INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INC, 10KSB40, 2000-03-30

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INC
10KSB40, 2000-03-30
CALCULATING & ACCOUNTING MACHINES (NO ELECTRONIC COMPUTERS)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM 10-KSB
------------------------

(MARK ONE)

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

FOR THE YEAR ENDED DECEMBER 31, 1999

[ ] 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 0-10294

INTERNATIONAL LOTTERY &
TOTALIZATOR SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
CALIFORNIA 95-3276269
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

2131 FARADAY AVENUE
CARLSBAD, CALIFORNIA 92008-7297
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (760) 931-4000

REGISTRANT'S HOME PAGE HTTP://WWW.ILTS.COM

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
(TITLE OF CLASS)

COMMON SHARES

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 12 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 [ ]

Aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 23, 2000 was approximately $6,184,299. Revenues for the
year ended December 31, 1999 were $5,650,000.

Number of common shares outstanding at March 23, 2000 was 12,943,000

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 1999 Annual Report to Stockholders of the Registrant: Part II
Portions of the Proxy Statement for 2000 Annual Meeting of Stockholders: Part
III

Transitional Small Business Disclosure Format............Yes [ ]
No [X]

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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X]

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TABLE OF CONTENTS

<TABLE>
<S> <C> <C>
PART I
ITEM 1. DESCRIPTION OF BUSINESS..................................... 1
General..................................................... 3
DATAMARK(R) and Intelimark(TM)Terminals..................... 3
Central System Wagering Application
Software -- DataTrak(R)..................................... 4
Lottery Systems Service Agreements.......................... 4
Spare Parts/Software Support Agreements..................... 5
Revenue Sources............................................. 5
Product Development......................................... 5
Backlog..................................................... 5
Marketing and Business Development.......................... 6
Manufacturing and Materials................................. 6
Competition................................................. 7
Employees................................................... 7
Patents, Trademarks and Licenses............................ 7
Regulation.................................................. 7
Dependence Upon a Few Customers............................. 7
Year 2000................................................... 8
Forward-Looking Statements.................................. 8
Seasonality................................................. 8
Working Capital Practices................................... 8
Environment Effects......................................... 8
Export Sales................................................ 8
ITEM 2. DESCRIPTION OF PROPERTY..................................... 8
ITEM 3. LEGAL PROCEEDINGS........................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 9
EXECUTIVE OFFICERS OF THE REGISTRANT........................ 9

PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS......................................... 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS........................ 10
ITEM 7. FINANCIAL STATEMENTS........................................ 10
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 10

PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT......................................................... 11
ITEM 10. EXECUTIVE COMPENSATION...................................... 11
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 11
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 11
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K............................ 11
</TABLE>

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

The Registrant designs, manufactures, sells, manages, supports and services
computerized wagering systems and terminals for the global pari-mutuel and
on-line lottery industries. The Registrant also provides facilities management
services to global on-line lottery owners. The Registrant's technology can be
used in other transaction-processing applications, such as keno gaming and
automated ticket printer/readers for toll turnpike systems.

The Registrant's wagering systems include the DATAMARK(R) and
Intelimark(TM) family of point-of-sale terminals, a central computer
installation that is comprised of Compaq computer hardware and a commercially
available operating system used in conjunction with ILTS' DataTrak(R)
application software, and the required communication network to interface the
terminals to the central computer installation. System features include
real-time processing of data received from multiple locations, hardware
redundancy and complete communications redundancy in order to provide the
highest level of fault tolerant operation.

The point-of-sale, proprietary component of the Registrant's systems are
the DATAMARK(R) and Intelimark(TM) family of ticketing terminals. These
terminals are compact, reliable, Intel microprocessor-based units, which scan
marksense slips or interpret operator-input data in order to produce a thermal
ticket receipt to be retained by the customer. The Registrant sells the
DATAMARK(R) and/or Intelimark(TM) terminal separately or as part of a turnkey
wagering application system or the Registrant will modify a terminal's features
or configurations and central system software to meet specific customer
requirements.

The Registrant's proprietary central system software application,
DataTrak(R), controls the overall lottery operation. This system is the result
of years of evolution of Registrant's first central system that was originally
developed by The Hong Kong Jockey Club (HKJC), one of the world's largest
horseracing and lottery operators in the world.

The required communication network to interface the DataTrak(R) central
system and the wagering terminals is designed by ILTS to best fit each
customer's specific application using commercially available hardware and
software.

DATAMARK(R) AND INTELIMARK(TM) TERMINALS

The Registrant has developed several models of both terminals to meet the
varied requirements of different wagering applications. All are PC compatible,
Intel microprocessor-based and have a compact, lightweight design for countertop
operation. The terminals are approximately 12" deep, 12" wide, 10" high, weigh
approximately 27 pounds, and are accompanied by a built-in or external display
and keyboards.

The DATAMARK(R) models utilize a patented, compact, single ticket path
which allows the terminal to print and read from both sides of the same ticket
without operator intervention. The terminal utilizes quick, quiet thermal
printing that does not require an inked cartridge or ribbon as do impact, dot
matrix printers, thereby improving print quality and reliability, and reducing
maintenance expenses. The terminals use either pre-cut thermal coated tickets or
thermal coated roll stock tickets or both. Some models will sequentially read
and print up to 50 tickets entered at one time through the use of a "bulk feed"
option.

The DATAMARK(R) terminal is best suited for application in the racing
industry, and is capable of issuing tickets for standard betting, as well as for
any feature pool wagers currently being used in pari-mutuel wagering. The
terminals are designed to facilitate multiple bets on one ticket and multiple
selections for each bet. In addition, the bettor marks bets on a pre-printed
playslip, which is then read optically by the terminal, the amount wagered is
calculated and the bet details printed on the back of the same ticket. Because
the ticket is prepared away from the pari-mutuel clerk's window, betting
transaction time is reduced, efficiency of the operation is improved and the
bettor obtains more privacy in the betting transaction.

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The newly developed Intelimark(TM) terminal has been specifically designed
to make use of a commercially available point-of-sale terminal computer with
custom designed reader/printer mechanisms as an integral part of the single unit
design. A variant of the DATAMARK(R) mechanism has been developed in order to
meet the requirements of racing applications. In the case of lottery
applications, the reader/printer is designed to use a commercially available
optical mark sense reader, and roll stock thermal printer. This configuration
can be offered with touch screen color SVGA display, or integral keyboard, or
both depending on the requirements of the customer. All of these configurations
have been developed to provide a very cost competitive terminal for the lottery
application. Both the horseracing and lottery applications that utilize the
touch screen make use of the ILTS patent pending graphical user interface for
the placement of wagers. This interface greatly simplifies and reduces the time
necessary to place a bet.

Registrant is a registered Value-Added Reseller (VAR) of point-of-sale
terminal equipment manufactured by Epson America, Inc.

CENTRAL SYSTEM WAGERING APPLICATION SOFTWARE -- DATATRAK(R)

The nucleus of each wagering system is the central computer installation
that receives information from ticket-issuing terminals, accumulates wagering
data, calculates odds and payouts, and provides a means of database management
in order to distribute information and allow generation of management reports.
In cooperation with the customer, the Registrant designs the configuration of
the central computer installation to provide the required games, fault-tolerant
operation, high throughput and security. The DataTrak(R) system has been
developed by ILTS to make use of commercially available software operating
systems and software programs to facilitate modification at a much lower cost to
the customer than in the past where proprietary software limited the customer's
ability to perform changes to the system.

Each central computer installation typically includes a client-server
computer configuration that uses Alpha computers manufactured by Compaq. ILTS is
a registered VAR of Compaq computer equipment. Certain of the Registrant's
customers presently use software in their pari-mutuel systems that is
proprietary to the Registrant.

The Registrant owns non-exclusive rights to permanently use the central
system software developed by HKJC for use and modification in its pari-mutuel
wagering and lottery systems. Under the terms of the amended license, the
Registrant has use of the HKJC software royalty-free for all systems sold after
May of 1999.

The Registrant has made significant modifications and enhancements to the
HKJC software. Chief among them is the migration of the system to a
client-server architecture using Compaq computer hardware, the incorporation of
Sybase relational database software, and the utilization of a Windows operating
system for management information and control. The entire application is called
DataTrak(R). These modifications and enhancements provide scalability to the
system so that each customer's unique requirements can be met in a most cost
effective way, the configuration can be changed easily as required, and the
customer is able to process data within a familiar software user interface
environment.

The Registrant has also added numerous new features to the base software,
including instant ticket validation and player registration. The system has the
following 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 wagering terminals from the central
computer installation via the communications network; a high degree of security
and redundancy to guard against unauthorized access and tampering and to ensure
fault tolerant operation without data loss; and a comprehensive management
information and control system.

LOTTERY SYSTEM SERVICE AGREEMENTS

On September 8, 1999, the Registrant entered into agreements with
Interactive Flight Technologies, Inc. (now named Global Technologies Limited
(GTL)) under which the Registrant is supplying an on-line lottery system and
facilities management services to GTL for operation of lotteries on behalf of
charities throughout the United Kingdom. The lottery will operate under a
license granted by the Gaming Board of Great Britain to

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Inter Lotto (UK) Ltd., and an operating agreement between Inter Lotto and GTL,
which has a substantial minority ownership interest in Inter Lotto.

Under the terms of the agreement, the Registrant is providing a complete
DataTrak(R) on-line lottery system including central system hardware and
software as well as a minimum of 3,500 DATAMARK(R) XClaim terminals, with
potential for expansion up to 15,000 terminals. In addition, under a separate
facilities management agreement, the Registrant, through a United Kingdom
subsidiary, is providing a full range of services in connection with the lottery
system, including installation, training, computer operations, network
management and field maintenance. The facilities management agreement has a base
term of eight years with options for extensions. The lottery is targeted to
launch operations in the first quarter of 2000.

SPARE PARTS/SOFTWARE SUPPORT AGREEMENTS

In addition to sales of terminals and systems, the Registrant realizes
ongoing revenue from the sale of spare parts for use in the maintenance of its
terminals, of which approximately 39,000 have been delivered to date. The
Registrant also enters into contracts with its customers to provide software
modifications, upgrades and support for its installed products.

REVENUE SOURCES

The following table sets forth the revenue for the periods indicated
attributable to different applications of the Registrant's technology:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997 1996 1995
------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Racing Products and Services.............. $1,658 $ 6,733 $ 2,443 $11,183 $10,448
Lottery Products and Services............. 3,402 5,705 7,729 5,105 7,680
Other..................................... 590 734 654 305 513
------ ------- ------- ------- -------
Total........................... $5,650 $13,172 $10,826 $16,593 $18,641
====== ======= ======= ======= =======
</TABLE>

PRODUCT DEVELOPMENT

The Registrant's ability to compete successfully depends in part upon its
ability to meet the current and anticipated needs of its customers. To that end,
the Registrant devotes a significant portion of its research and development
activity to refining and enhancing the features of existing products, systems
and software. In 1999, the Registrant spent approximately $1.2 million on
engineering, research and development, as compared to $1.5 million in 1998.

The Registrant has recently developed a product called the Intelimark(TM),
a terminal based on commercially available hardware and software integrated with
a reader and printer mechanism to provide the standard terminal features with
the following enhancements: the option for a full color SVGA touch screen user
interface; optional keyboard configurations to allow fast operator input; and
optional peripherals such as magnetic stripe readers, smart card readers, and
barcode readers which can be incorporated into the configuration. The unit
currently utilizes the Pentium class processor, but is scaled to accommodate
future processors as the need for additional capability arises. The unit
provides faster processing, higher resolution thermal printing, and the ability
to utilize cost effective, commercial off-the-shelf PC peripherals.

The Registrant has been certified since February 1996 under ISO 9001
registration. This certification demonstrates quality in design development and
manufacturing under ISO standards.

BACKLOG

The backlog of orders for its products and services believed by the
Registrant to be firm, amounted to approximately $16.4 million as of December
31, 1999, as compared to a backlog of approximately $3.6 million

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as of December 31, 1998. Of such backlog at December 31, 1999, approximately
$16.4 million is expected to be filled during 2000. See DESCRIPTION OF BUSINESS,
Dependence Upon A Few Customers.

MARKETING AND BUSINESS DEVELOPMENT

Management believes that the Registrant's continuing ability to obtain and
retain contracts for its wagering systems and terminals is directly related to
its reputation in its various fields of expertise. Because of its reputation,
the Registrant often receives unsolicited inquiries from potential customers.
The Registrant also learns of new business opportunities through the close
contacts that its personnel maintain with key officials in the international
horse racing and lottery industries.

Contracts to provide products to the horse racing and lottery industries
often are awarded through a competitive bidding process which can begin years
before a contract is awarded and involves substantial expenditures by the
Registrant. Through its contacts with existing customers and others in these
industries, the Registrant often becomes aware of prospective projects before
the customer circulates a request for proposal. If the Registrant is interested
in the project it typically submits a proposal, either before or after the
customer circulates a formal request for proposal, outlining the products it
would provide and the services it would perform. If the proposal is accepted,
the Registrant and its customer negotiate and enter into a contract on agreed
terms.

The Registrant's marketing efforts are carried out by the Registrant's
professional marketing and engineering staff and frequently involve other
executive officers of the Registrant. Marketing of the Registrant's products and
services throughout the world is often performed in conjunction with consultants
with whom the Registrant contracts, from time to time, for representation in
specific market areas. In addition, the Registrant has entered into an agreement
with eLottery, Inc. to jointly market and develop an interface for allowing the
Registrant's lottery systems to process eLottery's web-based retailing of
lottery tickets.

The Registrant's success depends in large part on its ability to obtain new
contracts to replace its existing contracts. The Registrant currently has
proposals outstanding to supply systems, terminals or components for use in the
pari-mutuel wagering industry and for lotteries in various foreign countries. In
addition to contract sales for terminals and systems, the Registrant has had
discussions with both new and existing customers regarding supplying products
for their operations and expects to bid for additional contracts in the future.
Because the realization of revenue from these prospects is dependent upon a
number of factors, including the bidding process and product development, there
can be no assurance that the Registrant will be successful in realizing revenue
from any of these activities.

MANUFACTURING AND MATERIALS

In March 1999, the Registrant contracted with Anacomp, Inc. to provide
contract manufacturing for all DATAMARK(R) terminals. Anacomp is located in
nearby Poway, California, and has additional flexibility in their manufacturing
facility. The facility has over 200,000 square feet of floor space under one
roof, and has the capacity to manufacture nearly 100 terminals per day. The
Registrant also benefits from the volume discounts on raw materials and
subassemblies that Anacomp receives from its vendors due to the already high
volume of parts purchased by them. Anacomp is currently manufacturing 3,675
terminals that are being shipped to GTL in England, and 815 terminals that are
being shipped to Ab Trav Och Galopp (ATG) in Sweden.

Manufacture consists principally of the assembly of parts, components and
subassemblies (most of which are designed by the Registrant) into finished
products. The contract manufacturer will purchase many parts, components and
subassemblies necessary for the terminals and the systems and assemble them into
finished products. These products and purchased computers are then integrated
with standard peripherals purchased by the Registrant to construct racing and
lottery systems. The Registrant generally has multiple sources for the various
items purchased from vendors, but some of these items are state-of-the-art and
could be, from time to time, in short supply. Certain other items are available
only from a single supplier. For the year ended December 31, 1999 no single
vendor accounted for 10% or more of the Registrant's raw material purchases.

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COMPETITION

The Registrant competes primarily in the horse racing industry and the
on-line lottery industry. The Registrant competes by providing high-quality
wagering systems and terminals that are reliable, secure and fast. In addition,
management believes that the Registrant offers its customers more flexibility in
design and custom options than do most of its competitors.

Management believes that the Registrant's main competitors in the sale of
horse racing systems and on-line lottery systems in the domestic and
international marketplace are: AWA Limited, an Australian company; Essnet, a
Swedish company; International Des Jeux, the French national lottery company;
and four United States companies: GTECH Holdings Corporation, Autotote Limited,
Video Lottery Technologies, and Scientific Games Holding Corporation. Management
believes that the Registrant has been a substantial factor in the international
marketplace. The Registrant's sales or leases in the United States have been
insignificant. In general the Registrant's competitors have significantly
greater resources than the Registrant. Competition for on-line lottery system
contracts is intense.

EMPLOYEES

As of December 31, 1999, the Registrant employs 72 people worldwide on a
full-time equivalent basis. Of this total, 33 were engaged in operations
support, 17 in engineering and software development and 22 in marketing and
administrative positions. None of the Registrant's employees are represented by
a union, and the Registrant believes its relations with its employees are good.

PATENTS, TRADEMARKS AND LICENSES

The Registrant has six U.S. patents issued on its products, and one patent
pending. The Registrant believes that its technical expertise, trade secrets and
the creative skills of its personnel are of substantially greater importance to
the success of the Registrant than the benefits of patent protection. The
Registrant typically requires customers, employees, licensees, subcontractors,
strategic partners, and joint venture partners who have access to proprietary
information concerning the Registrant's products to sign nondisclosure
agreements, and the Registrant relies on such agreements, other security
measures and trade secret law to protect such proprietary information. Central
system software in the Registrant's lottery systems was originally developed
under a non-exclusive license with HKJC.

REGULATION

The countries in which the Registrant markets its products generally have
regulations governing horse racing or lottery operations, and the appropriate
governing body could restrict or eliminate these operations in these countries.
Any such action could have a material adverse effect on the Registrant. Foreign
countries also often impose restrictions on corporations seeking to do business
within their borders, including foreign exchange controls and requirements for
domestic manufacturing content. In addition, laws and legal procedures in these
countries may differ from those generally existing in the United States and
conducting business in these countries may involve additional risk for the
Registrant in protecting its business and assets, including proprietary
information. Changes in foreign business restrictions or laws could have a
significant impact on the Registrant's operations.

DEPENDENCE UPON A FEW CUSTOMERS

The Registrant's business to date has been dependent on major contracts and
the loss of one or failure to replace completed contracts with new contracts
would have a materially adverse effect on the Registrant's business. During
1999, the Registrant's revenues were derived primarily from contracts with New
South Wales Lottery ($1.8 million); Philippine Gaming Management Corporation
($0.5 million); Olympic Gold Holdings ($0.5 million); HKJC ($0.4 million);
Leisure Management Berhad ($0.4 million); Singapore Turf Club ($0.4 million);
and all other in the aggregate ($1.6 million).

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YEAR 2000

As of March 23, 2000, we have not experienced any significant disruptions
as a result of the rollover from 1999 to 2000. However, the success to date of
our Year 2000 efforts cannot guarantee that a Year 2000 problem affecting third
parties, upon which we rely, will not become apparent in the future that could
harm our operations.

FORWARD-LOOKING STATEMENTS

The statements in this filing which are not historical facts are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth or implied
by forward-looking statements. These risks and uncertainties include the absence
of significant contract backlog, the dependence on business from foreign
customers sometimes in politically unstable regions, political and governmental
decisions as to the establishment of lotteries and other wagering industries in
which the Registrant's products are marketed, fluctuations in quarter-by-quarter
operating results, and other factors described in this Form 10-KSB.

SEASONALITY

In general, the Registrant's business is not subject to seasonal effects.

WORKING CAPITAL PRACTICES

The Registrant's sales contracts typically provide for deposits and
progress payments which have provided sufficient working capital for operations.

ENVIRONMENT EFFECTS

There are no significant capital expenditures required of the Registrant in
order to comply with laws relating to protection of the environment.

EXPORT SALES

The majority of the Registrant's revenues are derived from contracts with
foreign companies. As of December 31, 1999, the Registrant's equipment has been
delivered and installed in Sweden, Norway, Hong Kong, Singapore, Ukraine,
Australia, Finland, England, the Netherlands, Malaysia, Macau, China, Papua New
Guinea, Belgium and the Philippines. The companies with which the Registrant
contracts are normally sizeable organizations with substantial assets and are
capable of meeting the financial obligations undertaken. The Registrant has
entered into a few contracts specifying payment in currencies other than the
U.S. dollar, thereby assuming the risk associated with fluctuations in value of
foreign currencies. The majority of the Registrant's sales are denominated in
U.S. dollars and thus not subject to foreign currency fluctuations. However, the
ultimate cost of the Registrant's products to its customers have increased due
fluctuations in the foreign exchange rates of many southeast Asian countries.
The Registrant does not believe that its on-going business has been negatively
impacted by the Asian currency-exchange situation, however, one current customer
asked in 1998 and the Registrant agreed, to delay to a later undefined date the
scheduled delivery of terminals which has resulted in delay of revenues and cash
receipts to the Registrant of approximately $1.0 million.

See also Note 7 of Notes to Consolidated Financial Statements, incorporated
by reference in Part II, Item 7.

ITEM 2. DESCRIPTION OF PROPERTY

The Registrant's U.S. facilities consist of approximately 22,500 square
feet of leased office, warehouse and manufacturing space in Carlsbad,
California. The lease on this facility expires in the year 2005. The
Registrant's Australian subsidiary currently leases, at a monthly cost of
approximately A$8,400, approximately 13,000 square feet consisting of a
manufacturing and administrative facility. The lease on this property expires
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in October 2001. Since Registrant's technical support for the New South Wales
Lottery has ceased, the Registrant, with the assistance of the lessor, is
attempting to sub-lease this building, but in the interim, the Registrant is
continuing to use the administrative facility as a sales office for Australia
and New Zealand. See Note 7 of Notes to Consolidated Financial Statements,
incorporated by reference in Part II, Item 7.

Separate office and maintenance facilities to administer the U.K.
Charitable Lottery in England are provided by GTL, a customer of the Registrant.

ITEM 3. LEGAL PROCEEDINGS

WALTERS V. ILTS, ET AL

In November, 1995, Mr. James Walters, the former chairman and president of
the Registrant, filed an action in the San Diego County Superior Court against
the Registrant and its then current president, Frederick A. Brunn, alleging that
certain statements in a magazine article were slander per se by the Registrant
and Brunn. The case was settled in October 1999 at minimal financial cost to
Registrant.

The Registrant is also subject to other legal proceedings and claims that
arise in the normal course of business. While the outcome of these proceedings
and claims cannot be predicted with certainty, management does not believe that
the outcome of any of these matters will have a material adverse effect on the
Registrant's consolidated financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Inapplicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
M. Mark Michalko.............................. 45 President/Principal Financial
Officer
Robert McPhail................................ 65 Vice President, Sales and Marketing
Timothy R. Groth.............................. 50 Vice President, Technical Operations
Lawrence E. Logue............................. 63 Corporate Secretary
</TABLE>

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PART II

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

The Registrant's Common Stock is traded under the symbol ITSI on the
Over-the-Counter Bulletin Board (OTCBB). As of December 31, 1999, there were
12,943,000 common shares outstanding and approximately 1,100 shareholders of
record. In October, the Registrant's largest shareholder, Berjaya Lottery
Management (H.K.) LTD., purchased additional shares of the Registrant's common
stock for $5.2 million resulting in an increase in its ownership of the
Registrant's total outstanding shares to 71.4%. The Registrant's management
owned 1%.

<TABLE>
<CAPTION>
1999 HIGH LOW
---- ---- --------- ---
<S> <C> <C> <C>
First Quarter............................................. 15/32 9/32
Second Quarter............................................ 1 9/32
Third Quarter............................................. 1 5/16 9/16
Fourth Quarter............................................ 1 17/32 9/16
Average Daily Volume...................................... 14,900
Total Annual Trading Volume............................... 3,933,600
</TABLE>

<TABLE>
<CAPTION>
1998 HIGH LOW
---- ---- --------- ---
<S> <C> <C> <C>
First Quarter............................................. 3 3/4 21/16
Second Quarter............................................ 2 7/16 1/8
Third Quarter............................................. 2 3/16 1/2
Fourth Quarter............................................ 1 11/32 3/16
Average Daily Volume...................................... 17,184
Total Annual Trading Volume............................... 4,536,587
</TABLE>

Solely for the purpose of calculating the aggregate market value of the
voting stock held by non-affiliates of the Registrant, as set forth on the cover
of this report, it has been assumed that all executive officers and directors of
the Registrant and Berjaya Lottery Management (H.K.) Ltd. were affiliated
persons. All of the Registrant's common shares, the only voting stock
outstanding, beneficially owned by each such person (as defined in Rule 13d-3
under the Securities Exchange Act of 1934) have been assumed to be held by that
person for this calculation. The market value of the common shares is based on
the closing price for March 23, 2000, of $ 1.75 per share.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

The information required by this item is included on pages 7 through 10 of
the Registrant's Annual Report to Shareholders as of December 31, 1999 and 1998
for the years then ended under the same caption and is incorporated herein by
reference to such Annual Report.

ITEM 7. FINANCIAL STATEMENTS

The information required by this item is included on pages 11 through 14 of
the Registrant's Annual Report to Shareholders as of December 31, 1999 and 1998
for the years then ended and is incorporated herein by reference to such Annual
Report.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Inapplicable.

10
<PAGE> 11

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The information required is incorporated herein by reference to the
Registrant's definitive Proxy Statement for the 2000 Annual Meeting of
Shareholders.

ITEM 10. EXECUTIVE COMPENSATION

The information required is incorporated herein by reference to the
Registrant's definitive Proxy Statement for the 2000 Annual Meeting of
Shareholders.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required is incorporated herein by reference to the
Registrant's definitive Proxy Statement for the 2000 Annual Meeting of
Shareholders.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required is incorporated herein by reference to the
Registrant's definitive Proxy Statement for the 2000 Annual Meeting of
Shareholders.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

A. Exhibits

<TABLE>
<S> <C> <C>
(3) (a) Articles of Incorporation, as amended September 13, 1994,
reflecting corporate name change, and as amended January 7,
1998, reflecting authorization for 20 million shares of
preferred stock and By-laws (incorporated by reference to
Form 10-K for the year ended December 31, 1994, File No.
0-10294).
(b) Articles of Incorporation as amended June 2, 1998,
reflecting the three-for-one reverse stock split
(incorporated by reference to Form 10-K for the year ended
December 31, 1998, File No. 0-10294).
(c) Articles of Incorporation as amended June 2, 1998,
reflecting maximum indemnification for directors permitted
by California law (incorporated by reference to Form 10-K
for the year ended December 31, 1998, File No. 0-10294).
(d) A By-law effective June 2, 1998, amendment relating to
officers and directors indemnification and number of
directors (incorporated by reference to Form 10-K for the
year ended December 31, 1998, File No. 0-10294).
(10) (a) Third Amendment to Lease for the Registrant's facility in
Carlsbad, California dated August 11, 1999.
(b) The Registrant's 1986 Employee Stock Option Plan
(incorporated by reference to Exhibit 4(b) to the Form S-8
Registration Statement, File No. 33-34123, as filed on April
4, 1990.
(c) The Registrant's 1988 Employee Stock Option Plan
(incorporated by reference to Exhibit 4(b) to the Form S-8
Registration Statement, File No. 33-34123, as filed on April
4, 1990).
(d) The Registrant's 1990 Stock Incentive Plan (incorporated by
reference to Form 10-K for the year ended December 31, 1990,
File No. 0-10294 and File No. 33-79938).
(e) The Registrant's 1997 Directors' Stock Option Plan
(incorporated by reference to Form 10-K for the year ended
December 31, 1998, File No. 0-10294).
</TABLE>

11
<PAGE> 12

<TABLE>
<S> <C> <C>
(13) Annual Report to Shareholders as of December 31, 1999 and 1998 and for the years then ended. With
the exception of the information incorporated by reference into items 5, 6, 7, and 8 of this Form
10-K, the 1999 Annual Report to Shareholders is not deemed filed as part of this report.
(21) Subsidiaries of the Registrant.
(23A) Consent of Arthur Andersen LLP, Independent Public Accountants.
(23B) Report of Arthur Andersen LLP, Independent Public Accountants.
(27) Financial Data Schedule
</TABLE>

B. A current report on Form 8-K was filed on October 5, 1999 reporting a Change
in Control of Registrant by reason of a sale of the Registrant's Common Stock
to Berjaya Lottery Management Company (H.K.) Limited (Berjaya) for
approximately $5.2 million, increasing Berjaya's stock ownership from 38.5%
to 71.4%.

12
<PAGE> 13

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

By: /s/ M. MARK MICHALKO
---------------------------------------------------
M. Mark Michalko
President

Dated: March 26, 2000

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ THEODORE A. JOHNSON Chairman of the Board March 26, 2000
- -----------------------------------------------------
Theodore A. Johnson

/s/ M. MARK MICHALKO Director, President and March 26, 2000
- ----------------------------------------------------- Principal Financial Officer
M. Mark Michalko

/s/ ALAIN K.K. LEE Director March 26, 2000
- -----------------------------------------------------
Alain K. K. Lee

/s/ FREDERICK A. BRUNN Director March 26, 2000
- -----------------------------------------------------
Frederick A. Brunn

Director
- -----------------------------------------------------
Ng Foo Leong

/s/ MARTIN J. O'MEARA, JR. Director March 26, 2000
- -----------------------------------------------------
Martin J. O'Meara, Jr.

/s/ LEONARD G. MORRISSEY Director March 26, 2000
- -----------------------------------------------------
Leonard G. Morrissey

Director
- -----------------------------------------------------
Michael G. R. Sandberg

/s/ CHAN KIEN SING Director March 26, 2000
- -----------------------------------------------------
Chan Kien Sing
</TABLE>

<PAGE> 1
EXHIBIT 10 (a)

THIRD AMENDMENT TO LEASE

This Third Amendment to Lease ("Agreement") is dated for reference
purposes only as of August 11, 1999, by and between Equus 2131, LLC, a
California limited liability company, ("Lessor") successor in interest to
Carlsbad Research Center Number Six, ("Lessor"), and International Lottery &
Totalizator Systems, Inc., a California corporation ("Lessee").

RECITALS

A. Carlsbad Research Center Number Six ("Original Lessor") and
Lessee entered into that certain Lease agreement dated June 26,
1992, (the "Lease"), whereby Lessee leased from Original Lessor
the Premises known as 2131 Faraday Avenue, Carlsbad, CA 92008.
The Lease was subsequently amended by the First Amendment to
Lease, dated December 20, 1994, and by the Second Amendment to
Lease dated June 6, 1995.

B. Lessee now desires to reduce the total square footage of the
Premises and extend the term of the Lease, and Lessor, as
successor-in-interest to Original Lessor, agrees to thereto on
the terms and conditions set forth in this Amendment.

NOW, THEREFORE, in consideration of the facts contained in the Recitals above,
the mutual covenants and conditions below, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:

AGREEMENT

1. The expiration date of the Lease shall be June 20, 2005 (the
"Extended Term").

2. The total square footage of the Premises will be reduced to
22,530 rentable square feet (the "New Premises") as further
described in Exhibit 1-A, attached hereto and incorporated
herein by reference. At any time during the Extended Term, upon
written notice to Lessee, Lessor may add up to an additional
2,000 rentable square feet, (the "Additional Space") to the New
Premises at Lessor's sole option. In the event Lessor exercises
its option to add the Additional Space, it will be contiguous to
the New Premises and will be located in the rear half of the
building, in the crosshatched area of Exhibit 1-A.

3. Effective October 1, 1999, the rental rate shall be $1.00 NNN
per rentable square foot per month (which equals $22,530.00 per
month, based on the 22,530 rentable square feet). The rental
rent shall increase annually by three percent (3%) effective
each October 1st, beginning October 1, 2000.

4. Lessee's rent shall be abated for the period from September 16,
1999 through September 30, 1999.

5. The Security Deposit held by Lessor shall be increased by
$55,000.00 for a total Security Deposit of $100,000.00. The
Security Deposit shall not bear interest for benefit of Lessee,
and Lessee agrees to relinquish its right to receive interest
during the original term of the Lease.

6. Lessee shall be entitled to sixty-three (63) parking spaces (2.8
parking spaces per 1000 square feet of New Premises).

12
<PAGE> 2

7. Unless otherwise procured and maintained at Lessee's expense by
Lessor, Lessee shall procure and maintain, at Lessee's expense,
a heating, ventilation and air conditioning system maintenance
contract reasonably acceptable to Lessor. Lessee will be
responsible for payment of all utilities metered exclusively to
the New Premises. Any shared utility expenses paid by Lessor
shall be reimbursed to Lessor by Lessee. Lessee shall reimburse
Lessor for Lessee's prorata share of all other expenses
associated with operation, maintenance and repair of the
Premises, including Lessor's management fee of three percent
(3%) of monthly gross receipts and property taxes.

8. Lessor, at Lessor's sole cost and in conformance to all
applicable codes and laws, shall pay all costs to demise the
Building in accordance with Exhibit 1-A. Such costs include, but
are not limited to, demising walls, fire exits,
segregation/addition of electrical service, lighting and
mechanical segregation and all applicable soft costs. In
addition, Lessor will provide Lessee with an Improvement
Allowance ("Allowance") which shall not exceed $67,590.00 ($3.00
per rentable square foot) to improve the New Premises,
substantially in accordance with Exhibit 1-A. The Allowance may
only be used for actual improvements to the New Premises and
will include architectural/space planning, permit fees, and a
construction management fee payable to Equus Realty Advisors,
Inc. in the amount of five percent (5%) of the total cost of the
Improvement Allowance. The improvements shall be completed in
accordance with the attached Work Letter, Exhibit 1-B. Lessor
shall, at Lessor's sole cost, and in addition to the Allowance,
split the existing HVAC system to separately control Lessee's
CEO's office and the existing board room. Lessee will be
responsible for all costs associated with relocation or
modification of its computer, data/cabling, security and
telephone equipment and all office systems and furniture.

9. Lessee shall have the exclusive use of the Building address and
Lessor will create a separate address for the west half of the
building. Lessee agrees that the address of the west half of the
building may be 2131 Faraday Avenue, Suite 200, Carlsbad.

10. Lessee shall be allowed to maintain the current location of the
generator and air compressor in the back of the Building and
shall rerun services from such devices as part of the Tenant
Improvement Allowance.

11. Except as specifically modified herein, all other terms and
conditions of the Lease shall remain unchanged and in full force
and effect.

IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as
of October 1, 1999.

LESSOR LESSEE

Equus 2131, LLC International Lottery & Totalizator
a California limited liability company Systems, Inc., a California corporation

By: /s/ David R. Bourne By: /s/ Lawrence E. Logue
------------------------------------ ------------------------------------
David R. Bourne
Its: Manager Its: Corporate Secretary and
General Counsel
-----------------------------

<PAGE> 1
EXHIBIT 13

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

FORWARD LOOKING STATEMENTS

The statements in this filing which are not historical facts are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth or implied by forward-looking
statements. These risks and uncertainties include the absence of significant
contract backlog, the dependence on business from foreign customers sometimes in
politically unstable regions, political and governmental decisions as to the
establishment of lotteries and other wagering industries in which the Company's
products are marketed, fluctuations in quarter-by-quarter operating results, and
other factors described in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.

OVERVIEW

The Company has derived substantially all of its product sale revenues from the
sale of betting terminals to racing organizations and lotteries worldwide. The
size and timing of these transactions result in variability in product sales
revenues from period to period.

In past years, service revenues have been derived primarily from providing
betting terminal maintenance services to New South Wales Lotteries (NSWL). NSWL
is in the process of changing its lottery system to a competitor's system. As a
result, substantially all of the Company's service revenue contractually
terminated in January 2000.

RESULTS OF OPERATIONS

1999 VERSUS 1998

REVENUES: Total revenues in fiscal 1999 decreased 57% or $7.5 million,
as compared to fiscal 1998. Product sales decreased 70% in 1999 to $3.4 million
from $11.1 million in 1998 primarily resulting from a 99% decrease in terminal
shipments in 1999 compared to 1998. Service revenues increased 10% or $0.2
million from 1998, primarily resulting from an increase in demand for software
support to one customer.

GROSS PROFIT: The gross profit on product sales was 5% in 1999 compared
to 37% in 1998. The decreased gross profit percentage was due to lower
production volume to absorb fixed costs. The gross profit percentage on service
revenues increased to 34% in 1999 from 26% in 1998 due to support costs
remaining constant while revenues increased.

ENGINEERING, RESEARCH & DEVELOPMENT: Engineering, research and
development expenses decreased 20% to $1.2 million in 1999 compared to $1.5
million in 1998. The 1999 projects included the development of additional
terminals and software for customers as opposed to 1998 which consisted
primarily of expenditures for features for the DataTrak lottery system and the
integration of an impact printer into the Company's terminals.

SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses decreased 16% or $0.9 million in 1999 compared to 1998. This was
primarily due to the costs incurred in 1998 related to a proposed acquisition
that was not completed, and marginal decreases in marketing and travel
expenditures.

PROVISION FOR INCOME TAXES: The provision for income taxes in 1999 and
1998 relates to income earned in the Company's Australian subsidiary.

1998 VS. 1997

REVENUES: Total revenues in fiscal 1998 increased 22% or 2.3 million,
versus fiscal 1997. Product sales increased 32% in fiscal 1998 to $11.1 million
from $8.4 million in 1997. This is primarily the result of a 61% increase in
terminal shipments in 1998 compared to 1997 shipments, which also included one
central system sale. Service revenues decreased 15% or $0.4 million from 1997.
This decrease is the result of fewer customer support projects and the impact of
lower Australian exchange rates in 1998.

GROSS PROFIT: The gross profit on product sales was 37% in 1998 compared
to 7% in 1997. The increased gross profit percentage was due to the
manufacturing efficiencies achieved with the increased level of production,
lower production related expenses, sales of earlier model terminals which
previously had been fully reserved. Fiscal 1997 included charges of
approximately $1.3 million taken to recognize impairment in value of software
capitalized in prior years, reserves for inventory obsolescence, provisions for
certain development contracts and costs related to the closing of the Company's
United Kingdom subsidiary. The gross profit percentage on service revenues was
approximately the same both years.

1
<PAGE> 2

ENGINEERING, RESEARCH & DEVELOPMENT: Engineering, research and
development expenses decreased 13% to $1.5 million in 1998 compared to $1.7
million in 1997. Projects in 1998 included development of additional features
for the DataTrak lottery system and integration of an impact printer into the
Company's terminals. The 1997 expenditures were primarily directed towards
DataTrak lottery software and related features.

SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses decreased 16% or $1.0 million in 1998 compared to 1997. This was
primarily the result of a lower level of staffing in 1998, partially offset by
expenses incurred for a proposed Prime Gaming acquisition described in Note 1.

GAIN ON SALES OF SUBSIDIARY AND LOTTERY SERVICE AGREEMENT: In 1998, the
Company recognized a gain on the sale of its former Papua New Guinea lottery
service agreement of $105 thousand compared to a gain of $419 thousand in 1997.
Installment payments from the sale of the Papua New Guinea lottery were
suspended in late 1998 due to poor economic conditions in Papua New Guinea. In
addition, in 1997 the Company received final payment and recognized a gain of
$438 thousand from the 1993 sale of its McKinnie & Associates subsidiary.

PROVISION FOR INCOME TAXES: The provision for income taxes in 1998 and
1997 relates to income earned in the Company's Australian subsidiary.

LIQUIDITY AND CAPITAL RESOURCES

During fiscal 1999, working capital increased by $1.2 million as compared to
fiscal 1998 primarily as a result of the Berjaya equity infusion combined with
decreases in both accounts receivable and inventory.

Although the Company's net loss from operations was $4.2 million, cash on hand
increased by $4.5 million. The Company's largest shareholder, Berjaya Lottery
Management (H.K.) LTD. purchased additional shares in October 1999 of the
Company's common stock for $5.2 million, working capital increased by $1.2
million as described above, and monies were received for contracts in excess of
costs incurred.

In 1999, the Company took steps to reduce its fixed costs by renegotiating its
facilities lease to reduce lease expense and occupying a smaller portion of its
existing facility.

The Company strategically pursues long-term service contracts as a source of
revenue. In September 1999, the Company entered into agreements with
subsidiaries of Global Technologies Ltd. (GTL) pursuant to which the Company
will provide lottery equipment and, through the Company's United Kingdom
subsidiary, all facilities management services in connection with a lottery for
the benefit of charities throughout Great Britain under a lottery license
granted by the Gaming Board of Great Britain to an affiliate of GTL. Service
contracts pose new capital investment risks for the Company that do not exist in
its product sale business. Service contracts require an up-front investment of
capital, which is repaid only after a system becomes operational, based upon a
percentage of the customer's gross receipts from the system. The Company often
bears the risk that scheduling delays may occur and that a system may not become
operational or that the customer's gross receipts from the system may be less
than expected. The Company may have to seek the funds necessary to implement
such contracts from Berjaya or other sources. However, the GTL service agreement
was primarily customer funded. Costs incurred related to this contract have been
accumulated along with billings made under the contract. These amounts are shown
net in the balance sheet as "Billings in Excess of Costs on Uncompleted
Contracts."

The Company's consolidated financial statements have been prepared on a
continuing operations basis which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business.
Management recognizes that the Company must generate additional contract sales
to maintain its current level of operations in future years. If such contract
sales are not obtained, the Company may be required to seek additional sources
of funding in the form of debt or equity financing.

As of December 31, 1999, there were no material commitments for capital
expenditures.

Management anticipates that it will be successful in obtaining sufficient
product or service contracts to enable the Company to continue normal
operations; however, no assurances can be given that the Company will be
successful in realizing sufficient contract revenue. If the Company is unable to
obtain sufficient contract revenue, management will be required to reduce the
Company's operations.

FOREIGN EXCHANGE FLUCTUATION

The Company's reporting currency is the U.S. dollar. Historically, a majority of
the Company's sales have been denominated in U.S. dollars, with the balance
denominated in foreign currencies. These foreign currency sales have been
effected principally by the Company's international subsidiaries. Changes from

2
<PAGE> 3

reporting period to reporting period in the exchange rates between various
foreign currencies and the U.S. dollar have had, and will in the future continue
to have, an impact on revenue and expense reported by the Company, and such
effect may be material in any individual reporting period. As the contracts are
predominantly denominated in the functional currency of the subsidiary
performing under the contract, the Company has historically incurred immaterial
amounts of transaction gains or losses.

The balance sheets of the Company's international subsidiaries are translated
into U.S. dollars and consolidated with the balance sheet of the Company's
domestic subsidiary in accordance with U.S. accounting requirements. Changes in
the U.S. dollar value of the foreign currency denominated assets are accounted
for as an adjustment to stockholders' equity. Therefore, changes from reporting
period to reporting period in the exchange rates between various foreign
currencies and the U.S. dollar have had, and will continue to have, an impact on
the foreign currency translation component of stockholders' equity reported by
the Company, and such effect may be material in any individual reporting period.
The Company recognized a foreign exchange gain of $10 thousand in 1999 and a $65
thousand gain in 1998.

ASIA

Significant portions of the Company's revenues are derived from customers
located in Asia. In the last 36 months the currencies of the Asian countries in
which the Company's customer are located have declined significantly against the
U.S. dollar. Although the Company generally has been paid in U.S. dollars, this
decline has effectively increased the cost of the Company's products to its
customers. The Company does not believe that its on-going business has been
negatively impacted by the Asian currency exchange situation, however, one
current customer has asked, and the Company has agreed, to delay to a later
undefined date the scheduled delivery of terminals which will result in the
delay of Company revenues and cash receipts of approximately $1.0 million.

YEAR 2000

As of March 23, 2000, we have not experienced any significant disruptions as a
result of the rollover from 1999 to 2000. However, the success to date of our
year 2000 efforts cannot guarantee that a Year 2000 problem affecting third
parties, upon which we rely, will not become apparent in the future that could
harm our operations.

<PAGE> 4

ILTS - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998
$ in thousands, except per share amounts and non-monetary items
<S> <C> <C>
Statement of operations data
Revenue $ 5,650 $ 13,172
Gross profit $ 955 $ 4,599
Operating loss $ (4,594) $ (2,094)
Net loss $ (4,241) $ (1,892)
Loss per share - basic and diluted (1) $ (.55) $ (.31)

AS OF DECEMBER 31,
Balance sheet data
Total assets $ 8,511 $ 5,078
Shareholders' equity $ 3,473 $ 2,472
Shares outstanding 12,943 6,009

Key ratios and statistics
Gross profit percentage 16.90% 34.91%
Working capital $ 3,157 $ 2,007
Book value per share $ .27 $ .41
Current ratio 1.63 1.77
Backlog $ 16,402 $ 3,402
Employees 72 72

</TABLE>

(1) Reflects weighted average shares used in calculation from stock purchase
agreement between ILTS and Berjaya Lottery Management (H.K.) Limited.

<PAGE> 5

ILTS - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999 1998
$ in thousands, except share amounts
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,801 $ 2,270
Accounts receivable, net of allowance for doubtful accounts of $92 ($93 in 417 1,338
(1998)
Costs in excess of billings on uncompleted contracts - 45
Inventories, net 135 798
Other current assets 842 162
------------ ------------
Total current assets 8,195 4,613
------------ ------------

Equipment, furniture and fixtures at cost, less accumulated depreciation of
$3,877 ($3,669 in 1998) 316 465
------------ ------------
$ 8,511 $ 5,078
------------ ------------

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 684 $ 474
Billings in excess of costs on uncompleted contracts 2,237 9
Accrued payroll and related taxes 621 603
Related party liability 304 332
Other current liabilities 1,192 1,188
------------ ------------
Total current liabilities 5,038 2,606
------------ ------------

Commitments and contingencies (Notes 8 and 12)
Shareholders' equity:
Common shares; no par value, 50,000,000 shares authorized; 12,943,000
shares issued and outstanding in 1999 and 6,009,183 in 1998 56,326 51,103
Accumulated deficit (52,792) (48,551)
Other accumulated comprehensive loss (61) (80)
------------ ------------
Total shareholders' equity 3,473 2,472
------------ ------------
$ 8,511 $ 5,078
============ ============
</TABLE>

See accompanying notes.

<PAGE> 6

ILTS - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998
$ in thousands, except per share amounts
<S> <C> <C>
Revenues:
Sales of products $ 3,363 $ 11,102
Services 2,287 2,070
-------- --------
5,650 13,172
-------- --------
Cost of revenues:
Cost of sales of products 3,192 7,040
Cost of services 1,503 1,533
-------- --------
4,695 8,573
-------- --------
Gross profit 955 4,599
Engineering, research and development 1,173 1,464
Selling, general and administrative 4,376 5,229
-------- --------
Loss from operations (4,594) (2,094)
-------- --------

Other income:
Interest income, net 135 60
Exchange rate gain 10 65
Royalty and other income 344 -
Gain on sale of subsidiary and lottery service agreement - 105
-------- --------
Loss before provision for income taxes (4,105) (1,864)
-------- --------
Provision for income taxes 136 28
-------- --------
Net loss $ (4,241) $ (1,892)
-------- --------
Net loss per share - basic and diluted $ (0.55) $ (0.31)
-------- --------
Shares used in determination of net loss per share -
Basic and diluted 7,681 6,009
-------- --------
</TABLE>

See accompanying notes.

<PAGE> 7

ILTS - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
OTHER
ACCUMULATED
COMMON STOCK ACCUMULATED COMPREHENSIVE
SHARES AMOUNT DEFICIT INCOME (LOSS) TOTAL
------ ------ ------- ---------- -----
<S> <C> <C> <C> <C> <C>
Thousands of shares/dollars

Balance at December 31, 1997 6,009 $ 51,103 $(46,659) $ (352) $ 4,092
------- -------- -------- -------- --------
Foreign currency translation adjustment - - - 272 272
Net loss - 1998 - - (1,892) - (1,892)
------- -------- --------- ------- --------

Balance at December 31, 1998 6,009 51,103 (48,551) (80) 2,472
------- -------- --------- -------- --------
Proceeds from sale of common stock 6,934 5,200 - - 5,200
Compensation expense for options
issued to consultants - 23 - - 23
Foreign currency translation adjustment - - - 19 19
Net loss - 1999 - - (4,241) - (4,241)
------- -------- --------- -------- --------

Balance at December 31, 1999 12,943 $ 56,326 $(52,792) $ (61) $ 3,473
------- -------- -------- -------- --------
</TABLE>

See accompanying notes

<PAGE> 8

ILTS - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998
$ in thousands
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,241) $(1,892)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 244 338
Compensation expense for options issued to consultants 23 -
Gain on sale of subsidiary and lottery service operations - (105)
Loss on impaired manufacturing assets - 94
Changes in operating assets and liabilities:
Accounts receivable 921 (298)
Costs in excess of billings
on uncompleted contracts 45 1,671
Inventories 663 1,746
Accounts payable 210 (101)
Billings in excess of costs
on uncompleted contracts 2,228 (377)
Accrued payroll and related taxes 18 (236)
Related party liability (28) 186
Other assets (681) 27
Other liabilities 12 (1,436)
------- -------
Net cash used for operating activities (586) (383)
------- -------
Cash flows from investing activities:
Lottery service agreement sale proceeds and repayment of advances - 105
Additions to equipment (102) (95)
------- -------
Net cash provided by (used for) investing activities (102) 10
------- -------
Cash flows from financing activities:
Proceeds from issuance of common shares 5,200 -
------- -------
Net cash provided by financing activities 5,200 -
------- -------
Effect of exchange rate changes on cash 19 272
------- -------
Increase (decrease) in cash and cash equivalents 4,531 (101)

Cash and cash equivalents, beginning of year 2,270 2,371
------- -------
Cash and cash equivalents, end of year $ 6,801 $ 2,270
------- -------

Supplemental cash flow information:
Cash paid during the year for interest 1 1
Cash paid during the year for income taxes 19 69
</TABLE>

See accompanying notes.

<PAGE> 9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. OPERATIONS AND OTHER ORGANIZATIONAL MATTERS

The Company's consolidated financial statements for the year ended
December 31, 1999 have been prepared on a continuing operations basis which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The Company is largely dependent
upon significant contracts for its revenue, which typically include a deposit
upon contract signing and up to three months lead-time before delivery of
hardware begins. The Company has incurred net losses of $1.9 million and $4.2
million in 1998 and 1999 respectively, while revenues have decreased from $13.2
million in 1998 to $5.6 million in 1999. As of December 31, 1999, the Company
had a backlog (unaudited) of $16.4 million compared to a backlog (unaudited) of
$3.6 million in 1998.

On June 1, 1998, the stockholders of the Company approved an amendment
to the Articles of Incorporation to effect a three-for-one reverse stock split.
Each share of stock owned by stockholders of record at the close of business on
June 12, 1998 was converted into 0.333 shares. All share and per share data
presented in the Consolidated Financial Statements and footnotes of this Annual
Report have been restated to reflect the three-for-one reverse stock split.

In October 1999, Berjaya Lottery Management (H.K.) Limited purchased 6.9
million shares of the Company's common stock for $5.2 million, which increased
Berjaya's stock ownership to 71.4%.

Historically, approximately 70% of the Company's annual service revenues
have been derived from a terminal maintenance agreement with an Australian
lottery customer. In October 1998, the Australian lottery customer, as a result
of a competitive bid, awarded this contract to a competitor of the Company and
these service revenues terminated in January 2000.

In June 1998, the Company announced it had entered into negotiations to
acquire a controlling interest in Prime Gaming Philippines, Inc. ("Prime") from
Berjaya Lottery Management (H.K.) Limited ("Berjaya") and/or other Prime
shareholders in exchange for the issuance of Company common stock. One
requirement to complete the transaction was that Company common shares remain
trading on NASDAQ markets. In December 1998, NASDAQ notified the Company that it
did not meet NASDAQ listing criteria and that Company shares would begin trading
OTCBB. In February 1999, as a result of the Company's transfer from NASDAQ to
OTCBB, the Prime shareholders terminated the proposed transaction.

At December 31, 1999, the Company had working capital of $3.16 million.
Management recognizes that the Company must recover its investment in existing
contracts (Note 4) and generate additional contract sales to maintain its
current level of operations. Management anticipates that it will be successful
in recovering its investment in existing contracts and obtaining sufficient
contracts to enable the Company to continue normal operations; however, no
assurances can be given that the Company will be successful in realizing
sufficient new contract revenues or obtaining additional financing. If the
Company is unable to recover its investment in existing contracts, obtain
sufficient new contract revenue or financing, management will be required to
reduce the Company's operations. The Company's ability to continue its ongoing
operations on a long-term basis is dependent upon its ability to recover its
investment in existing contracts, to obtain additional financing, secure
additional new contracts and ultimately achieve a sustainable level of profit
from operations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION - The accompanying consolidating financial
statements include the accounts of the Company and its subsidiaries, all of
which are wholly owned. All significant intercompany accounts and transactions
are eliminated.

REVENUE RECOGNITION - The Company recognizes revenue on the basis of
shipment of products, performance of services, and in certain instances on the
percentage-of-completion method of accounting for long term contracts, or on the
completed contract method of accounting for long term contracts when all
criteria for recognizing revenue under the percentage-of-completion method of
accounting cannot be met. Revenues relating to the sale of certain assets, when
the ultimate total collection is not reasonably assured, are being recorded
under the cost recovery method.

USE OF ESTIMATES - The preparation of financial statements, in
conformity with accounting principles generally accepted in the United States,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities, at the date of the financial statements, and

Page 1
<PAGE> 10

the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

DEPRECIATION - Depreciation of equipment, furniture and fixtures is
provided principally using the straight-line method over estimated useful lives
of 3 - 7 years.

WARRANTY RESERVES - Estimated expenses for warranty obligations are
accrued as income is recognized on related contracts. The reserves are adjusted
periodically to reflect actual experience.

FOREIGN CURRENCY - The Company has contracts with certain customers that
are denominated in foreign currencies, and related transaction gains and losses
are recognized as a component of current operations. The consolidated accounts
of the Company's Australian subsidiary and UK subsidiary have been translated
from their functional currency, the Australian dollar and pound sterling,
respectively. The effect of the exchange rate fluctuations between the U.S.
dollar, the Australian dollar and the pound sterling are recorded as a component
of comprehensive income.

PER SHARE INFORMATION - Net loss per share is based on the weighted
average number of shares outstanding during the year. The weighted average
number of shares outstanding were revised to reflect the three-for-one reverse
stock split implemented June 12, 1998. Stock options are not included if their
effect would be anti-dilutive.

RESEARCH AND DEVELOPMENT - Engineering, research and development costs
are expensed as incurred. Substantially all engineering, research and
development expenses are related to new product development and designing
significant improvements.

CONCENTRATION OF CREDIT RISK - Accounts receivable and costs in excess
of billings on uncompleted contracts are primarily related to contracts with a
few major customers. These amounts are payable in accordance with the terms of
individual contracts and generally collateral is not required. Estimated credit
losses are provided for in the financial statements. The Company conducts
business in the Asia/Pacific region. Certain Asian countries have experienced
severe economic turmoil represented by depressed business conditions and
volatility in local currencies. Any significant further decline in these
economies and in the value of their currencies could have a material adverse
effect on the Company.

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Included in cash and cash equivalents at December 31, 1999 and 1998
are investments in commercial paper totaling $5.4 million and $1.1 million,
respectively, which mature in January 2000 and January 1999, respectively. The
estimated fair value of these investments approximates the carrying value;
therefore, there are no unrealized gains or losses as of December 31, 1999 or
1998.

STOCK OPTIONS - As permitted, the Company has elected the disclosure
only provisions of SFAS No. 123. Accordingly, the Company continues to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations in accounting for its employee
stock options. Under APB 25, because the exercise price of the Company's stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Options granted to non-employees are
recorded at fair value in accordance with SFAS 123.

MAJOR CUSTOMERS - During 1999, approximately $4.1 million or 72% of the
Company's revenues were derived from six customers. In 1998, the amount was $8.8
million or 67% from six customers.

RECENT ACCOUNTING PRONOUNCEMENTS - On January 1, 1998, the Company
adopted SFAS No. 130, "Reporting Comprehensive Income." The effect of the
implementation was to show the change in the foreign currency translation
adjustment in shareholders' equity as a component of comprehensive income. In
June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which was
amended by SFAS 137, which is required to be adopted for fiscal quarters of
fiscal years beginning after June 15, 2000. At this time, the Company has not
entered into any derivative instruments or hedging activities. In March 1998,
the Accounting Standards Executive Committee (AcSEC) issued AICPA Statement of
Position (SOP) 98-1, "Accounting for Costs of Computer Software Developed or
Obtained for Internal Use." This statement provides guidance on accounting for
the costs of computer software developed or obtained for internal use and
identifies characteristics of internal use software and provides assistance in
determining when computer software is for internal use. SOP 98-1 was adopted on
January 1, 1999. The adoption of SOP 98-1 had no significant impact on the
consolidated financial statements, results of operations, or related disclosures
thereto. In April 1998, the Accounting Standards Executive Committee (AcSEC)
issued AICPA SOP

Page 2
<PAGE> 11
98-5, "Reporting on the Costs of Start-Up Activities." This statement provides
guidance on financial reporting of start-up costs and organization costs and
requires that such costs of start-up activities be expensed as incurred. SOP
98-5 was adopted on January 1, 1999. The effect of the adoption was not
material. All start-up costs are expensed as incurred. In December 1999, the
SEC issued Staff Accounting Bulletin-101, "Revenue Recognition in Financial
Statements." SAB-101, as amended, is effective no later than the second fiscal
quarter of the fiscal year beginning after December 15, 1999. The Company is in
the process of evaluating the potential impact of this SAB, but anticipates that
the impact, if any, will be insignificant.

3. RELATED PARTY TRANSACTIONS

The Company has entered into sales agreements to supply terminals,
spares and services to entities in which the Company's largest shareholder,
Berjaya, has a significant equity interest. Revenues related to these agreements
totaled $0.5 million and $2.5 million in 1999 and 1998, respectively. Included
in accounts receivable and costs in excess of billings on uncompleted contracts
was $0.2 million and $0.3 million at December 31, 1999 and 1998, respectively,
relating to these customers.

During 1996 the Company entered into an agreement with Berjaya to
purchase specific inventory on behalf of Berjaya to enable the Company to
satisfy certain future potential orders in a timely manner. Title to the
inventory purchased resides with Berjaya; therefore, no amounts are reflected in
the consolidated balance sheets for inventory purchased on their behalf.
Advances received in excess of inventory purchased aggregated approximately $304
thousand and $332 thousand and have been reflected as a related party liability
in the accompanying consolidated balance sheets as of December 31, 1999 and
1998, respectively.

4. CONTRACTS IN PROCESS

The amounts by which total costs exceeded or were less than billings on
uncompleted contracts are as follows (in thousands):

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999 1998
<S> <C> <C>
Costs incurred (including deposits held for outsourced production) $ 3,166 $ 1,273
Estimated earnings - 213
------- -------
3,166 1,486
Less: billings (5,403) (1,450)
------- -------
$(2,237) $ 36
======= =======

Included in the accompanying consolidated balance sheets as follows:
Costs in excess of billings on uncompleted contracts $ - $ 45
Billings in excess of costs on uncompleted contracts (2,237) (9)
------- -------
$(2,237) $ 36
======= =======
</TABLE>

5. INVENTORIES

At December 31, inventories were comprised of (in thousands):

<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Raw materials $135 $207
Work in process - 591
Finished goods - -
---- ----
$135 $798
==== ====
</TABLE>

6. LOTTERY SERVICE AGREEMENTS

The Company enters into contracts to provide lottery equipment and
management of on-line lottery systems on a long-term basis. In September 1999,
the Company entered into agreements to provide equipment and facilities
management services for a charitable lottery in Great Britain expected to begin
operations in Spring 2000. The Company's investment in equipment and services
was substantially funded by its customer.

Page 3
<PAGE> 12

In 1992 and in 1995, the Company entered into contracts to provide
lottery equipment in Papua New Guinea and in the United Kingdom, respectively.

In July 1995, the Company sold all its interest in the Papua New Guinea
lottery operation to the principal shareholders of the licensee for a fixed
amount plus a percentage of the annual gross lottery sales or an annual sum of
$260 thousand, whichever is greater, for a period of five years, provided that
the additional sums shall not exceed $3.0 million. The Company recognized
approximately $105 thousand as a gain on the sale of the lottery service
agreement in 1998, before payments were suspended due to poor economic
conditions in Papua New Guinea. The Company is reviewing its options to recover
the remaining amount due under the terms of contract. At December 31, 1999, the
Company has no investment remaining on its balance sheet.

In 1997 and 1998, the Company recovered part of its investment in the
1995 U.K. lottery service agreement through a sale of a system and terminals to
Olympic Gold, which aggregated $3.8 million of which $2.8 million had been
previously reserved.

Included in royalties and other income is an amount of $290 thousand
reflecting proceeds from the settlement of the claim against the Arizona State
Lottery pertaining to the procurement for an on-line lottery system.

7. INDUSTRY SEGMENT AND GEOGRAPHICAL DATA

The Company operates in one industry segment, which includes totalizator
and lottery systems. The Company has an Australian subsidiary, International
Lottery & Totalizator Systems Australia Pty., Ltd., and a United Kingdom
subsidiary, ILTS UK Limited.

Sales between geographic areas are generally priced to recover material
costs plus an appropriate markup. Revenue by major customer location is as
follows (in thousands):

<TABLE>
<CAPTION>
CUSTOMER LOCATION 1999 1998
------- -------
<S> <C> <C>
Australia $ 1,800 1,500
Philippines 500 2,300
Ukraine 500 900
Hong Kong 400 1,700
Malaysia 400 1,000
Sweden 200 2,400
All other 1,800 3,400
------- -------
Total $ 5,600 $13,200
======= =======
</TABLE>

The following table summarizes information about the Company's
operations in different geographic areas for the years ended December 31, (in
thousands):

<TABLE>
<CAPTION>
1999 1998
------------------------------------------------- ---------------------------------------------------
EASTERN EASTERN
EUROPE/ CONSOLI EUROPE/ CONSOLI
USA PACIFIC EUROPE -DATED USA PACIFIC EUROPE -DATED
--------- -------- --------- --------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers:
Export $ 2,931 $ - $ - $ 2,931 $ 9,537 $ - $ - $ 9,537
Domestic 583 2,136 - 2,719 734 2,838 63 3,635
--------- -------- --------- --------- --------- -------- -------- ---------
Sales to:
Australia subsidiary 539 - - 539 1,209 - - 1,209
--------- -------- --------- --------- --------- -------- -------- ---------
4,053 2,136 - 6,189 11,480 2,838 63 14,381
--------- -------- --------- --------- --------- -------- -------- ---------
Elimination of
intercompany sales (539) - - (539) (1,209) - - (1,209)
--------- -------- --------- --------- --------- -------- -------- ---------
Total revenue 3,514 2,136 - 5,650 10,271 2,838 63 13,172
--------- -------- --------- --------- --------- -------- -------- ---------
Net income (loss) $ (4,426) $ 240 $ (55) $ (4,241) $ (2,407) $ 115 $ 400 $ (1,892)
--------- -------- --------- --------- --------- -------- -------- ---------
Identifiable assets $ 6,973 $ 1,286 $ 252 $ 8,511 $ 4,331 $ 747 $ - $ 5,078
--------- -------- --------- --------- --------- -------- -------- ---------
</TABLE>

Page 4
<PAGE> 13

8. LEASES

The Company leases its facilities in Carlsbad, California and Sydney,
Australia under operating lease agreements, which expire in June 2005 and
October 2001 respectively. The Carlsbad lease provides for an annual increase
and the Sydney lease provides for an increase in minimum annual rent based on
increases in various market indices. At December 31, 1999, the Company began to
close its Australian service operations and is using the facility as a sales
office. The Company remains obligated on the lease through October 2001;
however, the Company and the lessor are jointly attempting to lease the facility
to a new tenant. Rent expense for the years ended December 31, 1999 and 1998 was
$413 thousand and $581 thousand respectively.

Minimum future obligations for these leases are as follows (in
thousands): 2000 - $496; 2001 - $449; 2002 - $395; 2003 - $308; 2004 - $307;
2005 - $316.

9. INCOME TAXES

The provision for income taxes of $136 thousand in 1999 and $28 thousand
in 1998 primarily relates to income earned by the Company's Australian
subsidiary.

The following is a reconciliation of the actual tax provision to the
expected tax benefit computed by applying the statutory federal income tax rate
to the loss before provision for income taxes (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998
-------- --------
<S> <C> <C>
Expected federal income tax benefit at statutory rate $(1,627) $(1,354)
U.S. and foreign net operating losses - no benefit 1,627 1,354
Other, net 136 28
Provision for income taxes 136 28
-------- --------
</TABLE>

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes.

The components of the Company's deferred tax assets are as follows
(in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals 1,126 1,561
Net operating loss and credit carryforwards 21,918 20,253
Other 452 492
--------- ---------
Deferred tax assets 23,496 22,306
Valuation allowance (23,496) (22,306)
--------- ---------
Deferred taxes $ - $ -
========= =========
</TABLE>

The Company has Federal and California net operating losses of
approximately $58 million and $25 million, respectively, which begin to expire
in 2008 and 2,000, respectively, unless previously utilized. The difference
between the federal and California net operating loss carryforwards relates
primarily to California's statutory 50% annual reduction rule as well as
previous expiration of California net operating losses due to the shorter
five-year carryover period allowed by California tax statute. The Company has
provided a valuation allowance against its net deferred tax asset due to
uncertainty regarding its realization.

Page 5
<PAGE> 14

The Company also has federal general business credit carryforwards of
approximately $588 thousand, which begin to expire in 2002.

Pursuant to the Tax Reform Act of 1986, use of the Company's business
credit and net operating loss carryforwards may be limited if a cumulative
change in ownership of more than 50% occurs within any three-year period.

10. EMPLOYEE STOCK BONUS PLAN

The Company has an employee stock bonus plan, commonly referred to as a
401(k) plan, qualified under the Internal Revenue Code, in which all eligible
employees, as defined in the Internal Revenue Code, may elect to participate.
Under the Plan, employees may voluntarily make tax-deferred contributions of up
to 15% of their compensation to a trust, which provides the participant with
various investment alternatives. In addition, the Company, at the discretion of
the Board of Directors, may contribute an amount of Company stock for each
fiscal year that does not exceed 5% of the annual compensation of all
participants in the Plan. The Company made no contributions in 1999 and 1998.

11. STOCK OPTION PLANS

The Company has two current employee stock option plans and a
directors option plan whereby options to purchase 681 thousand and 26 thousand
shares, respectively, of the Company's common stock may be granted. Options
granted have 5-to-10 year terms that vest and become fully exercisable two to
four years from the date of grant.

Pro forma information regarding net loss and net loss per share is
required by SFAS No. 123, and has been determined as if the Company has
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value of these options was estimated at the date of grant, using
the Black-Scholes option pricing model, with the following weighted average
assumptions for 1999 and 1998, respectively: risk-free interest rates 5.97% -
6.68% and 4.58% - 4.95%, respectively; dividend yields of 0% in both 1999 and
1998; volatility factors of the expected market price of the Company's common
stock of 111 for 1999, 2.8 for 1998 and a weighted-average life of the option of
7.21 years for both 1999 and 1998.

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

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effects of
applying SFAS No. 123 for pro forma disclosure purposes are not likely to be
representative of the effects on pro forma net loss in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995. The Company's pro forma information follows (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Pro forma net loss $(4,308) $ (2,093)
Pro forma loss per share $ (0.56) $ (0.35)
</TABLE>

In 1999, the Company granted options to acquire 65,000 shares of the
Company's common stock to consultants. The options were issued at fair value
with a vesting period of two years and compensation expense of $23,400 was
recorded in accordance with SFAS 123.

Page 6
<PAGE> 15

A summary of the Company's stock option activity and related information
for the years ended December 31 follows (options in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 Weighted- 1998 Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 436 $ 9.92 493 $12.74
Granted 427 $ 1.00 63 $ 1.48
Exercised - $ - - $ -
Cancelled (117) $17.03 (120) $16.83
------- --------- ------- ---------
Outstanding-end of year 746 $ 3.70 436 $ 9.92
------- --------- ------- ---------
Exercisable at end of year 222 $ 8.80 263 $14.48
------- --------- ------- ---------
Weighted-average fair value of options
granted during the year $ 1.00 $ 1.48
------- --------- ------- ---------
</TABLE>

Exercise prices for options outstanding as of December 31, 1999 ranged
from $0.50 to $47.25. The weighted-average remaining contractual life of those
options is approximately 6 years.

At December 31, 1999, options for 458,844 shares were available for
future grant.

The following table summarizes information about stock options at
December 31, 1999 (shares in thousands):

<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
--------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
SHARES CONTRACTUAL LIFE PRICE SHARES PRICE
------ ---------------- ----- ------ -----
RANGE OF EXERCISE PRICES OF 12/31/99
<S> <C> <C> <C> <C> <C>
$ 0.5000-$ 3.8439 573 9.37years $ 1.70 49 $ 3.42
$ 3.8445-$ 6.6564 101 4.12years $ 4.62 101 $ 4.62
$ 8.2500-$34.5000 60 2.55years $ 12.54 60 $ 12.54
$47.2500-$47.2500 12 2.71years $ 47.25 12 $ 47.25
---------------- --- --------- --------- --- ---------
$ 0.5000-$47.2500 746 8.00years $ 3.70 222 $ 8.80
---------------- --- --------- --------- --- ---------
</TABLE>

12. LITIGATION

In November, 1995, Mr. James Walters, the former chairman and president
of the Company, filed an action in the San Diego County Superior Court against
the Company and its then current president, Frederick A. Brunn, alleging that
certain statements in a magazine article were slander per se by the Company and
Brunn. The case was settled in October 1999 at minimal financial cost to
Registrant.

The Company is also subject to other legal proceedings and claims that
arise in the normal course of business. While the outcome of these proceedings
and claims cannot be predicted with certainty, management does not believe that
the outcome of any of these matters will have a material adverse effect on the
Company's consolidated financial position or results of operations.

Page 7

<PAGE> 1

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

1. INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS AUSTRALIA, PTY. LTD.

Unit 1A, 167 Prospect Highway
Seven Hills, New South Wales 2147
Australia

2. ILTS UK LIMITED

Oakley Building
Broad Lane
Bracknell, Berkshire
RG12 9GU
Great Britain

<PAGE> 1
Exhibit 23A

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference of our report dated February 25, 2000, included in this Form 10KSB
into International Lottery & Totalizator Systems, Inc.'s previously filed From
S-8, No. 2-99618, No. 33-34121, No. 33-34123, No. 33-79938 and No. 33-69008, and
Form S-3 No. 33-78194.

ARTHUR ANDERSEN LLP

San Diego, California
March 28, 2000

<PAGE> 1
EXHIBIT 23B

ILTS - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

We have audited the accompanying consolidated balance sheets of International
Lottery & Totalizator Systems, Inc. (a California corporation) and subsidiaries
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the two years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of International
Lottery & Totalizator Systems, Inc. and subsidiaries as of December 31, 1999 and
1998 and the results of their operations and their cash flows for each of the
two years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

San Diego, California
February 25, 2000

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,801
<SECURITIES> 0
<RECEIVABLES> 417
<ALLOWANCES> 0
<INVENTORY> 135
<CURRENT-ASSETS> 8,195
<PP&E> 316
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,511
<CURRENT-LIABILITIES> 5,038
<BONDS> 0
0
0
<COMMON> 56,326
<OTHER-SE> (52,792)
<TOTAL-LIABILITY-AND-EQUITY> 8,511
<SALES> 5,650
<TOTAL-REVENUES> 5,650
<CGS> 4,695
<TOTAL-COSTS> 4,695
<OTHER-EXPENSES> 5,549
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> (4,241)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,241)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,241)
<EPS-BASIC> (.55)
<EPS-DILUTED> (.55)

</TABLE>