(FORTUNE Magazine) – Back in the 1970s, when state governments began taking over one of the Mob's favorite rackets--the numbers--and turning the game into state-run lotteries, cynics (and moralists) foresaw new frontiers of decay. Not only would the vigorish on betting be the most regressive tax known to man, they argued, but the business of administering lotteries would be an invitation to public scandal. Big exclusive contracts? Small-time politicians and bureaucrats? Lobbyists? Anybody in here smell cheap cigar smoke?

Optimists, on the other hand, saw a chance to turn a centuries-old compulsion to a good end. State lotteries could be modernized, computerized, sanitized against rigging. Collections and payments could be less prone to misunderstanding. Even if the odds remained terrible, the money would fund government, not crime. With state-sanctioned outlets in convenience stores, the numbers game could be a bigger business than ever before.

Nearly two decades have passed, and there are 38 lotteries operating in the U.S. Which prediction was right?

As it turns out, both. More intriguing yet, both are embodied in a single company, based in Rhode Island, called Gtech. In its 15-year history, Gtech practically built the lottery business. It has 70% market share worldwide, 4,200 employees, and a stock that trades on the New York Stock Exchange. It handles everything from running a lottery's complex computer network to teaching store clerks how to run its terminals. When states crave more revenue from gambling, Gtech obliges, devising marketing campaigns and even coming up with new games to lure more bettors. No matter what you think of state-sponsored gambling, it is beyond dispute that Gtech has made the numbers game modern, efficient, and hugely lucrative.

And yet a four-month FORTUNE investigation vividly shows that the cynics were right too. Rare is the company that has faced as many allegations of baldly sleazy conduct as Gtech. Most recently, early this October, in a federal courtroom in Newark, New Jersey, the company's former national sales manager, 49-year-old J. David Smith, was convicted of orchestrating a kickback scheme using inflated payments to state-level political consultants. The conviction brought down a man who almost single-handedly led Gtech to its current position, even as the whiff of scandal seemed to follow his every step.

Well, maybe not single-handedly. For there was a second crucial figure at the same trial, a witness reluctantly testifying against his former protege. That was Gtech CEO Guy B. Snowden, 51. It was fitting that Smith and Snowden should be brought together under such circumstances. For it was Smith and Snowden, working hand in glove, who had perfected the backroom art of lottery politics: rewarding political friends, annihilating enemies, and crushing the competition. In the process they had made millions, but it had come at a steep price: one man's career and a company's reputation.

Guy Snowden got his first taste of the gaming business in the mid-1970s when he and a friend, Victor Markowicz, formed a tiny consulting firm to advise state lotteries. A gruff, heavyset man, Snowden was a college dropout who had worked as an engineer with IBM before striking out on his own. The lottery business was itself in its infancy, but Snowden and Markowicz saw that it was poised to explode: The nation's growing anti-tax sentiment would make lottery revenues irresistible to politicians. They also saw that no company was focused solely on the business of running lotteries. So in 1981, Snowden, Markowicz, and a third co-founder, Robert Stern--backed by the Texas Bass brothers and their moneyman, Richard Rainwater--founded Gtech and began chasing lottery contracts.

Right from the start, Snowden's personality dominated the company. Stern departed after Snowden whipped him in a boardroom power struggle; Markowicz happily limited his attentions to developing new lottery technology. Snowden was--and is--a brutish executive: "I've heard somebody say that Guy gives everybody at least one chance," remarks a longtime industry colleague. He is also notoriously inattentive to details, and that too has been reflected in the way Gtech is run. It does a terrible job of managing earnings, for instance, resulting in a surprisingly erratic stock price for such a dominant company. Snowden, however, has done just fine. During Smith's New Jersey trial, he testified that he had pocketed at least $45 million from selling Gtech stock. (He still holds 775,598 Gtech shares, 1.8%, worth another $24 million.) The Basses didn't fare too poorly either; when they and Rainwater cashed out of Gtech, an original $200,000 investment had ballooned into $40 million.

Gtech's growth depended entirely on winning and keeping lottery contracts, and Snowden was willing to spend, and do, whatever it took to get them. By 1987 there were 23 state lotteries, and Gtech had won contracts with nine of them, including California, the biggest startup yet.

From the beginning, two things about Gtech stood out. First, the company dazzled state lottery directors with its ability to set up lottery systems fast, to run them smoothly, and to help them extract the maximum amount of money from the public. Nobody could run a lottery better. Second, Gtech's relations with these same state lottery directors had a way of raising eyebrows. Early on, New York lottery director John Quinn took the extraordinary step of dividing his state's contract--held for years by Automated Wagering, a division of Control Data--and gave half of it to Gtech. Nine months later Quinn went to work for Gtech.

David Smith--who along with Snowden refused FORTUNE's requests for interviews--got his start in the gaming business a few years after the Gtech CEO, but almost immediately he found himself on the wrong side of the law. In August 1981, while co-owner of a Kentucky vending-machine company, Smith was charged with the felony offense of distributing illegal video-poker machines. (He plea-bargained the charge down to "possession of a gambling device," a misdemeanor.) An up-from-nothing resident of Morganfield, a town of 3,800 in western Kentucky coal country, Smith spent one month as director of purchasing for the state of Kentucky. He lost the job after his bosses learned about his gambling conviction, which Smith hadn't disclosed on his application. Eventually Smith landed a position as a salesman with a small lottery company. By then he had also developed the habit of inflating his resume, a pattern he carried on at Gtech, where he listed two degrees he hadn't earned and claimed to have held his state job from "1982-84."

With his butter-wouldn't-melt-in-his-mouth charm, his relentless Dale Carnegie enthusiasm, and his burning desire to get rich, Smith was almost a parody of the smooth-talking driven salesman. Starting in the mid-1980s, he began turning his charm on Snowden, calling him out of the blue to talk the Gtech CEO into hiring him. In July 1987, Snowden did just that, giving Smith an extraordinary deal. He would be the company's vice president for sales, with more than half the country as his territory. His sole job was to land those state lottery contracts. If Smith succeeded, his commission would run into the millions.

Looking back, it's not too much to say this was the watershed event for Gtech--and, in fact, for the entire lottery industry. Competitors would call what followed the "David Smith era." At the time of Smith's hiring, Gtech was one of a handful of lottery contractors--no more than the first among equals. When he left seven years later, with investigations swirling around him, Gtech had routed its competitors: The company had landed 26 of 37 U.S. contracts, as well as 41 of the 68 foreign lotteries. During Smith's New Jersey trial, Snowden testified that, in his opinion, his superstar salesman was directly responsible for 25 of those U.S. contracts. Smith had done exactly what Snowden had asked of him. Precisely how he'd done it was less certain.

What makes a state lottery contract such a coveted prize? Consider: a huge portion of the U.S. population now considers gambling just another aspect of daily life, even as state governments have become addicted to the money their lotteries bring in. Last year Americans spent $35 billion on lottery tickets, nearly triple what they spent on all forms of recorded music. And the lottery companies that win these contracts--exclusive contracts, usually running between five and ten years--get to pocket a few pennies of every dollar wagered. In Texas, Gtech's take for the five years it has handled its lottery--about 4 cents of every dollar bet--has totaled well over $400 million.

That's why, when a state contract comes up for bid, the stakes are always huge. Whenever Snowden and Smith got a chance to bid for a lottery contract, they would conduct a furious campaign. In pursuing the giant British lottery several years ago--a highly contentious fight that Gtech eventually won--Snowden was so caught up in the battle that he actually moved his family to London. He would freely authorize the spending of huge sums if he thought he could buy Gtech even the tiniest edge. In 1993 alone the company spent $11 million just on lobbyists and "business consultants." When Gtech was competing for the Texas state lottery in 1991, the company signed Entrecorp, the lobbying firm of former Texas lieutenant governor Ben Barnes, to an incredible contract providing for the payment of 4% of Gtech's annual Texas revenue--provided that Gtech won. (It did, and Gtech paid Entrecorp $3.2 million in 1993.)

Somebody was said to have the ear of a governor? He'd be retained by Gtech, often on the eve of bidding. A political contribution was needed to help a legislator see things from Gtech's point of view? Never a problem. Was a little wining and dining in order? Snowden would go all out. "We'd go to dinner with the lottery director and find out that Gtech had hired a yacht and taken out the whole goddamn legislature," recalls W. Hubert Plummer, the former president of Automated Wagering, Gtech's archrival. "It was like shooting your popgun, and they were firing a howitzer."

Leading the way for Snowden was his point man, David Smith. Smith hired the lobbyists, schmoozed the legislators, worked behind the scenes to gather political intelligence that would help Gtech. And he got results. Kansas, Kentucky, Wisconsin, Indiana, Idaho--within three years of Smith's arrival at Gtech, these states and others had decided to give their lottery business to the company.

With Smith grabbing contract after contract, Snowden didn't seem to worry about his star salesman's methods, even though everywhere Smith went, political controversy was never far behind. "Guy's never been a detail person," says Lou Burns, a former Gtech operations executive who now works at a California lottery company that competes with Gtech outside the U.S. "He's a person who sits up on the top and says, 'Part the waters,' and the minions go out and part the waters. David was like Moses to the Creator."

What mystified everyone was how Smith performed his miracles. There was never anything you could pin down precisely, yet strange things seemed to happen. Gtech would submit a bid that was far higher than its competitors' and still walk away with the contract. That happened in Georgia in 1993, when lottery director Rebecca Paul, an unabashed Smith fan, allowed Gtech, which had come in $50 million higher than Automated Wagering, to chop its price in a closed-door meeting. Though its bid was still $27 million more, Gtech got the business.

Or Gtech would win a contract with an unusually low bid, and then be handed--say, a year later--a "contract enhancement" sweetening the deal by tens of millions. That happened in Maryland in 1992, where Gtech's $94 million lottery contract was supplemented by a $49 million award to run a new statewide video lottery game called keno.

Even stranger was the way Gtech always seemed not only to have a line on what was going to happen before it happened--but, to a remarkable degree, to be able to influence events. Snowden and Gtech denied doing anything improper. But time and again, lottery officials who sided with Gtech saw good things happen to them--sometimes even a cushy job with the world's leading lottery vendor. Lottery officials who crossed the company, on the other hand, sometimes found themselves out of a job entirely.

That's what happened in Colorado, where in 1988 the lottery director--citing a state law barring the lottery from doing business with any company that had a corporate officer with a gambling conviction--tried to disqualify Gtech. The company handled the matter by having four friendly lottery directors and a former Kentucky governor write letters vouching for Smith; then, just before the bids were due, Gtech "demoted" him from vice president to national sales manager, meaning, of course, that he was no longer a corporate officer. And what happened to Colorado's lottery director? Under furious attack for "bias" against Gtech, she was discovered to have accepted trips and meals from a Gtech competitor. She lost her job.

Then there's the case of Arizona five years later, where lottery director Bruce Mayberry, insisting that Gtech was violating its contract, refused the company's request that he extend its contract for three years or give the company a higher rate. Mayberry, too, would end up being fired, allegedly at the behest of the company's chief lobbyist, the governor's former deputy chief of staff. Strangest of all, on two occasions during the controversy, Mayberry received two packages from Smith containing rotting mutton. Mayberry, who now works for Automated Wagering, says that he considered the packages a Godfather-style threat; Smith said he didn't realize the meat was spoiled.

And in California a Gtech lobbyist was captured on tape bragging that the state's lottery director was "our gal."

Twice, Gtech lobbyists were convicted of crimes and sentenced to jail. Both times the indictments had resulted from investigations involving their activities for Gtech. But in both cases their convictions were unrelated to Gtech work. Thus could the company routinely proclaim, as in its most recent annual report (despite three ongoing grand-jury investigations), that "no charges of wrongdoing have been brought against the company by any grand jury or other governmental authority." To the Wall Street Journal in 1993, Snowden protested further: "In all of those investigations, there's never been any instance of wrongdoing. This company is absolutely sterling."

The best place to really understand how Gtech and David Smith did their business was Smith's home state, Kentucky. Kentucky got into the state lottery game in 1989, when a political newcomer, millionaire businessman Wallace Wilkinson, rode the issue into the governor's mansion.

What was Smith's first move? He hired Wilkinson's former campaign manager, Danny Briscoe, as Gtech's lead lobbyist. The terms of Briscoe's contract stated that he would be paid $372,000 over the next five years--a tidy sum for a state capital lobbyist--but only if Gtech was awarded the lottery contract. Such contingency contracts were classic Gtech.

Alas, lottery director Frank Keener turned out not to be a friend of Gtech: he made his distaste for David Smith plain, and he also managed to bluff Gtech into lowering its bid by $500,000, even though Gtech was already the low bidder. In the by-now standard pattern, Keener soon fell out of favor and lost his job. He blames his firing on Gtech.

Keener's replacement, in November 1990, was a man named James Hosker. He was very much Gtech's friend. The former longtime head of the Massachusetts lottery--and a legend in the industry for his unmatched ability to entice citizens to buy lottery tickets--Hosker, then 60, was among those who had written letters on Smith's behalf back in 1988. ("As I came to know Dave and his wife, Karen, a valued personal relationship developed.") Smith described Hosker as his best friend in the business. Although Massachusetts did not do business with Gtech--the state ran its own lottery--Hosker had opened the door to that possibility toward the end of his tenure, initiating bidding on a multimillion-dollar computer contract. Although Hosker had publicly stated he planned to join a lottery contractor after he left state government, political criticism that the deal was wired for Gtech prompted him to tell reporters that he was dropping that plan.

But why Kentucky? Hosker was a longtime Massachusetts political insider who had even done polling for former Boston mayor Kevin White. Kentucky was a far smaller state, halfway across the country, where he had no personal ties.

The answer, according to a statement Briscoe later made to the FBI, passing on intelligence he had picked up, was that Hosker's move to Kentucky had been largely arranged by Gtech, which wanted to reward him with a job but was worried how it would look if Hosker went directly onto Gtech's payroll after the Massachusetts dustup. So it had been arranged for him to first go to Kentucky, where, as Briscoe put it, "he could also help Gtech." Sure enough, less than a year after his arrival, the new lottery director signed a contract revision sweetening Gtech's deal. Outside auditors later would conclude that the agreement paid Gtech $2.7 million a year too much. Perhaps more important, Hosker was in place when the detectives started crawling around Kentucky, looking for dirt on David Smith.

That's what it had come to in the lottery business by the early 1990s: detectives. By then it was clear that Automated Wagering was getting its clock cleaned. The Control Data subsidiary had always prided itself on taking the high road. But with the high road leading mainly to lost contracts, the company began hiring its own squad of lobbyists, enlisting its own political allies, and passing out stories detailing Gtech controversies in other states. Every state contract award triggered political outcries, endless appeals, and fierce litigation--the "lottery wars," insiders called it. But nothing seemed to work. "We were losing procurements," says Hubert Plummer, a New York attorney who became Automated Wagering's president in 1990, "for reasons I couldn't explain."

Plummer's desperate response was to hire a Washington, D.C.-based private detective named Philip R. Manuel. Fearing a mole inside his company, he had Manuel sweep Automated Wagering's offices for bugs. (Nothing turned up.) But Manuel's real task was to get the goods on Gtech. By the spring of 1991, Manuel was hiring local operatives around the country, including two retired state police detectives in Kentucky. Before they began, Manuel had one question: If the two men came up with something on Smith, did they have the connections to present the information to the U.S. Attorney? They said they did. Automated Wagering was thus reduced to pursuing the indictment of David Smith as a competitive business strategy.

Within months Hosker had smoked them out. Although Hosker did not yet know who the two detectives were working for, he had his suspicions--and he knew exactly what to do. First, he ordered his security chief, George Stewart, to pursue an investigation of the investigators--an investigation that would include checking their hotel phone records and tracing their license plates. Then he called Guy Snowden. A few weeks later, Hosker took Stewart with him on a trip to Boston. On the second day of the trip, according to Stewart, Hosker took him to an unannounced meeting, introduced him to a large man, and said, "I want you to tell Guy Snowden everything that's going on."

Around this time, Snowden hired a security expert to sweep his home and office for bugs--and Smith's as well. (These, too, turned up nothing.) He also brought in David Povich, a partner in the Washington, D.C., firm Williams & Connolly, who handled Gtech's most ticklish matters. Accompanied by Cynthia Nebergall, Gtech's general counsel, and Terry Lenzner, the former Watergate assistant prosecutor-turned-private-investigator, Povich flew to Louisville in a Gtech plane to meet with Stewart. Afterward, Stewart drove the delegation back to the airport. Hosker instructed him to keep in close contact with Povich. Stewart says he protested: "I feel like I'm working for Gtech here."

"You're not working for Gtech," he says Hosker snapped. "You're working for me."

Over the next few weeks, Stewart estimates that he spoke to Povich "at least 15 times" and even faxed the company's private attorney a written report on what he and his field investigator had learned. "I was under Hosker's orders to do whatever Povich wanted done," Stewart says. "If a couple of days went by and Povich hadn't heard from me, Hosker would be all over me and say, 'Call him right now.' " (Hosker declined to respond to FORTUNE's request for an interview. Gtech spokesman Robert Rendine said the presence of the two Kentucky operatives snooping around posed "a security risk" to the lottery that "naturally" prompted Hosker to alert the company.)

Meanwhile, Automated Wagering and Gtech were embroiled in yet another contract battle, this one in Texas, which had passed its own lottery referendum in November 1991. It was the "Super Bowl of lotteries," David Smith said, and both Gtech and Automated Wagering treated it as such. But Gtech had the better political connections, which included Ben Barnes. And it had by far the better bid, underpricing its competitor by more than 30% and even promising to launch the lottery months earlier, thereby boosting the state's first-year revenues by as much as $135 million. Gtech won the contract.

For Control Data, Texas was the last hurrah. Even before the award to Gtech was finalized, the company announced that it was selling its lottery division to a small Montana company called Video Lottery Technologies, a video-poker and slot-machine manufacturer. Hugh Plummer resigned. Manuel halted his investigation. And in May 1992, Gtech proudly announced its new Texas site director. It was James Hosker.

By early 1992, David Smith had begun making noises about leaving Gtech. Whether this was a serious threat or not, Snowden took it very seriously. He mollified his star employee with a handsome new contract. (Smith would earn more than $2 million in 1992.) Far more important was another provision--one that opened the door for Smith to pocket hundreds of thousands more. At the sales manager's insistence, the company exempted Smith from conflict-of-interest language that applied to everyone else at Gtech, allowing him to moonlight as a consultant.

Smith's contract took effect on July 1, 1992. The very next day, an incredible, secret side deal Smith had cut with Barnes's Entrecorp also went into effect. According to later court testimony, Entrecorp agreed to funnel to Smith one-third of its Gtech commissions, which were running more than $3 million a year.

Gtech attorney Povich, responding to a FORTUNE call to Barnes, characterized this as a legitimate business-consulting arrangement. No charges have been filed in Texas (see box, "More Trouble for Gtech"). But it was these kinds of so-called side deals that caused the feds to catch up with David Smith. In both Kentucky and New Jersey, Smith had cut deals similar to his agreement with Barnes, and in both states the government concluded that these deals were nothing more than kickbacks. It was this charge that Smith was convicted of in New Jersey this past October.

It's worth lingering a moment over these deals, and not just because they finally brought Smith down. There is something about them that is so absurdly brazen--and yet so absurdly small-time. And while Snowden would later claim to have little or no knowledge of Smith's deals, their incestuous nature seems of a piece with what we know about how Gtech operated. Say this for David Smith: He kept his kickbacks in the family.

Take, first, Smith's deal in Kentucky, where he did his business with a millionaire wheeler-dealer named Luther Rogers Wells Jr. How did he know Wells? Wells, a former top aide to Governor Wilkinson, had done a number of favors for Gtech and Smith. Wells had fired the state's first lottery director. Wells had pushed for the hiring of Hosker. The state lottery commission, packed with Wells allies, had rubber-stamped valuable contract enhancements for Gtech. And finally, it was Wells, according to the Louisville Courier-Journal, who had carried the papers to Wilkinson, granting on the administration's final day in office a full pardon to David Smith for his troublesome 1981 gambling conviction. It does not seem at all far-fetched to say that Smith owed Wells.

In early 1992, Wells incorporated a company called Bluegrass Industrial Distributors. The company would never be more than a legal shell, yet in October 1992 it started receiving money from Gtech, courtesy of David Smith.

Gtech's Kentucky site director, Janet Levine, later told prosecutors that Smith had instructed her to add an 8% "brokerage fee" to payments Gtech made to one of its printers--a fee that was to go to Bluegrass. Levine said that when she challenged the arrangement, which also involved filling out fake invoices, she was told that Snowden had approved it. (Gtech's Rendine denies Levine's account.)

But that was just the beginning. Wells had also agreed to turn over a percentage of his payments to Smith. But he didn't write the checks directly to the salesman. Instead, Smith had him write checks to a handful of Kentucky contractors--ditch diggers, carpenters, and the like--who did work on Wayward Wind, Smith's million-dollar horse farm. Smith then instructed the contractors to keep whatever he owed them and write a check to him for the balance. In all, Bluegrass received $70,000 from Gtech. Of that amount, $31,000 wound up back in Smith's hands through this back-door method.

Smith's "side deal" in New Jersey was virtually a carbon copy of his arrangement with Wells. This time it involved two low-level New Jersey political consultants named Stephen Dandrea and Joseph LaPorta, who co-owned a firm called Benchmark Enterprises Inc. Bit players in South Jersey, they appeared to have gotten Gtech's business because LaPorta was a cousin of Joe Salema, who was Governor Jim Florio's chief of staff (and would eventually plead guilty to federal corruption charges unrelated to Gtech). Although Gtech already had the state contract, the company wanted to extend its reach by introducing keno.

After arranging two meetings for Gtech, first with Salema, then with the state treasurer and other officials, the two men got a contract calling for them to receive $30,000 a month. Even though protests from antigambling groups eventually forced Florio to shelve keno, the payments began coming like clockwork. Again Smith insisted on a cut--and directed most of the payments to the contractors on his Kentucky horse farm.

A few months later Smith authorized a $10,000 monthly fee to a second Dandrea-LaPorta company, Sambuca Consultants. But with the keno plan dead, Gtech co-chairman Victor Markowicz began to question the Benchmark fees, second only to those paid to Barnes's Entrecorp. So Smith cut the original Benchmark retainer to $20,000 a month. At the same time, prosecutors say, he authorized another $10,000-a-month payment to Dandrea and LaPorta, funneled through a company owned by a friend of theirs. That brought the monthly total to $40,000. All told, the FBI would turn up a stunning $739,047 in Gtech fees to the two men--and $169,500 from them to Smith.

By the end of 1993, federal investigators had uncovered the strange circle of payments. They had subpoenaed thousands of pages of Gtech documents and Smith's Kentucky bank records. Smith, apparently fearful that Dandrea and LaPorta might squeal, demanded a meeting in New York City with Dandrea. After the consultant met Smith's train, according to a statement Dandrea later gave to the FBI, Smith abruptly stopped their taxi on the way to a Manhattan hotel, insisting they switch cabs. When they finally arrived, Smith led Dandrea to a public bathroom and frisked him. He was cursing at Dandrea, in a rage. You've been talking to the FBI! You're wearing a wire! Dandrea denied it. Up in the hotel room, Smith frisked Dandrea again--then looked inside his jacket and searched his briefcase.

Gtech soon fired LaPorta and Dandrea, which so angered the pair that they began talking to the FBI, apparently not realizing that they themselves were targets.

In early February 1994, Smith resigned, for what Gtech would later insist were solely personal reasons. "We have decided life is too short to spend every day concentrating on the lottery business," Smith wrote in a breezy farewell letter to industry friends--a letter that had actually been formally approved by Gtech as part of his 20-page exit agreement.

Eight months later prosecutors announced the indictment of Smith and Wells in Kentucky, and Smith, LaPorta, and Dandrea in New Jersey. The charges: commercial bribery, fraud, money laundering, and transporting stolen monies--in other words, a kickback scheme that victimized Smith's employer, Gtech.

By now you can probably guess how Gtech reacted to Smith's indictments. Outrage? Condemnation?A vow to conduct an internal investigation? Don't be silly. Smith had been Snowden's golden boy, and now Gtech and Snowden were determined to protect him. Or so their subsequent actions would strongly suggest.

For starters, the company has paid all of Smith's legal bills. While Gtech's Rendine claims it has no choice under the terms of his exit agreement, the language in that agreement is so ludicrously protective of Smith that it can hardly be characterized as an arm's-length transaction. And Gtech has regularly offered expressions of sympathy and support. ("Naturally," wrote Snowden to lottery directors across the country after Smith's indictment, "we hope that the charges against Mr. Smith prove untrue.")

And while Snowden has consistently denied involvement in Smith's side deals, he has also offered rationales for at least one of them--the one with Rogers Wells--and refused to criticize those he didn't know about. Finally, when Snowden has been forced to testify against Smith, he has done so with great reluctance. In Kentucky, for instance, Snowden took the Fifth Amendment when called before the grand jury. (Rendine claims it was because Snowden had not been given time to prepare; the prosecutors say that Snowden was served with a subpoena 25 days in advance.)

As a result, when the trial began early last year, the Kentucky prosecutor argued that the company had been victimized by the kickback scheme, but he never called Snowden or anyone else from Gtech's top ranks to testify against Smith. When the prosecution rested, Smith's lawyer didn't even offer a defense. He called for the judge to throw the case out of court, on the grounds that Gtech, the presumptive victim, wasn't complaining. The judge agreed. "It would have been fairer if this indictment had never been issued," he said.

"We're pleased," said Rendine after the verdict. As for Rogers Wells, who had been indicted--and then let off--along with Smith, he soon found his way back on Gtech's payroll. He is now the company's lead consultant in Georgia.

In the recent New Jersey trial, things went differently from the start. Assistant U.S. Attorney Kimberly Guadagno, realizing how difficult it would be to portray Gtech as a victim, shrewdly cast the company's shareholders as the real victims and cast Snowden as one of the heavies in the plot--the person, she strongly implied, who created the culture that allowed Gtech's prize employee to feel so free to break the law.

She also made a point of laying bare Gtech's seamy underbelly for the jurors--and everyone else--to see plainly. She did so, in no small part, by insisting that Snowden testify, and then treating him as if he were a witness for Smith rather than the prosecution. Under her questioning, Snowden conceded that Smith reported only to him, that Rogers Wells was still on Gtech's payroll, that he had put Smith's wife's company on retainer, and that he himself had personal business deals with Smith (oil wells and horses) and Barnes (real estate). He also testified that even after learning of Smith's side deals, he had done nothing about them. Throughout, Snowden was vague and equivocal. When it came time for closing arguments, prosecutors seemed to be pointing the finger as much at Snowden as Smith. Gtech hadn't complained, a prosecutor said, because "it is run by people like Guy Snowden, a man who wouldn't even meet with the prosecution before this case. Guy Snowden can't afford to have his friend and former sales manager convicted of kickbacks." This time the jury agreed with the feds. On October 4, after just six hours of deliberation, it convicted Smith of all 20 counts against him. Dandrea was also convicted, while LaPorta was acquitted. Despite Gtech's best efforts, the jury had found that David Smith had defrauded the company.

And what of Gtech's business during these long years of investigations and indictments and trials? Amazingly, it hasn't been hurt in the least. For better or worse, Gtech's business is stronger than ever.

There was a time, last year, when it looked as if Gtech was vulnerable, and Automated Wagering finally seemed ready to strike back at its longtime opponent. Bidding low and taking advantage of Gtech's soiled image, it snatched contracts away from Gtech in Arizona, Maryland, and Kentucky. But then it had to deliver on those contracts, and that's where its challenge foundered.

The key test came in Arizona last November. A Gtech court challenge had caused Automated Wagering to put off purchasing new equipment required under the contract. As a result of the lengthy delay and buggy new software, the launch was a disaster: In the first eight days of operation, Automated Wagering's instant-ticket validation system was down more than half the time, and a third of all the terminals couldn't talk to the lottery's central computer. In March, Automated Wagering downloaded software to fix many of the bugs, and crashed the entire system. On and on the problems dragged.

And there was Gtech, waiting in the wings. On May 17 the Arizona lottery officially informed Automated Wagering that it was terminating its five-year online contract--a step never before taken against a vendor. The state awarded a one-year emergency contract to Gtech. Naturally, Gtech took over without a hitch.

Of course, that's always been the thing about Gtech. However questionable its methods in landing lottery contracts, it runs those lotteries with tremendous skill. Its problem has always been that it never seemed to trust that skill alone was enough.

Even now controversy continues to dog Gtech. Last year, after the bruising battle to land England's national lottery, Richard Branson, the flamboyant British entrepreneur whose consortium had been competing against a team led by Gtech, claimed that Snowden had tried to bribe him to drop out of the race. Snowden denied the charge, and he and Branson have since traded lawsuits. The Gtech consortium, which won the contract--the largest in the world--now runs the British lottery with its usual cool efficiency.

In the aftermath of the Arizona fiasco, Maryland stuck by Automated Wagering, but Kentucky has parted ways with the company. Despite a scathing auditor's report that resulted in the resignation of the entire state lottery commission, Kentucky concluded that it has no choice but to do business with Gtech. Other states are in the same position, and it is beginning to cost them. In New Mexico, where Gtech was the only bidder, the company was able to submit a bid millions higher than if it had faced real competition. In Rhode Island, Gtech's uncontested bid for a new contract will cost $1 million more than the state's current deal with the company.

Automated Wagering, meanwhile, is on the block again. It has stopped bidding for new business. It is down to seven U.S. contracts, compared with Gtech's 28. (Gtech also now has 48 contracts abroad.) The only state where Automated Wagering is making a concerted procurement effort right now is Florida--where it already has the lottery contract, and where it faces a typically tough Gtech challenge.

As for David Smith, his lawyer says he'll appeal. But Guadagno insists that her grand-jury investigation is not over yet, and she's now clearly taking aim at Gtech. It seems plausible that she'll try to get Smith, who is facing millions in fines and a minimum of 33 months in jail, to become a government witness against Gtech. Smith's family complained to a FORTUNE reporter during the trial that he was merely a sacrificial lamb in the government's crusade to nail the company.

"They've taken everything," Smith's 25-year-old son, Chad, told FORTUNE after the verdict had been announced, speaking tearfully of his father's future. "He was thinking of going back. Gtech had asked him to go back and work for them after all of this was over."

REPORTER ASSOCIATE Shaifali Puri