<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the Transition Period From _____ to ____

                         Commission file number 1-12986

                          INTERLOTT TECHNOLOGIES, INC.
             (Exact name of Registrant as specified in its charter)

        DELAWARE                                              31-1297916
(State of incorporation)                                   (I.R.S. Employer
                                                         Identification Number)

                 10830 Millington Court, Cincinnati, Ohio 45242
          (Address of principal executive offices, including zip code)

                                 (513) 792-7000
              (Registrant's telephone number, including area code)

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

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


      Title of each class            Name of each exchange on which registered
---------------------------------    -----------------------------------------
Common Stock, $.01 Par value                  American Stock Exchange

        Securities registered pursuant to Section 12(g) of the Act: None

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

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

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

The aggregate market value of the Registrant's outstanding Common Stock held by
non-affiliates of the Registrant on March 25, 1998 was $10,312,500. There were
3,210,000 shares of Common Stock outstanding as of March 25, 1998.

<PAGE>   2

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's 1997 Annual Report are incorporated by reference in
Part II hereof. Portions of the Registrant's Proxy Statement for the 1998 Annual
Meeting of Stockholders to be held on May 7, 1998 are incorporated by reference
in Part III hereof.


                                      -2-

<PAGE>   3

                          INTERLOTT TECHNOLOGIES, INC.
                           Annual Report On Form 10-K
                   For the Fiscal Year Ended December 31, 1997

                                Table of Contents

<TABLE>
<CAPTION>
Item                                                                                                            Page
Number                                                                                                          Number
------                                                                                                          ------
<S>      <C>                                                                                                    <C>
                                                             PART I

   1.    Business.........................................................................................        3

   2.    Properties.......................................................................................       23

   3.    Legal Proceedings................................................................................       23

   4.    Submission of Matters to a Vote of Security Holders..............................................       24

   4(A). Executive Officers of the Registrant.............................................................       24

                                                             PART II

   5.    Market for Registrant's Common Equity and Related Stockholder Matters............................       25

   6.    Selected Financial Data..........................................................................       25

   7.    Management's Discussion and Analysis of Financial Condition and Results of Operations............       26

   7(A). Quantitative and Qualitative Disclosure About Market Risk .......................................       26

   8.    Financial Statements and Supplementary Data......................................................       26

   9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............       26

                                                            PART III

  10.    Directors and Executive Officers of the Registrant...............................................       26

  11.    Executive Compensation...........................................................................       27

  12.    Security Ownership of Certain Beneficial Owners and Management...................................       27

  13.    Certain Relationships and Related Transactions...................................................       27

                                                             PART IV

  14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................       27

                                       SIGNATURES.........................................................       30

                                       INDEX OF FINANCIAL STATEMENT SCHEDULES.............................       S-1

                                       INDEX OF EXHIBITS..................................................       E-1
</TABLE>


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<PAGE>   4

                                     PART I

ITEM 1. BUSINESS

General

In addition to historical information, this report and the Company's 1997 Annual
Report include forward looking statements and information based on management's
beliefs, plans, expectations and assumptions and on currently available
information. The words "expect," "anticipate," "intend," "plan," "believe,"
"seek," "estimate" and similar expressions used in this report and the 1997
Annual Report are intended to identify forward looking statements, although this
report and the 1997 Annual Report also contains other forward looking
statements. The forward looking statements in this report are not guarantees of
future performance and involve certain risks, uncertainties and assumptions,
many of which are beyond the Company's control. Such factors include
particularly, but are not limited to, the level of market acceptance of ITVMs
and PCDMs generally as well as the demand for the Company's ITVMs and PCDMs. As
a result of the various risks, uncertainties and assumptions underlying the
forward looking statements in this report and the 1997 Annual Report, the
Company's future actions, financial condition, results of operations and
stockholder values could differ materially from any forward looking statement
made by the Company.  All written or oral forward looking statements
attributable to the Company are expressly qualified in their entirety by the
cautionary statements that explain or qualify the foward looking statements.

Interlott Technologies, Inc. (the "Company") is engaged primarily in the design,
manufacture, sale, lease and service of instant winner lottery ticket vending
machines ("ITVMs"). ITVMs 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. An instant lottery
commonly is played by players scratching off a latex coating from a pre-printed
ticket or tearing pull-tabs from a pre-printed ticket to determine the outcome
of the game. The Company's ITVMs dispense instant lottery tickets without the
assistance of an employee of the lottery instant ticket retailer or agent,
thereby permitting the retailer or agent to sell tickets without disrupting the
normal duties of its employees.

The Company's ITVMs dispense scratch-off instant lottery tickets using a
dispensing process that incorporates the Company's patented "burster
technology." The Company believes that this burster technology is superior to
any other ITVM scratch-off dispensing technology on the market and considers it
to be a key to its marketing efforts and the ITVM procurement decisions of the
various lotteries. The Company is unaware of any competitor that incorporates a
substantially equivalent or superior scratch-off dispensing mechanism in its
ITVMs. To dispense pull-tab instant lottery tickets, the Company has developed
an ITVM that incorporates a patented dispensing technology which is different
than the burster technology but that is also believed by the Company to be
superior to any other currently available pull-tab dispensing technology. ITVMs
that dispense pull-tab tickets are sometimes referred to herein as "pull tab
vending machines" or "PTVMs." The term "ITVM" includes both scratch-off vending
machines and PTVMs unless the context indicates otherwise.

As of December 31, 1997, the Company had sold or leased 12,414 ITVMs under
agreements with 22 different state lotteries and six foreign jurisdictions, or
their licensees or contractors. The Company was awarded four of the five
domestic ITVM contracts that were awarded in 1996 and five of the six contracts
that were awarded in 1997. Additionally, lotteries in eight states and eight
foreign jurisdictions currently are testing the Company's ITVMs or have
requested the Company to provide ITVMs for testing.

The Company continually seeks to enhance its existing product lines and develop
new products. The Company has developed a prepaid phone card dispensing machine
("PCDM") that enables providers of long distance telephone service to dispense
prepaid telephone calling cards in retail locations without the assistance of an
employee of the retailer. The dispensing process used in the Company's PCDM
incorporates the same patented technology used in the Company's PTVM, and the
Company believes that this dispensing technology is superior to any other PCDM
dispensing technology on the market. Sales of the Company's PCDMs began in the
latter part of 1995, and as of December 31, 1997, the Company had sold or leased
a total of 695 PCDMs. PCDM revenues in 1996 and 1997 represented 2% and 2.5% of
total revenues, respectively.

The Company was incorporated on February 20, 1990 under the laws of Ohio and was
reincorporated under the laws of Delaware on March 18, 1994. In April 1994, the
Company completed an initial public offering of Common Stock, and the Company's
Common Stock now trades on the American Stock Exchange under the symbol "ILI."


                                      -3-


<PAGE>   5

Industry Overview

         ITVMS

         The popularity and success of lotteries has increased worldwide in
recent years, and the popularity of instant lotteries has increased at a rate
that is greater than that of lotteries generally. Currently 37 states and the
District of Columbia operate lotteries as compared to 29 states as of June 30,
1989, and 37 states and the District of Columbia currently operate instant
lotteries as compared to 28 states as of June 30, 1989. The Company believes
that factors contributing to the rapid growth in the popularity and success of
instant ticket games, which now comprise 45% of total lottery sales in the
United States as compared to 24% in 1989, include more sophisticated marketing
techniques, the introduction of new state instant ticket lotteries, a broader
appeal among lottery consumers and increased technological advances in the
distribution of instant tickets.

         ITVMs were first deployed to serve the instant lottery market in 1991,
and the market for ITVMs has grown rapidly in subsequent years. The number of
installed ITVMs has increased from approximately 900 in 2 states in 1991 to
approximately 24,100 in 31 states, the District of Columbia and eight foreign
jurisdictions as of December 31, 1997. Three states and four foreign
jurisdictions currently are testing or preparing to test ITVMs in the field, and
the Company believes that several other states and foreign jurisdictions are
considering the use of ITVMs. Additionally, because states that utilize ITVMs
typically introduce the ITVMs into the instant ticket distribution system in
stages (preferring to test retail reception to a limited initial deployment of
ITVMs before fully committing funds to the deployment of a significantly larger
number of ITVMs), the Company believes that states currently utilizing ITVMs
represent a growing market for the Company's ITVMs.

         Although the Company believes that sales of instant lottery tickets and
the use of ITVMs will continue to increase, any decline in the popularity of
instant lottery games or in the market acceptance of ITVMs, as well as any other
event that results in a decrease in leasing or purchasing ITVMs by lotteries,
would have a material adverse effect on the Company. The Company's ability to
generate additional revenues and earnings will depend upon the continuation of
existing leases of ITVMs, orders for additional ITVMs by the lotteries that
currently utilize ITVMs, the implementation of programs that use ITVMs to
distribute tickets in the six additional states as well as foreign jurisdictions
that have instant ticket lotteries, and the approval of lotteries by the
remaining states and foreign jurisdictions. Future orders of ITVMs by lotteries
will depend in large part on continued market acceptance of ITVMs, of which
there can be no assurance. Accordingly, there can be no assurance that any
significant number of jurisdictions will implement or expand lottery programs
that utilize ITVMs.


                                      -4-

<PAGE>   6

         PCDMS

         Like instant lottery tickets, the use of prepaid telephone calling
cards also has grown significantly in the past few years. Prepaid telephone
calling cards enable callers to make long distance calls at rates that typically
are lower than the rates ordinarily charged for credit card or collect long
distance telephone calls. This factor, together with the usage control that
results from the pre-established value of the card, is perceived as a distinct
value of the card and is believed to be responsible for the popularity of
prepaid telephone calling cards.

         The use of PCDMs as a method of distribution of prepaid telephone
calling cards has paralleled the market acceptance of the card. PCDMs are now
being used successfully to sell prepaid telephone calling cards in truck stops,
military bases, convenience stores, airports, and numerous other types of retail
locations. The Company believes that the sale of prepaid long distance calling
cards and the use of PCDMs are in the very early stages of market development in
the United States and anticipates the continued development of the market.
However, any decline in the popularity of prepaid telephone calling cards or in
the market acceptance of PCDMs would limit the Company's ability to generate
revenues and earnings from its PCDMs. There can be no assurance that the Company
will be able to develop successfully the market for its PCDMs.

Business Strategy

         The Company's business strategy involves the following elements:

         -        Expansion of the Company's ITVM into new domestic and
                  international markets. Lotteries are becoming increasingly
                  aware of the success of ITVMs in increasing instant ticket
                  revenues, and many domestic and international jurisdictions
                  are currently testing and evaluating ITVMs. In the United
                  States, the Company currently is testing or preparing for
                  testing of ITVMs for lotteries in Idaho, Indiana and West
                  Virginia. Internationally, the Company currently is testing or
                  preparing for testing of ITVMs for lotteries in Costa Rica,
                  France, Quebec and Switzerland. The Company plans to expand
                  further into new and existing lottery jurisdictions by
                  expanding its marketing efforts and lowering the cost
                  associated with the procurement of its ITVMs. The Company also
                  intends to continue to aggressively market its ITVM products
                  and services to its existing customers to encourage expanded
                  use of ITVMs in existing distribution systems.

         -        PCDM market penetration. The Company has made only an initial
                  and limited penetration of the PCDM market to date, but the
                  Company is actively seeking to become a significant presence
                  in the PCDM market in the United States. The Company believes
                  that its ITVM has a reputation for quality, performance and
                  reliability, and the Company intends to capitalize on this
                  reputation in marketing its PCDM to providers of long distance
                  telephone services. The Company also intends to demonstrate to
                  such providers the advantages which its PCDM affords to the
                  retailers that sell prepaid telephone calling cards, which in
                  turn should lead to increased sales of prepaid calling cards
                  by such providers. To this end, the Company is working closely
                  with several providers of long distance telephone service to
                  expand the use of PCDMs in the distribution of prepaid
                  telephone calling cards. Four such providers are currently
                  testing or preparing to test the Company's PCDM. The Company
                  also intends to aggressively market its PCDM products to its
                  existing customers and to expand its marketing efforts to both
                  the providers and resellers of long distance services, as well
                  as to market its PDCMs to retailers of prepaid telephone
                  cards.


                                      -5-

<PAGE>   7

         -        Continued product innovation and technological advances.
                  Management believes that the Company's products are more
                  technologically advanced than the products of its competitors
                  and that the technological superiority of the Company's ITVM
                  is a principal reason for its success to date. To further
                  expand the Company's market opportunities, the Company
                  continually seeks to enhance its existing products and develop
                  complementary products that offer the superior operating
                  performance of its ITVMs and PCDMs. For example, the Company
                  has developed a compact, no-frills PCDM to address the needs
                  of those customers who do not desire a full-service machine.
                  The Company also has enhanced its software to interact with
                  currency acceptors of foreign currency and display messages in
                  foreign languages. Finally, the Company has improved its
                  on-line communications system.

         -        Manufacturing efficiencies. The Company continually seeks to
                  enhance its manufacturing operations to improve its gross
                  margins and overall profitability. The Company believes that
                  through design refinements and continued higher production
                  volumes, it will continue to achieve lower manufacturing costs
                  by receiving more favorable terms from vendors.

         -        Develop dispensing devices for other markets. The Company
                  intends to expand its existing product lines by developing new
                  dispensing devices for markets other than lotteries. For
                  example, the Company is developing and testing a device which
                  dispenses stored value "smart" cards for possible use by the
                  financial services industry to the extent that consumer use of
                  smart cards develops in the future.

Products

         The ITVM

         In 1987, the Company's former President and current Vice Chairman,
Edmund F. Turek, developed the technology for what the Company believes to be
the first automated ITVM. This burster dispensing technology is a key component
of the Company's ITVM for scratch-off instant lottery tickets and is protected
by a patent that the Company acquired from Mr. Turek's family-owned corporation.
See "Patents, Trademarks, and Copyrights" below.

         The Company's ITVMs automatically dispense instant lottery tickets upon
payment from the user. Unlike the products of some of the Company's competitors,
the burster technology in the Company's ITVMs automatically separates one
scratch-off instant ticket from another along the perforations between tickets
to help prevent tearing of the tickets or scarring of the latex on the tickets.
The Company's burster technology, which the Company believes to be the most
technologically advanced scratch-off dispensing system in the ITVM industry,
also enables the Company's ITVM to dispense and account for virtually any known
type of scratch-off instant lottery ticket, allowing the use of a wide range of
sizes, shapes, paper stocks or perforations, without the intervention of a
lottery retailer or agent. This feature allows lotteries to purchase virtually
any known type of scratch-off instant ticket from their instant ticket
manufacturer without having to request from the manufacturer major alterations
in the ticket perforations. For example, the Company's ITVM, unlike the products
of the Company's competitors, can dispense recyclable scratch-off tickets
without tearing or scarring the tickets. The Company believes that lotteries
will increasingly require the use of recyclable tickets in their ITVMs. This
feature also is particularly beneficial to foreign lottery jurisdictions that
may use non-standard sizes, shapes and paper stocks. In addition, the ITVM for
scratch-off tickets is faster than manual sales of scratch-off tickets as the
ITVM's entire dispensing process is completed in less than 1.5 seconds once the
ticket selector button has been pushed.


                                      -6-

<PAGE>   8

         The Company's ITVMs for scratch-off tickets have a proven record of
reliability. Based on an analysis of actual field service data regarding the
dispensing of approximately 55 million scratch-off instant tickets by the
Company's ITVMs during a 48 week period, the Company determined that the Mean
Time Between Failure of these ITVMs is approximately 3.78 years and that the
Mean Time to Repair is approximately 15 minutes. The data indicated that these
ITVMs dispense an average of 392,800 scratch-off instant tickets between
failures. The Company believes that it has developed an ITVM that has proven to
be reliable and that requires less maintenance than the products of its
competitors. The Company believes that the reliability of its ITVM and the lower
maintenance requirements distinguish the Company's ITVM for scratch-off tickets
from those of its competitors.
See "Competition" below.

         The Company's ITVMs for scratch-off tickets have the capacity to
dispense tickets from one to twelve different bins. Because each bin can
dispense tickets of different sizes, paper stocks and price levels, lotteries
can sell scratch-off tickets for up to twelve different instant winner games
with a single ITVM. The ITVM can accommodate up to 12,000 tickets in the
twelve-game unit and can dispense all tickets in the bin without manual
intervention. When all of the tickets in a bin have been dispensed, tickets can
be easily reloaded by an employee of the retailer or agent. This is in contrast
to the products of the Company's competitors, which the Company believes require
the retailer or other agent to tape the last few tickets in each bin to the next
pack of tickets provided by the retailer or other agent. The ability of the
Company's ITVM to dispense every ticket in each bin not only facilitates the
ticket reloading process but also enhances the accuracy of the inventory and
accounting functions.

         All of the Company's ITVMs accept bills in $1, $2, $5, $10 and $20
denominations and, in some applications, accept foreign currency. The size of
the Company's ITVMs for scratch-off tickets varies from 69 inches tall, 28
inches wide and 24 inches deep for a twelve-game unit to 19.75 inches tall, 15.5
inches wide and 20.5 inches deep for a countertop unit.

         All models are anchored to the floor or counter. The ITVMs typically
are custom designed to meet any color and other appearance specifications that a
lottery may desire. All models are Underwriters Laboratory ("UL(R)") listed and
Federal Communications Commission ("FCC") approved, which ensures that the ITVM
has passed nationally recognized safety standards and stringent requirements
designed to preclude machine damage and personal injury due to non-approved
components, devices, installation or application. The Company was the first
manufacturer of ITVMs to obtain UL(R) listing and FCC approval for its ITVMs.

         Each ITVM is standardized with an information display that provides the
player with easy-to-read instructions on how to use the machine and gives the
lottery retailer or agent the ability to read sales reports without printing the
report. The ITVM can be ordered with a "BETA BRITE(R)" multi-color LED sign
mounted on the top of the ITVM which is intended to increase attention to the
machine and thereby increase ticket sales. The BETA BRITE(R) sign is programmed
at the Company's manufacturing facility and can display any message the lottery
may desire. The BETA BRITE(R) also may be programmed by the retailer or agent or
can be programmed from the lottery headquarters by utilizing the Company's
optional modem communications system. The Company currently is utilizing the
BETA BRITE(R) on ITVMs installed throughout Arizona, Colorado, Florida, Georgia,
Idaho, Indiana, New Hampshire, New Mexico and Rhode Island.

         For security and durability purposes, each of the Company's ITVM
cabinets is manufactured with 16 gauge and 11 gauge steel. The surface of the
ITVM is coated with durable and fade resistant paints. The display windows are
fabricated from a flame resistant, high impact polycarbonate sheet material.
This material is shatter resistant, and to date to the knowledge of the Company,
none of the Company's installed ITVMs has had a polycarbonate window broken or
shattered. Additionally, to the knowledge of the Company, the cabinets have not
had any fading, marring, scratching, chipping or rusting. All of the


                                      -7-

<PAGE>   9

Company's ITVMs are manufactured with high security locks which are coded to
prevent unauthorized duplication, and each ITVM is keyed separately, except for
ITVMs deployed in Maryland where the Lottery desired a master key system. For
further security, each of the Company's bill acceptor units must be accessed
with a key unique to the particular acceptor unit.

         All of the Company's ITVMs for scratch-off tickets utilize copyrighted
software that can supply up to eleven different reports for accounting and
inventory purposes. These reports can provide to the lottery and its retailers
or agents a complete summary of daily sales, weekly sales, total sales, sales by
game, current status of the machine, inventory of the product currently in the
ITVM, the last three transactions of the ITVM and other types of information.
The software system allows for a simple diagnostic test to identify any
malfunction of the ITVM. The diagnostic mode communicates various information
such as ticket size setting, status of electronics, status of each game and
other information concerning the system software. The Company's ITVM software
system may be programmed to the detail specifications of the specific lottery.

         In 1995, the Company completed the development of a common electronic
system to be incorporated in all of the Company's equipment, providing
efficiency in development of common software as well as cost efficiencies in
acquiring electronic components.

         To dispense pull-tab instant lottery tickets, the Company's PTVM uses
the same technology, design and specifications as are incorporated in the
Company's PCDM. The Company's PCDM is described in detail below.

         THE PCDM

         Like the Company's ITVM for scratch-off tickets, the key component of
the Company's PCDM is the dispensing technology. The Company has the exclusive
right to the use of this patented dispensing technology, which it acquired from
a company owned by Kazmier J. Kasper, a director of the Company. See "Item 13.
Certain Relationships and Related Transactions."

         Similar to the Company's ITVM for scratch-off tickets, the Company's
PCDM automatically dispenses prepaid telephone calling cards upon payment from
the user. Unlike the products of some of the Company's competitors, the
dispenser technology in the Company's PCDMs automatically pulls one prepaid
telephone calling card from the bottom of the stack of cards without the jamming
that is associated with other dispensing processes. The Company's dispensing
technology, which the Company believes to be the most technologically advanced
dispensing system in the PCDM industry, also enables the Company's PCDM to
dispense and account for virtually any known thickness of calling card without
the intervention of the retailer. In addition, the PCDM is faster than manual
sales of prepaid telephone calling cards as the PCDM's entire dispensing process
is completed in less than 3 seconds once the selector button has been pushed.

         The Company's PCDMs have the capacity to dispense cards from two to six
different bins. The PCDM can accommodate up to 2,400 cards in the six bin unit
and can dispense all prepaid telephone calling cards in the bin without manual
intervention. When all of the cards in a bin have been dispensed, cards easily
can be reloaded by an employee of the retailer. The ability of the Company's
PCDM to dispense every card in each bin not only facilitates the card reloading
process but also enhances the accuracy of the inventory and accounting
functions.

         All of the Company's PCDMs accept bills in $1, $2, $5, $10 and $20
denominations and, in some applications, accept foreign currency. The size of
the Company's PCDMs varies from 66 inches tall, 26 inches wide and 19 inches
deep for a 6-bin dispenser unit to 22 inches tall, 14 inches wide and 10 inches


                                      -8-

<PAGE>   10

deep for a countertop unit. All models are anchored to the floor or counter,
except that the two bin model may be mounted on an optional pedestal. All models
are UL(R) listed and FCC approved. Each PCDM is standardized with an information
display that provides the user with easy-to-read instructions on how to use the
machine and gives the retailer the ability to read sales reports without
printing the report.

         For security and durability purposes, each of the Company's PCDM
cabinets is manufactured with 16 gauge and 11 gauge steel. The surface of the
PCDM is coated with durable and fade resistant paints. The display windows are
fabricated from a flame resistant, high impact polycarbonate sheet material. To
the knowledge of the Company, the cabinets have not had any fading, marring,
scratching, chipping or rusting. All of the Company's PCDMs are manufactured
with high security locks that are coded to prevent unauthorized duplication, and
each PCDM is keyed separately. For further security, each of the Company's bill
acceptor units must be accessed with a key unique to the particular acceptor
unit.

         All of the Company's PCDMs utilize copyrighted software that can supply
up to nine different reports for accounting and inventory purposes. These
reports can provide retailers a complete summary of daily sales, weekly sales,
total sales, sales by bin, current status of the machine, inventory of the
product currently in the PCDM, the last three transactions of the PCDM and other
types of information. The software system allows for a simple diagnostic test to
identify any malfunction of the PCDM.

Marketing and Sales

         ITVMS

         The Company markets its ITVMs to both domestic and international
lotteries and their licensees or prime contractors. The Company attends lottery
and gaming trade shows, maintains personal contact with lottery officials
through its sales force of five employees and advertises in trade publications
to increase its presence in the lottery industry.

         The focus of the Company's marketing strategy is on the superior
performance and reliability of its ITVMs, as well as continued competitive
pricing. Information developed through actual field use and product field tests
demonstrates that a significant factor in increasing instant ticket sales is the
reliability of the ITVM. Increased maintenance visits impair the ITVM "uptime,"
which in turn reduce ticket sales. The Company believes that its ITVMs, based on
actual field performance and product testing, are the most reliable and
technologically superior in the industry. Management believes that actual field
demonstrations comparing the Company's ITVM with those of its competitors is the
Company's best method of marketing. The Company has been awarded contracts to
provide ITVMs for nine of the last 11 state lotteries that have requested bid
proposals and five of the six domestic ITVM contracts that were awarded in 1997.

         The Company's ITVMs require preventive maintenance only twice a year.
The ITVM "downtime" resulting from this semi-annual preventive maintenance
averages approximately 20 minutes. On the other hand, the Company's principal
competitor, On-Point Technology Systems, Inc. ("On-Point"), for example,
recommends that preventive maintenance be performed on its ITVMs once a month.
All of the Company's existing contracts which require the Company to provide
preventive maintenance on its ITVMs provide for semi-annual preventive
maintenance.

         To further increase the likelihood of receiving ITVM orders from
lotteries, the Company intends to offer additional and more flexible financing
alternatives to the lotteries. The Company believes that many state lotteries,
due to budget considerations, cannot afford the high capital costs required to
purchase ITVMs. However, if the Company can provide attractive variations of its
standard and percentage lease financing options for the lotteries, the lotteries
can more affordably deploy ITVMs. The Company believes that these types of
financing alternatives will prove to be increasingly popular.


                                      -9-

<PAGE>   11

         The Company's ability to generate additional revenues and earnings from
deployments of its ITVMs will depend upon continued market acceptance of ITVMs.
The Company intends to expand its marketing presence with the retail grocers
associations, convenience store operators associations, retail stores at both
the corporate and store levels, and other types of corporate or association
member entities to familiarize these groups with the Company's ITVM. These
retailers are the lotteries' distribution system for all scratch-off and
pull-tab lottery tickets, and management believes that increased exposure to
lottery retailers will be a significant factor in the Company's ability to
expand the market for its lottery products. As the distribution system for all
lottery products, lottery retailers may advise the lotteries with regard to such
matters as new lottery products, improved marketing strategy and improved
product distribution. In many lottery jurisdictions, retailer advisory boards
provide input to the lotteries on various issues affecting the lottery. While
the lotteries must abide by the established procurement laws of their respective
jurisdictions in selecting an ITVM manufacturer, the lotteries may solicit the
opinions of the lottery retailers concerning the ITVMs under consideration by
the lottery because the retailers are directly affected by the selection
decision. The Company believes that retailers' opinions may be a significant
factor in a customer's decision regarding which manufacturer's ITVM to deploy in
its instant ticket distribution system.

         The Company will continue to participate in cooperative service
arrangements with other lottery suppliers as the lotteries increasingly rely on
these types of arrangements. These arrangements allow lotteries to reduce their
operating costs while increasing lottery revenues. Additionally, these
arrangements allow for a more efficient means for contracting products and
services. The Company's ITVMs are deployed in Georgia and West Virginia pursuant
to cooperative service arrangements between the Company and Scientific Games,
Inc., which is a primary contractor for the Georgia and West Virginia Lotteries,
and were deployed in New Jersey pursuant to a purchase agreement between the
Company and GTECH Corporation, which is the on-line supplier to the New Jersey
Lottery. Under these arrangements, the Company supplies ITVMs to Scientific
Games, Inc. for use in Georgia and West Virginia and supply ITVMs to GTECH
Corporation for use in New Jersey. The Company is responsible for installing,
servicing and maintaining the ITVMs in Georgia but is not required to provide
preventive maintenance or servicing for the ITVMs supplied for use in West
Virginia and New Jersey. Management believes that the deployment of the
Company's ITVMs in Georgia, West Virginia and New Jersey resulted in part from
the Company's cooperative service arrangements with Scientific Games, Inc. and
GTECH Corporation and that such cooperative service arrangements will prove to
be increasingly attractive to both domestic and international lotteries in the
future.

         PCDMS

         The Company has been marketing its PCDMs since late 1995 and to date
has employed a marketing strategy that is similar to the strategy that it has
used successfully to market its ITVMs. The focus of the Company's marketing
strategy is on the superior performance and reliability of its PCDMs as well as
on competitive pricing. The Company markets its PCDMs to both domestic and
international providers of long distance telephone service. The Company attends
telecommunications trade shows, maintains personal contact with
telecommunications companies through its sales force of two employees and
advertises in trade publications to increase its presence in the
telecommunications industry.

         The Company's ability to generate additional revenues and earnings from
the deployment of its PCDMs will depend upon continued market acceptance of
PCDMs. The Company intends to expand its marketing presence with the retail
grocers associations, convenience store operators associations, retail stores at
both the corporate and store levels, and other types of corporate or association
member entities to familiarize these groups with the Company's PCDM. These
retailers are the distribution system for prepaid telephone calling cards, and
management believes that increased exposure to PCDM retailers will be a


                                      -10-

<PAGE>   12

significant factor in the Company's ability to expand the market for its PCDM
products. To further increase the likelihood of receiving PCDM orders from
sellers of prepaid telephone calling cards, the Company intends to offer
additional and more flexible financing alternatives.

Contracts

         ITVMS

         General. The Company's lottery contracts typically are entered into
following a competitive bidding process. Once a lottery has determined to
utilize ITVMs in its distribution network, the lottery usually will request
proposals from ITVM providers. Lotteries within the United States typically
follow a procedure whereby the lottery issues a Request for Proposal ("RFP") to
determine the contract award for installation of ITVMs. The RFP generally seeks
information concerning each company's products, cost of the products or services
to be provided, quality of management, experience in the industry and other
factors that the lottery may deem material to a contract award. The RFP also may
specify product criteria and other qualifications or conditions that must be
satisfied, such as UL(R) listing and FCC approval of the ITVM and in-state or
minority supplier requirements. Generally, an evaluation committee comprised of
key lottery staff members appraise the proposals based on an established point
system, and the contract is awarded to the company with the most points.

         The nature of the RFP process varies from jurisdiction to jurisdiction.
The length of time that a lottery might take to award a contract can be
difficult to predict, and delays in the contract award process are frequent and
unpredictable. Additionally, the point system or the weighing of the various
points varies from jurisdiction to jurisdiction, which often makes it difficult
for the bidding companies to determine the relative importance of the various
factors to be considered by the evaluation committee. In certain cases the
contract award is challenged by the losing bidder, which can result in
protracted legal proceedings for all parties.

         The Company offers lotteries a choice of three types of contracts: (i)
Standard Lease Agreements; (ii) Sales Agreements; and (iii) Percentage Lease
Agreements. ITVM lease revenues as a percentage of the Company's total revenues
were 47.3%, 63.3% and 67.3% in 1995, 1996 and 1997, respectively.

         The Standard Lease Agreements provide that the lottery will pay a fixed
monthly price per machine for a specific period of time. These agreements
typically specify a number of years for the initial contract term with
additional option periods at the election of the lottery. The lottery may award
a separate service contract for the maintenance of the machines, incorporate the
cost of service into the established monthly lease price or perform machine
service themselves. The lotteries also may select a similar type of arrangement
as described above to procure the necessary supply of replacement parts for the
ITVMs.

         As noted above, the lease payments provided for in the typical Standard
Lease Agreement are fixed in most cases during the term of the agreement, and
these agreements typically permit the lottery to order additional ITVMs at any
time during the lease term. If the lottery orders a significant number of ITVMs
near the end of the lease term, the Company would have to incur significant
manufacturing costs but may receive lease payments for only a relatively short
period of time through the remainder of the lease term. However, the Company
believes that it is more likely that the lottery would elect to extend the lease
term rather than return the ITVMs after only a short period of use.
Additionally, the Company is unable to pass along to the lottery any increase in
its manufacturing and service costs during the term of the typical Standard
Lease Agreement. In the case of a Standard Lease Agreement which provides for a
short initial term (such as one year) with an option for the lottery to extend
the lease term for additional one-year periods, if the lottery does not extend
the initial lease term, the Company might incur a loss on the manufacture of the
ITVMs leased to the lottery under the initial lease agreement.


                                      -11-

<PAGE>   13

         Sales Agreements typically provide that the lottery will buy a certain
number of ITVMs over a specific period of time. Under the Sales Agreement, the
lottery generally pays for the ITVMs when delivered and has complete ownership
of the ITVMs. The lottery usually will contract with a vendor to maintain and
service the ITVMs, although some lotteries provide the maintenance and service
with their own service staffs. The lottery generally will enter into a parts
replacement contract with the vendor for replacement parts.

         All types of the ITVM contracts typically contain stringent
installation, performance and maintenance requirements. Failure to perform the
contract requirements may result in significant liquidated damages or contract
termination. The Company has various contract performance standards to which it
must adhere. To date, the Company has satisfied all of its contractual
installation, performance and maintenance requirements and therefore has not had
any contracts terminated by any lotteries.

         The Company's lottery contracts also typically require the Company to
indemnify the lottery, its officers and retailers for any liabilities arising
from the operation of the ITVMs or any services provided by the Company. The
Company typically is required to obtain liability insurance, fidelity insurance
and performance and litigation bonds to protect itself and the lottery from
potential liability. No such indemnification or insurance claims have ever been
asserted against the Company.

         The Company's contracts generally have an initial term of one to five
years with options to extend the duration of the contracts for periods of
between one and five years. The option extensions generally are at the lottery's
discretion and are exercised under the same terms and conditions as the original
contract. As of December 31, 1997, the initial term of nine of the Company's
contracts had expired, and in each case, the lottery exercised its option to
extend the term. The Company's contracts with lotteries, like most other types
of state contracts, typically permit a lottery to terminate the contract upon 30
days written notice for any reason. Upon termination of a lease contract, the
lottery would return the leased equipment to the Company. It is uncertain,
however, whether the Company would be able to re-lease or sell any ITVMs that
may be returned to the Company following the expiration or cancellation of a
lease. To date, no lottery has terminated its contract with the Company. Upon
termination of a contract, the lottery may award new contracts through a
competitive bid process.

         As noted above, the Company believes that 31 states and the District of
Columbia utilize ITVMs in some manner as part of their instant ticket
distribution system. The Company's ITVMs have been deployed in 22 of those
states as well as five foreign jurisdictions, and three additional states and
four foreign jurisdictions currently are testing the Company's ITVMs or have
requested that the Company provide ITVMs for testing. Set forth below is certain
information regarding the Company's contract status and the number of Company
ITVMs sold or leased in each of these jurisdictions as of December 31, 1997. All
of the Company's existing contracts, except for the contract with the Maryland
Lottery, have provisions that allow the lotteries to order additional ITVMs in
the future.

<TABLE>
<CAPTION>
                                                               Type of                       No. of ITVMS
State                      Status of Contract Award            Contract                     Sold or Leased
-----                      ------------------------            --------                     --------------
<S>                        <C>                                 <C>                          <C>
Arizona                    Awarded in October 1993;            Standard Lease/                   222
                           renewed through June 1998,          Maintenance
                           with a six month renewal
                           at the option of the lottery

Colorado                   Awarded in June 1996; renewed       Standard Lease/                   487
</TABLE>


                                      -12-


<PAGE>   14

<TABLE>
<S>                        <C>                                 <C>                          <C>
                           through June 2000                   Maintenance

District of Columbia       Awarded December 1997;              Standard Lease                     10
                           expires December 1998

Florida                    Awarded September 1996              Standard Lease                    500
                           expires June 1998 with two
                           one-year renewals at the option
                           of the lottery

Georgia (1)                Awarded in May 1993;                Standard Lease/                   502
                           renewed through May 2003            Maintenance

Idaho                      Purchases made by purchase          Sales                             185
                           orders in May and August 1995,
                           August 1996 and August 1997

Indiana                    Awarded in July 1995;               Standard Lease                    690
                           expires in October 1997, with
                           two one-year renewal at the
                           option of the lottery; first renewal
                           option has been exercised

Iowa                       Awarded in August 1994;             Standard Lease/                   531
                           expires in December 1998,           Maintenance
                           with two one-year renewals
                           at the option of the lottery

Kansas                     Awarded May 1997; expires           Standard Lease                     50
                           May 2000 with five one-year
                           renewals at the option of
                           the lottery

Kentucky                   Awarded in June 1991;               Sales                             912
                           renewed through February
                           1998, with two subsequent
                           one-year extensions at
                           the option of the lottery

Maine                      Awarded in July 1995; expires       Standard Lease/                   200
                           in July 1998, with two one-year     Maintenance
                           extensions at the
                           lottery's option

Maryland                   Awarded in September 1993;          Sales/Maintenance                 301
                           expires in September 1998;
                           additional contract awarded
                           that expires June 2003

Minnesota                  Awarded in December 1996;           Standard Lease/                    10
                           expires three years from            Maintenance
</TABLE>


                                      -13-

<PAGE>   15

<TABLE>
<S>                        <C>                                 <C>                          <C>
                           acceptance of each ITVM,
                           with two one-year renewals at
                           the option of the lottery

New Hampshire              Awarded in August 1994;             Standard Lease                    250
                           renewed through June 2000

New Jersey (2)             Purchase order received in          Sales                             200
                           December 1996

New Mexico                 Awarded May 1997; expires           Standard Lease                    200
                           May 2002, with five one-year
                           renewals at the option of the
                           lottery

New York (3)               Awards of purchase contracts        Sales/                          2,554
                           made in May 1992 and January        Maintenance/
                           January 1993; deployment            Standard Lease
                           completed in June 1992 and
                           February 1993, respectively;
                           initial one-year purchase and
                           three-year maintenance contract
                           entered  into in March 1995, with
                           a one-year renewal option by the
                           lottery; initial five-year lease
                           contract awarded in January
                           1997 for up to 1,000 units,
                           with a one-year renewal option
                           as mutually agreed

Ohio                       Awarded in January                  Standard Lease/                  1,726
                           1992; extended in June 1993 and     Maintenance
                           June 1995; expired in June 1997;
                           new contract awarded April 1997;
                           extended through June 1999, with
                           two two-year extensions at the
                           option of the lottery

Oregon                     Purchase orders issued in May       Sales                              520
                           1995 and January 1997

Rhode Island (4)           Awarded in June 1994;               Standard Lease/                    170
                           renewed through June 1998,          Maintenance
                           with one one-year renewal
                           at the option of the lottery

Texas                      Awarded in January 1995;            Standard Lease/                  1,424
                           renewed through February            Maintenance
                           1999, with a one-year renewal
                           at the option of the lottery

</TABLE>

                                      -14-

<PAGE>   16

<TABLE>
<S>                        <C>                                 <C>                          <C>
West Virginia (3)          Awarded in May 1992;                Sales                               55
                           initial deployment completed in
                           June 1992; additional units
                           deployed in April 1994

Barcelona, Spain (5)       Awarded in February 1994;           Standard Lease                      11
                           additional units deployed in
                           October 1995

Brazil                     Purchase order received in          Sales                                4
                           October 1996

Iceland                    Purchase orders issued in           Sales                               31
                           January and October 1997

Israel                     Purchase order issued in            Sales                               40
                           July 1997

Western Australia          Purchase order received in          Sales                                8
                           May 1995                                                            ------

                  Total Sold or Leased                                                         11,793
</TABLE>

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

(1)      The Company's contract is for the lease of ITVMs to Scientific Games,
         Inc., the primary contractor for the Georgia Lottery. In September
         1994, the Company and Scientific Games, Inc. agreed to convert the
         contract from a Percentage Lease Agreement to a Standard Lease
         Agreement.

(2)      The Company's contract is for the sale of 200 ITVMs to GTECH
         Corporation for use by the New Jersey Lottery, which were delivered in
         1997.

(3)      The Company's contract was for the sale of ITVMs to Scientific Games,
         Inc. for use by the New York and West Virginia Lotteries. The Company
         is not the sole manufacturer of ITVMs for the New York Lottery. The
         Company entered into a sales/maintenance contract in March 1995
         directly with the New York Lottery, including maintenance of ITVMs
         previously provided. The West Virginia Lottery also currently is
         conducting field tests on the Company's PTVM.

(4)      Effective October 1, 1995, the Company and the Rhode Island Lottery
         agreed to convert the contract from a Percentage Lease Agreement to a
         Standard Lease Agreement.

(5)      The Company's contract is with Entitat Autonomas, which provides
         lottery services to various Spanish lotteries.

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

         Substantially all of the Company's revenues are derived from its
contracts with a limited number of state lottery authorities or their
representatives for the lease, sale or service of ITVMs. During 1994 and 1995,
contracts with the Ohio Lottery, the New York Lottery and Scientific Games, Inc.
(the primary contractor for the Georgia Lottery) accounted for 83.3% and 72.9%,
respectively, of the Company's revenues, and during 1996, contracts with the New
York Lottery, the Ohio Lottery and the Texas Lottery


                                      -15-
<PAGE>   17

accounted for 67.6% of the Company's revenues. During 1997, no single contract
accounted for more than 20% of the Company's revenues.

         PCDMS

         Unlike the competitive bidding process applicable to the lotteries'
awards of ITVM contracts, purchasers of PCDMs typically do not issue RFPs or
otherwise mandate a competitive bidding process. Information regarding the
Company and its PCDM, and information regarding a telephone company's product
needs and criteria and other qualifications or conditions that must be
satisfied, typically is exchanged on a less formal basis in sales presentations
and subsequent meetings between representatives of the Company and
representatives of the telephone company. Due to the often complex and highly
structured organization of some telephone companies, the length of time that a
company might take to decide whether to select the Company's PCDM can be
difficult to predict and, similar to the lotteries' contract award process,
delays in PCDM selection decisions can be frequent and unpredictable.

         Unlike the Company's experience in the ITVM industry in which a lottery
typically enters into a lease or sales contract with the successful bidder, most
purchasers of the Company's PCDMs to date have ordered PCDMs solely through
purchase orders rather than contracts, although several customers entered into a
lease agreement for PCDMs. Like contracts with the lotteries, however, these
purchase orders may contain stringent installation, performance and service
requirements. As of December 31, 1997, the Company had sold 658 PCDMs and had 37
PCDMs under lease.

Manufacturing Process

         The manufacturing process consists of purchasing component parts,
assembling the ITVMs and PCDMs and then testing the final products. Generally,
the Company's machines use components which are built to Company specifications
and are available from multiple sources. The Company has a strict policy of
product procurement that emphasizes quality, satisfactory inventory of raw
materials, and cost. The Company has a primary vendor and secondary suppliers
for most of its components, and the Company typically has been able to obtain
adequate supplies of required components on a timely basis from its suppliers
or, when necessary, from alternative sources of supply. However, certain
important components, such as components of the Company's ITVM burster and PCDM
dispensing mechanisms and its bill acceptor mechanism, currently are purchased
from a single source. The purchase of components from single-source suppliers
subjects the Company to certain risks, including the continued availability of
suppliers, price increases, potential quality assurance problems and lead time
considerations. 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 machines should it elect or be
forced to use other suppliers for these components. Such a delay adversely could
affect the Company's ability to make timely deliveries of machines and to obtain
new contracts. The single-source supplier of certain components of the Company's
burster mechanism, PTVM dispensing mechanism and PCDM dispensing mechanism is
Algonquin Industries, Inc. Kazmier J. Kasper, a director of the Company, is the
President and owner of Algonquin Industries. See "Item 13. Certain Relationships
and Related Transactions."

         The Company assembles the components utilizing a core group of
manufacturing employees and, on an as needed basis, contracting with employment
agencies for appropriately trained manufacturing labor. The use of temporary,
contract manufacturing labor gives the Company the flexibility to meet the
production schedules required by large orders.


                                      -16-

<PAGE>   18

         The Company's Quality Control Department has responsibility for
measuring quality levels and overseeing appropriate corrective action in all
areas of the business. This includes supplier performance, in-house
manufacturing and field performance. The Quality Control Department is
responsible for measuring part, operator and assembly quality performance at all
stages of the production process, stopping the assembly line or stopping
shipments if necessary to assure that quality standards are met. The Quality
Control Department also is responsible for measuring vendor product quality and
taking appropriate actions, including rejection and disposition of substandard
material. The Quality Control Department also is responsible for vendor quality
system evaluation and vendor disqualification if necessary to ensure superior
product quality.

         The Company's manufacturing facility is located in Cincinnati, Ohio and
has the capacity to produce and provide inventory for approximately 250 machines
per week. The Company believes that this facility is suitable and adequate for
its current and anticipated manufacturing needs at the present time.

Research And New Product Development

         Since its inception, the Company has developed many of the
technological advancements used in the ITVM industry. The Company believes that
its ITVM was the first to obtain UL(R) listing and FCC approval. The Company
also believes that it was the first to (i) manufacture and deliver ITVMs under a
lease contract agreement, (ii) offer a "random play" push button selector option
through which the ITVM rather than the player randomly selects the game to be
played and (iii) receive patent protection for the technology used in its ITVM
burster dispensing mechanism.

         The Company currently employs three engineers and two technicians for
research and development but currently subcontracts the majority of its research
and development projects to independent contractors to reduce costs. The
Company's copyrighted software is upgraded continually to meet the different
demands of the various lotteries. In many instances, after an ITVM feature has
been developed for a specific lottery, it is incorporated into the product line
as a standard feature of the machine. The Company retains proprietary rights in
all such developments.

         The Company's ITVM may be purchased with an optional modem
communication system which allows lotteries to gather sales data from each ITVM
on an hourly, daily, weekly or monthly basis, depending on the needs of the
customer. This data includes the daily or weekly sales totals and breakdown of
these totals by game, including the total tickets sold. The Company has
developed software to enable each ITVM equipped with the system to communicate
to the host system automatically if there is a malfunction with the ITVM, thus
greatly enhancing the Company's ability to provide prompt service for the ITVM.
The Company has developed software to enable an ITVM equipped with the system to
communicate with the host computer if a ticket bin is empty, which allows the
lottery to call the retailer or agent and inform them of the situation.
Additionally, by utilizing this system with the optional BETA BRITE(R) message
display, the lottery can change the message display on any or all of its ITVMs.

         The Company has incorporated its patented pull-tab lottery ticket
dispensing mechanism into a combination ITVM which also contains the Company's
patented burster mechanism. The Company currently has six combination ITVMs
under lease to the Iowa Lottery. The pull-tab dispensing mechanism also has been
incorporated into the Company's PCDMs, and the Company believes that the ability
of the mechanism to dispense a variety of thicknesses of prepaid telephone
calling cards significantly differentiates the Company's PCDMs from those of its
competitors.

         In an effort to expand its product lines into new markets, the Company
is developing and testing a device which dispenses stored value "smart cards."
This product may be marketed in the future to the financial services industry to
the extent that consumer use of smart cards develops in the future.


                                      -17-

<PAGE>   19

         Research and development expenditures were $145,310, $665,449 and
$545,039 for 1995, 1996, and 1997, respectively. The Company expects that its
research and development efforts for the foreseeable future will be conducted by
both Company employees and independent contractors.

Customer Service and Product Repair

         Typically, the Company or its subcontractors install and service the
machines purchased or leased by the Company's customers. The Company also
provides maintenance of the ITVMs leased or sold to certain lotteries.
Additionally, the Company provides part replacement, repair and technical
services for various customers that have leased or purchased the Company's ITVMs
and PCDMs. Service is provided to the retailers by the Company's staff of
trained service technicians and dispatchers after a customer's representative
informs the Company of the problem via the Company's toll-free telephone service
line. The service dispatcher either resolves the matter over the telephone or
immediately dispatches one of the Company's service technicians to the machine's
location. The modular design and manufacturing standards of the Company's
machines enable the Company to conduct any necessary repairs and maintenance
quickly and efficiently. The Company estimates that meantime for all repairs is
less than 15 minutes after the Company's service technician arrives at the
machine's location.

         The Company believes, based on actual data collected from various
customers that have installed the Company's ITVMs and PCDMs, that the Company's
machines have experienced substantially fewer mechanical problems and machine
failures than machines currently sold by other industry participants. The
Company also believes that the superior performance of its ITVMs and PCDMs will
assist in the increased acceptance of these products among lotteries and
providers of long distance telephone service.

         The Company generally grants a 360-day repair or replacement warranty
covering all parts and components of its machines. However, the warranty period
may vary depending on the bid specifications. In certain circumstances the
Company may warrant the product for the complete life of the contract. In these
instances the contract generally will be a lease with the Company retaining
ownership of the machine. Provisions for estimated warranty costs are recorded
at the time of sale and are periodically adjusted to reflect actual experience.
See Note 1 of Notes to Financial Statements contained in the Company's 1997
Annual Report, which is filed as Exhibit 13 to this report.

Patents, Trademarks and Copyrights

         The Company currently has four U.S. patents and five pending patent
application relating to its ITVMs and has filed disclosure documents with the
United States Patent and Trademark Office ("PTO"), all as described below.

         The Company owns by assignment U.S. Patent No. 4,982,337 entitled
"System for Distributing Lottery Tickets." The assignment is recorded at the
PTO. This patent is for the Company's burster technology, which is the key
component of the Company's ITVM. The patent expires no later than December 31,
2007. The Company believes this patent is essential to the Company's business.
Additionally, the Company has developed an improvement to the burster technology
disclosed in this patent and has U.S. and international patent applications
pending on these improvements.

         The Company has developed a new system designed specifically for retail
sale of lottery tickets and other items at the retail point of sale. The system
utilizes the Company's burster technology and includes other modular and
distributed components that can be adapted for use at the point of sale. The
Company has a pending patent application at the PTO on this technology.


                                      -18-

<PAGE>   20

         The Company was issued U.S. Patent No. 5,330,185 on July 19, 1994 for
the "Method and Apparatus for Random Play of Lottery Games." This patent expires
no later than March 30, 2013 and has been assigned to the Company, and the
assignment is recorded at the PTO. The technology disclosed in this patent
allows a lottery game user to select a random play button as opposed to
selecting a specific game of a multiple game ITVM. Once the random play button
is pressed, the ITVM selects the game to be played based upon a random number
generation algorithm, thereby adding another element of chance to the lottery
ticket purchase. The Company believes that this patent gives the Company a
competitive advantage over other manufacturers that do not have ITVMs with
similar capabilities. The patent for the random play feature is considered
important but not essential to the Company's business.

         The Company was issued U.S. Patent No. 5,472,247 on December 5, 1995,
for a "Multi-Point High Security Locking Mechanism for Lottery Machines." This
patent expires no later than July 18, 2014 and has been assigned to the Company,
and the assignment is recorded at the PTO. Because of the threat of break-in and
theft of cash and lottery tickets contained within the ITVMs, the machines must
be secured against unauthorized break-in or theft. The technology disclosed in
this patent is a locking mechanism which provides a number of resistance points,
all of which function to impede the unauthorized opening of a door located on
the chassis of the Company's ITVM. The patent for the multi-point, high security
locking mechanism is considered important but not essential to the Company's
business.

         The Company was issued U.S. Design Patent No. 376,621 on December 17,
1996 for the Company's double-game countertop ITVM. This patent expires no later
than December 17, 2010 and has been assigned to the Company, and the assignment
is recorded at the PTO. The Company believes that this patent is important but
not essential to the Company's business.

         The Company has submitted an Information Disclosure Document to the PTO
for the purpose of identifying technology relating to its "Software Release
Control and Data Security for ITVMs." The technology allows secure remote
transmissions of software updates and operations data between the ITVM and the
Company or the respective lottery. The invention also includes a key management
system to control the keys used to encrypt data sent to and decrypt the data
received at the ITVM. The Disclosure Document was filed on April 28, 1993.

         The dispensing technology used in the Company's PTVM and PCDM was
developed by Algonquin Industries, Inc. and is licensed to the Company pursuant
to an exclusive license agreement with Algonquin Industries. Algonquin
Industries has been granted U.S. Patent No. 5,335,822 for this mechanism. Under
the terms of the license agreement, the Company is the sole entity entitled to
use this technology on its ITVMs. See "Item 13. Certain Relationships and
Related Transactions."

         The Company currently uses operating software to perform all functions
required to dispense and account for instant lottery tickets and prepaid
telephone calling cards. This software is a stand-alone program which does not
require any other software to operate. The software is designed to allow updates
to be made quickly and inexpensively. The software was designed by Future
Designs, a subcontractor to the Company, and employees of the Company. Future
Designs has assigned all of its right, title and interest in and to the software
to the Company. The Company intends to continue to develop software using both
employees and subcontractors who agree to assign the copyright to developed
software to the Company.

         The Company has obtained federal registration in the United States of
the following trademarks: INTERLOTT, INTERLOTT and design, and INSTANT SUCCESS.
The Company also has obtained registration of the trademark INTERLOTT in
Benelux, Hungary, Mexico and Spain. The Company does not deem the trademarks to
be critical to the future of its business.


                                      -19-

<PAGE>   21

         The Company enforces a policy requiring all of its employees and
subcontractors to execute confidentiality and proprietary rights agreements at
the commencement of their employment or contract for service with the Company.
The agreements generally provide that all inventions or discoveries and all
confidential information developed or made known to the employees or
subcontractors during the term of their employment or contract for service will
be assigned to the Company and will be kept confidential and not disclosed to
third parties.

         There can be no assurance that current or future patents and other
intellectual property rights of the Company will afford meaningful protection of
the Company's competitive position. Furthermore, the Company's competitors may
have filed patent applications for, or have been issued patents relating to,
products or technologies competitive with or superior to those of the Company.
The scope and validity of others' patents, the extent to which the Company or
its suppliers may be required to obtain licenses thereunder, and the
availability and cost of any such licenses are unknown, and there is no
assurance that the necessary licenses could be obtained on terms or conditions
which would not have a material adverse effect upon the Company. If the
Company's intellectual property rights are violated, the costs of litigation
could be significant and could divert funds that otherwise would have been
available for other purposes. Moreover, litigation concerning the alleged
violation of intellectual property rights is inherently uncertain, and the
claims and counterclaims that might be asserted against the Company, if
successful, could have a material adverse effect upon the Company's financial
condition and business operations.

Competition

         Competition in the markets for the Company's ITVM and PCDM is based on
a number of factors, including technological features, product quality and
reliability, price, compatibility, ease of installation and use, marketing and
distribution capabilities, product delivery time, and service and support. The
Company is aware of four manufacturers of ITVMs and approximately forty
manufacturers of PCDMs in the United States, and competition among these
manufacturers is intense. Of the four ITVM competitors, the Company has the
largest share of the ITVM market in the United States, followed by On-Point and
two smaller manufacturers. The Company is not aware of any published data
regarding market shares in the PCDM industry. The Company believes that of the
forty PCDM competitors, Opal Manufacturing Co. has the largest PCDM market share
in the United States, but there is no clear indication of the market shares of
the remaining companies.

         In addition, the ITVM and PCDM markets are relatively new markets that
have grown rapidly, and additional domestic and foreign manufacturers, some of
which have substantially greater resources and experience than the Company, may
elect to enter these markets. The instant ticket market also may face
competition from other types of lottery and gaming products, including
particularly on-line lottery products. The long distance telephone market
similarly may face competition from other types of communications products,
including facsimile, e-mail and other on-line products.

         The Company believes that its patented dispensing technologies make its
ITVM and PCDM dispensing mechanisms technologically superior to the dispensing
mechanisms of its competitors and that this is a significant competitive
advantage for the Company. The Company also believes that its products have
earned a strong reputation for their performance, reliability and cost
effectiveness. To remain competitive, the Company believes that it will need to
continue to incorporate new technological developments into its existing
products and to develop new products, as well as to maintain a competitive price
for its products. These efforts, together with the Company's continuing sales
and marketing efforts, will be critical to the Company's future success.
Although the Company believes that its current successes, coupled with its
history of continued product enhancement and cost reduction, will enable it to
compete favorably with its competitors, there can be no assurance that the
Company will be able to maintain or improve its competitive position in the ITVM
and PCDM markets.


                                      -20-

<PAGE>   22

Government Regulation

         ITVMS

         Lotteries are not permitted in the various states and jurisdictions of
the United States unless expressly authorized by legislation in the subject
jurisdiction. Similarly, the commencement of ITVM sales and leasing in new
jurisdictions requires authorizing legislation and implementing regulations at
the state level. The Company cannot predict the nature of the regulatory process
in any jurisdiction that may authorize the purchase and lease of ITVMs in the
future. Any such regulatory process may be burdensome to the Company or its key
personnel and stockholders and could include requirements that the Company would
be unable to satisfy.

         Currently, 37 states and the District of Columbia have enacted
legislation to allow for the operation of a lottery, and 32 of these
jurisdictions utilize ITVMs in some manner as part of their instant ticket
distribution process. The operation of the lotteries in each of these
jurisdictions is strictly regulated. The formal rules and regulations governing
lotteries vary from jurisdiction to jurisdiction but typically authorize the
lottery, create the governing authority, dictate the prize structure, establish
allocation of revenues, determine the type of games permitted, detail
appropriate marketing structures, specify procedures for selecting vendors and
define the qualifications of lottery personnel. No assurance can be given that
there will not be an adverse change in the lottery laws of any jurisdiction in
which the Company does business. Although the Company believes that it is
unlikely that states which have enacted legislation that expressly authorize the
use of ITVMs will adopt legislation in the foreseeable future that prohibits the
use of ITVMs, there can be no assurance that such legislation will not be
adopted in one or more jurisdictions in the foreseeable future.

         To ensure the integrity of the lottery, state laws provide for
extensive background investigations of each of the lottery's vendors and their
affiliates, subcontractors, officers, directors, employees and principal
stockholders. These investigations generally require detailed disclosure on a
continuous basis with respect to the vendors, affiliates, subcontractors,
officers, directors, employees and principal shareholders and, in the event the
lottery deems any of such persons to be unsuitable, the lottery may require the
termination of such persons. The failure of any such persons associated with the
Company to obtain or retain approval in any jurisdiction could have a material
adverse effect on the Company. Generally, regulatory authorities have broad
discretion when granting such approvals. Although the Company has never been
disqualified from a lottery contract as a result of a failure to obtain any such
approvals, no assurance can be given that such approvals will be obtained or
retained in the future.

         The Federal Gambling Devices Act of 1962 (the "Act") makes it unlawful,
with certain exceptions, for a person or entity to transport any gambling
devices across interstate lines unless that person or entity has first
registered with the United States Department of Justice. Although the Company
believes that it is not required to register under such Act, the Company has
voluntarily registered under the Act and intends to renew its registration
annually. The Act also imposes various record keeping and equipment
identification requirements. Violation of the Act may result in seizure or
forfeiture of equipment, as well as other penalties.

         The Company may retain governmental affairs representatives in various
jurisdictions of the United States to monitor legislation, advise the Company on
contract proposals, and assist with other issues that may affect the Company.
The Company believes it has complied with all applicable state regulatory
provisions relative to disclosure concerning the activities of itself and its
advisors. The Company is not dependent on any such representative for any
material contract.


                                      -21-

<PAGE>   23

         International jurisdictions that operate lotteries also impose strict
regulations. International regulations may vary from those in the United States.
Additionally, international regulations frequently impose restrictions on
foreign corporations doing business within the specific jurisdiction. As a
result, the Company may contract with local representation or align itself with
a local partner when pursuing international contracts.

         Laws and regulations of individual states and countries are subject to
change. The failure to comply with such laws and regulations could have an
adverse impact on the operations of the Company.

         PCDMs

         The Company is not aware of any federal, state or local regulations
that apply to the manufacture, lease or sale of PCDMs.

Backlog

         The Company's backlog of ITVMs committed for production as of December
31, 1997 was approximately $4,250,000, which was equal to the total base lease
payments or sales value for the 847 ITVMs that were committed for production but
had not been shipped to the Maryland and Ohio Lotteries as of December 31, 1997.
See "Lottery Contracts." At December 31, 1996, the backlog of ITVMs committed
for production was approximately $1,097,400, which was equal to the total base
lease payments or sales value for the 460 ITVMs that were committed for
production but had not been shipped to the Colorado, Indiana, New York and Texas
Lotteries as of December 31, 1996. It is anticipated that substantially all of
the Company's backlog at December 31, 1997 will be shipped on or before June 30,
1998. The Company had no backlog of PCDMs committed for production at December
31, 1997.

         The Company has entered into various lease or sales agreements that
permit the lotteries, at their sole option, to lease or purchase up to a total
of 1,100 additional ITVMs as of December 31, 1997. However, the Company does not
include in backlog ITVMs that may be sold or leased under existing contracts
unless the Company has received a firm order for the ITVMs. Due to the
relatively large size of individual orders, the small number of customers and
the long sales cycle of the lottery industry, management considers backlog to be
an indicator of current activity and not necessarily predictive of future
orders.

Employees

         The Company utilizes a work force of full-time employees supported from
time to time by temporary or contract manufacturing and engineering personnel.
As of December 31, 1997, the Company had 128 full-time employees, of which 50
were manufacturing employees, 7 were engineering employees, 55 were service
employees and 16 were executives or senior managers. Nine of the executives and
senior managers were devoted to sales and seven were devoted to management and
administration. The Company intends to increase sales and marketing personnel
during 1998 through the addition of two employees, to increase engineering
personnel through the addition of one employee and to increase management and
administrative personnel through the addition of three employees.

         The Company's business requires that it continue to attract and retain
additional personnel with a variety of skills, especially with engineering and
marketing expertise. Significant competition exists for such personnel, and
there can be no assurance that the Company will be able to attract and retain
personnel with the skills and experience needed to achieve and manage growth.


                                      -22-

<PAGE>   24

         No Company employees are represented by any union, and the Company
believes that its relations with its employees are good.


ITEM 2.  PROPERTIES

         The Company's manufacturing and distribution facilities currently are
located in a facility containing approximately 35,000 square feet of leased
space in Cincinnati, Ohio. The facility is comprised of approximately 5,000
square feet of office space and approximately 30,000 square feet of
manufacturing space with the capacity to produce and provide inventory for
approximately 250 machines per week. The lease is for a fixed term through
December 31, 1999.

         Effective January 1, 1997, the Company entered into a lease for a
second facility containing approximately 11,750 square feet of space located a
very short distance from the current facility in Cincinnati. The second facility
serves as the executive office of the Company housing the executive,
administrative, sales, engineering and service personnel. The lease for the
second facility also expires on December 31, 1999. The Company believes that
these two facilities are suitable for and adequate to support its operations for
the foreseeable future.

         The Company also leases approximately 1,000 square feet of warehouse
and office space in Alpharetta, Georgia for the purpose of storing and repairing
ITVMs used in connection with the Georgia Lottery. Scientific Games, Inc.
provides this space to the Company at no cost under the terms of the Company's
contract with Scientific Games. The lease is effective for the entire term of
the contract, which has an initial term that expires in May 1998. See "Item 1.
Business -- Contracts -- ITVMs." The Company believes that this facility is
suitable for and adequate to support its operations for the Georgia Lottery.


ITEM 3.  LEGAL PROCEEDINGS

         In January 1996, the Company filed a lawsuit now pending in the United
States District Court for the Southern District of Ohio against Lottery
Enterprises, Inc. ("LEI," which subsequently changed its name to On-Point
Technology Systems, Inc.) to collect sums that the Company alleges are owed to
it under an Agreement in Principle dated March 23, 1995, relating to the
Company's potential acquisition of LEI by merger (the "Transaction"). The
parties did not consummate the Transaction. The Agreement in Principle required
LEI to reimburse the Company's reasonable out-of-pocket expenses incurred in
connection with the Transaction in the event the parties failed to execute a
definitive merger agreement within 120 days of March 23, 1995, and the primary
reason that the parties did not execute a definitive merger agreement was other
than a breach of the Agreement in Principle by the Company. The Agreement in
Principle also required LEI to pay the Company a "breakup fee" in the event
that, within one year after the termination or abandonment of the Transaction by
LEI, LEI entered into a binding commitment to engage in a recapitalization, debt
issuance or working capital financing other than in the ordinary course of
business, and the primary reason for the termination or abandonment of the
Transaction was other than termination or breach of the Agreement in Principle
by the Company. The Company seeks the reimbursement of approximately $241,000 in
out-of-pocket expenses and a breakup fee of approximately $988,000.

         LEI denied any liability to the Company and also asserted counterclaims
against the Company seeking unspecified money damages exceeding $500,000. LEI
claimed that the Company competed unfairly with LEI and wrongfully interfered
with LEI's business by misrepresenting LEI's financial condition to the
Pennsylvania state lottery agency and by utilizing information about LEI
received during the due diligence conducted in connection with the Transaction.
LEI also claimed that it is entitled to


                                      -23-



<PAGE>   25

recover from the Company unspecified costs and expenses that it incurred in
connection with the Transaction and sought a declaration from the Court that it
is not obligated to pay the Company a breakup fee under the Agreement in
Principle.

         The Court granted partial summary judgment in the Company's favor on
the Complaint, ruling that within one year after the Transaction was abandoned
or terminated, LEI did enter into a recapitalization, debt issuance or working
capital financing other than in the ordinary course of business. The Court left
open the question whether LEI abandoned or terminated the Transaction (as
opposed to the Company), which will be determined at trial. The Court also left
open the question of whether LEI is obligated to reimburse the out-of-pocket
expenses incurred by the Company in connection with the Transaction. The Court
also has granted summary judgment in the Company's favor on LEI's counterclaims
for unfair competition and tortious interference.

         The Company is unable to predict the likelihood of success on its
remaining claims or on LEI's counterclaim. The Company is seeking approximately
$240,000 in out-of-pocket expenses and $988,000 on its claim for the breakup
fee, but is unable to predict how much, if any, of any judgment would be
collectible. The Company also is unable to predict whether LEI will prevail on
its counterclaims and, if so, the amount of damages that LEI might recover
against the Company. The Company also is unable to predict the amount of any
settlement that might be agreed upon by the parties in the future or the timing
of any such events. However, the Company believes that LEI's remaining
counterclaims are without merit and that any amount of any damages that
ultimately may be awarded to LEI would not have a material adverse effect on the
business, operations or financial condition of the Company.


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

         No matters were submitted by the Company to a vote of its stockholders
during the fourth quarter ended December 31, 1997.


ITEM 4(A).  EXECUTIVE OFFICERS OF THE REGISTRANT

         Set forth below, in accordance with General Instruction G(3) to Form
10-K and Instruction 3 to Item 401(b) of Regulation S-K, is certain information
regarding the executive officers of the Company.

         L. Rogers Wells, Jr., age 60, is Chairman of the Board and Chief
Executive Officer of the Company and has been the principal stockholder of the
Company since purchasing 80% of the Common Stock of the Company in September
1992. Mr. Wells served as a director of the Company from September 1992, and as
Chairman of the Board and Chief Executive Officer of the Company from October
1993, until his resignation from these positions in October 1994. He was
re-elected to these positions in February 1995. Additionally, Mr. Wells owns
American Materials, Incorporated, which assembles and distributes automobile and
truck components and serves as a regional warehousing and distribution center
for various businesses. Mr. Wells also owns International Investments, Inc.
("III"), which invests in and provides financing to various businesses,
including the Company. See "Item 13. Certain Relationships and Related
Transactions." Mr. Wells has been active in various other industries, including
manufacturing, mining, explosives and banking. From 1987 through 1991, Mr. Wells
served as Secretary of Finance and Administration for the Commonwealth of
Kentucky, and from 1989 through 1991 served as Secretary to the Governor's
Executive Cabinet. During his tenure as Secretary of Finance and Administration,
Mr. Wells served as Chairman of various finance and development authorities,
including the Kentucky Rural Economic Development Authority, the Kentucky
Infrastructure Authority and the Kentucky Housing Corporation.


                                      -24-

<PAGE>   26

         Edmund F. Turek, age 71, served as President and a director of the
Company from February 1990 until May 1997 and served as Chairman of the Board
and Chief Executive Officer of the Company from February 1990 to September 1992.
In May 1997, Mr. Turek became Vice Chairman of the Company and continued to
serve as a director. Mr. Turek began to develop the Company's ITVM in 1987 and
has guided the product through six generations to the current model. Mr. Turek
was Vice President of Peripheral Products in the computer division of SCI
Systems, Inc. from 1984 to 1989 where he developed business opportunities in the
commercial market for the design and manufacture of computer products. From 1953
to 1984, Mr. Turek held management, product development and operations positions
with various companies in the computer and aerospace industries.

         David F. Nichols, age 36, has been President of the Company since May
1997 and was named a director in December 1997. Mr. Nichols served as Senior
Vice President of Sales and Marketing of the Company from August 1994 to May
1997 and as Vice President-Operations of the Company from March 1993 until
August 1994. From December 1991 to December 1992, he was Executive Director of
the Board of Tax Appeals of the Commonwealth of Kentucky. From March 1990 to
December 1991, he was Principal Assistant to the Secretary of Finance and
Administration for the Commonwealth of Kentucky, and from March 1989 to March
1990, he was Principal Assistant to the Kentucky Office for Social Security. In
these two capacities, he advised senior agency officials on policies, programs
and operations of the agency and served as a liaison with the state legislature
and other elected officials. From June 1988 to December 1988, he was Deputy
Director of the Kentucky Democratic Party.

         Jerome J. Cain, age 53, has been Chief Financial Officer of the Company
since 1992. From 1979 until 1991, he was Vice President-Finance and
Administration of American Sign and Marketing Services, Inc., a sign
manufacturing company. From 1972 to 1979, he was Controller of Lockwood
Manufacturing Company, a sheet metal fabricating company. Mr. Cain also served
as an auditor and management consultant with Coopers & Lybrand, certified public
accountants. Mr. Cain is a certified public accountant.

         Thomas W. Stokes, age 34, has been Vice President of the Company since
May 1997. Mr. Stokes served as Director of Operations from January 1996 to May
1997 and as Purchasing Manager from March 1993 to December 1995. From 1988 to
1992, he served as unit controller for a food management company.

         The executive officers of the Company are appointed by and serve at the
discretion of the Board of Directors.

                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

         Information relating to the market for holders of and dividends paid on
the Company's Common Stock is set forth under the caption "Corporate Data and
Shareholder Information" on the inside back cover page of the Company's 1997
Annual Report. Such information is incorporated herein by reference. The 1997
Annual Report is filed as Exhibit 13 to this report.


ITEM 6.  SELECTED FINANCIAL DATA

         Selected financial data for the Company for each year of the five-year
period ended December 31, 1997 are set forth under the caption "Selected
Financial Data" on page 7 of the 1997 Annual Report. Such financial data are
incorporated herein by reference.


                                      -25-

<PAGE>   27


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

         A discussion of the financial condition and results of operations of
the Company at and for the dates and periods covered by the financial statements
set forth in the 1997 Annual Report is set forth under the caption "Management's
Discussion and Analysis" on pages 7 through 9 of the 1997 Annual Report. Such
discussion is incorporated herein by reference.

ITEM 7(A).  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The following financial statements of the Company and the independent
auditors' report thereon, which are set forth on pages 9 through 16 of the 1997
Annual Report, are incorporated herein by reference:

         Balance Sheets at December 31, 1996 and 1997

         Statements of Operations for each of the years in the three-year period
         ended December 31, 1997

         Statements of Stockholders' Equity (Deficit) for each of the years in
         the three-year period ended December 31, 1997

         Statements of Cash Flows for each of the years in the three-year period
         ended December 31, 1997

         Notes to Financial Statements

         The supplementary financial information required to be provided by Item
302 of Regulation S-K.


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

         Within the two-year period ended December 31, 1997 and subsequently,
the Company had no change in independent accountants or disagreements with
independent accountants on accounting and financial disclosure.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information relating to the directors of the Company is set forth under
the captions "Proposal 1 -- Election of Directors -- Nominees" and "Proposal 1
-- Election of Directors -- Information Regarding Nominees and Continuing
Directors" in the Company's Proxy Statement for its 1998 Annual Meeting of
Stockholders to be held on May 7, 1998. Such information is incorporated herein
by reference. Pursuant to Instruction 3 to Item 401(b) of Regulation S-K and
General Instruction G(3) to Form 10-K, information relating to the executive
officers of the Company is set forth in Part I, Item 4(A) of this report under
the caption "Executive Officers of the Registrant." Information regarding
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, by directors and executive officers of the Company and beneficial
owners of more than 10% of the Company's Common Stock is set forth under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement referred to in this Item 10 above. Such information is incorporated
herein by reference.


                                      -26-

<PAGE>   28


ITEM 11.  EXECUTIVE COMPENSATION

         Information relating to executive compensation is set forth under the
captions "Proposal 1 -- Election of Directors -- Director Compensation" and
"Executive Compensation" in the Proxy Statement referred to in Item 10 above.
Such information is incorporated herein by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information regarding ownership of the Company's Common Stock as of
December 31, 1997 by certain persons is set forth under the captions "Voting --
Principal Stockholders" and "Proposal 1 -- Election of Directors -- Information
Regarding Nominees and Continuing Directors" in the Proxy Statement referred to
in Item 10 above. Such information is incorporated herein by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information regarding certain relationships and transactions between
the Company and certain of its affiliates is set forth under the caption
"Certain Transactions" in the Proxy Statement referred to in Item 10 above. Such
information is incorporated herein by reference.


                                     PART IV

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

         (a)      Documents Filed as Part of This Report.

                  1.       Financial Statements

                           The following financial statements of the Company and
                           the independent auditors' report thereon are included
                           in the Company's 1997 Annual Report and are
                           incorporated by reference in Item 8 hereof:

                           Balance Sheets at December 31, 1996 and 1997

                           Statements of Income for each of the years in the
                           three-year period ended December 31, 1997

                           Statements of Stockholders' Equity for each of the
                           years in the three-year period ended December 31,
                           1997

                           Statements of Cash Flows for each of the years in the
                           three-year period ended December 31, 1997

                           Notes to Financial Statements

         2.       Financial Statement Schedules


                                      -27-

<PAGE>   29

                           The following financial statement schedule and the
                  independent auditors' report thereon are set forth beginning
                  on page S-1 of this report:

                                Schedule II - Valuation and Qualifying Accounts

                           All other schedules for which provision is made in
                  the applicable accounting regulations of the Securities and
                  Exchange Commission have been omitted because such schedules
                  are not required under the related instructions or are
                  inapplicable or because the information required is included
                  in the financial statements or notes thereto.

         3.       Exhibits

                           The following exhibits are filed with or incorporated
                  by reference in this report. Where such filing is made by
                  incorporation by reference to a previously filed registration
                  statement or report, such registration statement or report is
                  identified in parentheses. The Company will furnish any
                  exhibit upon request to Jerome J. Cain, Chief Financial
                  Officer of the Company, 10830 Millington Court, Cincinnati,
                  Ohio 45242. There is a charge of $.50 per page to cover
                  expenses of copying and mailing.

                  3.1      Certificate of Incorporation of the Company, as
                           amended, including Certificate of Designation of
                           Series A Preferred Stock (Exhibit 3.1 to the
                           Company's Registration Statement on Form S-1, No.
                           33-75142).

                  3.2      Bylaws of the Company (Exhibit 3.2 to the Company's
                           Registration Statement on Form S-1, No. 33-75142).

                  4.1      Promissory Note of the Company dated September 22,
                           1992 to Baumgartner & Brucher Radiology Associates,
                           Inc. Profit Sharing Plan for the benefit of Thomas E.
                           Turek, M.D. (Exhibit 4.2 to the Company's
                           Registration Statement on Form S-1, No. 33-75142).

                  4.2      Promissory Note of the Company dated September 22,
                           1990 to Mr. Thomas Goila (Exhibit 4.3 to the
                           Company's Registration Statement on Form S-1, No.
                           33-75142).

                  4.3      Loan Agreement dated October 29, 1997 between the
                           Company and Mercantile Business Credit Inc. - filed
                           herewith.

                  4.3(a)   Revolving Credit Note dated October 29, 1997 between
                           the Company and Mercantile Business Credit Inc. -
                           filed herewith.

                  4.3(b)   Security Agreement dated October 29, 1997 between the
                           Company and Mercantile Business Credit Inc. - filed
                           herewith.

                  4.3(c)   Patent, Trademark and License Security Agreement
                           dated October 29, 1997 between the Company and
                           Mercantile Business Credit Inc. - filed herewith.

                  10.1     Assignment of United States Letters Patent from BLM
                           Resources, Inc. to the Company with respect to United
                           States Patent No. 4,982,337, "System for Distributing
                           Lottery Tickets" (Exhibit 10.5 to the Company's
                           Registration Statement on Form S-1, No. 33-75142).


                                      -28-

<PAGE>   30

                  10.2     Pull-Tab Manufacturing and License Agreement between
                           Algonquin Industries, Inc., Kazmier Kasper and the
                           Company dated as of January 13, 1994 (Exhibit 10.6 to
                           the Company's Registration Statement on Form S-1, No.
                           33-75142).

                  10.3     Lease Agreement dated January 14, 1991 by and between
                           Gallenstein & Gallenstein and the Company related to
                           the Company's premises located at 6665 Creek Road,
                           Cincinnati, Ohio 45242 (Exhibit 10.7 to the Company's
                           Registration Statement on Form S-1, No. 33-75142).

                  10.3(a)  Addendum dated May 2, 1994 to Lease Agreement dated
                           January 14, 1991 (Exhibit 10.7) by and between
                           Gallenstein & Gallenstein and the Company related to
                           the Company's premises located at 6665 Creek Road,
                           Cincinnati, Ohio 45242 (Exhibit 10.7(a) to the
                           Company's Annual Report on Form 10-K for the year
                           ended December 31, 1994).

                  10.4     Management Contracts and Compensatory Plans

                           (a)      1994 Stock Incentive Plan (Exhibit 10.24 to
                                    the Company's Registration Statement on Form
                                    S-1, No. 33-75142).

                           (b)      1994 Directors Stock Incentive Plan (Exhibit
                                    10.25 to the Company's Registration
                                    Statement on Form S-1, No. 33-75142).

                           (c)      Employment Agreement effective February 1,
                                    1995 between L. Rogers Wells, Jr. and the
                                    Company - filed herewith.

                  11       Statement Regarding Computation of Per Share Earnings
                           - filed herewith.

                  13       1997 Annual Report - filed herewith. (1)

                  23       Consent of KPMG Peat Marwick LLP - filed herewith.

                  24       Powers of Attorney - filed herewith.

                  27       Financial Data Schedule (for SEC use only).


         (b) Reports on Form 8-K. No Current Reports on Form 8-K were filed by
the Company during the quarter ended December 31, 1997.

         (c)      See Item 14(a)(3) above.

         (d)      See Item 14(a)(2) above.


                  (1)    Except for portions of the 1997 Annual Report that are
expressly incorporated by reference into this Annual Report on Form 10-K, the
1997 Annual Report is furnished to the Commission solely for the information of
the Commission and not deemed to be "filed" with the Commission for purposes of
the Securities Exchange Act of 1934, as amended.


                                      -29-

<PAGE>   31

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 27, 1998.


                          INTERLOTT TECHNOLOGIES, INC.
                          (Registrant)


                          By: /s/ L. Rogers Wells, Jr.
                              -------------------------------------------------
                              L. Rogers Wells, Jr.
                              Chairman of the Board and Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 27, 1998.

<TABLE>
<CAPTION>
             Signature                                                  Title
             ---------                                                  ------
<S>                                                           <C>
/s/ L. Rogers Wells, Jr.                                      Chairman of the Board and Chief Executive Officer
---------------------------------------
L. Rogers Wells, Jr.


/s/ Edmund F. Turek                                           Vice Chairman and Director
---------------------------------------
Edmund F. Turek


/s/ David F. Nichols                                          President and Director
---------------------------------------
David F. Nichols


John J. Wingfield*                                            Director
---------------------------------------
John J. Wingfield


/s/ H. Jean Marshall                                          Director
---------------------------------------
H. Jean Marshall


Gary S. Bell*                                                 Secretary, Treasurer and Director
---------------------------------------
Gary S. Bell


Kazmier J. Kasper*                                            Director
---------------------------------------
Kazmier J. Kasper


/s/ Jerome J. Cain                                            Chief Financial and Accounting Officer
---------------------------------------
Jerome J. Cain


*By:  /s/ L. Rogers Wells, Jr.
    -----------------------------------
      L. Rogers Wells, Jr.
      as attorney-in-fact
</TABLE>


                                      -30-

<PAGE>   32

                     INDEX OF FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Report of Independent Auditors..........................................     S-2

Schedule II - Valuation and Qualifying Accounts.........................     S-3
</TABLE>


                                      S-1

<PAGE>   33
[KPMG LETTERHEAD]








                         Independent Auditor's Report




The Board of Directors
Interlott Technologies, Inc.:

Under date of February 28, 1998, we reported on the balance sheets of
Interlott Technologies, Inc. as of December 31, 1996 and 1997, and the related
statements of income, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997, as contained in the 1997
annual report to stockholders.  These financial statements and our report
thereon are incorporated by reference in the annual report on Form 10-K for the
year 1997.  In connection with our audits of the aforementioned financial
statements, we also audited the related financial statement schedule as listed
in the accompanying index.  This financial statement schedule is the
responsibility of the Company's management.  Our responsibility is to express
an opinion on this financial statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.



                                                          KPMG PEAT MARWICK LLP



Louisville, Kentucky
February 28, 1998



                                     S-2
<PAGE>   34


                          INTERLOTT TECHNOLOGIES, INC.

                 Schedule II - Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
     COLUMN A          COLUMN B                     COLUMN C                      COLUMN D           COLUMN E
-------------------------------------------------------------------------------------------------------------------
                                                   ADDITIONS
-------------------------------------------------------------------------------------------------------------------
                      BALANCE AT          CHARGED TO           CHARGED TO                            BALANCE AT
                       BEGINNING           COSTS AND             OTHER                                   END
DESCRIPTION            OF PERIOD           EXPENSES             ACCOUNTS         DEDUCTIONS           OF PERIOD
-------------------------------------------------------------------------------------------------------------------
<S>                   <C>                 <C>                  <C>               <C>                 <C>
Allowance for
doubtful accounts
-------------------------------------------------------------------------------------------------------------------
      1995               55,150            145,000                0                98,537            101,613
-------------------------------------------------------------------------------------------------------------------
      1996              101,613             57,500                0                43,688            115,425
-------------------------------------------------------------------------------------------------------------------
      1997              115,425             52,500                0                74,425             93,500
-------------------------------------------------------------------------------------------------------------------
</TABLE>


                                      S-3

<PAGE>   35


                          INTERLOTT TECHNOLOGIES, INC.

                                INDEX OF EXHIBITS

         The following exhibits are filed with or incorporated by reference in
this report. Where such filing is made by incorporation by reference to a
previously filed registration statement or report, such registration statement
or report is identified in parenthesis.

<TABLE>
<CAPTION>
EXHIBIT NO.                                     DESCRIPTION                                           PAGE
-----------                                     -----------                                           ----
     <S>                <C>                                                                           <C>
     3.1                Certificate of Incorporation of the Company, as amended,
                        including Certificate of Designation of Series A
                        Preferred Stock (Exhibit 3.1 to the Company's
                        Registration Statement on Form S-1, No. 33-75142).

     3.2                Bylaws of the Company (Exhibit 3.2 to the Company's
                        Registration Statement on Form S-1, No. 33-75142).

     4.1                Promissory Note of the Company dated September 22, 1992 to
                        Baumgartner & Brucher Radiology Associates, Inc. Profit
                        Sharing Plan for the benefit of Thomas E. Turek, M.D.
                        (Exhibit 4.2 to the Company's Registration Statement on
                        Form S-1, No. 33-75142).

     4.2                Promissory Note of the Company dated September 22, 1990
                        to Mr. Thomas Goila (Exhibit 4.3 to the Company's
                        Registration Statement on Form S-1, No. 33-75142).

     4.3                Loan Agreement dated October 29, 1997 between the
                        Company and Mercantile Business Credit - filed herewith.

     4.3(a)             Revolving Credit Note dated October 29, 1997 between the
                        Company and Mercantile Business Credit - filed herewith.

     4.3(b)             Security Agreement dated October 29, 1997 between the
                        Company and Mercantile Business Credit - filed herewith.

     4.3(c)             Patent, Trademark and License Security Agreement dated
                        October 29, 1997 between the Company and Mercantile
                        Business Credit - filed herewith.

     10.1               Assignment of United States Letters Patent from BLM
                        Resources, Inc. to the Company with respect to United
                        States Patent No. 4,982,337, "System for Distributing
                        Lottery Tickets" (Exhibit 10.5 to the Company's
                        Registration Statement on Form S-1, No. 33-75142).
</TABLE>


                                      E-1

<PAGE>   36
<TABLE>
     <S>                <C>                                                                           <C>
     10.2               Pull-Tab Manufacturing and License Agreement between
                        Algonquin Industries, Inc., Kazmier Kasper and the
                        Company dated as of January 13, 1994 (Exhibit 10.6 to
                        the Company's Registration Statement on Form S-1, No.
                        33-75142).

     10.3               Lease Agreement dated January 14, 1991 by and between
                        Gallenstein & Gallenstein and the Company related to the
                        Company's premises located at 6665 Creek Road,
                        Cincinnati, Ohio 45242 (Exhibit 10.7 to the Company's
                        Registration Statement on Form S-1, No. 33-75142).

     10.3(a)            Addendum dated May 2, 1994 to Lease Agreement
                        dated January 14, 1991 (Exhibit 10.7) by and between
                        Gallenstein & Gallenstein and the Company related to the
                        Company's premises located at 6665 Creek Road, Cincinnati,
                        Ohio 45242 (Exhibit 10.7(a) to the Company's Annual Report on
                        Form 10-K for the year ended December 31, 1994).

     10.4               Management Contracts and Compensatory Plans

                        (a)     1994 Stock Incentive Plan (Exhibit 10.24 to
                                the Company's Registration Statement on
                                Form S-1, No. 33-75142).

                        (b)     1994 Directors Stock Incentive Plan (Exhibit
                                10.25 to the Company's Registration Statement
                                on Form S-1, No. 33-75142).

                        (c)     Employment Agreement effective February 1, 1995
                                between L. Rogers Wells and the Company - filed
                                herewith.

     11                 Statement Regarding Computation of Per Share Earnings - filed herewith.

     13                 1997 Annual Report - filed herewith. (1)

     23                 Consent of KPMG Peat Marwick LLP - filed herewith.

     24                 Powers of Attorney - filed herewith.


     27                 Financial Data Schedule - (for SEC use only).
</TABLE>

    (1)   Except for portions of the 1997 Annual Report that are expressly
incorporated by reference into this Annual Report on Form 10-K, the 1997 Annual
Report is furnished to the Commission soley for the information of the
Commission and not deemed to be "filed" with the Commission for purposes of the
Securities Exchange Act of 1934, as amended.



                                      E-2