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

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FORM 10-K
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(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, 1998

[ ] 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)

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

2131 FARADAY AVENUE
CARLSBAD, CALIFORNIA 92008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

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, 1999 was approximately $1,100,258

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

Number of common shares outstanding at March 23, 1999 was 6,009,183

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 1998 Annual Report to Stockholders of the Registrant:
Parts II and IV

Portions of the Proxy Statement for 1999 Annual Meeting of
Stockholders, Part III

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

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 [ ]

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS............................................................................1

General.........................................................................1
DATAMARK(R) Terminals...........................................................1
Wagering and Other Terminal Products............................................1
Lottery Systems/Sales and Service Agreements....................................2
Revenue Sources.................................................................2
Product Development.............................................................3
Backlog.........................................................................3
Marketing and Business Development..............................................3
Manufacturing and Materials.....................................................4
Competition.....................................................................4
Employees.......................................................................4
Patents, Trademarks and Licenses................................................4
Regulation......................................................................4
Dependence Upon a Few Customers.................................................5
Year 2000.......................................................................5
Forward Looking Statement.......................................................5
Seasonality.....................................................................5
Working Capital Practices.......................................................6
Environment Effects.............................................................6
Export Sales....................................................................6

ITEM 2. PROPERTIES..........................................................................6
ITEM 3. LEGAL PROCEEDINGS...................................................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................7

EXECUTIVE OFFICERS OF THE REGISTRANT............................................7

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS.................................................7
ITEM 6. SELECTED FINANCIAL DATA.............................................................8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................8
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS...................................................8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..........................................8

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............................8
ITEM 11. EXECUTIVE COMPENSATION..........................................................8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..................................................................8
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................8

PART IV

ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE,
AND REPORTS ON FORM 8-K.........................................................9

PART I

ITEM 1. 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 has also bid for long-term service
contracts under which it intends to operate on-line lottery systems. 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 principal proprietary component of the Registrant's systems are the
DATAMARK(R) terminals, a compact, reliable microprocessor-based ticketing
terminal, which can print and process up to approximately 30 tickets per minute.
The Registrant sells the DATAMARK(R) terminal separately or as part of a turnkey
wagering application system and can modify a terminal's features or
configurations and central system software to meet specific customer
requirements.

The Registrant's wagering systems include DATAMARK(R) terminals, a central
computer installation, communication network and display equipment. System
features include real-time central processing of data received from multiple
locations, back-up hardware capability and complete communications redundancy
designed to provide fault tolerant operation.

DATAMARK(R) Terminals

The Registrant has developed several models of DATAMARK(R) terminals for
different wagering applications. All are PC compatible microprocessor-based and
have a compact, lightweight design for countertop operation. The Registrant has
recently developed a product called the DMNXT(TM) which allows a simple and
inexpensive means for existing DATAMARK(R) customers to upgrade their older
generation terminals to an Intel PC platform with improved features. The
features include faster processing, higher resolution printing, and the ability
to utilize cost effective, commercial off-the-shelf PC peripherals. Most
DATAMARK(R) 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 latest DATAMARK(R) models utilize a compact ticket path which allows the
terminal to print on either side and read from both sides of the same ticket.
The terminal contains a thermal printer which prints tickets quickly and quietly
without ink, ribbons or impact, 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. The terminals can
also be configured to use impact printing on plain paper. Some models will
sequentially read and print up to 50 tickets entered at one time.

The DATAMARK(R) terminal's basic functions are supplemented by various
features. In the horse racing industry, the DATAMARK(R) terminal 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 is able to mark 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.

Similarly, in the lottery industry, a player marks the numbers selected on a
pre-printed ticket or playslip which is read optically by the DATAMARK(R)
terminal and entered into the central system. The selections and the transaction
total are then either printed on the back of the playslip or on a separate
ticket and delivered to the player.

Wagering and Other Terminal Products

The Registrant historically has derived revenue in the horse racing industry
from sales contracts for DATAMARK(R) terminals and for wagering systems, which
include DATAMARK(R) terminals, a central computer installation and peripheral
and display equipment. The Registrant's systems are "sell-pay" systems, which
means that each terminal is capable of being used both for selling all types of
wagering tickets and for making payment to the ticket holders after validation
of winning tickets.

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, distributes information to the display
systems and terminals, and generates management information reports. In
cooperation with the customer, the Registrant designs the configuration of the
central computer installation to provide fault-tolerant operation, high
throughput and security. Each central computer installation typically

4
includes a computer configuration and various peripheral devices, such as
magnetic storage devices, management terminals and hardcopy printers, all of
which are manufactured by others. Although certain of the Registrant's customers
presently use software in their pari-mutuel systems which is proprietary to the
Registrant, the software presently offered by the Registrant in its horse racing
system is software, developed by Racecourse Totalizators Pty., LTD of Australia.

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 30,000 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.

Lottery Systems/Sales and Service Agreements

Computerized, or on-line, lotteries are currently operated in many
countries. Existing lottery systems include both manual systems and modern
on-line systems. In an on-line lottery system, betting terminals are connected
to a central computer installation by a communications network and the system
typically utilizes a pari-mutuel pool or fixed payout, or both, in offering
"lotto" and other numbers games.

The Registrant owns non-exclusive rights to use the central system software
developed by The Hong Kong Jockey Club (HKJC) for use in its pari-mutuel
wagering and lottery systems. Under the terms of the amended license the
Registrant pays The HKJC a royalty equal to a percentage of the revenue it
receives in connection with a sale, lease or providing a service of any lottery
system using this software. In addition, the Registrant is obligated to provide
The HKJC with any modifications which the Registrant makes to the software,
except where ownership to such modifications vests in the Registrant's
customers.

The Registrant has made significant modifications to The HKJC software.
Chief among them is the migration of the system to a client-server architecture,
the incorporation of Sybase relational database software, and the utilization of
a Windows operating system for the management information subsystem called
DataTrak(R). These enhancements allow the system to be scaled to meet each
customer's unique requirements and enables the customer 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. In the Registrant's DataTrak(R) lottery system, tickets
are processed on DATAMARK(R) terminals which are connected to a central computer
installation, usually by telephone lines. The central computer installation
utilizes Digital Equipment Corporation hardware. 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.

In July 1995, the Registrant sold its facilities management and equipment
lease contracts for the lottery in Papua New Guinea to the principal
shareholders of the operating company, The Lotto Pty. Ltd ("Lotto Pty."). The
Registrant has recognized revenues in 1996, 1997 and 1998 from this sale. Due to
economic conditions in Papua New Guinea, payments per the agreement were
suspended in 1998. The Registrant is reviewing its options at this time.

Revenue Sources

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

Years Ended December 31,
------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------

(dollars in thousands)
Racing Products and Services $6,733 $2,443 $11,183 $10,448 $13,932
Lottery Products and Services 5,705 7,729 5,105 7,680 9,231
Other 734 654 305 513 926
------- ------- ------- ------- -------
Total $13,172 $10,826 $16,593 $18,641 $24,089
======= ======= ======= ======= =======

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 1998 the Registrant spent approximately $1.5 million on
engineering, research and development, as compared to $1.7 million in both 1997
and 1996.

The Registrant developed the single roller DATAMARK Flipper(R) terminal
(Flipper(TM)) with a unique reader/printer mechanism that meets the needs of
many different applications by combining into one unit all of the functional
capabilities of previous DATAMARK(R) reader/printer mechanisms in a modular
fashion. Also, the Registrant has developed a terminal specifically aimed at
lottery applications called the DATAMARK(R) XClaim(TM). This terminal can be
configured to print tickets using thermal or impact printing.

The Registrant has recently developed a product called the DMNXT(TM) which
allows for a simple and inexpensive means for existing DATAMARK(R) customers to
upgrade their older generation terminals to an Intel PC platform with improved
features which include faster processing, higher resolution 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 $3.6 million as of December 31,
1998, as compared to a backlog of approximately $5.0 million as of December 31,
1997. Of such backlog at December 31, 1998, approximately $1.8 million is
expected to be filled during 1999. See 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 which 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.

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

6
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

A contract manufacturer, Anacomp, Inc., located in the San Diego area will
perform manufacture of the Registrant's terminals, beginning in 1999.
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 (some of which are designed by the Registrant) 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 twelve months ended December 31, 1998 no single vendor
accounted for 10% or more of the Registrant's raw material purchases.

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, 1998, the Registrant employs 72 people worldwide on a
full-time equivalent basis. Of this total, 16 were engaged in operations
support, 40 in engineering and software development and 16 in marketing and
administrative positions. None of the Registrant's employees is 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. 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 and joint venturers 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 used in the Registrant's lottery system has
been obtained under a non-exclusive license with The 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

7
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
1998, the Registrant's revenues were derived primarily from contracts with Ab
Trav Och Galopp ($2.2 million); Philippine Gaming Management Corporation ($2.1
million); Hong Kong Jockey Club ($1.5 million); New South Wales Lottery ($1.5
million); Olympic Gold Holdings ($0.9 million); The Revenue Markets, Inc.
($0.6 million); Leisure Management Berhad ($0.6 million); Singapore Turf Club
($0.6 million).

Year 2000

During fiscal 1998, the Registrant developed a plan to address anticipated
Year 2000 issues in connection with its data processing and other activities,
including non-information technology based systems. It is currently estimated
that the net cost to become Year 2000 compliant, including upgrades of its
personal computer hardware and software and its network, will total
approximately $30 thousand of which $5 thousand has been incurred to date. The
Registrant has completed its remediation portion of the Year 2000 project and
will be entering its testing phase during the first three-quarters of 1999.
Compliance status from key suppliers will be evaluated to determine whether the
Registrant will need to switch sources to ensure ongoing product/service
availability. This evaluation/conversion is expected to be completed by
September 1999. A contingency plan has not been developed, as the risk on
remaining items is considered low. Should any issues arise which cannot be
adequately addressed and remedied, management will develop a contingency plan at
that point. Although, based on a review of its data processing, operating, and
other computer based systems, the Registrant does not currently believe that it
will experience any significant adverse effect or material unbudgeted costs
resulting therefrom, there can be no assurance in that regard. In addition, the
Registrant has reviewed the software systems and hardware it has previously sold
and determined they are Year 2000 compliant.

The failure to correct a material Year 2000 problem could result in an
interruption in or a failure of certain normal activities or operations. Such
interruptions or failures could materially and adversely affect the Registrant's
results of operations, liquidity and financial conditions. Because there is
general uncertainty about the Year 2000 problem, including uncertainty about the
Year 2000 readiness of suppliers and customers, it is not possible to predict
whether Year 2000 problems will occur or what consequences such problems will
have on results of operation's, liquidity or financial condition. However, the
Registrant's plan to address Year 2000 issues is intended to minimize, to the
extent feasible, the possibility of interruptions of normal operations. There
can, however, be no assurance that the Registrant will be successful in doing
so.

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 annual report.

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.
A substantial portion of Registrant's working capital was expended in the early
1990s, in its attempt to establish viable operations in long-term lottery
service agreements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" incorporated by reference herein.

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, 1998 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
to recent 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 has asked and the Registrant has agreed, to delay to a later
undefined date the scheduled delivery of terminals which will result in the
delay of Registrant's revenues and cash receipts of approximately $1.0 million.

The Registrant operates a wholly-owned subsidiary in Australia. Also, see
Note 7 of Notes to Consolidated Financial Statements, incorporated by reference
in Part II, Item 8.

ITEM 2. PROPERTIES

The Registrant's U.S. facilities consist of approximately 43,500 square feet
of leased office, warehouse and manufacturing space in Carlsbad, California. The
lease on this facility expires in the year 2000. The Registrant's Australian
subsidiary leases approximately 13,000 square feet consisting of a manufacturing
and administrative facility. The lease on this property expires in October 2001.
See Note 7 of Notes to Consolidated Financial Statements, incorporated by
reference in Part II, Item 8.

ITEM 3. LEGAL PROCEEDINGS

Walter's 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

9
certain statements in a magazine article were slander per se by the Registrant
and Brunn and libel by the publishing company and the author, and that Mr.
Walters suffered an invasion of privacy by all defendants. In addition, Mr.
Walters alleged that erroneous information in the Registrant's 1995 proxy
statement resulted in two other magazine articles publishing allegedly incorrect
information. Mr. Walters seeks general and special damages of $9 million and
punitive damages. The publishing company and the author settled their lible
claims with Mr. Walters. On November 1, 1996, the San Diego County Superior
Court entered a summary judgement in favor of the Registrant and Mr. Brunn. On
November 20, 1998, the California Court of Appeal (Fourth District) reversed the
summary judgement of the trial court as to the slander claims against the
Registrant and Mr. Brunn and returned these claims to the lower court for a
trial on the merits. The appellate court upheld the summary judgement as to the
invasion of privacy claims and the erroneous information in the Registrant's
proxy statement. The Registrant has filed a petition for review with the
California Supreme Court.

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

Name Age Position
---- --- --------
M. Mark Michalko 44 President
Timothy R. Groth 49 Vice President, Technical Operations
Dennis D. Klahn 40 Chief Financial Officer
Lawrence E. Logue 62 Corporate Secretary

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, 1998 there were 6,009,183
common shares outstanding and approximately 900 shareholders of record. Berjaya
Lottery Management owned 38.4% of the total outstanding shares and the
Registrant's management owned 1%.

1998 HIGH LOW
---------------------------------------------------------------
First Quarter 33/4 2 1/16
Second Quarter 2 7/16 1 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

1997 HIGH LOW
---------------------------------------------------------------
First Quarter 4 3/16 1 7/8
Second Quarter 6 15/16 2 11/32
Third Quarter 6 3/4 3 9/16
Fourth Quarter 4 7/8 2 7/16
Average Daily Volume 20,279
Total Annual Trading Volume 5,353,532

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, 1999, of $0.3125 per share.

ITEM 6. SELECTED FINANCIAL DATA

The information required by this item is included on page 6 of the
Registrant's Annual Report to Shareholders for the year ended December 31, 1998
under the same caption and is incorporated herein by reference to such Annual
Report.

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

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

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS

The information required by this item is included on pages 1 through 21
of the Registrant's Annual Report to Shareholders for the year ended December
31, 1998 and is incorporated herein by reference to such Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Inapplicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required is incorporated herein by reference to the
Registrant's definitive Proxy Statement for the 1999 Annual Meeting of
Shareholders.

ITEM 11. EXECUTIVE COMPENSATION

The information required is incorporated herein by reference to the
Registrant's definitive Proxy Statement for the 1999 Annual Meeting of
Shareholders.

ITEM 12. 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 1999 Annual Meeting of
Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required is incorporated herein by reference to the
Registrant's definitive Proxy Statement for the 1999 Annual Meeting of
Shareholders.

PART IV

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

(a) List the following documents filed as a part of the report:

1. and 2. Index to Consolidated Financial Statements and
Financial Statement Schedule:

(i) Report of Arthur Andersen LLP, Independent Public
Accountants and Report of Ernst & Young LLP,
Independent Auditors

(ii) Consolidated Balance Sheets at December 31, 1998
and 1997*

(iii) Consolidated Statements of Operations and
Comprehensive Loss for each of the
three years in the period ended December 31, 1998*

(iv) Consolidated Statements of Shareholders' Equity for
each of the three years in the period ended December
31, 1998*

(v) Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1998*

(vi) Notes to Consolidated Financial Statements*

*incorporated by reference to the Annual Report to
Shareholders for the year ended December 31, 1998.

(vii) Schedule II - Valuation and Qualifying Accounts (Form
10-K, page 10)

All other schedules are omitted since the required
information is not applicable.

3. Exhibits

(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.

(c) Articles of Incorporation as amended June 2, 1998,
reflecting maximum indemnification for directors
permitted by California law.

(d) A By-law effective June 2, 1998, amendment relating
to officers and directors indemnification.

(10)(a) Lease for the Registrant's facility in Carlsbad,
California dated June 30, 1992, as amended by First
Amendment to Lease dated January 23, 1987
(incorporated by reference to Exhibit 10.11 to
Registration Statement File No. 33-18238 effective
February 19, 1988).

(b) Agreement with Sir Michael G. R. Sandberg dated
May 20, 1987 (incorporated by reference to Exhibit
10.15 to Registration Statement File No. 33-18238
effective February 19, 1988).

(c) 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).

(d) 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).

(e) 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).

(f) Agreement with The Hong Kong Jockey Club dated May
11, 1989 and amended on January 13, 1992
(incorporated by reference to Form 10-K for the year
ended December 31, 1991, File No. 0-10294).

(g) The Registrant's 1997 Directors' Stock Option Plan.

(13) Annual Report to Shareholders for the year ended December
31, 1998. With the exception of the information
incorporated by reference into items 5, 6, 7, and 8 of
this Form 10-K, the 1998 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
(23C) Consent of Ernst & Young LLP, Independent Auditors

(23D) Report of Ernst & Young LLP, Independent Auditors
13

SCHEDULE II

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
Valuation and Qualifying Accounts

Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Year Expenses Deductions End of Year
- ----------- --------- ------------ ---------- -----------

Years Ended:

December 31, 1998
-- Warranty Reserves $244,621 $29,750 $ 61,768 $212,603
-- Allowance for
Doubtful Accounts $173,298 0 $ 80,500 $ 92,798

December 31, 1997
-- Warranty Reserves $257,921 $75,258 $ 88,558 $244,621
-- Allowance for
Doubtful Accounts $111,112 $64,596 $ 2,410 173,298

December 31, 1996
-- Warranty Reserves $297,727 $84,594 $124,400 $257,921
-- Allowance for
Doubtful Accounts $ 62,956 $61,764 $ 13,608 $111,112

Warranty reserve deductions primarily reflect actual warranty costs incurred
by the Registrant.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)

By: /s/Dennis D. Klahn
-------------------------------
Dennis D. Klahn
Chief Financial Officer
Dated: March 26, 1999

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

Signature Title Date
- --------- ----- ----

/s/ Theodore A. Johnson Chairman of the Board March 26, 1999
- ------------------------
Theodore A. Johnson

/s/ M. Mark Michalko President March 26, 1999
- --------------------------
M. Mark Michalko

/s/ Dennis D. Klahn Chief Financial Officer March 26, 1999
- --------------------------
Dennis D. Klahn

/s/ Frederick A. Brunn Director March 26, 1999
- --------------------------
Frederick A. Brunn

/s/ Ng Foo Leong Director March 26, 1999
- --------------------------
Ng Foo Leong

/s/ Martin J. O'Meara, Jr. Director March 26, 1999
- --------------------------
Martin J. O'Meara, Jr.

Director March , 1999
- --------------------------
Michael G.R. Sandberg

/s/ Chan Kien Sing Director March 26, 1999
- --------------------------
Chan Kien Sing

Director March , 1999
- --------------------------
Ng Aik Chin