International Lottery & Totalizator Systems Inc – ‘PRE 14A’ for 6/1/98

As of:  Monday, 4/20/98   ·   For:  6/1/98   ·   Accession #:  936392-98-617   ·   File #:  0-10294

in

this entire Filing. an “Entity” Search.

Show

Documents searched

and

each “hit”. the 1st “hit”.

↓↑Hints

Preliminary Proxy Solicitation Material   —   Schedule 14A
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: PRE 14A     Preliminary Proxy Solicitation Material               33    189K 

Document Table of Contents

PRE 14A
1st Page of 33
TOC
↑Top
Previous
Next
↓Bottom
Just 1st
 

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934 

Filed by the Registrant [X]                                                     

Filed by a Party other than the Registrant [ ]                                  

Check the appropriate box:                                                      

[X]  Preliminary Proxy Statement                                                
[ ]  Confidential, for Use of the Commission Only                               
(as permitted by Rule 14a-6(e)(2))                                    
[ ]  Definitive Proxy Statement                                                 
[ ]  Definitive Additional Materials                                            
[ ]  Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12        

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. 
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):                              

/X/  No fee required.                                                           

/ /  Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.   

(1)  Title of each class of securities to which transaction applies:  

(2)  Aggregate number of securities to which transaction applies:     

(3)  Per unit price or other underlying value of transaction computed 
         pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):  

(4)  Proposed maximum aggregate value of transaction:                 

(5)  Total fee paid:                                                  

/ /  Fee paid previously with preliminary materials.                            

/ /  Check box if any part of the fee is offset as provided by Exchange Act Rule
  0-11(a)(2) and identify the filing for which the offsetting fee was paid
    previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.                   

(1)  Amount Previously Paid:                                          

(2)  Form, Schedule or Registration Statement No.:                    

(3)  Filing Party:                                                    

(4)  Date Filed:                                                      

PRE 14A
2nd Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 2nd
[LOGO]

 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
 2131 FARADAY AVENUE
 CARLSBAD, CALIFORNIA 92008-7297

NOTICE OF ANNUAL MEETING

   TO ENSURE YOUR REPRESENTATION AT THE MEETING, PLEASE DATE, SIGN AND
MAIL PROMPTLY THE ENCLOSED PROXY, FOR WHICH A RETURN ENVELOPE IS
PROVIDED.                                                       

The 1998 Annual Meeting of Shareholders of International Lottery & Totalizator  
Systems, Inc. (the "Company") will be held at 3:00 p.m., Pacific Daylight       
Savings Time, on Monday, June 1, 1998 at La Costa Resort and Spa, Costa Del Mar 
Road, Club House II, Carlsbad, California, for the following purposes:          

1.     To elect nine directors for the ensuing year.            
   2.     Approval of an Amendment to the Articles of Incorporation to
effect a 3 for 1 reverse stock split.             
3.     To approve an Amendment to the Bylaws to provide that the
             authorized number of directors shall not be less than seven (7)
             nor more than thirteen (13) and to set the number of authorized
directors at nine (9).                            
        4.     To approve an Amendment to the Articles of Incorporation limiting
       the liability of directors to the Company and authorizing
expanded indemnification.                         
      5.     To approve an amendment to the Bylaws regarding indemnification
 of directors, officers, employees and other agents.
      6.     To approve the Indemnification Agreements to be entered into by
the Company and its directors and officers.       
      7.     To transact such other business as may properly come before the
meeting and any adjournment thereof.              

Shareholders of record at the close of business on April 27, 1998 will be       
entitled to vote at the meeting. The transfer books will not be closed. The     
approximate date on which the proxy statement and form of proxy are first being 
sent or given to shareholders is April 30, 1998.                                

               By order of the Board of Directors,

M. Mark Michalko  
President         

April 30, 1998                                                                  
Carlsbad, California                                                            

PRE 14A
3rd Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 3rd

 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
 2131 FARADAY AVENUE
 CARLSBAD, CA 92008-7297

 PROXY STATEMENT

     Proxies in the form enclosed with this statement are solicited by the
Board of Directors of the Company for use at the Annual Meeting of Shareholders 
to be held in Carlsbad, California, on June 1, 1998, including any adjournments 
or postponements thereof. Execution of a proxy will not in any way affect a     
shareholder's right to attend the meeting and vote in person, and any holder    
giving a proxy has the right to revoke it at any time before it is exercised by 
filing with the Secretary of the Company a written revocation or duly executed  
proxy bearing a later date. The proxy will be suspended if the holder is present
at the meeting and elects to vote in person.                                    

 VOTING SECURITIES

    The voting securities of the Company consist of its common shares of
which 18,027,548 shares are outstanding as of April 27, 1998. Only holders of   
common shares of record on the books of the Company at the close of business on 
April 27, 1998 (the "Record Date") will be entitled to vote at the meeting. Each
such holder of common shares is entitled to one vote for each said share, and   
has the right to cumulate his or her votes for directors if his or her candidate
or candidates' names have been placed in nomination prior to the voting and any 
shareholder has given notice at the meeting prior to the voting of that         
shareholder's intention to cumulate his or her votes. The persons named in the  
enclosed proxy may or may not elect to give such notice and vote the shares they
represent in such a manner.                                                     

      Votes cast by proxy or in person at the Annual Meeting will be counted
by the person appointed by the Company to act as Inspector of Election for the  
Annual Meeting. The Inspector of Election will treat shares represented by      
proxies that reflect abstentions or include "broker non-votes" as shares that   
are present and entitled to vote for purposes of determining the presence of a  
quorum. Abstentions or "broker non-votes" do not constitute a vote "for" or     
"against" any matter and thus will be disregarded in the calculation of "votes  
cast." Any unmarked proxies, including those submitted by brokers or nominees,  
will be voted in favor of the nominees of the Board of Directors and for each of
the other proposals described in the Proxy Statement, as indicated in the       
accompanying proxy card.                                                        

       The approximate date on which the proxy statement and form of proxy are
first being sent or given to shareholders is April 30, 1998.                    

 ELECTION OF DIRECTORS

    Nine directors are to be elected at the Annual Meeting, each to hold
office for the term of one year and until his successor is elected. Proxy       
holders will, unless authorization to do so is withheld, vote the proxies       
received by them for the election of the nominees listed in the following table,
reserving the right, however, to distribute their votes among the nominees      
listed below in their discretion. All nominees have consented to serve as       
directors if elected by the shareholders. Although it is not contemplated that  
any nominee will be unable to serve as a director, in such event the proxies    
will be voted by the proxy holder for such other persons as may be designated by
the Board of Directors.                                                         

The following table sets forth certain information regarding the
beneficial ownership of the Company's common shares as of April 20, 1998 by (i) 
each director and nominee for director of the Company, (ii) certain executive   
officers, (iii) executive officers and directors of the Company as a group and  
(iv) each person or entity who is a beneficial owner of more than 5% of the     
Company's outstanding common shares. With respect to each director of the       
Company, the table also sets forth his age, the year he was first elected as a  
director, employment history for the past five years, and other directorships.  
For purposes of this proxy statement, beneficial ownership of securities is     
defined in accordance with the rules of the Securities and Exchange Commission  
and means generally the power to vote or exercise investment discretion with    
respect to securities, regardless of any economic interests therein. Except as  
otherwise indicated, the Company believes that the beneficial owners of the     
securities listed below have sole investment and voting power with respect to   
such shares, subject to community property laws where applicable.               

 1

PRE 14A
4th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 4th

                                                        [Enlarge/Download Table]

                                                               SHARES OF                  
                                                              COMMON STOCK                
                                                           BENEFICIALLY OWNED             
                                                           AS OF APRIL 20, 1998           
                                                           --------------------           
                                                                                  Percent 
NAME OF BENEFICIAL OWNER                                         Amount          of Class 
------------------------                                         ------          ---------
                                                                                          
Nominees for Director                                                                     
FREDERICK A. BRUNN, 53, Director since 1989.                    120,701 (A)          *    
        President from February 1994 to May 1997.                                         
        Prior thereto, Executive Vice President                                           
        since 1990. Chief Operating Officer, San                                          
        Diego Manufacturing Extension Center since                                        
        April 20, 1998.                                                                   

CHAN KIEN SING, 41, Director since June 1993.                    35,000 (B)          *    
        Group Executive Director of Berjaya Group                                         
        Berhad since 1990.                                                                

THEODORE A. JOHNSON , 57, Director since 1979.                   60,825 (B)          *    
        President, Minnesota Cooperation Office                                           
        for Small Business and Job Creation, Inc.                                         
        from 1980 to present.  Director of Surgidyne, Inc.                                

M. MARK MICHALKO, 43, Director since February 1994.              75,887 (A)          *    
        President since May, 1997, Executive Vice President,                              
        from February 1994 to May 1997. President of Quantum                              
        Gaming Corp., a gaming industry consulting firm for                               
        more than five years prior to February 1994.                                      

NG AIK CHIN, 43, Executive Assistant to the President since      10,465 (A)          *    
        1994. Senior Member of Beyaya Group Berhard's                                     
        management for more than five years prior to 1994.                                

NG FOO LEONG, 47, Director since June 1993.                      35,000 (B)          *    
        Executive Director, Sports Toto Malaysia Sdn Bhd,                                 
        a lottery gaming company from 1985 to present.                                    

MARTIN J. O'MEARA, JR., 69, Director since 1979.                326,226 (B)          *    
        President, The Budget Plan, Inc., a privately-                                    
        owned company engaged in the consumer loan                                        
        business and has been so employed for more                                        
        than five years.                                                                  

THE LORD SANDBERG OF PASSFIELD, 70, Director since              115,000 (B)          *    
        1987.  Private investor.  Chairman and                                            
        Chief Executive of the Hong Kong and Shanghai                                     
        Banking Corporation from 1977 to 1986.                                            
        Director of Broadstreet Inc. a bank holding company.                              

TAN SRI DATO SERI TAN CHEE YIOUN, 46                          6,600,000 (C)          38%  
        Group Chief Executive Officer of Berjaya Group                                    
        Berhad since prior to 1992. Director, February, 1994                              
        - May 1995.                                                                       

 2

PRE 14A
5th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 5th

                                                        [Enlarge/Download Table]

Named Executive Officers (excluding those listed above)                                
-------------------------------------------------------                                
                                                                                       
TIMOTHY R. GROTH                                                 23,047 (A)         *  
DENNIS D. KLAHN                                                  15,276 (A)         *  
LAWRENCE E. LOGUE                                                 8,819 (A)         *  
ROBERT F. MCPHAIL                                               189,840 (A)         *  
All directors and executive officers as a group (13 persons)  1,038,615 (A)(B)(C)   4% 
Significant Shareholder                                                                
BERJAYA LOTTERY MANAGEMENT (H.K.) LIMITED ("BERJAYA")         6,600,000 (C)        38% 
Level 28, Menara Shahzan Insas                                                         
Jalan Sultan Ismail                                                                    
5020 Kuala Lumpur, Malaysia                                                            

----------                                                                      
(A)     Includes the number of shares of Common Stock subject to unexercised    
       stock options which were exercisable within 60 days under the Company's
      1986, 1988 and 1990 Employee Stock Option Plans as follows: 82,000 for
    Mr. Brunn; 20,500 for Mr. Groth; 11,500 for Mr. Klahn; 4,750 for Mr.
        Logue; 82,500 for Mr. McPhail; 63,250 for Mr. Michalko; 8,000 for Mr. Ng
Aik Chin; and 272,500 for all executive officers as a group.    

(B)     Includes the number of shares of Common Stock subject to unexercised    
       stock options which were exercisable within 60 days under the Company's
      1993 Directors' Stock Option Plan which for each such outside director
is 35,000 and 175,000 for all such directors as a group.        

(C)     Mr. Vincent Tan is Chief Executive of the parent company of Berjaya; Mr.
    Chan Kien Sing and Mr. Ng Foo Leong are employees of an affiliate of
       Berjaya. Mr. Aik Chin Ng is also a designee of Berjaya to the Company's
      Board of Directors. All four individuals disclaim beneficial ownership
of such shares.                                                 

*       Less than one percent of the outstanding common shares.                 

    During 1997, four meetings of the Board of Directors were held. Each
incumbent director attended all meetings of the Board of Directors held during  
the year in which he was a director, except for both Mr. Chan Kien Sing and Mr. 
Ng Foo Leong who each missed one meeting. The Company has an Executive Committee
which consists of Messrs. Chan, Johnson and Michalko. The Executive Committee   
held no meetings during the year. The Executive Committee may exercise all the  
authority of the Board in the management of the Company except for matters      
expressly reserved by law for board action. The Board also has an Executive     
Compensation Committee consisting of Messrs. Johnson, O'Meara, Sandberg, and    
Chan. The Executive Compensation Committee met twice during the year. Its       
function is to establish compensation for all executive officers of the Company 
and administer the Company's 1986, 1988, and 1990 Employee Stock Option Plans.  
The Company has an Audit Committee consisting of Messrs. Sandberg, O'Meara,     
Johnson and Chan which held two meetings during the year. The Audit Committee   
provides advice and assistance regarding accounting, auditing and financial     
reporting practices of the Company. Each year it recommends to the Board a firm 
of independent public accountants to serve as auditors. The Audit Committee     
reviews with such auditors the scope and result of their audit, fees for        
services and independence in servicing the Company. The Company also has a      
Nominating Committee consisting of Messrs. Chan, O'Meara, Johnson and Michalko. 
The Nominating Committee held one meeting during the year. The Nominating       
Committee seeks out, evaluates and recommends to the Board qualified nominees   
for election as directors of the Company and considers other matters pertaining 
to the size and composition of the Board. The Nominating Committee will give    
appropriate consideration to qualified persons recommended by shareholders for  
nomination as directors provided that such recommendations are accompanied by   
information sufficient to enable the Nominating Committee to evaluate the       
qualifications of the nominee. During 1997, the Company established an          
Affiliations Committee to review and approve the fairness to the Company of any 
transactions between the Company and Berjaya. The members of the Committee are  
Messrs. Brunn, Johnson and O'Meara. The Affiliations Committee held three       
meetings in 1997.                                                               

 3

PRE 14A
6th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 6th

COMPENSATION OF DIRECTORS                                                       

      Each director who is not an employee of the Company receives an annual
retainer of $4,000 plus $500 per board meeting and reimbursement for all related
expenses. The chairman of each committee who is not an employee of the Company  
receives an additional annual retainer of $1,000. Each committee member receives
$500 per meeting and reimbursement of all related expenses, only if a committee 
meeting is held at a time when it does not coincide with a board meeting. Lord  
Sandberg is also a financial consultant to the Company and received fees of     
$12,500 in 1997.                                                                

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                  

Berjaya Transactions                                            

 During 1997 the Company received $1,154,103 as payment from three
different affiliates of Berjaya which are lottery customers of the Company and  
as of December 31, 1997 there was a balance outstanding owed to the Company by  
these customers of $172,512. Payments were primarily from Philippine Gaming     
Management Corporation in an amount of $161,840 related to a October, 1996      
lottery terminal contract and $462,787 for spare parts delivered in 1997. The   
Company has software support agreements with Sports Toto Malaysia Sdn Bhd and   
Natural Avenue Sdn Bhd of Malaysia ("Natural Avenue") each of which pays        
approximately $7,000 per month to the Company. In addition, during 1997 Natural 
Avenue paid the Company $82,600 for software upgrades and modifications to its  
lottery system.                                                                 

       On December 2, 1997, the Company issued a Notice of Special Meeting and
Proxy Statement in connection with a shareholders special meeting held on       
December 30, 1997 to approve a proposed amendment to the Company's Articles of  
Incorporation to provide for the issuance of up to 20 million shares of         
preferred stock. The Proxy Statement described a proposed purchase by Berjaya of
$5 million of Series A Preferred Stock and described the proposed terms of the  
Series A Preferred Stock to be finally approved by the Company's Affiliations   
Committee of the Board of Directors. The purchase by Berjaya of the $5 million  
preferred stock has not been concluded.                                         

Consulting Agreement                                            

Mr. Brunn                                                       

In May 1996, Mr. Brunn and the Company entered into a Consulting
Agreement (the "Consulting Agreement") in connection with Mr. Brunn's           
resignation as President of the Company.                                        

Pursuant to the Consulting Agreement Mr. Brunn agreed to provide
technical consulting services to the Company through May 14, 1999 subject to    
earlier termination under certain circumstances (the "Consulting Period"). In   
compensation, the Company paid Mr. Brunn consulting fees of $89,600 in 1997, and
is obligated to pay in monthly installments $93,800 in 1998 and $28,000 in 1999,
whether or not the Company utilizes his services. In the event that Mr. Brunn   
dies during the Consulting Period, the Company will pay his estate an amount    
equal to 100% of the remaining payment due through April 10, 1998 and 50% of the
remaining payment due to be made through the Consulting Period. In addition, Mr.
Brunn agreed not to directly or indirectly compete with the Company during the  
Consulting Period, except as otherwise provided in the Consulting Agreement.    

  The Company further agreed to continue Mr. Brunn's health benefits
through November, 1998 and to cause the stock options held by Mr. Brunn to      
become immediately vested and exercisable and to remain exercisable through the 
earlier of the original expiration date or May 16, 2001.                        

 4

PRE 14A
7th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 7th

EXECUTIVE COMPENSATION AND OTHER INFORMATION

REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE                                  

 Members of the Executive Compensation Committee (the "Committee")
evaluate the performance of senior management, including the president, and     
review and approve the base compensation and lump sum distributions for the     
Company's executive officers. The Committee also administers the Company's      
Executive Bonus Plan and employee stock option plans. The Committee periodically
reports to the Board on its activities.                                         

Compensation Philosophy                                         

The Committee bases its decisions on the Company's executive    
compensation philosophy, which relates the level of compensation to the         
Company's success in meeting its annual and long-term performance goals, rewards
individual achievement and seeks to attract and retain qualified executives. The
Company's executive compensation program consists of three principal components:
(i) base salary, (ii) potential for an annual lump-sum distribution based on    
individual performance and (iii) potential for an annual bonus under the        
Company's Executive Bonus Plan based upon the Company achieving a threshold     
level of profitability as well as individual performance. The second and third  
elements constitute "at-risk" portions of the compensation program. The Company 
positions its overall executive compensation levels at or near the median of the
range of compensation levels for other companies comparable to the Company      
located in Southern California and who are viewed as competitors for executive  
talent in the overall labor market. This data is obtained from surveys conducted
by external compensation consultants and trade associations. In reviewing this  
data, ILTS takes into account how its compensation policies and overall         
performance compare to similar indices for comparable companies.                

The Company employs a formal performance review system for all  
employees, including the president and the other Named Executive Officers (as   
defined on page 7). This process generates information that the Committee uses  
in making decisions on base compensation, lump-sum distributions and awards     
under the Company's Executive Bonus Plan. The president is responsible for      
preparing the reviews on all executive officers other than himself. The         
Committee Chairman is responsible for preparing the review on the president. All
reviews are then discussed and approved by the Committee. Executive performance 
is measured both in terms of the performance of the Company as a whole and      
various individual performance factors, including the performance of divisions  
for which such officer had management responsibility and individual managerial  
accomplishments.                                                                

 The Internal Revenue Code denies a deduction to any publicly held
corporation for compensation paid to any "covered employee" (which are defined  
as the president and the Company's other four most highly compensated officers, 
as of the end of a taxable year) to the extent that the compensation of any     
individual "covered employee" exceeds $1 million in any taxable year of the     
corporation beginning after 1993. Compensation which is payable pursuant to     
written binding agreements entered into before February 18, 1993 and            
compensation which constitutes "performance based compensation" is excludable in
applying the $1 million limit. It is the Company's policy to qualify the        
compensation paid to its top executives for deductibility under the new law in  
order to maximize the Company's income tax deductions. Based upon the Internal  
Revenue Service's regulations and projected compensation payable to the         
Company's "covered employees" for the 1998 taxable year, all compensation       
payable by the Company in 1998 to such covered employees should be deductible by
the Company.                                                                    

Base Salaries                                                   

  In determining base salaries for executive officers, the Committee
reviews external comparative data and also receives recommendations from        
management. The Committee bases its decisions on such data, as well as internal 
salary comparisons and individual performance evaluations. Under this system,   
salary increases have generally the same effect as a cost of living adjustment, 
although increases are not expressly tied to any cost of living indicator.      
Increases are awarded, however, only to those executives who are performing at a
satisfactory level or above. The Company's philosophy is that the base salary   
taken alone is generally lower than salary levels at comparable companies. Thus,
executives are required to earn awards under the "at-risk" portions of the      
compensation program described below in order to reach a competitive            
compensation level.                                                             

Lump Sum Distributions                                          

        Under traditional compensation systems, merit compensation increases are
made through increases in base pay. Under such systems, once the merit component
has been earned it is included in base salary going forward and becomes         

 5

PRE 14A
8th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 8th

a permanent part of cash compensation. In 1990, the Company instituted a        
different system in which the merit component of compensation for employees was 
divided into a base salary increase (discussed above) and a lump sum            
distribution awarded annually.                                                  

  The lump sum distribution is delivered apart from base salary in a
separate annual check and must be re-earned by employees each year. The Company 
believes that this lump sum distribution system emphasizes a performance culture
and provides a more direct link between employee compensation and performance.  
The system also allows the Company to create greater differences in employee    
compensation based upon performance. The relationship of pay to performance is  
further strengthened by the high visibility of the lump sum distribution.       

      Lump sum distributions are paid in October of each year based upon the
employee performance reviews. Determinations as to whether an employee has      
earned a lump sum distribution are not tied directly to Company performance.    
Employees have no entitlement to receive a lump sum distribution. Accordingly,  
the decision as to whether or not to make a lump sum distribution is impacted by
the overall performance of the Company.                                         

Executive Bonus Plan                                            

       In addition to base compensation and lump sum distributions, executives
are eligible to participate in the Company's Executive Bonus Plan. Under the    
Executive Bonus Plan, the Committee has set threshold levels of net after tax   
profit, exclusive of extraordinary items, for 1997 and 1998. No bonus awards are
made for any year in which the Company does not meet the threshold profitability
level. The amount of the bonus pool is based on a percentage of the Company's   
net after tax profits above the profitability thresholds and shall not cause the
net after tax profit to fall below the threshold after computation of the bonus 
pool. During each year of the Executive Bonus Plan, the Company's research and  
development budget must be sustained at a level to ensure that the Company's    
new product development is sufficient to keep it competitive in its marketplace,
and continuation engineering sufficient to maintain the Company's existing      
products must also be utilized. The Committee retains discretion to adjust the  
bonus pool and awards based upon extraordinary circumstances and other criteria 
as determined by the Committee.                                                 

      Individual awards under the Executive Bonus Plan are determined by the
size of the bonus pool and individual performance of the executive. The         
Committee has structured the Executive Bonus Plan so that award potential is    
consistent with competitive norms and potentially represents a significant      
percentage of the executive's overall compensation in any given year. Awards are
paid after completion of the Company's audited financial statements for that    
year.                                                                           

        The Company did not meet the profitability threshold under the Executive
Bonus Plan for 1997. Accordingly, no awards were made with respect to 1997.     

Stock Options                                                   

      The Committee believes that grants of stock options serve to align the
interests of executive officers with shareholder value. The number of stock     
options granted takes into account the recipient's position and is intended to  
recognize different levels of responsibility. In determining the level of stock 
option grants, the Committee also considers competitive practices. As a result, 
grants may vary from year to year.                                              

EXECUTIVE COMPENSATION COMMITTEE

      Theodore A. Johnson,                Martin J. O'Meara, Jr.
Chairman                                            

Michael G.R. Sandberg               Chan Kien Sing  

  April 30, 1998

 6

PRE 14A
9th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 9th

COMPENSATION OF NAMED EXECUTIVE OFFICERS                                        

      The following table shows, for the years ended December 31, 1997, 1996
and 1995, the compensation earned by the president and the four most highly     
compensated executive officers of the Company (the "Named Executive Officers")  
in 1997:                                                                        
              SUMMARY COMPENSATION TABLE

                                                        [Enlarge/Download Table]

                                                                            LONG TERM COMPENSATION        
                                                                            ----------------------        
                                                ANNUAL COMPENSATION          AWARDS        PAYOUTS        
                                                -------------------          ------        -------        
Name and                                                                                                  
Principal                                                                    Number of      All Other     
Position(s)                         Year         Salary (3)     Bonus (4)    Options (5)  Compensation (6)
----------------------------------------------------------------------------------------------------------
                                                                                                          
M. Mark Michalko                      1997       $136,836       $ 11,917         80,000       $  4,235    
President & Chief Executive           1996       $120,810       $  4,896         23,000       $  3,461    
Officer and Director                  1995       $122,600       $      0              0       $      0    
----------------------------------------------------------------------------------------------------------
Robert F. McPhail                     1997       $125,988       $ 11,785         10,000       $      0    
Vice President, Sales &               1996       $ 99,915       $  9,732              0       $      0    
Marketing                             1995       $109,775       $      0              0       $      0    
----------------------------------------------------------------------------------------------------------
Timothy R. Groth                      1997       $109,464       $  4,270         20,000       $  3,184    
Vice President,                       1996       $ 93,769       $  3,672         12,000       $  2,565    
Technical Operations                  1995       $ 94,115       $      0              0       $      0    
----------------------------------------------------------------------------------------------------------
Ng Aik Chin (1)                       1997       $144,901       $  7,804              0       $  4,187    
Executive Assistant to the            1996       $ 84,983       $  3,447         12,000       $  2,327    
President and Director                1995       $127,061       $      0              0       $  3,464    
----------------------------------------------------------------------------------------------------------
Frederick A. Brunn, (2)               1997       $154,863       $      0         10,000       $      0    
Director and former                   1996       $142,680       $  5,824         33,000       $  4,141    
President                             1995       $140,915       $      0              0       $  3,834    
----------------------------------------------------------------------------------------------------------

(1)     Mr. Ng's Salary for each year included a $6,000 housing allowance and   
       tax equalization payments of $30,556 in 1997, $0 in 1996 and $14,191 in
1995.                                                           
(2)     Mr. Brunn's, 1997 Salary includes $12,203 relating to his retirement and
        $84,000 relating to his consulting agreement. (See Certain Relationships
and Related Transactions herein).                               
(3)     Perquisites for each Named Executive Officer in 1997, 1996 and 1995 are 
        included under Salary and did not exceed the lesser of $50,000 or 10% of
the total salary and bonus for any such officer.                
(4)     Amounts reflect lump sum distributions paid in November 1997 and 1996.  
(5)     All awards are incentive stock options, granted pursuant to the         
    Company's 1990 Employee Stock Option Plan, except in the case of Mr.
        Brunn in which the option is pursuant to the 1997 Directors Option Plan.
(6)     All amounts are Company matching contributions to the Employee Stock    
Bonus(401(k) Plan.                                              

 7

PRE 14A
10th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 10th

STOCK OPTION GRANTS                                                             

       The following table sets forth information regarding the grant of stock
options during 1997 to the Named Executive Officers:                            

 OPTION GRANTS IN 1997

                                                        [Enlarge/Download Table]

                                                                                     POTENTIAL       
                                                                                REALIZABLE VALUE AT  
                                                                                  ASSUMED ANNUAL     
                                                                               RATES OF STOCK PRICE  
                                                                                   APPRECIATION      
                               INDIVIDUAL GRANTS                               FOR OPTION TERM (4)   
                        -------------------------------------                  --------------------- 
                                      Percent                                                        
                                      of Total                                                       
                                      Options                                                        
                        Number of     Granted to     Exercise                                        
                        Options       Employees      Price       Expiration                          
Name                    Granted (2)   in 1997        Per Share   Date (3)          5%         10%    
----                    -----------   --------       ---------   --------         ----       ----    
                                                                                                     
Mark M. Michalko (1)    80,000           19%         $1.28       5/15/07           $64,399   $163,199
-----------------------------------------------------------------------------------------------------
Robert F. McPhail       10,000            2%         $1.28       5/15/07            $8,050    $20,400
-----------------------------------------------------------------------------------------------------
Timothy R. Groth        20,000            5%         $1.28       5/15/07           $16,100    $40,800
-----------------------------------------------------------------------------------------------------
Ng Aik Chin             0                 0%         $1.28       5/15/07                $0         $0
-----------------------------------------------------------------------------------------------------
Frederick A. Brunn (A)  10,000            0%         $1.56       9/24/02            $9,811    $24,862
-----------------------------------------------------------------------------------------------------

----------                                                                      
(1)     Awarded to Mr. Michalko upon becoming President.                        

(2)     No stock appreciation rights were granted to any of the Named Executive 
Officers or other Company employees in 1997.                    

(3)     The options were issued under the Company's 1990 Employee Stock Option  
     Plan and are exercisable starting one year after the grant date, with
       25% of the shares covered thereby becoming exercisable at that date and
        with an additional 25% of the option shares becoming exercisable on each
      successive anniversary date, with full vesting occurring on the fourth
anniversary date.                                               

(4)     The dollar amounts under these columns are the result of calculations at
 the assumed compounded market appreciation rates of 5% and 10% as
       required by the Securities and Exchange Commission over a ten-year term
and, therefore, are not intended to forecast possible future    
appreciation, if any, of the stock price.                       

(A)     This option is issued under the 1997 Director's Option Plan. The option 
        is exercisable starting one year after the date of grant with 50% of the
     shares covered thereby becoming exercisable at that date and with the
     remaining 50% of the option shares becoming exercisable on the second
anniversary date.                                               

STOCK OPTION HOLDINGS                                                           

    The following table sets forth information with respect to the Named
Executive Officers concerning unexercised stock options held as of December 31, 
1997. There were no stock option exercises by executive officers in 1997 and    
there were no unexercised, in-the-money stock options at December 31, 1997.     

 UNEXERCISED OPTIONS

                                                        [Enlarge/Download Table]

                                                                         NUMBER OF           
                                                                        UNEXERCISED          
                                                                         OPTIONS AT          
                                                                     DECEMBER 31, 1997       
---------------------------------------------------------------------------------------------
Name                                                            Exercisable    Unexercisable 
---------------------------------------------------------------------------------------------
                                                                                             
M. Mark Michalko                                                   35,750        107,250     
---------------------------------------------------------------------------------------------
Robert F. McPhail                                                  80,000         10,000     
---------------------------------------------------------------------------------------------
Timothy R. Groth                                                   14,225         32,775     
---------------------------------------------------------------------------------------------
Ng Aik Chin                                                         8,000          9,000     
---------------------------------------------------------------------------------------------
Frederick A. Brunn                                                 83,250         41,000     
---------------------------------------------------------------------------------------------

 8

PRE 14A
11th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 11th

PERFORMANCE GRAPH                                                               

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN * 
AMONG INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.,
THE S & P SMALLCAP 600 INDEX AND A PEER GROUP 

                                                                [Download Table]

                           12/92   12/93    12/94    12/95    12/96    12/97
                           -----   -----    -----    -----    -----    -----
                                                                            
INTERNATIONAL LOTTERY &                                                     
TOTALIZATOR SYSTEMS, INC. $  100  $  338  $   55   $   30   $   18   $   18 

PEER GROUP                $  100  $   87  $   51   $   49   $   57   $   62 

S&P SMALLCAP 600          $  100  $  119  $  113   $  147   $  178   $  224 

*  $100 INVESTED ON 12/31/92 IN STOCK OR INDEX- INCLUDING REINVESTMENT OF       
DIVIDENDS, FISCAL YEAR ENDING DECEMBER 31.                                

 9

PRE 14A
12th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 12th
 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

       Dennis D. Klahn, Lawrence E. Logue and Robert F. McPhail did not timely
file the initial Form 3 on becoming corporate officers in May, 1997. No stock   
transactions occurred during the delinquent period.                             

    Ng Aik Chin did not report Company shares held in his 401(k) savings
plan account on his Form 5.                                                     

     The Company believes, based upon a review of reports furnished to the
Company and written representations that no other reports were required, and    
that, except as noted above, during 1997 its officers and directors complied    
with all filing requirements under Section 16(a) of the Securities Exchange Act 
of 1934.                                                                        

 APPROVAL OF AN AMENDMENT TO THE
 ARTICLES OF INCORPORATION
 REGARDING A REVERSE STOCK SPLIT
PROPOSAL 1

NASDAQ Action                                                                   

The Company's Common Stock is quoted on the NASDAQ National Market. In order to 
maintain its NASDAQ National Market listing, the Company must, among other      
rules, maintain net tangible assets of $4 million and a minimum bid price of    
$1.00 per share. On April 16, 1998, the closing price was $0.66.                

On April 3,1998 the Company received a letter from NASDAQ informing the Company,
pursuant to NASDAQ regulations that became effective in February 1998, that     
because the Company's stock closing bid price had not exceeded $1.00 for a 30   
consecutive day period ending on April 3, 1998, the Company's stock price must  
comply with the NASDAQ $1.00 minimum bid price rule for 10 consecutive trading  
days during a 90-day compliance period ending July 3, 1998. If the Company's    
price does not meet the 10-day test, the Company's stock will be removed from   
any NASDAQ listing on either its National or Small Cap Market at the opening of 
business on July 7, 1998. If the Company's stock were so delisted, any stock    
trading would be conducted on the OTC Bulletin Board or in the over the counter 
market in what is commonly referred to as the "pink sheets."                    

Even if the Reverse Split, as set out below occurs, and the Company's stock     
price meets the $1.00 minimum bid price, there can be no assurance that the     
Company will be able to maintain its NASDAQ listing. Specifically, the Company's
net tangible assets will likely fall below the $4 million NASDAQ National Market
minimum threshold as a result of any 1998 first quarter loss. As a result, the  
Company will require an infusion of equity capital by late May 1998 to avoid    
having NASDAQ move the Company's common stock from the NASDAQ National Market to
the NASDAQ Small Cap Market. Moreover, any further Company quarterly losses in  
1998 may cause the Company to fall below the $2 million net tangible asset      
threshold to maintain a listing on the NASDAQ Small Cap Market and the Company's
stock would be moved to the OTC trading market.                                 

Recommended Shareholder Approval                                                

In order to increase the stock price of the Common Stock to a level that will   
make it more likely that the Company will be able to meet the $1.00 minimum bid 
price requirement for its NASDAQ listing, the Board of Directors of the Company 
has unanimously approved, subject to shareholder approval, a proposed amendment 
to the Company's Articles of Incorporation, (the "Amendment"), which will effect
a three for one reverse stock split (the "Reverse Split") of the Company's      
outstanding shares of Common Stock. On April 17, 1998, the Company had          
50,000,000 shares of authorized Common Stock and 20,000,000 shares of authorized
Preferred Stock, of which approximately 18,027,548 shares of common stock were  
issued and outstanding and approximately 1,479,000 shares were reserved for     
issuance pursuant to outstanding options. Had the Amendment to effect the       
Reverse Split been approved and effective as of April 17, 1998, the Company     
would have had 50,000,000 authorized shares of Common Stock, approximately      
6,009,183 shares of Common Stock issued and outstanding, 493,000 shares reserved
for issuance pursuant to outstanding options and approximately 43,497,817       
authorized shares of Common Stock unissued and not reserved for any purpose.    

The Reverse Split will have the effect of reducing the number of shares owned by
each shareholder. By way of example, assuming the 3-for-1 Reverse Split, a      
shareholder who owned 300 shares prior to the Reverse Split ("Old Shares") would
own 100 shares immediately upon completion of the Reverse Split ("New Shares"). 
Each shareholder's proportionate share ownership in the Company remains         
undiluted by the Reverse Split. The Reverse Split will have the effect of       
increasing the number of odd-lot shareholders and cause those holders to have   
increased transaction costs in selling their shares.                            

While the proposed Amendment will reduce the number of outstanding shares, the  
number of authorized shares of Common Stock will remain at 50,000,000.          
Therefore, the Amendment will make available a substantial number of additional 
shares for issuance in the future without the need for further shareholder      
action. The Company does not have any current plans to issue such newly         
available authorized shares, but could decide to do so in the future.           

The complete text of the proposed Amendment is set forth in Appendix A to this  
Proxy Statement. The final text of the Amendment is subject to change in order  
to meet the requirements as to form that may be requested or required by the    
California Secretary of State.                                                  

No fractional New Shares will be issued as a result of the Reverse Split. In    
lieu thereof, each Shareholder whose Old Shares are not evenly divisible by     
three will receive one additional New Share for the fractional New Share that   
such shareholder would otherwise be entitled to receive as a result of the      
Reverse Split.                                                                  

Effects of Shareholder Rejection of the Reverse Split Proposal                  

In the event that the Company's securities are removed from the NASDAQ National 
Market and moved to the OTC Bulletin Board, investors could find it difficult to
obtain accurate quotations as to the price of the Common Stock and to buy or    
sell the Common Stock, and there may be reduced media coverage of the Company.  
In addition, the Common Stock could become subject to the "penny stock"         
regulations promulgated under the Securities Exchange Act of 1934, as amended,  
which impose additional restrictions on broker-dealers who trade in such stock  
and could severely limit the liquidity of the Common Stock. For all of the above
reasons, the Board believes that continuation by the Company of a NASDAQ listing
is in the best interests of the shareholders of the Company.                    

There can be no assurance, however, that any of the intended effects of the     
Reverse Split will occur. Specifically there can be no assurance that the price 
per share of New Shares will increase proportionately with the decrease in the  
number of Old Shares; that the price of the New Shares will meet the minimum bid
price requirement by the end of the 90-day NASDAQ compliance period, or that any
stock price increase can be sustained for a prolonged period of time. There can 
be no assurance that, upon completion of the Reverse Split, the adjusted stock  
price will not drift down immediately or shortly thereafter. Also, there can be 
no assurance that subsequent to the Reverse Split, the Company will be able to  
maintain the NASDAQ National Market's continuing listing requirements or even   
the NASDAQ Small Cap continuing listing requirements.                           

Stock Certificates and Fractional Shares                                        

The Reverse Split will automatically occur upon the filing of the Certificate of
Amendment with the California Secretary of State. No further action is required 
by the shareholders. However, following consummation of the Reverse Split,      
anticipated to be effected as promptly as practicable following shareholder     
approval of the Reverse Split, the Company's Transfer Agent, Chase Mellon       
Shareholder Services, will send to each shareholder of record on the effective  
date of the Reverse Split a letter of transmittal regarding replacing the Old   
Share certificates with New Share certificates that state the number of shares  
on a Reverse Split basis. Shareholders will be asked to surrender certificates  
representing Old Shares in accordance with the procedures set forth in the      
letter of transmittal. Upon such surrender, a certificate representing the New  
Shares will be issued and forwarded to the shareholders. However, until a       
shareholder's certificate of Old Shares is replaced by New Shares each          
certificate representing Old Shares will continue to be valid and represent New 
Shares equal to one-third the number of Old Shares plus any additional New Share
resulting from a fractional New Share. Persons who hold their shares in         
brokerage accounts or "street name" will not be required to take any further    
actions to effect the exchange of their share certificates.                     

Possible Board Action                                                           

The Board reserves the right, notwithstanding shareholder approval, not to      
proceed with the Reverse Split, if, at any time prior to filing the Amendment   
with the California Secretary of State, the Board of Directors, in its sole     
discretion, determines that the Reverse Split is no longer in the best interests
of the Company and its shareholders. The Board of Directors may consider a      
variety of factors in determining whether or not to proceed with the Reverse    
Split including, but not limited to, overall trends in the stock market, recent 
changes and anticipated trends in the per share market price of the Company's   
Common Stock, business developments and the Company's actual and projected      
financial performance. However, it is the Board's present intention to effect   
the Reverse Split as promptly as practicable following receipt of the requisite 
shareholder approval unless prior to the filing of the Amendment in early June, 
the Company's stock price equals or exceeds $1.00 per share for 10 consecutive  
trading days as required by the NASDAQ regulations.                             

 APPROVAL OF BYLAW AMENDMENT REGARDING NUMBER OF DIRECTORS
PROPOSAL 3

    The Company's Board of Directors has adopted an amendment to Article
III, Section 2 of the Company's Bylaws (the "Bylaws Directors Amendment"), which
provides that the number of directors of the Company shall not be less than     
seven (7) nor more than thirteen (13) and that the exact number of directors    
shall initially be nine (9). The full text of Article III, Section 2 is attached
to this Proxy Statement as Appendix B.                                          

EXISTING BYLAWS                                                                 

       The Company's current Bylaws provide that the number of directors shall
be not less than five (5) nor more than nine (9). The Board has currently set   
the exact number of directors at nine (9).                                      

BYLAWS DIRECTORS AMENDMENT                                                      

       The Board of Directors believes that it is in the best interests of the
Company to provide the Board with flexibility to add additional knowledgeable   
and experienced individuals to the Board if and when deemed appropriate and     
advisable. Accordingly, the Board has adopted the Bylaws Directors Amendment    
which provides that the number of directors shall not be less than seven (7) nor
more than thirteen (13). In addition, the Bylaws Directors Amendment provides   
that the number of directors shall be nine (9). If the Bylaws Directors         
Amendment is adopted by Company shareholders, the Board would have the power to 
set the exact number of directors from time to time within the range set in the 
Bylaws Directors Amendment.                                                     

VOTE REQUIRED                                                                   

       Approval of the Bylaws Directors Amendment will require the affirmative
vote of a majority of the shares of the Company's Common Stock outstanding as of
the record date.                                                                

 The Company's Board of Directors has approved the proposed Bylaws
Directors Amendment and recommends that shareholders vote FOR the proposed      
Bylaws Directors Amendment.                                                     

 APPROVAL OF
 AN AMENDMENT TO THE
 ARTICLES OF INCORPORATION
 REGARDING INDEMNIFICATION
PROPOSAL 4

INTRODUCTION                                                                    

       There has been a considerable amount of litigation in the United States
against corporate directors, officers or employees. The expense of such         
litigation, whether it is well-founded or not, is considerable. Most            
publicly-held corporations, including the Company, have obtained insurance      
protecting the corporation, its directors and officers against the costs of such
litigation and related expenses. However, the insurance typically contains      
significant exclusions from coverage. This has had the result of increasing the 
personal exposure of directors and officers and has made it increasingly        
difficult for corporations to attract or retain qualified directors.            

    The California Corporations Code ("Code") permits the elimination or
limitation of personal liability of directors for monetary damages and allows   
corporations to provide for indemnification of officers, directors and other    
corporate agents to a greater extent than expressly provided under California   
law. The Company's Board of Directors has approved an amendment to the Company's
Articles of Incorporation (the "Company Article Amendment") which would         
eliminate personal liability of directors for monetary damages for a breach of  
such directors' fiduciary duty of care to the fullest extent permitted under    
California law and would allow the Company to expand the scope of its           
indemnification of directors, officers and employees. Attached to this Proxy    
Statement as Appendix C is Article Five which will be added to the Company's    
Articles of Incorporation pursuant to the Company Article Amendment. See also   
"Approval of Bylaw Amendment Regarding Indemnification" and "Approval of        
Indemnification Agreements."                                                    

10

PRE 14A
13th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 13th

      The limited liability provisions of the Company Article Amendment will
not apply retroactively, but will become effective when the Company Article     
Amendment is accepted for filing by the California Secretary of State. Those    
aspects of the Legislation which provide protection beyond that permitted by    
prior law will be subject to judicial interpretation and therefore the validity 
and scope of such protection may be uncertain.                                  

PRINCIPAL REASONS FOR THE COMPANY ARTICLE AMENDMENT                             

     The Code permits a California corporation to adopt a provision in its
articles of incorporation eliminating or limiting the personal liability of a   
director to the corporation or its shareholders for monetary damages for breach 
of the director's duties to the corporation and its shareholders, provided that 
such liability does not arise from certain proscribed conduct. The Code provides
the foregoing described protection only with respect to actions brought by or in
the right of the corporation and does not apply to claims brought by outside    
parties or a shareholder seeking to recover on such shareholder's own behalf.   

 The Code also permits a corporation to include a provision in its
articles of incorporation enabling the corporation to indemnify its directors,  
officers, employees and other agents ("Agents") under a broader range of        
circumstances than those expressly provided for under Section 317 of the Code. A
corporation that has enabling language in its articles of incorporation may     
include in its bylaws, and in agreements between the corporation and its Agents,
provisions expanding the scope of indemnification beyond that specifically      
provided by California law.                                                     

      The Board of Directors of the Company has determined that it is in the
best interests of the Company and its shareholders to amend the Company's       
Articles of Incorporation to take advantage of the additional protections       
afforded by the Code. To date the Company has not experienced difficulty in     
attracting and retaining qualified individuals to serve as directors. However,  
the Company expects to continue to seek individuals to serve as directors of the
Company and believes that such persons will be less willing to serve as         
directors if they are not afforded additional protection from liability. The    
Company's Board of Directors believes that the ability to continue to attract   
and retain experienced individuals to serve as directors will be enhanced by    
providing to directors increased protection from the risk of litigation and     
personal liability.                                                             

     In order to provide further protection, the Board of Directors of the
Company has approved an amendment to the Bylaws of the Company and              
indemnification agreements to be entered into between the Company and its       
directors and the Company and its officers. The Bylaw amendment of the Company  
is in the form attached as Appendix D. The Indemnification Agreement will be    
substantially identical to the form of Indemnification Agreement attached hereto
as Appendix E. See "Approval of Bylaw Amendment Regarding Indemnification" and  
"Approval of indemnification Agreements."                                       

       The Company Article Amendment will have no effect on the liability of a
director for acts or omissions which occur prior to the date when the Company   
Article Amendment becomes effective. It should be noted, however, that the      
indemnification agreements proposed to be approved at the Annual Meeting will   
provide for certain indemnification against liabilities arising out of acts or  
omissions that occurred prior to the effectiveness of the agreements, assuming  
the required standard of conduct has been met. See "Approval of Indemnification 
Agreements."                                                                    

POSSIBLE DISADVANTAGES                                                          

       If the Company Article Amendment is approved by the shareholders at the
Annual Meeting and filed with the California Secretary of State, a director will
not be liable for monetary damages in an action brought by or in the right of   
the corporation for breach of such director's fiduciary duty of care, including 
a breach that constitutes negligence or even gross negligence, provided such    
breach does not involve certain proscribed conduct. See "Changes to be Effected 
by the Amendment" below. Directors would remain liable, however, for the matters
enumerated under "Changes to be Effected by the Amendment" and the shareholders 
and the Company would retain the right to pursue equitable remedies, such as    
injunctions and rescission of contracts.                                        

      As a result of the broadening of the Company's obligation to indemnify
its directors and officers and the amendment to the Company's Bylaws and the    
proposed Indemnification Agreements, it is more likely that a suit against      
directors or officers will result in full or partial indemnification by the     
Company than it would without such indemnification provisions in the Articles of
Incorporation and Bylaws or without the proposed Indemnification Agreements. In 
addition, as a result of the Company Article Amendment, the shareholders of the 
Company will be surrendering certain significant rights to claim damages from   
the directors or officers. Accordingly, the Company Article Amendment may reduce
the likelihood of shareholders or management bringing a lawsuit against         
directors or the shareholders bringing a lawsuit against the officers on behalf 
of the Company for a breach of fiduciary duty even though such an action, if    
successful, might otherwise have benefited the Company and its shareholders.    
Finally, inasmuch as the directors may benefit from the limitation of liability 
for monetary damages, there is an inherent conflict of interest in approval of  
the Company Article Amendment as well as the proposed Bylaw amendment of the    
Company and the proposed indemnification agreements. The shareholders should    
recognize that the directors have a direct personal interest in the approval of 
such actions, which could be considered potentially at variance with the        
interests of the shareholders.                                                  

11

PRE 14A
14th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 14th

CHANGES TO BE EFFECTED BY THE AMENDMENT                                         

        The following discussion summarizes certain material differences between
the Company's Articles of Incorporation as proposed to be amended and its       
Articles of Incorporation as currently in effect.                               

      Limitation of Liability. The Company Article Amendment would eliminate
the personal liability of a director to the Company or its shareholders for     
monetary damages in an action brought by or in the right of the corporation     
arising out of a director's breach of his or her duty to care, to the fullest   
extent permissible under California law. Liability for a breach of the duty of  
care arises when directors have failed to exercise sufficient care in reaching  
decisions or otherwise attending to their responsibilities as directors. The    
Company Article Amendment does not eliminate the duty to care; it only          
eliminates monetary damage awards occasioned by a breach of that duty.          
Accordingly, if the Company Article Amendment is approved by the shareholders   
and filed with the California Secretary of State, a breach of the duty of care  
would remain a valid basis for a suit seeking to stop a proposed transaction    
from occurring. It should be noted; however, that equitable remedies such as    
rescission may not as a practical matter be available in many circumstances,    
including, for example, after a transaction has already been consummated.       

      Notwithstanding the foregoing, the Code does not permit the Company to
limit or eliminate a director's personal liability for monetary damages based on
claims arising out of any of the following:                                     

      (1) Acts or omissions that involve intentional misconduct or a knowing
and culpable violation of the law;                                              

    (2) Acts or omissions that a director believes to be contrary to the
best interests of the Company or its shareholders or that involve the absence of
good faith on the part of the director;                                         

        (3) Any transaction from which the director derived an improper personal
benefit;                                                                        

       (4) Acts or omissions that show a reckless disregard for the director's
duty to the Company or its shareholders in circumstances in which the director  
was aware, or should have been aware, in the ordinary course of performing a    
director's duties, of a risk of serious injury to the Company or its            
shareholders;                                                                   

(5) Acts or omissions that constitute an unexcused pattern of   
inattention that amounts to an abdication of the director's duty to the Company 
or its shareholders;                                                            

(6) Transactions between the Company and a director or between  
corporations that have a common director that do not comply with Section 310 of 
the Code; or                                                                    

  (7) The unlawful repurchase or redemption of stock, the payment of
unlawful dividends or the making of any distribution, loan or guarantee, in     
violation of Section 316 of the Code.                                           

    The limitations of liability of the proposed Company Article applies
only to directors and does not purport to eliminate or limit the liability of   
officers of the Company, including officers who are also directors, for any act 
or omission as an officer, notwithstanding that the officer's actions, if       
negligent or improper, have been ratified by the Company's Board of Directors.  

  Indemnification of Directors and Officers. The Code also permits a
corporation to indemnify its directors and officers under a broader range of    
circumstances than expressly provided under California law if the corporation   
includes a provision in its articles of incorporation authorizing the           
corporation to indemnify its directors and officers in excess of that provided  
by Section 317 of the Code. The Code provides, however, that a corporation may  
not indemnify its directors or officers for those acts, omissions or            
transactions for which a director or officer cannot be relieved of liability    
under the Code. See "Changes to be Effected by the Amendment--Limitation of     
Liability." In addition, the Code prohibits a corporation from indemnifying its 
directors or officers as to circumstances in which indemnity is expressly       
prohibited by Section 317.                                                      

      The Company Article Amendment, together with the amended Bylaws of the
Company, if approved, will provide that (i) the Company is required to indemnify
its directors and officers to the fullest extent permitted by law, including    
those circumstances in which indemnification would otherwise be discretionary   
under Section 317; (ii) the Company is required to advance expenses to its      
directors and officers as incurred, including expenses relating to obtaining a  
determination that such directors or officers are entitled to indemnification,  
provided that they undertake to repay the amount advanced if it is ultimately   
determined that they are not entitled to indemnification; (iii) the Company is  
authorized to enter into indemnification agreements with its directors and      
officers; and (iv) the Company may not retroactively amend the Bylaw provision  
in a way which is adverse to persons entitled to indemnity thereunder.          

  The Board of Directors has amended the Company's Bylaws to require
indemnification of directors and officers of the Company to the fullest extent  
permitted under California law. For a detailed description of the Bylaw         
amendment, see "Approval of Bylaw Amendment Regarding Indemnification." In      
addition, if the Company Article Amendment becomes effective, the Company       
intends to enter into indemnification agreements with directors and officers    
substantially identical to the form of Indemnification Agreement attached hereto
as Appendix E. Each agreement would constitute a binding, legal obligation of   
the Company and could not be amended without the consent of the individual who  
is                                                                              

12

PRE 14A
15th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 15th

protected by such agreement. For a detailed description of the provisions of    
such agreements, including material exclusions and/or limitations on the        
indemnification permitted by the agreements, see "Approval of Indemnification   
Agreements."                                                                    

VOTE REQUIRED                                                                   

      Approval of the Company Article Amendment will require the affirmative
vote of a majority of the shares of the Company's Common Stock outstanding as of
the record date.                                                                

  The Company's Board of Directors has approved the proposed Company
Article Amendment and recommends that shareholders vote FOR the proposed Company
Article Amendment.                                                              

 APPROVAL OF BYLAW AMENDMENT
 REGARDING INDEMNIFICATION
PROPOSAL 5

       The Company's Board of Directors has adopted an amendment to Article VI
of the Company's Bylaws (the "Company Bylaw Amendment"), which provides         
generally that the Company shall, to the broadest and maximum extent permitted  
by law, indemnify each director and officer with respect to liabilities and     
expenses incurred in connection with derivative claims and third party claims.  
The text of Article VI is attached to this Proxy Statement as Appendix D.       

INDEMNIFICATION UNDER EXISTING BYLAWS                                           

   The Company's current Bylaws provide that the Company shall, to the
maximum extent permitted by the General Corporation Law of California, indemnify
each of its directors and officers against expenses, judgements, fines,         
settlements, and other amounts actually and reasonably incurred in connection   
with any proceeding arising by reason of the fact any such person is or was a   
director or officer of the company and shall advance to such director or officer
expenses incurred in defending any such proceeding to the maximum extent        
permitted by such law. Additionally, the Bylaws provide that the Company will   
indemnify a director or officer of the Company who is or was serving at the     
request of the Company as a director or officer of another corporation, or other
enterprise, or was a director or officer of a corporation which was a           
predecessor corporation of the corporation or of another enterprise at the      
request of such predecessor corporation. The Bylaws further provide that the    
Board of Directors may, in its discretion, provide by resolution for such       
indemnification of, or advance of expenses to, other agents of the Company, and 
likewise may refuse to provide for such indemnification or advance of expenses  
except to the extent such indemnification is mandatory under the California     
General Corporation Law.                                                        

BYLAW AMENDMENT                                                                 

  The Company Bylaw Amendment provides that the Company will, to the
broadest and maximum extent permitted by law, indemnify each person who was or  
is a party or is threatened to be made a party to any proceeding by reason of   
the fact that such person is or was a director or officer of another corporation
or other enterprise, against expenses (including attorneys' fees), judgements,  
fines, settlements and other amounts actually and reasonably incurred in        
connection with such proceeding. In addition, the Company will, to the broadest 
and maximum extent permitted by law, promptly upon demand advance to such person
any and all expenses (including attorneys' fees) incurred in defending or       
settling any such proceeding so long as such person undertakes to repay such    
amount if it is ultimately determined that such person is not entitled to such  
indemnification.                                                                

      In the event that the Company fails to pay or advance such expenses to
the director or officer, the director or officer will be entitled to bring suit 
for such expenses against the Company, and if successful, in whole or in part,  
shall be entitled to recover the expenses (including attorneys' fees) of        
prosecuting such claims against the Company. Notwithstanding the foregoing, it  
shall be a defense to such an action (except for an action brought to enforce a 
claim for expenses incurred in defending any claim for advancement of expenses  
where the required undertaking has been tendered to the Company) that the       
claimant has not met the standards of conduct required by the Code. See         
"California Law Regarding Indemnification." The burden of proving such defense  
by clear and convincing evidence shall be on the Company.                       

      With respect to other employees or agents of the Company, the Board of
Directors of the Company may in its discretion provide by resolution for such   
indemnification of or the advancement of expenses to such persons and likewise  
may refuse to provide for such indemnification or advancement of expenses to the
extent such indemnification is mandatory under the California General           
Corporation Law.                                                                

        Any rights to indemnification under the Bylaws shall not be exclusive of
any other right to indemnification under any statute, the Company's Articles of 
Incorporation or any other agreement or vote of the shareholders or             
disinterested directors or otherwise. The right to indemnification shall        
continue after a director's or officer's term of office with respect to acts or 
omissions during such person's term of office. In addition, any amendment which 
limits or otherwise adversely affects any such person entitled to               
indemnification shall apply only to claims arising after such amendment and     
delivery of notice of such amendment to the person affected.                    

13

PRE 14A
16th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 16th

CALIFORNIA LAW REGARDING INDEMNIFICATION                                        

       The Company is subject to the Code, which provides a detailed statutory
framework covering indemnification of any agent of the Company who is made or   
threatened to be made a party to any legal proceeding by reason of his or her   
service on behalf of the Company or its subsidiaries. California law provides   
that indemnification against expenses actually and reasonably incurred in       
connection with any such proceeding shall be made to any such person who has    
been successful "on the merits" in the defense of any such proceeding, but does 
not require indemnification in any other circumstance. For example, California  
law provides that a corporation may indemnify any agent of the corporation      
against expenses , judgements, fines settlements and other amounts actually and 
reasonably incurred in a proceeding against such person by reason of his or her 
service on behalf of the corporation (other than a proceeding brought by or in  
the right of the corporation), provided the person acted in good faith and in a 
manner he or she reasonably believed to be in the best interests of the         
corporation (and, in a criminal proceeding, had no reasonable cause to believe  
his or her conduct was unlawful). California law further provides that in       
proceedings brought by or in the right of the corporation, the corporation may  
indemnify such a person against expenses actually and reasonably incurred in    
connection with the defense or settlement of such a proceeding, provided such   
person acted in good faith and in a manner he or she reasonably believed to be  
in the best interests of the corporation and its shareholders. Indemnification  
is not available in proceedings brought by or in the right of the corporation   
(i) for amounts paid or expenses incurred in connection with a matter that is   
settled or otherwise disposed of without court approval or (ii) with respect to 
matters for which the agent shall have been adjudged to be liable to the        
corporation unless and only to the extent the court shall determine that such   
person is entitled to indemnification.                                          

      California law permits the advancing of expenses incurred in defending
any proceeding against an Agent by reason of his or her service on behalf of a  
corporation upon the agent undertaking to repay any such sums in the event it is
later determined that he or she is not entitled to be indemnified. California   
law, further provides that the indemnification provided by Section 317 of the   
Code is not exclusive of other rights to which those seeking indemnification may
be entitled under any bylaw, agreement, vote of shareholders or disinterested   
directors or otherwise, to the extent additional rights are authorized in the   
corporation's articles of incorporation. See "Approval of Amendment of Articles 
of Incorporation Regarding Indemnification--Changes to be Effected by the       
Amendment." California law further permits the corporation to procure insurance 
on behalf of its Agents against any liability incurred by any such person, even 
if the corporation would not otherwise have the power under applicable law to   
indemnify the Agent against such liability.                                     

 In view of the frequency and magnitude of claims asserted against
directors and officers and the risks of personal liability and expense to the   
Company's directors and officers, the Company's Board of Directors believe that 
the Company Bylaw Amendment is an appropriate measure toward ensuring that the  
Company will be able to retain and attract capable persons to serve as directors
and officers. For a complete discussion of the advantages and disadvantages of  
expanded indemnification, see "Approval of Amendment to Articles of             
Incorporation--Principal Reasons for the Company Article Amendment" and         
"Approval of Amendment to Articles of Incorporation--Possible Disadvantages."   

VOTE REQUIRED                                                                   

      The Board of Directors of the Company is authorized by the Articles of
Incorporation of the Company to adopt amendments to the Company's Bylaws and    
under this authority has adopted the Company Bylaw Amendment. Although          
shareholder approval of the Company Bylaw Amendment is not required, the Board  
of Directors is seeking this approval because each of the directors is          
potentially benefited by the amendment and therefore might be considered to have
a personal interest in this matter. Approval of this proposal by the affirmative
vote of a majority of the shares of Common Stock voting on this proposal at the 
meeting, with shares owned by the interested directors not entitled to vote     
thereon, will therefore insulate the Company Bylaw Amendment against challenges 
to legality in most instances. The Company Bylaw Amendment will become effective
upon such approval of the Company's shareholders.                               

        The Company's Board of Directors has approved the proposed Company Bylaw
Amendment and recommends that shareholders vote FOR the proposed Company Bylaw  
Amendment.                                                                      

APPROVAL OF INDEMNIFICATION AGREEMENTS
PROPOSAL 6

GENERAL                                                                         

The shareholders are being asked to approve and ratify proposed 
Indemnification Agreements (the "Indemnification Agreement") in substantially   
the form attached hereto as Appendix E. Such Indemnification Agreements will be 
entered into between the Company and its directors, including future directors  
and between the Company and its officers, including future officers.            

        The Board of Directors believes that the Indemnification Agreements will
serve the best interests of the Company and its shareholders by strengthening   
the Company's ability to attract and retain knowledgeable and experienced       
persons to serve as directors and officers. See "Approval of Amendment to       
Articles of Incorporation--Principal Reasons for the Company Article Amendment" 
and "Approval of Amendment to Articles of Incorporation--Possible               
Disadvantages."                                                                 

14

PRE 14A
17th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 17th

INDEMNIFICATION AGREEMENTS                                                      

 The proposed Indemnification Agreements attempt to provide to the
directors and officers of the Company the maximum indemnification allowed under 
applicable law and under the Company's Articles of Incorporation, as proposed to
be amended. The Indemnification Agreements provide for indemnification under a  
broader range of circumstances than those specifically provided by Section 317  
Code. It has not yet been determined; however, to what extent the               
indemnification expressly permitted by Section 317 may be expanded by agreement 
or otherwise and, therefore, the scope of indemnification provided by the       
Indemnification Agreements may be subject to future judicial interpretation.    

       Any award of indemnification would come directly from the assets of the
Company, thereby affecting a shareholder's investment. It should be noted that  
if the Indemnification Agreements are approved by the shareholders, they will by
their terms apply to conduct occurring prior to the effective date of such      
agreements. However, under California law, indemnification may not be           
permissible for acts occurring prior to the filing of the Company Article       
Amendment with the California Secretary of State if such indemnification exceeds
the scope of Section 317.                                                       

   The Indemnification Agreements set forth a number of procedural and
substantive matters which are not addressed or are addressed in less detail in  
Section 317, including the following:                                           

       1. The Indemnification Agreements in effect establish the
      presumption that the indemnified party has met the applicable standard
       of conduct required for indemnification. Section 317 requires a finding
        in each specific case by the corporation that the applicable standard of
conduct has been met.                                           

               2. The Indemnification Agreements provide that litigation expense
        shall be advanced to an indemnified party at his or her request provided
that he or she undertakes to repay the amount advanced if it is 
       ultimately determined that he or she is not entitled to indemnification
       for such expenses. Section 317 provides that advancement of expenses by
a corporation is discretionary.                                 

           3. In the event the Company does not pay an indemnified party
    within 30 days of such person's written request, the Indemnification
     Agreements allow the indemnified party to bring an action against the
     Company to recover the unpaid amount of the claim. In such an action,
 the burden of proving that the indemnified party did not meet the
     applicable standard of conduct will be on the Company; if the Company
       fails to establish that the applicable standard of conduct has not been
met in such case, the indemnified party will be entitled to     
       indemnification, which will include reimbursement for expenses incurred
       by the indemnified party in such action. Section 317 does not set forth
   any procedure for contesting a Company's determination of a party's
     right to indemnification or establish which party bears the burden of
proof with respect to a challenge to such a determination.      

              4. The Indemnification Agreements explicitly provide for partial
      indemnification of costs and expenses in the event that an indemnified
    party is not entitled to full indemnification under the terms of the
     Indemnification Agreements. Section 317 does not specifically address
      this issue. Section 317 does, however, provide that to the extent that
   an indemnified party has been successful on the merits, he shall be
entitled to such indemnification.                               

         5. The Indemnification Agreements automatically incorporate
        future changes in the law which increase the protection available to the
  indemnitee. Such changes will apply to the Company without further
   shareholder approval and may further impair shareholders' rights or
  subject the Company's assets to risk of loss in the event of large
indemnification claims.                                         

               6. The Indemnification Agreements explicitly provide that actions
  by an indemnified party serving at the request of the Company as a
  director or officer of a corporation, or other enterprise owned or
   controlled by the Company, shall be covered by the indemnification.
      Section 317 provides that a corporation may so indemnify such parties.
 It should be noted that by agreeing by contract to indemnify such
  parties, the Company may be exposed to liability for actions of an
    entity over which it may not exercise control, which liability could
adversely affect the Company's financial position.              

       The proposed Indemnification Agreements together with the limitation on
the directors' liability to be provided by the Company Article Amendment and the
Company Bylaw Amendment, reduce significantly the number of instances in which  
directors or officers might be held personally liable to the Company for        
monetary damages for breach of their fiduciary duties. Therefore, it should be  
noted that the current directors of the Company have a direct personal interest 
in the approval of the Indemnification Agreements. See "Approval of Amendment to
Articles of Incorporation--Possible Disadvantages."                             

       THE FOREGOING DISCUSSION OF THE INDEMNIFICATION AGREEMENTS IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FORM OF INDEMNIFICATION AGREEMENT ATTACHED  
TO THIS PROXY STATEMENT AS APPENDIX E, WHICH YOU ARE URGED TO READ AND CONSIDER 
CAREFULLY.                                                                      

INDEMNIFICATION FOR LIABILITIES UNDER THE SECURITIES ACT OF 1933                

     The Securities and Exchange Commission has expressed its opinion that
indemnification of directors, officers and controlling persons of the Company   
against liabilities arising under the Securities Act of 1933, as amended (the   
"Act"), is against public policy as expressed in the Act and is, therefore,     
unenforceable. In the event that a claim for indemnification against such       
liabilities (other than the payment by the Company of expenses incurred or paid 
by a director or officer of the Company in the successful defense of any such   
action, suit or proceeding) is asserted by such director or officer in          
connection with securities which have been registered, the Company will, unless 
in the opinion of                                                               

15

PRE 14A
18th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 18th

its counsel the matter has been settled by controlling precedent, submit to a   
court or appropriate jurisdiction the question whether such indemnification by  
it is against public policy as expressed in the Act and will be governed by the 
final adjudication of such issue.                                               

VOTE REQUIRED                                                                   

       Section 310 of the Code provides that no contract between a corporation
and one or more of its directors is either void or voidable because such        
director or directors are parties to such contract if either (i) the material   
facts as to the transaction and as to such director's interest are fully        
disclosed or known to the shareholders and such contract is approved by the     
affirmative vote of a majority of the shares of Common Stock entitled to vote,  
with the shares owned by the interested directors not entitled to vote thereon, 
or (ii) the material facts as to the transaction and as to such director's      
interest are fully disclosed or known to the Board of Directors, or a committee 
of the Board of Directors, and a disinterested majority of the Board or such    
committee approves the contract in good faith and the contract is just and      
reasonable to the corporation at the time it is approved. If the contract has   
not been approved as set forth in either (i) or (ii) above, the contract is not 
void or voidable if the person asserting the validity of the contract sustains  
the burden of proving that the contract was just and reasonable to the          
corporation at the time it was authorized.                                      

        Although the Company believes that the form of Indemnification Agreement
is just and reasonable to the Company, and that shareholder approval may not    
therefore be required to validate the Indemnification Agreements, the Company   
believes that it is appropriate to submit the Indemnification Agreements to the 
shareholders for their consideration. If the Indemnification Agreements are     
approved by the shareholders in the manner set forth in clause (i) of the       
preceding paragraph, they will not be void or voidable and the Company's        
shareholders may not later assert a claim that the Indemnification Agreements   
are invalid due to improper authorization; however, the shareholders may        
challenge the validity of the Indemnification Agreements on other grounds. If   
the Indemnification Agreements are not so approved by the shareholders, the     
Company may reconsider the implementation of such agreements. If such agreements
were implemented in the absence of shareholder approval, the invalidity of such 
agreements could thereafter be asserted by any shareholder. In such an instance,
the person asserting the validity on the contracts bears the burden of proving  
that they were just and reasonable to the corporation at the time they were     
authorized.                                                                     

 The Company's Board of Directors has approved the Indemnification
Agreements and recommends that shareholders vote FOR the approval of the        
Indemnification Agreements.                                                     

 OTHER MATTERS

      All shareholders of record at the close of business on April 27, 1998,
the record date for the determination of shareholders entitled to vote at the   
Annual Meeting, have been sent or are currently being sent a copy of the        
Company's Annual Report, including financial statements for the year ended      
December 31, 1997.                                                              

   The expense of preparing, printing and mailing the Notice of Annual
Meeting and proxy material and all other expenses of soliciting proxies will be 
borne by the Company. The Company has retained the services of ChaseMellon      
Shareholder Services L.L.C. to assist in the solicitation of proxies at a cost  
not to exceed $8,000. In addition to the solicitation of proxies by use of the  
mails, the directors, officers and regular employees of the Company, who will   
receive no compensation in addition to regular salary, may solicit proxies by   
mail, telegraph, telephone, or personal interview. The Company may also         
reimburse brokerage firms, banks, trustees, nominees and other persons for their
expenses in forwarding proxy material to the beneficial owners of shares held by
them of record.                                                                 

Management knows of no business which will be presented for     
consideration at the Annual Meeting other than that stated in the Notice of     
Annual Meeting. However, if any such matter shall properly come before the      
meeting, the persons named in the enclosed proxy form will vote the same in     
accordance with their best judgement.                                           

  Management expects a representative from the Company's independent
auditors, Arthur Andersen LLP, to attend the meeting.                           

      Shareholder proposals for presentation at the 1999 Annual Meeting must
be received by the Company no later than January 1, 1999 to be considered for   
inclusion in the 1999 proxy and proxy statement.                                

 By order of the Board of Directors,

M. Mark Michalko
 President
Carlsbad, California

16

PRE 14A
19th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 19th
                                                                      APPENDIX A

CERTIFICATE OF AMENDMENT OF ARTICLES OF 
INCORPORATION OF
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. 
A CALIFORNIA CORPORATION

M. Mark Michalko and Lawrence E. Logue certify that:                            

1.   They are the President and Secretary of International Lottery &            
Totalizator Systems, Inc., a California corporation.                            

2.   The Articles of Incorporation of said corporation shall be amended by      
revising Article Four to read as follows:                                       

"FOUR: This corporation is authorized to issue two classes of shares  
designated respectively "Common Stock" and "Preferred Stock," and referred to   
either as Common Stock or Common shares and Preferred Stock or Preferred        
shares, respectively. The authorized number of shares of Common Stock is        
50,000,000. Upon the amendment of this Article, each outstanding share of       
Common Stock is converted into 0.333 shares.                                    

The authorized number of shares of Preferred Stock is 20,000,000. The 
Preferred Stock may be issued from time to time in one or more series. The      
Board of Directors is authorized to fix the number of shares of any series of   
Preferred Stock and to determine the designation of any such series. The Board  
of Directors is also authorized to determine or alter the rights, privileges,   
designations, preferences and restrictions granted to or imposed upon any       
wholly unissued series of Preferred Stock and, within the limits and            
restrictions stated in any resolution or resolutions of the Board of Directors  
originally fixing the number shares constituting any series, to increase or     
decrease (but not below the number of shares of such series then outstanding)   
the number of shares of any such series subsequent to the issue of shares of    
that series."                                                                   

3.   The foregoing amendment of the Articles of Incorporation has been duly     
approved by the Board of Directors.                                             

4.   The foregoing amendment of the Articles of Incorporation has been duly     
approved by the required vote of shareholders in accordance with Section 902 of 
the California Corporations Code. The total number of outstanding shares is     
18,027,548. The number of shares voting in favor of the amendment equaled or    
exceeded the vote required. The percentage vote required was more than 50%.     

    We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct  
of our own knowledge.                                                           

Date: June 1, 1998                                                              

                            --------------------------------------
                 M. Mark Michalko, President

                             ---------------------------------------
                  Lawrence E. Logue, Secretary

A-1 

PRE 14A
20th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 20th

                                                                      Appendix B

Article III Section 2 of the Bylaws of the Corporation shall be amended as      
follows:                                                                        

Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The number of directors of the
corporation shall be not less than seven (7) nor more than thirteen (13). The   
exact number of directors shall be nine (9). The exact number of directors may  
be changed, within the limits specified above by a by-law amending this Section 
2, duly adopted by the Board of Directors or by the shareholders. The indefinite
number of directors may be changed, or a definite number fixed without provision
for an indefinite number, by a duly adopted amendment to the articles of        
incorporation or by an amendment to this by-law duly adopted by the vote or     
written consent of holders of a majority of the outstanding shares entitled to  
vote; provided, however, that an amendment reducing the number or the minimum   
number of directors to a number less than five (5) cannot be adopted if the     
votes cast against its adoption at a meeting of the shareholders, or the shares 
not consenting in the case of action by written consent, are equal to more than 
16-2/3% of the outstanding shares entitled to vote. No amendment may change the 
stated maximum number of authorized directors to a number greater than two times
the stated minimum number of directors minus one.                               

 B-1

PRE 14A
21st Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 21st
                                                                      APPENDIX C

CERTIFICATE OF AMENDMENT OF ARTICLES OF 
INCORPORATION OF
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. 
A CALIFORNIA CORPORATION

M. Mark Michalko and Lawrence E. Logue certify that:                            

1.   They are the President and Secretary of International Lottery &            
Totalizator Systems, Inc., a California corporation.                            

2.   The Articles of Incorporation of the Corporation shall be amended to add an
Article Five to provide as follows:                                             

"FIVE:    (a) The liability of the directors of the corporation for   
monetary damages shall be eliminated to the fullest extent permissible under    
California law.                                                                 

             (b) The corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the California Corporations Code) through  
bylaw provisions, agreements with agents, vote of shareholders or disinterested 
directors or otherwise, in excess of the indemnification otherwise permitted by 
Section 317 of the California Corporations Code, subject only to applicable     
limits set forth in Section 204 of the California Corporations Code with respect
to actions for breach of duty to the corporation and its shareholders.          

          (c) Any repeal or modification of this Article Five shall be
prospective and shall not affect the rights of indemnification or limitation of 
liability in effect at the time of the alleged occurrence of any act or omission
to act giving rise to liability or indemnification."                            

3.   The foregoing amendment of the Articles of Incorporation has been duly     
approved by the Board of Directors.                                             

4.   The foregoing amendment of the Articles of Incorporation has been duly     
approved by the required vote of shareholders in accordance with Section 902 of 
the California Corporations Code. The total number of outstanding shares is     
18,027,548. The number of shares voting in favor of the amendment equaled or    
exceeded the vote required. The percentage vote required was more than 50%.     

    We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct  
of our own knowledge.                                                           

Date: June 1, 1998                                                              

                            --------------------------------------
                 M. Mark Michalko, President

                             ---------------------------------------
                  Lawrence E. Logue, Secretary

C-1 

PRE 14A
22nd Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 22nd

                                                                      Appendix D

Article VI of the Bylaws of the Corporation shall be amended as follows:        

ARTICLE VI. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS  

      SECTION 1. Scope of Indemnification. (a) The corporation shall, to the
broadest and maximum extent permitted by law, indemnify each person who was or  
is a party or is threatened to be made a party to any proceeding by reason of   
the fact that such person is or was a director or officer of the corporation, or
is or was serving at the request of the corporation as a director or officer of 
another corporation or other enterprise, against expenses (including attorneys' 
fees), judgments, fines, settlements and other amounts actually and reasonably  
incurred in connection with such proceeding. In addition, the corporation shall,
to the broadest and maximum extent permitted by law, promptly demand pay to such
person any and all expenses (including attorneys' fees) incurred in defending or
settling any such proceeding in advance of the final disposition of such        
proceeding upon receipt of an undertaking by or on behalf of the director or    
officer to repay such amount if it shall ultimately be determined by a final    
judgment or other final adjudication that such person is not entitled to be     
indemnified by the corporation as authorized in this Section 1.                 

        (b) If a claim under paragraph (a) of this Section 1 is not paid in full
by the corporation within 45 days after a written claim has been received by the
corporation, the claimant may at any time thereafter bring suit against the     
corporation to recover the unpaid amount of the claim and, if successful in     
whole or in part, the claimant shall also be entitled to be paid the expenses of
prosecuting such claim, including attorneys' fees. It shall be a defense to any 
such action (other than an action brought to enforce a claim for expenses       
incurred in defending any proceeding in advance of its final disposition where  
the required undertaking has been tendered to the corporation) that the claimant
has not met the standards of conduct which make it permissible under the        
California Corporations Code for the corporation to indemnify the claimant for  
the amount claimed, but the burden of proving such defense by clear and         
convincing evidence shall be on the corporation.                                

      (c) The Board of Directors may in its discretion provide by resolution
for such indemnification of, or advance of expenses to, other employees or      
agents of the corporation, and likewise may refuse to provide for such          
indemnification or advance of expenses except to the extent such indemnification
is mandatory under the California General Corporation Law.                      

       SECTION 2. Non-exclusivity of Rights. The rights to indemnification and
to the advancement of expenses conferred in this Article VI shall be exclusive  
of any other right which any person may have or hereafter acquire under any     
statute, the corporation's articles of incorporation or any bylaw, agreement,   
vote of shareholders or disinterested directors or otherwise.                   

SECTION 3. Terms and Heirs. The rights to indemnification and   
advancement of expenses conferred in this Article VI shall continue as to any   
person who has ceased to be a director or officer with respect to any acts or   
omissions that occurred during the time such person was a director or officer   
and shall inure to the benefit of the heirs, executors and administrators of    
each such person.                                                               

     SECTION 4. Severability. If any provision of this Article VI shall be
found, in any proceeding or appeal therefrom or in any other circumstances or as
to any person entitled to indemnification hereunder to be unenforceable,        
ineffective or invalid for any reason, the enforceability, effect and validity  
of the remaining part or parts in other circumstances shall not be affected,    
except as otherwise required by applicable law.                                 

       SECTION 5. Amendments The provisions of this Article VI shall be deemed
to constitute an agreement between the corporation and each of the persons      
entitled to indemnification hereunder, for as long as such provisions remain in 
effect. Any amendment to the provisions of this Article VI which limits or      
otherwise adversely affects the scope of indemnification or rights of any such  
persons                                                                         

 D-1

PRE 14A
23rd Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 23rd

hereunder shall, as to such persons, apply only to claims or causes of action   
based on actions or events occurring after such amendment and delivery of notice
of such amendment is given to the person or persons so affected. Until notice of
such amendment is given to the person or persons whose rights hereunder are     
affected, such amendment shall have no effect on such rights of such persons    
hereunder. Any person entitled to indemnification under the provisions of this  
Article VI shall as to any act or omission occurring prior to the date of       
receipt of such notice, be entitled to indemnification to the same extent as had
such provisions continued as Bylaws of the corporation without such amendment.  

 D-2

PRE 14A
24th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 24th

                                                                      Appendix E

 INDEMNIFICATION AGREEMENT

The text of the Indemnification Agreement proposed is to be entered into between
the Company and each of its officers, directors and certain other agents will   
provide as follows:                                                             

THIS AGREEMENT is entered into as of _________________ between International    
Lottery & Totalizator Systems, Inc., a California corporation (the              
"Corporation"), and ____________ ("Indemnitee").                                

RECITALS

      A. The Corporation believes that it is essential to its best interests
to attract and retain highly capable persons to serve as directors, officers,   
and agents.                                                                     

   B. Indemnitee is or has been selected to be a director, officer, or
agent of the Corporation.                                                       

 C. The Corporation and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors, officers, and     
other agents of the Corporation.                                                

 D. In recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's service to the      
Corporation, and in order to induce Indemnitee to provide or continue to provide
services to the Corporation as a director, officer, or agent, the Corporation   
wishes to provide in this Agreement for the indemnification and the advancing of
expenses to Indemnitee to the fullest extent permitted by law and as set forth  
in this Agreement and, to the extent applicable, for the coverage of Indemnitee 
under the Corporation's policies of directors' and officers' liability          
insurance.                                                                      

        IN CONSIDERATION of the foregoing and of Indemnitee's providing services
to the Corporation directly or, at its request, with another enterprise, the    
parties agree as follows:                                                       

1.      DEFINITIONS.                                                            

1.1.   Board:  The board of directors of the Corporation.       

    1.2.   Change in Control: A state of affairs that shall be deemed to
have occurred if:                                                               

          (i) Any person, other than Berjaya Lottery Management (H.K.)
Limited or its affiliates, is or becomes the "beneficial owner" (as that term is
defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), directly or indirectly, of securities representing twenty     
percent (20%) or more of the total voting power of the Corporation's            
then-outstanding voting securities;                                             

               (ii) During any period of two consecutive years, individuals who,
at the beginning of such period constitute the board, together with any new     
director whose election by the board or nomination for election by the          
Corporation's shareholders was approved by a vote of at least two-thirds (2/3)  
of the directors then in office either who were directors at the beginning of   
the two-year period, or whose election or nomination was previously so approved,
cease for any reason to constitute a majority of the board;                     

 E-1

PRE 14A
25th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 25th

           (iii) The shareholders of the Corporation approve a merger or
consolidation of the Corporation with any other Corporation, other than a merger
or consolidation that would result in the voting securities of the Corporation  
outstanding immediately before such merger or consolidation continuing to       
represent (either by remaining outstanding or by being converted into voting    
securities of the surviving entity) at least eighty percent (80%) of the total  
voting power represented by the voting securities of the corporation or such    
surviving entity outstanding immediately after such merger or consolidation; or 

        (iv) The shareholders of the Corporation approve a plan of
complete liquidation of the Corporation, or an agreement for the sale or        
disposition by the Corporation (whether in one transaction or a series of       
transactions) of all or substantially all of the Corporation's assets.          

1.3.   Expenses:                                                

             (i) Any expense, liability, or loss, including attorneys' fees,
judgments, fines, ERISA excise taxes and penalties, or amounts paid or to be    
paid in settlement;                                                             

             (ii) Any interest, assessments, or other charges imposed on any
of the items in subparagraph (i) above; and                                     

            (iii) Any federal, state, local, or foreign taxes imposed as a
result of the actual or deemed receipt of any payments under this Agreement paid
or incurred in connection with investigating, defending, being a witness in,    
participating in (including on appeal), or preparing for any of the foregoing   
in, any proceeding relating to any Indemnifiable Event.                         

  1.4. Indemnifiable Event: Any event or occurrence that takes place
either before or after the execution of this Agreement, related to the fact that
Indemnitee is or was a director or an officer of the Corporation, or while a    
director or officer is or was serving at the request of the Corporation as a    
director, officer, employee, trustee, agent, or fiduciary of another foreign or 
domestic corporation, partnership, joint venture, employee benefit plan, trust, 
or other enterprise, or was a director, officer, employee, or agent of a foreign
or domestic corporation that was a predecessor corporation of the Corporation or
another enterprise at the request of such predecessor corporation, or related to
anything done or not done by Indemnitee in any such capacity, whether the basis 
of the proceeding is an alleged action in an official capacity as a director,   
officer, employee, or agent, or in any other capacity while serving as a        
director, officer, employee, or agent of the Corporation, as described in this  
paragraph.                                                                      

    1.5. Independent Counsel: The person or body appointed in connection
with Section 3.                                                                 

 1.6. Person: "person" (as that term is used in Sections 13(d) and
14(d) of the Exchange Act), other than a trustee or other fiduciary holding     
securities under an employee benefit plan of the Corporation acting in such     
capacity or a Corporation owned, directly or indirectly, by the shareholders of 
the Corporation in substantially the same proportions as their ownership of     
shares of the Corporation at the date of this Agreement.                        

       1.7. Participant: A person who is a party to, or witness or participant
(including on appeal) in, a Proceeding.                                         

  1.8. Potential Change in Control: A state of affairs that shall be
deemed to exist if:                                                             

              (i) The Corporation enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control;    

 E-2

PRE 14A
26th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 26th

               (ii) Any Person (including the Corporation) announces publicly an
intention to take or to consider taking actions that, if consummated, would     
constitute a Change in Control;                                                 

               (iii) Any Person who is or becomes the beneficial owner, directly
or indirectly, of securities of the Corporation representing 10 percent or more 
of the combined voting power of the Corporation's then-outstanding voting       
securities, increases his or her beneficial ownership of such securities by five
percent (5%) or more over the percentage owned by such person on the date of    
this Agreement; or                                                              

        (iv) The Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has occurred.         

       1.9. Proceeding: Any threatened, pending, or completed action, suit, or
proceeding, or any inquiry, hearing or investigation, whether conducted by the  
Corporation or any other party, that Indemnitee in good faith believes might    
lead to the institution of any such action, suit, or proceeding, whether civil, 
criminal, administrative, investigative, or other.                              

      1.10. Reviewing Party: The person or body appointed in accordance with
Section 3.                                                                      

        1.11. Voting Securities: Any securities of the Corporation that have the
right to vote generally in the election of directors.                           

2.      AGREEMENT TO INDEMNIFY.                                                 

     2.1. General Agreement. In the event Indemnitee was, is, or becomes a
participant in, or is threatened to be made a participant in, a Proceeding by   
reason of (or arising in part out of) an Indemnifiable Event, the Corporation   
shall indemnify the Indemnitee from and against any and all Expenses to the     
fullest extent permitted by law, as the same exists or may hereafter be amended 
or interpreted (but in the case of any such amendment or interpretation, only to
the extent that such amendment or interpretation permits the Corporation to     
provide broader indemnification rights than were permitted before this          
Agreement). The parties to this Agreement intend indemnification in excess of   
that expressly permitted by statute, including, without limitation, any         
indemnification provided by the Corporation's articles of incorporation, its    
bylaws, a vote of its shareholders or disinterested directors, or applicable    
law.                                                                            

2.2. Initiation of Proceeding. Notwithstanding anything in this 
Agreement to the contrary, Indemnitee shall not be entitled to indemnification  
under this Agreement in connection with any Proceeding initiated by Indemnitee  
against the Corporation or any director or officer of the Corporation unless (i)
the Corporation has joined in or the Board has consented to the initiation of   
such Proceeding; (ii) the Proceeding is one to enforce indemnification rights   
under Section 5; or (iii) the Proceeding is instituted after a Change in Control
and Independent Counsel has approved its initiation.                            

     2.3. Expense Advances. If so requested by Indemnitee, the Corporation
shall within ten business days of such request, advance all Expenses to         
Indemnitee (an "Expense Advance"). Notwithstanding the foregoing, to the extent 
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Corporation shall be entitled to be    
reimbursed by Indemnitee for all such amounts, and Indemnitee hereby agrees to  
reimburse the Corporation promptly for the same. If Indemnitee has commenced    
legal proceedings in a court of competent jurisdiction to secure a determination
that Indemnitee should be indemnified under applicable law as provided in       
Section 4, any determination made by the Reviewing Party that Indemnitee would  
not be permitted to be indemnified under applicable law shall not be binding,   
and                                                                             

 E-3

PRE 14A
27th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 27th

Indemnitee shall not be required to reimburse the Corporation for any Expense   
Advance until a final judicial determination is made (as to which all rights of 
appeal have been exhausted or have lapsed). Indemnitee's obligation to reimburse
the Corporation for Expense Advances shall be unsecured and no interest shall be
charged thereon.                                                                

      2.4. Mandatory Indemnification. Notwithstanding any other provision of
this Agreement, to the extent that Indemnitee has been successful on the merits 
in defense of any Proceeding relating in whole or in part to an Indemnifiable   
Event or in defense of any issue or matter in such Proceeding, Indemnitee shall 
be indemnified against all Expenses incurred in connection with such issue,     
matter, or event.                                                               

 2.5. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Corporation for a portion 
of Expenses, but not for the total amount of Expenses, the Corporation shall    
indemnify the Indemnitee for the portion to which Indemnitee is entitled.       

        2.6. Prohibited Indemnification. No indemnification under this Agreement
shall be paid by the Corporation on account of any Proceeding in which judgment 
is rendered against Indemnitee for an accounting of profits made from the       
purchase or sale by Indemnitee of securities of the Corporation under the       
provisions of Section 16(b) of the Exchange Act or similar provisions of any    
federal, state, or local laws.                                                  

3. REVIEWING PARTY. Before any Change in Control, the Reviewing Party shall be  
any appropriate person or body consisting of a member or members of the Board or
any other person or body appointed by the Board who is not a party to the       
Proceeding with respect to which Indemnitee is seeking indemnification; after a 
Change in Control, the reviewing party shall be the Independent Counsel. With   
respect to all matters arising after a Change in Control concerning the rights  
of Indemnitee to indemnity payments and Expense Advances under this Agreement or
any other agreement or under applicable law or the Corporation's articles of    
incorporation or bylaws now or hereafter in effect relating to indemnification  
for Indemnifiable Events, the Corporation shall seek legal advice only from     
Independent Counsel selected by Indemnitee and approved by the Corporation, the 
approval of whom shall not be unreasonably withheld, and who has not otherwise  
performed services for the Corporation or Indemnitee (other than in connection  
with indemnification matters) within the last five years. The Independent       
Counsel shall not include any person who, under the applicable standards of     
professional conduct then prevailing, would have a conflict of interest in      
representing either the Corporation or Indemnitee in an action to determine     
Indemnitee's rights under this Agreement. The counsel, among other things, shall
render a written opinion to the Corporation and Indemnitee as to whether and to 
what extent Indemnitee should be permitted to be indemnified under applicable   
law. The Corporation agrees to pay the reasonable fees of the Independent       
Counsel and to indemnify fully such counsel against any and all expenses,       
including attorneys' fees, claims, liabilities, loss, and damages arising out of
or relating to this Agreement or the engagement of Independent Counsel under    
this Agreement.                                                                 

4.      INDEMNIFICATION PROCESS AND APPEAL.                                     

      4.1. Indemnification Payment. Indemnitee shall receive indemnification
of Expenses from the Corporation in accordance with this Agreement as soon as   
practicable after Indemnitee has made written demand on the Corporation for     
indemnification, unless the Reviewing Party has given a written opinion to the  
Corporation that Indemnitee is not entitled to indemnification under this       
Agreement or applicable law.                                                    

 E-4

PRE 14A
28th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 28th

      4.2. Suit To Enforce Rights. Regardless of any action by the Reviewing
Party, if Indemnitee has not received full indemnification within 30 days after 
making a demand in accordance with Section 4.1 above, Indemnitee shall have the 
right to enforce its indemnification rights under this Agreement by commencing  
litigation in any court in the State of California seeking an initial           
determination by the court or challenging any determination by the Reviewing    
Party or any aspect of the Agreement. The Corporation hereby consents to service
of process and to appear in any such proceeding. Any determination by the       
Reviewing Party not challenged by Indemnitee shall be binding on the Corporation
and Indemnitee. The remedy provided in this Section 4.2 shall be in addition to 
any other remedies available to Indemnitee in law or equity.                    

      4.3. Defense to Indemnification, Burden of Proof, and Presumptions. It
shall be a defense to any action brought by Indemnitee against the Corporation  
to enforce this Agreement (other than an action brought to enforce a claim for  
Expenses incurred in defending a proceeding in advance of its final disposition 
when the required undertaking has been tendered to the Corporation) that it is  
not permissible under this Agreement or applicable law for the Corporation to   
indemnify the Indemnitee for the amount claimed. In connection with any such    
action or any determination by the Reviewing Party or otherwise as to whether   
Indemnitee is entitled to be indemnified under this Agreement, the burden of    
proving such a defense or determination shall be on the Corporation. Neither the
failure of the Reviewing Party or the Corporation (including its Board,         
Independent Counsel, or its shareholders) to have made a determination prior to 
the commencement of such action by Indemnitee that indemnification is proper    
under the circumstances because Indemnitee has met the standard of conduct set  
forth in applicable law, nor an actual determination by the Reviewing Party or  
Corporation (including its Board, Independent Counsel, or its shareholders) that
Indemnitee had not met such applicable standard of conduct shall be a defense to
the action or create a presumption that Indemnitee has not met the applicable   
standard of conduct. For purposes of this Agreement, the termination of any     
claim, action, suit, or proceeding, by judgment, order, settlement (whether with
or without court approval), conviction, or on a plea of nolo contendere, or its 
equivalent, shall not create a presumption that Indemnitee did not meet any     
particular standard of conduct or have any particular belief, or that a court   
has determined that indemnification is not permitted by applicable law.         

5.      INDEMNIFICATION FOR EXPENSES INCURRED IN ENFORCING RIGHTS.  The         
Corporation shall indemnify the Indemnitee against, and if requested by         
Indemnitee, the Corporation shall, within ten business days of such request,    
advance to Indemnitee, all Expenses as are incurred by Indemnitee in connection 
with any claim asserted against or action brought by Indemnitee for:            

        (a) Indemnification of Expenses or an Expense Advance by the Corporation
under this Agreement or any other agreement or under applicable law or the      
Corporation's articles of incorporation or bylaws now or hereafter in effect    
relating to indemnification for Indemnifiable Events, or                        

        (b) Recovery under directors' and officers' liability insurance policies
maintained by the Corporation for amounts paid in settlement if the Independent 
Counsel has approved the settlement.                                            

The Corporation shall not settle any Proceeding in any manner that would impose 
any penalty or limitation on Indemnitee without Indemnitee's written consent.   
Neither the Corporation nor Indemnitee will unreasonably withhold its consent to
any proposed settlement. The Corporation shall not be liable to indemnify the   
Indemnitee under this Agreement with regard to any judicial award if the        
Corporation was not given a reasonable and timely opportunity, at its expense,  
to participate in the defense of such action; however, the Corporation's        
liability under this Agreement shall not be excused if its participation in the 
Proceeding was barred by this Agreement.                                        

 E-5

PRE 14A
29th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 29th

6. ESTABLISHMENT OF TRUST. In the event of a Change in Control or a Potential   
Change in Control, the Corporation shall, upon written request by Indemnitee,   
create a trust for the benefit of the Indemnitee ("the Trust") and from time to 
time, upon written request of Indemnitee, shall fund the Trust in an amount     
sufficient to satisfy any and all Expenses reasonably anticipated at the time of
each such request to be incurred in connection with investigating, preparing    
for, participating in, and/or defending any Proceeding relating to an           
Indemnifiable Event. The amount or amounts to be deposited in the Trust under   
the foregoing funding obligation shall be determined by the Reviewing Party. The
terms of the Trust shall provide that on a Change in Control, (i) the Trust     
shall not be revoked or the principal invaded without the written consent of the
Indemnitee, (ii) the Trustee shall advance, within ten business days of a       
request by the Indemnitee, all Expenses to the Indemnitee (provided that the    
Indemnitee hereby agrees to reimburse the Trust under the same circumstances for
which the Indemnitee would be required to reimburse the Corporation under       
Section 2.3 above), (iii) the Trust shall continue to be funded by the          
Corporation in accordance with the funding obligation set forth in this Section 
6, (iv) the Trustee shall promptly pay to the Indemnitee all amounts for which  
the Indemnitee shall be entitled to indemnification under this Agreement or     
otherwise, and (v) all unexpended funds in the Trust shall revert to the        
Corporation on a final determination by the Reviewing Party or a court of       
competent jurisdiction, as the case may be, that the Indemnitee has been fully  
indemnified under the terms of this Agreement. The Trustee shall be chosen by   
the Indemnitee. Nothing in this Section 6 shall relieve the Corporation of any  
of its obligations under this Agreement. All income earned on the assets held in
the Trust shall be reported as income by the Corporation for federal, state,    
local, and foreign tax purposes. The Corporation shall pay all costs of         
establishing and maintaining the Trust, and shall indemnify the Trustee against 
any and all expenses (including attorneys' fees), claims, liabilities, loss, and
damages arising out of or relating to this Agreement or the establishment and   
maintenance of the Trust.                                                       

7. NONEXCLUSIVITY. The rights of Indemnitee under this Agreement shall be in    
addition to any other rights Indemnitee may have under the Corporation's        
articles of incorporation, bylaws, applicable law, or otherwise. To the extent  
that a change in applicable law (whether by statute or judicial decision)       
permits greater indemnification by agreement than would be afforded currently   
under the Corporation's articles of incorporation, bylaws, applicable law, or   
this Agreement, it is the intent of the parties that Indemnitee enjoy by this   
Agreement the greater benefits afforded by such change.                         

8. LIABILITY INSURANCE. To the extent the Corporation maintains an insurance    
policy or policies providing directors' and officers' liability insurance,      
Indemnitee shall be covered by such policy or policies, in accordance with its  
or their terms, to the maximum extent of the coverage available for any         
Corporation director or officer.                                                

9. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause of      
action shall be asserted by or on behalf of the Corporation or any affiliate of 
the Corporation against Indemnitee, Indemnitee's spouse, heirs, executors, or   
personal or legal representatives after the expiration of two years from the    
date of accrual of such cause of action, or such longer period as may be        
required by state law under the circumstances. Any claim or cause of action of  
the Corporation or its affiliate shall be extinguished and deemed released      
unless asserted by the timely filing of a legal action within such period;      
provided, however, that if any shorter period of limitations is otherwise       
applicable to any such cause of action, the shorter period shall govern.        

10. AMENDMENT OF THIS AGREEMENT. No supplement, modification, or amendment of   
this Agreement shall be binding unless executed in writing by both of the       
parties to this Agreement. No waiver of any of the provisions of this Agreement 
shall operate as a waiver of any other provisions (whether or not similar), nor 
shall such waiver constitute a continuing waiver. Except                        

 E-6

PRE 14A
30th Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 30th

as specifically provided in this Agreement, no failure to exercise or any delay 
in exercising any right or remedy shall constitute a waiver.                    

11. SUBROGATION. In the event of payment under this Agreement, the Corporation  
shall be subrogated to the extent of such payment to all of the rights of       
recovery of Indemnitee, who shall execute all papers required and shall do      
everything that may be necessary to secure such rights, including the execution 
of such documents necessary to enable the Corporation effectively to bring suit 
to enforce such rights.                                                         

12. NO DUPLICATION OF PAYMENTS. The Corporation shall not be liable under this  
Agreement to make any payment in connection with any claim made against         
Indemnitee to the extent Indemnitee has otherwise received payment (under any   
insurance policy, bylaw, or otherwise) of the amounts otherwise indemnifiable   
under this Agreement.                                                           

13. BINDING EFFECT. This Agreement shall be binding upon and inure to the       
benefit of and be enforceable by the parties hereto and their respective        
successors (including any direct or indirect successor by purchase, merger,     
consolidation, or otherwise to all or substantially all of the business and/or  
assets of the Corporation), assigns, spouses, heirs, and personal and legal     
representatives. The Corporation shall require and cause any successor (whether 
direct or indirect, by purchase, merger, consolidation, or otherwise) to all,   
substantially all, or a substantial part, of the business or assets of the      
Corporation or both, by written agreement in form and substance satisfactory to 
Indemnitee, expressly to assume and agree to perform this Agreement in the same 
manner and to the same extent that the Corporation would be required to perform 
if no such succession had taken place. The indemnification provided under this  
Agreement shall continue as to Indemnitee for any action taken or not taken     
while serving in an indemnified capacity pertaining to an Indemnifiable Event   
even though Indemnitee may have ceased to serve in such capacity at the time of 
any proceeding.                                                                 

14. SEVERABILITY. If any portion of this Agreement shall be held by a court of  
competent jurisdiction to be invalid, void, or otherwise unenforceable, the     
remaining provisions shall remain enforceable to the fullest extent permitted by
law. Furthermore, to the fullest extent possible, the provisions of this        
Agreement (including, without limitation, each portion of this Agreement        
containing any provision held to be invalid, void, or otherwise unenforceable,  
that is not itself invalid, void, or unenforceable) shall be construed so as to 
give effect to the intent manifested by the provision held invalid, void, or    
unenforceable.                                                                  

15. GOVERNING LAW. This Agreement shall be governed by and construed and        
enforced in accordance with the laws of the State of California applicable to   
contracts made and to be performed in this state without giving effect to the   
principles of conflicts of laws.                                                

16. NOTICES. All notices, demands, and other communications required or         
permitted under this Agreement shall be made in writing and shall be deemed to  
have been duly given if delivered by hand, against receipt, or mailed, postage  
prepaid, certified or registered mail, return receipt requested, and addressed  
to the Corporation at:                                                          

             International Lottery & Totalizator Systems, Inc.
2131 Faraday Avenue                 
Carlsbad, CA 92008-7297             
Attn: President                     

 E-7

PRE 14A
31st Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 31st

and to Indemnitee at:                                                           

__________________________________  
__________________________________  
__________________________________  
Attn: ____________________________  

Notice of change of address shall be effective only when given in accordance    
with this agreement. All notices complying with this paragraph shall be deemed  
to have been received on the date of delivery or on the third business day after
mailing.                                                                        

       IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the day specified above.                                   

INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.                               

By:____________________________________                         
M. Mark Michalko                                          
President                                                 

[NAME OF INDEMNITEE]                                                            

____________________________________                      
Name:                                                     
Title:                                                    

 E-8

PRE 14A
32nd Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 32nd
PROXY                                                                           
 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.

The undersigned hereby appoints Dennis D. Klahn and Lawrence E. Logue 
proxies, with power to act without the other and with power of substitution, and
hereby authorizes them to represent and vote as designated on the other side,   
all the shares of stock of International Lottery & Totalizator Systems, Inc.,   
standing in the name of the undersigned with all powers which the undersigned   
would possess if present at the Annual Meeting of Shareholders to be held June  
1, 1998 or any adjournment thereof.                                             

(Continued, and to be marked, dated and signed, on the other side)

    - FOLD AND DETACH HERE -

 AN INVITATION

Please join Management and the Board of Directors of
INTERNATIONAL LOTTERY &TOTALIZATOR SYSTEMS, INC.
 for the 1998 Annual Meeting of Shareholders

DATE:             Monday, June 1, 1998            

TIME:             2:30 p.m. to 4:30 p.m.          

                 2:30 - 3:00      Refreshments
                   3:00 - 4:00      Annual Meeting
              4:00 - 4:30      Reception

PLACE:            La Costa Resort and Spa         
                   Costa Del Mar Road, Club House II
      Carlsbad, California
(760) 438-9111
     Call for directions

       R.S.V.P.         Mary Anne Palmer:       (760) 930-3630

PRE 14A
Last Page of 33
TOC
1st
Previous
Next
↓Bottom
Just 33rd
                                                    Please mark your votes
                                                    as indicated in this example
                                                                         [X]

The Board of Directors recommends a vote FOR all items.                         

                                                                        WITHHELD
1. - ELECTION OF DIRECTORS - Nominees                              FOR   FOR ALL
                                                                 [  ]   [  ]
Frederick A. Brunn, Ng Aik Chin                                                 
Chan Kien Sing, Ng Foo Leong                                                    
Theodore A. Johnson, Martin J. O'Meara, Jr.                                     
M. Mark Michalko, Michael G.R. Sandberg and                                     
Tan Chee Yioun                                                                  
WITHHELD (Write one or more nominee's name(s) below)                            

____________________________________                                            

                                                         FOR    AGAINST  ABSTAIN
                                                        [  ]     [  ]     [  ]
2.   Approval of amendment to Articles of                                       
Incorporation to effect 3 for 1 reverse                               
stock split.                                                          

                                                        [  ]     [  ]     [  ]
3.   Amend Bylaws to increase the range of                                      
authorized directors and set the number                               
of authorized directors at nine.                                      

                                                        [  ]     [  ]     [  ]
4.   Amend Corporate Articles to limit                                          
liability of directors and authorize                                  
expanded directors/officers                                           
indemnification.                                                      

                                                        [  ]     [  ]     [  ]
5.   Approve Bylaw amendment for                                                
directors/officers indemnification.                                   

                                                        [  ]     [  ]     [  ]
6.   Approve Indemnification Agreement                                          
for directors/officers.                                               

Signature(s)_____________________________________________  Date________________ 
NOTE: Please sign as name appears hereon. Joint owners should each sign. When   
signing as attorney, executor, administrator, trustee or guardian, please give  
full title as such.                                                             

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘PRE 14A’ Filing		Date		First		Last			Other Filings
		5/16/01		6
		5/14/99		6					10QSB
		1/1/99		18
		7/7/98		12
		7/3/98		12
For Period End:		6/1/98		2		32			DEF 14A
		4/30/98		2		8			10-K/A
		4/27/98		2		18
Filed on:		4/20/98		3		4
		4/17/98		12
		4/16/98		12
		4/10/98		6
		4/3/98		12
		12/31/97		6		18			10-K,  10-K/A
		12/30/97		6					DEFS14A
		12/2/97		6
		12/31/96		9					10-K405
		12/31/95		9					10-K
		2/18/93		7
									List all Filings