GTECH HOLDINGS CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED: FEBRUARY 28, 2004

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________.

COMMISSION FILE NUMBER 1-11250

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GTECH HOLDINGS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 05-0450121
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)

55 TECHNOLOGY WAY, WEST GREENWICH, RHODE ISLAND 02817
(Address of Principal Executive Offices)

Registrant's telephone number, including area code: (401) 392-1000

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

Title of Each Class: Name of Each Exchange on which Registered:
- ------------------- -----------------------------------------

Common Stock $.01 par value New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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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. YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 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. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2

YES [X] NO [ ]

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of August 23, 2003 was approximately $2.27
billion.

On April 6, 2004, there were 59,325,280 outstanding shares of the registrant's
Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Document Location in Form 10-K
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Portions of Registrant's Proxy Statement Part III
For its 2004 Annual Meeting of Shareholders

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GTECH HOLDINGS CORPORATION

FORM 10-K

FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2004

INDEX

Page

PART I

Item 1. Business 4
Item 2. Properties 37
Item 3. Legal Proceedings 39
Item 4. Submission of Matters to a Vote of Security Holders 43
Additional Information -- Executive Officers 43

PART II

Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities 45
Item 6. Selected Consolidated Financial Data 46

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 47

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 69
Item 8. Financial Statements and Supplementary Data 70
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures 126
Item 9A. Controls and Procedures 127

PART III

Item 10. Directors and Executive Officers of the Registrant 128
Item 11. Executive Compensation 128
Item 12. Security Ownership of Certain Beneficial Owners and Management 128
Item 13. Certain Relationships and Related Transactions 128
Item 14. Principal Accountant Fees and Services 128

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 129

PART I

When used in this report, the terms "Company", "we", "our" and "us"
refer to GTECH Holdings Corporation ("Holdings") and its consolidated
subsidiaries, including GTECH Corporation ("GTECH").

ITEM 1. BUSINESS

GENERAL

We are a global technology services company providing software, networks and
professional services that power high-performance solutions. We are the world's
leading operator of highly-secure online lottery transaction processing systems,
operating in 44 countries worldwide, and we have a growing presence in
commercial services transaction processing. Our core market is the lottery
industry, for which we design, sell and operate a complete suite of
lottery-enabled point-of-sale terminals that are electronically linked with a
centralized transaction processing system which mediates lottery funds between
the retailer, where a transaction is enabled, and the lottery authority. We
currently operate, provide equipment and services to, or have entered into
contracts to operate or provide equipment and services in the future to, 27 of
the 41 online lottery authorities in the United States, and currently operate,
provide equipment and services to, or have entered into contracts to operate or
provide equipment and services in the future to, online lottery systems for 57
of the 113 international online lottery authorities.

We provide integrated online lottery transaction processing solutions, services
and products to governmental lottery authorities and governmental licensees
worldwide. We offer our customers a full range of lottery technology services,
including the design, assembly, installation, operation, maintenance and
marketing of online lottery systems and instant-ticket support systems. Our
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 our lottery customers in the United States have
entered into long-term service contracts (typically at least five years in
duration) pursuant to which we provide, operate and maintain the customers'
online lottery systems in return for a transaction processing fee typically
expressed as an agreed percentage of the gross lottery sales. Many of our
international lottery customers have purchased their online lottery systems,
although some, especially lottery authorities in Eastern Europe and Latin
America, have entered into long-term service contracts with us.

In recent years, lottery authorities have recognized that by offering new games
or products, they often are able to generate significant additional revenues. An
important

part of our strategy is to develop new products and services for our customers
in order to increase their lottery revenues. Indicative online products and
services introduced recently to increase lottery revenues for our customers
include Aladdin(TM), the Doubletake(TM) game, e-scratch(TM) and our family of
self-service terminals, including Instant Ticket Vending Machines (also known as
Lottery Product Vending Machines or Instant Ticket Dispensing Machines; "ITVMs")
designed, manufactured and marketed by Interlott Technologies, Inc.
("Interlott"), which we acquired during fiscal 2004, and, from our Altura(R)
family of terminals, the Altura Self-Service Terminal or Altura SST(TM). Aladdin
is a credit-card sized lottery ticket, that, through the use of magnetic strip
and thermal printing technology, can be reused up to 500 times, and which also
can be employed in various non-lottery commercial contexts. The Doubletake game
is an online lottery game that permits players to purchase an additional game
with instant-ticket features, thus enhancing wagering interest. Our e-scratch
product is a web-based interactive suite of scratch and reveal games that
combines the security and convenience of online play with the entertainment,
branded content and immediate gratification of instant-tickets. Interlott's
EDS-Q family of ITVMs offers flexibility and expandability (from a four to 24
game capacity) as well as the industry's first transaction processing
connectivity to in-store lottery terminals and lottery authority central
systems. Our Altura SST combines the functionality of ITVMs with the capability
of selling online lottery products through a touch screen interface. In recent
years, we have also introduced various instant-ticket support services, products
and systems to assist our lottery customers in increasing revenue.

In appropriate circumstances, we have extended our online and video lottery
product offerings through acquisitions. During fiscal 2004 we completed the
acquisition of Interlott, a leading provider of instant ticket vending machines
for the worldwide lottery industry, and entered into an agreement to acquire
Spielo Manufacturing Incorporated, a leading provider of video lottery terminals
and related products and services to the global gaming industry ("Spielo"). In
April 2004 (after the close of fiscal 2004) we completed the acquisition of
Spielo. See "Significant Developments Since The Start of Fiscal 2004", and Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations", below.

In recent years, we have taken steps to broaden our offerings of high-volume
transaction processing services outside of our core market of providing online
lottery services. During fiscal 2004, we completed our acquisition of a
controlling equity position of PolCard S.A., a leading debit and credit card
merchant transaction acquiror and processor in Poland. See "Significant
Developments Since The Start of Fiscal 2004", and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
below.

GTECH Corporation was founded in 1980. GTECH Holdings Corporation acquired GTECH
Corporation in a leveraged buy-out in February 1990.

Our World Headquarters is located at 55 Technology Way, West Greenwich, Rhode
Island 02817, and our telephone number is (401) 392-1000.

Our Internet address is www.gtech.com. We make available free of charge through
our Internet address our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. In addition, we review our financial results and
business prospects on quarterly earnings conference calls, and from time-to-time
on other conference call presentations, to which we invite the public to listen.
We typically announce by press release the date and time of, and dial-in and
Internet-access information respecting, such conference calls several days in
advance, and make materials respecting matters discussed on such conference
calls available free of charge through our Internet address.

FORWARD-LOOKING STATEMENTS

Statements contained or incorporated by reference in this report which are not
historical statements constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934. Generally, the words "may", "will", "should", "could", "expect",
"plan", "anticipate", "intend", "believe", "estimate", "continue", "project" and
similar expressions identify forward-looking statements. Such statements
include, without limitation, statements relating to:

- the future prospects for and stability of the lottery industry and
other businesses in which we are engaged or expect to be engaged;

- our future operating and financial performance;

- our ability to retain existing contracts and to obtain and retain new
contracts; and

- the results and effects of legal proceedings and investigations.

These forward-looking statements reflect management's assessment based on
information currently available, but are not guarantees and are subject to risks
and uncertainties that could cause actual results to differ materially from
those contemplated in the forward-looking statements. These risks and
uncertainties include, among other things, the matters described in this report
under "Certain Factors That May Affect Future Performance" below.

CERTAIN FACTORS THAT MAY AFFECT FUTURE PERFORMANCE

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

GOVERNMENT REGULATIONS AND OTHER ACTIONS AFFECTING THE ONLINE LOTTERY INDUSTRY
COULD HAVE A NEGATIVE EFFECT ON OUR BUSINESS AND SALES.

In the United States and in many international jurisdictions where we currently
operate or seek to do business, online lotteries are not permitted unless
expressly authorized by law. The successful implementation of our growth
strategy and our business could be materially adversely affected if
jurisdictions that do not currently authorize lotteries do not approve online
lotteries or if those jurisdictions that currently authorize lotteries do not
continue to permit such activities.

Once authorized, the ongoing operations of lotteries and lottery operators are
typically subject to extensive and evolving regulation. Lottery authorities
generally conduct an intensive investigation of the winning vendor and its
employees prior to and after the award of a lottery contract. Lottery
authorities with which we do business may require the removal of any of our
employees deemed to be unsuitable and are generally empowered to disqualify us
from receiving a lottery contract or operating a lottery system

as a result of any such investigation. Some jurisdictions also require extensive
personal and financial disclosure and background checks from persons and
entities beneficially owning a specified percentage (typically five percent or
more) of our securities. The failure of these beneficial owners to submit to
such background checks and provide required disclosure could jeopardize the
award of a lottery contract to us or provide grounds for termination of an
existing lottery contract. Additional restrictions are often imposed by
international jurisdictions in which we market our lottery systems upon foreign
corporations, such as us, seeking to do business there.

Further, there have been and may 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. In light of the
fact that such investigations frequently are conducted in secret, we may not
necessarily know of the existence of an investigation which might involve us.
Because our reputation for integrity is an important factor in our business
dealings with lottery and other governmental agencies, a governmental allegation
or a finding of improper conduct on our part or attributable to us in any manner
could have a material adverse effect on our business, including our ability to
retain existing contracts or to obtain new or renewal contracts. In addition,
continuing adverse publicity resulting from these investigations and related
matters could have a material adverse effect on our reputation and business. See
Item 3, "Legal Proceedings --Brazilian Legal Proceedings, The CEF Contract
Proceedings," and Item 8, Note 13 to Notes to Consolidated Financial Statements,
below, for a discussion of the late March 2004 recommendation by federal
attorneys with Brazil's Public Ministry that criminal charges be brought against
nine individuals, including four senior officers of Caixa Economica Federal, our
customer and the operator of Brazil's National Lottery, Antonio Carlos Rocha,
the former Senior Vice President of GTECH Holdings Corporation and President of
GTECH Brasil Ltda., our Brazilian subsidiary ("GTECH Brazil") and Marcelo Rovai,
GTECH Brazil's marketing director.

Finally, sales generated by online lottery games are dependent upon decisions
over which we have no control made by lottery authorities with respect to the
operation of these games, such as matters relating to the marketing and prize
payout features of online lottery games. Because we are typically compensated in
whole or in part based on a jurisdiction's gross online lottery sales, lower
than anticipated sales due to these factors could have a material adverse effect
on our revenues.

WE MAY BE SUBJECT TO ADVERSE DETERMINATIONS IN LEGAL PROCEEDINGS (INCLUDING
RECENTLY ANNOUNCED LEGAL PROCEEDINGS IN BRAZIL) WHICH COULD RESULT IN
SUBSTANTIAL MONETARY JUDGMENTS OR REPUTATIONAL DAMAGE.

We refer you to Item 3, "Legal Proceedings -- Brazilian Legal Proceedings, The
CEF Contract Proceedings," below for a discussion of a civil action recently
announced by federal attorneys with Brazil's Public Ministry against GTECH
Brasil Ltda, our Brazilian subsidiary, and two of our former employees, among
others, and other legal proceedings involving our contractual relationship with
Caixa Economica Federal, the Brazilian bank and operator of Brazil's National
Lottery. We are also subject to a securities class action lawsuit and to other
legal proceedings described more fully in this report in Item 3 under "Legal
Proceedings." We may not prevail in any of these legal proceedings. If we are
not successful in defending these legal proceedings, we could incur substantial
monetary judgments or penalties or damage to our reputation, and whether or not
we are successful, the proceedings may occupy the time and attention of our
senior management.

OUR LOTTERY OPERATIONS ARE DEPENDENT UPON OUR CONTINUED ABILITY TO RETAIN AND
EXTEND OUR EXISTING CONTRACTS AND WIN NEW CONTRACTS.

We derive the majority of our revenues and cash flow from our portfolio of
long-term facilities management contracts. Upon the expiration of a contract,
lottery authorities may award new contracts through a competitive procurement
process. In addition, our lottery contracts typically permit a lottery authority
to terminate the contract at any time for failure to perform and for other
specified reasons, and many of our contracts permit the lottery authority to
terminate the contract at will with limited notice and do not

specify the compensation, if any, to which we would be entitled were such
termination to occur.

In addition, some of our lottery contracts permit the lottery authority to
acquire title to our system-related equipment and software during the term of
the contract or upon the expiration or earlier termination of the contract, in
some cases without paying us any compensation related to the transfer of that
equipment and software to the lottery authority.

The termination of or failure to renew or extend one or more lottery contracts,
the renewal or extension of one or more lottery contracts on materially altered
terms or the loss of our assets without compensation could, depending upon the
circumstances, have a material adverse effect on our business, financial
condition, results and prospects. See Item 3, "Legal Proceedings - Brazilian
Legal Proceedings: The CEF Contract Proceedings," Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operation," below.

SLOW GROWTH OR DECLINES IN SALES OF ONLINE LOTTERY GOODS AND SERVICES COULD LEAD
TO LOWER REVENUES AND CASH FLOWS.

In recent years, as the United States lottery industry has matured, the rate of
lottery sales growth has slowed and certain of our customers have from
time-to-time experienced a downward trend in sales. These developments may in
part reflect increased competition that the lottery industry has experienced in
recent years for the consumers' entertainment dollar, including by virtue of a
proliferation of destination gaming venues, and an increased availability of
Internet gaming opportunities, as well as the relative difficulty of attracting
younger consumers to playing online lottery games. Our future success will
depend, in part, on the success of the lottery industry, as a whole, in
attracting and retaining players in the face of such increased competition for
the consumers' entertainment dollar (which competition may well increase further
in the future), as well as our own success in developing innovative products and
systems to achieve this goal. Our future success also will depend, in part, on
our ability to develop innovative products and services to permit us to
successfully market transaction processing goods and services outside of the
lottery industry. Our failure to achieve these goals could have a material
adverse effect on our business, financial condition and results and prospects.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operation," below.

WE DERIVE CLOSE TO HALF OF OUR REVENUES FROM FOREIGN JURISDICTIONS (INCLUDING
OVER 10% FROM BRAZILIAN OPERATIONS) AND ARE SUBJECT TO THE ECONOMIC, POLITICAL
AND SOCIAL INSTABILITY RISKS OF DOING BUSINESS IN FOREIGN JURISDICTIONS.

We are a global business and derive a substantial portion of our revenue from
our operations outside the United States. In particular, in fiscal 2004, we
derived approximately 49% of our revenues from our international operations and
approximately

10.2% of our revenues from our Brazilian operations alone (including 9.7% of our
revenues from the National Lottery of Brazil, our largest customer in fiscal
2004 based on annual revenues). In addition, a substantial portion of our assets
are held outside of the United States. We are also exposed to more general risks
of international operations, including increased governmental regulation of the
online lottery industry in the markets where we operate; exchange controls or
other currency restrictions; and significant political instability. Other
economic risks that our international activity subjects us to might include
inflation, foreign exchange risks (both depreciation and devaluation), illiquid
foreign exchange markets, high interest rates, debt default, unstable capital
markets and foreign direct investment restrictions. Political risks include
change of leadership, change of governmental policies, new foreign exchange
controls regulating the flow of money into or out of a country, failure of a
government to honor existing contracts, changes in tax laws and corruption, as
well as global risk aversion driven by political unrest," war and terrorism. See
Item 3, "Legal Proceedings - Brazilian Legal Proceedings and Item 8, Note 13 to
Notes to Consolidated Financial Statements, below for a discussion of various
legal matters, including allegations of employee misconduct and challenges to
our contract that may materially adversely affect our business in Brazil.
Finally, social instability risks include high crime in the countries in which
we operate due to poor economic and political conditions, riots, unemployment
and poor health conditions. These factors may affect our work force as well as
the general business environment in a country. See Item 8, Note 24 to Notes to
Consolidated Financial Statements included in this report, for additional
financial information respecting geographic areas where we conduct business.

The occurrence of any of these events in the markets where we operate could
jeopardize or limit our ability to transact business in those markets in the
manner we expect and could have a material adverse effect on our business,
financial condition, results and prospects.

OUR RESULTS OF OPERATIONS ARE EXPOSED TO FOREIGN CURRENCY EXCHANGE RATE
FLUCTUATIONS WHICH COULD RESULT IN LOWER REVENUES, NET INCOME AND CASH FLOWS
WHEN SUCH RESULTS ARE TRANSLATED INTO U.S. DOLLAR ACCOUNTS.

Our consolidated financial results are significantly affected by foreign
currency exchange rate fluctuations. Foreign currency exchange rate exposures
arise from current transactions and anticipated transactions denominated in
currencies other than United States dollars and from the translation of foreign
currency balance sheet accounts into United States dollar balance sheet
accounts. We are exposed to currency exchange rate fluctuations because a
significant portion of our revenues is denominated in currencies other than the
United States dollar. These exchange rate fluctuations have during certain
periods in our past adversely affected our operating results and may continue to
adversely affect our results of operations and the value of our assets outside
the United States. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operation," below.

WE HAVE A CONCENTRATED CUSTOMER BASE AND THE LOSS OF ANY OF OUR LARGER CUSTOMERS
(OR LOWER SALES FROM ANY OF THESE CUSTOMERS) COULD LEAD TO LOWER REVENUE.

Revenue from our top ten customers accounted for approximately 51% of our total
revenues in fiscal 2004. If we were to lose any of these larger customers, or if
these larger customers experience slow lottery ticket sales and consequently
reduced lottery revenue, our business, financial condition, results and
prospects could suffer.

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.

We have experienced and may continue to experience significant fluctuations in
our 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 our revenue) and expenses incurred in
connection with lottery start-ups. Fluctuations in our operating results from
quarter to quarter may cause our operating results to be below the expectations
of securities analysts and investors.

WE OPERATE IN A HIGHLY COMPETITIVE ENVIRONMENT AND INCREASED COMPETITION MAY
CAUSE US TO EXPERIENCE LOWER CASH FLOWS OR TO LOSE CONTRACTS.

The online lottery industry has faced increased competition in recent years for
the consumers' entertainment dollar, including from a proliferation of
destination gaming venues, and an increased availability of Internet gaming
opportunities. In addition, in recent years there has been increased competition
among domestic and international participants in the online lottery industry,
which could adversely affect our ability to win renewals of contracts from our
existing customers or to win contract awards from other lottery authorities. In
addition, awards of contracts to us are, from time to time, challenged by our
competitors. Increased competition also may have a material adverse effect on
the profitability of contracts which we do obtain. See "Competition" below. Over
the past several fiscal years, we have experienced and may continue to
experience a reduction in the percentage of lottery ticket sales that we receive
from certain customers resulting from contract rebids, extensions and renewals
due to a number of factors, including the substantial growth of lottery sales,
reductions in the cost of technology and telecommunications services and general
and competitive dynamics. We are unable to determine at this time the likely
effect of this trend on our business. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Result of Operations" below.

WE ARE SUBJECT TO SUBSTANTIAL PENALTIES FOR FAILURE TO PERFORM UNDER OUR
CONTRACTS.

Our lottery contracts typically permit termination of the contract at any time
for failure by us to perform and for other specified reasons and generally
contain demanding implementation and performance schedules. Failure to perform
under these contracts may result in substantial monetary liquidated damages, as
well as contract termination. These provisions in our lottery contracts present
an ongoing potential for substantial expense.

Lottery contracts also generally require us to post a performance bond, which in
some cases may be substantial, to secure our performance under such contracts.
We paid or incurred liquidated damages with respect to our contracts in an
amount equal to 0.50%, 0.47%, 0.14%, 0.47%, and 0.56% of our annual revenues in
fiscal 2004, 2003, 2002, 2001 and 2000, respectively. If we incur substantial
liquidated damages in the future, it could significantly reduce the amount of
funds that we have available for other uses in our business and may delay or
prevent us from pursuing and achieving our growth strategy, which could have a
material adverse effect on our business, financial condition, results and
prospects.

WE MAY NOT BE ABLE TO RESPOND TO TECHNOLOGICAL CHANGES OR TO SATISFY FUTURE
TECHNOLOGY DEMANDS OF OUR CUSTOMERS IN WHICH CASE WE COULD FALL BEHIND OUR
COMPETITORS.

Most of our software and hardware products are based on proprietary
technologies. While we believe that certain of our technologies, such as our
Enterprise Series(TM) open-architecture software platform, provides an industry
standard, if we were to fail to develop our product and service offerings to
take advantage of technological developments, we may fall behind our competitors
and our business, financial condition, results and prospects could suffer.

IF WE ARE UNABLE TO MANAGE POTENTIAL RISKS RELATED TO ACQUISITIONS, OUR BUSINESS
AND GROWTH PROSPECTS COULD SUFFER.

Part of our growth strategy involves acquisitions designed to extend our product
offerings and customer base. Since the start of fiscal 2004 (which ended on
February 28, 2004) we completed our acquisitions of Interlott Technologies,
Inc., a leading provider of instant ticket vending machines for the worldwide
lottery industry, and a controlling equity position in PolCard S.A., a leading
debit and credit card merchant transaction acquiror and processor in Poland, and
entered into agreements to acquire Spielo Manufacturing Incorporated ("Spielo"),
a leading provider of video lottery terminals and related products and services
to the global gaming industry, and Leeward Islands Lottery Holding Company, Inc.
("LILHCo"), a lottery holding company headquartered on the Caribbean islands of
Antigua and St. Croix. The acquisitions of Spielo and LILHCo closed during the
first quarter of fiscal 2005. See "Significant Developments Since Start of
Fiscal 2004" and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operation," below. Our ability to continue to expand
successfully through acquisitions depends on many factors, including our ability
to identify acquisition prospects and negotiate and close transactions. Even if
we complete an acquisition, the integration of an acquired business into our
operations involves numerous risks, including difficulties in integrating an
acquired company's hardware and software products and services with our own; the
diversion of our resources and management's attention from other business
concerns; the potential loss of key employees; risks associated with entering
markets in which we may have little experience; and the day-to-day management of
a substantially larger and more geographically diverse combined company.

We may not realize the synergies, operating efficiencies, market position or
revenue growth we anticipate from acquisitions and our failure to effectively
manage the above risks and other problems associated with acquisitions could
have a material adverse effect on our business, growth prospects and financial
performance.

Acquisitions outside of our core lottery market may subject us to enhanced
competition. For example, with the completion of our acquisition of Spielo, we
have entered the broader gaming technology and services industry, where we
expect to encounter significant competition.

Acquisitions also pose the risk that we may be exposed to successor liability
relating to actions by an acquired company and its management before the
acquisition. The due diligence we conduct in connection with an acquisition, and
any contractual indemnities we may receive from sellers of acquired companies,
may not be sufficient to protect us from, or compensate us for, actual
liabilities. A material liability associated with an acquisition could also
adversely affect our financial position and reduce the anticipated benefits of
the acquisition.

EXPANSION OF THE GAMING INDUSTRY FACES OPPOSITION WHICH COULD LIMIT OUR ACCESS
TO SOME MARKETS.

Gaming opponents continue to persist in efforts to curtail the expansion of
legalized gaming. We can give no assurance that this opposition will not be
successful in preventing the legalization of online gaming in jurisdictions
where these activities are presently prohibited or prohibiting or limiting the
expansion of online gaming where it is currently permitted, in either case to
the detriment of our business, financial condition, results and prospects.

OUR BUSINESS PROSPECTS AND FUTURE SUCCESS DEPEND UPON OUR ABILITY TO ATTRACT AND
RETAIN QUALIFIED EMPLOYEES.

Our business prospects and future success depend, in part, upon our ability to
attract and to retain qualified managerial, marketing and technical employees.
Competition for such employees is sometimes intense, and we may not succeed in
hiring and retaining the executives and other employees that we need. Our loss
of or inability to hire key employees could have a material adverse effect on
our business, financial condition, results and prospects.

OUR BUSINESS PROSPECTS AND FUTURE SUCCESS RELY HEAVILY UPON THE INTEGRITY OF OUR
EMPLOYEES AND EXECUTIVES AND THE SECURITY OF OUR SYSTEMS.

The real and perceived integrity and security of a lottery is critical to its
ability to attract players. We strive to set exacting standards of personal
integrity for our employees and system security for the systems that we provide
to our customers, and our reputation in this regard is an important factor in
our business dealings with lottery and other governmental agencies. For this
reason, an allegation or a finding of improper conduct on

our part, or on the part of one or more of our employees that is attributable to
us, or an actual or alleged system security defect or failure attributable to
us, could have a material adverse effect upon our business, financial condition,
results and prospects, including our ability to retain existing contracts or
obtain new or renewal contracts. See Item 3, "Legal Proceedings - "Brazilian
Legal Proceedings: The CEF Contract Proceedings".

OUR DEPENDENCE ON CERTAIN SUPPLIERS CREATES A RISK OF IMPLEMENTATION DELAYS IF
THE SUPPLY CONTRACT IS TERMINATED OR BREACHED, AND ANY DELAYS MAY RESULT IN
SUBSTANTIAL PENALTIES.

We purchase most of the parts, components and subassemblies necessary for our
terminals from outside sources. We assemble these parts, components and
subassemblies into finished products in our manufacturing facility. While most
of the parts, components and subassemblies can be purchased through more than
one supplier, we currently have approximately three material sole source
vendors. We believe that if a supply contract with one of these vendors were to
be terminated or breached, we would be able to replace the vendor. However, it
may take time to replace the vendor under some circumstances and any replacement
parts, components or subassemblies may be more expensive, which could reduce our
margins. Depending on a number of factors, including the level of the related
part, component or subassembly in our inventory, the time it takes to replace a
vendor may result in a delay in our implementation of a lottery system for a
customer. Generally, if we fail to meet our performance schedules under our
contracts, we may be subject to substantial penalties or liquidated damages, or
even contract termination.

OUR NON-LOTTERY VENTURES, WHICH ARE AN INCREASINGLY IMPORTANT ASPECT OF OUR
BUSINESS, MAY FAIL.

Our business prospects and future success depend, in part, upon our ability to
expand our transaction processing services into complementary and parallel
markets outside of our core lottery market. In fiscal 2004 (which ended on
February 28, 2004), commercial services transaction processing represented
approximately 7% of our total revenues. By way of comparison, in fiscal 2003,
approximately 5% of our total revenues were derived from commercial services
transaction processing. With our acquisition in May 2003 of a controlling equity
interest in PolCard, S.A., a leading debit and credit card merchant transaction
acquirer and processor company in Poland, we expect non-lottery ventures to
become increasingly significant to our overall financial performance. Because we
have less experience in non-lottery markets than we have in our core lottery
market, our non-lottery ventures present an enhanced element of risk for us. In
the near term, we expect to concentrate our efforts to grow commercial service
revenues principally in the United States, Latin America and Eastern Europe,
where we have significant operational experience and where we see opportunities
for growth. Our non-lottery ventures outside the United States are particularly
sensitive to the economic and political risks of doing business in these
countries, including foreign currency exchange risks. As non-lottery services
start to represent a more significant portion of our operations, the failure of
one or more of our non-lottery ventures could have a material effect on our
business, financial condition, results and prospects.

SIGNIFICANT DEVELOPMENTS SINCE THE START OF FISCAL 2004

LOTTERY CONTACT AWARDS

Since the start of fiscal 2004 (which ended on February 28, 2004) we have
received a number of contract awards and extensions from lottery authorities.

NEW ONLINE CUSTOMERS. During fiscal 2004, we received awards to install online
systems from three new online customers.

In September 2003, following a competitive procurement, we entered into a
six-year contract with the Florida lottery authority to supply a new online and
instant ticket lottery system, lottery terminals, telecommunications network and
related services. Sales are expected to commence under our contract with the
Florida lottery authority in February 2005.

In November 2003, following a competitive procurement, we entered into a
ten-year contract with Mahapola Higher Education Scholarship Trust Fund
("Mahapola") to provide online, instant and passive lottery technology and
management services in Sri Lanka. Online sales had been expected to commence
under our Sri Lanka lottery contract in September 2004, but in March 2004,
lawsuits were filed by competitors challenging Mahapola's award to us of a
lottery contract. These legal challenges have delayed and may prevent
implementation of our contract with Mahapola.

Finally, in January 2004, following a competitive procurement, we entered into a
seven-year contract with the Tennessee lottery authority to provide an online
lottery system, lottery terminals, related communications network and related
services. Sales commenced under our contract with the Tennessee lottery
authority in January 2004.

With respect to each of these three new contracts, we have provided or will
provide a lottery system featuring our Enterprise Series((TM)) architecture
(including Internet Protocol (IP) web-component technology) and our Altura
terminals.

NEW CONTRACTS AND EXTENSIONS WITH EXISTING CUSTOMERS. Since the start of fiscal
2004, we also have been awarded new contracts by, or have received contract
extensions from, a number of our existing customers.

In April 2003, we entered into an agreement with Caixa Economica Federal
("CEF"), the operator of Brazil's National Lottery and our largest customer in
fiscal 2004 based on annual revenues, pursuant to which the term of our contract
with CEF, which had been scheduled to expire in April 2003, was extended through
May 2005 (with CEF having the right to elect upon prior notice to terminate the
contract early at any time after December 2004), and fees payable under our
contract were reduced by 15%. See Item 3, "Legal Proceedings", Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 13 to Notes to Consolidated Financial Statements, below.

In May 2003, we entered into a Master Contract with the Rhode Island lottery
authority that amended our existing contracts with the Rhode Island lottery
authority and grants us the right to be the exclusive provider of online,
instant ticket and video lottery central systems and services for the Rhode
Island lottery authority during the 20-year term of the Master Contract for a
$12.5 million up-front license fee, which we paid in July 2003. The Master
Contract is part of a comprehensive economic development package that provides
incentives for us to keep our world headquarters and manufacturing operations in
Rhode Island. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and Note 8 to the "Notes to Consolidated
Financial Statements," below. The Master Contract provides for us to replace the
Rhode Island lottery authority's existing central system with our Enterprise
Series((TM)) central system, install a new state-of-the-art communications
network, and replace all of the lottery authority's online terminals with new
PC-based terminals by 2007. By 2015, the Master Contract provides for us to
again replace the Rhode Island lottery's then-existing central system hardware
with new state of the art hardware, and its then-existing terminals with new
online lottery terminals in accordance with performance ratings outlined in the
contract.

In June 2003, we entered into a new five-year contract with the Wisconsin
lottery authority to supply a new online and instant tickets lottery system, and
related telecommunications network. In January 2004, we signed a product sale
agreement with Sistemas Tecnicos de Loterias del Estado ("STL"), the operator of
the online system for Spain's National Lottery, to replace 2,500 existing
terminals with 2,500 Altura terminals and to provide STL with terminal
maintenance and repair services. In February 2004, we entered into a contract to
supply Beijing Welfare Lottery Center ("BWLC") with equipment, software, and
technical services to operate a computerized keno game in Beijing. In connection
with the contract, BWLC extended our original online lottery services contract
for an

additional three years, such that the contract, as extended, is scheduled to
terminate in December 2012, and entered into an alliance agreement with us under
which we agreed to provide BWLC with lottery central system hardware, network
connectivity, software licenses and ongoing software services in support of
BWLC's efforts to become a hub operator of lotteries implemented in neighboring
jurisdictions in China.

During fiscal 2004, the lottery authorities of Michigan, New Zealand, Denmark
and AB Svenska Spel, our lottery customer in Sweden, exercised options to extend
the terms of their online contracts with us. In addition, in October 2003 we
entered into a 12-year contract extension with Sazka, a.s., the operator of
lottery and betting games in the Czech Republic.

In August 2003, following a competitive procurement, the Nebraska lottery
authority announced that it had selected another vendor to provide equipment and
services for a new online lottery gaming system, and associated
telecommunications network, upon the scheduled expiration in June 2004 of our
current contract with the Nebraska lottery authority.

In February 2004, following a competitive procurement, we were selected by the
Mexican lottery authority Pronosticos para la Asistencia Publica to enter into a
six year agreement to provide equipment and services for a new online lottery
system and associated telecommunications network. In late April 2004, we were
notified that this award has been revoked. This revocation follows a ruling by
the Mexican Comptroller Ministry on a protest filed by unsuccessful competitors
that declared our bid non-compliant and disqualified us from the competitive
procurement. The Mexican lottery authority subsequently announced that it has
disqualified the sole remaining bidder as also being non-compliant and has
formally ended the procurement. We intend to pursue all appropriate avenues to
contest the Comptroller's decision.

OTHER PRODUCTS AND SERVICES

During fiscal 2004, we entered into a number of agreements, and announced a
number of other developments, respecting products and services outside of our
traditional online lottery product offerings.

VIDEO LOTTERY. In November 2003, we entered into an agreement to acquire all of
the shares of privately-held Spielo Manufacturing Incorporated, ("Spielo") a
leading provider of video lottery terminals ("VLTs") and related products and
services to the global gaming industry. This agreement provided for us to pay a
potential aggregate cash purchase price of approximately $185 million,
consisting of a $150 million payment due at the closing and an earn-out amount
of up to $35 million payable in the eighteen (18) months thereafter, which
earn-out amount Spielo shareholders are entitled to received based upon Spielo's
success in achieving certain VLT installation objectives in New York. In April
2004 (after the close of fiscal 2004) we completed the acquisition of Spielo. We
believe that by acquiring Spielo, we will be better able to deliver a complete,
integrated, VLT solution to our existing and potential customers with a single
point of contact and accountability.

The Master Contract that we entered into in May 2003 with the Rhode Island
lottery authority, described generally above, also provides for us to replace
the Rhode Island video lottery central system by 2010, to replace our
then-existing installed VLT base by July 2004, and to provide 1,000 of the 1,825
recently-approved additional VLTs to be installed at Lincoln Park and Newport
Grand (subject to satisfying certain performance standards). In addition, the
Master Contract gives us the right to provide up to 50 percent of any additional
gaming machines approved by the State of Rhode Island (subject to the
satisfaction of certain performance standards after 2008). See Note 8 to the
Notes to

Consolidated Financial Statements. Following consummation of the Spielo
acquisition, we will have an installed base of over 2,000 participation based
gaming machines in Rhode Island.

In June 2003, we entered into a contract with AB Svenska Spel, our lottery
customer in Sweden, to replace Svenska Spel's then-existing video lottery
central system, with our Enterprise Series(TM) video central system, to
provide Svenska Spel with approximately 2,200 internet protocol (IP)-ready video
site controllers, and to provide certain software licensing and support services
through September 2008. Sales commenced under the Svenska Spel system in
November 2003.

Finally, in July 2003, we entered into a five-year contract with the National
Lotteries Control Board and The Betting Levy Board ("NLCB/BLB") to provide a
complete video lottery solution, including a control system, VLTs and
communications network in Trinidad and Tobago. Sales are expected to commence
under the NLCB/BLB contract in November 2004.

COMMERCIAL SERVICES. In May 2003, we completed our acquisition of a controlling
equity position in PolCard S.A. ("PolCard"), for a purchase price, net of cash
acquired, of $35.9 million. PolCard is a leading debit and credit card merchant
transaction acquiror and processor in Poland. Upon the completion of this
acquisition, PolCard's outstanding equity was owned 66.5% by us, 33.2% by two
funds managed by Innova Capital Sp.Z.o.o ("Innova"), a Warsaw-based private
equity investment advisor, and 0.3% by the Polish Bank Association, one of
PolCard's previous owners. In September 2003, Innova exercised its right under
an option agreement to purchase from us 3.7% of PolCard's equity. Following the
exercise of this option, we now own 62.8% of PolCard's outstanding equity, while
the two funds managed by Innova own, in aggregate, 36.9% of PolCard's
outstanding equity. The Polish Bank Association continues to own 0.3% of the
outstanding equity of PolCard. We have the option to purchase Innova's interest
in PolCard, and Innova has the reciprocal right to sell its interest in PolCard
to us, during the period commencing approximately four and ending approximately
six years after the closing of this transaction. We believe that our acquisition
of a controlling equity position in PolCard will permit us to leverage our
extensive infrastructure in Poland in the development of our commercial services
product offerings.

In addition, in July 2003 we entered into a two-year contract extension with the
Idaho Department of Fish and Game to continue to provide products and services
to operate Idaho's fish and game licensing system through December 2006.

NEW PRODUCT OFFERINGS AND DEVELOPMENTS. In September 2003, we completed the
acquisition of Interlott Technologies, Inc. ("Interlott"), a leading provider of
instant ticket vending machines for the worldwide lottery industry, for an
aggregate purchase price, including assumed debt, of $87.5 million. We believe
that our acquisition of Interlott will expand our presence in the instant-ticket
distribution business, thus anchoring our self-service strategy and allowing us
to grow our core lottery market.

In March 2003, we announced a program whereby third party vendors of technology
that has been successfully tested for conformance with our technological and
security standards, can be approved for use with our GTECH Enterprise Series
lottery solution. Our Enterprise Series solution offers a unique open-system
architecture which allows lotteries the flexibility to continuously upgrade
their lottery systems by integrating a broad spectrum of third-party software
and hardware solutions to achieve greater performance. Our certification
process, and resulting ES Approved(TM) designation for qualifying third-party
products, supports the open system lottery architectural philosophy of our
Enterprise Series by facilitating the development of `best of class' technology
solutions.

In April 2003, we announced the development of our e-scratch product, a
web-based interactive suite of scratch and reveal games that combines the
security and convenience of online play with the entertainment, branded content
and immediate gratification of instant tickets. We believe that our e-scratch
product supports our strategy to expand the core lottery business by attracting
new players through traditional and emerging-content venues such as interactive
environments.

In July 2003, we entered into an agreement with 7-Eleven, Inc., the world's
largest convenience retailer, to add lottery sales capabilities to the chain's
Vcom(TM) electronic commerce kiosks in selected 7-Eleven, Inc. stores in the
United States. Subject to the approval of applicable state lottery authorities,
customers will be able to purchase lottery tickets through Vcom kiosks using our
proprietary "Lottery Inside" technology.

DEVELOPMENTS SINCE THE CLOSE OF FISCAL 2004

We have reported several developments since the close of fiscal 2004 (which
ended on February 28, 2004).

In April 2004, we entered into an agreement to acquire all of the shares of
privately-held Leeward Islands Lottery Holding Company, Inc. ("LILHCo"), a
lottery operating company headquartered on the Caribbean islands of Antigua and
St. Croix. The enterprise purchase price for LILHCo payable in cash at closing
will be approximately $40 million. LILHCo holds long-term licenses to operate
lotteries in Antigua/Barbuda, Anguilla, St. Kitts & Nevis, St. Maarten/Saba/St.
Eustatius and Turks & Caicos, and operates lotteries in Barbados, Bermuda and
the U.S. Virgin Islands. In addition, LILHCo recently obtained a new 10-year
video lottery terminal license in Turks & Caicos, and has received confirmation
that its existing license in St. Kitts & Nevis allows for the installation of
video lottery games. In May 2004 we completed the acquisition of LILHCo. We
expect to replace LILHCo's current systems and equipment with our Enterprise
Series(TM) architecture and Altura (TM) terminals. We believe that the
acquisition of LILHCo broadens our strategic foothold in the Caribbean lottery
market as well as offers significant growth opportunities in additional
jurisdictions within the Caribbean.

In March 2004, we received notice that, following a competitive procurement, the
Illinois lottery authority intends to award us a five-year contract to provide
the Illinois lottery authority with up to 2,000 instant ticket vending machines.
In March 2004, we also were named by the Washington lottery authority, following
a competitive procurement, as the apparent successful bidder to receive a
three-year contract to provide the Washington lottery with up to 1,000 lottery
product vending machines. These awards are subject to the successful completion
of contract negotiations with, respectively, the Illinois and Washington lottery
authorities.

In April 2004, we entered into a five-year contract extension with Oeuvre
Nationale Secours Grande-Duchesse Charlotte, the operator of Loterie Nationale
of Luxembourg, to provide new lottery terminals, products and services through
October 2012.

In May 2004, we were notified by our customer, Loteria Electronica de Puerto
Rico, of its intent to negotiate a contract to provide a new online lottery
system and an associated telecommunications network with another vendor to take
effect upon the expiration of our current contract in March 2005.

LOTTERY INDUSTRY

Statements relating to the lottery industry contained in this report are based
on information compiled by us, or derived from independent public sources which
we believe 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 over 200 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 into two principal groups: online
lotteries and off-line lotteries. An online lottery is conducted through a
computerized lottery system in which lottery terminals are connected to a
central computer system. An online 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.

In general, online lotteries generate significantly greater revenues than both
traditional off-line lottery games and instant-ticket games. In addition, there
are several other advantages to online lotteries as compared to traditional
off-line lotteries. Unlike

traditional off-line lottery games, wagers can be accepted and processed by an
online lottery system until minutes before a drawing, thereby significantly
increasing the lottery's revenue in cases in which a large prize has attracted
substantial wagering interest. Online lottery systems also provide greater
reliability and security, allow a wider variety of games to be offered and
automate accounting and administrative procedures which are otherwise manually
performed.

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

According to La Fleur's 2003 World Lottery Almanac, from 1972 through 2003,
total annual lottery ticket sales in the United States grew from approximately
$295.0 million to approximately $44.8 billion, although, in recent years, as the
United States lottery industry has matured, the rate of lottery sales growth has
slowed and certain of our customers have from time-to-time experienced a
downward trend in sales. See "Certain Factors That May Affect Future Performance
- - Slow growth or declines in sales of online lottery goods and services could
lead to lower revenues and net income," above.

There are currently 41 jurisdictions operating online lotteries in the United
States. Implementation of lotteries in other jurisdictions will depend upon
successful completion of legislative, regulatory and administrative processes.

Outside the United States, government operated or licensed lotteries, many of
which are off-line, have a long history. The international online lottery
industry has experienced significant growth. Since 1977, when there were no
online lotteries operating outside of the United States, 113 international
jurisdictions have implemented online lottery systems. A number of other
international jurisdictions, principally in Europe, Asia-Pacific, and Latin
America, are currently considering the implementation of online lotteries.

ONLINE LOTTERY BUSINESS

ONLINE LOTTERY CONTRACTS

OVERVIEW. We generally conduct business under one of two types of contractual
arrangements which are described in more detail below: Facilities Management
Contracts and Product Sales Contracts. Under a typical Facilities Management
Contract, we construct, install and operate the lottery system and retain
ownership of the lottery system. These contracts generally provide for a
variable amount of monthly or weekly service fees to be paid to us directly from
the lottery authority based on a percentage of a lottery's gross online and
instant ticket sales. Under Product Sales Contracts, we

construct, sell, deliver and install a turnkey online lottery system or lottery
equipment and license the computer software for a fixed price, and the lottery
authority subsequently operates 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 we operate a lottery. The United Kingdom's National
Lottery, Taiwan's Public Welfare Lottery and the South African National Lottery
provide important exceptions to the general rule, in that in each case a
licensee to whom we supply goods and services (rather than the lottery
authority) operates all aspects of the respective lottery with the exception of
proceeds allocation.

With respect to fiscal 2004, approximately 83.8% of our revenues were service
revenues earned under our Facilities Management Contracts; approximately 8.9% of
our revenues were product sales revenues earned under Product Sales Contracts;
and approximately 7.3% of our revenues were attributable to the provision of
nonlottery goods and services.

FACILITIES MANAGEMENT CONTRACTS. Our Facilities Management Contracts typically
require us to construct, install and operate the lottery system for an initial
term, which is typically at least five years, and usually contain options
permitting the lottery authority to extend the contract under the same terms and
conditions for one or more additional periods, generally ranging from one to
five years. In addition, our customers occasionally renegotiate extensions on
different terms and conditions.

Our revenues under Facilities Management Contracts are generally a variable
amount of monthly or weekly service fees which are paid to us directly from the
lottery authority based on a percentage of such lottery's gross online and
instant ticket sales. The level of lottery ticket sales within a given
jurisdiction is determined by many factors, including population density, the
types of games played and the games' design, the number of terminals, the size
and frequency of prizes, the nature of the lottery's marketing efforts and the
length of time the online lottery system has been in operation.

Under our Facilities Management Contracts, we typically retain title to the
lottery system and typically provide our customers with the services necessary
to operate and manage the lottery system. We install and commence operations of
a lottery system after being awarded a Facilities Management Contract and,
following the start-up of the lottery system, we are responsible for all aspects
of the system's operations. We typically operate 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 have shared the same central system. In addition, in most
jurisdictions we employ a dedicated work force, consisting of a site director,
marketing personnel, computer operators, communications specialists and customer
service representatives who service and maintain most aspects of the system.

Under certain of our Facilities Management Contracts the lottery authority has
the right to purchase our lottery system during the contract term at a
predetermined price, which is calculated so that it exceeds the net book value
of the system at the time the right is exercisable. In addition, some of our
lottery contracts permit the lottery authority to acquire title to our
system-related equipment and software during the term of the contract or upon
the expiration or earlier termination of the contract, in some cases (i.e., were
we to materially breach or be unable to perform under certain circumstances)
without paying us any compensation related to the transfer of that equipment and
software to the lottery authority. Our role, if any, with respect to the
continued operation of a lottery system in the event of the exercise of such a
purchase option generally is not specified in such contracts and thus would be
subject to negotiation. Under many of our Facilities Management Contracts, the
lottery authority also has the option to require us to install additional
terminals and/or add new lottery games. Such installations may require
significant expenditures by us. However, since our 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 our lottery contracts, in addition to constructing, installing
and operating the online lottery systems in these jurisdictions, we are
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 we receive fees based
upon a percentage of the sales of the instant-ticket games.

Revenues from Facilities Management Contracts are accounted for as Service
Revenue in our Consolidated Income Statements.

Unless otherwise indicated, the table below sets forth the lottery authorities
with which we had Facilities Management Contracts and fully installed,
operational lottery systems as of February 28, 2004, and as to which we are the
sole supplier of central computers and terminals and material services. The
table also sets forth information regarding the term of each contract and, as of
February 28, 2004, the approximate number of terminals installed in each
jurisdiction.

APPROXIMATE CURRENT
NUMBER OF LOTTERY DATE OF COMMENCEMENT OF DATE OF EXPIRATION OF EXTENSION
JURISDICTION TERMINALS INSTALLED(1) CURRENT CONTRACT CURRENT CONTRACT TERM OPTIONS*
------------ ---------------------- ----------------------- --------------------- ----------

UNITED STATES:
Arizona 2,500 9/99 9/06 ---

California 18,540 10/03 10/09 4 one-year

Colorado (2) 2,440 3/95 10/04 ---

D.C. (3) 580 6/99 11/09 ---

Florida (4) -- 1/05 3/11 2 two-year

Georgia 8,045 9/03 9/10 ---

Idaho (5) 740 2/99 2/07 ---

Illinois 6,860 4/00 10/07 1 one-year

Kansas 1,850 7/02 6/08 ---

Kentucky 2,813 4/97 6/08 ---

Louisiana 2,790 6/97 6/10 ---

Michigan 8,460 1/98 1/09 ---

Minnesota 3,000 2/03 2/08 5 one-year

Missouri 2,950 7/96 6/05 ---

Nebraska (6) 935 4/94 6/04 ---

New Jersey 6,000 6/96 6/06 ---

New Mexico 1,160 6/96 11/08 ---

New York 15,600 11/00 3/07 3 one-year

Ohio 7,230 8/00 6/05 2 two-year

Oregon 3,000 12/96 6/05 3 one-year

Rhode Island 1,030 7/03 6/23 ---

Tennessee 3,800 1/04 4/11 ---

Texas 16,350 8/02 8/11 ---

Washington 2,700 9/95 6/06 ---

APPROXIMATE CURRENT
NUMBER OF LOTTERY DATE OF COMMENCEMENT OF DATE OF EXPIRATION OF EXTENSION
JURISDICTION TERMINALS INSTALLED(1) CURRENT CONTRACT CURRENT CONTRACT TERM OPTIONS*
------------ ---------------------- ----------------------- --------------------- ----------

Wisconsin 3,070 11/03 6/11 2 one-year

INTERNATIONAL:
Argentina
- -Loteria National 800 11/93 1/05 ---
Sociedad del
Estado (5, 7)
- -Boldt IPLC (5) 3,000 11/99 11/09 ---

Barbados
- -T.L. Lotteries 200 10/94 11/04 ---

Brazil
- -National
Lottery (8) 21,800 5/00 5/05 ---
- -Minas Gerais 800 10/94 11/06 ---
- -Santa Catarina 105 4/02 4/06 1 one-year

Colombia
- -ETESA (9) 2,400 12/99 1/11 5 years

Czech Republic
- -SAZKA 8,250 10/92 12/17 ---

Ireland
- -An Post Nat'l
Lottery Company 2,060 6/02 12/08 (10)

Jamaica
- -Supreme
Ventures Limited 700 11/00 01/11 1 ten-year

Luxembourg (11)
- -Loterie Nationale 150 6/01 10/07 4 one-year

Mexico
- -Pronosticos Para
La Assistencia
Publica 6,800 (12) (12) (12)

Morocco
- -La Societe de 1,600 8/99 4/09 1 one-year
Gestion de la
Loterie Nationale
and La Marocaine
des Jeux et Les
Sports

APPROXIMATE CURRENT
NUMBER OF LOTTERY DATE OF COMMENCEMENT OF DATE OF EXPIRATION OF EXTENSION
JURISDICTION TERMINALS INSTALLED(1) CURRENT CONTRACT CURRENT CONTRACT TERM OPTIONS*
------------ ---------------------- ----------------------- --------------------- ----------

Poland
- -Totalizator 9,200 5/01 5/11 1 six-month
Sportowy

Puerto Rico
- -Loteria 2,290 3/99 3/05 (6)
Electronica de
Puerto Rico

Slovak Republic
- -TIPOS a.s. 1,550 3/96 12/11 ---

South Africa (13)
- -National Lottery 8,235 7/99 4/07 1 one-year

Spain
- -L'Entitat 2,445 10/97 4/04 1 six-month
Autonoma de Jocs
I Apostes de la
Generalitat de
Catalunya (14)

Sri Lanka
- -Mahapola Higher -- 11/03 (14) 1 five-year
Education
Scholarship Trust
Fund (15)

Taiwan
- -Taipei Bank (16) 7,000 11/01 12/06 ---

Trinidad & Tobago
- -National Lotteries 600 12/93 7/06 1 three-year
Control Board

Turkey
- -Turkish National 4,000 2/96 11/04 (17)
Lottery (5)

United Kingdom
- -The National 25,440 1/02 1/09 ---
Lottery (18)

Ukraine
- -Ukrainian
National Lottery 2,430 8/00 12/10 ---

*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 or instant
ticket vending machines.

(2) The Colorado lottery authority has selected another vendor to provide
equipment and services after the Colorado lottery authority's contract
with us expires in October 2004.

(3) Operated by Lottery Technology Enterprises, a joint venture in which we
have a 1% interest, and to which we supply lottery goods and services.

(4) The lottery system that we are implementing for the Florida lottery
authority under the contract that we entered into during fiscal 2004 is
scheduled to become operational in February 2005.

(5) Under these contractual arrangements (which we formerly referred to as
"Operating Contracts"), the lottery authorities purchased the lottery
system and related software license from us at the respective start of
the contracts.

(6) The Nebraska lottery authority has selected another vendor to provide
equipment and services after the Nebraska lottery authority's contract
with us expires in June 2004. The Puerto Rico lottery authority has
selected another vendor to provide equipment and services after the
Puerto Rico lottery authority's contract with us terminates in March
2005.

(7) We are the service provider only with respect to one-half of this
network.

(8) Operated by GTECH Brasil Holdings, S.A., a Brazilian company in which
we own all voting stock. The term of our contract runs until May 2005,
with Caixa Economica Federal, the operator of the National Lottery,
having the right to elect upon prior notice to terminate the contract
as early as December 2004. See "Item 3, "Legal Proceedings" and Note 13
to Notes to Consolidated Financial Statements below.

(9) Our contract with the Colombia lottery authority is not a true
facilities management contract in that title to the equipment vests in
the Colombia lottery authority at the end of the term.

(10) Our contract with the Ireland lottery authority may be extended for any
period mutually acceptable to us and the Ireland lottery authority.

(11) The Luxembourg lottery authority can extend the software license
granted by us for up to 10 years after the end of the initial term and
any extensions of the contract.

(12) Our contract with the Mexico lottery authority is not a true facilities
management contract. Title to all equipment, which initially had been
supplied under lease, has passed to the lottery authority pursuant to
the terms of our agreement. We provide maintenance and other services,
if requested by the lottery authority. In February 2004, the Mexico
lottery authority selected the Company, after a competitive
procurement, as the apparent successful vendor to provide equipment and
services for a new online lottery system under a proposed six-year
contract. In late April 2004, we were notified that this award has been
revoked. This revocation follows a ruling by the Mexican Comptroller
Ministry on a protest filed by unsuccessful competitors that declared
our bid non-compliant and disqualified us from the competitive
procurement. The Mexican lottery authority subsequently announced that
it has disqualified the sole remaining bidder as also being
non-compliant and has formally ended the procurement. We intend to
pursue all appropriate avenues to contest the Comptroller's decision.

(13) Operated by Uthingo consortium, in which we are a 10 percent equity
owner.

(14) We are in the process of negotiating a one-year extension of our
contract with this lottery authority.

(15) The lottery system that we are implementing for the Mahapola Higher
Education Scholarship Trust Fund ("Mahapola") under the contract that
we entered into during fiscal 2004 is scheduled to become operational
in September 2004, although lawsuits filed by competitors challenging
the award have delayed and may prevent implementation of this lottery
system. See "Significant Developments Since the Start of Fiscal 2004,"
above. Our contract with Mahapola runs from the tenth anniversary of
the first date on which lottery tickets are processed or September
2014, whichever is earlier.

(16) Lottery Technology Services Corporation ("LTSC"), a consortium in which
we own a 44% indirect interest, entered into a Commission Agreement
with the Bank of Taipei to operate the Taiwan Public Welfare Lottery.
ACER, Inc. indirectly owns the other 56% of LTSC. We supply terminals
to LTSC and provide to LTSC central system maintenance, software
support and consulting services pursuant to service and supply
agreements.

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

(18) Operated by Camelot Group plc, a consortium, on a facilities management
basis.

PRODUCT SALES CONTRACTS. Under Product Sale Contracts, we construct, sell,
deliver and install turnkey lottery systems or lottery equipment and license the
computer software for a fixed price, and the lottery authority subsequently
operates the lottery system. We also sell additional terminals and central
computers to expand existing systems and/or replace existing equipment under
Product Sales Contracts.

In connection with our Product Sales Contracts, we generally design the lottery
system, train the lottery authority's personnel and provide other services
required to make and

keep the system operational. We also generally license our software to our
customers for a fixed additional fee.

Historically, product sales revenues have been derived from the installation of
new online lottery systems, installation of new software 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 our direct and indirect customers that since
March 1, 1999 have purchased (or have agreed to purchase) from us new online or
video lottery systems, software and/or terminals and equipment in connection
with the expansion of existing lottery systems.

Argentina --Boldt IPLC
Australia --Lotteries Commission of New South Wales
Australia --Lotteries Commission of South Australia
Australia --Western Australia Lotteries Commission
Belgium --Loterie Nationale de Belgique
Canada --British Columbia Lottery Corporation
--Western Canada Lottery Corporation
China --Beijing Welfare Lottery Center
France --La Francaise des Jeux
Germany --WestLotto
--Sachsische Lotto - Gmbh
Israel --Mifal Hapayis
Luxembourg --Loterie Nationale
Massachusetts --Massachusetts State Lottery Commission
Netherlands --Stichting de Nationale Sport Totalisator
Poland --Totalizator Sportowy Sp. Zo.o
Portugal --Santa Casa de Misericordia de Lisboa
Singapore --Singapore Pools (Pte) Ltd.
South Africa --Uthingo
Spain --Sistemas Tecnicos de Loterias del Estado
--Organizacion Nacional de Ciegos Espanoles
Sweden --AB Svenska Spel
Switzerland --Loterie de la Suisse Romande
Taiwan --Lottery Technology Services Corporation
United Kingdom --The National Lottery
Virginia --Virginia Lottery

INSTANT TICKET VENDING MACHINE LOTTERY CONTRACTS

OVERVIEW: As described above, during fiscal 2004 we completed the acquisition of
Interlott Technologies, Inc. ("Interlott"), a leading provider of instant ticket
vending machines ("ITVMs") for the lottery industry worldwide. Like GTECH,
Interlott generally conducts business under one of two types of contractual
arrangements which are described in more detail below: Facilities Management
Contracts and Product Sales Contracts.

FACILITIES MANAGEMENT CONTRACTS: Under a typical Facilities Management Contract
with a lottery authority, Interlott builds to specification, installs, and
services ITVMs for an initial term which typically is four years. These
contracts usually contain options permitting the relevant lottery authority to
extend the contract under the same terms and conditions for additional periods,
generally ranging from one to three years. In addition, Interlott's customers
occasionally renegotiate extensions on different terms and conditions.

Historically, the majority of Interlott's Facilities Management Contracts have
been based on a compensation structure involving fixed monthly lease payments
paid directly by the lottery authorities. However, recent Interlott Facilities
Management Contracts feature a compensation structure based upon a negotiated
percentage of the ITVM instant tickets sales revenues. Under Interlott's
Facilities Management Contracts, Interlott retains title to the ITVMs, while
providing its customers with necessary support services. In most jurisdictions
Interlott employs a dedicated work force, consisting of a Regional Service
Manager, marketing personnel, and customer service representatives who help
service and maintain most aspects of the ITVM program.

PRODUCT SALES CONTRACTS: Under a typical Product Sales Contract, for a fixed
price Interlott constructs, sells, delivers and installs a turnkey ITVM system
that the lottery jurisdiction subsequently operates.

The table below sets forth the lottery authorities with which Interlott
currently has Facilities Management Contracts ("FMCs"). This table also provides
(except where noted by footnote) historical information respecting the number of
ITVMs that are currently in service that were sold by Interlott prior to the
completion of our acquisition of Interlott under its various Product Sales
Contracts ("PSCs"). The table also sets forth information regarding the term of
each FMC, as well as the approximate number of ITVMs installed in each FMC
jurisdiction as of the date hereof.

DATE OF
FMC APPROXIMATE DATE OF EXPIRATION OF CURRENT
OR NUMBER OF COMMENCEMENT OF CURRENT EXTENSION
JURISDICTION PSC ITVMS IN SERVICE CURRENT CONTRACT CONTRACT TERM OPTIONS
- ------------ --- ---------------- ---------------- ------------- ----------

Arizona FMC 325 7/03 7/05 3 one-year

California PSC 4,190

Colorado FMC 530 7/00 10/04 --

D.C. FMC 90 12/01 12/04 1 one-year

Idaho PSC 170

Illinois FMC 2,730(2) 6/97(2) (2) (2)

Indiana FMC 685 1/01 12/04 --

Iowa FMC 430 1/01 12/04 2 one-year

Kentucky FMC 530 8/99 8/04 --

Maine FMC 165 7/99 7/04 --

Maryland FMC 955 2/00 2/05 --

Massachusetts PSC 1,575

Minnesota FMC 15 12/01 11/04 2 one-year

Missouri FMC 630 6/01 6/04 4 one-year

New Hampshire FMC 220 7/00 6/05 --

New Jersey(1) 210

New Mexico FMC 160 5/97 5/04 3 one-year

New York FMC 4,380 5/02 5/05 2 one-year

Ohio FMC 1,500 7/03 6/05 2 two-year

Oregon PSC 520

Pennsylvania PSC 3,050(3)

Rhode Island(1) 100

Texas FMC 1,200 10/03 10/06 2 one-year

Virginia PSC 1,650

Washington FMC 1,010 12/98(4) 11/04(4) --

West Virginia PSC 110

Wisconsin(1) 500

- -------------
(1) Represents ITVMs installed under a GTECH Facilities Management Contract. See
Facilities Management Contracts table above for additional information.

- -------------------
(2) The contract term with the Illinois lottery authority runs in tranches,
based upon the corresponding dates of installation for ITVMs. Upon expiration of
their respective contract terms, ITVMs may be purchased by the lottery
authority, with post-purchase service to be provided by our Interlott business
unit under a service contract. Installed ITVM base includes both ITVMs that are
leased to, and ITVMs that are owned by, the lottery authority. The contract term
with regards to the last tranche of ITVMs installed in Illinois expires in
August 2008. In March 2004, after the close of fiscal 2004, we received notice
that, following a competitive procurement, the Illinois lottery authority
intends to award us a five-year contract to provide up to 2,000 ITVMs. This
award is subject to the successful completion of negotiations with the Illinois
lottery authority.

(3) Of this number, 650 ITVMs were purchased by a company providing facilities
management services to the Pennsylvania lottery authority after the completion
of our acquisition of Interlott in fiscal 2004.

(4) In March 2004, after the close of fiscal 2004, we received notice that we
were named by the Washington lottery authority, following a competitive
procurement, as the approved successful bidder to receive a three-year contract
to provide the Washington lottery authority with up to 1,000 ITVMs. This award
is subject to the successful completion of negotiations with the Washington
lottery authority.

CONTRACT AWARD PROCESS

In the United States, lottery authorities generally commence the contract award
process by issuing a request inviting proposals from various lottery vendors.
The request for proposals usually indicates certain requirements specific to the
jurisdiction, such as the number of terminals and breadth of services desired,
the 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.

Our marketing efforts for our lottery products and services frequently involve
top management in addition to our 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 our lottery products and services to lottery authorities outside of
the United States is often performed in conjunction with licensees and
consultants with whom we contract for representation in specific market areas.
Although generally neither a condition of their contracts with us nor a
condition of their contracts with lottery authorities, such licensees and
consultants often agree with us to provide on-site services after installation
of the online lottery system.

After the expiration of the initial or extended contract term, a lottery
authority in the United States generally may either seek to 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.

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

ONLINE PRODUCTS AND SERVICES

A significant portion of our revenues and cash flow is derived from our
portfolio of long-term online lottery service contracts, each of which in the
ordinary course of our business periodically is the subject of competitive
procurement or renegotiation. Our lottery operations are dependent upon our
continued ability to retain and extend our existing contracts and win new
contracts.

Our 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.

Our online lottery systems control and perform the following functions: entry of
wagers using a terminal's keyboard or a fully-integrated optical mark
recognition reader; automatic auditing 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 on redundant systems; transmission of
authorization for the originating terminal to accept the wager and print a
receipt or ticket, winning ticket identification and validation; and
administrative functions, including determination of prize pools and generation
of management information reports.

The basic functions of our systems, which are 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

We design, manufacture and provide the point-of-sale terminals used in our
online lottery systems. Our model GT-101TF terminals, introduced in 1985, and
our model GT-401/OI terminals, introduced in 1989, are installed in numerous
jurisdictions. Our Spectra(R) terminal series (GT-401/0M, 402/0M and 403/OM),
first introduced in 1989, is distinguished by its modular internal and external
architecture.

Our ISYS terminal series (GT-501, 502 and 503), 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.

During fiscal 1999, we announced the introduction of the PlayerExpress(TM)
terminal, which was designed specifically for large retail environments, such as
grocery stores, with numerous checkout lanes.

During fiscal 1999, we also announced the launch of our Altura family of
terminals. Altura, which represents the initial offering of our ninth generation
of online lottery terminal, permits applications to be written in the Java
programming language, enabling the rapid development of a wide variety of games

that are compatible with numerous software environments. We have supplied Altura
terminals to a number of our customers.

The Altura LVT and Altura SST terminals are the newest additions to our Altura
family of terminals. The Altura LVT, which features a compact platform, touch
screen interface and expandable configuration, is designed to meet the needs of
retailers with low volumes of transactions. The Altura SST, a self-service
terminal, combines the functionality of instant ticket vending machines
("ITVMs") with the capability of selling online lottery products through a touch
screen interface.

During fiscal 2004, we expanded our self-service terminal offerings with the
completion of our acquisition of Interlott Technologies, Inc. ("Interlott"), a
leading provider of ITVMs for the worldwide lottery industry. Interlott's EDS-Q
family of ITVMs offers flexibility and expandability (from a four to 24 game
capacity) as well as the industry's first transaction processing connectivity to
in-store lottery terminals and lottery authority central systems. We recently
accepted our first order for a hybrid self-service product that we have
developed which we believe will combine the functionality of the ITVM and Altura
SST, enabling the sale of both instant tickets and online games.

During fiscal 2004, we entered into an agreement to acquire Spielo
Manufacturing, Incorporated ("Spielo"), a leading provider of video lottery
terminals and related products and services to the global gaming industry. In
April 2004 (after the close of fiscal 2004) we completed the acquisition of
Spielo. We believe that this acquisition will further expand our terminal
offerings. The Spielo family of terminals includes the Aura,(TM) a video lottery
terminal that features a high-resolution 18" flat screen color monitor, 16-bit
digital stereo sound, ergonomic design and powerful processor, and the Power
Station 5,(TM) a video lottery terminal that is designed to meet the needs of
bar and restaurant venues.

We are not dependent upon the use of our proprietary terminals and have the
ability to integrate into our online lottery systems qualified third party
terminals.

SOFTWARE. We design and provide, or license from third parties, all applications
solutions for our lottery systems. Our 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. Our ProSys(R) software system is based on client server architecture and
provides open interfaces which allow for the integration and support of
third-party and commercial modules and applications.

Our latest generation software system, the Enterprise Series(TM), is a unique,
fully-open architecture that we believe provides a new industry standard for the
development, deployment, integration and support of next-generation online
lottery solutions, including those which permit sales of lottery products via a
secure infrastructure over the Internet, without compromising the integrity of
the games. The open system architecture of the Enterprise Series(TM) allows
lotteries the flexibility to continuously upgrade their lottery systems, and
integrate a broad spectrum of third party hardware and software solutions to
achieve greater performance. In March 2003 we announced the launch of a
certification process whereby third party technology vendors can be approved for
integration with the Enterprise Series

platform. Under our Enterprise Series certification process we have certified 4
third party vendors and 3 third party vendors are pending review.

CENTRAL COMPUTERS. Each of our lottery systems contains one or more central
computer sites to which the lottery terminals are connected. Our central
computer systems are manufactured by Hewlett-Packard Company, Stratus Computer,
Inc. and IBM Corporation. The specifications for the configuration of our
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
back-up power suppliers), which are all manufactured by third parties, and a
microcomputer-based communication and switching subsystem. In addition, we
supply management information systems that provide lottery personnel access to
important financial and operational data without compromising the security of
the online system. Based upon our development of our Enterprise Series(TM), we
will be able to integrate qualified third party software applications.

COMMUNICATIONS. Our 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, we have
developed the capability to utilize and interface with a wide range of
communications technologies to provide a data communications pathway between the
lottery terminals and the central computers, 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.

According to industry sources that we regard as reliable, we are the largest
global provider of wireless point-of-sale devices.

GAMES. An important factor in maintaining and increasing public interest in
lottery games is innovation in game design that aims to catch the eye and
interest of potential players. In conjunction with lottery authorities, we
utilize principles of demographics, sociology, psychology, mathematics and
computer technology to design customized lottery games which are intended to
appeal to the populations served by our lottery systems. The principal
characteristics of game design include: frequency of drawing, size of pool, cost
per play and setting of appropriate odds. We believe that our expertise in game
design has enhanced the marketing of our lottery systems and has contributed to
increases in the revenues of some of our customers.

Keno(TM), an online game which we, together with the Lotteries Commission of
South Australia, first introduced in 1990, exemplifies how innovative lottery
games can help our lottery customers maintain or increase public interest in
lottery games and thereby generate additional revenues. Keno(TM), features
online drawings as often as every four minutes and is currently offered by 20 of
our customers.

We currently have a substantial number of variations of lottery games in our
software library and new games under development. We believe that this game
library and the "know how" and experience accumulated by our professionals since
our inception make it possible for us to meet the requirements of our customers
for specifically tailored games on a timely and comprehensive basis.

In March 2004, after the close of fiscal 2004, we announced that we had entered
into agreements with Hasbro Properties Group, the intellectual property
development arm of Hasbro, Inc. ("Hasbro"), and New Vision Gaming, a company
with extensive casino game development experience ("New Vision"), that we
believe will further strengthen our lottery game content library. Under the
Hasbro agreement, Hasbro grants to us a license to develop and distribute select
lottery products featuring Hasbro's Monopoly(TM) and Battleship(TM) brands in
the United States, Canada and Mexico, while our agreement with New Vision
permits us to offer on an exclusive basis two of New Vision's flagship games
through a variety of lottery distribution channels.

MARKETING. In United States jurisdictions in which we have been awarded a
lottery contract, we are 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,
we developed "GMark," a computerized marketing analysis system used to determine
favorable locations for new lottery terminals. The lottery authorities of
California, Florida, Georgia, Illinois, Kansas, Missouri, New York, Ohio, Rhode
Island, Texas and Washington currently utilize GMark systems, and many customers
contact the Market Research Group from time to time to obtain GMark services.

WARRANTY. We offer a product warranty on all of our manufactured products
(primarily terminals and related peripherals) sold to third parties. Although we
do not have a standard product warranty, our typical warranty provides that we
will repair or replace defective products for a period of time (usually ninety
days) from the date revenue is recognized or from the date a product is
delivered and tested. We estimate product warranty costs we expect to incur
during the warranty period and we record a charge to costs of sales for the
estimated warranty cost at the time the product sale is recorded. In determining
the appropriate warranty provision, consideration is given to historical
warranty cost information, the status of the terminal model in its life cycle
and current terminal performance. We periodically assess the adequacy of our
product warranty reserves and adjust them as necessary in the period when the
information necessary to make the adjustment becomes available.

We typically do not provide a product warranty on purchased products sold to
third parties but attempt to pass the manufacturer's warranty, if any, on to our
customers.

NON-LOTTERY COMMERCIAL SERVICES

While transaction processing services for the online lottery industry remains
our core service offering, we have in recent years undertaken to capitalize on
the investments that we have made in secure, high-volume transaction processing
technology through development of additional applications, such as financial or
retail transaction processing. During fiscal 2004, revenues from non-lottery
commercial services accounted for approximately 7% of our consolidated revenues.

In May 2000, we signed a contract with Caixa Economica Federal, the operator of
Brazil's National Lottery, to include additional financial transaction services
(including bill and tax payment, social security contribution and traditional
banking transaction services) over our dedicated network infrastructure. We are
party to agreements with more than 700 retailers in Chile to provide electronic
bill payment services at retail outlets throughout the country. See Item 3,
"Legal Proceedings - Brazilian Legal Proceedings," below.

During fiscal 2003, we entered into an agreement with Supreme Ventures Limited,
a licensee operating certain online games in Jamaica, and Mossel Jamaica
Limited, a cellular telephone service provider in Jamaica ("Digicel") to provide
Digicel with a non-exclusive distribution network for the electronic sale of
personal identification numbers for cellular phone usage in Jamaica, thus
providing customers in Jamaica with the ability to place cellular telephone
calls using purchased minutes. During fiscal 2004, we acquired a controlling
equity position in PolCard S.A., a leading debit and credit card merchant
transaction acquirer and processor in Poland, and were awarded a two-year
contract extension by the Idaho Department of Fish and Game to continue to
provide products and services to operate Idaho's fish and game licensing system
through December 31, 2006. See "Significant Developments Since the Start of
Fiscal 2004" above.

PRODUCT DEVELOPMENT

We devote substantial resources in order to enhance our present products and
systems and develop new products. In fiscal 2004, we spent approximately $57.3
million on research and development, as compared to $42.9 million in fiscal
2003, and $33.8 million in fiscal 2002.

INTELLECTUAL PROPERTY

Historically, we generally have not sought to obtain patents on our products,
believing that our technical "know-how," trade secrets and the creative skills
of our personnel would be of substantially more importance to our success than
the benefit which patent protection ordinarily would afford. As we continue to
advance the development of new technological solutions, we have decided to
pursue comprehensive intellectual property protection, including patents where
appropriate, for these solutions. We are currently pursuing protection of some
of our newest advances in technology and gaming, including our Enterprise
Series(TM), a unique, fully-open, integrated solution which includes the ability
to distribute lottery games via a secure infrastructure over the Internet,
without compromising the integrity of the games. We have obtained patent
protection in certain of our key business methods in the areas of infrastructure
systems, terminal improvements and creative game design. These use-related
patents will provide legal protection in the U.S. for the next 18 to 20 years.

PRODUCTION, ASSEMBLY AND COMPONENTS

We purchase most of the parts, components and subassemblies necessary for our
terminals and other products from outside sources. We assemble these parts,
components and subassemblies into finished products in our manufacturing
facility where we also conduct all of our quality testing. We offer central
systems manufactured by Hewlett-Packard Company, Stratus Computer, Inc. and IBM
Corporation for our lottery systems. We do not manufacture any central system
components. We have approximately three material sole source vendors. The loss
of any of those vendors might result in material additional costs and/or
manufacturing delays.

BACKLOG

The backlog of our orders for sales of our products, which are supported by
signed contracts with our customers and which are believed by us to be firm,
amounted to approximately $166.7 million as of

February 28, 2004, as compared to a backlog of approximately $141.2 million as
of February 22, 2003. The increase in the backlog is due to a higher level of
product sales expected to be consummated in fiscal year 2005. Approximately
$112.8 million, or 67.7% of the backlog at February 28, 2004, is expected to be
filled during fiscal 2005.

COMPETITION

The online lottery industry has faced increased competition in recent years for
the consumers' entertainment dollar, including from a proliferation of
destination gaming venues, and an increased availability of Internet gaming
opportunities. In addition, in recent years, there has been increased
competition among domestic and international participants in the online lottery
industry. The online lottery business is highly competitive in the United States
and internationally. Both in the United States and internationally, price is an
increasingly 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 2004, our principal competitors in the online lottery business
(and the number of online lottery jurisdictions currently serviced or under
contract worldwide by such competitors) were as follows: Scientific Games
Corporation (including the business formerly known as Automated Wagering
International, Inc., and IGT Online Entertainment Systems, Inc.) (32); Essnet
(11); and Intralot S.A. (5).

PERSONNEL

As of April 1, 2004, we had approximately 4,900 full-time employees worldwide.
The vast majority of our domestic employees is not represented by any labor
union. We believe that our relationship with our employees is satisfactory.

ITEM 2. PROPERTIES

Our world headquarters and research and development and main production facility
are located in our approximately 260,000 square foot building on approximately
26 acres in West Greenwich, Rhode Island, which we lease from West Greenwich
Technology Associates, L.P. We are a limited partner in, and own 50% of, this
partnership. As amended during fiscal 2002, our lease term runs until January 1,
2007 and we have an option to purchase the remaining 50% interest in West
Greenwich Technology Associates, L.P. on or before the termination of the lease
term. We own approximately 24 acres adjoining our headquarters in West
Greenwich, Rhode Island. In May 2003, we entered into a master contract with the
Rhode Island Lottery that, among other matters, relates to the development of a
new world headquarters facility containing at least 210,000 square feet in
Providence, Rhode Island by December 31, 2006. See Note 8 to Notes to
Consolidated Financial Statements for further information respecting the planned
relocation of our World Headquarters to Providence, Rhode Island, and certain
related matters.

We also own an approximately 140,000 square foot manufacturing and central
storage facility in Coventry, Rhode Island.

In addition, except in New York State, where we own our back-up data center
facility, we lease, or are supplied by the relevant state authorities with, our
data center facilities in the various jurisdictions. We also lease office, depot
maintenance and warehouse space in a number of other locations.

Our facilities are in good condition and are adequate for our present needs.

ITEM 3. LEGAL PROCEEDINGS

BRAZILIAN LEGAL PROCEEDINGS

THE CEF CONTRACT PROCEEDINGS

BACKGROUND. In September 1993, we purchased 41.5% of the voting common and
non-voting preferred stock of Racimec Informatica Brasileira S.A. ("Racimec"), a
Brazilian company engaged in the lottery business and the predecessor of our
present Brazilian subsidiary, GTECH Brasil Ltda. In January 1996, we purchased
the remaining voting common stock, and 37.7% of the non-voting preferred stock,
of Racimec. Subsequent to January 1996, Racimec's accounts were consolidated
with our own. In December 1997, we purchased the remaining non-voting preferred
stock of Racimec. Racimec was reorganized in December 1998, and was eventually
renamed GTECH Brasil Ltda. ("GTECH Brazil").

In January 1997, Caixa Economica Federal ("CEF"), the Brazilian bank and
operator of Brazil's National Lottery, and Racimec entered into a four-year
contract pursuant to which Racimec agreed to provide online lottery services and
technology to CEF (the "1997 Contract"). This award was made by CEF with respect
to a competitive bid that CEF had issued in 1994. Online lottery sales by
Brazil's National Lottery commenced in May 1997.

In May 2000, CEF and GTECH Brazil terminated the 1997 Contract and entered into
a new agreement obliging GTECH Brazil to provide lottery goods and services and
additional financial transaction services (including bill and tax payment,
social security contribution and traditional banking transaction services) to
CEF for a contract term that, as subsequently extended, was scheduled to expire
in April 2003 (the "2000 Contract"). In April 2003, GTECH Brazil entered into an
agreement with CEF (the "2003 Contract Extension") pursuant to which: (a) the
term of the 2000 Contract was extended through May 2005, with CEF having the
right to elect upon prior notice to terminate the 2000 Contract early at any
time after December 2004, and (b) fees payable to GTECH Brazil under the 2000
Contract were reduced by 15%.

As part of sworn testimony before the Brazilian Congress, in April 2004 CEF's
President indicated that it is his intent to enter into negotiations with GTECH
Brazil to accommodate an as-of-yet undisclosed procurement process, pursuant to
which he would seek to negotiate certain concessions from GTECH Brazil relating
to pending court actions respecting CEF procurement matters, and CEF would agree
to extend the 2000 Contract beyond its current term. See -- "CEF Procurement,"
below. In addition, CEF and GTECH Brazil continue to work closely. For example,
CEF recently notified us that GTECH Brazil has been pre-qualified for an
upcoming bid to provide services and equipment for the Caixa Aqui, a
correspondent banking system comprised of free-standing kiosks operated by CEF.
GTECH Brazil and pre-qualified companies have been invited to present proposals
to CEF regarding the expansion of the service offering and network territory of
Caixa Aqui.

Revenues from the 2000 Contract accounted for approximately 9.7% of our total
revenues for fiscal 2004, making CEF our largest customer for fiscal 2004 based
on revenues.

CRIMINAL ALLEGATIONS AGAINST CERTAIN EMPLOYEES. In late March 2004, federal
attorneys with Brazil's Public Ministry (the "Public Ministry Attorneys")
recommended that criminal charges be brought against nine individuals, including
four senior officers of CEF; Antonio Carlos Rocha, the former Senior Vice
President of GTECH Holdings Corporation and President of GTECH Brazil; and
Marcelo Rovai, GTECH Brazil's marketing director. No other present or former
employee of the Company has been implicated by the Public Ministry Attorneys,
and under Brazilian law (which provides that criminal charges may not be brought
against corporations and other entities), we cannot be subject to criminal
charges in connection with this matter. We understand that Messrs. Rocha and
Rovai will likely be charged with offering an improper inducement in connection
with the negotiation of the 2003 Contract Extension. We further understand that
Messrs. Rocha and Rovai will likely be charged with effectively co-authoring or
aiding and abetting certain allegedly fraudulent or inappropriate management
practices of the CEF management who agreed to enter into the 2003 Contract
Extension. An investigation is being conducted on our behalf to ascertain the
facts regarding this matter. The Company has encouraged Messrs. Rocha and Rovai
to cooperate fully with the Brazilian authorities investigating this matter. In
addition, the United States Securities and Exchange Commission has made an
informal inquiry as to this matter, and we are cooperating fully with this
inquiry. Brazilian news accounts have quoted CEF's President as denying that
there had been any external pressure applied in connection with the negotiation
of the 2003 CEF Contract Extension.

In light of the fact that our reputation for integrity is an important factor in
our business dealings with lottery and other governmental agencies, an
allegation or finding of improper conduct that is attributable to us could have
a material adverse effect on our business, both within Brazil and elsewhere,
including our ability to retain existing contracts or to obtain new or renewal
contracts. In addition, continuing adverse publicity resulting from these likely
charges and any resulting, or related, legal proceedings could have a material
adverse effect on our reputation and business. Because these proceedings are in
their initial stages, it is impossible for us to assess their merits, or to
provide an estimate of losses likely to be incurred in connection with these
proceedings, or their financial statement impact, if any. See Item 1, "Certain
Factors That May Affect Future Performance - `Government regulations and other
actions affecting the online lottery industry could have a negative effect on
our business and sales,' -- `Our lottery operations are dependent upon our
continued ability to retain and extend our existing contracts and our new
contracts,'--`We derive close to half of our revenues from foreign jurisdictions
(including over 10% from Brazilian operations) and are subject to the economic,
political and social instability risks of doing business in foreign
jurisdictions, and -- `Our business prospects and future success depend upon our
ability to attract and retain qualified employees'," above.

CIVIL ACTION BY THE PUBLIC MINISTRY ATTORNEYS. We recently have learned through
a press release issued by the Public Ministry Attorneys that a civil action has
been initiated by the Public Ministry Attorneys in the Federal Court of Brasilia
against GTECH Brazil; 17 former officers and employees of CEF; the former
president of Racimec; Antonio Carlos Rocha, the former Senior Vice President of
GTECH Holdings Corporation and President of GTECH Brazil, and Marcos Andrade,
another former officer of GTECH Brazil. The focus of the purported civil action
is the contractual relationship between CEF, GTECH Brazil and GTECH Brazil's
predecessor company, Racimec, for the period from 1994 to 2002, the year before
the current government took over the administration of CEF. We understand that
this civil action will allege that the defendants acted illegally in entering
into and performing the 1997 Contract and the 2000 Contract. It is reported that
this civil action seeks to invalidate the 2000 Contract (which, as extended, is
still in force) as well as to impose penalties equal to the sum of all amounts
paid to us under the 1997 Contract and the 2000 Contract from January 1997 to
present, which we estimate to be approximately US$650 million at current
exchange rates, plus certain other permitted amounts, minus our proven
investment costs. As of this filing, we have not been served with notice of this
civil action, nor is it available as a public record. We expect to mount a
vigorous challenge to the far-reaching claims reported to be part of this
lawsuit.

POPULAR CLAIM. In February 2004, Vincius Bijos, a Brazilian, commenced a public
class action lawsuit in Brazil's Brasilia District Court of the Federal District
against the Brazilian Federal government; CEF; several former and current
officers of CEF; the former president of Racimec; and GTECH Brazil, seeking,
among the relief requested of the Court, a preliminary injunction prohibiting
CEF from making further payments to GTECH Brazil under the 2000 Contract, and an
order that would terminate the 2000 Contract and require the defendants, jointly
and severally, to refund amounts received by GTECH Brazil under the 1997
Contract and the 2000 Contract, together with interest, appropriate monetary
adjustments, court costs and expenses. This public class action lawsuit bases
its claims upon numerous alleged defects and irregularities, which the suit
asserts violate Brazilian law, in the 1997 Contract and the 2000 Contract, and
the manner in which the procurement processes that gave rise to the awards of
these contracts were organized and administered. Among its claims, this lawsuit
asserts that CEF's procurement and contracting process unlawfully restricted
competition and gave preference to a non-Brazilian vendor over potential
Brazilian vendors, and that GTECH Brazil unlawfully abused its competitive
position in respect to these procurements and the related contracting processes.
We intend to mount a vigorous challenge to the far-reaching claims that make up
this lawsuit. We note that the Public Ministry Attorneys have filed an opinion
with the federal court disagreeing with the request that an injunction enjoining
payments from CEF to GTECH Brazil be entered and requesting that this suit be
consolidated with the Public Ministry Attorneys' civil action described above.

TCU AUDIT. As previously reported, on June 5, 2003, the Federal Court of
Accounts ("TCU"), the court charged with auditing agencies of the Brazilian
federal government and its subdivisions, summoned us, together with several
current and former employees of the CEF to appear before TCU's Brasilia court.
The summons required the defendants to show cause why they should not be
required to jointly pay a base amount determined by the TCU to be due of
R$91,974,625.10, duly indexed for inflation and interest as of May 26, 2000
(Decision No. 692/2003). We estimate that this claim, in aggregate, is for the
local currency equivalent of approximately US$61.3 million at current exchange
rates. The allegations underlying this summons are set forth in a report (the
"Audit Report") issued by the TCU in May 2003 respecting an audit conducted by
the TCU of the 1997 Contract.

The central allegation of the Audit Report is that under the 1997 Contract we
were accorded certain payment increases, and we contracted to supply to CEF
certain services, that were not contemplated by the procurement process
respecting the 1997 Contract and that are not otherwise permitted under
applicable Brazilian law. The Audit Report alleges that as a result of this, CEF
overpaid us under the 1997 Contract for the period commencing in January 1997
through May 26, 2000, and that we are liable with respect to such alleged
overpayments as specified above. The Audit Report further determines that TCU
shall audit the 2000 Contract and any other contract between us and CEF in
effect after May 26, 2000 respecting the provision by us of lottery services.
Moreover, the Audit Report states that the TCU will refer the Audit Report to,
among others, the Public Ministry Attorneys and the Brazil Federal
Police (who, we have been advised, are conducting an investigation of CEF's
public procurement

activities in general). See -- "Criminal Allegations Against Certain Employees,"
and "Civil Action by Public Ministry Attorneys," above. The Audit Report does
not allege that we have acted improperly.

In November 2003, we presented our defense to the claims and determination of
the TCU that CEF overpaid us. We plan to continue to vigorously defend ourselves
against the allegations made by TCU in the Audit Report and the proceedings
initiated by the TCU with respect thereto. While we believe that we have good
defenses to the claims and determination of the TCU, it is impossible at this
time for us to predict the outcome of the TCU proceedings, or provide an
estimate of losses likely to be incurred in connection with the resolution of
this matter, or its financial statement impact, if any.

CEF PROCUREMENT. As previously reported, we are involved in legal proceedings
with CEF respecting the CEF's plans for the operation of the National Lottery
after expiration of the 2000 Contract, as extended. These legal proceedings
began in June 2002, at which time CEF held a public hearing to reveal that it
plans, upon the termination of the 2000 Contract, to directly acquire all
terminals and certain related goods and services, to lease or to otherwise
directly acquire all necessary telecommunications equipment and services, and to
itself perform all necessary data processing services. In June 2002, we filed
before the 17th Federal Lower Court of Brasilia, a lawsuit captioned
"Atentadeo", in which we allege that CEF's proposed procurement process violates
said Court's judgment obtained by us in March 2001, pursuant to which, in the
context of a prior Request For Proposals proposed by CEF in 2000, we had
obtained a writ permitting us to submit an integrated bid for all goods and
services to be required under the successor to the 2000 Contract.

In June 2003, after a series of rulings by various Brazilian courts, the Federal
Higher Court of Brasilia issued a decision permitting CEF to obtain goods and
services necessary to operate the National Lottery after the termination of the
2000 Contract by publishing four separate Requests For Proposals (the "Four RFP
Procurement").

While legal proceedings continue, we believe that the June 2003 decision
indicates that we are unlikely ultimately to prevail in our challenge to CEF's
plans for a procurement process contemplating multiple vendors supplying lottery
goods and services to CEF after termination of the 2000 Contract in May 2005, or
earlier as described above. If CEF proceeds with the Four RFP Procurement, or a
similar plan involving multiple Requests For Proposal, and we are ultimately
unsuccessful in our efforts to be allowed to submit a single integrated bid for
all goods and services required under the successor to the 2000 Contract, it is
likely that our revenues with respect to any successor contract awarded to us by
CEF will be materially less than revenues earned by us under the 2000 Contract.
Moreover, while we will be the incumbent vendor with respect to this procurement
by CEF, there can be no assurance that we will be selected by CEF to supply
goods and services after termination of the 2000 Contract.

CEF's President recently indicated that in order to accommodate an as-of-yet
undisclosed procurement process, it is his intent to seek to negotiate: (a)
certain concessions from GTECH Brazil relating to pending court actions
respecting CEF procurement matters, and (b) an extension of the term of the 2000
Contract. See "Background" above.

SERLOPAR SUIT

As previously reported, in April 2002 Serlopar, the lottery authority for the
Brazilian state of Parana, sued our subsidiaries Dreamport Brasil Ltda. and
GTECH Brasil Ltda. in the 2nd Public Finance Court of the City of Curitiba,
State of Parana, under an agreement dated July 31, 1997, as amended (the "VLT
Agreement"). Pursuant to the VLT Agreement, we agreed to install and operate
video lottery terminals ("VLTs") in Parana. Serlopar alleges in its suit that we
installed only 450 of the 1,000 VLTs that we were allegedly obliged to install,
and that we were overpaid, and failed to reimburse Serlopar certain amounts
alleged to be due to Serlopar, under the VLT Agreement. Serlopar seeks payment
from us of approximately US$28 million (at current foreign exchange rates) with
respect to these claims, together with unspecified amounts alleged to be due
from the defendants with respect to general losses and damages (including loss
of revenues) and court costs and legal fees. We believe we have good defenses to
the claims made by Serlopar in this lawsuit, and we intend to continue to defend
ourselves vigorously in these proceedings. We believe that the outcome of this
suit will not have a material impact on our financial statements or business.

OTHER LEGAL PROCEEDINGS

SHAREHOLDER CLASS ACTION SUIT

As previously reported, we, together with William Y. O'Connor, our former
Chairman and Chief Executive Officer, Steven P. Nowick, our former President and
Chief Operating Officer, and W. Bruce Turner, our former Chairman and current
President and Chief Executive Officer, were named as defendants in a shareholder
class action suit captioned Sandra Kafenbaum and Steven Schulman, individually
and on behalf of all others similarly situated v. GTECH Holdings Corporation,
et. al., which suit was filed in the U.S. District Court of Rhode Island in
August 2000 and subsequently amended in February 2001. As amended, the complaint
filed in the case generally alleges that with respect to various announcements
made between July 13, 1998 and August 29, 2000, we and the other defendants
violated federal securities laws (including Section 10(b) of the Securities
Exchange Act of 1934) by making allegedly false and misleading statements
(including statements alleged to be overly optimistic respecting certain lottery
contract awards to us and respecting our prospects in certain non-lottery
business lines and investments), while failing to disclose in a timely manner
certain allegedly material adverse information that we purportedly had a duty to
disclose (including an alleged inability to close certain contract awards and as
to certain alleged cost overruns). The complaint seeks to recover monetary
compensation for all damages sustained as a result of defendants' alleged
wrongdoing in an amount to be determined at trial (including pre-judgment and
post-judgment interest thereon), costs and expenses incurred in connection with
the suit (including counsel fees and expert fees) and such other and further
relief as the court may deem just and proper. In April 2001, we and the other
defendants moved to dismiss the complaint on the grounds that the allegations
made in the complaint are unsupported by fact and fail, in any event, to state a
cause of action under the federal securities laws. Oral argument for our motion
to dismiss was held in October 2001. In September 2002, the Court ruled on our
motion, granting the motion to dismiss as to certain of our statements, but
denying the motion to dismiss as to certain other of our statements cited in the
complaint. The Court also granted our motion to dismiss plaintiff's claim
against Mr. Turner, holding that there are no actionable statements attributable
to him. We believe that we have good defenses to the claims made in this
lawsuit. Nevertheless, at the present time we are unable to predict the outcome
of this lawsuit or provide an estimate of losses likely to be incurred in
connection with this matter or its financial statement impact, if any.

COHEN SUIT

As previously reported, on August 7, 2002 we terminated without cause the
employment of Howard S. Cohen, our former President and Chief Executive Officer.
In March 2003, Mr. Cohen attempted to exercise options granted by us in April
2002 to purchase 450,000 shares of our Common Stock at a per-share exercise
price of $23.30. The non-qualified stock option agreement entered into between
Mr. Cohen and us respecting the April 2002 grant of options provides by its
terms that, in the event that Mr. Cohen's employment was terminated without
cause, options remaining exercisable must be exercised within six months from
the date of termination (i.e., by February 7, 2003). Because Mr. Cohen had
failed to exercise his April 2002 options within the term provided in the
applicable stock option agreement, we did not permit Mr. Cohen to exercise these
options. In May 2003, Mr. Cohen filed suit in Rhode Island Superior Court
against us and the attorneys who had advised him in connection with the
negotiation of his severance agreement, respecting his attempt to exercise the
April 2002 stock options. The suit, captioned Howard S. Cohen v. GTECH
Corporation, GTECH Holdings Corporation, Michael J. Tuchman, Levenfeld
Pearlstein, Charlene F. Marant and Marant Enterprises Holdings LLC, alleges
that: (i) we breached our agreements with Mr. Cohen in failing to allow him to
exercise his April 2002 options; (ii) through fraud by us, or the mutual mistake
of the parties, the April 2002 option grant does not reflect the intent of the
parties, and (iii) we had a duty to advise Mr. Cohen of his mistaken belief (if
such it was) as to the exercise term of the April 2002 options, and failed to so
advise Mr. Cohen. Mr. Cohen also alleges that his attorneys had failed in their
duty of care in misadvising him as to the correct period during which he could
exercise his options, and, in addition, had practiced law in Rhode Island
without a license in violation of applicable Rhode Island law. Mr. Cohen seeks
damages against us and the other defendants in an amount of not less than $4.0
million, plus interest, costs and reasonable attorneys fees. With respect to us,
he also seeks an order reforming the terms of the April 2002 option grant to
reflect the alleged intent of the parties with respect to the post-termination
exercise term, and other equitable relief. Mr. Cohen also asks for a declaratory
judgment construing our 2000 Omnibus Stock Option and Long Term Incentive Plan
and Mr. Cohen's employment and severance agreements, as to the relevant option
exercise period. We believe that we have good defenses to the claims made by Mr.
Cohen in this lawsuit and we intend to vigorously defend ourselves in these
proceedings. Nevertheless, at the present time we are unable to predict the
outcome of this lawsuit.

For further information respecting legal proceedings, see Item 1, "Certain
Factors Affecting Future Performance" and Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," of this report, and
Item 8, Note 13 to Notes to Consolidated Financial Statements included in this
report. We also are subject to certain other legal proceedings and claims which
management believes, on the basis of information presently available to it, will
not materially adversely affect our 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 the security holders of GTECH Holdings
Corporation ("Holdings") during the last quarter of fiscal 2004.

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

The Executive Officers of Holdings as of April 1, 2004 are:

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

W. Bruce Turner 44 President and Chief Executive Officer since August 2002. Mr. Turner, who is
also a Director of Holdings, was elected the Chairman of Holdings by the Board
in July 2000, and subsequently served as Holdings' acting Chief Executive
Officer from August 2000 through March 2001. Previously, Mr. Turner was an
independent consultant and private investor from February 1999 to July 2000.
Mr. Turner was a Managing Director, Equity Research, for Salomon Smith Barney
(formerly Salomon Brothers) from January 1994 until February 1999; and
Director, Leisure Equity Research for Raymond James & Associates from October
1989 until January 1994.

David J. Calabro 54 Executive Vice President and Chief Operating Officer since October 2002, having
previously been Executive Vice President, Global Operations, from October 2001,
and Senior Vice President with responsibility for the Company's worldwide
facilities management business, from March 1999. Previously, Mr. Calabro was
employed by Unisys Corporation, a leading provider of information technology,
from May 1995 through February 1999 as its Vice President and General Manager
of the United States and Canada Public Sector Market Group, and prior to that,
was Director of Business Operations (Government Systems Group) from August 1987
through April 1995 for Digital Equipment Corporation, a leading supplier of
computer goods and services.

Marc A. Crisafulli 35 Senior Vice President, Gaming Solutions since December 2003; Senior Vice
President, General Counsel and Secretary since March 2001 and Chief Compliance
Officer since September 2001. Previously, Mr. Crisafulli was an associate (from
September 1994 through June 2000) and a partner (from July 2000 through March

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

2001) of the Providence-based law firm of Edwards & Angell, LLP where he
practiced as a commercial trial lawyer.

Kathleen E. McKeough 53 Senior Vice President, Human Resources since May 2000. Previously, Ms. McKeough
was Senior Vice President of Human Resources of Allied Domecq Retailing U.S., a
subsidiary of Allied Domecq, a leading producer and distributor of wines and
spirits and owner of quick-service restaurants, from 1996 to 1999, and prior to
this, was Chief Financial Officer and Treasurer of Allied Domecq Retailing U.S.
from 1994 to 1996.

Timothy B. Nyman 53 Senior Vice President of Global Services since October 2002. Previously,
beginning in 1981, Mr. Nyman was employed by the Company in a series of
increasingly responsible positions including, through September 2002, as the
Company's Vice President of Client Services.

Jaymin B. Patel 36 Senior Vice President and Chief Financial Officer since January 2000.
Previously, beginning in 1994, Mr. Patel was employed by the Company in a
series of increasingly responsible positions including, from April 1998 until
January 2000, as GTECH's Vice President, Financial Planning and Business
Evaluation. Prior to his arrival at the Company, Mr. Patel served as a
Chartered Accountant with PriceWaterhouse in London.

Donald R. Sweitzer 56 Senior Vice President, Global Business Development & Public Affairs, since
February 2003. Mr. Sweitzer joined the Company in July 1998 as its Senior Vice
President, Government Relations, and later served as the Company's Senior Vice
President, Public Affairs, through January 2003. Previously, Mr. Sweitzer was
President of the Dorset Resource and Strategy Group, a government affairs
consultancy, from November 1996 through June 1998, and President and Managing
Partner of Politics Inc., a political consulting firm, from January 1995
through August 1996. Mr. Sweitzer also served as the Political Director of the
Democratic National Committee from April 1993 through January 1995, and served
as the Finance Director of this same body from April 1985 through January 1989.

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

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

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.

All share prices set forth below reflect the 2-for-1 stock split of the Common
Stock effected in the form of a stock dividend distributed during the first
quarter of fiscal 2003.

FISCAL 2003 HIGH LOW
----------- ---- ---

First Quarter (February 24 - May 25, 2002) $30.49 $23.00
Second Quarter (May 26 - August 24, 2002) $30.08 $17.62
Third Quarter (August 25 - November 23, 2002) $26.49 $18.38
Fourth Quarter (November 24, 2002 - February 22, 2003) $29.35 $22.60

FISCAL 2004 HIGH LOW
----------- ---- ---

First Quarter (February 23 - May 24, 2003) $36.95 $26.79
Second Quarter (May 25 - August 24, 2003) $41.90 $33.30
Third Quarter (August 24 - November 22, 2003) $49.09 $40.05
Fourth Quarter (November 23, 2003 - February 28, 2004) $60.23 $47.41

The closing price of the Common Stock on the New York Stock Exchange on April 6,
2004 was $60.60. As of April 6, 2004, there were approximately 765 holders of
record of the Common Stock.

Prior to July 2003, Holdings had never paid cash dividends on its Common Stock.
In July 2003, we announced that Holdings' Board of Directors had approved an
annual cash dividend in the amount of $0.68 per share, payable quarterly
beginning in the second quarter of fiscal 2004. Holdings accordingly declared
and paid cash dividends in the amount of $0.17 per share in each of July and
October 2003 and January and April 2004. Due to the fact that Holdings is a
holding company, and its operations are conducted through the Company, the
ability of Holdings to pay dividends on its Common Stock in the future will be
dependent on the earnings and cash flow of its subsidiaries, and the
availability of such cash flow to Holdings.

The remainder of the response to this Item incorporates by reference Item 8,
Note 17 to Notes to Consolidated Financial Statements. All securities reflected
on Note 17 are authorized for issuance under compensation plans previously
approved by Holdings' shareholders.

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 in this report. With the exception of the number
of lottery customers at year end, the data in the table is derived from our
consolidated financial statements which were audited by independent auditors.

Fiscal Year Ended
------------------------------------------------------------------------
February 28, February 22, February 23, February 24, February 26,
2004 (a) 2003 2002 2001 2000
------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)

OPERATING DATA:
Revenues:
Services $ 957,471 $ 868,896 $ 831,787 $ 856,475 $ 860,419
Sales of products 93,859 109,894 177,914 80,068 150,379
----------- ----------- ----------- ----------- -----------
Total 1,051,330 978,790 1,009,701 936,543 1,010,798
Gross Profit:
Services 419,632 333,855 245,479 292,380 305,110
Sales of products 34,633 30,951 41,462 5,224 48,426
----------- ----------- ----------- ----------- -----------
Total 454,265 364,806 286,941 297,604 353,536

Special charges (credit) (b) - (1,121) - 42,270 (1,104)
Operating income 287,855 226,945 134,350 81,905 180,000
Net income 183,200 142,021 68,026 43,148 93,585

PER SHARE DATA:
Basic $ 3.15 $ 2.49 $ 1.15 $ 0.62 $ 1.29
Diluted 2.84 2.43 1.13 0.62 1.29

DIVIDENDS PAID $ 29,977 $ - $ - $ - $ -

BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents $ 129,339 $ 116,174 $ 35,095 $ 46,948 $ 11,115
Investment securities available-for-sale 221,850 - - - -
Total assets 1,559,131 954,195 853,829 938,160 891,023
Long-term debt, less current portion 463,215 287,088 329,715 316,961 349,400
Shareholders' equity 562,289 315,566 202,955 314,362 296,576

CASH FLOW DATA:
Net cash provided by operating activities $ 414,336 $ 332,256 $ 345,230 $ 251,970 $ 230,782
Net cash used for investing activities (612,459) (158,608) (164,726) (162,566) (164,343)
Net purchases of available-for-sale investment securities 221,850 - - - -
----------- ----------- ----------- ----------- -----------
Free cash flow (c) $ 23,727 $ 173,648 $ 180,504 $ 89,404 $ 66,439
=========== =========== =========== =========== ===========

Net cash provided by (used for) financing activities $ 206,937 $ (96,193) $ (188,341) $ (50,725) $ (67,753)

OTHER DATA:
Income before income taxes $ 290,794 $ 229,066 $ 109,720 $ 70,735 $ 155,977
Interest expense 10,919 11,267 22,876 27,165 29,032
Depreciation and amortization 119,059 138,185 168,543 174,395 185,376
----------- ----------- ----------- ----------- -----------
EBITDA (d) $ 420,772 $ 378,518 $ 301,139 $ 272,295 $ 370,385
=========== =========== =========== =========== ===========

Number of lottery customers at year-end (e) 84 84 82 83 82

- ----------
(a) 53-week year.

(b) The impact of the special charges (credit) on earnings per share on a
diluted basis was ($0.01), $0.37 and ($0.01) in fiscal 2003, 2001 and 2000,
respectively.

(c) Free cash flow (net cash provided by operating activities less net cash
used for investing activities, excluding the net purchases of
available-for-sale investment securities), represents the excess cash flows
generated over and above the investment of capital required to both
maintain and grow our ongoing revenue streams. Based upon the long term
contractual cycles in our business, we believe free cash flow trends
represent a useful guide to help determine the amount of internally
generated capital available for enhancing long-term shareholder value,
through a balance of investing in new growth opportunities, the tax
efficient return of capital to our shareholders and repayment of debt
obligations. As we define it, free cash flow may not be comparable to other
similarly titled measures used by other companies.

(d) We believe that earnings before interest, taxes, depreciation and
amortization, or EBITDA, assists in explaining trends in our operating
performance, provides useful information about our ability to incur and
service indebtedness and is a commonly used measure of performance by
securities analysts and investors in the gaming industry. EBITDA should not
be considered as an alternative to operating income as an indicator of our
performance or to cash flows as a measure of our liquidity. As we define
it, EBITDA may not be comparable to other similarly titled measures used by
other companies.

(e) A lottery customer is defined as a jurisdiction utilizing our systems or
products for a traditional online lottery.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The following Management's Discussion and Analysis ("MD&A") is intended to help
the reader understand the financial results of GTECH Holdings Corporation. MD&A
is provided as a supplement to, and should be read in conjunction with, our
financial statements and the accompanying notes. This overview provides guidance
on the individual sections of MD&A as follows:

- - FORWARD-LOOKING STATEMENTS - cautionary information about forward-looking
statements.

- - OUR BUSINESS - a general description of our business; various legal
proceedings relating to Brazil; acquisitions; significant contract bids and
extensions; the consolidation of a special-purpose entity; and our common
stock split.

- - APPLICATION OF CRITICAL ACCOUNTING POLICIES - a discussion of accounting
policies that require critical judgments and estimates.

- - OPERATIONS REVIEW - an analysis of our consolidated results of operations
for the three years presented in our financial statements. We operate in
one business - Transaction Processing, and we have a single operating and
reportable business segment. Therefore, our discussions are not quantified
by segment results.

- - LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION - an analysis of cash
flows, financial position, contractual obligations and potential
commitments.

- - FINANCIAL RISK MANAGEMENT AND DIVIDEND POLICY - information about financial
risk management; interest rate market risk; equity price risk; foreign
currency exchange rate risk; and our dividend policy.

- - SUBSEQUENT EVENTS - information about material events that occurred
subsequent to February 28, 2004.

Unless specified otherwise, we use the terms "Holdings," "the Company," "we,"
"our," and "us" in MD&A to refer to GTECH Holdings Corporation and its
consolidated subsidiaries included in the consolidated financial statements.

FORWARD-LOOKING STATEMENTS

Statements contained in this section and elsewhere in this report which are not
historical statements constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934. Generally, the words "believe," "expect," "estimate," "anticipate,"
"will," "may," "could," "plan," "continue," and similar expressions identify
forward-looking statements. See Item 1 - "Forward-Looking Statements" and
"Certain Factors That May Affect Future Performance" for further information.

OUR BUSINESS

GENERAL

We operate on a 52-week or 53-week fiscal year ending on the last Saturday in
February. Fiscal 2004 was a 53-week year and we included the extra week in our
fourth quarter ending February 28, 2004. Fiscal 2003 and 2002 were 52-week
years.

We are a global technology services company providing software, networks and
professional services that power high-performance solutions. We are the world's
leading operator of highly-secure online lottery transaction processing systems,
operating in 44 countries worldwide and we have a growing presence in commercial
services transaction processing. In fiscal 2004, approximately 93% of our
consolidated revenues were lottery related and approximately 7% were derived
from commercial services transaction processing. Comparatively, in fiscal 2003,
lottery related revenues and commercial services transaction processing revenues
were approximately 95% and 5% of our consolidated revenues, respectively.

Being a global business, we derive a substantial portion of our revenue from our
operations outside of the United States. In particular, in fiscal 2004, we
derived 49.4% of our revenues from international operations and 10.2% of our
revenues from our Brazilian operations alone (including 9.7% of our revenues
from Caixa Economica Federal, the operator of Brazil's National Lottery, our
largest customer in fiscal 2004 based on annual revenues). In addition,
substantial portions of our assets, primarily consisting of equipment we use to
operate online lottery systems for our customers, are held outside of the United
States. We are also exposed to more general risks of international operations,
including increased governmental regulation of the online lottery industry in
the markets where we operate; exchange controls or other currency restrictions;
and significant political instability.

We have derived substantially all of our revenues from the rendering of services
and the sale or supply of computerized online lottery systems and components to
government-authorized lotteries. Our service revenues are derived primarily from
lottery service contracts, which are typically at least five years in duration,
and generally provide compensation to us based upon a percentage of a lottery's
gross online and instant ticket sales. These percentages vary depending on the
size of the lottery and the scope of services provided to the lottery. We
primarily derive product sale revenues from the installation of new online
lottery systems, installation of new software and sales of lottery terminals and
equipment in connection with the expansion of existing lottery systems. Our
product margins fluctuate depending on the mix, volume and timing of product
sale contracts. Our product sale revenues from period to period may not be
comparable due to the size and timing of product sale transactions. During
fiscal 2005, we currently anticipate that product sales will be in the range of
$210 million to $220 million.

Our business is highly regulated, and the competition to secure new government
contracts is often intense. From time to time, competitors challenge our
contract awards and there have been, and may 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.
In light of the fact that such investigations frequently are conducted in
secret, we may not necessarily know of the existence of an investigation which
might involve us. Because our reputation for integrity is an important factor in
our business dealings with lottery and other governmental agencies, a
governmental allegation or a finding of improper conduct on our part or
attributable to us in any manner could have a material adverse effect on our
business, including our ability to retain existing contracts or to obtain new or
renewal contracts. In addition, continuing adverse publicity resulting from
these investigations and related matters could have a material adverse effect on
our reputation and business. See the following for further information
concerning these matters and other contingencies:

- - Part I, Item 1 - "Certain Factors That May Affect Future Performance -
Government regulations and other actions affecting the online lottery
industry could have a negative effect on our business and sales;"

- - Part I, Item 3 - "Legal Proceedings;"

- - Note 13 to the consolidated financial statements.

BRAZIL LEGAL PROCEEDINGS

In late March 2004 (after the close of fiscal 2004), federal attorneys with
Brazil's Public Ministry (the "Public Ministry Attorneys") recommended that
criminal charges be brought against nine individuals, including four senior
officers of Caixa Economica Federal ("CEF"), our customer and the operator of
Brazil's National Lottery, and a former and a present employee of our Company.
An investigation is being conducted on our behalf to ascertain the facts
regarding this matter. The Company has encouraged our former and present
employees to cooperate fully with the Brazilian authorities investigating this
matter. In addition, the United States Securities and Exchange Commission has
made an informal inquiry as to this matter, and we are cooperating with this
inquiry. We recently have learned through a press release issued by the Public
Ministry Attorneys that a civil action has been initiated by the Public Ministry
Attorneys in the Federal Court of Brasilia against GTECH Brasil Ltd. ("GTECH
Brazil"); 17 former officers and employees of CEF; the former president of
Racimec Informatica Brasileira S.A. ("Racimec") a Brazilian company engaged in
the lottery business and the predecessor of GTECH Brazil; and two former
officers of GTECH Brazil. The focus of the purported civil action is the
contractual relationship between CEF, GTECH Brazil and Racimec for the period
1994 to 2002. Revenues from our lottery contract with CEF accounted for 9.7% of
our total fiscal 2004 revenues, making CEF our largest customer in fiscal 2004
based upon annual revenues. Refer to Part I, Item 3, "Legal
Proceedings--Brazilian Legal Proceedings, The CEF Contract Proceedings," and
Note 13 to the consolidated financial statements for detailed disclosures
regarding this matter.

ACQUISITIONS

During fiscal 2004, we extended our online lottery product offerings by
acquiring Interlott Technologies, Inc. ("Interlott"), a leading provider of
instant ticket vending machines for the worldwide lottery industry, for an
aggregate purchase price, including assumed debt, of $87.5 million. We believe
our acquisition of Interlott will expand our presence in the instant-ticket
distribution business, thereby anchoring our self-service strategy and allowing
us to grow our core lottery market.

We also acquired a controlling equity position in PolCard S.A. ("PolCard") this
fiscal year, for a purchase price, net of cash acquired, of $35.9 million.
PolCard is the leading debit and credit card merchant transaction acquirer and
processor in Poland. This acquisition has broadened our offerings of high-volume
transaction processing services outside of our core market of providing online
lottery services.

Refer to "Subsequent Events" below for information related to acquisitions
completed after the close of fiscal 2004.

We continue to evaluate a variety of opportunities to broaden our offerings of
high-volume transaction processing services outside of our core market of
providing online lottery services, such as the processing and transmission of
commercial, non-lottery transactions including bill payments, electronic tax
payments, utility payments, prepaid cellular telephone recharges and
retail-based programs such as gift cards. Currently, our networks in Brazil,
Poland, Chile, the Czech Republic and Jamaica process bill payments and other
commercial service transactions. In the near term, we expect to concentrate our
efforts to grow commercial service revenues principally in the United States,
Latin America and Eastern Europe. While our goal is to leverage our technology,
infrastructure and relationships to drive growth in commercial services, if, in
the course of pursuing these opportunities, we identify an opportunity to gain
access to certain markets through the acquisition of existing businesses, we may
consider making such acquisitions.

SIGNIFICANT CONTRACT BIDS AND EXTENSIONS

A majority of our revenues and cash flow is derived from our portfolio of
long-term online lottery service contracts, each of which in the ordinary course
of our business is periodically the subject of competitive procurement or
renegotiation. In fiscal 2004, we continued to execute against our growth
strategy by signing new contracts and contract extensions both domestically and
abroad.

Contracts with New Customers

During fiscal 2004, following public, competitive procurements, we signed
contracts to provide new online and instant-ticket lottery systems, terminals
and related services with three new customers: Tennessee Education Lottery
Corporation; Florida Lottery; and Mahapola Higher Education Scholarship Trust
Fund (Sri Lanka).

TENNESSEE EDUCATION LOTTERY CORPORATION

We signed a seven-year integrated services contract (which does not include any
extension options) with the Tennessee Education Lottery Corporation in January
2004. Instant-ticket sales commenced in January 2004 and lottery sales on the
online lottery system commenced in March 2004.

FLORIDA LOTTERY

We signed a six-year integrated services contract with the Florida Lottery which
is expected to commence in February 2005 and includes two, two-year extension
options.

SRI LANKA

In Sri Lanka, we signed a 10-year integrated services contract, which includes a
five-year extension option. Online sales had been expected to commence under our
Sri Lanka lottery contract in September 2004, but in March 2004, lawsuits were
filed by competitors challenging the award of the contract to us. These legal
challenges have delayed and may prevent implementation of our contract in Sri
Lanka.

New Contracts with Existing Customers

In May 2003, we entered into a Master Contract with the Rhode Island Lottery
(the "Lottery") that amends our existing contracts with the Lottery and grants
us the right to be the exclusive provider of online, instant-ticket and video
lottery central systems and services for the Lottery during the 20-year term of
the Master Contract for a $12.5 million up-front license fee which we paid in
July 2003. The Master Contract is part of a comprehensive economic development
package that provides incentives for us to keep our world corporate headquarters
and manufacturing operations in Rhode Island. See Note 8 to the consolidated
financial statements for further information concerning this contract.

In February 2004, following a competitive procurement, we were selected
by the Mexican lottery authority Pronosticos para la Asistencia Publica to
enter into a six-year agreement to provide equipment and services for a new
online lottery system and an associated telecommunications network. In late
April 2004, we were notified that this award has been revoked. This action
follows a ruling by the Mexican Comptroller Ministry in respect of a protest
filed by unsuccessful competitors that declared our bid non-compliant and
disqualified us from the competitive procurement. The Mexican lottery authority
subsequently announced that it has disqualified the sole remaining bidder as
also being non-compliant and has formally ended the procurement. We intend to
pursue all appropriate avenues to contest the Comptroller's decision.

Contract Extensions

During fiscal 2004, we entered into contract extensions with existing customers
in the following jurisdictions: Brazil (National Lottery); Wisconsin; Trinidad
and Tobago; the Czech Republic; Michigan; China; Denmark; New Zealand; Portugal;
Turkey; Sweden; and Idaho (Department of Fish and Game).

The National Lottery of Brazil was our largest contract in fiscal 2004, as
measured by annual revenues, accounting for 9.7% of our consolidated revenues.
See Part I, Item 3 - "Legal Proceedings--Brazilian Legal Proceedings, The CEF
Contract Extension Proceedings," and Note 13 to the consolidated financial
statements for further information concerning this contract.

New Contracts and Contract Extensions Subsequent to Fiscal 2004

In March 2004, following a competitive procurement, we were named as the
apparent successful bidder to provide the Washington Lottery with Lottery
Product Vending Machines and ongoing maintenance and support services. The
proposed three-year contract includes three one-year extension options.

Also in March 2004, following a competitive procurement, we received a notice of
intent to award a contract to provide the Illinois Lottery with Instant Ticket
Dispensing Machines and ongoing maintenance and support services. The proposed
five-year contract includes a three-year extension option.

In April 2004, we signed a five-year contract extension with our customer in
Luxembourg to provide lottery terminals, products and ongoing services through
October 2012.

Other Contract Information

During fiscal 2004, following a competitive procurement, the Nebraska lottery
authority selected another vendor to provide equipment and services for a new
online lottery gaming system upon the scheduled expiration of our current
contract with the Nebraska Lottery in June 2004, however, we will remain as the
Nebraska Lottery's instant-ticket products and system supplier through June
2008.

In May 2004 (after the close of fiscal 2004), we were notified by our customer,
Loteria Electronica de Puerto Rico, of its intent to negotiate a contract to
provide a new online lottery system and an associated telecommunications network
with another vendor to take effect upon the expiration of our current contract
in March 2005.

Our compensation under lottery service contracts is typically based upon a
percentage of a lottery's gross online and instant ticket sales. Over the past
several fiscal years, we have experienced and may continue to experience a
reduction in the percentage of lottery ticket sales we receive from certain
customers resulting from contract rebids, extensions and renewals due to a
number of factors, including the substantial growth of lottery sales over the
last decade, reductions in the cost of technology and telecommunications
services, and general market and competitive dynamics. In anticipation and
response to these trends, beginning in fiscal 2001, we began the implementation
of our new Enterprise Series-led technology strategy combined with the
implementation of a number of ongoing cost savings initiatives and efficiency
improvement programs designed to enable us to maintain our market leadership in
the lottery industry. We are unable to determine at this time the likely effect
of this trend on our business.

See Part I, Item 1 - "Certain Factors That May Affect Future Performance - Our
lottery operations are dependent upon our continued ability to retain and extend
our existing contracts and win new contracts" and "Significant Developments
Since the Start of Fiscal 2004 - Lottery Contract Awards " for further
information concerning these matters.

CONSOLIDATION OF WEST GREENWICH TECHNOLOGY ASSOCIATES, L.P.

We have a 50% limited partnership interest in West Greenwich Technology
Associates, L.P. (the "Partnership"), which owns our world headquarters
facilities and leases them to us. The general partner of the Partnership is an
unrelated third party. This Partnership is considered a variable interest entity
commonly referred to as a special-purpose entity, as defined by Financial
Accounting Standards Board Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("FIN 46").

Prior to the third quarter of fiscal 2004, we accounted for the Partnership
using the equity method of accounting. Beginning in the third quarter of fiscal
2004, we consolidated the Partnership in accordance with FIN 46, which requires
the consolidation of a variable interest entity (as defined) by its primary
beneficiary. As a result, we recorded our world headquarters facilities owned by
the Partnership as an asset and the Partnership's loan as a liability in our
consolidated financial statements. The adoption of this interpretation increased
balance sheet assets and liabilities by $30.0 million and $26.7 million,
respectively, and resulted in a one-time, non-cash, after-tax gain of $3.3
million. The pre-tax gain of $5.3 million is recorded in Other Income (Expense)
in our Consolidated Income Statements and not as a cumulative-effect adjustment
because the gain is not material to our consolidated financial statements.

COMMON STOCK SPLIT

In the first quarter of fiscal 2003, our Board of Directors approved a 2-for-1
common stock split that was distributed in the form of a stock dividend on May
23, 2002 to shareholders of record on May 16, 2002. All references to common
shares and per share amounts have been retroactively adjusted to reflect the
stock split for fiscal 2003 and 2002 as presented in the consolidated financial
statements and footnotes.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

We have identified the accounting policies listed below that we believe are most
critical to our financial condition and results of operations, and that require
management's most difficult, subjective and complex judgments in estimating the
effect of inherent uncertainties. This section should be read in conjunction
with Note 1 to the consolidated financial statements, which includes other
significant accounting policies.

REVENUE RECOGNITION

Amounts received from customers in advance of revenue recognition are recorded
in Advance Payments from Customers in our Consolidated Balance Sheets. We record
liquidated damage assessments, which are penalties incurred due to a failure to
meet specified deadlines or performance standards, as a reduction of revenue in
the period they become probable and estimable. Liquidated damage assessments
equaled 0.50%, 0.47% and 0.14% of our total revenues in fiscal 2004, 2003 and
2002, respectively.

Service revenues from commercial transaction processing services are recorded
based on the net amount retained in accordance with Emerging Issues Task Force
Issue No. 99-19, "Reporting Revenue Gross as a Principal Versus Net as an
Agent."

We generally conduct out lottery business under two types of contractual
arrangements: Facilities Management Contracts and Product Sales Contracts.

Facilities Management Contracts

Under typical Facilities Management Contracts, we construct, install and operate
the lottery system, and retain ownership of the lottery system. These contracts
generally provide for a variable amount of monthly or weekly service fees paid
to us directly from the lottery authority based on a percentage of a lottery's
gross online and instant ticket sales. These fees are recognized as revenue in
the period earned and are classified as Service Revenue in our Consolidated
Income Statements.

Product Sales Contracts

Under Product Sales Contracts, we construct, sell, deliver and install a turnkey
online lottery system ("lottery system") or lottery equipment, and license the
computer software for a fixed price, and the lottery authority subsequently
operates the lottery system.

Because Product Sales Contracts include significant customization, modification
and other services prior to customer acceptance that are considered essential to
the lottery software inherent in our lottery systems, revenue is recognized
using contract accounting. Under contract accounting, amounts due to us, and
costs incurred by us in constructing the lottery system, prior to customer
acceptance, are deferred. Revenue attributable to the lottery system is
classified as Sales of Products in our Consolidated Income Statements and is
recognized upon customer acceptance as long as there are no substantial doubts
regarding collectibility (the completed contract method of accounting). Revenue
attributable to any ongoing services provided subsequent to customer acceptance
is classified as Service Revenue in our Consolidated Income Statements and is
recognized in the period earned because the lottery system has stand-alone value
to the customer and there is objective and reliable evidence of fair value of
the ongoing services.

In certain Product Sale Contracts (primarily the sale of lottery terminals), we
are not responsible for installation. In these cases, we recognize revenue when
it is realized or realizable and earned. We consider revenue realized or
realizable and earned when we have persuasive evidence of an arrangement, the
product has been shipped or the services have been provided to the customer,
customer acceptance criteria (if any) have been met, the sales price is fixed or
determinable and collectibility is reasonably assured.

INCOME TAX EXPENSE AND ACCRUALS

Our annual income tax rate is based upon our income, statutory tax rates and tax
planning opportunities available to us in the various jurisdictions in which we
operate. Significant judgment is required in determining our annual income tax
rate and in evaluating our tax positions. We establish reserves when, despite
our belief that our tax return positions are fully supportable, we believe that
certain positions are likely to be challenged and that we may not succeed. We
adjust these reserves in light of changing facts and circumstances, such as the
result of a tax audit. An estimated effective income tax rate for a year is
applied to our quarterly operating results. In the event there is a significant
or unusual item recognized in our quarterly operating results, the tax
attributable to that item is separately calculated and recorded at the same time
as that item.

Tax law requires items to be included in the income tax return at different
times than the items are reflected in the financial statements. As a result, our
annual income tax rate reflected in our financial statements is different than
that reported in our tax return (our cash tax rate). Some of these differences
are permanent, such as expenses that are not deductible in our income tax
return, and some differences reverse over time, such as depreciation expense.
These timing differences create deferred tax assets and liabilities. Deferred
tax assets generally represent items that can be used as a tax deduction or
credit in our income tax return in future years for which we have already
recorded the tax benefit in our income statement. We establish valuation
allowances for our deferred tax assets when we believe expected future taxable
income is not likely to support the use of a tax deduction or credit in that tax
jurisdiction. Deferred tax liabilities generally represent income tax expense
recognized in our financial statements for which payment has been deferred, or
expense for which we have already taken a deduction in our income tax return but
we have not yet recognized as expense in our financial statements. We have not
recognized any United States income tax expense on undistributed international
earnings since we intend to reinvest the earnings outside the United States for
the foreseeable future.

A number of years may elapse before a particular matter, for which we have
established a reserve, is finally resolved. The number of years with open tax
audits varies depending on the tax jurisdiction. While it is often difficult to
predict the final outcome or the timing of resolution of any particular tax
matter, we believe our reserves reflect the most probable outcome of known
tax contingencies.

TRADE ACCOUNTS RECEIVABLE, NET AND SALES-TYPE LEASE RECEIVABLES

We evaluate the collectibility of trade accounts and sales-type lease
receivables on a customer-by-customer basis and we believe our reserves are
adequate; however, if economic circumstances change significantly resulting in a
major customer's inability or unwillingness to meet its financial obligations to
us, original estimates of the recoverability of amounts due to us could be
reduced by significant amounts requiring additional reserves. During fiscal 2004
and 2003, we did not experience any collectibility or billing problems with
any major customers or geographic localities for which revenue has been
recognized.

INVENTORIES AND OBSOLESCENCE

Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories include amounts related to products we manufacture or
assemble for our long-term service contracts, which are transferred to Systems,
Equipment and Other Assets Relating to Contracts in our Consolidated Balance
Sheets upon shipment. Inventories also include amounts related to product sales
contracts, including product sales under long-term contracts. We regularly
review inventory quantities on hand and record provisions for potentially
obsolete or slow-moving inventory based primarily on our estimated forecast of
product demand and production requirements. We believe our reserves are
adequate; however, should future sales forecasts change, our original estimates
of obsolescence could increase by a significant amount requiring additional
reserves.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets determined to have indefinite useful lives
are not amortized but are reviewed for impairment annually, or more frequently
if events or circumstances indicate that these assets may be impaired. Other
intangible assets determined to have definite lives are amortized over their
useful lives. We review other intangible assets with definite lives for
impairment to ensure they are appropriately valued if conditions exist that may
indicate the carrying value may not be recoverable. Such conditions may include,
among others, significant adverse changes in the extent or manner in which an
asset is being used or in legal factors or in the business climate that could
affect the value of an asset.

Because we have a single operating and reportable business segment (the
Transaction Processing Segment), we perform our goodwill impairment test by
comparing the fair value of the Transaction Processing segment with its book
value, including goodwill. If the fair value of the Transaction Processing
segment exceeds the book value, goodwill is not impaired. If the book value
exceeds the fair value, we would calculate the potential impairment loss by
comparing the implied fair value of goodwill with the book value. If the implied
goodwill is less than the book value, a write-down would be recorded.

IMPAIRMENT OF LONG-LIVED ASSETS

We periodically evaluate the recoverability of long-lived assets whenever
indicators of impairment are present. Indicators of impairment include such
items as declines in revenues, earnings or cash flows or material adverse
changes in the economic or political stability of a particular country, which
may indicate that the carrying amount of an asset is not recoverable. If facts
and circumstances indicate that our long-lived assets may be impaired, the
estimated future undiscounted cash flows associated with these long-lived assets
would be compared to their carrying amounts to determine if a write-down to fair
value is necessary.

OPERATIONS REVIEW

Refer to the Summary Financial Data table while reading the operations review
below.

SUMMARY FINANCIAL DATA

Fiscal Year Ended
---------------------------------------------------
February 28, February 22, February 23,
2004 2003 2002
---------------- --------------- --------- -----
(Dollars in thousands)

Revenues:
Services $ 957,471 91.1% $868,896 88.8% $ 831,787 82.4%
Sales of products 93,859 8.9 109,894 11.2 177,914 17.6
--------- ----- -------- ----- --------- -----
Total 1,051,330 100.0 978,790 100.0 1,009,701 100.0

Costs and expenses:
Costs of services (a) 537,839 56.2 535,041 61.6 586,308 70.5
Costs of sales (a) 59,226 63.1 78,943 71.8 136,452 76.7
--------- ----- -------- ----- --------- -----
Total 597,065 56.8 613,984 62.7 722,760 71.6
--------- ----- -------- ----- --------- -----

Gross profit 454,265 43.2 364,806 37.3 286,941 28.4

Selling, general and administrative 109,092 10.4 96,130 9.8 112,763 11.2
Research and development 57,318 5.4 42,852 4.4 33,779 3.3
Goodwill amortization - - - - 6,049 0.6
Special credit - - (1,121) (0.1) - -
--------- ----- -------- ----- --------- -----
Operating expenses 166,410 15.8 137,861 14.1 152,591 15.1

Operating income 287,855 27.4 226,945 23.2 134,350 13.3

Other income (expense):
Interest income 5,733 0.5 3,837 0.4 5,450 0.5
Equity in earnings of unconsolidated
affiliates 6,236 0.6 7,376 0.8 3,959 0.4
Other income (expense) 1,889 0.2 2,175 0.2 (11,163) (1.1)
Interest expense (10,919) (1.0) (11,267) (1.2) (22,876) (2.2)
--------- ----- -------- ----- --------- -----
2,939 0.3 2,121 0.2 (24,630) (2.4)
--------- ----- -------- ----- --------- -----

Income before income taxes 290,794 27.7 229,066 23.4 109,720 10.9

Income taxes 107,594 10.3 87,045 8.9 41,694 4.2
---------------- -------- ----- --------- -----
Net income $ 183,200 17.4% $142,021 14.5% $ 68,026 6.7%
========= ===== ======== ===== ========= =====

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

COMPARISON OF FISCAL 2004 WITH 2003

Revenues were $1.1 billion in fiscal 2004, compared to $978.8 million in fiscal
2003, up $72.5 million, or 7.4%.

The following discussion on service revenues should be read in conjunction with
the table below (in millions):

Fiscal Year Ended
------------------------------------------------------
Change
February 28, February 22, ------------------
Service revenues 2004 2003 $ %
- ---------------- -------------- -------------- --------- ----

Domestic lottery $ 519.7 $ 492.6 $ 27.1 5.5
International lottery 360.9 323.6 37.3 11.5
Commercial services 74.2 50.0 24.2 48.5
All other 2.7 2.7 - -
-------------- -------------- -------- ----
$ 957.5 $ 868.9 $ 88.6 10.2
============== ============== ======== ====

The 5.5% increase in domestic lottery service revenues was primarily due to
higher service revenues from an increase in sales by our domestic lottery
customers of approximately 4% with the balance principally due to the combined
effect of an extra week of service revenues in fiscal 2004 and the acquisition
of Interlott. While we are not able to quantify precisely the reasons for
increases in sales by our domestic lottery customers, we believe that in
general, such increases are attributable to enhanced marketing efforts by state
lottery authorities seeking to offset declining tax revenues and the successful
introduction by state lottery authorities of new games and products,
modifications to existing games (such as matrix changes and more frequent
drawings) and expanded distribution channels, such as Keno.

The 11.5% increase in international lottery service revenues includes higher
service revenues from an increase in sales by our international lottery
customers of approximately 9%, along with the impact of the effect of an extra
week of service revenues in fiscal 2004 of approximately 1.5%, with the balance
of the increase due to the combined impact of favorable foreign exchange rates
partially offset by contractual rate changes. While we are not able to quantify
precisely the reasons for increases in sales by our international lottery
customers, we believe that in general, such increases are attributable to more
rapid growth rates typical of newer lottery jurisdictions, the successful
introduction of new games and modifications to existing games (such as matrix
changes and more frequent drawings).

The 48.5% increase in commercial transaction processing services was primarily
due to the acquisition of PolCard, which contributed $21.4 million of service
revenues in fiscal 2004.

Product sales were $93.9 million in fiscal 2004, compared to $109.9 million in
fiscal 2003, down $16.0 million or 14.6%. Significant product sales in the prior
year included the sale of a turnkey system to our customer in Portugal, and
significant product sales in the current year included the sale of an
interactive system to our customer in the United Kingdom.

Our service margins improved from 38.4% in fiscal 2003 to 43.8% in fiscal 2004,
primarily due to lower depreciation of approximately 2.0 percentage points,
principally related to fully depreciated assets associated with our contract
with Caixa Economica Federal in Brazil, with the balance of the increase
primarily due to the impact of higher service revenues.

Our product margins fluctuate depending on the mix, volume and timing of product
sales contracts. Our product margins were 36.9% in fiscal 2004 compared to 28.2%
in fiscal 2003, primarily due to the different mix of sales.

Operating expenses were $166.4 million in fiscal 2004, compared to $137.9
million in fiscal 2003, up $28.5 million, or 20.7%. This increase was driven by
$13.0 million of increased spending on selling, general and administrative
expenses, primarily driven by increased business development activities in
Poland and Mexico associated with our commercial services business and the
consolidation of PolCard and Interlott. In addition, our investment in research
and development increased by $14.4 million as we continue our efforts to
accelerate the development and deployment of Enterprise Series into the
marketplace. As a percentage of revenues, operating expenses were 15.8% and
14.1% during fiscal 2004 and 2003, respectively.

Interest income was $5.7 million in fiscal 2004, compared to $3.8 million in
fiscal 2003, up $1.9 million reflecting interest earned on the cash proceeds
from the $250 million of debt issued in the third quarter of fiscal 2004.

Equity income was $6.2 million in fiscal 2004 compared to $7.4 million in fiscal
2003, primarily due to lower equity income resulting principally from lower
revenues generated by our joint venture in Taiwan.

The components of other income in fiscal 2004 and fiscal 2003 are as follows (in
millions):

Fiscal Year Ended
-----------------------------
February 28, February 22,
2004 2003
-------------- -------------

One-time, non-cash, pre-tax gain resulting from the
consolidation of the partnership that owns our world
headquarters facilities $ 5.3 $ -
Minority interest in consolidated subsidiaries (4.5) (0.6)
Foreign exchange gains (losses) (0.2) 4.2
Net charges associated with the early retirement of debt - (2.3)
Other 1.3 0.9
------------- -------------
Total other income $ 1.9 $ 2.2
============= =============

The $5.3 million one-time, non-cash, pre-tax gain resulting from the
consolidation of the partnership that owns our world headquarters facilities was
recorded in compliance with Financial Accounting Standards Board Interpretation
No. 46, "Consolidation of Variable Interest Entities."

Weighted average diluted shares in fiscal 2004 increased by 6.8 million shares
to 65.1 million shares, primarily due to the assumed conversion of our $175
million principal amount of 1.75% Convertible Debentures (the "Debentures") into
shares of our common stock, resulting in a decrease to diluted earnings per
share of approximately $0.22. These Debentures are convertible at the option of
the holder into shares of our common stock at a conversion price of
approximately $27.50 per share when, among other circumstances, our stock closes
above $33 per share for at least 20 out of 30 consecutive trading days prior to
the date of surrender for conversion. There are a total of 6.4 million shares
issuable upon the conversion of the Debentures. The Debentures were convertible
for 209 out of 256 trading days in fiscal 2004, and accordingly, 5.2 million
shares were included in the computation of diluted earnings per share.

Our effective income tax rate decreased from 38% in fiscal 2003 to 37% in fiscal
2004 principally due to a larger percentage of international profits taxed at
rates that are lower than the U.S. statutory tax rate.

COMPARISON OF FISCAL 2003 WITH 2002

Revenues were $978.8 million in fiscal 2003, compared to $1.0 billion in fiscal
2002, down $30.9 million, or 3.1%.

The following discussion on service revenues should be read in conjunction with
the table below (in millions):

Fiscal Year Ended
------------------------------------------------------
Change
February 22, February 23, ------------------
Service revenues 2003 2002 $ %
- ---------------- -------------- -------------- --------- -----

Domestic lottery $ 492.6 $ 481.2 $ 11.4 2.4
International lottery 323.6 290.4 33.2 11.4
Commercial services 50.0 50.3 (0.3) (0.6)
All other 2.7 9.9 (7.2) (72.3)
-------------- -------------- -------- -----
$ 868.9 $ 831.8 $ 37.1 4.5
============== ============== ======== =====

Service revenues increased by 4.5% in fiscal 2003 compared to fiscal 2002. Had
last year's average exchange rates prevailed throughout fiscal 2003, we estimate
that service revenues would have increased by approximately 7.1% compared to
last year.

The 2.4% increase in domestic lottery service revenues includes higher service
revenues from an increase in sales by our domestic lottery customers of
approximately 7%, partially offset by the combined impact of lower jackpot
activity, net new contracts and contractual rate changes of approximately 4%.

The 11.4% increase in international lottery service revenues includes higher
service revenues from an increase in sales by our international lottery
customers of approximately 6% and the combined impact of higher jackpot
activity, net new contracts and contractual rate changes of approximately 8%.
These positive factors were partially offset by lower service revenues of
approximately 4% resulting from the weakening of the Brazilian real against the
U.S. dollar.

Service revenues from commercial transaction processing services (primarily in
Brazil), were down slightly from the prior year due to the weakening of the
Brazilian real against the U.S. dollar. In local currency, commercial
transaction processing service revenues increased approximately 20.5% over the
prior year.

Product sales were $109.9 million in fiscal 2003, compared to $177.9 million in
fiscal 2002, down $68.0 million, or 38.2%. Product sales in the prior year
included significant sales of terminals and software to our customer in the
United Kingdom. The absence of sales to our United Kingdom customer in fiscal
2003 was partially offset by the sale of a turnkey lottery system to our
customer in Portugal during the current fiscal year.

Our service margins improved from 29.5% in fiscal 2002 to 38.4% in fiscal 2003.
Fiscal 2003 service margins were 3.2 percentage points higher due to the prior
year write-off of assets and reserves associated with the economic instability
in Argentina and impairment charges relating to an under-performing
international contract and 2.3 percentage points higher due to lower
depreciation (principally related to contract extensions and fully depreciated
assets associated with existing contracts). Higher sales by our lottery
customers, new contracts that generated incrementally higher gross margins, and
improved operational and service delivery efficiencies also contributed to the
improvement in service margins in fiscal 2003.

Our product margins improved to 28.2% in fiscal 2003 compared to 23.3% in fiscal
2002. Fiscal 2002 product margins were negatively impacted by inventory reserves
recorded in connection with a product sale contract with a customer in Italy.

Operating expenses were $137.9 million in fiscal 2003, compared to $152.6
million in fiscal 2002, down $14.7 million, or 9.7%. This decrease was primarily
driven by our continued execution of cost savings initiatives and emphasis on
improving operating efficiencies, along with the benefit of the adoption of the
new accounting standard on goodwill, which eliminated approximately $6.0 million
of goodwill amortization during the current year. In addition, we recorded a
credit against the special charge taken in fiscal 2001 of $1.1 million, which
reflects lower than anticipated severance costs associated with the fiscal 2001
value assessment of our business operations. These declines in operating
expenses were partially offset by $9.1 million of increased spending on research
and development in an effort to accelerate deployment of our Enterprise Series
platform in the marketplace. As a percentage of revenues, operating expenses
were 14.1% and 15.1% during fiscal 2003 and 2002, respectively.

Equity income was $7.4 million in fiscal 2003, compared to $4.0 million in
fiscal 2002, up $3.4 million, or 86.3%, primarily due to equity income from the
first full year of operations of our joint venture in Taiwan.

The components of other income (expense) in fiscal 2003 and fiscal 2002 are as
follows (in millions):

Fiscal Year Ended
-----------------------------
February 22, February 23,
2003 2002
------------- -------------

Foreign exchange gains (losses) $ 4.2 $ (0.3)
Net charges associated with the early retirement of debt (2.3) (12.5)
Minority interest in consolidated subsidiaries (0.6) (0.2)
Write-off of our cost method investment in the common stock
of an Internet security developer - (9.3)
Gain on the sale of a majority interest in our subsidiary in the
Czech Republic - 3.9
Amortization of the gain on the 1998 sale of our 22.5% equity
interest in Camelot Group plc - 5.0
Other 0.9 2.2
------------- -------------
Total other income (expense) $ 2.2 $ (11.2)
============= =============

During the third quarter of fiscal 2003, we used cash on hand to repurchase the
remaining $40 million of our 7.75% Series A Senior Notes due 2004. In connection
with this repurchase, we recorded net charges of $2.3 million, principally
comprised of tender premiums to the holders of the notes, net of gains from the
sale of interest rate swaps associated with the notes.

During the fourth quarter of fiscal 2002, we repurchased $110 million of 7.75%
Series A Senior Notes due 2004 and $55 million of 7.87% Series B Senior Notes
due 2007 (collectively, the "Senior Notes"). In connection with this repurchase,
we recorded charges of $12.5 million, principally comprised of tender premiums
of $12.2 million to the holders of the notes, net of gains on interest rate
swaps of $6.2 million, along with make whole premiums of $5.2 million associated
with the refinancing of our World Headquarters facilities by the partnership
that owns the facilities.

Interest expense was $11.3 million in fiscal 2003, compared to $22.9 million in
fiscal 2002, down $11.6 million, or 50.7%. This decrease was primarily due to
our debt refinancing in the fourth quarter of the prior fiscal year and the
third quarter of this fiscal year, resulting in lower debt balances and lower
interest rates. In the fourth quarter of the prior fiscal year, we issued $175
million principal amount of 1.75% Convertible Debentures ("Debentures"). We used
a portion of the proceeds from the Debentures to retire $165 million of Senior
Notes in the fourth quarter of fiscal 2002 and we used cash on hand to
repurchase the remaining $40 million of 7.75% Series A Senior Notes in the third
quarter of fiscal 2003.

Weighted average diluted shares in fiscal 2003 declined 1.9 million shares to
58.4 million shares as a result of our share repurchase programs, resulting in
an improvement to diluted earnings per share of approximately $0.08.

Our Debentures are convertible at the option of the holder into shares of our
common stock at a conversion price of $27.50 per share when our stock closes at
or above $33 per share for 20 out of 30 consecutive trading days prior to the
date of surrender for conversion. For fiscal 2003 and 2002, 6.4 million shares
issuable upon the conversion of the Debentures were not included in the
computation of diluted earnings per share because, in accordance with their
terms, the Debentures had not yet become convertible.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION

We believe our ability to generate cash from operations to reinvest in our
business is one of our fundamental financial strengths. We expect cash flows
from operations in fiscal 2005 to be comparable to fiscal 2004 levels and we
expect to meet our financial commitments and operating needs in the foreseeable
future. We expect to use cash generated from operating activities primarily for
aggregate contractual obligations, to fund all or a portion of the cash needed
for potential acquisitions and to pay dividends. Our debt ratings of Baa1 from
Moody's and BBB from Standard and Poor's contribute to our ability to access
capital markets at attractive prices. These ratings reflect several factors,
including our strong cash flows and balance sheet.

ANALYSIS OF CASH FLOWS

During fiscal 2004, we generated $414.3 million of cash from operations which,
along with cash on hand, was principally used to purchase $268.0 million of
systems, equipment and other assets relating to contracts and to fund
acquisitions of $74.4 million. In addition, during the third quarter of fiscal
2004, we issued $250 million of 4.75% Senior Notes. At February 28, 2004,
we had $129.3 million of cash and cash equivalents on hand and $221.9 million of
short-term investment securities.

Our business is capital-intensive. We currently estimate that net cash to be
used for investing activities in fiscal 2005 will be in the range of $570
million to $600 million, including approximately $225 million related to the
acquisitions of Spielo Manufacturing Incorporated and Leeward Islands Lottery
Holding Company Inc. (See "Subsequent Events" below.) We expect our principal
sources of liquidity to be existing cash and short-term investment balances,
along with cash we generate from operations. Our credit facility provides for an
unsecured revolving line of credit of $300 million and matures in June 2006. As
of February 28, 2004, there were no borrowings under the credit facility. Up to
$100 million of the Credit Facility may be used for the issuance of letters of
credit. As of February 28, 2004, after considering $8.8 million of letters of
credit issued and outstanding, there was $291.2 million available for borrowing
under the Credit Facility.

We currently expect that our cash flow from operations, existing cash and
short-term investment balances and available borrowings under our credit
facility will be sufficient, for the foreseeable future, to fund our anticipated
working capital and ordinary capital expenditure needs, to service our debt
obligations, to fund anticipated internal growth, to fund all or a portion of
the cash needed for potential acquisitions, to pay dividends, to fund the
capital requirements under our Master Contract with the Rhode Island Lottery and
to repurchase shares of our common stock, from time to time, under our share
repurchase programs. We may also seek alternative sources of financing to fund
certain of our obligations under our Master Contract with the Rhode Island
Lottery and to fund future potential acquisitions and growth opportunities that
are not currently contemplated in the $570 million to $600 million we estimate
we will need in fiscal 2005 for the uses disclosed above.

FINANCIAL POSITION

Our balance sheet as of February 28, 2004, as compared to our balance sheet as
of February 22, 2003, was impacted by our acquisitions of Interlott and PolCard
and the consolidation of our 50% limited partnership interest in West Greenwich
Technology Associates, L.P. Drivers of the material changes in each specific
balance sheet category are described below.

Investment securities available-for-sale were up $221.9 million primarily driven
by the issuance of $250 million of debt in the third quarter of fiscal 2004.

Trade accounts receivable, net increased by $11.2 million, from $107.7 million
at February 22, 2003 to $118.9 million at February 28, 2004, primarily due to
$29.0 million related to the PolCard and Interlott acquisitions, partially
offset by collections related to product sales we recorded in the fourth quarter
of fiscal 2003.

Inventories increased by $4.5 million, from $72.3 million at February 22, 2003
to $76.8 million at February 28, 2004, primarily due to an increase in inventory
associated with product sales expected to be recorded during fiscal 2005 and
2006 and inventory associated with the acquisition of Interlott in September
2003, partially offset by the sale of an interactive system to our customer in
the United Kingdom.

Systems, equipment and other assets relating to contracts, net, increased by
$180.5 million, from $410.9 million at February 22, 2003 to $591.4 million at
February 28, 2004, primarily due to the purchase of $268.0 million of systems,
equipment and other assets relating to contracts (principally related to lottery
system implementations in California and Georgia and the acquisitions of
Interlott and PolCard), partially offset by depreciation expense.

Goodwill, net, increased by $73.1 million, from $115.5 million at February 22,
2003 to $188.6 million at February 28, 2004, primarily due to the acquisitions
of PolCard and Interlott.

Property, plant and equipment, net, increased by $33.1 million, from $24.5
million at February 22, 2003 to $57.6 million at February 28, 2004, primarily
due to the consolidation of the partnership that owns our world headquarters
facilities.

Intangible assets, net, increased by $26.0 million, from $2.2 million at
February 22, 2003 to $28.2 million at February 28, 2004, due to a $12.5 million
up-front license fee we paid to the Rhode Island Lottery, with the balance
related to intangible assets recorded as a result of our acquisitions of PolCard
and Interlott.

The refundable performance deposit balance of $20.0 million at February 28, 2004
relates to a performance deposit we paid to our customer in the Czech Republic
in connection with our contract extension in September 2003. Refer to Note 9 to
the consolidated financial statements for additional information.

Advance payments from customers increased by $51.7 million, from $52.4 million
at February 22, 2003 to $104.1 million at February 28, 2004, primarily due to
advances received from customers related to product sales that are expected to
be recorded during fiscal 2005 and 2006.

Income taxes payable decreased by $41.6 million, from $54.0 million at February
22, 2003 to $12.4 million at February 28, 2004, primarily due to a
reclassification of $23.2 million to deferred income taxes relating to tax
deductions taken on the fiscal 2003 tax return that were not contemplated at the
end of fiscal 2003, along with the tax benefits related to foreign currency
translation and tax benefits on stock award plans for which we received a tax
deduction in fiscal 2004.

Current portion of long-term debt increased by $99.3 million, from $7.0 million
at February 22, 2003 to $106.3 million at February 28, 2004, primarily due to
$90.0 million of 7.87% Senior Notes that were reclassified from long-term debt
due to our plan to repurchase them in May 2004. See "Subsequent Events" below.

Long-term debt, less current portion, increased by $176.1 million, from $287.1
million at February 22, 2003 to $463.2 million at February 28, 2004, primarily
due to proceeds from the issuance of $250 million of 4.75% Senior Notes during
the third quarter of fiscal 2004, along with debt resulting from the
consolidation of the partnership that owns our world headquarters facilities,
partially offset by the $90.0 million of 7.87% Senior Notes that were
reclassified as current debt.

Other liabilities increased by $14.3 million, from $39.4 million at February 22,
2003 to $53.7 million at February 28, 2004 primarily due to an advance payment
on an equipment order we received from a domestic facilities management lottery
customer that will be amortized to service revenue ratably over the base
contract term.

Deferred income taxes were up $61.7 million primarily due to the
reclassification from income taxes payable noted above, along with accelerated
tax deductions relating to depreciation on investments in new and existing
lottery systems during the year.

CONTRACTUAL OBLIGATIONS

As of February 28, 2004, the Company's contractual obligations, including
payments due by period, are as follows (in millions):

Fiscal
--------------------------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter Total
-------- -------- -------- -------- -------- ---------- --------

Long-term debt $ 106.3 $ 2.3 $ 30.6 $ 0.2 $ 0.2 $ 429.9 $ 569.5
Operating leases 21.2 16.9 7.4 4.6 3.6 6.7 60.4
-------- -------- -------- -------- -------- -------- --------
Total $ 127.5 $ 19.2 $ 38.0 $ 4.8 $ 3.8 $ 436.6 $ 629.9
======== ======== ======== ======== ======== ======== ========

Refer to Notes 11 and 23 to the consolidated financial statements for additional
information regarding long-term debt and operating leases.

POTENTIAL COMMITMENTS

Performance and other bonds

In connection with certain contracts and procurements, we have been required to
deliver performance bonds for the benefit of our customers and bid and
litigation bonds for the benefit of potential customers, respectively. These
bonds give the beneficiary the right to obtain payment and/or performance from
the issuer of the bond if the events set forth in the bond occur. In the case of
performance bonds, which generally have a term of one year, such events include
our failure to perform our obligations under the applicable contract. To obtain
these bonds, we are required to indemnify the issuers against the costs they
incur if a beneficiary exercises its rights under a bond. Historically, our
customers have not exercised their rights under these bonds and we do not
currently anticipate that they will do so. The following table provides
information related to potential commitments at February 28, 2004 (in millions):

Total Potential
Commitments
---------------

Performance bonds $ 215.9
Litigation bonds 8.5
Financial guarantees 6.9
All other bonds 2.3
----------
$ 233.6
==========

FINANCIAL RISK MANAGEMENT AND DIVIDEND POLICY

FINANCIAL RISK MANAGEMENT

The primary market risk inherent in our financial instruments and exposures is
the potential loss arising from adverse changes in interest rates and foreign
currency exchange rates. Our exposure to commodity price changes is not
considered material and is managed through our procurement and sales practices.
At February 28, 2004, we owned $221.9 million of investment securities
available-for-sale. We use various techniques to manage our market risks,
including from time to time, the use of derivative instruments. We manage our
exposure to counterparty credit risk by entering into financial instruments with
major, financially sound counterparties with high-grade credit ratings and by
limiting exposure to any one counterparty. We do not engage in currency or
interest rate speculation.

Interest Rate Market Risk

Interest rate market risk is estimated as the potential change in the fair value
of our total debt or current earnings resulting from a hypothetical 10% adverse
change in interest rates.

The estimated fair value of our long-term debt and change in the estimated fair
value due to hypothetical changes in interest rates are as follows (dollars in
millions):

Estimated Fair Value
-------------------------------------------------------------
At February 28, 10% Increase in 10% Decrease in
2004 Interest Rates Interest Rates
--------------- --------------- ----------------

$250 million of 4.75% Senior Notes $ 251.0 $ 250.1 $ 252.0

$90 million of 7.87% Senior Notes 100.0 99.4 100.6

$175 million of 1.75% Convertible 375.2 375.1 375.2
Debentures

The estimated fair values above were determined by an independent investment
banker and the values of the Senior Notes were determined after taking into
consideration $150 million of interest rate swaps. A hypothetical 10% adverse or
favorable change in interest rates applied to variable rate debt would not have
a material effect on current earnings.

We use various techniques to mitigate the risk associated with future changes in
interest rates, including entering into interest rate swaps. In October 2003, we
entered into three interest rate swaps for an aggregate notional amount of $150
million, which effectively entitle us to exchange fixed rate payments for
variable rate payments for the period October 15, 2003 to October 15, 2010.

Equity price risk

The estimated fair value of our $175 million of 1.75% Convertible Debentures and
change in the estimated fair value due to hypothetical changes in the market
price of our common stock is as follows (dollars in millions):

Estimated Fair Value
---------------------------------------------------------
10% Increase in 10% Decrease in
At February 28, Market Price of Market Price of
2004 Common Stock Common Stock
----------------- --------------- ---------------

$175 million of 1.75% Convertible
Debentures $ 375.2 $ 411.7 $ 339.1

The estimated fair values above were determined by an independent investment
banker and were based on a quoted market price of $214.375 per Debenture.

Foreign Currency Exchange Rate Risk

We are subject to foreign exchange exposures arising from current and
anticipated transactions denominated in currencies other than our functional
currency, which is United States dollars, and from the translation of foreign
currency balance sheet accounts into United States dollar balance sheet
accounts.

We seek to manage our foreign exchange risk by securing payment from our
customers in United States dollars, by sharing risk with our customers, by
utilizing foreign currency borrowings, by leading and lagging receipts and
payments, and by entering into foreign currency exchange and option contracts.
In addition, a significant portion of the costs attributable to our foreign
currency revenues are payable in the local currencies. In limited circumstances,
but whenever possible, we negotiate clauses into our contracts that allow for
price adjustments should a material change in foreign exchange rates occur.

From time to time, we enter into foreign currency exchange and option contracts
to reduce the exposure associated with certain firm commitments, variable
service revenues and certain assets and liabilities denominated in foreign
currencies. However, we do not engage in foreign currency speculation. These
contracts generally have maturities of 12 months or less and are regularly
renewed to provide continuing coverage throughout the year. At February 28, 2004
and February 22, 2003, a hypothetical 10% adverse change in foreign exchange
rates would result in a translation loss of $22.6 million and $10.1 million,
respectively, that would be recorded in the equity section of our balance sheet.

At February 28, 2004 and February 22, 2003, a hypothetical 10% adverse change in
foreign exchange rates would result in a net pre-tax transaction loss of $2.0
million and $2.5 million, respectively, that would be recorded in current
earnings after considering the effects of foreign exchange contracts currently
in place.

At February 28, 2004, a hypothetical 10% adverse change in foreign exchange
rates would result in a net reduction of cash flows from anticipatory
transactions in fiscal 2005 of $17.4 million, after considering the effects of
foreign exchange contracts currently in place. The percentage of fiscal 2004 and
2003 anticipatory cash flows that were hedged varied throughout each fiscal
year, but averaged 63% in fiscal 2004 compared to 61% in fiscal 2003.

As of February 28, 2004, we had contracts for the sale of foreign currency of
approximately $63.8 million (primarily Euro and pounds sterling) and the
purchase of foreign currency of approximately $45.3 million (primarily Brazilian
real, pounds sterling, Swedish krona and New Taiwan dollars). Comparatively, at
February 22, 2003, we had contracts for the sale of foreign currency of
approximately $116.9 million (primarily Euro, pounds sterling and Czech koruna)
and the purchase of foreign currency of approximately $41.1 million (primarily
pounds sterling and Brazilian real). Refer to Note 12 to the consolidated
financial statements for additional information.

DIVIDEND POLICY

We are committed to returning value to our shareholders. Beginning in the second
quarter of fiscal 2004, we commenced paying cash dividends on our common stock
of $0.17 per share, equivalent to a full-year dividend of $0.68 per share. We
currently plan to continue paying dividends in the foreseeable future.

SUBSEQUENT EVENTS

Sale of Investment

At February 28, 2004, we held a 50% interest in Gaming Entertainment (Delaware)
L.L.C. ("GED"). GED manages a racino for Harrington Raceway, Inc.
("Harrington"). On April 9, 2004, we sold our 50% interest in GED to Harrington
for approximately $12.0 million and recognized a gain of approximately $11.0
million.

Prepayment of Senior Notes

On April 13, 2004, we announced that GTECH will prepay on May 13, 2004, the
remaining $90.0 million aggregate principal amount of its 7.87% Senior Notes due
2007. In connection with this prepayment, we expect to record net charges of
approximately $1.0 million, principally comprised of tender premiums net of
interest rate swaps which will be recorded in Other Income (Expense) in our
Consolidated Income Statements.

ACQUISITIONS

Spielo Manufacturing Incorporated

On April 30, 2004, we completed the acquisition of privately-held Spielo
Manufacturing Incorporated ("Spielo"), a leading provider of video lottery
terminals ("VLTs") and related products and services to the global gaming
industry, for an all-cash purchase price of approximately $150 million. In
addition, we paid Spielo shareholders approximately $7 million of a potential
maximum earn-out amount of up to $35 million, which Spielo shareholders are
entitled to receive in the 18 months following the closing, based upon Spielo
achieving certain VLT installation objectives in New York. By acquiring Spielo,
we will be better able to deliver a comprehensive, integrated VLT solution to
our existing and potential customers, with a single point of contact and
accountability.

Leeward Islands Lottery Holding Company Inc.

On May 5, 2004, we completed the acquisition of privately-held Leeward Islands
Lottery Holding Company Inc. ("LILHCo"), a lottery operating company
headquartered on the Caribbean islands of Antigua and St. Croix, for an
all-cash purchase price of approximately $40 million. By acquiring
Caribbean-based LILHCo, we will enhance our strategic foothold in that region,
as well as provide significant growth opportunities in additional jurisdictions
throughout the Caribbean.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk disclosures are included in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" above.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
GTECH Holdings Corp.

We have audited the accompanying consolidated balance sheets of GTECH Holdings
Corporation and subsidiaries as of February 28, 2004 and February 22, 2003, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended February 28, 2004. Our
audits also included the financial statement schedule listed in the index at
item 16(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of GTECH Holdings
Corporation and subsidiaries at February 28, 2004 and February 22, 2003, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended February 28, 2004, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

As discussed in Note 7 to the consolidated financial statements, in fiscal 2003
GTECH Holdings Corporation adopted Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets".

/s/ Ernst & Young LLP

Boston, Massachusetts
March 29, 2004, except for
Note 25, as to which the date is May 5, 2004

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

February 28, February 22,
2004 2003
------------ ------------
(Dollars in thousands)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 129,339 $ 116,174
Investment securities available-for-sale 221,850 -
Trade accounts receivable, net 118,902 107,666
Sales-type lease receivables 7,705 4,400
Inventories 76,784 72,287
Deferred income taxes 34,396 29,410
Other current assets 24,426 18,660
------------ ------------
TOTAL CURRENT ASSETS 613,402 348,597

SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS, net 591,362 410,911

GOODWILL, net 188,612 115,498

PROPERTY, PLANT AND EQUIPMENT, net 57,576 24,510

INTANGIBLE ASSETS, net 28,231 2,190

REFUNDABLE PERFORMANCE DEPOSIT 20,000 -

SALES-TYPE LEASE RECEIVABLES 17,653 10,854

DEFERRED INCOME TAXES - 4,266

OTHER ASSETS 42,295 37,369
------------ ------------
TOTAL ASSETS $ 1,559,131 $ 954,195
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 80,004 $ 74,042
Accrued expenses 47,428 51,200
Employee compensation 33,981 37,494
Advance payments from customers 104,128 52,442
Deferred revenue and advance billings 14,459 17,264
Income taxes payable 12,394 54,043
Taxes other than income taxes 19,459 16,020
Short-term borrowings - 2,616
Current portion of long-term debt 106,319 6,992
------------ ------------
TOTAL CURRENT LIABILITIES 418,172 312,113

LONG-TERM DEBT, less current portion 463,215 287,088

OTHER LIABILITIES 53,736 39,428

DEFERRED INCOME TAXES 61,719 -

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,
92,295,404 and 92,296,404 shares issued; 59,197,584 and 56,638,331 shares
outstanding at February 28, 2004 and February 22, 2003, respectively 923 923
Additional paid-in capital 266,320 235,266
Accumulated other comprehensive loss (70,508) (95,488)
Retained earnings 839,270 684,653
------------ ------------
1,036,005 825,354
Less cost of 33,097,820 and 35,658,073 shares in treasury at
February 28, 2004 and February 22, 2003, respectively (473,716) (509,788)
------------ ------------
562,289 315,566
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,559,131 $ 954,195
============ ============

See Notes to Consolidated Financial Statements

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

Fiscal Year Ended
-------------------------------------------------
February 28, February 22, February 23,
2004 2003 2002
------------ ------------ ------------
(Dollars in thousands, except per share amounts)

Revenues:
Services $ 957,471 $ 868,896 $ 831,787
Sales of products 93,859 109,894 177,914
------------ ------------ ------------
1,051,330 978,790 1,009,701
Costs and expenses:
Costs of services 537,839 535,041 586,308
Costs of sales 59,226 78,943 136,452
------------ ------------ ------------
597,065 613,984 722,760
------------ ------------ ------------

Gross profit 454,265 364,806 286,941

Selling, general and administrative 109,092 96,130 112,763
Research and development 57,318 42,852 33,779
Goodwill amortization - - 6,049
Special credit - (1,121) -
------------ ------------ ------------
Operating expenses 166,410 137,861 152,591
------------ ------------ ------------

Operating income 287,855 226,945 134,350

Other income (expense):
Interest income 5,733 3,837 5,450
Equity in earnings of unconsolidated affiliates 6,236 7,376 3,959
Other income (expense) 1,889 2,175 (11,163)
Interest expense (10,919) (11,267) (22,876)
------------ ------------ ------------
2,939 2,121 (24,630)
------------ ------------ ------------

Income before income taxes 290,794 229,066 109,720

Income taxes 107,594 87,045 41,694
------------ ------------ ------------

Net income $ 183,200 $ 142,021 $ 68,026
============ ============ ============

Basic earnings per share $ 3.15 $ 2.49 $ 1.15
============ ============ ============

Diluted earnings per share $ 2.84 $ 2.43 $ 1.13
============ ============ ============

Weighted average shares outstanding - basic 58,232 57,081 58,998
============ ============ ============

Weighted average shares outstanding - diluted . 65,144 58,391 60,318
============ ============ ============

Dividends per share - common stock $ 0.51 $ - $ -
============ ============ ============

See Notes to Consolidated Financial Statements

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal Year Ended
------------------------------------------
February 28, February 22, February 23,
2004 2003 2002
------------ ------------ ------------
(Dollars in thousands)

OPERATING ACTIVITIES
Net income $ 183,200 $ 142,021 $ 68,026
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 115,324 133,452 154,071
Intangibles amortization 3,735 4,733 8,423
Goodwill amortization - - 6,049
Deferred income taxes benefit (provision) 59,457 (1,567) (2,175)
Tax benefit related to stock award plans 10,432 8,037 4,879
Minority interest 4,502 578 160
Non-cash gain from consolidation of West Greenwich Technology Associates, L.P. (5,292) - -
Termination of interest rate swaps - 11,357 2,364
Asset impairment charges - - 27,183
Equity in earnings of unconsolidated affiliates, net of dividends received 1,672 316 (815)
Other 9,995 2,740 12,240
Changes in operating assets and liabilities:
Trade accounts receivable 3,788 (12,007) 19,234
Inventories 3,030 14,387 31,381
Accounts payable 2,186 13,734 (5,886)
Advance payments from customers 51,601 (10,109) 24,518
Income taxes payable (27,649) 5,590 (10,645)
Other assets and liabilities (1,645) 18,994 6,223
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 414,336 332,256 345,230

INVESTING ACTIVITIES
Purchases of systems, equipment and other assets relating to contracts (268,010) (155,556) (176,511)
Purchases of available-for-sale investment securities (242,050) - -
Maturities and sales of available-for-sale investment securities 20,200 - -
Acquisitions (net of cash acquired) (74,442) - (552)
Refundable performance deposit (20,000) - -
Purchases of property, plant and equipment (12,772) (5,612) (4,822)
License fee (12,500) - -
Investments in and advances to unconsolidated subsidiaries (2,885) - -
Proceeds from sale of investments - 2,560 2,098
Proceeds from the sale of majority interest in a subsidiary - - 10,000
Cash received from affiliates - - 3,786
Other - - 1,275
------------ ------------ ------------
NET CASH USED FOR INVESTING ACTIVITIES (612,459) (158,608) (164,726)

FINANCING ACTIVITIES

Net proceeds from issuance of long-term debt 252,588 - 359,810
Principal payments on long-term debt (33,293) (47,416) (349,130)
Proceeds from stock options 23,943 16,867 44,814
Dividends paid (29,977) - -
Debt issuance costs (2,125) (120) (6,539)
Purchases of treasury stock - (64,032) (219,322)
Tender premiums and fees - (3,434) (17,930)
Other (4,199) 1,942 (44)
------------ ------------ ------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 206,937 (96,193) (188,341)

Effect of exchange rate changes on cash 4,351 3,624 (4,016)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,165 81,079 (11,853)

Cash and cash equivalents at beginning of year 116,174 35,095 46,948
------------ ------------ ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR $ 129,339 $ 116,174 $ 35,095
============ ============ ============

See Notes to Consolidated Financial Statements

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Accumulated
Additional Other
Outstanding Common Paid-in Comprehensive Retained Treasury
Shares Stock Capital Income Earnings Stock Total
----------- ------ ---------- ------------- -------- -------- ---------
(Dollars in thousands)

Balance at February 24, 2001 68,515,054 $ 445 $ 176,286 $ (85,852) $479,305 $(255,822) $ 314,362

Comprehensive income:
Net income - - - - 68,026 - 68,026
Other comprehensive income (loss):
Foreign currency translation - - - (15,122) - - (15,122)
Unrecognized net gain on derivative instruments - - - 201 - - 201
Unrealized loss on investments - - - (42) - - (42)
---------
Comprehensive income 53,063
Treasury shares purchased (14,946,600) - - - - (219,322) (219,322)
Shares issued under employee stock purchase and stock
award plans 580,028 - - - (4,353) 7,534 3,181
Shares issued upon exercise of stock options 3,342,774 16 44,096 - (100) 802 44,814
Other stock-based compensation - - 1,978 - - - 1,978
Tax benefits related to stock award plans - - 4,879 - - - 4,879
----------- ----- --------- ----------- -------- --------- ---------
Balance at February 23, 2002 57,491,256 $ 461 $ 227,239 $ (100,815) $542,878 $(466,808) $ 202,955

Comprehensive income:
Net income - - - - 142,021 - 142,021
Other comprehensive income (loss), net of tax:
Foreign currency translation, net of tax
benefits of $13 million - - - 5,344 - - 5,344
Unrecognized net gain on derivative instruments - - - 91 - - 91
Unrealized loss on investments - - - (108) - - (108)
---------
Comprehensive income 147,348
Treasury shares purchased (2,380,000) - - - - (64,032) (64,032)
Shares issued under employee stock purchase and stock
award plans 248,625 - - - 906 3,485 4,391
Shares issued upon exercise of stock options 1,278,450 - (10) - (690) 17,567 16,867
Tax benefits related to stock award plans - - 8,037 - - - 8,037
May 2002 two-for-one stock split - 462 - - (462) - -
----------- ----- --------- ----------- -------- --------- ---------
Balance at February 22, 2003 56,638,331 $ 923 $ 235,266 $ (95,488) $684,653 $(509,788) $ 315,566

Comprehensive income:
Net income - - - - 183,200 - 183,200
Other comprehensive income (loss), net of tax:
Foreign currency translation, net of tax
benefits of $13 million - - - 26,418 - - 26,418
Unrecognized net loss on derivative instruments - - - (1,423) - - (1,423)
Unrealized loss on investments - - - (15) - - (15)
---------
Comprehensive income 208,180
Cash dividends on common stock ($0.51 per share) - - - - (30,178) - (30,178)
Shares issued to acquire Interlott Technologies, Inc. 717,565 - 20,622 - - 10,212 30,834
Shares issued under employee stock purchase and stock
award plans 212,012 - - - 843 2,669 3,512
Shares issued upon exercise of stock options 1,629,676 - - - 752 23,191 23,943
Tax benefits related to stock award plans - - 10,432 - - - 10,432
----------- ----- --------- ----------- -------- --------- ---------
Balance at February 28, 2004 59,197,584 $ 923 $ 266,320 $ (70,508) $839,270 $(473,716) $ 562,289
=========== ===== ========= =========== ======== ========= =========

See Notes to Consolidated Financial Statements

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

GTECH Holdings Corporation ("Holdings") is a global technology services
company providing software, networks and professional services that power
high-performance solutions. Operating in 44 countries worldwide, we are the
world's leading operator of highly-secure online lottery transaction processing
systems and we have a growing presence in commercial services transaction
processing. We have a single operating and reportable business segment, the
Transaction Processing segment. In these notes, the terms "Holdings," "Company,"
"we," "our," and "us" refer to GTECH Holdings Corporation and all subsidiaries
included in the consolidated financial statements. Holdings conducts business
through its consolidated subsidiaries and unconsolidated affiliates and has, as
its only material asset, an investment in GTECH Corporation ("GTECH"), its
wholly-owned subsidiary.

BASIS OF PRESENTATION AND CONSOLIDATION

Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States and include the accounts of
Holdings, GTECH, and all majority-owned or controlled subsidiaries. We use the
equity method to account for our investments in 20% to 50% owned affiliates and
investments in corporate joint ventures. Consolidated net income includes our
share of the net earnings of these companies. We account for our investments in
less than 20% owned affiliates under the cost method. We eliminate from our
financial results all significant intercompany accounts and transactions.

We operate on a 52-week or 53-week fiscal year ending on the last Saturday in
February. Fiscal 2004 was a 53-week year and we included the extra week in our
fourth quarter ending February 28, 2004. Fiscal 2003 and 2002 were 52-week
years.

Certain amounts in the prior years' financial statements have been reclassified
to conform to the current year presentation.

REVENUE RECOGNITION

Amounts received from customers in advance of revenue recognition are recorded
in Advance Payments from Customers in our Consolidated Balance Sheets. We record
liquidated damage assessments, which are penalties incurred due to a failure to
meet specified deadlines or performance standards, as a reduction of revenue in
the period they become probable and estimable. Liquidated damage assessments
equaled 0.50%, 0.47% and 0.14% of our total revenues in fiscal 2004, 2003 and
2002, respectively.

Service revenues from commercial transaction processing services are recorded
based on the net amount retained in accordance with Emerging Issues Task Force
Issue No. 99-19, "Reporting Revenue Gross as a Principal Versus Net as an
Agent."

We generally conduct our lottery business under two types of contractual
arrangements: Facilities Management Contracts and Product Sales Contracts.

FACILITIES MANAGEMENT CONTRACTS

Under typical Facilities Management Contracts, we construct, install and operate
the lottery system, and retain ownership of the lottery system. These contracts
generally provide for a variable amount of monthly or weekly service fees paid
to us directly from the lottery authority based on a percentage of a lottery's
gross online and instant ticket sales. These fees are recognized as revenue in
the period earned and are classified as Service Revenue in our Consolidated
Income Statements.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PRODUCT SALES CONTRACTS

Under Product Sales Contracts, we construct, sell, deliver and install a turnkey
online lottery system ("lottery system") or lottery equipment, and license the
computer software for a fixed price, and the lottery authority subsequently
operates the lottery system.

Because Product Sales Contracts include significant customization, modification
and other services prior to customer acceptance that are considered essential to
the lottery software inherent in our lottery systems, revenue is recognized
using contract accounting. Under contract accounting, amounts due to us, and
costs incurred by us in constructing the lottery system, prior to customer
acceptance, are deferred. Revenue attributable to the lottery system is
classified as Sales of Products in our Consolidated Income Statements and is
recognized upon customer acceptance as long as there are no substantial doubts
regarding collectibility (the completed contract method of accounting). Revenue
attributable to any ongoing services provided subsequent to customer acceptance
is classified as Service Revenue in our Consolidated Income Statements and is
recognized in the period earned because the lottery system has stand-alone value
to the customer and there is objective and reliable evidence of fair value of
the ongoing services.

In certain Product Sale Contracts (primarily the sale of lottery terminals), we
are not responsible for installation. In these cases, we recognize revenue when
it is realized or realizable and earned. We consider revenue realized or
realizable and earned when we have persuasive evidence of an arrangement, the
product has been shipped or the services have been provided to the customer,
customer acceptance criteria (if any) have been met, the sales price is fixed or
determinable and collectibility is reasonably assured.

STOCK-BASED COMPENSATION

We have stock-based compensation plans which are described in detail in "Note 17
- - Stock-Based Compensation Plans." We follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and related Interpretations
in accounting for our stock-based compensation plans and we have elected to
continue to use the intrinsic value-based method to account for stock option
grants. We have adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"). Accordingly, no
compensation expense has been recognized for our stock-based compensation plans
other than for restricted stock.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Had we elected to recognize compensation expense based upon the fair value at
the grant dates for awards under these plans, net income and earnings per share
would have been reduced to the pro forma amounts listed in the table below. The
fair value of each grant is estimated on the date of grant using the
Black-Scholes option pricing model. Also disclosed in the table below are the
principal weighted average assumptions used to estimate the fair value of the
grants.

Fiscal Year Ended
-------------------------------------------------------------
February 28, 2004 February 22, 2003 February 23, 2002
----------------- ----------------- -----------------
(Dollars in thousands, except per share amounts)

Net income, as reported $ 183,200 $ 142,021 $ 68,026
Add: Stock-based compensation expense included
in reported net income, net of related tax effects 2,067 2,027 2,685
Deduct: Total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax effects (6,540) (8,785) (8,389)
----------------- ----------------- ----------------
Pro forma net income $ 178,727 $ 135,263 $ 62,322
================= ================= ================

Basic earnings per share:
As reported $ 3.15 $ 2.49 $ 1.15
Pro forma 3.07 2.37 1.06
Diluted earnings per share:
As reported $ 2.84 $ 2.43 $ 1.13
Pro forma 2.77 2.32 1.03

Estimated weighted average fair value
of options granted per share $ 10.00 $ 8.00 $ 12.00

Principal assumptions:
Risk-free interest rate 2.4% 4.3% 4.4%
Expected life (in years) 3.8 3.3 3.7
Expected volatility 39.0% 40.0% 47.0%
Expected dividend yield 2.0% - -

The effects of expensing the estimated fair value of stock options on our fiscal
2004, 2003 and 2002 net income and earnings per share is not necessarily
representative of the effects on actual net income for future years because of
the vesting period of the stock options and the potential issuance of additional
stock options in future years.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

USE OF ESTIMATES

In conformity with generally accepted accounting principles, the preparation of
our financial statements requires that we make estimates, judgments and
assumptions that affect the reported amounts in our financial statements and
accompanying notes. Some of our more significant estimates include estimates of
future cash flows associated with long-lived assets; allocation of revenues and
fair values in multiple-element arrangements; inventory obsolescence; allowance
for doubtful accounts; product warranty; depreciable lives of assets; and income
taxes. Our estimates are based on the facts and circumstances available at the
time estimates are made, historical experience, contract terms, risk of loss,
general economic conditions and trends, and our assessment of the probable
future outcome of these matters. Actual results may ultimately differ from
initial estimates and assumptions.

FOREIGN CURRENCY TRANSLATION

The functional currency for the majority of our foreign subsidiaries is the
applicable local currency. For those subsidiaries, we translate assets and
liabilities at exchange rates in effect at the balance sheet date, and income
and expense accounts at weighted average exchange rates. The resulting foreign
currency translation adjustments are recorded in Accumulated Other Comprehensive
Loss in our Consolidated Balance Sheets. Gains or losses resulting from foreign
currency transactions are recorded in our Consolidated Income Statements. We
recognized net foreign exchange gains (losses) as a component of Service Revenue
and Other Income (Expense) in our Consolidated Income Statements as follows:

Fiscal Year Ended
---------------------------------------------------------
February 28, 2004 February 22, 2003 February 23, 2002
----------------- ----------------- -----------------
(Dollars in thousands)

Service revenue $ (3,601) $ (3,247) $ (1,143)
Other income (expense) (185) 4,237 (251)
----------------- ----------------- -----------------
Total net foreign exchange gains (losses) $ (3,786) $ 990 $ (1,394)
================= ================= =================

For those foreign subsidiaries operating in a highly inflationary economy or
whose functional currency is the United States dollar, nonmonetary assets and
liabilities are translated at historical rates and monetary assets and
liabilities are translated at current rates. The resulting foreign currency
translation adjustments are recorded in Cost of Services in our Consolidated
Income Statements.

DERIVATIVES AND HEDGING TRANSACTIONS

We use derivative financial instruments principally to manage the risk of
foreign currency exchange rate and interest rate fluctuations and we account for
our derivative financial instruments in accordance with Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," as amended. SFAS 133 requires that all
derivative instruments be reported on the balance sheet at fair value and
establishes criteria for the designation and the assessment of the effectiveness
of hedging relationships.

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

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

We record certain contracts used to provide us with a degree of protection
against foreign exchange risk on our variable service revenues at fair value in
our Consolidated Balance Sheets. The related gains or losses on these contracts
are either deferred in Shareholders' Equity (Accumulated Other Comprehensive
Loss) or immediately recognized in earnings depending on whether the contract
qualifies for hedge accounting. The deferred gains and losses are subsequently
recognized in earnings in the period that the related items being hedged are
received and recognized in earnings. Contracts used to hedge assets and
liabilities denominated in foreign currencies are recorded in our Consolidated
Balance Sheets at fair value and the related gains or losses on these contracts
are immediately recognized in earnings as a component of Other Income (Expense)
in our Consolidated Income Statements.

INTEREST RATE SWAPS

From time to time, we enter into interest rate swap agreements to mitigate our
exposure to interest rate changes. The amount and term of each interest rate
swap agreement is matched with all or a portion of the then outstanding
principal balance and remaining term of a specific debt obligation. These
agreements involve the exchange of fixed interest rates for variable interest
rates over the term of the agreement without an exchange of the notional amount
upon which the payments are based. The differential to be received or paid as
interest rates change is accrued and recognized as an adjustment of interest
expense related to the debt. The related amount receivable from or payable to
counterparties is included as an asset or liability in our Consolidated Balance
Sheets.

Gains resulting from the early termination of interest rate swap agreements are
deferred as an adjustment to the carrying amount of the outstanding debt and
amortized as adjustments to interest expense over the remaining period
originally covered by the terminated swap agreements. In the event of the early
extinguishment of debt, any gain or loss from the swap would be recognized in
earnings as a component of Other Income (Expense) in our Consolidated Income
Statements in the same period as the extinguishment gain or loss.

RESEARCH AND DEVELOPMENT

We expense research and development costs as incurred.

ADVERTISING COSTS

Advertising costs are expensed as incurred and amounted to $6.9 million, $10.4
million and $7.7 million in fiscal 2004, 2003 and 2002, respectively.

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 are expected to 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 AND CASH EQUIVALENTS

We classify short-term, highly liquid investments with an original maturity of
three months or less at the date of purchase as cash equivalents.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVESTMENT SECURITIES AVAILABLE-FOR-SALE

Investment securities, which primarily consist of state and municipal auction
rate securities and variable rate demand obligations, are classified as
"available for sale" under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" and are recorded at fair value. We invest in short-term investments
that are generally highly liquid and are assigned a minimal credit rating of A-
or A3 from Standard and Poor's or Moody's Investor Service, respectively. Any
unrealized gains and losses, net of income tax effects, would be computed on the
basis of specific identification and reported as a component of Accumulated
Other Comprehensive Loss in our Consolidated Balance Sheets. Realized gains and
losses would be included in Other Income (Expense) in our Consolidated Income
Statements. We did not incur any unrealized or realized gains or losses in
fiscal 2004.

TRADE ACCOUNTS RECEIVABLE, NET AND SALES-TYPE LEASE RECEIVABLES

Trade accounts receivable are reflected net of allowances for doubtful accounts
and liquidated damages of $10.7 million and $20.6 million at February 28, 2004
and February 22, 2003, respectively. We evaluate the collectibility of trade
accounts and sales-type lease receivables on a customer-by-customer basis and we
believe our reserves are adequate; however, if economic circumstances change
significantly resulting in a major customer's inability or unwillingness to meet
its financial obligations to us, original estimates of the recoverability of
amounts due to us could be reduced by significant amounts requiring additional
reserves. During fiscal 2004 and 2003, we did not experience any collectibility
or billing problems with any major customers or geographic localities for which
revenue has been recognized.

INVENTORIES AND OBSOLESCENCE

Inventories are net of allowances of $8.1 million and $14.6 million at February
28, 2004 and February 22, 2003, respectively. Inventories are stated at the
lower of cost (first-in, first-out method) or market. Inventories include
amounts we manufacture or assemble for our long-term service contracts, which
are transferred to Systems, Equipment and Other Assets Relating to Contracts
upon shipment. Inventories also include amounts related to product sales
contracts, including product sales under long-term contracts. We regularly
review inventory quantities on hand and record provisions for potentially
obsolete or slow-moving inventory based primarily on our estimated forecast of
product demand and production requirements. We believe our reserves are
adequate; however, should future sales forecasts change, our original estimates
of obsolescence could increase by a significant amount requiring additional
reserves.

SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS, NET

Systems, equipment and other assets relating to contracts are stated on the
basis of cost. The cost less any salvage value is depreciated over the base
contract term, not to exceed 10 years, using the straight-line method for
financial reporting purposes and accelerated methods for income tax purposes. In
cases where contract extension periods exist, any salvage value is depreciated
over the extension term. In cases where the base contract term is less than five
years, the cost of contract assets, less the salvage value, is depreciated over
five years (the estimated useful life of the assets).

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CAPITALIZED SOFTWARE DEVELOPMENT COSTS

Capitalized software development costs are comprised of amounts specific to
customer contracts and amounts related to software products that are, or are
anticipated to be, included in our product offerings. Costs specific to customer
contracts are included in Systems, Equipment and Other Assets Relating to
Contracts, net and are capitalized and amortized over the base term of the
customer contract to which they relate, or five years, whichever is longer.
Costs related to product offerings are charged to research and development
expense as incurred until such time as technological feasibility has been
established for the product. Thereafter, they are capitalized and included in
Intangible Assets, net in our Consolidated Balance Sheets and are generally
amortized over five years on a straight-line basis. We periodically evaluate
costs related to product offerings for impairment based on customer
requirements. We did not capitalize any software development costs related to
product offerings in fiscal 2004, 2003 or 2002.

Unamortized software development costs consist of the following:

February 28, 2004 February 22, 2003
----------------- -----------------
(Dollars in thousands)

Specific to customer contracts $ 42,139 $ 37,212
Product offerings 1,556 2,190
----------------- -----------------
$ 43,695 $ 39,402
================= =================

Amortization expense is included in Costs of Services or Costs of Sales in our
Consolidated Income Statements and consists of the following:

Fiscal Year Ended
---------------------------------------------------------------
February 28, 2004 February 22, 2003 February 23, 2002
----------------- ----------------- -----------------
(Dollars in thousands)

Specific to customer contracts $ 10,447 $ 15,235 $ 14,977
Product offerings 1,544 2,467 3,288
----------------- ----------------- -----------------
$ 11,991 $ 17,702 $ 18,265
================= ================= =================

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets determined to have indefinite useful lives
are not amortized but are reviewed for impairment annually, or more frequently
if events or circumstances indicate these assets may be impaired. Other
intangible assets determined to have definite lives are amortized over their
useful lives. We review other intangible assets with definite lives for
impairment to ensure they are appropriately valued if conditions exist that may
indicate the carrying value may not be recoverable. Such conditions may include,
among others, significant adverse changes in the extent or manner in which an
asset is being used or in legal factors or in the business climate that could
affect the value of an asset.

Because we have a single operating and reportable business segment (the
Transaction Processing Segment), we perform our goodwill impairment test by
comparing the fair value of the Transaction Processing Segment with its book
value, including goodwill. If the fair value of the Transaction Processing
Segment exceeds the book value, goodwill is not impaired. If the book value
exceeds the fair value, we would calculate the potential impairment loss by
comparing the implied fair value of goodwill with the book value. If the implied
goodwill is less than the book value, a write-down would be recorded.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

IMPAIRMENT OF LONG-LIVED ASSETS

We periodically evaluate the recoverability of long-lived assets whenever
indicators of impairment are present. Indicators of impairment include such
items as declines in revenues, earnings or cash flows or material adverse
changes in the economic or political stability of a particular country, which
may indicate that the carrying amount of an asset is not recoverable. If facts
and circumstances indicate our long-lived assets may be impaired, the
estimated future undiscounted cash flows associated with these long-lived assets
would be compared to their carrying amounts to determine if a write-down to fair
value is necessary. (See Note 4.)

NEW ACCOUNTING PRONOUNCEMENTS

FASB INTERPRETATION NO. 46

In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
which requires the consolidation of a variable interest entity (as defined) by
its primary beneficiary. Primary beneficiaries are those companies that are
subject to a majority of the risk of loss or entitled to receive a majority of
the variable interest entity's residual returns, or both. In determining whether
it is the primary beneficiary of a variable interest entity, a company with a
variable interest must also treat a variable interest held by the company's
related parties in that same entity as its own interests. In December 2003, the
FASB published a revision to clarify some of the provisions of FIN 46 and to
exempt certain entities from its requirements. FIN 46, as revised, applies to
variable interest entities that are commonly referred to as special-purpose
entities for periods ending after December 15, 2003 (our fiscal 2004 fourth
quarter) and for all other types of variable interest entities for periods
ending after March 15, 2004 (our fiscal 2005 first quarter). Earlier application
is permitted.

We have applied the provisions of FIN 46 to our 50% limited partnership interest
in West Greenwich Technology Associates, L.P. (the "Partnership"), which owns
our world headquarters facilities and leases them to us, resulting in the
consolidation of the Partnership in the third quarter of fiscal 2004. Refer to
Note 16 for detailed disclosures.

Our evaluation of the impact of FIN 46 on certain of our investments created
prior to February 1, 2003 is ongoing and is not expected to have a material
impact on our financial statements. If applicable, we would not be required to
apply FIN 46 to these investments until our fiscal 2005 first quarter.

FASB STATEMENT NO. 149

In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). SFAS 149 amends Statement of Financial Accounting
Standards No. 133 to provide clarification on the financial accounting and
reporting of derivative instruments and hedging activities and requires that
contracts with similar characteristics be accounted for on a comparable basis.
The provisions of SFAS 149 are effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The adoption of SFAS 149 did not have a material effect on our results of
operations or financial position.

FASB STATEMENT NO. 150

In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards on the
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. The provisions of SFAS 150 are
effective for financial instruments entered into or modified after May 31, 2003
and to all other instruments that exist as of the beginning of the first interim
financial reporting period beginning after June 15, 2003 (our third quarter of
fiscal 2004). The adoption of SFAS 150 did not have a material effect on our
results of operations or financial position.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

EITF 00-21

Beginning with our fiscal 2004 third quarter, we adopted Emerging Issues Task
Force Issue No. 00-21, "Multiple-Deliverable Revenue Arrangements" ("EITF
00-21"), which provides guidance on how to account for arrangements that may
involve the delivery or performance of multiple products, services, and/or
rights to use assets. The adoption of EITF 00-21 did not have a material effect
on our results of operations or financial position.

NOTE 2 - COMMON STOCK SPLIT

In the first quarter of fiscal 2003, our Board of Directors approved a 2-for-1
common stock split that was distributed in the form of a stock dividend on May
23, 2002 to shareholders of record on May 16, 2002. All references to common
shares and per share amounts have been retroactively adjusted to reflect the
stock split for fiscal 2003 and 2002 as presented in these consolidated
financial statements and footnotes.

NOTE 3 - BUSINESS ACQUISITIONS

POLCARD S.A.

On May 28, 2003, we completed the acquisition of a controlling equity position
in PolCard S.A. ("PolCard"), for a purchase price, net of cash acquired, of
$35.9 million. PolCard is the leading debit and credit card merchant transaction
acquirer and processor in Poland. At August 23, 2003, PolCard's outstanding
equity was owned 66.5% by us, 33.2% by two funds managed by Innova Capital
Sp. zo.o. ("Innova"), a Warsaw-based private equity investment advisor, and
0.3% by the Polish Bank Association, one of PolCard's previous owners. In
September 2003, Innova exercised its rights under an option agreement to
purchase from us, 3.7% of PolCard's equity for a purchase price of $2.3 million.
Following the exercise of this right, we now own 62.8% of PolCard's outstanding
equity, while the two funds managed by Innova own, in aggregate, 36.9% of
PolCard's outstanding equity, the fair value of which approximated $22.2
million. The Polish Bank Association continues to own 0.3% of the outstanding
equity of PolCard. We have a fair value option to purchase Innova's interest in
PolCard, and Innova has the reciprocal right to sell its interest in PolCard to
us at fair value, during the period May 2007 to May 2009.

INTERLOTT TECHNOLOGIES, INC.

On September 18, 2003, we completed the acquisition of Interlott Technologies,
Inc. ("Interlott"), a leading provider of instant ticket vending machines for
the worldwide lottery industry. Interlott shareholders were given the
opportunity to elect to receive either $9.00 per share in cash or a number of
shares of Holdings common stock having a value of $9.00, or a combination of
both, subject to adjustment so that the aggregate consideration we paid was
48.5% in cash and 51.5% in Holdings common stock. The final exchange ratio of
0.2156 shares of Holdings common stock for every share of Interlott common stock
was determined based on the average closing price of $41.74 for Holdings common
stock for the 20 trading day period commencing August 14, 2003 through September
11, 2003. For purposes of purchase accounting, Holdings common stock was valued
at $42.97 per share using the average price of Holdings common stock two days
prior to the acquisition date in accordance with Emerging Issues Task Force
Issue No. 99-12, "Determination of the Measurement Date for the Market Price of
Acquirer Securities Issued in a Purchase Business Combination." The aggregate
purchase price, including assumed debt, was as follows:

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - BUSINESS ACQUISITIONS (CONTINUED)

Aggregate
purchase price
--------------
(in thousands)

Cash ($9.00 per share of Interlott common stock) $ 28,211
Cash payment to cancel outstanding stock options relating to Interlott
common stock 5,701
--------------
Cash purchase price 33,912
Issuance of 717,565 shares of Holdings common stock 30,834
--------------
Total aggregate purchase price 64,746
Cash payment to settle Interlott debt 22,759
--------------
$ 87,505
==============

The PolCard and Interlott acquisitions are individually and in the aggregate,
not material to our consolidated financial statements and, accordingly, pro
forma financial information has not been presented. Neither acquisition required
the approval of our shareholders. Refer to Note 7 for detailed disclosures
regarding Goodwill and Other Intangible Assets related to these acquisitions.

EUROPRINT

On July 1, 1998, we acquired 80% of the equity of Europrint Holdings Ltd.
("Europrint") and its wholly owned subsidiaries, including Interactive Games
International ("IGI"), for a net cash purchase price of $21.6 million, including
related acquisition costs. Europrint is a provider of media promotional games
and IGI has pioneered the development of interactive, televised lottery games.
On June 24, 2003 (our fiscal 2004 second quarter), we exercised our option to
acquire the remaining 20% of the equity of Europrint for approximately $5.1
million.

Refer to Note 25 for information related to acquisitions completed after the
close of fiscal 2004.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - ASSET IMPAIRMENT CHARGES

During fiscal 2004 and 2003, we did not record any asset impairment charges.
During fiscal 2002, we recorded asset impairment charges of $27.2 million
relating to the impairment of certain long-lived assets as follows (in
thousands):

Asset
Impairment
Charge Consolidated Income Statement Presentation
-------------- ------------------------------------------

Certain under-performing international contracts $ 15,809 Costs of Services
Other than temporary decline in the value of our
cost method investment in the common stock of
an internet security developer 9,313 Other Income (Expense)
Facility write-down 1,061 Selling, General & Administrative expense
Other than temporary decline in the value of one
of our equity method investments 1,000 Equity in Earnings of Unconsolidated Affiliates
--------------
$ 27,183
==============

The basis for these impairment charges was our estimate of the future
undiscounted cash flows expected to be generated from the use of those assets
compared to their net book value. The undiscounted cash flow projections were
less than the net book value, indicating impairment.

NOTE 5 - INVENTORIES

Inventories consist of the following:

February 28, 2004 February 22, 2003
----------------- -----------------
(Dollars in thousands)

Raw materials $ 14,540 $ 14,133
Work in progress 60,470 57,756
Finished goods 1,774 398
----------------- -----------------
$ 76,784 $ 72,287
================= =================

Inventories include amounts we manufacture or assemble for our long-term service
contracts and amounts related to product sales contracts, including product
sales which are accounted for using contract accounting. Work in progress at
February 28, 2004 and February 22, 2003, includes approximately $54.9 million
and $54.4 million, respectively, related to product sale contracts.

Amounts received from customers in advance of revenue recognition (primarily
related to product sale contracts included in work in progress above) totaled
$104.1 million and $52.4 million at February 28, 2004 and February 22, 2003,
respectively. These amounts are included in Advance Payments from Customers in
our Consolidated Balance Sheets.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS

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

February 28, 2004 February 22, 2003
----------------- -----------------
(Dollars in thousands)

Land and buildings $ 1,182 $ 1,184
Computer terminals and systems 1,185,841 1,103,809
Furniture and equipment 163,562 131,492
Contracts in progress 22,603 39,571
----------------- -----------------
1,373,188 1,276,056
Less accumulated depreciation and amortization 781,826 865,145
----------------- -----------------
$ 591,362 $ 410,911
================= =================

NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS

In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), goodwill and indefinite
lived intangible assets are no longer amortized but are reviewed for impairment
annually, or more frequently if events or circumstances indicate that these
assets may be impaired. Intangible assets deemed to have definite lives are
amortized over their useful lives.

The adoption of SFAS 142 required us to perform an initial impairment assessment
on all goodwill and indefinite lived intangible assets as of February 24, 2002
(the first day of fiscal 2003) and we determined that no impairment existed. In
connection with the adoption of the new standard, we determined that goodwill
with a net book value of $1.3 million met the standards' intangible asset
recognition criteria. Accordingly, we reclassified this amount during fiscal
2003 into intangible assets and we will continue to amortize it over its
remaining useful life.

The following table presents the impact of SFAS 142 on net income and earnings
per share had the standard been in effect for fiscal year 2002:

Fiscal Year Ended
February 23, 2002
-----------------
(Dollars in thousands,
except per share data)

Net income as reported $ 68,026
Add back amortization 5,710
-----------------
Adjusted net income $ 73,736
=================

Basic earnings per share as reported $ 1.15
Add back amortization .10
-----------------
Adjusted earnings per share - basic $ 1.25
=================

Diluted earnings per share as reported $ 1.13
Add back amortization .09
-----------------
Adjusted earnings per share - diluted $ 1.22
=================

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)

A reconciliation of the net carrying amount of goodwill, which is not deductible
for income tax purposes, is as follows (in thousands):

Net Carrying
Amount
-------------

Balance as of February 22, 2003 $ 115,498
Goodwill acquired during the year 73,114
-------------
Balance as of February 28, 2004 $ 188,612
=============

The following tables present the information for intangible assets, which are
being amortized over their estimated useful lives, with no estimated residual
values. We do not have any intangible assets that are not subject to
amortization.

As of February 28, 2004
--------------------------------------------------------------------------
Weighted Average Gross Net
Amortization Carrying Accumulated Carrying
Period Amount Amortization Amount
---------------- ------------- ------------ ----------
(Dollars in thousands)

Capitalized software 5 $ 14,777 $ 14,301 $ 476
License fee 20 12,500 413 12,087
Customer contracts 6 11,044 1,342 9,702
Patents 6 5,100 353 4,747
Computer software 6 1,241 161 1,080
Non-compete agreement 2 222 83 139
------------- ------------ ----------
$ 44,884 $ 16,653 $ 28,231
============= ============ ==========

The weighted average amortization period in total for intangible assets as of
February 28, 2004 was 10 years.

As of February 22, 2003
--------------------------------------------------------------------------
Weighted Average Gross Net
Amortization Carrying Accumulated Carrying
Period Amount Amortization Amount
---------------- ------------- ------------ ----------
(Dollars in thousands)

Capitalized software 5 $ 15,108 $ 12,918 $ 2,190
============= ============ ==========

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)

A reconciliation of the net carrying amount of intangible assets is as follows
(in thousands):

Net Carrying
Amount
------------

Balance as of February 22, 2003 $ 2,190

Intangible assets acquired during the year:
Purchase business combination related:
Customer contracts 11,044
Patents 5,100
Computer software 1,241
Non-compete agreement 222
------------
17,607

License fee (see Note 8) 12,500
------------
Total intangible assets acquired 30,107

Capitalized software (331)
Amortization expense (3,735)
------------
Balance as of February 28, 2004 $ 28,231
============

Purchase business combination intangible assets acquired during fiscal 2004
relate to the acquisitions of PolCard and Interlott (refer to Note 3 for
detailed disclosures).

Amortization expense for fiscal 2004 and 2003 is as follows:

Fiscal Year Ended
-----------------------------------------
February 28, 2004 February 22, 2003
----------------- -----------------
(Dollars in thousands)

Capitalized software $ 1,383 $ 2,729
Customer contracts 1,342 2,004
License fee 413 -
Patents 353 -
Computer software 161 -
Non-compete agreement 83 -
----------------- -----------------
Total intangibles amortization $ 3,735 $ 4,733
================= =================

Amortization expense for the next five fiscal years and thereafter is estimated
to be as follows (in thousands):

Fiscal Amortization
Year Expense
- ---------- -------------

2005 $ 4,199
2006 4,077
2007 3,490
2008 3,108
2009 2,393
Thereafter 10,964
-------------
Total $ 28,231
=============

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - LICENSE FEE

On May 12, 2003, we entered into a Master Contract with the Rhode Island Lottery
(the "Lottery") that amends our existing contracts with the Lottery and grants
us the right to be the exclusive provider of online, instant ticket and video
lottery central systems and services for the Lottery during the 20-year term of
the Master Contract for a $12.5 million up-front license fee which we paid in
July 2003. This license fee is included in Intangible Assets, net in our
Consolidated Balance Sheet at February 28, 2004 and will be amortized as a
reduction in service revenue on a straight-line basis over the 20-year term of
the Master Contract. (See Note 7.)

The Master Contract is part of a comprehensive economic development package that
provides incentives for us to keep our world headquarters and manufacturing
operations in Rhode Island. Under the terms of the Master Contract, we are to
invest (or cause to be invested) at least $100 million in the State of Rhode
Island, in the aggregate, by December 31, 2008. This investment commitment
includes the $12.5 million up-front license fee; new online and video lottery
related hardware, software and services; the development of a new world
headquarters facility of at least 210,000 square feet in Providence, Rhode
Island by December 31, 2006; and improvements to our existing manufacturing
facility in West Greenwich, Rhode Island. We have agreed to employ at least
1,000 people full-time in Rhode Island by the end of calendar year 2005 and
maintain that level of employment thereafter. In the event the State of Rhode
Island takes certain actions which affect our financial performance, we will be
automatically released from the in-state employment obligation. We currently
plan to satisfy our obligation to invest (or cause to be invested) at least $100
million in the State of Rhode Island by December 31, 2008 as follows: (i)
approximately $24 million that was invested during fiscal 2004; (ii)
approximately $29 million that will be invested during fiscal 2005; and (iii)
the balance that will be invested during fiscal 2006. In addition, in July 2003
we entered into a tax stabilization agreement (the "Agreement") with the City of
Providence (the "City"), whereby the City agreed to stabilize the real estate
and personal property taxes payable in connection with our new world
headquarters facility in the City and the personal property associated with such
facility for 20 years. We also agreed to complete and occupy the facility by
December 31, 2006, employ 500 employees at the facility by 2009, and we made
certain commitments regarding our employment, purchasing and education
activities in the City. The Lottery may terminate the Master Contract in the
event that we fail to meet our obligations as stated above.

NOTE 9 - REFUNDABLE PERFORMANCE DEPOSIT

On September 23, 2003, we entered into a 12-year contract extension to provide
online lottery products and services to SAZKA, a.s. ("SAZKA"), the operator of
lottery and betting games in the Czech Republic. The contract extension will
commence on January 1, 2006 and expires on December 31, 2017. As part of the
contract extension, we paid SAZKA a $20 million performance deposit that SAZKA
will repay upon the achievement of certain milestones beginning in 2006. The
performance deposit is scheduled to be repaid as follows:

(in thousands)
--------------

On or before January 2, 2006 $ 8,000
On or before January 2, 2007 8,000
On or before January 2, 2008 2,000
On or before January 2, 2009 1,000
On or before January 2, 2010 1,000
--------------
$ 20,000
==============

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - PRODUCT WARRANTIES

We offer a product warranty on all of our manufactured products (primarily
terminals and related peripherals) sold to our customers. Although we do not
have a standard product warranty, our typical warranty provides that we will
repair or replace defective products for a period of time (usually a minimum of
90 days) from the date revenue is recognized or from the date a product is
delivered and tested. We estimate product warranty costs that we expect to incur
during the warranty period and we record a charge to costs of sales for the
estimated warranty cost at the time the product sale is recorded. In determining
the appropriate warranty provision, consideration is given to historical
warranty cost information, the status of the terminal model in its life cycle
and current terminal performance. We periodically assess the adequacy of our
product warranty reserves and adjust them as necessary in the period when the
information necessary to make the adjustment becomes available.

We typically do not provide a product warranty on purchased products sold to our
customers but attempt to pass the manufacturer's warranty, if any, on to them.

A summary of product warranty activity (which is included in Accrued Expenses in
our Consolidated Balance Sheets), for the year ended February 28, 2004 is as
follows (in thousands):

Product
Warranty
--------

Balance as of February 22, 2003 $ 437
Current year reserves 405
Charges incurred (51)
Change in estimate (42)
--------
Balance as of February 28, 2004 $ 749
========

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - LONG -TERM DEBT

Long-term debt consists of the following:

February 28, 2004 February 22, 2003
----------------- -----------------
(Dollars in thousands)

4.75% Senior Notes due October 2010 $ 249,636 $ -
1.75% Convertible Debentures due December 2021 175,000 175,000
7.87% Series B Guaranteed Senior Notes due May 2007 90,000 95,000
World Headquarters loan due January 2007 27,933 -
Interest rate swaps due through October 2010 16,902 14,721
Other, due through April 2006 10,063 9,359
----------------- -----------------
569,534 294,080
Less current portion 106,319 6,992
----------------- -----------------
$ 463,215 $ 287,088
================= =================

At February 28, 2004, long-term debt matures as follows (in thousands):

Fiscal
--------------------------------------------------------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter Total
----------- ------------ ----------- ----------- ------------ ------------ ----------

Long-term debt $ 106,319 $ 2,344 $ 30,616 $ 198 $ 198 $ 429,859 $ 569,534
=========== ============ =========== =========== ============ ============ ==========

4.75% SENIOR NOTES

In October 2003, Holdings issued, in a private placement, $250 million principal
discounted amount of 4.75% Senior Notes due October 15, 2010, all of which were
subsequently exchanged for 4.75% Senior Notes due October 15, 2010 registered
under the Securities Act of 1933 (the "2010 Senior Notes"). The 2010 Senior
Notes are unsecured and unsubordinated obligations of Holdings that are fully
and unconditionally guaranteed by GTECH and certain of its subsidiaries.
Interest is payable semi-annually in arrears on April 15 and October 15 of each
year, beginning on April 15, 2004. We intend to use the proceeds from the 2010
Senior Notes for general corporate purposes, which may include funding future
acquisitions. In conjunction with the 2010 Senior Note offering, in October
2003, we entered into three interest rate swaps with an aggregate notional
amount of $150 million, which effectively entitle us to exchange fixed rate
payments for variable rate payments for the period October 15, 2003 to October
15, 2010.

1.75% CONVERTIBLE DEBENTURES

In December 2001, Holdings issued, in a private placement, $175 million
principal amount of 1.75% Convertible Debentures due December 15, 2021 (the
"Debentures"). The Debentures are unsecured and unsubordinated obligations of
Holdings that are fully and unconditionally guaranteed by GTECH and certain of
its subsidiaries. Interest on the Debentures is payable semi-annually in arrears
on June 15 and December 15 of each year and accrues at an initial rate of 1.75%
per year, subject to reset beginning December 15, 2006 under certain
circumstances. In no event will the interest rate be reset below 1.75% or above
2.5% per year.

On or after December 15, 2006, we may redeem for cash, all or part of the
Debentures at a redemption price equal to 100% of the principal amount of the
Debentures, plus accrued interest up to, but not including, the date of
redemption. Holders of the Debentures may require us to repurchase all or part
of their Debentures on December 15, 2004, December 15, 2006, December 15, 2011
and December 15, 2016 at a price equal to 100% of the principal amount of the
Debentures, plus accrued interest. We may choose to pay the purchase price in
cash, shares of our common stock, or a combination of both. In addition, upon a
change in control of our Company occurring on or before December 15, 2021, each
Debenture holder may require us to repurchase all or a portion of such holder's
Debentures for cash.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - LONG -TERM DEBT (CONTINUED)

Our scheduled debt maturities assume holders of the Debentures do not require us
to repurchase all or a part of them on December 15, 2004 or December 15, 2006,
respectively, and also assumes that we do not redeem them for cash on or after
December 15, 2006.

The Debentures are convertible at the option of the holder into shares of our
common stock at an initial conversion rate of 36.3636 shares of common stock per
$1,000 principal amount of Debentures, which is equivalent to an initial
conversion price of approximately $27.50 per share, subject to certain
adjustments, in the following circumstances:

(i) if the sale price of our common stock is more than 120% of the
conversion price (approximately $33.00 per share) for at least 20
trading days in a 30 trading-day period prior to the date of surrender
for conversion;

(ii) during any period in which the credit ratings assigned to the
Debentures by Moody's or Standard & Poor's are reduced to below Ba1 or
BB, respectively, or in which the credit rating assigned to the
Debentures is suspended or withdrawn by either rating agency;

(iii) if the Debentures have been called for redemption; or

(iv) upon the occurrence of specified corporate transactions.

Should the Debentures meet the conversion requirements, a total of 6.4 million
shares of our common stock would be issuable. The Debentures became convertible
on May 1, 2003 and remained convertible through the end of fiscal 2004 (February
28, 2004) because the sale price of our common stock was more than 120% of the
conversion price (approximately $33.00 per share) for at least 20 trading days
in a 30 trading-day period. However, no Debenture holders opted to convert them
into shares of our common stock. During fiscal 2003, the Debentures did not meet
any of the conversion circumstances.

The Debentures have been classified as long-term liabilities in our Consolidated
Balance Sheets at February 28, 2004 because we intend to borrow under our $300
million revolving credit facility (the "Credit Facility") to refinance any
amount holders of the Debentures require us to repurchase on December 15, 2004.
Any amount borrowed under the Credit Facility is expected to remain outstanding
for an uninterrupted period extending beyond one year from February 28, 2004.

7.87% SERIES B GUARANTEED SENIOR NOTES

In September 2003, GTECH repurchased $5.0 million aggregate principal amount of
its 7.87% Series B Guaranteed Senior Notes due May 15, 2007 (the "2007 Senior
Notes") for approximately $7.2 million. The 2007 Senior Notes are unsecured and
unsubordinated obligations of GTECH that are fully and unconditionally
guaranteed by Holdings and certain of GTECH's subsidiaries. Interest is payable
semi-annually in arrears on May 15 and November 15 of each year. Refer to Note
25 for additional information.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - LONG -TERM DEBT (CONTINUED)

WORLD HEADQUARTERS LOAN

We have a 50% limited partnership interest in West Greenwich Technology
Associates, L.P. (the "Partnership"), which owns our world headquarters
facilities and leases them to us. Beginning in the third quarter of fiscal 2004,
we consolidated the Partnership, which required us to record the Partnership's
$27.9 million loan as long-term debt (the "Loan") on our Consolidated Balance
Sheet at February 28, 2004. The Loan matures on January 1, 2007 and is secured
by all of the assets of the Partnership. Interest on the Loan is generally
payable monthly in arrears at rates determined by reference to the LIBOR rate
plus a margin based on a ratio of our consolidated total indebtedness to our
consolidated earnings before interest, taxes, depreciation and amortization.
Unsecured creditors of the Partnership have no recourse to the assets of GTECH,
either in its capacity as a limited partner or as a tenant of the Partnership.
Also in connection with the consolidation of the Partnership, we recorded the
world headquarters facilities owned by the Partnership as an asset. Refer to
Note 16 for detailed disclosures.

CREDIT FACILITY

GTECH has a $300 million unsecured revolving credit facility expiring on June
22, 2006 (the "Credit Facility"). The Credit Facility is unsecured and
unsubordinated and is fully and unconditionally guaranteed by Holdings and
certain of GTECH's subsidiaries. Interest is generally payable monthly in
arrears at rates determined by reference to the LIBOR rate plus a margin based
on a ratio of our consolidated total indebtedness to our consolidated earnings
before interest, taxes, depreciation and amortization. At February 28, 2004 and
February 22, 2003 there were no outstanding borrowings under the Credit
Facility. At February 28, 2004, we were required to pay a facility fee of .275%
per annum on the total revolving credit commitment. Up to $100 million of the
Credit Facility may be used for the issuance of letters of credit. At February
28, 2004, we had $8.8 million of letters of credit issued and outstanding under
the Credit Facility and $51.3 million of letters of credit issued and
outstanding outside of the Credit Facility. The total weighted average annual
cost for all letters of credit was 0.96%.

The credit agreement for the Credit Facility has covenants including, among
other things, requirements relating to the maintenance of certain financial
ratios and restrictions on our ability to pay dividends under certain
circumstances.

In the second quarter of fiscal 2004, we began paying quarterly cash dividends
on our common stock of $0.17 per share and we currently plan to continue paying
dividends in the foreseeable future. At February 28, 2004, under the most
restrictive covenants, we had $266.0 million of retained earnings available for
the payment of dividends.

At February 28, 2004 we were in compliance with all applicable covenants
contained in our debt agreements.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - FINANCIAL INSTRUMENTS

CREDIT RISK

We manage our exposure to counterparty credit risk by entering into financial
instruments with major, financially sound counterparties with high-grade credit
ratings and by limiting exposure to any one counterparty.

CASH AND CASH EQUIVALENTS

Cash equivalents are stated at cost, which approximates fair value.

INVESTMENT SECURITIES AVAILABLE-FOR-SALE

The carrying amounts and estimated fair values of our investment securities are
as follows:

February 28, 2004 February 22, 2003
---------------------------------- ----------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
---------------- ---------------- ---------------- ----------------
(Dollars in thousands)

State and Municipal Auction Rate Securities $ 116,450 $ 116,450 $ - $ -
State and Municipal Variable Rate Demand
Obligations 77,900 77,900 - -
Corporate Auction Rate Preferred Securities 27,500 27,500 - -
---------------- ---------------- -------------- ----------------
$ 221,850 $ 221,850 $ - $ -
================ ================ ============== ================

LONG-TERM DEBT

The carrying amounts and estimated fair values of our debt, as determined by an
independent investment banker, are as follows:

February 28, 2004 February 22, 2003
---------------------------------- ----------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
---------------- ---------------- ---------------- ----------------
(Dollars in thousands)

4.75% Senior Notes due October 2010 $ 249,636 $ 255,960 $ - $ -
1.75% Convertible Debentures due
December 2021 175,000 375,156 175,000 221,690
7.87% Series B Guaranteed Senior Notes
due May 2007 90,000 99,976 95,000 105,850
World Headquarters loan due January 2007 27,933 27,933 - -
Interest rate swaps due through October 2010 16,902 16,902 14,721 14,721
Other, due through April 2006 10,063 10,063 9,359 9,359
---------------- ---------------- ---------------- ----------------
$ 569,534 $ 785,990 $ 294,080 $ 351,620
================ ================ ================ ================

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - FINANCIAL INSTRUMENTS (CONTINUED)

FOREIGN CURRENCY EXCHANGE CONTRACTS

The following table summarizes, by major currency, the contractual amounts of
our forward exchange and option contracts translated to United States dollars
using the exchange rate at the balance sheet date. The buy and sell amounts
represent the United States dollar equivalent of commitments to purchase and
sell foreign currencies.

February 28, 2004 February 22, 2003
---------------------------------- ----------------------------------
Buy Sell Buy Sell
Contracts Contracts Contracts Contracts
---------------- ---------------- ---------------- ----------------
(Dollars in thousands)

Brazilian real $ 10,100 $ - $ 10,100 $ -
Pounds sterling 8,412 20,949 18,700 43,663
Swedish krona 7,400 - 4,254 -
Taiwan dollar 6,242 - 1,323 -
Mexican peso 5,375 - 3,987 -
Australian dollar 780 2,011 - 1,999
Euro 642 26,329 1,180 54,717
Czech koruna - 6,957 - 8,833
Other 6,369 7,588 1,537 7,721
---------------- ---------------- ---------------- ----------------
Total $ 45,320 $ 63,834 $ 41,081 $ 116,933
================ ================ ================ ================

The fair values of our foreign currency exchange contracts are estimated based
on quoted market prices of comparable contracts, adjusted through interpolation
when necessary for maturity differences. The carrying amounts and estimated fair
values of our foreign currency exchange contracts was a $1.5 million liability
at February 28, 2004 and $0.1 million asset at February 22, 2003.

INTEREST RATE SWAPS

In June 2001, we entered into two interest rate swaps with an aggregate notional
amount of $150 million that provided interest rate protection over the period
June 6, 2001 to May 15, 2007. The fair value of the swaps was recorded as an
asset and the carrying value of the underlying debt was adjusted by an equal
amount in accordance with SFAS 133. In the fourth quarter of fiscal 2002, in
connection with the repurchase of $55 million of Senior Notes, we sold $55
million of the interest rate swaps for $2.4 million, which was recorded as Other
Income (Expense) in our Consolidated Income Statements.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - FINANCIAL INSTRUMENTS (CONTINUED)

In March 2002, we entered into an interest rate swap with an aggregate notional
amount of $40 million that provides interest rate protection over the period
March 21, 2002 to May 15, 2004. The fair value of the swap was recorded as an
asset and the carrying value of the underlying debt was adjusted by an equal
amount in accordance with SFAS 133.

During the third quarter of fiscal 2003, we sold $135 million of interest rate
swaps for $13.1 million. Approximately $10.0 million of these proceeds will be
amortized as a reduction of interest expense through the due date of the Series
B Senior Notes (May 2007). Approximately $1.3 million of the remaining proceeds
was recorded as Other Income (Expense) in our Consolidated Income Statements in
connection with the extinguishment of the Series A Senior Notes during the third
quarter of fiscal 2003 and approximately $1.8 million was applied against the
receivables from banks associated with the interest rate swaps that were sold.

In October 2003, we entered into three interest rate swaps with an aggregate
notional amount of $150 million that provides interest rate protection over the
period October 15, 2003 to October 15, 2010. The fair value of the swap was
recorded as an asset and the carrying value of the underlying debt was adjusted
by an equal amount in accordance with SFAS 133.

As of February 22, 2003, there were no outstanding interest rate swaps. As of
February 28, 2004, there were $150 million of interest rate swaps outstanding
related to our 4.75% Senior Notes due October 2010.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - 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. We are typically required to furnish substantial bonds to
secure our 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 our contracts permit the customer
to terminate the contract at will and do not specify the compensation, if any,
that we would be entitled to were such a termination to occur. In fiscal 2004,
2003 and 2002, we paid or incurred liquidated damages (with respect to our
contracts) of $5.2 million, $4.6 million and $1.4 million, respectively.

LITIGATION

BRAZILIAN LEGAL PROCEEDINGS

THE CEF CONTRACT PROCEEDINGS

BACKGROUND. In September 1993, we purchased 41.5% of the voting common and
non-voting preferred stock of Racimec Informatica Brasileira S.A. ("Racimec"), a
Brazilian company engaged in the lottery business and the predecessor of our
present Brazilian subsidiary, GTECH Brasil Ltda. In January 1996, we purchased
the remaining voting common stock, and 37.7% of the non-voting preferred stock,
of Racimec. Subsequent to January 1996, Racimec's accounts were consolidated
with our own. In December 1997, we purchased the remaining non-voting preferred
stock of Racimec. Racimec was reorganized in December 1998, and was eventually
renamed GTECH Brasil Ltda. ("GTECH Brazil").

In January 1997, Caixa Economica Federal ("CEF"), the Brazilian bank and
operator of Brazil's National Lottery, and Racimec entered into a four-year
contract pursuant to which Racimec agreed to provide online lottery services and
technology to CEF (the "1997 Contract"). This award was made by CEF with respect
to a competitive bid that CEF had issued in 1994. Online lottery sales by
Brazil's National Lottery commenced in May 1997. In May 2000, CEF and GTECH
Brazil terminated the 1997 Contract and entered into a new agreement obliging
GTECH Brazil to provide lottery goods and services and additional financial
transaction services (including bill and tax payment, social security
contribution and traditional banking transaction services) to CEF for a contract
term that, as subsequently extended, was scheduled to expire in April 2003 (the
"2000 Contract"). In April 2003, GTECH Brazil entered into an agreement with CEF
(the "2003 Contract Extension") pursuant to which: (a) the term of the 2000
Contract was extended through May 2005, with CEF having the right to elect upon
prior notice to terminate the 2000 Contract early at any time after December
2004, and (b) fees payable to GTECH Brazil under the 2000 Contract were reduced
by 15%.

As part of sworn testimony before the Brazilian Congress, in April 2004 CEF's
President indicated that it is his intent to enter into negotiations with GTECH
Brazil to accommodate an as-of-yet undisclosed procurement process, pursuant to
which he would seek to negotiate certain concessions from GTECH Brazil relating
to pending court actions respecting CEF procurement matters, and CEF would agree
to extend the 2000 Contract beyond its current term. See -- "CEF Procurement,"
below. In addition, CEF and GTECH Brazil continue to work closely. For example,
CEF recently notified us that GTECH Brazil has been pre-qualified for an
upcoming bid to provide services and equipment for the Caixa Aqui, a
correspondent banking system comprised of free-standing kiosks operated by CEF.
GTECH Brazil and pre-qualified companies have been invited to present proposals
to CEF regarding the expansion of the service offering and network territory of
Caixa Aqui.

Revenues from the 2000 Contract accounted for approximately 9.7% of our total
revenues for fiscal 2004, making CEF our largest customer for fiscal 2004 based
on revenues.

CRIMINAL ALLEGATIONS AGAINST CERTAIN EMPLOYEES. In late March 2004, federal
attorneys with Brazil's Public Ministry (the "Public Ministry Attorneys")
recommended that criminal charges be brought against nine individuals, including
four senior officers of CEF; Antonio Carlos Rocha, the former Senior Vice
President of GTECH Holdings Corporation and President of GTECH Brazil; and
Marcelo Rovai, GTECH Brazil's marketing director. No other present or former
employee of the Company has been implicated by the Public Ministry Attorneys,
and under Brazilian law (which provides that criminal charges may not be brought
against corporations and other entities), we cannot be subject to criminal
charges in connection with this matter. We understand that Messrs. Rocha and
Rovai will likely be charged with offering an improper inducement in connection
with the negotiation of the 2003 Contract Extension. We further understand that
Messrs. Rocha and Rovai will likely be charged with effectively co-authoring or
aiding and abetting certain allegedly fraudulent or inappropriate management
practices of the CEF management who agreed to enter into the 2003 Contract
Extension. An investigation is being conducted on our behalf to ascertain the
facts regarding this matter. The Company has encouraged Messrs. Rocha and Rovai
to cooperate fully with Brazilian authorities investigating this matter. In
addition, the United States Securities and Exchange Commission has

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

made an informal inquiry as to this matter, and we are cooperating fully with
this inquiry. Brazilian news accounts have quoted CEF's President as denying
that there had been any external pressure applied in connection with the
negotiation of the 2003 CEF Contract Extension.

In light of the fact that our reputation for integrity is an important factor in
our business dealings with lottery and other governmental agencies, an
allegation or finding of improper conduct that is attributable to us could have
a material adverse effect on our business, both within Brazil and elsewhere,
including our ability to retain existing contracts or to obtain new or renewal
contracts. In addition, continuing adverse publicity resulting from these likely
charges and any resulting, or related, legal proceedings could have a material
adverse effect on our reputation and business. Because these proceedings are in
their initial stages, it is impossible for us to assess their merits, or to
provide an estimate of losses likely to be incurred in connection with these
proceedings, or their financial statement impact, if any.

CIVIL ACTION BY THE PUBLIC MINISTRY ATTORNEYS. We recently have learned through
a press release issued by the Public Ministry Attorneys that a civil action has
been initiated by the Public Ministry Attorneys in the Federal Court of Brasilia
against GTECH Brazil; 17 former officers and employees of CEF; the former
president of Racimec; Antonio Carlos Rocha, the former Senior Vice President of
GTECH Holdings Corporation and President of GTECH Brazil, and Marcos Andrade,
another former officer of GTECH Brazil. The focus of the purported civil action
is the contractual relationship between CEF, GTECH Brazil and GTECH Brazil's
predecessor company, Racimec, for the period from 1994 to 2002, the year before
the current government took over the administration of CEF. We understand that
this civil action will allege that the defendants acted illegally in entering
into and performing the 1997 Contract and the 2000 Contract. It is reported that
this civil action seeks to invalidate the 2000 Contract (which, as extended, is
still in force) as well as to impose penalties equal to the sum of all amounts
paid to us under the 1997 Contract and the 2000 Contract from January 1997 to
present, which we estimate to be approximately US$650 million at current
exchange rates, plus certain other permitted amounts, minus our proven
investment costs. As of this filing, we have not been served with notice of this
civil action, nor is it available as a public record. We expect to mount a
vigorous challenge to the far-reaching claims reported to be part of this
lawsuit.

POPULAR CLAIM. In February 2004, Vincius Bijos, a Brazilian, commenced a public
class action lawsuit in Brazil's Brasilia District Court of the Federal District
against the Brazilian Federal government; CEF; several former and current
officers of CEF; the former president of Racimec; and GTECH Brazil, seeking,
among the relief requested of the Court, a preliminary injunction prohibiting
CEF from making further payments to GTECH Brazil under the 2000 Contract, and an
order that would terminate the 2000 Contract and require the defendants, jointly
and severally, to refund amounts received by GTECH Brazil under the 1997
Contract and the 2000 Contract, together with interest, appropriate monetary
adjustments, court costs and expenses. This public class action lawsuit bases
its claims upon numerous alleged defects and irregularities, which the suit
asserts violate Brazilian law, in the 1997 Contract and the 2000 Contract, and
the manner in which the procurement processes that gave rise to the awards of
these contracts were organized and administered. Among its claims, this lawsuit
asserts that CEF's procurement and contracting process unlawfully restricted
competition and gave preference to a non-Brazilian vendor over potential
Brazilian vendors, and that GTECH Brazil unlawfully abused its competitive
position in respect to these procurements and the related contracting processes.
We intend to mount a vigorous challenge to the far-reaching claims that make up
this lawsuit. We note that the Public Ministry Attorneys have filed an opinion
with the federal court disagreeing with the request that an injunction enjoining
payments from CEF to GTECH Brazil be entered and requesting that this suit be
consolidated with the Public Ministry Attorneys' civil action described above.

TCU AUDIT. As previously reported, on June 5, 2003, the Federal Court of
Accounts ("TCU"), the court charged with auditing agencies of the Brazilian
federal government and its subdivisions, summoned us, together with several
current and former employees of the CEF to appear before TCU's Brasilia court.
The summons required the defendants to show cause why they should not be
required to jointly pay a base amount determined by the TCU to be due of
R$91,974,625.10, duly indexed for inflation and interest as of May 26, 2000
(Decision No. 692/2003). We estimate that this claim, in aggregate, is for the
local currency equivalent of approximately US$61.3 million at

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

current exchange rates. The allegations underlying this summons are set forth in
a report (the "Audit Report") issued by the TCU in May 2003 respecting an audit
conducted by the TCU of the 1997 Contract.

The central allegation of the Audit Report is that under the 1997 Contract we
were accorded certain payment increases, and we contracted to supply to CEF
certain services, that were not contemplated by the procurement process
respecting the 1997 Contract and that are not otherwise permitted under
applicable Brazilian law. The Audit Report alleges that as a result of this, CEF
overpaid us under the 1997 Contract for the period commencing in January 1997
through May 26, 2000, and that we are liable with respect to such alleged
overpayments as specified above. The Audit Report further determines that TCU
shall audit the 2000 Contract and any other contract between us and CEF in
effect after May 26, 2000 respecting the provision by us of lottery services.
Moreover, the Audit Report states that the TCU will refer the Audit Report to,
among others, the Public Ministry Attorneys and the Brazil Federal Police (who,
we have been advised, are conducting an investigation of CEF's public
procurement activities in general). See - "Criminal Allegations Against Certain
Employees," and "Civil Action by Public Ministry Attorneys," above. The Audit
Report does not allege that we have acted improperly.

In November 2003, we presented our defense to the claims and determination of
the TCU that CEF overpaid us. We plan to continue to vigorously defend ourselves
against the allegations made by TCU in the Audit Report and the proceedings
initiated by the TCU with respect thereto. While we believe that we have good
defenses to the claims and determination of the TCU, it is impossible at this
time for us to predict the outcome of the TCU proceedings, or provide an
estimate of losses likely to be incurred in connection with the resolution of
this matter, or its financial statement impact, if any.

CEF PROCUREMENT. As previously reported, we are involved in legal proceedings
with CEF respecting the CEF's plans for the operation of the National Lottery
after expiration of the 2000 Contract, as extended. These legal proceedings
began in June 2002, at which time CEF held a public hearing to reveal that it
plans, upon the termination of the 2000 Contract, to directly acquire all
terminals and certain related goods and services, to lease or to otherwise
directly acquire all necessary telecommunications equipment and services, and to
itself perform all necessary data processing services. In June 2002, we filed
before the 17th Federal Lower Court of Brasilia, a lawsuit captioned
"Atentadeo", in which we allege that CEF's proposed procurement process violates
said Court's judgment obtained by us in March 2001, pursuant to which, in the
context of a prior Request For Proposals proposed by CEF in 2000, we had
obtained a writ permitting us to submit an integrated bid for all goods and
services to be required under the successor to the 2000 Contract.

In June 2003, after a series of rulings by various Brazilian courts, the Federal
Higher Court of Brasilia issued a decision permitting CEF to obtain goods and
services necessary to operate the National Lottery after the termination of the
2000 Contract by publishing four separate Requests For Proposals (the "Four RFP
Procurement").

While legal proceedings continue, we believe that the June 2003 decision
indicates that we are unlikely ultimately to prevail in our challenge to CEF's
plans for a procurement process contemplating multiple vendors supplying lottery
goods and services to CEF after termination of the 2000 Contract in May 2005, or
earlier as described above. If CEF proceeds with the Four RFP Procurement, or a
similar plan involving multiple Requests For Proposal, and we are ultimately
unsuccessful in our efforts to be allowed to submit a single integrated bid for
all goods and services required under the successor to the 2000 Contract, it is
likely that our revenues with respect to any successor contract awarded to us by
CEF will be materially less than revenues earned by us under the 2000 Contract.
Moreover, while we will be the incumbent vendor with respect to this procurement
by CEF, there can be no assurance that we will be selected by CEF to supply
goods and services after termination of the 2000 Contract.

CEF's President recently indicated that in order to accommodate an as-of-yet
undisclosed procurement process, it is his intent to seek to negotiate: (a)
certain concessions from GTECH Brazil relating to pending court actions
respecting CEF procurement matters, and (b) an extension of the term of the 2000
Contract. See "Background" above.

SERLOPAR SUIT

As previously reported, in April 2002 Serlopar, the lottery authority for the
Brazilian state of Parana, sued our subsidiaries Dreamport Brasil Ltda. and
GTECH Brasil Ltda. in the 2nd Public Finance Court of the City of Curitiba,

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

State of Parana, under an agreement dated July 31, 1997, as amended (the "VLT
Agreement"). Pursuant to the VLT Agreement, we agreed to install and operate
video lottery terminals ("VLTs") in Parana. Serlopar alleges in its suit that we
installed only 450 of the 1,000 VLTs that we were allegedly obliged to install,
and that we were overpaid, and failed to reimburse Serlopar certain amounts
alleged to be due to Serlopar, under the VLT Agreement. Serlopar seeks payment
from us of approximately US$28 million (at current foreign exchange rates) with
respect to these claims, together with unspecified amounts alleged to be due
from the defendants with respect to general losses and damages (including loss
of revenues) and court costs and legal fees. We believe we have good defenses to
the claims made by Serlopar in this lawsuit, and we intend to continue to defend
ourselves vigorously in these proceedings. We believe that the outcome of this
suit will not have a material impact on our financial statements or business.

OTHER LEGAL PROCEEDINGS

SHAREHOLDER CLASS ACTION SUIT

As previously reported, we, together with William Y. O'Connor, our former
Chairman and Chief Executive Officer, Steven P. Nowick, our former President and
Chief Operating Officer, and W. Bruce Turner, our former Chairman and current
President and Chief Executive Officer, were named as defendants in a shareholder
class action suit captioned Sandra Kafenbaum and Steven Schulman, individually
and on behalf of all others similarly situated v. GTECH Holdings Corporation,
et. al., which suit was filed in the U.S. District Court of Rhode Island in
August 2000 and subsequently amended in February 2001. As amended, the complaint
filed in the case generally alleges that with respect to various announcements
made between July 13, 1998 and August 29, 2000, we and the other defendants
violated federal securities laws (including Section 10(b) of the Securities
Exchange Act of 1934) by making allegedly false and misleading statements
(including statements alleged to be overly optimistic respecting certain lottery
contract awards to us and respecting our prospects in certain non-lottery
business lines and investments), while failing to disclose in a timely manner
certain allegedly material adverse information that we purportedly had a duty to
disclose (including an alleged inability to close certain contract awards and as
to certain alleged cost overruns). The complaint seeks to recover monetary
compensation for all damages sustained as a result of defendants' alleged
wrongdoing in an amount to be determined at trial (including pre-judgment and
post-judgment interest thereon), costs and expenses incurred in connection with
the suit (including counsel fees and expert fees) and such other and further
relief as the court may deem just and proper. In April 2001, we and the other
defendants moved to dismiss the complaint on the grounds that the allegations
made in the complaint are unsupported by fact and fail, in any event, to state a
cause of action under the federal securities laws. Oral argument for our motion
to dismiss was held in October 2001. In September 2002, the Court ruled on our
motion, granting the motion to dismiss as to certain of our statements, but
denying the motion to dismiss as to certain other of our statements cited in the
complaint. The Court also granted our motion to dismiss plaintiff's claim
against Mr. Turner, holding that there are no actionable statements attributable
to him. We believe that we have good defenses to the claims made in this
lawsuit. Nevertheless, at the present time we are unable to predict the outcome
of this lawsuit or provide an estimate of losses likely to be incurred in
connection with this matter or its financial statement impact, if any.

COHEN SUIT

As previously reported, on August 7, 2002 we terminated without cause the
employment of Howard S. Cohen, our former President and Chief Executive Officer.
In March 2003, Mr. Cohen attempted to exercise options granted by us in April
2002 to purchase 450,000 shares of our Common Stock at a per-share exercise
price of $23.30. The non-qualified stock option agreement entered into between
Mr. Cohen and us respecting the April 2002 grant of options provides by its
terms that, in the event that Mr. Cohen's employment was terminated without
cause, options remaining exercisable must be exercised within six months from
the date of termination (i.e., by February 7, 2003). Because Mr. Cohen had
failed to exercise his April 2002 options within the term provided in the
applicable stock option agreement, we did not permit Mr. Cohen to exercise these
options. In May 2003, Mr. Cohen filed suit in Rhode Island Superior Court
against us and the attorneys who had advised him in connection with the
negotiation of his severance agreement, respecting his attempt to exercise the
April 2002 stock options. The suit, captioned Howard S. Cohen v. GTECH
Corporation, GTECH Holdings Corporation, Michael J. Tuchman, Levenfeld
Pearlstein, Charlene F. Marant and Marant Enterprises Holdings LLC, alleges
that: (i) we breached our agreements with Mr. Cohen in failing to allow him to
exercise his April 2002 options; (ii) through fraud by us, or the mutual mistake
of the parties, the April 2002 option grant does not reflect the intent of the
parties, and (iii) we had a duty to advise Mr. Cohen of his mistaken belief (if
such it was) as to the exercise term of the April 2002 options, and failed

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

to so advise Mr. Cohen. Mr. Cohen also alleges that his attorneys had failed in
their duty of care in misadvising him as to the correct period during which he
could exercise his options, and, in addition, had practiced law in Rhode Island
without a license in violation of applicable Rhode Island law. Mr. Cohen seeks
damages against us and the other defendants in an amount of not less than $4.0
million, plus interest, costs and reasonable attorneys fees. With respect to us,
he also seeks an order reforming the terms of the April 2002 option grant to
reflect the alleged intent of the parties with respect to the post-termination
exercise term, and other equitable relief. Mr. Cohen also asks for a declaratory
judgment construing our 2000 Omnibus Stock Option and Long Term Incentive Plan
and Mr. Cohen's employment and severance agreements, as to the relevant option
exercise period. We believe that we have good defenses to the claims made by Mr.
Cohen in this lawsuit and we intend to vigorously defend ourselves in these
proceedings. Nevertheless, at the present time we are unable to predict the
outcome of this lawsuit.

We also are subject to certain other legal proceedings and claims which
management believes, on the basis of information presently available to it, will
not materially adversely affect our consolidated financial position or results
of operations.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 - GUARANTEES AND INDEMNIFICATIONS

PERFORMANCE AND OTHER BONDS

In connection with certain contracts and procurements, we have been required to
deliver performance bonds for the benefit of our customers and bid and
litigation bonds for the benefit of potential customers, respectively. These
bonds give the beneficiary the right to obtain payment and/or performance from
the issuer of the bond if the events set forth in the bond occur. In the case of
performance bonds, which generally have a term of one year, such events include
our failure to perform our obligations under the applicable contract. To obtain
these bonds, we are required to indemnify the issuers against the costs they
incur if a beneficiary exercises its rights under a bond. Historically, our
customers have not exercised their rights under these bonds and we do not
currently anticipate that they will do so. The following table provides
information related to potential commitments at February 28, 2004 (in
thousands):

Total potential
commitments
---------------

Performance bonds $ 215,908
Litigation bonds 8,545
Financial guarantees 6,941
All other bonds 2,158
---------------
$ 233,552
===============

LOTTERY TECHNOLOGY SERVICES INVESTMENT CORPORATION

We have a 44% interest in Lottery Technology Services Investment Corporation
("LTSIC"), which we account for using the equity method of accounting. LTSIC's
wholly owned subsidiary, Lottery Technology Services Corporation ("LTSC"),
provides equipment and services (which we supplied to LTSC), to the Bank of
Taipei. The Bank of Taipei holds the license to operate the Taiwan Public
Welfare Lottery. (See Note 22.)

In order to assist LTSC with the financing they required to enable them to
perform under their obligation to operate the Taiwan Public Welfare Lottery on
behalf of the Bank of Taipei, at February 28, 2004 and February 22, 2003, we
guaranteed $4.6 million and $4.4 million, respectively, principal amount of
loans made by an unrelated commercial lender to LTSC. The loans have a maturity
date of March 2007 and our guarantee expires in July 2007. We did not receive
any consideration in exchange for our guarantees on behalf of LTSC. Rather,
these guarantees were issued in connection with the formation of LTSC and LTSIC.

We are recognizing 56% of our product sales to, and service revenue from, LTSC.
The remaining 44% of product sales (and related cost) and service revenue, has
been deferred as a result of our equity interest in LTSIC and related guarantee
of LTSC's debt, respectively, and is included in Deferred Revenue and Advance
Billings and Other Liabilities in our Consolidated Balance Sheets at February
28, 2004 and February 22, 2003. Product sale deferrals are being recognized
ratably over the life of our contract with LTSC and service revenue deferrals
are being recognized as the guaranteed debt is repaid. At February 28, 2004,
deferred product gross profit and deferred service revenue totaled $3.4 million
and $7.3 million, respectively.

TIMES SQUARED INCORPORATED

We guaranteed outstanding lease obligations of Times Squared Incorporated
("Times Squared") for which we received no monetary consideration. The amount
outstanding under the lease at February 28, 2004 and February 22, 2003, was $2.3
million and $2.5 million, respectively. Our guarantee expires in December 2013.
Times Squared is a nonprofit corporation established to provide, among other
things, secondary and high school level educational programs. Times Squared
operates a Charter School for Engineering, Mathematics, Science and Technology
in Providence, Rhode Island that serves inner city children who aspire to
careers in the sciences and technology.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 - GUARANTEES AND INDEMNIFICATIONS (CONTINUED)

LOTTERY TECHNOLOGY ENTERPRISES

We have a 1% interest in Lottery Technology Enterprises ("LTE"), a joint venture
between us and District Enterprise for Lottery Technology Applications of
Washington, D.C. The joint venture agreement terminates on December 31, 2012.
LTE holds a 10-year contract (which expires in November 2009) with the District
of Columbia Lottery and Charitable Games Control Board. Under Washington, D.C.
law, by virtue of our 1% interest in LTE, we are jointly and severally liable,
with the other partner, for the acts of the joint venture.

DELAWARE LLC

We have a 50% interest in Gaming Entertainment (Delaware) L.L.C. ("GED"). GED is
also owned 50% by a subsidiary of Full House Resorts, Inc. ("FHRI"). Pursuant to
a 1995 management agreement ("Agreement"), GED manages a racino for Harrington
Raceway, Inc. ("Harrington") and in return receives a percentage of gross
revenues and operating profits as defined in the Agreement. Along with FHRI, we
guarantee the payment of all amounts due Harrington under the Agreement. Our
guarantee expires on February 1, 2012 or upon expiration of the Delaware Horse
Racing Redevelopment Act. The consideration we receive in exchange for the
guarantee are the equity earnings from our ownership in GED. Refer to Note 25
for additional information.

NOTE 15 - ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of, and changes in, other comprehensive loss are as follows:

Foreign Net Gain (loss) Unrealized
Currency on Derivative Gain (loss)
Translation Instruments on Investments Total
------------- --------------- -------------- ------------
(Dollars in thousands)

Balance at February 24, 2001 $ (85,917) $ (27) $ 92 $ (85,852)
Changes during the year, net of tax (15,122) 201 (42) (14,963)
------------- --------------- -------------- ------------
Balance at February 23, 2002 (101,039) 174 50 (100,815)

Changes during the year, net of tax 5,344 91 (108) 5,327
------------- --------------- -------------- ------------
Balance at February 22, 2003 (95,695) 265 (58) (95,488)

Changes during the year, net of tax 26,418 (1,423) (15) 24,980
------------ --------------- -------------- ------------
Balance at February 28, 2004 $ (69,277) $ (1,158) $ (73) $ (70,508)
============= =============== ============== ============

Foreign currency translation of ($69.3) million at February 28, 2004 is
primarily associated with our subsidiaries in Brazil. In April 2003, we entered
into an agreement with Caixa Economica Federal ("CEF"), the operator of Brazil's
National Lottery and our largest customer in fiscal 2004, pursuant to which the
term of our contract with CEF, which had been scheduled to expire in April 2004,
was extended for 25 months from April 2003 (with CEF having the right to elect
upon prior notice to terminate the contract early at any time after 20 months),
and fees payable under our contract were reduced by 15%. (See Note 13.)

The ($1.2) million of net losses on derivative instruments is expected to be
reclassified to earnings in the next 12 months as the underlying transactions
occur.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 - CONSOLIDATION OF WEST GREENWICH TECHNOLOGY ASSOCIATES, L.P.

We have a 50% limited partnership interest in West Greenwich Technology
Associates, L.P. (the "Partnership"), which owns our world headquarters
facilities and leases them to us. The general partner of the Partnership is an
unrelated third party. Prior to the third quarter of fiscal 2004, we accounted
for the Partnership using the equity method of accounting. Beginning in the
third quarter of fiscal 2004, we consolidated the Partnership in accordance with
Financial Accounting Standards Board Interpretation No. 46, "Consolidation of
Variable Interest Entities," which requires the consolidation of a variable
interest entity (as defined) by its primary beneficiary. As a result, we
recorded our world headquarters facilities owned by the Partnership as an asset
and the Partnership's loan as a liability in our consolidated financial
statements. The adoption of this interpretation increased balance sheet assets
and liabilities by $30.0 million and $26.7 million, respectively, and resulted
in a one-time, non-cash, after-tax gain of $3.3 million. The pre-tax gain of
$5.3 million is recorded in Other Income (Expense) in our Consolidated Income
Statements and not as a cumulative-effect adjustment because the gain is not
material to our consolidated financial statements. Refer to Note 11 for detailed
disclosures on the Partnership's loan.

NOTE 17 - STOCK-BASED COMPENSATION PLANS

We have various stock-based compensation plans whereby nonemployee members of
our Board of Directors, officers and other key employees may receive grants of
incentive stock options, nonqualified stock options, restricted stock, stock
appreciation rights and performance awards. We are authorized to grant up to
14,400,000 shares of common stock under these plans and, at February 28, 2004,
grants of 8,958,100 nonqualified stock options and 1,473,000 shares of
restricted stock had been made.

The stock options granted under these plans are to purchase our common stock at
a price not less than fair market value at the date of grant. Stock options
generally become exercisable ratably over a four-year period from the date of
grant and expire 10 years after the date of grant (unless an earlier expiration
date is set at the time of grant) and are subject to possible earlier exercise
and termination in certain circumstances.

We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations in accounting for our plans. We
have adopted the disclosure-only provisions of SFAS 148, an amendment of SFAS
123. Therefore, no compensation cost has been recognized for stock option grants
under the plans because the exercise price of all options granted was equal to
100% of the fair market value of our common stock on the respective date of each
grant.

A summary of stock option activity under the plans is as follows:

Fiscal Year Ended
--------------------------------------------------------------------------
February 28, 2004 February 22, 2003 February 23, 2002
--------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
under Exercise under Exercise under Exercise
Options Price Options Price Options Price
---------- -------- ---------- -------- ---------- ----------

Outstanding at beginning of year 5,351,926 $ 16.64 5,210,376 $ 13.56 6,588,750 $ 12.94
Granted 1,085,450 34.20 2,212,000 22.83 2,582,000 15.06
Exercised (1,629,676) 14.69 (1,278,450) 13.20 (3,342,774) 13.39
Forfeited (469,750) 23.35 (792,000) 19.23 (617,600) 14.10
---------- ---------- ----------
Outstanding at end of year 4,337,950 21.04 5,351,926 16.64 5,210,376 13.56
========== ========== ==========

Exercisable at end of year 1,963,500 $ 17.20 2,550,426 $ 16.38 890,626 $ 14.00
========== ========== ==========

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 - STOCK-BASED COMPENSATION PLANS (CONTINUED)

Exercise prices for stock options outstanding under the plans as of February 28,
2004 are summarized as follows:

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

$ 8.44 - $12.66 669,750 6.0 $ 10.25 453,500 $ 10.45
$13.39 - $19.36 1,638,250 7.3 15.69 959,500 16.05
$19.95 - $29.81 1,072,500 8.1 24.08 550,500 24.78
$33.40 - $48.76 942,450 9.1 33.95 - -
$56.19 - $57.74 15,000 10.0 57.20 - -
----------- ------------
4,337,950 1,963,500
=========== ============

During fiscal 2004, 2003 and 2002, we awarded 264,000, 195,000 and 279,000
shares of restricted stock, respectively, to nonemployee members of our Board of
Directors, officers and certain other key employees of our Company. Such shares
had a weighted average fair value at the date of grant of $36, $23 and $16 per
share, respectively. Recipients of restricted stock do not pay us any cash
consideration for the shares. The fair value of the restricted stock award is
being charged to expense over the vesting period. We recorded noncash charges to
operations during fiscal 2004, 2003 and 2002 of $3.3 million, $3.3 million and
$4.3 million, respectively, as compensation expense related to restricted stock.

In April 2003, our Board of Directors approved the Senior Staff Officer Stock
Ownership Plan (the "Plan"), whereby Senior Staff Officers of our Company are
required to maintain ownership of our common stock equivalent to a percentage of
their base salary. By the end of fiscal 2008, our Chief Executive Officer will
be required to attain ownership equal to two times his base salary, and all
other Senior Staff Officers will be required to attain ownership equal to one
times their base salary. In order to satisfy ownership requirements, the Plan
participants must own and hold vested and unencumbered shares of our common
stock.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18 - EMPLOYEE STOCK PURCHASE PLAN

We maintain a Qualified Employee Stock Purchase Plan, which provides that
eligible employees may purchase shares of our common stock, through regular
payroll deductions, of up to 10% of their base earnings. Substantially all
employees are eligible to participate in this plan, with the exception of those
employees who are 5% or more shareholders in our Company. The purchase price is
equal to 85% of the fair market value of the stock on the first or last trading
day of the six-month offering period, whichever is lower. Employees may purchase
shares having a fair market value of up to $25,000 per calendar year. All shares
purchased must be retained for a period of one year. No compensation expense is
recorded in connection with this plan. On July 25, 2003, this plan was modified
by the Board of Directors to extend the expiration date of the plan to August
31, 2004 or the date the shares provided by the plan have been purchased. A
total of 1,500,000 treasury shares were made available for purchase under this
plan, of which 806,595 shares remain available for future purchase as of
February 28, 2004.

NOTE 19 - EMPLOYEE BENEFITS

We have two defined contribution 401(k) retirement savings and profit sharing
plans (the "Plans") covering substantially all 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 each year. We contribute this
amount on the employee's behalf to the Plans and also make a matching
contribution.

For periods prior to March 1, 2003, the employer matching contribution was equal
to 100% on the first 3% and 50% on the next 2% that the employee elected to
defer, up to a maximum matching contribution of 4% of the employee's base pay.
Effective March 1, 2003, the matching contribution was changed to 100% on the
first 3% that the employee elects to defer, up to a maximum matching
contribution of 3% of the employee's base pay.

At our discretion, we may contribute additional amounts to the Plans on behalf
of employees based upon our profits for a given fiscal year. To be eligible to
receive a profit sharing contribution, a participant must be in the employ of
the Company on December 31 and the last day of the fiscal year for which the
contribution is made. For this purpose only, an individual who is receiving
salary continuance payments on the last day of the fiscal year for which the
contribution is made is deemed to be in the employ of the company. Employees are
100% vested at all times in the amounts they defer and any earnings on their
contributions and are fully vested in the Company's matching contributions,
profit sharing and any earnings on these contributions on the first anniversary
of their date of hire. Beginning in fiscal 2005, the Company will discontinue
the payment of profit sharing contributions.

On September 18, 2003, we completed the acquisition of Interlott Technologies,
Inc. ("Interlott"). Interlott had a defined contribution 401(k) retirement plan
that was terminated as of December 31, 2003. As of January 1, 2004, the
employees participating under the terminated plan became eligible for the Plans
summarized above.

Benefits under the Plans will generally be paid to participants upon retirement
or in certain other limited circumstances. In fiscal 2004, 2003 and 2002, we
recorded expense under these Plans of $7.1 million, $9.0 million and $7.3
million, respectively.

We have a defined contribution Supplemental Retirement Plan that provides
additional retirement benefits to certain key employees. At our discretion, we
may contribute additional amounts to this plan on behalf of such key employees
equal to the percentage of profit sharing contributions contributed to the Plan
for the calendar year multiplied by the key employees' compensation (as defined
by the Plan) for such year. In fiscal 2004, 2003 and 2002, we recorded expense
under this plan of $0.2 million, $0.6 million and $0.3 million, respectively.
Beginning in fiscal 2005, the Company will discontinue the payment of
supplemental retirement benefits.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20 - EARNINGS PER SHARE

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

Fiscal Year Ended
------------------------------------------------------------
February 28, 2004 February 22, 2003 February 23, 2002
----------------- ----------------- -----------------
(Dollars and shares in thousands, except per share amounts)

NUMERATOR:
Net income (Numerator for basic
earnings per share) $ 183,200 $ 142,021 $ 68,026

Effect of dilutive securities:
Interest expense on 1.75%
Convertible Debentures, net of tax 1,736 - -
----------------- ----------------- -----------------
Numerator for diluted earnings per share $ 184,936 $ 142,021 $ 68,026
================= ================= =================
DENOMINATOR:
Denominator for basic earnings per
share-weighted average shares 58,232 57,081 58,998

Effect of dilutive securities:
1.75% Convertible Debentures 5,195 - -
Employee stock options 1,579 1,219 1,040
Unvested restricted and stock bonus
discount shares 138 91 280
----------------- ----------------- -----------------
Dilutive potential common shares 6,912 1,310 1,320

Denominator for diluted earnings per
share-adjusted weighted-average
shares and assumed conversions 65,144 58,391 60,318
================= ================= =================
Basic earnings per share $ 3.15 $ 2.49 $ 1.15
================= ================= =================
Diluted earnings per share $ 2.84 $ 2.43 $ 1.13
================= ================= =================

Our 1.75% Convertible Debentures ("Debentures") are convertible at the option of
the holder into shares of our common stock at an initial conversion rate of
36.3636 shares of common stock per $1,000 principal amount of Debentures, which
is equivalent to an initial conversion price of approximately $27.50 per share.
The Debentures become convertible when, among other circumstances, the closing
price of our common stock is more than 120% of the conversion price
(approximately $33 per share) for at least 20 out of 30 consecutive trading days
prior to the date of surrender for conversion. There are a total of 6.4 million
shares issuable upon the conversion of the Debentures.

During fiscal 2004, the Debentures were convertible for 209 out of 256 trading
days and approximately 5.2 million shares were included in the computation of
diluted earnings per share. For fiscal 2003 and 2002, none of the 6.4 million
shares were included in the computation of diluted earnings per share because,
in accordance with their terms, the Debentures had not yet become convertible.

Included in stock options outstanding are options to purchase 246,000, 569,000
and 652,000 shares of common stock at February 28, 2004, February 22, 2003 and
February 23, 2002, respectively, that were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market price of the common shares (the effect would be
anti-dilutive).

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21 - INCOME TAXES

Income before income taxes is based on the geographical contract source of
income and consists of the following:

Fiscal Year Ended
------------------------------------------------------------
February 28, 2004 February 22, 2003 February 23, 2002
----------------- ----------------- -----------------
(Dollars in thousands)

United States $ 37,355 $ 34,506 $ (33,072)
Foreign 253,439 194,560 142,792
----------------- ----------------- -----------------
$ 290,794 $ 229,066 $ 109,720
================= ================= =================

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

Fiscal Year Ended
------------------------------------------------------------
February 28, 2004 February 22, 2003 February 23, 2002
----------------- ----------------- -----------------
(Dollars in thousands)

Current:
Federal $ (4,145) $ 45,787 $ 884
State 5,877 4,905 2,132
Foreign 46,405 37,920 40,853
----------------- ----------------- -----------------
Total Current 48,137 88,612 43,869
----------------- ----------------- -----------------
Deferred:
Federal $ 58,510 $ 3,499 $ 4,072
State 3,049 398 474
Foreign (2,102) (5,464) (6,721)
----------------- ----------------- -----------------
Total Deferred 59,457 (1,567) (2,175)
----------------- ----------------- -----------------
Total Provision $ 107,594 $ 87,045 $ 41,694
================= ================= =================

The tax effects of temporary differences and carryforwards that give rise to
deferred tax assets and liabilities consist of the following:

February 28, 2004 February 22, 2003
----------------- -----------------
(Dollars in thousands)

Deferred tax assets:
Accruals not currently deductible for tax purposes $ 24,681 $ 27,900
Interest rate swap gain 3,955 698
Inventory reserves 5,949 6,324
Cash collected in excess of revenue recognized 8,846 4,331
Depreciation 7,543 -
Other 10,380 10,659
----------------- -----------------
61,354 49,912
Deferred tax liabilities:
Depreciation (71,339) (8,273)
Contingent interest on convertible debt (7,310) (3,462)
Basis in partnership interest (4,343) (2,443)
Other (5,685) (2,058)
----------------- -----------------
(88,677) (16,236)
----------------- -----------------
Net deferred tax assets (liabilities) $ (27,323) $ 33,676
================= =================

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21 - INCOME TAXES (CONTINUED)

Undistributed earnings of foreign subsidiaries, excluding accumulated net
earnings of foreign subsidiaries that, if remitted, would result in minimal or
no additional tax because of the availability of foreign tax credits, amounted
to $41.4 million at February 28, 2004. 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 $6.4 million.

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

Fiscal Year Ended
------------------------------------------------------------
February 28, 2004 February 22, 2003 February 23, 2002
----------------- ----------------- -----------------

Federal income tax using statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 2.0 1.5 1.5
Goodwill - - 1.4
Nondeductible expenses 0.4 0.5 0.9
Tax credits (0.3) (0.7) (1.2)
Other (0.1) 1.7 0.4
----------------- ----------------- -----------------
37.0% 38.0% 38.0%
================= ================= =================

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 22 - TRANSACTIONS WITH RELATED PARTIES

Receivables from related parties, which are included in Trade Accounts
Receivable in our Consolidated Balance Sheets are as follows:

February 28, 2004 February 22, 2003
----------------- -----------------
(Dollars in thousands)

Lottery Technology Services Corporation $ 2,699 $ 9,590
Uthingo Management Proprietary Limited 2,827 3,557
Lottery Technology Enterprises 462 913
----------------- -----------------
$ 5,988 $ 14,060
================= =================

LOTTERY TECHNOLOGY SERVICES CORPORATION

We have a 44% interest in Lottery Technology Services Investment Corporation
("LTSIC"), which we account for using the equity method of accounting. LTSIC's
wholly owned subsidiary, Lottery Technology Services Corporation ("LTSC"),
provides equipment and services (which we supplied to LTSC), to the Bank of
Taipei. The Bank of Taipei holds the license to operate the Taiwan Public
Welfare Lottery.

In order to assist LTSC with the financing they required to enable them to
perform under their obligation to operate the Taiwan Public Welfare Lottery on
behalf of the Bank of Taipei, at February 28, 2004 and February 22, 2003, we
guaranteed $4.6 million and $4.4 million, respectively, principal amount of
loans made by an unrelated commercial lender to LTSC. The loans have a maturity
date of March 2007 and our guarantee expires in July 2007. We did not receive
any consideration in exchange for our guarantees on behalf of LTSC. Rather,
these guarantees were issued in connection with the formation of LTSC and LTSIC.

Sales of products to, and service revenues from, LTSC were $27.8 million, $8.5
million and $16.9 million in fiscal 2004, 2003 and 2002 respectively. We are
recognizing 56% of our product sales to, and service revenue from, LTSC. The
remaining 44% of product sales (and related cost) and service revenue, has been
deferred as a result of our equity interest in LTSIC and related guarantee of
LTSC's debt, respectively, and is included in Deferred Revenue and Advance
Billings and Other Liabilities in our Consolidated Balance Sheets at February
28, 2004 and February 22, 2003. Product sale deferrals are being recognized
ratably over the life of our contract with LTSC and service revenue deferrals
are being recognized as the guaranteed debt is repaid.

UTHINGO MANAGEMENT PROPRIETARY LIMITED

We have a 10% interest in Uthingo Management Proprietary Limited ("Uthingo"),
which is accounted for using the equity method. Uthingo is a corporate joint
venture that holds the license to operate the South African National Lottery.
Sales of products to, and service revenues from, Uthingo were $19.8 million,
$18.0 million and $16.3 million in fiscal 2004, 2003 and 2002, respectively.

LOTTERY TECHNOLOGY ENTERPRISES

We have a 1% interest in Lottery Technology Enterprises ("LTE"), a joint venture
between us and District Enterprise for Lottery Technology Applications of
Washington, D.C. LTE holds a 10-year contract (which expires in November 2009)
with the District of Columbia Lottery and Charitable Games Control Board.
Service revenues from LTE were $3.4 million, $3.0 million and $3.0 million in
fiscal 2004, 2003 and 2002, respectively.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 22 - TRANSACTIONS WITH RELATED PARTIES (CONTINUED)

FULL HOUSE RESORTS, INC.

Prior to February 24, 2001, we held a 50% interest in each of four joint
ventures with Full House Resorts, Inc. ("Full House"). The joint ventures were
engaged in the financing and development of Native American and other casino
gaming ventures. During fiscal 2002, we sold our interest in three of the four
joint ventures for cash consideration of $1.8 million, which approximated
carrying value. At February 23, 2002, we held a promissory note ("Note") issued
by Full House with an outstanding principal balance of $2.4 million. During
fiscal 2003, the Note was paid in full. Interest on the Note was payable monthly
at the prime rate. Refer to Note 25 for additional information.

WEST GREENWICH TECHNOLOGY ASSOCIATES, L.P.

We have a 50% limited partnership interest in West Greenwich Technology
Associates, L.P. (the "Partnership"), which owns our World Headquarters
facilities and leases them to us. The general partner of the Partnership is an
unrelated third party. Prior to the third quarter of fiscal 2004, we accounted
for the Partnership using the equity method of accounting. Beginning in the
third quarter of fiscal 2004, we consolidated the Partnership in accordance with
Financial Accounting Standards Board Interpretation No. 46, "Consolidation of
Variable Interest Entities," which requires consolidation of a variable interest
entity (as defined) by its primary beneficiary. As a result, we recorded our
world headquarters facilities owned by the Partnership as an asset and the
Partnership's loan as a liability in our consolidated financial statements. The
adoption of this interpretation increased balance sheet assets and liabilities
by $30.0 million and $26.7 million, respectively, and resulted in a one-time,
non-cash, after-tax gain of $3.3 million. The pre-tax gain of $5.3 million is
recorded in Other Income (Expense) in our Consolidated Income Statements and not
as a cumulative-effect adjustment because the gain is not material to our
consolidated financial statements.

In December 2001, the Partnership refinanced its outstanding mortgage on
favorable terms and an unrelated third party became the new general partner of
the Partnership, replacing the prior general partners. The Partnership incurred
an expense on extinguishment of debt in the amount of $5.4 million in connection
with the repayment of the existing mortgage, which was allocated to us and is
included in Other Income (Expense) in our Consolidated Income Statements. In
connection with the refinancing, the existing lease was amended to shorten its
term and reduce the current lease payments. The Partnership has classified the
lease as an operating lease in accordance with Financial Accounting Standards
Board Statement 13, "Accounting for Leases. " We recorded rent expense related
to the lease of $0.5 million and $2.4 million in fiscal 2003 and 2002
respectively, which is included in Selling, General and Administrative expense
in our Consolidated Income Statements.

AITKEN SPENCE GTECH PRIVATE LIMITED

We have a 50% interest in Aitken Spence GTECH Private Limited Co. ("ASG"), which
is accounted for using the equity method. ASG is a corporate joint venture that
will aid in the operation and management of the lottery in Sri Lanka. There were
no sales of products to, or service revenues from, ASG during fiscal 2004 or
2003.

LOXLEY GTECH PRIVATE LIMITED

We have a 49% interest in Loxley GTECH Private Limited Co. ("LGT"), which is
accounted for using the equity method. LGT is a corporate joint venture that
will provide the on-line lottery system in Thailand. There were no sales of
products to, or service revenues from, LGT during fiscal 2004 or 2003.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 23 - LEASES

We lease certain facilities, equipment and vehicles under noncancelable
operating leases that expire at various dates through fiscal 2015. Certain of
these leases have escalation clauses and renewal options. We are required to pay
all maintenance costs, taxes and insurance premiums relating to our leased
assets.

Future minimum lease payments for noncancelable operating leases with initial
lease terms in excess of one year at February 28, 2004 were as follows (in
thousands):

Fiscal Year Amount
- ----------- ----------

2005 $ 21,197
2006 16,949
2007 7,359
2008 4,635
2009 3,613
Thereafter 6,609
----------
Total minimum lease payments $ 60,362
==========

Rental expense for operating leases was $27.9 million, $26.4 million and $33.2
million for fiscal 2004, 2003 and 2002, respectively.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 24 - BUSINESS SEGMENT AND GEOGRAPHIC DATA

We are a global technology services company providing software, networks and
professional services that power high-performance solutions. We have a single
operating and reportable business segment, the Transaction Processing segment,
with our core market being the lottery industry. The accounting policies of the
Transaction Processing segment are the same as those described in Note 1 -
"Organization and Summary of Significant Accounting Policies." Management
evaluates the performance of this segment based on operating income.

During the fourth quarter of fiscal 2003, we renamed the Lottery segment as the
Transaction Processing segment, and have included our Transactive business unit
in this segment because it provides transaction processing services.

The Company's geographic data is summarized below:

Fiscal Year Ended
-----------------------------------------------------------
February 28, 2004 February 22, 2003 February 23, 2002
----------------- ----------------- -----------------
(Dollars in thousands)

Revenues from external sources:
United States $ 531,776 $ 496,908 $ 493,624
Brazil 106,913 100,371 115,751
United Kingdom 85,595 54,824 126,403
Other foreign 327,046 326,687 273,923
----------------- ----------------- -----------------
$ 1,051,330 $ 978,790 $ 1,009,701
================= ================= =================

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

Fiscal Year Ended
-----------------------------------------------------------
February 28, 2004 February 22, 2003 February 23, 2002
----------------- ----------------- -----------------
(Dollars in thousands)

Systems, equipment and other assets
relating to contracts, net:
United States $ 482,118 $ 298,732 $ 224,323
Brazil 8,514 7,552 38,976
Other foreign 100,730 104,627 106,296
----------------- ----------------- -----------------
$ 591,362 $ 410,911 $ 369,595
================= ================= =================

For fiscal 2004, 2003 and 2002, the aggregate revenues from Caixa Economica
Federal in Brazil represented 9.7%, 9.8% and 10.7% of our consolidated
revenues, respectively. For fiscal 2002, the aggregate revenues from Camelot
Group plc in the United Kingdom represented 11.3% of our consolidated revenues.
No other customer accounted for more than 10% of consolidated revenues in those
fiscal years.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 25 - SUBSEQUENT EVENTS

SALE OF INVESTMENT

At February 28, 2004, we held a 50% interest in Gaming Entertainment (Delaware)
L.L.C. ("GED"). GED manages a racino for Harrington Raceway, Inc.
("Harrington"). On April 9, 2004, we sold our 50% interest in GED to Harrington
for approximately $12.0 million and recognized a gain of approximately $11.0
million.

PREPAYMENT OF SENIOR NOTES

On April 13, 2004, we announced that GTECH will prepay on May 13, 2004, the
remaining $90.0 million aggregate principal amount of its 7.87% Senior Notes due
2007. In connection with this prepayment, we expect to record net charges of
approximately $1.0 million, principally comprised of tender premiums net of
interest rate swaps which will be recorded in Other Income (Expense) in our
Consolidated Income Statements.

Acquisitions

SPIELO MANUFACTURING INCORPORATED

On April 30, 2004, we completed the acquisition of privately-held Spielo
Manufacturing Incorporated ("Spielo"), a leading provider of video lottery
terminals ("VLT's") and related products and services to the global gaming
industry, for an all-cash purchase price of approximately $150 million. In
addition, we paid Spielo shareholders approximately $7 million of a potential
maximum earn-out amount of up to $35 million, which Spielo shareholders are
entitled to receive in the 18 months following the closing, based upon Spielo
achieving certain VLT installation objectives in New York. Approval of this
transaction by our shareholders was not required.

LEEWARD ISLANDS LOTTERY HOLDING COMPANY INC.

On May 5, 2004, we completed the acquisition of privately-held Leeward Islands
Lottery Holding Company Inc., a lottery operating company headquartered on the
Caribbean islands of Antigua and St. Croix, for an all-cash purchase price of
approximately $40 million. Approval of this transaction by our shareholders was
not required.

BRAZIL LEGAL PROCEEDINGS

In late March 2004, federal attorneys with Brazil's Public Ministry (the "Public
Ministry Attorneys") recommended that criminal charges be brought against nine
individuals, including four senior officers of Caixa Economica Federal ("CEF"),
our customer and the operator of Brazil's National Lottery, and a former and a
present employee of our Company. An investigation is being conducted on our
behalf to ascertain the facts regarding this matter. The Company has encouraged
our former and present employees to cooperate fully with the Brazilian
authorities investigating this matter. In addition, the United States Securities
and Exchange Commission has made an informal inquiry as to this matter and we
are cooperating with this inquiry. We recently have learned through a press
release issued by the Public Ministry Attorneys that a civil action has been
initiated by the Public Ministry Attorneys in the Federal Court of Brasilia
against GTECH Brasil Ltda. ("GTECH Brazil"); 17 former officers and employees of
CEF; the former president of Racimec Informatica Brasileira S.A. ("Racimec"), a
Brazilian company engaged in the lottery business and the predecessor of GTECH
Brazil; and two former officers of GTECH Brazil. The focus of the purported
civil action is the contractual relationship between CEF, GTECH Brazil and
Racimec for the period 1994 to 2002. Revenues from our lottery contract with CEF
accounted for 9.7% of our total fiscal 2004 revenues, making CEF our largest
customer in fiscal 2004 based upon annual revenues. Refer to Note 13 for
detailed disclosures regarding these and other Brazil related legal matters.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 26 - SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information is summarized as follows:

Fiscal Year Ended
-------------------------------------------------------------
February 28, 2004 February 22, 2003 February 23, 2002
----------------- ----------------- -----------------
(Dollars in thousands)

Income taxes paid $ 66,729 $ 76,944 $ 51,006

Interest paid, net of amounts capitalized 5,725 11,266 25,216

Income tax refunds (1,995) (1,901) (1,057)

Non-cash investing and financing activities are excluded from the consolidated
statement of cash flows. Non-cash activities are summarized as follows:

Fiscal Year Ended
-------------------------------------------------------------
February 28, 2004 February 22, 2003 February 23, 2002
----------------- ----------------- -----------------
(Dollars in thousands)

Issuance of 717,565 shares of Holding
common stock in connection with the
acquisition of Interlott Technologies, Inc. $ 30,834 $ - $ -
Treasury shares issued under stock
award plans 2,437 3,508 1,461

NOTE 27 - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION

On December 18, 2001, Holdings (the "Parent Company") issued, in a private
placement, $175 million principal amount of 1.75% Convertible Debentures due
December 15, 2021 (the " Debentures"). On October 9, 2003, the Parent Company
issued, in a private placement, $250 million principal amount of 4.75% Senior
Notes due October 15, 2010, all of which were subsequently exchanged for 4.75%
Senior Notes due October 15, 2010 registered under the Securities Act of 1933
(the "Senior Notes"). The Debentures and Senior Notes are unsecured and
unsubordinated obligations of the Parent Company that are jointly and severally,
fully and unconditionally guaranteed by GTECH and two of its wholly owned
subsidiaries: GTECH Rhode Island Corporation and GTECH Latin America Corporation
(collectively with GTECH, the "Guarantor Subsidiaries"). Condensed consolidating
financial information is presented below.

Selling, general and administrative costs and research and development costs are
allocated to each subsidiary based on the ratio of the subsidiaries' combined
service revenues and sales of products to consolidated revenues.

The Parent Company conducts business through its consolidated subsidiaries and
unconsolidated affiliates and has, as its only material asset, an investment in
GTECH. Equity in earnings of consolidated affiliates recorded by the Parent
Company includes the Parent Company's share of the after-tax earnings of GTECH.
Taxes payable and deferred income taxes are obligations of the subsidiaries.
Income tax expense related to both current and deferred income taxes are
allocated to each subsidiary based on our consolidated effective income tax
rates.

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 27 - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Balance Sheets
February 28, 2004

Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)

Assets
Current Assets:
Cash and cash equivalents $ - $ 68,956 $ 60,383 $ - $ 129,339
Investment securities
available-for-sale - 221,850 - - 221,850
Trade accounts receivable, net - 75,590 43,312 - 118,902
Due from subsidiaries and affiliates - 49,168 - (49,168) -
Sales-type lease receivables - 3,967 3,738 - 7,705
Inventories - 52,697 29,943 (5,856) 76,784
Deferred income taxes - 30,254 4,142 - 34,396
Other current assets - 5,481 18,945 - 24,426
------------- ------------- ------------- ------------- -------------
Total Current Assets - 507,963 160,463 (55,024) 613,402

Systems, Equipment and Other
Assets Relating to Contracts, net - 518,976 80,111 (7,725) 591,362
Investment in Subsidiaries and
Affiliates 562,289 162,788 - (725,077) -
Goodwill, net - 115,965 72,647 - 188,612
Property, Plant and Equipment, net - 28,543 29,033 - 57,576
Intangible Assets, net - 21,850 6,381 - 28,231
Refundable Performance Deposit - - 20,000 - 20,000
Sales-Type Lease Receivables - 8,125 9,528 - 17,653
Other Assets - 20,822 21,473 - 42,295
------------- ------------- ------------- ------------- -------------
Total Assets $ 562,289 $ 1,385,032 $ 399,636 $ (787,826) $ 1,559,131
============= ============= ============= ============= =============

Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ - $ 54,967 $ 25,037 $ - $ 80,004
Due to subsidiaries and affiliates - - 49,168 (49,168) -
Accrued expenses - 32,041 15,387 - 47,428
Employee compensation - 29,256 4,725 - 33,981
Advance payments from customers - 45,648 58,480 - 104,128
Deferred revenue and advance
billings - 8,282 6,177 - 14,459
Income taxes payable - 4,419 7,975 - 12,394
Taxes other than income taxes - 8,643 10,816 - 19,459
Current portion of long-term debt - 100,886 5,433 - 106,319
------------- ------------- ------------- ------------- -------------
Total Current Liabilities - 284,142 183,198 (49,168) 418,172

Long-Term Debt, less current portion - 430,652 32,563 - 463,215
Other Liabilities - 36,526 17,210 - 53,736
Deferred Income Taxes - 57,842 3,877 - 61,719
Shareholders' Equity 562,289 575,870 162,788 (738,658) 562,289
------------- ------------- ------------- ------------- -------------
Total Liabilities and
Shareholders' Equity $ 562,289 $ 1,385,032 $ 399,636 $ (787,826) $ 1,559,131
============= ============= ============= ============= =============

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 27 - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Balance Sheets
February 22, 2003

Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)

Assets
Current Assets:
Cash and cash equivalents $ - $ 88,739 $ 27,435 $ - $ 116,174
Trade accounts receivable, net - 69,185 38,481 - 107,666
Due from subsidiaries and affiliates - 58,657 - (58,657) -
Sales-type lease receivables - 1,795 2,605 - 4,400
Inventories - 62,011 35,563 (25,287) 72,287
Deferred income taxes - 27,581 1,829 - 29,410
Other current assets - 8,597 10,063 - 18,660
------------- ------------- ------------- ------------- -------------
Total Current Assets - 316,565 115,976 (83,944) 348,597

Systems, Equipment and Other
Assets Relating to Contracts, net - 347,172 73,886 (10,147) 410,911
Investment in Subsidiaries and
Affiliates 315,566 81,570 - (397,136) -
Goodwill, net - 70,605 44,893 - 115,498
Property, Plant and Equipment, net - 24,510 - - 24,510
Intangible Assets, net - 1,122 1,068 - 2,190
Sales-Type Lease Receivables - 483 10,371 - 10,854
Deferred Income Taxes - (10,856) 15,122 - 4,266
Other Assets - 31,456 5,913 - 37,369
------------- ------------- ------------- ------------- -------------
Total Assets $ 315,566 $ 862,627 $ 267,229 $ (491,227) $ 954,195
============= ============= ============= ============= =============

Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ - $ 63,580 $ 10,462 $ - $ 74,042
Due to subsidiaries and affiliates - - 58,657 (58,657) -
Accrued expenses - 34,601 16,599 - 51,200
Employee compensation - 33,290 4,204 - 37,494
Advance payments from customers - 14,554 37,888 - 52,442
Deferred revenue and advance
billings - 9,722 7,542 - 17,264
Income taxes payable - 42,841 11,202 - 54,043
Taxes other than income taxes - 7,402 8,618 - 16,020
Short term borrowings - - 2,616 - 2,616
Current portion of long-term debt - 3,524 3,468 - 6,992
------------- ------------- ------------- ------------- -------------
Total Current Liabilities - 209,514 161,256 (58,657) 312,113

Long-Term Debt, less current
portion - 281,197 5,891 - 287,088
Other Liabilities - 20,916 18,512 - 39,428
Shareholders' Equity 315,566 351,000 81,570 (432,570) 315,566
------------- ------------- ------------- ------------- -------------
Total Liabilities and
Shareholders' Equity $ 315,566 $ 862,627 $ 267,229 $ (491,227) $ 954,195
============= ============= ============= ============= =============

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 27 - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Income Statements
Fiscal Year Ended February 28, 2004

Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)

Revenues:
Services $ - $ 684,299 $ 273,172 $ - $ 957,471
Sales of products - 40,643 53,216 - 93,859
Intercompany sales and fees - 101,932 47,881 (149,813) -
------------- ------------- ------------- ------------- -------------
- 826,874 374,269 (149,813) 1,051,330
Costs and expenses:
Costs of services - 372,109 169,451 (3,721) 537,839
Costs of sales - 21,433 37,856 (63) 59,226
Intercompany cost of sales and fees - 100,111 20,865 (120,976) -
------------- ------------- ------------- ------------- -------------
- 493,653 228,172 (124,760) 597,065
------------- ------------- ------------- ------------- -------------

Gross profit - 333,221 146,097 (25,053) 454,265

Selling, general & administrative - 75,213 33,879 - 109,092
Research and development - 39,530 17,788 - 57,318
------------- ------------- ------------- ------------- -------------
Operating expenses - 114,743 51,667 - 166,410
------------- ------------- ------------- ------------- -------------

Operating income - 218,478 94,430 (25,053) 287,855

Other income (expense):
Interest income - 1,882 3,851 - 5,733
Equity in earnings of
unconsolidated affiliates - 2,038 4,198 - 6,236
Equity in earnings of
consolidated affiliates 183,200 61,334 - (244,534) -
Other income (expense) - 5,817 (3,928) - 1,889
Interest expense - (9,724) (1,195) - (10,919)
------------- ------------- ------------- ------------- -------------

Income before income taxes 183,200 279,825 97,356 (269,587) 290,794

Income taxes - 103,535 36,022 (31,963) 107,594
------------- ------------- ------------- ------------- -------------

Net income $ 183,200 $ 176,290 $ 61,334 $ (237,624) $ 183,200
============= ============= ============= ============= =============

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 27 - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Income Statements
Fiscal Year Ended February 22, 2003

Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)

Revenues:
Services $ - $ 658,815 $ 210,081 $ - $ 868,896
Sales of products - 58,310 51,584 - 109,894
Intercompany sales and fees - 96,058 58,756 (154,814) -
------------- ------------- ------------- ------------- -------------
- 813,183 320,421 (154,814) 978,790
Costs and expenses:
Costs of services - 383,256 177,663 (25,878) 535,041
Costs of sales - 49,578 29,799 (434) 78,943
Intercompany cost of sales
and fees - 65,446 21,671 (87,117) -
------------- ------------- ------------- ------------- -------------
- 498,280 229,133 (113,429) 613,984
------------- ------------- ------------- ------------- -------------

Gross profit - 314,903 91,288 (41,385) 364,806

Selling, general & administrative - 70,434 25,696 - 96,130
Research and development - 31,391 11,461 - 42,852
Special charge (credit) - (1,121) - - (1,121)
------------- ------------- ------------- ------------- -------------
Operating expenses - 100,704 37,157 - 137,861
------------- ------------- ------------- ------------- -------------

Operating income - 214,199 54,131 (41,385) 226,945

Other income (expense):
Interest income - 1,597 2,240 - 3,837
Equity in earnings of
unconsolidated affiliates - 3,499 3,877 - 7,376
Equity in earnings of
consolidated affiliates 142,021 40,991 - (183,012) -
Other income (expense) - (5,930) 8,105 - 2,175
Interest expense - (9,028) (2,239) - (11,267)
------------- ------------- ------------- ------------- -------------

Income before income taxes 142,021 245,328 66,114 (224,397) 229,066

Income taxes - 93,225 25,123 (31,303) 87,045
------------- ------------- ------------- ------------- -------------

Net income $ 142,021 $ 152,103 $ 40,991 $ (193,094) $ 142,021
============= ============= ============= ============= =============

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 27 - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Income Statements
Fiscal Year Ended February 23, 2002

Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)

Revenues:
Services $ - $ 634,014 $ 197,773 $ - $ 831,787
Sales of products - 141,772 36,142 - 177,914
Intercompany sales and fees - 169,234 86,762 (255,996) -
------------- ------------- ------------- ------------- -------------
- 945,020 320,677 (255,996) 1,009,701
Costs and expenses:
Costs of services - 395,602 200,880 (10,174) 586,308
Costs of sales - 117,017 20,450 (1,015) 136,452
Intercompany cost of sales
and fees - 102,334 36,051 (138,385) -
------------- ------------- ------------- ------------- -------------
- 614,953 257,381 (149,574) 722,760
------------- ------------- ------------- ------------- -------------

Gross profit - 330,067 63,296 (106,422) 286,941

Selling, general & administrative - 86,635 26,128 - 112,763
Research and development - 25,943 7,836 - 33,779
Goodwill amortization - 2,529 3,520 - 6,049
------------- ------------- ------------- ------------- -------------
Operating expenses - 115,107 37,484 - 152,591
------------- ------------- ------------- ------------- -------------

Operating income - 214,960 25,812 (106,422) 134,350

Other income (expense):
Interest income - 2,222 3,228 - 5,450
Equity in earnings of
unconsolidated affiliates - 1,174 2,785 - 3,959
Equity in earnings of
consolidated affiliates 68,026 22,670 - (90,696) -
Other income (expense) - (18,090) 6,927 - (11,163)
Interest expense - (20,691) (2,185) - (22,876)
------------- ------------- ------------- ------------- -------------

Income before income taxes 68,026 202,245 36,567 (197,118) 109,720

Income taxes - 76,853 13,897 (49,056) 41,694
------------- ------------- ------------- ------------- -------------

Net income $ 68,026 $ 125,392 $ 22,670 $ (148,062) $ 68,026
============= ============= ============= ============= =============

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 27 - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Cash Flows
Fiscal Year Ended February 28, 2004

Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)

Net cash provided by operating
activities $ - $ 338,912 $ 76,286 $ (862) $ 414,336

Investing Activities
Purchases of systems, equipment
and other assets relating to
contracts - (252,273) (16,599) 862 (268,010)
Purchases of available-for-sale
investment securities - (242,050) - - (242,050)
Acquisitions (net of cash acquired) - (40,691) (33,751) - (74,442)
Refundable performance deposit - - (20,000) - (20,000)
Purchases of property, plant and
equipment - (12,772) - - (12,772)
License fee - (12,500) - - (12,500)
Investments in and advances to
unconsolidated affiliates - (1,185) (1,700) - (2,885)
Maturities and sales of
available-for-sale investment
securities - 20,200 - - 20,200
------------- ------------- ------------- ------------- -------------
Net cash used for investing activities - (541,271) (72,050) 862 (612,459)

Financing Activities
Net proceeds from issuance of
long-term debt - 251,006 1,582 - 252,588
Principal payments on long-term
debt - (27,759) (5,534) - (33,293)
Proceeds from stock options 23,943 - - - 23,943
Dividends paid (29,977) - - - (29,977)
Debt issuance costs - (2,125) - - (2,125)
Intercompany capital transactions 4,959 (38,710) 33,751 - -
Other 1,075 - (5,274) - (4,199)
------------- ------------- ------------- ------------- -------------
Net cash provided by financing
activities - 182,412 24,525 - 206,937

Effect of exchange rate changes
on cash - 164 4,187 - 4,351
------------- ------------- ------------- ------------- -------------
Increase (decrease) in cash and
cash equivalents - (19,783) 32,948 - 13,165
Cash and cash equivalents at
beginning of year - 88,739 27,435 - 116,174
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at end
of year $ - $ 68,956 $ 60,383 $ - $ 129,339
============= ============= ============= ============= =============

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 27 - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Cash Flows
Fiscal Year Ended February 22, 2003

Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)

Net cash provided by operating
activities $ - $ 294,549 $ 39,497 $ (1,790) $ 332,256

Investing Activities
Purchases of systems, equipment
and other assets relating to
contracts - (135,465) (21,881) 1,790 (155,556)
Proceeds from sale of investments - 2,560 - - 2,560
Purchases of property, plant and
equipment - (5,612) - - (5,612)
------------- ------------- ------------- ------------- -------------
Net cash used for investing
activities - (138,517) (21,881) 1,790 (158,608)

Financing Activities
Principal payments on long-term
debt - (43,571) (3,845) - (47,416)
Purchases of treasury stock (64,032) - - - (64,032)
Proceeds from stock options 16,867 - - - 16,867
Intercompany capital transactions 46,282 (46,282) - - -
Tender premiums and
prepayment fees - (3,434) - - (3,434)
Debt issuance costs - (120) - - (120)
Other 883 - 1,059 - 1,942
------------- ------------- ------------- ------------- -------------
Net cash used for financing
activities - (93,407) (2,786) - (96,193)

Effect of exchange rate changes
on cash - 249 3,375 - 3,624
------------- ------------- ------------- ------------- -------------
Increase in cash and
cash equivalents - 62,874 18,205 - 81,079
Cash and cash equivalents at
beginning of year - 25,865 9,230 - 35,095
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at end
of year $ - $ 88,739 $ 27,435 $ - $ 116,174
============= ============= ============= ============= =============

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 27 - SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Cash Flows
Fiscal Year Ended February 23, 2002

Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)

Net cash provided by operating
activities $ - $ 303,564 $ 58,073 $ (16,407) $ 345,230

Investing Activities
Purchases of systems, equipment
and other assets relating to
contracts - (132,610) (60,308) 16,407 (176,511)
Acquisitions (net of cash acquired) - - (552) - (552)
Proceeds from the sale of majority
interest in a subsidiary - 10,000 - - 10,000
Proceeds from sale of investments - - 2,098 - 2,098
Cash received from affiliates - 3,786 - - 3,786
Purchase of property, plant and
equipment - (4,822) - - (4,822)
Other - 1,360 (85) - 1,275
------------- ------------- ------------- ------------- -------------
Net cash used for investing activities - (122,286) (58,847) 16,407 (164,726)

Financing Activities
Net proceeds from issuance of
long-term debt - 353,000 6,810 - 359,810
Principal payments on long-term
debt - (347,573) (1,557) - (349,130)
Purchases of treasury stock (219,322) - - - (219,322)
Proceeds from stock options 44,814 - - - 44,814
Intercompany capital transactions 172,788 (172,788) - - -
Tender premiums and
prepayment fees - (17,930) - - (17,930)
Debt issuance costs - (6,539) - - (6,539)
Other 1,720 - (1,764) - (44)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used for)
financing activities - (191,830) 3,489 - (188,341)

Effect of exchange rate changes
on cash - (651) (3,365) - (4,016)
------------- ------------- ------------- ------------- -------------
Decrease in cash and
cash equivalents - (11,203) (650) - (11,853)
Cash and cash equivalents at
beginning of year - 37,068 9,880 - 46,948
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at end
of year $ - $ 25,865 $ 9,230 $ - $ 35,095
============= ============= ============= ============= =============

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 28 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations for
fiscal 2004 and 2003:

First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
(Dollars in thousands, except per share amounts)

Fiscal year ended February 28, 2004:
Service revenues $ 223,538 $ 238,019 $ 231,225 $ 264,689
Sales of products 16,047 39,228 23,697 14,887
Gross profit 104,159 115,632 109,837 124,637
Net income 41,026 48,476 45,867 47,831

Basic earnings per share $ .72 $ .84 $ .78 $ .81
Diluted earnings per share .68 .74 .69 .72

Fiscal year ended February 22, 2003:
Service revenues $ 223,735 $ 211,600 $ 207,784 $ 225,777
Sales of products 7,677 9,358 48,682 44,177
Gross profit 78,230 89,907 88,274 108,395
Net income 29,041 38,207 32,831 41,942

Basic earnings per share $ .50 $ .67 $ .58 $ .74
Diluted earnings per share .49 .66 .57 .72

We operate on a 52-week or 53-week fiscal year ending on the last Saturday in
February. Fiscal 2004 was a 53-week year and we included the extra week in our
fourth quarter ending February 28, 2004. Fiscal 2003 was a 52-week year.

Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly diluted earnings per share in
fiscal 2004 and 2003 does not equal the total computed for those years.

During the third quarter of fiscal 2004, we recorded a pre-tax gain of $5.3
million in connection with the consolidation of our 50% limited partnership
interest in West Greenwich Technology Associates, L.P., which is included in
Other Income (Expense) in our Consolidated Income Statements. Refer to Note 16
for detailed disclosures.

During the third quarter of fiscal 2003, we recorded net charges of $2.3 million
in connection with the retirement of $40 million of Senior Notes, which is
included in Other Income (Expense) in our Consolidated Income Statements.

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to our management, including our
President and Chief Executive Officer ("CEO") and our Senior Vice President and
Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives and management was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Our controls and procedures are designed to provide a reasonable
level of assurance in reaching our desired controls and procedures objectives.

As of the end of the fiscal year covered by this report, we carried out an
evaluation under the supervision and with the participation of our management,
including our CEO and our CFO, of the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rule 13a-14(c) under
the Securities Exchange Act of 1934). Based upon that evaluation, the CEO and
CFO concluded that the Company's disclosure controls and procedures were
effective in reaching a reasonable level of assurance of achieving management's
desired controls and procedures objectives. In the fourth quarter of fiscal
2004, there were no significant changes in our internal controls or in other
factors that could significantly affect these controls, and no corrective
actions have been taken with regard to significant deficiencies or material
weaknesses in such controls.

PART III

INCORPORATED BY REFERENCE

The information called for by Part III (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", Item
13 - "Certain Relationships and Related Transactions" and Item 14 - "Principal
Accountant Fees and Services") of Form 10-K is incorporated herein by reference
to Holdings' definitive proxy statement for its Annual Meeting of Shareholders
scheduled to be held in August 2004, 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.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)

(1) FINANCIAL STATEMENTS:

Page(s)

Report of Ernst & Young LLP, Independent Auditors 71

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

Consolidated Balance Sheets at
February 28, 2004 and February 22, 2003 72

Consolidated Income Statements
Fiscal year ended February 28, 2004,
Fiscal year ended February 22, 2003, and
Fiscal year ended February 23, 2002 73

Consolidated Statements of Cash Flows -
Fiscal year ended February 28, 2004,
Fiscal year ended February 22, 2003, and
Fiscal year ended February 23, 2002 74

Consolidated Statements of Shareholders' Equity--
Fiscal year ended February 28, 2004,
Fiscal year ended February 22, 2003, and
Fiscal year ended February 23, 2002 75

Notes to Consolidated Financial Statements 76

(2) FINANCIAL STATEMENT SCHEDULES TO GTECH HOLDINGS CORPORATION AND
SUBSIDIARIES:

Schedule II - Valuation and Qualifying Accounts 136

All other financial statement schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and, therefore,
have been omitted.

(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.

4.1 Credit Agreement, dated June 22, 2001, by and among GTECH, as Borrower,
Bank of America, N.A., as Administrative Agent and as Lender and the
Lenders party thereto from time to time (incorporated by reference to
Exhibit 10.1 of Holdings' 10-Q for the quarterly period ended May 26,
2001).

4.2 Indenture, dated as of December 18, 2001, by and among Holdings, GTECH,
GTECH Rhode Island Corporation, GTECH Latin America Corporation, and
The Bank of New York (incorporated by reference to Exhibit 4.1 of
Holdings' 10-Q for the quarterly period ended November 24, 2001).

4.3 Registration Rights Agreement, dated December 18, 2001, by and among
Credit Suisse First Boston Corporation, Bank of America Securities LLC,
and Merrill Lynch, Pierce Fenner & Smith Incorporated, as
Representatives, and Holdings, GTECH, GTECH Rhode Island Corporation,
and GTECH Latin America Corporation (incorporated by reference to
Exhibit 4.2 of Holdings' 10-Q for the quarterly period ended November
24, 2001).

4.4 Specimen Form of certificate of Common Stock (incorporated by reference
to Exhibit 4.18 of the S-1 of Holdings, Registration No. 33-54236).

10.1 Agreement dated March 5, 2001 by and between Holdings and Howard S.
Cohen (incorporated by reference to Exhibit 10.1 of Holdings' Form 10-K
for the fiscal year ended February 24, 2001 (the "2001 10-K")).*

10.2 Amendment, dated March 28, 2001, to Agreement dated March 5, 2001, by
and between Holdings and Howard S. Cohen (incorporated by reference to
Exhibit 10.2 of Holdings' 2001 10-K).*

10.3 Amendment, dated May 4, 2001, to the Agreement, dated March 5, 2001, as
amended, by and between Holdings and Howard S. Cohen. (incorporated by
reference to Exhibit 10.3 of Holdings' 10-Q for the quarterly period
ended May 26, 2001).*

10.4 Separation Agreement and Mutual Release, dated as of December 13, 2002,
by and among Holdings, GTECH and Howard S. Cohen (incorporated by
reference to Exhibit 10.4 of

Holdings' 10-K for the fiscal year ended February 22, 2003, as
originally filed on April 25, 2003 (the "Holdings' 2003 10-K)). *

10.5 Agreement, dated as of August 9, 2000, between Holdings and W. Bruce
Turner (incorporated by reference to Exhibit 10.3 of Holdings' 10-Q for
the quarterly period ended August 26, 2000).*

10.6 Amendment, dated as of June 1, 2001, to the Agreement, dated as of
August 9, 2000 by and between Holdings and W. Bruce Turner
(incorporated by reference to Exhibit 10.3 of Holdings' 10-Q for the
quarterly period ended May 26, 2001).*

10.7 Agreement, dated as of August 6, 2002, among Holdings, GTECH and W.
Bruce Turner (incorporated by reference to Exhibit 10.1 of Holdings'
10-Q for the Quarterly Period ended August 24, 2002).*

+10.8 Separation Agreement and Release, dated as of August 21, 2003, by and
among Holdings, the Company and Antonio Carlos Rocha.*

+10.9 Separation Agreement and Mutual Release, dated as of January 7, 2004,
by and among Holdings, the Company and Larry Smith.*

10.10 Form of Agreement, relating to a potential change of control involving
Holdings, entered into between Holdings and, respectively, certain
members of senior management (incorporated by reference to Exhibit 10.5
of Holdings' 2000 10-K).*

10.11 List of signatories to Agreement relating to potential change of
control involving Holdings and certain members of senior management,
with the respective dates of such Agreements (incorporated by reference
to Exhibit 10.9 of Holdings' 2003 10-K). *

10.12.1 GTECH Corporation Executive Perquisites Program (incorporated by
reference to Exhibit 10.10 of Holdings' 2003 10-K). *

+10.12.2 Amendments to GTECH Executive Perquisites Program and Supplemental
Retirement Plan.*

+10.13 List of participants in GTECH Corporation Executive Perquisites
Program.*

10.14 Form of Executive Separation Agreement (incorporated by reference to
Exhibit 10, 12 of Holidays' 2003 10-K).*

+10.15 Schedule of Recipients of Executive Separation Agreement.*

10.16 Supplemental Retirement Plan effective January 1, 1992 (incorporated by
reference to Exhibit 10.8 of Holdings 2000 10-K).*

+10.17 List of Participants in Supplemental Retirement Plan.*

10.18 Contract for Lottery Operations and Services, dated October 10, 2001,
by and between the Texas Lottery Commission and GTECH (incorporated by
reference to Exhibit 10.1 of Holdings' 10-Q for the quarterly period
ended November 24, 2001).

10.19 Amendment No. 1 to Contract for Lottery Operations and Services, dated
October 18, 2001, by and between the Texas Lottery Commission and GTECH
(incorporated by reference to Exhibit 10.2 of Holdings' 10-Q for the
quarterly period ended November 24, 2001).

10.20 Agreement between Caixa Economica Federal and RACIMEC Informatica
Brasileira S.A. (predecessor to GTECH Brasil Ltda.) dated May 26, 2000,
respecting the provision of goods and services for the Brazil National
Lottery (incorporated by reference to Exhibit 10.12 of Holdings' 2000
10-K).

10.21 Amendment to Agreement between Caixa Economica Federal and RACIMEC
Informatica Brasileira S.A. (predecessor to GTECH Brasil Ltda.)
(incorporated by reference to Exhibit 10.21 of Holdings' 2001 10-K).

10.22 Amendment to Agreement between CEF and GTECH Brasil Ltda., dated
September 14, 2001 (incorporated by reference to Exhibit 10.20 of
Holdings' 2003 10-K).

10.23 Amendment to Agreement between CEF and GTECH Brasil Ltda., dated July
1, 2002 (incorporated by reference to Exhibit 10.21 of Holdings' 2003
10-K).

10.24 Amendment to Agreement between CEF and GTECH Brasil Ltda., dated
January 14, 2003 (incorporated by reference to Exhibit 10.22 of
Holdings' 2003 10-K).

10.25 Fifth Amendment to Agreement between CEF and GTECH Brasil Ltda., dated
April 8, 2003 (incorporated by reference to Exhibit 10.23 of Holdings'
2003 10-K).

10.26 Master Contract, dated as of May 12, 2003, by and between the Company
and the Rhode Island Lottery (incorporated by reference to Exhibit 10.2
of Holdings' 10-Q for the quarterly period ended May 24, 2003).

10.27 Participation Agreement, dated as of December 14, 2001, by and among
GTECH, West Greenwich Technology Associates, L.P., Key Corporate
Capital Inc., Post Office Square Funding Inc., Credit Lyonnais New York
Branch, The Bank of Nova Scotia, and the Lenders described therein
(incorporated by reference to Exhibit 10.24 of Holdings' 2002 10-K).

10.28 Second Amended and Restated Indenture of Lease, dated as of December
14, 2001, by and between West Greenwich Technology Associates, L.P.,
and GTECH (incorporated by reference to Exhibit 10.25 of Holdings' 2002
10-K).

10.29 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).*

10.30 1996 Non-Employee Directors' Stock Option Plan (incorporated by
reference to Exhibit 10.2 of Holdings' 10-Q for the quarterly period
ended May 31, 1997).*

10.31 First Amendment to the 1996 Non-Employee Directors' Stock Option Plan
(incorporated by reference to Exhibit 10.27 of Holdings' 2001 10-K).*

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

10.33 Amendment to 1997 Stock Option Plan dated April 2, 2002 (incorporated
by reference to Exhibit 10.32 of Holdings' 2002 10-K).*

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

10.35 Income Deferral Plan - 1998, as amended and restated (incorporated by
reference to Exhibit 10.32 of Holdings' 2003 10-K).*

10.36 Holdings' 1998 Employee Stock Purchase Plan, as amended and restated as
of November 1, 2001 (incorporated by reference to Exhibit 10.4 of
Holdings' 10-Q for the quarterly period ended November 24, 2001).*

10.37 1999 Non-Employee Directors' Stock Option Plan (incorporated by
reference to the Appendix of Holdings' 1999 Notice of Annual Meeting
and Proxy Statement).*

10.38 First Amendment to the 1999 Non-Employee Directors' Stock Option Plan
(incorporated by reference to Exhibit 10.32 of the Holdings' 2001
10-K).*

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

10.40 Holdings' 2000 Restricted Stock Plan and Form of Restricted Stock
Agreement (incorporated by reference to Exhibit 10.4 of Holdings' 10-Q
for the quarterly period ended August 26, 2000).*

10.41 Holdings' 2000 Omnibus Stock Option and Long-Term Incentive Plan
(incorporated by reference to Holdings' Proxy Statement filed on
September 22, 2000).*

10.42 Holdings' 2002 Omnibus Stock Option and Long-Term Incentive Plan
(incorporated by reference to Holdings' Proxy Statement filed on June
21, 2002).*

10.43 Holdings' Management Stock Bonus Program (incorporated by reference to
Exhibit 10.40 of Holdings' 2003 10-K).*

10.44 Senior Staff Officer Stock Ownership Plan, dated July 1, 2003
(incorporated by reference to Exhibit 10.1 of Holdings' 10-Q for the
quarterly period ended May 24, 2003).

+10.45 OEM Purchase Agreement by and between GTECH and Trans Act Technologies
Incorporated, dated July 2, 2002.

+10.46 OEM Purchase Agreement by and between GTECH and Tokyo Magnetic Printing
Co. Ltd, dated July 9, 1999.

+10.47 OEM Purchase Agreement by and between GTECH and BCM Advanced Research,
dated December 11, 2002.

+12.1 Computation of Ratio of Earnings to Fixed Charges.

14.1 The Company's Code of Conduct applicable to, among others, its Chief
Executive Officer, Chief Financial and principal accounting
officer(incorporated by reference to Exhibit 14.1 of Holdings' 2003
10-K).

+21.1 Subsidiaries of the Company.

+23.1 Consent of Ernst & Young, LLP.

+31.1 Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, of W. Bruce Turner, President and Chief Executive Officer of the
Company.

+31.2 Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, of Jaymin B. Patel, Senior Vice President and Chief Financial
Officer of the Company.

+32.1 Certification, Pursuant to 18 United States Code Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
W. Bruce Turner, President and Chief Executive Officer of the Company.

+32.2 Certification, Pursuant to 18 United States Code Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
Jaymin B. Patel, Senior Vice President and Chief Financial Officer of
the Company.

- ---------------------------
+ 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 filed the following report with the Securities and Exchange
Commission on Form 8-K during the last quarter of the fiscal year covered by
this report:

(i) The Company filed a report on Form 8-K on December 16, 2003
incorporating by reference: (A) a press release issued by
GTECH on December 16, 2003 announcing its fiscal 2004 third
quarter results and updating guidance for fiscal 2004, (B) the
scripts for the Company's fiscal 2004 third quarter earnings
conference call held on December 16, 2003, and (C) the slide
presentation accompanying the Company's fiscal 2004 third
quarter earnings conference call held on December 16, 2003.

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 12, 2004.

GTECH HOLDINGS CORPORATION

By: /s/ W. Bruce Turner
----------------------------------------
W. Bruce Turner, Chief Executive Officer

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.

SIGNATURE TITLE DATE
- --------------------------------- --------------------------------------------------- --------------

/s/ W. Bruce Turner
_________________________________ Chief Executive Officer (principal executive May 12, 2004
W. Bruce Turner officer) and Director

/s/ Jaymin B. Patel
_________________________________ Senior Vice President & Chief Financial Officer May 12, 2004
Jaymin B. Patel (principal financial officer)

/s/ Robert J. Plourde
_________________________________ Vice President, Chief Accounting Officer and May 12, 2004
Robert J. Plourde Corporate Controller (principal accounting officer)

/s/ Robert M. Dewey, Jr.
_________________________________ Director, Chairman of the Board May 12, 2004
Robert M. Dewey, Jr.

/s/ Christine M. Cournoyer
_________________________________ Director May 12, 2004
Christine M. Cournoyer

SIGNATURE TITLE DATE
- --------------------------------- --------------------------------------------------- --------------

/s/ Burnett W. Donoho
_________________________________ Director May 12, 2004
Burnett W. Donoho

/s/ Sir Jeremy Hanley
_________________________________ Director May 12, 2004
The Rt. Hon.
Sir Jeremy Hanley KCMG

_________________________________ Director May 12, 2004
Philip R. Lochner, Jr.

/s/ James F. McCann
_________________________________ Director May 12, 2004
James F. McCann

/s/ Anthony Ruys
_________________________________ Director May 12, 2004
Anthony Ruys

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

GTECH HOLDINGS CORPORATION AND SUBSIDIARIES

- ----------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------------------------------------------------------------------
Additions
-------------------------
Balance at Charged Charged to Balance at
beginning to costs other end of
Description of year and expenses accounts Deductions year
- ---------------------------------------------- ---------- ------------ ---------- ----------- ----------
(Dollars in thousands)

Valuation accounts deducted from assets to
which they apply:
Allowances for doubtful accounts $ 18,508 $ 227 $ 944 (a) $ (14,269) (d) $ 5,410
Allowances for liquidated damages 2,127 5,237 721 (2,802) (e) 5,283
Inventory allowances 14,561 (379) 6,349 (b) (12,411) (f) 8,120
Sales-type lease allowances 1,060 (1,072) - 12 -
Other 1,300 - 1,200 (c) (26) 2,474
---------- ------------ ---------- ---------- ----------
Total Fiscal Year Ended February 28, 2004 $ 37,556 $ 4,013 $ 9,214 $ (29,496) $ 21,287
========== ============ ========== ========== ==========

Allowances for doubtful accounts $ 18,773 $ 58 $ 5,528 (a) $ (5,851) (d) $ 18,508
Allowances for liquidated damages 1,614 4,587 807 (4,881) (e) 2,127
Inventory allowances 14,225 1,833 - (1,497) (f) 14,561
Sales-type lease allowances 4,098 (566) 39 (2,511) (d) 1,060
Other 607 621 2,472 (c) (2,400) (e) 1,300
---------- ------------ ---------- ---------- ----------
Total Fiscal Year Ended February 22, 2003 $ 39,317 $ 6,533 $ 8,846 $ (17,140) $ 37,556
========== ============ ========== ========== ==========

Allowances for doubtful accounts $ 3,534 $ 3,898 $ 13,778 (a) $ (2,437) (d) $ 18,773
Allowances for liquidated damages 3,839 1,397 - (3,622) (e) 1,614
Inventory allowances 6,721 9,839 - (2,335) (f) 14,225
Sales-type lease allowances - 4,098 - - 4,098
Other - 607 - - 607
---------- ------------ ---------- ---------- ----------
Total Fiscal Year Ended February 23, 2002 $ 14,094 $ 19,839 $ 13,778 $ (8,394) $ 39,317
========== ============ ========== ========== ==========

(a) Opening reserve balances associated with acquisitions or reserves for
amounts billed to customers which were not recorded as revenues

(b) Opening reserve balances associated with acquisitions

(c) Reserves transferred from accrued expenses and/or other assets

(d) Write-offs and recoveries of previous write-offs

(e) Payments made directly to customers

(f) Disposal of obsolete material