SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K



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

For the fiscal year ended December 31,
2000

OR



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



|                                                                                  
|----------------------------------------------------------------------------------
|For the transition period from ________ to _______
Commission File Number: 0-11551

eLOT, Inc.

(Exact name of registrant as specified in its charter)

|                                                                                                 |  |                                                
|------------------------------------------------------------------------------------------------ |  | -----------------------------------------------
|Virginia
(State or other jurisdiction of incorporation
or organization)                          |  | 86-0449210
(I.R.S. Employer
Identification No.)
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|301 Merritt 7 Corporate Park
Norwalk, Connecticut 06851
(Address of principal executive offices) |  | (Zip Code)                                     

Registrants telephone number, including area code: (203) 840-8600

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

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|                    |  |                                          
|N/A                 |  | None                                     

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
7 1/2% Convertible Subordinated Debentures, Due March 15, 2011
(Title of Class)





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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]

The aggregate market value of the common stock held by non-affiliates of the
registrant (assuming for this purpose that all executive officers and directors
of the registrant are affiliates) as of January 31, 2001 was $36,486,867, based
on the last sale price for the common stock on that date.

The number of shares outstanding of the registrants only class of common
stock, $.01 par value per share, as of January 31, 2001, was 69,795,901.

DOCUMENTS INCORPORATED BY REFERENCE

None





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TABLE OF CONTENTS

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|Item                                                                                     |  | Page
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|PART I                                                                                  
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|1. Business                                                                              |  |      | 1  | 
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|2. Properties                                                                            |  |      | 22 | 
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|3. Legal Proceedings                                                                     |  |      | 22 | 
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|4. Submission of Matters to a Vote of Security Holders                                   |  |      | 22 | 
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|PART II                                                                                 
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|5. Market for Registrants Common Equity and Related Stockholder Matters                 |  |      | 24 | 
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|6. Selected Financial Data                                                               |  |      | 26 | 
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|7. Managements Discussion and Analysis of Financial Condition and
Results of Operations |  |      | 27 | 
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|7A. Quantitative and Qualitative Disclosures About Market Risk                           |  |      | 34 | 
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|8. Financial Statements and Supplementary Data                                           |  |      | 35 | 
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|9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure  |  |      | 57 | 
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|PART III                                                                                
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|10. Directors and Executive Officers of the Registrant                                   |  |      | 58 | 
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|11. Executive Compensation                                                               |  |      | 64 | 
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|12. Security Ownership of Certain Beneficial Owners and Management                       |  |      | 75 | 
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|13. Certain Relationships and Related Transactions                                       |  |      | 78 | 
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|PART IV                                                                                 
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|14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                      |  |      | 80 | 





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PART I

ITEM 1. BUSINESS

eLOT, Inc., formerly named Executone Information Systems, Inc.,
and its wholly owned subsidiary eLottery, Inc. (ELOT or the
Company) intends to be a web-based retailer of governmental
lottery tickets and is committed to leading the governmental lottery
industry into the e-commerce market. ELOT has developed, installed
and operated systems that have processed ten million e-commerce
lottery ticket sales and transactions. It has operated Internet,
Intranet, and telephone communications, accounting, banking,
database and other applications and services that can facilitate the
electronic sale of new and existing lottery products worldwide. The
Company has also developed supplemental e-commerce solutions for
governmental lotteries that leverage the power of the Internet while
political, legal and social issues are simultaneously addressed.
For example, through the use of the Companys Internet Marketing,
Analysis, Research, and Communications System (IMARCS), lotteries
can maximize ticket sales and marketing efforts by communicating
one-on-one with current players and attract new players via the
Internet. The Company also offers email lottery subscription
services and technology that allows lottery players to submit
non-winning scratch tickets on the Internet in order to qualify for
additional chances to win, permitting lotteries to obtain data on
and communicate with millions of players, subject to the lotterys
and players permission.

ELOT also operates a lottery results email notification service
(LENS) at its eLottoNet.com site and a reward-entertainment lottery
portal, eLotteryFreeWay.com, which offers lottery and entertainment
games (for no consideration) with registered players earning
ePoints that are redeemable for cash and merchandise. The
eLotteryFreeWay is located at http://www.elotteryfreeway.com).
eLotterys corporate web site is on the World Wide Web at
http://www.eLottery.com.

Capitalized product names used in this report are registered or
unregistered trademarks of the Company or its subsidiaries except
where specifically identified with products of an unaffiliated
company.

ELOTs executive offices are located at 301 Merritt 7 Corporate
Park, Norwalk, Connecticut 06851, telephone 203-840-8600. The
common stock of ELOT (the Common Stock) is traded on the NASDAQ
National Market System under the symbol ELOT, and its Convertible
Subordinated Debentures due 2011 (the Debentures) trade on the
NASDAQ system under the symbol ELOTG. See Recent Developments.

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RECENT DEVELOPMENTS

Network60

On March 8, 2001, eLOT announced it had signed a definitive
agreement to acquire all of the subsidiaries of privately held
Network60, Inc. Network60s subsidiaries own four highly visited
marketing promotional web sites; www.EasyWinning.com,
www.PrizeChest.com, www.CoolWinning.com, and www.RadioStakes.com.
Network60 is a Internet promotions and permission-based direct
marketing company, which offers a flexible, cost effective direct
marketing medium to traditional corporations, advertising agencies,
and online companies. EasyWinning.com, CoolWinning.com and
RadioStakes.com are client-sponsored sweepstakes sites that function
as lead generation vehicles. PrizeChest.com is a prize fulfillment
site. The combined registered users of eLOTs and Network60s web
sites will exceed 3 million and the acquisition expands the
Companys ability to reach Internet users who would be responsive to
targeted governmental lottery marketing messages and ultimately
likely to purchase lottery tickets.

Under the terms of the agreement eLOT acquired the
subsidiaries of Network60 in exchange for 3.5 million common shares
of eLOT stock. Additional consideration in the form of up to 1.6
million common shares will be paid contingent upon achieving
specific contractual revenue and gross margin targets in the coming
12 months.

MDI

On November 2, 2000, ELOT announced a strategic alliance
agreement with MDI Entertainment, Inc. MDI specializes in creating,
marketing and implementing entertainment-based promotions on behalf
of the North American lottery industry. MDIs principal business
has been the scratch ticket segment of the government lottery
industry, for which it licenses well-known brand names and
entertainment properties. Some of MDIs properties include
Harley-Davidson®, Wheel of Fortune®,
Jeopardy!®, and Elvis Presley®. ELOT
intends to capitalize on these strengths with MDI and bring them to
the Internet. As part of the strategic alliance, eLottery and MDI
will form a joint venture to develop web sites to allow lottery
players to submit non-winning scratch tickets for additional chances
to win, without requiring players to send them through the mail.
These web sites will register and aggregate millions of players,
subject to the lotterys and players permission. These sites are
expected to significantly increase eLotterys database of lottery
players who are Internet users.

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Additionally, the strategic alliance calls for MDIs sales and
marketing team to market eLotterys products and services, including
IMARCS Internet marketing technology, lottery results email
notification service (LENS), email subscription services and lottery
ticket web retailing, to MDIs clients, which include 34 U.S. state
lotteries and three Canadian lotteries. Under terms of the
agreement, ELOT issued 1 million of its common shares in exchange
for 444 shares of preferred stock in MDI convertible to 444,444
shares of MDI common stock, and acquired a warrant to purchase an
additional 555,556 common shares of MDI at $3.50 per share.

Discontinued Operations

Effective January 1, 2000, ELOT completed the sale of its
computer telephony business to Inter-Tel, Incorporated. On December
15, 2000, ELOT reached agreement with Inter-Tel to settle certain
disputed claims relating to the sale of the telephony business.
Approximately $3.5 million of the purchase price was being held in
an escrow account to be available to Inter-Tel to satisfy certain
potential purchase price adjustments and indemnity claims for up to
one year following the sale. ELOT and Inter-Tel agreed to settle
all asserted claims and potential other claims arising from the sale
by releasing from the escrow $1,950,000 to ELOT and approximately
$1,550,000 to Inter-Tel, with the parties splitting the accrued
interest on a pro rata basis. This settlement reduced the proceeds
to ELOT of the telephony sale by $1,550,000 but released $1,950,000
plus interest from the escrow without further negotiation or legal
proceedings.

On July 21, 2000, ELOT completed the sale of its healthcare
communications business to Grinnell Corporation for $5 million in
cash. ELOT has announced the intention to sell its investment in
Dialogic Communications Corporation (DCC). ELOT owns greater than
50% of the outstanding shares in DCC. DCC is a privately held
company headquartered in Franklin, Tennessee that is an established
leader in interactive call processing solutions for business,
industry and government. It is the leading provider of voice
recognition units (VRUs and ARUs) to the cable television industry
and a successful provider of emergency notification systems to
Public Service agencies, the military, financial institutions and
other customers that have the need to establish assured contact with
large numbers of people in a short period of time. DCCs Board of
Directors and management have agreed to support ELOTs attempts to
monetize all or part of its investment in DCC. Robert C. Daum,
ELOTs Executive Vice President,

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Development and Finance, serves on DCCs Board of Directors.
ELOT is attempting to complete a sale of all or part of its DCC
investment in the first half of 2001.

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BUSINESS

eLottery History

On December 19, 1995, the Company acquired 100% of the common
stock of eLottery. eLotterys subsidiary, UniStar Entertainment,
had an exclusive five-year contract ending January 2003 to design,
develop, finance, and manage the National Indian Lottery, which was
marketed under the brand name U.S. Lottery, for the Coeur dAlene
Tribe of Idaho (CDA). Until December 1998, UniStar Entertainment
provided development and management of the software, network design
and call center applications for the Lotterys operations. In
December 1998, the U.S. District Court for the District of Idaho
ruled, in a case brought by AT&T, that the U.S. Lottery was not
authorized by the federal Indian Gaming Regulatory Act of 1988
(IGRA) and was governed by state law, and eLottery and the CDA
terminated the U.S. Lottery.

As a result of the adverse legal decision and upon review of
the strategic alternatives and the significant market opportunity
for web-based lottery ticket sales and related business
opportunities, the Company developed a new strategy to utilize
eLotterys technology and experience gained in operation of the U.S.
Lottery to become a web-based retailer of lottery tickets and a
provider of Internet marketing and advertising programs for
authorized government lotteries. In March 1999, the Board of
Directors of ELOT announced that it would divest the companys
traditional telephony and healthcare businesses and retain the
proceeds of any sales in the company to help it accelerate the
achievement of eLotterys business plans.

eLottery Mission and Strategy

ELOT, through its wholly owned subsidiary, eLottery, Inc., is
pursuing opportunities to become a web-based retailer of lottery
services and to license its systems and services to state and
international lotteries. eLottery develops, provides and maintains
Internet, Intranet, telephone, communications, accounting, banking,
database and other applications and services to facilitate the
electronic sale of new and existing lottery products worldwide.
eLottery is committed to leading the governmental lottery industry
into the e-commerce market using its past experience and
market-tested products. eLottery has positioned itself to become a
leader in the area by addressing the many complex legal, political
and social issues facing governmental lotteries as they react to the
significant market changes signaled by the rapid growth in Internet
sales. eLottery has developed, installed and operated Internet,
Intranet, telephone,

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communications, accounting, banking, database and other
applications and services to facilitate the electronic sale of new
and existing lottery products.

eLottery has developed proprietary lottery technologies
designed to take advantage of the expected impact that recent
advances in telecommunications and computers will have on the nature
and delivery of lottery products and the support systems necessary
to administer them. Management believes eLottery is the first
company to develop and operate secure, integrated Internet, Intranet
and telephone lottery gaming systems. eLotterys Internet and
Intranet systems provide for the electronic sale and support of both
periodic and instant draw lottery games and instant electronic
scratch-off games.

Using the Companys systems, lotteries will be able to
electronically distribute lottery tickets for both periodic and
instant draw lottery games over the Internet through our websites or
the lotteries websites, or through an Intranet, through telephone
networks, or through stand-alone, custom-designed electronic lottery
terminals. The Company believes that the electronic distribution of
lottery tickets through these systems will increase sales for
lotteries because the systems make the purchase of tickets easier
and use technology to enhance the lottery gaming experience.
Subject to applicable law, a website can contain links to the sites
of participating lotteries utilizing eLotterys technologies to sell
their lottery tickets over the Internet, or eLottery may sell
lottery tickets as an agent for certain lottery operators.
Management believes that eLotterys systems provide lotteries with
numerous advantages relative to traditional means of distribution,
including:



| |  |  | player database creation and tracking capability;                 
| | - |  | ------------------------------------------------------------------
|
| |  |  | efficient sale and distribution of tickets over the Internet;     
|
| |  |  | entertaining fast-play instant games; and                         
|
| |  |  | access to new and more demographically attractive market segments.

The Company believes that the combination of the advantages of
Internet commerce and its ability to customize its systems can
result in eLottery becoming a leading provider of products and
services for the lottery industry.

In addition to web-based lottery ticket sales, eLottery has
developed parallel lines of business that simultaneously leverage
the opportunities presented by the Internet for lotteries and
provide additional, related revenue opportunities. On June 13,
2000, the Company announced a

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long-term strategic partnership agreement with PlasmaNet, Inc.,
a leading online database
marketing company providing targeted advertising and marketing
services and operator of the FreeLotto.com website. As a part of
the agreement with PlasmaNet, Plasmanet agreed to place eLottery
links on the FreeLotto.com home page, to seamlessly connect to the
eLottoNet.com site and eLotteryFreeWay.com. In addition, eLottery
has the exclusive right to market products and services related to
the pay-to-play lottery business to FreeLotto.coms user base.

eLottery also acquired from PlasmaNet the web site
LottoNet.com, a lottery results website. The eLottonet.com web site
was redesigned and relaunched in late 2000. Through registration at
the eLottonet site, lottery players can receive free e-mails
notifying them of selected state lottery results. eLottery derives
revenue from advertising placed on those e-mails. eLottery expects
eLottoNet.com to be a more significant advertising revenue generator
than its eLotteryFreeWay.com site because advertisers are willing to
pay higher rates for targeted emails compared to Internet banner
advertising. eLottonets registered active subscriber base
contained over 1,300,000 names at the end of January 2001.

In addition to web-based lottery ticket sales, eLottery is
targeting Internet advertising and marketing dollars from
governmental lotteries. Lotteries worldwide spend billions of
dollars annually on promotions with almost none of that being spent
on the Internet and through the use of eLotterys IMARCS system, the
Company expects to capture a portion of that market. The IMARCS
system also allows eLottery to begin building relationships with the
U.S. State lotteries and potential lottery ticket purchasers.
eLottery currently has IMARCS agreements with the state lotteries of
Idaho, Maryland and Indiana, pursuant to which it is paid
transaction-based fees for e-mail services.

As part of their strategic alliance, eLottery and MDI have
formed a joint venture to develop second chance and third chance
Internet promotions and web sites to allow lottery players to submit
non-winning scratch tickets for additional chances to win, without
requiring players to send them through the mail. Second and third
chance sites have been launched in Kentucky, New Jersey and Indiana.
See eLottery Products.

eLottery also generates revenues through advertising and
e-commerce transactions on its lottery portal, eLotteryFreeWay.com,
a website designed to attract, aggregate, entertain, register,
retain and derive revenue from an Internet-based community that the
Company believes will be highly predisposed to playing and
purchasing lottery tickets on the Internet. eLotteryFreeWay offers
customers the opportunity to play a variety of games for free and
win cash or discounts on

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merchandise. There are significant
potential benefits between eLotteryFreeWay and the Companys goal
of selling lottery tickets over the Internet.
eLotteryFreeWay is a means through which eLottery is building a
player base with a high propensity to buy lottery tickets on-net.

Through eLottoNet, the IMARCS system, second and third chance
promotions, and eLotteryFreeWay, eLottery is generating revenues
while building a database of customers that are Internet users and
play the lottery, the exact demographic eLottery will be targeting
for the web-based sale of lottery tickets. At the same time,
eLottery is beginning to build a brand name among consumers as well
as within the lottery industry.

eLottery Products

Lottery Retailing Systems

eLottery has developed proprietary lottery technologies
designed to take advantage of the impact that eLottery believes
recent advances in telecommunications and computers will have on the
nature and delivery of lottery products and the support systems
necessary to administer them. eLottery believes it is the first to
develop and operate secure, integrated Internet, Intranet and
telephone lottery gaming systems. Its Internet and Intranet systems
provide for the electronic sale and support of both periodic and
instant draw lottery games and instant electronic scratch-off
games. eLottery believes that its systems provide lotteries with
numerous advantages relative to traditional means of distribution,
including player tracking ability and access to new and more
demographically attractive market segments through sale of tickets
over the Internet and entertaining fast-play instant games.
eLottery also provides border control technology and the ability to
control underage play and problem gambling. A web site retailer
will have the ability to remain open 24 hours a day, seven days a
week, without incurring additional overhead costs and will be able
to electronically distribute lottery tickets and games and offer
lottery players convenient and timely product fulfillment. eLottery
management believes that the combination of the advantages of
Internet commerce and distribution with eLotterys ability to
customize its systems will result in eLottery becoming a leading
provider of products and services for the lottery industry.

eLottery has developed its systems to provide secure electronic
production, delivery, validation, billing and accounting for lottery
games. The systems are configurable, which allows the addition,
deletion and substitution of games offered. Tickets may be
purchased through the lottery operations center using a personal
computer connected via the Internet, via custom-designed electronic
lottery terminals connected over a LAN or over the telephone.

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Both the Internet and Intranet systems contain significant
features and procedures to prevent abusive play. eLottery believes
that its systems contain processes and procedures to protect against
play by minors and to control problem gaming at least equal to that
provided by existing state-run lottery systems.

The Companys electronic lottery distribution system may
comprise the following elements that can be used together or on a
stand-alone basis depending upon the specific application:



| |  | Basic Operation. A customer registers, opens an account,
and receives a user identification number and password.
Registration can be through the Internet, by telephone or in
person at a lottery retail store. The customer deposits funds
into the account by debit card, cash or check. Once the
account is funded, the customer may use the available balance
to purchase tickets to play the games or other merchandise.
Any prizes are credited to the account. Customer withdrawals
may be requested through the Internet, by telephone or in
person at a lottery retail store.                                                                                                                                                                                                                                                                                                                                                                                                                                
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Card Access. The system could also be accessed using
player cards. Player cards add several dimensions to the
system, particularly from a regulatory point of view. Because
these cards would be issued at controlled facilities, access to
the system could be equally controlled, enforcing, for example,
age requirements, residency requirements, use of cash rather
than credit cards, and amount of play. In addition, these
lottery cards could be sold through the lotteries existing
agent distribution channel. Several types of cards could be
made available, including bearer cards (having a unique
identity representing an account on the system and consisting
of an ID and Password embedded in the card), bonus cards (used
as promotional cards to encourage people to begin playing but
not exchangeable for cash), club cards (entitling members to
monthly promotions or other communications about the lottery
games and allowing the play activity to be tracked) and prepaid
lottery cards.
| 
| |  | Client Server Architecture. The eLottery system is
designed so that players can access the system using several
different devices connected to the centralized server. For
example, players can use personal computers connected over the
Internet, custom-designed electronic lottery terminals
connected via a LAN or over the Internet, or a voice response
unit connected by telephone. Administrative terminals can be
connected via the Internet, thus allowing the operation and
administration of the eLottery system to be conducted from
remote locations.                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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| |  | Centralized Accounting Server.A centralized accounting
server keeps track of all of the transactions on the system.
This server accounts for and controls transactions with
customers including registration, deposits, withdrawals,
purchases of tickets or other merchandise and
the awarding of prizes. The centralized accounting server
produces a myriad of reports to monitor both the players
activities as well as the performance of the games according to
their individual working papers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Lottery Server.The lottery server is a centralized
network of computers controlling the essential operations of
the games including the game play, issuance of the tickets or
generation of a random event, determination of a winner and the
awarding of the prize.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| 
| |  | Banking System.This system validates the credit card
information received from the customer with the national
Visanet network. The system is currently capable of processing
10,000 transactions per hour in about 10 seconds each and is
expandable to handle a larger volume of transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| 
| |  | Intranet System.The Intranet system is based on the
same architecture as the Internet system using private
connections instead of the Internet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| 
| |  | Lottery Stations.Lottery stations can be several
different devices. The lottery games can be played using
personal computers connected either via the Internet or direct
dial. Games can be played using custom-designed electronic
lottery terminals or the draw games can be played using a
telephone. Custom-designed electronic lottery terminals could
be built using standard off the shelf hardware components
consisting primarily of a touch screen monitor and a standard
Pentium processor networked to the central system.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| 
| |  | Cashier Terminals and Automatic Recharge Machines.The
eLottery system could utilize cashier stations and automated
terminals to accept player deposits and disburse winnings to
players. The player would present the card, which would be
swiped reading the card ID and password into the system. Funds
could be received from the player (either physically or through
an automated funds transfer). The central system then would
add the deposit to the balance of the account associated with
the card. To withdraw balances from the card, the player would
present the card to the cashier or automated machine, the
cashier or machine would swipe the card and the system would
display the new card balance. The cashier or machine would
disburse the requested cash to the player. The card reader of
the cashier terminal or automated machine could also identify
an authorized agents card. This access would permit the agent
to obtain information about the machine as well as perform the
empty function.

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Security.The integrity of a lottery is essential to its
successful operation. While operating the US Lottery, eLottery did
not encounter any breaches in security and is unaware of any
practical, economically feasible way to breach the security of its
instant lottery tickets that could result in a material loss to any
of its customers, nor is it aware of any security breach that has
resulted in any material loss to any of its current lottery
customers. eLottery constantly assesses the adequacy of its
security systems, incorporating various improvements, bar coding and
additional layers of protection.

Games.The architecture of both of eLotterys Internet and
Intranet systems allow the addition, deletion and substitution of
lottery games offered. The lottery games have been designed to fall
within generally accepted definitions of a lottery game. Lottery
games generally fall into two broad classifications: (i) instant
games or Scratchers in which the outcome is predetermined and
known instantly and (ii) draw games in which the outcome depends
upon a random event in the future. eLottery currently offers a 6/49
draw game, various Pick 3 instant games and a Keno game on its
eLotteryFreeWay site or for the Jamaica Lottery.

Jamaica Lottery. In October 1999, ELOT entered into a software
licensing and development agreement and a management agreement with
the Jamaica Lottery Corporation (JLC), the government-authorized
provider of Jamaican government lottery products, and
eCaribbean.com, Limited, a Jamaican company that has been designated
the exclusive internet retail agent of JLC. Under the agreement,
ELOT has provided, and licenses and maintains, proprietary internet
lottery software and systems to JLC for use in making sales of
authorized Jamaican government lottery products to eligible Jamaican
citizens and other persons in a manner and under circumstances
deemed by JLC to comply with applicable law. The agreement has an
initial term of ten years and provides for compensation to eLottery
of a percentage of the net lottery revenues from Internet sales,
after payment of the prize pool, required governmental and
charitable payments, internet service provider fees, and banking
fees not charged to customers accounts. eLottery delivered the
customized software and systems in August 2000 and JLC launched
Internet retail sales of Jamaica Lottery tickets in October 2000.
JLC has not yet begun active marketing of the Internet retail site
and revenues from JLC Internet sales have not been material.

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Lottery Promotion and Advertising Applications

The Company has identified a process that it believes will lead
to states permitting web-based lottery ticket retailing. The first
phase is a contract with a state to begin an Internet marketing
program to gather data on customers who both purchase lottery
tickets and are Internet users by establishing very important
players clubs on the Internet and communicating with and marketing
lottery products to the registered players through targeted e-mails.
This effort can be accelerated and assisted by the use of second
chance and third chance promotions on the Internet that bring
lottery players to the lotterys website, increase VIP club
registrations, and demonstrate the value of Internet marketing to
lottery and state government officials. The next step is to
increase the sales of paper tickets through promotions on the
Internet. Ultimately when approval from the relevant authorities is
received the Company can begin selling subscriptions for lottery
tickets, and eventually individual lottery tickets, on the Internet.

VIP Clubs and IMARCS

eLotterys IMARCS (Internet Marketing, Analysis, Research and
Communications System) database marketing solution for governmental
lotteries is an Internet tool that will allow lotteries to maximize
sales and marketing efforts by communicating one-to-one with their
current players and will assist in attracting new players. IMARCS
leverages the power of the Internet to deliver one-to-one marketing
messages that maximize sales revenue. In addition to assisting
clients capture Internet data, IMARCS campaigns can be an efficient
and very cost effective way for lotteries to achieve their sales and
marketing goals. IMARCS is an Opt-in/Opt-out database that allows
the lotteries to create campaigns that address: birthday clubs,
winner awareness, winning number notifications, jackpot reminders,
community events, game suggestions, co-promotional events, and many
additional VIP member benefits. IMARCS also provides the
functionality to communicate through traditional direct mail as well
as e-mail. The IMARCS program also offers lotteries the capability
to capture Internet based advertising revenue from their current web
sites. Official lottery web sites receive millions of hits per
month, yet yield no advertising revenue because many are unable to
accept revenue that falls outside of lottery ticket sales. The
program can capture, collect and bill third party advertising
revenue as a web based advertising agent. The new revenue can then
be exchanged for IMARCS Internet marketing campaigns and
subscription services  generating an Internet ad revenue stream
that funds Internet direct marketing campaigns to increase ticket
sales. This optional IMARCS

12



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feature offers lotteries full discretionary authority to
control who would be allowed to advertise on their web site.

Second and Third Chance Sites

On November 2, 2000, ELOT announced a strategic alliance
agreement with MDI Entertainment, Inc. MDI specializes in creating,
marketing and implementing entertainment-based promotions on behalf
of the North American lottery industry. MDIs principal business
has been the scratch ticket segment of the government lottery
industry, for which it licenses well-known brand names and
entertainment properties. Some of MDIs properties include
Harley-Davidson®, Wheel of Fortune®,
Jeopardy!®, and Elvis Presley®. ELOT
intends to capitalize on these strengths with MDI and bring them to
the Internet. As part of the strategic alliance, eLottery and MDI
have formed a joint venture to develop web sites to allow lottery
players to submit non-winning scratch tickets for additional chances
to win, without requiring players to send them through the mail.
These web sites will register and aggregate millions of players,
subject to the lotterys and players permission. These sites are
expected to significantly increase eLotterys and the lotteries
database of lottery players who are Internet users.

Since executing the strategic alliance with MDI, the Company
has worked with MDI to launch second and third chance promotions in
the States of New Jersey, Kentucky and Indiana (Hoosier Lottery).
These states have launched a series of second and third chance
Internet promotions tied directly to two of MDIs exclusive lottery
licensed brands, Elvis Presley® and SPAM®
and using eLotterys technology. In addition, the Hoosier Lottery
utilizes eLOTs IMARCS technology for its Very Important Players
(VIP) Club. These Internet initiatives are being promoted in a
variety of ways. E-mails will be sent to Kentucky residents in
eLOTs proprietary database and there will be ads in Kentucky
newspapers. That proprietary database will also be used in New
Jersey and Indiana. In addition, in New Jersey, information about
the Internet opportunity will be contained in more than 750,000
brochures to be distributed to players by the Lotterys 6,500
retailers. In Indiana, special e-mails will be sent to the nearly
10,000 registrants in its VIP Club. The ability to enter the second
chance drawing electronically will also be spelled out on the back
of the Hoosier SPAM® ticket.

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Lottery E-Mail Notification (LENS)

On June 13, 2000, the Company announced a long-term strategic
partnership agreement with PlasmaNet, Inc., a leading online
database marketing company providing targeted advertising and
marketing services and operator of the FreeLotto.com website. As a
part of the agreement with PlasmaNet, Plasmanet agreed to place
eLottery links on the FreeLotto.com home page, to seamlessly connect
to the eLottoNet.com site and eLotteryFreeWay.com. In addition,
eLottery has the exclusive right to market products and services
related to the pay-to-play lottery business to FreeLotto.coms user
base.

The eLottonet.com web site was redesigned and relaunched in
late 2000. Through registration at the eLottonet site, lottery
players can receive free e-mails notifying them of selected state
lottery results. eLottery derives revenue from advertising placed
on those e-mails. eLottery expects eLottoNet.com to be a more
significant advertising revenue generator than its
eLotteryFreeWay.com site because advertisers are willing to pay
higher rates for targeted emails compared to Internet banner
advertising. eLottonets registered active subscriber base
contained over 1,300,000 names at the end of January 2001.

eLotteryFreeWay Website

A reward-entertainment lottery portal, eLotteryFreeWay.com
offers lottery and entertainment games (for no consideration) with
registered players earning ePoints that are redeemable for cash
and merchandise. eLotteryFreeWays mission is to build an Internet
community whose members are expected to be highly predisposed to
purchase governmental lottery tickets over the Internet. Since the
site launch in November 1999, the Company has attempted to build its
customer base of registered users and to maintain a high level of
customer play on the site, which translates into impressions that in
turn can generate advertising revenue.

Lottery Distribution and Strategic Partnership Agreements

In June 2000, the Company entered into asset purchase and
strategic alliance agreements with PlasmaNet, Inc. Under the terms
of the asset purchase agreement in connection with the purchase of
LottoNet.com (now named eLottoNet.com), ELOT issued 100,000 shares
of common stock to PlasmaNet. Under the terms of the strategic
partnership agreement, ELOT issued an additional 1,500,000 shares of
its common stock as a prepayment for the first 500,000 of
PlasmaNets FreeLotto.com site unique users to opt into the
eLottonet.com lottery notification site. As consideration for any
FreeLotto unique users over 500,000, ELOT will be required to

14



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issue
up to 5,400,000 additional shares of its common stock for 4,500,000
additional unique
users. ELOT is required to pay consideration for up to 375,000
additional unique users supplied by PlasmaNet per quarter in excess
of the previous highest number of users previously paid for. As
payment for these users, ELOT has the option to pay:

(i) cash consideration in the amount of $3.00 per unique user;

(ii) a number of shares of ELOT common stock equal to the
product of $3.00 and the number of unique users divided by the
average stock price as quoted on the NASDAQ National Market for the
prior 30 trading days; or

(iii) if ELOT stock is trading for less than $2.50 per share,
cash consideration in an amount equal to the net advertising
revenues attributable to the unique users and the remainder in the
form of a note in the principal amount equal to the product of $3.00
and the number of unique users (excluding any unique users covered
by the net advertising revenue cash consideration). This note
matures three years from the date of issuance; however, ELOT must
redeem the note on the fifth business day following any day that the
ELOT average stock price over the prior 30 trading days is equal to
or greater than $2.50. The redemption price for this note is
payable in shares of common stock equal to the principal amount of
the note divided by this average stock price.

On November 2, 2000, ELOT entered into a strategic alliance
agreement with MDI Entertainment, Inc. MDI specializes in creating,
marketing and implementing entertainment-based promotions on behalf
of the North American lottery industry, principally in the scratch
ticket segment. As part of the strategic alliance, eLottery and MDI
have formed a joint venture to develop web sites to allow lottery
players to submit non-winning scratch tickets for additional chances
to win, without requiring players to send them through the mail.
These sites are expected to significantly increase eLotterys and
the lotteries database of lottery players who are Internet users.

Additionally, the strategic alliance calls for MDIs sales and
marketing team to market eLotterys products and services, including
IMARCS Internet marketing technology, lottery results email
notification service (LENS), email subscription services and lottery
ticket web retailing, to MDIs clients, which include 34 U.S. state
lotteries and three Canadian lotteries. Under terms of the
agreement, ELOT issued 1 million of its common shares in exchange
for 444 shares of preferred stock in MDI convertible to 444,444
shares of MDI common stock, and acquired a warrant to purchase an
additional 555,556 common shares of MDI at $3.50 per share.

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On October 25, 1999, eLottery entered into a software licensing
and development agreement and a management agreement with the
Jamaica Lottery Corporation, the government-authorized provider of
Jamaican government lottery products, and eCaribbean.com, Limited, a
Jamaican company that has been designated the exclusive Internet
retail agent of the Jamaican Lottery Corporation. Under the
agreement, eLottery agreed to customize, license and maintain its
proprietary Internet lottery software and systems for use in making
sales of authorized Jamaican government lottery products to eligible
Jamaican citizens and other persons in a manner and under
circumstances reasonably believed to comply with applicable law.
The agreement has an initial term of ten years and provides for
compensation to eLottery of a percentage of the net lottery revenues
from sales by eCaribbean.com, Limited, after payment of the prize
pool, required governmental and charitable payments, Internet
service provider fees, and banking fees not charged to customers
accounts. The Jamaica Lottery Corporation and eLottery launched
Internet retail sales of Jamaica Lottery tickets in October 2000.

eLottery entered into a Strategic Partnership Agreement, dated
May 11, 1999, with Autotote Lottery Corporation. Autotote is a
primary supplier of on-line systems to track the distribution and
validate the sales of lottery products. Autotote has contracts to
provide on-line services and equipment that track retail sales of
lottery products for the States of Connecticut and Montana and the
countries of Italy, the Dominican Republic and Barbados. eLottery
and Autotote agreed to jointly develop a secure interface between
their respective systems in order to allow tickets sold through
eLotterys systems to be validated through the Autotote system and
to jointly market the eLottery web retail concept to each
jurisdiction with which Autotote has entered into a contract, as
well as other jurisdictions to which the parties may mutually agree.
In the event that eLottery, with the assistance of Autotote, enters
into a contract with any web retailer, Autotote will be entitled to
an interface fee to be negotiated at the time of the execution of
the contract. In addition, eLottery must license to Autotote, or to
the jurisdiction as appropriate, its independent system to support
the conduct of instant lottery games to be sold via e-commerce. The
system would be licensed without a fee if eLottery is the web
retailer or for a fee to be negotiated if it is not the web
retailer. eLottery granted Autotote an exclusive license for its
system in the jurisdictions with which Autotote has entered into
contracts as well as certain additional states.

eLottery also entered into a Joint Venture Agreement, dated
July 13, 1999, with International Lottery & Totalizator Systems,
Inc. (ILTS). ILTS provides computerized wagering systems equipment
and services to lottery and racing organizations in 18 countries
worldwide.

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eLottery and ILTS agreed to jointly market Internet lottery
capabilities to ILTS international lottery and pari-mutuel
customers. The agreement provides for development of an interface
that will allow ILTS lottery systems to process eLotterys
web-based retailing of lottery tickets.

Product Development

eLotterys product development efforts are devoted to continual
improvement in all aspects of its lottery systems. Software
developers operating under proprietary development contracts
leverage eLotterys ability to produce games, create database
accounting and banking systems, enhance and customize system
features and provide state-of-the-art Internet design and
engineering capability. eLottery believes this an efficient low
cost method to gain access to the best and latest technologies. The
system architecture is designed to permit several developers to work
independently on various modules of the system. These games can be
modified to separate key elements to run in a secure client server
environment and operate efficiently on eLotterys electronic lottery
distribution systems. This ability to modify the lottery games
allows eLottery to work with all game publishers and modify their
games to operate on the system and significantly add to eLotterys
game portfolio.

eLottery Sales and Marketing

eLottery is marketing (i) directly to state agencies and other
licensed entities, both through its sales employees and independent
consultants, and (ii) through strategic alliances with other
providers of games and gaming technology. The ultimate success of
eLotterys lottery platform depends on its acceptance by lottery
operators and lottery patrons. eLottery believes that, from the
point of view of lottery operators, the attractiveness of its
electronic lottery distribution systems depends on its ability to
increase lottery sales, its ease of upgrade, maintenance and game
change and its information management. eLottery believes that, from
the lottery patrons perspective, the attractiveness of a platform
is a function of entertainment value. eLotterys sales and
marketing strategy is to generate product sales by highlighting the
advantages presented by its electronic lottery distribution systems
to lottery operators, such as the potential for increased lottery
ticket sales, and by positioning itself as a partner with lottery
operators. eLotterys marketing strategy also targets lottery
players and will focus on developing brand recognition for the
eLotteryFreeWay.com and eLottoNet.com web sites as well as
aggregating a player base that is believed to be predisposed to
purchase lottery tickets on the Internet..

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eLottery is working to develop close relationships with lottery
operators, utilizing its marketing representatives as consultants to
lottery operators on methods to increase lottery ticket
sales through the use of eLotterys products. eLotterys
electronic lottery distribution systems have been designed to
supplement the sales and marketing efforts of the operating
lotteries enhancing their ability to attract new players and
increase the revenue from their customer base. Detailed play
information can be accumulated in the system including lottery games
played, duration of play, time of play, purchase and prize data and
a host of other data elements. When matched with other demographic
data, this information could be valuable in designing promotional
offers and advertising campaigns. Specialized e-mail features
provide the capability to deliver promotional programs to specific
accounts based upon the results of a contest, completion of a
survey, winning a game of chance or other similar event.

Patents, Trademarks, and Copyrights

Management believes that the success of eLottery will be
affected by its ability to design, develop and market new products
and new or enhanced applications. The patentability of such new
products or applications is evaluated and patent applications are
filed where necessary to protect unique developments. eLottery
currently has six U.S. patent applications pending.

eLottery has registered or applied to register its trademarks
when it believes registration to be important to its ongoing
business operations. In addition, eLottery has registered and owns
numerous Internet domain names that it is using or may use in the
future in its business. eLottery also generally claims copyright
protection for its software used in connection with its products and
relies upon trade secret, contract and copyright laws to protect its
proprietary rights in its software, designs and documentation.

Certain of the eLottery products incorporate technology and
software licensed by eLottery from independent third parties.
Generally, these licenses have required payment of a license fee for
the licensed technology.

Competition

The lottery business is highly competitive, and eLottery faces
competition from a number of domestic and foreign instant ticket
manufacturers, on-line lottery system providers and other
competitors.

In particular, there are currently three primary lottery
services competitors in the United States: GTECH Corporation
(GTECH), Automated Wagering International, Inc. (AWI), a
subsidiary of Powerhouse Technologies, Inc. (Powerhouse), and
Scientific Games Holdings

18



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Corp. (Sci-Games). eLottery believes that these companies engage in
vigorous competition with respect to existing lottery technologies and
services and have experienced a decline in the
rate of growth of existing lottery operations. These companies
may be developing Internet retail capabilities and value added
lottery systems and services for the domestic and international
markets in order to provide new growth opportunities for established
state lotteries and higher margin returns for the providers of
related technologies and services.

Internationally, there are many lottery services and product
suppliers that provide competition to eLottery, in addition to the
companies listed above. eLottery anticipates that a considerable
length of time will be needed to develop an independent market
presence in foreign countries other than Canada and Mexico, and
there will be substantially higher costs in pursuing these markets.
Therefore, eLottery anticipates that the marketing of its products
and services internationally will be conducted primarily through
joint ventures with existing providers of lottery services or
independent consultants. No assurance can be given that eLottery
will develop such relationships to the point of having a significant
impact on its financial results or operations in the near future.

Both in the domestic market and internationally, factors that
influence the award of lottery contracts in addition to price are
believed to include, among others, the ability to optimize lottery
revenues through game design and technical capability, quality of
the product, dependability, production capacity, marketing
experience, financial condition and reputation of the bidder, the
security and integrity of the bidders production operations,
products and services and the satisfaction of various other
requirements and qualifications imposed by specific jurisdictions.

Competitors have typically either manufactured only instant
tickets or provided only certain on-line services to support
conventional sales of paper lottery tickets, including software for
the management systems, marketing assistance and various other
specific duties. However, certain competitors have announced plans
to market Internet-based lottery systems and certain jurisdictions
have already undertaken Internet lottery ticket sales.

eLottery is a relatively recent arrival among the developers of
traditional technology and marketing concepts for lottery operators.
In addition, eLotterys limited experience in the industry is
expected to negatively impact eLotterys competitive position.
However, in the delivery of market tested, secure, integrated
telephone, Internet and Intranet technologies that support new forms
of lottery participation and methods of administration, eLottery
believes that

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its experience level is superior. eLottery believes
that other lottery services and product suppliers have for several
years made capital investments intended to position themselves to
participate in this market niche. However, none has yet
demonstrated the unique focus or devoted the
extensive time and resources necessary to successfully develop,
customize and install an operational integrated telephone and
Internet lottery system similar to that provided by and operated by
eLottery for the U.S. Lottery. In addition, to some extent, the
technological developments inherent in eLotterys electronic lottery
distribution systems have the potential to materially reduce the
capital investment required to finance secure lottery operations,
which could affect the perception that the experience and resources
of competing traditional lottery companies are as valuable as they
have been in the past. eLottery believes that prior lottery
experience has been a factor in states prior decisions in
connection with the award of lottery contracts. Thus, eLottery
believes its prior Internet lottery experience will be a factor that
limits the ability of eLotterys competitors to compete with
eLottery in the development of this market niche.

Government Regulation and Legislation

Lotteries are not permitted in various states or jurisdictions
of the United States unless expressly authorized by law. The
ongoing operations of authorized lotteries in the United States
typically are extensively regulated. Applicable legislation varies
from jurisdiction to jurisdiction but, in addition to authorizing
the lottery and creating the applicable regulatory authority, the
lottery statutes generally dictate certain broad parameters of
lottery operation, including the percentage of lottery revenues that
must be paid out in prizes. Lottery authorities typically exercise
significant control as to the selection of vendors and award of
lottery contracts, ticket prices, types of games played and
marketing strategy, all of which could affect eLotterys operating
results.

Prior to and after granting a lottery contract, governmental
authorities generally conduct an investigation of the company and
its employees pursuant to which such authorities may require removal
of an employee deemed to be unsuitable. Certain states also require
extensive personal and financial disclosure (including, among other
things, submission of fingerprints, personal financial statements
and federal and state income tax returns) and background checks of
control persons and entities beneficially owning a specified
percentage (typically 5% or more) of the companys securities. The
failure of such beneficial owners to submit to such background

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checks and provide such disclosure could jeopardize the award of a
lottery contract to eLottery or provide the basis for cancellation
of any existing lottery contract.

The award of lottery contracts and ongoing operations of
lotteries in international jurisdictions also are extensively
regulated, although this regulation usually varies from that
prevailing in the United States. Restrictions are frequently
imposed on foreign corporations seeking to do business in such
jurisdictions. Laws and regulations applicable to lotteries in the
United States and foreign jurisdictions are subject to change and
the effect of such changes on eLotterys ongoing and potential
operations cannot be predicted with certainty.

It is the Companys understanding that several federal and
state prosecutorial agencies in the United States have taken the
position that the provision of Internet gaming services to residents
of the United States is subject to existing federal and state laws
which generally prohibit the provision of gaming opportunities,
except where licensed or subject to exemption. On the other hand,
it is the Companys understanding that many providers of Internet
gaming services to citizens and residents of the United States have
taken the position that existing federal and state laws pertaining
to the provision of gaming opportunities do not apply to Internet
gaming services. Legislation has been introduced to the United
States Senate and House of Representatives in the last two sessions
of Congress which, if enacted, would have effectively amended the
Federal Wire Statute, codified at 18 U.S.C. Section 1084, to
prohibit the provision of Internet gaming operations to residents of
the United States with certain exceptions. It is the Companys
policy to comply with federal and state laws in the United States
pertaining to gaming and at the present time and, in the absence of
a contract to do so with a state authorized lottery, not to offer
its Internet gaming services to residents of the United States.

In the last session of Congress, there were two bills pending
that could have affected internet lotteries: Senate bill S. 692 ES,
also known as the Kyl Bill, and H.R. 3125, also known as the
Goodlatte/McCollum Bill. If either bill had passed in its proposed
form, it would have limited the purchase of lottery tickets via an
electronic network to terminals in places open to the general
public, and would have prohibited the purchase of lottery tickets
from a home computer. This prohibition could have had a material
adverse effect on ELOTs ability to carry out its current business
plan. In their proposed forms, neither bill, if passed, would have
otherwise materially limited the sale of state lottery tickets
offered exclusively to state residents, as envisioned by ELOTs
business plan. It is uncertain whether the Kyl Bill, the
Goodlatte/McCollum Bill or any bill dealing with Internet lotteries
will be considered or passed

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by either house of Congress and signed
into law in future sessions of Congress. The only legislation
introduced in Congress to date in 2001 is Leach Bill in the House,
which defines illegal Internet gaming as illegal Internet gaming
activity as defined by the individual states, leaving the States to
define what is legal Internet gaming within their borders. If
legislation
restricting its ability to carry out the business plan is
enacted into law, it could have a material adverse effect on the
operations of eLOT.

Employees

As of March 1, 2001, ELOT employed 28 persons, including
general and administrative management and operational employees,
none of whom are represented by unions. eLottery conducts its
product development activities primarily through the use of
independent software development contracts to improve its access to
software development talent and keep its fixed overhead to a
minimum..

ITEM 2. PROPERTIES

eLOTs principal offices are located in leased facilities in
Norwalk, Connecticut and New York, New York. Total square footage is
approximately 12,000 square feet. The current annual net rent for
the Companys leased and subleased facilities as of December 31,
2000 was approximately $450,000. The Company believes its
facilities are adequate and generally suitable for its business
requirements at the present time and for the immediate future.

ITEM 3. LEGAL PROCEEDINGS

The Company currently is a named defendant in several lawsuits
that have arisen in the normal course of its business. Those
lawsuits and proceedings relate primarily distribution arrangements
and products sold by discontinued operations of the Company. In the
opinion of the Company, these proceedings are not expected to have a
material adverse effect on the consolidated financial position,
results of operations or liquidity of the Company and, to the extent
they are not covered by insurance, reserves adequate to satisfy such
liabilities have been established.

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

The Registrants Annual Meeting of Shareholders was held on
January 25, 2001.

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Proxies were solicited by the Registrants management pursuant
to Regulation 14 under the Securities Act of 1934. The only proposal was the election of the Board of Directors; there was no
solicitation in opposition to managements nominees listed in the
Proxy Statement dated December 13, 2000, and all such nominees were
elected pursuant to the vote of the shareholders.

The total number of shares of the Companys Common Stock, $.01
par value, outstanding as of December 8, 2000, the record date for
the Annual Meeting, was 66,696,043, and 63,210,719 shares were
represented in person or by proxy at the Annual Meeting.

The votes cast for and against each nominee for director are as follows:



|Stanley J. Kabala    | For: 56,028,342 votes    
|-------------------- | -------------------------
|                     | Withheld: 7,182,377 votes
|                     |                          
|Edwin J. McGuinn     | For: 61,676,830 votes    
|                     | Withheld: 1,533,889 votes
|                     |                          
|Richard J. Fernandes | For: 61,623,896 votes    
|                     | Withheld: 1,586,823 votes
|                     |                          
|Philip Gunn          | For: 56,704,142 votes    
|                     | Withheld: 6,506,577 votes
|                     |                          
|John P. Hectus       | For: 61,324,190 votes    
|                     | Withheld: 1,886,529      
|                     |                          
|Jerry M. Seslowe     | For: 60,356,566 votes    
|                     | Withheld: 2,854,163 votes
|                     |                          

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PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The number of holders of record of the Companys Common Stock
as of the close of business on January 31, 2001 was approximately
1,600. The Common Stock is traded on the NASDAQ National Market
System under the symbol ELOT. As reported by NASDAQ on March 1,
2001, the closing sale price of the Common Stock on the NASDAQ
National Market System was $.3438 per share. The following table
reflects in dollars the high and low closing sale prices for ELOTs
Common Stock as reported by the NASDAQ National Market System for
the periods indicated:

|     |  |                |  |  |  |      |        |     |  |   |       | 
|---- |  | -------------- |  |  |  | ---- | ------ | --- |  | - | ----- | 
|     |  | Fiscal Period  |  |  |  | High |        | Low
|     |  |                |  |  |  |      |        |    
|2000
|    
|    
|    
|    
|     |  | First Quarter  |  |  |  | $    | 10.125 |     |  | $ | 5.031 | 
|    
|    
|    
|    
|     |  | Second Quarter |  |  |  |      | 5.375  |     |  |   | 1.875 | 
|    
|    
|    
|    
|     |  | Third Quarter  |  |  |  |      | 2.469  |     |  |   | 1.250 | 
|    
|    
|    
|    
|     |  | Fourth Quarter |  |  |  |      | 1.531  |     |  |   | 0.375 | 
|    
|    
|    
|    
|1999
|    
|    
|    
|    
|     |  | First Quarter  |  |  |  | $    | 4.125  |     |  | $ | 1.531 | 
|    
|    
|    
|    
|     |  | Second Quarter |  |  |  |      | 12.000 |     |  |   | 3.000 | 
|    
|    
|    
|    
|     |  | Third Quarter  |  |  |  |      | 5.469  |     |  |   | 2.938 | 
|    
|    
|    
|    
|     |  | Fourth Quarter |  |  |  |      | 6.875  |     |  |   | 2.188 | 

On December 26, 2000, the NASDAQ Stock Market issued a letter
to the Company stating that the Company is out of compliance with
the requirements for continued listing on the National Market System
or the Small Cap Market of NASDAQ because the common stock had
closed below $1.00 per share for 30 consecutive trading days as of
December 21, 2000. The Company had 90 days, or until March 26,
2001, to come back into compliance by having a closing price of
$1.00 or more for more than ten consecutive trading days. Since at
the end of 90 days the stock price was still not in compliance, the
Company will request a hearing as to whether the common stock should
be permitted to continue to trade on the National Market System or
the Small Cap Market. After the hearing, which usually is scheduled
four to six weeks after the request, NASDAQ will decide if the
Company can continue trading on the National Market or the Small Cap
Market of NASDAQ or trade only in the over-the-counter (OTC) market.
If the common stock is delisted from National Market trading, it
could have a material adverse effect on the price and the liquidity
of the common stock.

24



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It is the present policy of the Board of Directors to retain
earnings for use in the business and the Company has not paid any
dividends and does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future.

25



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ITEM 6. SELECTED FINANCIAL DATA

The following is selected financial data for eLOT for the five years ended
December 31, 2000.

(In thousands, except for per share amounts)

|                                                                     |                         |   |         |         |      |   |                          |       |      |   |         |       |   |   |        |       |   |   |         |       |  
|-------------------------------------------------------------------- | ----------------------- | - | ------- | ------- | ---- | - | ------------------------ | ----- | ---- | - | ------- | ----- | - | - | ------ | ----- | - | - | ------- | ----- | -
|                                                                     |                         |   |         |         |      |   | Years Ended December 31,
|                                                                     |                         |   |        
|                                                                     |                         |   | 2000    |         | 1999 |   | 1998                     |       | 1997 |   | 1996   
|                                                                     |                         |   |         |         |      |   |                          |       |      |   |        
|Net Revenues                                                         |                         | $ | 831     |         |      | $ | 831                      |       |      | $ |        |       |   | $ |       |       |   | $ |       
|                                                                     |                         |   |         |         |      |   |                          |       |      |   |         |       |   |   |        |       |   |   |         |      
|Loss Before
Income Taxes From
Continuing Operations                  |                         | $ | (15,016 | )       |      | $ | (12,022                  | )     |      | $ | (25,617 | )     |   | $ | (3,163 | )     |   | $ | (3,405  | )    
|                                                                     |                         |   |         |         |      |   |                          |       |      |   |         |       |   |   |        |       |   |   |         |      
|Loss From
Continuing Operations                                      |                         | $ | (15,016 | )       |      | $ | (12,022                  | )     |      | $ | (25,617 | )     |   | $ | (3,163 | )     |   | $ | (3,405  | )    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Income (Loss) From Discontinued
Operations, Net of Taxes (1)         |                         | $ | (6,034  | )       |      |   | (14,906                  | )     |      |   | (11,242 | )     |   |   | 2,942  |       |   |   | 27,567  |      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Extraordinary Item Loss on
Extinguishment of Debt,
Net of Taxes (2) |                         |   |        |         |      |   |                         |       |      |   |        |       |   |   |       |       |   |   | (355    | )    
|                                                                     |                         |   |         |         |      |   |                          |       |      |   |         |       |   |   |        |       |   |   |         |      
|Net Income (Loss)                                                    |                         | $ | (21,050 | )       |      | $ | (26,928                  | )     |      | $ | (36,859 | )     |   | $ | (221   | )     |   | $ | 23,807  |      
|                                                                     |                         |   |         |         |      |   |                          |       |      |   |         |       |   |   |        |       |   |   |         |      
|BASIC EARNINGS (LOSS) PER SHARE:                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Continuing Operations   |   | $       | (0.23   | )    |   | $                        | (0.21 | )    |   | $       | (0.51 | ) |   | $      | (0.06 | ) |   | $       | (0.06 | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Discontinued Operations |   |         | (  0.09 | )    |   |                          | (0.25 | )    |   |         | (0.23 | ) |   |        | 0.06  |   |   |         | 0.53  |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Extraordinary Item      |   |         |        |      |   |                          |      |      |   |         |      |   |   |        |      |   |   |         | (0.01 | )
|                                                                     |                         |   |         |         |      |   |                          |       |      |   |         |       |   |   |        |       |   |   |         |      
|                                                                     | Net Income (Loss)       |   | $       | (0.32   | )    |   | $                        | (0.46 | )    |   | $       | (0.74 | ) |   | $      |      |   |   | $       | 0.46  |  
|                                                                     |                         |   |         |         |      |   |                          |       |      |   |         |       |   |   |        |       |   |   |         |      
|DILUTED EARNINGS (LOSS) PER SHARE:                                  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Continuing Operations   |   | $       | (0.23   | )    |   | $                        | (0.21 | )    |   | $       | (0.51 | ) |   | $      | (0.06 | ) |   | $       | (0.07 | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Discontinued Operations |   |         | (0.09   | )    |   |                          | (0.25 | )    |   |         | (0.23 | ) |   |        | 0.06  |   |   |         | 0.53  |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Extraordinary Item      |   |         |        |      |   |                          |      |      |   |         |      |   |   |        |      |   |   |         | (0.01 | )
|                                                                     |                         |   |         |         |      |   |                          |       |      |   |         |       |   |   |        |       |   |   |         |      
|                                                                     | Net Income (Loss)       |   | $       | (0.32   | )    |   | $                        | (0.46 | )    |   | $       | (0.74 | ) |   | $      |      |   |   | $       | 0.45  |  
|                                                                     |                         |   |         |         |      |   |                          |       |      |   |         |       |   |   |        |       |   |   |         |      
|Total Assets                                                         |                         | $ | 27,603  |         |      | $ | 62,162                   |       |      | $ | 72,136  |       |   | $ | 98,728 |       |   | $ | 106,090 |      
|                                                                     |                         |   |         |         |      |   |                          |       |      |   |         |       |   |   |        |       |   |   |         |      
|Long-Term Debt                                                       |                         | $ | 14,243  |         |      | $ | 13,660                   |       |      | $ | 22,986  |       |   | $ | 13,821 |       |   | $ | 13,401  |      
|                                                                     |                         |   |         |         |      |   |                          |       |      |   |         |       |   |   |        |       |   |   |         |      
|Cash Dividends Declared
Per Share (3)                                |                         | $ |        |         |      | $ |                         |       |      | $ |        |       |   | $ |       |       |   | $ |        |      
|                                                                     |                         |   |         |         |      |   |                          |       |      |   |         |       |   |   |        |       |   |   |         |      



---

|(1) |  | Discontinued operations represent the results of the Computer
Telephony and Healthcare businesses, along with the Companys investment
in Dialogic Communications Corporation and certain related corporate
expenses as well as the gains and losses from the sales of discontinued
businesses.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | The 1996 extraordinary item relates to the write-off of deferred debt
issue costs associated with the Companys revolving credit facility
repaid in June 1996.                                                                                                                                 
|   
|   
|   
|   
|(3) |  | The Company has not declared or paid any cash dividends on its Common
Stock. Refer to Stock Data.                                                                                                                                                                                            

26



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

The following discussion and analysis explains trends in the
Companys financial condition as of December 31, 2000 and 1999 and
results of operations for each of the most recent three years in the
period ended December 31, 2000. It is intended to help shareholders
and other readers understand the dynamics of the Companys business
and the key factors underlying its financial results. This
discussion should be read in conjunction with the consolidated
financial statements and notes included elsewhere in this Form 10-K.
Management believes that certain statements in this discussion and
analysis constitute forward-looking statements within the meaning of
the U.S. Private Securities Litigation Reform Act of 1995. Such
statements are based on current expectations, estimates and
projections about the industries in which the Company operates,
managements beliefs and assumptions made by management. Such
forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results,
performance or achievements of the Company, or industry results, to
be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking
statements. Such risks, uncertainties and assumptions include,
among others, the following: general economic and business
conditions; demographic changes; rapid technology development and
changes; timing of product introductions; the mix of
products/services; industry capacity and other industry trends; and
the ability of the Company to attract and retain key employees.

OVERVIEW

eLOT, Inc., (formerly Executone Information Systems, Inc.), through
its subsidiary eLottery, Inc., is committed to leading the
governmental lottery industry into the e-commerce market. The
Company previously developed, installed and operated systems that
processed ten million e-commerce lottery ticket sales and
transactions. The Company has operated Internet, Intranet,
telephone, communications, accounting, banking, database and other
applications and services that can facilitate the electronic sale of
new and existing lottery products worldwide.

eLottery also operates a reward-entertainment lottery portal,
eLotteryFreeWay, which offers lottery and entertainment games (for no
consideration) with registered players earning e-points that are
redeemable for cash and merchandise. eLotteryFreeWays mission is to
build an Internet community whose members are expected to be highly
predisposed to purchase governmental lottery tickets over the
Internet.

27



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The Company has also developed supplemental e-commerce solutions for
governmental lotteries that leverage the power of the Internet.
eLottery is also an application service provider of Internet
marketing and advertising technology for lotteries. The Companys
IMARCS (Internet Marketing Analysis Research and Communications
System) database marketing solution enables government
lotteries to attract, register and communicate with lottery players
through advanced Internet technology. In addition, eLOTs
subsidiary, eLOTTONET, Inc., offers a free daily lottery email
notification service (LENS) of state lottery results and other
information and services via e-mail.

The Company also has entered into a strategic alliance agreement
with MDI Entertainment, Inc. MDI specializes in creating, marketing
and implementing entertainment-based promotions on behalf of the
North American lottery industry. As part of the strategic alliance,
eLottery, Inc., a subsidiary of eLOT, and MDI have formed a joint
venture to develop web sites to allow lottery players to submit
non-winning scratch tickets for additional chances to win.
Additionally, the strategic alliance calls for MDIs sales and
marketing team to market eLotterys products and services to MDIs
clients.

Discontinued Operations

In March 1999, eLOT announced its intention to divest its Computer
Telephony and Healthcare Communications divisions in order to focus
on the electronic lottery business conducted by eLottery. On
January 1, 2000, the Company sold the Computer Telephony business to
Inter-Tel for $42.8 million (after adjustment for certain indemnity
claims) in cash. On July 21, 2000, the Company completed the sale
of its Healthcare Communications division to Grinnell Corporation
for $5.0 million in cash. The Company is pursuing the sale of all
or part of its investment in DCC. The businesses and investment
have been reflected in the accompanying consolidated financial
statements and discussion and analysis as discontinued operations.

Financial Condition

The Company has incurred recurring losses from continuing operations
during the transformation to the Companys new business strategy.
The Company believes that it will continue to operate at a loss
until such time when its operations generate sufficient revenues to
cover its costs, which the Company does not currently anticipate
occurring until sometime in 2002. The report of independent public
accountants on the Companys consolidated financial statements for
the year ended December 31, 2000 contains an explanatory paragraph
stating that the consolidated financial statements have been
prepared assuming that the Company will continue as a going concern,
while noting that the Companys recurring losses raise substantial
doubt about the Companys ability to continue as a going concern.
The consolidated financial statements do not include any adjustments
that might result should the Company be unable to continue as a
going concern. Managements plans are addressed in Note C to the
consolidated financial statements and in the Liquidity and Capital
Resources section later in Item 7.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31,
1999

RESULTS OF OPERATIONS

REVENUES: During the fourth quarter of 1999, the Companys eLottery
subsidiary began generating advertising revenues through its lottery
portal web site at www.eLotteryFreeWay.com

28



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launched on November 9,
1999. During the third quarter of 2000, the Company also began
generating advertising revenues from its Lottery notification
services (LENS) and transaction based revenue from its VIP Club
programs with certain governmental lotteries. Net Revenues (after
sales agency commissions) for the two years ended December 31, 2000
and 1999 were $831,000 and $8,000, respectively.

PRIZES, CONTENT, ADVERTISING AND PROMOTION: Prizes, content,
advertising and promotions for the two years ended December 31, 2000
were $2,311,000 and $296,000, respectively. These expenses include
ePoints earned by registered players on the eLotteryFreeWay
entertainment site, cost of editorial content, advertising expenses
and special promotional programs designed to acquire new registered
players and reward the existing player base.

GENERAL & ADMINISTRATIVE: General & Administrative expenses were
$9.7 million for 2000, up from $4.6 million for the comparable
period in 1999. The increase in General & Administrative expenses
is attributable to the continued development of the eLottery
business plan including expanding the Companys eLotteryFreeWay
portal web site, costs incurred preparing for the launch of the
Companys Jamaica contract to sell Lottery tickets over the
Internet, implementation of the IMARCS software product in several
states, increased lobbying efforts related to proposed U.S.
government legislation regarding our business, and increased
personnel, legal and occupancy costs.

DEPRECIATION AND AMORTIZATION: Depreciation and amortization
expense for the year was approximately $2.5 million in 2000 and $1.1
million in 1999. This increase is due to the amortization of the
intangible asset recorded upon the acquisition of users from
FreeLotto for our Lottery Notification business and increased
depreciation resulting from capital expenditures for both our
Lottery and eLotteryFreeWay initiatives.

ASSET IMPAIRMENT: During both 2000 and 1999, the Company performed
reviews of the realization of certain computer software and hardware
costs and determined that certain assets were impaired, which has
resulted in such assets no longer being used in the Companys
operations. As a result, the Company recorded an asset impairment
charge of $128,000 in 2000 and $1.5 million in 1999.

NON-CASH COMPENSATION CHARGE: A non-cash compensation charge of $.7
million was recorded in 2000 for management compensation to be paid
in stock in lieu of cash. A similar charge was recorded during 1999
in the amount of $2.6 million related to the issuance of stock
options to certain key executives of eLottery who have been
instrumental in developing the current business model and are key to
the future success of the Company. The exercise price of these
options was below the market price at the date of grant.

INTEREST EXPENSE: Interest expense for 2000 was $1.6 million, a
decrease of $1.7 million from 1999. The decrease is due to lower
levels of bank borrowings in 2000 due to repayment of the credit
facility upon the sale of the Computer Telephony business in January
2000.

OTHER INCOME, NET: Other income, net, was $1.1 million in 2000 as
compared to $1.3 million in 1999. The 2000 income was primarily due
to interest income earned from the investment of corporate funds.
In 1999, the Company had a nonrecurring $1.2 million gain on the
receipt of payment from Claricom on a $5.9 million junior
subordinated note plus interest, along with the redemption of the
warrants held by the Company, both of which were part of the
consideration received in the 1996 sale of the direct sales
organization.

29



---



DISCONTINUED OPERATIONS: Revenues from discontinued operations for
the year ended December 31, 2000 were $17.5 million compared to
$128.6 million in 1999. The decrease in revenue is due entirely to
the sale of the Computer Telephony business in January 2000 and the
Healthcare business in July 2000. The loss from discontinued
operations for 2000 was $6.4 million versus $14.9 for 1999.

The Company recorded an after-tax gain for the year ended December
31, 2000 of $0.4 million related to the sale of discontinued
operations in 2000. This gain represents an after-tax gain of $14.9
million (net of a tax provision of $9.9 million) on the sale of the
Computer Telephony division, an $8.5 million loss related to the
sale of the Healthcare Communications division and a $6 million
valuation allowance against deferred tax assets that the Company
estimates will not be realizable when all of the discontinued
operations are sold.

OTHER MATTERS

The Company completed the review of its computer systems and the
implementation of new systems during 1999. As a result, the Company
did not experience any significant adverse impact of the Year 2000
problem internally or from any of its major suppliers or customers.

30



---



YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31,
1998

RESULTS OF OPERATIONS

REVENUES: During the fourth quarter, the Companys eLottery
subsidiary began generating advertising revenues through its lottery
portal web site at www.eLotteryFreeWay.com launched on November 9,
1999. Net Revenues (after sales agency commissions) were $8,000 for
the year ended December 31, 1999.

PRIZES, CONTENT, ADVERTISING AND PROMOTION: Prizes, content,
advertising and promotion for the two years ended December 31, 1999
were $296,000 and $0, respectively. These expenses include
ePoints earned by registered players on the eLotteryFreeWay
entertainment site, cost of editorial content, advertising expenses
and special promotional programs designed to acquire new registered
players and reward our existing player base.

GENERAL & ADMINISTRATIVE: General & Administrative expenses were
$4.6 million for the year, up from $1.9 million for 1998. In
addition to General & Administrative expenses for our eLottery
subsidiary, the results also include eLOT corporate expenses. The
increase in Selling, General & Administrative expenses is
attributable to the continued development of the eLottery business
plan including the launching of our eLotteryFreeWay portal web site.
All areas of Selling, General & Administrative expenses increased
including advertising and promotion, personnel costs, legal, and
occupancy costs.

DEPRECIATION AND AMORTIZATION: Depreciation and amortization
expense for the year was approximately $1.1 million in both 1999 and
1998.

ASSET IMPAIRMENT: In response to the legal decision issued December
17, 1998 in AT&T vs. Coeur dAlene Tribe, eLottery and the CDA
terminated operation of the NIL and the US Lottery telephone and
Internet operations managed by eLottery. As a result, the Company
reevaluated certain of its assets in accordance with the provisions
of SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets. Based upon this review, management determined that both
the intangibles and the advances to the NIL had become impaired as
of the date of this legal decision. As of December 17, 1998, net
intangibles and advances to NIL of $12.9 million and $11.2 million,
respectively, were written down to zero, which represented the
estimated fair value of the assets, as no future cash flows will be
generated by the NIL. The Company also recorded an additional
charge of $1.4 million for shutdown costs and the write-off of
certain deferred startup expenses related to the NIL. The total
NIL-related write-off included in the 1998 statement of operations
was $25.5 million.

In 1999, the Company performed an additional review of the
realization of certain computer software and hardware costs and
determined that certain additional assets were impaired due to
changes in technology, which has resulted in such assets no longer
being used in the Companys operations. As a result, the Company
recorded an additional charge of $1.5 million in 1999.

NON-CASH COMPENSATION CHARGE: A non-cash stock compensation charge
was recorded during 1999 in the amount of $2.6 million related to
the issuance of stock options to certain key executives of eLottery
who have been instrumental in developing the current business model
and are key to the future success of the Company. The exercise
price of these options was below the market price at the date of
grant.

31



---



INTEREST EXPENSE: Interest expense for 1999 was $3.3 million, an
increase of $0.9 million from 1998. The increase is due to higher
levels of bank borrowings in 1999.

OTHER INCOME, NET: Other income, net decreased primarily due to a
nonrecurring $1.2 million gain on the receipt of payment from
Claricom on a $5.9 million junior subordinated note plus interest,
along with the redemption of the warrants held by the Company, both
of which were part of the consideration received in the 1996 sale of
the direct sales organization. The Company recorded a nonrecurring
gain in 1998 on a negotiated settlement with a former supplier of
videoconferencing equipment totaling $5.3 million.

DISCONTINUED OPERATIONS: Revenues from discontinued operations were
$128.6 million in 1999 compared to $133.5 million in 1998. The
loss from discontinued operations was $14.9 million for 1999 versus
$11.2 million for 1998. Both revenues and the net losses for the
Computer Telephony and Healthcare businesses were negatively
impacted by the uncertainty in their respective markets associated
with the pending change in ownership of these business units.

The loss from discontinued operations includes an estimated loss on
disposal of $5.0 million related to the healthcare business. The
estimated loss included the write-off of goodwill of $3.6 million
and estimated costs of disposal of $1.4 million. After the
finalization of indemnity claims during 2000, the cash proceeds were
$42.8 million.

During 1998, the Company recorded $9.0 million in special charges
related to the discontinued businesses. These charges include $5.3
million relating to changes the Company made to restructure its
business, primarily involving separation costs related to changes in
senior management of these businesses and a provision for losses to
be incurred in subleasing a portion of the discontinued businesses
leased facilities.

Also included is a $3.7 million charge to settle claims made by
Lucent Technologies (Lucent), which holds the patent rights to
certain intellectual property allegedly used in the Computer
Telephony business.

LIQUIDITY AND CAPITAL RESOURCES

In 1998, the Company entered into a credit facility with Fleet
Capital Corporation. The credit facility provided a maximum overall
credit line of $30 million consisting of a revolving line of credit
for direct borrowings, along with standby and trade letters of
credit. The credit facility was secured by substantially all of the
Companys assets and had a five-year term. Upon the sale of the
Computer Telephony business on January 1, 2000, the outstanding
balance of $19.6 million under this credit facility was repaid and
the facility was terminated. After paying down this facility, the
Company had approximately $19 million in cash and cash equivalents,
$4.0 million of which was restricted in an escrow account associated
with the sale of the Computer Telephony business to Inter-Tel, Inc.
The Company and Inter-Tel reached a settlement agreement regarding
indemnity and other claims asserted by Inter-Tel and the Company
received approximately $2.5 million (plus interest) of the escrowed
proceeds during 2000.

At December 31, 2000, the Company had approximately $5.7 million of
cash and cash equivalents. The Company has incurred recurring
losses from continuing operations during the transition to the
Companys new business strategy. The Company believes that it will
continue to operate at a loss until such time when its operations
generate sufficient revenues to cover its

32



---



costs, which the Company
does not currently anticipate occurring until sometime in 2002.
Revenues from eLOT operations were affected by the decline in
Internet advertising pricing throughout 2000 and the Company has
noticed further deterioration in the first quarter of 2001. In
addition, revenues have been slow to materialize in the lottery
business due to governmental lotteries migrating more cautiously
than expected onto the Internet due to legislative, political and
social issues. The Company does not expect the cash resources as of
December 31, 2000 to be sufficient to fund its operations throughout
2001. As a result of the above factors, the report of independent
public accountants on the Companys consolidated financial
statements for the year ended December 31, 2000 contains an
explanatory paragraph stating that the consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern, while noting that the Companys
recurring losses raise substantial doubt about the Companys ability
to continue as a going concern.

To improve its financial situation, the Company has implemented or
intends to implement the following: 1) hired an investment banker
to sell a portion of the Companys investment in Dialogic
Communications Corporation (DCC) 2) made a significant reduction
in the Companys workforce; 3) reduced its planned capital
expenditures significantly; 4) dramatically reduced its planned
lobbying expenditures focused on defeating legislative efforts to
prevent the sale of lottery tickets over the Internet; 5)
implemented a 15% salary deferral program for senior management; 6)
reduced rewards and content costs related to the operation of the
Companys consumer web sites; and 7) reduced all other identifiable
expenses to the extent possible. The Company is also exploring
several strategic alternatives for financing its activities and
operations going forward.

Although there can be no assurances that the Company will be able to
raise additional cash through the sale of DCC or find alternate
financing, the Company believes that if it is successful in doing
so, the proceeds from one or both of these transactions plus the
current cash balances, increased revenue and the reduction of
expenses in 2001 will provide the Company with sufficient resources
to fund its operations through December 31, 2001.

CASH FLOW FROM OPERATING ACTIVITIES

Cash used by continuing operating activities was $15.0 million in
2000, versus $2.1 million in 1999. Cash used by discontinued
operating activities in 2000 was $8.3 million versus $15.1 million
in 1999.

Cash provided by investing activities was approximately $46.1
million in 2000, primarily due to the proceeds received from the
sale of the Computer Telephony business of $42.8 million, the sale
of the Healthcare business of $5.0 million and the repayment by
certain key management of the Executive Stock Incentive Plan
(ESIP) loans for $2.6 million, offset partially by the purchase of
property and equipment of $4.0 million. Cash provided by investing
activities totaled $6.5 million in 1999.

The Company used $18.1 million in cash from financing activities
during 2000. The primary use of cash was the repayment of the
outstanding balance under the credit facility and other long-term
debt of $20.1 million, offset partially by proceeds from the
exercise of stock options. During 1999, the Company generated $10.3
million from its financing activities, primarily by increased
borrowings of $11.0 million and proceeds from the exercise of stock
options of $0.8 million and used $1.3 million to repurchase 420,000
shares of the Companys common stock.

33



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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

The Company has not used derivative financial instruments during 2000. The
Company has various debt instruments. The primary debt instrument is
convertible subordinated debentures, which have a fixed interest rate. See
Note E in Notes to Financial Statements under Item 8 for further information.

34



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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

eLOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share amounts)

|                                  |                                                                            |                                            |         |                          |         |      |         |         |         |   |         |         |         |  
|--------------------------------- | -------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------------------------ | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                  |                                                                            |                                            |         | Years Ended December 31,
|                                  |                                                                            |                                            |         | 2000                     |         | 1999 |         | 1998   
|                                  |                                                                            |                                            |         |                          |         |      |         |        
|NET REVENUES                      |                                                                            | $                                          | 831     |                          |         | $    | 8       |         |         | $ |        |        
|                                  |                                                                            |                                            |         |                          |         |      |         |         |         |   |         |        
|COSTS AND EXPENSES:              
|                                 
|                                 
|                                 
|                                 
|                                  |                                                                            | Prizes, content, advertising and promotion |         |                          | 2,311   |      |         |         | 296     |   |         |         |        |  
|                                 
|                                 
|                                 
|                                 
|                                  |                                                                            | General and Administrative                 |         |                          | 9,701   |      |         |         | 4,621   |   |         |         | 1,946   |  
|                                 
|                                 
|                                 
|                                 
|                                  |                                                                            | Asset Impairment                           |         |                          | 128     |      |         |         | 1,461   |   |         |         | 25,486  |  
|                                 
|                                 
|                                 
|                                 
|                                  |                                                                            | Non Cash Compensation Charge               |         |                          | 650     |      |         |         | 2,625   |   |         |         |        |  
|                                 
|                                 
|                                 
|                                 
|                                  |                                                                            | Depreciation and Amortization              |         |                          | 2,524   |      |         |         | 1,085   |   |         |         | 1,116   |  
|                                  |                                                                            |                                            |         |                          |         |      |         |         |         |   |         |        
|                                  |                                                                            |                                            | 15,314  |                          |         |      | 10,088  |         |         |   | 28,548  |        
|                                  |                                                                            |                                            |         |                          |         |      |         |         |         |   |         |        
|OPERATING LOSS                    |                                                                            |                                            | (14,483 | )                        |         |      | (10,080 | )       |         |   | (28,548 | )      
|                                 
|                                 
|                                 
|                                 
|INTEREST EXPENSE                  |                                                                            |                                            | (1,627  | )                        |         |      | (3,279  | )       |         |   | (2,393  | )      
|                                 
|                                 
|                                 
|                                 
|OTHER INCOME, NET                 |                                                                            |                                            | 1,094   |                          |         |      | 1,337   |         |         |   | 5,324   |        
|                                  |                                                                            |                                            |         |                          |         |      |         |         |         |   |         |        
|LOSS FROM CONTINUING OPERATIONS  
|                                 
|                                 
|                                 
|                                 
|                                  |                                                                            | BEFORE INCOME TAXES                        |         |                          | (15,016 | )    |         |         | (12,022 | ) |         |         | (25,617 | )
|                                 
|                                 
|                                 
|                                 
|INCOME TAXES                      |                                                                            |                                            |        |                          |         |      |        |         |         |   |        |        
|                                  |                                                                            |                                            |         |                          |         |      |         |         |         |   |         |        
|LOSS FROM CONTINUING OPERATIONS   |                                                                            |                                            | (15,016 | )                        |         |      | (12,022 | )       |         |   | (25,617 | )      
|                                 
|                                 
|                                 
|                                 
|DISCONTINUED OPERATIONS:         
|                                 
|                                 
|                                 
|                                 
|                                  | Loss from discontinued operations                                          |                                            |         | (6,421                   | )       |      |         | (14,906 | )       |   |         | (11,242 | )      
|                                 
|                                 
|                                 
|                                 
|                                  | Gain on sale of discontinued operations, (net
of tax provision of $15,924) |                                            |         | 387                      |         |      |         |        |         |   |         |        |        
|                                  |                                                                            |                                            |         |                          |         |      |         |         |         |   |         |        
|NET LOSS                          |                                                                            | $                                          | (21,050 | )                        |         | $    | (26,928 | )       |         | $ | (36,859 | )      
|                                  |                                                                            |                                            |         |                          |         |      |         |         |         |   |         |        
|BASIC AND DILUTED LOSS PER SHARE:
|                                 
|                                 
|                                 
|                                 
|                                  | Loss from continuing operations                                            |                                            | $       | (0.23                    | )       |      | $       | (0.21   | )       |   | $       | (0.51   | )      
|                                 
|                                 
|                                 
|                                 
|                                  | Loss from discontinued operations                                          |                                            |         | (0.10                    | )       |      |         | (0.25   | )       |   |         | (0.23   | )      
|                                 
|                                 
|                                 
|                                 
|                                  | Gain on sale of discontinued operations                                    |                                            |         | 0.01                     |         |      |         |        |         |   |         |        |        
|                                  |                                                                            |                                            |         |                          |         |      |         |         |         |   |         |        
|                                  | NET INCOME (LOSS) PER SHARE                                                |                                            | $       | (0.32                    | )       |      | $       | (0.46   | )       |   | $       | (0.74   | )      
|                                  |                                                                            |                                            |         |                          |         |      |         |         |         |   |         |        
|AVERAGE COMMON SHARES OUTSTANDING |                                                                            |                                            | 65,303  |                          |         |      | 58,752  |         |         |   | 49,755  |        
|                                  |                                                                            |                                            |         |                          |         |      |         |         |         |   |         |        

The accompanying notes are an integral part of these consolidated statements.

35



---



eLOT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                                       |                                                                                                                     |              |        |              |   |   |        |         |   | 
|------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------- | ------------ | ------ | ------------ | - | - | ------ | ------- | - | 
|(In thousands, except for share and per share amounts) |                                                                                                                     | December 31, |        | December 31,
|                                                       |                                                                                                                     | 2000         |        | 1999        
|                                                       |                                                                                                                     |              |        |             
|ASSETS                                                
|                                                      
|                                                      
|                                                      
|                                                      
|CURRENT ASSETS:                                       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Cash and cash equivalents                                                                                           |              | $      | 5,731        |   |   | $      | 1,060   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accounts receivable, net of allowance of $84 in 2000                                                                |              |        | 222          |   |   |        | 8       |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Prepaid expenses and other current assets                                                                           |              |        | 709          |   |   |        | 174     |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net assets of discontinued operations                                                                               |              |        | 8,294        |   |   |        | 51,402  |  
|                                                       |                                                                                                                     |              |        |              |   |   |        |        
|                                                       | Total Current Assets                                                                                                |              |        | 14,956       |   |   |        | 52,644  |  
|                                                      
|                                                      
|                                                      
|                                                      
|PROPERTY AND EQUIPMENT, net                            |                                                                                                                     |              | 5,143  |              |   |   | 2,480  |        
|                                                      
|                                                      
|                                                      
|                                                      
|INTANGIBLE ASSETS, net                                 |                                                                                                                     |              | 4,018  |              |   |   |       |        
|                                                      
|                                                      
|                                                      
|                                                      
|INVESTMENTS AND OTHER ASSETS                           |                                                                                                                     |              | 3,486  |              |   |   | 5,034  |        
|                                                       |                                                                                                                     |              |        |              |   |   |        |        
|                                                       |                                                                                                                     | $            | 27,603 |              |   | $ | 60,158 |        
|                                                       |                                                                                                                     |              |        |              |   |   |        |        
|LIABILITIES AND STOCKHOLDERS EQUITY                  
|                                                      
|                                                      
|                                                      
|                                                      
|CURRENT LIABILITIES:                                  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Current portion of long-term debt                                                                                   |              | $      | 240          |   |   | $      | 19,818  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accounts payable                                                                                                    |              |        | 1,841        |   |   |        | 5,342   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accrued payroll and related costs                                                                                   |              |        | 838          |   |   |        | 772     |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accrued liabilities                                                                                                 |              |        | 2,083        |   |   |        | 1,804   |  
|                                                       |                                                                                                                     |              |        |              |   |   |        |        
|                                                       | Total Current Liabilities                                                                                           |              |        | 5,002        |   |   |        | 27,736  |  
|                                                      
|                                                      
|                                                      
|                                                      
|LONG-TERM DEBT                                         |                                                                                                                     |              | 14,243 |              |   |   | 13,660 |        
|                                                       |                                                                                                                     |              |        |              |   |   |        |        
|                                                       | Total Liabilities                                                                                                   |              |        | 19,245       |   |   |        | 41,396  |  
|                                                       |                                                                                                                     |              |        |              |   |   |        |        
|STOCKHOLDERS EQUITY:                                 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Common stock: $.01 par value; 130,000,000 shares   
authorized; 69,645,441 and 63,010,953 issued and   
outstanding |              |        | 696          |   |   |        | 630     |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Additional paid-in capital                                                                                          |              |        | 91,911       |   |   |        | 81,054  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accumulated other comprehensive loss                                                                                |              |        | (613         | ) |   |        | (336    | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accumulated deficit                                                                                                 |              |        | (83,636      | ) |   |        | (62,586 | )
|                                                       |                                                                                                                     |              |        |              |   |   |        |        
|                                                       | Total Stockholders Equity                                                                                          |              |        | 8,358        |   |   |        | 18,762  |  
|                                                       |                                                                                                                     |              |        |              |   |   |        |        
|                                                       |                                                                                                                     | $            | 27,603 |              |   | $ | 60,158 |        
|                                                       |                                                                                                                     |              |        |              |   |   |        |        

The accompanying notes are an integral part of these consolidated balance
sheets.

36



---



eLOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                               |                                                                                        |                                            |         |         |                          |         |        |         |        |         |        |         |        |  
|---------------------------------------------------- | --------------------------------------------- | -------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------------------------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | -
|(In thousands)                                       |                                               |                                                                                        |                                            |         |         | Years Ended December 31,
|                                                     |                                               |                                                                                        |                                            |         | 2000    |                          | 1999    |        | 1998   
|                                                     |                                               |                                                                                        |                                            |         |         |                          |         |        |        
|CASH FLOWS FROM OPERATING ACTIVITIES:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                               | Loss from continuing operations                                                        |                                            | $       | (15,016 | )                        |         | $      | (12,022 | )      |         | $      | (25,617 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                               | Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                               |                                                                                        | Depreciation and amortization              |         |         | 2,524                    |         |        |         | 1,085  |         |        |         | 1,116  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                               |                                                                                        | Allowance for doubtful accounts            |         |         | 84                       |         |        |         |       |         |        |         |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                               |                                                                                        | Asset impairment and other related charges |         |         | 128                      |         |        |         | 1,461  |         |        |         | 25,486 |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                               |                                                                                        | Gain on litigation settlement              |         |         |                         |         |        |         |       |         |        |         | (5,269 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                               |                                                                                        | Stock compensation expense                 |         |         | 650                      |         |        |         | 2,625  |         |        |         |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                               |                                                                                        | Gain on Claricom notes/warrants            |         |         |                          |         |        |         | (1,161 | )       |        |         |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                               |                                                                                        | Other, net                                 |         |         | 325                      |         |        |         | 371    |         |        |         | 118    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                               | Changes in working capital items:                                                     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                               |                                                                                        | Accounts receivable                        |         |         | (294                     | )       |        |         | (12    | )       |        |         |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                               |                                                                                        | Accounts payable and accruals              |         |         | (3,296                   | )       |        |         | 5,040  |         |        |         | (398   | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                               |                                                                                        | Other working capital items, net           |         |         | (113                     | )       |        |         | 537    |         |        |         | 5,858  |  
|                                                     |                                               |                                                                                        |                                            |         |         |                          |         |        |         |        |         |       
|NET CASH PROVIDED (USED) BY                         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | CONTINUING OPERATING ACTIVITIES               |                                                                                        |                                            | (15,008 | )       |                          |         | (2,076 | )       |        |         | 1,294  |        
|                                                    
|                                                    
|                                                    
|                                                    
|Cash flows used by discontinued operating activities |                                               |                                                                                        | (8,288                                     | )       |         |                          | (15,119 | )      |         |        | (14,427 | )     
|                                                     |                                               |                                                                                        |                                            |         |         |                          |         |        |         |        |         |       
|NET CASH USED BY OPERATING ACTIVITIES                |                                               |                                                                                        | (23,296                                    | )       |         |                          | (17,195 | )      |         |        | (13,133 | )     
|                                                     |                                               |                                                                                        |                                            |         |         |                          |         |        |         |        |         |       
|CASH FLOWS FROM INVESTING ACTIVITIES:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of property and equipment            |                                                                                        |                                            | (4,025  | )       |                          |         | (1,048 | )       |        |         | (1,566 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Dispositions of business                      |                                                                                        |                                            | 47,790  |         |                          |         |       |         |        |         | 5,000  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Deferred NIL expenses                         |                                                                                        |                                            |        |         |                          |         |       |         |        |         | (4,377 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from Claricom note/warrants          |                                                                                        |                                            |        |         |                          |         | 9,261  |         |        |         |       |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payment of ESIP bank loans                    |                                                                                        |                                            |        |         |                          |         | (2,154 | )       |        |         |       |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | ESIP participants loan settlements            |                                                                                        |                                            | 2,578   |         |                          |         | 925    |         |        |         |       |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other, net                                    |                                                                                        |                                            | (283    | )       |                          |         | (493   | )       |        |         | (124   | )      
|                                                     |                                               |                                                                                        |                                            |         |         |                          |         |        |         |        |         |       
|NET CASH PROVIDED (USED) BY                         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                               | INVESTING ACTIVITIES                                                                   |                                            |         | 46,060  |                          |         |        | 6,491   |        |         |        | (1,067  | )     
|                                                     |                                               |                                                                                        |                                            |         |         |                          |         |        |         |        |         |       
|CASH FLOWS FROM FINANCING ACTIVITIES:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Borrowings (repayments) under credit facility |                                                                                        |                                            | (19,617 | )       |                          |         | 11,035 |         |        |         | 8,582  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayments of other long-term debt            |                                                                                        |                                            | (457    | )       |                          |         | (192   | )       |        |         | (751   | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repurchase of stock                           |                                                                                        |                                            |        |         |                          |         | (1,338 | )       |        |         | (148   | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from issuance of stock               |                                                                                        |                                            | 1,981   |         |                          |         | 777    |         |        |         | 272    |        
|                                                     |                                               |                                                                                        |                                            |         |         |                          |         |        |         |        |         |       
|NET CASH PROVIDED (USED) BY FINANCING               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | ACTIVITIES                                    |                                                                                        |                                            | (18,093 | )       |                          |         | 10,282 |         |        |         | 7,955  |        
|                                                     |                                               |                                                                                        |                                            |         |         |                          |         |        |         |        |         |       
|INC /(DEC) IN CASH AND CASH EQUIVALENTS              |                                               |                                                                                        | 4,671                                      |         |         |                          | (422    | )      |         |        | (6,245  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|CASH AND CASH EQUIVALENTS BEGINNING                
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | OF YEAR                                       |                                                                                        |                                            | 1,060   |         |                          |         | 1,482  |         |        |         | 7,727  |        
|                                                     |                                               |                                                                                        |                                            |         |         |                          |         |        |         |        |         |       
|CASH AND CASH EQUIVALENTS END                      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | OF YEAR                                       |                                                                                        | $                                          | 5,731   |         |                          | $       | 1,060  |         |        | $       | 1,482  |        
|                                                     |                                               |                                                                                        |                                            |         |         |                          |         |        |         |        |         |       

The accompanying notes are an integral part of these consolidated statements.

37



---



eLOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

|                                                           |                                    |              |            |                 |  |         |     |               |  |          |          |      |  |           |        |        |  |   |        |   |  |              |  |        |  |       |      |      |   |   |         |   |  |   |         |         |  
|---------------------------------------------------------- | ---------------------------------- | ------------ | ---------- | --------------- |  | ------- | --- | ------------- |  | -------- | -------- | ---- |  | --------- | ------ | ------ |  | - | ------ | - |  | ------------ |  | ------ |  | ----- | ---- | ---- | - | - | ------- | - |  | - | ------- | ------- | -
|Additional                                                 |                                    |              |            |                 |  |         |     |               |  |          |          |      |  |           |        |        |  |   |        |   |  | Accum. Other |  | Accum. |  | Total
|(In thousands, except for                                  |                                    | Common Stock |            | Preferred Stock |  | Paid-In |     | Comprehensive |  | Earnings |          |     
|Stockholders'                                              |                                    |              |            |                 |  |         |     |               |  |         
|share amounts)                                             |                                    | Shares       |            | Amount          |  | Shares  |     | Amount        |  | Capital  |          | Loss |  | (Deficit) |        | Equity
|                                                           |                                    |              |            |                 |  |         |     |               |  |          |          |      |  |           |        |       
|Balance at December 31, 1997                               |                                    |              | 49,660,359 |                 |  | $       | 497 |               |  |          | 350,000  |      |  | $         | 7,300  |        |  | $ | 71,500 |   |  |              |  |        |  |       |     |      |   | $ | 1,201   |   |  | $ | 80,498  |        
|                                                           |                                    |              |            |                 |  |         |     |               |  |          |          |      |  |           |        |        |  |   |        |   |  |              |  |        |  |       |      |      |   |   |         |   |  |   |         |        
|Proceeds from issuances of stock
from employee stock plans |                                    |              | 314,448    |                 |  |         | 2   |               |  |          |          |      |  |           |        |        |  |   | 150    |   |  |              |  |        |  |       |      |      |   |   |         |   |  |   | 152     |        
|                                                          
|                                                          
|                                                          
|                                                          
|Amortization of deferred
compensation                      |                                    |              |            |                 |  |         |     |               |  |          |          |      |  |           |        |        |  |   | 121    |   |  |              |  |        |  |       |      |      |   |   |         |   |  |   | 121     |        
|                                                          
|                                                          
|                                                          
|                                                          
|Repurchase and cancellation of stock                       |                                    |              | (140,000   | )               |  |         | (1  | )             |  |          |          |      |  |           |        |        |  |   | (147   | ) |  |              |  |        |  |       |      |      |   |   |         |   |  |   | (148    | )      
|                                                          
|                                                          
|                                                          
|                                                          
|Net loss                                                   |                                    |              |            |                 |  |         |     |               |  |          |          |      |  |           |        |        |  |   |        |   |  |              |  |        |  |       |      |      |   |   | (36,859 | ) |  |   | (36,859 | )      
|                                                           |                                    |              |            |                 |  |         |     |               |  |          |          |      |  |           |        |        |  |   |        |   |  |              |  |        |  |       |      |      |   |   |         |   |  |   |         |        
|Balance at December 31, 1998                               |                                    |              | 49,834,807 |                 |  | $       | 498 |               |  |          | 350,000  |      |  | $         | 7,300  |        |  | $ | 71,624 |   |  |              |  |        |  |       |     |      |   | $ | (35,658 | ) |  | $ | 43,764  |        
|                                                           |                                    |              |            |                 |  |         |     |               |  |          |          |      |  |           |        |        |  |   |        |   |  |              |  |        |  |       |      |      |   |   |         |   |  |   |         |        
|Proceeds from issuances of stock
from employee stock plans |                                    |              | 296,151    |                 |  |         | 3   |               |  |          |          |      |  |           |        |        |  |   | 3,480  |   |  |              |  |        |  |       |      |      |   |   |         |   |  |   | 3,483   |        
|                                                          
|                                                          
|                                                          
|                                                          
|Amortization of deferred
compensation                      |                                    |              |            |                 |  |         |     |               |  |          |          |      |  |           |        |        |  |   | 120    |   |  |              |  |        |  |       |      |      |   |   |         |   |  |   | 120     |        
|                                                          
|                                                          
|                                                          
|                                                          
|Repurchase and cancellation of stock                       |                                    |              | (420,000   | )               |  |         | (4  | )             |  |          |          |      |  |           |        |        |  |   | (1,337 | ) |  |              |  |        |  |       |      |      |   |   |         |   |  |   | (1,341  | )      
|                                                          
|                                                          
|                                                          
|                                                          
|Conversion of preferred stock
to common stock              |                                    |              | 13,299,995 |                 |  |         | 133 |               |  |          | (350,000 | )    |  |           | (7,300 | )      |  |   | 7,167  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Comprehensive loss
Net loss                                |                                    |              |            |                 |  |         |     |               |  |          |          |      |  |           |        |        |  |   |        |   |  |              |  |        |  |       |      |      |   |   | (26,928 | ) |  |   | (26,928 | )      
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Unrealized loss of equity security |              |            |                 |  |         |     |               |  |          |          |      |  |           |        |        |  |   |        |   |  |              |  |        |  |       |      | (336 | ) |   |         |   |  |   |         | (336    | )
|                                                           |                                    |              |            |                 |  |         |     |               |  |          |          |      |  |           |        |        |  |   |        |   |  |              |  |        |  |       |      |      |   |   |         |   |  |   |         |        
|                                                           | Total comprehensive loss           |              |            |                 |  |         |     |               |  |          |          |      |  |           |        |        |  |   |        |   |  |              |  |        |  |       |      |      |   |   |         |   |  |   |         | (27,264 | )
|                                                           |                                    |              |            |                 |  |         |     |               |  |          |          |      |  |           |        |        |  |   |        |   |  |              |  |        |  |       |      |      |   |   |         |   |  |   |         |        
|Balance at December 31, 1999                               |                                    |              | 63,010,953 |                 |  | $       | 630 |               |  |          |         |      |  | $         |       |        |  | $ | 81,054 |   |  |              |  |        |  | $     | (336 | )    |   | $ | (62,586 | ) |  | $ | 18,762  |        
|                                                           |                                    |              |            |                 |  |         |     |               |  |          |          |      |  |           |        |        |  |   |        |   |  |              |  |        |  |       |      |      |   |   |         |   |  |   |         |        





---



eLOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

|                                            |                                    |              |            |                 |  |         |     |               |  |          |   |      |  |           |   |        |  |   |        |  |  |              |  |        |  |       |      |      |   |   |         |   |  |   |         |         |  
|------------------------------------------- | ---------------------------------- | ------------ | ---------- | --------------- |  | ------- | --- | ------------- |  | -------- | - | ---- |  | --------- | - | ------ |  | - | ------ |  |  | ------------ |  | ------ |  | ----- | ---- | ---- | - | - | ------- | - |  | - | ------- | ------- | -
|Additional                                  |                                    |              |            |                 |  |         |     |               |  |          |   |      |  |           |   |        |  |   |        |  |  | Accum. Other |  | Accum. |  | Total
|(In thousands, except for                   |                                    | Common Stock |            | Preferred Stock |  | Paid-In |     | Comprehensive |  | Earnings |   |     
|Stockholders'                               |                                    |              |            |                 |  |         |     |               |  |         
|share amounts)                              |                                    | Shares       |            | Amount          |  | Shares  |     | Amount        |  | Capital  |   | Loss |  | (Deficit) |   | Equity
|                                            |                                    |              |            |                 |  |         |     |               |  |          |   |      |  |           |   |       
|Balance at December 31, 1999                |                                    |              | 63,010,953 |                 |  | $       | 630 |               |  |          |  |      |  | $         |  |        |  | $ | 81,054 |  |  |              |  |        |  | $     | (336 | )    |   | $ | (62,586 | ) |  | $ | 18,762  |        
|                                            |                                    |              |           
|Issuance of stock
from employee stock plans |                                    |              | 757,578    |                 |  | $       | 7   |               |  |          |   |      |  |           |   |        |  | $ | 1,378  |  |  |              |  |        |  |       |      |      |   |   |         |   |  | $ | 1,385   |        
|                                           
|                                           
|                                           
|                                           
|Issuance of stock
to acquire assets         |                                    |              | 2,854,686  |                 |  | $       | 29  |               |  |          |   |      |  |           |   |        |  | $ | 7,649  |  |  |              |  |        |  |       |      |      |   |   |         |   |  | $ | 7,678   |        
|                                           
|                                           
|                                           
|                                           
|Issuance of stock to
satisfy liabilities    |                                    |              | 1,950,000  |                 |  | $       | 19  |               |  |          |   |      |  |           |   |        |  | $ | 956    |  |  |              |  |        |  |       |      |      |   |   |         |   |  | $ | 975     |        
|                                           
|                                           
|                                           
|                                           
|Issuance of stock  other                   |                                    |              | 1,072,224  |                 |  | $       | 11  |               |  |          |   |      |  |           |   |        |  | $ | 874    |  |  |              |  |        |  |       |      |      |   |   |         |   |  | $ | 885     |        
|                                           
|                                           
|                                           
|                                           
|Comprehensive loss
Net loss                 |                                    |              |            |                 |  |         |     |               |  |          |   |      |  |           |   |        |  |   |        |  |  |              |  |        |  |       |      |      |   |   | (21,050 | ) |  |   | (21,050 | )      
|                                           
|                                           
|                                           
|                                           
|                                            | Unrealized loss of equity security |              |            |                 |  |         |     |               |  |          |   |      |  |           |   |        |  |   |        |  |  |              |  |        |  |       |      | (277 | ) |   |         |   |  |   |         | (277    | )
|                                            |                                    |              |           
|                                            | Total comprehensive loss           |              |            |                 |  |         |     |               |  |          |   |      |  |           |   |        |  |   |        |  |  |              |  |        |  |       |      |      |   |   |         |   |  |   |         | (21,327 | )
|                                            |                                    |              |           
|Balance at December 31, 2000                |                                    |              | 69,645,441 |                 |  | $       | 696 |               |  |          |  |      |  | $         |  |        |  | $ | 91,911 |  |  |              |  |        |  | $     | (613 | )    |   | $ | (83,636 | ) |  | $ | 8,358   |        
|                                            |                                    |              |           

The accompanying notes are an integral part of these consolidated statements.

39



---



eLOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A NATURE OF THE BUSINESS AND FORMATION OF THE COMPANY

eLOT, Inc. (the Company or eLOT), formerly known as Executone Information
Systems, Inc., is committed to leading the governmental lottery industry into
the e-commerce market. The Company has developed, installed and operated
systems that have processed ten million e-commerce lottery ticket sales and
transactions. It has operated Internet, Intranet, telephone, communications,
accounting, banking, database and other applications and services that can
facilitate the electronic sale of new and existing lottery products worldwide.

The Company operates a reward-entertainment lottery portal, eLotteryFreeWay,
which offers lottery and entertainment games (for no consideration) with
registered players earning e-Points that are redeemable for cash and
merchandise credit. eLotteryFreeWays mission is to build an Internet
community whose members are expected to be highly predisposed to purchase
governmental lottery tickets over the Internet.

The Company has also developed transitional e-commerce solutions for
governmental lotteries, which leverage the power of the Internet, while
political, legal and social issues surrounding the sales of lottery tickets
over the Internet are simultaneously addressed. eLOT is an application service
provider of Internet marketing and advertising technology for lotteries. The
Companys IMARCS (Internet Marketing Analysis Research and Communications
System) database marketing solution enables government lotteries to attract,
register and communicate with lottery players through advanced Internet
technology. The Company, along with a strategic partner, jointly markets and
develops web sites to allow lottery players to submit non-winning scratch
tickets for additional chances to win and to expand the database of lottery
players. In addition, eLOTs subsidiary, eLOTTONET, Inc., offers a free daily
lottery email notification service (LENS) of state lottery results and other
information and services via email.

On January 4, 2000, the Company changed its name from Executone Information
Systems, Inc. to eLOT, Inc. to recognize the change in the Companys core
business focus to the governmental lottery industry. Accordingly, all of the
Companys operations are in one segment.

As discussed in Note D, the Companys Computer Telephony and Healthcare
communications businesses, along with certain other assets and liabilities are
presented as discontinued operations in the accompanying consolidated financial
statements.

NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries. In
consolidating the accompanying financial statements, all significant
intercompany transactions have been eliminated. Investments in affiliated
companies owned more than 20%, but not in excess of 50%, are recorded under the
equity method.

40



---



Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Revenue Recognition. In 1999 and 2000, the Company generated its revenues
through the sale of advertising on its web site. Advertising revenue is
recognized ratably in the period in which the advertising is displayed.
Advertising revenue is also recognized net of sales agency commissions. The
Company participates in certain barter transactions and recognizes revenue at
rates equal to or less than comparable cash transactions. Total barter revenue
was $126,000, $0 and $0 for the years ended December 31, 2000, 1999, and 1998,
respectively.

Advertising Expense. The Company expenses advertising costs as incurred.
Advertising expense was $488,000, $312,000 and $0 for the years ended December
31, 2000, 1999, and 1998, respectively.

Earnings Per Share. Earnings per share is calculated in accordance with the
provisions of SFAS No. 128, Earnings Per Share. Basic earnings per share is
based upon the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share is based upon the weighted
average number of shares of common stock outstanding plus the dilutive effect
of stock options and warrants outstanding during the period. Stock options and
warrants, the convertible preferred stock and the convertible debentures, which
are antidilutive, have been excluded from the computations.

Cash and Cash Equivalents. Cash and cash equivalents include short-term
investments with original maturities of three months or less.

Property and Equipment, net. Property and equipment at December 31, 2000 and
1999 consist of the following:

|                               |  |      |        |      |  |   |        |  
|------------------------------ |  | ---- | ------ | ---- |  | - | ------ | -
|(Amounts in thousands)         |  | 2000 |        | 1999
|                               |  |      |        |     
|Furniture and fixtures         |  | $    | 61     |      |  | $ | 40     |  
|                              
|                              
|                              
|                              
|Leasehold improvements         |  |      | 149    |      |  |   | 115    |  
|                              
|                              
|                              
|                              
|Computer hardware and software |  |      | 7,350  |      |  |   | 3,376  |  
|                               |  |      |        |      |  |   |        |  
|                               |  |      | 7,560  |      |  |   | 3,531  |  
|                              
|                              
|                              
|                              
|Accumulated depreciation       |  |      | (2,417 | )    |  |   | (1,051 | )
|                               |  |      |        |      |  |   |        |  
|Property and equipment, net    |  | $    | 5,143  |      |  | $ | 2,480  |  
|                               |  |      |        |      |  |   |        |  

Depreciation is provided on a straight-line basis over the estimated economic
useful lives of property and equipment, which range from three to five years.
Amortization of leasehold improvements is provided over the lease term or five
years, whichever is shorter. Amortization of computer hardware and software is
provided on a straight-line basis over the estimated useful life of three
years.

Income Taxes. The Company utilizes the liability method of accounting for
income taxes as set forth in SFAS No. 109, Accounting for Income Taxes.
Under the liability method, deferred taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.

41



---



Software and Web Site Development Costs. The Company accounts for these costs
in accordance with AICPA Statement of Position 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. Accordingly, the
Company expenses costs incurred in the preliminary stage and, thereafter,
capitalizes costs incurred in the developing or obtaining of internal use
software and web site development. Such capitalized costs are included in
property and equipment and are amortized over a period of three years and are
subject to impairment evaluation in accordance with the provisions of SFAS No.
121, Accounting for the Impairment of Long-Lived Assets.

Fair Value of Financial Instruments. The fair value of the Companys
Convertible Subordinated Debentures at December 31, 2000 is approximately $5.7
million, based upon market quotes. The carrying value of all other financial
instruments included in the accompanying consolidated financial statements
approximate fair value as of December 31, 2000 is based upon current interest
rates.

Noncash Investing and Financing Activities. The following non-cash investing
and financing activities took place during the three years ended December 31,
2000:

|                                                         |  |      |       |      |  |      |       |  |  |   |     | 
|-------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | --- | 
|(Amounts in thousands)                                   |  | 2000 |       | 1999 |  | 1998
|                                                         |  |      |       |      |  |     
|Conversion of preferred stock to common stock            |  | $    |      |      |  | $    | 7,300 |  |  | $ |    | 
|                                                        
|                                                        
|                                                        
|                                                        
|Common shares exchanged to exercise options
and warrants |  |      | 4,805 |      |  |      | 24    |  |  |   | 230 | 
|                                                        
|                                                        
|                                                        
|                                                        
|Common shares issued to
acquire shares of DCC            |  |      | 2,284 |      |  |      |      |  |  |   |    | 
|                                                        
|                                                        
|                                                        
|                                                        
|Common shares issued to
acquire intangible assets        |  |      | 4,301 |      |  |      |      |  |  |   |    | 
|                                                        
|                                                        
|                                                        
|                                                        
|Common shares issued as
investment in MDI                |  |      | 1,093 |      |  |      |      |  |  |   |    | 
|                                                        
|                                                        
|                                                        
|                                                        
|Common shares issued to
satisfy liabilities              |  |      | 975   |      |  |      |      |  |  |   |    | 
|                                                        
|                                                        
|                                                        
|                                                        
|Exercise of warrants in exchange for license             |  |      | 289   |      |  |      |      |  |  |   |    | 

Refer to the consolidated statements of cash flows for information on
cash-related operating, investing and financing activities.

New Accounting Pronouncements. In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment to SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities, SFAS No. 133 established accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivatives fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivatives gain and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting.

Elot will adopt SFAS No. 133 (a amended by SFAS 138) as of January 1, 2001. We
estimate that adoption will not have a material impact in our financial
statements.

42



---



Reclassifications. Certain reclassifications have been made to the prior year
amounts to conform to the current year presentation.

NOTE C  FINANCIAL CONDITION

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company has incurred recurring losses from continuing
operations during 2000 and 1999 of $15.0 million and $12.0 million,
respectively, and the Company had only $5.7 million of cash as of December 31,
2000. The Company believes that it will continue to operate at a loss until
such time when its operations generate sufficient revenues to cover its costs,
which the Company does not currently anticipate occurring until sometime in
2002. Revenues from eLOT operations were affected by the decline in Internet
advertising pricing throughout 2000 and the Company has noticed further
deterioration in the first quarter of 2001. In addition, revenues have been
slow to materialize in the lottery business due to governmental lotteries
migrating more cautiously than expected onto the Internet due to legislative,
political and social issues. The Company does not expect that the cash
resources as of December 31, 2000 will be sufficient to fund its operations
through December 31, 2001.

To improve its financial situation, the Company has implemented or intends
to implement the following: 1) hired an investment banker to sell a portion of
the Companys investment in Dialogic Communications Corporation (DCC); 2)
made a reduction in the Companys workforce; 3) reduced its planned Capital
expenditures significantly; 4) dramatically reduced its planned lobbying
expenditures focused on defeating legislative efforts to prevent the sale of
lottery tickets over the Internet; 5) implemented a 15% salary deferral program
for senior management; 6) reduced rewards and content costs related to the
operation of the Companys consumer web sites; and 7) reduced all other
identifiable expenses to the extent possible. The Company is also exploring
several strategic alternatives for financing its activities and operations
going forward.

Although there can be no assurances that the Company will be able to raise
additional cash through the sale of DCC or find alternate financing, the
Company believes that if it is successful in doing so, the proceeds from one or
both of these transactions plus the current cash balances and reduction of
expenses in 2001, will provide the Company with sufficient resources to fund
its operations through December 31, 2001.

NOTE D  DISCONTINUED OPERATIONS

On March 29, 1999, the Company announced that it would divest
its Computer Telephony and
Healthcare businesses. By divesting the core Computer Telephony and Healthcare
businesses, the Company focused its resources on its Internet subsidiary,
eLottery, Inc. During the fourth quarter of 1999, the Company finalized the
plan of disposal for these businesses, and accordingly, started accounting for
the businesses as discontinued operations.

On January 1, 2000, the Company completed the sale of its Computer Telephony
division to Inter-Tel, Incorporated for $44.3 million in cash plus the
assumption of certain liabilities. The $44.3 million in proceeds included $4.0
million that was held in escrow. The Company and Inter-Tel reached a
settlement agreement regarding indemnity and other claims asserted by Inter-Tel
in 2000 and the Company received approximately $2.5 million (plus interest) of
the escrowed proceeds during 2000. A

43



---



portion of the proceeds was used to repay
all of the Companys outstanding revolving debt ($19.6 million) in January
2000.

On July 21, 2000, the Company completed the sale of its Healthcare
Communications division to Grinnell Corporation for $5.0 million in cash.
eLOT is also continuing to pursue the sale of all or part of its investment in
Dialogic Communications Corporation (DCC), a private company, based in
Franklin, Tennessee, that develops and markets interactive call processing
solutions for business, industry and government. The net investment in DCC as
of December 31, 2000 is $3.5 million.

Summarized financial information for the discontinued operations is as follows
(000s):

|                                                         |  |      |        |      |  |      |         |   |  |   |         |  
|-------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|For the years ended December 31,                         |  | 2000 |        | 1999 |  | 1998
|                                                         |  |      |        |      |  |     
|Revenues                                                 |  | $    | 17,479 |      |  | $    | 128,591 |   |  | $ | 133,498 |  
|                                                        
|                                                        
|                                                        
|                                                        
|Income (Loss) before Income Taxes                        |  |      | (6,421 | )    |  |      | (14,906 | ) |  |   | (15,474 | )
|                                                        
|                                                        
|                                                        
|                                                        
|Income (Loss) from Discontinued
Operations, Net of Taxes |  |      | (6,421 | )    |  |      | (14,906 | ) |  |   | (11,242 | )
|                                                        
|                                                        
|                                                        
|                                                        
|Gain on Sale of Discontinued Operations, Net of taxes    |  |      | 387    |      |  |      |        |   |  |   |        |  

|                                      |  |      |        |      |  |   |        | 
|------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|As of December 31,                    |  | 2000 |        | 1999
|                                      |  |      |        |     
|Current Assets                        |  | $    |       |      |  | $ | 57,981 | 
|                                     
|                                     
|                                     
|                                     
|Total Assets                          |  |      | 11,132 |      |  |   | 92,706 | 
|                                     
|                                     
|                                     
|                                     
|Current Liabilities                   |  |      | 2,838  |      |  |   | 38,784 | 
|                                     
|                                     
|                                     
|                                     
|Total Liabilities                     |  |      | 2,838  |      |  |   | 39,304 | 
|                                     
|                                     
|                                     
|                                     
|Net Assets of Discontinued Operations |  |      | 8,294  |      |  |   | 51,402 | 

In summary, the Company recorded an after-tax gain of $0.4 million related to
the sale of discontinued operations in 2000. This gain represents an after-tax
gain of $14.9 million (net of a tax provision of $9.9 million) on the sale of
the Computer Telephony division, an $8.5 million loss related to the sale of
the Healthcare Communications division ($5 million in the first quarter and
$3.5 million in the second quarter) and a $6 million valuation allowance
against deferred tax assets that the Company estimates will not be realizable
when all of the discontinued operations are sold.

44



---



NOTE E DEBT

The Companys debt is summarized below at December 31, 2000 and 1999:

|                                               |  |      |           |      |  |   |               | 
|---------------------------------------------- |  | ---- | --------- | ---- |  | - | ------------- | 
|(Amounts in thousands)                         |  | 2000 |           | 1999
|                                               |  |      |           |     
|Borrowings Under Revolving Credit Facility (a) |  | $    |          |      |  | $ | 19,617        | 
|                                              
|                                              
|                                              
|                                              
|Convertible Subordinated Debentures (b)        |  |      | 13,269    |      |  |   | 12,995        | 
|                                              
|                                              
|                                              
|                                              
|Capital Lease Obligations (c)                  |  |      | 196       |      |  |   | 320           | 
|                                              
|                                              
|                                              
|                                              
|Non-Interest Bearing Notes (d)                 |  |      | 907       |      |  |   |              | 
|                                              
|                                              
|                                              
|                                              
|Other                                          |  |      | 111       |      |  |   | 546           | 
|                                               |  |      |           |      |  |   |               | 
|Total Debt                                     |  |      | 14,483    |      |  |   | 33,478        | 
|                                              
|                                              
|                                              
|                                              
|Less: Current Portion of Long-Term Debt        |  |      | <    240> |      |  |   | <     19,818> | 
|                                               |  |      |           |      |  |   |               | 
|Total Long-Term Debt                           |  | $    | 14,243    |      |  | $ | 13,660        | 
|                                               |  |      |           |      |  |   |               | 



|(a) |  | On August 14, 1998, the Company entered into a revolving credit facility
(the Credit Facility) with Fleet Capital Corporation expiring in 2003.
The Credit Facility provided a maximum overall credit line of $30 million
consisting of a revolving line of credit for direct borrowings, along with
standby and trade letters of credit. Direct borrowings and letter of
credit advances were made available pursuant to a formula based on the
levels of eligible accounts receivable and inventories. The Credit
Facility was fully repaid on January 3, 2000 and is no longer available to
the Company. The average interest rate for the year ended December 31,
1999 was 9.3%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | The Companys Convertible Subordinated Debentures (the Debentures),
issued in April 1986, are due March 15, 2011 and bear interest at 7 1/2%,
payable March 15th and September 15th. The face value of the outstanding
Debentures at December 31, 2000 was $16.3 million. The face value of the
Debentures was adjusted to fair value in connection with the Companys
1988 quasi-reorganization. The Debentures are convertible at the option
of the holder into Common Stock of the Company at any time on or before
March 15, 2011, unless previously redeemed, at a conversion price of
$10.625 per share, subject to adjustment in certain events. Subject to
certain restrictions, the Debentures are redeemable in whole or in part,
at the option of the Company, at par. The Debentures are also subject to
annual sinking fund payments of $1.5 million. In January 1992, $15
million principal amount of Debentures with a book value of $10.1 million
was exchanged for 674,865 shares of Convertible Preferred Stock and
2,999,400 Common Stock Purchase Warrants. Debentures reacquired by the
Company in the debt-for-equity exchange and in connection with Warrant
exercises were delivered in lieu of cash in satisfying sinking fund
requirements. Thus, no cash sinking fund payment will be due on the
Debentures until March 2008.
|   
|   
|   
|   
|   
|   
|   
|   
|    |  | The Trustee for the Debentures has been notified by the holder of the
majority of the debentures that the holder believes that the Company is in
breach of certain provisions of the Indenture governing the Debentures. The
holder claims that the sales of the Computer Telephony and Healthcare
Communications businesses constituted a sale of substantially all of the
assets of the Company and thus it was a breach of the Indenture to complete
those sales without payment of the Debentures. The Trustee has investigated
this alleged breach with full cooperation from the Company. The Trustee has
not notified the Company that there has been a breach or that the Debentures
are currently payable. As a result, the Company has not classified the
Debentures as a current liability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|   
|   
|   
|(c) |  | The Company has entered into capital lease arrangements primarily for
computer hardware and software with a net book value of approximately $.3
million at December 31, 2000 and $.4 million at                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

45



---



|    |  | December 31, 1999. Such leases have been capitalized using implicit
interest rates which range from 8.4% to 9.5%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(d) |  | As part of the strategic relationship with PlasmaNet (see Note J) the
Company received customer referrals during the second half of 2000. As
consideration for acquiring these unique customers, and in accordance with
the agreement with PlasmaNet, the Company is obligated under three year
non-interest bearing notes. The face value of these notes is $1.2 million
and such non-interest bearing notes have been recorded at their discounted
present value using a 12% interest rate. An accretion charge of $42,000
was recorded in 2000 and charged to interest expense.

The following is a schedule of future maturities of long-term debt at December
31, 2000:

|                          |  |                        |        | 
|------------------------- |  | ---------------------- | ------ | 
|Years Ending December 31: |  | (Amounts in thousands)
|                          |  |                       
|2001                      |  | $                      | 240    | 
|                         
|                         
|                         
|                         
|2002                      |  |                        | 67     | 
|                         
|                         
|                         
|                         
|2003                      |  |                        | 907    | 
|                         
|                         
|                         
|                         
|Thereafter                |  |                        | 13,269 | 
|                          |  |                        |        | 
|                          |  | $                      | 14,483 | 
|                          |  |                        |        | 

For the years ended December 31, 2000, 1999 and 1998, the Company made cash
payments of approximately $1.3 million, $2.7 million and $1.7 million,
respectively, for interest expense on indebtedness.

NOTE F INCOME TAXES

eLOT continuing operations have only generated minimal current revenue and
there are no historical earnings to support the realization of any current or
deferred tax benefits. As a result, no current or deferred tax benefit has
been recorded on the Statements of Operations for income taxes applicable to
the net losses. eLOT does have certain deferred tax assets which represent
future tax deductions, but they can only be utilized if eLOT generates
sufficient future taxable income. As of December 31, 2000, a valuation
allowance has been provided for the entire deferred tax asset included in
continuing operations and all but $6.7 million of deferred tax assets reflected
in discontinued operations. The deferred tax asset reflected in discontinued
operations is more likely than not to be realized through the sale of the
Companys investment in DCC.

46



---



Deferred tax assets are determined based on the differences between the
financial reporting and tax bases of assets. The significant components of the
Companys deferred tax assets are as follows:

|                                |                          |      |         |      |  |   |         |   | 
|------------------------------- | ------------------------ | ---- | ------- | ---- |  | - | ------- | - | 
|(Amounts in thousands)          |                          | 2000 |         | 1999
|                                |                          |      |         |     
|Net operating loss carryforward |                          | $    | 26,988  |      |  | $ | 11,666  |  
|                               
|                               
|                               
|                               
|Debenture revaluation           |                          |      | (1,205  | )    |  |   | (1,320  | )
|                               
|                               
|                               
|                               
|Start up costs                  |                          |      | 856     |      |  |   | 1,427   |  
|                               
|                               
|                               
|                               
|Property and equipment          |                          |      | (793    | )    |  |   | 226     |  
|                               
|                               
|                               
|                               
|Other timing items              |                          |      | (267    | )    |  |   | (1,043  | )
|                                |                          |      |         |      |  |   |         |  
|Total deferred tax assets       |                          |      | 25,579  |      |  |   | 10,956  |  
|                               
|                               
|                               
|                               
|Valuation allowance             |                          |      | (25,579 | )    |  |   | (10,956 | )
|                                |                          |      |         |      |  |   |         |  
|                                | Deferred tax assets, net |      | $       |     |  |   | $       |  | 
|                                |                          |      |         |      |  |   |         |  

The differences between the benefit for income taxes at the US statutory rate
and the Companys effective rate are summarized as follows:

|                                             |  |      |        |      |  |      |        |   |  |   |        |  
|-------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|(Amounts in thousands)                       |  | 2000 |        | 1999 |  | 1998
|                                             |  |      |        |      |  |     
|Federal tax at statutory rate (34 %)         |  | $    | (5,105 | )    |  | $    | (4,087 | ) |  | $ | (8,710 | )
|                                            
|                                            
|                                            
|                                            
|State income tax, net of federal tax benefit |  |      | (733   | )    |  |      | (589   | ) |  |   | (1,255 | )
|                                            
|                                            
|                                            
|                                            
|Tax benefit not recorded                     |  |      | 4,372  |      |  |      | 3,616  |   |  |   | 5,148  |  
|                                            
|                                            
|                                            
|                                            
|Compensation charges                         |  |      |       |      |  |      | 910    |   |  |   |       |  
|                                            
|                                            
|                                            
|                                            
|Write off of intangibles                     |  |      |       |      |  |      |       |   |  |   | 4,780  |  
|                                            
|                                            
|                                            
|                                            
|Other, net                                   |  |      |       |      |  |      | 150    |   |  |   | 37     |  
|                                             |  |      |        |      |  |      |        |   |  |   |        |  
|                                             |  | $    |       |      |  | $    |       |   |  | $ |       |  
|                                             |  |      |        |      |  |      |        |   |  |   |        |  

The Company has available federal net operating loss carryforwards (NOLs),
subject to review by the Internal Revenue Service, totaling approximately $136
million at December 31, 2000 of which $67 million relates to discontinued
operations. These net operating losses expire in the years 2001 to 2020. The
Company also has available federal general business tax credit carryforwards of
$4.2 million which expire through 2018 and alternative minimum tax credit
carryforwards of approximately $.9, which may be carried forward indefinitely.

For the years ended December 31, 2000, 1999 and 1998, the Company made cash
payments of approximately than $0.1 million, $0.1 million and $0.1 million,
respectively, for income taxes.

47



---



NOTE G- EARNINGS PER SHARE

A reconciliation of the Companys earnings (loss) per share calculations from
continuing operations for the three years ended December 31, 2000 is as
follows:

|                                             |  |            |         |           |  |           |        |  |  |   |       |  
|-------------------------------------------- |  | ---------- | ------- | --------- |  | --------- | ------ |  |  | - | ----- | -
|(In thousands, except for per share amounts) |  | Loss from  |         | Weighted 
|                                             |  | Continuing |         | Average   |  | Per Share
|                                             |  | Operations |         | Shares___ |  | Amount___
|                                             |  |            |         |           |  |          
|For the year ended December 31, 2000:       
|                                             |  |            |         |           |  |           |        |  |  |   |       |  
|Basic and Diluted Loss Per share             |  | $          | (15,016 | )         |  |           | 65,303 |  |  | $ | (0.23 | )
|                                             |  |            |         |           |  |           |        |  |  |   |       |  
|For the year ended December 31, 1999:       
|                                             |  |            |         |           |  |           |        |  |  |   |       |  
|Basic and Diluted Loss Per Share             |  | $          | (12,022 | )         |  |           | 58,752 |  |  | $ | (0.21 | )
|                                             |  |            |         |           |  |           |        |  |  |   |       |  
|For the year ended December 31, 1998:       
|                                             |  |            |         |           |  |           |        |  |  |   |       |  
|Basic and Diluted Loss Per Share             |  | $          | (25,617 | )         |  |           | 49,755 |  |  | $ | (0.51 | )
|                                             |  |            |         |           |  |           |        |  |  |   |       |  

The Companys Convertible Subordinated Debentures (see Note E (b)) are
convertible into approximately 1.5 million shares of common stock as of
December 31, 2000. The shares issuable upon conversion of the Debentures were
not included in the computation of diluted earnings per share because they
would be antidilutive for each of the periods presented. Options to purchase
approximately 2.4 million, 1.8 million and 163,000 shares of common stock as of
December 31, 2000, 1999 and 1998, respectively, were not included in the
computation of diluted earnings per share due to the net losses for those
years. Options to purchase 2.5 million, 1.0 million and 1.8 million shares of
common stock as of December 31, 2000, 1999 and 1998, respectively, were not
included in the computation of diluted earnings per share because the exercise
price was greater than the average market price of the shares of common stock.

The convertible preferred stock issued in connection with the acquisition of
eLottery was antidilutive, at issuance, and has been excluded from the above
calculations. Effective April 13, 1999, the convertible preferred stock was
converted into common stock.

NOTE H COMMITMENTS AND CONTINGENCIES

Operating Leases. The Company conducts its business operations in leased
premises under noncancellable operating leases expiring in March 2005. Rental
expense under theses operating leases amounted to $0.4 million and $0.2 million
for the two years ended December 31, 2000. Prior to March 1999, the Companys
premises were part of the facilities leased for the Computer Telephony and
Healthcare businesses.

48



---



The following represents the future minimum rental payments due under the
noncancellable operating leases as of December 31, 2000:

|                          |  |                        |       | 
|------------------------- |  | ---------------------- | ----- | 
|Years Ending
December 31, |  | (Amounts in
thousands)
|                          |  |                       
|2001                      |  | $                      | 449   | 
|                         
|                         
|                         
|                         
|2002                      |  |                        | 371   | 
|                         
|                         
|                         
|                         
|2003                      |  |                        | 358   | 
|                         
|                         
|                         
|                         
|2004                      |  |                        | 278   | 
|                         
|                         
|                         
|                         
|2005                      |  |                        | 21    | 
|                          |  |                        |       | 
|                          |  | $                      | 1,477 | 
|                          |  |                        |       | 

Litigation: The Company currently is named as a defendant in several lawsuits
that have arisen in the normal course of its business. Those lawsuits and
proceedings relate primarily to distribution arrangements and products of the
discontinued operations. In the opinion of the Company, these proceedings are
not expected to have a material adverse effect on the consolidated financial
position, results of operations or liquidity of the Company.

NOTE I  INVESTMENTS AND OTHER ASSETS

Other assets consist of the following as of December 31, 2000 and 1999,
respectively:

|                                           |  |      |       |      |  |   |       | 
|------------------------------------------ |  | ---- | ----- | ---- |  | - | ----- | 
|(Amounts in
thousands)                     |  | 2000 |       | 1999
|                                           |  |      |       |     
|Investment in MDI (a)                      |  | $    | 1,093 |      |  | $ |      | 
|                                          
|                                          
|                                          
|                                          
|Investment in Virtgame (b)                 |  |      | 87    |      |  |   | 364   | 
|                                          
|                                          
|                                          
|                                          
|ESIP Receivable (c)                        |  |      | 405   |      |  |   | 2,983 | 
|                                          
|                                          
|                                          
|                                          
|Prepaid Executive Life Insurance and Other |  |      | 1,901 |      |  |   | 1,687 | 
|                                           |  |      |       |      |  |   |       | 
|                                           |  | $    | 3,486 |      |  | $ | 5,034 | 
|                                           |  |      |       |      |  |   |       | 



---

|(a) |  | On November 2, 2000, the Company entered into a strategic alliance
agreement with MDI Entertainment, Inc. MDI specializes in creating,
marketing and implementing entertainment-based promotions on behalf of
the North American lottery industry. Under terms of the agreement,
eLOT issued 1 million common shares in exchange for 444 shares of
preferred stock in MDI convertible into 444,444 shares of MDI common
stock. eLOT also received a warrant to purchase an additional 555,556
common shares of MDI at $3.50 per share. The Companys investment is
carried under the cost method.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | The investment in Virtgame.com, (which is an equity security with a
quoted market value) has been adjusted to the market value of this
investment at December 31, 2000. The fair value adjustment is
reflected in Accumulated Other Comprehensive Loss in the accompanying
consolidated financial statements.                                                                                                                                                                                                                                                                                    
|   
|   
|   
|   
|(c) |  | In 1994, the Companys shareholders adopted the 1994 Executive
Stock Incentive Plan (the Executive Plan), which enabled officers and
other key employees to purchase a total of up to 3,000,000 shares of
the Companys Common Stock. As of December 31, 2000 and 1999, the
amount receivable from Plan participants was $.4 million and $3
million, respectively. Shares                                                                                                                                                                                                                      

49



---



| |  | acquired under the Executive Plan are held by the Company as security
under a loan and pledge agreement.
| |  | --------------------------------------------------------------------------------------------------------

NOTE J  INTANGIBLE ASSETS

On May 31, 2000, the Company entered into a long-term strategic partnership
agreement with PlasmaNet, Inc., a leading online database marketing company
providing targeted advertising and marketing services. PlasmaNet owns and
operates FreeLotto.com.

The Company issued 1.6 million common shares valued at $4.3 million to
PlasmaNet as consideration for the site and as payment for the first tranche of
registered customer referrals. The acquisition has been accounted for under
the purchase method and the results of operations of this business are included
in the Companys financial statements beginning on the date of acquisition.
The purchase price has been allocated to intangible assets and is being
amortized over the estimated economic life of the assets acquired of three
years. The agreement calls for additional consideration contingent upon
success in reaching specified registered customer referral milestones. The
Company received additional customer referrals in 2000. The Company has
capitalized an additional $.9 million for these new customer referrals and has
recorded a non-interest bearing three-year note as consideration for these
referrals. (See Note E) The agreement calls for PlasmaNet to replenish
referrals who opt out of the lottery notification service at no additional cost
to the Company. Total amortization expense for 2000 and accumulated
amortization as of December 31, 2000 was $1.1 million.

NOTE K STOCK OPTIONS AND WARRANTS

The Company has established stock option plans under which it is authorized to
grant both incentive stock options and non-qualified stock options to officers
and other key employees. Options are generally granted at a price not less
than the fair market value on the date of the grant and become exercisable over
a three-and-four-year period and expire after five to ten years. In December
1999, options to purchase 1.0 million shares of common stock were issued at a
price less than market value at the date of grant. Accordingly, the Company
recorded $2.6 million in compensation expense in 1999. Shares available for
granting of future options under these plans amounted to 8.5 million as of
December 31, 2000.

50



---



A summary of the status of the Companys stock option plans, as well as
non-plan options, as of December 31, 2000, 1999 and 1998 is as follows:

|                          |  |        |           |       |      |          |      |       |  |        |           |          |  |   |      |  |  |          |           |   |  |   |      | 
|------------------------- |  | ------ | --------- | ----- | ---- | -------- | ---- | ----- |  | ------ | --------- | -------- |  | - | ---- |  |  | -------- | --------- | - |  | - | ---- | 
|                          |  | 2000   | 1999      |       | 1998
|                          |  |        |           |       |      |          |      |      
|                          |  |        |           |       |      | Weighted |      |       |  |        |           | Weighted |  |   |      |  |  | Weighted
|                          |  |        |           |       |      | Average  |      |       |  |        |           | Average  |  |   |      |  |  | Average 
|                          |  |        |           |       |      | Exercise |      |       |  |        |           | Exercise |  |   |      |  |  | Exercise
|                          |  | Shares |           | Price |      | Shares   |      | Price |  | Shares |           | Price   
|                          |  |        |           |       |      |          |      |       |  |        |           |         
|Outstanding 1/1           |  |        | 4,230,975 |       |      | $        | 2.44 |       |  |        | 2,255,199 |          |  | $ | 2.42 |  |  |          | 1,510,899 |   |  | $ | 2.89 | 
|                         
|                         
|                         
|                         
|Granted                   |  |        | 5,354,000 |       |      | $        | 3.13 |       |  |        | 2,314,900 |          |  | $ | 2.63 |  |  |          | 1,407,400 |   |  | $ | 1.90 | 
|                         
|                         
|                         
|                         
|Exercised                 |  |        | (813,802  | )     |      | $        | 2.26 |       |  |        | (200,512  | )        |  | $ | 2.66 |  |  |          | (138,550  | ) |  | $ | 2.01 | 
|                         
|                         
|                         
|                         
|Cancelled                 |  |        | (764,818  | )     |      | $        | 3.61 |       |  |        | (138,612  | )        |  | $ | 3.67 |  |  |          | (524,550  | ) |  | $ | 2.51 | 
|                          |  |        |           |       |      |          |      |       |  |        |           |          |  |   |      |  |  |          |           |  
|Outstanding 12/31         |  |        | 8,006,355 |       |      | $        | 2.92 |       |  |        | 4,230,975 |          |  | $ | 2.44 |  |  |          | 2,255,199 |   |  | $ | 2.42 | 
|                          |  |        |           |       |      |          |      |       |  |        |           |          |  |   |      |  |  |          |           |  
|Options exercisable
12/31 |  |        | 4,037,221 |       |      | $        | 3.27 |       |  |        | 3,260,975 |          |  | $ | 2.48 |  |  |          | 994,025   |   |  | $ | 3.06 | 
|                          |  |        |           |       |      |          |      |       |  |        |           |          |  |   |      |  |  |          |           |  

Information relative to options outstanding at December 31, 2000 is as follows:

|              |  |                     |           |                     |  |          |      |             |  |          |      |  |  |          |           |  |  |   |      | 
|------------- |  | ------------------- | --------- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ---- |  |  | -------- | --------- |  |  | - | ---- | 
|              |  | Options
Outstanding |           | Options
Exercisable
|              |  |                     |           |                    
|              |  |                     |           |                     |  | Weighted |      | Weighted    |  |          |      |  |  | Weighted
|              |  | Shares              |           | Average             |  | Average  |      | Shares      |  | Average 
|Exercise      |  | Outstanding         |           | Remaining           |  | Exercise |      | Exercisable |  | Exercise
|Prices        |  | 12/31/00            |           | Life
(yrs)          |  | Price    |      | 12/31/00    |  | Price   
|             
|$0.56 - $0.56 |  |                     | 250,000   |                     |  |          | 9.95 |             |  | $        | 0.56 |  |  |          | 0         |  |  | $ | 0.00 | 
|             
|             
|             
|             
|$1.00 - $1.00 |  |                     | 1,125,000 |                     |  |          | 5.06 |             |  | $        | 1.00 |  |  |          | 83,332    |  |  | $ | 1.00 | 
|             
|             
|             
|             
|$1.25 - $1.25 |  |                     | 1,000,000 |                     |  |          | 9.00 |             |  | $        | 1.25 |  |  |          | 753,200   |  |  | $ | 1.25 | 
|             
|             
|             
|             
|$1.50 - $2.47 |  |                     | 977,488   |                     |  |          | 2.36 |             |  | $        | 2.03 |  |  |          | 725,488   |  |  | $ | 1.89 | 
|             
|             
|             
|             
|$2.53 - $2.56 |  |                     | 67,000    |                     |  |          | 2.81 |             |  | $        | 2.55 |  |  |          | 30,000    |  |  | $ | 2.53 | 
|             
|             
|             
|             
|$2.69 - $2.69 |  |                     | 2,025,000 |                     |  |          | 4.39 |             |  | $        | 2.69 |  |  |          | 600,000   |  |  | $ | 2.69 | 
|             
|             
|             
|             
|$2.75 - $3.81 |  |                     | 105,200   |                     |  |          | 2.86 |             |  | $        | 3.18 |  |  |          | 50,200    |  |  | $ | 3.13 | 
|             
|             
|             
|             
|$3.88 - $3.88 |  |                     | 1,091,667 |                     |  |          | 3.95 |             |  | $        | 3.88 |  |  |          | 1,001,668 |  |  | $ | 3.88 | 
|             
|             
|             
|             
|$4.41 - $6.38 |  |                     | 264,500   |                     |  |          | 3.54 |             |  | $        | 5.20 |  |  |          | 159,500   |  |  | $ | 5.32 | 
|             
|             
|             
|             
|$6.59 - $7.38 |  |                     | 1,100,500 |                     |  |          | 8.57 |             |  | $        | 6.67 |  |  |          | 633,833   |  |  | $ | 6.66 | 
|             
|             
|             
|             
|              |  |                     |           |                     |  |          |      |             |  |          |      |  |  |          |           |  |  |   |      | 
|             
|             
|             
|             
|$0.56 - $7.38 |  |                     | 8,006,355 |                     |  |          | 5.44 |             |  | $        | 2.92 |  |  |          | 4,037,221 |  |  | $ | 3.27 | 
|              |  |                     |           |                     |  |          |      |             |  |          |      |  |  |          |           | 

The fair value of options granted during 2000, 1999 and 1998 was $2.57, $3.80
and $1.23 per share, respectively. Fair value was estimated using the
Black-Scholes option-pricing model with the following assumptions: expected
volatility ranging from 85% to 164%, a risk-free interest rate ranging from
4.8% to 6.6%, an expected option life of 5.0 years and no dividend yield.

The Company applies APB Opinion 25 in accounting for its plans. Other than the
$2.6 million recognized in 1999 for 1.0 million options granted at below market
value, no compensation cost has been recognized for its stock option plans. If
compensation cost had been determined in accordance with

51



---



SFAS No. 123,
Accounting for Stock-Based Compensation, net income would have been reduced
by
$10.0 million, $2.6 million, and $0.4 million for 2000, 1999 and 1998,
respectively. The reduction in earnings per share would have been $0.15 in
2000, $0.04 in 1999 and immaterial in 1998.

As of December 31, 2000, the Company has warrants outstanding that permit the
holders to purchase a total of 1,372,222 shares of Common Stock at prices
ranging from $0.01 to $6.00 per share, expiring through March 2005. At
December 31, 2000, 372,222 of these warrants were exercisable. Warrants were
exercised for 72,224 shares of Common Stock for the year ended December 31 2000
at a price of $0.01. No warrants were exercised during 1999 or 1998.

NOTE L STOCK PURCHASE PLAN

Until December 31, 1999, a total of 2,750,000 shares of Common Stock were
authorized for issuance under the Companys employee stock purchase plan (the
Employee Plan). The Employee Plan permitted eligible employees to purchase
up to 1,000 shares of Common Stock at the lower of 85% of the fair market value
of the Common Stock at the beginning or at the end of each six-month offering
period. Pursuant to the Employee Plan, 30,242 and 39,866 shares of common
stock were sold to employees during the two years ended December 31, 1999 and
1998, respectively. The weighted average fair value of these purchase rights
for 1999 and 1998 was $1.46, and $0.86 per share, respectively. Fair value was
estimated using the Black-Scholes option pricing model with the following
assumptions used for both years: expected volatility ranging from 85% to 150%,
risk-free interest rate of 6.6%, an expected term of six months and no dividend
yield.

The Company applies APB Opinion 25 in accounting for the Employee Plan and,
accordingly, no compensation cost has been recognized. If compensation cost
had been determined in accordance with SFAS No. 123, the impact on net income
and earnings per share would have been immaterial for 1999 and 1998.

NOTE M  401(K) SAVINGS

The Company has a 401(k) Savings Plan under which it matches employee
contributions at the discretion of the Companys Board of Directors. The
Companys matching contribution, consisting of shares of its Common Stock
purchased in the open market, is equal to 25% of each employees contribution,
up to a maximum of $660 per employee. The expense for the matching
contribution for the years ended December 31, 2000, 1999 and 1998 was
approximately $8,000, $13,000 and $10,000, respectively.

52



---



NOTE N OTHER INCOME, NET

Other Income, net consists of the following for the three years ended December
31, 2000:

|                                   |  |      |       |      |  |      |       |  |  |   |       |  
|---------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | -
|(Amounts in
thousands)             |  | 2000 |       | 1999 |  | 1998
|                                   |  |      |       |      |  |     
|Interest income                    |  | $    | 1,136 |      |  | $    | 120   |  |  | $ | 157   |  
|                                  
|                                  
|                                  
|                                  
|Gain on Claricom note/warrants (a) |  |      |      |      |  |      | 1,161 |  |  |   |      |  
|                                  
|                                  
|                                  
|                                  
|Gain on Litigation Settlement (b)  |  |      |      |      |  |      |      |  |  |   | 5,269 |  
|                                  
|                                  
|                                  
|                                  
|Other, net                         |  |      | (42   | )    |  |      | 56    |  |  |   | (102  | )
|                                   |  |      |       |      |  |      |       |  |  |   |       |  
|                                   |  | $    | 1,094 |      |  | $    | 1,337 |  |  | $ | 5,324 |  
|                                   |  |      |       |      |  |      |       |  |  |   |       |  



|(a) |  | In February 1999, the Company received $9.3 million from Claricom
as payment in full for a $5.9 million junior subordinated note plus
interest, along with the redemption of warrants. The note and warrants
were part of the consideration received when the Company sold its
direct sales and service organization in 1996.                                                                                                                                                                                         
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | In June 1996, the Company sold its Videoconferencing division to BT
Visual Images LLC for a $0.2 million note, royalties on
videoconferencing revenue through June 1998 and contingent
consideration related to the sale of equipment inventory. The Company
recorded a loss of $3.9 million on the transaction. In October 1998,
the Company received $5 million in cash, as part of a negotiated legal
settlement with its former supplier of videoconferencing equipment,
resulting in a $5.3 million gain in 1998.

NOTE O  ASSET IMPAIRMENT

On December 17, 1998, the United States District Court for the District of
Idaho ruled in the case of AT&T vs. Coeur dAlene Tribe that the orders
previously issued by the Tribal Court upholding the legality of the US Lottery
were erroneous. In response to this legal decision, eLottery and the CDA
terminated operation of the NIL and the US Lottery in every state where it had
been offered. As a result, the Company reevaluated certain of its assets in
accordance with the provisions of SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets. Based upon such review, management determined that both
the intangibles and the advances to the NIL were impaired as of the date of
this legal decision. As of December 17, 1998, net intangibles and Advances to
NIL of $12.9 million and $11.2 million, respectively, were written down to
zero, which represented the estimated fair value of the assets, as no future
cash flows were to be generated by the NIL. In addition, $0.7 million in NIL
startup costs (primarily post-acquisition building costs) included in other
assets were also impaired. This amount would have been written off as of
January 1, 1999 with the adoption of SOP 98-5. However, due to the termination
of NIL operations, management concluded that it should be written off during
the fourth quarter of 1998. Shutdown costs and other adjustments amounted to
an additional $0.7 million, all of which was paid as of December 31, 1999.

During 2000 and 1999, the Company performed additional evaluations of the
realizability of certain fixed assets and determined that certain computer
hardware and software costs were impaired based upon the current changes in
technology which has resulted in such computer hardware and software no longer
being used in the Companys operations. As a result of these reviews, the
Company recorded an asset impairment charge of $128,000 in 2000 and $1.5
million in 1999.

53



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NOTE P SELECTED QUARTERLY FINANCIAL DATA (unaudited)

The following is a summary of unaudited selected quarterly financial data for
the years ended December 31, 2000 and 1999:

|                                                    |                                        |                    |        |          |  |               |        |              |   |   |        |   |  |   |        |   | 
|--------------------------------------------------- | -------------------------------------- | ------------------ | ------ | -------- |  | ------------- | ------ | ------------ | - | - | ------ | - |  | - | ------ | - | 
|                                                    |                                        | Three Months
Ended
|                                                    |                                        |                   
|(In
thousands,                                      |                                        | March
31,          |        | June
30, |  | September
30, |        | December
31,
|except for
per share amounts)                       |                                        | 2000               |        | 2000     |  | 2000          |        | 2000        
|                                                    |                                        |                    |        |          |  |               |        |             
|Net Revenues                                        |                                        | $                  | 121    |          |  | $             | 81     |              |   | $ | 228    |   |  | $ | 401    |  
|                                                   
|                                                   
|                                                   
|                                                   
|Loss from continuing operations
Before Income Taxes |                                        |                    | (2,569 | )        |  |               | (3,483 | )            |   |   | (4,271 | ) |  |   | (4,693 | )
|                                                   
|                                                   
|                                                   
|                                                   
|Loss From Continuing Operations                     |                                        |                    | (2,569 | )        |  |               | (3,483 | )            |   |   | (4,271 | ) |  |   | (4,693 | )
|                                                   
|                                                   
|                                                   
|                                                   
|Gain on Sale of Discontinued Operation              |                                        |                    | 3,887  |          |  |               | (3,500 | )            |   |   |       |   |  |   |       |  
|                                                   
|                                                   
|                                                   
|                                                   
|Discontinued Operations                             |                                        |                    | (1,231 | )        |  |               | (2,822 | )            |   |   | (2,269 | ) |  |   | (101   | )
|                                                   
|                                                   
|                                                   
|                                                   
|Net Income (Loss)                                   |                                        |                    | 87     |          |  |               | (9,805 | )            |   |   | (6,538 | ) |  |   | (4,794 | )
|                                                   
|                                                   
|                                                   
|                                                   
|Loss Per Share:                                    
|                                                   
|                                                   
|                                                   
|                                                   
|Continuing Operations                               |                                        |                    | (0.04  | )        |  |               | (0.05  | )            |   |   | (0.07  | ) |  |   | (0.07  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Gain on Sale of Discontinued Operation |                    |        | 0.06     |  |               |        | (0.05        | ) |   |        |  |  |   |        |  | 
|                                                   
|                                                   
|                                                   
|                                                   
|Discontinued Operations                             |                                        |                    | (0.02  | )        |  |               | (0.04  | )            |   |   | (0.03  | ) |  |   | (0.01  | ) | 

|                                                    |                         |                    |        |          |   |               |        |              |   |   |        |       |   |   |         |       |  
|--------------------------------------------------- | ----------------------- | ------------------ | ------ | -------- | - | ------------- | ------ | ------------ | - | - | ------ | ----- | - | - | ------- | ----- | -
|                                                    |                         | Three Months
Ended
|                                                    |                         |                   
|(In
thousands,                                      |                         | March
31,          |        | June
30, |   | September
30, |        | December
31,
|except for
per share amounts)                       |                         | 1999               |        | 1999     |   | 1999          |        | 1999        
|                                                    |                         |                    |        |          |   |               |        |             
|Net Revenues                                        |                         | $                  |       |          |   | $             |       |              |   | $ |       |       |   | $ | 8       |      
|                                                   
|                                                   
|                                                   
|                                                   
|Loss Before Income Taxes From
Continuing Operations |                         |                    | (662   | )        |   |               | (2,204 | )            |   |   | (2,394 | )     |   |   | (6,762  | )    
|                                                   
|                                                   
|                                                   
|                                                   
|Income (Loss) From Continuing Operations            |                         |                    | (662   | )        |   |               | (2,204 | )            |   |   | (2,394 | )     |   |   | (6,762  | )    
|                                                   
|                                                   
|                                                   
|                                                   
|Discontinued Operations                             |                         |                    | (2,369 | )        |   |               | (2,063 | )            |   |   | (775   | )     |   |   | (9,699  | )    
|                                                   
|                                                   
|                                                   
|                                                   
|Net Loss                                            |                         |                    | (3,031 | )        |   |               | (4,267 | )            |   |   | (3,169 | )     |   |   | (16,461 | )    
|                                                   
|                                                   
|                                                   
|                                                   
|Loss Per Share:                                    
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Continuing Operations   |                    |        | (0.01    | ) |               |        | (0.04        | ) |   |        | (0.04 | ) |   |         | (0.12 | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Discontinued Operations |                    |        | (0.05    | ) |               |        | (0.03        | ) |   |        | (0.01 | ) |   |         | (0.16 | )

The three months ended December 31, 1999 includes the write-off of $1.5 million
in assets related to certain computer hardware and software that is no longer
being used and termination of the NIL. (See Note O).

54



---



NOTE Q  RELATED PARTY TRANSACTIONS

Certain software and development services have been provided to eLottery by a
company whose principal is the son of an officer of the Companys subsidiary.
Fees incurred by the Company in 2000, 1999 and 1998 were $1.5 million, $.5
million and $.6 million respectively. Certain consulting services and capital
asset purchases have been provided to eLottery by another company whose
principal is a son of the same officer of the Companys subsidiary. Fees
incurred by the Company in 2000, 1999 and 1998 were $.9 million, $.1 million
and $.1 million respectively.

In addition, the Company has a $250,000 note receivable with an officer of the
Companys subsidiary, which bears interest at an annual rate of 6.45% from date
of inception.

NOTE R  SUBSEQUENT EVENT (UNAUDITED)

On March 8, 2001 the Company issued 3.5 million share of common stock to
acquire the subsidiaries of NETWORK 60, Inc., which own four promotional web
sites. An additional 1.6 million shares of common stock may be issued but is
contingent upon achieving certain revenue and gross margin targets over the
next 12 months.

55



---



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
eLOT, Inc.:

We have audited the accompanying consolidated balance sheets of eLOT, Inc. (a
Virginia corporation) and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of operations, changes in stockholders
equity and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of eLOT, Inc. and subsidiaries as
of December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000,
in conformity with accounting principles generally accepted in the United
States.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note C to
the financial statements, the Company has suffered recurring losses from
operations that raise substantial doubt about its ability to continue as a
going concern. Managements plans in regard to this matter are also described
in Note C. The financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be
unable to continue as a going concern.

ARTHUR ANDERSEN LLP

Stamford, Connecticut
February 20, 2001

56



---



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

None.

57



---



PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors

The following persons are currently serving as directors of the Company.
Certain information regarding each director is set forth below, including each
individuals principal occupation and business experience during the last five
years, directorships in other public companies, and the year in which the
individual was elected a director of the Company or one of its predecessor
companies.

|                      |  |     |    |                      |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  |      | 
|--------------------- |  | --- | -- | -------------------- | -------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ---- | 
|                     
|Name                  |  | Age |    | Principal Occupation | Director Since
|                     
|Edwin J. McGuinn, Jr. |  |     | 49 |                      |                | President and Chief Executive Officer of
the Company since May 2000. Prior to
joining eLOT, since 1998, Mr. McGuinn was
President and CEO of Automated Trading
Systems, Inc. and its subsidiary,
LIMITrader Securities, Inc., an Internet
based securities firm operating one of
the first proprietary web-based systems
for trading corporate bonds, medium term
notes and high-yield bonds.                                                                                                                                                                                                                                     |  |  | 2000 | 
|                     
|                     
|                     
|                     
|                      |  |     |    |                      |                | From 1996 to 1998, Mr. McGuinn was
Executive Vice President and head of
operations at InterVest Securities, Inc.,
an electronic bond-trading network where
he was responsible for all sales,
marketing and trading operations. Prior
thereto, he held executive management
positions at Rodman & Renshaw Capital
Group, Inc. (from 1995 to 1996), Lehman
Brothers, and Mabon Securities. He spent
eleven years at Lehman Brothers as a
Managing Director where he was a member
of the firms fixed income operating
committee responsible for international
trading, sales and research in New York,
London and Tokyo.           
|                     
|                     
|                     
|                     
|                      |  |     |    |                      |                | Mr. McGuinn is a CPA and holds a
bachelors degree in mathematics and
economics from Colgate University, and a
masters degree in accounting from NYU.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                     
|Stanley J. Kabala     |  |     | 57 |                      |                | Chairman of the Company since May 2000;
prior thereto, President, Chief Executive
Officer and Chairman of the Company since
June 1998. Prior thereto, Mr. Kabala was
President and Chief Executive Officer of
Rogers Cantel Mobile Communications, the
largest wireless telephone company in
Canada, and Chief Operating Officer of
its parent Rogers Communications, Inc.,
from 1996 through 1997. During 1995, he
was President and Chief Executive Officer
of Unitel Communications, Inc., Canadas
largest alternative long distance
provider. From 1968 through 1994, Mr.
Kabala held various positions at AT&T
Corporation. |  |  | 1998 | 
|                     
|Richard J. Fernandes  |  |     | 42 |                      |                | Founder and Chief Executive Officer since
1999 of Webloyalty.com. From 1989 until
1998, Mr. Fernandes served in several
executive positions at CUC International,
Inc., including President of its
subsidiary Plextel Telecommunications, a
database-driven classified business, from
1996 to 1998, and Executive Vice
President, Interactive Services and
Senior Vice                                                                                                                                                                                                                                                            |  |  | 2000 | 

58



---



|                 |  |  |    |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |      | 
|---------------- |  |  | -- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ---- | 
|                
|                 |  |  |    |  |  | President, Interactive Services from 1993
to 1996.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                
|Philip D. Gunn   |  |  | 49 |  |  | Co-founder and President of Growth
Capital Partners, LLC, a professional
merchant banking and venture capital
investment firm. Before establishing
Growth Capital Partners in 1982, Mr. Gunn
was a Vice President in the Manufacturers
Hanover Merchant Banking Group with
overall responsibility for merger and
acquisition advisory services. During
the past twenty years, he has been active
in structuring, negotiating, and
financing corporate acquisitions,
management buyouts and venture capital
investments.   |  |  | 1999 | 
|                
|John P. Hectus   |  |  | 56 |  |  | Retired. Mr. Hectus was President, AT&T
Canada Enterprises from March 1999 to
December 1999; Vice President, Finance
and Chief Financial Officer, AT&T Canada
Enterprises, from June 1998 to March 31,
1999; Senior Vice President and Chief
Financial Officer, AT&T Canada, Inc. from
February 1996 through May 1998; and Vice
President and Chief Financial Officer,
AT&T Caribbean & Latin America from
January 1995 through January 1996. Prior
thereto, he held various executive
positions within AT&T Corporation. |  |  | 1998 | 
|                
|Jerry M. Seslowe |  |  | 55 |  |  | Managing Director of Resource Holdings
Ltd., an investment and financial
consulting firm, since 1983. Prior to
1983, Mr. Seslowe was a partner at KPMG
Peat Marwick, a provider of investment
and financial services. Mr. Seslowe has
served as a director of eLOT since
February 1996 and prior to ELOTs
acquisition of eLottery was a director of
eLottery. Mr. Seslowe is a certified
public accountant and attorney.                                                                                                 |  |  | 1996 | 
|                

59



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Board and Committee Activities

During 2000, the ELOT Board of Directors met on 17 occasions. All
directors attended more than 75% of the total number of meetings of the Board
and of all committees of which they were members during 2000. During 2000, the
Board had two standing committees, an Audit Committee and a Compensation
Committee.

The function of the Audit Committee is to recommend the selection of
auditors and to review the audit report and the adequacy of internal controls.
The Audit Committee met four times during 2000. The members of the Audit
Committee during 2000 were John Hectus (Chairman), Rick Fernandes and Philip
Gunn. Effective January 1, 2001, the members of the Audit Committee are John
Hectus (Chairman), Rick Fernandes and Jerry Seslowe.

The Compensation Committee recommends to the full Board the compensation
arrangements, stock option grants and other benefits for executive management
of ELOT as well as the incentive plans to be adopted by Executone. The
Compensation Committee met once during 2000. The members of the Compensation
Committee during 2000 were John Hectus and Jerry Seslowe, who will continue on
that Committee in 2001.

Effective November 15, 2000, the Board amended the Bylaws of the Company
to require a Lead Director of the independent directors, and a Nominating
Committee and a Transaction Committee of the Board, all of the members of which
shall be independent as defined in the Bylaws. The independent directors have
selected John Hectus as the Lead Director in accordance with the Bylaws. The
Nominating Committee shall be responsible for the evaluation and nomination of
Board members. The Nominating Committee will consist of Rick Fernandes and
John Hectus. The Transaction Committee shall be responsible for reviewing all
related-party transactions involving the Corporation, and considering and
making recommendations to the full Board with respect to all proposals
involving (a) a change in control, or (b) the purchase or sale of assets
constituting more than 10% of the Corporations total assets. The Transaction
Committee will consist of Jerry Seslowe and Philip Gunn.

60



---



Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires that the
Companys directors and executive officers, and persons who own more than 10%
of a registered class of the Companys equity securities, file with the
Securities and Exchange Commission initial reports of ownership and reports of
change in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than 10% shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms that
they file.

To the Companys knowledge, based solely on review of the copies of such
reports furnished to the Company, and written representations that no other
reports were required, during the fiscal year ended December 31, 2000, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.

EXECUTIVE OFFICERS OF ELOT

The executive officers of eLOT are as follows:

|                      |  |     |    |                    |  |                                                            
|--------------------- |  | --- | -- | ------------------ |  | -----------------------------------------------------------
|                     
|Name                  |  | Age |    | Position with ELOT
|                     
|Edwin J. McGuinn, Jr. |  |     | 49 |                    |  | President and Chief Executive Officer                      
|                     
|                     
|                     
|                     
|Robert C. Daum        |  |     | 48 |                    |  | Executive Vice President, Finance and
Development          
|                     
|                     
|                     
|                     
|Michael W. Yacenda    |  |     | 49 |                    |  | Executive Vice President and President,
eLottery, Inc.     
|                     
|                     
|                     
|                     
|Barbara C. Anderson   |  |     | 49 |                    |  | Senior Vice President, Law and
Administration and Secretary
|                     
|                     
|                     
|                     
|David J. Parcells     |  |     | 42 |                    |  | Vice President and Chief Financial Officer                 

Edwin J. McGuinn has been President and Chief Executive Officer of the
Company since May 2000. Prior to joining ELOT, since 1998, Mr. McGuinn was
President and CEO of Automated Trading Systems, Inc. and its subsidiary,
LIMITrader Securities, Inc., an Internet based securities firm operating one of
the first proprietary web-based systems for trading corporate bonds, medium
term notes and high-yield bonds. From 1996 to 1998, Mr. McGuinn was Executive
Vice President and head of operations at InterVest Securities, Inc., an
electronic

61



---



bond-trading network where he was responsible for all sales, marketing and
trading operations. Prior thereto, he held executive management positions at
Rodman & Renshaw Capital Group, Inc., Lehman Brothers, and Mabon Securities.
He spent eleven years at Lehman Brothers as a Managing Director where he was a
member of the firms fixed income operating committee responsible for
international trading, sales and research in New York, London and Tokyo. Mr.
McGuinn is a CPA and holds a bachelors degree in mathematics and economics
from Colgate University, and a masters degree in accounting from NYU.

Robert C. Daum has been Executive Vice President, Finance and Development,
since February 2000. From 1978 to 1999, Mr. Daum was employed in the
investment banking industry, focused on corporate finance and mergers and
acquisitions. Between 1994 and 1999 he was a Managing Director with Warburg
Dillon Read and a predecessor, UBS securities. Prior to 1994, Mr. Daum was
employed by Prudential Securities, Merrill Lynch & Co., and Dillon Read and
Co., Inc. He holds a B.A. from Colgate University and an M.B.A. from Harvard
University.

Michael W. Yacenda has served as Executive Vice President of ELOT since
January 1990, and as President of eLottery and its subsidiary, UniStar
Entertainment since 1996. Prior to that time, he was Vice President, Finance
and Chief Financial Officer of ELOT from July 1988 to January 1990. He served
as a Vice President of ISOETEC from 1983 to 1988. From 1974 to 1983, Mr.
Yacenda was employed by the public accounting firm, Arthur Andersen & Co. Mr.
Yacenda is a certified public accountant.

Barbara C. Anderson has been Senior Vice President, Law and Administration
and Secretary of ELOT since January 2000. Prior to that time, she was Vice
President, Law & Administration since October 1998, and Vice President, General
Counsel and Secretary since 1990. From 1985 to 1989, she was Corporate Counsel
of United States Surgical Corporation, a manufacturer of medical devices. She
holds a B.A. from Middlebury College and a J.D. from New York University.

David J. Parcells has served as Vice President and Chief Financial Officer
since January 2000. Prior to that he served as President and Chief Financial
Officer of Sentinel Business Systems, Inc. from 1998-2000. From 1993 to 1998,
Mr. Parcells served as Vice President,

62



---



Operations for Swiss Army Brands, Inc.
Prior thereto, he was Senior Manager for Arthur
Andersen, LLP from 1985-1993. Mr. Parcells sits on the Board of St.
Vincents Medical Center Foundation. He is a graduate of Providence College and
a Certified Public Accountant.

63



---



ITEM 11. EXECUTIVE COMPENSATION

Director Compensation

Each director of ELOT, other than Mr. McGuinn, was granted upon his
election or reelection to the Board in 1999 or 2000, an option to purchase
100,000 shares of ELOTs common stock, at the market price on the date of
election, under the terms of ELOTs 1999 Stock Incentive Plan approved by the
shareholders on December 14, 1999. Each director elected at the 1999 Annual
Meeting was granted an option to purchase 100,000 ELOT shares at the market
price at December 14, 1999 of $3.875 per share, and Mr. Fernandes was granted
an option to purchase 100,000 shares at $7.375 per share, the market price on
March 3, 2000, when he was elected to the Board. On July 17, 2000, each
current director was granted an option to purchase 40,000 ELOT shares at the
market price on that date of $1.875 per share. In addition, during 2000, each
director was paid, and it is the current intention of the Company to continue
to pay in 2001, a fee of $500 per Board or Committee meeting attended and
reimbursement of expenses incurred in attending Board and Committee meetings.

As of December 14, 1999, when the new Stock Incentive Plan was adopted,
127,800 shares had been issued upon exercise of options granted under the terms
of the 1990 Directors Stock Option Plan, and options to purchase 72,800 shares
of common stock (at exercise prices ranging from $1.50 to $6.38 per share) were
outstanding under the terms of that plan as of January 31, 2001. During 1999,
Mr. Philip Gunn received options to purchase 4,500 shares under the 1990 plan
upon his initial election to the Board. No other grants were made to current
directors under the prior Plan in 1999.

Prior to the 1999 Annual Meeting, the Companys director compensation
program provided that each director who did not receive other direct
compensation from ELOT also received upon his or her initial election to the
Board a warrant to purchase 25,000 shares of ELOT common stock at the market
price at the date of grant. Each warrant has a term of five years. Under this
program, the following warrants were granted to current directors upon their
initial election to the Board:

64



---



|                 |  |                   |                         |   |      | 
|---------------- |  | ----------------- | ----------------------- | - | ---- | 
|Name             |  | Date of Grant     | Warrant Price Per Share
|                 |  |                   |                        
|Philip D. Gunn   |  | May 21, 1999      |                         | $ | 5.31 | 
|                
|                
|                
|                
|John J. Hectus   |  | November 18, 1998 |                         | $ | 1.25 | 
|                
|                
|                
|                
|Jerry M. Seslowe |  | February 1, 1996  |                         | $ | 2.63 | 

ELOT also reimburses directors for the travel and accommodation expenses
incurred in attending Board meetings.

Summary Compensation Table

The following table sets forth the compensation by the Company of the
current Chief Executive Officer, the former Chief Executive Officer and the
four most highly compensated other executive officers of ELOT in 2000, for
services in all capacities to the Company and its subsidiaries during the three
fiscal years ended December 31, 2000.

65



---



|                              |  |      |      |     |  |        |         |       |  |              |         |          |  |              |        |           |  |           |           |  |  |  |        | 
|----------------------------- |  | ---- | ---- | --- |  | ------ | ------- | ----- |  | ------------ | ------- | -------- |  | ------------ | ------ | --------- |  | --------- | --------- |  |  |  | ------ | 
|                              |  |     
|                              |  |      |      |     |  |        |         |       |  |              |         |          |  | Other Annual |        | Awards of |  | All Other
|                              |  |      |      |     |  | Salary |         | Bonus |  | Compensation |         | Options/ |  | Compensation
|Name and Principal Position   |  | Year |      | ($) |  | ($)    |         | ($)   |  | SARs (#)     |         | ($) (1) 
|                             
|Edwin J. McGuinn, Jr.         |  |      | 2000 |     |  |        | 187,500 |       |  |              | -0-     |          |  |              | -0-    |           |  |           | 2,500,000 |  |  |  | -0-    | 
|                             
|                             
|                             
|                             
|President and Chief Executive |  |      | 1999 |     |  |        | -0-     |       |  |              | -0-     |          |  |              | -0-    |           |  |           | -0-       |  |  |  | -0-    | 
|                             
|                             
|                             
|                             
|Officer                       |  |      | 1998 |     |  |        | -0-     |       |  |              | -0-     |          |  |              | -0-    |           |  |           | -0-       |  |  |  | -0-    | 
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|Stanley J. Kabala (2)         |  |      | 2000 |     |  |        | 138,463 |       |  |              | -0-     |          |  |              | -0-    |           |  |           | 40,000    |  |  |  | 2,870  | 
|                             
|                             
|                             
|                             
|Chairman of the Board,        |  |      | 1999 |     |  |        | 300,000 |       |  |              | 633,833 |          |  |              | -0-    |           |  |           | 50,000    |  |  |  | 6,493  | 
|                             
|                             
|                             
|                             
|Former President and Chief    |  |      | 1998 |     |  |        | 144,231 |       |  |              | 151,562 |          |  |              | 91,936 |           |  |           | 400,000   |  |  |  | 6,072  | 
|                             
|                             
|                             
|                             
|Executive Officer            
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|Michael W. Yacenda            |  |      | 2000 |     |  |        | 262,400 |       |  |              | -0-     |          |  |              | -0-    |           |  |           | 250,000   |  |  |  | -0-    | 
|                             
|                             
|                             
|                             
|Executive Vice President      |  |      | 1999 |     |  |        | 262,400 |       |  |              | 0       |          |  |              | 0      |           |  |           | 500,000   |  |  |  | 6,708  | 
|                             
|                             
|                             
|                             
|President, eLottery, Inc.     |  |      | 1998 |     |  |        | 262,203 |       |  |              | 0       |          |  |              | 0      |           |  |           | 0         |  |  |  | 6,072  | 
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|Robert C. Daum                |  |      | 2000 |     |  |        | 210,577 |       |  |              | -0-     |          |  |              | -0-    |           |  |           | 1,500,000 |  |  |  | -0-    | 
|                             
|                             
|                             
|                             
|Executive Vice President      |  |      | 1999 |     |  |        | -0-     |       |  |              | -0-     |          |  |              | -0-    |           |  |           | -0-       |  |  |  | -0-    | 
|                             
|                             
|                             
|                             
|Finance and Strategic         |  |      | 1998 |     |  |        | -0-     |       |  |              | -0-     |          |  |              | -0-    |           |  |           | -0-       |  |  |  | -0-    | 
|                             
|                             
|                             
|                             
|Development                  
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|Barbara C. Anderson           |  |      | 2000 |     |  |        | 175,368 |       |  |              | 60,850  |          |  |              | -0-    |           |  |           | -0-       |  |  |  | 3,133  | 
|                             
|                             
|                             
|                             
|Senior Vice President, Law &  |  |      | 1999 |     |  |        | 167,075 |       |  |              | -0-     |          |  |              | -0-    |           |  |           | 290,000   |  |  |  | 18,942 | 
|                             
|                             
|                             
|                             
|Administration and Secretary  |  |      | 1998 |     |  |        | 166,950 |       |  |              | -0-     |          |  |              | -0-    |           |  |           | 80,000    |  |  |  | 17,926 | 
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|David J. Parcells             |  |      | 2000 |     |  |        | 158,954 |       |  |              | -0-     |          |  |              | -0-    |           |  |           | 250,000   |  |  |  | -0-    | 
|                             
|                             
|                             
|                             
|Vice President and Chief      |  |      | 1999 |     |  |        | -0-     |       |  |              | -0-     |          |  |              | -0-    |           |  |           | -0-       |  |  |  | -0-    | 
|                             
|                             
|                             
|                             
|Financial Officer             |  |      | 1998 |     |  |        | -0-     |       |  |              | -0-     |          |  |              | -0-    |           |  |           | -0-       |  |  |  | -0-    | 



|(1) |  | All Other Compensation includes for Mr. Kabala, Mr. Yacenda and Ms.
Anderson a matching contribution by the Company under the Companys 401(k)
plan in the amount of $660 each for each year. This column also includes
premiums paid by the Company for long-term disability and life insurance
for the following individuals in the following amounts in 2000: Mr.
Kabala, $2,210; Mr. Yacenda, $4,367; and Ms. Anderson, $2,473; in the
following amounts in 1999: Mr. Kabala, $5,833; Mr. Yacenda, $6,048; and
Ms. Anderson, $3,282; and in the following amounts in 1998: Mr. Kabala,
$5,412; Mr. Yacenda, $5,412; and Ms. Anderson, $2,266. This column also
includes in the case of Ms. Anderson $15,000 in credits against the
exercise price of employee stock options in each of 1999 and 1998.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Mr. Kabala was elected Chairman, President and Chief Executive Officer
effective June 28, 1998 and resigned as President and Chief Executive
Officer in May 2000. The 40,000 share option awarded to Mr. Kabala in 2000
was awarded solely in his capacity as a director. See the discussion of
his employment agreement below. The amounts shown as bonuses for 1998 and
1999 represent the taxable value of stock granted pursuant to his
employment agreement described below.                                                                                                                                                                                                                                                                                                                          

66



---



Employment Agreements

In June 1998, the Company entered into an employment agreement with
Stanley J. Kabala, its Chairman of the Board, President and Chief Executive
Officer, for an initial term of one year. The employment agreement provided
for a minimum base salary of $300,000 per year, eligibility for a incentive
bonus of 150,000 shares of Common Stock upon achievement of objective
performance goals set by the Board of Directors, a signing bonus of 200,000
restricted shares of Common Stock vesting ratably over 12 months and an initial
stock option covering 200,000 shares of Common Stock vesting ratably over 12
months. The agreement further provided that in the event of the termination of
Mr. Kabalas employment by the Company without cause or his voluntary
termination of employment upon certain events, including diminution of his
responsibilities or a change of control, the Company would pay Mr. Kabala his
base salary for the remainder of the initial term, a prorated bonus and
continuation of medical insurance coverage, and his restricted stock and stock
options would vest immediately. In August 1999, the Board of Directors
approved the extension of Mr. Kabalas employment on a month-to-month basis, to
continue at least until the earlier of the closings of the sales of the
computer telephony and healthcare communications businesses or March 31, 2000,
at the same salary. The Board also granted 50,000 shares to Mr. Kabala as
further compensation for his services during the prior year, and approved a
contingent grant of 25,000 additional shares and an option to purchase 100,000
shares at $4.125 per share, contingent upon his employment throughout the sales
of the telephone and healthcare businesses to buyers other than a management
group in which he participates. The additional contingent shares and option
were not earned by Mr. Kabala and were not granted. In May 2000, Mr. Kabala
resigned as President and Chief Executive Officer. He retained his position as
non-employee Chairman of the Board.

In May 2000, the Company entered into an employment agreement with Edwin
J. McGuinn, its President and Chief Executive Officer, for an initial term of
three years. The employment agreement provides for a minimum base salary of
$325,000 per year, eligibility for a incentive bonus equal to 50% of salary
upon achievement of objective performance goals set by the Board of Directors,
and an initial stock option covering 2,000,000 shares of Common Stock vesting
in quarterly increments over 36 months. The agreement further provides that in
the event

67



---



of the termination of Mr. McGuinns employment by the Company without
cause or his voluntary termination of employment upon certain events, including
diminution of his responsibilities or a change of control, the Company would
pay Mr. McGuinn his base salary for the remainder of the initial term or one
year, whichever is longer, and a prorated bonus for the year in which
termination occurs, and his stock options would vest immediately and be
exercisable for the balance of the option term or three years, whichever is
shorter.

68



---



Option Grants in Last Fiscal Year

The following table sets forth individual grants of stock options and
stock appreciation rights made during 2000 to each of the executive officers
named in the Summary Compensation Table above. There were no grants of stock
appreciation rights (SARs) to any officers or exercises of stock appreciation
rights by officers in 2000.

OPTION GRANTS IN LAST FISCAL YEAR

|                      |  |             |           |            |  |          |       |            |  |                     |       |                      |  |                   |          |                            |  |  |     |  |  |  |     | 
|--------------------- |  | ----------- | --------- | ---------- |  | -------- | ----- | ---------- |  | ------------------- | ----- | -------------------- |  | ----------------- | -------- | -------------------------- |  |  | --- |  |  |  | --- | 
|                      |  |             |           |            |  | % of    
|                      |  |             |           |            |  | Total    |       |            |  |                     |       |                      |  |                   |          | Potential Realizable Value
|                      |  | Number of   |           | Options    |  |          |       |            |  |                     |       |                      |  | At Assumed Annual
|                      |  | Securities  |           | Granted to |  | Exercise |       |            |  |                     |       | Rates of Stock Price
|                      |  | Underlying  |           | Employees  |  | or Base  |       |            |  |                     |       | Appreciation        
|                      |  | Options     |           | in Fiscal  |  | Price    |       | Expiration |  | For Option Term (1)
|Name                  |  | Granted (#) |           | Year       |  | ($/sh)   |       | Date       |  | 5%($)               |       | 10% ($)             
|                      |  |             |           |            |  |          |       |            |  |                     |       |                     
|Edwin J. McGuinn, Jr. |  |             | 2,000,000 |            |  |          | 24.63 |            |  |                     | 2.69  |                      |  |                   | 5/22/05  |                            |  |  | -0- |  |  |  | -0- | 
|                     
|                     
|                     
|                     
|                      |  |             | 500,000   |            |  |          | 6.16  |            |  |                     | 1.00  |                      |  |                   | 12/12/05 |                            |  |  | -0- |  |  |  | -0- | 
|                     
|                     
|                     
|                     
|Stanley J. Kabala     |  |             | 40,000    | (2)        |  |          | .49   |            |  |                     | 1.875 |                      |  |                   | 7/17/    |                            |  |  | -0- |  |  |  | -0- | 
|                     
|                     
|                     
|                     
|Michael W. Yacenda    |  |             | 250,000   |            |  |          | 3.08  |            |  |                     | 1.25  |                      |  |                   | 1/03/10  |                            |  |  | -0- |  |  |  | -0- | 
|                     
|                     
|                     
|                     
|Robert C. Daum        |  |             | 1,000,000 |            |  |          | 12.31 |            |  |                     | 6.59  |                      |  |                   | 2/15/02  |                            |  |  | -0- |  |  |  | -0- | 
|                     
|                     
|                     
|                     
|                      |  |             | 500,000   |            |  |          | 6.16  |            |  |                     | 1.00  |                      |  |                   | 12/12/05 |                            |  |  | -0- |  |  |  | -0- | 
|                     
|                     
|                     
|                     
|Barbara C. Anderson   |  |             | 0         |            |  |          | 0     |            |  |                     |      |                      |  |                   |         |                            |  |  |    |  |  |  |    | 
|                     
|                     
|                     
|                     
|David J. Parcells     |  |             | 50,000    |            |  |          | .62   |            |  |                     | 5.75  |                      |  |                   | 1/11/05  |                            |  |  | -0- |  |  |  | -0- | 
|                     
|                     
|                     
|                     
|                      |  |             | 200,000   |            |  |          | 2.46  |            |  |                     | 2.47  |                      |  |                   | 7/18/05  |                            |  |  | -0- |  |  |  | -0- | 



---

|(1) |  | Based upon the last sale price on December 31, 2000 of $.50 per share
of Common Stock.
|--- |  | --------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Option granted in capacity as non-employee director. See Director
Compensation.     

69



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Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values

The following table sets forth each exercise of stock options made during
the year ended December 31, 2000 by the current Chief Executive Officer, the
former Chief Executive Officer, and the four most highly compensated other
executive officers and the fiscal year-end value of unexercised options held by
those individuals as of December 31, 2000. There were no exercises or holdings
of stock appreciation rights by any officers during 2000, and there are no
outstanding stock appreciation rights.

|                      |  |              |        |              |  |               |        |                       |  |                         |                   |                         |  |  |  |  |  |  |      | 
|--------------------- |  | ------------ | ------ | ------------ |  | ------------- | ------ | --------------------- |  | ----------------------- | ----------------- | ----------------------- |  |  |  |  |  |  | ---- | 
|                      |  |              |        |              |  |               |        |                       |  | Number of               |                   | Value of Unexercised   
|                      |  |              |        |              |  |               |        |                       |  | Unexercised Options     |                   | In-the Money Options at
|                      |  | Shares       |        |              |  |               |        | at Fiscal Year-End(#) |  | Fiscal Year-End ($) (1)
|                      |  | Acquired on  |        | Value        |  | Exercisable/  |        |                       |  | Exercisable/           
|Name                  |  | Exercise (#) |        | Realized ($) |  | Unexercisable |        | Unexercisable        
|                     
|Edwin J. McGuinn, Jr. |  |              | 0      |              |  |               | 0      |                       |  |                         | 641,666/1,858,334 |                         |  |  |  |  |  |  | 0/0- | 
|                     
|Stanley J. Kabala     |  |              | 0      |              |  |               | 0      |                       |  |                         | 340,000/0         |                         |  |  |  |  |  |  | 0/0- | 
|                     
|                     
|                     
|                     
|Michael W. Yacenda    |  |              | 0      |              |  |               | 0      |                       |  |                         | 564,900/185,100   |                         |  |  |  |  |  |  | 0/0- | 
|                     
|                     
|                     
|                     
|Robert C. Daum        |  |              | 0      |              |  |               | 0      |                       |  |                         | 625,499/874,501   |                         |  |  |  |  |  |  | 0/0- | 
|                     
|                     
|                     
|                     
|Barbara C. Anderson   |  |              | 15,600 |              |  |               | 51,683 | (2)                   |  |                         | 370,000/0         |                         |  |  |  |  |  |  | 0/0- | 
|                     
|                     
|                     
|                     
|David J. Parcells     |  |              | 0      |              |  |               | 0      |                       |  |                         | 0/250,000         |                         |  |  |  |  |  |  | 0/0- | 



|(1) |  | Based upon the last sale price on December 31, 2000 of $.50 per share of
Common Stock.
|--- |  | --------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Based on market price at date of exercise; shares acquired were not sold.             

Compensation Committee Report on Executive
Compensation

It is the responsibility of the Compensation Committee of the Board of
Directors to administer the Companys incentive plans, review the performance
of management and approve the compensation of the Chief Executive Officer and
other executive officers of the Company.

The Compensation Committee believes that the Companys success depends on
the coordinated efforts of individual employees working as a team toward
defined common goals. The objectives of the Companys compensation program are
to align executive compensation with business objectives, to reward individual
and team performance furthering the business objectives, and to attract, retain
and reward employees who will contribute to the long-term success of the
Company with competitive salary and incentive plans.

Specifically, executive compensation decisions are based on the following
factors:

1. The total direct compensation package for the Companys executives is
made up of three elements: base salary, a short-term incentive program in the
form of a performance-based bonus, and a long-term incentive program, usually
in the form of stock options.

2. The Committee believes that the total compensation of all executives
should have a large incentive element that is dependent upon overall Company
performance measured against objectives established at the beginning of the
fiscal year. Bonus and stock options represent a significant portion of the
total compensation package, in an attempt to further the Companys goal of
linking compensation more closely to the Companys performance. The percentage
of direct compensation that is dependent upon the Companys attainment of its
objectives also

70



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generally increases as the responsibility of the officer in question for
the overall corporate performance increases.

3. Total compensation levels, i.e., base salary, bonus potential, and
number of stock options, are established by individual levels of responsibility
and reference to competitive compensation levels for executives performing
similar functions and having equivalent levels of responsibility. However,
whether actual bonuses are paid to each executive depends upon the achievement
of Company profitability goals.

4. There were no merit increases in salary for any of the executive
officers of ELOT during 2000. Merit increases in base salary for executives
other than the chief executive officer are generally reviewed on an individual
basis by the chief executive officer and increases are dependent upon a
favorable evaluation by the chief executive officer of individual executive
performance relative to individual goals, the functioning of the executives
team within the corporate structure, success in furthering the corporate
strategy and goals, and individual management skills. Based upon his
evaluation, the chief executive officer may recommend base salary increases to
the Committee for its approval.

5. In addition to base salary and merit increases, the Compensation
Committee considers cash incentive bonuses or stock awards for officers of the
Company and its subsidiary eLottery, including the Chief Executive Officer,
both prospectively based upon the attainment of specific performance goals, and
retrospectively based upon the Committees discretionary judgment as to the
performance during the year of the Company and its executive officers or other
considerations deemed appropriate at the time. The Committee has not approved
any bonus payments to either chief executive officer of the Company or any of
the four other highest paid executive officers of the Company for 2000, except
cash bonuses paid to one of the four other highest paid executive officers
based on individual performance as disclosed in the Summary Compensation Table.

The Committee reserves the right to make discretionary bonus awards in
appropriate circumstances where an executive might merit a bonus based on other
considerations.

6. In June 1998, the Company entered into an employment agreement with
Stanley J. Kabala, its then Chairman of the Board, President and Chief
Executive Officer, as described above under Executive Compensation. In
August 1999, the Committee and the Board approved the month-to-month extension
of Mr. Kabalas employment through the sale of the Companys telephony
healthcare businesses and the DCC investment or March 31, 2000, at the same
salary and granted Mr. Kabala (i) a bonus stock award of 50,000 shares and (ii)
the opportunity for Mr. Kabala to earn an additional stock bonus of 25,000
shares of Common Stock and an option to purchase 100,000 shares at $4.125 per
share upon the closing of the sale of the telephony and healthcare businesses
and the DCC investment. The contingent compensation described in (ii) was not
earned due to Mr. Kabalas resignation as an officer and employee prior to the
sale of the healthcare business and DCC investment.

7. All executives, including the Chief Executive Officer, are eligible for
stock option grants under the employee stock option plan applicable to
employees generally, as approved by the Compensation Committee. The number of
options granted to any individual depends on individual performance, salary
level and competitive data. In addition, in determining the number

71



---



of stock
options granted to each senior executive, the Compensation Committee reviews
the
unvested options of each executive to determine the future benefits
potentially available to the executive. The number of options granted will
depend in part on the total number of unvested options deemed necessary to
create a long-term incentive on the part of the executive to remain with the
Company in order to realize future benefits.

In 2000, the Committee approved stock option grants for certain of its
executive officers as described in the Summary Compensation Table above. The
Board of Directors and the Compensation Committee believes that the option
grants were necessary to recruit or retain the executives and for the
implementation of the Companys business plan. The options are subject to a
vesting schedule over three years in order to encourage the executives to
continue their employment with the Company.

In conclusion, the Compensation Committee believes that the base salary,
bonus and stock options of the Companys Chief Executive Officer and other
executives are appropriate in light of competitive pay practices and the
Companys performance against short and long-term performance goals.



72



---



PERFORMANCE GRAPH

The graph below compares, for the last five fiscal years, the yearly
percentage change in cumulative total returns (assuming reinvestment of
dividends and interest) of (i) the Companys Common Stock, (ii) the NASDAQ
Stock Market (iii) the JP Morgan H&Q Internet 100 Index and (iv) a peer group
index (the Old Peer Group) constructed by the Company in prior years. The
Old Peer Group includes companies who competed with the discontinued businesses
of the company in the general voice communications equipment area as well as
those active in several more specified areas, such as automatic call
distribution and voice mail. The Old Peer Group is only being presented in the
year of transition to using the JP Morgan H&Q Internet 100 index (Internet
Index) This Internet Index is more representative of ELOTs continuing
operations.



73



---



Weighted Average Cumulative Total Returns

|               |  |      |  |      |  |      |  |      |  |      |        |      |  |  |        |  |  |  |        |  |  |  |        |  |  |  |        | 
|-------------- |  | ---- |  | ---- |  | ---- |  | ---- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|               |  |      |  |      |  |      |  |      |  |     
|               |  | 1995 |  | 1996 |  | 1997 |  | 1998 |  | 1999 |        | 2000
|ELOT           |  |      |  | 100  |  |      |  |      |  |      | 102.70 |      |  |  | 94.59  |  |  |  | 75.68  |  |  |  | 235.16 |  |  |  | 21.62  | 
|              
|              
|              
|              
|NASDAQ         |  |      |  | 100  |  |      |  |      |  |      | 123.04 |      |  |  | 150.69 |  |  |  | 212.51 |  |  |  | 394.94 |  |  |  | 237.68 | 
|              
|              
|              
|              
|OLD PEER GROUP |  |      |  | 100  |  |      |  |      |  |      | 127.02 |      |  |  | 125.26 |  |  |  | 117.56 |  |  |  | 195.63 |  |  |  | 71.69  | 
|              
|              
|              
|              
|JP MORGAN H&Q  |  |      |  | 100  |  |      |  |      |  |      | 84.26  |      |  |  | 113.08 |  |  |  | 263.25 |  |  |  | 912.76 |  |  |  | 351.20 | 
|              
|              
|              
|              
|INTERNET       |  |      |  | 100  | 

Compensation Committee Interlocks and Insider
Participation

The members of the Compensation Committee are Jerry Seslowe and John
Hectus.

No member of the Committee is a former or current officer or employee of
the Company or any subsidiary.

No executive officer of the Company served as a director or a member of
the Compensation Committee or of the equivalent body of any entity, any one of
whose executive officers serve on the Compensation Committee or the Board of
Directors of the Company.

74



---



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT

The following table lists any person (including any group as that term
is used in Section 13(d)(3) of the Exchange Act) who, to the knowledge of eLOT,
was the beneficial owner as of December 31, 2000, of more than 5% of the
outstanding voting shares of the Company. Unless otherwise noted, the owner has
sole voting and dispositive power with respect to the securities.

|               |  |                            |  |                      |           |                      |  |  |     |  
|-------------- |  | -------------------------- |  | -------------------- | --------- | -------------------- |  |  | --- | -
|               |  | Name and Address of        |  | Amount and Nature of
|Title of Class |  | Beneficial Owner           |  | Beneficial Ownership |           | Percent of
Class (1)
|              
|Common Stock   |  | Heartland Advisors, Inc.   |  |                      | 5,520,000 |                      |  |  | 7.9 | %
|              
|              
|              
|              
|               |  | 790 North Milwaukee Street
|              
|              
|              
|              
|               |  | Milwaukee, WI 53202       



|(1) |  | Percentages shown are based upon 69,646,043 shares of common stock
outstanding as of December 31, 2000.
|--- |  | -------------------------------------------------------------------------------------------------------

The following table sets forth as of January 31, 2001, the beneficial
ownership of the Companys voting shares by all current directors and nominees
of the Company, the current Chief Executive Officer, the former Chief Executive
Officer, the four next most highly compensated executive officers in 2000, and
all current directors and executive officers of the Company as a group. Unless
otherwise indicated, each person listed below has sole voting and investment
power over all shares beneficially owned by him.

|               |  |                                                            |  |                      |  |                        
|-------------- |  | ---------------------------------------------------------- |  | -------------------- |  | -----------------------
|               |  | Name of                                                    |  | Amount and Nature of
|Title of Class |  | Beneficial Owner                                           |  | Beneficial Ownership |  | Percentage of Class (1)
|              
|Common Stock   |  | Barbara C. Anderson                                        |  | 466,607 (2)          |  | *                      
|              
|              
|              
|              
|               |  | Robert C. Daum                                             |  | 750,499 (3)          |  | 1.1%                   
|              
|              
|              
|              
|               |  | Richard J. Fernandes                                       |  | 170,000 (4)          |  | *                      
|              
|              
|              
|              
|               |  | Philip D. Gunn                                             |  | 334,500 (5)          |  | *                      
|              
|              
|              
|              
|               |  | John P. Hectus                                             |  | 179,700 (6)          |  | *                      
|              
|              
|              
|              
|               |  | Stanley J. Kabala                                          |  | 627,287 (7)          |  | *                      
|              
|              
|              
|              
|               |  | Edwin J. McGuinn, Jr.                                      |  | 873,333(8)           |  | 1.2%*                  
|              
|              
|              
|              
|               |  | David Parcells                                             |  | 16,667 (9)           |  | *                      
|              
|              
|              
|              
|               |  | Jerry M. Seslowe                                           |  | 692,315 (10)         |  | *                      
|              
|              
|              
|              
|               |  | Michael W. Yacenda                                         |  | 970,446 (11)         |  | 1.4%                   
|              
|              
|              
|              
|               |  | All Current Directors and
Officers as a Group
(10 Persons) |  | 5,017,795 (12)       |  | 6.8%                   

75



---





|*    |  | Less than 1% of the class.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(1)  |  | Percentages shown are based upon 69,795,901 shares of common stock
actually outstanding as of January 31, 2001. In cases where the beneficial
ownership of the individual or group includes options, warrants or convertible
securities, the percentage is based on 69,795,901 shares actually outstanding,
plus the number of shares issuable upon exercise or conversion of any such
options, warrants or convertible securities held by the individual or group.
The percentage does not reflect or assume the exercise or conversion of any
options, warrants or convertible securities not owned by the individual or
group in question.
|    
|    
|    
|    
|(2)  |  | Includes 370,000 shares issuable upon exercise of options that are or will
become exercisable by March 31, 2001 and 7,247 shares issuable upon conversion
of the Companys Debentures of which Ms. Anderson beneficially owns $77,000 in
principal amount or less than 1% of the outstanding principal amount; does not
include 100,000 shares subject to options that are not and will not become
exercisable by March 31, 2001.                                                                                                                                                                                                            
|    
|    
|    
|    
|(3)  |  | Includes 750,499 shares issuable upon exercise of options that are or will
become exercisable by March 31, 2001; does not include 1,249,501 shares subject
to options that are not and will not become exercisable by March 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|    
|    
|    
|(4)  |  | Includes 140,000 shares issuable upon exercise of options that are or will
become exercisable by March 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|    
|    
|    
|(5)  |  | Includes 309,500 shares subject to options and 25,000 shares subject to
warrants that are or will become exercisable by March 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    
|    
|    
|    
|(6)  |  | Includes 154,700 shares issuable upon exercise of options and 25,000
shares issuable upon exercise of warrants that are or will become exercisable
by March 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|    
|    
|    
|(7)  |  | Includes 340,000 shares issuable upon exercise of options that are or will
become exercisable by March 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|    
|    
|    
|(8)  |  | Includes 823,333 shares issuable upon exercise of options that are or will
become exercisable by March 31, 2001; does not include 2,176,667 shares
subject to options that are not and will not become exercisable by March 31,
2001.                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|    
|    
|    
|(9)  |  | Includes 16,667 shares subject to options that are exercisable by March 31,
2001; does not include 333,333 shares subject to options that are not and will
not become exercisable by March 31, 2001                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    
|    
|    
|    
|(10) |  | Includes 193,600 shares subject to options and 25,000 shares subject to
warrants that are exercisable by March 31, 2001. Also includes 25,467 shares
of Common Stock owned and 163,559 shares of Common Stock subject to exercisable
options and warrants held by Resource                                                                                                                                                                                                                                                                                                                                                                   

76



---



|     |  | Holdings Associates, of which Mr. Seslowe
is a managing director and in which he holds a greater than 10% ownership
interest.                                                                                                                                                                                                                                                                                
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(11) |  | Includes 627,375 shares subject to options that are or will become
exercisable by March 31, 2001, and 1,600 shares issuable upon conversion of the
Companys Debentures, of which Mr. Yacenda beneficially owns $17,000 in
principal amount or less than 1% of the outstanding principal amount. Does not
include 372,625 shares subject to options not exercisable by March 31, 2001.                       
|    
|    
|    
|    
|(12) |  | Includes 3,725,674 shares issuable upon exercise of options that are or
will become exercisable by March 31, 2001, and 175,000 shares issuable upon
exercise of warrants that are or will become exercisable by March 31, 2001, and
8,847 shares issuable upon conversion of the Companys Debentures. Does not
include 4,295,685 shares issuable upon exercise of options not exercisable by
March 31, 2001.

77



---



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The 1994 Executive Stock Incentive Plan (the Executive Plan), approved
by shareholders at the 1994 Annual Meeting, was implemented in October 1994
with 30 employees participating. Under the terms of the Executive Plan,
eligible key employees were granted the right to purchase shares of the
Companys Common Stock at the market price, which was $3.1875 per share at the
time of purchase. Participating employees financed the purchases of these
shares through loans by the Companys bank lender at the prime rate less 1/4%,
payable over five years. The loans were fully-recourse to the participating
employees but were guaranteed by letters of credit from the Company to the
lending bank. The Company lent the employee 85% of the interest due to the
bank. The Company held the purchased Common Stock as security for its
guarantees of the repayment of the loans. Sales of the shares purchased under
the Plan were subject to certain restrictions.

In December 1997, the Compensation Committee of the Board of Directors of
the Company agreed, subject to the Company obtaining the agreement of the
lending bank, that it would allow the participant loans to remain outstanding
until December 2001 instead of requiring repayment in August 1999, and that it
would defer collection from each participant of the 15% of the 1997 interest on
the loans that would otherwise have been currently payable to the Company. The
Committee also decided to waive certain restrictions in the Plan to allow
participants to sell a portion or all of their Plan stock in 1998, subject to
applicable legal requirements and to repayment of the loan with the proceeds of
the shares sold.

In June 1998, the Board of Directors approved a Transition and Retention
Plan (the Transition Plan) and offered it to certain participants in the
Executive Plan including the executive officers listed in the table below. The
Transition Plan provides, in exchange for a release of all prior claims by the
participant, defined retention and severance payments, option grants at current
market value and deferral of all loan interest to the participant. A
participant in the Transition Plan earned, through continued employment over a
period of three years, a retention payment of up to 110% of any shortfall of
the market value of the Common Stock purchased with the loan below the loans
outstanding principal and interest. The amount of this retention payment would
have been determined, and the payment become payable, only if and when the
participants employment with the Company ended without a prior repayment of
the loan. In the event the Company terminates the participants employment
without cause, or a change of control of the Company occurs, the retention
payment became fully vested and payable immediately. The Company had the
option at any time to repurchase the Purchased Shares from a Transition Plan
participant at the fair market value, in which case the participant remains
liable for any loan balance not repaid from the repurchase proceeds subject the
other terms of the Transition Plan. Under certain circumstances, such as
termination by the Company of the participants employment following a change
of control or otherwise without cause as defined in the Transition Plan, the
participant is also entitled to continuation of salary and benefits for nine
months.

78



---



The following table contains information about borrowings in excess of
$60,000 by current executive officers that were outstanding during 2000
pursuant to the Executive Plan. The amounts listed below also include the
interest paid by the Company to the bank, reimbursement of which was owed by
the individual to the Company. The persons listed below became fully vested in
the retention payment under the Transition Plan as a result of the sale of the
computer telephony business to Inter-Tel on January 1, 2000 and repaid the loan
including accrued interest in full in 2000.

|                    |  |                      |           |                   |  |   |   | 
|------------------- |  | -------------------- | --------- | ----------------- |  | - | - | 
|                    |  | Highest Amount       |           | Unpaid           
|                    |  | Indebtedness Between |           | Indebtedness     
|                    |  | January 1, 1999 and  |           | at               
|                    |  | January 31, 2001,    |           | January 31, 2001,
|                    |  | Including            |           | Including        
|Name                |  | Accrued Interest     |           | Accrued Interest 
|                    |  |                     
|Barbara C. Anderson |  | $                    | 257,621   |                   |  | $ | 0 | 
|                   
|                   
|                   
|                   
|Michael W. Yacenda  |  | $                    | 1,525,430 |                   |  |   | 0 | 

On August 2, 1999, the Board of Directors approved, with Mr. Seslowe
abstaining, the issuance to Resource Holdings Associates, an investment banking
firm in which Mr. Seslowe has more than a 10% interest, of a warrant to
purchase 100,000 shares of common stock at a price of $3.00 per share, as
compensation for certain investment banking services provided and to be
provided to the company. Management believes the compensation paid for these
services to be as least at favorable to the company as would have been obtained
though arms-length negotiations with an independent third party.

On January 13, 2000, the Company acquired from Twelve Oaks Liquidating Trust
254,686 shares (or approximately 4%) of the outstanding common stock of
Dialogic Communications Corp. (DCC), of which the Company already owned
approximately 47% of the issued and outstanding common stock. The purchase
price for the DCC shares was 254,656 shares of newly issued shares of the
Companys Common Stock. Twelve Oaks Liquidating Trust is a liquidating trust
for Twelve Oaks Capital Limited Partners, of which Philip D. Gunn, a director
of the Company and Interim CEO of eLottery, Inc., was the general partner and
held a greater than 10% interest. Mr. Gunn is also the Liquidating Trustee for
the Trust. The Company believes the acquisition of the DCC shares gave the
Company over 51% of the voting stock of DCC and will make the sale of the DCC
investment both easier to accomplish and more profitable to eLOT. Management
believes the purchase price paid for the DCC shares to be as least at favorable
to the Company as would have been obtained though arms-length negotiations
with a third party not affiliated with the Company.

79



---



PART IV

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

(a)(1), (a)(2) and (d). The financial statements required by this item and
incorporated herein by reference are as follows:

Report of Independent Public Accountants

Consolidated Balance Sheets December 31, 2000 and 1999
Consolidated Statements of Operations Years ended December 31, 2000, 1999 and
1998

Consolidated Statements of Changes in Stockholders Equity Three years ended
December 31, 2000

Consolidated Statements of Cash Flows Years ended December 31, 2000, 1999 and
1998

Notes to Consolidated Financial Statements

The schedule to consolidated financial statements required by this item and
included in this report is as follows:

Report of Independent Public Accountants on Schedule

Schedule II Valuation and Qualifying Accounts

(a)(3) and (c). The exhibits required by this item and included in this report
or incorporated herein by reference are as follows:

Exhibit No.

|Exhibit No. |  |                                                                                                                                                                                                                                                               
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2-1         |  | Agreement and Plan of Merger by and among EXECUTONE Information
Systems, Inc., Executone Newco, Inc., and Unistar Gaming Corp., dated as
of December 19, 1995. Incorporated by reference to the Registrants
Current Report on Form 8-K dated January 3, 1996.
|           
|           
|           
|           
|3-1         |  | Articles of Incorporation, as amended through December 18, 1995.
Incorporated by reference to the Registrants Annual Report on Form 10-K
for the year ended December 31, 1995, filed on April 15, 1996.                                                      

80



---



|      |  |                                                                                                                                                                                                                                                                                                                                                                                 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|     
|     
|     
|3-2   |  | Articles of Amendment dated and filed December 19, 1995, amending the
Companys Articles of Incorporation. Incorporated by reference to the
Registrants Current Report on Form 8-K dated January 3, 1996.                                                                                                                                                                      
|     
|     
|     
|     
|3-3   |  | Articles of Amendment filed January 4, 2000, amending the Companys
Articles of Incorporation. Incorporated by reference to the Registrants
Annual Report on Form 10-K for the year ended December 31, 1999, filed
March 31, 2000.                                                                                                                                             
|     
|     
|     
|     
|3-4   |  | Bylaws, as amended. Incorporated by reference to the Registrants
Current Report on Form 8-K filed November 14, 2000.                                                                                                                                                                                                                                                           
|     
|     
|     
|     
|4-10  |  | Indenture dated March 1, 1986 with United States Trust Company of New
York relating to 7 1/2% Convertible Subordinated Debentures of Vodavi
Technology Corporation due March 15, 2011. Incorporated by reference to
Vodavi Technology Corporations Registration Statement on Form S-1 (as
amended) (Registration No. 33-3827) filed on March 9, 1986 and amended
April 1, 1986.
|     
|     
|     
|     
|4-11  |  | First Supplemental Indenture dated August 4, 1989 with United States
Trust Company of New York relating to 7 1/2% Convertible Subordinated
Debentures due March 15, 2011. Incorporated by reference to the
Registrants Annual Report on Form 10-K for the year ended December 31,
1989.                                                                                        
|     
|     
|     
|     
|4-12  |  | Specimen Certificate representing 7 1/2% Convertible Subordinated
Debentures. Incorporated by reference to the Registrants Annual Report
on Form 10-K for the year ended December 31, 1989.                                                                                                                                                                                    
|     
|     
|     
|     
|10-3  |  | 1999 Stock Incentive Plan. Incorporated by reference to the Registrants
definitive Proxy Statement (Form 14A) filed on November 18, 1999.                                                                                                                                                                                                                                      
|     
|     
|     
|     
|10-7  |  | 1994 Executive Stock Incentive Plan. Incorporated by reference to the
Registrants Annual Report on Form 10-K for the year ended December 31,
1994.                                                                                                                                                                                                                             
|     
|     
|     
|     
|10-8  |  | 1998 Transition and Retention Plan. Incorporated by reference to the
Registrants Annual Report on Form 10-K for the year ended December 31,
1998.                                                                                                                                                                                                                              
|     
|     
|     
|     
|10-20 |  | Warrant to Purchase 25,000 Shares of Common Stock of the Registrant, in
favor of Jerry M. Seslowe, dated February 1, 1996. Incorporated by
reference to the Registrants Annual Report on Form 10-K/A for the year
ended December 31, 1996 filed on April 30, 1997.                                                                                                             
|     
|     
|     
|     
|10-21 |  | Warrant to Purchase 25,000 Shares of Common Stock of the Registrant, in
favor of John P Hectus, dated November 18, 1998. Incorporated by
reference to the Registrants Annual Report on Form 10-K/A for the year
ended December 31, 1998.                                                                                                                                       

81



---



|      |  |                                                                                                                                                                                                                                                          
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|     
|     
|     
|10-22 |  | Warrant to Purchase 25,000 Shares of Common Stock of the Registrant, in
favor of Philip D. Gunn, dated May 21, 1999. Incorporated by reference
to the Registrants Annual Report on Form 10-K for the year ended December
31, 1999, filed March 31, 2000.
|     
|     
|     
|     
|21    |  | Subsidiaries of eLOT, Inc. Filed herewith.                                                                                                                                                                                                               
|     
|     
|     
|     
|23    |  | Consent of Arthur Andersen LLP. Filed herewith.                                                                                                                                                                                                          
|     
|     
|     
|     
|27    |  | Financial Data Schedule. Filed herewith.                                                                                                                                                                                                                 

Undertakings

For the purposes of complying with the rules governing Form S-8 under the
Securities Act of 1933, the undersigned registrant hereby undertakes as
follows, which undertaking shall be incorporated by reference into registrants
Registration Statements on the following Form S-8 filings:

S-8 Reg. No. 333-34346 filed April 7, 2000 on 1999 Stock Incentive Plan
(13,000,000 shares)

Insofar as indemnification arising under the Securities Act of 1933 (the Act)
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to the court of 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.

Reports on Form 8-K

The Registrant filed the following reports on Form 8-K during the quarter
ended December 31, 2000:

Current Report on Form 8-K dated November 14, 2000
Current Report on Form 8-K dated December 22, 2000

82



---



SIGNATURES

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

| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | eLOT, Inc.                                                                                              
| |                                                                                                         
| | By:  /s/ Edwin J. McGuinn,
Jr.
       Edwin J. McGuinn, Jr.
       President and Chief Executive Officer

March 26, 2001
Norwalk, Connecticut

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

|               |  |                                                                                                           
|-------------- |  | ----------------------------------------------------------------------------------------------------------
|March 26, 2001 |  | /s/ Edwin J. McGuinn, Jr._______________                                                                  
|               |  |                                                                                                           
|               |  | Edwin J. McGuinn, Jr.
President and Chief Executive Officer
(Principal Executive Officer)                 
|              
|              
|              
|              
|March 26, 2001 |  | /s/ David J. Parcells____________________                                                                 
|               |  |                                                                                                           
|               |  | David J. Parcells
Vice President, and Chief Financial Officer
(Principal Financial and Accounting Officer)
|              
|              
|              
|              
|March 26, 2001
|               |  |                                                                                                           
|               |  | Richard J. Fernandes, Director                                                                            
|              
|              
|              
|              
|March 26, 2001 |  | /s/ Philip D. Gunn_____________________                                                                   
|               |  |                                                                                                           
|               |  | Philip D, Gunn, Director                                                                                  
|              
|              
|              
|              
|March 26, 2001 |  | ___________________________________                                                                       
|               |  |                                                                                                           
|               |  | John P. Hectus, Director                                                                                  
|              
|              
|              
|              
|March 26, 2001 |  | /s/ Stanley J. Kabala___________________                                                                  
|               |  |                                                                                                           
|               |  | Stanley J. Kabala, Chairman of the Board                                                                  
|              
|              
|              
|              
|March 26, 2001 |  | /s/ Jerry M. Seslowe___________________                                                                   
|               |  |                                                                                                           
|               |  | Jerry M. Seslowe, Director                                                                                

83



---



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
eLOT, Inc.:

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of eLOT, Inc. and subsidiaries included in
this Form 10-K, and have issued our report thereon dated February 20, 2001.
Our audit was made for the purpose of forming an opinion on those statements
taken as a whole. The schedule listed in Item 14 is the responsibility of the
Companys management and is presented for purposes of complying with the
Securities and Exchange Commissions rules and are not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

ARTHUR ANDERSEN LLP

Stamford, Connecticut
February 20, 2001

S-1



---



SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
(Amounts in Thousands)

|                                    |  |            |        |              |          |            |        |            |  |        |        |            |  |   |         |  |  |   |       | 
|----------------------------------- |  | ---------- | ------ | ------------ | -------- | ---------- | ------ | ---------- |  | ------ | ------ | ---------- |  | - | ------- |  |  | - | ----- | 
|                                    |  |            |        |              |          | Additions  |        | Deductions
|                                    |  |            |        |              |          |            |        |           
|                                    |  |            |        |              |          | Charged    |        | Charged   
|                                    |  | Balance at |        | (Credited)   |          | (Credited) |        |            |  |        |        | Balance at
|                                    |  | Beginning  |        | to Costs and | to Other |            |        |            |  |        | End of
|Description                         |  | of Period  |        | Expenses     |          | Accounts   |        | Payments   |  | Period
|                                    |  |            |        |              |          |            |        |            |  |       
|                                    |  |            |        |              |          |            |        |            |  |        |        |            |  |   |         |  |  |   |       | 
|Year ended December 31, 2000       
|                                   
|                                   
|                                   
|                                   
|Reserve for Discontinued Operations |  |            | $4,480 |              |          |            |        |            |  |        |        |            |  | $ | (1,642) |  |  | $ | 2,838 | 
|                                   
|                                   
|                                   
|                                   
|Allowance for Doubtful Accounts     |  |            | ---    |              |          | $          | 84     |            |  |        | ---    |            |  |   | ---     |  |  | $ | 84    | 
|                                    |  |            |        |              |          |            |        |            |  |        |        |            |  |   |         |  |  |   |       | 
|                                   
|                                   
|                                   
|                                   
|Year ended December 31, 1999       
|                                   
|                                   
|                                   
|                                   
|Reserve for Discontinued Operations |  |            | $7,424 |              |          | $          | 1,320  |            |  |        | ---    |            |  | $ | (4,364) |  |  | $ | 4,480 | 
|                                    |  |            |        |              |          |            |        |            |  |        |        |            |  |   |         |  |  |   |       | 
|                                   
|                                   
|                                   
|                                   
|Year ended December 31, 1998       
|                                   
|                                   
|                                   
|                                   
|Reserve for Discontinued Operations |  |            | ---    |              |          | $          | 11,028 |            |  |        | ---    |            |  | $ | (3,604) |  |  | $ | 7,424 | 

S-2