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                                    FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended: February 27, 1999
                           Commission File No: 1-11250

                           GTECH HOLDINGS CORPORATION

            Delaware                                         05-0450121         
  (State or other jurisdiction                         (IRS Employer ID Number)
of incorporation or organization)

              55 Technology Way, West Greenwich, Rhode Island 02817
                                 (401) 392-1000
          (Address and telephone number of Principal Executive Offices)


           Securities registered pursuant to Section 12(b) of the Act:

    Title of Each Class:                             Common Stock $.01 par value
                                                    
    Name of Each Exchange on which Registered:       New York Stock Exchange
                                               

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X]

Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [x]

The aggregate market value of the registrant's Common Stock (its only voting
stock) held by non-affiliates of the registrant as of May 3, 1999 was
$987,743,750. (Reference is made to Page 39 herein for a statement of the
assumptions upon which this calculation is based.)

On May 3, 1999, there were outstanding 37,556,150 shares of the registrant's
Common Stock.

Documents Incorporated By Reference: Certain portions of the registrant's 1999
definitive proxy statement relating to its scheduled July 1999 Annual Meeting of
Shareholders (which proxy statement is expected to be filed with the Commission
not later than 120 days after the end of the registrant's last fiscal year) are
incorporated by reference into Part III of this report.
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                                     PART I
ITEM 1.  BUSINESS

GENERAL

GTECH Corporation ("GTECH") is the world's leading operator of computerized
online lottery systems and the wholly owned subsidiary of GTECH Holdings
Corporation ("Holdings"; collectively with its direct and indirect subsidiaries,
including GTECH, the "Company"). The Company currently operates, or supplies
equipment to, online lottery systems for 29 of the 38 online lottery authorities
in the United States and has supplied, currently operates or has entered into
contracts to operate in the future online lottery systems for 52 of the 84
international online lottery authorities. The Company, seeking to develop growth
opportunities outside of the online lottery industry, is actively involved in
the pursuit of other gaming and entertainment opportunities, such as 
venue-based gaming and video lottery. The Company also is considering expanding
into other complimentary areas of business, especially those involving 
transaction processing.

Since the establishment of the first online lottery in 1975, the online lottery
industry has experienced substantial growth, as governments have increasingly
relied on lotteries as a non-tax source of revenue. After a number of years of
growth, the Company has witnessed over the past two years a downward trend in
the sales generated by its United States lottery customers. During calendar
1998, ticket sales in the online lottery industry were approximately $20.1
billion in the United States, representing a decline of approximately 6% from
online lottery ticket sales in the United States during calendar 1997. During
fiscal 1999 (which ended February 27, 1999), lottery sales by the Company's
domestic customers declined approximately 2% from fiscal 1998 levels, resulting
in a decline in the Company's domestic service revenues of 5.6%. Notwithstanding
this, worldwide sales by the Company's lottery customers increased approximately
5% in fiscal 1999 over fiscal 1998. See "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations" below.

The Company's core business consists of providing online lottery services and
products to governmental lottery authorities and governmental licensees
worldwide. The Company offers its customers a full range of lottery services,
including the design, assembly, installation, operation, maintenance and
marketing of online lottery systems and instant ticket support systems and
services. The Company's lottery systems consist of numerous lottery terminals
located in retail outlets, central computer systems, systems software and game
software, and communications equipment which connects the terminals and the
central computer systems.

Historically, the majority of the Company's lottery customers in the United
States have entered into long-term service contracts pursuant to which the
Company provides, operates and maintains the customers' online lottery systems
in return for a percentage of the gross lottery revenues. Many of the Company's
international lottery customers have purchased their online lottery systems,
although some, especially lottery authorities in Eastern Europe and Latin
America, have entered into long-term service contracts with the Company. In
recent years there has been, in general, an industry movement away from product
sales in favor of long-term service contracts. In fiscal 1993, approximately 70%
of the Company's lottery revenues were 
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derived from its portfolio of long-term online lottery service contracts with
substantially all of the remainder being derived from lottery product sales. In
fiscal 1999, approximately 95% of the Company's lottery revenues were derived
from online lottery service contracts. As anticipated, product sales declined
from $122.0 million in fiscal 1998 to $85.5 million in fiscal 1999.
Notwithstanding this, and the general industry trend away from product sales
described above, the Company currently anticipates that revenues attributable to
product sales to lotteries during fiscal 2000 are likely to return to
approximately fiscal 1998 levels.

In recent years, lottery authorities have recognized that by offering new games
or products, they often are able to generate significant additional revenues. An
important part of the Company's strategy is to develop new products and services
for its customers in order to increase their lottery revenues. The Company's
principal online products and services introduced in recent years consist of
keno, instant ticket support systems and services and televised lottery programs
such as BingoVision(TM). Keno, an online lottery game which features drawings as
often as every five minutes, was first introduced by the Company and the
Lotteries Commission of South Australia in 1990 and subsequently has been
introduced successfully by the Company and lottery authorities in 20 additional
jurisdictions on four continents. The Company currently provides instant ticket
support services, products and systems in 26 domestic jurisdictions and 13
jurisdictions outside of the United States. In recent years, the Company has
offered customers television lottery games. BingoVision(TM), the Company's best
known television game, is a televised bingo-based lottery game which is played
in 10 jurisdictions. During fiscal 1999, the Company augmented its game design
expertise by acquiring 80% of the equity of Europrint Holdings Ltd. and its
wholly-owned subsidiary, Interactive Games International, which pioneered the
development of interactive, televised lottery games, including BingoVision(TM).
See "Certain Significant Developments Since the Start of Fiscal 1999" and
"Products and Services Introduced in Recent Years" below.

During fiscal 1999, the Company announced that it had established a business
unit, UWin!(TM), to provide internet-based interactive games to its
international customers in the government-sponsored lottery market. In May 1999,
after the close of fiscal 1999, the Company entered into a contract with the An
Post National Lottery Company, the Irish lottery authority, to provide, maintain
and operate its UWin!(TM) internet solution in the Republic of Ireland through
March 2000. See "Certain Significant Developments Since the Start of Fiscal
1999" and "Products and Services Introduced in Recent Years" below.

In recent years, the Company also has broadened its product lines outside of its
core business of providing online lottery services and products. In September
1995, the Company incorporated its Dreamport, Inc. ("Dreamport") subsidiary, to
pursue gaming opportunities other than online lottery, including video lottery
and venue-based gaming. Dreamport now provides a comprehensive array of 
creative management and technology solutions and development and strategic
services to the gaming and entertainment markets, as well as video lottery
systems and other gaming technology. Dreamport, through a joint venture with
Full House Resorts, Inc., provides financing, gaming development and management
services to the Midway Slots and Simulcast emporium at Harrington Raceway in
Delaware and the Huron Potawatomi Tribe in Battle Creek, Michigan, which
recently entered into a tribal


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compact with the State of Michigan. Dreamport currently independently provides
machine gaming video lottery products and services to 10 jurisdictions
worldwide. During fiscal 1999, Dreamport, in equal partnership with Harrah's
Entertainment, Inc. and Keeneland Association, purchased the assets of Turfway
Park, a thoroughbred race course in Florence, Kentucky. See "Certain Significant
Developments Since the Start of Fiscal 1999" below.

Since August 1993, the Company, principally through its wholly-owned subsidiary,
Transactive Corporation ("Transactive"), has been in the business of providing
electronic benefits delivery ("EBT") systems and services on behalf of
government authorities. During fiscal 1998, the Company announced that it had
entered into an agreement to sell to Citicorp Services, Inc., a subsidiary of
Citicorp ("Citicorp Services"), certain of its EBT contracts, subject to
receiving necessary customer consents and regulatory approvals, and that it had
decided not to pursue future opportunities that may arise in the electronic
benefits delivery industry. During fiscal 1999, the Company reported that the
U.S. Department of Justice had commenced a legal action to enjoin the
consummation of the transaction on anti-trust grounds and, subsequently, that
Citicorp Services had terminated the agreement to purchase certain of
Transactive's EBT contracts. The Department of Justice's legal proceeding was
dismissed as a result of this termination, and the Company announced that it
would continue to perform all EBT contracts through their terms. See "Certain
Significant Developments Since the Start of Fiscal 1999," below.

GTECH was founded in 1980. Holdings acquired GTECH in a leveraged buy-out, in
which members of then-senior management of GTECH participated, that was
completed in February 1990.

The Company's principal executive offices are located at 55 Technology Way, West
Greenwich, Rhode Island 02817, and its telephone number is (401) 392-1000.


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CERTAIN FACTORS THAT MAY AFFECT FUTURE PERFORMANCE

The future performance of the Company's business is subject to the factors set
forth below, as well as the other considerations described elsewhere herein.

Certain statements contained in this Report are forward looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934. Such statements include, without limitation,
statements relating to (i) the future prospects for and stability of the lottery
industry and other businesses in which the Company is or expects to be engaged,
(ii) the future operating and financial performance of the Company, (iii) the
ability of the Company to retain existing business and to obtain and retain new
business, (iv) the Company's program to address potential issues relating to the
change of date to January 1, 2000 ("Year 2000"), and (v) the results and effects
of legal proceedings and investigations. Such forward looking statements reflect
management's assessment based on information currently available, but are not
guarantees and are subject to risks and uncertainties which could cause actual
results to differ materially from those contemplated in the forward looking
statements. These risks and uncertainties include but are not limited to those
set forth herein and in the Company's press releases and its Forms 10-K, 10-Q,
8-K and other reports and filings with the Securities and Exchange Commission
(the "SEC").

                             GOVERNMENTAL REGULATION

In the United States, lotteries are not permitted in a particular jurisdiction
unless expressly authorized by law in such jurisdiction. Once authorized, the
ongoing operation of a lottery is highly regulated. Lottery authorities, which
generally conduct an intensive investigation of the Company and its employees
prior to and after the award of a lottery contract, may require the removal of
any Company employees deemed to be unsuitable and are generally empowered to
disqualify the Company from receiving a lottery contract or operating a lottery
system as a result of any such investigation. Certain jurisdictions also require
extensive personal and financial disclosure and background checks from persons
and entities beneficially owning a specified percentage (typically 5% or more)
of the Company's securities. The failure of such beneficial owners to submit to
such background checks and provide such disclosure could jeopardize the award of
a lottery contract to the Company or provide grounds for termination of an
existing lottery contract.

The international jurisdictions in which the Company markets its lottery systems
also usually have legislation and regulations governing lottery operations. The
regulation of lotteries in these international jurisdictions typically varies
from the regulation of lotteries in the United States. In addition, restrictions
are often imposed on foreign corporations seeking to do business in such
jurisdictions. As a result, the Company has found it desirable in a number of
instances to ally itself as a subcontractor or joint venture partner with one or
more local companies in seeking international lottery contracts.


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         MAINTENANCE OF BUSINESS RELATIONSHIPS AND CERTAIN LEGAL MATTERS

A significant portion of the Company's revenues and cash flow is derived from
its portfolio of long-term online lottery service contracts. The Company's
online lottery service contracts typically have an initial term of five years
and usually provide the customer with options to extend the contract under the
same terms and conditions for additional periods generally ranging from one to
five years. The Company's customers have generally exercised some or all of the
extension options under their contracts or negotiated extensions on different
terms and conditions. Upon the expiration of a contract, lottery authorities may
award new contracts through a competitive procurement process. There can be no
assurance that, in the future, the Company's contracts will be extended or that
it will be awarded new contracts as a result of competitive procurement
processes. The Company's lottery contracts typically permit a lottery authority
to terminate the contract at any time for failure to perform and other specified
reasons, and many of such contracts permit the lottery authority to terminate
the contract at will and do not specify the compensation, if any, to which the
Company would be entitled were such termination to occur. The termination of or
failure to renew one or more lottery contracts could, depending upon the
circumstances, have a material adverse effect on the Company's business,
financial condition and results and prospects.

The Company regularly engages public affairs and governmental relations
advisors, including lobbyists, in various jurisdictions to advise legislators,
other governmental officials and the public in connection with lottery
legislation, to monitor potential lottery legislation and to advise the Company
in connection with the Company's lottery proposals. The Company also makes
contributions to various political parties and associations but does not make
contributions to individual candidates or their campaigns.

As previously publicly reported, in October 1994, the U.S. Attorney's Office for
the District of New Jersey indicted J. David Smith, the former sales manager of
the Company (who resigned in early 1994 for reasons unrelated to the
indictments), and two other individuals who served as consultants to the Company
through their wholly-owned company, The Benchmark Group, Inc. ("Benchmark"). The
indictment alleged essentially that, unbeknownst to the Company, Mr. Smith had
received kickbacks from the consultants for his own benefit. The indictment did
not charge the Company with any wrongdoing, and the actions complained of did
not affect the Company's New Jersey lottery operations. The trial of Mr. Smith
and the two consultants commenced in September 1996 in the U.S. District Court
for New Jersey, and on October 4, 1996, Mr. Smith and one of the two consultants
were found guilty of all charges. The other consultant, Joseph LaPorta, was
found not guilty. The New Jersey U.S. Attorney immediately announced in a press
release that a grand jury investigation in that jurisdiction was continuing but
did not specify the scope of such investigation. In the midst of these events,
the New Jersey Lottery Commission awarded the Company a contract to continue
operating its State lottery. In October 1998, the Court sentenced Mr. Smith to a
prison term of 63 months, ordered him to pay restitution to the Company in the
amount of $169,500 and fined him $20,000. Mr. Smith filed a notice of appeal in
the United States Court of Appeals for the Third Circuit and in April 1999 oral
argument on this appeal was heard. In November 1998, the U.S. Attorney's Office
for the 




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District of New Jersey advised the Company that currently GTECH is not
the subject or target of an ongoing grand jury investigation by that office.

In 1995, the Texas U.S. Attorney's Office also issued grand jury document
subpoenas to the Company, and the Company has cooperated with this
investigation.

In February 1999, a witness appearing before the Moriarty Tribunal, an
investigative body convened by the Irish Parliament and chaired by Mr. Justice
Moriarty to investigate the business affairs generally of former Taoiseach
(Prime Minister) of Ireland Charles Haughey, testified that in February 1993 Guy
B. Snowden, then Chief Executive Officer of the Company, had invested pound
sterling 67,000 (approximately $100,000) of his personal funds in a company 
owned by Mr. Haughey's son. Mr. Haughey had resigned as Taoiseach in February 
1992. In July 1992, the An Post Irish National Lottery Company, the Irish 
lottery authority (the "NLC"), issued a Request for Proposals respecting online
and instant ticket lottery goods and services, and in September 1992 the 
Company, which was the then incumbent provider of lottery goods and services to
the NLC under an agreement awarded to the Company in 1987, submitted a Proposal
to the NLC in response to the NLC's Request for Proposals. In November 1992, 
the NLC selected the Company to provide online and instant ticket goods and
services to the NLC under the terms of the competitive procurement and, 
following negotiations, a definitive agreement was entered into between the NLC
and the Company in March 1993. The Tribunal has requested that the Company 
provide various documents regarding the Company's business in Ireland. The
Company is cooperating with the Tribunal. In addition, the Company has made its
own inquiry into the facts surrounding Mr. Snowden's investment and the extent,
if any, of the Company's involvement in or knowledge of that investment. The
Company's investigation has determined that no Company funds were used to make
Mr. Snowden's investment, and there is no information to suggest that Mr. 
Snowden ever sought reimbursement for the investment from the Company. Further,
there is no information to suggest that Mr. Snowden informed anyone else at the
Company of his investment at the time or that his investment was related in any
way to the renewal of the Company's contract to supply systems and support to 
the NLC. Mr. Snowden has advised the Company through counsel that (i) his 
investment was a strictly personal one, (ii) the investment was made from his
personal funds, (iii) he never sought reimbursement for any portion of his 
investment from the Company or any other entity, and (iv) his investment was 
not related to the NLC and was not intended to and did not influence the NLC's
decision to renew the Company's contract.

No charges of wrongdoing have ever been brought against the Company by any grand
jury or other governmental authority.

The Company does not believe that it has engaged in any wrongdoing in connection
with these matters. However, since current investigations are still or maybe
underway and are conducted in whole or in part in secret, the Company lacks
sufficient information to determine with certainty their ultimate scope and
whether the government authorities will assert claims resulting from these or
other investigations that could implicate or reflect adversely upon the Company.
Because the Company's reputation for integrity is an important factor in its
business dealings 




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with lottery and other governmental agencies, if government authorities were to
make an allegation of, or if there were to be a finding of, improper conduct on
the part of or attributable to the Company in any matter, such an allegation or
finding could have a material adverse effect on the Company's business,
including its ability to retain existing contracts and to obtain new or renewal
contracts. In addition, continuing adverse publicity resulting from these
investigations and related matters could have such a material adverse effect.

In November 1998, Benchmark and Joseph LaPorta, the consultant and shareholder
of Benchmark who was found not guilty in the criminal proceeding described in
the paragraph above respecting J. David Smith, filed suit in the Superior Court
of New Jersey (Atlantic County - Law Division) against GTECH and Victor
Markowicz, the Company's former Co-Chairman, alleging that GTECH had wrongfully
terminated and otherwise breached a May 1992 contract, as amended, between the
Company and Benchmark pursuant to which Benchmark provided government relations
services on behalf of GTECH in New Jersey. The complaint filed by Benchmark and
Mr. LaPorta also alleged that GTECH had breached an implied covenant of good
faith and fair dealing by allegedly authorizing and directing Benchmark to make
payments that were not within the contemplation of the contract and by
terminating its contract with Benchmark after allegedly receiving substantial
benefits from Benchmark; that GTECH had committed fraud upon Benchmark by
allegedly making knowingly false representations to Benchmark prior to
termination of the May 1992 contract; and that GTECH and Mr. Markowicz had
committed fraud upon and had made negligent representations to Benchmark by
allegedly concealing that certain payments which the Company is said to have
directed that Benchmark make to third parties were allegedly made for the
personal benefit of Mr. Markowicz and unspecified others. The complaint seeks
unspecified compensatory and punitive damages and costs and such other further
relief as the Court deems equitable and just. In December 1998, the Company
filed a motion to dismiss, or in the alternative for summary judgment. The
Company believes that Benchmark's complaint, and the allegations underlying the
complaint, are wholly without merit. The Company intends to continue to
vigorously defend itself in these proceedings.

In December 1998, Lawrence Littwin, the former Executive Director of the Texas
Lottery Commission from June 1997 to October 1997, filed suit against GTECH in
the United States District Court for the Northern District of Texas alleging
that GTECH, as operator of the Texas lottery, unlawfully attempted to have Mr.
Littwin removed as Executive Director of the Texas Lottery Commission in order
to continue its alleged unlawful control of the Texas Lottery Commission and the
Texas lottery. The specific causes of action alleged by Mr. Littwin include
alleged tortious interference by GTECH with Mr. Littwin's employment
relationship with the Texas Lottery Commission which caused him to be removed as
the Executive Director; alleged conspiracy with unspecified third parties to
maintain control of the Texas Lottery Commission and the Texas lottery; and
various alleged civil violations by GTECH of the Racketeer Influenced Corrupt
Organization Act (18 Sections 1961(4) and 1962(b), (c) and (d)) ("RICO").
Mr. Littwin's complaint seeks unspecified damages (including treble damages in
the case of RICO violations) and costs. Discovery is proceeding in this matter.
The Company believes that Mr. Littwin's complaint, and the allegations
underlying the complaint, are wholly without merit. The Company continues to
vigorously defend itself in these proceedings.



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                   FLUCTUATION OF QUARTERLY OPERATING RESULTS

The Company has experienced and may continue to experience significant
fluctuations in operating results from quarter to quarter due to such factors as
the amount and timing of product sales, the occurrence of large jackpots in
lotteries (which increase the amount wagered and the Company's revenue) and
expenses incurred in connection with lottery start-ups and other new ventures.

                       LIQUIDATED DAMAGES UNDER CONTRACTS

The Company's lottery contracts typically permit termination of the contract at
any time for failure of the Company to perform and for other specified reasons
and generally contain demanding implementation schedules and performance
schedules. Failure to perform under such contracts may result in substantial
monetary liquidated damages, as well as contract termination. Many of the
Company's lottery contracts also permit the lottery authority to terminate the
contract at will and do not specify the compensation, if any, to which the
Company would be entitled should such termination occur. Certain of the
Company's United States lottery contracts have contained provisions for up to
$700,000 a day in liquidated damages for late system start-up and provide for up
to $10,000 or more in penalties per minute for system downtime in excess of a
stipulated grace period, and certain of the Company's international customers
(most notably the United Kingdom's National Lottery) similarly reserve the right
to assess substantial monetary damages in the event of contract termination or
breach. Although such liquidated damages provisions are customary in the lottery
industry and the actual liquidated damages imposed are generally subject to
negotiation, such provisions in the Company's lottery contracts present an
ongoing potential for substantial expense. Liquidated damages are generally
deducted directly from revenues the Company has otherwise earned from the
lottery authorities and are budgeted by the Company on an annual basis. Lottery
contracts generally require the vendor (i.e., the Company) to post a performance
bond, which in some cases may be substantial, securing the vendor's performance
under such contracts.

Liquidated damages paid or incurred by the Company with respect to its contracts
equaled 0.50%, 0.23%, 0.25%, 0.21% and 0.35% of annual revenues in each of the
five fiscal years ending February 1995 through 1999, respectively.

                               IMPACT OF YEAR 2000

Many computer programs, including those used by the Company and its suppliers
and customers, use only two digits to identify a year and were not designed to
handle years beginning after 1999. This Year 2000 computer issue creates
potentially significant risks for the Company. If lottery, gaming or EBT systems
that the Company supplies to customers, or management information systems that
the Company uses internally, do not correctly recognize and process date
information beyond the year 1999, there could be an adverse impact on customers'
and/or the Company's operations. See Item 7, "Management's Discussion and 
Analysis of Financial Condition and Results of Operations" below.



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                                GAMING OPPOSITION

While the Company believes that legalized gaming, especially lottery, generally
enjoys widespread public support, gaming opponents have continued to persist in
efforts to curtail the expansion of legalized gaming. Recently, for example, the
National Gaming Impact Study Commission, a commission created by the U.S.
Congress in 1997 to study the economic and social effects of legalized gambling,
narrowly voted to endorse a non-binding recommendation for a moratorium on the
spread of casinos, lotteries and slot machines in the United States.

                          STRENGTHENING OF COMPETITION

The online lottery industry is increasingly competitive in the United States and
internationally, which increased competition could adversely affect the
Company's ability to win renewals of contracts from its existing customers and
to win contract awards from other lottery authorities. In addition, such
increased competition may affect the profitability of contracts which the
Company does obtain. Through fiscal 2001 (which ends in February 2001), a number
of the Company's larger contracts are expected to come up for renewal, including
its contracts with the lottery authorities of New York, Ohio, Brazil (National
Lottery) and the United Kingdom. See "Competition" below.

                         FOREIGN CURRENCY EXCHANGE RATES

Foreign currency exchange exposure arises from currency transactions and
anticipated transactions denominated by the Company in a currency other than
U.S. dollars and from the translation by the Company of foreign currency balance
sheet accounts into U.S. dollar balance sheet accounts. The Company employs a
variety of strategies in its effort to mange its substantial foreign currency
exchange exposure. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operation" below.



CERTAIN SIGNIFICANT DEVELOPMENTS SINCE THE START OF FISCAL 1999

          LOTTERY CONTRACT AWARDS AND RELATED SIGNIFICANT DEVELOPMENTS

Since the start of fiscal 1999 (which ended on February 27, 1999) the Company
has received a number of service contract awards and extensions from lottery
authorities.

NEW-ONLINE CUSTOMERS. During fiscal 1999, the Company received awards to install
online lottery systems from two new online customers, and commenced online sales
under a contract


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signed in late fiscal 1998 with a third new online customer. In October 1998,
the Company announced that it had signed a product sales and services contract
to supply online lottery equipment, software and services to New South Wales
Lotteries Corporation following a competitive procurement. Under the terms of
the contract, the Company will replace the Lottery's existing system with new
central system hardware and PRO:SYS(TM) software. In addition, the Company will
replace the Lottery's existing terminal equipment with the Company's new
Altura(TM) terminal, the Company's latest generation online terminal. Also in
October 1998, the Company announced that following a competitive procurement it
had been selected to provide under a product sales and services contract a fully
integrated gaming system, consisting of online lottery equipment, software and
services, to Mifal Hapayis, the Israeli National Lottery. Online lottery sales
are scheduled to commence under the New South Wales Lotteries Corporation and
Mifal Hapayis contracts in March 2000 and August 1999, respectively. In
addition, in March 1998, online lottery sales commenced under the agreement
which it entered into in February 1998, prior to the start of fiscal 1999, with
Sport Toto Teskilat Mudurlugu (Sports Toto Organization Directorate), the
Company's second lottery customer in Turkey. Under the terms of this agreement,
the Turkish sports betting organization shares an existing lottery system
provided by the Company to Milli Piyango, the Turkish National Lottery.

In addition to contracts to provide online systems to the new customers
described above, in September 1998, the Company signed an agreement to provide
BingoVision(TM), the Company's online lottery game which combines a bingo
drawing with a television game show, and related services to five German state
lotteries: Berlin, Brandenburg, Saxony, Saxony-Anhalt and Thuringen. The Company
is currently the online vendor to two of these states, Saxony and Thuringen. The
Company will provide the technology to enable the online vendors in Berlin,
Brandenburg and Saxony-Anhalt to offer the game. This contract marks the first
implementation of a Company lottery game in a jurisdiction where the Company is
not the primary vendor.

OTHER NEW ONLINE CONTRACTS AND EXTENSIONS. Since the start of fiscal 1999, the
Company has been awarded new online service contracts by, or has received
contract extensions from, a number of its existing customers.

In March 1998, the Company announced that it had signed a new eight year
facilities management contract with the Michigan lottery authority to provide an
online lottery system and services. In February 1999, the Company entered into a
new five year contract to provide online products and services to the Arizona
lottery, including new central system hardware, PRO:SYS(TM) online gaming
software and approximately 2,500 ISYS(TM) terminals. The award has two one-year
extension options and followed a competitive procurement. In November 1998, the
Company announced that it had been selected under a three year agreement to
provide and to service the California lottery authority with instant ticket
vending machines leased from On-Point Technology Systems, Inc., a premier
supplier of automated, self-service lottery ticket vending machines. In March
1999, after the close of fiscal 1999, the Company announced it signed a new
six-year facilities management contract to provide online lottery products and
services to Loteria Electronica de Puerto Rico.



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In October 1998, the Company, reporting its sole loss in a competitive
procurement for fiscal 1999, announced that the Indiana lottery authority had
awarded a contract to provide equipment and services for a new online lottery
system to a competitor of the Company.

In addition to entering into the new facilities management contracts described
above, the Company entered into a number of significant product sale agreements
with existing customers since the start of fiscal 1999. In March 1998, the
Company announced that it had completed the first installation of its
PRO:SYS(TM) system in Asia under a product sales agreement with Singapore Pools
(Private) Limited and in February 1999, the Company announced that it had signed
another product sales agreement with this customer for the development and
installation of sports betting games. In May 1998, the Company entered into a
new contract to provide online lottery equipment, software and services under a
product sale and multi-year service agreement with South Australia Lotteries
Corporation. In July 1998, the Company announced that it had signed a product
sale and service agreement with AB Svenska Spel, a Swedish lottery authority, to
provide the latest version of its PRO:SYS(TM) software system, barcode readers
for the lottery's online retailers, GVT instant ticket validators and network
support equipment. In July 1998, the Company also announced that it had entered
into a product sales agreement to provide online lottery equipment and services
to DeLotto Stichting de Nationale Sporttotalisator of the Netherlands following
a competitive procurement. In December 1998, the Company announced that it had
signed a new contract with La Loterie Nationale de Belgique, Belgium's National
Lottery. In January 1999, the Company announced that it had entered into a new
product sales agreement with Dansk Tipstjeneste, Denmark's National Lottery
operator, to replace the lottery's existing terminals. In February 1999, the
Company signed a product sales agreement with Sports Toto Malayasia Sdn. Bhd.
for the Company's Spectra II terminals. Also in February 1999, the Company
announced that it had entered into a new product sales and services agreement to
provide online lottery products and services to the Idaho lottery authority.

In addition, since the start of fiscal 1999, the lottery authorities of
Colorado, Denmark, New York, Nebraska and Ohio have extended the terms of their
online contracts with the Company.

                        DREAMPORT AND NON-LOTTERY GAMING

Since the start of fiscal 1999, there have been several significant developments
respecting the Company's non-lottery gaming and entertainment business. In July
1998, the Company announced that it had entered into an agreement with la
Societe de la Loterie de la Suisse Romande - the non-profit lottery company
operating in the six French-speaking cantons in Switzerland - to provide,
through Dreamport, the Company's non-lottery gaming and entertainment
subsidiary, touch screen terminals, validation management terminals and
Dreamport's Video PRO:SYS(TM) central system for the operation of an electronic
instant lottery game. The system was sold, and the related technology licensed,
to the Loterie Romande. In January 1999, Dreamport announced that Turfway Park
LLC, a newly formed company where membership interests are owned equally by
Keeneland Association, Inc., Dreamport and a wholly-owned subsidiary of Harrah's
Entertainment, had entered into an agreement with Turfway Park Racing
Association, Inc. to purchase Turfway Park, a traditional racetrack located in
Florence, Kentucky (in the Cincinnati, Ohio market) featuring thoroughbred
racing and simulcast 



                                       11
<PAGE>   13
wagering, and related assets for $37 million. This transaction closed in March
1999. In February 1999, Dreamport entered into a five-year distribution and
services agreement with Jenosys Technologies, Inc., a leading provider of
table-based and wireless electronic bingo systems, under which Dreamport will
act as the exclusive distributor of Jenosys electronic bingo products to
government agencies in the provinces of Canada. During fiscal 1999, Dreamport
also announced an agreement with Penn National Gaming, Inc. to sell the
Company's assets related to the provision of gaming technology at Charles Town
Races in West Virginia. See "Products and Services Introduced in Recent
Years---Non-Lottery Gaming Products and Services" below.

                            NEW PRODUCTS AND SERVICES

Since the start of fiscal 1999, the Company also has made several announcements
respecting new products and services. In March 1998, the Company announced its
agreement to provide to the Colorado lottery its new terminal product,
PlayerExpress(TM). PlayerExpress(TM), part of the Company's new generation of
terminals, which is designed specifically for large retail environments with
numerous checkout lanes, allows customers to conveniently play lottery at the
checkout area of their retail store as part of their regular shopping. The
Company subsequently entered into agreements with the Nebraska lottery authority
and (after the close of fiscal 1999) the New Zealand lottery authority to supply
Player Express(TM) terminals. In October 1998, the Company launched its
Altura(TM) family of terminals. Altura(TM), which represents the initial
offering of the Company's ninth generation of online lottery terminals, permits
applications to be written in the Java programming language enabling the rapid
development of a wide variety of games that are compatible with numerous
software environments. In July 1998, the Company acquired 80% of the equity of
Europrint Holdings Ltd. ("Europrint") and its wholly-owned subsidiaries,
including Interactive Games International ("IGI"), for a net cash purchase price
of $21.6 million, including related acquisition costs. The Company has the
option, and under certain circumstances the obligation, to acquire the remaining
20% of the equity of Europrint and IGI within five years from the date of
acquisition. The Company augmented its game design expertise with the
acquisition of Europrint, which is among the world's largest providers of media
promotional games, and IGI which has pioneered the development of interactive,
televised lottery games including BingoVision(TM) and SplitLevel(TM). In July
1998, the Company established a business unit, UWin!(TM), to provide
internet-based interactive games to its international customers in the
government-sponsored lottery market. In May 1999, after the close of fiscal
1999, the Company entered into a contract with the An Post National Lottery
Company, the Irish lottery authority, to provide, maintain and operate its
UWin!(TM) internet solution in the Republic of Ireland through March 2000.

                                   OTHER NEWS

The Company also reported other important developments since the start of fiscal
1999. In April 1998 the Company announced that it had reached an agreement with
Camelot Group, plc, the operator of the United Kingdom's National Lottery, for
the repurchase of the equity formerly owned by the Company in Camelot for pound
sterling 51 million. The Company also reported significant developments
respecting the agreement announced in February 1998, by Transactive Corporation,
the Company's electronic benefits transfer (EBT) subsidiary, to sell to Citicorp
Services, Inc., Transactive's EBT contracts and certain related assets. In July
1998, the U.S. Department of Justice commenced a legal action to enjoin the 




                                       12
<PAGE>   14
consummation of this transaction on anti-trust grounds and, in January 1999
Citicorp Services, Inc. terminated this agreement. The legal proceeding was
dismissed as a result of this termination and the Company announced that it
would continue to perform all EBT contracts through their terms. Finally, in
March 1999, after the close of fiscal 1999, the Company announced that Quick
Draw, the keno-style game operated in New York state on a lottery system
provided by the Company, would terminate effective April 1, 1999, and the game
did terminate as announced, due to the failure of the New York State legislature
to extend the legislation authorizing the game. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" below.

                             MANAGEMENT DEVELOPMENTS

Since the beginning of fiscal 1999, there were a number of significant
managerial developments. In March 1998, Steven P. Nowick, who had joined the
Company as Senior Vice President, Corporate Development, in September 1997, was
elected Chief Operating Officer of the Company. The Company also strengthened
its management team by hiring Donald R. Sweitzer as the Company's Senior Vice
President of Government Relations in July 1998, Jean-Pierre Desbiens, as Senior
Vice President, Product Sales and Development, in August 1998, and David J.
Calabro, as the Company's Senior Vice President responsible for Company's
facilities management business, in March 1999, after the close of fiscal 1999.
The Company also announced the departure of Laurance W. Gay, formerly Senior
Vice President, Sales and Business Development, in March 1998, and Michael R.
Chambrello, formerly the Company's Executive Vice President, in July 1998.

LOTTERY INDUSTRY

Statements relating to the lottery industry contained in this Report are based
on information compiled by the Company, or derived from independent public
sources which the Company believes to be reliable. No assurance can be given,
however, regarding the accuracy of such statements. In general, there is less
publicly-available information concerning the international lottery industry
than the lottery industry in the United States.

Lotteries are operated by state and foreign governmental authorities and their
licensees in approximately 195 jurisdictions worldwide. Governments have
authorized lotteries primarily as a means of generating non-tax revenues. In the
United States, lottery revenues are frequently designated for particular
purposes, such as education, economic development, conservation, transportation
and aid to the elderly. Many states have become increasingly dependent on their
lotteries as revenues from lottery ticket sales are often a significant source
of funding for these programs.

Although there are many types of lotteries in the world, it is possible to
categorize government authorized lotteries in two principal groups: online
lotteries and off-line lotteries. An online lottery is conducted through a
computerized lottery system in which lottery terminals are connected to a
central computer system, typically by dedicated telephone lines. An online
lottery system is generally utilized for conducting games such as lotto, sports
pools, keno and numbers, 




                                       13
<PAGE>   15
in which players make their own selections. Off-line lotteries feature lottery
games which are not computerized, including traditional off-line lottery games
and instant ticket games. Traditional off-line lottery games, in which players
purchase tickets which are manually processed for a future drawing, generally
are conducted only in international jurisdictions. Instant ticket games, in
which players scratch off a coating from a pre-printed ticket to determine if it
is a winning ticket, are conducted both internationally and in the United
States.

In general, online lotteries generate significantly greater revenues than both
traditional off-line lottery games and instant ticket games. In addition, there
are several other advantages to online lotteries as compared to traditional
off-line lotteries. Unlike traditional off-line lottery games, wagers can be
accepted and processed by an online lottery system until minutes before a
drawing, thereby significantly increasing the lottery's revenue in cases in
which a large prize has attracted substantial wagering interest. Online lottery
systems also provide greater reliability and security, allow a wider variety of
games to be offered and automate accounting and administrative procedures which
are otherwise manually performed.

Typically, approximately 50% of the gross revenues of an online lottery in the
United States is returned to the public in the form of prizes. Approximately 35%
is used by the state to support specific public programs or as a contribution to
the state's general funds. The remaining 15% is generally used to fund the
operations of the lottery, including the cost of advertising, sales commissions
to point-of-purchase retailers and service fees to vendors such as GTECH.

From 1971 through 1998, total annual lottery ticket sales in the United States
grew from approximately $147.5 million to approximately $34.1 billion, although
the Company has witnessed, over the last two years, a downward trend in sales
generated by its United States lottery customers. See "General" above.
Historically, most of the growth in ticket sales has occurred in the online
portion of the lottery business which accounted for approximately 59% of total
lottery ticket sales in 1998.

There are currently 38 jurisdictions operating online lotteries in the United
States. Implementation of lotteries in other jurisdictions, will depend upon
successful completion of legislative, regulatory and administrative processes.

Outside the United States, government operated or licensed lotteries, many of
which are off-line, have a long history. The international online lottery
industry has experienced significant growth. Since 1977, when there were no
online lotteries operating outside of the United States, 84 international
jurisdictions have implemented online lottery systems. A number of other
international jurisdictions, principally in Europe, Asia and Latin America, are
currently considering the implementation of online lotteries.

ONLINE LOTTERY CONTRACTS

The Company generally conducts business under one of three types of contractual
arrangements: Facilities Management Contracts, Operating Contracts and Product
Sales Contracts. Under a typical Facilities Management Contract, the Company
installs, operates and maintains a lottery 



                                       14
<PAGE>   16
system, while retaining ownership of the lottery system. These contracts
generally provide for service fees directly from the lottery authority to the
Company based on a percentage of online lottery ticket sales. Under an Operating
Contract, the Company generally provides the same services as under a Facilities
Management Contract, but sells the lottery system and licenses the computer
software to the lottery authority. Ongoing service fees to the Company under an
Operating Contract are usually based on a percentage of lottery ticket sales.
Under a Product Sales Contract, the Company sells, delivers and installs a
turnkey lottery system or lottery equipment and licenses the computer software
for a fixed price, and the lottery authority subsequently operates and maintains
the lottery system.

The collection of lottery monies, the selection of winners, the financial
responsibility for the payment of prizes and the qualification of retail sales
agents are usually the sole responsibility of the lottery authority in each
jurisdiction in which the Company operates a lottery. The United Kingdom's
National Lottery provides an important exception to the general rule. Camelot, a
consortium of companies, is licensed by the United Kingdom government to operate
all aspects of the National Lottery with the exception of proceeds allocation.

                         FACILITIES MANAGEMENT CONTRACTS

The Company's Facilities Management Contracts generally require the Company to
install, operate and maintain an online lottery system for an initial term,
which is typically at least five years, and usually contain options permitting
the lottery authority to extend the contract under the same terms and conditions
for one or more additional periods, generally ranging from one to five years. In
addition, the Company's customers occasionally renegotiate extensions on
different terms and conditions. See "Certain Factors That May Affect Future
Performance- Liquidated Damages Under Contracts" above.

The Company's revenues under Facilities Management Contracts are generally based
upon a percentage of gross online lottery ticket sales. The level of lottery
ticket sales within a given jurisdiction is determined by many factors,
including population density, the types of games played and the games' design,
the number of terminals, the size and frequency of prizes, the nature of the
lottery's marketing efforts and the length of time the online lottery system has
been in operation.

Under its Facilities Management Contracts, the Company retains title to the
lottery system and typically provides its customers with the services necessary
to operate and manage the lottery system. The Company installs and commences
operations of a lottery system after being awarded a Facilities Management
Contract and, following the start-up of the lottery system, is responsible for
all aspects of the system's operations. The Company typically operates lottery
systems in each jurisdiction on a stand-alone basis through the installation of
two or more dedicated central computer systems, although in a few instances
several jurisdictions share the same central system. In addition, the Company
employs a dedicated work force in each jurisdiction, consisting of a site
director, marketing personnel, computer and hotline operators, communications
specialists and customer service representatives who service and maintain the
system.



                                       15
<PAGE>   17
Under certain of the Company's Facilities Management Contracts the lottery
authority has the right to purchase the Company's lottery system during the
contract term at a predetermined price, which is calculated so that it exceeds
the Company's net book value of the system at the time the right is exercisable.
The Company's role with respect to the continued operation of a lottery system
in the event of the exercise of such a purchase option generally is not
specified in such contracts and thus would be subject to negotiation. Under many
of the Company's Facilities Management Contracts, the lottery authority also has
the option to require the Company to install additional terminals and/or add new
lottery games. Such installations may require significant expenditures by the
Company. However, since the Company's revenues under such contracts generally
depend on the level of lottery ticket sales, such expenditures have generally
been recovered through the revenues generated by the additional equipment or
games and revenues from existing equipment.

Under a number of the Company's lottery contracts (including the Georgia, New
York, Texas and United Kingdom contracts), in addition to providing, operating
and maintaining the online lottery system in these jurisdictions, GTECH is
providing a wide range of support services and equipment for the lottery's
instant ticket games, such as marketing, distribution and automation of
validation, inventory and accounting systems, for which it receives fees based
upon a percentage of the revenues of the instant ticket games.

Revenues from Facilities Management Contracts are accounted for as service
revenues in the Company's Income Statements.


                                       16
<PAGE>   18
The table below sets forth the lottery authorities with which the Company had
Facilities Management Contracts as of April 15, 1999. Unless otherwise
indicated, the Company is the sole supplier of central computers and terminals
and services to each of the lottery authorities listed below. The table also
sets forth information regarding the term of each contract and, as of March 31,
1999, the approximate number of terminals installed in each jurisdiction.

                         FACILITIES MANAGEMENT CONTRACTS

<TABLE>
<CAPTION>
                                                                                                                 CURRENT
                      APPROXIMATE NO. OF LOTTERY      DATE OF COMMENCEMENT OF       DATE OF EXPIRATION OF       EXTENSION
JURISDICTION            TERMINALS INSTALLED(1)           CURRENT CONTRACT           CURRENT CONTRACT TERM        OPTIONS*
<S>                   <C>                             <C>                           <C>                         <C>
UNITED STATES:
Arizona                          2,466                         1/99                       9/99 (2)                 --
California (3)                  13,850                        10/93                         10/03                  --
Colorado                         2,561                         3/95                         10/04                  --
D.C. (4)                           571                         5/95                         11/99                  --
Georgia                          6,614                         4/93                         9/03                   --
Illinois                         8,480                         2/89                         10/99                  1 one-year
Indiana (5)                      3,994                         3/90                         8/99                   --
Iowa                             1,512                         4/91                         6/01                   1 two-year
Kansas                           1,806                         7/97                         6/02                   1 three-year
                                                                                                                   1 two-year
Kentucky                          2,898                        4/97                         6/03                   5 one-year
Louisiana                        2,768                         6/97                         6/05                   5 one- year
Maine (6)                          995                         7/90                         6/00                   --
Michigan                         6,513                         1/98                         1/06                   3 one-year
Missouri                         2,623                         7/96                         7/01                   1 two-year
Nebraska                           870                         4/94                         6/04                   --
New Hampshire (6)                  988                         7/90                         6/00                   --
New Jersey                       5,980                         6/96                         6/01                   5 years
New Mexico                       1,198                         6/96                         11/03                  5 one-year
New York                        13,701                         2/93                         2/00                   2 one-year
Ohio                             6,662                        10/93                         6/01                   --
Oregon                           2,732                        12/96                         10/04                  3 one-year
Rhode Island                       949                         1/97                         7/02                   5 one-year
Texas                           15,347                         3/92                         8/02                   --
Vermont (6)                        474                         7/90                         6/00                   --
</TABLE>


                                       17
<PAGE>   19
<TABLE>
<CAPTION>

                                                                                                                 CURRENT
                      APPROXIMATE NO. OF LOTTERY     DATE OF COMMENCEMENT OF        DATE OF EXPIRATION OF       EXTENSION
JURISDICTION            TERMINALS INSTALLED(1)           CURRENT CONTRACT           CURRENT CONTRACT TERM       OPTIONS*
------------            ----------------------           ----------------           ---------------------       --------
<S>                     <C>                              <C>                        <C>                         <C>    
Washington State                   2,449                       9/95                         6/01                 3 years
West Virginia                      1,386                       2/92                         6/00                 2 one-year
Wisconsin                          3,092                       6/97                         6/02                 2 one-year
                                                                                                             
                                                                                                             
INTERNATIONAL:                                                                                               
Barbados                                                                                                     
-T.L. Lotteries                      185                      10/94                         1/00                 2 one-year
Brazil (7)                                                                                                   
-National                                                                                                    
   Lottery (7)                    12,533                       1/97                         9/01                 (7)
-Minas Gerais                        912                      10/94                         10/00                (7)
-Parana                              776                       8/94                          8/99                (7)
-Santa Caterina                      170                       5/95                          5/00                (7)
-FGFS Sports Club                     92                      11/94                         11/99                (7)
Chile                                                                                                        
-Polla Chilena de                  1,699                      12/93                         8/99                 --
Beneficencia S.A.                                                                                            
Czech Republic (8)                                                                                           
-SAZKA                             2,980                      10/92                          (8)                 (8)
Ireland (9)                                                                                                  
-An Post Nat'l                     2,059                       3/93                         3/00                 (9)
Lottery Company                                                                                              
Lithuania (10)                                                                                               
-OLIFEJA                             796                      12/94                         12/09                (10)
Poland (11)                                                                                                  
-Totalizator                       5,191                       3/91                         10/01                (11)
Sportowy                                                                                                     
Puerto Rico                                                                                                  
-Loteria                           2,072                       3/99                         3/05                 1 three-year
Electronica de                                                                                               
Puerto Rico                                                                                                  
Slovakia                                                                                                     
-TIPOS, a.s. (12)                  1,082                       3/96                         (12)                 --
</TABLE>



                                       18
<PAGE>   20
<TABLE>
<CAPTION>
                                                                                                                  CURRENT
                        APPROXIMATE NO. OF LOTTERY    DATE OF COMMENCEMENT OF       DATE OF EXPIRATION OF        EXTENSION
JURISDICTION              TERMINALS INSTALLED(1)          CURRENT CONTRACT          CURRENT CONTRACT TERM        OPTIONS*
<S>                     <C>                           <C>                           <C>                          <C>
Spain
-L'Entitat Autonoma                 2,502                      10/97                       10/03                  1 six-month
de Jocs I Apostes de                                                                                            
la Generalitat de                                                                                               
Catalunya                                                                                                       
Trinidad & Tobago                                                                                               
-National Lotteries                   628                      12/93                        7/99                  5 one-year
Control Board                                                                                                   
United Kingdom                                                                                                  
-The National                       9,739                      7/94                         9/01                  --
Lottery (13)                                                                                                    
</TABLE>
                                        
--------------------

* Reflects extensions available to the lottery authority under the same terms as
the current contract. Lottery authorities occasionally negotiate extensions on
different terms and conditions.

(1)      Total does not include instant ticket validation terminals.

(2)      The Company has entered into a new five-year contract (with two
         one-year extension options) with the Arizona lottery authority that
         commences in September 1999.

(3)      In addition, the Company is a subcontractor to High Integrity Systems,
         Inc. ("HISI"), which has a contract with the California lottery
         authority to install and maintain 6,309 terminals using HISI's
         proprietary dial-up technology for online and instant ticket sales and
         validation.

(4)      Operated by Lottery Technology Enterprises, a joint venture in which
         the Company has a 40% interest.

(5)      The Indiana lottery authority has entered into a contract with the
         competitor of the Company commencing in August 1999.

(6)      The Maine, New Hampshire and Vermont lottery authorities share a
         central computer system.

(7)      Operated by GTECH Brasil Holdings, S.A. (formerly RACIMEC Informatica
         Basileira, S.A.), a Brazilian company in which the Company owns all
         voting stock. Each of the Brazilian agreements may be extended, at the
         option of the respective lottery authority, for one or more extension
         terms not to exceed, in aggregate, the duration of the base term.

(8)      The contract with the Czech Republic lottery authority runs until seven
         years after the installation of the 2,000th terminal or three years
         after the installation of any terminals after the 2,000th terminal,
         whichever is later.




                                       19
<PAGE>   21
(9)      The contracts with the Ireland lottery authority may either be extended
         for any period mutually acceptable to the Company and the lottery
         authority or continue indefinitely until termination by the lottery
         authority.

(10)     The Company's contract with the Lithuania lottery authority
         automatically extends from year-to-year unless either party gives
         timely notice of non-renewal.

(11)     The term of the Company's contract with the Poland lottery authority
         automatically renews for an indefinite number of one-year extension
         periods thereafter unless either party gives timely notice of
         non-renewal.

(12)     The Company's contract with TIPOS expires seven years after the
         installation of the 1,000th terminal on the system.

(13)     Operated by Camelot Group plc, a consortium of which the Company was,
         until April 1998, a member, on a facilities management basis. The
         Company will continue to sell equipment to Camelot Group plc for use by
         The National Lottery.



                                       20
<PAGE>   22
                               OPERATING CONTRACTS

Under an Operating Contract, the Company generally operates and maintains the
lottery system and provides on-going software support services in the same
manner as under a Facilities Management Contract, except that the Company sells
the lottery system and licenses the software to the lottery authority at the
beginning of the contract rather than retaining ownership of the system. Ongoing
service fees to the Company under its Operating Contracts are usually based on a
percentage of lottery ticket sales. The initial contract term, extensions,
rebidding processes and termination rights for Operating Contracts are generally
substantially the same as those under Facilities Management Contracts.

Revenues from sales of lottery systems and equipment under Operating Contracts
are accounted for as product sales revenue, and services provided under such
contracts are accounted for as service revenues in the Company's Income
Statements.

The table below sets forth the lottery authorities with which the Company had
Operating Contracts as of April 15, 1999. Unless otherwise indicated, the
Company is the sole supplier of lottery equipment and services to each of the
lottery authorities listed below. The table also sets forth information
regarding the term of each contract and, as of March 31, 1999, the approximate
number of terminals installed in each jurisdiction.


                               OPERATING CONTRACTS


<TABLE>
<CAPTION>
                               APPROXIMATE NO. OF                               DATE OF EXPIRATION OF      CURRENT
                               LOTTERY TERMINALS     DATE OF COMMENCEMENT OF    CURRENT CONTRACT TERM     EXTENSION
JURISDICTION                      INSTALLED(1)           CURRENT CONTRACT                                  OPTIONS*
<S>                            <C>                   <C>                        <C>                       <C>

UNITED STATES:
Idaho                                   659                    2/99                     2/03              4 one-year
                                                        
INTERNATIONAL:                                          
Argentina                                               
                                                        
-Loteria National Sociedad              801                   11/93                     4/01              1 two-year
del Estado                                              
                                                        
Turkey                                                  
                                                        
-Turkish National Lottery             3,591                    2/96                     11/01                (2)
</TABLE>
                                                        
         * Reflects extensions available to the lottery authority under the same
terms as the current contract. Lottery authorities occasionally negotiate
extensions on different terms and conditions.



                                       21
<PAGE>   23
(1)      Total does not include instant ticket validation terminals.

(2)      The term of the contract with the Turkey lottery authority shall
         automatically renew for successive one-year extension terms unless
         either party gives timely notice of non-renewal. In addition, the
         Turkey lottery authority has the option to assume responsibility for
         the provision of certain lottery services at any time after the second
         anniversary of system start-up.



                             PRODUCT SALES CONTRACTS

The Company sells, delivers and installs online lottery systems for a fixed
price under Product Sales Contracts. The Company also sells additional terminals
and central computers to expand existing systems and/or replace existing
equipment under Product Sales Contracts.

In connection with its Product Sales Contracts, the Company generally designs
the lottery system, trains the lottery authority's personnel and provides other
services required to make and keep the system operational. The Company also
generally licenses its software to its customers for a fixed additional fee.

Historically, product sales revenues have been derived from the installation of
new online lottery systems and the sales of lottery terminals and equipment in
connection with the expansion of existing lottery systems. The size and timing
of these transactions at times has resulted in variability in product sales
revenues from quarter to quarter. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

The table below lists certain of the Company's direct and indirect customers
that have purchased or as to which they have agreed to purchase lottery
terminals and other online lottery equipment from the Company since March 1,
1991. The Company has found the size and timing of product sales often difficult
to predict and has experienced variability in product sales revenues from period
to period.

           Argentina             --National Lottery of Argentina
           Argentina             --Provincial Lottery of Buenos Aires
           Australia             --Lotteries Commission of New South Wales
           Australia             --Lotteries Commission of South Australia
           Australia             --Tattersall Sweep Consultation
           Australia             --Lotteries Commission of West Australia
           Austria               --Osterreichische Lotto Toto Gesmbh
           Belgium               --Loterie Nationale de Belgique
           Canada                --Atlantic Lottery Corporation
           Canada                --British Columbia Lottery Corporation
           Canada                --Ontario Lottery Corporation
           Canada                --Saskatchewan Gaming Commission




                                       22
<PAGE>   24
           Canada                --Western Canada Lottery Corporation
           Denmark               --Dansk Tipstjanst
           Finland               --Oy Veikkaus AB
           Germany               --Sachsiche Lotto-GmbH
           Germany               --Lotterie Treuhandgesellschaft Mbh Thuringen
           Iceland               --Islensk Getspa
           Iceland               --Islenskar Getraunir
           Israel                --Mifal Hapayis
           Malaysia              --Pan Malaysian Pools
           Malaysia              --Lotteries Corporation (Sabah) Sdn. Bhd.
           Malaysia              --Sports Toto Malaysia Bhd.
           Massachusetts        -- Massachusetts State Lottery Commission
           Netherlands           --Stichting de Nationale Sport Totalisator
           New Zealand           --New Zealand Lotteries Commission
           Philippines           --Philippines Charity Sweepstake Office
           Singapore             --Singapore Pools (Pte) Ltd.
           Spain                 --Sistemas Tecnicos de Loterias del Estado
           Sweden                --AB Svenska Spel
           Switzerland           --Sport-Toto Gesellschaft
           Switzerland           --Loterie de la Suisse Romande
           Turkey                --Spor Toto Teskilat Mudurlugu
           United Kingdom        --The National Lottery


CONTRACT AWARD PROCESS

In the United States, lottery authorities generally commence the contract award
process by issuing a request for proposals inviting proposals from various
lottery vendors. The request for proposals usually indicates certain
requirements specific to the jurisdiction, such as particular games which will
be required, particular pricing mechanisms, the experience required of the
vendor and the amount of any performance bonds that must be furnished. After the
bids have been evaluated and a particular vendor's bid has been accepted, the
lottery authority and the vendor generally negotiate a contract in more detailed
terms. Once the contract has been finalized, the vendor begins to install the
lottery system.

After the expiration of the initial contract term and all extensions thereof, a
lottery authority in the United States generally may either negotiate further
extensions or commence a new competitive bidding process. Internationally,
lottery authorities do not typically utilize as formal a bidding process, but
rather negotiate proposals with one or more potential vendors.





                                       23
<PAGE>   25
The Company's marketing efforts for its lottery products and services frequently
involve top management in addition to the Company's professional marketing
staff. These efforts consist primarily of marketing presentations to the lottery
authorities of jurisdictions in which requests for proposals have been issued.

Marketing of the Company's lottery products and services to lottery authorities
outside of the United States is often performed in conjunction with licensees
and consultants with whom the Company contracts for representation in specific
market areas. Although generally neither a condition of their contracts with the
Company nor a condition of their contracts with lottery authorities, such
licensees and consultants often agree with the Company to provide on-site
services after installation of the online lottery system.

Pursuant to a 1990 Distributorship and License Agreement (the "D&L Agreement")
between the Company and CGK Computer Gesellschaft Konstanz GmbH ("CGK"), a
subsidiary of Siemens AG, the Company granted to CGK the exclusive right to
distribute, service, sell and market the Company's online lottery systems and
components in selected European jurisdictions under separately negotiated
Memoranda of Understanding ("MOUs"). Although the D&L Agreement terminated
during fiscal 1996, CGK and the Company continue to fulfill their respective
obligations under certain MOUs and related agreements entered into under the D&L
Agreement.

From time to time, there are challenges or other proceedings relating to the
awarding of lottery contracts.

PRODUCTS AND SERVICES

The Company's lottery systems consist of lottery terminals, central computer
systems, systems and communications software and game software, and
communications equipment which connects the terminals and the central computer
systems. The systems' terminals are typically located in high-traffic retail
outlets, such as newsstands, convenience stores, food stores, tobacco shops and
liquor stores.

The Company's online lottery systems control and perform the following
functions: entry of wagers using a terminal's keyboard or a fully-integrated
optical mark recognition reader; automatic editing of each wager for correctness
by the originating terminal; encryption and transmission of the wager and
related data to the central computer installation(s); processing of each wager
by the central computers, including entry of the wager into redundant data
bases; transmission of authorization for the originating terminal to accept the
wager and print a receipt or ticket, winning ticket identification and
validation; and administrative functions, including determination of prize pools
and generation of management information reports.

The Company's systems are capable of handling in excess of 100,000 transactions
per minute, which rate is in excess of the requirements of any of its customers.
The basic functions listed above, as well as various optional or custom-designed
functions, are performed under internal controls designed for maximum security
and minimum processing time. Security is provided 



                                       24
<PAGE>   26
through an integrated system of techniques, procedures and controls supported by
hardware, software and human resources. Individual systems generally have
redundant capacity at multiple levels and sophisticated software to ensure
continuous service to the customer.

                                    TERMINALS

The Company designs, manufactures and provides the point-of-sale terminals used
in its online lottery systems. Currently, approximately 153,000 of its model
GT-101 FX terminals, introduced in 1983, its model GT-101TF terminals,
introduced in 1985, and its model GT-401/OI terminals, introduced in 1989, are
installed in numerous jurisdictions. All of these terminals use advanced
microprocessors and software programs to provide the increased transaction
processing performance levels and communications interfaces required in the
online lottery industry. These terminals are designed to allow customization of
application functions to each lottery's specifications, including optical mark
recognition, ticket graphics printing, user and customer display options and
other application functions. The terminals' hardware facilitates independent
development of applications programs by the Company. The Company's Spectra(TM)
terminal series (GT-401 and 402 O/M), first introduced in 1989, is distinguished
by its modular internal and external architecture. The modular design provides
an enhanced level of flexibility to lottery jurisdictions by permitting them to
choose among a variety of options and terminal subsystem configurations,
including readers, printers, keyboards, displays, and communications interfaces.
As of February 27, 1999, a total of approximately 62,000 Spectra(TM) terminals
were installed in numerous international jurisdictions.

The Company's ISYS terminal series, (GT-502), introduced during fiscal 1996, is
an integral, single-unit terminal which features modular subassemblies, high
performance ticket printer and playslip reader subassemblies, an easy-to-use
design, and a host of new features and technologies. As of February 27, 1999,
approximately 53,000 ISYS terminals were installed in numerous lottery
jurisdictions.

During fiscal 1999, the Company announced its agreement to provide to the
Colorado lottery its new terminal, Player's Express(TM), which was designed
specifically for large retail environments with numerous checkout lanes. The
Company subsequently entered into agreements with the Nebraska lottery authority
and (after the close of fiscal 1999) the New Zealand lottery authority to supply
PlayerExpress(TM) terminals. As of February 27, 1999, approximately 90
PlayerExpress(TM) terminals were installed. In addition, during fiscal 1999, the
Company also announced the launch of its Altura(TM) family of terminals. The
Company expects the first Altura(TM) terminals to be installed during fiscal
2000. See "Products and Services Introduced in Recent Years" below.

                                    SOFTWARE

The Company designs and provides all applications software for its lottery
systems. The Company's highly sophisticated and specialized software is designed
to provide the following system characteristics: rapid processing, storage and
retrieval of transaction data in high volumes and in multiple applications; the
ability to down-line load (i.e., to reprogram the lottery terminals from the
central computer installation via the communications system to add new games); a
high degree of security and redundancy to guard against unauthorized access and
tampering and to 




                                       25
<PAGE>   27
ensure continued operations without data loss; and a comprehensive management
information and control system. In addition to featuring the aforementioned
characteristics, the Company's latest generation software system, PRO:SYS(TM),
is based on client server architecture and provides open interfaces which allow
for the integration and support of third-party and commercial modules and
applications. See "Products and Services Introduced in Recent Years" below.

                                CENTRAL COMPUTERS

Each of the Company's lottery systems contains one or more central computer
sites to which the lottery terminals are connected. The Company's central
computer systems are manufactured by Compaq Computer Corporation (formerly
Digital Equipment Corporation), and Stratus Computer, Inc. The specifications
for the configuration of the Company's central computer installations are
designed to provide continuous availability, a high throughput rate and maximum
security. Central computer installations typically include: redundant mainframe
computers, various peripheral devices (such as magnetic storage devices,
management terminals and hard copy printers), and various safety, environmental
control and security subsystems (including a back-up power supply), which are
all manufactured by third parties, and a microcomputer-based communication and
switching subsystem. In addition, the Company supplies management information
systems that provide lottery personnel access to important financial and
operational data without compromising the security of the online system.

                                 COMMUNICATIONS

The Company's lottery terminals are typically connected to the central computer
installations by dedicated telephone lines owned or leased by the jurisdiction
in which the system is located. Due to the varying nature of telecommunications
services available in lottery jurisdictions, the Company has developed the
capability to interface with a wide range of communications technologies,
including UHF Radio capability (narrow-band and Spread Spectrum), GSAT/VSAT,
Microwave, Integrated Services Digital Networking (ISDN), Data Over Voice (DOV),
fiber optic and cellular telephone. In Argentina, Barbados, Brazil, the Spanish
province of Catalunya, Chile, The Czech Republic (to which the Company is
supplying the DL-201F, the Company's latest radio technology), Estonia,
Lithuania, Mexico, New Mexico, Poland, Puerto Rico, Slovakia, Trinidad and
Tobago and Venezuela, the Company utilizes UHF Radio Data-Link Communications
system in lieu of telephone lines to provide a data communications pathway
between the lottery terminals and the central computers. The Company also uses
this technology in the United States to supplement the existing telephone
networks in Ohio, Oregon, Rhode Island, Texas, Washington and the District of
Columbia. The Company's GSAT satellite technology makes it feasible to serve
large market areas where telephone lines are either unavailable, unreliable or
too costly. GSAT currently operates in the United States in remote areas of
Colorado, New Mexico, Texas and Washington, and internationally in Argentina,
the Czech Republic, Brazil, Chile, Poland and the United Kingdom. The Company
has also implemented UHF radio in conjunction with GSAT to further enhance
reliability and cost savings in remote areas.





                                       26
<PAGE>   28
                                      GAMES

An important factor in maintaining and increasing public interest in lottery
games is innovation in game design. The Company's GameScape(TM) group, in
conjunction with lottery authorities, utilizes principles of demographics,
sociology, psychology, mathematics and computer technology to design customized
lottery games which are intended to appeal to the populations served by its
lottery systems. The principal characteristics of game design include: frequency
of drawing, size of pool, cost per play and setting of appropriate odds. The
Company believes that its expertise in game design has enhanced the marketing of
its lottery systems and has contributed to increases in the revenues of the
Company's customers.

The Company's GameScape(TM) group currently has a substantial number of
variations of lottery games in its software library and several promising new
games under development. The Company believes that this game library and the
"know how" and experience accumulated by its professionals since the Company's
inception make it possible for the Company to meet the requirements of its
customers for specifically tailored games on a timely and comprehensive basis.

During fiscal 1999, the Company augmented its game design expertise by acquiring
Europrint Holdings Limited (among the world's largest providers of media
promotional games) and its wholly-owned subsidiaries including Interactive Games
international, Inc. (which has pioneered the development of interactive,
televised lottery games including BingoVision(TM) and SplitLevel(TM)). See
"Certain Significant Developments Since the Start of Fiscal 1999" above.


                                    MARKETING

In United States jurisdictions in which the Company has been awarded a lottery
contract, the Company is frequently asked to assist the lottery authority in the
marketing of lottery games to the public. Such assistance generally includes
advice with respect to game design, and promotion and development and
distribution of terminals and advertising programs. As part of such assistance,
the Company developed "GMark," a computerized marketing analysis system used to
determine favorable locations for new lottery terminals. The lottery authorities
of California, Florida, Georgia, Illinois, Missouri, New Jersey, New York, Ohio,
Rhode Island, Texas, Washington and Wisconsin currently utilize GMark systems,
and many customers contact the Market Research Group at GameScape(TM) from time
to time to obtain GMark services.

                                    WARRANTY

Because the Company retains title to the system under a Facilities Management
Contract, no warranty is provided on the Company's products supplied under such
contracts. The Company does repair or replace such products as necessary to
fulfill its obligations under such contract. There is no standard warranty on
products manufactured by the Company. A typical warranty provides that the
Company will repair or replace defective products for a period of time (usually
one year) from the date a product is delivered and tested. Product warranty
expenses for the 



                                       27
<PAGE>   29
fiscal years 1999, 1998 and 1997 were not material. The Company typically does
not provide a warranty on products it sells that are manufactured by third
parties, but attempts to pass the manufacturer's warranty, if any, on to the
customer. With respect to computer software, the Company typically modifies its
software as necessary so that the software conforms to the specifications of the
contract with the customer.

PRODUCTS AND SERVICES INTRODUCED IN RECENT YEARS

                                 ONLINE LOTTERY

In recent years, lottery authorities have recognized that by offering new games
or products, the lotteries are often able to generate significant additional
revenues. An important part of the Company's strategy is to develop new products
and services for its customers in order to increase their lottery revenues. The
Company's principal online lottery products and services introduced in recent
years are keno, instant ticket support services and televised lottery games,
such as BingoVision(TM). In addition, the Company has recently launched its
Altura(TM) series terminals, Players Express(TM) terminal and PRO:SYS(TM)
software system to enhance the functionality and appeal of its existing software
and terminal lines.

KENO. While new online jurisdictions offer growth by providing access to new
players, more mature markets, such as the United States, rely principally upon
the introduction of new games to provide growth. One such game introduced by the
Company is keno. In keno, players typically choose up to 10 numbers from a field
of 80 and attempt to match their numbers against any 20 numbers which are
randomly selected by a central computer system. Alternatively, the player may
choose up to 10 numbers and wager that none of such numbers will match the 20
numbers randomly selected. This game combines the multiple prize payouts of a
lotto-type game with the immediacy of an instant scratch-off lottery game. It is
also unique in its play-style and distribution, which decreases the risk that
the game will cannibalize existing online lottery revenues. Keno is more
interactive than typical online lottery games and is designed to be played in
the company of others. While most lotto and numbers games are found in
convenience stores and supermarkets, places visited frequently and often
individually, keno outlets are often located in restaurants, taverns and bowling
alleys and other social settings which tend to be visited by groups of people.

From the Company's introduction in April 1990 of the first online keno game for
the Lotteries Commission of South Australia through the end of fiscal 1999, the
Company had assisted lottery authorities in Belgium, Brazil (Parana, Minas
Gerais, Santa Caterina and Goias), California, The Czech Republic, Georgia,
Kansas, Lithuania, Massachusetts, New York, Oregon, Rhode Island, Catalunya
(Spain), the Slovak Republic, Switzerland (La Societe de la Loterie de la Suisse
Romande), Trinidad and Tobago, West Virginia and Venezuela (Loteria de Caracas)
in implementing online keno games.

Keno illustrates the impact that new games can have on lottery revenues. Since
the United States introduction of keno in 1991, United States keno revenues have
grown significantly, exceeding $1.8 billion and accounting for more than 9% of
total United States online lottery revenues in 




                                       28
<PAGE>   30
1998. The popularity of keno has led the Company to explore the development of
new games based upon keno. Most notably, the Company developed in recent years
Keno Plus(TM), a new product that combines expanded keno game characteristics
with new hardware and enhanced product support.

Keno has been the subject of legal challenges in recent years. Most notably, in
June 1996, the California Supreme Court in Western Telecon, Inc. et al v.
California State Lottery unexpectedly reversed trial and appellate court
decisions and found the California keno game to be a banked game rather than a
lottery because it provides for a fixed prize that is not dependent upon the
size of the prize pool. Accordingly, the Court concluded that the keno game was
not authorized by the California lottery law, and the California State Lottery
suspended operation of the keno game in June 1996. In September 1996, the
Company launched a parimutuel monitor game designed by the Company and the
California State Lottery as a replacement for the suspended game. Although the
new game, like keno, features frequent drawings, its payouts are based upon a
prize pool determined by sales rather than by predetermined or fixed amounts.
Keno was also the subject of an unsuccessful legal challenge in New York which
began in August 1995. There can be no assurances that legal challenges to keno
will not be brought in the future in these or other jurisdictions, nor can there
be any assurances respecting the results of such legal challenges, if any, upon
the operations of keno in jurisdictions serviced by the Company.

In March 1999, after the close of fiscal 1999, the Company announced that Quick
Draw, the keno-style lottery game operated in New York State provided by the
Company, would terminate effective April 1, 1999, and the game did terminate as
announced, due to the failure by the New York State legislature to extend the
legislation authorizing the game. See Item 7, "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" below.

INSTANT TICKET SUPPORT SERVICES. The Company provides certain products, systems
and services to the instant ticket lottery industry. The Company's online
support systems for the instant ticket lottery business provide comprehensive
functionality, including: instant ticket validation; retailer accounting;
inventory control and tracking; ticket stock distribution; electronic funds
transfer; finance and sales tracking reports; and marketing support.

In order to automate and increase the security of instant ticket lotteries, the
Company developed the GTECH Validation Terminal ("GVT"), a point-of-sale device
that facilitates instant ticket validation and provides access to the Company's
online instant ticket support systems for instant ticket agents who are not part
of a lottery's online lottery system. The Company also offers add-on validation
terminals which attach to its online lottery terminals and provide the same
functionality as the GVT, while using the existing communications network.

The Company is providing marketing, distribution, online validation, inventory
control and accounting support services and equipment (but not the printing of
the instant tickets) for the Texas lottery's instant ticket games. In addition,
the Company currently provides instant ticket support services to lottery
authorities in Arizona, California, Colorado, District of Columbia, Georgia,
Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Massachusetts,
Michigan, Missouri, New Hampshire, New Jersey, New Mexico, New York, Ohio,
Oregon, Rhode Island, 



                                       29
<PAGE>   31
Texas, Vermont, Washington and Wisconsin. Internationally, the Company currently
supplies lottery authorities in Australia, Belgium, Brazil, Chile, Denmark,
Finland, Ireland, Netherlands, New Zealand, Spain (Catalunya), Sweden and the
United Kingdom with instant ticket support services.

TELEVISION LOTTERY GAMES. The Company in recent years has offered a product line
of televised lottery games. Players buy tickets from online lottery retailers
and mark them while following a live, televised game show which includes a draw
of numbers.

Through the use of proprietary game-tracking software, the Company is able to
display, live, how many at-home players are winners or about to become winners,
with each new numbers draw. The Company has implemented BingoVision(TM), a
television lottery game featuring a bingo draw, in Estonia, Lithuania, New
Zealand, Slovakia, Belgium, and five German states; has implemented
SplitLevel(TM), a televised game featuring displayed boards of numbers with
winners determined by the number of matches from these boards in Estonia; and is
actively marketing these and other games to other lottery authorities.

THE PRO:SYS(TM) SOFTWARE SYSTEM. PRO:SYS(TM) is the Company's latest software
system. Employing a user friendly interface, lotteries can use PRO:SYS(TM) to
manage all aspects of their gaming environment, including online, instant ticket
sales and accounting and video games. Features such as promotions management and
information analysis allow lottery authorities to tailor the system to their
individual needs. PRO:SYS(TM) was first installed in September 1994 for Societe
de la Loterie de la Suisse Romande, Switzerland. Since that time, the Company
has installed PRO:SYS(TM) in systems used by the lottery authorities of Arizona,
Washington, D.C.; Colorado; Idaho; Ontario, Canada; Sachsische Lotto-GmbH in
Leipzig, Germany; Washington State; Missouri; Denmark; New Mexico;
Massachusetts; New Jersey; Thuringen, Germany; Kansas; Kentucky; Ohio; Oregon;
Rhode Island; Wisconsin; New Zealand; Belgium; Finland; Sweden; and Switzerland
and is in the process of installing PRO:SYS(TM) in two additional jurisdictions.

THE ISYS(TM) TERMINAL SERIES. During fiscal 1996, the Company introduced its
ISYS(TM) terminal series. ISYS(TM) is an integral, single-unit terminal which
features modular subassemblies, high performance ticket printer and playslip
reader subassemblies, an easy-to-use design, and a host of new features and
technologies. The Company believes that ISYS(TM) improves upon previous terminal
designs by featuring simplified wager entry via intuitive keyboard and screen
formats, improved system status monitoring and the latest instant ticket
validator technology. The Company has installed ISYS(TM) in systems used by
lottery authorities in Brazil, Massachusetts, Missouri, New Jersey, New Mexico,
Turkey, Washington State, District of Columbia, Wisconsin and W. Australia,
Kansas, and Rhode Island. See "Products and Services--Terminals" above.

THE PLAYER EXPRESS(TM) TERMINAL. During fiscal 1999, the Company announced the
introduction of its new terminal, the Player Express(TM). Player Express(TM),
which had its inaugural installation under the Company's contract with the
Colorado lottery authority, was designed as part of the Company's attempt to
provide a total solution for selling lottery tickets in large retail



                                       30
<PAGE>   32
environments with numerous checkout lanes. Player Express(TM) allows consumers
to conveniently play lottery at the checkout area of retail stores as part of
their regular shopping.

THE ALTURA(TM) TERMINAL. During fiscal 1999, the Company announced the launch of
its Altura(TM) family of terminals. Altura(TM), which represents the initial
offering of the Company's ninth generation of online lottery terminals, permits
applications to be written in the Java programming language enabling the rapid
development of a wide variety of games that are compatible with numerous
software environments.

VIDEOSITE.(TM) During fiscal 1998, the Company acquired VideoSite, Inc., a
leading provider of multimedia broadcasting software. VideoSite is in the
process of developing lottery and retail advertising and promotional products
which will use its broadcasting software to complement the Company's
video-based gaming software products.


                    NON-LOTTERY GAMING PRODUCTS AND SERVICES

In September 1995, the Company incorporated Dreamport, Inc. to pursue gaming
opportunities other than online lottery including video lottery and
venue-based gaming.

Dreamport provides a comprehensive array of creative management and technology
solutions, and development and strategic services to the gaming and
entertainment markets as well as video lottery systems and other gaming
technology. Dreamport's video lottery machine gaming systems combine the
security and integrity of the Company's traditional online lottery systems with
entertainment-based video games. These video lottery machine gaming systems
include a controlling central computer system, video lottery terminal gaming
machines (which the Company acquires through an exclusive OEM manufacturing
relationship with Bally Gaming Systems, Inc.), the Company's ticket validation
terminals, and a self-diagnostic communications network. Games offered by these
video lottery machine gaming systems include poker, blackjack, keno, bingo, reel
games and electronic instant lottery games.

The Company entered the video lottery machine gaming business during fiscal 1991
and currently provides machine gaming video lottery products and services to
lottery jurisdictions in Minas Gerais, Santa Catarina and Parana, Brazil;
Switzerland; Alberta, British Columbia, Saskatchewan, Canada; Oregon; and Rhode
Island.

Through a joint venture with Full House Resorts, Inc., the Company also provides
financing, gaming development and management services to the Midway Slots and
Simulcast Emporium at Harrington Raceway in Delaware and the Huron Potawatomi
Tribe in Battle Creek, Michigan.

In March 1999, the Company, in equal partnership with Harrah's Entertainment,
Inc. and Keeneland Association, purchased the assets of Turfway Park, a
thoroughbred racecourse located in Florence, Kentucky (in the Cincinnati, Ohio
market) featuring thoroughbred racing and simulcast wagering. Included with the
purchased assets was a 24% ownership interest in, and management contract for,
Kentucky Downs, a thoroughbred racetrack and simulcast center on the Kentucky
border in close proximity to the Nashville, Tennessee market. See "Certain
Significant Developments Since the Start of Fiscal 1999 - Dreamport and
Non-Lottery Gaming" above.

PRODUCT DEVELOPMENT



                                       31
<PAGE>   33
The Company devotes substantial resources in order to enhance its present
products and systems and develop new products. In fiscal 1999, the Company spent
approximately $40.2 million on research and development, as compared to $36.5
million in fiscal 1998 and $31.0 million in fiscal 1997. As of February 27,
1999, the Company (including subsidiaries) had approximately 450 full-time
employees, including certain members of senior management, engaged in research
and development.

INTELLECTUAL PROPERTY

Although the Company occasionally seeks patent protection on certain
technological developments, the Company generally has not sought to obtain
patents on its products, and it is doubtful whether patents could be obtained in
many instances. The Company believes that its technical "know-how," trade
secrets and the creative skills of its personnel are of substantially more
importance to the success of the Company than the benefit which patent
protection ordinarily would afford. The Company typically requires customers,
employees, licensees, subcontractors and joint venture partners who have access
to proprietary information concerning the Company's products to sign
non-disclosure agreements, and the Company relies on such agreements, other
security measures and trade secret law to protect such proprietary information.

PRODUCTION, ASSEMBLY AND COMPONENTS

The Company purchases most of the parts, components and subassemblies (some of
which are designed by the Company) necessary for its terminals and other
products from outside sources and assembles them into finished products. The
Company offers central systems manufactured by Compaq Computer Corporation
(formerly Digital Equipment Corporation) and Stratus Computer, Inc. for its
lottery systems.

BACKLOG

The backlog of the Company's orders for sales of its products and services
believed by the Company to be firm and the fixed fee portion of service
contracts amounted to approximately $305.5 million as of February 27, 1999, as
compared to a backlog of approximately $235 million as of February 28, 1998.
Approximately $148.1 million, or 48.5% of the backlog at February 27, 1999, is
not expected to be filled during fiscal 2000. Not included in such backlog are
(i) amounts which are payable to the Company under its lottery contracts based
on a percentage of lottery ticket sales which amounts, historically, have
represented a substantial portion of the Company's revenues and (ii) revenues
related to the Company's Transactive subsidiary, which revenues are variable in
nature.

COMPETITION

The online lottery business is highly competitive in the United States and
internationally. Both in the United States and internationally, price is an
important, but usually not the sole criterion for selection. Other significant
factors that influence the award of lottery contracts are: the ability to
optimize lottery revenues through technical capability and applications
knowledge; the quality, 




                                       32
<PAGE>   34
dependability and upgrade capability of the system; the marketing and gaming
experience, financial condition and reputation of the vendor; and the
satisfaction of other requirements and qualifications that the lottery authority
may impose.

During fiscal 1999, the Company's principal competitors in the online lottery
business (and the number of online lottery jurisdictions currently serviced or
under contract worldwide by such competitors) are as follows: Automated Wagering
International, Inc., a subsidiary of Powerhouse Technologies, Inc. (formerly,
Video Lotteries Technologies, Inc.) (9); Autotote Corporation (3) ("Autotote");
Scientific Games Holdings Corporation (which acquired Telecontrol, the European
lottery operation formerly owned by Autotote, during fiscal year 1998, as
described below) (8, all of which are jointly serviced with International des
Jeux); International Totalizator Systems, Inc. (6); and International des Jeux
(Lotto France) (8, all of which are jointly serviced by Telecontrol and
International des Jeux); and Essnet/Alcatel (15).

Two additional competitors for European online lottery business have emerged in
recent years. During fiscal 1996, CGK Computer Gesellschaft Konstanz mbH
("CGK"), a subsidiary of Siemens AG, and the Company agreed to terminate their
1990 Distributorship and License Agreement pursuant to which CGK had exclusive
right to distribute, service, sell and market the Company's online lottery
systems and components in specified European jurisdictions. Subsequent to August
1995, the effective date of this termination, CGK has been a direct competitor
of the Company in Europe. Further, in April 1997, Scientific Games Holdings
Corporation completed the purchase of TeleControl, as mentioned above. Under the
terms of the acquisition agreement, Scientific Games will have the right to
license and purchase Autotote's wagering terminals for use in lottery
applications.

In March 1999 (after the close of fiscal 1999), Anchor Gaming, an operator and
developer of gaming machines and casinos, and Powerhouse Technologies, Inc.,
announced the signing of a definitive merger agreement. The merger of these two
companies is likely to provide Automated Wagering International, Inc., the
Company's leading competitor in the U.S. and a subsidiary of Powerhouse
Technologies, Inc., with enhanced financial resources.

Dreamport faces competition from numerous companies that seek to finance,
develop and manage destination gaming facilities, on and off of Native American
lands, as well as from technology providers. The principal competitors providing
video lottery technology in competition with the Company include Autotote
Systems, Inc., Spielo Manufacturing, Inc., Powerhouse Technologies, Inc., Video
Lottery Technologies, Inc., WMS Gaming, Inc., International Game Technology,
Inc. and Bally Manufacturing, Inc. some of which have supplied substantially
more systems and terminals than the Company.



                                       33
<PAGE>   35
PERSONNEL

As of May 1, 1999 the Company had approximately 4,800 full-time employees
worldwide. The Company's employees are not represented by any labor union. The
Company believes that its relationship with its employees is satisfactory.

ITEM 2.  PROPERTIES

The Company's corporate headquarters and main research and development and
production facility are located in its approximately 260,000 square foot
building located on approximately 26 acres in West Greenwich, Rhode Island,
which the Company leases from West Greenwich Technology Associates Limited
Partnership. The Company is a limited partner in, and owns 50% of, this
partnership. The Company's lease term runs until August 26, 2013 with two
five-year options to extend the term and also grants the Company an option to
purchase the property.

The Company owns approximately 24 acres adjoining its headquarters in West
Greenwich, Rhode Island.

The Company also owns an approximately 23,000 square foot office building in
Coventry, Rhode Island, which it uses for electronic benefits delivery and video
lottery operations, as well as an approximately 140,000 square foot
manufacturing and central storage facility in Coventry, Rhode Island.

The Company leases two office buildings of approximately 46,000 and 43,000
square feet in Boca Raton, Florida which it uses to support its Dreamport 
operations, its Latin American marketing efforts and its Transactive national
call center operations. These agreements each provide for a base lease term
which expires in 2003 and for one or more extension options thereafter.

In addition, except in New York State, where the Company owns its back-up data
center facility, and in Austin, Texas, where the Company owns an approximately
39,000 square foot facility which is used by Transactive, the Company leases, or
is supplied by the relevant state authorities with, its data center facilities
in the various jurisdictions. The Company also leases office, depot maintenance
and warehouse space in various other locations.

The Company leases facilities in Watford and London, England from which it bases
its European sales efforts. The Company also maintains an office in Brussels,
Belgium which provides a base of additional support for its European operations.

The Company's facilities are in good condition and are adequate for its present
needs.


                                       34
<PAGE>   36
ITEM 3.  LEGAL PROCEEDINGS

In September 1996, Jack M. Janis and Linda Janis, both individually and on
behalf of a class of persons similarly situated, filed suit against the
California State Lottery Commission, Southland Corporation and the Company in
the Supreme Court of the State of California (County of Los Angeles). This suit
alleged, in light of the June 1996 decision of the California Supreme Court,
Western Telcon, Inc. et. al. V. California State Lottery (which held that the
California State Lottery's keno game as then structured was not a lottery game
and therefore was not authorized by California lottery law), that the defendants
were unjustly enriched and were guilty of unfair business practices and
misleading advertising in connection with the sale of keno tickets from January
1, 1992 through suspension of the keno game in June 1996. The suit sought
restitution of all amounts realized by the defendants through the sale of keno
tickets less funds paid to public schools pursuant to relevant California law
and proceeds paid to holders of winning keno tickets, together with costs,
disbursements and prejudgment interest. In 1997, the Court granted the Company
summary judgment but granted the plaintiffs limited leave to amend their
complaint; the plaintiffs filed an amended complaint; and the Court granted the
Company's motion to strike and for summary judgment as to the amended complaint,
this time without leave to amend. Plaintiffs filed a notice of appeal, and in
November 1998, the California Court of Appeal affirmed. Plaintiffs then sought
review by the California Supreme Court, which denied review in March 1999,
effectively ending the case.

The Company monitors, and occasionally affirmatively becomes involved in,
litigation involving Indian gaming in states where such litigation may, directly
or indirectly, concern or call into question the legal rights and operations of
state lotteries to which the Company provides contract services. The purpose of
this effort is to protect state lottery interests, and thus the Company's
revenue streams, from service contracts. As previously publicly reported, one
such piece of litigation is Rumsey Indian Rancheria v. Wilson, currently pending
in the Ninth Circuit Court of Appeals on appeal from the U.S. District Court for
the Eastern District of California, which involves a suit by several California
Indian tribes against the State and Governor of California under the federal
Indian Gaming Regulatory Act ("IGRA"). The Indian Tribes claimed in the District
Court that certain elements of the California State Lottery (which is a customer
of the Company) ("CSL") and the equipment on which it is run involve the
operation of slot machines and, therefore, under IGRA, the tribes also must be
permitted to operate slot machines. The State of California argued at times that
the CSL does not involve the operation of slot machines; however, the State at
times appeared to be taking the position that, if and to the extent the CSL does
involve the operation of slot machines, it must be terminated because the CSL is
not exempt from the California law prohibiting the operation of slot machines.
The Company filed amicus curiae briefs in the District Court arguing that the
CSL does not involve the operation of slot machines and that even if it does,
the CSL is exempt from the State law prohibition on slot machines. In September
1998, the Court entered summary judgment for the defendants. The Indian Tribes
have since appealed the District Court's decision, and, as noted above, the
appeal is now pending before the Ninth Circuit Court of Appeals.



                                       35
<PAGE>   37
In July 1998, the U.S. Department of Justice filed suit in the U.S. District
Court for the District of Delaware, U.S. v. Citicorp, Inc., Citicorp Services,
Inc., GTECH Holdings Corporation and Transactive Corporation, seeking to enjoin
the consummation of a transaction between Citicorp Services, Inc. and the
Company's Transactive subsidiary respecting the sale to Citicorp of
Transactive's electronic benefits transfer contracts and certain related assets
(which transaction is described in particularity in connection with the
discussion of the $99.4 million-$60.6 million after-tax -- special charge
recorded by the Company in the fourth quarter of fiscal 1998 in Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Special Charge.") The Department of Justice alleged in the suit
that the proposed sale of assets would tend substantially to lessen competition
in the electronic benefits transfer market in violation of Section 7 of the
Clayton Act, as amended (15 U.S.C. Section 18), and would constitute an
unreasonable restraint of trade in violation of Section 1 of the Sherman Act (15
U.S.C. Section 1). In January 1999, the Company announced the termination of the
agreement between Citicorp and Transactive, following which the parties to the
litigation entered into a settlement and the suit was dismissed. See "Certain
Significant Developments Since the Start of Fiscal 1999", above, and Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Special Charges".

In April 1999, the Company was served with a lawsuit entitled Pantaleon
Arellano, et. al. and Estelle Arellano v. The California State Lottery, et. al.
in California Superior Court (Orange County), which was filed in March, 1999. In
this action, plaintiffs are a husband and wife who claim to have purchased a
winning ticket in the California State Lottery's ("CSL's") April 8, 1998 Super
Lotto drawing. That drawing resulted in the award of a $102 million jackpot,
which was split evenly among three holders of tickets bearing the winning
numbers. Plaintiffs here claim to have purchased a ticket for that drawing with
the same winning numbers; plaintiffs and the Company have been told that CSL
computer records reveal that the ticket plaintiffs hold was purchased after the
close of sales for that drawing, and after the winning numbers were announced.
If plaintiffs had purchased a winning ticket in the relevant drawing, they would
have a claim against the CSL for one-fourth of that jackpot amount, i.e.,
approximately $25.5 million. In their complaint, they attempt to state a claim
against both the CSL (and its Commission and the State of California) and the
Company for $104 million, apparently their approximation of the full amount of
the jackpot. They also seek to have this amount trebled, alleging that the
defendants' conduct in denying plaintiffs' claim to the jackpot was racially
motivated, and they seek various other amounts, including emotional distress
damages and attorney fees. The Company believes that this complaint, and the
allegations underlying the complaint, are wholly without merit. The Company
intends to defend itself vigorously in these proceedings.

For information respecting certain other legal proceedings, refer to Item 1,
"Certain Factors Affecting Future Performance - Maintenance of Business
Relationships and Certain Legal Matters" and Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," of this report,
and Note G of Notes to Consolidated Financial Statements included in this
report. The Company also is subject to certain legal proceedings and claims
which management believes, on the basis of information presently available to
it, will not materially adversely affect the Company's consolidated financial
position or results of operations.



                                       36
<PAGE>   38
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of Holding's security holders during the
last quarter of fiscal 1999.



                                       37
<PAGE>   39
ADDITIONAL INFORMATION

The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K:

                        EXECUTIVE OFFICERS OF THE COMPANY

The Executive Officers of Holdings as of May 7, 1999 are:

Name                     Age        Position

William Y. O'Connor      54         Chairman (since February 1998), Chief 
                                    Executive Officer (since July 1997),
                                    President (since December 1994) and director
                                    (since July 1995). Mr. O'Connor also served
                                    as Chief Operating Officer from December
                                    1994 until March 1998. Previously, Mr.
                                    O'Connor was the President and Chief
                                    Executive Officer of Ascom Timeplex, a
                                    telecommunications company, from 1992 to
                                    1994 and prior to that was Corporate Senior
                                    Vice President and President of the
                                    Broadband Communications Group of
                                    Scientific-Atlanta, Inc. from 1987 to 1992.

Stephen A. Davidson      55         Senior Vice President since September 1996 
                                    and Vice President - Human Resources from
                                    July 1992 to September 1996.

Steven P. Nowick         45         Chief Operating Officer since March 1998 and
                                    Senior Vice President since July 1997.
                                    Previously, Mr. Nowick was President,
                                    Corporate Product Management, of Ameritech
                                    Corporation, a telecommunications company,
                                    from 1994 to 1997 and Practice Leader with
                                    respect to telecommunications and related
                                    areas of practice with Booz, Allen &
                                    Hamilton, a consultancy, from 1992 to 1994.

Thomas J. Sauser         55         Senior Vice President and Chief Financial 
                                    Officer since February 1996. Mr. Sauser has
                                    also served as Treasurer from February 1996
                                    until July 1997 and again since November
                                    1997. Previously, Mr. Sauser was Chief
                                    Financial Officer and Senior Vice President
                                    of EG&G, Inc. from 1994 through 1995. Prior
                                    to this, Mr. Sauser was employed by IBM
                                    Corporation where, from 1991 to 1994, he was
                                    Assistant to the General Manager and Vice
                                    President, Finance, Technical Operations and
                                    HQ Services.



                                       38
<PAGE>   40
Donald L. Stanford       48         Senior Vice President, with responsibility 
                                    for technology, for more than five years.

Donald R. Sweitzer       51         Senior Vice President - Government Relations
                                    since July 1998. Previously, Mr. Sweitzer
                                    was President of the Dorset Resource and
                                    Strategy Group, a government affairs
                                    consultancy, from November 1996 through June
                                    1998, and President and Managing Partner of
                                    Politics Inc., a political consulting firm,
                                    from January 1995 through August 1996. Mr.
                                    Sweitzer also served as Kentucky State
                                    Director of Clinton/Gore 1996 Inc.,
                                    President Clinton and Vice President Gore's
                                    1996 political campaign vehicle, from August
                                    1996 through November 1996, and as Political
                                    Director of the Democratic National
                                    Committee from April 1994 through January
                                    1995.

Executive officers and other officers are elected or appointed by, and serve at
the pleasure of, the Board of Directors. Some are party to employment contracts
with the Company. The information set forth above reflects positions held with
Holdings except as expressly provided to the contrary.

For the purposes of calculating the aggregate market value of the shares of
Common Stock of Holdings held by nonaffiliates, as shown on the cover page of
this report, it has been assumed that all the outstanding shares were held by
nonaffiliates except for the shares beneficially owned by: directors of
Holdings, officers, and employees of and consultants to Holdings and GTECH.
However, this should not be deemed to constitute an admission that all such
persons or entities are, in fact, affiliates of Holdings, or that there are not
other persons who may be deemed to be affiliates of Holdings. Further
information concerning shareholdings of officers, directors and principal
shareholders of Holdings will be included in Holdings' definitive proxy
statement relating to its scheduled July 1999 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission.



                                       39
<PAGE>   41
                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
              RELATED STOCKHOLDER MATTERS

The principal United States market on which Holdings' Common Stock is traded is
the New York Stock Exchange where it is traded under the symbol "GTK."

The following table sets forth on a per share basis the high and low sale prices
of Common Stock for the fiscal quarters indicated, as reported on the New York
Stock Exchange Composite Tape.

<TABLE>
<CAPTION>
FISCAL 1998                                             HIGH          LOW
<S>                                                   <C>           <C>
First Quarter (February 23-May 31, 1997)              $34 1/2       $28 3/8
Second Quarter (June 1-August 30, 1997)               $34 1/4       $29 3/4
Third Quarter (August 31-November 29, 1997)           $35 7/16      $29 1/2
Fourth Quarter (November 30-February 28, 1998)        $35 3/4       $26 3/16
</TABLE>

<TABLE>
<CAPTION>
FISCAL 1999                                            HIGH           LOW
<S>                                                   <C>           <C>

First Quarter (March 1 - May 30, 1998)                $40 5/8       $31
Second Quarter (May 31- August 29, 1998)              $35 9/16      $27
Third Quarter (August 30 - November 28, 1998)         $28 13/16     $21 3/4
Fourth Quarter (November 29 - February 27, 1999)      $27 9/16      $20 5/16
</TABLE>

The closing price of the Common Stock on the New York Stock Exchange on May 3,
1999 was $26 3/8. As of May 3, 1999, there were approximately 1,050 holders of
record of the Common Stock.

During fiscal 1999, 5,688 shares of Holdings' unregistered Common Stock vested
under stock award plans. Pursuant to the terms of these plans, the shares were
issued for no cash consideration. Registration of such shares was not required
because the transaction did not constitute a "sale" under Section 2(3) of the
Securities Act of 1933 or, alternatively, the transaction was exempt pursuant to
the private offering provisions of the Act and the rules thereunder.

Holdings has never paid cash dividends on its Common Stock and has no current
plan to do so. The current policy of Holdings' Board of Directors is to reinvest
earnings in the operation and expansion of the Company's business. Further,
Holdings is a holding company and the operations of the Company are conducted
through Holdings' subsidiaries. Accordingly, the ability of Holdings to pay
dividends on its Common Stock would be dependent on the earnings and cash flow
of its subsidiaries and the availability of such cash flow to Holdings.


                                       40
<PAGE>   42
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

 The selected consolidated financial data below should be read in conjunction
with Item 7--"Management's Discussion and Analysis of Financial Condition and
Results of Operations," the Consolidated Financial Statements and the other
financial information included herein. The operating, balance sheet and per
share data in the table are derived from the consolidated financial statements
of the Company which were audited by independent auditors.



                                       41

<PAGE>   43
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                 Fiscal Year Ended
                                                  ------------------------------------------------------------------------------
                                                  February 27,     February 28,     February 22,     February 24,   February 25,
                                                      1999            1998 (a)          1997             1996           1995
                                                  ------------     ------------     ------------     ------------   ------------
                                                                  (Dollars in thousands, except per share amounts)
<S>                                               <C>              <C>              <C>              <C>            <C>
OPERATING DATA:
Revenues:
      Services (b)                                 $  887,395       $  868,522       $  789,534       $  686,043     $  547,767
      Sales of products                                85,528          122,045          114,738           58,047        147,340
                                                   ----------       ----------       ----------       ----------     ----------
          Total                                       972,923          990,567          904,272          744,090        695,107
                                                                                                                     
Gross Profit:                                                                                                        
      Services (b)                                    295,608          265,038          237,872          244,139        194,097
      Sales of products                                25,703           48,230           47,297           13,595         41,468
                                                   ----------       ----------       ----------       ----------     ----------
          Total                                       321,311          313,268          285,169          257,734        235,565
                                                                                                                     
Operating income (b)                                  141,720 (c)       44,104 (d)      127,091          117,983        104,481 (e)
Interest expense, net of interest income               23,326           24,578           16,388           12,107         13,065
Income from continuing operations before                                                                             
      extraordinary charge                             89,063           27,214           77,803           66,627         52,319
Loss from operations of AmTote                           --               --               --               --           (6,583)
Loss on disposal of AmTote                               --               --               --               --          (43,444)
Extraordinary charge                                     --               --               --               --           (1,420)
Net income                                             89,063           27,214           77,803           66,627            872
                                                                                                                     
PER SHARE DATA:                                                                                                      
BASIC:                                                                                                               
From continuing operations                         $     2.17       $      .65       $     1.81       $     1.54     $     1.20
Net income                                               2.17              .65             1.81             1.54            .02 (f)
DILUTED:                                                                                                             
From continuing operations                               2.16              .64             1.80             1.53           1.20
Net income                                               2.16              .64             1.80             1.53            .02 (f)
                                                                                                                     
OTHER DATA:                                                                                                          
Earnings before depreciation, amortization,                                                                          
      interest, taxes and other noncash charges    $  376,158       $  347,099       $  326,054       $  273,570     $  221,832
Cumulative number of lottery terminals                                                                               
      shipped (g)                                     377,857          360,202          316,614          280,897        261,287
Number of lottery terminals sold                        4,921           11,963           13,609            3,658         12,282
Number of lottery customers at year-end                    81               78               79               74             72
                                                                                                                     
BALANCE SHEET DATA (AT END OF PERIOD):                                                                               
Working capital                                    $    3,755       $   27,371       $   36,914       $   21,414     $    6,086
Total assets                                          874,215        1,023,812          956,541          859,380        779,254
Long-term debt, less current portion                  319,078          453,587          382,499          382,930        338,468
Shareholders' equity                                  283,906          345,210          358,133          296,725        232,931
</TABLE>

(a)      53-week year.

(b)      The Company's Brazilian operations prior to January 31, 1996 were
         included in the financial statements of the Company on the equity
         method of accounting.

(c)      Includes a special charge of $15.0 million or $.22 per basic share;
         $.21 per diluted share. See Note P to the consolidated financial
         statements.

(d)      Includes a special charge of $99.4 million or $1.45 per basic share;
         $1.44 per diluted share. See Note P to the consolidated financial
         statements.

(e)      Includes an $11.1 million special charge consisting of a $6.1 million
         charge in connection with the reduction of the Company's workforce and
         relocation of certain operating functions and $5.0 million to write off
         its video gaming-related inventory.

(f)      Includes the effect of operating losses of the Company's former AmTote
         subsidiary - $.15 per share, loss on disposal of AmTote - $1.00 per
         share, and extraordinary loss relating to early extinguishment of debt
         - $.03 per share.

(g)      Terminals shipped represents lottery terminals sold under product sale
         contracts and lottery terminals supplied under service contracts.

                                      F-1
<PAGE>   44
Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS 


Certain statements contained in this section and elsewhere in this report are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934. Such statements
include, without limitation, statements relating to (i) the future prospects for
and stability of the lottery industry and other businesses that the Company is
engaged in or expects to engage in, (ii) the future operating and financial
performance of the Company, (iii) the ability of the Company to retain existing
business and to obtain and retain new business, (iv) the Company's program to
address potential issues relating to the change of date to January 1, 2000
("Year 2000"), and (v) the results and effects of legal proceedings and
investigations. Such forward-looking statements reflect management's assessment
based on information currently available, but are not guarantees and are subject
to risks and uncertainties that could cause actual results to differ materially
from those contemplated in the forward-looking statements. These risks and
uncertainties include, but are not limited to, those set forth below and
elsewhere in this report and in the Company's press releases and its Forms 10-K,
10-Q, 8-K and other reports and filings with the Securities and Exchange
Commission (the "SEC").

General

The Company has derived substantially all of its revenues from the rendering of
services and the sale or supply of computerized online lottery systems and
components to government-authorized lotteries. Service revenues have been
derived primarily from lottery service contracts. These contracts are typically
at least five years in duration, and are generally based upon a percentage of a
lottery's gross online lottery sales. These percentages vary depending on the
size of the lottery and the scope of services provided to the lottery. Product
sale revenues have been derived primarily from the installation of new online
lottery systems and sales of lottery terminals and equipment in connection with
the expansion of existing lottery systems. The size and timing of these
transactions have resulted in variability in product sale revenues from period
to period. The Company currently anticipates that product purchases by lotteries
during fiscal 2000 will return to approximately fiscal 1998 levels.

The Company has taken steps to broaden its offerings of high-volume transaction
processing services outside of its core business of providing online lottery
services. For example, the Company's Dreamport subsidiary ("Dreamport") provides
gaming technology and a comprehensive array of management, development and
strategic services to the gaming and entertainment markets. Also, on July 1,
1998, the Company acquired 80% of the equity of Europrint Holdings Ltd.
("Europrint") and its wholly owned subsidiaries, including Interactive Games
International ("IGI"), for a net cash purchase price of $21.6 million, including
related acquisition costs. The Company has the option, and under certain
circumstances the obligation, to acquire the remaining 20% of the equity of
Europrint and IGI within five years from the date of acquisition. Europrint is
among the world's largest providers of media promotional games and IGI has
pioneered the development of interactive, televised lottery games.

The Company's business is highly regulated, and the competition to secure new
government contracts is often intense. Awards of contracts to the Company are,
from time to time, challenged by competitors. Further, there have been and
continue to be investigations of various types, including grand jury
investigations, conducted by governmental authorities into possible
improprieties and wrongdoing in connection with efforts to obtain and/or the
awarding of lottery contracts and related matters. Although the Company does not
believe that it has engaged in any wrongdoing in connection with these matters,
certain investigations that are conducted largely in secret are still under way.
Accordingly, the Company lacks sufficient information to determine with
certainty their ultimate scope and whether the government authorities will
assert claims resulting from these or other investigations that could implicate
or reflect adversely upon the Company. Because the Company's reputation for
integrity is an important factor in its business dealings with lottery and other
government agencies, if government authorities were to make an allegation of, or
if there were to be a finding of, improper conduct on the part of or
attributable to the Company in any matter, such an allegation or finding could
have a material adverse effect on the Company's business, including its ability
to retain existing contracts and to obtain new or renewal contracts. In
addition, continuing adverse publicity resulting from these investigations and
related matters could have such a material adverse effect. See Note G to the
Consolidated Financial Statements, Part I, Item 1, -- "Certain Factors That May
Affect Future Performance --Maintenance of Business Relationships and Certain
Legal Matters" and Part I, Item 3 -- "Legal Proceedings" herein for further
information concerning these matters and other contingencies.

The Company operates on a 52- to 53-week fiscal year ending on the last Saturday
in February. Fiscal 1998 was a 53-week year.

All references to the Consolidated Financial Statements of the Company and Notes
thereto, are to the Consolidated Financial Statements of the Company and Notes
thereto included in Item 8 herein.

                                      F-2
<PAGE>   45
The following discussion should be read in conjunction with the table below.

<TABLE>
<CAPTION>

                                                             SUMMARY FINANCIAL DATA

                                                               Fiscal Year Ended
                                      ----------------------------------------------------------------------
                                           February 27,            February 28,             February 22,
                                              1999                   1998 (a)                   1997
                                      --------------------     --------------------     --------------------
                                                              (Dollars in thousands)
<S>                                   <C>            <C>       <C>            <C>       <C>            <C>
Revenues:
     Services                         $ 887,395       91.2%    $ 868,522       87.7%    $ 789,534       87.3%
     Sales of products                   85,528        8.8       122,045       12.3       114,738       12.7
                                      ---------      -----     ---------      -----     ---------      -----
         Total                          972,923      100.0       990,567      100.0       904,272      100.0

Costs and expenses:                                                                                    
     Costs of services (b)              591,787       66.7       603,484       69.5       551,662       69.9
     Costs of sales (b)                  59,825       69.9        73,815       60.5        67,441       58.8
                                      ---------      -----     ---------      -----     ---------      -----
         Total                          651,612       67.0       677,299       68.4       619,103       68.5
                                      ---------      -----     ---------      -----     ---------      -----
Gross profit                            321,311       33.0       313,268       31.6       285,169       31.5

Selling, general and administrative     124,433       12.8       133,284       13.5       127,080       14.0
Research and development                 40,158        4.1        36,498        3.7        30,998        3.4
Special charge                           15,000        1.5        99,382       10.0          --         --
                                      ---------      -----     ---------      -----     ---------      -----
Operating income                        141,720       14.6        44,104        4.4       127,091       14.1

Other income (expense):                                                                                
     Interest income                      4,079        0.4         5,733        0.6         4,424        0.5
     Equity in earnings of                                                                             
     unconsolidated affiliates            7,113        0.7        24,376        2.5        16,727        1.8
     Other income                        25,447        2.6           711        0.1         4,439        0.5
     Interest expense                   (27,405)      (2.8)      (30,311)      (3.1)      (20,812)      (2.3)
                                      ---------      -----     ---------      -----     ---------      -----
Income before income taxes              150,954       15.5        44,613        4.5       131,869       14.6

Income taxes                             61,891        6.3        17,399        1.8        54,066        6.0
                                      ---------      -----     ---------      -----     ---------      -----
Net income                            $  89,063        9.2%    $  27,214        2.7%    $  77,803        8.6%
                                      =========      =====     =========      =====     =========      =====
</TABLE>


(a)      53-week year

(b)      Percentages are computed based on cost as a percentage of related
         revenue.

                                      F-3
<PAGE>   46
Special Charges

In the fourth quarter of fiscal 1998 the Company's Board of Directors approved a
plan of repositioning and restructuring of the Company's operations (the "Plan")
and recorded a $99.4 million special charge ($60.6 million after-tax, or $1.45
per basic share; $1.44 per diluted share) related to the execution of the Plan.
The special charge consisted principally of costs to exit the electronic
benefits transfer (EBT) business conducted by the Company's Transactive
subsidiary ("Transactive"). In addition, the special charge included costs
associated with a worldwide workforce reduction, contractual obligations in
connection with the departures of the Company's former chairman and
vice-chairman from the Company and asset impairment charges relating to two of
the Company's lottery contracts.

The Company realized pre-tax savings in fiscal 1999 of approximately $43.0
million resulting from the Plan.

In February 1998, the Company entered into an asset purchase agreement with
Citicorp Services, Inc. ("Citicorp"), to sell EBT contracts and certain related
assets held by Transactive. In July 1998, the U.S. Department of Justice
commenced a legal action seeking to enjoin the consummation of the transaction,
and in January 1999 Citicorp terminated the agreement pursuant to a clause in
the contract that permitted termination by either party if the closing did not
occur within a timeframe that has expired. Principally as a result of the
contract termination, the Company recorded an additional special charge in the
fourth quarter of fiscal 1999 of $15.0 million ($8.9 million after-tax; or $.22
per basic and diluted share) in order to write down the assets held for sale to
their net realizable value. The proposed sale did not include the contracts or
assets in connection with Transactive's provision of benefit identification
cards to the state of New York, electronic payment file transfer services to the
city of New York, or hunting, fishing and recreational licenses to the state of
Texas. The Company plans to continue to honor those contracts and Transactive's
EBT contracts, but has decided not to pursue new opportunities in those areas or
seek new U.S. EBT contracts.



Results of Operations

COMPARISON OF FISCAL 1999 WITH 1998

Revenues for fiscal 1999 were $972.9 million, representing a $17.7 million, or
1.8%, decrease from revenues of $990.6 million in fiscal 1998.

Service revenues in fiscal 1999 were $887.4 million, representing an $18.9
million, or 2.2%, increase over the $868.5 million of service revenues in fiscal
1998. This increase resulted primarily from $11.3 million of higher service
revenues from the Company's existing lottery customer base, including higher
lottery jackpot activity, and $6.6 million of incremental service revenues from
Dreamport. The increase in service revenues reflects a $15.0 million reduction
in service revenue associated with having 13 weeks in the first quarter of
fiscal 1999 compared with 14 weeks in the first quarter of fiscal 1998.

In fiscal 1999, lottery sales by the Company's domestic customers declined
approximately 2% compared with fiscal 1998, primarily reflecting the continued
decline in sales in Texas and New 

                                      F-4
<PAGE>   47
York. This decline, coupled with contractual rate reductions in Texas,
California and Georgia, resulted in a decline in the Company's domestic service
revenues of 5.6%. Excluding Texas, lottery sales for the Company's domestic
customers increased approximately 5%.

Lottery sales by the Company's international customers increased approximately
19% in fiscal 1999 compared with fiscal 1998, driven primarily by growth in
Brazil, Mexico, Poland and Germany. This increase, coupled with contractual rate
increases in Brazil and Mexico and partially offset by the impact of the
reduction in the dollar value of foreign currencies, resulted in growth of 14%
in the Company's international lottery service revenues.

Worldwide sales by the Company's lottery customers increased approximately 5% in
fiscal 1999 versus fiscal 1998. Incorporating rate and currency changes, the
Company's total lottery service revenues grew 1.4%. The weakening of foreign
currencies impacted fiscal 1999 lottery service revenues. However, these effects
were offset by gains from financial hedges, reflected in other income. Had
average exchange rates in fiscal 1998 continued throughout fiscal 1999, service
revenues would have been approximately $30.0 million higher than reported.

As anticipated, product sales declined from $122.0 million in fiscal 1998 to
$85.5 million in fiscal 1999. This decrease resulted primarily from lower
terminal sales in fiscal 1999 than in fiscal 1998. The Company sold
approximately 4,900 lottery terminals during fiscal 1999, as compared to
approximately 12,000 lottery terminals during fiscal 1998. Fiscal 1998 product
sales included approximately 6,500 terminals to the state of Massachusetts
comprising part of the sale of a new online lottery central system to that
customer in the third quarter of fiscal 1998.

Gross margins on service revenues were 33.3% in fiscal 1999, up from 30.5% in
fiscal 1998, primarily due to cost reductions resulting from the restructuring
and repositioning Plan announced by the Company in February 1998, along with
higher lottery jackpot activity in fiscal 1999 than in fiscal 1998.

Gross margins on product sales fluctuate depending on the mix, volume and timing
of product sales contracts. Gross margins on product sales declined from 39.5%
in fiscal 1998 to 30.1% in fiscal 1999. This change was primarily due to a shift
in product mix along with the acquisition of Europrint, a business with lower
margins than the Company has realized historically.

Selling, general and administrative expenses in fiscal 1999 were $124.4 million,
representing an $8.9 million, or 6.6%, decrease from the $133.3 million incurred
in fiscal 1998. This decrease was primarily attributable to lower legal expenses
and a reduction in costs resulting from the restructuring and repositioning
Plan. These declines were partially offset by selling, general and
administrative expenses of Europrint and IGI. As a percentage of revenues,
selling, general and administrative expenses were 12.8% and 13.5% during fiscal
1999 and 1998, respectively.

Research and development expenses in fiscal 1999 were $40.2 million,
representing a $3.7 million, or 10.0%, increase over research and development
expenses of $36.5 million in fiscal 1998. This increase reflects costs
associated with the continuing development of the Company's Internet wagering
platform, as well as an increase in the number of new products in the
development pipeline. As a percentage of revenues, research and development
expenses were 4.1% and 3.7% during fiscal 1999 and 1998, respectively.

                                      F-5
<PAGE>   48
Interest income in fiscal 1999 was $4.1 million, a decrease of $1.6 million from
interest income of $5.7 million earned during fiscal 1998. During fiscal 1998,
the Company had higher dollar-denominated cash balances on hand in Brazil than
in fiscal 1999 to fund the online lottery system implementation that was
completed for Caixa Economica Federal ("Caixa"), Latin America's largest
financial institution, in fiscal 1998.

Equity in earnings of unconsolidated affiliates in fiscal 1999 was $7.1 million,
a decrease of $17.3 million from the $24.4 million earned during fiscal 1998.
This decrease resulted principally from the Company's sale, in April 1998, of
its 22.5% equity interest in Camelot Group plc ("Camelot") back to Camelot for
$84.9 million. The book value of the Company's Camelot investment at the time of
sale was $51.8 million. A portion of the cash received by the Company would have
to be returned to Camelot in the event that Camelot's operating license is
revoked for certain reasons determined to be attributable to the Company.
Accordingly, the Company has deferred the recognition of the gain from the sale
of its investment and is recognizing such gain ratably over the remaining period
of Camelot's operating license, due to expire in September 2001. The sale of
this equity interest does not affect the Company's position as the principal
supplier of goods and services to Camelot, but has reduced the Company's equity
in earnings of unconsolidated affiliates.

Other income in fiscal 1999 was $25.4 million, an increase of $24.7 million over
the $.7 million earned in fiscal 1998. Other income in fiscal 1999 includes
foreign exchange gains associated with the Company's global asset protection and
foreign exchange management programs, as well as the amortization of the gain on
the sale of Camelot. The Company, through its asset protection strategy, avoided
a cash loss in Brazil by investing accumulated cash in dollar-denominated
investments while awaiting government approvals to repatriate these dollars to
the U.S. Subsequent to February 27, 1999, government approval was obtained and
this cash was repatriated. The success of the Company's foreign exchange
management program offset approximately 90% of the gross profit erosion that
resulted from the year to year weakening of foreign currencies.

Interest expense in fiscal 1999 was $27.4 million, a decrease of $2.9 million
from interest expense of $30.3 million incurred during fiscal 1998. This
decrease was primarily due to lower debt outstanding under the Company's
revolving credit facility, partially offset by higher average interest rates on
the Company's outstanding debt.

The Company's effective income tax rate increased from 39% in fiscal 1998 to 41%
in fiscal 1999 due principally to the loss of the beneficial tax effect of U.K.
equity earnings that were reported on an after-tax basis. This increase was
partially offset by the congressional extension of the Research and Development
tax credit. The Company's effective income tax rate was greater than the
statutory rate primarily due to state income taxes and certain expenses that are
not deductible for income tax purposes.

Subsequent Event

On April 1, 1999, after the close of fiscal 1999, Quick Draw, the keno-style
game operated in New York on a lottery system provided by the Company,
terminated due to the failure of the New York State Legislature to extend the
legislation authorizing the game. Quick Draw was authorized by the New York
State Legislature, and implemented by the New York State Lottery on September 5,
1995, to increase revenue for New York public schools. In the Lottery's fiscal
year ending March 31, 1999, Quick Draw sales totaled approximately $482.0
million.

The termination of the Quick Draw game in New York will not have a material
impact on the Company's results of operations for the first quarter of fiscal
2000. The Company believes that it is likely that the New York Legislature will
enact legislation that will provide for the continuation of Quick Draw during
the Company's fiscal 2000 second quarter, however, there can be no assurance
that this will be the case.


                                      F-6
<PAGE>   49

COMPARISON OF FISCAL 1998 WITH 1997

Revenues for fiscal 1998 were $990.6 million, representing an $86.3 million, or
9.5%, increase over revenues of $904.3 million in fiscal 1997.

Service revenues in fiscal 1998 were $868.5 million, representing a $78.9
million, or 10.0%, increase over the $789.6 million of service revenues in
fiscal 1997. This increase resulted primarily from $46.5 million of higher
service revenues from the Company's existing lottery customer base, along with
$32.8 million of service revenues from a new online lottery system implemented
for the Caixa by the Company in Brazil. After a number of years of growth, the
Company witnessed, over the last three fiscal quarters of 1998, a downward trend
in the sales generated by its U.S. lottery customers.

Product sales for fiscal 1998 were $122.0 million, representing an increase of
$7.3 million, or 6.4%, over the $114.7 million of product sales in fiscal 1997.
This increase resulted primarily from higher central system sales in fiscal 1998
than in fiscal 1997, including a large product sale to the Massachusetts State
Lottery in the third quarter. These increases were partially offset by lower
terminal sales and lower sales of component parts and equipment to Camelot and
other members of the U.K. lottery consortium. The Company sold approximately
12,000 lottery terminals during fiscal 1998, as compared to approximately 13,600
lottery terminals during fiscal 1997.

Gross margins on service revenues were 30.5% in fiscal 1998, up from 30.1% in
fiscal 1997, primarily due to improved margins on certain existing lottery
contracts, partially offset by lower margins from new lottery and electronic
benefit contracts that began in fiscal 1998.

Gross margins on product sales fluctuate depending on the mix, volume and timing
of product sales contracts. Gross margins on product sales were 39.5% in fiscal
1998 compared with 41.2% in fiscal 1997.

Selling, general and administrative expenses in fiscal 1998 were $133.3 million,
representing a $6.2 million, or 4.9%, increase over the $127.1 million incurred
in fiscal 1997. This increase was primarily attributable to increased sales,
marketing and business development costs, along with higher administrative costs
that were necessary to support expanded operations (including Dreamport). As a
percentage of revenues, selling, general and administrative expenses were 13.5%
and 14.0% during fiscal 1998 and 1997, respectively.

Research and development expenses in fiscal 1998 were $36.5 million,
representing a $5.5 million, or 17.7%, increase over research and development
expenses of $31.0 million in fiscal 1997. This increase reflects higher
development activity for new hardware products, including the Company's latest
generation lottery terminal, the design and related software for new games, and
the costs associated with the continuing development of an Internet wagering
platform. As a percentage of revenues, research and development expenses were
3.7% and 3.4% during fiscal 1998 and 1997, respectively.

Interest income in fiscal 1998 was $5.7 million, an increase of $1.3 million
over interest income of $4.4 million earned during fiscal 1997. This increase
reflects higher dollar-denominated cash balances that were on hand in Brazil to
fund the online lottery system implementation recently completed for Caixa,
along with interest earned on sales-type lease receivables.

Equity in earnings of unconsolidated affiliates in fiscal 1998 was $24.4
million, an increase of $7.7 million over the $16.7 million earned during fiscal
1997. This increase was primarily due to higher equity income from Camelot,
along with higher equity income from Dreamport partnerships in Delaware and
Oregon.

                                      F-7
<PAGE>   50
Other income in fiscal 1998 was $.7 million, a decrease of $3.7 million from the
$4.4 million earned in fiscal 1997. Other income of $4.4 million earned during
fiscal 1997 primarily represented the gain on the sale of the Company's
investment in Pacific Online Systems Corporation.

Interest expense in fiscal 1998 was $30.3 million, an increase of $9.5 million
over interest expense of $20.8 million incurred during fiscal 1997. This
increase was primarily due to higher average debt outstanding to fund the
online lottery system implementation for Caixa, along with higher average
interest rates.

The Company's effective income tax rate decreased to 39% in fiscal 1998 from 41%
in fiscal 1997 due principally to a reduction in nondeductible expenditures,
increased recognition of tax credits and the full-year effect of the
restructuring of financing and operations in Brazil. The Company's effective
income tax rate was greater than the statutory rate primarily due to state
income taxes and certain expenses that are not deductible for income tax
purposes.


Changes in Financial Position, Liquidity and Capital Resources

During fiscal 1999, the Company generated $286.3 million of cash from
operations. This cash, together with $84.9 million of cash received from the
sale of the Company's investment in Camelot, was used to pay down $117.0 million
on the Company's Credit Facility; to fund the purchase of $121.2 million of
systems, equipment and other assets relating to contracts; to repurchase $70.8
million of the Company' common stock and to fund the acquisition of Europrint
for $21.6 million.

Trade accounts receivable increased by $12.9 million, from $93.8 million at
February 28, 1998 to $106.7 million at February 27, 1999, primarily due to a
higher level of product sales in the fourth quarter of fiscal 1999 compared to
the fourth quarter of fiscal 1998, along with receivables of Europrint and IGI.

Inventories increased by $34.0 million, from $27.9 million at February 28, 1998
to $61.9 million at February 27, 1999, primarily due to spending related to
product sales expected to be delivered by November 1999 (see advance payments
from customers below).

Assets held for sale decreased by $14.2 million, due to the termination of the
agreement to sell Transactive EBT contracts and certain related assets to
Citicorp. The write-off of these assets is included in the fiscal 1999 special
charge.

The cost of systems, equipment and other assets relating to contracts decreased
by $46.9 million, from $1,204.6 million at February 28, 1998 to $1,157.7 million
at February 27, 1999. This decrease reflects $102.2 million relating to the
devaluation of the Brazilian currency in January 1999, partially offset by the
continuing installation of a new lottery system in Michigan and the expansion of
lottery systems in several domestic and international locations.

Current deferred income taxes decreased by $11.5 million, from $40.9 million at
February 28, 1998 to $29.4 million at February 29, 1999, primarily due to the
acceleration of tax deductions relating to capitalized software costs.

                                      F-8
<PAGE>   51
Investments in and advances to unconsolidated affiliates decreased by $54.0
million, from $64.8 million at February 28, 1998 to $10.8 million at February
27, 1999, primarily due to the sale of the Company's investment in Camelot.

The special charge accrual decreased by $27.6 million, from $33.6 million at
February 28, 1998 to $6.1 million at February 27, 1999, due to severance and
related payments and legal costs in connection with the previously reported
Branson litigation and judgement in the U.K.

Advance payments from customers increased by $30.0 million, from $.5 million at
February 28, 1998 to $30.5 million at February 27, 1999. This increase reflects
the down payments received on product sales orders from six international
customers and that portion of the deferred gain from the sale of the Company's
investment in Camelot that will be recognized in other income in fiscal 2000.

Income taxes payable, that are reported net of income tax refunds receivable,
increased by $32.5 million, from $25.4 million at February 28, 1998 to $57.9
million at February 27, 1999. This increase was primarily due to an income tax
refund received relating to the fiscal 1998 special charge and the timing of
income tax payments, including those related to the sale of the Company's
investment in Camelot.

Long-term debt, less current portion decreased by $134.5 million, from $453.6
million at February 28, 1998 to $319.1 million at February 27, 1999. This
decrease was primarily due to the application of the proceeds received from the
sale of the Company's investment in Camelot and free cash flow generated during
fiscal 1999 to the Credit Facility.

Other liabilities increased by $10.7 million, from $19.2 million at February 28,
1998 to $29.9 million at February 27, 1999, reflecting the long-term portion of
the deferred gain from the sale of the Company's investment in Camelot.

The Company's business is capital-intensive. Although it is not possible to
estimate precisely, due to the nature of the business, the Company currently
anticipates that the level of capital expenditures for systems, equipment and
other assets relating to contracts required during fiscal 2000 will be in a
range of $200.0 million to $220.0 million. The principal sources of liquidity
for the Company are expected to be cash generated from operations and borrowings
under the Company's Credit Facility. As of May 1, 1999 the Company had utilized
approximately $36.5 million of its $400 million Credit Facility. The Company
currently expects that its cash flow from operations and available borrowings
under its Credit Facility will be sufficient to fund its anticipated working
capital and ordinary capital expenditure needs, to service its debt obligations
and to fund anticipated internal growth in the foreseeable future.

                                      F-9
<PAGE>   52
Inflation

The impact of inflation on the Company's operations has not been significant to
date. While the Company believes that its business is not highly sensitive to
inflation, there can be no assurance that a high rate of inflation in the future
would not have an adverse effect on the Company's operations, particularly in
emerging markets such as Brazil. The Company historically used the U.S. dollar
as the functional currency for its operations in Brazil due to the high levels
of inflation in the Brazilian economy. The Company began using the local
currency in Brazil as the functional currency on March 1, 1998 because of the
significant reduction in the rate of inflation in Brazil. At February 27, 1999,
the net book value of the Company's investments in Brazil was approximately $100
million.

Market Risk Disclosures

The primary market risk inherent in the Company's financial instruments and
exposures is the potential loss arising from adverse changes in interest rates
and foreign currency rates. The Company's exposure to commodity price changes is
not considered material and is managed through its procurement and sales
practices. The Company did not own any marketable equity securities during
fiscal 1999.

Interest rates

Interest rate market risk is estimated as the potential change in the fair value
of the Company's total debt or current earnings resulting from a hypothetical
10% adverse change in interest rates. At February 27, 1999, the estimated fair
value of the Company's fixed rate debt, as determined by an independent
investment banker, approximated $313.4 million. A hypothetical 10% adverse
change in interest rates would increase the estimated fair value of the
Company's fixed rate debt to $322.0 million. A hypothetical 10% favorable change
in interest rates would decrease the estimated fair value of the Company's fixed
rate debt to $305.1 million.

A hypothetical 10% adverse or favorable change in interest rates applied to
variable rate debt would not have a material affect on current earnings.

The Company uses various techniques to reduce the risk associated with future
increases in interest rates, the most significant being the private placement of
seven- and 10-year fixed rate debt on May 29, 1997.

Foreign Currency Exchange Rates

Foreign exchange exposures arise from current transactions and anticipated
transactions denominated in a currency other than an entity's functional
currency and from the translation of foreign currency balance sheet accounts
into U.S. dollar balance sheet accounts.

The Company seeks to manage its foreign exchange risk by securing payment from
its customers in U.S. dollars, by sharing risk with its customers, by utilizing
foreign currency borrowings, by leading and lagging receipts and payments and by
entering into foreign currency exchange and option contracts. In addition, a
significant portion of the costs attributable to the Company's foreign currency
revenues are payable in the local currencies. Whenever possible, the Company
negotiates clauses into its contracts that allow for price adjustments should a
material change in foreign exchange rates occur.

The Company, from time to time, enters into foreign currency exchange and option
contracts to reduce the exposure associated with current transactions and
anticipated transactions denominated in foreign currencies. However, the Company
does not engage in currency speculation. At February 27, 1999, a hypothetical
10% adverse change in foreign exchange rates would result in a translation loss
of $17.0 million that would be recorded in the equity section of the Company's
balance sheet.

At February 27, 1999, a hypothetical 10% adverse change in foreign exchange
rates would result in a net transaction loss of $.8 million recorded in current
earnings after considering the effects of foreign exchange contracts currently
in place.

At February 27, 1999, a hypothetical 10% adverse change in foreign exchange
rates would result in a net reduction of cash flows from anticipatory
transactions in fiscal 2000 by $13.1 million. The percentage of fiscal 1999
anticipatory transactions that were hedged varied throughout fiscal 1999, but
averaged 65%.

As of May 1, 1999, the Company had approximately $67.8 million of outstanding
foreign currency exchange contracts to purchase foreign currencies (primarily
pounds sterling) and approximately $94.3 million of outstanding foreign currency
exchange and option contracts to sell foreign currencies (primarily Spanish
pesetas, Mexican pesos, pounds sterling and Brazilian reals).



                                       F-10
<PAGE>   53

IMPACT OF YEAR 2000

The Year 2000 computer issue creates potentially significant risks for the
Company. If lottery, gaming or EBT systems that the Company supplies to
customers or management information systems that the Company uses internally do
not correctly recognize and process date information beyond the year 1999, there
could be an adverse impact on customers' and/or the Company's operations. The
Company is actively managing its program to assess the capability of its
lottery, gaming and EBT products and its interfaces to customer systems to
handle the Year 2000. With respect to customer systems, the major challenge for
the Company in remediating the Year 2000 issue is the multinational nature of
the Company's business and the high degree of global coordination that is
required with customers, suppliers and employees.

The Company has established a Year 2000 project team and a program office at its
corporate headquarters, made up of dedicated and shared resources, to provide
the guidance and support necessary to accomplish the Year 2000 initiative.
The status of the Company's six-phase program as of May 1, 1999 is as follows:

-        The inventory phase consists of compiling a comprehensive list of
         software and hardware technologies in use by the Company. This phase is
         complete.

-        The assessment phase consists of determining the compliance status of
         each technology identified in the inventory phase. This phase is
         complete.

-        The planning phase consists of developing plans to upgrade hardware
         and/or software to Year 2000 compliance. This phase is complete.

-        The implementation phase consists of executing the tasks identified in
         the planning phase. This phase is approximately 50% complete and is
         expected to be completed by September 1, 1999.

-        The quality assurance phase consists of testing and validating systems
         replaced or modified as part of the implementation phase. This phase
         has begun for approximately 35% of our sites and is expected to be
         completed by September 1, 1999.

-        The special case phase consists of developing and implementing specific
         plans for any Year 2000 issues that cannot be handled by the previous
         phases. This phase will include monitoring each site for change
         control, contingency planning, monitoring vendor compliance issues and
         other matters that may arise. This phase will commence in September
         1999.

The Company is actively working with and seeking to enlist the cooperation of
its customers to ensure integration with their systems and telecommunications
networks. The Company is also actively working with critical suppliers of
products and services to determine that the suppliers' operations and the
products and services they provide are Year 2000 capable. The Company will
continue to monitor their progress toward Year 2000 capability.

The majority of the internal management information systems in use by the
Company (including SAP's R/3 system, System Union's SUN accounting system and
Hyperion's Pillar software) are Year 2000 compliant. The Company has a time
tracking system and an accounting system in Brazil that are not Year 2000
compliant. The Company is executing its plan to replace these two systems with
SAP's R/3 system by September 1999. The Company has a limited number of non-IT
systems that are primarily in use by the engineering and manufacturing
departments of the Company. The Company began the inventory and assessment of
these systems in October 1998 and plans to complete remediation by September 1,
1999.

The Company's contingency planning involves using already established problem
resolution processes to resolve any problems encountered during the Year 2000
timeframe. As a standard practice, the Company provides 24 hour a day
operational support. This support provides focused individuals in all
disciplines that respond in real time to operational issues. The Company's
contingency planning will include the expansion of the Year 2000 help desk team
and the creation of eight to 10 command centers worldwide to provide the
necessary response to issues that may arise as January 1, 2000 approaches.

The Company currently expects that the total cost of the Year 2000 program will
not exceed $25 million, including $5 million for the purchase of software and
hardware that will be capitalized and $20 million that will be expensed. As of
May 1, 1999 the Company had spent approximately $8.4 million on the program. The
total cost estimate does not include possible costs related to any customer or
other claims or the cost of internal software and hardware replaced in the
normal course of business but does include the cost to install new software and
hardware that is being accelerated to provide a solution to Year 2000 issues.
The total cost estimate is based on the Company's current assessment of the
program and is subject to change as the program progresses.

Year 2000 issues could have a significant impact on the Company's operations and
its financial condition and results if modifications cannot be completed on a
timely basis, unforeseen needs or problems arise, or systems operated by third
parties are not Year 2000 compliant. In addition to the potential for a
significant loss of revenues and possible damage claims by third parties
associated with Year 2000 issues, certain of the Company's United States lottery
contracts provide for up to $10,000 or more in liquidated damages per minute for
system downtime in excess of a stipulated grace period and certain of the
Company's international customers reserve the right to assess substantial
liquidated damages in the event that system downtime does occur. Based on
currently available information, management does not believe that the Year 2000
matters discussed above will cause significant operational or financial problems
for the Company; however there can be no assurance that this will be the case.


                                      F-11
<PAGE>   54
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's market risk disclosures are included in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
above.
<PAGE>   55

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



























<PAGE>   56
Report of Independent Auditors

Board of Directors and Shareholders
GTECH Holdings Corporation

We have audited the accompanying consolidated balance sheets of GTECH Holdings
Corporation and subsidiaries as of February 27, 1999 and February 28, 1998 and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended February 27, 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. The financial statements of Camelot Group plc (an entity in which
the Company had a 22.5% interest until April, 1998) have been audited by other
auditors whose report has been furnished to us; insofar as our opinion on the
consolidated financial statements of the Company relates to data included for
Camelot Group plc, it is based solely on their report.

We conducted our audits in accordance with generally accepted auditing
standards. 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 evaluationg the overall financial statement presentation.
We believe our audits and the report of other auditors provide a reasonable
basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of GTECH Holdings Corporation and
subsidiaries at February 27, 1999 and February 28, 1998 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended February 27, 1999, in conformity with generally accepted
accounting principles.


                                        Ernst & Young LLP

Boston, Massachusetts
March 29, 1999

                                      F-12
<PAGE>   57
                        REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CAMELOT GROUP PLC

We have audited the financial statements of Camelot Group plc as of January 31,
1998 and February 1, 1997, and for the years then ended which are expressed in
pounds sterling. 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 audit in accordance with auditing standards generally accepted
in the United Kingdom and 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 the
financial position of Camelot Group plc at January 31, 1998 and February 1,
1997, and the results of its operations, total recognised gains and losses and
cash flows for each of the years ended January 31, 1998 and February 1, 1997, in
conformity with generally accepted accounting principles in the United Kingdom.

Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the United
States. The application of the latter would have affected the determination of
net income expressed in pounds sterling for the years ended January 31, 1998 and
February 1, 1997 and the determination of shareholders' equity also expressed in
pounds sterling at January 31, 1998 and February 1, 1997 to the extent
summarized in footnote 24 to the financial statements.

Price Waterhouse
Chartered Accountants
London, England

March 23, 1998

                                  F-13
<PAGE>   58
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                           February 27,   February 28,
                                                                                              1999            1998
                                                                                           -----------    -----------
                                                                                             (Dollars in thousands)
<S>                                                                                        <C>            <C>
ASSETS
CURRENT ASSETS:
    Cash and cash equivalents                                                              $     7,733    $     8,250
    Trade accounts receivable                                                                  106,693         93,778
    Sales-type lease receivables                                                                 6,743         13,958
    Inventories                                                                                 61,893         27,853
    Deferred income taxes                                                                       29,419         40,897
    Assets held for sale                                                                          --           14,178
    Other current assets                                                                        14,047         14,141
                                                                                           -----------    -----------
                        TOTAL CURRENT ASSETS                                                   226,528        213,055

SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS                                      397,561        526,856

GOODWILL                                                                                       135,662        118,537

INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES                                        10,801         64,808

OTHER ASSETS                                                                                   103,663        100,556
                                                                                           -----------    -----------
                        TOTAL ASSETS                                                       $   874,215    $ 1,023,812
                                                                                           ===========    ===========


LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
    Accounts payable                                                                       $    43,402    $    39,451
    Accrued expenses                                                                            55,609         57,155
    Special charge                                                                               6,058         33,631
    Employee compensation                                                                       27,379         25,648
    Advance payments from customers                                                             30,458            504
    Income taxes payable                                                                        57,907         25,392
    Current portion of long-term debt                                                            1,960          3,903
                                                                                           -----------    -----------
                        TOTAL CURRENT LIABILITIES                                              222,773        185,684

LONG-TERM DEBT, less current portion                                                           319,078        453,587

OTHER LIABILITIES                                                                               29,908         19,171

DEFERRED INCOME TAXES                                                                           18,550         20,160

COMMITMENTS AND CONTINGENCIES                                                                     --             --

SHAREHOLDERS' EQUITY:
    Preferred Stock, par value $.01 per share--20,000,000 shares authorized, none issued          --             --
    Common Stock, par value $.01 per share--150,000,000 shares authorized,
     44,152,565 and 43,922,627 shares issued; 38,722,063 and 41,284,146 shares
      outstanding at February 27, 1999 and February 28, 1998, respectively                         442            439
    Additional paid-in capital                                                                 176,434        171,302
    Equity carryover basis adjustment                                                           (7,008)        (7,008)
    Accumulated other comprehensive income                                                     (84,842)           (42)
    Retained earnings                                                                          345,018        255,955
                                                                                           -----------    -----------
                                                                                               430,044        420,646
    Less cost of 5,430,502 and 2,638,481 shares in treasury at
      February 27, 1999 and  February 28, 1998, respectively                                  (146,138)       (75,436)
                                                                                           -----------    -----------
                                                                                               283,906        345,210
                                                                                           -----------    -----------
                        TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                         $   874,215    $ 1,023,812
                                                                                           ===========    ===========
</TABLE>


See Notes to Consolidated Financial Statements

                                      F-14

<PAGE>   59
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                         CONSOLIDATED INCOME STATEMENTS

<TABLE>
<CAPTION>
                                                       Fiscal Year Ended
                                         ----------------------------------------------
                                         February 27,     February 28,     February 22,
                                            1999            1998 (a)          1997
                                         ------------     ------------     ------------
                                        (Dollars in thousands, except per share amounts)
<S>                                      <C>              <C>              <C>
Revenues:
    Services                              $ 887,395        $ 868,522        $ 789,534
    Sales of products                        85,528          122,045          114,738
                                          ---------        ---------        ---------
                                            972,923          990,567          904,272
Costs and expenses:
    Costs of services                       591,787          603,484          551,662
    Costs of sales                           59,825           73,815           67,441
                                          ---------        ---------        ---------
                                            651,612          677,299          619,103
                                          ---------        ---------        ---------

Gross profit                                321,311          313,268          285,169

Selling, general and administrative         124,433          133,284          127,080
Research and development                     40,158           36,498           30,998
Special charge                               15,000           99,382             --
                                          ---------        ---------        ---------

Operating income                            141,720           44,104          127,091

Other income (expense):
    Interest income                           4,079            5,733            4,424
    Equity in earnings of
    unconsolidated affiliates                 7,113           24,376           16,727
    Other income                             25,447              711            4,439
    Interest expense                        (27,405)         (30,311)         (20,812)
                                          ---------        ---------        ---------

Income before income taxes                  150,954           44,613          131,869

Income taxes                                 61,891           17,399           54,066
                                          ---------        ---------        ---------

Net income                                $  89,063        $  27,214        $  77,803
                                          =========        =========        =========

Basic earnings per share                  $    2.17        $     .65        $    1.81
                                          =========        =========        =========

Diluted earnings per share                $    2.16        $     .64        $    1.80
                                          =========        =========        =========
</TABLE>


See Notes to Consolidated Financial Statements

(a)      53-week year

                                      F-15
<PAGE>   60
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                       Common Stock                       Equity        Accumulated
                                                 -----------------------   Additional   Carryover          Other
                                                   Issued                   Paid-in       Basis        Comprehensive     Retained   
                                                   Shares       Amount      Capital     Adjustment         Income        Earnings   
                                                 ----------   ----------   ----------   ----------     -------------    ----------  
                                                                                    (Dollars in thousands)              
<S>                                              <C>          <C>          <C>          <C>             <C>             <C>
Balance at February 24, 1996                     43,739,520   $      437   $  167,758   $   (7,008)     $     (463)     $  150,938  
Comprehensive income:                                                                                                   
     Net income                                           -            -            -            -               -          77,803  
     Other comprehensive income:                                                                                        
         Foreign currency translation                     -            -            -            -           1,935               -  
                                                                                                                                    
Comprehensive income                                                                                                                
Purchase of 637,200                                                                                                     
     shares of common stock                               -            -            -            -               -               -  
Common stock issued                                                                                                     
     under stock award plans                        106,131            1        1,947            -               -               -  
                                                                                                                        
                                                 ----------   ----------   ----------   ----------      ----------      ----------  
Balance at February 22, 1997                     43,845,651   $      438   $  169,705   $   (7,008)     $    1,472      $  228,741  
                                                                                                                        
Comprehensive income:                                                                                                   
     Net income                                           -            -            -            -               -          27,214  
     Other comprehensive income:                                                                                        
         Foreign currency translation                     -            -            -            -          (1,514)              -  
                                                                                                                                    
Comprehensive income                                                                                                                
Purchase of 1,283,600                                                                                                   
     shares of common stock                               -            -            -            -               -               -  
Common stock issued                                                                                                     
     under stock award plans                         76,976            1        1,597            -               -               -  
                                                                                                                        
                                                 ----------   ----------   ----------   ----------      ----------      ----------  
Balance at February 28, 1998                     43,922,627   $      439   $  171,302   $   (7,008)     $      (42)     $  255,955  
                                                                                                                        
Comprehensive income:                                                                                                   
     Net income                                           -            -            -            -               -          89,063  
     Other comprehensive income:                                                                                        
         Foreign currency translation                     -            -            -            -         (85,094)              -  
         Net gain on derivative instruments               -            -            -            -             294               -  
                                                                                                                                    
Comprehensive income                                                                                                                
Purchase of 2,794,100                                                                                                   
     shares of common stock                               -            -            -            -               -               -  
Reissuance of 2,079 shares from treasury under                                                                          
     Director Stock election plan                         -            -            -            -               -               -  
Common stock issued                                                                                                     
     under stock award plans                        229,938            3        5,132            -               -               -  
                                                 ----------   ----------   ----------   ----------      ----------      ----------  
Balance at February 27, 1999                     44,152,565   $      442   $  176,434   $   (7,008)     $  (84,842)     $  345,018  
                                                 ==========   ==========   ==========   ==========      ==========      ==========  
</TABLE>
<TABLE>
<CAPTION>
                                                   Treasury                    
                                                    Stock         Total       
                                                  ----------    ----------    
                                                   (Dollars in thousands)
<S>                                               <C>           <C>
Balance at February 24, 1996                      $  (14,937)   $  296,725    
Comprehensive income:                                                         
     Net income                                            -        77,803    
     Other comprehensive income:                                              
         Foreign currency translation                      -         1,935    
                                                                ----------    
Comprehensive income                                                79,738    
Purchase of 637,200                                                           
     shares of common stock                          (20,278)      (20,278)   
Common stock issued                                                           
     under stock award plans                               -         1,948    
                                                                              
                                                  ----------    ----------    
Balance at February 22, 1997                      $  (35,215)   $  358,133    
                                                                              
Comprehensive income:                                                         
     Net income                                            -        27,214    
     Other comprehensive income:                                              
         Foreign currency translation                      -        (1,514)   
                                                                ----------    
Comprehensive income                                                25,700    
Purchase of 1,283,600                                                         
     shares of common stock                          (40,221)      (40,221)   
Common stock issued                                                           
     under stock award plans                               -         1,598    
                                                                              
                                                  ----------    ----------    
Balance at February 28, 1998                      $  (75,436)   $  345,210    
                                                                              
Comprehensive income:                                                         
     Net income                                            -        89,063    
     Other comprehensive income:                                              
         Foreign currency translation                      -       (85,094)   
         Net gain on derivative instruments                -           294    
                                                                ----------    
Comprehensive income                                                 4,263    
Purchase of 2,794,100                                                         
     shares of common stock                          (70,757)      (70,757)   
Reissuance of 2,079 shares from treasury under                                
     Director Stock election plan                         55            55    
Common stock issued                                                           
     under stock award plans                               -         5,135    
                                                  ----------    ----------    
Balance at February 27, 1999                      $ (146,138)   $  283,906    
                                                  ==========    ==========    
</TABLE>


See Notes to Consolidated Financial Statements

                                      F-16
<PAGE>   61
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                         Fiscal Year Ended
                                                                            ----------------------------------------------
                                                                            February 27,     February 28,     February 22,
                                                                               1999            1998 (a)           1997
                                                                            ------------     ------------     ------------
                                                                                       (Dollars in thousands)
<S>                                                                         <C>              <C>              <C>
OPERATING ACTIVITIES
Net income                                                                   $  89,063        $  27,214        $  77,803
Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation and amortization                                            199,321          204,768          172,630
      Special charge                                                            15,000           99,382               --
      Deferred income taxes (benefit) provision                                  9,868          (24,187)          22,441
      Equity in earnings of unconsolidated affiliates,
          net of dividends received                                             (3,117)          (8,632)          (9,174)
      Foreign currency transaction gains                                        (8,650)              --               --
      Other                                                                      2,405            8,214             (346)
      Changes in operating assets and liabilities, 
          net of effects of acquisitions:
          Trade accounts receivable                                            (10,716)          17,907          (36,952)
          Inventories                                                          (33,479)           7,693            8,307
          Special charge                                                       (26,105)         (12,163)              --
          Other assets and liabilities                                          52,692          (26,061)         (15,594)
                                                                             ---------        ---------        ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                      286,282          294,135          219,115

INVESTING ACTIVITIES
Purchases of systems, equipment and other assets 
    relating to contracts                                                     (121,198)        (283,542)        (191,970)
Acquisitions (net of cash acquired)                                            (19,687)         (20,976)          (2,000)
Investments in and advances to unconsolidated affiliates                          (529)          (5,414)          (9,817)
Cash received from affiliates                                                    1,906            6,644           11,203
Proceeds from sale of investments                                               84,904               --            5,895
Other                                                                          (22,627)         (20,592)         (12,341)
                                                                             ---------        ---------        ---------
NET CASH USED FOR INVESTING ACTIVITIES                                         (77,231)        (323,880)        (199,030)

FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt                                   117,706          541,605            6,107
Principal payments on long-term debt                                          (254,768)        (472,542)          (4,358)
Purchases of treasury stock                                                    (70,757)         (40,221)         (20,278)
Other                                                                            4,771           (2,108)           1,802
                                                                             ---------        ---------        ---------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES                          (203,048)          26,734          (16,727)

Effect of exchange rate changes on cash                                         (6,520)            (724)             108
                                                                             ---------        ---------        ---------
(DECREASE) INCREASE IN CASH AND CASH  EQUIVALENTS                                 (517)          (3,735)           3,466

Cash and cash equivalents at beginning of year                                   8,250           11,985            8,519
                                                                             ---------        ---------        ---------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                     $   7,733        $   8,250        $  11,985
                                                                             =========        =========        =========

SUPPLEMENTAL CASH FLOW INFORMATION:
    Interest payments (net of amounts capitalized)                           $  27,574        $  23,647        $  20,523
    Income tax payments                                                         24,945           32,188           30,045
    Income tax refunds                                                         (13,345)          (2,904)            (335)
</TABLE>



See Notes to Consolidated Financial Statements

(a)      53-week year

                                      F-17
<PAGE>   62
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE A - SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: GTECH Holdings Corporation ("Holdings") conducts
business through its consolidated subsidiaries and unconsolidated affiliates and
has, as its only asset, an investment in GTECH Corporation ("GTECH"), its
wholly-owned subsidiary. The consolidated financial statements include the
accounts of Holdings, GTECH and all majority and wholly-owned subsidiaries
(collectively referred to herein as the "Company"). Significant intercompany
accounts and transactions have been eliminated in preparing the Consolidated
Financial Statements. Investments in 20% to 50% owned affiliates are accounted
for using the equity method and investments in less than 20% owned affiliates
are accounted for using the cost method.

Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.

Industry Segment and Nature of Operations: The Company operates predominately in
one business segment that provides online, high speed, highly-secured
transaction processing systems to the worldwide lottery industry. The Company's
lottery service contracts are generally subject to a new competitive procurement
process after the expiration of the contract term and any extensions thereof.
The Company's business is highly regulated, and the competition to secure new
government contracts is often intense.

In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("FAS 131"). The Company adopted the provisions of FAS 131
during fiscal 1999. The new rules established revised standards for public
companies relating to the reporting of financial and descriptive information
about their operating segments in financial statements. It also established
standards for related disclosures about products and services, geographic areas
and major customers. The adoption of FAS 131 did not affect the Company's
results of operations or financial position, but did affect the disclosure of
segment information contained in the notes to the consolidated financial
statements (See Note N).

Fiscal Year: The Company operates on a 52- to 53-week fiscal year ending on the
last Saturday in February. Fiscal 1999 and 1997 were 52-week years and fiscal
1998 was a 53-week year.

Use of estimates: 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.

Revenue Recognition: Service revenues are recognized as the services are
performed. Liquidated damages are expensed as incurred.

Revenues from product sales or sales-type leases are recognized when
installation is complete and the product is accepted by the customer. In those
instances where the Company is not responsible for installation, revenue is
recognized when the product is shipped.

Foreign Currency Translation: The functional currency for the majority of the
Company's foreign operations is the applicable local currency. The translation
of the applicable foreign currencies into U.S. dollars is performed for balance
sheet accounts using exchange rates in effect at the balance sheet date and for
revenue and expense accounts using a weighted average exchange rate during the
period. The gains or losses resulting from such translation are reported in
accumulated other comprehensive income, whereas gains or losses resulting from
foreign currency transactions are included in results of operations. The Company
recognized net foreign exchange gains (losses) of $15,268,000, $(573,000) and
$336,000 in fiscal 1999, 1998 and 1997, respectively, that are included as a
component of other income in the Company's consolidated income statements.

For those foreign subsidiaries operating in a highly inflationary economy or
having the U.S. dollar as their functional currency, nonmonetary assets are
translated at historical rates and monetary assets and liabilities are
translated at current rates. Translation adjustments are included in the
determination of net income.
<PAGE>   63
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)

Research and Development: Research and development expenses are charged to
operations as incurred.

Stock-Based Compensation: The Company grants stock options for a fixed number of
shares of the common stock of Holdings ("Common Stock") to employees and
non-employee directors with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and, accordingly, recognizes no compensation expense
for stock option grants.

Derivatives: The Company uses derivative financial instruments principally to
manage the risk of foreign currency exchange rate fluctuations and accounts for
its derivative financial instruments in accordance with Financial Accounting
Standards Board Statement 133, "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133"). The adoption of FAS 133 by the Company
effective August 30, 1998 (the first day of its fiscal 1999 third quarter) did
not have a material effect on the earnings or the financial position of the
Company.

From time to time, the Company enters into foreign currency exchange and option
contracts to reduce the exposure associated with certain firm commitments,
variable service revenues and certain assets and liabilities denominated in
foreign currencies. These contracts generally have maturities of 12 months or
less, and are regularly renewed to provide continuing coverage throughout the
year. The Company does not engage in currency speculation.

The Company records contracts used to hedge firm commitments at fair value in
its consolidated balance sheet and the related gains or losses on these
contracts are immediately recognized in earnings. The Company records certain
contracts used to protect the Company against foreign exchange risk on its
variable service revenues at fair value in its consolidated balance sheet. The
related gains or losses on these contracts are either deferred in shareholders'
equity (accumulated other comprehensive income) or immediately recognized in
earnings dependent on whether the contract can be treated as a hedge. The
deferred gains and losses are subsequently recognized in earnings in the period
that the related items being hedged are received and recognized in earnings.
Contracts used to hedge assets and liabilities denominated in foreign currencies
are recorded in the Company's consolidated balance sheet and the related gains
or losses on these contracts are immediately recognized in earnings. Gains and
losses on foreign exchange contracts are included as a component of other
income in the Company's consolidated income statements.

Income Taxes: Deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted income tax rates and laws that will be in
effect when the temporary differences are expected to reverse. Additionally,
deferred tax assets and liabilities are separated into current and noncurrent
amounts based on the classification of the related assets and liabilities for
financial reporting purposes.

Cash Equivalents: The Company considers short-term, highly liquid investments
with an original maturity of three months or less at the date of purchase to be
cash equivalents.

Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market.

Systems, Equipment and Other Assets Relating to Contracts: Systems, equipment
and other assets relating to contracts are stated on the basis of cost.
Depreciation is computed over the estimated useful lives of the assets using the
straight-line method for financial reporting purposes and accelerated methods
for income tax purposes. The estimated useful life is generally five years.

Capitalized Software Development Costs: Unamortized software development costs,
included in systems, equipment and other assets relating to contracts and other
assets in the Company's consolidated balance sheets, were $51,900,000 and
$41,024,000 at February 27, 1999 and February 28, 1998, respectively.
Amortization expense amounted to $12,821,000, $7,457,000 and $3,967,000 in
fiscal 1999, 1998 and 1997, respectively, and is included in cost of services in
the Company's consolidated income statements.
<PAGE>   64
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)

Impairment of Long-Lived Assets: If facts and circumstances were to indicate
that the Company's long-lived assets might be impaired, the estimated future
undiscounted cash flows associated with the long-lived asset would be compared
to its carrying amount to determine if a write-down to fair value is necessary.

Goodwill: Goodwill represents the excess of cost over the fair value of net
assets acquired and is amortized on a straight-line basis principally over 40
years. As of February 27, 1999 and February 28, 1998, accumulated amortization
was $30,018,000 and $24,164,000, respectively.

New Accounting Pronouncements: In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130"). The Company adopted FAS 130 during fiscal
1999. The new rules established standards for the reporting of comprehensive
income and its components in financial statements. Comprehensive income consists
of net income and other gains and losses affecting shareholders' equity that,
under generally accepted accounting principles, are excluded from net income.
For the Company, such items consist primarily of gains and losses on certain
derivative financial instruments and foreign currency translation gains and
losses. The adoption of FAS 130 affected the presentation in the accompanying
consolidated statement of shareholders' equity. Prior year financial statements
have been reclassified to conform to the new requirements.

In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 requires the expensing of start-up costs and was adopted
by the Company on February 29, 1999 (the first day of fiscal 2000). The adoption
of SOP 98-5 did not have a material impact on the results of operations or the
financial position of the Company.


NOTE B - BUSINESS ACQUISITIONS

On July 1, 1998, the Company acquired 80% of the equity of Europrint Holdings
Ltd. ("Europrint") and its wholly owned subsidiaries, including Interactive
Games International ("IGI"), for a net cash purchase price of $21,641,000,
including related acquisition costs. Europrint is a provider of media
promotional games and IGI has pioneered the development of interactive,
televised lottery games. The Company has the option, and under certain
circumstances the obligation, to acquire the remaining 20% of the equity of
Europrint and IGI within five years from the date of acquisition.

On October 3, 1997, the Company acquired 100% of the capital stock of VideoFax
Systems, Inc., a provider of multimedia broadcasting software, for cash
consideration of $15,362,000.

Pro forma information has not been provided because on an individual and
aggregate basis, the acquisitions were not material to the Company's operations.
<PAGE>   65
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE C - INVENTORIES

Inventories consist of:

<TABLE>
<CAPTION>
                                                    February 27, 1999      February 28, 1998
                                                    ------------------     ------------------
                                                             (Dollars in thousands)

<S>                                                 <C>                    <C>               
Purchased components                                $           27,323     $           17,202
Finished subassemblies                                           2,922                  1,719
Work in progress                                                23,309                  7,789
Finished goods                                                   8,339                  1,143
                                                    ------------------     ------------------
                                                    $           61,893     $           27,853
                                                    ==================     ==================
</TABLE>


NOTE D - SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS

Systems, equipment and other assets relating to contracts consists of:


<TABLE>
<CAPTION>
                                                    February 27, 1999      February 28, 1998
                                                    ------------------     ------------------
                                                             (Dollars in thousands)

<S>                                                 <C>                    <C>               
Land and buildings                                  $            5,259     $            5,226
Computer terminals and systems                               1,007,202              1,035,977
Furniture and equipment                                        110,231                107,233
Contracts in progress                                           34,991                 56,116
                                                    ------------------     ------------------
                                                             1,157,683              1,204,552
Less accumulated depreciation and amortization                 760,122                677,696
                                                    ------------------     ------------------
                                                    $          397,561     $          526,856
                                                    ==================     ==================
</TABLE>


<PAGE>   66
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE E - UNCONSOLIDATED AFFILIATES

The Company has a 40% interest in Lottery Technology Enterprises ("LTE"), a 50%
interest in each of four joint ventures with Full House Resorts, Inc. ("Full
House") and a 50% interest in Union Temporal de Empress ("UTE"). LTE is a joint
venture comprised of the Company and District Enterprise for Lottery Technology
Applications of Washington, D.C., that holds a contract with the District of
Columbia Lottery and Charitable Games Control Board. The joint ventures with
Full House are engaged in the financing and development of Native American and
other casino gaming ventures. UTE is a joint venture comprised of the Company
and Luditec S.A. that provides facility management services to the Catalunya
Lottery in Spain.

In addition, as of February 28, 1998, the Company had a 22.5% interest in
Camelot Group plc ("Camelot"). Camelot is a consortium that operates the United
Kingdom lottery and was the largest of the Company's unconsolidated affiliates.
In April 1998, the Company sold its investment back to Camelot for $84,904,000.
The book value of the Camelot investment at the time of the sale was
$51,763,000. A portion of the cash received by the Company will have to be
returned to Camelot in the event that Camelot's operating license is revoked for
certain reasons determined to be attributable to the Company. Accordingly, the
Company has deferred the recognition of the gain from the sale of its investment
and is recognizing such gain ratably over the remaining period of Camelot's
operating license due to expire in September 2001. The deferred gain at February
27, 1999 is included in advance payments to customers and other liabilities in
the Company's consolidated balance sheets. The Company continues as the
principal supplier of goods and services to Camelot. The Company's investments
in and advances to Camelot amounted to $52,071,000 and $43,358,000 at February
28, 1998 and February 22, 1997, respectively. The Company's equity in the
earnings of Camelot amounted to $2,624,000, $20,988,000 and $14,394,000 for
fiscal 1999, 1998 and 1997, respectively.

The following is a summary of the combined financial condition of the Company's
unconsolidated affiliates along with their combined results of operations, for
those investments held at the fiscal year end presented, used as the basis for
applying the equity method of accounting:


<TABLE>
<CAPTION>
                                                                 Fiscal Year Ended                      
                                           ------------------------------------------------------------
                                           February 27, 1999     February 28, 1998    February 22, 1997
                                           -----------------     -----------------    -----------------
                                                               (Dollars in thousands)
<S>                                        <C>                   <C>                  <C>               
Earnings data:
    Revenues                               $          34,950     $       9,098,191    $       7,319,017
    Gross profit                                       8,683               295,169              235,610
    Net income                                         8,847                99,833               65,743

Balance sheet data:
    Current assets                         $           4,659     $         757,944    $         646,082
    Noncurrent assets                                  7,452               123,603              156,472
    Current liabilities                                3,617               599,365              556,011
    Noncurrent liabilities                               169                45,101               55,798
</TABLE>


The Company's share of undistributed earnings of affiliated companies included
in retained earnings was $2,258,000, $35,130,000 and $26,203,000 at February 27,
1999, February 28, 1998 and February 22, 1997, respectively. Dividends received
from unconsolidated affiliates were $3,996,000, $15,744,000 and $7,553,000 in
fiscal 1999, 1998 and 1997, respectively.




<PAGE>   67
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE F - LONG-TERM DEBT


Long-term debt consists of:

<TABLE>
<CAPTION>
                                                    February 27, 1999      February 28, 1998
                                                    ------------------     ------------------
                                                             (Dollars in thousands)

<S>                                                 <C>                    <C>               
Revolving credit facility                           $           18,000     $          135,000
7.75% Series A Senior Notes due 2004                           150,000                150,000
7.87% Series B Senior Notes due 2007                           150,000                150,000
Other                                                            3,038                 22,490
                                                    ------------------     ------------------
                                                               321,038                457,490
Less current portion                                             1,960                  3,903
                                                    ------------------     ------------------
                                                    $          319,078     $          453,587
                                                    ==================     ==================
</TABLE>

The Company has an unsecured revolving credit facility of $400,000,000 expiring
in June 2002 (the "Credit Facility"). At February 27, 1999, the weighted average
interest rate for all outstanding borrowings under the Credit Facility was
5.27%. The Company is required to pay a facility fee of .125% per annum on the
total revolving credit commitment. The restrictive provisions of the Credit
Facility include, among other things, requirements relating to the maintenance
of certain financial ratios, restrictions on additional indebtedness and
restrictions on the ability of the Company to make cash distributions on its
Common Stock under certain circumstances. At February 27, 1999, under the most
restrictive covenants, the Company had available $83,906,000 of retained
earnings for the payment of dividends. The Company has never paid cash dividends
on its Common Stock and does not plan to do so in the foreseeable future. The
current policy of the Company's Board of Directors is to reinvest earnings in
the operation and expansion of the business of the Company. On May 29, 1997, the
Company issued, in a private placement, $150,000,000 of unsecured 7.75% Series A
Senior Notes due 2004 and $150,000,000 of unsecured 7.87% Series B Senior Notes
due 2007 (collectively, the "Senior Notes"). Interest on each issue is payable
semiannually in arrears. The proceeds from the sale of the Senior Notes were
used to pay down the Credit Facility.

Up to $100,000,000 of the Credit Facility may be used for the issuance of
letters of credit. There were no letters of credit outstanding under the Credit
Facility as of February 27, 1999. The Company had outstanding, at February 27,
1999, $47,160,000 of letters of credit issued outside of the Credit Facility.
The weighted average annual cost for these letters of credit was .5%.

At February 27, 1999, long-term debt maturing over the next five fiscal years is
as follows:


<TABLE>
<CAPTION>
                        Fiscal Year                               (Dollars in thousands)
                        -----------
<S>                                                                       <C>      
                        2000                                              $   1,960
                        2001                                                     78
                        2002                                                    ---
                        2003                                                 19,000
                        2004                                                    ---
                        Thereafter                                          300,000
</TABLE>


Interest costs incurred by the Company were $29,388,000, $34,659,000 and
$25,036,000 (of these amounts, $1,983,000, $4,348,000 and $4,224,000 were
capitalized as additional costs of qualifying property during the construction
period) during fiscal 1999, 1998 and 1997, respectively.




<PAGE>   68
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE G - COMMITMENTS AND CONTINGENCIES

Contracts

Contracts generally contain time schedules for, among other things, commencement
of system operations and the installation of terminals, as well as detailed
performance standards. The Company is typically required to furnish substantial
bonds to secure its performance under these contracts. In addition to other
possible consequences, including contract termination, failure to meet specified
deadlines or performance standards could trigger substantial penalties in the
form of liquidated damage assessments. Many of the Company's contracts permit
the customer to terminate the contract at will and do not specify the
compensation, if any, that the Company would be entitled were such a termination
to occur.

Legal Matters

As previously publicly reported, in October 1994, the U.S. Attorney's Office for
the District of New Jersey indicted J. David Smith, the former sales manager of
the Company (who resigned in early 1994 for reasons unrelated to the
indictments), and two other individuals who served as consultants to the Company
through their wholly-owned company, The Benchmark Group, Inc. ("Benchmark"). The
indictment alleged essentially that, unbeknownst to the Company, Mr. Smith had
received kickbacks from the consultants for his own benefit. The indictment did
not charge the Company with any wrongdoing, and the actions complained of did
not affect the Company's New Jersey lottery operations. The trial of Mr. Smith
and the two consultants commenced in September 1996 in the U.S. District Court
for New Jersey, and on October 4, 1996, Mr. Smith and one of the two consultants
were found guilty of all charges. The other consultant, Joseph LaPorta, was
found not guilty. The New Jersey U.S. Attorney immediately announced in a press
release that a grand jury investigation in that jurisdiction was continuing but
did not specify the scope of such investigation. In the midst of these events,
the New Jersey Lottery Commission awarded the Company a contract to continue
operating its State lottery. In October 1998, the Court sentenced Mr. Smith to a
prison term of 63 months, ordered him to pay restitution to the Company in the
amount of $169,500 and fined him $20,000. Mr. Smith filed a notice of appeal in
the United States Court of Appeals for the Third Circuit and in April 1999 oral
argument on this appeal was heard. In November 1998, the U.S. Attorney's Office
for the District of New Jersey advised the Company that currently GTECH is not
the subject or target of an ongoing grand jury investigation by that office.

In 1995, the Texas U.S. Attorney's Office also issued grand jury document
subpoenas to the Company, and the Company has cooperated with this
investigation.

In February 1999, a witness appearing before the Moriarty Tribunal, an
investigative body convened by the Irish Parliament and chaired by Mr. Justice
Moriarty to investigate the business affairs generally of former Taoiseach
(Prime Minister) of Ireland Charles Haughey, testified that in February 1993 Guy
B. Snowden, then Chief Executive Officer of the Company, had invested pound
sterling 67,000 (approximately $100,000) of his personal funds in a company
owned by Mr. Haughey's son. Mr. Haughey had resigned as Taoiseach in February
1992. In July 1992, the An Post Irish National Lottery Company, the Irish
lottery authority (the "NLC"), issued a Request for Proposals respecting online
and instant ticket lottery goods and services, and in September 1992 the
Company, which was the then incumbent provider of lottery goods and services to
the NLC under an agreement awarded to the Company in 1987, submitted a Proposal
to the NLC in response to the NLC's Request for Proposals. In November 1992, the
NLC selected the Company to provide online and instant ticket goods and services
to the NLC under the terms of the competitive procurement and, following
negotiations, a definitive agreement was entered into between the NLC and the
Company in March 1993. The Tribunal has requested that the Company provide
various documents regarding the Company's business in Ireland. The Company is
cooperating with the Tribunal. In addition, the Company has made its own inquiry
into the facts surrounding Mr. Snowden's investment and the extent, if any, of
the Company's involvement in or knowledge of that investment. The Company's
investigation has determined that no Company funds were used to make Mr.
Snowden's investment, and there is no information to suggest that Mr. Snowden
ever sought reimbursement for the investment from the Company. Further, there is
no information to suggest that Mr. Snowden informed anyone else at the Company
of his investment at the time or that his investment was related in any way to
the renewal of the Company's contract to supply systems and support to the NLC.
Mr. Snowden has advised the Company through counsel that (i) his investment was
a strictly personal one, (ii) the investment was made from his
<PAGE>   69
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE G - COMMITMENTS AND CONTINGENCIES-(CONTINUED)

personal funds, (iii) he never sought reimbursement for any portion of his
investment from the Company or any other entity, and (iv) his investment was not
related to the NLC and was not intended to and did not influence the NLC's
decision to renew the Company's contract.

No charges of wrongdoing have ever been brought against the Company by any grand
jury or other governmental authority.

The Company does not believe that it has engaged in any wrongdoing in connection
with these matters. However, since current investigations are still or maybe
underway and are conducted in whole or in part in secret, the Company lacks
sufficient information to determine with certainty their ultimate scope and
whether the government authorities will assert claims resulting from these or
other investigations that could implicate or reflect adversely upon the Company.
Because the Company's reputation for integrity is an important factor in its
business dealings with lottery and other governmental agencies, if government
authorities were to make an allegation of, or if there were to be a finding of,
improper conduct on the part of or attributable to the Company in any matter,
such an allegation or finding could have a material adverse effect on the
Company's business, including its ability to retain existing contracts and to
obtain new or renewal contracts. In addition, continuing adverse publicity
resulting from these investigations and related matters could have such a
material adverse effect.

In November 1998, Benchmark and Joseph LaPorta, the consultant and shareholder
of Benchmark who was found not guilty in the criminal proceeding described in
the paragraph above respecting J. David Smith, filed suit in the Superior Court
of New Jersey (Atlantic County - Law Division) against GTECH and Victor
Markowicz, the Company's former co-chairman, alleging that GTECH had wrongfully
terminated and otherwise breached a May 1992 contract, as amended, between the
Company and Benchmark pursuant to which Benchmark provided government relations
services on behalf of GTECH in New Jersey. The complaint filed by Benchmark and
Mr. LaPorta also alleged that GTECH had breached an implied covenant of good
faith and fair dealing by allegedly authorizing and directing Benchmark to make
payments that were not within the contemplation of the contract and by
terminating its contract with Benchmark after allegedly receiving substantial
benefits from Benchmark; that GTECH had committed fraud upon Benchmark by
allegedly making knowingly false representations to Benchmark prior to
termination of the May 1992 contract; and that GTECH and Mr. Markowicz had
committed fraud upon and had made negligent representations to Benchmark by
allegedly concealing that certain payments which the Company is said to have
directed that Benchmark make to third parties were allegedly made for the
personal benefit of Mr. Markowicz and unspecified others. The complaint seeks
unspecified compensatory and punitive damages and costs and such other further
relief as the Court deems equitable and just. In December 1998, the Company
filed a motion to dismiss, or in the alternative for summary judgment. The
Company believes that Benchmark's complaint, and the allegations underlying the
complaint, are wholly without merit. The Company intends to continue to
vigorously defend itself in these proceedings.

In December 1998, Lawrence Littwin, the former Executive Director of the Texas
Lottery Commission from June 1997 to October 1997, filed suit against GTECH in
the United States District Court for the Northern District of Texas alleging
that GTECH, as operator of the Texas lottery, unlawfully attempted to have Mr.
Littwin removed as Executive Director of the Texas Lottery Commission in order
to continue its alleged unlawful control of the Texas Lottery Commission and the
Texas lottery. The specific causes of action alleged by Mr. Littwin include
alleged tortious interference by GTECH with Mr. Littwin's employment
relationship with the Texas Lottery Commission which caused him to be removed as
the Executive Director; alleged conspiracy with unspecified third parties to
maintain control of the Texas Lottery Commission and the Texas lottery; and
various alleged civil violations by GTECH of the Racketeer Influenced Corrupt
Organization Act (18 Sections 1961(4) and 1962(b), (c) and (d)) ("RICO").
Mr. Littwin's complaint seeks unspecified damages (including treble damages in
the case of RICO violations) and costs. Discovery is proceeding in this matter.
The Company believes that Mr. Littwin's complaint, and the allegations
underlying the complaint, are wholly without merit. The Company continues to
vigorously defend itself in these proceedings.
<PAGE>   70
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE G - COMMITMENTS AND CONTINGENCIES-(CONTINUED)

In September 1996, Jack M. Janis and Linda Janis, both individually and on
behalf of a class of persons similarly situated, filed suit against the
California State Lottery Commission, Southland Corporation and the Company in
the Supreme Court of the State of California (County of Los Angeles). This suit
alleged, in light of the June 1996 decision of the California Supreme Court,
Western Telcon, Inc. et al. V. California State Lottery (which held that the
California State Lottery's keno game as then structured was not a lottery game
and therefore was not authorized by California lottery law), that the defendants
were unjustly enriched and were guilty of unfair business practices and
misleading advertising in connection with the sale of keno tickets from January
1, 1992 through suspension of the keno game in June 1996. The suit sought
restitution of all amounts realized by the defendants through the sale of keno
tickets less funds paid to public schools pursuant to relevant California law
and proceeds paid to holders of winning keno tickets, together with costs,
disbursements and prejudgment interest. In 1997, the Court granted the Company
summary judgment but granted the plaintiffs limited leave to amend their
complaint; the plaintiffs filed an amended complaint; and the Court granted the
Company's motion to strike and for summary judgment as to the amended complaint,
this time without leave to amend. Plaintiffs filed a notice of appeal, and in
November 1998, the California Court of Appeal affirmed. Plaintiffs then sought
review by the California Supreme Court, which denied review in March 1999,
effectively ending the case.

The Company monitors, and occasionally affirmatively becomes involved in,
litigation involving Indian gaming in states where such litigation may, directly
or indirectly, concern or call into question the legal rights and operations of
state lotteries to which the Company provides contract services. The purpose of
this effort is to protect state lottery interests, and thus the Company's
revenue streams, from service contracts. As previously publicly reported, one
such piece of litigation is Rumsey Indian Rancheria v. Wilson, currently pending
in the Ninth Circuit Court of Appeals on appeal from the U.S. District Court for
the Eastern District of California, which involves a suit by several California
Indian tribes against the State and Governor of California under the federal
Indian Gaming Regulatory Act ("IGRA"). The Indian Tribes claimed in the District
Court that certain elements of the California State Lottery (which is a customer
of the Company) ("CSL") and the equipment on which it is run involve the
operation of slot machines and, therefore, under IGRA, the tribes also must be
permitted to operate slot machines. The State of California argued at times that
the CSL does not involve the operation of slot machines; however, the State at
times appeared to be taking the position that, if and to the extent the CSL does
involve the operation of slot machines, it must be terminated because the CSL is
not exempt from the California law prohibiting the operation of slot machines.
The Company filed amicus curiae briefs in the District Court arguing that the
CSL does not involve the operation of slot machines and that even if it does,
the CSL is exempt from the State law prohibition on slot machines. In September
1998, the Court entered summary judgment for the defendants. The Indian Tribes
have since appealed the District Court's decision, and, as noted above, the
appeal is now pending before the Ninth Circuit Court of Appeals.

In July 1998, the U.S. Department of Justice filed suit in the U.S. District
Court for the District of Delaware, U.S. v. Citicorp, Inc., Citicorp Services,
Inc., GTECH Holdings Corporation and Transactive Corporation, seeking to enjoin
the consummation of a transaction between Citicorp Services, Inc. and the
Company's Transactive subsidiary respecting the sale to Citicorp of
Transactive's electronic benefits transfer contracts and certain related assets.
The Department of Justice alleged in the suit that the proposed sale of assets
would tend substantially to lessen competition in the electronic benefits
transfer market in violation of Section 7 of the Clayton Act, as amended (15
U.S.C. Section 18), and would constitute an unreasonable restraint of trade in
violation of Section 1 of the Sherman Act (15 U.S.C. Section 1). In January
1999, the Company announced the termination of the agreement between Citicorp
and Transactive, following which the parties to the litigation entered into a
settlement and the suit was dismissed.

In April 1999, the Company was served with a lawsuit entitled Pantaleon
Arellano, et al. and Estelle Arellano v. The California State Lottery, et al.
California Superior Court (Orange County), which was filed in March, 1999. In
this action, plaintiffs are a husband and wife who claim to have purchased a
winning ticket in the California State Lottery's ("CSL's") April 8, 1998 Super
Lotto drawing. That drawing resulted in the award of a $102 million jackpot,
which was split evenly among three holders of tickets bearing the winning
numbers. Plaintiffs here claim to have purchased a ticket for that drawing with
the same winning numbers; plaintiffs and the Company have been told that CSL
computer records reveal that the ticket plaintiffs hold was purchased after the
close of sales for that drawing, and after the winning numbers were announced.
If plaintiffs had purchased a winning ticket in the relevant
<PAGE>   71
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE G - COMMITMENTS AND CONTINGENCIES-(CONTINUED)

drawing, they would have a claim against the CSL for one-fourth of that jackpot
amount, i.e., approximately $25.5 million. In their complaint, they attempt to
state a claim against both the CSL (and its Commission and the State of
California) and the Company for $104 million, apparently their approximation of
the full amount of the jackpot. They also seek to have this amount trebled,
alleging that the defendants' conduct in denying plaintiffs' claim to the
jackpot was racially motivated, and they seek various other amounts, including
emotional distress damages and attorney fees. The Company believes that this
complaint, and the allegations underlying the complaint, are wholly without
merit. The Company intends to defend itself vigorously in these proceedings.

The Company also is subject to certain legal proceedings and claims which
management believes, on the basis of information presently available to it, will
not materially adversely affect the Company's consolidated financial position or
results of operations.


NOTE H - STOCK OPTION AND PURCHASE PLANS

The Company has three stock option plans that provide for the granting of
incentive stock options and nonqualified stock options to officers and other key
employees of the Company and non-employee members of the Company's Board of
Directors. All current outstanding options are nonqualified stock options. The
options granted under these plans are to purchase Common Stock at a price not
less than fair market value at the date of grant. The 1997 employee stock option
plan is the only plan where stock options may still be granted. The Company is
authorized to grant options for up to 2,800,000 shares of Common Stock under
this plan, and at February 27, 1999, 962,500 options had been granted. Employee
options generally become exercisable ratably over a four-year period from date
of grant. Employee options expire 10 years after date of grant unless an earlier
expiration date is set at time of grant. Non-employee director options are
exercisable approximately one year after date of grant and expire five years
after date of grant, subject to earlier exercise and termination in certain
circumstances.

The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for the plans. Accordingly, no compensation
expense has been recognized. Had compensation expense for options granted under
the plans after February 25, 1995 been determined based on the estimated fair
value at the grant dates for awards under the plan, the Company's pro forma net
income and basic and diluted earnings per share for fiscal 1999, 1998 and 1997
would have been $85,797,000 and $2.09 and $2.09, respectively, $25,267,000 and
$.60 and $.60, respectively, and $76,331,000 and $1.78 and $1.76, respectively.

The fair value of options granted after February 25, 1995 under the plans was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for fiscal 1999, 1998 and 1997,
respectively: risk-free interest rates of 5.77%, 6.14% and 5.80%; volatility
factors of the expected market price of the Company's common stock of .40, .28
and .35; and a weighted-average expected life of the option of 5.3 years, 6.5
years and 4.0 years. The Company did not assume a dividend yield for fiscal
1999, 1998 or 1997. Under these assumptions, the weighted-average fair value of
an option to purchase one share granted in fiscal 1999, 1998 and 1997,
respectively, was approximately $15, $13 and $10.
<PAGE>   72
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE H - STOCK OPTION AND PURCHASE PLANS -(CONTINUED)


A summary of the Company's stock option activity and related information
follows:

<TABLE>
<CAPTION>
                                                                 Fiscal Year Ended                                
                                 ---------------------------------------------------------------------------------
                                     February 27, 1999          February 28, 1998            February 22, 1997    
                                 --------------------------  ------------------------   --------------------------
                                                 Weighted                     Weighted                     Weighted
                                    Shares        Average        Shares        Average        Shares        Average
                                     Under       Exercise         under       Exercise         under       Exercise
                                    Options        Price         Options        Price         Options        Price   
                                   ---------     --------     -----------     ---------    -----------     ---------
                                                                                                         
<S>                                <C>          <C>             <C>         <C>              <C>          <C>      
Outstanding at beginning of year   1,501,550    $  25.127       1,356,175   $   23.462       1,214,150    $  21.964
Granted                            1,012,500       34.044         252,000       32.392         245,500       28.446
Exercised                           (228,750)      22.295         (60,250)      18.043         (79,225)      17.433
Forfeited                           (202,000)      30.458         (46,375)      25.112         (24,250)      18.603
                                   ---------                  -----------                  -----------   
Outstanding at end of year         2,083,300    $  29.255       1,501,550   $   25.127       1,356,175    $  23.462
                                   =========                  ===========                  ===========   
                                                                                                         
Exercisable at end of year           890,550    $  24.220         731,425   $   23.063         402,675    $  21.865
</TABLE>



Exercise prices for options outstanding under the plans are summarized as
follows:

<TABLE>
<CAPTION>
                                            Weighted Average
                                        -----------------------                 Weighted
                                         Remaining                               Average
       Range of             Options     Contractual    Exercise      Options    Exercise
    Exercise Prices       Outstanding   Life (Years)     Price     Exercisable    Price 
  -----------------       -----------   -----------  ----------    -----------  --------

  February 27, 1999
<S>                       <C>             <C>       <C>             <C>        <C>     
   $16.88 - $22.19          349,175         5.8      $  18.400       348,300    $ 18.390
   $25.69 - $35.28        1,734,125         7.9         31.441       542,250      27.965


  February 28, 1998

   $16.88 - $22.19          486,300         6.9      $  17.977       338,175    $ 18.048
   $25.69 - $35.28        1,015,250         7.7         28.552       393,250      27.377
</TABLE>


In July 1998 shareholders approved the GTECH Holdings Corporation 1998 Employee
Stock Purchase Plan (the "Plan") that allows substantially all full-time
employees to acquire shares of Common Stock through payroll deductions over
six-month offering periods (May 1 and November 1). The purchase price is equal
to 85% of the shares' fair market value on either the first or last day of the
offering period, whichever is lower. Purchases are limited to 10% of an
employee's salary, up to a maximum of $25,000 per calendar year. The Plan
expires upon the earlier of July 31, 2003 or the date the shares provided by the
plan have been purchased. A total of 750,000 treasury shares are available for
purchase under the Plan. At February 27, 1999, no shares of Common Stock had
been issued under the Plan.




<PAGE>   73
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE I - EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share:


<TABLE>
<CAPTION>
                                                                 Fiscal Year Ended                     
                                           ------------------------------------------------------------
                                           February 27, 1999     February 28, 1998    February 22, 1997 
                                           -----------------     -----------------    -----------------
                                           (Dollars and shares in thousands, except per share amounts)

Numerator:
<S>                                        <C>                   <C>                  <C>               
    Net income                             $           89,063    $           27,214   $           77,803

Denominator:
    Weighted average shares - Basic                    40,957                41,887               42,976

    Effect of dilutive securities:
      Employee stock options                              188                   342                  333
                                           ------------------    ------------------   ------------------

    Weighted average shares - Diluted                  41,145                42,229               43,309
                                           ==================    ==================   ==================

Basic earnings per share                   $             2.17    $              .65   $            1.81
                                           ==================    ==================   =================

Diluted earnings per share                 $             2.16    $              .64   $            1.80
                                           ==================    ==================   =================
</TABLE>


NOTE J - INCOME TAXES

The components of income before income taxes were as follows:

<TABLE>
<CAPTION>
                                                                Fiscal Year Ended                      
                                           ------------------------------------------------------------
                                           February 27, 1999    February 28, 1998     February 22, 1997
                                           -----------------    -----------------     ------------------
                                                              (Dollars in thousands)

<S>                                        <C>                  <C>                   <C>               
United States                              $           51,773   $            4,883    $           93,990
Foreign                                                99,181               39,730                37,879
                                           ------------------   ------------------    ------------------
                                           $          150,954   $           44,613    $          131,869
                                           ==================   ==================    ==================
</TABLE>


Significant components of the provision for income taxes were as follows:

<TABLE>
<CAPTION>
                                                                 Fiscal Year Ended                     
                                           ------------------------------------------------------------
                                           February 27, 1999     February 28, 1998    February 22, 1997
                                           -----------------     -----------------    -----------------
                                                               (Dollars in thousands)
Current:
<S>                                        <C>                   <C>                  <C>               
    Federal                                $            3,135    $           17,254   $           11,050
    State                                               4,448                 5,154                5,970
    Foreign                                            44,440                19,178               14,605
                                           ------------------    ------------------   ------------------
       Total Current                                   52,023                41,586               31,625
                                           ------------------    ------------------   ------------------
Deferred:
    Federal                                $           14,216    $          (21,504)  $           20,040
    State                                               2,521                (2,683)               2,401
    Foreign                                            (6,869)                  ---                  ---
                                           ------------------    ------------------   ------------------
       Total Deferred                                   9,868               (24,187)              22,441
                                           ------------------    ------------------   ------------------
    Total Provision                        $           61,891    $           17,399   $           54,066
                                           ==================    ==================   ==================
</TABLE>


<PAGE>   74
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE J - INCOME TAXES-(CONTINUED)

Significant components of the Company's deferred tax assets and liabilities were
as follows:

<TABLE>
<CAPTION>
                                                       February 27, 1999      February 28, 1998
                                                       -----------------      -----------------
                                                                (Dollars in thousands)

Deferred tax assets:
<S>                                                    <C>                    <C>               
   Special charge                                      $           29,796     $           24,947
   Accruals not currently deductible for tax purposes              16,177                 17,422
   Cash collected in excess of revenue recognized                   7,643                  2,446
   Other                                                            4,544                  2,856
                                                       ------------------     ------------------
                                                                   58,160                 47,671
Deferred tax liabilities:
   Depreciation                                                   (36,293)               (17,937)
   Advance payments from customers                                 (7,065)                (7,502)
   Other                                                           (3,933)                (1,495)
                                                       ------------------     ------------------
                                                                  (47,291)               (26,934)
                                                       ------------------     ------------------
       Net deferred tax assets                         $           10,869     $           20,737
                                                       ==================     ==================
</TABLE>



Undistributed earnings of foreign subsidiaries, excluding accumulated net
earnings of foreign subsidiaries that, if remitted, would result in little or no
additional tax because of the availability of foreign tax credits, amounted to
$3,000,000 at February 27, 1999. These earnings reflect full provision for
foreign income taxes and are intended to be indefinitely reinvested in foreign
operations. United States taxes that would be payable upon the remittance of
these earnings are estimated to be $365,000.

The effective income tax rate on income before income taxes differed from the
statutory federal income tax rate for the following reasons:

<TABLE>
<CAPTION>
                                                                 Fiscal Year Ended                     
                                           ------------------------------------------------------------
                                           February 27, 1999     February 28, 1998    February 22, 1997
                                           -----------------     -----------------    -----------------
<S>                                        <C>                   <C>                  <C>  
Federal income tax using statutory rate                 35.0%                 35.0%               35.0%
State taxes, net of federal benefit                      3.0                   3.6                 4.0
Equity in earnings of unconsolidated
   affiliates                                           ---                    3.2                (2.7)
Nondeductible expenses                                   1.6                   4.2                 1.4
Goodwill                                                 1.1                   3.7                 1.1
Tax credits                                              (.8)                 (6.5)               ---
Other                                                    1.1                  (4.2)                2.2        
                                           ------------------    ------------------   -----------------
                                                        41.0%                 39.0%               41.0%
                                           ==================    ==================   =================
</TABLE>

<PAGE>   75
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE  K - TRANSACTIONS WITH RELATED PARTIES

Sales of products and services to Camelot and the other members of the U.K.
lottery consortium were $53,355,000 and $53,298,000 in fiscal 1998 and 1997,
respectively. At February 28, 1998, the Company had receivables net of advance
payments of $7,159,000, from Camelot and the other members of the consortium. In
April 1998, the Company sold its 22.5% equity interest in Camelot (See Note E).

Sales of products and services to LTE were $4,155,000, $3,907,000 and $3,714,000
in fiscal 1999, 1998 and 1997, respectively. At February 27, 1999 and February
28, 1998, the Company had receivables of $278,000 and $326,000, respectively,
from LTE.

At February 27, 1999 and February 28, 1998, the Company had a note receivable
from Full House of $3,000,000. The note was interest free until January 25, 1998
and interest bearing thereafter at the prime rate. Interest is payable monthly.
The principal balance of the note is due on January 25, 2001.

The Company paid rent of $2,612,000, $2,612,000 and $2,619,000 to West Greenwich
Technology Associates Limited Partnership (that is 50% owned by the Company and
50% owned by an unrelated third party), in fiscal 1999, 1998 and 1997,
respectively, for the Company's West Greenwich, Rhode Island corporate
headquarters and research and development and main production facility. The
agreement calls for rent payments to escalate to $3,510,000 beginning March 1,
1999, and to $3,531,000 beginning March 1, 2004.

During fiscal 1995, the Company, pursuant to the terms of an employment
agreement with William Y. O'Connor, its Chairman and Chief Executive Officer,
made loans to him to enable him to retire certain third-party indebtedness. The
loans consisted of $400,000 under a line of credit arrangement that required no
interest and that was repaid during fiscal 1997 and $500,000 bearing interest at
the rate of 6.0% per annum that was repayable in full on or before November 1,
1999. During fiscal 1998, the Company extended the due date of the $500,000 loan
from November 1, 1999 to January 1, 2000 and agreed to forgive the principal
amount of the loan in four equal installments on August 1, 1997, January 1,
1998, January 1, 1999, and January 1, 2000. Interest will continue to accrue at
6.0% per annum on the outstanding principal balance of the loan. Loans
outstanding, including interest, at February 27, 1999 and February 28, 1998,
amounted to $127,000 and $281,000, respectively.


NOTE L - LEASES

The Company leases certain facilities, equipment and vehicles under
noncancelable operating leases that expire at various dates through fiscal 2014.
Certain of these leases have escalation clauses and renewal options ranging from
one to 10 years. The Company is required to pay all maintenance, taxes and
insurance relating to its leased assets.

Future minimum lease payments, by year and in the aggregate, under noncancelable
operating leases with initial terms greater than one year, consist of the
following at February 27, 1999:


<TABLE>
<CAPTION>
                 Fiscal Year                               (Dollars in thousands)
                 -----------
<S>              <C>                                             <C>            
                 2000                                            $        29,307
                 2001                                                     26,389
                 2002                                                     16,996
                 2003                                                     15,253
                 2004                                                     12,193
                 Thereafter                                               46,554
                                                                 ---------------
                 Total minimum lease payments                    $       146,692
                                                                 ===============
</TABLE>


Rental expense for operating leases was $28,358,000, $28,937,000 and $27,471,000
for fiscal 1999, 1998 and 1997, respectively.

<PAGE>   76
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE M - EMPLOYEE BENEFITS

The Company has two defined contribution 401(k) retirement savings and profit
sharing plans (the "Plans") covering substantially all full-time employees in
the United States and the Commonwealth of Puerto Rico. Under these Plans, an
eligible employee may elect to defer receipt of a portion of base pay for each
year. The Company will contribute this amount on the employee's behalf to the
Plans and will also make a matching contribution equal to 50% of the amount that
the employee has elected to defer, up to a maximum matching contribution of 2
1/2% of the employee's base pay. The Company, at its discretion, may contribute
additional amounts to the Plans on behalf of employees based upon its profits
for a given fiscal year. Participants are 100% vested at all times in their
entire account balance in the Plans. Benefits under the Plans generally will be
paid to participants upon retirement or in certain other limited circumstances.
In fiscal 1999, 1998 and 1997, the Company recorded expense under these plans of
$7,578,000, $5,706,000 and $7,010,000, respectively.

The Company has a defined contribution Supplemental Retirement Plan that
provides additional retirement benefits to certain key employees. The Company,
at its discretion, may contribute additional amounts to this plan on behalf of
such key employees equal to the percentage of profit sharing contributions
contributed for the calendar year multiplied by the key employees' compensation
(as defined) for such year. In fiscal 1999, 1998 and 1997 the Company recorded
expense under this plan of $415,000, $952,000 and $1,254,000, respectively.




<PAGE>   77
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE N - BUSINESS SEGMENT AND GEOGRAPHIC DATA

The Company presently has one reportable segment. The Lottery segment provides
online, high speed, highly secured transaction processing systems to the
worldwide lottery industry. The accounting policies of the Lottery segment are
the same as those described in the summary of significant accounting policies.
Executive management of the Company evaluates segment performance based on net
operating profit after income taxes. All other revenues (as reported below) are
comprised principally of revenues from the Company's Transactive and Dreamport
subsidiaries (See Note P for additional information regarding the Company's
Transactive subsidiary).

The Company's business segment data is summarized below:

<TABLE>
<CAPTION>
   February 27, 1999                                           Lottery           All Other          Consolidated
   -----------------                                        ------------         ---------          ------------
    OPERATING DATA:
<S>                                                         <C>                  <C>               <C>          
     Revenues from external sources                         $    873,984         $ 98,939          $     972,923
     Net operating profit after income taxes                     110,846            2,456                113,302
     Interest income                                               3,065            1,014                  4,079
     Equity in earnings of unconsolidated affiliates               2,791            4,322                  7,113
     Depreciation and amortization                               187,736           11,585                199,321
    BALANCE SHEET DATA (AT END OF PERIOD):
     Segment assets                                              786,006           88,209                874,215
     Investment in and advances to
      unconsolidated affiliates                                       68           10,733                 10,801
    CASH FLOW DATA:
     Capital expenditures                                        114,209            6,989                121,198

   February 28, 1998
   -----------------
    OPERATING DATA:
     Revenues from external sources                         $    929,191      $    61,376          $     990,567
     Net operating profit (loss) after income taxes              120,689           (9,995)               110,694
     Interest income                                               3,763            1,970                  5,733
     Equity in earnings of unconsolidated affiliates              21,369            3,007                 24,376
     Depreciation and amortization                               189,168           15,600                204,768
    BALANCE SHEET DATA (AT END OF PERIOD):
     Segment assets                                              955,878           67,934              1,023,812
     Investment in and advances to
      unconsolidated affiliates                                   52,593           12,215                 64,808
    CASH FLOW DATA:
     Capital expenditures                                        257,806           25,736                283,542

   February 22, 1997
   -----------------
    OPERATING DATA:
     Revenues from external sources                         $    860,398      $    43,874          $     904,272
     Net operating profit (loss) after income taxes              107,179          (12,872)                94,307
     Interest income                                               3,017            1,407                  4,424
     Equity in earnings of unconsolidated affiliates              15,066            1,661                 16,727
     Depreciation and amortization                               159,803           12,827                172,630
    BALANCE SHEET DATA (AT END OF PERIOD):
     Segment assets                                              860,651           95,890                956,541
     Investment in and advances to
      unconsolidated affiliates                                   43,610           13,083                 56,693
    CASH FLOW DATA:
     Capital expenditures                                        174,189           17,781                191,970
</TABLE>



<PAGE>   78
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE N - BUSINESS SEGMENT AND GEOGRAPHIC DATA-(CONTINUED)

The following is a reconciliation of net operating profit after income taxes to
net income as reported on the consolidated income statements:

<TABLE>
<CAPTION>
                                                                 Fiscal Year Ended                     
                                            -----------------------------------------------------------
                                            February 27, 1999    February 28, 1998    February 22, 1997
                                            -----------------    -----------------    -----------------

<S>                                         <C>                  <C>                  <C>               
Net operating profit after income taxes     $          113,302   $          110,694   $           94,307
   Reconciling items, net of tax:
   Interest expense                                    (16,169)             (18,490)             (12,279)
   Special charge                                       (8,850)             (60,623)                 ---
   Other                                                   780               (4,367)              (4,225)
                                            ------------------   -------------------  -------------------
     Net income                             $           89,063   $           27,214   $           77,803
                                            ===================  ===================  ==================
</TABLE>


The Company's geographic data is summarized below:

<TABLE>
<CAPTION>
                                                                 Fiscal Year Ended                     
                                            -----------------------------------------------------------
                                            February 27, 1999    February 28, 1998    February 22, 1997
                                            -----------------    -----------------    -----------------
Revenues from external sources:
<S>                                         <C>                  <C>                  <C>               
     United States                          $          570,548   $          622,244   $          568,705
     Brazil                                            118,611               88,589               55,770
     Other foreign                                     283,764              279,734              279,797
                                            ------------------   ------------------   ------------------
                                            $          972,923   $          990,567   $          904,272
                                            ==================   ==================   ==================
</TABLE>


Revenues are attributed to countries based on the location of the customer.

<TABLE>
<CAPTION>
                                                                 Fiscal Year Ended                     
                                            -----------------------------------------------------------
                                            February 27, 1999    February 28, 1998    February 22, 1997
                                            -----------------    -----------------    -----------------
Systems, equipment and other assets 
  relating to contracts:
<S>                                         <C>                  <C>                  <C>               
     United States                          $         260,585    $          297,861   $          369,405
     Brazil                                            63,015               150,301               48,245
     Other foreign                                     73,961                78,694               84,651
                                            -----------------    ------------------   ------------------
                                            $         397,561    $          526,856   $          502,301
                                            =================    ==================   ==================
</TABLE>


For fiscal 1999, the aggregate revenues from Caixa Economica Federal in Brazil
represented 11.2% of the Company's consolidated revenues. For fiscal 1999, 1998
and 1997, the aggregate revenues from the state of Texas represented 10.6%,
14.2% and 15.8% of the Company's consolidated revenues, respectively. No other
customer accounted for more than 10% of the consolidated revenues in such years.
<PAGE>   79
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE O - FINANCIAL INSTRUMENTS

Cash and cash equivalents

Cash equivalents are stated at cost that approximates fair value.

Debt

The carrying amounts of the Company's borrowings under the Credit Facility
approximate fair value due primarily to its variable interest rate
characteristics and its short-term tenure. At February 27, 1999, the estimated
fair value of the Senior Notes as determined by an independent investment banker
approximated $313,449,000.

Foreign Currency Exchange Contracts

At February 27, 1999, the Company had contracts for the sale of foreign currency
of $80,296,000 (primarily Spanish pesetas, Mexican pesos and Brazilian reals)
and the purchase of foreign currency of $71,085,000 (primarily pounds sterling),
compared to contracts for the sale of $27,018,000 (primarily Spanish pesetas)
and the purchase of $9,466,000 (primarily pounds sterling) at February 28, 1998.
The fair values of the Company's foreign currency exchange contracts are
estimated based on quoted market prices of comparable contracts, adjusted
through interpolation when necessary for maturity differences. In the aggregate,
the carrying value of these contracts approximated fair value at February 27,
1999 and February 28, 1998.

The Company had minimal exposure to loss from nonperformance by the
counterparties to its forward exchange contract agreements at the end of fiscal
1999, and does not anticipate nonperformance by counterparties in the periodic
settlements of amounts due. The Company currently minimizes this potential for
risk by entering into forward exchange contracts exclusively with major,
financially sound counterparties, and by limiting exposure with any one
financial institution.
<PAGE>   80
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE P - SPECIAL CHARGE

In the fourth quarter of fiscal 1998, the Company recorded a $99,382,000 special
charge ($60,623,000 after-tax, or $1.45 per basic share; $1.44 per diluted
share). The special charge consisted principally of costs to exit the electronic
benefit transfer (EBT) business conducted by the Company's Transactive
subsidiary ("Transactive"). In addition, the special charge included costs
associated with a worldwide workforce reduction, contractual obligations in
connection with the departures of the Company's former Chairman and Vice
Chairman from the Company and asset impairment charges relating to two of the
Company's lottery contracts.

In February 1998, the Company entered into an asset purchase agreement with
Citicorp Services, Inc. ("Citicorp"), to sell EBT contracts and certain related
assets held by Transactive. In July 1998, the U.S. Department of Justice
commenced a legal action seeking to enjoin the consummation of the transaction,
on anti-trust grounds and in January 1999 Citicorp terminated the agreement
pursuant to a clause in the contract that permitted termination by either party
if the closing did not occur within a timeframe that has expired. Principally as
a result of the contract termination, the Company recorded an additional special
charge of $15,000,000 ($8,850,000 after-tax, or $.22 per basic and diluted
share) in the fourth quarter of fiscal 1999 in order to write down the assets
held for sale in connection with this transaction to their net realizable value.
Those assets consisted primarily of EBT contract assets.

The major components of the special charge accrual at February 27, 1999 are
contractual obligations relating to exiting the EBT business of $1,627,000,
severance payments to be made to terminated employees of $1,464,000 and costs
associated with the termination of a consulting contract in fiscal 1999 of
$2,000,000. During fiscal 1999, the Company made severance payments of
$7,868,000 to 464 terminated employees.

A summary of the special charge activity is as follows:

<TABLE>
<CAPTION>
                       Disposition     Worldwide      Executive       Asset
                         of EBT        Workforce     Contractual   Impairment
                        Business       Reduction     Obligations     Charges         Other           Total  
                     -------------   ------------  ------------   ------------   --------------  ------------
<S>                  <C>             <C>           <C>            <C>            <C>             <C>        
Special charge       $     43,556    $     12,484  $     17,950   $    14,903    $      10,489   $    99,382
Cash expenditures            (241)           (204)       (9,437)          ---           (2,281)      (12,163)
Noncash charges           (37,386)            ---           ---       (15,098)          (1,104)      (53,588)
                     -------------   ------------  ------------   ------------   --------------  ------------
Balance 2/28/98             5,929          12,280         8,513          (195)           7,104        33,631
                     ------------    ------------  ------------   ------------   -------------   -----------

Change in estimate         13,601          (2,948)          (20)        2,604            1,763        15,000
Cash expenditures          (3,662)         (7,868)       (8,493)       (1,543)          (4,539)      (26,105)
Noncash charges           (14,241)            ---           ---          (866)          (1,361)      (16,468)
                     -------------    -----------  ------------   ------------   --------------  ------------
Balance 2/27/99      $      1,627    $      1,464  $        ---   $       ---    $       2,967   $     6,058
                     ============    ============  ============   ===========    =============   ===========
</TABLE>


<PAGE>   81
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE Q - QUARTERLY RESULTS OF OPERATIONS - (UNAUDITED)


The following is a summary of the unaudited quarterly results of operations for
fiscal 1999 and 1998:

<TABLE>
<CAPTION>
                                                           First          Second          Third        Fourth
                                                          Quarter         Quarter        Quarter       Quarter  
                                                      -------------   --------------  ------------   -----------
                                                           (Dollars in thousands, except per share amounts)
Fiscal year ended February 27,1999:
<S>                                                   <C>             <C>             <C>            <C>        
      Service revenues                                $     221,881   $      224,582  $    226,076   $   214,856
      Sales of products                                      10,398            8,952        25,599        40,579
      Gross profit                                           75,679           78,199        87,753        79,680
      Net income                                             18,679           21,848        26,476        22,060

      Basic earnings per share                        $         .45   $          .53  $        .64   $       .55
      Diluted earnings per share                      $         .45   $          .53  $        .64   $       .55

Fiscal year ended February 28,1998:
      Service revenues                                $     225,930   $      209,139  $    213,116   $   220,337
      Sales of products                                      19,241           17,671        51,649        33,484
      Gross profit                                           77,128           74,093        82,005        80,042
      Net income (loss)                                      19,320           20,225        23,933       (36,264)

      Basic earnings per share                        $         .46   $          .48  $        .57   $      (.87)
      Diluted earnings per share                      $         .46   $          .48  $        .57   $      (.87)
</TABLE>



There were 13 weeks in the first quarter of fiscal 1999 and 14 weeks in the
first quarter of fiscal 1998.

The Company recorded special charges of $15,000,000 and $99,382,000 in the
fourth quarters of fiscal 1999 and fiscal 1998, respectively (See Note P).

Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly diluted earnings per share in
fiscal 1999 and the sum of the quarterly basic earnings per share in fiscal 1998
do not equal the total computed for the year.

NOTE R - SUBSEQUENT EVENT

In March 1999, the Company announced that Quick Draw, the keno-style game
operated in New York State on a lottery system provided by the Company, would
terminate effective April 1, 1999. The game did terminate as announced, due to
the failure of the New York State legislature to extend the legislation
authorizing the game.
<PAGE>   82
ITEM 9.  CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
              ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.
<PAGE>   83
                                    PART III

INCORPORATED BY REFERENCE

The information called for by Item 10--"Directors and Executive Officers of the
Registrant" (other than the information concerning executive officers set forth
after Item 4 herein), Item 11--"Executive Compensation," Item 12--"Security
Ownership of Certain Beneficial Owners and Management" and Item 13--"Certain
Relationships and Related Transactions" of Form 10-K is incorporated herein by
reference Holding' definitive proxy statement for its Annual Meeting of
Shareholders scheduled to be held in July 1999, which definitive proxy statement
is expected to be filed with the Commission not later than 120 days after the
end of the fiscal year to which this report relates.
<PAGE>   84
                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
           FORM 8-K

(a) Financial Statement Schedules and Exhibits:
                                                                        Page(s)
(1) Report of Ernst & Young LLP, Independent Auditors

(2) Report of Price Waterhouse, Independent Accountants

The following consolidated financial statements of GTECH Holdings Corporation
and subsidiaries are included in Item 8:

Consolidated Balance Sheets at
     February 27, 1999 and February 28, 1998

Consolidated Income Statements 
     Fiscal year ended February 27, 1999 
     Fiscal year ended February 28, 1998, and 
     Fiscal year ended February 22, 1997

Consolidated Statements of Shareholders' Equity--
     Fiscal year ended February 27, 1999, 
     Fiscal year ended February 28, 1998, and 
     Fiscal year ended February 22, 1997

Consolidated Statements of Cash Flows--
     Fiscal year ended February 27, 1999
     Fiscal year ended February 28, 1998, and 
     Fiscal year ended February 22, 1997


Notes to Consolidated Financial Statements

SCHEDULES OMITTED:

All schedules are omitted as they are not applicable or the information is shown
in the financial statements or notes thereto.
<PAGE>   85
(3) EXHIBITS:


3.1      Restated Certificate of Incorporation of Holdings, as amended
         (incorporated by reference to Exhibit 3.1 to the Form S-l of Holdings
         and GTECH Corporation ("GTECH"), Registration No. 33-31867 (the "1990
         S-1").

3.2      Certificate of Amendment to the Certificate of Incorporation of
         Holdings (incorporated by reference to Exhibit 3.2 to the Form S-1 of
         Holdings, Registration No. 33-48264 (the "July 1992 S-1")).

3.3      Amended and Restated By-Laws of Holdings (incorporated by reference to
         Exhibit 3 of Holdings' 10-Q for the quarterly period ended August 29,
         1998.

4.1      Amended and Restated Credit Agreement, dated as of June 18, 1997, among
         GTECH, certain lenders and Bank of Montreal, Banque Paribas, Fleet
         National Bank, The Bank of Nova Scotia and BankBoston, N.A., as
         Co-Agents; The Bank of New York, as Documentation Agent, and
         NationsBank, as Administrative Agent (incorporated by reference to
         Exhibit 4.1 of Holdings' 10-Q for the quarterly period ended May 31,
         1997.)

+4.2     Amendment No. 1 to Amended and Restated Credit Agreement, dated as of
         February 26, 1999, among GTECH, certain lenders, and Bank of Montreal,
         Banque Paribas, Fleet National Bank, the Bank of Nova Scotia and Bank
         Boston, NA, as Co-Agents; The Bank of New York, as Documentation Agent
         and Nations Bank, as Administrative Agent.

4.3      Note and Guarantee Agreement, dated as of May 15, 1997, among GTECH
         Holdings and certain financial institutions (incorporated by reference
         to Exhibit 4.2 of Holdings' 10-Q for the quarterly period ended May 31,
         1997).

+4.4     Amendment No. 1 to Note and Guarantee Agreement dated as of May 15,
         1997, dated as of February 22, 1999.

4.5      Specimen Form of certificate of Common Stock (incorporated by reference
         to Exhibit 4.18 of the December 1992 5-1).

10.1     Amended and Restated Employment Agreement dated September 19, 1997
         between GTECH, Holdings and William Y. O'Connor (incorporated by
         reference to Exhibit 10.1 of Holdings' 10-Q for the quarterly period
         ended August 30, 1997).*

10.2     First Amendment to Employment Agreement dated as of April 6, 1998
         between GTECH, Holdings and William Y. O'Connor. (incorporated by
         reference to Exhibit 10.11 of Holdings' 1998 10-K).*
<PAGE>   86
10.3     Restricted Rights Arrangement between Holdings and Mr. O'Connor
         (incorporated by reference to Exhibit 10.44 of Holdings' 1995 10-K).*

+10.4    Agreement dated January 15, 1999 by and between Steven P. Nowick and
         Holdings.*

10.5     Amended and Restated Employment Agreement dated as of December 1, 1995
         between GTECH and Laurance W. Gay.*

10.6     Agreement dated July 15, 1997 between Holdings and Laurance W. Gay
         (incorporated by reference to Exhibit 10.3 of Holdings' 10-Q for the
         quarterly period ended August 30, 1997).*

10.7     Severance Agreement and Release dated March 9, 1998 between GTECH,
         Holdings and Laurance W. Gay.*

+10.8    Form of Agreement entered into between Holdings and certain members of
         senior management and list of signatories to Agreements and dates.

10.9     GTECH Corporation Executive Perquisites Program (incorporated by
         reference to Exhibit 10.8 of Holdings' 1993 10-K).*

10.10    Form of Indemnification Agreement (incorporated by reference as Exhibit
         10.14 of GTECH's 1992 10-K).

10.11    List of Indemnification Agreement signatories and dates (incorporated
         by reference to Exhibit 10.17 of Holdings' 1996 10-K).

10.12    Form of Executive Separation Agreement and Schedule of Recipients (form
         of Executive Separation Agreement incorporated by reference to Exhibit
         10.18 of Holdings' 1996 10-K).*

10.13    Supplemental Retirement Plan effective January 1, 1992 and List of
         participants (form of Supplemental Retirement Plan incorporated by
         reference to Exhibit 10.16 of GTECH's 1992 10-K). (List incorporated by
         reference to Exhibit 10.21 of Holdings' 1998 10-K)*

10.14    Contract for the Texas Lottery Operator for the State of Texas between
         GTECH and the Texas Comptroller of Public Accounts--Lottery Division,
         dated March 7, 1992 (incorporated by reference to Exhibit 10.44 of
         GTECH's 1992 10-K).

10.15    Amendment to the Contract for the Texas Lottery Operator for the State
         of Texas between GTECH and the Texas Comptroller of Public
         Accounts--Lottery Division, dated June 1, 1994 (incorporated by
         reference to Exhibit 10 of Holdings' 10-Q for the quarterly period
         ended May 25, 1996).
<PAGE>   87
10.16    Second Amendment to the Contract for the Texas Lottery Operator for the
         State of Texas between GTECH and the Texas Comptroller of Public
         Accounts--Lottery Division, dated May 28, 1996 (incorporated by
         reference to Exhibit 10.1 to the Form S-3 of Holdings, Registration No.
         333-3602).

10.17    Purchase and Sale Agreement dated 8 February 1994 between Camelot Group
         plc and GTECH (incorporated by reference to Exhibit 10.31 of Holdings'
         1995 10-K).

10.18    Terminals Supply Agreement dated 8 February 1994 among Camelot Group
         plc, International Computers Limited and GTECH (incorporated by
         reference to Exhibit 10.32 of the Company's 1995 10-K).

10.19    Field Services Agreement dated 8 February 1994 among Camelot Group plc,
         International Computers Limited and GTECH (incorporated by reference to
         Exhibit 10.33 of Holdings' 1995 10-K).

10.20    Lottery Technology Support Services Agreement dated 8 February 1994
         between Camelot Group plc and GTECH (incorporated by reference to
         Exhibit 10.34 of Holdings' 1995 10-K).

10.21    Letter dated March 31, 1998 to William Y. O'Connor, Chairman and Chief
         Executive Officer of GTECH, from Tim Holley, Chief Executive Officer of
         Camelot Group plc (incorporated by reference to Exhibit 10.1 of
         Holdings' 8-K filed on May 5, 1998).

10.22    Letter dated April 1, 1998 to William Y. O'Connor, Chairman and Chief
         Executive Officer of GTECH, from Tim Holley, Chief Executive Officer of
         Camelot Group plc (incorporated by reference to Exhibit 10.2 of
         Holdings' 8-K filed on May 5, 1998).

10.23    Agreement dated April 20, 1998 between Camelot Group plc and GTECH U.K.
         Limited for the purchase by Camelot Group plc of 11,250,000 of its own
         shares (incorporated by reference to Exhibit 10.3 of Holdings' 8-K
         filed on May 5, 1998).

10.24    Deed of Variation, dated April 20, 1998, between De La Rue plc, Racal
         Electronics plc, Cadbury Schweppes plc, International Computers
         Limited, GTECH UK Limited, Holdings, Camelot Group plc, the Director
         General of the National Lottery and the Secretary of State for Culture,
         Media & Sport (incorporated by reference to Exhibit 10.4 of Holdings'
         8-K filed on May 5, 1998).

10.25    Exit Agreement between De La Rue plc, Racal Electronics plc, GTECH U.K.
         Limited, Cadbury Schweppes Public Limited Company, International
         Computers Limited, GTECH Corporation and Camelot Group (incorporated by
         reference to Exhibit 10.5 of Holdings' 8-K filed on May 5, 1998).

10.26    Amended and Restated Agreement of Limited Partnership by and among
         GTECH, GP Technology Associates, L.P. and GP Technology, Inc. dated
         August 26, 1993; 
<PAGE>   88
         Certificate of Limited Partnership of West Greenwich Technology
         Associates, L.P. dated August 26, 1993; Amended and Restated Indenture
         of Lease between GTECH and West Greenwich Technology Associates, L.P.
         dated August 26, 1993 (incorporated by reference to Exhibit 10.24 of
         Holdings' 1994 10-K).

10.27    Business Agreement dated December 28, 1990 between Digital Equipment
         Corporation and GTECH; Work Statement Number NED91188 dated March 11,
         1991 to GTECH from Digital Equipment Corporation; First Addendum dated
         March 19, 1991 to Digital Work Statement Number NED91188 dated March
         11, 1991 to GTECH from Digital Equipment Corporation (incorporated by
         reference to Exhibit 10.57 of the July 1992 S-1).

10.28    Maintenance Agreement Number 117A dated December 1, 1989, between GTECH
         and Concurrent Computer Corporation (incorporated by reference to
         Exhibit 10.58 of the July 1992 S-1).

10.29    1992 Outside Directors' Director Stock Unit Plan (incorporated by
         reference to Exhibit 10.55 of Holdings' 1993 10-K).*

10.30    1994 Stock Option Plan, as amended and restated (incorporated by
         reference to Exhibit 10.1 of Holdings' 10-Q for the quarterly period
         ended May 31, 1997).*

10.31    1996 Non-Employee Directors' Stock Option Plan, as amended
         (incorporated herein by reference to Exhibit 10.2 of Holdings' 10-Q for
         the quarterly period ended May 31, 1997).*

10.32    1997 Stock Option Plan (incorporated herein by reference to the
         Appendix of Holdings' 1997 Notice of Annual Meeting and Proxy
         Statement).*

10.33    Holdings' 1998 Non-Employee Directors' Stock Election Plan
         (incorporated by reference to Exhibit 4.2 to the Form S-8 of Holdings,
         Registration Number 333-5781).

10.34    Income Deferral Plan - 1998 (incorporated by reference to Exhibit 10 of
         the Holdings' 10-Q for the quarterly period ended November 28, 1998).*

10.35    Trust Agreement, dated December 18, 1998, by and between Holdings and
         The Bank of New York, as Trustee, respecting the Income Deferral Plan -
         1998 (incorporated by reference to Exhibit 10.1 of the Holdings' 10-Q
         for the quarterly period ended November 28, 1998.)*

+21.1    Subsidiaries of the Company.

+23.1    Consent of Ernst & Young, LLP.

+23.2    Consent of Price Waterhouse.
<PAGE>   89
+27.1    Fiscal 1999 Financial Data Schedule.

----------------------------
+    Filed herewith.

* Indicates a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.

Certain instruments defining the rights of holders of long-term debt have not
been filed pursuant to item 601(b)(4)(iii)(A) of Regulation SK. Copies of such
instruments will be furnished to the Commission upon request.

(b) Reports on Form 8-K:

The Company did not file any reports on Form 8-K during the last quarter of the
fiscal year covered by this report.
<PAGE>   90
                                   SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in West Greenwich, Rhode Island, on
May 11, 1999.

                           GTECH HOLDINGS CORPORATION


                           By: /s/ William Y. O'Connor
                               ----------------------------------------------
                           William Y. O'Connor, Chairman of the Board and CEO

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                              TITLE                                                DATE
<S>                        <C>                                                           <C>
/s/ William Y. O'Connor    Director, Chairman of the Board, Chief Executive Officer      May 11, 1999
-----------------------    (principal executive officer)
William Y. O'Connor                                                                                  

/s/ Thomas J. Sauser       Senior Vice President & Chief Financial Officer               May 11, 1999
----------------------     (principal financial officer)
Thomas J. Sauser                                                                                     


/s/ Robert J. Plourde      Vice President and Corporate Controller (principal            May 11, 1999
----------------------     accounting officer)
Robert J. Plourde                                                                                    
</TABLE>
<PAGE>   91
SIGNATURE                                 TITLE                   DATE

/s/ Robert M. Dewey, Jr.                Director              May 11, 1999
----------------------------------
Robert M. Dewey, Jr.


/s/ Burnett W. Donoho                   Director              May 11, 1999
----------------------------------      
Burnett W. Donoho


/s/ Moore                               Director              May 11, 1999
----------------------------------     
The Rt. Hon. Lord Moore
 of Lower Marsh, P.C.


/s/ Emmett Paige, Jr.                   Director              May 11, 1999
----------------------------------   
Lt. Gen. (Ret.) Emmett Paige, Jr.

/s/ Anthony Ruys                        Director              May 11, 1999
----------------------------------      
Anthony Ruys