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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 28, 1998
                           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 20, 1998 was
$1,368,058,887.50 (Reference is made to Page 37 herein for a statement of the
assumptions upon which this calculation is based.)

On May 8, 1998, there were outstanding 44,109,231 shares of the registrant's
Common Stock.

Documents Incorporated By Reference: Certain portions of the registrant's 1998
definitive proxy statement relating to its scheduled July 1998 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
on-line 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, on-line lottery systems for 29 of the 38 on-line lottery
authorities in the United States and has supplied, currently operates or has
entered into contracts to operate in the future on-line lottery systems for 50
of the 77 international on-line lottery authorities. The Company, seeking to
develop growth opportunities outside of the on-line lottery industry, is
actively involved in the pursuit of gaming and entertainment opportunities other
than on-line lottery, such as destination gaming and video lottery. The Company
also is considering expanding into other complimentary areas of business.

Since the establishment of the first on-line lottery in 1975, the on-line
lottery industry has experienced substantial growth, as governments have
increasingly relied on lotteries as a non-tax source of revenue. During calendar
1997, ticket sales in the on-line lottery industry were approximately $21.4
billion in the United States. After a number of years of growth, the Company has
witnessed, over its last three fiscal quarters, a downward trend in the sales
generated by its United States lottery customers. While the Company believes the
on-line lottery industry will continue to grow (assuming, as anticipated, that
additional international jurisdictions implement on-line lotteries and
international and United States jurisdictions with existing on-line lotteries
expand their lottery systems and introduce new lottery products and games), the
Company believes that such growth, especially in the United States
jurisdictions, will proceed during fiscal 1999 at a lower rate than has
characterized the lottery industry at any time over the past two decades.

The Company's core business consists of providing on-line 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 on-line 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' on-line lottery systems
in return for a percentage of the gross lottery revenues. Many of the Company's
international lottery customers have purchased their on-line lottery systems,
although some, especially lottery authorities in Eastern Europe and Latin
America, have entered into long-term service contracts with the Company.
Although product sales increased in fiscal year 1998 over fiscal 1997 levels, in
recent years there has been 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 derived from its portfolio of
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long-term on-line lottery service contracts with substantially all of the
remainder being derived from lottery product sales. In fiscal 1998,
approximately 88% of the Company's lottery revenues were derived from on-line
lottery service contracts. The Company believes that revenues attributable to
product purchases by lotteries during fiscal 1999 are likely to be substantially
below fiscal 1998 levels.

In recent years, lottery authorities have recognized that by offering new games
or products, lotteries 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 on-line products and services introduced in recent years
consist of keno, instant ticket support systems and services and
BingoVision(TM). Keno, an on-line 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 18 additional
jurisdictions on four continents. The Company currently provides instant ticket
support services, products and systems in 25 domestic jurisdictions and 11
jurisdictions outside of the United States. BingoVision(TM), a televised
bingo-based lottery game developed by the Company, is presently implemented by
the Company in 5 jurisdictions. In fiscal 1997, the Company organized GameScape,
Inc. ("GameScape") as a vehicle to develop, test, package, and introduce new
games targeted to the marketing needs of its lottery customers. GameScape has
several promising new games under development. See "Products and Services
Introduced in Recent Years,"- below.

In recent years, the Company has broadened its product lines outside of its core
business of providing on-line lottery services and products. In November 1994,
the Company announced the formation of its Gaming Group, later incorporated as
Dreamport, Inc. ("Dreamport"), to pursue gaming opportunities other than on-line
lottery, including video lottery and destination gaming. Dreamport, in
association with Full House Resorts, Inc., subsequently helped to finance and
develop casinos on Native American lands in Coos Bay, Oregon, and at the State
Fairgrounds, Kent County, Delaware. During fiscal 1998, Dreamport, in
conjunction with IGT, a wholly-owned subsidiary of International Game
Technology, successfully implemented video lottery systems for lottery
authorities in Parana and Minas Gerais, Brazil. During fiscal 1998, the Company
acquired VideoSite, Inc., a leading provider of multimedia broadcasting
software, and announced that DataTrans, a joint venture in which the Company is
a partner, will provide data communications services in Poland.

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. The Company believes that changes in welfare
regulations has hampered its ability to compete profitably in this industry and
that its electronic benefits and delivery business has proven to be a
disproportionate


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distraction from the Company's business. See "Significant Developments Since the
Start of Fiscal 1998," 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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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, and (iv) 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 filings with the Securities and Exchange
Commission.

                             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 on-line lottery service contracts. The Company's
on-line 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 and
prospects.

The Company regularly engages public affairs and governmental relations
advisors, including lobbyists, in various jurisdictions to advise legislators
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 and benefits delivery contract proposals. The Company also makes
contributions to various political parties and associations but does not make
contributions to individual candidates or their campaigns.

It has not been uncommon in the lottery industry for investigations of various
types, including grand jury investigations, to be conducted by federal or state
law enforcement and other officials into possible undue influence, bribery or
other improprieties or wrongdoing in connection with efforts to obtain or the
awarding of lottery contracts and related matters. Such investigations often are
called for by disappointed competitors or politicians (who may include those
opposed to gaming or the lottery business). Some investigations in the past have
involved the Company, or its consultants, lobbyists or representatives, directly
or indirectly, and the Company is aware of federal grand jury investigations
currently being conducted by the U.S. Attorneys in New Jersey and Texas.

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. 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


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other consultant 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 October 1996, Mr. Smith moved for a new trial. In the midst of these events,
the New Jersey Lottery Commission awarded the Company a contract to continue
operating the State lottery.

In December 1996, the New Jersey U.S. Attorney's Office issued a new subpoena to
the Company, and the Company produced documents in response to this subpoena. In
January 1997, the New Jersey U.S. Attorney's Office publicly disseminated on the
Internet and to the media a sentencing memorandum containing derogatory
information regarding Mr. Smith, several consultants to the Company, and the
Company itself. The Company and several other persons mentioned in the
sentencing memorandum filed a motion for contempt against the U.S. Attorney's
Office, alleging that the public dissemination of the sentencing memorandum,
which included secret grand jury information, was improper. In February 1997,
the New Jersey U.S. Attorney's Office issued another subpoena to the Company (to
which the Company is objecting). The Company is advised that the New Jersey U.S.
Attorney's Office subsequently issued subpoenas to a third party seeking
financial records of a number of persons presently or formerly employed by or
otherwise associated with the Company, including certain former officers and
consultants. On February 4, 1998, the United States District Court for the
District of New Jersey issued its decision regarding the sentencing memorandum,
concluding that it was improperly publicly disseminated, and, among other
things, ordered the U.S. Attorney's Office to issue a written letter of apology
to the Company. The U.S. Attorney's Office filed a notice of appeal from that
order with the Third Circuit Court of Appeals, and the Company filed a
conditional notice of appeal in response thereto.

Mr. Smith still has not been sentenced on his October 1996 conviction. On May 5,
1998, the New Jersey Federal Court heard oral argument on Mr. Smith's motion for
a new trial. The Court may hear further argument before issuing a decision,
which is anticipated shortly.

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

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 the current investigations are still underway
and are conducted largely 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.


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In addition, continuing adverse publicity resulting from these investigations
and related matters could have such a material adverse effect.

As widely reported in the Texas media and previously reported by the Company,
during fiscal 1997 the Texas Lottery Commission inquired of the Company
regarding its business practices relating to the Texas Lottery (as described in
particularity in Item 1 - "Maintenance of Business Relationships and Certain
Legal Matters" of the Company's fiscal 1997 Annual Report on Form 10-K), and the
Company has cooperated with those inquiries. In addition, the Texas State
Auditor has issued to the Company a Request for Information. The Company
complied with that request, and the Texas State Auditor publicly issued its
Audit Report on September 1, 1997. The Texas State Auditor found that the Texas
Lottery failed to exercise strict control and close supervision over its
contractors, and that the Company did not live up to its obligations under the
contract and its own ethical policies. The Company submitted a response to the
Audit Report disputing many of the Texas State Auditor's conclusions. In January
1998, the Texas State Auditor notified the Company that it was deferring further
audit work relating to the Company's lottery operator contract in Texas.

In August 1997 the Texas Lottery Commission issued a Request for Proposals (the
"RFP") with respect to GTECH's lottery operator contract. GTECH filed two
administrative protests challenging the RFP, which were denied by the Executive
Director and the Texas Lottery Commission. GTECH appealed the denial of the
protests to the Travis County District Court. The Commission responded to the
appeal by asserting that the Court lacked jurisdiction to consider those claims.
In December 1997, GTECH also announced that it had declined to submit a proposal
in response to the Commission's RFP in light of the perceived flaws in the RFP
and the related procurement process and GTECH's position that it is party to a
valid contract with the Commission through August 2002.

In January 1998, GTECH filed a motion for partial summary judgment with the
Travis County District Court asking the Court to declare that the terms of the
RFP violated Texas law and to invalidate the RFP. On February 6, 1998, the Court
heard argument on the Commission's claim that the Court lacked jurisdiction to
hear the case and on GTECH's claim that the RFP was unlawful. On February 19,
1998, before the Court rendered a decision on these matters, the Executive
Director of the Texas Lottery canceled the RFP without awarding a new contract,
thus, in effect, leaving the Company's contract in place. On February 25, 1998,
the Court granted the Commission's unopposed motion to voluntarily dismiss the
case without prejudice.

In April 1997, Nora Linares, the former Executive Director of the Texas Lottery
Commission, filed suit against GTECH and James Hosker, the Company's Texas Site
Director (captioned Nora Alicia Linares v. GTECH Corporation and James Hosker,
et al.), in the District Court of Travis County, Texas (261st Judicial
District). Ms. Linares, who had been terminated as Executive Director of the
Texas Lottery Commission in January 1997, alleges that GTECH, in violation of
Texas State Law and its lottery contract with the State of Texas, engaged in
questionable business practices, tortiously interfered with her employment
relationship with her former employer by, among other things, hiring Michael
Moeller, with whom she had a personal relationship, as a consultant, and
intentionally inflicted emotional distress upon her. Ms. Linares seeks both a  


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declaratory judgment setting forth the rights, duties and responsibilities which
GTECH owes to public officials such as Ms. Linares, as well as actual and
exemplary damages from GTECH. Discovery has commenced. GTECH believes that this
lawsuit is without merit and is defending itself (and Mr. Hosker) vigorously.

In December 1995, Richard Branson filed suit in the United Kingdom's High Court
of Justice (Queen's Bench Division) against GTECH U.K. Corporation, a subsidiary
of the Company, and Robert Rendine, its press spokesman (captioned Richard
Branson v. GTECH U.K. Corporation and Robert Rendine), and in January 1996, Mr.
Branson filed suit in this same court against the Company's then Chairman, Guy
B. Snowden (captioned Richard Branson v. Guy Snowden), alleging in both cases
that the defendants had libeled Mr. Branson by denying Mr. Branson's allegation
that Mr. Snowden had offered Mr. Branson a bribe not to bid on the U.K. lottery
contract in 1993. Mr. Snowden filed a countersuit in January 1996 in the U.K.
against Mr. Branson alleging that Mr. Branson's allegations libeled Mr. Snowden.
The trial on these matters commenced in January 1998, and concluded on February
2, 1998 with the jury's finding that Mr. Snowden had attempted to bribe Mr.
Branson not to bid on the U.K. lottery contract in 1993. The jury awarded
damages to Mr. Branson against Mr. Snowden and GTECH UK Corporation in the
amount of pounds sterling 100,000 and costs. Mr. Branson's claim against Mr.
Rendine was dismissed. Mr. Snowden has filed a notice of appeal with respect to
the judgment entered against him.

Following the judgment against Mr. Snowden and GTECH U.K. Corporation, and as
widely reported in the media, the Office of the National Lottery of the United
Kingdom ("OFLOT"), commenced an inquiry of the Company to determine whether it
was "fit and proper" to continue its involvement in the National Lottery under
the National Lottery Act, and the Company has cooperated with that inquiry. The
Company submitted written representations and evidence to the Director General
of OFLOT. In addition, the Board of Directors of the Company made oral
submissions to the Director General. On April 9, 1998, the Director General
announced his findings that the Company was fit and proper to continue as
supplier of goods and services to Camelot, the holder of the National Lottery
license, and the National Lottery. See "Significant Developments Since the Start
of Fiscal 1998," below and Item 7 "Management's Discussion and Analysis --
Subsequent Event" and Notes E, K and R to Consolidated Financial Statements
herein.

                   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


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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 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 0.53%, 0.50%, 0.23%, 0.25% and .21% of annual revenues in each of the
five fiscal years ending February 1994 through 1998, 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. These programs, some of which are critical to
the Company's operations, could fail to properly process data that contain dates
after 1999 unless they are modified or replaced, potentially exposing the
Company to the incurrence of significant expense to correct such failures as
well as, in certain circumstances, the possibility of significant liquidated and
other damages. The Company has undertaken a worldwide effort to test its various
computer software programs (both those used internally and those provided to
customers) in order to complete the necessary modifications by August 1999 and
has initiated formal communications with its significant suppliers and customers
to determine the extent to which the Company is vulnerable to any such third
party's failure to upgrade its own software. See Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
below.

SIGNIFICANT DEVELOPMENTS SINCE THE START OF FISCAL 1998

           LOTTERY CONTRACT AWARDS AND OTHER SIGNIFICANT DEVELOPMENTS

Since the start of fiscal 1998 (which ended on February 28, 1998), the Company
has received a number of service contract awards and extensions from lottery
authorities.


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NEW-ON-LINE CUSTOMERS. During fiscal 1998, the Company received awards from two
new on-line customers. In February 1998, the Company signed a product sales and
services agreement with Spor Toto Teskilat Mudurlugu (Sports Toto Organization
Directorate), the Company's second lottery customer in Turkey. The Turkish
sports betting organization will share an existing lottery system provided by
the Company to Milli Piyango, the Turkish National Lottery. Under the terms of
the four-year agreement, which includes an option for Spor Toto to license
additional gaming software, the Company will modify, operate and maintain sports
betting games on the on-line system. Spor Toto represents the Company's 50th
lottery customer outside the United States and its 79th lottery customer
worldwide. In May 1997, the Company announced that it had entered into an
agreement with Loteria Nacional de Beneficencia y Salubridad, the Bolivian
National Lottery, to operate the country's first on-line lottery system. The
Bolivian National Lottery and the Turkish sports betting organization commenced
on-line sales in October 1997 and March 1998, respectively.

OTHER NEW ON-LINE CONTRACTS AND EXTENSIONS. Since the start of fiscal 1998, the
Company was awarded new on-line service contracts by, or received contract
extensions from, a number of its existing customers.

In April 1997, the Company signed a new five-year facilities management contract
with the Kentucky Lottery Corporation to provide an on-line lottery system and
services. The Company had been invited to negotiate this new contract after the
Kentucky lottery authority had accepted the withdrawal by a competitor of the
Company of its proposal. In July 1997, the Company signed a new seven-year
facilities management contract to provide on-line equipment and services for the
Louisiana Lottery Corporation. In October 1997, the Company, through a joint
venture formed with Luditec, S.A., entered into a new six-year facilities
management agreement to provide on-line lottery services and technology to Loto
Catalunya, the lottery of the Catalonia autonomous region in Spain. In January
1998, the Company signed a new facilities management contract with the Michigan
Bureau of State Lottery to provide on-line goods and services and a new lottery
back office system. The basic term of this Michigan contract ends in January
2006. On-line lottery sales commenced, or are scheduled to commence, under the
Kentucky, Louisiana, Catalonia and Michigan contracts in June 1998, January
1998, June 1998 and June 1998, respectively.

In addition to entering into the new facilities management contracts described
above, the Company also entered into several significant product sale agreements
with existing customers during fiscal 1998. In May 1997, the Company, following
a competitive procurement, entered into a new product sales agreement with the
New Zealand Lotteries Commission to replace the lottery authority's existing
equipment with new central system hardware and the Company's PRO:SYS(TM)
software. This contract also includes a five-year service agreement under which
the Company will provide system and terminal maintenance. The New Zealand
lottery authority commenced on-line sales under this new system in March 1998.
In October 1997, the Company announced that Dansk Tipstjeneste A/S, its lottery
customer in Denmark, purchased 3,500 terminal printers from the Company. In
February 1998, the Company completed installation of its PRO:SYS(TM) system in
Singapore Pools (Private) Limited under a product sales agreement


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entered into during fiscal 1998. On-line lottery sales commenced over this new
PRO:SYS(TM) system in May 1998.

In addition, the lottery authorities of Arizona, Chile, Colorado, Georgia,
Indiana, Ohio and New York extended the terms of their on-line contracts with
the Company.

DEVELOPMENTS RESPECTING TEXAS AND THE UNITED KINGDOM. Since the start of fiscal
1998, the Company reported material developments impacting its lottery business
in Texas and the United Kingdom. In February 1998, the Company announced that
the Texas Lottery had terminated the procurement process that it had initiated
in August 1997 for the provision of products and services currently provided in
part by the Company. The Company had declined to respond to the request for
proposal issued by the Texas Lottery and had filed suit challenging the
procurement process. See "Maintenance of Business Relationships and Certain
Legal Matters," above. On April 9, 1998 (after the close of fiscal 1998), the
Director General of the Office of National Lottery of the United Kingdom, which
had commenced an inquiry of the Company in the wake of the verdicts in the civil
libel actions involving British businessman Richard Branson, former Company
Chairman Guy B. Snowden and the Company's United Kingdom subsidiary, announced
his findings that the Company is "fit and proper" to continue as a supplier to
Camelot, the operator of the National Lottery. On April 1, 1998, the Company
announced that it would sell to Camelot its 22.5% equity interest in Camelot.
The sale of the Company's equity interest in Camelot does not affect the
Company's position as the principal provider of goods and services to Camelot.
See "Maintenance of Business Relationships and Certain Legal Matters" above and
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," below.

                        DREAMPORT AND NON-LOTTERY GAMING

Since the start of fiscal 1998, the Company has made several announcements
respecting its non-lottery gaming and entertainment business. In August 1997,
Dreamport, the Company's non-lottery gaming and entertainment subsidiary,
announced in conjunction with IGT, a wholly-owned subsidiary of International
Game Technology, that it would provide comprehensive video lottery services and
systems to two existing customers of GTECH Brasil Holdings, S.A. (formerly,
RACIMEC Informatica Brasileira S.A.), GTECH's Brazilian subsidiary ("GBH"), in
the Brazilian states of Parana and Minas Gerais. Under the arrangements, the
lottery authorities in Parana and Minas Gerais are supplied video lottery
terminals manufactured by IGT for installation in gaming halls in the respective
jurisdictions, which video lottery terminals are monitored on a real-time basis
by Dreamport's video PRO:SYS(TM) central control system. To date, Dreamport,
through GBH, which acts as the prime contractor to the respective lottery
organizations, has completed the successful implementation of the video lottery
systems in 3 gaming halls in Parana and 2 gaming halls in Minas Gerais. In
addition, during fiscal 1998, Dreamport received an extension of its license as
a video lottery terminal provider in Rhode Island through November, 1999. The
Rhode Island lottery authority agreed, in addition to granting the extension, to
increase the number of Dreamport-supplied video lottery terminals by 34% in
recognition of the Company's outstanding performance.


                                       11
<PAGE>   13
In September 1997, the Company announced that the New Jersey Casino Central
Commission had granted the Company a casino service industry license. Under the
terms of the license, which runs through August 1999, the Company is permitted
to offer goods and services to licensed casino and gaming entities in New
Jersey.

                           OTHER PRODUCTS AND SERVICES

Since the start of fiscal 1998, the Company announced several developments
respecting other products and services. In October 1997, the Company acquired
VideoSite, Inc., a leading provider of multimedia broadcasting software, with a
view towards complementing the Company's video-based gaming software products.
In addition, during fiscal 1998 the Company announced that DataTrans, a joint
venture in which the Company is a partner, will provide data communications
services in Poland. See "General," above.

In February 1998, the Company announced that it had entered into an asset
purchase agreement with Citicorp Services to sell EBT contracts and certain
related assets currently held by Transactive. Under the agreement, Citicorp
Services is to purchase EBT contracts and significant related assets pertaining
to four jurisdictions: Illinois; Indiana; Sacramento County, California; and
Texas. The transaction is subject to receiving the consents of the applicable
state contract parties and to obtaining regulatory approvals, including from
the U.S. Department of Justice which is reviewing and may challenge the
proposed transaction. The Company expects to receive a decision from the
Department of Justice in June 1998. Under a post-closing transition plan,
expected to be completed by December 1998, Citicorp Services is to assume sole
management of the EBT systems previously operated by Transactive for the four
jurisdictions. After December 1998, Transactive is to continue to provide
services to Citicorp Services as a subcontractor for a period of time. The sale
does 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. See "General" above and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."                

                             MANAGEMENT DEVELOPMENTS

During fiscal 1998, the Company reported several significant managerial
developments. In May 1997, the Company's Board of Directors elected William Y.
O'Connor as Chief Executive Officer effective July 14, 1997, the date of the
1997 GTECH Annual Meeting. Mr. O'Connor joined the Company as President and
Chief Operating Officer in October 1994 under an employment agreement which
contemplated that he would become Chief Executive Officer. In September 1997,
the Company strengthened its management team with the appointment of Steven P.
Nowick as Senior Vice President responsible for leading the Company's on-going
corporate development activities. After the close of fiscal 1998, the Company's
Board of Directors appointed Mr. Nowick Chief Operating Officer of the Company.


                                       12
<PAGE>   14
In February 1998, Guy B. Snowden resigned as a director and Chairman of the
Board of Directors. Mr. Snowden's term of employment under his employment
agreement with the Company was set to expire at the end of February 1998, with
his Board term to expire in July 1998. Mr. Snowden advanced his scheduled
retirement in order to avoid any adverse impact on the Company's business
resulting from the civil decision returned against him in early February 1998 in
the cross-libel civil actions involving Richard Branson. See "Maintenance of
Business Relationships and Certain Legal Matters." Effective upon the
resignation of Mr. Snowden, the Board of Directors elected William Y.
O'Connor to the position of Chairman.

Also in February 1998, the Company announced that Victor Markowicz, who had been
withdrawing from day-to-day operations since 1996 as part of the Company's
transition plan and corporate strategy, had stepped down as Vice Chairman and as
a director of the Company effective March 1, 1998. Mr. Markowicz's term of
employment under his employment agreement with the Company expired at the end of
February 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 170 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: on-line
lotteries and off-line lotteries. An on-line 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 on-line
lottery system is generally utilized for conducting games such as lotto, sports
pools, keno and numbers, 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.


                                       13
<PAGE>   15
In general, on-line lotteries generate significantly greater revenues than both
traditional off-line lottery games and instant ticket games. In addition, there
are several other advantages to on-line lotteries as compared to traditional
off-line lotteries. Unlike traditional off-line lottery games, wagers can be
accepted and processed by an on-line 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. On-line 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 on-line 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 1997, total annual lottery ticket sales in the United States
grew from approximately $147.5 million to approximately $33.8 billion, although
the Company has witnessed, over the last three quarters, 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 on-line
portion of the lottery business which accounted for approximately 60% of total
lottery ticket sales in 1997.

There are currently 38 jurisdictions operating on-line 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 on-line lottery
industry has experienced significant growth. Since 1977, when there were no
on-line lotteries operating outside of the United States, 77 international
jurisdictions have implemented on-line lottery systems. A number of other
international jurisdictions, principally in Europe, Asia and Latin America, are
currently considering the implementation of on-line lotteries.

ON-LINE 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 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 on-line
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


                                       14
<PAGE>   16
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 of which the Company was a member, 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 on-line 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 in the aggregate from two
to six years. In addition, the Company's customers occasionally renegotiate
extensions on different terms and conditions. See "Liquidated Damages Under
Contracts" above.

The Company's revenues under Facilities Management Contracts are generally based
upon a percentage of gross on-line 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 on-line 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 generally within six months 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.

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 is not specified in such
contracts and thus would be subject to negotiation. Under many of the Company's
Facilities Management


                                       15
<PAGE>   17
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 on-line 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, 1998. 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,
1998, 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                       2,420                       2/98                    12/98            1 one-year
California(2)                 7,306                      10/93                    10/03            --
Colorado                      2,405                       3/95                    10/04            --
D.C.(3)                         612                       5/95                    11/99            --
Georgia(4)                    5,935                       4/93                     9/03            --
Illinois                      6,554                       2/89                    10/99            1 one-year
Indiana                       3,830                       3/90                     6/99            --
Iowa                          1,500                       4/91                     6/01            1 two-year
Kansas                        1,784                       7/97                     6/02            1 three-year
                                                                                                   1 two-year
Kentucky                      2,760                       4/97                     6/03            5 one-year
Louisiana                     2,680                       6/97                     6/05            5 one- year
Maine(5)                      1,022                       7/90                     6/00            --
Michigan                      6,427                       1/98                     1/06            3 one-year
Missouri                      2,535                       7/96                     7/01            1 two-year
Nebraska                        793                       4/94                     6/00            1 four-year
New Hampshire(5)                951                       7/90                     6/00            --
New Jersey                    5,500                       6/96                     6/01            5 years
New Mexico                    1,150                       6/96                    11/03            5 one-year
New York                     12,500                       2/93                     2/00            2 one-year
Ohio                          6,170                      10/93                     6/99            1 two-year
Oregon                        2,770                      12/96                    10/04            3 one-year
Rhode Island                    900                       1/97                     7/02            5 one-year
Texas                        14,472                       3/92                     8/02(6)         --
Vermont(5)                      467                       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             2,250                       9/95                      6/01            3 years
West Virginia                1,335                       2/92                      6/00            2 one-year
Wisconsin                    3,121                       6/97                      6/02            2 one-year
                           -------
    SUBTOTAL               100,149


INTERNATIONAL:
Barbados
-T.L. Lotteries               187                       10/94                      1/00            2 one-year
Bolivia                         0                        5/97                      5/02            1 five-year
-National Lottery
Brazil(7)
-National
   Lottery(7)               6,000                        1/97                      9/01            (7)
-Minas Gerais                 500                       10/94                     10/00            (7)
-Parana                     1,276                        8/94                      8/98            (7)
-Santa Caterina             1,500                        5/95                      5/00            (7)
-FGFS Sports Club              18                       11/94                     11/99            (7)
Chile
-Polla Chilena de           1,750                       12/93                      8/99            --
Beneficencia S.A.
Czech Republic(8)
-SAZKA                      2,260                       10/92                       (8)            (8)
Estonia
-Ras Eesti Loto(9)            450                        1/94                      1/06            (9)
Ireland (10)
-An Post Nat'l              2,005                        3/93                      3/00            (10)
Lottery Company
Lithuania(11)
-OLIFEJA                      510                       12/94                     12/09            (11)
Poland(12)
-Totalizator                3,168                        3/91                      3/99            (12)
Sportowy
Puerto Rico
-Loteria                    1,800                        4/90                     11/98            --
Electronica de
Puerto Rico
Slovakia
-TIPOS, a.s.(13)              930                        3/96                       (13)           --
</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          1,495                      10/97                     10/03            1 six-month
de Jocs I Apostes de
la Generalitat de
Catalunya
Trinidad & Tobago
-National Lotteries            550                      12/93                      7/99            5 one-year
Control Board
United Kingdom
-The National               26,087                       7/94                      9/01            --
Lottery (14)
Venezuela (10) (15)
-Loteria de Caracas            450                       4/93                      4/03            1 five-year
-Loteria de Oriente                                      6/89                      6/99            (10)
-Loteria de Zulia                                       12/90                     12/00            (10)
                           -------
SUBTOTAL                    50,936

TOTAL TERMINALS
INSTALLED                  151,085
</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)      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 6,000 terminals using HISI's
         proprietary dial-up technology for on-line and instant ticket sales and
         validation.

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

(4)      The Company and the Georgia lottery authority are in the process of
         memorializing their previously announced agreement to extend the
         current contract term to September 2003.

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

(6)      See also "Significant Developments Since the Start of Fiscal 1998 --
         Lottery Contracts and Awards," above.

(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.


                                       19
<PAGE>   21
(8)      The contract with the Czech Republic lottery authority runs until seven
         years after the installation of the 2,500th terminal or three years
         after the installation of any terminals after the 3,000th terminal,
         whichever is later.

(9)      The Company's contract with Ras Eesti Loto provides for an automatic
         three-year extension, in certain circumstances, and an indefinite
         number of one-year extension options.

(10)     The contracts with the lottery authorities of Ireland and Venezuela
         (Loteria de Oriente and Loteria de Zulia) may either be extended for
         any period mutually acceptable to the Company and the respective
         lottery authority or continue indefinitely until termination by the
         respective lottery authority.

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

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

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

(14)     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. See also "Significant Developments Since the
         Start of Fiscal 1998 --Lottery Contracts and Awards," above.

(15)     The Venezuela lottery authorities share the same central computer
         system.


                                       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 on the Company's Income
Statements.

The table below sets forth the lottery authorities with which the Company had
Operating Contracts as of April 15, 1998. 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, 1998, 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      EXTENSION
JURISDICTION                      INSTALLED(1)          CURRENT CONTRACT                TERM             OPTIONS*
------------                      ------------          ----------------                ----             --------
<S>                            <C>                   <C>                        <C>                      <C>
UNITED STATES:
Idaho                                  696                    3/90                      6/00             --
  SUBTOTAL                             696
                                   =======


INTERNATIONAL:
Argentina

-Loteria National Sociedad             780                   11/93                      4/01             1 two-year
del Estado

Denmark                              2,761                    9/95                      1/00             --

-Dansk Tipstjanst (2)

The Netherlands

-Stichting de Nationale              2,750                   12/91                     12/98             (4)

Sporttotalisator (3)

Turkey

-Turkish National Lottery            1,500                    2/96                     11/01             (5)
                                   -------
  SUBTOTAL                           7,791
                                   =======
TOTAL TERMINALS INSTALLED            8,487
</TABLE>


                                       21
<PAGE>   23
         * 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 Denmark lottery authority has exercised an option to assume
         responsibility for the operation and maintenance of the lottery system.

(3)      The Company has entered into a Memorandum of Understanding with CGK
         Computer Gesellschaft Konstanz GmbH which has the contract with the
         Netherlands lottery authority. The Netherlands lottery authority
         operates the system and maintains all terminals. The Company performs
         all software maintenance, except terminal application maintenance. The
         Company also provides spare and repair parts.

(4)      The contract may either be extended for any period mutually acceptable
         to the Company and the lottery authority or continues indefinitely
         until termination by the lottery authority.

(5)      The term of the contract with the Turkish lottery authority shall
         automatically renew for successive one-year extension terms unless
         either party gives timely notice of non-renewal. In addition, the
         Turkish 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 on-line 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 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 on-line 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 lottery terminals and other on-line 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 South Australia
            Australia            --Lotteries Commission of Western Australia
            Australia            --Tattersall Sweep Consultation
            Australia            --Lotteries Commission of West Australia


                                       22
<PAGE>   24
            Austria              --Osterreichische Lotto Toto Gesmbh
            Belgium              --Loterie Nationale de Belgique
            Canada               --Atlantic Lottery Corporation
            Canada               --British Columbia Lottery Corporation
            Canada               --Ontario Lottery Corporation
            Canada               --Western Canada Lottery Corporation
            Canada               --Saskatchewan Gaming Commission
            Finland              --Oy Veikkaus AB
            Germany              --Sachsiche Lotto-GmbH
            Germany              --Lotterie Treuhandgesellschaft Mbh Thuringen
            Iceland              --Islensk Getspa
            Iceland              --Islenskar Getraunir
            Malaysia             --Pan Malaysian Pools
            Malaysia             --Lotteries Corporation (Sabah) Sdn. Bhd.
            Malaysia             --Sports Toto Malaysia Bhd.
            Massachusetts        --Massachusetts State Lottery Commission
            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.


                                       23
<PAGE>   25
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.

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 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 on-line 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 on-line 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 on-line 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.


                                       24
<PAGE>   26
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 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 on-line lottery systems. Currently, approximately 140,000 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
on-line 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 28, 1998, a total of approximately 57,000 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 28, 1998,
approximately 27,400 terminals were installed in numerous lottery jurisdictions.
During fiscal 1998, the Company entered into a contract to supply its newest
terminal, Player's Express(TM). 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 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


                                       25
<PAGE>   27
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 Digital Equipment Corporation, Concurrent
Computer 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 on-line 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 Catalonia, 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 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.

                                    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, Georgia, Kansas, Missouri, New Jersey, New York, Ohio, Texas,
Washington and Wisconsin have installed GMark systems, and most other 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 fiscal years 1998, 1997 and 1996 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.


                                       27
<PAGE>   29
PRODUCTS AND SERVICES INTRODUCED IN RECENT YEARS

                                 ON-LINE 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 on-line lottery products and services introduced in recent
years are keno, instant ticket support services and BingoVision(TM). In
addition, the Company has recently introduced its ISYS(TM) series terminal and
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 on-line 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 on-line lottery revenues. Keno is more
interactive than typical on-line 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 on-line keno game for
the Lotteries Commission of South Australia through the end of fiscal 1998, 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), Switzerland (La Societe de la Loterie de la Suisse Romande), Trinidad
and Tobago, West Virginia and Venezuela (Loteria de Caracas) in implementing
on-line 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 on-line lottery revenues in 1997. The popularity of keno has
led the Company to explore the development of new games based upon keno. Most
notably, the Company has developed 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


                                       28
<PAGE>   30
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 announced the launch of 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.

INSTANT TICKET SUPPORT SERVICES. The Company provides certain products, systems
and services to the instant ticket lottery industry. The Company's on-line
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
on-line instant ticket support systems for instant ticket agents who are not
part of a lottery's on-line lottery system. The Company also offers add-on
validation terminals which attach to its on-line lottery terminals and provide
the same functionality as the GVT, while using the existing communications
network.

The Company is providing marketing, distribution, on-line 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, Michigan, Missouri,
New Hampshire, New Jersey, New Mexico, New York, Ohio, Oregon, Rhode Island,
Vermont, Washington and Wisconsin. Internationally, the Company currently
supplies lottery authorities in Australia, Belgium, Brazil, Chile, Denmark,
Finland, Ireland, Netherlands, New Zealand, Spain and the United Kingdom with
instant ticket support services.

BINGOVISION(TM). The Company has recently developed BingoVision(TM), a product
line of televised bingo-based lottery games. Players buy tickets from on-line
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) in
Estonia, Lithuania, New Zealand, Slovakia and Belgium and is actively marketing
the game to other lottery authorities.


                                       29
<PAGE>   31
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 on-line, 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 1998, the Company introduced its
newest terminal, the Player Express(TM). Player Express(TM), which will have its
inaugural installation pursuant to the contract extension the Company recently
entered into 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 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.

                    NON-LOTTERY GAMING PRODUCTS AND SERVICES

In November 1994, the Company announced the formation of its Gaming Group, later
incorporated under the name Dreamport, to pursue gaming opportunities other than
on-line lottery including video lottery and destination gaming.

Dreamport provides a comprehensive array of management, development and
strategic services to the gaming and entertainment markets as well as video
lottery systems and other gaming technology. Dreamport's video lottery systems
combine the security and integrity of the Company's traditional on-line lottery
systems with entertainment-based video games. The Company's video lottery
systems include a controlling central computer system, multiple video lottery
terminals (which the Company acquires from third-party manufacturers), the
Company's ticket validation terminals, and a self-diagnostic communications
network. Games offered by the Company's video lottery systems include poker,
blackjack, keno and bingo and other games. The


                                       30
<PAGE>   32
Company entered the video lottery business during fiscal 1991 and currently
provides video lottery products to lottery jurisdictions in Minas Gerais and
Parana, Brazil; Alberta and Saskatchewan, Canada; Oregon; Rhode Island; and West
Virginia. Currently, video lotteries are operated or are being implemented or
tested in a number of international and domestic jurisdictions. There can be no
assurance as to how many jurisdictions will eventually legalize video lottery
systems.

PRODUCT DEVELOPMENT

The Company devotes substantial resources in order to enhance its present
products and systems and develop new products. Products recently developed by
GTECH include BingoVision(TM), the ISYS(TM) Terminal Series, the PRO:SYS(TM)
Software System and the Player Express(TM) terminal.

In fiscal 1998, the Company spent approximately $36.5 million on research and
development, as compared to $31.0 million in fiscal 1997 and $29.5 million in
fiscal 1996. As of February 28, 1998, 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 their terminals and other
products from outside sources and assembles them into finished products. The
Company offers central systems manufactured by 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 $235 million as of February 28, 1998, as
compared to a backlog of approximately $266.1 million as of February 22, 1997.
Approximately $140 million, or 59.6% of the backlog at February 28, 1998, is not
expected to be filled during fiscal 1999. Not included in such backlog are
amounts which are payable to the Company under its lottery contracts based on a
percentage of lottery


                                       31
<PAGE>   33
ticket sales which amounts, historically, have represented a substantial portion
of the Company's revenues and revenues related to the Company's Transactive
subsidiary, which revenues are variable in nature.

COMPETITION

The on-line lottery business is highly competitive in both 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, 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 1998, the Company's principal competitors in the on-line lottery
business (and the number of on-line 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) (5, all of which are jointly serviced with International des
Jeux); International Totalizator Systems, Inc. (6); International des Jeux
(Lotto France) (6, 5 of which are jointly serviced by Telecontrol and
International des Jeux); and Essnet/Alcatel (12).

Two additional competitors for European on-line 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 on-line 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 agreement, Scientific Games will have the right to license and
purchase Autotote's wagering terminals for use in lottery applications.

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., Video Lottery Technologies, Inc., WMS
Gaming, Inc. and Bally Manufacturing, Inc. some of which have supplied
substantially more systems and terminals than the Company.


                                       32
<PAGE>   34
PERSONNEL

As of May 1, 1998 the Company had approximately 4,800 full-time employees
worldwide, including approximately 245 employees employed by Transactive and
approximately 480 employees employed by GBH. 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, respectively, its
Latin American marketing efforts and its Transactive 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, its electronic
benefits transfer subsidiary, 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.


                                       33
<PAGE>   35
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
alleges, 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 seeks
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. The Company has responded with a
vigorous defense. In February 1997 the Court granted the Company summary
judgment but granted the plaintiffs limited leave to amend their complaint
alleging alternative theories of recovery. The plaintiffs filed an amended
complaint in March 1997. In June 1997, 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 have filed a notice of appeal. The Company believes
that these claims are without merit and intends to continue to defend itself
vigorously in the appeal.

In July 1997, Border Capital (Nevada) Corp. ("BCNC"), Border Capital Corp., IBC
Investments Limited ("IBC") and Gaming Properties & Investments, LLC ("GPI")
filed suit against the Arizona Lottery, the Company and GTECH in the United
States District Court for the District of Delaware. The plaintiffs alleged that
"Arizona Bingo", a game recently offered by GTECH and the Arizona Lottery,
infringed upon United States patents issued in 1994 and 1996 which are
represented to be owned by IBC and exclusively licensed to BCNC and GPI. The
plaintiffs sought a declaratory judgment that IBC is the owner of the patents
and that the patents have been willfully infringed by the defendants; injunctive
relief enjoining further alleged infringement; and actual and exemplary damages
from the defendants respecting such alleged infringement. GTECH filed its answer
in October 1997 and asserted, among other defenses, that the patents in suit are
invalid and unenforceable. GTECH filed a counterclaim for declaratory relief.

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. One such piece of litigation is Rumsey
Indian Rancheria v. Wilson, currently pending in the U. S. District Court for
the Eastern District of California, which involves a suit by several California
Indian tribes against the Governor of California under the federal Indian Gaming
Regulatory Act ("IGRA"). The Indian Tribes are claiming that certain elements of
the California State Lottery (which is a customer of the Company) and the
equipment on which it is run involve the operation of slot machines and,
therefore, under IGRA, the tribes


                                       34
<PAGE>   36
also must be permitted to operate slot machines. The State of California is
arguing that the California Lottery does not involve the operation of slot
machines; however, the State also appears to be taking the position that, if and
to the extent the California Lottery does involve the operation of slot
machines, it must be terminated because the California Lottery is not exempt
from the California law prohibiting the operation of slot machines. The Company
recently has been granted leave to file amicus curiae briefs in this case and
will argue that the California Lottery does not involve the operation of slot
machines and that even if it does, the California Lottery is exempt from the
State law prohibition on slot machines. While the Company believes its position
in this matter is the correct one and that it should prevail, there can be no
assurance that such will be the case, and an adverse ruling could result in some
or all of the California Lottery being shut down for an indeterminate period
which, in turn, could adversely affect the Company's substantial revenues from
and investment in the California Lottery.

For information respecting certain other legal proceedings, refer to Item 1,
"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.

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 1998.


                                       35
<PAGE>   37
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 12, 1998 are:

Name                    Age   Position
----                    ---   --------

William Y. O'Connor     53    Chairman (since February 1998), Chief Executive
                              Officer (since July 1997), President (since
                              December 1994) and director (since July 1995) of
                              the Company. Mr. O'Connor also served as Chief
                              Operating Officer of the Company 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.

Michael R. Chambrello   40    Executive Vice President since September 1996.  He
                              served as Vice President - U.S. Operations from
                              1991 to 1996. Prior to that, Mr. Chambrello served
                              in various positions since joining the Company in
                              1982.

Steven P. Nowick        44    Chief Operating Officer and Acting Vice President
                              for Sales and Business Development since March
                              1998 and Senior Vice President of the Company
                              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        54    Senior Vice President and Chief Financial Officer
                              of the Company since February 1996. Mr. Sauser has
                              also served as Treasurer of the Company 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.


                                       36
<PAGE>   38
Executive officers and other officers are elected or appointed by, and serve at
the pleasure of, the Board of Directors, and some are party to employment
contracts with the Company. The information set forth above reflects positions
held with Holdings except with respect to employment history of Mr. Chambrello
for periods prior to February 1, 1990, which refers to positions held with
GTECH.

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 and
related trusts. 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 is included in Holdings' definitive proxy
statement relating to its scheduled July 1998 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission.


                                       37
<PAGE>   39
                                     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 1997                                          HIGH        LOW
-----------                                          ----        ---
<S>                                                <C>         <C>
First Quarter (February 25-May 25, 1996)           $ 33 1/2    $ 26 3/4
Second Quarter (May 26-August 24, 1996)            $ 33 3/8    $ 25 1/2
Third Quarter (August 25-November 23, 1996)        $ 32 3/4    $ 27 1/8
Fourth Quarter (November 24-February 22, 1997)     $ 37 1/4    $ 29 3/8

<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>

The closing price of the Common Stock on the New York Stock Exchange on May 20,
1998 was $31.56. As May 20, 1998, there were approximately 1,142 holders of
record of the Common Stock.

During fiscal 1998, 12,226 shares of Holdings' unregistered Common Stock vested
under stock award plans. Pursuant to the terms of these plans, the shares were
issued with no cash consideration to Holdings. 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 does not plan to
do so in the foreseeable future. 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 its subsidiaries. Accordingly, the ability of
Holdings to pay dividends on its Common Stock is dependent on the earnings and
cash flow of its subsidiaries and the availability of such cash flow to
Holdings.


                                       38
<PAGE>   40
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.


                                       39
<PAGE>   41
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                    Fiscal Year Ended
                                                         -------------------------------------------------------------------------
                                                         February 28,    February 22,  February 24,  February 25,     February 26,
                                                             1998(a)        1997           1996          1995             1994
                                                         ------------    ------------  ------------  ------------     ------------
<S>                                                      <C>             <C>           <C>           <C>              <C>       
OPERATING DATA:                                                        (Dollars in thousands, except per share amounts)
Revenues:
  Services (b)                                           $   868,522      $  789,534    $  686,043    $  547,767       $  457,529
  Sales of products                                          122,045         114,738        58,047       147,340          135,271
                                                          ----------      ----------    ----------    ----------       ----------
     Total                                                   990,567         904,272       744,090       695,107          592,800

Gross Profit:
  Services (b)                                               265,038         237,872       244,139       194,097          152,845
  Sales of products                                           48,230          47,297        13,595        41,468           62,941
                                                          ----------      ----------    ----------    ----------       ----------
     Total                                                   313,268         285,169       257,734       235,565          215,786

Operating income (b)                                          44,104(c)      127,091       117,983       104,481(d)       119,206
Interest expense, net of interest income                      24,578          16,388        12,107        13,065           11,756
Income from continuing operations before
  extraordinary charge                                        27,214          77,803        66,627        52,319           66,473
Loss from operations of AmTote                                    --              --            --        (6,583)         (10,323)
Loss on disposal of AmTote                                        --              --            --       (43,444)              --
Extraordinary charge                                              --              --            --        (1,420)              --
Net income                                                    27,214          77,803        66,627           872           56,150

PER SHARE DATA:
Basic:
From continuing operations                                $      .65      $     1.81    $     1.54    $     1.20       $     1.53
Net income                                                       .65            1.81          1.54           .02(e)          1.29(f)
Diluted:
From continuing operations                                       .64            1.80          1.53          1.20             1.53
Net income                                                       .64            1.80          1.53           .02(e)          1.29(f)

OTHER DATA:
Earnings before depreciation, amortization,
  interest, taxes and other non-cash charges              $  347,099      $  326,054    $  273,570    $  221,832       $  213,756
Cumulative number of lottery terminals
  shipped (g)                                                360,202         316,614       280,897       261,287          221,254
Number of lottery terminals sold                              11,963          13,609         3,658        12,282           17,557
Number of lottery customers at year-end                           78              79            74            72               67

BALANCE SHEET DATA  (AT END OF PERIOD):
Working capital                                           $   27,371      $   36,914    $   21,414    $    6,086       $   25,364
Total assets                                               1,023,812         956,541       859,380       779,254          665,250
Long-term debt, less current portion                         453,587         382,499       382,930       338,468          258,961
Shareholders' equity                                         345,210         358,133       296,725       232,931          232,329
</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 $99.4 million or $1.45 per basic share;
         $1.44 per diluted share. See Note P to the consolidated financial
         statements.

(d)      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.

(e)      Includes the effect of operating losses of AmTote, $.15 per share, loss
         on disposal of AmTote, $1.00 per share, and extraordinary loss relating
         to early extinguishment of debt, $.03 per share.

(f)      Includes the effect of operating losses of AmTote, $.24 per share.

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

                                       40
<PAGE>   42
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 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, and (iv) 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 above and elsewhere in this report and in the Company's press releases
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 on-line lottery systems and
components to government-authorized lotteries. Service revenues have been
derived primarily from service contracts, which are typically of at least five
years' duration, and are generally based upon a percentage of a lottery's gross
on-line 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 on-line 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 sales revenues from period to period. Fiscal
1998 was a significant year for product sales, including a large product sale to
the Massachusetts State Lottery in the third quarter. The Company currently
anticipates that product purchases by lotteries during fiscal 1999 could be
lower than the fiscal 1998 level by as much as 50%.

The Company has taken steps to broaden its offerings of high-volume transaction
processing services outside of its core business of providing on-line lottery
services. The Company's Dreamport subsidiary ("Dreamport") provides gaming
technology and a comprehensive array of management, development and strategic
services to the gaming and entertainment market. The Company's VideoSite
subsidiary ("VideoSite"), acquired in October 1997, provides multimedia
broadcasting software.

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 

                                       41
<PAGE>   43
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 materially
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 materially adverse effect. See Note G to the
Consolidated Financial Statements, Part I, Item 1, -- "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 ended on February 28, 1998 and 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.

                                       42
<PAGE>   44
The following discussion should be read in conjunction with the table below.


<TABLE>
<CAPTION>
                                                                                    SUMMARY FINANCIAL DATA

                                                                                      Fiscal Year Ended
                                                         -----------------------------------------------------------------------
                                                                 February 28,            February 22,             February 24,
                                                                   1998 (a)                 1997                     1996
                                                         -----------------------------------------------------------------------
                                                                                    (Dollars in thousands)
<S>                                                      <C>             <C>      <C>             <C>      <C>             <C>  
Revenues:
  Services                                               $ 868,522        87.7%   $ 789,534        87.3%   $ 686,043        92.2%
  Sales of products                                        122,045        12.3      114,738        12.7       58,047         7.8
                                                         ---------       -----    ---------       -----    ---------       -----
    Total                                                  990,567       100.0      904,272       100.0      744,090       100.0
                                                        

Costs and expenses:
  Costs of services (b)                                    603,484        69.5      551,662        69.9      441,904        64.4
  Costs of sales (b)                                        73,815        60.5       67,441        58.8       44,452        76.6
                                                         ---------       -----    ---------       -----    ---------       -----
    Total                                                  677,299        68.4      619,103        68.5      486,356        65.4
                                                         ---------       -----    ---------       -----    ---------       -----

Gross profit                                               313,268        31.6      285,169        31.5      257,734        34.6

Selling, general and administrative                        133,284        13.5      127,080        14.0      110,212        14.8
Research and development                                    36,498         3.7       30,998         3.4       29,539         4.0
Special charge                                              99,382        10.0           --        --             --        --
                                                         ---------       -----    ---------       -----    ---------       -----

Operating income                                            44,104         4.4      127,091        14.1      117,983        15.8

Other income (expense):
  Interest income                                            5,733         0.6        4,424         0.5       12,124         1.6
  Equity in earnings of unconsolidated affiliates           24,376         2.5       16,727         1.8        8,060         1.1
  Other income                                                 711         0.1        4,439         0.5          939         0.1
  Interest expense                                         (30,311)       (3.1)     (20,812)       (2.3)     (24,231)       (3.2)
                                                         ---------       -----    ---------       -----    ---------       -----

Income before income taxes                                  44,613         4.5      131,869        14.6      114,875        15.4

Income taxes                                                17,399         1.8       54,066         6.0       48,248         6.5
                                                         ---------       -----    ---------       -----    ---------       -----
Net income                                               $  27,214         2.7%   $  77,803         8.6%   $  66,627         8.9%
                                                         =========       =====    =========       =====    =========       =====
</TABLE>


(a)      53-week year

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

                                       43
<PAGE>   45
Results of Operations

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 on-line lottery system implemented
by the Company in Brazil. The Brazil National Lottery is run by Caixa Economica
Federal ("Caixa"), Latin America's largest financial institution. After a
number of years of growth, the Company has witnessed, over its last three
fiscal quarters, a downward trend in the sales generated by its U.S. lottery
customers. The Company believes that this is a temporary condition and that the
growth rate for its U.S. lottery customers sales will be in the 2-4% range in
fiscal 1999. However, there can be no assurance that this will be the case. 

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 ("OEM
equipment") to Camelot Group plc ("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, due primarily 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 and
VideoSite). 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.

                                       44
<PAGE>   46
In the fourth quarter of fiscal 1998, the Company recorded a $99.4 million
special charge ($60.6 million after-tax, or $1.45 per basic share; $1.44 per
diluted share). In February 1998, the Company entered into an asset purchase
agreement with Citicorp Services, Inc. ("Citicorp"), to sell electronic benefits
transfer (EBT) contracts and certain related assets currently held by the
Company's Transactive subsidiary ("Transactive"). Under the agreement, Citicorp
is to pay Transactive approximately $11.5 million, subject to adjustments, for
EBT contracts and significant related assets pertaining to four jurisdictions:
Illinois; Indiana; Sacramento County, California; and Texas. The transaction is
subject to the consents of the applicable state contract parties and to
regulatory approvals, including the U.S. Department of Justice which is
reviewing the transaction and may challenge it. The Company expects to receive a
decision from the Department of Justice in June 1998. Under a post-closing
transition plan, expected to be completed by December 1998, Citicorp is to
assume sole management of the EBT systems previously operated by Transactive for
the four jurisdictions. After December 1998, Transactive is to continue to
provide services to Citicorp as a subcontractor for a period of time. The sale
does 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. Those services will continue to be
provided by Transactive. The Company has decided not to pursue new opportunities
in those areas or seek new U.S. EBT contracts. In connection with the sale of
the EBT contracts and related assets, the Company recorded a fourth quarter
charge of approximately $32.9 million to write down assets to net realizable
value. This charge assumes that requisite customer and regulatory approvals will
be received. In the event that some or all approvals are not received, the
transaction may not be able to be consummated and/or an additional charge may be
required. In addition, because of the decision to forgo future EBT-related
opportunities, it was anticipated that cash flows from the New York State
identification card contract and the Texas license contract would not be
sufficient to recover capital investment because these two contracts utilize
certain EBT assets. Accordingly, the Company wrote down assets related to these
two contracts by approximately $10.6 million. In order to compete more
effectively for future business opportunities and to enhance the efficiency and
effectiveness of the Company's core lottery operations, the Company will undergo
a worldwide workforce reduction to eliminate a total of approximately 800
positions (virtually all of which will occur in fiscal 1999), close certain
administrative offices and reposition its WorldServ subsidiary. The Company
recorded charges of approximately $21.0 million associated with these actions.
The special charge also includes approximately $20.0 million of contractual
obligations in connection with the departures of Guy B. Snowden and Victor
Markowicz (the Company's former Chairman and Vice-Chairman, respectively) from
the Company, along with legal costs in connection with the Branson litigation
and judgement in the U.K., and asset impairment charges of approximately $14.9
million relating to two of the Company's lottery contracts. The special charge
accrual of $33.6 million at February 28, 1998 consists primarily of severance
and lease termination costs and will be funded through cash flow from operations
during fiscal 1999.

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 on-line 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 due primarily to 

                                       45
<PAGE>   47
higher equity income from Camelot along with higher equity income from Dreamport
partnerships in Delaware and Oregon.

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 ("Pacific").

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 due primarily to higher average debt outstanding to fund the
on-line 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 due primarily to state
income taxes and certain expenses that are not deductible for income tax
purposes.

Subsequent Event

In April 1998, the Company sold its 22.5% equity interest in Camelot to Camelot
for approximately $84.9 million. The book value of the Camelot investment at the
time of sale was approximately $51.8 million. A portion of the cash received by
the Company would have to be returned to Camelot in the event that Camelot loses
its operating license for reasons attributable to the Company. Accordingly, the
Company has deferred the recognition of the gain from the sale of its investment
and will recognize such gain evenly over the remaining period of Camelot's
operating license. The sale of the equity interest does not affect the Company's
position as the principal supplier of goods and services to Camelot, but will
reduce the Company's equity in earnings of unconsolidated affiliates. (Reference
is made to the Company's Report on Form 8-K and 8-K/A filed with the SEC in May
1998 for further information concerning the sale of the Company's equity
interest in Camelot).


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. These programs, some of which are critical to
the Company's operations, could fail to properly process data that contain dates
after 1999 unless they are modified or replaced. The Company has undertaken a
worldwide effort to test its various computer software programs (both those used
internally and those provided to customers) in order to complete the necessary
modifications by August 1999 (the "Year 2000 Project"). In addition, the Company
has initiated formal communications with all of its significant suppliers and
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to upgrade their own software for Year 2000 issues.

The total cost to the Company of the Year 2000 Project is estimated at $15
million of which $5 million will be expensed as incurred and $10 million will be
spent on new hardware and software that will be capitalized.

                                       46
<PAGE>   48
The cost of the Year 2000 Project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans, and other factors.

The Company believes it is on track to resolve this issue in a timely fashion
without having a material adverse effect on its business, operations or
financial condition, but there can be no assurance that this will be the case.


COMPARISON OF FISCAL 1997 WITH 1996

Revenues for fiscal 1997 were $904.3 million, representing a $160.2 million, or
21.5%, increase over revenues of $744.1 million in fiscal 1996.

Service revenues in fiscal 1997 were $789.6 million, representing a $103.6
million, or 15.1%, increase over the $686.0 million of service revenues in
fiscal 1996. This increase resulted primarily from $51.4 million of higher
service revenues from GTECH Brasil Holdings S.A. (formerly know as Racimec,
hereinafter referred to as GBH) , a $33.5 million increase in service revenues
from the Company's existing customer base, $8.8 million of higher service
revenues from Transactive and $7.8 million of service revenues from new on-line
lottery systems operated by the Company that commenced operations in fiscal
1997. The results of GBH for fiscal 1996 were included in the financial
statements of the Company on the equity method of accounting through January 31,
1996. The results of GBH for fiscal 1997 and the month of February 1996 have
been consolidated. See Note B to the Consolidated Financial Statements.

Product sales for fiscal 1997 were $114.7 million, representing an increase of
$56.6 million, or 97.7%, over the $58.1 million of product sales in fiscal 1996.
This increase resulted primarily from higher lottery terminal sales in fiscal
1997 than in fiscal 1996, along with the sale of four new central systems in
fiscal 1997 as compared to the sale of two new central systems in fiscal 1996.
These increases were partially offset by lower sales of OEM equipment to Camelot
and other members of the U.K. lottery consortium. The Company sold approximately
13,600 lottery terminals during fiscal 1997, as compared to approximately 3,700
lottery terminals during fiscal 1996.

Gross margins on service revenues decreased to 30.1% in fiscal 1997 from 35.6%
in fiscal 1996, due primarily to a small loss in fiscal 1997 at GBH relating to
the start-up nature of the on-line lotteries serviced by GBH, along with lower
margins experienced on new lottery contracts in the early stages of lottery
operations. Also contributing to the reduction was a lack of significant large
jackpot activity in the domestic lottery jurisdictions serviced by the Company
in fiscal 1997, compared to a relatively high level of jackpot activity during
fiscal 1996.

The small loss incurred by GBH during fiscal 1997 was in line with management's
expectations. This represented a substantial improvement over the results for
fiscal 1996 and reflected the revenue-enhancement and cost-reduction plan
implemented by the Company during the fourth quarter of fiscal 1996. In
addition, in January 1997, GBH signed a contract to provide, operate and
maintain an on-line lottery system for Caixa. The Caixa on-line lottery system
became operational in May 1997.

                                       47
<PAGE>   49
Gross margins on product sales fluctuate depending on the mix, volume and timing
of product sales contracts. The increase in gross margins on product sales from
23.4% in fiscal 1996 to 41.2% in fiscal 1997 resulted from the realization of
more traditional margins from the sale of central systems during fiscal 1997
than realized in fiscal 1996, along with a higher level of lottery terminal
sales in fiscal 1997 than fiscal 1996.

Selling, general and administrative expenses in fiscal 1997 were $127.1 million,
representing a $16.9 million, or 15.3%, increase over the $110.2 million
incurred in fiscal 1996. This increase was primarily attributable to higher
administrative costs that were necessary to support expanded operations
(including two of the Company's newly formed subsidiaries, Dreamport and
WorldServ), increased sales and marketing for existing and new lottery
customers, and higher legal costs, relating in large part to investigations and
legal proceedings. As a percentage of revenues, selling, general and
administrative expenses were 14.0% and 14.8% during fiscal 1997 and 1996,
respectively.

Research and development expenses in fiscal 1997 were $31.0 million,
representing a $1.5 million, or 4.9%, increase over research and development
expenses of $29.5 million in fiscal 1996. This increase reflects higher
development activity for new lottery game design and for the Company's newest
generation of terminals. As a percentage of revenues, research and development
expenses were 3.4% and 4.0% during fiscal 1997 and 1996, respectively.

Interest income in fiscal 1997 was $4.4 million, a decrease of $7.7 million from
interest income of $12.1 million earned during fiscal 1996. This decrease was
attributable largely to the consolidation of GBH and the resulting absence of
interest on loans from the Company to GBH.

Equity in earnings of unconsolidated affiliates in fiscal 1997 was $16.7
million, an increase of $8.6 million over the $8.1 million earned during fiscal
1996. This increase was due primarily to the consolidation of GBH and the
resulting absence of equity losses from GBH in fiscal 1997, along with equity
income from Dreamport investments, partially offset by lower equity income from
Camelot resulting from lower instant ticket sales.

Other income in fiscal 1997 was $4.4 million, an increase of $3.5 million over
the $1.0 million earned in fiscal 1996. This increase was due primarily to the
sale by the Company of its investment in Pacific.

Interest expense in fiscal 1997 was $20.8 million, a decrease of $3.4 million
from interest expense of $24.2 million incurred during fiscal 1996. This
decrease was due primarily to a higher level of interest capitalized to on-line
lottery system projects in fiscal 1997, along with lower interest rates,
partially offset by higher average debt outstanding.

The Company's effective income tax rate decreased to 41% in fiscal 1997 from 42%
in fiscal 1996 due principally to a reduction in nondeductible expenditures, as
well as the restructuring of the financing of Brazil. The Company's effective
income tax rate of 41% for fiscal 1997 was greater than the statutory rate due
primarily to state income taxes and certain expenses that are not deductible for
income tax purposes.

                                       48
<PAGE>   50
Changes in Financial Position, Liquidity and Capital Resources

During fiscal 1998, the Company generated $294.1 million of cash from
operations. This cash, along with $67.9 million of net borrowings, was used
primarily to fund the purchase of $283.5 million of systems, equipment and other
assets relating to contracts, the repurchase of $40.2 million of the Company's
common stock and acquisition activity totaling $21.0 million.

The cost of systems, equipment and other assets relating to contracts increased
by $140.9 million, from $1,063.7 million at February 22, 1997 to $1,204.6
million at February 28, 1998. This increase reflects the installation of a
substantial portion of the new lottery system for Caixa, the installation of new
lottery systems for lotteries in Wisconsin, Kansas, and Ohio, the continuing
installation of a new lottery system for the Oregon lottery and the expansion of
lottery systems in several domestic and international locations. These increases
were partially offset by impairment write-downs recorded as part of the special
charge.

Trade accounts receivable decreased by $16.9 million, from $110.7 million at
February 22, 1997 to $93.8 million at February 28, 1998, due primarily to the
lower level of product sales in the fourth quarter of fiscal 1998 compared to
the fourth quarter of fiscal 1997.

Current deferred income taxes increased by $20.7 million, from $20.2 million at
February 22, 1997 to $40.9 million at February 28, 1998, due primarily to the
timing of income tax deductions attributable to the special charge accrual.

Other assets increased by $19.1 million, from $81.5 million at February 22, 1997
to $100.6 million at February 28, 1998, due primarily to software acquired as
part of the acquisition of VideoSite and the capitalization of costs relating to
the development of standard software product offerings.

Accounts payable decreased by $14.4 million, from $53.9 million at February 22,
1997 to $39.5 million at February 28, 1998, due primarily to lower inventory and
the current lower volume of ongoing lottery and benefits delivery system
installations.

Advance payments from customers decreased by $10.0 million, from $10.5 million
at February 22, 1997 to $.5 million at February 28, 1998, due to product sales
recognized in fiscal 1998.

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 1999 will be in a
range of $160.0 million to $210.0 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 2, 1998 the Company had utilized
approximately $40.0 million of its $400 million Credit Facility. The Company
currently expects that its cash flow from operations and available borrowings
under its Credit Facility, together with other sources of capital believed to be
available, will be sufficient to permit it to meet its anticipated working
capital and ordinary capital expenditure needs, to service its debt obligations
and to permit it to fund anticipated internal growth.

                                       49

<PAGE>   51
Inflation, Interest Rates and Foreign Exchange Fluctuation

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 has 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 will begin using the
local currency in Brazil as the functional currency beginning in fiscal 1999
because of the significant reduction in the rate of inflation in Brazil. The
change in functional currency is not expected to materially affect the Company's
operations. At February 28, 1998, the net book value of the Company's
investments in Brazil was approximately $187.8 million.

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

The Company attempts 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 contracts. In addition,
a significant portion of the costs attributable to the Company's foreign
currency revenues are incurred in the local currencies.

The Company, from time to time, enters into foreign currency exchange and option
contracts to reduce the exposure associated with certain firm sales commitments,
anticipated local currency margin and certain assets and liabilities denominated
in foreign currencies. The Company does not engage in currency speculation.
Unrealized gains and losses on contracts that hedge specific foreign currency
commitments are deferred and accounted for as part of the transaction being
hedged. Contracts used to hedge anticipated local currency margin and certain
assets and liabilities are marked to market with the resulting transaction gains
or losses included in other income. As of May 2, 1998, the Company had
approximately $99.0 million of outstanding foreign currency exchange contracts
to purchase foreign currencies (primarily pounds Sterling) and approximately
$102.9 million of outstanding foreign currency exchange and option contracts to
sell foreign currencies (primarily pounds Sterling, Spanish pesetas and
Australian dollars).

                                       50
<PAGE>   52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA










                                       51
<PAGE>   53
                         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 28, 1998 and February 22, 1997 and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended February 28, 1998. 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 has a 22.5% interest), 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 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 28, 1998 and February 22, 1997 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended February 28, 1998, in conformity with generally accepted
accounting principles.

                                        /s/ Ernst & Young LLP

                                        ERNST & YOUNG LLP

Boston, Massachusetts
April 1, 1998, except for Note R, as
 to which the date is April 20, 1998

                                       52
<PAGE>   54

Report of Independent Accountants

To the Board of Directors and Shareholders of Camelot Group plc

We have audited the financial statements and financial statement schedules of
Camelot Group plc on pages 3 to 19 which are expressed in pounds sterling.
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audit.

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 from 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
audit provides a reasonable basis for our opinion.

In our opinion, the financial statements audited by us referred to above
present fairly, in all material respects, the financial position of Camelot
Group plc at 31 January 1998 and at 1 February 1997 and the results of its
operations, total recognised gains and losses and cash flows for the years
ended 31 January 1998, 1 February 1997 and 3 February 1996 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 31
January 1998, 1 February 1997 and 3 February 1996 and the determination of
shareholders' equity also expressed in pounds sterling at 31 January 1998 and 1
February 1997 to the extent summarised in the attached reconciliation.

                                         /s/ Price Waterhouse

                                         Price Waterhouse
                                         Chartered Accountants
                                         London, England

23 March 1998

                                       53

<PAGE>   55
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                              February 28,    February 22,
                                                                                                 1998            1997
                                                                                              ------------    ------------
ASSETS                                                                                            (Dollars in thousands)
<S>                                                                                            <C>             <C>        
CURRENT ASSETS:
  Cash and cash equivalents                                                                  $     8,250     $    11,985
  Trade accounts receivable                                                                       93,778         110,707
  Sales-type lease receivables                                                                    13,958          15,231
  Inventories                                                                                     27,853          35,326
  Deferred income taxes                                                                           40,897          20,237
  Assets held for sale                                                                            14,178              --
  Other current assets                                                                            14,141           9,743
                                                                                             -----------     -----------
                 TOTAL CURRENT ASSETS                                                            213,055         203,229

SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS                                        526,856         502,301

GOODWILL, net of accumulated amortization                                                        118,537         112,853

INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES                                          64,808          56,693

OTHER ASSETS                                                                                     100,556          81,465
                                                                                             -----------     -----------
                 TOTAL ASSETS                                                                $ 1,023,812     $   956,541
                                                                                             ===========     ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable                                                                           $    39,451     $    53,944
  Accrued expenses                                                                                57,155          54,020
  Special charge                                                                                  33,631              --
  Employee compensation                                                                           25,648          27,991
  Advance payments from customers                                                                    504          10,534
  Income taxes payable                                                                            25,392          13,777
  Current portion of long-term debt                                                                3,903           6,049
                                                                                             -----------     -----------
                 TOTAL CURRENT LIABILITIES                                                       185,684         166,315

LONG-TERM DEBT, less current portion                                                             453,587         382,499

OTHER LIABILITIES                                                                                 19,171          25,907

DEFERRED INCOME TAXES                                                                             20,160          23,687

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,
    43,922,627 and 43,845,651 shares issued; 41,284,146 and 42,490,770 shares
    outstanding at February 28, 1998 and February 22, 1997, respectively                             439             438
  Additional paid-in capital                                                                     171,302         169,705
  Equity carryover basis adjustment                                                               (7,008)         (7,008)
  Cumulative translation adjustment                                                                  (42)          1,472
  Retained earnings                                                                              255,955         228,741
                                                                                             -----------     -----------
                                                                                                 420,646         393,348
  Less cost of 2,638,481 and 1,354,881 shares in treasury at
    February 28, 1998 and  February 22, 1997, respectively                                       (75,436)        (35,215)
                                                                                             -----------     -----------
                                                                                                 345,210         358,133
                                                                                             -----------     -----------
                 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                  $ 1,023,812     $   956,541
                                                                                             ===========     ===========
</TABLE>


See Notes to Consolidated Financial Statements

                                       54
<PAGE>   56
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                         CONSOLIDATED INCOME STATEMENTS


<TABLE>
<CAPTION>
                                                                     Fiscal Year Ended
                                                      ------------------------------------------------
                                                      February 28,      February 22,      February 24,
                                                        1998 (a)           1997              1996
                                                      ------------      ------------      ------------
                                                      (Dollars in thousands, except per share amounts)
<S>                                                   <C>               <C>               <C>      
Revenues:
  Services                                              $868,522          $789,534          $686,043 
  Sales of products                                      122,045           114,738            58,047
                                                        --------          --------          --------
                                                         990,567           904,272           744,090
Costs and expenses:                                                                       
  Costs of services                                      603,484           551,662           441,904
  Costs of sales                                          73,815            67,441            44,452
                                                        --------          --------          --------
                                                         677,299           619,103           486,356
                                                        --------          --------          --------
Gross profit                                             313,268           285,169           257,734
                                                                                          
Selling, general and administrative                      133,284           127,080           110,212
Research and development                                  36,498            30,998            29,539
Special charge                                            99,382                --                --
                                                        --------          --------          --------
Operating income                                          44,104           127,091           117,983
                                                                                          
Other income (expense):                                                                   
  Interest income                                          5,733             4,424            12,124
  Equity in earnings of unconsolidated affiliates         24,376            16,727             8,060
  Other income                                               711             4,439               939
  Interest expense                                       (30,311)          (20,812)          (24,231)
                                                        --------          --------          --------
Income before income taxes                                44,613           131,869           114,875
                                                                                          
Income taxes                                              17,399            54,066            48,248
                                                        --------          --------          --------
Net income                                              $ 27,214          $ 77,803          $ 66,627
                                                        ========          ========          ========
                                                                                          
                                                        --------          --------          --------
Basic earnings per share                                $    .65          $   1.81          $   1.54
                                                        ========          ========          ========
                                                                                          
                                                        --------          --------          --------
Diluted earnings per share                              $    .64          $   1.80          $   1.53
                                                        ========          ========          ========
</TABLE>


See Notes to Consolidated Financial Statements

(a) 53-week year

                                       55
<PAGE>   57
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                      Common Stock          Additional
                                ------------------------      Paid-in                     Retained      Treasury
                                  Shares        Amount        Capital        Other        Earnings        Stock          Total
                                ----------    ----------    ----------    ----------     ----------    ----------     ----------
                                                                    (Dollars in thousands)
<S>                             <C>           <C>           <C>           <C>            <C>           <C>            <C>       
Balance at February 25, 1995    43,671,876    $      437    $  161,996    $   (6,209)    $   84,311    $   (7,604)    $  232,931

Purchase of 294,000
  shares of common stock                --            --            --            --             --        (7,333)        (7,333)
Common stock issued
  under stock award plans           67,644            --         1,334            --             --            --          1,334
Tax benefit from stock
  compensation                          --            --         4,428            --             --            --          4,428
Net income                              --            --            --            --         66,627            --         66,627
Foreign currency translation            --            --            --        (1,262)            --            --         (1,262)
                                ----------    ----------    ----------    ----------     ----------    ----------     ----------
Balance at February 24, 1996    43,739,520    $      437    $  167,758    $   (7,471)    $  150,938    $  (14,937)    $  296,725

Purchase of 637,200
  shares of common stock                --            --            --            --             --       (20,278)       (20,278)
Common stock issued
  under stock award plans          106,131             1         1,947            --             --            --          1,948
Net income                              --            --            --            --         77,803            --         77,803
Foreign currency translation            --            --            --         1,935             --            --          1,935
                                ----------    ----------    ----------    ----------     ----------    ----------     ----------
Balance at February 22, 1997    43,845,651    $      438    $  169,705    $   (5,536)    $  228,741    $  (35,215)    $  358,133

Purchase of 1,283,600
  shares of common stock                --            --            --            --             --       (40,221)       (40,221)
Common stock issued
  under stock award plans           76,976             1         1,597            --             --            --          1,598
Net income                              --            --            --            --         27,214            --         27,214
Foreign currency translation            --            --            --        (1,514)            --            --         (1,514)
                                ----------    ----------    ----------    ----------     ----------    ----------     ----------
Balance at February 28, 1998    43,922,627    $      439    $  171,302    $   (7,050)    $  255,955    $  (75,436)    $  345,210
                                ==========    ==========    ==========    ==========     ==========    ==========     ==========
</TABLE>


See Notes to Consolidated Financial Statements

                                       56
<PAGE>   58
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                                   Fiscal Year Ended
                                                                                        ----------------------------------------
                                                                                        February 28,  February 22,  February 24,
                                                                                          1998 (a)        1997          1996
                                                                                        ------------  ------------  ------------
                                                                                                (Dollars in thousands)
<S>                                                                                      <C>           <C>           <C>      
OPERATING ACTIVITIES
Net income                                                                               $  27,214     $  77,803     $  66,627
Adjustments to reconcile net income to net cash
  provided by operating activities:
    Depreciation and amortization                                                          204,768       172,630       132,550
    Special charge                                                                          99,382            --            --
    Deferred income taxes (benefit) provision                                              (24,187)       22,441        16,412
    Equity in earnings of unconsolidated affiliates,
      net of dividends received                                                             (8,632)       (9,174)       (8,060)
    Other                                                                                    8,214          (346)        4,316
    Changes in operating assets and liabilities, net of effects of acquisitions:
      Trade accounts receivable                                                             17,907       (36,952)        3,400
      Inventories                                                                            7,693         8,307        (3,217)
      Special charge                                                                       (12,163)           --            --
      Other assets and liabilities                                                         (26,061)      (15,594)       (5,011)
                                                                                         ---------     ---------     ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                                  294,135       219,115       207,017

INVESTING ACTIVITIES
Purchases of systems, equipment and other assets relating to contracts                    (283,542)     (191,970)     (183,986)
Acquisitions (net of cash acquired)                                                        (20,976)       (2,000)         (495)
Investments in and advances to unconsolidated affiliates                                    (5,414)       (9,817)      (41,591)
Cash received from affiliates                                                                6,644        11,203         3,734
Proceeds from sale of investments                                                               --         5,895            --
Other                                                                                      (20,592)      (12,341)      (10,265)
                                                                                         ---------     ---------     ---------
NET CASH USED FOR INVESTING ACTIVITIES                                                    (323,880)     (199,030)     (232,603)

FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt                                               541,605         6,107        49,394
Principal payments on long-term debt                                                      (472,542)       (4,358)       (6,396)
Net borrowings (payments) under short-term borrowing arrangements                           (1,144)          444        (3,788)
Purchases of treasury stock                                                                (40,221)      (20,278)       (7,333)
Other                                                                                         (964)        1,358          (454)
                                                                                         ---------     ---------     ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES                                        26,734       (16,727)       31,423

Effect of exchange rate changes on cash                                                       (724)          108          (750)
                                                                                         ---------     ---------     ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                            (3,735)        3,466         5,087

Cash and cash equivalents at beginning of year                                              11,985         8,519         3,432
                                                                                         ---------     ---------     ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                                 $   8,250     $  11,985     $   8,519
                                                                                         =========     =========     =========


SUPPLEMENTAL CASH FLOW INFORMATION:
  Interest payments (net of amounts capitalized)                                         $  23,647     $  20,523     $  25,485
  Income tax payments                                                                       32,188        30,045        30,830
  Income tax refunds                                                                        (2,904)         (335)         (762)
</TABLE>


See Notes to Consolidated Financial Statements

(a) 53-week year

                                       57
<PAGE>   59
                   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 with the current year presentation.

Industry Segment and Nature of Operations: The Company operates in one business
segment that provides on-line, high speed, highly-secured transaction processing
systems predominately to the 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.

Fiscal Year: 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.

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 current 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
accumulated as a separate component of shareholders' equity, whereas gains or
losses resulting from foreign currency transactions are included in results of
operations.

For those foreign subsidiaries operating in a highly inflationary economy or
having the U.S. dollar as their functional currency, net nonmonetary assets are
translated at historical rates and net monetary assets are translated at current
rates. Translation adjustments are included in the determination of net income.

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 the stock option grants.

                                       58
<PAGE>   60
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


NOTE A - SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)

Derivatives: The Company, from time to time, enters into foreign currency
exchange and option contracts to reduce the exposure associated with certain
firm sales commitments, anticipated local currency margin and certain assets and
liabilities denominated in foreign currencies. The Company does not engage in
currency speculation. Unrealized gains and losses on contracts that hedge
specific foreign currency commitments are deferred and accounted for as part of
the transaction being hedged. Contracts used to hedge anticipated local currency
margin and certain assets and liabilities are marked to market with the
resulting transaction gains or losses included in other income.

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.

Impairment of Long-Lived Assets: If facts and circumstances 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 28, 1998 and February 22, 1997, accumulated amortization
was $24,164,000 and $19,498,000, respectively.

New Accounting Pronouncements: In 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings per Share" (FAS 128). This Statement
establishes standards for computing and presenting earnings per share. The
Company adopted the provisions of this Statement during fiscal 1998. All
earnings per share amounts for all periods presented have been restated to
conform to the new requirements.

In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
established new rules for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. This
Statement is effective for fiscal years beginning after December 15, 1997.
Management of the Company does not believe this statement will have a material
impact on the financial statements of the Company.

Also in 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This Statement is effective for financial statements for fiscal years beginning
after December 15, 1997. The adoption of this Statement will not affect results
of operations or financial position, but will affect the disclosure of segment
information.

                                       59
<PAGE>   61
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


NOTE A - SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)

In April 1998, the Financial Accounting Standards Board issued Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities." This Statement,
which requires the expensing of start-up costs, will be required to be adopted
by the Company during fiscal 2000. The Company is currently in the process of
evaluating the impact of this Statement on the Company's operations.


NOTE B - BUSINESS ACQUISITIONS

On September 1, 1993, the Company acquired 41.5% of the voting common and 41.5%
of the nonvoting preferred stock of Racimec Informatica Brasileira S.A.
("Racimec"), a Brazilian company engaged in the lottery business, for cash
consideration of approximately $6,900,000 plus related expenses. On January 31,
1996, the Company acquired the remaining voting common stock and 37.7% of
nonvoting preferred stock of Racimec for cash consideration of $4,600,000 plus
related expenses and the exchange by the Company of $9,400,000 of notes and
related accrued interest receivable from a shareholder of Racimec. During fiscal
1998, the Company purchased the remaining nonvoting preferred stock of Racimec
for approximately $5,900,000. In connection with the acquisition, the Company
has recorded approximately $35,112,000 of goodwill. The results of Racimec for
fiscal 1996 are included in the financial statements of the Company using the
equity method of accounting through January 31, 1996. Subsequent to January 31,
1996, the accounts of Racimec have been consolidated.

In February 1997, the Company acquired 100% of the voting common stock of SB
Industria E Comercio LTDA. ("SB Manaus"), a company located in Brazil, for
$2,000,000. SB Manaus was the consortium partner of Racimec in connection with
the bid for the on-line lottery contract with Caixa Economica Federal ("Caixa"),
Latin America's largest financial institution that runs Brazil's national
lottery. The Caixa contract was awarded to Racimec in January 1997.

The following summary presents on an unaudited pro forma basis, the combined
results of the Company and Racimec as if the January 31, 1996 acquisition had
taken place as of the beginning of fiscal 1996. For purposes of this pro forma
presentation, the pre-acquisition results of operations have been adjusted to
give effect to interest costs of funds used to finance the acquisition,
intercompany transactions and amortization of goodwill.

<TABLE>
<CAPTION>
                                                              Unaudited
                                                            ------------
(Dollars in thousands, except per share amounts)            February 24,
                                                                1996
                                                            ------------
<S>                                                         <C>      
Revenue                                                        $ 787,747

Net income                                                        54,085

Earnings per share:
     Basic                                                     $    1.25
     Diluted                                                        1.24
</TABLE>

The above pro forma information does not purport to represent the Company's
actual results of operations had the January 31, 1996 acquisition of Racimec
occurred at the beginning of fiscal 1996 or to project the Company's results for
any future periods.

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

                                       60
<PAGE>   62
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


NOTE C  - INVENTORIES

Inventories consist of:

<TABLE>
<CAPTION>
                                                    February 28, 1998      February 22, 1997
                                                    -----------------      -----------------
                                                           (Dollars in thousands)      
<S>                                                <C>                     <C>    
Purchased components                               $           17,202      $          11,483
Finished subassemblies                                          1,719                  1,993
Work in progress                                                7,789                 16,106
Finished goods                                                  1,143                  5,744
                                                              -------                -------
                                                   $           27,853      $          35,326
                                                              =======                =======
</TABLE>


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

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


<TABLE>
<CAPTION>
                                                      February 28, 1998    February 22, 1997
                                                      -----------------    -----------------
                                                              (Dollars in thousands)
<S>                                                   <C>                  <C>       
Land and buildings                                    $           5,226    $           5,881
Computer terminals and systems                                1,035,977              925,614
Furniture and equipment                                         107,233               95,284
Contracts in progress                                            56,116               36,872
                                                             ----------           ----------
                                                              1,204,552            1,063,651
Less accumulated depreciation and amortization                  677,696              561,350
                                                             ----------           ----------
                                                      $         526,856    $         502,301
                                                             ==========           ==========
</TABLE>

                                       61
<PAGE>   63
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


NOTE E - UNCONSOLIDATED AFFILIATES

The Company's investments in unconsolidated affiliated companies over which it
exerts significant influence are accounted for using the equity method. The
Company has a 22.5% interest in Camelot Group plc ("Camelot"). See Note R. The
Company also 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"). In addition, at
February 24, 1996, the Company held a 20% interest in Pacific Online Systems
Corporation ("Pacific"). The Company sold its investment in Pacific in fiscal
1997 for $5,895,000.

Camelot is a consortium that operates the United Kingdom lottery and is the
largest of the Company's unconsolidated affiliates. 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. In addition, the Company's equity in
the earnings of Camelot amounted to $20,988,000, $14,394,000 and $17,961,000 for
fiscal 1998, 1997 and 1996, respectively. 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. Pacific is a corporation that holds a contract with the Philippine
Charity Sweepstakes Office.

The following is a summary of the combined financial condition of the Company's
unconsolidated affiliates along with their combined results of operations, used
as the basis for applying the equity method of accounting:


<TABLE>
<CAPTION>
                                                          Fiscal Year Ended
                                      ---------------------------------------------------------
                                      February 28, 1998   February 22, 1997   February 24, 1996
                                      -----------------   -----------------   -----------------
                                                       (Dollars in thousands)
<S>                                   <C>                 <C>                 <C>       
Earnings data:
  Revenues                            $       9,098,191   $       7,319,017   $       7,919,759
  Gross profit                                  295,169             235,610             261,445
  Net income                                     99,833              65,743              65,587
                                                                             
Balance sheet data:                                                          
  Current assets                      $         757,944   $         646,082   $         731,108
  Noncurrent assets                             123,603             156,472             169,401
  Current liabilities                           599,365             556,011             716,951
  Noncurrent liabilities                         45,101              55,798              29,919
</TABLE>


The Company's share of undistributed earnings of affiliated companies included
in retained earnings was $35,130,000, $26,203,000 and $17,030,000 at February
28, 1998, February 22, 1997 and February 24, 1996, respectively. Dividends
received from unconsolidated affiliates were $15,384,000, $6,881,000 and
$3,298,000 in fiscal 1998, 1997 and 1996, respectively.

                                       62
<PAGE>   64
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


NOTE F  - LONG-TERM DEBT


Long-term debt consists of:

<TABLE>
<CAPTION>
                                                    February 28, 1998     February 22, 1997
                                                    -----------------     -----------------
                                                            (Dollars in thousands)
<S>                                                 <C>                   <C>     
Revolving credit facility                           $         135,000     $         367,000
7.75% Series A Senior Notes due 2004                          150,000                    --
7.87% Series B Senior Notes due 2007                          150,000                    --
Other                                                          22,490                21,548
                                                             --------              --------
                                                              457,490               388,548
Less current portion                                            3,903                 6,049
                                                             --------              --------
                                                    $         453,587     $         382,499
                                                             ========              ========
</TABLE>

The Company has an unsecured revolving credit facility of $400,000,000 expiring
in June 2002 (the "Credit Facility"). At February 28, 1998, the weighted average
interest rate for all outstanding borrowings under the Credit Facility was
5.82%. 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 28, 1998, under the most
restrictive covenants, the Company had available $77,210,000 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 28, 1998. The Company had outstanding, at February 28,
1998, $74,182,000 of letters of credit issued outside of the Credit Facility.
The weighted average annual cost for these letters of credit was .5%.

At February 28, 1998, long-term debt maturing over the next five fiscal years is
as follows:

<TABLE>
<CAPTION>
Fiscal Year                                               (Dollars in thousands)
-----------                                               
<S>                                                       <C>      
1999                                                      $               3,903
2000                                                                     17,087
2001                                                                        ---
2002                                                                        ---
2003                                                                    136,500
Thereafter                                                              300,000
</TABLE>
                                                  

Interest costs incurred by the Company were $34,659,000, $25,036,000 and
$24,548,000 (of which $4,348,000, $4,224,000 and $317,000 were capitalized as
additional costs of qualifying property during the construction period) for
fiscal 1998, 1997 and 1996, respectively.

                                       63
<PAGE>   65
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


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, to which the Company would be entitled were such a
termination to occur.

Legal Matters

It has not been uncommon in the lottery industry for investigations of various
types, including grand jury investigations, to be conducted by federal or state
law enforcement and other officials into possible undue influence, bribery or
other improprieties or wrongdoing in connection with efforts to obtain or the
awarding of lottery contracts and related matters. Such investigations often are
called for by disappointed competitors or politicians (who may include those
opposed to gaming or the lottery business). Some investigations in the past have
involved the Company, or its consultants, lobbyists or representatives, directly
or indirectly, and the Company is aware of federal grand jury investigations
currently being conducted by the U.S. Attorneys in New Jersey and Texas.

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. 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 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 October 1996, Mr. Smith
moved for a new trial. In the midst of these events, the New Jersey Lottery
Commission awarded the Company a contract to continue operating the State
lottery.

In December 1996, the New Jersey U.S. Attorney's Office issued a new subpoena to
the Company, and the Company produced documents in response to this subpoena. In
January 1997, the New Jersey U.S. Attorney's Office publicly disseminated on the
Internet and to the media a sentencing memorandum containing derogatory
information regarding Mr. Smith, several consultants to the Company, and the
Company itself. The Company and several other persons mentioned in the
sentencing memorandum filed a motion for contempt against the U.S. Attorney's
Office, alleging that the public dissemination of the sentencing memorandum,
which included secret grand jury information, was improper. In February 1997,
the New Jersey U.S. Attorney's Office issued another subpoena to the Company (to
which the Company is objecting). The Company is advised that the New Jersey U.S.
Attorney's Office subsequently issued subpoenas to a third party seeking
financial records of a number of persons presently or formerly employed by or
otherwise associated with the Company, including certain former officers and
consultants. On February 4, 1998, the United States District Court for the
District of New Jersey issued its decision regarding the sentencing memorandum,
concluding that it was improperly publicly disseminated, and, among other
things, ordered the U.S. Attorney's Office to issue a written letter of apology
to the Company. The U.S. Attorney's Office filed a 

                                       64
<PAGE>   66
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

NOTE G-COMMITMENTS AND CONTINGENCIES-(continued)

notice of appeal from that order with the Third Circuit Court of Appeals, and
the Company filed a conditional notice of appeal in response thereto.

Mr. Smith still has not been sentenced on his October 1996 conviction. On May 5,
1998, the New Jersey Federal Court heard oral argument on Mr. Smith's motion for
a new trial. The Court may hear further argument before issuing a decision,
which is anticipated shortly.

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

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 the current investigations are still underway
and are conducted largely 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.

As widely reported in the Texas media and previously reported by the Company,
during fiscal 1997 the Texas Lottery Commission inquired of the Company
regarding its business practices relating to the Texas Lottery (as described
in particularity in Item 1-"Maintenance of Business Relationships and Certain
Legal Matters" of the Company's fiscal 1997 Annual Report on Form 10-K), and the
Company has cooperated with those inquiries. In addition, the Texas State
Auditor has issued to the Company a Request for Information. The Company
complied with that request, and the Texas State Auditor publicly issued its
Audit Report on September 1, 1997. The Texas State Auditor found that the Texas
Lottery failed to exercise strict control and close supervision over its
contractors, and that the Company did not live up to its obligations under the
contract and its own ethical policies. The Company submitted a response to the
Audit Report disputing many of the Texas State Auditor's conclusions. In
January 1998, the Texas State Auditor notified the Company that it was
deferring further audit work relating to the Company's lottery operator
contract in Texas.                           

In August 1997 the Texas Lottery Commission issued a Request for Proposals (the
"RFP") with respect to GTECH's lottery operator contract. GTECH filed two
administrative protests challenging the RFP, which were denied by the Executive
Director and the Texas Lottery Commission. GTECH appealed the denial of the
protests to the Travis County District Court. The Commission responded to the
appeal by asserting that the Court lacked jurisdiction to consider those claims.
In December 1997, GTECH also announced that it had declined to submit a proposal
in response to the Commission's RFP in light of the perceived flaws in the RFP
and the related procurement process and GTECH's position that it is party to a
valid contract with the Commission through August 2002.

In January 1998, GTECH filed a motion for partial summary judgment with the
Travis County District Court asking the Court to declare that the terms of the
RFP violated Texas law and to invalidate the RFP. On February 6, 1998, the Court
heard argument on the Commission's claim that the Court lacked jurisdiction to
hear the case and on GTECH's claim that the RFP was unlawful. On February 19,
1998, before the Court rendered a decision on these matters, the Executive
Director of the Texas Lottery canceled the RFP without awarding a new contract,
thus, in effect, leaving the Company's contract in place. On February 25, 1998,
the Court granted the Commission's unopposed motion to voluntarily dismiss the
case without prejudice.

                                       65
<PAGE>   67
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

NOTE G-COMMITMENTS AND CONTINGENCIES-(continued)

In April 1997, Nora Linares, the former Executive Director of the Texas Lottery
Commission, filed suit against GTECH and James Hosker, the Company's Texas Site
Director (captioned Nora Alicia Linares v. GTECH Corporation and James Hosker,
et al.), in the District Court of Travis County, Texas (261st Judicial
District). Ms. Linares, who had been terminated as Executive Director of the
Texas Lottery Commission in January 1997, alleges that GTECH, in violation of
Texas State Law and its lottery contract with the State of Texas, engaged in
questionable business practices, tortiously interfered with her employment
relationship with her former employer by, among other things, hiring Michael
Moeller, with whom she had a personal relationship, as a consultant, and
intentionally inflicted emotional distress upon her. Ms. Linares seeks both a
declaratory judgment setting forth the rights, duties and responsibilities
which GTECH owes to public officials such as Ms. Linares, as well as actual and
exemplary damages from GTECH. Discovery has commenced. GTECH believes that this
lawsuit is without merit and is defending itself (and Mr. Hosker) vigorously. 

In December 1995, Richard Branson filed suit in the United Kingdom's High Court
of Justice (Queen's Bench Division) against GTECH U.K. Corporation, a subsidiary
of the Company, and Robert Rendine, its press spokesman (captioned Richard
Branson v. GTECH U.K. Corporation and Robert Rendine), and in January 1996, Mr.
Branson filed suit in this same court against the Company's then Chairman, Guy
B. Snowden (captioned Richard Branson v. Guy Snowden), alleging in both cases
that the defendants had libeled Mr. Branson by denying Mr. Branson's allegation
that Mr. Snowden had offered Mr. Branson a bribe not to bid on the U.K. lottery
contract in 1993. Mr. Snowden filed a countersuit in January 1996 in the U.K.
against Mr. Branson alleging that Mr. Branson's allegations libeled Mr. Snowden.
The trial on these matters commenced in January 1998, and concluded on February
2, 1998 with the jury's finding that Mr. Snowden had attempted to bribe Mr.
Branson not to bid on the U.K. lottery contract in 1993. The jury awarded
damages to Mr. Branson against Mr. Snowden and GTECH UK Corporation in the
amount of pounds sterling 100,000 and costs. Mr. Branson's claim against Mr.
Rendine was dismissed. Mr. Snowden has filed a notice of appeal with respect to
the judgment entered against him.

Following the judgment against Mr. Snowden and GTECH U.K. Corporation, and as
widely reported in the media, the Office of the National Lottery of the United
Kingdom ("OFLOT"), commenced an inquiry of the Company to determine whether it
was "fit and proper" to continue its involvement in the National Lottery under
the National Lottery Act, and the Company has cooperated with that inquiry. The
Company submitted written representations and evidence to the Director General
of OFLOT. In addition, the Board of Directors of the Company made oral
submissions to the Director General. On April 9, 1998, the Director General
announced his findings that the Company was fit and proper to continue in its
capacity as supplier of goods and services to Camelot, the holder of the
National Lottery license, and the National Lottery. See Note R.

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
alleges, 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 seeks
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. The Company has responded with a
vigorous defense. In February 1997, the Court granted the Company summary
judgment but granted the plaintiffs limited leave to amend their complaint
alleging alternative theories of recovery. The plaintiffs filed an amended
complaint in March 1997. In June 1997, 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 have filed a notice of appeal. The Company believes
that these claims are without merit and intends to continue to defend itself
vigorously in the appeal.

                                       66

<PAGE>   68
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

NOTE G-COMMITMENTS AND CONTINGENCIES-(continued)

In July 1997, Border Capital (Nevada) Corp. ("BCNC"), Border Capital Corp., IBC
Investments Limited ("IBC") and Gaming Properties & Investments, LLC ("GPI")
filed suit against the Arizona Lottery, the Company and GTECH in the United
States District Court for the District of Delaware. The plaintiffs alleged that
"Arizona Bingo," a game recently offered by GTECH and the Arizona Lottery,
infringed upon United States patents issued in 1994 and 1996 which are
represented to be owned by IBC and exclusively licensed to BCNC and GPI. The
plaintiffs sought a declaratory judgment that IBC is the owner of the patents
and that the patents have been willfully infringed by the defendants; injunctive
relief enjoining further alleged infringement; and actual and exemplary damages
from the defendants respecting such alleged infringement. GTECH filed its answer
in October 1997 and asserted, among other defenses, that the patents in suit are
invalid and unenforceable. GTECH filed a counterclaim for declaratory relief.

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. One such piece of litigation is Rumsey
Indian Rancheria v. Wilson, currently pending in the U. S. District Court for
the Eastern District of California, which involves a suit by several California
Indian tribes against the Governor of California under the federal Indian Gaming
Regulatory Act ("IGRA"). The Indian Tribes are claiming that certain elements of
the California State Lottery (which is a customer of the Company) 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 is arguing that the California Lottery does
not involve the operation of slot machines; however, the State also appears to
be taking the position that, if and to the extent the California Lottery does
involve the operation of slot machines, it must be terminated because the
California Lottery is not exempt from the California law prohibiting the
operation of slot machines. The Company recently has been granted leave to file
amicus curiae briefs in this case and will argue that the California Lottery
does not involve the operation of slot machines and that even if it does, the
California Lottery is exempt from the State law prohibition on slot machines.
While the Company believes its position in this matter is the correct one and
that it should prevail, there can be no assurance that such will be the case,
and an adverse ruling could result in some or all of the California Lottery
being shut down for an indeterminate period which, in turn, could adversely
affect the Company's substantial revenues from and investment in the California
Lottery.

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.

                                       67

<PAGE>   69
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


NOTE H - STOCK OPTION PLANS

The GTECH Holdings Corporation 1994 Stock Option Plan, as amended, (the "1994
Plan") authorizes up to an aggregate of 1,800,000 shares of Common Stock for the
granting of incentive stock options and nonqualified stock options to officers
and other key employees of the Company at a price not less than the fair market
value of a share of Common Stock on the date the option is granted. Options
expire 10 years after date of grant and generally become exercisable ratably
over a four-year period from date of grant (subject to acceleration 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 1994 Plan. Accordingly, no compensation
expense has been recognized. Had compensation expense for options granted under
the 1994 Plan 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 1998, 1997 and
1996 would have been $25,551,000 and $.61 and $.61, respectively, $76,331,000
and $1.78 and $1.76, respectively, and $66,295,000 and $1.53 and $1.52,
respectively. The effects on fiscal 1998, 1997 and 1996 pro forma net income and
earnings per share of expensing the estimated fair value of stock options are
not necessarily representative of the effects on reported net income for future
years because of the vesting period of the stock options and the potential for
issuance of additional stock options in future years.

The fair value of options granted after February 25, 1995 under the 1994 Plan
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for fiscal 1998, 1997 and 1996,
respectively: risk-free interest rates of 6.16%, 5.59% and 5.78%; volatility
factors of the expected market price of the Company's common stock of .28, .32
and .37; and a weighted-average expected life of the option of 7.9 years, 4.0
years and 7.2 years. The Company did not assume a dividend yield for fiscal
1998, 1997 or 1996. Under these assumptions, the weighted-average fair value of
an option to purchase one share granted in fiscal 1998, 1997, and 1996,
respectively, was approximately $15, $10 and $13.

A summary of the Company's 1994 Plan stock option activity and related
information follows:


<TABLE>
<CAPTION>

                                                                        Fiscal Year Ended
                                        -----------------------------------------------------------------------------------
                                           February 28, 1998             February 22, 1997             February 24, 1996
                                        -----------------------       -----------------------       -----------------------
                                                       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        1,306,175      $23.303        1,214,150      $21.964          793,500      $17.532
Granted                                   202,000       32.365          195,500       28.656          567,500       26.844
Exercised                                 (60,250)      18.043          (79,225)      17.433          (33,850)      16.875
Forfeited                                 (46,375)      25.112          (24,250)      18.603         (113,000)      16.875
                                        ---------                     ---------                     ---------
Outstanding at end of year              1,401,550      $24.775        1,306,175      $23.303        1,214,150      $21.964
                                        =========                     =========                     =========

Exercisable at end of year                685,925      $22.761          402,675      $21.865          147,425      $17.759
</TABLE>

                                       68
<PAGE>   70
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


NOTE  H - STOCK OPTION PLANS -(CONTINUED)

Exercise prices for options outstanding under the 1994 Plan are summarized as
follows:

<TABLE>
<CAPTION>

                                         Weighted Average                   
                                    ------------------------                Weighted
                                     Remaining                               Average
    Range of           Options      Contractual    Exercise     Options     Exercise
 Exercise Prices     Outstanding        Life         Price    Exercisable     Price                               
-----------------    -----------    -----------    --------   -----------   -------- 
<S>                  <C>            <C>            <C>        <C>           <C>    
February 28, 1998
$16.875 - $22.188        486,300            6.9      17.977       338,175     18.048
$25.688 - $32.720        915,250            8.1      28.387       347,750     27.344

February 22, 1997
$16.875 - $22.188        557,925            7.9      17.861       235,550     18.012
$25.688 - $31.500        748,250            8.8      27.361       167,125     27.295

</TABLE>


In May 1997, the Board of Directors of the Company adopted, and in July 1997
shareholders approved, the GTECH Holdings Corporation 1997 Stock Option Plan
(the "1997 Plan"). The 1997 Plan authorizes up to an aggregate of 2,800,000
shares of Common Stock for the granting of incentive stock options and
nonqualified stock options to officers and other key employees of the Company at
a price not less than the fair market value on the date the option is granted.
Options become exercisable as determined at the date of grant by a committee of
the Board of Directors, but not earlier than six months from the date of grant,
except in limited circumstances. Options expire 10 years after the date of grant
unless an earlier expiration date is set at the time of grant. No participant in
the 1997 Plan may be granted options under the 1997 Plan in any calendar year to
purchase more than 150,000 shares. At February 28, 1998, no options had been
granted under the 1997 Plan. The 1997 Plan essentially replaces the 1994 Plan,
and no further options will be granted under the 1994 Plan.

                                       69
<PAGE>   71
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


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 28, 1998   February 27, 1997   February 24, 1996
                                      -----------------   -----------------   -----------------
                                      (Dollars and shares in thousands, except per share amounts)
<S>                                   <C>                 <C>                 <C>
Numerator:                                                                    
  Net income                          $          27,214   $          77,803   $          66,627

Denominator:
  Weighted average shares - Basic                41,887              42,976              43,236

  Effect of dilutive securities:
    Employee stock options                          342                 333                 246
                                                -------             -------             -------
  Weighted average shares - Diluted              42,229              43,309              43,482
                                                =======             =======             =======
Basic earnings per share              $             .65   $            1.81    $           1.54
                                                =======             =======             =======
Diluted earnings per share            $             .64   $            1.80    $           1.53
                                                =======             =======             =======
</TABLE>

                                       70
<PAGE>   72
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


NOTE  J - INCOME TAXES

The components of income before income taxes were as follows:

<TABLE>
<CAPTION>
                                                 Fiscal Year Ended
                                  -------------------------------------------------
                                  February 28,      February 22,       February 24, 
                                      1998             1997               1996
                                  ------------      ------------       ------------ 
                                               (Dollars in thousands)
<S>                               <C>               <C>                <C>     
United States                     $      4,883      $     93,990       $     92,101
Foreign                                 39,730            37,879             22,774
                                      --------          --------           --------
                                  $     44,613      $    131,869       $    114,875
                                      ========          ========           ========
</TABLE>


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

<TABLE>
<CAPTION>
                                                      Fiscal Year Ended
                                          -----------------------------------------
                                          February 28,   February 22,  February 24,
                                              1998           1997          1996
                                          ------------   ------------  ------------ 
                                                    (Dollars in thousands)
<S>                                       <C>            <C>           <C>     
Current:
  Federal                                $      17,254   $     11,050  $      7,882
  State                                          5,154          5,970         5,150
  Foreign                                       19,178         14,605        14,376
                                              --------       --------      --------
    Total Current                               41,586         31,625        27,408
                                              --------       --------      --------
Deferred:
  Federal                                $     (21,504)  $     20,040  $     15,615
  State                                         (2,683)         2,401           797
                                              --------       --------      --------
    Total Deferred                             (24,187)        22,441        16,412
                                              --------       --------      --------
Charge in lieu of income taxes                      --             --         4,428
                                              --------       --------      --------
    Total Provision                      $      17,399   $     54,066  $     48,248
                                              ========       ========      ========
</TABLE>


Charge in lieu of income taxes represents the income tax benefit allocated to
shareholders' equity related to the excess of tax deductions over book expense
for restricted stock plans.

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


<TABLE>
<CAPTION>
                                                     February 28,      February 22, 
                                                         1998              1997
                                                     ------------      ------------ 
                                                          (Dollars in thousands)
<S>                                                  <C>               <C>     
Deferred tax assets:
 Accruals not currently deductible for tax purposes  $     30,783      $     22,911
 Special charge                                            24,947                --
 Cash collected in excess of revenue recognized             2,446             5,045
 Inventory reserves                                         2,058             3,084
 Other                                                        798             2,128
                                                         --------           -------
                                                           61,032            33,168

Deferred tax liabilities:
 Depreciation                                             (26,736)          (26,306)
 Advance payments                                          (7,502)           (5,850)
 Other                                                     (6,057)           (4,462)
                                                         --------          --------
                                                          (40,295)          (36,618)
                                                         --------          --------
 Net deferred tax assets (liabilities)               $     20,737      $     (3,450)
                                                         ========          ========
</TABLE>

                                       71
<PAGE>   73
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


NOTE  J - INCOME TAXES-(CONTINUED)

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
$4,000,000 at February 28, 1998. 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 $360,000.

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 28,   February 22,  February 24,
                                                 1998           1997          1996
                                             ------------   ------------  ------------
<S>                                          <C>            <C>           <C>  
Federal income tax using statutory rate             35.0%          35.0%         35.0%
State taxes, net of federal benefit                  3.6            4.0           4.0
Equity in earnings of unconsolidated
  affiliates                                         3.2           (2.7)         (3.1)
Nondeductible expenses                               4.2            1.4           2.0
Goodwill                                             3.7            1.1            .9
Tax credits                                         (6.5)            --            -- 
Other                                               (4.2)           2.2           3.2
                                                    ----           ----          ---- 
                                                    39.0%          41.0%         42.0%
                                                    ====           ====          ==== 
</TABLE>

                                       72
<PAGE>   74
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


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, $53,298,000 and $56,451,000 in fiscal 1998,
1997 and 1996, respectively. At February 28, 1998 and February 22, 1997, the
Company had receivables net of advance payments of $7,159,000 and $7,035,000,
respectively, from Camelot and the other members of the consortium.

Sales of products and services to LTE were $3,907,000, $3,714,000 and $3,334,000
in fiscal 1998, 1997 and 1996, respectively. At February 28, 1998 and February
22, 1997, the Company had receivables of $326,000 and $265,000, respectively,
from LTE.

Sales of products to Racimec were $2,140,000 in fiscal 1996.

At February 28, 1998 and February 22, 1997, 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. In addition, at
February 22, 1997 the Company had a loan receivable from one of its joint
ventures with Full House in the amount of $6,336,000. Interest on the loan was
payable monthly at the prime rate plus 1%. During fiscal 1998 the loan was
repaid in full.

The Company has a loan program under its expired Restricted Stock Unit Plan that
assists employees in paying federal and state income tax withholdings associated
with stock awards that became taxable compensation to them. Current and future
loans and related interest are repayable on February 1, 1999. The loans are
evidenced by promissory notes that bear interest at the rate of 7.1% per annum.
Loans outstanding at February 28, 1998 and February 22, 1997, amounted to
$292,000 and $389,000, respectively.

The Company paid rent of $2,612,000, $2,619,000 and $2,612,000 to West Greenwich
Technology Associates Limited Partnership (that is 50% owned by the Company and
50% owned by an unrelated third party), in fiscal 1998, 1997 and 1996,
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 current Chairman and Chief Executive
Officer, made loans to him to enable him to retire certain third-party
indebtedness. The loans consisted of a $400,000 loan under a line of credit
arrangement that required no interest and that was repaid during fiscal 1997 and
a loan in the amount of $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 28, 1998 and February 22, 1997, amounted to $281,000 and
$536,000, respectively.

                                       73
<PAGE>   75
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


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 28, 1998:

<TABLE>
<CAPTION>
Fiscal Year                                          (Dollars in thousands)
-----------
<S>                                                  <C>    
   1999                                              $              26,734
   2000                                                             25,922
   2001                                                             16,862
   2002                                                             15,123
   2003                                                             13,285
   Thereafter                                                       55,456
                                                                  --------
   Total minimum lease payments                      $             153,382
                                                                  ========
</TABLE>


Rental expense for all operating leases was $28,937,000, $27,471,000 and
$23,285,000 for fiscal 1998, 1997 and 1996, respectively.


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 in which case the Company will contribute this amount on the employee's
behalf to the Plans and also will 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 1998, 1997 and 1996, the Company recorded
expense under these plans of $5,706,000, $7,010,000 and $4,478,000,
respectively.

The Company has a Supplemental Retirement Plan, that is a defined contribution
plan that provides additional retirement benefits to certain key employees. The
Company, at its discretion, may contribute additional amounts to the 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 1998, 1997 and 1996 the
Company recorded expense under this plan of $952,000, $1,254,000 and $804,000,
respectively.

                                       74
<PAGE>   76
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


NOTE  N - FOREIGN OPERATIONS

The Company's geographic area data is summarized below:


<TABLE>
<CAPTION>
                                                               Fiscal Year Ended
                                                ------------------------------------------------
                                                February 28,      February 22,      February 24,
                                                    1998              1997              1996
                                                ------------      ------------      ------------
                                                            (Dollars in thousands)
<S>                                             <C>               <C>               <C>      
Service Revenues and Product Sales:                                   
  United States                                 $    690,226      $    670,090      $    585,258
  Brazil                                              88,590            55,769             4,346
  Other Foreign                                      211,751           178,413           154,486
                                                   ---------         ---------         ---------
                                                $    990,567      $    904,272      $    744,090
                                                   =========         =========         =========

Operating Profit:                                
  United States                                 $     11,431      $    108,697      $    101,208
  Brazil                                               1,347            (6,114)           (2,485)
  Other Foreign                                       55,246            46,026            36,645
                                                   ---------         ---------         ---------
    Total Operating Profit                            68,024           148,609           135,368
General corporate expenses                           (23,920)          (21,518)          (17,385)
Interest expense                                     (30,311)          (20,812)          (24,231)
Interest income                                        5,733             4,424            12,124 
Equity in earnings of unconsolidated          
  affiliates                                          24,376            16,727             8,060
Other income                                             711             4,439               939
                                                   ---------         ---------         ---------
Income before income taxes                      $     44,613      $    131,869      $    114,875
                                                   =========         =========         =========
</TABLE>


<TABLE>
<CAPTION>
                                                February 28,        February 22,    February 24, 
                                                   1998                1997            1996
                                                ------------        ------------    ------------ 
                                                              (Dollars in thousands)
<S>                                             <C>                 <C>             <C>        
Identifiable Assets:
  United States                                 $    651,804        $  685,125      $    579,154
  Brazil                                             191,950            96,544            94,754
  Other Foreign                                      123,310           131,608           135,314
                                                 -----------         ---------       -----------
                                                     967,064           913,277           809,222

Investments in and advances to
   unconsolidated affiliates                          64,808            56,693            49,068
Other corporate assets                                45,733            23,235            28,444
                                                 -----------         ---------       -----------
                                                   1,077,605           993,205           886,734
Eliminations                                         (53,793)          (36,664)          (27,354)
                                                 -----------         ---------       -----------
  Total Assets                                  $  1,023,812        $  956,541      $    859,380
                                                 ===========         =========       ===========
</TABLE>

                                       75
<PAGE>   77
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


NOTE  N - FOREIGN OPERATIONS-(CONTINUED)

For fiscal 1998, 1997 and 1996, the Company's United States revenues included
export sales of $54,102,000, $88,440,000, and $54,969,000, respectively,
principally as follows: to continental Europe and New Zealand in the amounts of
$32,823,000 and $9,148,000, respectively, in fiscal 1998; to continental Europe,
Asia and the United Kingdom in the amounts of $54,166,000, $14,401,000 and
$10,818,000, respectively, in fiscal 1997; and to continental Europe and the
United Kingdom in the amounts of $24,788,000 and $16,896,000, respectively, in
fiscal 1996.

For fiscal 1998, 1997 and 1996, the aggregate revenues from the Company's
lottery operations in the State of Texas represented 14.2%, 15.8% and 17.5% of
the Company's consolidated revenues, respectively. No other customer accounted
for more than 10% of consolidated revenues in such years.


NOTE  O - FINANCIAL INSTRUMENTS

Cash and cash equivalents

Cash equivalents are stated at cost which approximates fair value.

Debt

The carrying amounts of the Company's borrowings under the Credit Facility
approximates fair value. The estimated fair value of the Senior Notes as
determined by an independent investment banker approximated $321,277,500 at
February 28, 1998.

Forward Exchange Contracts

As of February 28, 1998 and February 22, 1997, the Company had approximately
$9,466,000 and $13,829,000, respectively, of outstanding foreign currency
exchange contracts to purchase foreign currencies (primarily pounds Sterling and
Singapore dollars) and approximately $27,018,000 and $20,567,000, respectively,
of outstanding foreign currency exchange contracts to sell foreign currencies
(primarily Spanish pesetas, New Zealand dollars and Irish punts). 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. The carrying value of these contracts,
in the aggregate, approximated fair value at February 28, 1998 and February 22,
1997.

                                       76
<PAGE>   78
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


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).                                                                

In February 1998, the Company entered into an asset purchase agreement with
Citicorp Services, Inc. ("Citicorp") to sell electronic benefits transfer (EBT)
contracts and certain related assets held by the Company's Transactive
subsidiary ("Transactive"). Under the agreement, Citicorp is to pay Transactive
approximately $11,500,000, subject to adjustments, for EBT contracts and
significant related assets pertaining to four jurisdictions: Illinois; Indiana;
Sacramento County, California; and Texas. The transaction is subject to the
consents of the applicable state contract parties and to regulatory approvals,
including the U.S. Department of Justice which is reviewing the transaction and
may challenge it. The Company expects to receive a decision from the Department
of Justice in June 1998. Under a post-closing transition plan, expected to be
completed by December 1998, Citicorp is to assume sole management of the EBT
systems previously operated by Transactive for the four jurisdictions. After
December 1998, Transactive is to continue to provide services to Citicorp as a
subcontractor for a period of time. The sale does 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. Those services will continue to be provided by Transactive. The Company
has decided not to pursue new opportunities in those areas or seek new U.S. EBT
contracts. In connection with the sale of the EBT contracts and related assets,
the Company recorded a fourth quarter charge of approximately $32,877,000 to
write down assets to net realizable value. This charge assumes that requisite
customer and regulatory approvals will be received. In the event that some or
all approvals are not received, the transaction may not be able to be
consummated and/or an additional charge may be required. At February 28, 1998,
assets held for sale of $14,178,000, consist primarily of EBT contract assets to
be acquired by Citicorp under the asset purchase agreement.
                                                                               
Because of the decision to forgo future EBT-related opportunities, it was
anticipated that cash flows from the New York State identification card contract
and the Texas license contract would not be sufficient to recover capital
investment because these two contracts utilize certain EBT assets. Accordingly,
the Company wrote down assets related to these two contracts by approximately
$10,678,000.

In order to compete more effectively for future business opportunities and to
enhance the efficiency and effectiveness of the Company's core lottery
operations, the Company will undergo a worldwide workforce reduction to
eliminate a total of approximately 800 positions (virtually all of which will
occur in fiscal 1999), close certain administrative offices and reposition its
WorldServ subsidiary. The Company recorded charges of approximately $20,973,000
associated with these actions.

The special charge also includes approximately $19,951,000 of contractual
obligations in connection with the departures of Guy B. Snowden and Victor
Markowicz (the Company's former Chairman and Vice Chairman, respectively) from
the Company, along with legal costs in connection with the Branson litigation
and judgement in the U.K., and asset impairment charges of approximately
$14,903,000 relating to two of the Company's lottery contracts. Severance
payments made in fiscal 1998 relating to the special charge were approximately
$9,505,000.

The major components of the special charge accrual at February 28, 1998 of
$33,631,000, are severance of $23,457,000 and lease termination costs of
$3,861,000.

                                       77
<PAGE>   79
                   GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)


NOTE Q - QUARTERLY RESULTS OF OPERATIONS - (UNAUDITED)


The following is a summary of the quarterly results of operations for fiscal
1998 and 1997:

<TABLE>
<CAPTION>
                                            First         Second          Third         Fourth
                                           Quarter        Quarter        Quarter        Quarter
                                           -------        -------        -------        -------
                                               (Dollars in thousands, except per share amounts)
<S>                                        <C>            <C>            <C>            <C>
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)

Fiscal year ended February 22, 1997:        
  Service revenues                          $194,986       $191,812       $198,259      $204,477
  Sales of products                           16,187         23,141         33,621        41,789
  Gross profit                                70,304         66,469         71,963        76,433
  Net income                                  18,203         17,501         19,080        23,019

  Basic earnings per share                  $    .42       $    .41       $    .44      $    .54

  Diluted earnings per share                $    .42       $    .40       $    .44      $    .54
</TABLE>

The fiscal year 1997 and first three quarters of fiscal year 1998 earnings per
share amounts have been restated to comply with FAS 128.

In the fourth quarter of fiscal 1998, the Company recorded a $99,382,000 special
charge (See Note P).


NOTE  R - SUBSEQUENT EVENT

In April 1998, the Company sold its investment in Camelot to Camelot for
approximately $84,904,000. The book value of the Camelot investment at the time
of sale was approximately $51,763,000. A portion of the cash received by the
Company would have to be returned to Camelot in the event that Camelot loses its
operating license for reasons attributable to the Company. Accordingly, the
Company has deferred the recognition of the gain from the sale of its investment
and will recognize such gain evenly over the remaining period of Camelot's
operating license. The sale of the equity interest does not affect the Company's
position as the principal supplier of goods and services to Camelot.

                                       78
<PAGE>   80
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE

Not applicable.


                                       79
<PAGE>   81
                                    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 1998, 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.


                                       80
<PAGE>   82
                                     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 28, 1998 and
     February 22, 1997

Consolidated Income Statements 
     Fiscal year ended February 28, 1998, 
     Fiscal year ended February 22, 1997 and 
     Fiscal year ended February 24, 1996

Consolidated Statements of Shareholders' Equity--
     Fiscal year ended February 28, 1998, 
     Fiscal year ended February 22, 1997 and 
     Fiscal year ended February 24, 1996

Consolidated Statements of Cash Flows--
     Fiscal year ended February 28, 1998,
     Fiscal year ended February 22, 1997 and 
     Fiscal year ended February 24, 1996

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.


                                       81
<PAGE>   83
(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 3.3 of Holdings' 1997 10-K).

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      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).

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

4.4      Management Equity Agreement dated as of January 23, 1998 among Holdings
         and certain Investors signatory thereto (incorporated by reference to
         Exhibit (b)(9) to the Schedule 13E-3 filed by the Company, GTECH, GTEK
         Acquisition, DLJCC, Victor Markowicz and Guy B. Snowden, File No.
         0-12604, a copy of which may be obtained from the Public Reference
         Bureau of the Securities and Exchange Commission).

4.5      First Amendment dated as of July 31, 1990 to the Management Equity
         Agreement dated as of January 23, 1998 among Holdings and certain
         Investors signatory thereto (incorporated by reference to Exhibit 4.16
         to the 1990 S-1, File No. 0-12604, a copy of which may be obtained from
         the Public Reference Bureau of the Securities and Exchange Commission).

4.6      Amendment No. 2 dates as of May 1, 1990, and Amendment No. 3 dated as
         of May 6, 1990, to the Management Equity Agreement dated as of January
         23, 1990 among the Company and certain Investors signatory thereto
         (incorporated by reference to Exhibit 10.3 to GTECH's 1991 10-K).


                                       82
<PAGE>   84
4.7      Amendment No. 4, dated as of September 15, 1993, to the Management
         Equity Agreement dated as of January 23, 1990, among the Company and
         certain Investors signatory thereto (incorporated by reference to
         Exhibit 4.13 of the Company's 1994 10-K).

4.8      Amendment No. 6, dated as of October 29, 1993, to the Management Equity
         Agreement dated as of January 23, 1990 among the Company and certain
         Investors signatory thereto (incorporated by reference to Exhibit 4.14
         of the Company's 1994 10-K).

10.1     Employment Agreement dated as of January 23, 1990 between GTECH,
         Holdings and Victor Markowicz (incorporated by reference to Exhibit (b)
         (11) to the Schedule 13E.3 filed by GTECH Corporation, Holdings, GTEK
         Acquisition, Donaldson, Lufkin & Jenrette Securities Corporation
         ("DLJCC"), Victor Markowicz and Guy B. Snowden, File No. 0-12604).*

10.2     Amendment to the Employment Agreement dated as of January 23, 1990
         between GTECH, Holdings and Victor Markowicz (incorporated by reference
         to Exhibit 10.2 to the July 1992 S-1).*

10.3     Confirmation of Waiver respecting certain provisions of the Employment
         Agreement dated as of January 23, 1990 between GTECH, Holdings and
         Victor Markowicz, dated February 13, 1996 (incorporated by reference to
         Exhibit 10.3 of Holdings' 1996 10-K).*

10.4     Second Amendment to Employment Agreement dated February 12, 1997 among
         GTECH, Holdings and Victor Markowicz (incorporated by reference to
         Exhibit 10.4 of Holdings' 1997 10-K).*

+10.5    Severance Agreement and Release dated as of February 28, 1998 by and
         among GTECH, Holdings and Victor Markowicz.*

10.5     Employment Agreement dated as of January 23, 1990 between GTECH,
         Holdings and Guy B. Snowden (incorporated by reference to Exhibit (b)
         (12) to the Schedule 13E.3 filed by GTECH, Holdings, GTEK Acquisition,
         DLJCC, Victor Markowicz and Guy B. Snowden, file no. 0-12604).*

10.6     Amendment to the Employment Agreement dated as of January 23, 1990
         between GTECH, Holdings and Guy B. Snowden (incorporated by reference
         to Exhibit 10.4 of the July 1992 S-1).*

10.7     Confirmation of Waiver respecting certain provisions of the Employment
         Agreement dated as of January 23, 1990 between GTECH, the Company and
         Guy B. Snowden, dated February 13, 1996 (incorporated by reference to
         Exhibit 10.6 of Holdings' 1996 10-K).*


                                       83
<PAGE>   85
10.8     Second Amendment to Employment Agreement dated as of February 12, 1997
         among GTECH, Holdings and Guy B. Snowden (incorporated by reference to
         Exhibit 10.8 of Holdings' 1997 10-K).*

+10.9    Severance Agreement and Release dated as of February 3, 1998 by and
         among GTECH, Holdings and Guy B. Snowden.*

10.10    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).*

+10.11   First Amendment to Employment Agreement dated as of April 6, 1998
         between GTECH, Holdings and William Y. O'Connor.*

+10.12   Amended and Restated Employment Agreement dated as of December 1, 1995
         between GTECH and Laurance W. Gay.*

10.13    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).*

+10.14   Severance Agreement and Release dated March 9, 1998 between GTECH,
         Holdings and Laurance W. Gay.

10.15    Agreement dated July 15, 1997 between Holdings and Thomas J. Sauser
         (incorporated by reference to Exhibit 10.4 of Holdings' 10-Q for the
         quarterly period ended August 30, 1997).*

10.16    Agreement dated July 15, 1997 between Holdings and Michael R.
         Chambrello (incorporated by reference to Exhibit 10.2 of Holdings' 10-Q
         for the quarterly period ended August 30, 1997).*

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

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

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

+10.20   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).*


                                       84

<PAGE>   86

+10.21        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).*

10.22         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).

10.23         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).

10.24         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).

10.25         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).

10.26         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).

10.27         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).

10.28         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).

10.29         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).

10.30         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).

10.31         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).


                                       85
<PAGE>   87
10.32         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).

10.33         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).

10.34         Amended and Restated Agreement of Limited Partnership by and among
              GTECH, GP Technology Associates, L.P. and GP Technology, Inc.
              dated August 26, 1993; 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).

10.35         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).

10.36         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).

10.37         Restricted Rights Arrangement between Holdings and Mr. O'Connor
              (incorporated by reference to Exhibit 10.44 of Holdings' 1995
              10-K).*

10.38         1992 Outside Directors' Director Stock Unit Plan (incorporated by
              reference to Exhibit 10.55 of Holdings' 1993 10-K).*

10.39         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).*

10.40         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).*

10.41         1997 Stock Option Plan (incorporated herein by reference to the
              Appendix of Holdings' 1997 Notice of Annual Meeting and Proxy
              Statement).*


                                       86
<PAGE>   88
+21.1         Subsidiaries of the Company.

+23.1         Consent of Ernst & Young, LLP.

+23.2         Consent of Price Waterhouse.

+27.1         Fiscal 1998 Financial Data Schedule.

+27.2         Fiscal 1997 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.


                                       87
<PAGE>   89
                                   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 28, 1998.

                           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 28, 1998
------------------------             (principal executive officer)    
William Y. O'Connor                  


 /s/ Thomas J. Sauser                Senior Vice President & Chief Financial Officer               May 28, 1998
---------------------------          (principal financial officer)
Thomas J. Sauser                     



 /s/ Robert J. Plourde               Vice President and Corporate Controller (principal            May 28, 1998
-------------------------------      accounting officer) 
Robert J. Plourde                    
</TABLE>



                                       88
<PAGE>   90
<TABLE>
<CAPTION>
SIGNATURE                                                      TITLE                                   DATE

<S>                                                          <C>                                   <C> 
 /s/ Robert M. Dewey, Jr.                                    Director                              May 28, 1998
-------------------------------
Robert M. Dewey, Jr.



 /s/ Burnett W. Donoho                                       Director                              May 28, 1998
-------------------------------
Burnett W. Donoho



 /s/ Moore                                                   Director                              May 28, 1998
-------------------------------
The Rt. Hon. Lord Moore
 of Lower Marsh, P.C.



 /s/ Lt. Gen. Emmett Paige Jr.                               Director                              May 28, 1998
-------------------------------
Lt. Gen. (Ret.) Emmett Paige, Jr.


                                                             Director                              May 28, 1998
 /s/ Anthony Ruys
-------------------------------
Anthony Ruys
</TABLE>



                                       89
<PAGE>   91
                                EXHIBIT INDEX



+10.5    Severance Agreement and Release dated as of February 28, 1998 by and
         among GTECH, Holdings and Victor Markowicz.*

+10.9    Severance Agreement and Release dated as of February 3, 1998 by and
         among GTECH, Holdings and Guy B. Snowden.*

+10.11   First Amendment to Employment Agreement dated as of April 6, 1998
         between GTECH, Holdings and William Y. O'Connor.*

+10.12   Amended and Restated Employment Agreement dated as of December 1, 1995
         between GTECH and Laurance W. Gay.*

+10.14   Severance Agreement and Release dated March 9, 1998 between GTECH,
         Holdings and Laurance W. Gay.

+10.20   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).*                                    

+10.21   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).*

+21.1    Subsidiaries of the Company.

+23.1    Consent of Ernst & Young, LLP.

+23.2    Consent of Price Waterhouse.

+27.1    Fiscal 1998 Financial Data Schedule.

+27.2    Fiscal 1997 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.