadjustmenttoNetRevenuestotheStateofNorthCarolinaintheamountof$82.

AdditionaldetailsontheStateTreasurer’ssecuritieslendingprogramareincludedintheStateofNorthCarolina’sComprehensiveAnnualFinan-cialReport.AnelectronicversionofthisreportisavailablebyaccessingtheNorthCarolinaOfficeoftheStateController’sInternethomepagehttp://www.osc.nc.gov/andclickingon“FinancialReports,”orbycallingtheStateController’sFinancialReportingSectionat(919)981-5454.

E. Allowance for Doubtful Accounts:AnallowancefordoubtfulaccountshasnotbeenestablishedbecausetherearenoindicationsofsignificantdelinquenciesfromthecollectionofretaileraccountsasofJune30,2010and2009.

F. Capital Assets:TheNCELdefinescapitalassetsasassetswithaninitialunitcostof$5,000orgreaterandanestimatedusefullifeoftwoormoreyears.Thisdefi-nitionconformstothepolicyoftheNCOfficeofStateController.Depreciationiscomputedusingthestraight-linemethodovertheestimatedlivesoftheassets.TheNCELusesthehalfyearconvention.Whenassetsareretiredorotherwisedisposedof,thecostandrelatedaccumulateddepreciationwillberemovedfromthebooksandanyresultinggainorlossreflectedinoperationsoftheperiodofdisposal.Capitalassetsarecarriedatcostlessaccumulateddepreciation.Theestimatedusefullivesbygeneralcategoryareasfollows:

Category Years

Equipment 5-7

Furniture 5

ComputersandSoftware 3-5

G. Game Revenue Recognition:FortheNCEL’son-linegames,POWERBALL,MegaMillions,CarolinaCash5,CarolinaPick4,CarolinaPick3,andrafflesoffered,revenueisrecog-nizedatthetimeofsaleonadailybasis.Forinstantgames,revenueisrecognizedatthetimeapackofticketsissettled(SeeNote3A.1–GameRevenue).

h. Lottery Prize Expense Recognition:ForPOWERBALL,MegaMillions,CarolinaCash5,CarolinaPick4,CarolinaPick3,andforraffles,prizeexpenseisrecordedat50percentofsalesonadailybasis.Forinstantgames,prizeexpenseisaccruedbasedonthefinalproductionprizestructurepercentageprovidedbythegamingvendorforeachgameandrecordeddailyonvalueofpackssettled.Certaingamesincludefreetickets(prizetickets)whichentitletheholdertoexchangeoneinstantticketforanotherofequalvalue.Fortheinstantgameswithprizetickets,thefinalprizestructurepercentageusedisadjustedtoeliminatethevalueoftheprizetickets.Prizeexpenseformerchandiseprizesisrecognizedasprizesarefulfilled.

I. use of Estimates:Thepreparationoffinancialstatements inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericarequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesasofthedatesofthefinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiods.Actualresultscoulddifferfromthoseestimates.

NOTE 3 – Revenue

A. Operating Revenue:

1. Game Revenue:Instantpacksaresettledusingthefollowingmethodology: •Manuallybytheretailerinitiatingasettlement transactionviathegamingterminal. •Automaticallybythegamingsystem-twentyone (21)daysafterpackactivation. •Automaticallybythegamingsystem-oncethefifth(5th) packinaspecificgameisactivatedbyaretailer,theoldest activepackissettled.

Operating revenues are reduced by the value of prize tickets validated during a period.

2. Fees and Licenses:ThemajorityofFeesandLicensesrepresentaweeklyretailercommunicationfeechargedtoactiveretailersforterminalsatellitecommunicationsandanapplicationfeefornewretailersandchangesinownership.TotalFeesandLicensesfor2010and2009were$4,859and$4,663respectively.

B. Non-operating Revenue:ThecashaccountsoftheNCELareShort-termInvestmentFund(STIF)AccountswhichareinterestbearingaccountsheldwiththeNCStateTreasurer.InvestmentsarelimitedtothoseauthorizedfortheState’sGeneralFund,pursuanttoNCGeneralStatute147-69.1.Theinterestearnedonthesebalancesisrecordedasnon-operatingrevenue,andis$1,484,and$3,608fortheyearsendedJune30,2010and2009,respectively.TheallocableshareoftherevenuearisingfromtheStateTreasurer’sSecuritiesLendingCollateralprogramisincludedasinvestmentearnings.ThisalsoreflectsadividendfromMUSLof$29,and$7fortheyearsendedJune30,2010and2009,respectively.Theremaining$184,fortheyearendedJune30,2010ispredominatelycomprisedofsalesofmarketingandstartupmaterialstootherlotteries.Theremaining$1fortheyearendedJune30,2009iscomposedofmiscellaneousitems.Non-operatingrevenuesarenettedagainstnon-operatingexpenses,withtheexceptionofsecuritieslendingcollateralprogramtransactionsonthefinancialstatements.

NOTE 4 – Expenses

A. Operating Expenses:

1. Lottery Prize Expense: 2. Retailer Commissions:

3. Retailer IncentivesInfiscalyear2010,theLotteryCommissionapprovedaretailerincentiveprogramwhereretailerswouldreceivecompensationforsellingatoptierprizeorsecondtierprizeintheMulti-StategamesPOWERBALLandMegaMillionsandatoptierprizeinCarolinaCash5.Thetotalpaidintheretailerincentiveprograminfiscalyear2010was$394.

4. Other Services:Theprincipalexpensesincludedare:securityservices,backgroundchecks,communications,legalservices,travel,financialauditservices,networksupport,andcostsfortemporaryemployees.

NotesToFinancialStatements(inthousands)-June30,2010&2009(continued)

36 37

Prize Expense 2010 2009

Instant $ 546,911 $ 474,111On-line 273,497 237,67850%ofunclaimedprizes 14,894 19,901 Total $ 835,302 $ 731,690

Commissions 2010 2009

Instant $ 59,777 $55,788On-line 39,563 34,578 Total $ 99,340 $ 90,366

Game Revenue 2010 2009

Instant $ 855,566 $ 798,676LessPrizeTickets (1,309) (9,580)On-line 565,747 494,435Baddebtwriteoff (396) (86)Damagedtickets,Salesservices (9) (5)

Total $ 1,419,599 $ 1,283,440

2010 2009

Securityservices $ 11 $ 10Backgroundchecks 797 849Communications,includingwiring 1,328 1,032

Legalservices 42 14Travel 79 104Other 1,298 966

$ 3,555 $ 2,975

NotesToFinancialStatements(inthousands)-June30,2010&2009(continued)

5. Furniture, Fixtures, and Equipment:Tooperatealottery,numerousitemsofequipment,furniture,andticketdispensersarerequired.Mostoftheseitemswereonetimepurchasestobereplacedasneededatvariouspointsinthefuture.Theseitemswerealsobelowourthresholdforcapitalization(seeNote5E–CapitalAssets)andthereforeexpensed.Thetotalfortheseexpenseswas$376infiscalyear2010and$249infiscalyear2009.

6. Leases – Buildings, Offices and Other Equipment:TheNCELhasenteredintovariousoperatingleasesthroughtheNorthCarolinaStateDepartmentofAdministrationforbuildingandofficefacilities.Theseleasesareforinitialtermsofseventotenyears.Projectedleasepaymentsforthesefacilitiesare:

ThetotalspacerentalcostsfortheyearendedJune30,2010was$1,034and$858fortheyearendedJune30,2009respectively.TheNCELalsohasseveralcontractsforvariousequipmentleases.

B. Non-operating Expenses:TheallocableshareoftheexpensesarisingfromStateTreasurer’sSecuritiesLendingCollateralprogramtransactions,totaling$63and$635fortheyearsendedJune30,2010and2009respectively,arealsoincludedasnon-operatingexpense.Inaddition,foryearendedJune30,2010theNCELincurredanexpenseof$200totheInternalRevenueService(IRS)foranassessmentmadeunderIRCSection6651forthelatedepositofwithheldfederalincometax.Thisnon-operatingexpenseresultedfromanaccountingprocessingchangemadeinearly2008thatresultedinashortdelayinremittingwithheldincometaxtotheIRS.TheNCELiscurrentlyappealingthischarge.FortheyearendedJune30,2010,theremaining$16non-operatingexpenseresultedfromalossonasaleofpropertyandequipment.

C. Transfers Out:TherewerethreesignificanttransfersoutoftheNCEL.$1,000wastransferredtotheNCDepartmentofHealthandHumanServicesforagamblingaddictioneducationandtreatmentprogramasstipulatedintheNorthCarolinaLotteryActforyearsendedJune30,2010and2009(Note7D).

Thesecondtransferis$14,894and$19,901fortheyearsendedJune30,2010and2009,respectively,fromunclaimedprizesduringtheyear.TheNorthCarolinaStateLotteryActrequirestheNCELtotransfer“Fiftypercent(50%)”ofunclaimedprizestotheNCEducationLotteryFundeachyear(Note7C).

ThethirdtransferisincompliancewiththeNorthCarolinaStateLotteryAct.ThisActrequiresall“NetRevenues”oftheNCELtobetransferredtotheNCEducationLotteryFundfortheeducationalpurposessetforthinthelegislation.Ofthe$417,311and$394,028ofJune30,2010and2009“NetRevenues”(seeNote12),respectively,$398,015and$387,474respectively,wasactuallytransferredtotheNCEducationLotteryFund.TheremainingwasrecordedasapayabletotheState,butremainedintheNCEL.Theremaining$18,059and$6,554fortheyearsendedJune30,2010and2009,respectively,weretransferredsubsequenttoyear-end.NCGeneralStatute18Cstates:“ThefundsremainingintheNorthCarolinaStateLotteryFundafterreceiptofallrevenuestotheLotteryFundandafteraccrualofallobligationsoftheCommissionforprizesandexpensesshallbeconsideredtobethenetrevenuesoftheNorthCarolinaStateLotteryFund.”

NOTE 5 – Assets

A. Cash:ThecashandcashequivalentsbalancesatJune30,2010and2009includenoundepositedreceiptsonhand.

Unlessspecificallyexempt,theNCELisrequiredbyNorthCarolinaGeneralStatute147-77todepositmoneysreceivedwiththeStateTreasurerorwithadepositoryinstitutioninthenameoftheStateTreasurer.Exceptasnotedabove,allNCELfundsaredepositedwiththeStateTreasurer.TheNCELhasnodepositpolicyconcerningcreditrisk,asalldepositsareheldbytheStateTreasurer.

AtJune30,2010and2009,respectively,$38,664and$33,124oftheamountshownontheStatementofNetAssetsascashandcashequivalentsrepresentstheNCEL’sequitypositionintheStateTreasurer’sShort-TermInvestmentFund.TheShort-TermInvestmentFund(aportfoliowithintheStateTreasurer’sInvestmentPool,anexternalinvestmentpoolthatisnotregisteredwiththeSecuritiesandExchangeCommissionanddoesnothaveacreditrating)hadaweightedaveragematurityof1.6and1.8yearsasofJune30,2010and2009respectively.Assetsandsharesof

theShort-TermInvestmentFundarevaluedatamortizedcost,whichapproximatesfairvalue.DepositandinvestmentrisksassociatedwiththeStateTreasurer’sInvestmentPool(whichincludestheStateTreasurer’sShort-TermInvestmentFund)areincludedintheStateofNorthCarolina’sComprehensiveAnnualFinancialReport.Anelectronicversionofthisreport isavailablebyaccessingtheNorthCarolinaOfficeoftheStateController’sInternethomepagehttp://www.osc.nc.gov/andclickingon“FinancialReports”orbycallingtheStateController’sFinancialReportingSectionat(919)981-5454.

B. Accounts Receivable:AccountsReceivableprimarilyrepresentsamountsduefromretailersforsettlementofpacksofticketslesscommissionsandprizespaidbytheretailers.ElectronicFundsTransferisusedtocollectreceivablesweeklyfromretailerbankaccountsthatweresetupintrustfortheNCEL.

C. Inventory:InventoryfortheNCELconsistsofallmerchandiseprizesthatarepaidforbeforedistribution,inventoryisreducedasprizesarefulfilled.InventoryasofJune30,2010was$209,and$293asofJune30,2009,respectively.

D. Investment in Annuity Contracts:Investments inAnnuityContractsrepresentthepresentvalueofthecontractsthatfundthelongterminstallmentprizescontractedthroughinsurancecompanyannuities(SeeNote7B).Thecurrentandlongtermbalancesare$2,150and$25,007forfiscalyear2010and$1,100and$12,418forfiscalyear2009respectively.

E. Capital Assets:TheactivityforcapitalassetsfortheyearendedJune30,2010was:

TheactivityforcapitalassetsfortheyearendedJune30,2009was:

38 39

Year Ending Amount 2011 $ 1,065 2012 682 2013 699 2014 702 2015 713 2016-2020 751

Total $ 4,612

Balance Balance Category July 1, 2009 Increases Decreases June 30, 2010

Capital assets, depreciable Furniture $ 29 $ - $ - $ 29 Equipment 2,606 529 (482) 2,653 Motorizedequipment 67 - - 67 Totalcapitalassets,depreciable 2,702 529 (482) 2,749 Less accumulated depreciation for: Furniture 18 5 - 23 Equipment 1,336 564 (465) 1,435 Motorizedequipment 38 14 - 52 Totalaccumulateddepreciation 1,392 583 (465) 1,510

Totalcapitalassets,depreciable,net 1,310 (54) (17) 1,239

Capital assets, net $ 1,310 $ (54 ) $ (17 ) $ 1,239

Balance Balance Category July 1, 2008 Increases Decreases June 30, 2009

Capital assets, depreciable Furniture $ 29 $ - $ - $ 29 Equipment 2,239 367 - 2,606 Motorizedequipment 67 - - 67 Totalcapitalassets,depreciable 2,335 367 - 2,702 Less accumulated depreciation for: Furniture 11 7 - 18 Equipment 813 523 - 1,336 Motorizedequipment 24 14 - 38 Totalaccumulateddepreciation 848 544 - 1,392 Totalcapitalassets,depreciable,net 1,487 (177) - 1,310

Capital assets, net $ 1,487 $ (177 ) $ - $ 1,310

NotesToFinancialStatements(inthousands)-June30,2010&2009(continued)

Equipmentexpendituresfor2010includefiresuppressionsystems,threerandomnumbergeneratorsandanupgradedtelephonesystemintheregionaloffices.Equipmentexpendituresfor2009includeCarolinaPick4drawmachinesandanupgradedtelephonesystem.

NOTE 6 – Liabilities

A. Accounts Payable:Thisprimarilyrepresentstradepayablestovendors,prizeliabilities,andmultistategamelow-tierliability.Atyearend,June30,2010and2009,thebalanceswere:

B. Other Payables:ThisrepresentsamountsduetoMUSLof$1,181and$2,108fortheyearsendedJune30,2010and2009,respectivelyfortheNCEL’sshareofPOWERBALLandMegaMillionsjackpotprizes.Theremainderresultedfromfederalandstatewithholdingonprizepayments,andvariousclear-ingaccounts.

C. Annuity Prize Awards Payable:AnnuityPrizeawardspayablerepresentthepresentvalueofthecontractsthatfundthelongterminstallmentprizesthatareduetoNCELan-nuityprizewinners(SeeNote7B).Thecurrentandlongtermbalancesare$2,150and$25,007forfiscalyear2010and$1,100and$12,418forfiscalyear2009respectively.

Annuityactivityforbothshortandlongtermaccountsduringfiscalyear2010areasfollows:

D. Due to Other Funds:AsexplainedinNote4C,$18,059and$6,554fortheyearsendedJune30,2010and2009,respectively,representstheamountsofthe“NetRev-enues”and“50%ofUnclaimedPrizes”fortheyearnotyettransferredtotheStateasofJune30,butwillbetransferredtotheStatesubsequenttoyear-end.TheremainderisduetootherstateagenciesforservicesprovidedtotheNCEL.

E. Accrued Paid Time Off:Paidtimeoff(PTO)isprovidedtoemployeesforusewhenevervacation,sickleave,personalleaveorbereavementleaveisrequestedandap-proved.Underthispolicy,everycalendaryear,onJanuary1st,aspecificamountofPTOwillbecreditedtoDirector’sandabovePTOaccounts.Allotheremployees’PTOaccountswillbecreditedonamonthlybasisasearned.Employeesmustbeemployedatleastoneyeartoreceivepayforaccruedleavebalances.Directorsandabovewillbepaidoutaccruedleavebalancesuponseparationprovidedtheyhaveattainedaminimumofsix(6)months’serviceonthedateofseparation.

ActivityfortheyearendedJune30,2010:

ActivityfortheyearendedJune30,2009:

NOTE 7 – Other Important Items

A. Deposits with Multi-State Lottery Association (MuSL):MUSLisavoluntaryassociationcreatedforthepurposeofadministeringjoint,multi-jurisdictionallotterygames,suchasPOWERBALLandMegaMillions.ThroughJune30,2010,MUSLincludes31statelotteries,theDistrictofColumbiaandtheU.S.VirginIslands.ThechiefexecutiveofficerofeachmemberlotteryservesontheMUSLboardofdirectors.

AsamemberofMUSL,theNCELisrequiredtocontributetovariousprizereservefundsmaintainedbyMUSL.Thesecontributionsareincludedinthe50%prizeexpensecomputedonPOWERBALLandMegaMillionssales.Thenetamountofthe50%prizeexpenselesstheamountre-quiredtopaylow-tierprizeswithintheStateispaidtoMUSL.ThispaymentistocovertheNCEL’sshareofcurrentjackpotprizesbasedontheNCEL’spercentofsalesforeachdrawingandtheNCEL’sshareoftheprizereservefund.TheprizereservefundservesasacontingencyreservetoprotectallMUSLmembersincludingtheNCELfromunforeseenprizeliabilities.Allprizereservefundsremitted,andtherelatedinterestearn-ings,willbereturnedtotheNCELuponleavingMUSL,lessanyportionofunanticipatedprizeclaimswhichmayhavebeenpaidfromthefund.AsofJune30,2010and2009,theNCELhadbeencreditedwith$7,921and$6,906intheMUSLprizereservefunds.

B. Annuity Installment Prizes:TheNCELfundslongterminstallmentprizesthroughthepurchaseofinsurancecompanyannuities.Thecontractholderswillfundthefuturevalueoftheinstallmentprizeawardsoverthelifeoftheprizeawardedtotheplayer.TheNCELcurrentlyholdscontractswithMetLifeInsur-anceCompanyandPrudentialLifeInsuranceCompanytoprovidethesefutureprizeinstallmentpayments.ThefuturevalueoftheannuityprizesawardedasofJune30,2010is$39,300and$21,450asofJune30,2009.

C. unclaimed Prizes:AsofJune30,2010and2009,theNCELhadunclaimedprizesfrombothonlineandinstantgames.ThefirstPOWERBALLdrawaftertheNCELstartedsellingticketswasonMay31,2006,andtherefore,theNCELbeganrecognizingunclaimedprizesonNovember27,2006(180daysafterthefirstdraw).ThefirstCarolinaPick3unclaimedprizeswererecordedonApril4,2007andthefirstunclaimedprizesforCarolinaCash5wererecordedonApril25,2007.UnclaimedprizesforCarolinaPick4wererecordedonNovember14,2009.UnclaimedprizesforMegaMillionswerenotrecorded,sincetheendofthefiscalyearwaslessthan180daysafterthefirstdrawonFebruary2,2010.TheNCELclosedforty-sixinstantgamesduringthe2010fiscalyearresultingin$20,088inunclaimedprizes.

D. Compulsive Gambling Contribution:ByNorthCarolinaGeneralStatute theNCELmustmake“a transferof$1,000annually to theDepartmentofHealthandHumanServices(DHHS)forgamblingaddictioneducationandtreatmentprograms.”(SeeNote4C)

E. Limitations on Operating and Advertising Expenses:AsestablishedinNorthCarolinaGeneralStatute18C-162(a)(3);“Nomorethaneightpercent(8%)ofthetotalannualrevenues,asdescribedinthisChapter,shallbeallocatedforpaymentofexpensesoftheLottery.Advertisingexpensesshallnotexceedonepercent(1%)ofthetotalannualrevenues.”TheonepercentforadvertisingexpensesisincludedintheeightpercentmaximumforLotteryexpenses.Totalannualrevenuesincludeproceedsfromthesaleoflotterytickets,interestearnedbytheNCEL,andallotherfundscreditedtotheLotteryfromanysource.

40 41

Type Account 2010 2009

Tradepayablestovendors $ 5,103 $ 4,607 Instantprizeliability 4,278 8,987 Prizeliability-unusedunclaimedprizes 8,175 7,294 Multistategameslow-tierliability 4,098 3,449 Prizeliability–breakage 4,371 5,068 Prizeliability–rollover 133 - Other 3 1

Total accounts payable $ 26,161 $ 29,406

Beginning Balance Annuity Annuity Reclass to Ending Balance 7/1/09 Purchases Appreciation Disbursements Short Term 6/30/10 ShortTerm $ 1,100 $ - $ - $ (1,100) $ 2,150 $ 2,150 LongTerm 12,418 13,726 1,013 - (2,150) 25,007

Total Annuities $ 13,518 $ 13,726 $ 1,013 $ (1,100 ) $ - $ 27,157

Beginning Earned used Ending Current Liability Long Term Portion $1,152 $1,112 $990 $1,274 $43 $1,231

Game Type 2010 2009

Instant $ 20,088 $ 29,953Powerball 5,066 5,594CarolinaCash5 1,917 2,322CarolinaPick4 668 -CarolinaPick3 2,049 1,933raffle - - Total unclaimed prizes $ 29,788 $ 39,802

Beginning Earned used Ending Current Liability Long Term Portion $1,274 $1,135 $1,316 $1,093 $65 $1,028

NotesToFinancialStatements(inthousands)-June30,2010&2009(continued)

NOTE 8 – Risk Management

TheNCELisexposedtovariousrisksoflossrelatedtotorts;theftof,damageto,andthedestructionofassets;errorsandomissions;injuriestoemployees;andnaturaldisasters.TheNCELparticipatesintheState’sRiskManagementProgramforproperty,liability,crimeandautomobilecoverage,andpaysanannualpremiumforthiscoverage.TheLotteryhasnotexperiencedanylossesduringtheyearendedJune30,2010.

Thetypesofcoverage,limits,anddeductiblesasofJune30,2010aredescribedbelow(thefollowingchartisnotshowninthousands).

EmployeesandretireesareprovidedhealthcarecoveragebytheStateofNorthCarolina’sComprehensiveMajorMedicalPlan.Thisemployeebenefitplanisfundedbyemployerandemployeecontributions.

TheNorthCarolinaWorkers’CompensationProgramprovidesbenefitstoworkersinjuredonthejob.AllemployeesoftheStateareincludedintheprogram.Whenanemployeeisinjured,theNCEL’sprimaryresponsibilityistoarrangeforandprovidethenecessarytreatmentforworkrelatedinjury.TheStateisself-insuredforworkers’compensation.Athirdpartyadministratorprocessesworkers’compensationclaims.Stateagencies,includingtheNCEL,contributetoafundadministeredbytheOfficeoftheStateControllertocovertheirworkers’compensationclaims.ThethirdpartyadministratorreceivesapercaseadministrationfeeanddrawsdownStatefundstomakemedicalandindemnitypaymentsonbehalfoftheStateinaccordancewiththeNorthCarolinaWorkers’CompensationAct.

Termlifeinsuranceof$25to$50isprovidedtoeligibleemployees.Thisself-insureddeathbenefitprogramisadministeredbytheNorthCarolinaDepartmentoftheStateTreasurerandfundedviaemployercontributions.Theemployercontributionratewas.16%forthecurrentfiscalyear.

AdditionaldetailsonState-administeredriskmanagementprogramsaredisclosedintheStateofNorthCarolina’sComprehensiveAnnualFinan-cialReport.AnelectronicversionofthisreportisavailablebyaccessingtheNorthCarolinaOfficeoftheStateController’sInternethomepagehttp://www.osc.nc.gov/andclickingon“FinancialReports”orbycallingtheStateController’sFinancialReportingSectionat(919)981-5454.

NOTE 9 – Pension and Deferred Compensation Plans

A. Retirement Plan:Eachpermanentfull-timeemployee,asaconditionofemployment,isamemberoftheTeachers’andStateEmployees’RetirementSystem(TSERS)andisautomaticallyenrolledintheTeachers’andStateEmployees’RetirementSystem.

TheTeachers’andStateEmployees’RetirementSystemisacostsharingmultiple-employerdefinedbenefitpensionplanestablishedbytheStatetoprovidepensionbenefitsforemployeesoftheState,itscomponentunitsandlocalboardsofeducation.TheplanisadministeredbytheNorthCarolinaStateTreasurer.

BenefitandcontributionprovisionsfortheTeachers’andStateEmployees’RetirementSystemareestablishedbyNorthCarolinaGeneralStatutes135-5and135-8andmaybeamendedonlybytheNorthCarolinaGeneralAssembly.EmployerandmembercontributionratesareseteachyearbytheNorthCarolinaGeneralAssemblybasedonannualactuarialvaluations.

FortheyearsendingJune30,2010,2009and2008,respectively,theNCELhadatotalpayrollof$11,968,$11,696,and$10,862ofwhich$11,968,$11,240and$10,340wascoveredundertheTeachers’andStateEmployees’RetirementSystem.TotalemployerandemployeecontributionsforpensionbenefitsfortheyearendedJune30,2010,2009and2008were$1,143,$1,052and$805,respectively.Requiredemployercontribution

Type Coverage Limits ($) Deductible ($) Comments

Publicofficersandemployeeliability 1,000,000/10,000,000 Thefirst150,000/1,000,000per Stateisself-insuredupto$1,000,000; personispaidbytheCommission. excessupto$10,000,000is withaprivateinsurer.

Allrisk–propertycontents 4,244,182 5,000 Auto–liability 1,000,000perperson/ 10,000,000peraccident

Auto–comp/collision 29,470 50 Comp.deductible 100 Collisiondeductible

Theft,disappearance,destruction 250,000 2,500 Insidepremises

Theft,disappearance,destruction 50,000 2,500 Outsidepremises

Computerfraud 5,000,000 75,000 +10%over$75,000

Employeedishonesty 5,000,000 75,000 +10%over$75,000

Forgeryandalteration 100,000 2,500

robberyandsafeburglary 500,000 1,000 –money/securities

ratesfortheyearsendedJune30,2010,2009and2008,were3.57%,3.36%and3.05%,respectively,whileemployeecontributionswere6%eachyear.TheNCELmade100%ofitsannualrequiredcontributionsfortheyearsendedJune30,2010,2009,and2008,whichwere$425,$378and$313,respectively.

TheTeachers’andStateEmployees’RetirementSystem’sfinancialinformationisincludedintheStateofNorthCarolina’sComprehensiveAnnualFinancialReport.AnelectronicversionofthisreportisavailablebyaccessingtheNorthCarolinaOfficeoftheStateController’sInternethomepagehttp://www.osc.nc.gov/andclickingon“FinancialReports”,orbycallingtheStateController’sFinancialReportingSectionat(919)981-5454.

B. Supplemental Retirement Income Plan:IRCSection401(k)Plan–Allfull-timeemployeesareeligibletoenrollintheSupplementalRetirementIncomePlan,adefinedcontributionplan,createdunderInternalRevenueCodeSection401(k).Allcostsofadministeringtheplanaretheresponsibilityofplanparticipants.ThePlanisprovidedbyPrudentialRetirement,administeredbytheNCDepartmentoftheStateTreasurerandsponsoredbytheStateofNorthCarolina.TheeffectivedateofparticipationwasJanuary30,2006.Thevoluntarycontributionsbyemployeesamountedto$203,$206and$194fortheyearsendedJune30,2010,2009and2008,respectively.

C. Deferred Compensation Plan:IRCSection457Plan–TheStateofNorthCarolinaoffersitspermanentemployeesadeferredcompensationplancreatedinaccordancewithInternalRevenueCodeSection457throughtheNorthCarolinaPublicEmployeeDeferredCompensationPlan(the“Plan”).ThePlanpermitseachparticipatingemployeetodeferaportionofhisorhersalaryuntilfutureyears.Thedeferredcompensationisavailabletoemployeesuponseparationfromservice,death,disability,retirementorfinancialhardshipsifapprovedbytheBoardofTrusteesofthePlan.TheBoard,apartoftheNorthCarolinaDepartmentofStateTreasurer,maintainsaseparatefundfortheexclusivebenefitoftheparticipatingemployeesandtheirbeneficiaries,theNorthCarolinaPublicEmployeeDeferredCompensationTrustFund.TheBoardalsocontractswithanexternalthirdpartytoperformcertainadministrativerequirementsandtomanagethetrustfund’sassets.AllcostsofadministeringandfundingthePlanaretherespon-sibilityofthePlanparticipants.TheeffectivedateofparticipationwasJanuary30,2006.Thevoluntarycontributionsbyemployeesamountedto$134,$80and$67fortheyearsendedJune30,2010,2009and2008.

NOTE 10 – Other Postemployment Benefits

A. health Care for Long-Term Disability Beneficiaries and Retirees:TheNCELparticipatesintheComprehensiveMajorMedicalPlan(thePlan),acost-sharing,multiple-employerdefinedbenefithealthcareplanthatprovidespostemploymenthealthinsurancetoeligibleformeremployees.Eligibleformeremployeesincludelong-termdisabilitybeneficiariesoftheDisabilityIncomePlanofNorthCarolinaandretireesoftheTeachers’andStateEmployees’RetirementSystem.Coverageeligibilityvariesdependingonyearsofcontributorymembershipserviceintheretirementsystempriortodisabilityorretirement.

ThePlan’sbenefitandcontributionprovisionsareestablishedbyChapter135-7,Article1,andChapter135,Article3,oftheGeneralStatutesandmaybeamendedonlybytheNorthCarolinaGeneralAssembly.ThePlandoesnotprovideforautomaticpost-retirementbenefitincreases.

ByGeneralStatute,aRetireeHealthBenefitFund(theFund)hasbeenestablishedasafundinwhichaccumulatedcontributionsfromemployersandanyearningsonthosecontributionsshallbeusedtoprovidehealthbenefitstoretiredanddisabledemployeesandapplicablebeneficiaries.Bystatute,theFundisadministeredbytheBoardofTrusteesTeachers’andStateEmployees’RetirementSystemandcontributionstothefundareirrevocable.Alsobylaw,FundassetsarededicatedtoprovidingbenefitstoretiredanddisabledemployeesandapplicablebeneficiariesandarenotsubjecttotheclaimsofcreditorsoftheemployersmakingcontributionstotheFund.ContributionratestotheFund,whichareintendedtofinancebenefitsandadministrativeexpensesonapay-as-you-gobasis,aredeterminedbytheGeneralAssemblyintheAppropriationsBill.

For thecurrentfiscalyear theNCELcontributed4.5%of thecoveredpayrollunder theTeachers’andStateEmployees’RetirementSystem.RequiredcontributionratesfortheyearsendedJune30,2009and2008,were4.5%and4.1%,respectively.TheNCELmade100%ofitsannualrequiredcontributionstothePlanfortheyearsendedJune30,2010,2009,and2008,whichwere$539,$461,and$421,respectively.

TheNCELassumesnoliabilityforretireehealthcarebenefitsprovidedbytheprogramsotherthanitsrequiredcontribution.

Additional detailed information about these programs can be located in the State of North Carolina’s Comprehensive Annual FinancialReport.Anelectronicversionofthisreport isavailablebyaccessingtheNorthCarolinaOfficeoftheStateController’s Internethomepagehttp://www.osc.nc.gov/andclickingon“FinancialReports”,orbycallingtheStateController’sFinancialReportingSectionat(919)981-5454.

B. Long-Term Disability:TheNCELparticipatesintheDisabilityIncomePlanofNorthCarolina(DIPNC),acost-sharing,multiple-employerdefinedbenefitplan,toprovideshort-termandlong-termdisabilitybenefitstoeligiblemembersoftheTeachers’andStateEmployees’RetirementSystem.Benefitandcontribu-tionprovisionsareestablishedbyChapter135,Article6,oftheGeneralStatutes,andmaybeamendedonlybytheNorthCarolinaGeneralAssembly.Theplandoesnotprovideforautomaticpost-retirementbenefitincreases.

DisabilityincomebenefitsarefundedbyactuariallydeterminedemployercontributionsthatareestablishedintheAppropriationsBillbytheGen-eralAssembly.ForthefiscalyearendedJune30,2010,theNCELmadeastatutorycontributionof.52%ofcoveredpayrollundertheTeachers’and

42 43

NotesToFinancialStatements(inthousands)-June30,2010&2009(continued)

StateEmployees’RetirementSystemandtheOptionalRetirementProgramtotheDIPNC.RequiredcontributionratesfortheyearsendedJune30,2010,2009and2008were.52%,.52%and.52%,respectively.TheNCELmade100%ofitsannualrequiredcontributionstotheDIPNCfortheyearsendedJune30,2010,2009,and2008,whichwere$62,$58,and$54,respectively.TheNCELassumesnoliabilityforlong-termdisabilitybenefitsunderthePlanotherthanitscontribution.

Additional detailed information about the DIPNC is disclosed in the State of North Carolina’s ComprehensiveAnnual Financial Report.An electronic version of this report is available by accessing the North Carolina Office of the State Controller’s Internet home pagehttp://www.osc.nc.gov/andclickingon“FinancialReports”,orbycallingtheStateController’sFinancialReportingSectionat(919)981-5454.

NOTE 11 – Litigation

AsofJune30,2010,theNCELisnot,noranticipatesbeing,apartytoanylitigation.

NOTE 12 - Allocation Of Total Annual Revenues/Transfers To NC Education Lottery Fund

InaccordancewithSection§18C-162oftheNCELAct:Allocationofrevenues.

(a) TheCommissionshallallocaterevenuestotheNorthCarolinaStateLotteryFundinordertoincreaseandmaximizetheavailable revenuesforeducationpurposes,andtotheextentpracticable,shalladheretothefollowingguidelines: (1) Atleastfiftypercent(50%)ofthetotalannualrevenues,asdescribedinthisChapter,shallbereturnedtothepublicinthe formofprizes. (2) Atleastthirty-fivepercent(35%)ofthetotalannualrevenues,asdescribedinthisChapter,shallbetransferredasprovided inG.S.18C-164. (3) Nomorethaneightpercent(8%)ofthetotalannualrevenues,asdescribedinthisChapter,shallbeallocatedforpaymentof expensesoftheLottery.Advertisingexpensesshallnotexceedonepercent(1%)ofthetotalannualrevenues. (4) Nomorethansevenpercent(7%)ofthetotalannualrevenues,asdescribedinthisChapter,shallbeallocatedforcompensation paidtolotterygameretailers.

(b) TotheextentthattheexpensesoftheCommissionarelessthaneightpercent(8%)oftotalannualrevenues,theCommissionmay allocateanysurplusfunds: (1) Toincreaseprizepayments;or (2) Tothebenefitofthepublicpurposesasdescribedinthischapter.

(c) Unclaimedprizemoneyshallbeheldseparateandapartfromtheotherrevenuesandallocatedasfollows: (1) Fifty(50%)toenhanceprizesundersubdivision(a)(1)ofthissection. (2) Fifty(50%)totheEducationLotteryFundtobeallocatedinaccordancewithG.S. 18C-164(c).(2005-344,s.1;2005-276,s.31.1(r);2007-323,s.5.2(c).)

Additionally,inaccordancewithSection§18C142oftheNCELAct,Compensationforlotterygameretailers,“Theamountofcompensationpaidtolotterygameretailersfortheirsalesoflotteryticketsorsharesshallbesevenpercent(7%)oftheretailpriceoftheticketsorsharessoldforeachlotterygame.”§18C-161.TypesofincometotheNorthCarolinaStateLotteryFund.

(1) Allproceedsfromthesaleoflotteryticketsorshares. (2) Thefundsforinitialstart-upcostsprovidedbytheState. (3) AllotherfundscreditedorappropriatedtotheCommissionfromanysources. (4) InterestearnedbytheNorthCarolinaLotteryFund.

AsofSeptember30,2010theNCELtransferred$419.5million,$407.4millionand$344.8millionfortheyearsendedJune30,2010,2009and2008,respectively,totheNCEducationLotteryFund.AsexplainedinNote4C,$18.0million,$6.5millionand$3.5millionfortheyearsendedJune30,2010,2009and2008,respectively,istheamountofthe“NetRevenues”and“50%ofUnclaimedPrizes”fortheyearnotyettransferredtothestateasofJune30,butwillbetransferredduringthesubsequentfiscalyear.

NOTE 13 – Changes In Financial Accounting and Reporting

ForthefiscalyearendedJune30,2010,theNCELimplementedthefollowingpronouncementissuedbytheGovernmentalAccountingStandardsBoard(GASB):

GASBStatementNo.51,AccountingandFinancialReportingforIntangibleAssets.

GASBStatementNo.51providesneededguidanceregardinghowtoidentify,accountfor,andreportintangibleassets.ThisStatementrequiresthatallintangibleassetsnotspecificallyexcludedbyitsscopeprovisionsbeclassifiedascapitalassets.Accordingly,existingauthoritativeguidancerelatedtotheaccountingandfinancialreportingforcapitalassetsshouldbeappliedtotheseintangibleassets,asapplicable.Thispronouncementprovidesadditionalguidancethatspecificallyaddressestheuniquenatureofintangibleassets,including1)establishingaspecifiedconditionsap-proachtorecognizingintangibleassetsthatareinternallygenerated,2)providingguidanceonrecognizinginternallygeneratedcomputersoftware,and3)establishingspecificguidancefortheamortizationofintangibleassets.

NOTE 14 – Reclassifications and Restatements

Duringfiscalyear2010theNCELbeganreportingaliabilityforlongtermannuitywinners.Theliabilityfortheprizesisoffsetbyinvestmentsinannuitycontracts,whichfundthelongterminstallmentprizes.RestatementsofassetsandliabilitiesforyearendedJune30,2009wascompletedtoprovidethesameinformation.AdditionalinformationonthelongtermprizeliabilityandinvestmentscanbefoundinNotes5D,6C,and7B.

NOTE 15 – Subsequent Events

TheCommissionNCELhasevaluatedallsubsequenteventsforpotentialrecognitionanddisclosurethroughNovember1,2010thedatethesefinancialstatementswereavailabletobeissued.

44 45

2010

LotteryTicketSales $ 1,420,908 FeesandLicenses 4,859 InvestmentEarningsandOtherrevenues 2,699 TotalAnnualrevenue 1,428,466

LessPrizeTickets (1,309) 0% OfTotalAnnualRevenueTotalNetrevenue 1,427,157

PrizeExpense (835,302) 59% OfTotalAnnualRevenue

Advertising (11,792) 1% OfTotalAnnualRevenueAllOtherExpensesandTransfers (48,518) TotalSection18C-162.a.3 (60,310) 4% OfTotalAnnualRevenue

Commissions(per18C-142) (99,340) 7% OfLotteryTicketSales

unclaimedPrizestoTheStateofNorthCarolina 14,894 NetrevenuestoTheStateofNorthCarolina 417,311

Total Revenues to The State of North Carolina $ 432,205 30% Of Total Annual Revenue

2009

LotteryTicketSales $ 1,293,020 FeesandLicenses 4,663 InvestmentEarningsandOtherrevenues 4,251 TotalAnnualrevenue 1,301,934

LessPrizeTickets (9,580) 1% OfTotalAnnualRevenueTotalNetrevenue 1,292,354

PrizeExpense (731,690) 56% OfTotalAnnualRevenue

Advertising (11,172) 1% OfTotalAnnualRevenueAllOtherExpensesandTransfers (45,197) TotalSection18C-162.a.3 (56,369) 4% OfTotalAnnualRevenue

Commissions(per18C-142) (90,366) 7% OfLotteryTicketSales

unclaimedPrizestoTheStateofNorthCarolina 19,901 NetrevenuestoTheStateofNorthCarolina 394,028

Total Revenues to The State of North Carolina $ 413,929 32% Of Total Annual Revenue

OrDErINGINFORMATIONAuditreportsissuedbytheOfficeoftheStateAuditorcanbeobtainedfromthewebsiteatwww.ncauditor.net.Also,partiesmayregisteron thewebsite to receiveautomaticemail notificationwhenever reportsof interest are issued.Otherwise,copiesofauditreportsmaybeobtainedbycon-tactingthe:

Office of the State AuditorStateofNorthCarolina2SouthSalisburyStreet20601MailServiceCenterraleigh,NC27699-0601

Telephone: 919.807.7500Facsimile: 919.807.7647

600copiesofthispublicdocumentwereprintedatacostof$3,438.00or$5.73percopy.

Independent Auditors’ Report on Internal Control Over Financial Reporting and on Compliance and Other

Matters Based on an Audit of Financial Statements Performed in Accordance WithGovernment Auditing StandardsTo the CommissionersNorth Carolina Education LotteryRaleigh, North Carolina

We have audited the statements of net assets of the North Carolina Education Lottery (NCEL), a major enterprise fund of

the State of North Carolina as of June 30, 2010 and 2009, and the related statements of revenues, expenses, and changes

in fund net assets and cash flows for the years then ended, and have issued our report thereon dated November 9, 2010.

We conducted our audits 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.

The financial statements present only the NCEL and do not purport to, and do not, present fairly the financial position of the

State of North Carolina, as of and for the years ended June 30, 2010 and 2009, and the changes in its financial position and

its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of

America.

Internal Control over Financial ReportingIn planning and performing our audit, we considered the NCEL’s internal control over financial reporting as a basis for dsign-

ing our audit procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of

expressing an opinion on the effectiveness of the NCEL’s internal control over financial reporting. Accordingly, we do not

express an opinion on the effectiveness of the NCEL’s internal control over financial reporting.A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in

the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis.

A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable pos-

sibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a

timely basis.

Our consideration of the internal control over financial reporting was for the limited purpose described in the first paragraph

of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be defi-

ciencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over financial

reporting that we consider to be material weaknesses, as defined above.Compliance and Other MattersAs part of obtaining reasonable assurance about whether the NCEL’s financial statements are free of material misstatement,

we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncom-

pliance with which could have a direct and material effect on the determination of financial statement amounts. However,

providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not

express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required

to be reported under Government Auditing Standards.This report is intended solely for the information and use of management, the Commissioners, others within the organization,

and the State of North Carolina and is not intended to be and should not be used by anyone other than these specified parties.CHERRY, BEKAERT & HOLLAND, L.L.P.

Raleigh, North CarolinaNovember 9, 2010

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2100yonkersroadraleigh,NC27604

919.301.3300nc-educationlottery.org