The lottery began selling tickets in March 2006 and has generated more than $500 million for state education programs and school construction from a portion of ticket revenues.

Two of the panel's three judges rejected arguments from taxpayers and others who sued the state and elected officials, arguing that illegal methods were used by House and Senate leaders to approve the lottery legislation in 2005. But a third judge sided with the plaintiffs.

The divided court allows the plaintiffs to request an automatic appeal to the state Supreme Court, and their attorney indicated Tuesday that a request would be made.

''We live to fight another day,'' said Bob Orr, a former Supreme Court justice and current Republican gubernatorial candidate who represents taxpayers and two conservative groups in the lawsuit. Liberal groups also were among the plaintiffs.

The lottery began selling tickets in March 2006 and has generated more than $500 million for state education programs and school construction from a portion of ticket revenues.

The plaintiffs argued that each chamber should have voted twice on separate days as required by the state constitution for bills that generate money for the state. Instead, the House and Senate voted once and narrowly approved the creation of the North Carolina Education Lottery.

The lottery legislation didn't fall under those constitutional rules partly because playing the lottery isn't required by state law, unlike paying state taxes, Judge Jim Wynn wrote in the majority opinion. Judge Bob Hunter concurred.

The state constitution dictates that the House and Senate must have two votes on separate days to approve bills that impose a tax, raise money on the state's credit or pledge the state to repay any debt.

Hunter and Wynn agreed that none of those three elements applied to the lottery bill. Wynn compared purchasing lottery tickets to motorists paying to use a toll road, since both create revenue for the state but aren't required of taxpayers.

''Unlike the compulsory nature of a tax, a toll and participation in the lottery are activities freely undertaken by citizens of their own volition,'' Wynn wrote in the majority opinion.

Also, lottery players are not guaranteed to receive payment, such as what a bond provides. And the North Carolina State Lottery Commission, not the state itself, is responsible for paying any prizes, Wynn said.

In her dissent, Judge Ann Marie Calabria wrote that the lottery legislation didn't contain language preventing the state from paying off debts incurred by the lottery. The General Assembly didn't approve the legislation legally because the lottery generates revenue for a state education fund, she said.

''The revenues raised are not incidental to the game nor reasonably related to the maintenance and operation of the game, but are central to the game's purpose; therefore the revenues from the lottery are taxes,'' she wrote.

Calabria said lawmakers should be forced to revote on the lottery if it chooses to keep the games operating. But she said the revenues already generated for public education don't need to be returned or refunded.

The House approved the lottery bill by a vote of 61-59 on April 6, 2005. The Senate's vote on August 30 was 24-24, but Lt. Gov. Beverly Perdue, a Democrat now running for governor, voted to break the tie.

''I thought that what we did was proper so I'm delighted that the court says that they agree,'' said Sen. Tony Rand, D-Cumberland, the Senate Rules Committee chairman. Tom Shaheen, the lottery's executive director, added: ''We are pleased with the decision so we are able to continue raising money for education.''

Gov. Mike Easley signed the bill into law a day later. North Carolina was the last state on the East Coast to have a lottery.