<PAGE>   1
                                                                    EXHIBIT 10.1



                         SEVERANCE AGREEMENT AND RELEASE

       This SEVERANCE AGREEMENT AND RELEASE ("Agreement") is made as of the 5th
day of July, 2000, by and among GTECH Holdings Corporation, GTECH Corporation
(together with their respective direct and indirect subsidiaries and affiliates
and any of their respective officers, directors or employees (collectively
"GTECH" or the "Company") and William Y. O'Connor ("Mr. O'Connor").

                                   WITNESSETH:

       WHEREAS, the parties have agreed that it is in their mutual best interest
that Mr. O'Connor and GTECH sever their relationship; and

       WHEREAS, the parties wish to set forth their agreement respecting the
terms and conditions thereof.

       NOW, THEREFORE, the parties hereby agree as follows:

1.     Termination of Employment. It is hereby agreed that Mr. O'Connor's
       employment terminates effective July 5, 2000 (the "Termination Date"),
       and as of the Termination Date Mr. O'Connor shall no longer serve: (a) as
       an employee, director and Chairman of the Board of Directors of GTECH
       Holdings Corporation; (b) as an employee, director and Chairman of the
       Board of Directors of GTECH Corporation, and (c) as an employee, officer
       and director of all direct and indirect subsidiaries and other affiliates
       of GTECH Holdings Corporation.

2.     Severance Payment. (a) GTECH shall make to Mr. O'Connor a lump sum
       payment with respect to post-employment severance of $8,748,785 (before
       deduction of any tax withholdings) immediately after this Agreement
       becomes effective in accordance with Section 19 below.

       (b) This payment and the other benefits provided for in this Agreement
       constitute the entire obligation of GTECH, represent full and complete
       satisfaction by GTECH of all obligations under that certain Employment
       Agreement dated as of September 19, 1997, as amended or clarified (the
       "Employment Agreement"), and constitute full and complete settlement of
       any claim under law or equity that Mr. O'Connor might otherwise assert
       against GTECH for compensation, benefits or remuneration of any form.

3.     Benefits. From and after the Termination Date, Mr. O'Connor shall not be
       eligible for any GTECH benefits or perquisites, and shall no longer be
       eligible to participate in any GTECH benefit program or plan, except as
       expressly set forth below:

       a. GTECH shall (i) for a period of three years following the Termination
       Date, or until Mr. O'Connor's earlier death, continue, at its expense, to
       provide Mr. O'Connor with the term life insurance policy in accordance
       with the policy requirements provided for in Section 6(b) of the
       Employment Agreement (or if higher the amount in effect as of the

<PAGE>   2

       Termination Date) ("Life Insurance Coverage"), (ii) for a period of
       eighteen months following the Termination Date but in no circumstances
       commencing not later than one year after the Termination Date, provide
       Mr. O'Connor with out placement services through a bona fide out
       placement organization acceptable to Mr. O'Connor that, at a minimum,
       agrees to supply Mr. O'Connor with out placement counseling, a private
       office and administrative support, including telephone service, and (iii)
       for a period of six years following the Termination Date, or until Mr.
       O'Connor's earlier death, continue to provide the medical (including
       dental, orthodontic and optical) coverage specified in Section 4 of
       Appendix B of the Employment Agreement ("Medical Coverage") and on the
       terms and conditions so specified at substantially the same level as
       provided to Mr. O'Connor and his spouse, and his dependents, as of the
       Termination Date. Thereafter, Mr. O'Connor shall be entitled to whatever
       medical coverage, if any, as is required to be provided by applicable
       law.

       b. Mr. O'Connor will become fully vested in the GTECH's Supplemental
       Retirement Plan for Senior Executives ("SERP") in existence as of the
       date hereof and in any other non-qualified, deferred compensation,
       incentive compensation or retirement plan currently in effect (together
       with the SERP, the "non-qualified Plans"). Within 30 days after the
       Termination Date, GTECH shall pay to Mr. O'Connor the sum of (i) the
       present value of all benefits accrued under the Non-qualified Plans (as
       supplemented by any early retirement subsidies), using such actuarial
       assumptions as are then used to fund GTECH's tax-qualified defined
       benefit pension plan (or, if there is no such plan, such actuarial
       factors as would reasonably be used by comparable companies in funding
       defined benefit pension plans (but including, in all events, an interest
       rate no greater than the rate that would then be used by the Pension
       Benefit Guaranty Corporation to value immediate annuities upon plan
       termination)), and (ii) an amount equal to three times the average
       benefit accrued (in the case of plans providing for accruals of
       identified future benefits) and GTECH contributions (in the case of other
       plans) made to GTECH's tax-qualified defined benefit plan and
       profit-sharing and 401(k) retirement plan and the Non-qualified Plans
       over the previous three fiscal years (as supplemental by, in the case of
       accrued benefits, any early retirement subsidies). GTECH shall also pay
       to Mr. O'Connor (i) any amount in Mr. O'Connor's account under GTECH's
       profit sharing and 401(k) plan forfeited by the Mr. O'Connor due to the
       termination of his employment, and (ii) the present value of any accrued
       benefit (as supplemented by any early retirement subsidies) under any
       defined benefit plan of GTECH forfeited by Mr. O'Connor due to the
       termination of his employment, determined using such actuarial
       assumptions as are then used to fund such plan.

       c. To the extent not otherwise addressed herein, Mr. O'Connor shall
       receive the full benefit of all tax gross-ups provided for under the
       Employment Agreement for benefits in effect up to and through, or which
       continue after the Termination Date and any payments hereunder in respect
       of benefits subject to a gross-up obligation under the Employment
       Agreement that would have continued after the Termination Date, without
       duplication of any such gross-up obligation for any benefits.


<PAGE>   3

       d. GTECH shall also bear the expense of : (i) tax preparation services
       for Mr. O'Connor for the 2000 calendar year and (ii) reasonable
       attorneys' fees incurred by Mr. O'Connor in the negotiation and
       preparation of this Agreement. In addition, GTECH shall reimburse Mr.
       O'Connor for all reasonable and necessary business expenses incurred but
       not yet reimbursed up through the Termination Date and GTECH shall be
       responsible for the costs of the country club, health club and spa
       memberships and payments with respect to the automobile which the Company
       had been covering until the Termination Date, after which time those
       expenses shall be the exclusive responsibility of Mr. O'Connor.

       e. In the event that Mr. O'Connor secures other employment (including
       employment as a consultant) during the period in which the Company is
       obligated to continue Life Insurance Coverage and/or Medical Coverage
       under subsection (a) above as applicable, GTECH may offset such
       obligations by any Life Insurance Coverage or Medical Coverage which Mr.
       O'Connor receives during the applicable continuation period from a
       successor employer, so long as the aggregate coverage (from GTECH and the
       successor employer) is no less than the aggregate coverage provided by
       GTECH as of the Termination Date; provided that nothing contained herein
       shall limit any continuation of coverage required by law. Mr. O'Connor
       shall notify the Company promptly of his securing of any such employment
       (including employment as a consultant).

       f. Mr. O'Connor shall be indemnified by the Company in connection with
       his performance of services under his Employment Agreement and the
       termination of his employment at the maximum level permitted by law. The
       Company shall cause Mr. O'Connor to continue to be covered by directors
       and officers liability insurance substantially similar to that provided
       to the Company's directors and officers, but in no event shall such
       liability insurance provide less than $20,000,000 of coverage for such
       directors and officers, including Mr. O'Connor. The Company shall
       continue to indemnify Mr. O'Connor as provided above, and maintain such
       liability insurance with coverage for Mr. O'Connor, for any claims that
       may be made against Mr. O'Connor with respect to his service as a
       director or officer of the Company for claims arising out of conduct on
       or before the Termination Date.

4.     Continuing Obligations. Mr. O'Connor further covenants with GTECH as
       follows:

       a. For a period of three years after the Termination Date, Mr. O'Connor,
       upon reasonable notice, shall furnish such information and proper
       assistance to the Company as may reasonably be required in connection
       with any third party claims, investigations, litigation or similar
       proceedings which may involve the Company with respect to the period of
       Mr. O'Connor's employment with the Company. If such information or
       assistance is required, Mr. O'Connor shall be reimbursed by the Company
       for any and all reasonable expenses incurred by him in providing such
       information and assistance and shall be compensated by the Company at a
       reasonable hourly rate to be agreed upon by the parties for the time he
       spends providing such information and assistance.

       b. Mr. O'Connor shall not knowingly use for his own benefit or disclose
       or reveal to any unauthorized person any trade secret or other
       confidential information relating to the Company, including any customer
       lists, customer needs, price and performance

<PAGE>   4

       information, processes, specifications, hardware, software, firmware,
       programs, devices supply sources and characteristics, business
       opportunities, marketing, promotional, pricing and financing techniques,
       or other information relating to the business of the Company, provided
       that such restriction on additional information shall not apply to
       information which is (i) proven to be generally available in the
       industry, (ii) disclosed in published literature or (iii) obtained by Mr.
       O'Connor after the Termination Date from a third party without binder of
       secrecy. Mr. O'Connor agrees that, except as otherwise agreed by the
       Company, he will return to the Company, within seven days after the
       Termination Date, any physical embodiment of such confidential
       information, except that in any event Mr. O'Connor may retain his
       rolodex.

       c. All rights, title and interest in and to any ideas, inventions,
       technology, processes, know-how, works hardware, software, firmware,
       programs, devices, trade secrets, trade names, trademarks or service
       marks, which Mr. O'Connor may have conceived, created, organized,
       prepared or produced during the period of his employment with the Company
       and which relate to the business of the Company, and all rights, title
       and interest in and to any patents, patent applications, copyright
       registrations and copyright applications resulting therefrom, are owned
       by the Company, and Mr. O'Connor agrees to provide reasonable assistance
       to the Company, including executing documents, providing evidence and
       testimony, in establishing, enforcing and maintaining such rights, title
       and interest of the Company; provided that the Mr. O'Connor shall be
       compensated at a reasonable hourly rate to be agreed upon by the parties
       and reimbursed for any and all reasonable expenses incurred as well as
       for any compensation from other sources that Mr. O'Connor can demonstrate
       was foregone by virtue of providing such assistance.

       d. Mr. O'Connor does hereby irrevocably constitute, authorize, empower
       and appoint the Company, or any of its officers, such Mr. O'Connor's true
       and lawful attorney (with full power of substitution and delegation) in
       Mr. O'Connor's name, and in Mr. O'Connor's place and stead, or in the
       Company's name, to take and do such action, and to make, sign, execute,
       acknowledge and deliver any and all instruments or documents which the
       Company, from time to time, may deem desirable or necessary to vest in
       the Company, its successors and assigns, any of the rights, title or
       interest granted pursuant to subsection (c) above for the use and benefit
       of the Company, its successors and assigns.

5.     Release. (a) Mr. O'Connor hereby releases and forever discharges GTECH,
       its present and former directors, officers, employees, agents,
       subsidiaries, shareholders, successors and assigns from any and all
       liabilities, causes of action, debts, claims and demands (including
       without limitation claims and demands for monetary payment) both in law
       and in equity, known or unknown, fixed or contingent, which he may have
       or claim to have based upon or in any way related to employment (as an
       officer, director or employee), rights or entitlements related thereto or
       termination of such employment by GTECH and hereby covenants not to file
       a lawsuit or charge to assert such claims. This includes but is not
       limited to claims of breach of contract and wrongful termination and
       claims arising under the Federal Age Discrimination in Employment Act,
       and any other federal, state or local laws prohibiting employment
       discrimination or claims growing out of any legal restrictions on GTECH's
       right to terminate its employees. Any rights which Mr.

<PAGE>   5

       O'Connor may have to sell unregistered shares of GTECH Holdings
       Corporation Common Stock pursuant to Rule 144 shall not be unreasonably
       infringed by GTECH.

       (b) GTECH hereby releases and forever discharges Mr. O'Connor and his
       estate from any and all liabilities, causes of action, debts, claims and
       demands both in law and in equity, known or unknown, fixed or contingent,
       which the Company may have or claim to have against Mr. O'Connor based
       upon or in any way related to his employment at GTECH as of and through
       the Termination Date or his termination of his employment.

       (c) These releases shall not apply to any breach of this Agreement.

6.     Advice of Counsel. Mr. O'Connor understands that various State and
       Federal laws prohibit employment discrimination based on age, sex, race,
       color, national origin, religion, handicap or veteran status. These laws
       are enforced through the Equal Employment Opportunity Commission (EEOC),
       Department of Labor and State Human Rights Agencies. Mr. O'Connor
       acknowledges that he has been advised by GTECH to discuss this Agreement
       with his attorney and has been encouraged to take this Agreement home for
       up to twenty-one days so that he can thoroughly review and understand the
       effect of this Agreement before acting on it.

7.     Non-Competition and Other Restrictions. Mr. O'Connor further covenants
       with GTECH as follows and, with respect to Section 7(a), expressly agrees
       that $1,500,000 of the cash payment hereunder is subject to his
       compliance with that subsection.

       a. For a period of three years after the Termination Date, Mr. O'Connor
       shall not engage or propose to engage, directly or indirectly (which
       includes owning, managing, operating, controlling, being employed by,
       acting as a consultant to, giving financial assistance to, participating
       in or being connected in any material way with any business or person so
       engaged) anywhere in the United States, including its territories and
       possessions, or in any foreign country (the United States and any such
       foreign country being deemed to be a separate "Territory") in any
       business which competes or proposes to compete with any business
       (including, without limitation, the Lottery and Gaming Business, the EBT
       Business and network communications services) in which the Company was
       engaged or proposed to be engaged in such Territory at the time of the
       termination of Mr. O'Connor's employment; provided, that Mr. O'Connor's
       ownership as a passive investor of less than one percent of the issued
       and outstanding stock or equity, or $100,000 principal amount of any debt
       securities, of any corporation, partnership or other entity so engaged
       shall not by itself by deemed to constitute such engagement by Mr.
       O'Connor. As used herein, the "Lottery and Gaming Business" shall mean
       the provision of products or services of every nature relating to the
       operation of all manner of lotteries, non-lottery games of chance and
       parimutuel wagering however and wherever conducted, and "EBT Business"
       shall mean the provision of products or services of every nature relating
       to the distribution by electronic means of payments or payments in kind,
       and the conducting by electronic means of financial transactions,
       relating to governmental public assistance programs.

       b. Further, for a period of three years after the Termination Date, Mr.
       O'Connor shall not (i) intentionally disturb or interfere with any
       business relationship between the Company

<PAGE>   6

       and any of its employees, dealers, customers, suppliers or similar
       business associates, or (ii) solicit or cause to be solicited any officer
       or employee of the Company to terminate such person's relationship with
       the Company.

       c. Mr. O'Connor recognizes that the possible restrictions on Mr.
       O'Connor's activities which may occur as a result of his performance of
       his obligations under this Section 7 and Section 4(b) are required for
       the reasonable protection of GTECH and its investments, and Mr. O'Connor
       expressly acknowledges that such restrictions are fair and reasonable for
       that purpose. Mr. O'Connor further expressly acknowledges that damages
       alone will be an inadequate remedy for any breach or violation of any of
       the provisions of this Section 7 and Section 4(b), and that GTECH, in
       addition to all other remedies hereunder and at law or equity, shall be
       entitled, as a matter of right, to injunctive relief, including specific
       performance, with respect to any such breach or violation, in any court
       of competent jurisdiction. If any of the provisions of this Section 7 are
       held to be in any respect an unreasonable restriction upon Mr. O'Connor
       then they shall be deemed to extend only over the maximum period of time,
       geographic area, and/or range of activities as to which they may be
       enforceable.

8.     Assistance. After the Termination Date, GTECH shall make itself available
       in any third party claims, investigations, litigation or similar
       proceedings to answer any questions relating to Mr. O'Connor's employment
       or actions as an employee, officer or director of GTECH, including
       without limitation attendance at any deposition or similar proceeding.

9.     Return of Property. Mr. O'Connor shall return to GTECH any GTECH property
       in his possession, custody or control within fourteen days of the
       Termination Date; provided, however, that Mr. O'Connor may retain the car
       which GTECH provided him during his employment for the current wholesale
       value as customarily determined and he may retain the office equipment
       currently located in his home office in New Jersey. Within such time,
       GTECH shall ship by professional movers which are insured, to Mr.
       O'Connor's home, at GTECH's expense, personal property of Mr. O'Connor
       presently on GTECH's business premises or the condominium in East
       Greenwich.

10.    Comments. Mr. O'Connor shall at no time make or cause to be made any
       derogatory or disparaging comments regarding GTECH, its business, or its
       present or past directors, officers or employees.

11.    Tax Withholding. The Company may withhold from any compensation or
       benefits payable under this agreement all Federal, State, City, or other
       taxes as shall be required pursuant to any law or governmental
       regulations or ruling.

12.    No Admission. The execution of this Agreement does not represent and
       shall not be construed as an admission of a violation of any statute or
       law or breach of any duty or obligation by either GTECH or Mr. O'Connor.

13.    Severability. The invalidity or unenforceability of any particular
       provision of this Agreement shall not affect the other provisions hereof,
       and this Agreement shall be construed in all respects as if such invalid
       and unenforceable provisions were omitted.


<PAGE>   7

14.    Non-assignability. (a) Neither this Agreement nor any rights or interest
       hereunder shall be assignable by Mr. O'Connor, his beneficiaries, or
       legal representatives without the Company's prior written consent. In the
       event of any sale, transfer or other disposition of all or substantially
       all of the Company's assets or business, whether by merger, consolidation
       or otherwise to any entity or person other than the Company, this
       Agreement, and the rights and obligations of the Company under it, shall
       be transferred to such entity or person pursuant to an agreement in form
       and substance reasonably satisfactory to Mr. O'Connor from any successor
       to the business of the Company to assume and agree to perform this
       Agreement, but such assignment or transfer shall not limit the Company's
       liability under this Agreement to Mr. O'Connor.

       (b) This Agreement shall be binding upon, and accrue to the benefit of,
       Mr. O'Connor and the Company and their respective heirs, executors,
       administrator, successors and permitted assigns, including, in the case
       of the Company, any person or entity acquiring all or substantially all
       of the Company's assets.

15.    Governing Law; Attorneys' Fees. (a) This Agreement is made pursuant to
       and shall be governed by the laws of the State of Rhode Island, without
       regard to its rules regarding conflict of laws. The parties agree that
       the courts of the State of Rhode Island, and the Federal Courts located
       therein, shall have exclusive jurisdiction over all matters arising from
       this Agreement and further agree to accept service of process with
       respect to any such proceedings.

       (b) GTECH shall pay, at least monthly, all costs and expenses, including
       attorney's fees and disbursements, incurred by Mr. O'Connor in connection
       with any legal proceeding (including an arbitration), whether or not
       instituted by GTECH or Mr. O'Connor, relating to any provisions of this
       Agreement, including but not limited to the interpretation, enforcement
       or reasonableness thereof; provided that if Mr. O'Connor instituted the
       proceeding and the judge or other decision maker presiding over the
       proceeding affirmatively finds that Mr. O'Connor has failed to prevail on
       all material issues, Mr. O'Connor shall pay his own costs and expenses
       (and, if applicable, return any amounts theretofore paid to Mr. O'Connor
       under this subsection 15(b).

16.    Entire Agreement. This Agreement contains the entire understanding
       between Mr. O'Connor and GTECH regarding the subject matter hereof and,
       except as expressly set forth herein, supersedes any prior agreements,
       written or oral, including without limitation the Employment Agreement. `

17.    Stock Options. (a) Mr. O'Connor's outstanding options, whether or not
       they have vested as of the Termination Date, shall accelerate and become
       vested in full and shall remain exercisable following the Termination
       Date, unless subject to earlier expiration or termination in accordance
       with the terms of the stock option plan in effect as of the Termination
       Date. However, notwithstanding any provision of this Agreement, in no
       event shall Mr. O'Connor be treated in a manner less favorable with
       respect to stock options or Restricted Stock then as provided for in the
       Employment Agreement as though

<PAGE>   8

       Mr. O'Connor's departure from the Company was termination not for cause
       for purposes of the Employment Agreement.

       (b) The Company shall use his best efforts to file, and cause to be
       effective under the Securities Act of 1933, as amended, a registration
       statement on Form S-8 (or a comparable form) with respect to the
       restricted stock shares (or other rights) of equity, if any, issued by
       the Company as of or before the Termination Date under the Employment
       Agreement. The Company will also use its best efforts to ensure that each
       grant provided for under or otherwise contemplated by the Employment
       Agreement shall meet the requirements for exemption under Rule 16b-3
       under the Securities Exchange Act of 1934, as amended.

18.    Modification. This Agreement may not be changed orally but only by an
       agreement in writing signed by the party against whom enforcement of any
       waiver, change, modification, extension or discharge is sought. Mr.
       O'Connor acknowledges that he has not relied upon any representation or
       statement, written or oral, not set forth in this Agreement.

19.    Revocation; Effective Date. Mr. O'Connor may revoke his agreement to the
       terms hereof at any time during the seven-day period immediately
       following the date of his signature below ("Revocation Period") by
       delivering written notice of his revocation to the GTECH. This Agreement
       shall become effective upon the expiration of the Revocation Period.

<PAGE>   9

       IN WITNESS WHEREOF, the parties have executed this Agreement on the date
set forth below.

GTECH Holdings Corporation                Attest:

-------------------------------
by
  -----------------------------



GTECH Corporation                         Attest:

-------------------------------
by
  -----------------------------



                                          Witness:


-------------------------------
William Y. O'Connor


date