<PAGE>   1
                       CONSOLIDATED FINANCIAL STATEMENTS
                        SCIENTIFIC GAMES HOLDINGS CORP.
   YEARS ENDED DECEMBER 31, 1999 AND 1998 WITH REPORT OF INDEPENDENT AUDITORS

CONTENTS

<TABLE>
<S>                                                    <C>
Five-Year Selected Financial Data                      14

Management's Discussion and Analysis                   15

Consolidated Statements of Income                      23

Consolidated Balance Sheets                            24

Consolidated Statements of Cash Flows                  25

Consolidated Statements of Shareholders' Equity        26

Notes to Consolidated Financial Statements             28

Report of Independent Auditors                         44

Corporate Information                                  45
</TABLE>


                                                      13


<PAGE>   2

FIVE-YEAR SELECTED FINANCIAL DATA

SCIENTIFIC GAMES HOLDINGS CORP.

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31
                                         ----------------------------------------------------------------------------
(In thousands, except per share data)      1999            1998            1997(1)           1996             1995
---------------------------------------------------------------------------------------------------------------------

<S>                                      <C>              <C>              <C>              <C>              <C>
STATEMENT OF OPERATIONS DATA
Revenues                                 $228,573         $213,800         $197,456         $146,620         $149,240
                                         ----------------------------------------------------------------------------
Net income                                 20,488           19,409            8,972           18,726           22,428
                                         ----------------------------------------------------------------------------
Earnings per common share (diluted)          1.72             1.58              .72             1.41             1.64
                                         ============================================================================

BALANCE SHEET DATA
Total assets                              203,633          179,633          164,410          127,529          110,186
                                         ----------------------------------------------------------------------------
Bank debt                                  23,547           12,482           32,716            4,429              376
                                         ----------------------------------------------------------------------------
Shareholders' equity                      123,542(2)       111,906(3)        98,127(4)        93,789(5)        94,580
                                         ============================================================================
</TABLE>

(1) Includes the operations of SGIL for the full year and SG Austria since the
acquisition in April 1997 and includes two one-time write-offs.
(2) Reflects the purchase of $8.0 million in company stock.
(3) Reflects the purchase of $10.5 million of company stock.
(4) Reflects the purchase of $5.8 million of company stock.
(5) Reflects the purchase of $24.6 million of company stock.


14
<PAGE>   3

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                        SCIENTIFIC GAMES HOLDINGS CORP.

GENERAL

Our revenues are generated primarily from the sale of our products and services
to governmentally operated or sanctioned lotteries worldwide and, to a lesser
extent, non-lottery related entities both in the United States and worldwide.
We categorize our sales into two main segments: (1) Instant Tickets and Related
Services and (2) Systems.

In the Instant Tickets and Related Services segment, we primarily supply game
design, sales and marketing support, instant ticket manufacturing and delivery,
inventory management and distribution, and retailer telemarketing and field
services to our customers. In addition, this segment includes promotional
instant tickets and pull-tab tickets that we sell to both lottery and
non-lottery customers and pre-paid phone cards that we sell to
telecommunications companies.

In the Systems segment, we primarily supply transaction processing software that
accommodates instant ticket accounting and validation and on-line lottery games,
point-of-sale terminal hardware which connects to these systems, central site
computers and communication hardware which run these systems, and ongoing
support and maintenance services for these products. This segment also includes
software, hardware and support for sports betting and credit card processing
systems for non-lottery customers. In addition, we refer to our Cooperative
Services contracts in various sections of this report. Cooperative Services is
the branded marketing name that we give to customer contracts where we provide
some combination of products and services offered in our Instant Tickets and
Related Services segment and our Systems segment.

Instant Tickets and Related Services revenues are generally based on a price per
1,000 tickets delivered or based upon a percentage of the lottery's sales to the
public over a contract period. Systems revenues may be based on a fixed price
for the product or service or based upon a percentage of the lottery's sales to
the public over a contract period.

Our operating results may vary significantly from period to period. Our revenues
and capital expenditures may be difficult to forecast because our sales cycles
may vary and depend upon factors such as the size and timing of awarded
contracts, changes in customer budgets, ticket inventory position, lottery
retail sales and general economic conditions. Contracts with governmental
entities operating newly authorized instant lotteries tend to generate higher
levels of sales in the initial months. All of our domestic lottery contracts
currently are with jurisdictions whose lotteries have been in operation at least
one year. Our operating results may be affected by the working capital
requirements associated with preparing facilities and equipment, establishing a
distribution system and printing tickets for recently awarded contracts, and by
the amount of time elapsing before the receipt and/or recognition of revenues
from the sale of lottery tickets. Our operating results may also be affected by
the utilization of overtime labor costs and our ability to smoothly integrate
new and/or upgraded production equipment with our existing production
operations. Lottery revenues and particular product sales to lotteries may vary
in a quarter causing fluctuations in our revenue from quarter to quarter.
Additionally, circumstances encountered in international markets, including the
substantial amount of time involved in bidding on an international contract, the
evaluation of such bid and the resultant contract award or rejection, may vary
significantly from that originally anticipated when the bid is prepared. All of
these factors may make it difficult to forecast revenues and expenditures
related to our operations over extended periods and may result in fluctuations
in our quarterly financial results.

Our U.S. lottery contracts typically have an initial term of from one to five
years and usually provide the customer with options to extend the contract one
or more times under the same, or mutually agreeable, terms and conditions for
additional periods generally ranging from one to five years. Our customers have
exercised extension options in our U.S. instant lottery contracts a majority of
the time. Our international lottery contracts are less likely to have firm
contract periods and, historically, international lottery instant ticket
customers have sought competitive bids for such contracts more frequently. Upon
the expiration of a contract (including any extensions that may have been
exercised), lottery authorities often award new contracts through a competitive
procurement process. During any quarter, some lottery contract is typically
expiring and/or reaching an optional extension date. Instant ticket contracts
may be for the supply of tickets on either a primary or back-up basis. A primary
supplier has a contract to supply a majority of the lottery's ticket needs, and
a back-up supplier has a contract to supply a smaller portion of the lottery's
ticket needs.


                                                                              15
<PAGE>   4

We sell our goods and services to customers outside the United States, as well
as to customers in countries in which our foreign subsidiaries have operating
facilities, and our foreign subsidiaries also sell to customers located outside
the country in which their production facilities are located. Although we do
business worldwide, a majority of our current foreign operations are conducted
in, and U.S. export sales are made to, customers located in Europe. For segment
and geographic information on our business, please see Note 11 of the Notes to
the Financial Statements set forth elsewhere in this report.

During 1999, in the Instant Tickets and Related Services segment, we had 12 U.S.
contracts subject to extensions or scheduled to expire. With respect to the
foregoing contracts, we received 11 contract extensions and were the successful
bidder on a contract re-bid with an existing customer.

We estimate, based in part upon industry and lottery furnished information, that
our U.S. customers with contracts which were scheduled to expire in 1999
(regardless of whether renewal options were available under such contracts)
represented, in the aggregate, retail sales equal to approximately 41.9% of
total 1999 instant lottery ticket retail sales by U.S. government lotteries
("1999 U.S. Lottery Sales"). Industry sources estimate that 1999 U.S. Lottery
Sales were approximately $14.2 billion in both 1999 and 1998. In comparison,
seven U.S. contracts held by our competitors were scheduled to expire
(regardless of whether renewal options were available under such contracts) in
1999. We estimate that our competitors' domestic customers with contracts which
were scheduled to expire in 1999 represented aggregate retail sales equal to
approximately 22.4% of 1999 U.S. Lottery Sales. Of the contracts formerly held
by the Company's competitors in 1999, we were the successful bidder on one
contract and we estimate that this contract accounted for approximately 9.9% of
1999 U.S. Lottery Sales. For a listing of our U.S. contracts and the scheduled
expiration dates, also see Item I Business "Markets" in our Annual Report on
Form 10-K.

Our results with respect to contracts previously held by our competitors in 1999
are as follows: We were awarded an instant ticket contract by the Texas Lottery
Commission. Under this contract, we will provide instant tickets and related
services for a three-year period. We were awarded an instant ticket
telemarketing and distribution services contract by the New York State Lottery.
This contract began in January 2000 and runs through January 2002, with an
optional extension for up to one additional year. We also were awarded a
two-year backup contract for instant tickets and related services by the Idaho
Lottery.

During the year we lost our backup contract with the Wisconsin Lottery to a
competitor.

Internationally, we received the following contracts in 1999: A new three-year
contract to supply instant tickets and related services to An Post National
Lottery Corporation, the operator of the national lottery in Ireland, and a new
contract to provide the perpetual license for SciTrak, an inventory and
distribution lottery system in Spain.

We also produced more telephone cards for various international
telecommunication companies in 1999 than we did in 1998.

For our Systems segment during 1999, we were the apparent winner of the
on-line/instant lottery gaming system, retailer terminals and associated instant
gaming products and services to the Maine State Lottery. Our preliminary
contract award from the Maine State Lottery was invalidated by the Appeal Panel
of the Maine Department of Administrative and Financial Services in February
2000, and we anticipate that the contract may be re-bid. Internationally, we
signed a contract with the Western Canada Lottery Corp. ("WCLC") to provide an
on-line game management control system and related services. We also completed
the connection of seven German lotteries to our SGI-Net system for the express
purpose of supporting the Oddset sports game. Oddset is an on-line game in which
players can wager weekly on national and international soccer matches.

Our business is highly competitive and continues to be in a period of intense
price-based competition, particularly from other instant ticket suppliers. Many
of the lottery contracts awarded or re-awarded to us in 1999 (and the orders
thereunder) have certain lower equivalent prices than charged in the previous
contracts. To the extent such contracts contain lower equivalent prices, our
profit margins are adversely affected. The impact of lower equivalent prices in
certain of our contracts may be offset, in part, by other factors, including
higher order levels from new and existing customers, increased production
efficiencies, consolidation of our production operations, introduction of new
equipment (as discussed in "Recent Developments") and other savings associated
with economies of scale. We cannot predict with certainty either the continued
duration or extent of


16
<PAGE>   5

such pricing factors or our ability to offset such factors either in whole or in
part. The current period of price-based competition and the resulting cycle of
lower customer pricing has existed for approximately three years.

While we frequently are awarded new contracts when our U.S. contracts and
extensions expire, we cannot be assured that any of our particular contracts
will be extended or that we will be awarded new contracts as a result of future
competitive procurement processes, nor can there be any assurances with respect
to our ability to offset, in whole or in part, the effects of any intensified or
prolonged price competition.

We have nine Instant Tickets and Related Services contracts in the U.S. which
are subject to extensions or scheduled to expire during 2000. We estimate that
these nine U.S. contracts had aggregate retail sales equal to approximately
18.5% of 1999 U.S. Lottery Sales. We also estimate that there are five U.S.
contracts of competitors subject to extensions or scheduled to expire in 2000
which had aggregate retail sales equal to approximately 15.4% of 1999 U.S.
Lottery Sales.

RECENT DEVELOPMENTS

With respect to the contracts described above, the Colorado Lottery and the
Washington State Lottery have already announced the award of new contracts to
us. On January 25, 2000, we announced that we had been awarded a three-year
contract to provide instant tickets and related services to the Washington State
Lottery. The award includes the option of an additional three-year extension. On
February 7, 2000, we announced that we had been awarded a new Scratch Games
Services contract to provide instant tickets, distribution and related services,
including research, tel-sell support and packaging and distribution to the
Colorado Lottery. The award is for a four-year term with the option of an
additional one-year extension. The Colorado and Washington State lotteries had
combined retail sales equivalent of 3.3% of the total U.S. instant ticket market
in 1999.

The Kentucky Lottery Corporation Board also has exercised an option to extend
and has amended its existing contract with us to provide for the statewide sale
of instant lottery ticket probability games using "Player's Choice" probability
tickets. The agreement also calls for us to install 1,000 SciScan validation
terminals at lottery retailers across Kentucky.

As previously announced, we are consolidating our printing operations in our
Georgia facility and plan to close our instant ticket printing operation in
Gilroy, California in June 2000. These decisions were prompted by our decision
to replace aging equipment with new state-of-the-art printing technologies that
should result in significant cost savings. We estimate that the combination of
the efficiencies from a new press and the consolidation into one facility will
reduce our total production costs by over $5 million per year. We estimate that
the closure costs for Gilroy will be approximately $2.6 million. Such costs
include approximately $2.0 million in restructuring costs as defined by FASB
Emerging Issues Task Force Issue No. 94-3 and other costs. The restructuring
costs primarily include the cost of involuntary employee severance and
separation benefits and lease termination payments. The other costs of
approximately $600,000 primarily include certain relocation expenses and
incentive pay to retain certain employees until the plant is closed.

RESULTS OF OPERATIONS

The following table illustrates certain components of the consolidated results
of operations expressed as a percentage of revenues for the periods indicated.

<TABLE>
<CAPTION>
                                   1999         1998       1997
----------------------------------------------------------------
<S>                               <C>          <C>         <C>
Revenues                          100.0%       100.0%      100.0%
Gross margin                       34.9         35.2        36.8
Selling, general and
  administrative                   12.7         12.4        13.0
Depreciation and
  amortization                      7.9          7.6         6.7
One-time write-offs                 0.0          0.0         6.8
Interest income                     0.2          0.2         0.2
Gain (loss) on
  foreign currency                  0.2          0.0         0.3
Interest expense                    0.3          0.6         0.5
Minority interest in
  subsidiaries income              (0.2)         0.0         0.0
Income before income taxes         14.2         14.8        10.3
Income tax expense                  5.2          5.7         5.8
Net income                          9.0%         9.1%        4.5%
</TABLE>


                                                                              17
<PAGE>   6

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.

Revenues for the year ended December 31, 1999, increased $14.8 million or 6.9%
over the revenues for the year ended December 31, 1998. The increase was
primarily due to increased Instant Tickets and Related Services revenues of
approximately $12.7, which represented a 7.5% increase for the segment. This
increase was due to a $16.6 million increase in sales of international pre-paid
telephone cards, which was a 500% increase in sales of this product over the
previous year. Partially offsetting the segment's increase in revenue was a $3.9
million decrease in other product revenues due primarily to lower international
instant ticket sales volumes and continued lower equivalent sales prices as a
result of competitive pricing pressures as discussed above and in the Company's
prior periodic reports. The remainder of the increase in total revenues of $2.1
million came from the Systems segment and was due primarily to implementation of
new international customer contracts obtained during the past two years. Instant
Tickets and Related Services revenues accounted for approximately 79.3% of the
Company's gross revenues in 1999 versus 78.9% in 1998. Total international
revenues based on the customers' country of domicile accounted for approximately
38.1% of the Company's gross revenues in 1999 versus 35.4% for 1998.

On a comparative basis, gross margin increased $4.6 million or 6.1% while gross
margin as a percentage of revenues decreased to 34.9% from 35.2% for the years
ended December 31, 1999 and 1998, respectively. The dollar margin increase was
primarily due to the increased sales volumes of pre-paid telephone cards. The
percentage margin decline was mainly attributable to Instant Tickets and Related
Services contracts awarded or extended having lower equivalent sales prices than
charged in previous contracts and lower instant ticket export sales, offset in
part by continued efficiency improvements in instant ticket and pre-paid
telephone card manufacturing.

Selling, general and administrative ("SG&A") expenses increased $2.5 million for
the year ended December 31, 1999 over the same period of 1998. SG&A expenses
increased as a percentage of revenues to 12.7% from 12.4%. The increase was due
primarily to the full year operation of the French joint venture formed in
December 1998 and additional expenses required to support increased
sales activity in new and existing markets, including pre-paid telephone cards.

Depreciation and amortization expenses increased for the year ended December 31,
1999 by $1.7 million over the comparable period of 1998. The increase was due
primarily to the full year operation of the French joint venture and the
acceleration of depreciation of equipment to be disposed of earlier than
originally anticipated.

Operating income for the year ended December 31, 1999 increased $370,000 or 1.1%
from the year ended December 31, 1998. The increase was attributable to the same
reasons as noted above.

Interest income for the year ended December 31, 1999 increased by $18,000 from
the year ended December 31, 1998. The increase was attributable to higher
average cash and cash equivalents balances during the same comparable periods.

Other income for the year ended December 31, 1999 decreased $184,000 compared to
the year ended December 31, 1998. The decrease was mainly due to net losses
incurred in the disposition of assets in 1999 versus gains in 1998.

We experienced a net gain of $437,000 on foreign currency in the year ended
December 31, 1999, compared to a loss of approximately $65,000 in the year ended
December 31, 1998. The gains primarily resulted from the positive exchange rate
effect of the strengthening U.S. dollar on certain foreign denominated
liabilities.

Interest expense for the year ended December 31, 1999 decreased approximately
$765,000 from the year ended December 31, 1998. The decrease was mainly
attributable to the decrease in the average balance outstanding under the
Company's Bank Credit Facility compared to the prior period. Also contributing
to the decrease was the transfer of a portion of the Company's debt to
borrowings with lower interest rates.

The effective tax rate for the year ended December 31, 1999 was 36.9% as
compared to 38.6% for the year ended December 31, 1998. The lower effective tax
rate for the year was primarily a result of adjustments to tax liabilities, due
to the favorable resolution of certain contingencies.

Net income was $20.5 million for the year ended December 31, 1999 compared to
$19.4 million for the year ended December 31, 1998.


18
<PAGE>   7

Earnings per common share (diluted) for the year ended December 31, 1999 were
$1.72 cents per share compared to $1.58 for the comparable period in 1998. The
increase in earnings per common share was primarily due to the increase in
earnings and a decrease in the weighted-average number of common equivalent
shares outstanding. The weighted-average number of diluted shares outstanding
decreased from 12.3 million in 1998 to 11.9 million in 1999.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.

Revenues for the year ended December 31, 1998 increased $16.3 million or 8.3%
over the revenues for the year ended December 31, 1997. The increase was
primarily due to additional Systems revenues of approximately $20.1 million.
Contributing to this increase was a full year of operations for our Scientific
Games Kommunikations - und Computersysteme GmbH subsidiary ("SG Austria"), which
was acquired in April 1997, and sales to new international customers, including
La Francaise des Jeux, operator of the French National Lottery, and Praxa
Limited, prime contractor to the Golden Casket Lottery Corporation in Australia.
The increase in revenues was partially offset by a decline of $4.0 million in
Instant Tickets and Related Services revenues which was primarily attributable
to lower international sales volumes and continued lower equivalent sales prices
as a result of competitive pricing pressures as discussed above and in our prior
periodic reports. Instant Tickets and Related Services revenues accounted for
approximately 78.9% of our gross revenues in 1998 versus 87.4% in 1997. Total
international revenues based on the customer's country of domicile accounted for
approximately 35.4% of our gross revenues in 1998 versus 34.0% for 1997.

Gross margins decreased to 35.2% for the year ended December 31, 1998, from
36.8% for the year ended December 31, 1997. The margin decline was mainly
attributable to Instant Tickets and Related Services contracts awarded or
re-awarded having lower equivalent sales prices than charged in previous
contracts and lower international sales volumes, partially offset by continued
efficiency improvements in domestic instant ticket manufacturing. Also partially
offsetting the decline was the full year ownership of SG Austria and the new
Systems sales discussed previously.

Selling, general and administrative ("SG&A") expenses increased $865,000 for the
year ended December 31, 1998, over the same period of 1997. SG&A expenses
decreased as a percentage of revenues to 12.4% from 13.0%. The dollar increase
was primarily attributable to a full year ownership of SG Austria, additional
expenses related to the joint venture with La Francaise des Jeux, an increase in
international sales efforts, including the expanded activities of a sales branch
in South Africa, and sales efforts related to The Daily Race Game joint venture
with Telecom Productions Inc., which was introduced in 1998.

Depreciation and amortization expenses increased for the year ended December 31,
1998 by $3.1 million over the comparable period of 1997. The increase was due
primarily to the full year ownership of SG Austria and additional SciScan
terminals placed in services during the second half of 1997 and the beginning of
1998.

During 1997, we recognized a one-time write-off of $10.1 million for in-process
technology acquired in connection with the April 15, 1997 acquisition of SG
Austria. In addition, in July 1997 we discontinued our charity pull-tab ticket
business line that was produced and distributed by our then-named subsidiary
GameTec Inc. ("GameTec"). In October 1997, we sold substantially all of the
assets of GameTec to International Gamco, Inc. ("Gamco"). We also entered into a
three year extendible marketing agreement with Gamco in 1997 to provide
marketing and related services to state lotteries for pull-tab tickets printed
by Gamco. We continue to provide pull-tab tickets to our lottery customers
through such marketing agreement. A one-time write-off of $3.4 million (pre-tax)
was recognized in the year ended December 31, 1997 for losses from the
disposition of the assets of our pull-tab ticket business line. We did not have
similar write-offs in 1998.

Operating income for the year ended December 31, 1998 increased $11.9 million or
58.6% from the year ended December 31, 1997. The increase was primarily
attributable to the pull-tab business and in-process technology one-time
write-offs in 1997, as discussed previously, and additional Systems sales during
1998. Partially offsetting the operating income increase was a decline in
operating income in the Instant Tickets and Related Services segment due mainly
to pricing pressures discussed previously.


                                                                              19
<PAGE>   8

Interest income for the year ended December 31, 1998 increased by approximately
$130,000 from the comparable year ended December 31, 1997. The increase was
mainly due to the interest related to an employee benefit plan, which was offset
by a comparable charge to compensation expense.

We experienced a net loss of $65,000 on foreign currency in the year ended
December 31, 1998, compared to a gain of approximately $507,000 in the year
ended December 31, 1997. The losses primarily resulted from fluctuations in
exchange rates on non-U.S. dollar currency holdings. The 1997 gains were
primarily attributable to gains on the hedging of the purchase price of SG
Austria as well as net gains on non-U.S. dollar transactions in the normal
course of business.

Interest expense for the year ended December 31, 1998 increased approximately
$442,000 from the year ended December 31, 1997. The increase in interest expense
resulted from higher average borrowings under our credit facility for year ended
December 31, 1998.

The effective tax rate for the year ended December 31, 1998 was 38.6% as
compared to 55.9% for the year ended December 31, 1997. The higher than normal
effective tax rate for 1997 was primarily a result of a one-time write-off of
$10.1 million for in-process technology.

Net income was $19.4 million for the year ended December 31, 1998, compared to
$9.0 million for the year ended December 31, 1997. The increase in net income of
$10.4 million was primarily due to the one-time write-offs in 1997 for the
pull-tab business and in-process technology. Comparative net income excluding
these one-time write-offs decreased by $1.7 million in 1998.

Earnings per common share (diluted) for the year ended December 31, 1998 were
$1.58 cents per share compared to $0.72 for the comparable period in 1997. The
increase in earnings per share was primarily due to the one-time write-offs in
1997 as discussed above. Earnings per common share (diluted) for the year ended
December 31, 1997, excluding the one-time write-offs, would have been $1.70. The
decrease in earnings per share, excluding the write-offs, was partially offset
by a reduction in the weighted-average number of common equivalent shares
outstanding resulting from the lower average share price in 1998 and the related
effects on dilutive stock options. The weighted-average number of diluted shares
outstanding decreased from 12.4 million in 1997 to 12.3 million in 1998.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of funds are accumulated cash and cash equivalents, cash
provided by operations and borrowings under our credit facilities. Our primary
uses of cash are for working capital, capital expenditures and general corporate
purposes, which may include common stock repurchases, acquisitions and strategic
investments in joint ventures or other businesses.

During the year ended December 31, 1999, our major cash requirements were for
the repurchase of common stock and purchase of additional property and
equipment. In comparison, during the year ending December 31, 1998, along with
common stock repurchases and capital expenditures, we also used a portion of our
cash and cash equivalents to make an earnout payment of $4.5 million to Hilton
Hotels Corporation (successor by merger to Bally Entertainment Corporation).
This earnout payment, made on October 26, 1998, arose in connection with the
October 1, 1991, acquisition of our assets from Bally.

Our cash and cash equivalents balance increased by approximately $5.5 million
during 1999, increasing from $9.3 million to $14.8 million, while our debt
increased from approximately $12.5 million to $23.5 million. We increased our
net borrowings under our credit facilities by $11.0 million. We currently have
two such facilities: an $80 million credit facility and a $25 million credit
facility. Such facilities were entered into in December 1999 and replaced our
former bank credit facility. The increased borrowings were primarily due to an
increased investment in property and equipment. Increases in total shareholders'
equity resulted from current year earnings and option exercises in the period
which were partially offset by the repurchases under our stock repurchase
program.

In 1999, we generated $26.3 million in cash from operating activities, as
compared to $45.5 million in 1998. The decline in cash from operations was
primarily related to a $6.6 million increase in tax payments and increases in
accounts receivable and other assets.


20
<PAGE>   9

Cash used in investing activities increased from $14.6 million in 1998 to $23.5
million in 1999. Cash was used to acquire an interest in businesses for $1.3
million and net purchases of additional property and equipment in the amount of
approximately $22.3 million.

Financing activities provided cash of approximately $3.5 million in 1999 as
compared to utilizing approximately $24.1 million in 1998. The primary reasons
for the change were an increase to the outstanding borrowings under our former
bank credit facility due to a net increase in borrowings thereunder of $11.0
million, and the decrease in the amount of common stock repurchased to 509,200
shares for an aggregate cost of approximately $8.0 million versus the repurchase
of 559,000 shares for an aggregate cost of approximately $10.5 million in the
prior year. We currently have authorization from our Board of Directors to
purchase, from time to time, depending on market conditions, up to 1,370,600
additional shares of our common stock.

As of December 31, 1999, we had outstanding borrowings of approximately $23.5
million under our $80 million credit facility and zero under our $25 million
credit facility. Both credit facilities offer borrowing rate options under prime
rate, London Interbank Offered Rate ("LIBOR") or Interbank Offered Rate
("IBOR"), plus or minus an applicable margin depending on the type of borrowing
and our debt to total capitalization ratio as defined in such agreement. Both
credit facilities contain covenants that, among other things, require a defined
debt to total capitalization ratio and a certain fixed charge ratio, that limit
our ability to grant security interest in our assets and that restrict asset
sales.

Our $80 million credit facility expires in November 2002 and gives us the
ability to borrow in U.S. dollars, German deutsche marks, French francs, British
pounds sterling and Euros. Our $25 million credit facility expires in November
2000 and gives us the ability to borrow thereunder in U.S. dollars. As of
December 31, 1999, our outstanding borrowings under the credit facilities were
in a mix of British pounds sterling, Euros and U.S. dollars.

While we estimate we will spend over $45 million in capital expenditures in
2000, we believe that the availability of funds under our credit facilities,
cash flows from operations and our ability to obtain alternative sources of
financing will permit us to fund our operations, working capital requirements
and obligations, as well as other potential investment or business
opportunities. In the event we have additional capital requirements for new
business opportunities, we believe we have the ability to obtain additional
capital from the capital markets. For a discussion of a dispute under a foreign
contract of an affiliated company in Colombia, see Note 10 of the Notes to the
Financial Statements set forth elsewhere in this report and Part I, Item 3 of
the Company's Annual Report on Form 10-K, "Legal Proceedings."

INFLATION, CHANGING PRICES, FOREIGN CURRENCY FLUCTUATIONS AND MARKET RISK

We believe that inflation has not had an abnormal or unanticipated effect on our
operations. Inflationary pressures would be significant to our business if raw
materials used for instant lottery ticket production are significantly affected.
Available supply from the paper industry tends to fluctuate, and prices may be
affected by supply.

In 1999, inflation was not a significant factor in our results of operations,
and we were not impacted by significant pricing changes in our costs, except for
personnel related expenditures. We are unable to forecast the prices or supply
of substrate or other raw materials in 2000 but we currently do not anticipate
any substantial changes that will materially affect our operating results.

In certain limited cases, our contracts with our customers contain provisions to
adjust for inflation on an annual basis, but we cannot be assured that this
adjustment would cover raw material price increases. While we have long-term and
generally satisfactory relationships with most of our suppliers, we also believe
alternative sources to meet our raw material needs are available.

We manage our foreign currency exchange risks on a global basis by one or more
of the following: (i) securing payment from our customers in U.S. dollars, when
possible, (ii) utilizing borrowings denominated in foreign currency, and (iii)
entering into foreign currency exchange contracts. In addition, a significant
portion of the cost attributable to our foreign operations is incurred in the
local currencies. We believe that a 10% adverse change in currency exchange
rates would not have a significant adverse effect on the net earnings or cash
flows of the Company.


                                                                              21
<PAGE>   10

We may, from time to time, enter into foreign currency exchange or other
contracts to hedge the risk associated with certain firm sales commitments,
anticipated revenue streams and certain assets and liabilities denominated in
foreign currencies. One of our credit facilities also allows us to borrow in
certain European currencies. We do not engage in currency speculation. Assets
and liabilities of foreign operations are translated from the local currency
into U.S. dollars at the approximate rate of currency exchange at the end of the
fiscal period. Translation gains and losses of foreign operations that use local
currencies as the functional currency are accumulated and reported as a separate
component of shareholders' equity. Revenues and expenses are translated at
average monthly exchange rates for the month. Transaction gains and losses
arising from exchange rate fluctuations on transactions denominated in a
currency other than the local functional currency are included in our results of
operations.

To the extent we do not hedge our foreign currency exchange risk, such
transactions may have the effect of reducing or increasing the amount of revenue
recorded in dollars or which is actually repatriated to the United States.
Conversely, by entering into hedging contracts, we may, in exchange for
minimizing the risk of potential losses associated with foreign currency
transactions, also thereby necessarily minimize the potential for additional
gain associated with foreign currency translation. While we have always been
able to enter into foreign currency exchange hedging transactions when we have
sought such arrangements, no assurances can be given that our ability to enter
into such transactions will not adversely be affected in the future by one or
more of the following: (i) doing business in a country with limitations on the
expatriation of earnings or other governmental regulations, (ii) doing business
in a country for which there is only limited international interest in the
provision of hedging arrangements by financial institutions, and (iii) the
inability to procure hedging agreements as the result of some financial crisis
associated with that country or which has otherwise affected the interest of
financial institutions in entering into hedging transactions in general.

IMPACT OF YEAR 2000

In prior years, we discussed the nature and progress of our plans to become Year
2000 ready. In late 1999, we completed our remediation and testing of systems.
As a result of those planning and implementation efforts, we experienced no
significant disruptions in mission-critical information technology and
non-information technology systems, and we believe those systems successfully
responded to the Year 2000 date change. We expensed approximately $785,000
during 1999 in connection with remediating our systems. We are not aware of any
material problems resulting from Year 2000 issues, either with our products, our
internal systems, or the products and services of third parties supplied to us.
We will continue to monitor our mission-critical computer applications and those
of our suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.


22
<PAGE>   11

                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31
                                                      ----------------------------------------
(In thousands, except per share data)                    1999            1998           1997
----------------------------------------------------------------------------------------------

<S>                                                   <C>             <C>             <C>
Revenues                                              $ 228,573       $ 213,800       $197,456
Cost of revenues                                        148,826         138,630        124,718
                                                      ----------------------------------------
                                                         79,747          75,170         72,738
Selling, general and administrative expenses             29,031          26,518         25,653
Depreciation and amortization                            18,024          16,330         13,229
Pull-tab business write-off                                  --              --          3,376
In-process technology write-off                              --              --         10,102
Interest income                                             502             484            354
Other income (expense)                                      (37)            147             --
Gain (loss) on foreign currency                             437             (65)           507
Interest expense                                            588           1,353            911
Minority interest in subsidiaries' (income) loss           (531)             85             --
                                                      ----------------------------------------
Income before income taxes                               32,475          31,620         20,328
Income tax expense                                       11,987          12,211         11,356
                                                      ----------------------------------------
Net income                                            $  20,488       $  19,409       $  8,972
==============================================================================================
Basic net income per common share                     $    1.73       $    1.60       $   0.75
==============================================================================================
Diluted net income per common share                   $    1.72       $    1.58       $   0.72
==============================================================================================

Average common shares outstanding - basic                11,828          12,108         12,020
Dilutive effect of stock options and non-vested
  restricted stock awards                                   116             190            407
==============================================================================================
Average common shares outstanding - diluted              11,944          12,298         12,427
==============================================================================================
</TABLE>

See accompanying notes.


                                                                              23
<PAGE>   12

                          CONSOLIDATED BALANCE SHEETS

                        SCIENTIFIC GAMES HOLDINGS CORP.

<TABLE>
<CAPTION>
                                                                              DECEMBER 31
                                                                       -------------------------
(In thousands, except share numbers and par value)                        1999           1998
------------------------------------------------------------------------------------------------

<S>                                                                    <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents                                            $  14,775       $   9,270
  Trade receivables                                                       48,655          39,445
  Inventories                                                             15,281          15,090
  Pre-paid expenses and other current assets                               2,706           2,111
  Deferred income tax benefits                                             1,053           1,032
                                                                       -------------------------
Total current assets                                                      82,470          66,948

Property and equipment, at cost:
  Land                                                                     2,404           2,521
  Buildings                                                               12,535          11,664
  Production and other equipment                                         110,219         101,098
  Construction-in-progress                                                12,526           2,047
                                                                       -------------------------
                                                                         137,684         117,330
  Less accumulated depreciation and amortization                         (68,705)        (57,386)
                                                                       -------------------------
                                                                          68,979          59,944
Goodwill                                                                  31,473          35,282
Other assets                                                              20,711          17,459
                                                                       -------------------------
                                                                       $ 203,633       $ 179,633
================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                     $  15,912       $  16,270
  Accrued liabilities                                                     23,397          17,822
  Credit facilities                                                           --          12,482
  Income taxes payable                                                     1,827           3,932
                                                                       -------------------------
Total current liabilities                                                 41,136          50,506
Credit facilities                                                         23,547              --
Other long-term liabilities                                                5,677           8,221
Deferred income taxes payable                                              6,727           6,694
Minority interest in consolidated subsidiaries                             3,004           2,306
Shareholders' equity:
  Preferred stock - 3,000,000 shares authorized,
    no shares issued and outstanding                                          --              --
  Common stock - par value $.001 per share: 25,750,000 shares
    authorized; 11,915,702 shares and 11,875,737 shares issued at
    December 31, 1999 and 1998, respectively                                  12              12
  Additional paid-in capital                                              66,060          65,551
  Accumulated earnings                                                    66,689          46,201
  Accumulated other comprehensive income                                  (1,198)            142
  Treasury stock, at cost - 509,200 shares at December 31, 1999           (8,021)             --
                                                                       -------------------------
  Total shareholders' equity                                             123,542         111,906
                                                                       -------------------------
                                                                       $ 203,633       $ 179,633
================================================================================================
</TABLE>

See accompanying notes.


24
<PAGE>   13

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                        SCIENTIFIC GAMES HOLDINGS CORP.
<TABLE>
<CAPTION>

                                                                 YEAR ENDED DECEMBER 31
                                                         --------------------------------------
(In thousands)                                             1999           1998           1997
-----------------------------------------------------------------------------------------------
<S>                                                      <C>            <C>            <C>

OPERATING ACTIVITIES
Net income                                               $ 20,488       $ 19,409       $  8,972
Adjustments to reconcile net income to net cash
  used in operating activities:
  Depreciation                                             12,813         12,012         10,361
  Amortization                                              5,211          4,318          2,868
  In-process technology write-off                              --             --         10,102
  Pull-tab business write-off                                  --             --          3,376
  Loss (gain) on disposal of property and equipment            32             (5)            --
  Deferred income taxes                                        12          4,407         (1,513)
  Stock compensation expense                                   64            563          1,313
  Minority interest                                           531            (85)            --
Changes in operating assets and liabilities:
  Accounts receivable                                      (9,319)        (4,416)           536
  Inventories                                                (466)        (3,470)         1,376
  Accounts payable                                            298          9,751         (4,256)
  Other                                                    (3,384)         3,039        (11,670)
                                                         --------------------------------------
Net cash provided by operating activities                  26,280         45,523         21,465

INVESTING ACTIVITIES
Proceeds from sale of assets                                  174            188            800
Payments for property and equipment                       (22,470)        (8,359)       (22,280)
Acquisitions of businesses, net of cash acquired           (1,250)        (6,469)       (24,091)
                                                         --------------------------------------
Net cash used in investing activities                     (23,546)       (14,640)       (45,571)

FINANCING ACTIVITIES
Payments on notes receivable from officers                     --             71             --
Borrowings under credit facilities                         65,685          3,000         36,060
Payments on credit facilities                             (54,620)       (21,142)        (9,420)
Repurchase of common stock                                 (8,021)       (10,461)        (5,787)
Proceeds from the exercise of common stock options            417          4,427             57
                                                         --------------------------------------
Net cash provided by financing activities                   3,461        (24,105)        20,910
Effect of exchange rate changes on cash                      (690)          (351)          (213)
                                                         --------------------------------------
Increase (decrease) in cash and cash equivalents            5,505          6,427         (3,409)
Cash and cash equivalents at beginning of year              9,270          2,843          6,252
                                                         --------------------------------------
Cash and cash equivalents at end of year                 $ 14,775       $  9,270       $  2,843
===============================================================================================
</TABLE>

See accompanying notes


                                                                              25
<PAGE>   14

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                        SCIENTIFIC GAMES HOLDINGS CORP.

<TABLE>
<CAPTION>
                                                            COMMON STOCK        ADDITIONAL
                                                         ------------------      PAID-IN
(In thousands)                                           SHARES      AMOUNT      CAPITAL
------------------------------------------------------------------------------------------

<S>                                                      <C>         <C>        <C>
Balance at January 1, 1997                               12,158       $ 12       $56,486
  Foreign currency translation adjustment                    --         --            --
  Net income                                                 --         --            --
  Comprehensive income                                       --         --            --
  Exercise of stock options, including tax benefit           20         --           150
  Compensation expense in connection
    with stock option plans                                  --         --         1,313
  Repurchase and retirement of common stock                (302)        --            --
                                                         ---------------------------------
Balance at December 31, 1997                             11,876       $ 12       $57,949
  Foreign currency translation adjustment                    --         --            --
  Additional minimum pension liability                       --         --            --
  Net income                                                 --         --            --
  Comprehensive income                                       --         --            --
  Exercise of stock options, including tax benefit          659          1         7,039
  Compensation expense in connection with
    stock option plans                                       --         --           563
  Repurchase and retirement of common stock                (659)        (1)           --
  Repayment of notes receivable                              --         --            --
                                                         ---------------------------------
Balance at December 31, 1998                             11,876         12        65,551
  Foreign currency translation adjustment                    --         --            --
  Unrealized gain (loss) on investments                      --         --            --
  Additional minimum pension liability                       --         --            --
  Net income                                                 --         --            --
  Comprehensive income                                       --         --            --
  Exercise of stock options, including tax benefit           24         --           152
  Employee stock purchase plan                               16         --           293
  Compensation expense in connection with
    stock option plans                                       --         --            64
  Repurchase and retirement of common stock                  --         --            --
  Purchase of Treasury stock                               (509)        --            --
BALANCE AT DECEMBER 31, 1999                             11,407       $ 12       $66,060
                                                         =================================
</TABLE>

See accompanying notes.


26
<PAGE>   15

<TABLE>
<CAPTION>
                                    NOTES
                                  RECEIVABLE          OTHER
 TREASURY        ACCUMULATED       FROM THE       COMPREHENSIVE
  STOCK            EARNINGS      SALE OF STOCK        INCOME            TOTAL
-------------------------------------------------------------------------------

<S>              <C>             <C>              <C>                 <C>
$    --           $ 36,671           $(71)          $   691           $  93,789
     --                 --             --              (310)               (310)
     --              8,972             --                --               8,972
                                                                      ---------
     --                 --             --                --               8,662
                                                                      ---------
     --                 --             --                --                 150

     --                 --             --                --               1,313
     --             (5,787)            --                --              (5,787)
-------------------------------------------------------------------------------
     --           $ 39,856           $(71)          $   381           $  98,127
     --                 --             --                16                  16
     --                 --             --              (255)               (255)
     --             19,409             --                --              19,409
                                                                      ---------
     --                 --             --                --              19,170
                                                                      ---------
     --                 --             --                --               7,040

     --                 --             --                --                 563
     --            (13,064)            --                --             (13,065)
     --                 --             71                --                  71
-------------------------------------------------------------------------------
     --             46,201             --               142             111,906
     --                 --             --            (1,487)             (1,487)
     --                 --             --                21                  21
     --                 --             --               126                 126
     --             20,488             --                --              20,488
                                                                      ---------
     --                 --             --                --              19,148
                                                                      ---------
     --                 --             --                --                 152
     --                 --             --                --                 293

     --                 --             --                --                  64
     --                 --             --                --                  --
 (8,021)                --             --                --              (8,021)
$(8,021)          $ 66,689           $ --           $(1,198)          $ 123,542
===============================================================================
</TABLE>


                                                                              27


<PAGE>   16

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        SCIENTIFIC GAMES HOLDINGS CORP.
                               DECEMBER 31, 1999

1. CORPORATE ORGANIZATION AND BASIS OF PRESENTATION

Scientific Games Holdings Corp. ("Company") provides a full range of lottery
game consulting and production services, including the manufacturing,
warehousing and distribution of instant lottery tickets and related
instant-ticket services such as game design, sales and marketing support,
retailer telemarketing and field services. The Company also provides lottery
systems and systems-related services, including transaction processing software
that accommodates instant ticket game accounting and validation and on-line
games, point-of-sale terminal hardware which connect to these systems, central
site computer and communications hardware which run these systems and ongoing
maintenance for each of these items. These products and services (Instant
Tickets and Related Services and Systems) are provided primarily to domestic and
international governmentally sanctioned lotteries. The Company enters into
short-term and long-term contracts with these lotteries to obtain rights to
provide lottery products and services. Non-lottery products and services include
the production of pre-paid telephone cards. Products and services are provided
through the Company's wholly owned subsidiaries and its joint ventures,
Alpharetta, Georgia-based Scientific Games Inc. ("SGI"), United Kingdom-based
Scientific Games International Limited ("SGIL"), Austria-based Scientific Games
International GmbH ("SG Austria") and France-based SciGames France SAS ("SG
France"). See Note 3.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

The following summarizes the Company's principal accounting policies.
Consolidated financial statements presented herein include the accounts and
operations of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

REVENUES AND COST OF REVENUES

Revenues from the sales of the Company's products and services are recognized
based upon shipment and delivery, a percentage of the lottery's instant ticket
or on-line sales to the public over a contracted period, as support and
maintenance services are provided under related agreements, or the percentage of
completion method for development projects, or any combination of the foregoing.
All costs related to the design, planning and production of instant ticket
segment products are capitalized as inventories and recognized as cost of
revenues when the products are shipped or when sold to the public. Costs related
to the planning and development of the systems and systems-related services may
be recorded based upon the percentage of completion method, or if the revenue is
recognized based on lottery sales to the public, then the costs may be
recognized over the period of the contract. Costs related to the provision of
support and maintenance services are recorded in costs of revenues, and revenues
are recognized when the service is provided.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist principally of cash and institutional money
market funds on deposit with banks. The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents.

TRADE RECEIVABLES

The Company generally does not require collateral or other security for its
receivables. For certain foreign receivables, the Company requires letters of
credit backing such amounts. Credit losses have been within management's
expectations. The Company had unbilled receivables of $14.0 million and $9.6
million on its percentage of completion contracts at December 31, 1999 and 1998,
respectively. The unbilled receivables are expected to be collected within one
year.


28
<PAGE>   17

INVENTORIES

Inventories consist principally of instant lottery tickets, telephone cards,
materials related to their production and certain electronic components related
to Systems terminals. Inventories are valued at the lower of cost (first-in,
first-out method) or market. Inventories consist of the following:

<TABLE>
<CAPTION>
                                DECEMBER 31
                         ------------------------
(In thousands)             1999             1998
-------------------------------------------------
<S>                      <C>              <C>
Finished goods           $ 8,633          $ 7,939
Work-in-process            2,075            1,087
Raw materials              4,573            6,064
                         ------------------------
                         $15,281          $15,090
=================================================
</TABLE>

PROPERTY AND EQUIPMENT

Leasehold improvements are amortized on the straight-line method over the lives
of the respective leases or, where applicable, the related lottery game
contracts. Amortization associated with capitalized leases is included in
depreciation expense. Production and other equipment and office furniture and
equipment are depreciated on the straight-line method, generally over 3 to 14
years. Buildings are depreciated on the straight-line method over 31 years.

GOODWILL

Goodwill represents the excess purchase price paid over the net assets acquired
in connection with business combinations accounted for under the purchase
method. Goodwill is being amortized on the straight-line method. Goodwill
related to SGIL, SG Austria and SG France is being amortized over periods of 4
to 30 years. Accumulated amortization of goodwill totaled approximately $5.9
million and $3.5 million at December 31, 1999 and 1998, respectively.

In the event facts and circumstances indicate that goodwill or other long-lived
assets may be impaired, an evaluation of recoverability would then be performed.
If an evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash flow value is
required.

OTHER ASSETS

Other assets consist of the following:

<TABLE>
<CAPTION>
                                                       DECEMBER 31
                                                ------------------------
(In thousands)                                    1999            1998
------------------------------------------------------------------------
<S>                                             <C>              <C>
Cash surrender value of life insurance          $ 5,513          $ 3,836
Lottery contract costs                            3,721            5,509
Intangible pension asset                          2,781            3,138
Other                                             8,696            4,976
                                                ------------------------
                                                $20,711          $17,459
========================================================================
</TABLE>


                                                                              29
<PAGE>   18

ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                             DECEMBER 31
                                                      ------------------------
(In thousands)                                          1999            1998
------------------------------------------------------------------------------
<S>                                                   <C>              <C>
Potential legal claims and other assessments          $   799          $   917
Reserves for defective ticket adjustments                 549              650
Accrued compensation                                    4,949            2,920
Amounts due to other entities                           4,051            3,283
Accrued contract costs                                  7,440            7,645
Other                                                   5,609            2,407
                                                      ------------------------
                                                      $23,397          $17,822
==============================================================================
</TABLE>

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of foreign operations are translated from the local
currency into U.S. dollars at the rate of currency exchange at the end of the
fiscal period. Translation gains and losses of foreign operations that use local
currencies as the functional currency are accumulated and reported as other
comprehensive income in shareholders' equity. Revenues and expenses are
translated at average monthly exchange rates. Transaction gains and losses
arising from exchange rate fluctuations on transactions denominated in a
currency other than the local functional currency are included in the results of
operations.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount reflected in the consolidated balance sheets for cash, cash
equivalents, accounts receivable, accounts payable and bank debt approximate
their respective fair values.

ACCOUNTING POLICIES NOT YET ADOPTED

In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and for Hedging Activities. Statement 133 provides a comprehensive
standard for the recognition and measurement of derivatives and hedging
activities. Statement No. 133 requires all derivatives to be recorded on the
balance sheet at fair value and establishes "special accounting" for the
different types of hedges. Though the accounting treatment and criteria for each
type of hedge are unique, they all result in recognizing offsetting changes in
value or cash flows of both the hedge and the hedged item in earnings in the
same period. Changes in fair value of derivatives that do not meet the hedge
criteria are included in earnings in the period of the change. The Company does
not believe that the adoption of Statement No. 133 in 2001 will have a
significant impact on its consolidated financial statements.

3. ACQUISITIONS AND DISPOSITIONS

On April 15, 1997, the Company completed its stock acquisition of TeleControl
Kommunikations - und Computersysteme Gesellschaft m.b.h., an Austrian
corporation which was renamed Scientific Games Kommunikations - und
Computersysteme GmbH. ("SG Austria"), an on-line lottery and transaction systems
company located in Vienna, Austria, from Autotote Corporation. The purchase
price was $26.9 million net of $2.8 million of SG Austria's acquired cash. The
purchase was accounted for under the purchase method of accounting. The purchase
price was allocated to approximately $5.1 million of net assets and to a
one-time write-off of $10.1 million in connection with in-process research and
development costs based on an appraisal, with the remainder allocated to
goodwill to be amortized over 15 years.


30
<PAGE>   19

The accompanying financial statements include the results of operation of SG
Austria from the date of such acquisition. The following table summarizes the
Company's estimated pro forma unaudited results of operations as if the purchase
of SG Austria occurred on January 1, 1996:

<TABLE>
<CAPTION>
(In thousands, except per share amounts)          1997
--------------------------------------------------------
<S>                                          <C>
Revenues                                     $   200,225
Net income                                        18,841
Earnings per common share - basic                   1.57
Earnings per common share - diluted                 1.51
</TABLE>

The pro forma results presented above include adjustments to reflect interest
expense on borrowings for the acquisitions, amortization of assets acquired
including intangibles, certain management expenses related to the Company's
combined operations and the income tax effect of such pro forma adjustments and
income taxes on earnings.

These pro forma unaudited results of operations do not purport to represent what
the Company's actual results of operations would have been if the SG Austria
acquisition had occurred on January 1, 1997 and should not serve as a forecast
of the Company's operating results for any future periods. The pro forma
adjustments are based solely upon certain assumptions that management believes
are reasonable under the circumstances at this time. However, the full impact of
potential cost savings has not been reflected in the pro forma results presented
above, although there can be no assurances such cost savings will be achieved.

In the fourth quarter of 1998, the Company formed a joint venture with La
Francaise des Jeux, the operator of the French National Lottery. The joint
venture corporation, ("SG France"), was formed to provide systems maintenance
services for the lottery terminal software and hardware of six German provincial
lotteries, terminal maintenance for the French National Lottery and to develop a
lottery terminal to be used by La Francaise des Jeux in France and by the
Company throughout the world. The Company's initial cash contribution to SG
France was approximately $1.9 million which resulted in a 55% ownership
interest. The Company also advanced to SG France approximately $1.4 million as a
loan to acquire inventory to be used in the venture. Goodwill and other
intangibles totaling approximately $2.5 million have been recognized in the
consolidated financial statements in connection with the joint venture.

In 1997, the Company discontinued its charity pull-tab ticket business line
which was produced and distributed by its then-named subsidiary GameTec, Inc.
("GameTec"). A write-off of $3.4 million (pre-tax) was recognized for the
disposition of the assets of this business line in 1997. In connection with the
disposition, the Company sold substantially all of the assets of GameTec. The
Company entered into a three-year extendible marketing agreement with the buyer
to provide marketing and related services to state lotteries for pull-tab
tickets. The Company will continue to provide pull-tab tickets to its lottery
customers through the marketing agreement.

4. CREDIT FACILITY

On November 30, 1999 the Company entered into a three-year, $80 million credit
facility with four banks (the "$80 Million Credit Facility"). The $80 Million
Credit Facility contains provisions for domestic and foreign currency loans
whereby, at the request of the Company, funds may be borrowed and repaid in
either US dollars, British pounds sterling, French francs, deutsche marks, or
the European currency, Euros. In addition, on the same day, the Company also
entered into a separate, 364-day, $25 million credit facility with one of the
participating banks (the "$25 Million Credit Facility"). The $25 Million Credit
Facility expires on November 29, 2000, and can be renegotiated at the mutual
consent of both the bank and the Company


                                                                              31
<PAGE>   20

for the subsequent 364 days. The interest-rate options available to the Company
under both credit facilities are LIBOR, IBOR and the Base Rate (the higher of
the prime rate, or the federal funds rate plus .5%), plus the applicable margin
as defined in the credit facilities. These interest rates options are applicable
and available in varying circumstances based upon, among other things, the
amount and nature of the borrowings and the Company's leverage ratio at the time
such amounts are borrowed. The weighted-average interest rate on the outstanding
borrowings under the combined credit facilities, including foreign currency
debt, during 1999 and 1998 was 4.9% and 5.0%, respectively. For the $80 Million
Credit Facility exclusively, a per annum fee of .20% is payable on the average,
daily unused portion of the commitment. At December 31, 1999, outstanding
borrowings under the combined credit facilities was $23.5 million. This amount
included $10.5 million British pounds sterling, $5.0 million Euros, and the
balance of $8.0 million was U.S. dollars.

Both credit facilities contain covenants that restrict the Company's ability to
incur additional debt or create liens on any of its property, except as
permitted, and require the Company to maintain a leverage ratio, as defined, at
or below 50% and a fixed charge coverage ratio of at least three to one.

For the year ended December 31, 1999, interest paid totaled $770,000, of which
$101,000 was capitalized. For the year ended December 31, 1998, interest paid
totaled $1.2 million. These amounts include interest on bank debt, interest on
capital leases and commitment fees. For the year ended December 31, 1997,
interest paid and incurred totaled $955,000, of which $44,000 was capitalized.

The outstanding balance under the $80 Million Credit Facility is due on November
30, 2002.

5. SHAREHOLDERS' EQUITY

In July 1997, the Company adopted a shareholders' rights plan, which provided
for the issuance to each holder of the Company's common stock, certain rights
(the "Rights") to purchase shares of the Company's redeemable Series A
Participating Cumulative Preferred Stock pursuant to the terms of a Rights
Agreement. Such Rights are exercisable after distribution by the holders
thereof, other than "Acquiring Persons" as defined in the Rights Agreement, in
the event of certain ownership changes and in connection with certain business
combinations. The Rights have certain anti-takeover effects. The Rights may
cause substantial dilution to a person that attempts to acquire the Company
without a condition to such an offer being that a substantial number of the
Rights to be acquired or that the Rights be redeemed or declared invalid. The
Rights should not interfere with any merger or other business combination
approved by the Board of Directors (under some circumstances with the
concurrence of the continuing directors, as defined) since the rights may be
redeemed by the Company.

6. STOCK OPTIONS

The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation, requires use of option valuation models
that were not developed for use in valuing employee stock options.

The Company has stock option plans that provide for the granting of
non-qualified options to purchase the Company's common stock to selected key
employees, officers and directors. Such options generally have ratable, annual
vesting periods ranging from 3 to 7 years from the date of the grant, and
maximum terms ranging from 7 to 10 years from the date of the grant.


32
<PAGE>   21

A summary of the Company's stock option activity and related information for the
years ended December 31, 1999, 1998 and 1997 follows:

<TABLE>
<CAPTION>
                                                1999                              1998                            1997
-----------------------------------------------------------------------------------------------------------------------------------
                                                        WEIGHTED-                        WEIGHTED-                        WEIGHTED-
                                                         AVERAGE                          AVERAGE                          AVERAGE
                                       SHARES           EXERCISE        SHARES           EXERCISE        SHARES           EXERCISE
                                       (000'S)            PRICE         (000'S)            PRICE         (000'S)            PRICE
                                       --------------------------------------------------------------------------------------------
<S>                                    <C>              <C>             <C>              <C>             <C>              <C>
Outstanding - beginning of year         1,019           $   17.72        1,376           $   12.46        1,271           $   11.41
Granted                                   125               17.08          345               19.76          125               20.60
Exercised                                 (25)               5.54         (659)               7.56          (18)               3.17
Forfeited                                 (58)               7.70          (43)              20.68           (2)               3.06
                                        -----                            -----                            -----
Outstanding - end of year               1,061               17.27        1,019               17.72        1,376           $   12.46
                                        =====                            =====                            =====
Exercisable - end of year                 662           $   16.38          558           $   15.06          885           $    9.59
                                        =====                            =====                            =====
</TABLE>

Exercise prices for options ranged from $1.46 to $7.00 for approximately 149,000
options, from $9.44 to $20.00 for approximately 580,000 options, and from $20.00
to $38.00 for approximately 332,000 options. The weighted-average remaining
contractual life of those options is 7.3 years.

The Company charged approximately $64,000, $563,000 and $1.3 million to
operations in 1999, 1998 and 1997, respectively, representing the amortization
of the difference in the option price and the fair market value of the option
shares at the date of grant.

At December 31, 1999, the Company has approximately 518,000 shares of Common
Stock available for future grants.

Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994, under the fair value method of that Statement. The fair value
of these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1999, 1998 and
1997, respectively: risk-free interest rates of 5.4%, 5.2% and 6.7%, a dividend
yield of 0.0%; volatility factors of the expected market price of the Company's
common stock of .41, .41 and .46; and a weighted-average expected life of the
option of 8.0, 8.0 and 8.7 years. The weighted-average fair values of options
granted during 1999, 1998 and 1997 were $9.50, $10.94 and $13.16, respectively.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected share price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.


                                                                              33
<PAGE>   22

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):

<TABLE>
<CAPTION>
                                               1999            1998            1997
-------------------------------------------------------------------------------------
<S>                                         <C>             <C>             <C>
Pro forma net income                        $   19,238      $   18,352      $   7,689
Pro forma earnings per share - diluted      $     1.61      $     1.51      $     .62
</TABLE>

Because Statement 123 is applicable to options granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until future years.

7. INCOME TAXES

Income tax expense is composed of the following:

<TABLE>
<CAPTION>
                               YEAR ENDED DECEMBER 31
                        ----------------------------------
(in thousands)            1999         1998          1997
----------------------------------------------------------
<S>                     <C>          <C>          <C>
Current:
  Federal               $ 7,329      $ 5,939      $ 10,457
  State                     984          796         2,600
  Foreign                 3,662        1,069           842
Deferred:
  Federal                     1        2,765        (1,433)
  State                      --          629          (213)
  Foreign                    11        1,013          (897)
                        ----------------------------------
Income tax expense      $11,987      $12,211      $ 11,356
==========================================================
</TABLE>

The difference between the provision for income taxes and amounts computed by
applying federal statutory rates to income before income taxes is summarized as
follows:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31
                                                         --------------------------------------
(in thousands)                                             1999           1998            1997
-----------------------------------------------------------------------------------------------
<S>                                                      <C>            <C>            <C>
Federal income tax expense at statutory rates            $ 11,367       $ 11,067       $  7,115
State income taxes net of federal income tax effect           639          1,082          1,551
Non-deductible expenses                                     1,236          1,139            450
In-process technology write-off                                --             --          3,535
Tax credits                                                  (115)          (305)          (582)
Other                                                      (1,140)          (772)          (713)
                                                         --------------------------------------
Income tax provision                                     $ 11,987       $ 12,211       $ 11,356
===============================================================================================
</TABLE>

The pre-tax income (loss) attributed to the Company's foreign operations was
approximately $9.3 million, $7.7 million and ($8.5) million for the years ended
December 31, 1999, 1998 and 1997, respectively.


34
<PAGE>   23

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1999 and
1998 are as follows:


<TABLE>
<CAPTION>
(in thousands)                       1999        1998
------------------------------------------------------
<S>                                 <C>         <C>
Deferred tax liabilities:
  Tax over book depreciation        $5,058      $3,897
  Other - net                        1,669       2,797
                                    ------------------
Total deferred tax liabilities       6,727       6,694

Deferred tax assets:
  Accruals and reserves                150          42
  Stock compensation                   903         902
                                    ------------------
Total deferred tax assets            1,053       1,032
                                    ------------------
Net deferred tax liabilities        $5,674      $5,662
======================================================
</TABLE>

The Company made federal and state income tax payments of approximately $10.1
million, $7.6 million and $11.7 million in the years ended December 31, 1999,
1998 and 1997, respectively. The Company made $4.7 million, $580,000 and
$750,000 in foreign income tax payments in the years ended December 31, 1999,
1998 and 1997, respectively.

8. LEASES

The Company leases certain office and warehouse facilities under operating
leases. Lease expense for operating leases totaled approximately $4.0 million,
$2.8 million and $2.3 million for the years ended December 31, 1999, 1998
and 1997, respectively.

Future minimum lease obligations at December 31, 1999, are summarized as
follows:

<TABLE>
<CAPTION>
(in thousands):                             OPERATING LEASES
------------------------------------------------------------
<S>                                         <C>
2000                                            $ 3,805
2001                                              3,066
2002                                              1,339
2003                                                829
2004                                                720
Thereafter                                        2,245
                                                -------
Total lease obligations                         $12,004
============================================================
</TABLE>


                                                                              35
<PAGE>   24

9. BENEFIT PLANS

The Company sponsors the following defined contribution plans for its employees
and directors:

The Company sponsors the Scientific Games Inc. Savings and Investment Plan, a
savings plan which covers all SGI employees who elect to participate. Employees
are eligible for participation on the enrollment date following six months of
service. Prior to 1999, the Company contributed an amount equal to 33% of the
portion of the employee's elective deferral contributions which do not exceed 6%
of the employee's total pay for each payroll period in which an elective
deferral is made, subject to the limitations of the Internal Revenue Code.
Beginning in 1999, the Company contributed an amount equal to 50% of the portion
of the employee's elective deferral contributions which do not exceed 6% of the
employee's total pay for each payroll period in which an elective deferral is
made. The Company's matching portion of employees' contributions is made with
the Company's common stock, which is purchased on the open market. Matching
contributions of the Company are 100% vested upon receipt. Approximately
$581,000, $360,000 and $331,000 was expensed by the Company related to this plan
during 1999, 1998 and 1997, respectively.

On October 1, 1996, the Company established the Scientific Games Inc. Management
Deferred Compensation Plan ("MDCP") to provide deferred compensation for a
select group of management or highly compensated employees. Generally,
participants in the MDCP may elect to defer up to 50% of their salary and up to
100% of their annual cash incentive bonus. Assets of the MDCP may be held by a
rabbi trust and are accounted for as assets of the Company; therefore all
earnings and expenses are recorded in the Company's financial statements. The
net amount of the MDCP's earnings and losses is recorded as additional liability
to the participants and is an expense of the Company. Assets and liabilities of
the MDCP totaled approximately $1.4 million and $1.7 million, respectively, at
December 31, 1999. Compensation expense associated with the MDCP was
approximately $292,000, $546,000 and $649,000 for the years ended December 31,
1999, 1998 and 1997, respectively.

Effective July 11, 1996, the Company established the Scientific Games Holdings
Corp. Directors Deferred Compensation Plan ("DDCP") to provide each member of
the Board of Directors who is not an employee of the Company an opportunity, on
an annual basis, to defer all or any portion of his or her director's fees.
Similar to the MDCP discussed above, assets of the DDCP may be held by a rabbi
trust. Assets and liabilities of the DDCP totaled approximately $279,000 and
$322,000, respectively, at December 31, 1999. Compensation expense associated
with the DDCP was approximately $60,000, $133,000 and $71,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.

The Company also sponsors the following defined benefit plans for certain
employees:

Certain employees of SGIL are participants in a defined-benefit pension plan
administered by SGIL. The benefits are based on an average of the employee's
compensation over two years preceding retirement or leave of service.

The Company also sponsors the Scientific Games Inc. Supplemental Executive
Retirement Plan ("SERP") covering certain executives as determined by the
Compensation Committee of the Board. All current participants are 100% vested in
their benefits. Generally, participants will receive benefits for 15 years in an
amount equal to 53% of his or her compensation in the final three calendar years
of employment. Such amounts may be reduced based upon length of service and
vesting schedules for participants entering the SERP after January 1, 1996.

The following tables summarize the SGIL Plan and the SERP. Amounts related to
the SERP for 1997 have not been presented as such amounts were not significant.


36
<PAGE>   25

<TABLE>
<CAPTION>

                                                                         DECEMBER 31
                                            -----------------------------------------------------------------
                                                             SGIL                               SERP
                                            ------------------------------------------- ---------------------
(In thousands)                                1999           1998           1997          1999         1998
--------------------------------------------------------------------------------------- ---------------------
<S>                                         <C>            <C>            <C>           <C>           <C>
CHANGES IN BENEFIT OBLIGATION
Net benefit obligation at
  beginning of year                         $ 11,960       $  9,634       $ 8,089       $ 5,506       $ 5,252
Service cost                                   1,018            963           775           283           134
Interest cost                                    646            631           770           404           394
Actuarial (gain) loss                          2,044            732            --           (23)         (152)
Gross benefits paid                               --             --            --          (163)         (122)

                                            ------------------------------------------- ---------------------

Net benefit obligation at                   $ 15,668       $ 11,960       $ 9,634       $ 6,007       $ 5,506
  end of year                               =========================================== =====================

CHANGES IN PLAN ASSETS
Fair value of plan assets at
  beginning of year                         $ 11,777       $  9,883       $ 9,059       $    --       $    --
Actual return on plan assets                   1,647            780            49            --            --
Employer contributions                           799            963           775            --            --
Plan participants' contribution                  476            151            --            --            --
Gross benefits paid                               --             --            --            --            --
                                            ------------------------------------------- ---------------------
Fair value of plan assets at
  end of year                               $ 14,699       $ 11,777       $ 9,883       $    --       $    --
                                            =========================================== =====================

<CAPTION>
                                                                         DECEMBER 31
                                            -----------------------------------------------------------------
                                                             SGIL                               SERP
                                            ------------------------------------------- ---------------------
(In thousands)                                1999           1998           1997          1999         1998
--------------------------------------------------------------------------------------- ---------------------
<S>                                         <C>            <C>            <C>           <C>           <C>
Funded status at end of year                $   (969)      $   (183)      $   249       $(6,007)      $(5,506)
Unrecognized net actuarial gain (loss)           727           (100)         (396)          595           623
Unrecognized prior service cost                   --             --            --         2,781         3,139
Additional minimum liability                      --             --            --        (2,910)       (3,394)
Intangible asset                                  --             --            --         2,781         3,139
Accumulated other
  comprehensive income                            --             --            --           129           255
                                            ------------------------------------------- ---------------------
Net amount recognized
  at end of year                            $   (242)      $   (283)      $  (147)      $(2,631)      $(1,744)
                                            =========================================== =====================

Service cost                                $  1,018       $    963       $   775       $   283       $   134
Interest cost                                    646            631           770           404           394
Expected return on plan assets                  (889)          (780)         (819)           --            --
Amortization of unrecognized
  transition obligation                           --            (16)           --            --            --
Amortization of prior service cost                --             --            --           358           358
Amortization of actuarial loss (gain)             --             --            --             4            29
                                            ------------------------------------------- ---------------------
Net periodic pension cost                   $    775       $    798       $   726       $ 1,049       $   915
                                            =========================================== =====================
</TABLE>


                                                                              37
<PAGE>   26

Assumptions used in the accounting for the defined benefit plans are as follows:

<TABLE>
<CAPTION>
                                                      DECEMBER 31
                                      --------------------------------------------
                                                SGIL                     SERP
                                      ----------------------------- --------------
(In thousands)                        1999      1998      1997      1999      1998
------------------------------------------------------------------- --------------
<S>                                   <C>       <C>       <C>       <C>       <C>
Weighted-average discount rate        6.0%      5.5%      6.5%      7.5%      7.5%
Rate of increase in future
  compensation levels                 4.5%      4.0%      4.5%      5.0%      5.0%
Expected long term rate of
  return on plan assets               7.5%      7.5%      7.5%       --        --
</TABLE>

The SERP is not a qualified plan and has no plan assets. To provide a funding
source for the payment of certain benefits under the SERP, the Company owns
whole-life insurance contracts on certain of the participants. The cash value of
these policies was approximately $2.5 million at December 31, 1998 and
approximately $3.8 million at December 31, 1999. The Company made cash payments
associated with the policies of approximately $787,000 annually during 1999,
1998 and 1997. These policies have been placed in a rabbi trust, which will hold
the policies and death benefits as they are received.

10. CONTINGENCIES

As initially reported in July 1993 and periodically reported thereafter, the
Company's Scientific Games Inc. ("SGI") subsidiary owns a minority interest in
Wintech de Colombia S.A. ("Wintech"), which formerly operated the Colombian
national lottery under contract with Empresa Colombiana de Recursos para la
Salud, S.A. ("Ecosalud"), an agency of the Colombian government. The contract
projected that certain levels of lottery ticket sales would be attained and
provided a penalty against Wintech, SGI and the other shareholders of Wintech of
up to $5.0 million if such performance levels of lottery ticket sales were not
achieved. In addition, with respect to a further guarantee of performance under
the contract with Ecosalud, SGI delivered to Ecosalud a $4.0 million bond issued
by a Colombian surety, Seguros del Estado ("Seguros"). Wintech started the
instant lottery in Colombia, but, due to difficulties beyond its control,
including, among other factors, social and political unrest in Colombia,
frequently interrupted telephone service and power outages, and competition from
another lottery being operated in a province of Colombia in violation of
Wintech's exclusive license from Ecosalud, the projected sales level was not met
for the year ended June 1993. On July 1, 1993, Ecosalud adopted resolutions
declaring, among other things, that the contract was in default and asserted
various claims for compensation and penalties against Wintech, SGI and other
shareholders of Wintech. As the Company has previously disclosed in its filings
with the Commission, litigation is pending in Colombia concerning various claims
among Ecosalud, Wintech and SGI, relating to the termination of the contracts
with Ecosalud (the "Colombian Litigation"). Ecosalud's claims in the Colombian
Litigation were for, among other things, realization on the full amount of the
penalty, plus interest and costs of the bond.

SGI has consulted with Colombian counsel and been advised that SGI has various
legal defenses to Ecosalud's claims. SGI also has certain cross indemnities and
undertakings from the two other privately held shareholders of Wintech for their
respective shares of any liability to Ecosalud. That obligation is secured in
part by a $1.5 million confirmed letter of credit in favor of SGI.


38
<PAGE>   27

The Colombian surety, which issued a $4.0 million bond to Ecosalud under the
contract, paid $2.4 to Ecosalud under the bond and made demand upon SGI for that
amount under the indemnity agreement entered into by the surety and SGI. SGI
declined to make or authorize any such payment and notified the surety that any
payment in response to Ecosalud's demand on the bond was at the surety's risk.
No assurance can be given that the other shareholders of Wintech will, or have
sufficient assets to, honor their indemnity undertakings to SGI when the claims
by Ecosalud against SGI and Wintech are finally resolved, in the event such
claims result in any final liability.

On April 2, 1998, Seguros brought suit against SGI in the United States District
Court for the Northern District of Georgia, Atlanta Division, Civil Action No.
1:98-CV-968-CAM. The plaintiff sought $2.4 million for sums paid by Seguros to
Ecosalud under the surety bond on November 1, 1994, plus interest at the
Colombian bank rate of interest. SGI filed a motion to dismiss based on the
Colombian statute of limitations of two years and, alternatively, sought that
the case be dismissed on other grounds. Seguros filed a motion for summary
judgment with the Court on May 6, 1998 seeking summary judgment on its claim in
the amount of $2.4 million, plus interest.

On September 29, 1999, the District Court issued an order in which it denied
various motions of SGI, including a motion to dismiss, and granted Seguros'
motion for summary judgment. On September 29, 1999, the District Court also
entered judgment for Seguros in the amount of $2.4 million or the equivalent in
Colombian pesos as of the judgment date, plus prejudgment interest at a rate of
38.76% per annum, equivalent to approximately $4.6 million.

SGI has appealed the matters covered by the District Court's order and judgment.
SGI has posted an appeal bond in the amount of $7 million through its existing
bonding arrangements. SGI continues to believe that it has meritorious defenses,
including that the amount paid by Seguros was improperly paid because of the
default by Ecosalud of its obligations to SGI, which claims remain the subject
of separate litigation in Colombia.

In addition to vigorously prosecuting its appeal of the District Court's order
and judgment, SGI continues to vigorously defend the Colombian litigation and
has been advised by counsel that SGI has various defenses on the merits as well
as procedural defenses to the litigation (which it has asserted). Nevertheless,
it is not possible to determine the exact/ultimate outcome of the appeal of the
order and judgment granted to Seguros or the outcome of any litigation in
Colombia. While it is not feasible to predict or determine the final outcome of
these proceedings, management, based on the knowledge of the related facts and
circumstances, does not believe that any potential losses will result in a
materially adverse effect on the Company's financial position, results of
operations, liquidity or capital resources.

At December 31, 1999, the Company had contracts for the completion of the
expansions of the Alpharetta and U.K. facilities totaling approximately $17.5
million.


                                                                              39
<PAGE>   28

11. SEGMENT INFORMATION

The Company's primary customers are government-sanctioned lotteries worldwide.
The two primary products sold by these lotteries are instant ticket games
(scratch-off lottery tickets) and on-line lottery games (lotto-type games). The
Company's two reportable segments are organized based on the products and
services it supplies to lotteries, Instant Tickets and Related Services and
Systems.

In the Instant Tickets and Related Services segment, the Company primarily
supplies game design, sales and marketing support, instant ticket manufacturing
and delivery, inventory management and distribution, and retailer telemarketing
and field service. In addition, this segment includes the supply of promotional
instant tickets and pull-tab tickets, which are sold to both lottery and
non-lottery customers as well as pre-paid phone cards which are sold to
telecommunications companies. These products represented less than 10% of the
Company's revenue.

In the Systems segment, the Company primarily supplies transaction processing
software that accommodates instant ticket accounting and validation and on-line
games, point-of-sale terminal hardware which connects to these systems, central
site computer and communication hardware which run these systems, and ongoing
maintenance services for each of these items. On-line lottery games include
lotto, daily pick, keno and other games. The Systems segment also includes
software and hardware for sports wagering systems and credit card processing
systems for non-lottery customers.

The Company refers to Cooperative Services in various sections of this annual
report. Cooperative Services is a branded marketing name given to the
combination of any of the products offered by the two segments under one
customer contract. The Company believes the Cooperative Services name assists it
in promoting greater awareness of its capabilities, but does not treat it as a
separate segment. The intersegment sales relate to Systems activity included in
Instant Tickets and Related Services customer contracts. The amount of
intersegment sales was calculated based on the market value of the product or
service provided as if it was sold separately. The Corporate line items in the
schedules relate to general and administrative functions which are not allocated
to the segments.


40
<PAGE>   29

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31
                                                          -----------------------------------------
(In thousands)                                               1999            1998            1997
---------------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>             <C>
Segment Information
Revenue from external customers:
  Instant Tickets and Related Services                    $ 188,571       $ 176,676       $ 178,923
    Intersegment revenue                                     (7,306)         (8,098)         (6,353)
  Systems                                                    39,716          36,810          18,470
    Intersegment revenue                                      7,306           8,098           6,353
  Corporate                                                     286             314              63
                                                          -----------------------------------------
Total revenue from external customers                     $ 228,573       $ 213,800       $ 197,456
===================================================================================================

Depreciation and amortization:
  Instant Tickets and Related Services                    $   9,186       $   8,887       $   8,868
  Systems                                                     6,880           6,091           3,406
  Corporate                                                   1,958           1,352             955
                                                          -----------------------------------------
Total depreciation and amortization                       $  18,024       $  16,330       $  13,229
===================================================================================================

Operating income (loss):
  Instant Tickets and Related Services                    $  38,255       $  34,343       $  37,707
    Pull-tab business write-off                                  --              --          (3,376)
  Systems                                                     6,152           7,577           5,553
    In-process technology write-off                              --              --         (10,102)
  Corporate                                                 (11,715)         (9,598)         (9,404)
                                                          -----------------------------------------
Total operating income                                    $  32,692       $  32,322       $  20,378
  Interest expense                                             (588)         (1,353)           (911)
  Other                                                         371             651             861
                                                          -----------------------------------------
Income before income taxes                                $  32,475       $  31,620       $  20,328
===================================================================================================

Assets:
  Instant Tickets and Related Services                    $ 131,101       $ 137,718       $ 136,470
  Systems                                                    56,141          26,564          19,485
  Corporate                                                  16,391          15,351           8,455
                                                          -----------------------------------------
Total assets                                              $ 203,633       $ 179,633       $ 164,410
===================================================================================================
</TABLE>


                                                                              41
<PAGE>   30

<TABLE>
<CAPTION>
                                    YEAR ENDED DECEMBER 31
                             ------------------------------------
(In thousands)                 1999          1998          1997
-----------------------------------------------------------------
<S>                          <C>           <C>           <C>
GEOGRAPHIC INFORMATION
Net revenues(1):
  United States              $168,147      $169,360      $158,911
  Europe                       60,426        44,440        38,545
                             ------------------------------------
Total net revenues           $228,573      $213,800      $197,456
=================================================================

Net revenues(2):
  United States              $141,392      $138,199      $131,335
  Europe                       69,150        68,250        58,089
  Other                        18,031         7,351         8,032
                             ------------------------------------
Total net revenues           $228,573      $213,800      $197,456
=================================================================

Net long-lived assets:
  United States              $ 74,467      $ 75,062      $ 80,738
  Europe                       25,985        20,164        17,460
                             ------------------------------------
Total long-lived assets      $100,452      $ 95,226      $ 98,198
=================================================================
</TABLE>

(1) Based on subsidiaries' countries of domicile
(2) Based on customers' countries of domicile

During the year ended December 31, 1999, one customer comprised approximately
10% of the Company's total revenues, and for the years ended December 31, 1998
and 1997, respectively, no single customer accounted for over 10% of the
Company's total revenues.


42
<PAGE>   31

12. QUARTERLY INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                              FIRST       SECOND        THIRD       FOURTH
(In thousands, except per share data)        QUARTER      QUARTER      QUARTER      QUARTER
-------------------------------------------------------------------------------------------
<S>                                          <C>          <C>          <C>          <C>
1999
Revenues                                     $52,665      $57,125      $59,511      $59,272
Gross profit                                  18,947       21,549       20,444       18,807
Income before taxes                            8,081        8,628        7,866        7,900
Net income                                     5,006        5,430        5,373        4,679
                                             ----------------------------------------------
Net income per share - basic                 $  0.42      $  0.46      $  0.45      $  0.40
                                             ==============================================
Net income per share - diluted               $  0.42      $  0.45      $  0.45      $  0.40
                                             ==============================================

1998
Revenues                                     $48,419      $51,567      $53,928      $59,886
Gross profit                                  16,862       18,832       20,116       19,360
Income before taxes                            6,229        8,103        9,093        8,195
Net income                                     3,777        4,853        5,282        5,497
                                             ----------------------------------------------
Net income per share - basic                 $   .32      $   .39      $   .43      $   .46
                                             ==============================================
Net income per share - diluted               $   .31      $   .39      $   .43      $   .46
                                             ==============================================
</TABLE>


                                                                              43
<PAGE>   32

                         REPORT OF INDEPENDENT AUDITORS
                               BOARD OF DIRECTORS
                        SCIENTIFIC GAMES HOLDINGS CORP.

We have audited the consolidated balance sheets of Scientific Games Holdings
Corp. (the "Company") as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company'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. 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 accounting principles used and 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
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Scientific Games
Holdings Corp. at December 31, 1999 and 1998, and the results of its operations
and cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.


ERNST & YOUNG LLP


Atlanta, Georgia
February 10, 2000


44
<PAGE>   33
                             CORPORATE INFORMATION

                        SCIENTIFIC GAMES HOLDINGS CORP.


CORPORATE HEADQUARTERS
Scientific Games Holdings Corp.
1500 Bluegrass Lakes Parkway
Alpharetta, Georgia 30004
Tel: 770.664.3700

INDEPENDENT AUDITORS
Ernst & Young LLP
600 Peachtree Street
Atlanta, Georgia 30308-2215

CORPORATE COUNSEL
Smith, Gambrell & Russell, LLP
Suite 3100 Promenade II
1230 Peachtree Street, N.E.
Atlanta, Georgia 30309-3592

TRANSFER AGENT AND REGISTRAR
First Union National Bank of North Carolina
Corporate Trust Client Services NC-1153
1525 West W.T. Harris Boulevard -- 3C3
Charlotte, NC 28288-1153
Tel: 704.590.7375

ANNUAL REPORT ON FORM 10-K
Copies of the Company's Annual Report for the fiscal year ended December 31,
1999, as filed with the Securities and Exchange Commission will be sent to any
shareholder upon request in writing to:
         SCIENTIFIC GAMES HOLDINGS CORP.
         1500 BLUEGRASS LAKES PARKWAY
         ALPHARETTA, GEORGIA 30004
         ATTENTION: CORPORATE SECRETARY

INVESTOR/ANALYST CONTACT
Cliff O. Bickell
Chief Financial Officer
Scientific Games Holdings Corp.
1500 Bluegrass Lakes Parkway
Alpharetta, Georgia 30004
Tel: 770.664.3700
Web Site: http://www.scigames.com
For faxed press release:
800.758.5804 ext. 110329

ANNUAL MEETING OF SHAREHOLDERS
The annual meeting will be held at 9:00 a.m. on May 19, 2000 at:
Atlanta/Windward Hilton Garden Inn
4025 Windward Concourse
Alpharetta, Georgia 30005

COMMON STOCK
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol SG. Quarterly high and low closing stock prices for 1998 and 1999 were:

<TABLE>
<CAPTION>
1999                       HIGH                       LOW
<S>                        <C>                        <C>
First Quarter              $18.25                     $16.75
Second Quarter              19.50                      15.44
Third Quarter               21.00                      19.19
Fourth Quarter              19.75                      14.50
</TABLE>

<TABLE>
<CAPTION>
1998                       HIGH                       LOW
<S>                        <C>                        <C>
First Quarter              $23.00                    $19.25
Second Quarter              23.44                     17.56
Third Quarter               24.00                     18.31
Fourth Quarter              19.31                     16.00
</TABLE>

NUMBER OF SHAREHOLDERS
As of March 13, 2000, we had approximately 106 shareholders of record. This
number excludes individual shareholders holding stock under nominee security
position listings.

FORWARD-LOOKING INFORMATION
Except for the historical information contained in this Annual Report, certain
matters discussed herein, especially in the narrative portion of this report,
constitute forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the matters discussed in
such statements. Factors which might cause such differences include, but are
not limited to, those discussed under Item 1 of the Company's Annual Report on
Form 10-K.

DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock. The
Company currently anticipates that its earnings will be retained for
development of the Company's business and does not anticipate paying any cash
dividends on its Common stock in the foreseeable future.