<PAGE>   1
                                                                      EXHIBIT 13


                                  Annual Report

                                      1998

                                    INTERLOTT
                               TECHNOLOGIES, INC.


<PAGE>   2

COMPANY PROFILE

At Interlott Technologies, Inc. we develop new approaches to vending by
engineering systems that utilize our patented technology in concert with the
latest telecommunications, hardware, and software, in response to market needs.

Since the Company's founding in 1990, we have been committed to providing
unsurpassed reliability, dependability, and security through efficient
dispensing technology that offers our customers and their customers convenience,
and sure, quick delivery. Through this commitment, we have become the leading
supplier of Instant Ticket Vending Machines (ITVMs) for lotteries worldwide. Our
dispensing technology and philosophy of responding to our customers' needs have
earned us recognition as a leader and positioned us to expand into new markets
where our innovative technology will enhance the way companies do business.

Table of Contents
<TABLE>
================================================
<S>                                          <C>
To Our Shareholders                            1
------------------------------------------------
Answering market needs with
innovative products                            2
------------------------------------------------
Integrating quick, convenient delivery
with market insight                            4
------------------------------------------------
Conclusion                                     5
------------------------------------------------
Selected Financial Data                        7
------------------------------------------------
Management's Discussion & Analysis             7
Financial Statements                          10
------------------------------------------------
Corporate Data & 
Shareholder Information                       17
================================================
</TABLE>


                                   INTERLOTT
                               TECHNOLOGIES, INC.



<PAGE>   3


               Placing products and information at a fingertip -


                              Photo of world with
                            a finger pushing button
                                     on it

 
<PAGE>   4


                                                              Annual Report 1998


                                           Photo of L. Rogers Wells and
                                           David Nichols in front of
                                                  Interlott sign

                                    L. Rogers Wells, Jr.        David F. Nichols
                                    Chairman of the Board             President
                                    and Chief Executive Officer


Dear Fellow Shareholders:

1998 marks the fourth straight year of profitability for our Company. It was
also a year during which we won four of the six contracts awarded for supplying
machines to lottery customers. A year during which we completed the development
of our counter top version of the ITVM. A year during which we developed a
methodology for automated remote machine reporting and signed our first contract
utilizing this technology. The accomplishments of 1998 provide the basis for a
bright future for the Company.

Revenues for 1998 topped $24 million, a 26% increase over 1997 and a record
level for the Company, net income exceeded $1.6 million, a 12% increase over
1997, and cash flow from operations increased 20% to $6.7 million.

The Company was awarded new or extended contracts with Arizona, Florida,
Indiana, Kansas, Ohio, Texas and Washington. We now have contracts with 23 of
the 32 domestic lotteries which utilize vending technology to promote growth of
their instant (scratch-off) games. In addition, phone card machines were
deployed both domestically and internationally.

Our continued commitment to understanding and answering the needs of our
customers was further evidenced with the development of our counter-top vending
units providing for growth of instant ticket sales for the lotteries, while
addressing the retailers' concern for security and optimum use of counter space.
Similarly, our automated reporting system answered the lotteries' need for
tracking sales and obtaining marketing information at minimal cost.

By the end of 1998 we had approximately 9,000 machines leased or on order to be
leased by eighteen domestic lotteries. This clearly illustrates our commitment
to leasing rather than selling our equipment and our desire to "partner" with
our customers. Future lease revenues for this equipment totaled more than $70
million at year end.

Once again, your management and Board of Directors would like to thank you for
your continued loyalty and support as we work together for the continued growth
of the Company.

Sincerely,

/s/ L. Rogers Wells, Jr.
-----------------------------
L. Rogers Wells, Jr.
Chairman of the Board and CEO


                                                                               1

<PAGE>   5

Photo of burster with             Photo of              Photo of montage of pull
instant tickets feeding      Ohio 12 game ITVM,          tab tickets and various
       into it             Wisconsin 8 game ITVM         plastic cards including
                                    and                 phone, transit and smart
                            Kansas 6 game PTVM                   cards          
                                                        


from
INNOVATION
             

          Answering market needs with innovative products - Our dispensing
          systems represent a convergence of today's latest technologies with
          uniquely engineered mechanisms. Between the idea and implementation
          lies technological innovation -- the intangible commodity that has
          made Interlott a leader in the dispensing industry. Interlott succeeds
          as a company because we respond to our customers' needs with
          breakthrough dispensing systems that place products and information at
          a fingertip.

                            Illustration of the U.S.
                            indicating what companies
                             have the ITVM contracts
                               with the lotteries

     to implementation

<TABLE>
<S>           <C>
INTERLOTT
TECHNOLOGIES, INC.  Current Lottery contracts:  Interlott's  Competitors' Potential  Non-Lottery States
</TABLE>

2



<PAGE>   6

<TABLE>
<S>                        <C>                         <C>                      <C>   
    Photo of woman            Close up of a hand          Photo of a woman        Photo of a couple    
purchasing a phone card    inserting a phone card into  purchasing a smart card  presenting a card for a
  from a King's Island           a phone slot           from an Interlot SCDM         purchase         
        PCDM                                                                    
</TABLE>


evolution

Interlott's role as a technological leader began with the invention of our
patented Burster. The Burster was the key component in the development of the
first automated Instant Ticket Vending Machine (ITVM) by Interlott. This
state-of-the-art technology gave lotteries the freedom to reliably sell instant
game tickets in a wide variety of sizes, shapes and paper stocks without the
intervention of a ticket agent.

Continually addressing the needs of our customers-lotteries, retailers and
players alike-we refined the ITVM. The request by all to make more games
available in the smallest space possible, led the evolution from our original
four game unit to our present day sixteen game ITVM. As a result of this
technology, instant ticket sales have risen, allowing Interlott to capture more
than 70% of the ITVM market.

refinement

Lotteries also needed a way to securely dispense their individual paper pull-tab
tickets. Our unique, ShurShuttle dispensing process was the answer. Incorporated
in our complete line of our Pull Tab Vending Machines (PTVMs) it ensures that
ticket dispensing is flawless, efficient, and completely secure.

With the emergence of the prepaid telephone card industry, the capabilities of
our unique ShurShuttle dispenser were again recognized. This patented technology
has become the key component in dispensing individual products, from paper
tickets to plastic cards, as utilized in our Phone Card Dispensing Machines
(PCDMs) and Smart Card Dispensing Machines (SCDMs). We continue to explore
opportunities to utilize our dispensing technology in new

looking ahead

arenas. Closed-end environments such as theme parks, college campuses, and
military bases provide us a multitude of opportunities. We continue to identify
venues for our products where speed and convenience are priorities, such as
parking garages, transit terminals, malls, and vacation resorts.
Internationally, with the advent of the Eurodollar, we perceive new applications
for our technology every day.

Interlott's financial strength and technological leadership are enabling us to
take the Company in exciting new directions, responding to market needs with
innovative products. We provide solutions by offering practical methods and
advances in technology that place products and information at a fingertip.


                  Bringing you tomorrow's solutions... today.

                                                                               3

<PAGE>   7


<TABLE>
<S>                          <C>                         <C>
  Close up of someone          Close up of a woman       A store manager opening   
selecting a ticket from an   selecting a ticket from an  the dispenser units behind
  Ohio 12 game ITVM          MVP unit on a store check    his convenience store    
                                   out counter                   counter           
</TABLE>
                                                         

Integrating convenient, quick delivery with market insight -

          Our patented Burster and ShurShuttle dispensers have been the
          catalysts enabling Interlott to offer sure, quick, and convenient
          delivery of products through our innovative vending systems. But our
          mission is ongoing. Capitalizing on the most advanced hardware,
          software and telecommunications technology available, we now provide
          the vendor the advantage of on-line service data transmission,
          inventory status, detailed accounting reports, and valuable market
          information.

     (from) (automation) automation automation
                           Close up photo of various
                            sales tapes with reports
                            taken from an Interlott
                                      ITVM

INTERLOTT                                                           to
TECHNOLOGIES, INC.                                                   information

4



<PAGE>   8

<TABLE>
<S>               <C>                          <C>                          <C>
above of a line       "http:/" symbol          Man and woman in lottery        Man initializing a    
out lanes in a    representing the internet      office reviewing sales     transaction at an ITVM,  
every store                                    results from the ITVMs in    supposedly in the future 
                                                      their state           
</TABLE>
                                               

efficiency

We recognized the opportunity to increase over-the-counter sales of instant
scratch tickets and seized it. Customer lines can be long. Sales, inventory, and
record keeping are labor intensive. Tickets are difficult to see. Shrinkage has
eaten into profits. Still, the majority of instant tickets sales are impulse
purchases made at the convenience store checkout.

Over the past two years, we have been working with lotteries, retailers and
players alike to develop the Modular Vending Platform (MVP), the smart instant
ticket dispenser, which combines the latest technologies with our advanced
engineering and design. The MVP reduces transaction time, automates the
accounting process, improves ticket visibility, and eliminates shrinkage,
resulting in more sales, less work, and increased profits. The MVP has been
introduced

insight

across the U.S. in convenience stores, grocery chains, and hyper-markets and
feedback has been overwhelmingly positive.

As instant game sales represent an ever increasing percentage of lotteries'
total revenues, obtaining sales and inventory data on a real time basis has
become a necessity. Our insight into this situation prompted the development of
our Automated Communication System (ACS).

Using the latest telecommunications software and hardware, the ACS provides
lotteries with instant reporting by all ITVMs located throughout each state for
sales data, inventory and maintenance control. The ACS transmits detailed sales
data via modem, generating reports instantaneously, which are made available to
the lottery over the internet.

opportunity

The ACS provides demographic sales data and strategic marketing information to
the lottery, empowering them to give players the games they want, when and where
they want them. This ability translates into increased instant ticket revenues
and the most efficient sales system to date. We continue to explore similar
avenues where the ACS can be used to transform traditional vending into
reliable, convenient market driven sales.

We are breaking new ground, merging our dispensing technology with the latest
innovations in hardware, software and telecommunications, to provide advanced
vending systems to a variety of niche markets worldwide. We envision many
different possibilities--from multifunctional ATMs to systems able to offer
three dimensional products. The potential can be limitless.


                                                                               5


<PAGE>   9



                     REDEFINING AN INDUSTRY WITH EMPLOYEES,
                          PARTNERS, AND TECHNOLOGY...


At Interlott, we realize that it takes more than great products to build a
successful company. To revolutionize an industry through technology, it takes
management and employees who require more than the status quo. Our dispensing
technology receives the insightful guidance of a committed corporate team and
supportive client base. We work together to efficiency develop products that
provide measurable benefits to our customers and in turn, to their customer. We
offer a creative environment where people and ideas flourish to bring products
and information to the world at the touch of a fingertip.


                            Photo of the world with
                                computer symbols
                          surrounding it and a finger
                              pushing a button on
                                   top of it


                  Bringing you a tomorrow's solution...TODAY.


INTERLOTT 
TECHNOLOGIES, INC.


6

<PAGE>   10
 
Selected Financial Data

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------
                                                                     Year Ended
===============================================================================================================
                                      Dec. 31         Dec. 31          Dec. 31        Dec. 31          Dec. 31
                                       1994             1995            1996            1997            1998
===============================================================================================================
<S>                                 <C>              <C>             <C>             <C>             <C>       
Revenues
---------------------------------------------------------------------------------------------------------------
  Machine sales                         40,650        9,746,339       5,596,698       4,567,441       8,229,950
---------------------------------------------------------------------------------------------------------------
  Machine leases                     6,093,528        9,132,132      11,766,623      12,874,450      14,165,379
---------------------------------------------------------------------------------------------------------------
  Other                                250,442          435,137       1,235,368       1,669,160       2,078,644
---------------------------------------------------------------------------------------------------------------
Net revenues                         6,384,620       19,313,608      18,598,689      19,111,051      24,473,973
---------------------------------------------------------------------------------------------------------------
Net income (loss)                     (932,100)       1,987,219       1,320,597       1,451,654       1,622,313
---------------------------------------------------------------------------------------------------------------
Income per share(1)                      (0.32)            0.62            0.41            0.45            0.51
---------------------------------------------------------------------------------------------------------------
Depreciation and amortization        1,884,855        2,982,547       3,902,387       4,143,408       4,585,325
---------------------------------------------------------------------------------------------------------------
Leased ITVMs, less
accumulated depreciation             8,392,946       10,779,929      10,940,398      14,740,462      17,105,891
---------------------------------------------------------------------------------------------------------------
Total assets                        15,020,321       20,483,686      20,992,733      24,612,884      28,774,249
---------------------------------------------------------------------------------------------------------------
Total debt                           5,398,103        9,040,784       7,715,140       9,458,004      11,645,374
---------------------------------------------------------------------------------------------------------------
Redeemable preferred stock           1,335,000        1,335,000       1,335,000       1,335,000       1,335,000
===============================================================================================================
(1)Reflects the weighted average number of shares outstanding for the respective periods, taking into  account 
   a 21.5 to 1 split of Common Stock effected in March, 1994.
---------------------------------------------------------------------------------------------------------------
</TABLE>

MANAGEMENT'S DISCUSSION & ANALYSIS

OVERVIEW

The Company's revenue base consists of (1) payments from ITVM and PCDM leases
(2) sales of ITVMs and PCDMs, (3) and to a lesser extent, sales of parts for
ITVMs and PCDMs and service agreements. The Company emphasizes leasing rather
than selling ITVMs to lotteries when possible. Leases provide the Company with a
consistent revenue stream, opportunities to generate income on financing, and
the potential to deploy a greater number of ITVMs within a lottery's budget due
to the lower initial cash outlay required by the lottery. Leasing ITVMs also
gives the lotteries the flexibility to enhance their ITVMs in the future with
new technology from the Company. On the other hand, leasing ITVMs requires the
Company to invest capital or otherwise finance the manufacture of ITVMs, unlike
sales of ITVMs that result in the receipt of payment in full upon delivery of
the ITVMs. When the Company sells ITVMs, the Company generally is able to
manufacture and deliver the ITVMs and receive full payment for them before it
must pay for the materials used to manufacture the ITVMs. Nevertheless, the
Company believes that the advantages of leasing ITVMs as described above justify
the initial capital investment or financing costs required to manufacture ITVMs
for lease. The majority of ITVMs to date have been leased.

For similar reasons, the Company emphasizes leasing rather than selling PCDMs to
providers of prepaid telephone cards. As with ITVMs, the Company believes that
the benefits to the Company of leasing PCDMs warrant the initial capital
investment required to manufacture PCDMs. However, the great majority of the
PCDMs deployed to date have been sold rather than leased.

The Company historically has experienced fluctuations in its financial results
primarily due to its dependence upon a small number of major customers and the
unpredictable nature, timing and results of the lotteries' contract bid and
award processes. The Company's revenues and capital expenditures can vary
significantly from period to period because the Company's sales cycle may be
relatively long and because the amount and timing of revenues and capital
expenditures depend on factors such as the amount and timing of awarded
contracts, changes in customer budgets and demands, and general economic
conditions. Operating results may be affected by the lead-time sometimes
required for business opportunities to result in signed lease or sales
agreements, working capital requirements associated with manufacturing ITVMs
pursuant to new orders, increased competition, and the extended time that may
elapse between the award of a contract and the receipt of revenues from the sale
or lease of ITVMs.

--------------------------------------------------------------------------------
RESULTS OF OPERATIONS

The table below presents selected financial information derived from the
Company's statements of income expressed as a percentage of revenues for the
years indicated.

<TABLE>
<CAPTION>
                                              Year Ended
                                 ----------------------------------
                                 Dec. 31        Dec. 31     Dec. 31
                                   1996          1997         1998
Revenues
===================================================================
<S>                               <C>           <C>          <C>  
  Machine sales                    30.1%         24.0%        33.6%
-------------------------------------------------------------------
  Machine leases                   63.3          67.3         57.9
-------------------------------------------------------------------
  Other                             6.6           8.7          8.5
-------------------------------------------------------------------
    Total revenues                100.0         100.0        100.0
-------------------------------------------------------------------
Cost of revenues,
  excluding depreciation           47.6          41.7         48.4
-------------------------------------------------------------------
Depreciation                       20.3          20.6         17.5
-------------------------------------------------------------------
Gross margin                       32.1          37.7         34.1
-------------------------------------------------------------------
Selling, general and
  administrative expenses          18.6          18.3         16.5
-------------------------------------------------------------------
Research and
  development costs                 3.6           2.9          2.5
-------------------------------------------------------------------
Operating income                    9.9          16.5         15.1
-------------------------------------------------------------------
Interest expense                    3.8           3.7          4.0
-------------------------------------------------------------------
Income before
  income taxes                      6.1          12.8         11.1
-------------------------------------------------------------------
Income taxes                       (1.0)          5.2          4.5
===================================================================
Net income                          7.1%          7.6%         6.6%
===================================================================
</TABLE>

SUMMARY OF QUARTERLY DATA

Quarterly financial data for the years ended December 31, 1997 and 1998 shown
here (in thousands, except for per share data).

<TABLE>
<CAPTION>
1997                           First      Second     Third      Fourth
=====================================================================
<S>                           <C>         <C>        <C>        <C>  
Net sales                     $4,164      6,931      3,867      4,129
---------------------------------------------------------------------
Gross profit                   1,232      2,478      1,552      1,941
---------------------------------------------------------------------
Net income                        30        777        208        437
---------------------------------------------------------------------
Basic income per share          0.01       0.24       0.06       0.14
---------------------------------------------------------------------
Diluted income per share        0.01       0.24       0.06       0.13
=====================================================================
</TABLE>

<TABLE>
<CAPTION>
1998                           First      Second     Third      Fourth
=====================================================================
<S>                           <C>         <C>        <C>        <C>  
Net sales                     $5,884      7,323      5,714      5,554
---------------------------------------------------------------------
Gross profit                   1,718      2,492      1,874      2,270
---------------------------------------------------------------------
Net income                       291        630        225        476
---------------------------------------------------------------------
Basic income per share          0.09       0.19       0.07       0.15
---------------------------------------------------------------------
Diluted income per share        0.09       0.19       0.07       0.15
=====================================================================
</TABLE>

                                                                               7


<PAGE>   11

1997 Compared to 1998

Total revenues increased by $5,362,922 from $19,111,051 to $24,473,973 in 1998,
or 28%, due primarily to a $3,662,509 increase in machine sales and a $1,290,929
increase in lease revenues accompanied by a $409,484 increase in other revenues.
Revenues from sales increased by 80% from $4,567,441 in 1997 to $8,229,950 in
1998, as a result of an increase in ITVMs and PCDMs sold in 1998 over 1997. The
units sold in 1998 included a greater number of higher priced machines than
1997. Revenues from leases increased by 10% from $12,874,450 in 1997 to
$14,165,379 in 1998, resulting from the continuation of leases in nine states
and the renewal of five leases in other states that had reached the conclusion
of their original terms. The total number of ITVMs and PCDMs under lease
increased in 1998 as a result of deployment of new units, offset by the
retirement of older units. Other revenues increased by 25% from $1,669,160 in
1997 to $2,078,644 in 1998 as machines deployed prior to 1998 generated parts
and service revenue for the entire year, and service for ITVMs in one state was
taken over from a subcontractor.

Lease revenues were 67% and 58% of total revenues for 1997 and 1998,
respectively. Revenues from sales of ITVMs and PCDMs were 24% and 34% of total
revenues in 1997 and 1998, respectively. The increase in lease revenues and
increase in sales revenues reflect the cumulative effect of continuing revenues
from machines under lease which were deployed prior to 1998 and the incremental
revenue of new machines leased or deployed in 1998.

Cost of revenues for machine sales and other increased 33% from $4,378,669 in
1997 to $5,809,057 in 1998. This increase reflects the 47% increase in number of
machines sold, offset by lower costs of the units sold in 1998. Cost of revenues
for leased ITVMs and PCDMs, excluding depreciation, increased 67% from
$3,584,017 in 1997 to $6,020,437 in 1998. The increase in cost of leased
revenues was the result of higher personnel and subcontractor costs related to
the larger number of machines deployed during 1998.

Depreciation of ITVMs and PCDMs increased by 9% from $3,924,244 in 1997 to
$4,290,128 in 1998. The increase was lower than the related increase in the
number of ITVMs and PCDMs, as certain units had been fully depreciated by the
end of 1997.

Selling, general and administrative expenses increased 16% from $3,492,020 in
1997 to $4,048,751 in 1998 as a result of increases in salaries and wages for
additional staff and increases in travel and entertainment cost. However,
selling, general and administrative expenses as a percentage of revenues,
decreased slightly from 18% in 1997 to 17% in 1998.

Research and development costs increased by 14% from $545,039 in 1997 to
$618,819 in 1998. This increase resulted from continuing development and
refinement of existing products to meet the various needs of customers for the
Company's dispensing technologies. The Company maintains its philosophy of using
contractors as the primary source of research and development efforts, allowing
the Company to focus its expenditures on the technical expertise necessary to
accomplish the specific project.

Operating income increased by 16% from $3,187,062 in 1997 to $3,686,781 in 1998.
This increase resulted from the continuing benefit of revenues derived from
machines deployed in prior periods, including machines which had been fully
depreciated, combined with ongoing machine sales and leases.

Interest expense increased by 30% from $747,008 in 1997 to $967,768 in 1998. The
increase reflects the cost of additional borrowings to finance leased equipment
built and deployed in 1998, offset by lower interest rates resulting from
utilization of the LIBOR option in the Company's agreement.

Income taxes increased by 11% from $988,400 in 1997 to $1,096,673 in 1998 as a
result of an increase in income before taxes of 11%. The effective tax rate
remained consistent at 40% in 1997 and 1998.

As a result of the above factors, the Company's net income increased by 12% from
$1,451,654 in 1997 to $1,622,313 in 1998.

1996 COMPARED TO 1997

Total revenues increased by $512,362 from $18,598,689 to $19,111,051 in 1997, or
3%, due primarily to a $1,107,827 increase in lease revenues accompanied by a
$433,792 increase in other revenues offset by a $1,029,257 decrease in sales of
ITVMs and PCDMs.

Revenues from leases increased by 9% from $11,766,623 in 1996 to $12,874,450 in
1997, resulting from the continuation of leases in nine states, the addition of
leases in three states, and the renewal of a lease in another state which had
reached the conclusion of the original term. The total number of ITVMs and PCDMs
under lease increased to 6,834 in 1997 as a result of deployment of additional
units, offset by the retirement of older units. Other revenues increased by 35%
from $1,235,368 in 1996 to $1,669,160 in 1997 as ITVMs were deployed in one
additional state and machines deployed prior to 1997 generated parts and service
revenue for the entire year. Revenues from sales decreased by 18% from
$5,596,698 in 1996 to $4,567,441 in 1997, as a result of a decrease in ITVMs and
PCDMs sold in 1997 as compared to 1996. The decrease in units sold was partially
offset by a greater number of higher priced units sold in 1997 as compared to
those sold in 1996.

Lease revenues were 63% and 67% of total revenues for 1996 and 1997,
respectively. Revenues from sales of ITVMs and PCDMs were 30% and 24% of total
revenues in 1997 and 1996, respectively.

Cost of revenues for machine sales and other decreased 28% from $6,052,763 in
1996 to $4,378,669 in 1997. This decrease reflects the 35% decrease in number of
machines sold offset by the higher cost of the higher priced units sold in 1997.
Cost of revenues for leased ITVMs and PCDMs, excluding depreciation, increased
26% from $2,839,162 in 1996 to $3,584,017 in 1997. The increase in cost of
leased revenues was the result of higher warranty parts costs and higher
personnel and subcontractor costs related to the larger number of machines
deployed during 1997.

Depreciation of ITVMs and PCDMs increased by 5% from $3,744,065 in 1996 to
$3,924,244 in 1997. The increase was lower than the related increase in the
number of ITVMs and PCDMs, as certain units had been fully depreciated by the
end of 1996.

Selling, general and administrative expenses increased 1% from $3,461,364 in
1996 to $3,492,020 in 1997. Selling, general and administrative expenses as a
percentage of revenues decreased slightly from 19% in 1996 to 18% in 1997.

Research and development costs decreased by 18% from $665,449 in 1996 to
$545,039 in 1997. This decrease results from the wind down of major projects
such as the smart card dispensing machine, as well as the continuing development
and refinement of existing products to meet the variety of the needs of the
customers for our dispensing technologies. The Company maintains its philosophy
of using contractors as the primary source of research and development efforts,
allowing the Company to focus its expenditures on the technical expertise
necessary to accomplish the specific project.

Operating income increased by 74% from $1,835,886 in 1996 to $3,187,062 in 1997.
This increase resulted from the continuing benefit of revenues derived from
machines deployed in prior periods, including machines which had been fully
depreciated, combined with the control of operating expenses.

Interest expense increased by 4% from $718,642 in 1996 to $747,008 in 1997. The
increase reflects the cost of additional borrowings to finance leased equipment
built and deployed in 1997. To a lesser extent, interest expense was affected by
the reduced interest rate of the new credit facility.

The significant change in income taxes in 1997 resulted from the Company having
used available net operating loss carryovers in 1996 and as a result, incurring
taxes at an effective tax rate of 40% in 1997.

As a result of the above factors, the Company's net income increased by 10% from
$1,320,597 in 1996 to $1,451,654 in 1997.

Liquidity and Capital Resources

The Company's liquidity and capital resources are significantly impacted by its
decision to use leasing as a means to market its ITVMs and PCDMs. Leasing
generally offers the Company better gross margins than direct sales agreements.
However, leasing inherently requires more capital and a longer-term payout than
sales. As of December 31, 1998, the Company had a total of 7,812 ITVMs and PCDMs
under operating and sales type leases.


8


<PAGE>   12

Net cash provided by operating activities increased 2% from $7,281,457 in 1997
to $7,435,079 in 1998. Net cash used in investing activities increased 7% from
$9,069,836 in 1997 to $9,735,516 in 1998. Net cash provided by financing
activities increased by 26% from $1,742,864 in 1997 to $2,187,370 in 1998.

At December 31, 1997 and 1998, the Company had working capital deficits of
$4,328,068 and $7,466,831, respectively. These deficits reflect the
classification of the Company's revolving credit facility as a current debt
because of the revolver clause of the facility.

At December 31, 1998, the Company was indebted to Mercantile Business Credit,
Inc. in the aggregate principal amount of $11,166,374 pursuant to this revolving
credit agreement The facility permits the Company to borrow up to $15,000,000 at
the prime interest rate or the respective LIBOR rate plus two percent through
October 2000, with two one-year extensions to October, 2002. Borrowings under
this facility are collateralized by all of the assets of the Company and an
assignment of all proceeds from lease agreements. The facility prohibits the
declaration or payment of cash dividends until the Company has retired debt owed
to two stockholders and all of the outstanding preferred stock of the Company.
At December 31, 1998, the Company had $3,833,626 available under this facility.

At December 31, 1998, the Company was indebted to two stockholders in the
aggregate principal amount of $479,000 which had been incurred prior to 1992 to
finance the manufacture of certain ITVMs. See Note 7 of Notes to Financial
Statements.

The Company's capital expenditures totaled $9,069,836 and $9,735,516 for 1997
and 1998, respectively. These amounts include $8,710,315 and $9,611,623 for the
manufacture of machines leased during the respective periods. Other expenditures
represent machinery and equipment costs for expanded capacity. The Company had
no material commitments for additional capital expenditures as of December 31,
1998 other than for the manufacture of ITVMs and PCDMs for future lease.

At December 31, 1998, the Company had estimated tax net operating loss
carryforwards of approximately $1,021,000, which are available to offset future
federal taxable income, if any, through 2009. The use of these carryforwards is
subject to certain annual limitations due to ownership changes in 1992.

IMPACT OF THE YEAR 2000

The Company relies on computer-based technology and utilizes a variety of
third-party hardware and proprietary and third party software. The Company's
dispensing equipment generally uses proprietary software, with third-party
software being used more extensively for administrative functions, such as
accounting and human resource management. In addition to such information
technology (IT) systems, the Company's operations rely on various non-IT
equipment and systems that contain embedded computer technology. Third parties,
with whom the Company has commercial relationships, including vendors of
materials and components incorporated into the Company's products and of
products and services used by the Company in its operations (such as banking and
financial services, data processing services, telecommunications services and
utilities), also rely highly on computer based technology.

The Company has assessed the potential effects of the Year 2000 issue on the
Company's business, financial condition and results of operations. In
conjunction with this assessment, the Company developed and commenced the
implementation of the compliance program described below.

The Company has undertaken a review of its proprietary IT systems relating to
its dispensing equipment. No systems were identified as relating to the critical
functions of the Company's ITVMs or PCDMs. As such, the Company believes that no
remediation with regard to those proprietary IT systems is necessary at this
time.

The Company has contacted its third party providers of critical hardware and
software and has obtained appropriate representations to the effect that such
hardware or software is or will timely be Year 2000 compliant.

The Company has undertaken a review of its non-IT systems and is implementing a
remediation program with respect to those systems that are within the control of
the Company. Selected non-IT suppliers and vendors have been contacted to
identify any significant exposures that may exist and identify alternate sources
or strategies where necessary.

The Company has incurred minimal costs to date in assessing the potential
effects of the Year 2000 issue on the Company and does not expect or anticipate
any material expenditures in the future in connection with the Year 2000 issue.
Nevertheless, the issues presented by the Year 2000 issue and the proposed
solutions therefor are very complex and the Company's Year 2000 compliance
depends heavily on the technical skills of employees and independent contractors
and the representations and preparedness of third parties. Moreover, Year 2000
issues present a number of risks that are beyond the Company's reasonable
control, such as the failure of utility companies to deliver electricity, the
failure of telecommunications companies to provide voice and data services, the
failure of financial institutions to process transactions and transfer funds,
the failure of vendors to deliver materials or perform services required by the
Company and the collateral effects on the Company of the effects of Year 2000
issues on the economy in general or on the Company's business partners and
customers in particular. Although the Company believes that its Year 2000
compliance program is designed to appropriately identify and address those Year
2000 issues that are subject to the Company's reasonable control, there can be
no assurance that the Company's efforts in this regard will be fully effective
or that the Year 2000 issues will not have a material adverse effect on the
Company's business, financial condition or results of operations.

SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

The words "expect", "anticipate", "intend", "plan", "believe", "seek",
"estimate" and similar expressions used in this report are intended to identify
forward-looking statements, although this report also contains other
forward-looking statements. Any forward-looking statements in this report are
made pursuant to the "safe harbor" provisions of the Private Securities
Litigation Act of 1995. Investors are cautioned that actual results may differ
substantially from such forward-looking statements. Forward-looking statements
involve risks and uncertainties including, but not limited to, continued
acceptance of the Company's products and services in the marketplace,
competitive factors, new products and technological changes, dependence upon
third party vendors, a limited number of customers, political and other
uncertainties related to customer purchases and other risks detailed in the
Company's periodic filings with the Securities and Exchange Commission.

INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders:

          We have audited the accompanying balance sheets of Interlott
Technologies, Inc. as of December 31, 1997 and 1998, and the related statements
of income, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998. 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 audit in accordance with generally accepted auditing
standards. 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 Interlott
Technologies, Inc. as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.


/s/ KPMG LLP


February 26, 1999


                                                                               9


<PAGE>   13
BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                    ---------------------------
                                                                                       1997              1998
---------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                   <C>
ASSETS
---------------------------------------------------------------------------------------------------------------
Current assets:
---------------------------------------------------------------------------------------------------------------
   Cash                                                                            $    143,071          30,004
---------------------------------------------------------------------------------------------------------------
   Accounts receivable, less allowance for doubtful accounts of $93,501 in 1997
     and $153,501 in 1998                                                             2,918,092       2,816,589
---------------------------------------------------------------------------------------------------------------
   Investment in sales type leases, current portion                                     216,485         888,627
---------------------------------------------------------------------------------------------------------------
   Inventories                                                                        4,051,495       3,129,959
---------------------------------------------------------------------------------------------------------------
   Prepaid expenses                                                                     147,450          82,105
===============================================================================================================
          Total current assets                                                        7,476,593       6,947,284
===============================================================================================================
Property and equipment:
---------------------------------------------------------------------------------------------------------------
   Leased machines                                                                   25,718,832      29,484,623
---------------------------------------------------------------------------------------------------------------
   Machinery and equipment                                                              519,388         631,111
---------------------------------------------------------------------------------------------------------------
   Building and leasehold improvements                                                  265,854         271,433
---------------------------------------------------------------------------------------------------------------
   Furniture and fixtures                                                               124,359         130,950
===============================================================================================================
                                                                                     26,628,433      30,518,117
   Less accumulated depreciation and amortization                                   (11,382,120)    (12,970,895)
===============================================================================================================
          Net property and equipment                                                 15,246,313      17,547,222
===============================================================================================================
Investment in sales type leases, less current portion                                 1,051,011       3,766,408
---------------------------------------------------------------------------------------------------------------
Product development rights, net of accumulated amortization of $513,333 in
  1997 and $586,665 in 1998                                                             586,667         513,335
---------------------------------------------------------------------------------------------------------------
Deferred tax asset                                                                      252,300              --
===============================================================================================================
                                                                                   $ 24,612,884      28,774,249
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY 
---------------------------------------------------------------------------------------------------------------
   Current liabilities:
---------------------------------------------------------------------------------------------------------------
   Notes payable to financial institutions                                         $  8,978,036      11,166,374
---------------------------------------------------------------------------------------------------------------
   Current portion of notes payable - related parties                                        --         192,302
---------------------------------------------------------------------------------------------------------------
   Current installments of long-term debt                                                   968              --
---------------------------------------------------------------------------------------------------------------
   Accounts payable                                                                   1,142,065       1,479,831
---------------------------------------------------------------------------------------------------------------
   Accounts payable - related parties                                                   328,960         215,734
---------------------------------------------------------------------------------------------------------------
   Accrued expenses                                                                   1,254,182       1,111,416
---------------------------------------------------------------------------------------------------------------
   Income taxes payable                                                                 100,450         248,458
===============================================================================================================
       Total current liabilities                                                     11,804,661      14,414,115
===============================================================================================================
Notes payable - related parties, excluding current portion                              479,000         286,698
---------------------------------------------------------------------------------------------------------------
Deferred income taxes                                                                        --         121,900
===============================================================================================================
   Total liabilities                                                                 12,283,661      14,822,713
===============================================================================================================
Series A preferred stock, $.01 par value; 20,000,000 shares authorized,
   1,335,000 shares issued and outstanding                                            1,335,000       1,335,000
===============================================================================================================
Stockholders' equity:
---------------------------------------------------------------------------------------------------------------
   Common stock, $.01 par value; 20,000,000 shares authorized,
       3,210,000 shares issued and outstanding in 1997 and 1998                          32,100          32,100
---------------------------------------------------------------------------------------------------------------
   Additional paid-in capital                                                        10,376,017      10,376,017
---------------------------------------------------------------------------------------------------------------
   Retained earnings                                                                    586,106       2,208,419
===============================================================================================================
       Total stockholders' equity                                                    10,994,223      12,616,536
---------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities
---------------------------------------------------------------------------------------------------------------
                                                                                   $ 24,612,884      28,774,249
===============================================================================================================
                                                                 See accompanying notes to financial statements.
</TABLE>


10
<PAGE>   14


STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                              Years Ended December 31,
                                                   --------------------------------------------
                                                       1996            1997            1998
------------------------------------------------------------------------------------------------
<S>                                                <C>               <C>             <C>
Revenues:
------------------------------------------------------------------------------------------------
   Machine sales                                   $  5,596,698       4,567,441       8,229,950
------------------------------------------------------------------------------------------------
   Machine leases                                    11,766,623      12,874,450      14,165,379
------------------------------------------------------------------------------------------------
   Other                                              1,235,368       1,669,160       2,078,644
================================================================================================
                                                     18,598,689      19,111,051      24,473,973
================================================================================================
Cost of revenues:
------------------------------------------------------------------------------------------------
   Machines sales and other                           6,052,763       4,378,669       5,809,057
------------------------------------------------------------------------------------------------
   Machine leases                                     6,583,227       7,508,261      10,310,565
================================================================================================
                                                     12,635,990      11,886,930      16,119,622
================================================================================================
       Gross margin                                   5,962,699       7,224,121       8,354,351
------------------------------------------------------------------------------------------------
Operating expenses:
------------------------------------------------------------------------------------------------
   Selling, general and administrative expenses       3,461,364       3,492,020       4,048,751
------------------------------------------------------------------------------------------------
   Research and development costs                       665,449         545,039         618,819
================================================================================================
                                                      4,126,813       4,037,059       4,667,570
================================================================================================
       Operating income                               1,835,886       3,187,062       3,686,781
================================================================================================
Other income (expense)
------------------------------------------------------------------------------------------------
   Interest expense                                    (718,642)       (747,008)       (967,768)
------------------------------------------------------------------------------------------------
   Interest income                                       10,353              --              --
================================================================================================
                                                       (708,289)       (747,008)       (967,768)
================================================================================================
Income before income taxes                            1,127,597       2,440,054       2,719,013
------------------------------------------------------------------------------------------------
Income taxes                                           (193,000)        988,400       1,096,700
================================================================================================
       Net income                                  $  1,320,597       1,451,654       1,622,313
================================================================================================
   Basic income per share                          $        .41             .45             .51
================================================================================================
   Diluted income per share                        $        .41             .45             .50
================================================================================================
                                                 See accompanying notes to financial statements.
</TABLE>

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                          Years ended December 31, 1996, 1997 and 1998
----------------------------------------------------------------------------------------------------------------------
                                          Common Stock              Additional         (Accumulated
                                    ------------------------          Paid-in             Deficit)
                                     Shares          Amount           Capital       Retained Earnings        Total
                                     ------          ------           -------       -----------------        -----
<S>                                 <C>              <C>            <C>             <C>                    <C>
----------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995       3,210,000        $32,100        $10,376,017        $(2,186,145)        $ 8,221,972
----------------------------------------------------------------------------------------------------------------------
   Net income                              --             --                 --          1,320,597           1,320,597
======================================================================================================================
Balances at December 31, 1996       3,210,000         32,100         10,376,017           (865,548)          9,542,569
----------------------------------------------------------------------------------------------------------------------
   Net income                              --             --                 --          1,451,654           1,451,654
======================================================================================================================
Balances at December 31, 1997       3,210,000         32,100         10,376,017            586,106          10,994,223
----------------------------------------------------------------------------------------------------------------------
   Net income                              --             --                 --          1,622,313           1,622,313
======================================================================================================================
Balances at December 31, 1998       3,210,000        $32,100        $10,376,017        $ 2,208,419         $12,616,536
======================================================================================================================
                                                                        See accompanying notes to financial statements
</TABLE>

                                                                              11
<PAGE>   15


STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                                   ---------------------------------------
                                                                       1996          1997          1998
----------------------------------------------------------------------------------------------------------
<S>                                                                <C>             <C>           <C>
Cash flows from operating activities:
----------------------------------------------------------------------------------------------------------
   Net income                                                      $ 1,320,597     1,451,654     1,622,313
----------------------------------------------------------------------------------------------------------
   Adjustments to reconcile net income to net
       cash provided by operating activities:
----------------------------------------------------------------------------------------------------------
       Depreciation and amortization                                 3,902,387     4,143,408     4,585,325
----------------------------------------------------------------------------------------------------------
       Principal portion of sales type leases received                      --       164,194       557,116
----------------------------------------------------------------------------------------------------------
       Deferred income taxes                                          (456,000)      203,700       374,200
----------------------------------------------------------------------------------------------------------
       Gain on sale of equipment under sales type leases                    --      (447,915)   (1,177,773)
----------------------------------------------------------------------------------------------------------
       Decrease in accounts receivable                                 607,423       298,927       101,503
----------------------------------------------------------------------------------------------------------
       (Increase) decrease in inventories                             (605,391)    1,035,052     1,110,268
----------------------------------------------------------------------------------------------------------
       Decrease in prepaid expenses                                    183,152         6,804        32,345
----------------------------------------------------------------------------------------------------------
       (Decrease) increase in accounts payable                        (100,288)      217,852       337,766
----------------------------------------------------------------------------------------------------------
       (Decrease) increase in accounts payable - related parties       306,416        22,431      (113,226)
----------------------------------------------------------------------------------------------------------
       (Decrease) increase in accrued expenses                         206,216       186,650      (142,766)
----------------------------------------------------------------------------------------------------------
       Increase (decrease) in income taxes payable                     101,750        (1,300)      148,008
==========================================================================================================
          Net cash provided by operating activities                  5,466,262     7,281,457     7,435,079
==========================================================================================================
Cash flows from investing activities:
----------------------------------------------------------------------------------------------------------
   Cost of leased machines                                          (3,904,534)   (8,710,315)   (9,611,623)
----------------------------------------------------------------------------------------------------------
   Purchases of property and equipment                                 (47,858)     (359,521)     (123,893)
==========================================================================================================
       Net cash used in investing activities                        (3,952,392)   (9,069,836)   (9,735,516)
==========================================================================================================
Cash flows from financing activities:
----------------------------------------------------------------------------------------------------------
   Increase (decrease) in notes payable                             (1,320,985)    1,747,865     2,188,338
----------------------------------------------------------------------------------------------------------
   Repayments of long-term debt                                         (4,659)       (5,001)         (968)
----------------------------------------------------------------------------------------------------------
       Net cash provided by (used in) financing activities          (1,325,644)    1,742,864     2,187,370
==========================================================================================================
Decrease (increase) in cash                                            188,226       (45,515)     (113,067)
----------------------------------------------------------------------------------------------------------
Cash at beginning of year                                                  360       188,586       143,071
==========================================================================================================
Cash at end of year                                                $   188,586       143,071        30,004
==========================================================================================================
Supplemental disclosures of cash flow information:
----------------------------------------------------------------------------------------------------------
   Interest paid                                                   $   643,822       671,515       902,252
----------------------------------------------------------------------------------------------------------
   Income taxes paid                                               $        --       631,610       526,807
==========================================================================================================
                                                            See accompanying notes to financial statements.
</TABLE>


12
<PAGE>   16

                         NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 1996, 1997, and 1998

1.       Summary of Significant Accounting Policies

         a.       Business Description

                  Interlott Technologies, Inc. (the Company), as renamed in June
                  1997 (formerly International Lottery, Inc.) was incorporated
                  in February 1990 under the laws of Ohio, was reincorporated
                  under the laws of Delaware on March 18, 1994 and does business
                  under the name Interlott. The Company designs, manufactures,
                  leases, sells and services vending machines for use in
                  connection with public lotteries operated by states and
                  foreign public entities, as well as for use by providers of
                  prepaid telephone cards.

         b.       Operating and Sales Type Leases

                  Depending on the specific terms contained in a lease
                  agreement, a lease is either classified as an operating lease
                  or capitalized as a sales type lease, in accordance with
                  Statement of Financial Accounting Standards (SFAS) No. 13,
                  Accounting for Leases, as amended.

                  The net investment in operating leases consists of leased
                  machines, which are carried at cost, less the amount
                  depreciated to date. Operating lease revenue consists of the
                  contractual lease payments and is recognized ratably over the
                  lease term. Expenses are principally depreciation and
                  maintenance of the leased machines (see Note 1d).

                  The net investment in sales type leases consists of the
                  present values of the future minimum lease payments. Sales
                  type lease revenues consist of the profits earned on the sales
                  of the leased machines and interest earned on the present
                  value of the lease payments. Interest revenue is recognized as
                  a constant percentage return on the net investment.

                  Any future losses related to lease cancellations would be
                  recorded in the period such losses became known and estimable.

         c.       Inventories

                  Inventories consist of parts and supplies, and vending
                  machines assembled or in the process of assembly. Inventories
                  are stated at the lower of cost or market, with cost
                  determined using standard costing which approximates the
                  first-in, first-out method.

         d.       Property and Equipment

                  Property and equipment are stated at cost. Depreciation of
                  property and equipment is calculated on the straight-line
                  method over the estimated useful lives of the assets, to the
                  Company's estimate of the assets' residual values, as follows:

<TABLE>
                  <S>                              <C>
                  -------------------------------------------------------------
                  Leased machines                   5 years
                  Machinery and equipment          10 years
                  Furniture and fixtures            5 years
                  -------------------------------------------------------------
</TABLE>

                  Leasehold improvements are amortized on the straight-line
                  method over the lease term. Amortization of assets held under
                  leasehold improvements is included with depreciation expense.

         e.       Product Development Rights

                  Product development rights represent the exclusive rights to
                  certain patents and other related manufacturing technologies
                  to manufacture and assemble the instant ticket vending
                  machines. The asset is amortized on the straight-line method
                  over fifteen years, which represents the lower of the
                  remaining life of the patents or the estimated remaining life
                  of the technology currently in use. The Company assesses the
                  recoverability of this intangible asset by determining whether
                  the amortization of the asset balance over its remaining life
                  can be recovered through undiscounted future cash flows of the
                  Company. The amount of the asset impairment, if any, is
                  measured based on projected discounted operating cash flows
                  using a discount rate reflecting the Company's average cost of
                  funds. The assessment of the recoverability of the asset will
                  be impacted if estimated future operating cash flows are not
                  achieved.

         f.       Income Taxes

                  The Company accounts for income taxes using the asset and
                  liability method. In accordance with this method, deferred tax
                  assets and liabilities are recognized for the future tax
                  consequences attributable to differences between the financial
                  statement carrying amounts of existing assets and liabilities
                  and their respective tax bases and operating loss and tax
                  credit carryforwards. Deferred tax assets and liabilities are
                  measured using the enacted tax rates expected to apply to
                  taxable income in the years in which those temporary
                  differences are expected to be recovered or settled. Under
                  this method, the effect on deferred tax assets and liabilities
                  of a change in tax rates is recognized in income in the period
                  that includes the rate change enactment date.

         g.       Disclosure About Fair Value of Financial Instruments

                  SFAS No. 107, Disclosure About Fair Value of Financial
                  Instruments, defines the fair value of a financial instrument
                  as the amount at which the instrument could be exchanged in a
                  current transaction between willing parties. The carrying
                  amounts as of December 31, 1998 of cash, accounts receivable,
                  accounts payable, accounts payable - related parties, accrued
                  expenses and income taxes payable approximate fair value due
                  to the short maturity of these investments. The carrying
                  amount of notes payable to financial institutions and notes
                  payable - related parties approximate fair value, as such
                  borrowings bear interest at the Company's current rates for
                  such types of instruments.

         h.       Stock Incentive Plans

                  Prior to January 1, 1996, the Company accounted for its stock
                  incentive plans in accordance with the provisions of
                  Accounting Principles Board (APB) Opinion No. 25, Accounting
                  for Stock Issued to Employees, and related interpretations. As
                  such, compensation expense would be recorded on the date of
                  grant only if the current market price of the underlying stock
                  exceeded the exercise price. On January 1, 1996, the Company
                  adopted SFAS No. 123, Accounting for Stock-Based Compensation,
                  which permits entities to recognize as expense over the
                  vesting period the fair value of all stock-based awards on the
                  date of grant. Alternatively, SFAS No. 123 also allows
                  entities to continue to apply the provisions of APB Opinion
                  No. 25 and provide pro forma net income and pro forma income
                  per share disclosures for employee stock option grants made in
                  1995 and future years as if the fair-value-based method
                  defined in SFAS No. 123 had been applied. The Company has
                  elected to continue to apply the provisions of APB Opinion No.
                  25 and provide the pro forma disclosure provisions of SFAS No.
                  123.

         i.       Warranty Costs

                  Provision for estimated warranty costs on machines sold is
                  recorded at the time of sale and periodically adjusted to
                  reflect actual experience.

         j.       Research and Development Costs

                  Research and development costs are charged to expense in the
                  year incurred.

         k.       Income Per Share

                  Effective December 31, 1997, the Company adopted SFAS No. 128,
                  Earnings Per Share, which simplified the standards for
                  computing income per share. There was no material impact on
                  the Company's previously reported annual or interim period
                  income per share amounts, as a result of the adoption. Basic
                  income per share is based upon the weighted average number of
                  common shares outstanding. Diluted income per share is based
                  upon the weighted average number of common shares outstanding,
                  including the effects of all dilutive potential common shares
                  outstanding.

         l.       Use of Estimates

                  Management of the Company has made a number of estimates and
                  assumptions relating to the reporting of assets and
                  liabilities and the disclosure of contingent liabilities to
                  prepare these financial statements in conformity with
                  generally accepted accounting principles. Actual results could
                  differ from those estimates.

         m.       Reclassifications

                  Certain prior year amounts have been reclassified to conform
                  with the current year presentation.

2.       Investment in Sales Type Leases The Company leases 200 instant ticket
         vending machines (ITVMs) to one state lottery under a sales type lease
         that commenced in May 1997 and 585 ITVMs to another state lottery under
         a sales type lease that commenced in May 1998. The components of the
         net investment in sales type leases at December 31, 1997 and 1998 are
         as follows:


                                                                              13
<PAGE>   17

<TABLE>
<CAPTION>
                                    1997             1998
         ---------------------------------------------------
         <S>                     <C>               <C>
         Minimum lease
           payments receivable   $1,851,200        6,134,450
         Less unearned
           revenue on lease
           payments receivable      583,704        1,479,415
         ---------------------------------------------------
                                  1,267,496        4,655,035
         Less current portion       216,485          888,627
         ---------------------------------------------------
         Investment in sales
           type leases, less
           current portion       $1,051,011        3,766,408
         ---------------------------------------------------
</TABLE>

         Future minimum lease payments to be received by the Company under these
         sales type leases are as follows:

<TABLE>
<CAPTION>
         Years ending December 31,
         ----------------------------------------
         <S>                           <C>
         1999                          $1,480,200
         2000                           1,480,200
         2001                           1,480,200
         2002                           1,195,400
         2003                             498,450
         ----------------------------------------
                                       $6,134,450
         ----------------------------------------
</TABLE>

3.       Inventories

         Inventories at December 31, 1997 and 1998 consist of the following:

<TABLE>
<CAPTION>
                                   1997          1998
         ----------------------------------------------
         <S>                    <C>           <C>
         Finished goods         $1,155,808    1,528,656
         Work in process            82,162      302,766
         Raw materials
           and supplies          3,088,525    2,506,647
                                 4,326,495    4,338,069
         ----------------------------------------------
         Less valuation reserve    275,000    1,208,110
         ----------------------------------------------
                                $4,051,495    3,129,959
         ----------------------------------------------
</TABLE>

4.       Leased Machines

         At December 31, 1997 and 1998, the Company leased 6,834 and 7,027 ITVMs
         to 14 state lotteries, respectively, under operating leases. The leases
         generally provide for the lotteries to make monthly or quarterly
         payments for rentals of the ITVMs over various lease terms. The
         components of the net investment in operating leases, which include
         estimated residual values, at December 31, 1997 and 1998 are as
         follows:

<TABLE>
<CAPTION>
                                  1997         1998
         ---------------------------------------------
         <S>                  <C>           <C>
         Leased machines      $25,718,832   29,484,623
         Less accumulated
           depreciation        10,978,370   12,378,732
         ---------------------------------------------
                              $14,740,462   17,105,891
         ---------------------------------------------
</TABLE>

         Future minimum lease payments to be received by the Company under
         operating leases are as follows:

<TABLE>
<CAPTION>
         Years ending December 31,
          ------------------------------------------
         <S>                             <C>
            1999                         $ 9,357,250
            2000                           3,558,582
            2001                             963,792
            2002                             963,792
            2003                             375,000
         -------------------------------------------
                                         $15,218,416
         -------------------------------------------
</TABLE>

5.       Notes Payable

         The Company had a revolving credit facility with a financial
         institution that permitted the Company to borrow through September 1998
         up to $12,500,000 at the prime interest rate plus 1.0%. Draws against
         this facility were made in the form of demand notes. The Company paid
         an annual commitment fee of .25% on the unused portion of the
         commitment and a monthly usage fee equal to .25% of the highest
         outstanding balance during each month. Borrowings under this agreement
         were collateralized by all assets of the Company and assignment of
         proceeds from lease agreements. This borrowing was retired with
         proceeds from the new borrowing entered into in October 1997.

         In October 1997, the Company entered into a new revolving credit
         facility with a financial institution that permits the Company to
         borrow through October 2000 up to $15,000,000 at a floating rate
         indexed to the London Interbank Borrowing Offer Rate or the financial
         institutions prime interest rate of 5.63% and 7.75%, respectively at
         December 31, 1998. In conjunction with the establishment of the
         facility, the Company opened a lockbox and controlled disbursement
         account. All lockbox receipts are recorded as payments against the
         facility, and presented checks are recorded as draws on the facility.
         Borrowings under this credit facility are collateralized by all assets
         of the Company and assignment of proceeds from lease agreements. At
         December 31, 1997 and 1998, the Company had borrowings of $8,978,036
         and $11,166,374 outstanding with additional borrowings of $6,021,964
         and $3,833,626 available under the facility, respectively.

6.       Long-Term Debt

         Long-term debt at December 31, 1997 represented a term note payable to
         a bank with final payment due February 20, 1998, payable in monthly
         installments of $448, including interest at a rate of 7.99% per annum.
         The note was collateralized by automotive equipment and was repaid in
         1998.

7.       Notes Payable - Related Parties

         The Company has the following notes payable to related parties at
         December 31, 1997 and 1998:

<TABLE>
<CAPTION>
                                                          1997           1998
         ----------------------------------------------------------------------
         <S>                                           <C>           <C>
         Note payable to a stockholder due in annual
         installments equal to twenty-five percent
         (25%) of the net profits, if any, of the
         Company from its business operations as
         reported in the Company's annual financial
         statements prepared in accordance with
         generally accepted accounting principles.
         The payments shall begin on the first
         business day of the fourth month of the
         Company's fiscal year, for income tax
         purposes, immediately following (1) the
         payment of all debts of the Company
         outstanding as of September 25, 1992 and (2)
         the posting by the Company of retained
         earnings of at least $1,000,000 determined
         in accordance with generally accepted
         accounting principles, and continue on the
         same day each year until the principal and
         unpaid interest is paid in full. The note
         bears interest at the prime rate of Chase
         Manhattan Bank of New York (7.75% at
         December 31, 1998). The note is unsecured.    $400,000         400,000

         Note payable to a stockholder due and
         limited to twenty-five percent (25%) of the
         net profits of the Company, if any, from its
         business operations as reported in the
         Company's annual financial statements
         prepared in accordance with generally
         accepted accounting principles. The payments
         shall begin on the first business day of the
         fourth month of the Company's first year,
         for income tax purposes, immediately
         following (1) the payments of all debts of
         the Company outstanding as of September 25,
         1992; (2) the posting by the Company of
         retained earnings of at least $1,000,000
         determined in accordance with generally
         accepted accounting principles; and (3)
         payment in full of principal and interest
         due by the Company to a stockholder in the
         amount of $400,000. The note does not
         provide for any interest and is unsecured.      79,000          79,000
         ----------------------------------------------------------------------
                                                        479,000         479,000
         Less current portion                                 -         192,302
         ----------------------------------------------------------------------
                                                       $479,000         286,698
         ----------------------------------------------------------------------
</TABLE>



14
<PAGE>   18

8.       Income Taxes

         Income tax expense (benefit) is summarized as follows:

<TABLE>
<CAPTION>
                                     Year ended December 31,
         ---------------------------------------------------
                           1996          1997         1998
         ---------------------------------------------------
         <S>            <C>             <C>        <C>
         Current:
           Federal      $ 200,000       557,400      566,000
           State and
            local          63,000       156,000      156,500
         Deferred:
           State and
            local        (456,000)      275,000      374,200
         ---------------------------------------------------
                        $(193,000)      988,400    1,096,700
         ---------------------------------------------------
</TABLE>

         A reconciliation of income tax expense (benefit) in relation to the
         amounts computed by application of the U.S. Federal income tax rate of
         34% to pretax income follows:

<TABLE>
<CAPTION>
                                         1996          1997           1998
         -----------------------------------------------------------------------
         <S>                           <C>            <C>              <C>
         Federal
         income tax
         expense at
         the statutory
         rate                          $383,000       830,000          924,400

         Increase (reduction) in income taxes resulting from:

         Change in
         the beginning-
         of-the-year
         balance of
         the valuation
         allowance
         for the
         deferred tax
         assets
         allocated to
         income tax
         expense                       (672,000)            -
         Amortization
         of product
         development
         rights                          25,000        25,000           25,000 
         State and
         local taxes,
         net of federal
         benefit                         63,000       103,000          103,300
         Other                            8,000        30,400           44,000
         -----------------------------------------------------------------------
                                      $(193,000)      988,400        1,096,700
         -----------------------------------------------------------------------
</TABLE>

         The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities at
         December 31, 1997 and 1998 are presented below:

<TABLE>
<CAPTION>
                                                      1997          1998
         ----------------------------------------------------------------------
         <S>                                        <C>             <C>
         Deferred tax assets:
           Bad debt allowance                       $ 32,000        52,200
           Warranty costs                              9,000        10,100
         Net operating
           loss carryforwards                        400,000       347,100
         Inventory valuation reserve                      --       317,300
         Other, net                                   73,300            --
         ----------------------------------------------------------------------
         Total gross deferred
           tax assets                                514,300       726,700
         ----------------------------------------------------------------------
         Deferred tax liabilities:
           Property and equipment,
             principally due
             to differences
             in depreciation                         127,000       537,800
           Investment in
             sales type leases                       135,000       310,800
         ----------------------------------------------------------------------
         Total gross deferred
           tax liabilities                           262,000       848,600
         ----------------------------------------------------------------------
         Net deferred tax
           assets (liabilities)                     $252,300      (121,900)
         ----------------------------------------------------------------------
</TABLE>

         In assessing the realizability of deferred tax assets, management
         considers whether it is more likely than not that some portion or all
         of the deferred tax assets will not be realized. The ultimate
         realization of deferred tax assets is dependent upon the generation of
         future taxable income during the periods in which those temporary
         differences become deductible. Management considers the scheduled
         reversal of deferred tax liabilities, projected future income and tax
         planning strategies in making this assessment.

         At December 31, 1998, the Company has net operating loss carryforwards
         for Federal income tax purposes of approximately $1,021,000, which are
         available to offset future Federal taxable income, if any, through
         2009. However, due to an ownership change on September 25, 1992,
         utilization of these carryforwards is subject to certain annual
         limitations.

9.       Redeemable Preferred Stock

         The Company's preferred stock is nonparticipating and has no rights to
         dividends. The holders of the preferred stock are entitled to sell to
         the Company all of their shares of preferred stock at a price of $1.00
         per share upon (1) the payment of all debts of the Company outstanding
         as of September 25, 1992, (2) the reporting by the Company of retained
         earnings of at least $1,000,000 determined in accordance with generally
         accepted accounting principles, and (3) the payment in full by the
         Company of a promissory note in the original amount of $400,000 to a
         related party. Due to the redemption feature of the preferred stock, it
         has been classified separately from stockholders' equity in the
         Company's balance sheet. 

         The Company may, at its discretion, redeem all or part of the
         outstanding preferred stock at any time. The redemption price for the
         preferred stock is $1.00 per share and may be payable in the form of a
         promissory note.

10.      Stock Incentive Plans

         In March 1994, the Company and its Board of Directors approved and
         adopted the Company's 1994 Stock Incentive Plan and the Company's 1994
         Directors' Stock Incentive Plan (collectively, the Plans), which became
         effective at the date of the initial public offering. The Plans provide
         for the issuance of stock options for up to 260,000 shares of common
         stock to officers, employees, consultants and other supporters of the
         Company and up to 60,000 shares of common stock to nonemployee
         directors of the Company. Stock options are granted with an exercise
         price equal to the stock's fair market value at the date of grant.
         Options may be exercised subject to a vesting schedule which provides
         for vesting each year for a period of four years subject to the
         recipient's continued employment or service to the Company, and must be
         exercised within 10 years after the date of grant.

         As permitted by SFAS No. 123, the Company applies the intrinsic value
         method prescribed by APB Opinion No. 25 and related interpretations in
         accounting for its stock option plans. Accordingly, no compensation
         cost has been recognized in the accompanying statements of income.

         A summary of the status of the Company's stock option plans as of
         December 31, 1996, 1997, and 1998 and the changes therein for the years
         then ended is presented below:

<TABLE>
<CAPTION>
                                        1996                   1997                1998
         ---------------------------------------------------------------------------------
                                       Weighted              Weighted             Weighted
                                       Average               Average               Average
                                       Exercise              Exercise             Exercise
                             Shares     Price       Shares     Price    Shares     Price
         ---------------------------------------------------------------------------------
         <S>                 <C>       <C>         <C>       <C>        <C>       <C>
         Outstanding at
           beginning
           of year           131,725    $ 9.66     147,225    $ 9.38    180,875    $ 9.12
         Granted              15,500      7.00      37,000      8.00     36,300      6.75
         Exercised                --        --          --        --         --        --
         Forfeited                --        --       3,350     11.50      5,000     11.50
         ---------------------------------------------------------------------------------
         Outstanding at
         end of year         147,225      9.38     180,875      9.12    212,175      8.65
         Options
         exercisable
         at year-end          49,926     10.05      79,660      9.77    120,794      9.48
         ---------------------------------------------------------------------------------
         Weighted-average
         fair value of
         options granted
         during the year    $   5.11               $  5.82              $  5.16
         ---------------------------------------------------------------------------------
</TABLE>

Had compensation cost for options granted during 1996, 1997 and 1998 been
determined consistent with the fair value methodology of SFAS No. 123, the
Company's net income and income per share would have been reduced to the pro
forma amounts presented below:

<TABLE>
<CAPTION>
                                           1996            1997            1998
         -------------------------------------------------------------------------
         <S>                         <C>                 <C>             <C>
         Net income
              As reported            $   1,320,597       1,451,654       1,622,313
              Pro forma                  1,307,807       1,324,003       1,511,265
         -------------------------------------------------------------------------
         Basic income per share
              As reported                      .41             .45             .51
              Pro forma                        .41             .41             .47
         -------------------------------------------------------------------------
         Diluted income per share
              As reported                      .41             .45             .50
              Pro forma                        .41             .41             .47
         -------------------------------------------------------------------------
</TABLE>

         The full impact of calculating compensation cost for stock options
         under SFAS No. 123 is not reflected in the pro forma net income amounts
         presented above because compensation cost is recognized over the
         options' vesting period of four years and compensation cost for options
         granted prior to January 1, 1995 is not considered.

         The fair value of options granted during 1996, 1997 and 1998 for
         purposes of the accompanying pro forma disclosures is estimated on the
         grant date using the Black-Scholes option-pricing model with the
         following weighted-average assumptions: no



                                                                              15
<PAGE>   19

         dividends paid, as it has been the Company's policy not to declare or
         pay dividends since its initial public offering in 1994 and the Company
         does not anticipate paying dividends in the foreseeable future;
         expected volatility of 52%, 56% and 65%, respectively, based on the
         calculated volatility of the Company's stock since its initial public
         offering; risk-free rates of return of 6.66%, 5.86% and 4.98%,
         respectively; and expected lives of 10 years.

         Information about stock options outstanding at December 31, 1998 is as
         follows:

<TABLE>
<CAPTION>
                                         Options Outstanding            Options Exercisable
         ------------------------------------------------------------------------------------------
              Range                     Weighted-Avg.
               of                       Remaining       Weighted-Avg.                  Weighted-Avg.
            Exercise       Number      Contractual         Exercise        Number       Exercisable
             Prices     Outstanding       Life              Price       Exercisable       Price
         ------------------------------------------------------------------------------------------
         <S>            <C>            <C>              <C>             <C>            <C>
          6.50 -  8.63    165,550         7.75            $  7.86          76,813        $  8.33
         10.13 - 11.50     46,625         5.53              11.43          44,125          11.50
         ------------------------------------------------------------------------------------------
                          212,175         7.26            $  8.65         120,938        $  9.49
         ==========================================================================================
</TABLE>

11.      Income Per Share

         The computations of basic and diluted income per share for each year
         are as follows:

<TABLE>
<CAPTION>
       ----------------------------------------------------------------------------
                                           Net                               Per
                                         Earnings        Shares             Share
       1996                             (Numerator)   (Denominator)         Amount
       ----------------------------------------------------------------------------
       <S>                              <C>            <C>                  <C>
         Basic income per share:
           Net income available to
           common stockholders           $1,320,597      3,210,000            0.41
       ----------------------------------------------------------------------------
         Diluted income per share:
           Effect of dilutive
           securities stock options              --          2,000
           Net income available to
           common stockholders and
           assumed conversions            1,320,597      3,212,000            0.41
       ----------------------------------------------------------------------------
       1997
       ----------------------------------------------------------------------------
           Basic income per share:
           Net income available to
           common stockholders            1,451,654      3,210,000            0.45
       ----------------------------------------------------------------------------
         Diluted income per share:
           Effect of dilutive
           securities stock options              --          2,661
           Net income available to
           common stockholders and
           assumed conversions            1,451,654      3,212,661            0.45
       ----------------------------------------------------------------------------
       1998
       ----------------------------------------------------------------------------
           Basic income per share:
           Net income available to
           common stockholders            1,622,313      3,210,000            0.51
       ----------------------------------------------------------------------------
         Diluted income per share:
           Effect of dilutive
           securities stock options              --         10,649
           Net income available to
           common stockholders and
           assumed conversions            1,622,313      3,220,649            0.50
       ----------------------------------------------------------------------------
</TABLE>

         Options to purchase 49,975, 129,725 and 52,475 shares of common stock
         were outstanding in 1996, 1997 and 1998, respectively, but were not
         included in the computation of diluted income per share because the
         options' exercise prices were greater than the average market price of
         common shares.

12.      Noncash Investing Activities

         Upon lease expiration in 1998, one state lottery returned to the
         Company leased machines with a net book value of $442, 897. The Company
         used parts from these returned machines in the manufacturing of
         recertified new machines. Some of the recertified new machines were
         deployed in 1998 under new leases.

13.      Related Party Transactions

         Accounts payable - related parties is $328,960 and $215,734 at December
         31, 1997 and 1998, respectively, and represent management fees and
         expenses payable to a company owned 100% by the majority stockholder
         and parts expenses payable to an entity which is owned by a director.

         Amounts expensed related to the company owned by the majority
         stockholder were $73,321, $36,000 and $36,000 for the years ended
         December 31, 1996, 1997 and 1998, respectively.

         The entity owned by a director supplies the Company with certain parts
         for its dispensing mechanisms. In addition, on January 13, 1994, the
         Company entered into a manufacturing and license agreement with this
         entity pursuant to which the Company purchased an exclusive license to
         make, use and sell pull-tab lottery ticket dispensing mechanisms
         produced by this entity. The Company had purchases from this entity
         which were charged to cost of revenues of approximately $1,986,000,
         $2,996,000 and $3,800,887 for the years ended December 31, 1996, 1997
         and 1998, respectively.

         Interest expense arising from notes payable-related parties amounted to
         $33,085, $33,714 and $33,401 for the years ended December 31, 1996,
         1997 and 1998, respectively.

14.      Customer and Supplier Concentrations 

         A significant portion of the Company's revenues is derived from a
         limited number of state lottery authorities or their representatives
         for the lease, sale or service of ITVMs. For the years ended December
         31, 1996, 1997 and 1998, one customer generated 45%, 29% and 24%,
         respectively, of the machine lease revenues. In addition, single state
         contracts generated 69%, 32% and 48% of the machine sales revenues for
         the years ended December 31, 1996, 1997 and 1998, respectively. Future
         revenue from machine sales is dependent upon the Company winning awards
         in a competitive bidding process.

         The Company currently purchases certain components used in its vending
         machines, including components used in its burster mechanism and its
         bill acceptor mechanism, from single suppliers.

         The purchase of components from outside suppliers on a sole source
         basis subjects the Company to certain risks, including the continued
         availability of suppliers, price increases and potential quality
         assurance problems. Because other suppliers exist that can duplicate
         these components should the Company elect or be forced to use a
         different supplier, the Company does not believe that any such change
         in suppliers would result in the termination of a production contract.
         However, the Company could experience a delay of 30 to 60 days in the
         production of vending machines should it elect or be forced to use
         other suppliers for these components. Any delay of more than 30 to 60
         days could adversely affect the Company's ability to make timely
         deliveries of vending machines and to obtain new contracts.

15.      Lease Commitments

         The Company leases its office, manufacturing and warehouse facilities
         under noncancelable operating leases. The leases expire on December 31,
         1999, and require lease payments of $50,000, $91,000 and $69,000 a
         year, respectively, through expiration. Total rent expense under these
         leases approximated $91,000, $141,000 and $210,000, for the years ended
         December 31, 1996, 1997 and 1998, respectively.

16.      Segment and Related Information

         Effective January 1, 1998, the Company adopted SFAS No. 131,
         Disclosures About Segments of an Enterprise and Related Information,
         which changes the way the Company reports information about its
         operating segments. The Company has two reportable segments: ITVMs and
         prepaid phone card dispensing machines (PCDMs). The ITVM segment is the
         larger of the Company's two segments. The Company designs,
         manufactures, sells, leases and services ITVMs that are used by public
         lotteries operated by states and foreign public entities to dispense
         instant winner lottery tickets primarily in retail locations such as
         supermarkets and convenience stores. Within the PCDM segment, the
         Company designs, manufactures, sells, leases and services PCDMs that
         are used by providers of long distance telephone service to dispense
         prepaid telephone calling cards in retail locations.

         The accounting policies of the segments are the same as those described
         in the summary of significant accounting policies. The Company
         evaluates performance based on segment operating profits.

<TABLE>
<CAPTION>
                                       ITVM          PCDM          Total
         ----------------------------------------------------------------------
         1996
         <S>                       <C>              <C>          <C>
         Revenues                  $18,179,353      419,336      18,598,689
         Segment gross margin        5,915,851       46,848       5,962,699
         Total assets               19,158,006      745,958      19,903,964
         Capital expenditures        3,902,041        2,493       3,904,534
         Depreciation                3,734,696        9,369       3,744,065
         ----------------------------------------------------------------------
         1997
         Revenues                   18,586,960      524,091      19,111,051
         Segment gross margin        7,133,182       90,939       7,224,121
         Total assets               23,105,044      459,168      23,564,212
         Capital expenditures        8,661,022       49,293       8,710,315
         Depreciation                3,910,146       14,098       3,924,244
         ----------------------------------------------------------------------
         1998
         Revenues                   23,965,442      508,531      24,473,973
         Segment gross margin        8,310,947       43,404       8,354,351
         Total assets               27,478,447      742,362      28,220,809
         Capital expenditures        9,486,255      125,368       9,611,623
         Depreciation                4,231,700       58,428       4,290,128
         ----------------------------------------------------------------------
</TABLE>

         Total assets for the segments excludes cash, prepaid expenses, net
         property and equipment other than leased machines and deferred tax
         assets, as such assets are not specifically identifiable to a
         particular segment.

17.      Commitments and Contingent Liabilities As of December 31, 1998, the
         Company had outstanding purchase commitments for raw materials of
         approximately $4,368,184, of which $4,050,184 and $318,000 will be used
         in the manufacturing of instant ticket and prepaid telephone card
         vending machines, respectively. Management intends to utilize these
         commitments as machines are produced.




16
<PAGE>   20


                              Photo of world with
                            a finger pushing button
                                     on it


                Placing products and information at a fingertip-

<PAGE>   21

                    CORPORATE DATA & SHAREHOLDER INFORMATION

HEADQUARTERS

Interlott Technologies, Inc.
10830 Millington Court
Cincinnati, OH  45242
(513) 792-7000

INVESTOR INQUIRIES

Chief Financial Officer
10830 Millington Court
Cincinnati, OH 45242
(513) 792-7000

REGISTRAR AND TRANSFER AGENT

First Union National Bank
230 South Tryon Street
Charlotte, NC  28288-1154

CORPORATE COUNSEL

Alston & Bird LLP
Atlanta, Georgia

Taft, Stettinius & Hollister LLP
Cincinnati, Ohio

INDEPENDENT AUDITORS

KPMG Peat Marwick LLP
Cincinnati, OH

OFFICERS

L. Rogers Wells, Jr.
Chairman of the Board and CEO

David F. Nichols
President

Gary S. Bell
Secretary

Thomas W. Stokes
Vice President of Operations

Dennis W. Blazer
Chief Financial Officer

DIRECTORS

L. Rogers Wells, Jr.
Chairman of the Board and CEO

Edmund F. Turek
Board Member

Gary S. Bell
Secretary

Kazmier J. Kasper
President, Algonquin Industries, Inc.
a manufacturer of metal and machined parts

H. Jean Marshall
Project Director for the City of Cincinnati

David F. Nichols
President

John J. Wingfield
Manager, A. G. Edwards & Sons, Inc., Louisville
an investment banking company

The Company's Common Stock has been traded on the American Stock Exchange under
the symbol "ILI" since the Company's initial public offering of Common Stock in
April 1994. Prior to the initial public offering, there was no established
trading market for the Company's Common Stock. The following tables show the
high and low closing sale prices per share for the Common Stock as reported by
the American Stock Exchange for the periods indicated:

<TABLE>
<CAPTION>
1997                    HIGH             LOW
==============================================
<S>                  <C>                <C> 
First Quarter        $   8   1/8        6 5/8
----------------------------------------------
Second Quarter           8   1/4        6 1/2
----------------------------------------------
Third Quarter           10 11/16        6 7/8
----------------------------------------------
Fourth Quarter          10   5/8        7 5/8
</TABLE>

<TABLE>
<CAPTION>
1998                    HIGH             LOW
==============================================
<S>                  <C>                <C> 
First Quarter        $  9 3/4           7 3/4
----------------------------------------------
Second Quarter         14               9 5/8
----------------------------------------------
Third Quarter          10 3/4           7 7/8
----------------------------------------------
Fourth Quarter          8 1/8           6 1/2
==============================================
</TABLE>

At March 12,1998, there were approximately 68 stockholders of record and an
unknown number of beneficial owners holding stock in nominee or "street" name.
The Company has paid no cash dividends on its Common Stock and currently intends
to retain all future earnings for use in the development of its business.

Form 10-K: A copy of the Company's 1998 Annual Report on Form 10-K, as filed
with the Securities and Exchange Commission, is available, without exhibits,
free of charge to shareholders. Requests should be addressed to:

Shareholder Relations
Interlott Technologies, Inc.
10830 Millington Court
Cincinnati, OH 45242

The 1999 Annual Meeting will be held at The Holiday Inn Cincinnati North at
I-275, on May 6, 1999 at 10:00am, local time. 


INTERLOTT
TECHNOLOGIES, INC.



<PAGE>   22

                                                                       INTERLOTT
                                                              TECHNOLOGIES, INC.

                                                          10830 Millington Court
                                                            Cincinnati, OH 45242
                                                              Phone 513.792.7000
                                                                Fax 513.792.7001
                                                               www.interlott.com