<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K


                                (AMENDMENT NO. 1)


                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

              [ ] 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 001-12986

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

        DELAWARE                                         31-1297916
(State of incorporation)                    (IRS Employer Identification Number)

                     7697 INNOVATION WAY, MASON, OHIO 45040
          (Address of principal executive offices, including zip code)

                                 (513) 701-7000
              (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]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

The aggregate market value of the Registrant's outstanding Common Stock held by
non-affiliates of the Registrant on June 28, 2002, the last business day of the
Registrant's most recently completed second fiscal quarter, was $16,175,411.
There were 6,459,718 shares of Common Stock outstanding as of March 20, 2003.

<PAGE>

                          INTERLOTT TECHNOLOGIES, INC.
                           ANNUAL REPORT ON FORM 10-K
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
ITEM
NUMBER                                                                                                 PAGE
------                                                                                                 ----
<S>                                                                                                    <C>
PART I
   1.      Business.................................................................................     1
   2.      Properties...............................................................................    15
   3.      Legal Proceedings........................................................................    15
   4.      Submission of Matters to a Vote of Security Holders......................................    15

PART II
   5.      Market for the Registrant's Common Stock and Related Stockholder Matters.................    16
   6.      Selected Financial Data..................................................................    17
   7.      Management's Discussion and Analysis of Financial Condition and Results of
           Operations...............................................................................    17
   7(A).   Quantitative and Qualitative Disclosures About Market Risk...............................    28
   8.      Financial Statements and Supplementary Data..............................................    30
   9.      Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.....    49

PART III
   10.     Directors and Executive Officers of the Registrant.......................................    50
   11.     Executive Compensation...................................................................    52
   12.     Security Ownership of Certain Beneficial Owners and Management
           and Related Stockholder Matters..........................................................    56
   13.     Certain Relationships and Related Transactions...........................................    57
   14.     Controls and Procedures..................................................................    57

PART IV
   15.     Exhibits, Financial Statement Schedules, and Reports on Form 8-K.........................    58

           SIGNATURES and CERTIFICATIONS............................................................    59
           FINANCIAL STATEMENT SCHEDULE.............................................................   S-1
           INDEX OF EXHIBITS........................................................................   E-1
</TABLE>

<PAGE>

                                     PART I

ITEM 1.  BUSINESS

         Interlott Technologies, Inc. (the "Company" or "Interlott") 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 international 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 directly to players, 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, 2002, the Company had sold or leased over 30,000
ITVMs through agreements with 29 different state lotteries and the District of
Columbia and 14 international jurisdictions, or their licensees or contractors.

         Taking advantage of its expertise in dispensing technology, the Company
introduced a prepaid phone card dispensing machine ("PCDM") in 1995 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. Although PCDM revenues in 2002 represented less than
1% of total revenues, the Company continues to believe that PCDMs may be a
source of future sales growth.

         The Company has entered into an Agreement and Plan of Merger dated as
of March 17, 2003 with GTECH Holdings Corporation and a subsidiary of GTECH,
pursuant to which the Company will merge into the subsidiary and become a
wholly-owned subsidiary of GTECH. Upon the merger, each share of the Company's
Common Stock will be changed into the right to receive $9.00 in cash, GTECH
common stock or a combination of the two, with 51.5% of the aggregate merger
consideration to be paid in GTECH common stock and the balance in cash.

                                        1

<PAGE>

         Consummation of the merger is subject to satisfaction of various
conditions, including the approval of the Company's stockholders, the making of
various regulatory filings, the absence of any injunction or certain litigation
challenging the merger, the receipt of tax and other legal opinions, the
accuracy of the parties' representations and warranties and performance of their
agreements, and the receipt of consents to the merger from customers
representing 85% of the Company's projected business for 2003 and certain other
parties to material contacts. GTECH may terminate the merger agreement if its
stock price declines by 18% unless the Company elects to convert the merger
consideration into all cash.

         The Company has agreed not to solicit a competing offer, but may
terminate the merger agreement to accept an unsolicited superior proposal. If it
does so, the Company will be required to pay GTECH a termination fee of $2.75
million and reimburse GTECH's expenses up to $750,000.

         In connection with the Merger Agreement, GTECH also entered into a
Stockholder Voting and Option Agreement and a Noncompetition Agreement with L.
Rogers Wells, Jr. Under the Voting and Option Agreement, Mr. Wells agreed to
vote in favor of the merger and granted GTECH the option to purchase his Company
Common Stock at $9.00 if the Merger Agreement terminates for specified reasons.
The Voting and Option Agreement terminates if the Company terminates the Merger
Agreement to accept a superior proposal. If GTECH exercises the option, it is
required to make a cash tender offer for the remaining Common Stock of the
Company at $9.00 per share.

         Pursuant to the Noncompetition Agreement, Mr. Wells has agreed not to
engage in the lottery business for five years after consummation of the merger.
As compensation for this agreement, GTECH will pay him $250,000 per year during
that five-year period.

         Interlott is a Delaware corporation. The Company's Common Stock trades
on the American Stock Exchange under the symbol "ILI."

PRODUCTS

         The ITVM

         In 1987, Edmund F. Turek, a director of and consultant to the Company,
led the team that developed the technology for what the Company believes was the
first automated ITVM. The 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. 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. This technology also enables the Company's ITVMs 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 a lottery to purchase

                                        2

<PAGE>

virtually all types of scratch-off instant tickets from its instant ticket
manufacturer without having to request from the manufacturer major alterations
in the ticket perforations. For example, the Company's ITVM can dispense
recyclable scratch-off tickets without tearing or scarring the tickets. This
feature also is particularly beneficial to international 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.

         The Company's ITVMs for scratch-off tickets have a record of
reliability. The Company believes that the mean time between failure of its
ITVMs is approximately 3.75 years and that the mean time to repair is
approximately 15 minutes.

         Since the introduction of the Company's modular Expandable Dispensing
System (EDS) in 2000, the Company's ITVM for scratch-off tickets has had the
capacity to dispense tickets from one to 24 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 24 different instant-winner games with a
single ITVM. The ITVM can accommodate up to 24,000 tickets in the 24-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. 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 international currency. The size
of the Company's ITVM for scratch-off tickets varies from 69 inches tall, 28
inches wide and 33.5 inches deep for a 24-game unit to 19.75 inches tall, 15.5
inches wide and 20.5 inches deep for a countertop unit.

         The Company's Instant Ticket Management System ("ITMS") also known as
GameGuard, addresses the specific needs of convenience store and grocery
check-out lanes. The GameGuard may be installed in a variety of configurations,
including on the counter or under-the-counter. This technology reduces ticket
shrinkage and increases sales volume of instant tickets and also may be tied
into the Point of Service register.

         All models are anchored to the floor or counter. The ITVMs typically
are custom designed to meet any color and other appearance specifications
requested by a lottery. 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.

         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

                                        3
<PAGE>

programmed from the lottery headquarters by utilizing the Company's optional
modem communications system.

         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 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 12 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.

         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, described 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.

         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. The dispensing technology in the Company's PCDM 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 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 three seconds once the selector button has been pushed.

                                       4
<PAGE>

         The Company's PCDMs have the capacity to dispense cards from two to six
different bins. The PCDM can accommodate up to 3,600 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 international currency. The size
of the Company's PCDMs varies from 66 inches tall, 26 inches wide and 19 inches
deep for a six-bin dispenser unit to 22 inches tall, 14 inches wide and 10
inches 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 twelve 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 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 an ITVM's "uptime,"
which in turn reduces ticket sales. The Company believes that its ITVMs, based
on actual field performance and product testing, are the most reliable and
technologically superior in

                                       5
<PAGE>


the industry. 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.

         To further increase the likelihood of receiving ITVM orders from
lotteries, the Company offers 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 is expanding 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. While the lotteries must abide by the established
procurement laws of their respective jurisdictions in selecting an ITVM
manufacturer, in many lottery jurisdictions retailer advisory boards provide
input to the lotteries on various issues affecting the lottery. The Company
believes that retailers' opinions are a significant factor in a customer's
decision regarding which manufacturer's ITVM to deploy in its instant ticket
distribution system.

         On occasion, the Company participates in cooperative supply
arrangements with other lottery suppliers. These arrangements allow lotteries to
reduce their operating costs and provide a more efficient means for contracting
products and services. The Company's ITVMs are deployed in Pennsylvania and West
Virginia pursuant to cooperative supply arrangements between the Company and
International Game Technologies, which is the primary contractor for the
Pennsylvania and West Virginia Lotteries. ITVMs are deployed in Georgia pursuant
to a cooperative supply arrangement with Scientific Games, Inc. and in
California and New Jersey pursuant to maintenance or purchase agreements between
the Company and GTECH Corporation, which is the on-line supplier to both
Lotteries. 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 Pennsylvania, West Virginia,
California and New Jersey.

         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 and advertises in trade
publications to increase its presence in the telecommunications industry.

         The Company is expanding its marketing presence with the retail grocers
associations, convenience store operators associations, retail stores at both
the corporate and store levels, and

                                       6
<PAGE>

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. To further increase the likelihood of receiving
PCDM orders from sellers of prepaid telephone calling cards, the Company is
offering additional and more flexible financing alternatives; however, almost
all the PCDMs in the field today have been sold rather than leased.

CONTRACTS

         ITVMs

         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, a committee of key lottery staff members
evaluates 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.
Additionally, the point system or the weighting 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 42.2%, 42.9% and 36.0% in 2000, 2001 and 2002, 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 itself. Similar arrangements are available for 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

                                       7
<PAGE>

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 increases 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.

         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 the 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.

         Percentage Lease Agreements provide that the lottery will pay a
percentage of sales for tickets sold through our ITVMS. This amount will vary
depending upon the location of the machine, the number of games available and
the general trends in instant lottery sales.

         All types of 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. To date, the Company has not had to pay any liquidated damages or
had any contract terminated by any lottery.

         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 maintains 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 between
one and five years. The option extensions generally are under the same terms and
conditions as the original contract. 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. To date, no lottery has terminated its contract with the
Company.

         Twenty-seven states and the District of Columbia currently utilize
ITVMs in some manner as part of their instant ticket distribution system. As of
December 31, 2002, Company ITVMs were deployed in all of these states and the
District of Columbia as well as in 14 international jurisdictions. The Company
currently has 11,484 ITVMs under lease with 18 states and the District of
Columbia. These leases expire on various dates through 2005. In certain

                                       8
<PAGE>


cases, the Company's contracts are with third parties who are the primary
contractors to the lottery. See "Marketing and Sales - ITVMs" above.


         Significant portions of the Company's annual revenues are derived from
a limited number of contracts, which vary in size and by customer from year to
year. During 2002, the Company's contract with the Illinois Lottery for the sale
of ITVMs accounted for 21% of the Company's revenues, a sales and lease
contract with the New York Lottery accounted for 18% of the Company's revenues
and a contract with the California Lottery accounted for 17% of the Company
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.

         Most PCDMs to date have been acquired through purchase orders rather
than contracts and are sold rather than leased. Like contracts with the
lotteries, the purchase orders may contain stringent installation, performance
and service requirements. As of December 31, 2002, the Company had sold 935
PCDMs.

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 primary vendor and
secondary suppliers for most of its components and typically has been able to
obtain adequate supplies of required components on a timely basis. However,
certain important components, such as components of the Company's ITVM burster,
PTVM dispensing mechanism and PCDM dispensing mechanism currently are purchased
from a single source. 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 a 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 production which could adversely 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.

                                       9
<PAGE>

         The Company's manufacturing facility has the capacity to produce
approximately 300 machines per week.

RESEARCH AND PRODUCT DEVELOPMENT

         The Company continually seeks to enhance its existing product lines and
to develop new products and has developed many of the technological advancements
used in the ITVM industry. The Company was the first to obtain UL(R) listing
and FCC approval. The Company also 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 several engineers and technicians for
research and development. To reduce costs, the Company subcontracts the majority
of its research and development projects to independent contractors. 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's ITVMs may be purchased with optional modem communication
software 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 that enables a modem equipped ITVM to communicate to the host system
automatically if the ITVM malfunctions, thus greatly enhancing the Company's
ability to provide prompt service, or 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 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 2000, the Company introduced its modular Expandable Dispensing
System (EDS). These ITVMs have the unique ability to increase the number of
dispensing units in an existing machine. The EDS series is field expandable up
to 24 games and incorporates all the same features and benefits as previous
models. The expansion is accomplished on-site and in a manner of minutes and
gives the lotteries the ability to add one or more dispensing units to the
machine, without affecting the overall operation or appearance. These ITVMs are
the most modern and technologically advanced ITVMs in the industry.

                                       10
<PAGE>

         Research and development expenditures were $640,151, $347,596 and
$529,585 for 2000, 2001 and 2002, respectively.

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 maintains a
toll-free telephone line for service calls. If the service dispatcher cannot
resolve the problem over the telephone, he or she will immediately dispatch 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 the mean time for all repairs is less than 15 minutes
after the service technician arrives at the machine's location.

         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.

PATENTS, TRADEMARKS AND COPYRIGHTS

         The Company currently has twenty-three U.S. and foreign patents and
thirty pending patent applications relating to its ITVMs and lottery related
technology and has filed a disclosure document with the United States Patent and
Trademark Office ("PTO").

         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 basic burster technology, which is the key
component of many of the Company's ITVMs. The patent expires December 31, 2007.
Improvements to the burster technology owned by the Company are the subject of
U.S. Patent No. 5,836,498, which expires April 10, 2016. That version of the
improved burster provides for an increased range of operation for reliable and
effective separation of the adjacent tickets along the lines of weakness.
Additional patent applications are pending on these and other improvements to
the burster technology.

         The Company has developed a new system designed specifically for retail
vending of lottery tickets and other items at the 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 owns U.S. Patent Nos. 5,943,241; 6,038,492; 6,351,688 and 6,356,794; and
has corresponding foreign patent properties on this technology.

         The Company owns U.S. Patent No. 5,330,185 for the "Method and
Apparatus for Random Play of Lottery Games," which expires March 30, 2013; U.S.
Patent No. 5,472,247 for a "Multi-Point High Security Locking Mechanism for
Lottery Machines," which expires July 18, 2014; and U.S. Patent No. 5,772,510,
which expires October 26, 2015 on a system and associated method for completing
lottery tickets prior to being dispensed from a lottery ticket terminal.

                                       11
<PAGE>

         The Company also owns six design patents including U.S. Design Patent
No. 376,621 for the Company's double-game countertop ITVM, which expires
December 17, 2010 and U.S. Design Patent No. 369,622 directed to a ticket
dispensing machine and expires May 7, 2010. Additionally, U.S. Design Patent No.
428,060 is owned by the Company on a front panel for a ticket dispensing
machine. The Company also owns U.S. Design Patent Nos. 448,957; 448,956; and
441,227, each entitled "Countertop Lottery Ticket Dispenser." Each of these
design patents is directed to various configurations for countertop lottery
ticket dispensers. The Company believes that each of these design patents is
important but not essential to the Company's business.

         The Company has an Information Disclosure Document on file with the PTO
for the purpose of identifying technology relating to its "Software Release
Control and Data Security for ITVMs." The technology allows secure remote
transmission 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 Company is the exclusive licensee of the dispensing technology used
in PTVMs and PCDMs pursuant to an agreement with Algonquin Industries. Algonquin
Industries has been granted ten U.S. patents and has corresponding foreign
patents/applications for the licensed technology. 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 also has a number of pending patent applications that are
directed to various features of countertop ticket dispensers, self-serve lottery
ticket vending machines, lottery ticket separation mechanisms and lottery games.
The variety of technologies encompassed by these pending applications includes
lottery ticket dispensers in which a single rotary separator serves multiple
ticket channels and the separator mechanism itself. Additionally, specific
configurations of countertop ticket dispensers, techniques for administering a
lottery game and adapting known games to a lottery environment are also included
in these pending applications.

         The Company has obtained or filed for federal registration in the
United States of the following trademarks: INTERLOTT, CHECKWRITER, MVP MODULAR
VENDING PLATFORM and INSTANT SUCCESS. The Company does not deem the trademarks
to be critical to the future of its business.

         The Company requires all of its employees and subcontractors to execute
confidentiality and proprietary rights agreements, which prohibit disclosure of
the trade secrets of the Company and provides that all inventions or discoveries
during the term of their employment or contract for service are assigned to the
Company.

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,

                                       12
<PAGE>

ease of installation and use, marketing and distribution capabilities, product
delivery time, and service and support. The Company is aware of three
manufacturers of ITVMs and four manufacturers of PCDMs in the United States, and
competition among these manufacturers is intense. Of the three ITVM competitors,
the Company has the largest share of the ITVM market in the United States. The
Company is not aware of any published data regarding market shares in the PCDM
industry, but the Company does not believe that it has the largest market share
in the PCDM industry.

         Additional domestic and international manufacturers, some of which have
substantially greater resources and experience than the Company, may elect to
enter the ITVM and PCDM markets. The instant ticket market also faces
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.

GOVERNMENT REGULATION

         ITVMs

         Lotteries are not permitted in the various states and jurisdictions of
the United States unless expressly authorized by legislation. Similarly, the
commencement of ITVM sales and leasing in a jurisdiction requires authorizing
legislation and implementing regulations.

         Currently, 38 states and the District of Columbia have enacted
legislation to allow for the operation of a lottery, and 27 of these
jurisdictions currently 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 price 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. Although the Company currently
believes that it is unlikely that states which have enacted legislation that
expressly authorizes the use of ITVMs will adopt legislation in the foreseeable
future that prohibits the use of ITVMs, there can be no assurance that this will
not occur.

                                       13
<PAGE>

         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 regulations generally require detailed continuing
disclosure. If the lottery deems a person unsuitable, the lottery may require
the termination of the person's relationship with the Company. The failure of a
person 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. The
Company has never been disqualified from a lottery contract as a result of a
failure to obtain any such approvals.

         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 the Act, the Company has
registered voluntarily 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 retains 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 relating to disclosure of its activities and those of its advisors.

         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
international 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.

         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 as of December 31, 2002 was
approximately $6,818,795, which was equal to the total base lease payments or
sales value for ITVMs that were committed for production but had not been
shipped to various lotteries as of December 31, 2002. At December 31, 2001, the
comparable backlog was approximately $4,881,900. It is anticipated that
substantially all of the Company's backlog at December 31, 2002 will be shipped
on or before December 31, 2003.

         The Company has various lease or sales agreements that permit the
lotteries, at their sole option, to lease or purchase additional ITVMs. However,
the Company does not include these

                                       14
<PAGE>

additional ITVMs in backlog 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, 2002, the Company had 231 full-time employees, of which 81
were manufacturing employees, 9 were engineering employees, 100 were service
employees, 28 were clerical and administrative employees, 7 were sales employees
and 6 were executives or senior managers. Two of the executives and senior
managers were devoted to sales and four were devoted to management and
administration. 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, sales, distribution and executive offices
are located in approximately 52,500 square feet of leased space in Mason, Ohio.
The facility is comprised of 15,000 square feet of office space and 37,500
square feet of manufacturing and storage space. The Company believes that this
facility is suitable for and adequate to support its operations for the
foreseeable future. The lease for this facility expires on March 31, 2005.

ITEM 3.  LEGAL PROCEEDINGS


         On November 1, 2002, the Company filed a Complaint against Pollard
Banknote Limited (and related parties) for patent infringement by Pollard in
connection with its marketing of Instant Ticket Vending Machines that are
alleged to infringe Interlott's patented burster technology. Interlott
Technologies, Inc. v. Pollard Banknote Limited, et al., United States District
Court for the Northern District of Ohio. An Answer and Counterclaim was filed by
Pollard on November 25, 2002, in which Pollard denied liability for infringement
and asserted that Interlott's burster patent (No. 4,982,337) is invalid or
unenforceable. Document production is in its early stages and no depositions
have yet been taken. It is not possible to predict a likely outcome at this
time.


         The Company is involved from time to time in litigation in the ordinary
course of its business. The Company does not believe that, other than described
above, there is any currently pending or threatened litigation against the
Company that, individually or in the aggregate, is likely to have a material
adverse effect on its business, financial condition or results of operations.

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, 2002.

                                       15
<PAGE>


                                     PART II

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

         The Company's Common Stock is traded on the American Stock Exchange
under the symbol "ILI." The table below shows the high and low closing sale
prices per share for the Common Stock as reported by the American Stock Exchange
for the periods indicated.

<TABLE>
<CAPTION>
                                                               High        Low
                                                               ----        ---
<S>                                                          <C>         <C>
2001:
         First Quarter                                       $ 6.38      $ 3.82
         Second Quarter                                        5.24        4.00
         Third Quarter                                         6.40        4.50
         Fourth Quarter                                        4.90        4.02

2002:
         First Quarter                                       $ 5.75      $ 4.45
         Second Quarter                                        6.95        5.40
         Third Quarter                                         7.25        5.20
         Fourth Quarter                                        6.10        5.15
</TABLE>

         At March 4, 2003 there were approximately 50 stockholders of record and
an unknown number of beneficial owners holding stock in nominee or "street"
name. The Company has paid no cash dividends on its Common Stock and currently
intends to retain all future earnings for use in the development of its
business.

                                       16

<PAGE>


ITEM 6.           SELECTED FINANCIAL DATA

         The following table presents selected financial data derived from the
Company's audited financial statements for each year in the five-year period
ended December 31, 2002 and should be read in conjunction with the Company's
Financial Statements and with Management's Discussion and Analysis of Financial
Condition and Results of Operations set forth below.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                             Year Ended December 31,
---------------------------------------------------------------------------------------------------------
                                        2002           2001            2000          1999         1998
---------------------------------------------------------------------------------------------------------
                                                      (in thousands, except per share data)
---------------------------------------------------------------------------------------------------------
<S>                                   <C>            <C>             <C>           <C>          <C>
Revenues
  Machine sales                       $ 27,209       $ 19,359        $ 21,959      $  3,312     $  8,230
  Machine leases                        18,698         18,337          17,966        16,902       14,165
  Other                                  6,097          5,021           2,664         2,120        2,079
Net revenues                            52,003         42,716          42,589        22,334       24,474
Net income                               3,091          1,949           3,610         2,070        1,622
Net income per share(1)                   0.48          0.30             0.56          0.32         0.25
Depreciation and amortization            7,247          7,315           6,622         5,548        4,585

Leased ITVMs, less
   accumulated depreciation             13,277         17,883          21,573        21,549       17,106
Total assets                            51,722         54,917          40,004        36,204       28,774
Total debt                              21,335         29,743          16,000        16,292       11,645
--------------------------------------------------------------------------------------------------------
Redeemable preferred stock                  --             --              --      $  1,335     $  1,335
--------------------------------------------------------------------------------------------------------
</TABLE>

(1)Reflects the weighted average number of shares outstanding for the respective
  periods, taking into account a 2-for-1 split of the Company's Common Stock
  effected in December 2000.

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

OVERVIEW


         The Company's revenue base consists of revenues from (1) operating
leases for instant ticket vending machines ("ITVMs") and phone card dispensing
machines ("PCDMs"), (2) sales of ITVMs which are accounted for as sales type
leases in the same manner as a direct sale but have the on-going cash flow
characteristics of operating leases, (3) sales of ITVMs and PCDMs, and (4) to a
lesser extent, sales of parts for ITVMs and PCDMs and service agreements. Leases
provide the Company with a consistent revenue stream, opportunities to generate
income on financing, and the potential to deploy a greater number of ITVMs
within a lottery's budget due to the lower initial cash outlay required by the
lottery. Leasing ITVMs also gives a lottery the flexibility to enhance its ITVMs
in the future with new technology from the Company. On the other hand, leasing
ITVMs requires the Company to invest capital or otherwise finance the
manufacture of ITVMs, whereas sales of ITVMs result in the receipt of payment in
full upon


                                       17

<PAGE>

delivery of the ITVMs. When the Company sells ITVMs, the Company generally is
able to manufacture and deliver the ITVMs and receive full payment for them
before it must pay for the materials used to manufacture the ITVMs.
Nevertheless, the Company believes that the advantages of leasing ITVMs, as
described above, justify the initial capital investment or financing costs
required to manufacture ITVMs for lease.

         Some of the benefits of leasing described above apply to PCDMs; however
due to the typically smaller size of a PCDM customer order, a great majority of
the PCDMs deployed to date have been sold rather than leased.

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

         On June 1, 2001 the Company completed the acquisition of the lottery
assets of On-Point Technology Systems, Inc., including patents, technology,
accounts receivable of $1.0 million, $3.4 million of inventory, service
contracts and lease contracts with four state and two international lotteries.
On-Point's lottery related revenues during 2000 were $10.2 million. The purchase
price included approximately $13 million paid at the closing; deferred payments
of $9 million payable, subject to adjustment, over five years; and an earn-out
of up to $6 million based on certain future revenues.

2002 AS COMPARED TO 2001

         Total revenues increased by 22% or $9,287,350 from $42,715,686 in 2001
to $52,003,036 in 2002, primarily due to a $7,850,185 increase in machine sales
to several state lotteries. Other revenues increased $1,076,015 from $5,020,599
in 2001 to $6,096,614 in 2002 primarily as a result of the full year effect of
the addition of maintenance contracts for the New York and Virginia lotteries
which were acquired from On-Point on June 1, 2001. Revenues from leases
increased by 2%, from $18,336,526 in 2001 to $18,697,676 in 2002. The total
number of ITVMs and PCDMs under lease decreased in 2002. Lease revenues were 43%
and 36% of total revenues for 2001 and 2002, respectively. Revenues from sales
of ITVMs and PCDMs were 45% and 52% of total revenues in 2001 and 2002,
respectively.


         Cost of revenues for machine sales increased 26% from $14,251,360 in
2001 to $17,914,274 in 2002. This increase was due to an increase in the number
of machines sold in 2002. Excluding depreciation, cost of revenues for leased
ITVMs and PCDMs increased 23% from $10,748,221 in 2001 to $13,105,267 in 2002.
The dollar increase in cost of lease revenues was the result of a full year of
higher personnel and subcontractor costs related to a large number of machines
acquired from On-Point on June 1, 2001 which amounted to $1,504,551, to
increased


                                       18

<PAGE>


travel cost and temporary labor of $133,000 related to deployment costs for new
leased machines deployed during 2002 and to removal costs for machines being
returned. Additionally, manufacturing salaries and indirect labor increased by
$359,411. As a result of these factors, gross margin as a percent of revenues
increased 2% from 27% in 2001 to 29% in 2002.


         Depreciation of ITVMs and PCDMs decreased 5% from $6,394,051 in 2001 to
$6,079,605 in 2002. The decrease was due primarily to the full twelve months'
effect in 2002 of the removal of equipment from the field in July 2001 due to
the expiration of a lease contract.

         On July 20, 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. The Company adopted SFAS No. 142 on
January 1, 2002, as required. Any effect will be the difference in no longer
amortizing goodwill and any impairment that is determined. At this time, the
Company believes that no impairment exists. The Company considers cash flow
losses as an indicator of potential impairment. When undiscounted cash flows are
less than the carrying value, an impairment loss will be recognized.

         Goodwill amortization from June 2001, when the assets of On-Point were
acquired, through December 31, 2001, was approximately $166,600. Amortization
for 2002 would have been $244,081.


         Selling, general and administrative expenses increased 15% from
$5,915,233 in 2001 to $6,784,042 in 2002. The increase resulted primarily from
an increase in legal and professional fees of $420,884 and higher administrative
salary and wage expenses of $162,208. As a percentage of revenues, selling,
general and administrative expenses decreased from 14% in 2001 to 13% in 2002.


         Research and development costs increased by 52% from $347,596 in 2001
to $529,585 in 2002 as the Company completed the development phase of its
GameGuard countertop units and improved dispensing mechanisms. The Company
generally contracts out its research and development efforts. This allows the
Company to focus its expenditures on the technical expertise necessary to
accomplish a specific project.

         Operating income increased by 54% from $4,892,644 in 2001 to $7,510,263
in 2002. This increase resulted primarily from the higher sales volume and
higher margins for machines sold. As a percentage of revenues, operating income
increased from 11% in 2001 to 14% in 2002.

         Interest expense increased by 4% from $2,049,605 in 2001 to $2,138,409
in 2002. The increase reflected the full year cost of additional borrowings to
finance the acquisition of the lottery assets of On-Point on June 1, 2001.

                                       19

<PAGE>
         Pre-tax income increased 75% from $2,884,335 in 2001 to $5,035,979 in
2002.

         The effective income tax rate increased from 32.4% in 2001 to 38.6% in
2002. This difference was due primarily to a change in the tax accounting method
for patents which reduced income tax expense by $199,654 in 2001.

         As a result of the above factors, the Company's net income increased by
59% from $1,949,306 in 2001 to $3,090,645 in 2002.

2001 AS COMPARED TO 2000

         Total revenues increased by $126,596, from $42,589,090 in 2000 to
$42,715,686 in 2001, due to a $2,356,585 increase in other revenues and a
$370,081 increase in lease revenues offset by a $2,600,070 decrease in machine
sales. Other revenues increased by 88% from $2,664,014 in 2000 to $5,020,599 in
2001, primarily as a result of the addition of maintenance contracts for the New
York and Virginia lotteries which were acquired from On-Point. Revenues from
leases increased by 2%, from $17,966,445 in 2000 to $18,336,526 in 2001,
primarily due to the addition of a lease of machines to the Illinois lottery
which was also acquired as part of the purchase of On-Point. This increase was
partially offset by the expiration of a lease contract with the Florida lottery
which expired on July 1, 2001. The total number of ITVMs and PCDMs under lease
decreased in 2001. Lease revenues were 42% and 43% of total revenues for 2000
and 2001, respectively. Machine sales in 2000 included a record purchase of
ITVMs for one state lottery that was produced and shipped over the first three
quarters of the year. In 2001, a large sale was completed during the first two
quarters while smaller orders were produced during the third and fourth quarter
resulting in lower total sales for 2001. Revenues from sales of ITVMs and PCDMs
were 52% and 45% of total revenues in 2000 and 2001, respectively.


         Cost of revenues for machine sales and other decreased 10% from
$15,850,677 in 2000 to $14,251,360 in 2001. This decrease reflected a 9%
decrease in the number of machines sold in 2001 and slightly lower machine
costs. Excluding depreciation, cost of revenues for leased ITVMs and PCDMs
increased 58% from $6,798,596 in 2000 to $10,748,221 in 2001. The dollar
increase in cost of lease revenues was the result of amortization of leases
acquired from On-Point of $499,450, higher personnel and subcontractor costs
related to a large number of machines acquired from On-Point which amounted to
$2,490,928 and the cost of new leased machines deployed during 2001 in the
amount of $93,744.


         Depreciation of ITVMs and PCDMs increased less than 1% from $6,366,899
in 2000 to $6,394,051 in 2001. The increase was due to newer units being
deployed that have more dispensing capacity and cost more.

         On July 20, 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be

                                       20

<PAGE>


Disposed Of. At this time, the Company believes that no impairment exists. The
Company considers cash flow losses as an indicator of potential impairment. When
undiscounted cash flows are less than the carrying value, an impairment loss
will be recognized.

         The Company adopted SFAS No. 142 on January 1, 2002, as required. Any
effect will be the difference in no longer amortizing goodwill and any
impairment that is determined. Goodwill amortization from June 2001, when the
assets of On-Point were acquired, through December 31, 2001, was approximately
$166,600.


         Selling, general and administrative expenses increased 9% from
$5,421,062 in 2000 to $5,915,233 in 2001. The increase resulted primarily from
higher salary and wage expenses of $339,267 and an increase in legal and
professional fees of $144,332. As a percentage of revenues, selling, general and
administrative expenses increased from 13% in 2000 to 14% in 2001.


         Research and development costs decreased by 46% from $640,150 in 2000
to $347,596 in 2001 as the Company completed the development phase of its
Expandable Dispensing System (EDS) in 2000 for deployment in 2001. The Company
generally contracts out its research and development efforts. This allows the
Company to focus its expenditures on the technical expertise necessary to
accomplish a specific project.

         Operating income decreased by 34% from $7,425,152 in 2000 to $4,892,644
in 2001. This decrease resulted primarily from the higher cost of revenues for
leased machines discussed above and from the amortization of goodwill and leases
relating to the On-Point acquisition. As a percentage of revenues, operating
income decreased from 17% in 2000 to 12% in 2001.

         Interest expense increased by 30% from $1,580,969 in 2000 to $2,049,605
in 2001. The increase reflected the cost of additional borrowings to finance the
acquisition of the lottery assets of On-Point on June 1, 2001.

         Pre-tax income decreased 50% from $5,786,798 in 2000 to $2,884,335 in
2001.

         The effective income tax rate decreased from 37.6% in 2000 to 32.4% in
2001. This decrease was due primarily to a change in the tax accounting method
for patents which reduced income tax expense by $199,654 in 2001.

         As a result of the above factors, the Company's net income decreased by
46% from $3,610,199 in 2000 to $1,949,306 in 2001.

LIQUIDITY AND CAPITAL RESOURCES

         Net cash provided by operating activities increased 56% from $8,842,961
in 2001 to $13,751,187 in 2002. This increase in net cash was partially due to a
decrease in inventory as a result of returned ITVMs being refurbished and sold,
as well as an increase in the principal portion of sale-type leases received.
Also, deferred taxes increased as the result of additional sales-type leases in
2002. Net cash used in investing activities decreased 75% from $21,663,552 in
2001 to $5,491,632 in 2002. The 2001 investing activity included $13,486,146 for
the acquisition of On-Point Technologies. Financing activities in 2002 used net
cash of $8,377,395 as

                                       21

<PAGE>

compared to $13,311,278 of net cash provided by financing activities in 2001.
This was due principally to the payoff of the $5 million subordinated note and
additional payments made from operating cash flow to reduce the credit line.

         The Company's decision to lease a significant portion of its ITVMs
generally offers the Company better gross margins than direct sales agreements.
However, leasing inherently requires more capital and a longer-term payout than
sales. As of December 31, 2002, the Company had a total of 11,484 ITVMs and
PCDMs under operating and sales type leases. The Company's current backlog of
$6.8 million includes machines to be sold to the New York lottery of $3.4
million and machines to be sold to the California lottery in the amount of $2.2
million. There are no leased machines in the backlog at this time.

         Inventories decreased by $2.2 million from $10.6 million in 2001 to
$8.4 million in 2002 primarily due to the sale of $1.7 million of inventory
returned in 2001 from expired leases that was refurbished and resold in 2002.

         Goodwill in the amount of $4,572,655 and acquired leases in the amount
of $2,925,355 at December 31, 2002 resulted from the On-Point acquisition.

         The Company's revolving credit facility is classified as a current
liability due to the revolver clause of the agreement. As a result, current
liabilities exceeded current assets as of December 31, 2001 and 2002 by
$7,322,359 and $6,253,474, respectively. Prior to the closing of the acquisition
of the lottery assets of On-Point, to finance the cash payment paid at closing,
the Company increased its existing credit facility with its bank from $25
million to $30 million, and also completed a mezzanine financing of junior debt
in the principal amount of $5 million with the bank. The credit facility is a
three year credit line, which expires on May 31, 2004, secured by a lien on all
of the assets of the Company. The interest rate on the credit facility is based
on the prime rate or LIBOR, adjusted up or down depending on the Company's
funded debt to EBITDA ratio. The current rate is LIBOR plus 2.00% (3.4% at March
1, 2003). The terms of the credit facility require the Company to maintain a
cash balance at all times equal to .875% of the total amount of the facility.
Additionally, the Company must comply with certain loan covenants which include,
among other things, a minimum ratio of funded debt to EBITDA and a minimum
tangible net worth requirement. The Company was in full compliance with the
requirements of the covenants as of December 31, 2002.

         The mezzanine financing consisted of a $5 million term note due June
30, 2003, which was subordinate to the credit facility. This note bore interest
at a fixed rate of 9% per annum and required the Company to pay a success fee
equal to 1% of the unpaid principal balance of the note outstanding on the last
day of the fiscal quarter for each of the four (4) fiscal quarters ending on
September 30, 2001, December 31, 2001, March 31, 2002, and June 30, 2002; and
equal to 1.5% of the unpaid principal balance of the note outstanding on the
last day of the fiscal quarter for each of the four (4) fiscal quarters ending
on September 30, 2002, December 31, 2002, March 31, 2003 and June 30, 2003. The
note could be prepaid whenever availability on the credit facility exceeded $2
million and the Company was in compliance with all loan covenants. These
requirements were met, and the note was paid off in its entirety on August 13,
2002.

                                       22

<PAGE>

         At March 5, 2003, the Company had $9,803,834 available under its credit
facility. The Company believes that the amount available on its credit facility,
together with cash flows from operations, will be sufficient to meet its
currently foreseeable short and long-term needs for liquidity.

         The Company entered into an interest rate swap agreement with a total
notional principal amount of $5 million at July 3, 2001 which expires on May 31,
2004 and an interest rate swap agreement with a total notional principal amount
of $10 million at November 7, 2002 which also expires on May 31, 2004. The
objective of these agreements is to convert a portion of the Company's floating
rate revolving credit facility to a fixed rate. The estimated fair value of the
interest rate swap agreements was approximately ($453,484) at December 31, 2002.
The estimated fair value is based upon appropriate market information and
projected interest rate changes obtained from a reputable institution. The
estimated amount of deferred loss on the hedge to be reclassified to earnings in
2003 is $320,000.

         At December 31, 2000, the Company was indebted to one stockholder in
the amount of $79,000. Additionally in 2000, four stockholders elected to
convert their shares of redeemable preferred stock to notes payable in the
amount of $1,335,000. The notes held by these five stockholders require, among
other things, that 25% of the net income of the Company for the fiscal year be
paid toward the aggregate principal amount owed on the notes on the first
business day of the fourth month following the fiscal year end. Consequently, on
April 1, 2002, $487,327 was paid on these notes leaving a balance of $24,124 at
December 31, 2002. That amount will be paid in full on April 1, 2003. See Note 6
of Notes to Financial Statements.

         The Company's capital expenditures totaled $8,177,406 and $5,491,632
for 2001 and 2002, respectively. These amounts included $7,979,117 and
$5,481,016 for the manufacture of machines leased during the respective periods.
Other expenditures represented machinery and equipment costs for expanded plant
and office capacity.

         The Company had no material commitments for additional capital
expenditures as of December 31, 2002 other than for the manufacture of ITVMs and
PCDMs for future sale or lease.

         At December 31, 2002, the Company had estimated tax net operating loss
carryforwards of approximately $374,800 which are available to offset future
federal taxable income, if any, through 2009. The use of these carryforwards is
subject to certain annual limitations due to an ownership change in 1992. The
net operating loss carryforward reduced taxable income by $161,559 for a net
federal tax benefit of $54,930 in 2002.

CRITICAL ACCOUNTING POLICIES

         Our accounting policies affecting our financial condition and results
of operation are more fully described in Note (1) to our financial statements.
Certain of the Company's accounting policies require the application of judgment
by management in selecting appropriate assumptions for calculating financial
estimates which inherently contain some degree of uncertainty. Management bases
its estimates on historical experience and various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the reported carrying value of assets and
liabilities and the

                                       23

<PAGE>


reported amounts of revenues and expenses that may not be readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.


         Revenue Recognition


         The Company derives revenues from delivery of products and services in
the form of sales, sales type leases, operating leases, maintenance fees and
extended warranties. All products and services are provided under the terms of a
written contract with a contractually fixed and determinable price. Payment
terms are also defined under the contracts and collectibility is reasonably
assured. Revenues from sales of ITVMs and spare parts are recognized when title
to the product passes to the customer or when the products are delivered to the
customer in accordance with the terms of the contract. Revenues from sales type
leases are recorded in the same manner as direct sales and are recognized when
products are delivered to the customer. Revenues from operating leases,
maintenance services and extended warranties are recognized over time, typically
monthly, during the period of time when the services are provided.


         Goodwill and Other Intangibles

         The Company records all assets and liabilities acquired in purchase
acquisitions, including goodwill and other intangibles, at fair value as
required by SFAS 141. Goodwill and indefinite-lived assets are no longer
amortized but are subject, at a minimum, to annual tests for impairment. Other
intangible assets are amortized over their estimated useful lives using
straight-line methods and are subject to impairment if events or circumstances
indicate a possible inability to realize the carrying amount. The initial
goodwill and other intangibles recorded and subsequent impairment analysis
requires management to make subjective judgments concerning estimates of how the
acquired asset will perform in the future using a discounted cash flow analysis.
Events and factors that may significantly affect the estimates include, among
others, competitive forces, customer behaviors and attrition, changes in revenue
growth trends, cost structures and technology.

         Property and Equipment - Leased Machines

         Property and equipment - leased machines are stated at cost.
Depreciation of property and equipment is calculated on the straight-line method
over the estimated five-year useful life of the machines after a reduction
reflecting the Company's estimate of the machines' residual value of 15%.
Although most lottery contracts have varying terms, the typical term with
extensions is approximately five years. In the event that the contract term is
less than five years, the leased machines are returned to inventory at net book
value which becomes the basis for refurbished or certified new equipment which
can be resold or leased to another lottery. In the event that the contract
extends beyond a five-year term, the machines are fully depreciated to a net
book value of zero.

         Allowance for Inventory Obsolescence

         The allowance for inventory obsolescence is established to provide for
probable losses inherent in maintaining an inventory of various generations of
technologically advanced machines and parts. Due to our very successful
rehabilitated and recertified new equipment

                                       24

<PAGE>

programs which offer extremely competitive pricing alternatives and in light of
the fact that there is a significant base of installed machines that need
service parts, it is uncommon that an inventory item reaches a stage of total
obsolescence. In the event that it becomes readily apparent that a machine or
certain machine components have little or no chance of being sold to any
existing or potential customers, an impairment reduction is recorded in the
allowance.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         Some of the statements in this report are forward-looking statements.
They include statements regarding our current beliefs, plans, expectations and
assumptions about matters such as our expected financial position and operating
results, our business strategy and our financing plans. These statements can
sometimes be identified by our use of forward-looking words such as
"anticipate," "believe," "estimate," "expect," "intend," "plan," "seek,"
"should" and similar expressions. Our forward-looking statements are subject to
numerous risks, uncertainties and assumptions, many of which are beyond our
control. These risks, uncertainties and assumptions include the risk factors
discussed below. We cannot guarantee that our forward-looking statements will
turn out to be correct or that our beliefs, plans, expectations and assumptions
will not change. Our forward-looking statements may be incorrect, and actual
results could be very different from and worse than our expectations as
expressed in those statements.

         Any forward-looking statements in this report are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Act of 1995.

THE FOLLOWING RISK FACTORS APPLY TO INTERLOTT AND ITS BUSINESS:

         WE MAY EXPERIENCE FLUCTUATIONS IN OUR FINANCIAL RESULTS AND, AS A
RESULT, OUR STOCK PRICE.

         In the past, we have experienced significant fluctuations in our
financial results. Our revenues, capital expenditures and operating results can
vary significantly due to:

    -   relatively long sales cycles;

    -   the unpredictable timing and amount of contracts awarded by state
        lotteries and telephone companies;

    -   the extended time between the award of a contract and the receipt of
        revenues from the sale or lease of ITVMs and PCDMs;

    -   changes in customer budgets; and

    -   working capital required to manufacture ITVMs and PCDMs pursuant to new
        orders.

         These factors may make it difficult to forecast revenues and
expenditures over extended periods. Consequently, our operating results for any
period could be below the expectations of securities analysts and investors.
This in turn could lead to sudden and sometimes dramatic declines in the market
price of our stock.

                                       25

<PAGE>

         OUR GROWTH WILL DEPEND UPON CONTINUED MARKET ACCEPTANCE OF ITVMs AND
PCDMs.

         Our ability to generate additional revenues and earnings will depend
upon the continuation of existing leases of ITVMs and PCDMs, the distribution of
ITVMs and PCDMs in additional states and international jurisdictions, the
approval of lotteries in remaining states and international jurisdictions and
increased future orders of ITVMs and PCDMs. As of December 31, 2002, 27 states
and the District of Columbia used ITVMs as part of their instant ticket
distribution system. We had leased or sold ITVMS in all of those states, the
District of Columbia and in 14 international jurisdictions. We have marketed
PCDMs since 1995 and, as of December 31, 2002, we had sold or leased 935 PCDMs.
However, the popularity of instant lottery games, the use of prepaid telephone
calling cards and the related demand for our products may not continue. Although
the total dollar amount of instant ticket sales continues to increase, the rate
of increase has declined.

         SIGNIFICANT PORTIONS OF OUR ANNUAL REVENUE FREQUENTLY ARE DERIVED FROM
A LIMITED NUMBER OF CONTRACTS, WHICH VARY IN SIZE AND BY CUSTOMER FROM YEAR TO
YEAR.

         We have traditionally derived a significant portion of our annual
revenues from a limited number of state lottery authorities or their
representatives for the lease, sale or service of ITVMs. In particular, during
2002, contracts with the Illinois, New York and California lotteries accounted
for 21%, 18% and 17% of our total revenues, respectively. This can cause our
revenues and earnings to fluctuate between quarters based on the timing of
orders and realization of revenues from these orders. Further, none of our large
customers has any obligation to lease or purchase additional machines from us. A
loss of any of these large contracts could have a material adverse effect on our
business, financial condition and results of operations.

         WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR PROPRIETARY RIGHTS OR
AVOIDING CLAIMS THAT WE INFRINGE THE PROPRIETARY RIGHTS OF OTHERS.

         We principally rely upon patent, copyright, trademark and trade secret
laws, license agreements and employee nondisclosure agreements to protect our
proprietary rights and technology. These laws and contractual provisions provide
only limited protection. Our success depends largely on our burster technology
that is protected by a patent that expires on December 31, 2007. Additionally,
we have twenty-two other patents and thirty pending patent applications with the
United States Patent and Trademark Office and foreign patent offices. We also
have an exclusive license agreement with Algonquin Industries, Inc. for use of
their patented pull-tab instant ticket dispensing mechanism in our PTVM and
PCDM. We cannot be certain that we and Algonquin have taken adequate steps to
prevent misappropriation of the technology that we use or that competitors will
not independently develop technologies that are substantially equivalent or
superior to our technology. Moreover, we could incur substantial costs and
diversion of management resources in the defense of any claims relating to the
proprietary rights of others, which could have a material adverse effect on our
business, financial condition and results of operations.

                                       26

<PAGE>

         WE MAY NOT BE ABLE TO ADAPT TO CHANGES IN TECHNOLOGY, PRODUCTS AND
INDUSTRY STANDARDS.

         The instant ticket market, the ITVM market, the prepaid telephone
calling card market and the PCDM market are characterized by rapidly changing
technology and evolving industry practices. Competitors may introduce other
types of lottery, gaming and prepaid telephone calling card products. To be
successful, we must:

    -   use leading technologies effectively;

    -   continue developing our technical expertise;

    -   enhance our existing products and services; and

    -   develop new products and services.

         If we fail to do any of these things, our customers may choose to
purchase products and services from our competitors. Our inability to anticipate
changes in technology and industry practices and to develop and introduce new
products and services in a timely manner would likely result in a material
adverse effect on our business, financial condition and results of operation.

         THE STATE LOTTERIES CAN CANCEL THEIR CONTRACTS WITH US FOR ANY REASON
AND CAN ASSESS SIGNIFICANT DAMAGES AGAINST US IF WE DO NOT SATISFACTORILY
PERFORM THE CONTRACTS.

         Our 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. We may not be able to re-lease or sell any ITVMs that are
returned to us by a lottery following the cancellation or expiration of a lease.
These lottery contracts also impose demanding installation, performance and
maintenance requirements. Our failure to perform the contract requirements could
result in significant liquidated damages or contract termination. Our lottery
contracts typically require us to indemnify the lottery, its officers and
retailers for any liabilities arising from the operation of the ITVMs or any
services that we provide. These provisions present an ongoing risk of
significant damage assessments or contract terminations, which could have a
material adverse effect on our business, financial condition and results of
operation.

         A SINGLE STOCKHOLDER CONTROLS A MAJORITY OF OUR STOCK AND CAN EXERT
SIGNIFICANT INFLUENCE OVER OUR CORPORATE MATTERS.

         As of March 15, 2003, L. Roger Wells, Jr. beneficially owned 54.8% of
the Company's outstanding common stock. As a result, Mr. Wells can control the
election of directors and the outcome of certain corporate actions requiring
stockholder approval.

         OUR ITVM LEASE CONTRACTS MAY RESULT IN LOSSES.

         Our standard lease agreements provide for fixed lease payments during
the term of the agreement and some permit the lottery to order additional ITVMs
at any time during the lease term. If one of these lotteries were to order a
large number of ITVMs near the end of the lease term, we would incur significant
manufacturing costs but might receive lease payments for only a relatively short
period of time through the remainder of the lease term. Additionally, we are
unable to pass along to the lottery any increases in manufacturing and service
costs during the

                                       27

<PAGE>

term of a lease agreement. Our standard lease agreements provide 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, we might incur a loss on the manufacture of the ITVMs if we
are unable to re-lease or sell the machines.

         THE ITVM AND PCDM MARKETS ARE VERY COMPETITIVE.

         We may not be able to compete successfully against current or future
competitors, some of whom may have greater resources and experience than us. The
instant ticket market also may face competition from other types of lottery and
gaming products, 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.
If the ability to provide ITVMs and PCDMs internationally becomes a competitive
advantage in the instant ticket lottery and prepaid calling card industries, we
will have to expand our presence internationally or risk a disadvantage relative
to our competitors. Increased competition could cause us to increase our selling
and marketing expenses and research and development costs. We may not be able to
offset the effects of any such increased costs through an increase in the number
of lottery contracts and higher revenue from sales and leases of ITVMs and
PCDMs, and we may not have the resources to compete successfully. These
developments could have a material adverse effect on our business, financial
condition and results of operation.

         BECAUSE WE DEPEND UPON SINGLE OR LIMITED SOURCE SUPPLIERS, WE COULD
TEMPORARILY LOSE OUR SUPPLY OF SOME CRITICAL PARTS OR EXPERIENCE SIGNIFICANT
PRICE INCREASES.

         We currently purchase certain important parts, such as components of
our ITVM burster, PTVM dispensing mechanism and PCDM dispensing mechanism, from
a single source. The purchase of these components from outside suppliers on a
sole source basis subjects us to certain risks, including the continued
availability of suppliers, price increases and potential quality assurance
problems. Because other suppliers exist that can duplicate these components
should we elect or be forced to use a different supplier, we do not believe that
a change in suppliers would result in the termination of a production contract.
However, we could experience a delay of 30 to 60 days in the production of ITVMs
and PCDMs should we elect or be forced to use other suppliers. Any delay of 30
to 60 days could have a material adverse effect on our business, financial
condition and results of operation.

         OUR INDUSTRY IS SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION WHICH
COULD NEGATIVELY AFFECT US.

         State and local governments strictly regulate the operation of
lotteries and the sales and leasing of ITVMs. Further, international
jurisdictions that operate lotteries impose strict regulations which may vary
from those in the United States. Any adverse change in the lottery laws of any
jurisdiction in which we sell and lease ITVMs could impose burdensome
requirements or requirements that we may be unable to satisfy. Our failure to
comply with changing lottery-related laws and regulations could have a material
adverse effect on our business, financial condition and results of operation.

                                       28

<PAGE>


         In addition, state laws provide for background investigations on each
of the lottery's vendors and their affiliates, subcontractors, officers,
directors, employees and principal stockholders. The failure of any of these
parties associated with us to obtain or retain approval in any jurisdiction
could have a material adverse effect on our business, financial condition and
results of operation.


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

         The Company entered into an interest rate swap agreement with a total
notional principal amount of $5 million at July 3, 2001 which expires on May 31,
2004 and an interest rate swap agreement with a total notional principal amount
of $10 million at November 7, 2002 which also expires on May 31, 2004. The
objective of these agreements is to convert a portion of the Company's floating
rate revolving credit facility to a fixed rate. The estimated fair value of the
interest rate swap agreements was approximately ($453,484) at December 31, 2002.
The estimated fair value is based upon appropriate market information and
projected interest rate changes obtained from a reputable institution.


                                       29

<PAGE>

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Interlott Technologies, Inc.:

We have audited the accompanying balance sheets of Interlott Technologies, Inc.
as of December 31, 2002 and 2001, and the related statements of income,
stockholders' equity, and cash flows for the three years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interlott Technologies, Inc. as
of December 31, 2002 and 2001, and the results of its operations and its cash
flows for the three years ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.

We have also audited Schedule II for each of the three years in the period ended
December 31, 2002. In our opinion, this schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information therein.

As discussed in Note (1) to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" on January 1, 2002.

/s/ Grant Thornton LLP

Cincinnati, Ohio
February 17, 2003, except for Note 18 as to which the date is March 17, 2003.

                                       30

<PAGE>


                          INTERLOTT TECHNOLOGIES, INC.

                                  Balance Sheet

                           December 31, 2002 and 2001
<TABLE>
<CAPTION>
                                                                            2002                  2001
                                                                        -------------          -----------
<S>                                                                     <C>                    <C>
ASSETS
Current assets:
    Cash                                                                $     419,492              537,332
    Accounts receivable, less allowance for doubtful accounts
      of $53,332 in 2002 and $203,101 in 2001                               6,646,988            7,125,250
    Investment in sales type leases, current portion                        2,588,005            2,299,706
    Inventories                                                             8,440,471           10,628,290
    Prepaid & refundable taxes                                                562,598              404,220
    Note receivable from stockholder                                                -                    -
    Deferred tax asset                                                        508,600              182,350
    Prepaid expenses                                                          639,307              274,033
==========================================================================================================
             Total current assets                                          19,805,461           21,451,181
==========================================================================================================
Property and equipment:
    Leased machines                                                        35,113,524           33,759,213
    Machinery and equipment                                                   784,219              777,687
    Building and leasehold improvements                                       688,234              689,409
    Furniture and fixtures                                                    182,717              179,182
==========================================================================================================
                                                                           36,768,694           35,405,491
    Less accumulated depreciation and amortization                        (22,963,442)         (16,784,029)
==========================================================================================================
             Net property and equipment                                    13,805,252           18,621,462
==========================================================================================================
Other assets                                                                  238,176              578,386
Goodwill net of accumulated amortization of $166,581 in 2001                4,572,655            4,572,655
Value of leases acquired net of accumulated amortization
    of $1,355,650 in 2002 and $499,450 in 2001                              2,925,355            3,781,555
Investment in sales type leases, less current portion                      10,154,855            5,618,510
Product development rights, net of accumulated amortization of
    $880,000 in 2002 and $806,661 in 2001                                     220,000              293,339
==========================================================================================================
                                                                        $  51,721,754           54,917,088
==========================================================================================================
</TABLE>

See accompanying notes to financial statements.

                                       31

<PAGE>


                          INTERLOTT TECHNOLOGIES, INC.

                            Balance Sheet, Continued

                           December 31, 2002 and 2001
<TABLE>
<CAPTION>
                                                                                   2002                2001
                                                                               ------------         ---------
<S>                                                                            <C>                  <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Notes payable to financial institutions                                    $ 21,310,417         24,255,659
    Notes payable - related parties                                                  24,124            487,327
    Accounts payable                                                              2,663,405          2,249,874
    Accounts payable - related parties                                              380,855            317,505
    Accrued expenses                                                              1,680,134          1,463,175
==============================================================================================================
             Total current liabilities                                           26,058,935         28,773,540
==============================================================================================================
Subordinated term note                                                                    -          5,000,000
Deferred tax liability                                                            2,009,600            568,950
==============================================================================================================
             Total liabilities                                                   28,068,535         34,342,490
==============================================================================================================
Commitments and contingent liabilities
==============================================================================================================
Interest rate swap agreements                                                       453,484            580,174
==============================================================================================================
Notes payable - related parties                                                           -             24,124
==============================================================================================================
Stockholders' equity:
    Common stock, $.01 par value; 20,000,000 shares authorized,
       6,455,826 shares issued and outstanding in 2002
       and 6,441,498 shares issued and outstanding in 2001                           64,558             32,140
    Additional paid-in capital                                                   10,568,907         10,482,853
    Treasury stock                                                                  (63,298)                 -
    Accumulated comprehensive income (loss)                                        (299,299)          (382,915)
    Retained earnings                                                            12,928,867          9,838,222
==============================================================================================================
             Total stockholders' equity                                          23,199,735         19,970,300
                                                                               ------------         ----------
                                                                               $ 51,721,754         54,917,088
==============================================================================================================
</TABLE>

See accompanying notes to financial statements.

                                       32

<PAGE>


                          INTERLOTT TECHNOLOGIES, INC.

                               Statement of Income

                  Years Ended December 31, 2002, 2001 and 2000


<TABLE>
<CAPTION>
                                                             2002                2001               2000
                                                         ------------         ----------         ----------
<S>                                                      <C>                  <C>                <C>
Revenues:
    Machine sales                                        $ 27,208,746         19,358,561         21,958,631
    Machine leases                                         18,697,676         18,336,526         17,966,445
    Other                                                   6,096,614          5,020,599          2,664,014
                                                         ------------         ----------         ----------
                                                           52,003,036         42,715,686         42,589,090
Cost of revenues:
    Machine sales and other                                17,914,274         14,251,360         15,850,677
    Machine leases                                         19,264,872         17,142,272         13,252,049
                                                         ------------         ----------         ----------
                                                           37,179,146         31,393,632         29,102,726
                                                         ------------         ----------         ----------
             Gross margin                                  14,823,890         11,322,054         13,486,364
Operating expenses:
    Selling, general and administrative expenses            6,784,042          5,915,233          5,421,062
    Research and development costs                            529,585            347,596            640,150
    Amortization of goodwill                                        -            166,581                  -
                                                         ------------         ----------         ----------
                                                            7,313,627          6,429,410          6,061,212
                                                         ------------         ----------         ----------
             Operating income                               7,510,263          4,892,644          7,425,152
Other income (expense)
    Interest expense                                       (2,138,409)        (2,049,605)        (1,580,969)
    Other                                                    (335,875)            41,296            (57,385)
                                                         ------------         ----------         ----------
                                                           (2,474,284)        (2,008,309)        (1,638,354)

Income before income taxes                                  5,035,979          2,884,335          5,786,798

Income tax provision                                        1,945,334            935,029          2,176,599
                                                         ------------         ----------         ----------
             Net income                                  $  3,090,645          1,949,306          3,610,199
                                                         ============         ==========         ==========

Basic net income per share                               $       0.48               0.30               0.56
                                                         ============         ==========         ==========
Diluted net income per share                             $       0.46               0.30               0.56
                                                         ============         ===========        ==========
</TABLE>


See accompanying notes to financial statements.

                                       33

<PAGE>


                          INTERLOTT TECHNOLOGIES, INC.

                        Statement of Stockholders' Equity

                  Years ended December 31, 2000, 2001 and 2002


<TABLE>
<CAPTION>
                                                                                                         Additional
                                                                 Comprehensive                Common      Paid-in        Retained
                                                                    Income       Shares       Stock       Capital        Earnings
                                                                 -------------  ---------    --------   ------------    ----------
<S>                                                              <C>            <C>          <C>        <C>             <C>
Balances at December 31, 1999                                      $        -   6,420,000    $ 32,100   $ 10,376,017    $ 4,278,717
Shares issued for exercise of options                                       -       7,000          35         51,062              -
Shares issued in connection with Employee Stock Purchase Plan               -       2,910          14            (14)             -
Stock split                                                                 -           -      32,149        (32,149)             -
Net income                                                                  -           -           -              -      3,610,199
-----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000                                               -   6,429,910      64,298     10,394,916      7,888,916
Cumulative effect of transition adjustment                                  -           -           -              -              -
Shares issued for exercise of options                                       -       1,000          10          4,490              -
Shares issued in connection with Employee Stock Purchase Plan               -      10,588         106         51,173              -
Comprehensive income (loss):
      Net income                                                    1,949,306           -           -              -      1,949,306
      Other comprehensive loss related to swap agreements
        (net of tax of $162,260)                                     (314,975)          -           -              -              -
-----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income                                          1,634,331

Balances at December 31, 2001                                               -   6,441,498      64,414     10,450,579      9,838,222
Cumulative effect of transition adjustment                                  -           -           -              -              -
Shares issued for exercise of options                                       -      10,750         108         58,179              -
Shares issued in connection with Employee Stock Purchase Plan               -      14,078         141         60,149              -
Shares redeemed in connection with Stock Buyback Program                    -     (10,500)       (105)             -              -
Comprehensive income (loss):
      Net income                                                    3,090,645           -           -              -      3,090,645
      Other comprehensive gain related to swap agreements
        (net of tax of $43,074)                                        83,616           -           -              -              -
-----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income                                         $6,442,923
Balances at December 31, 2002                                               -   6,455,826    $ 64,558   $ 10,568,907    $12,928,867
                                                                                =========    --------   ------------    -----------

<CAPTION>
                                                                     Accumulated
                                                                    Comprehensive    Treasury
                                                                    Income (Loss)     shares          Total
                                                                    -------------    --------       ------------
<S>                                                                 <C>              <C>            <C>
Balances at December 31, 1999                                        $        -      $      -       $ 14,686,834
Shares issued for exercise of options                                         -             -             51,097
Shares issued in connection with Employee Stock Purchase Plan                 -             -                  -
Stock split                                                                   -             -                  -
Net income                                                                    -             -          3,610,199
----------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000                                                 -             -         18,348,130
Cumulative effect of transition adjustment                              (67,940)            -            (67,940)
Shares issued for exercise of options                                         -             -              4,500
Shares issued in connection with Employee Stock Purchase Plan                 -             -             51,279
Comprehensive income (loss):
      Net income                                                              -             -          1,949,306
      Other comprehensive loss related to swap agreements
        (net of tax of $162,260)                                       (314,975)            -           (314,975)
----------------------------------------------------------------------------------------------------------------
Total comprehensive income

Balances at December 31, 2001                                          (382,915)            -         19,970,300
Cumulative effect of transition adjustment                                    -             -                  -
Shares issued for exercise of options                                         -             -             58,287
Shares issued in connection with Employee Stock Purchase Plan                 -             -             60,290
Shares redeemed in connection with Stock Buyback Program                      -       (63,298)           (63,403)
Comprehensive income (loss):                                                                                   -
      Net income                                                              -             -          3,090,645
      Other comprehensive gain related to swap agreements
        (net of tax of $43,074)                                          83,616             -             83,616
----------------------------------------------------------------------------------------------------------------
Total comprehensive income
Balances at December 31, 2002                                        $ (299,299)     $(63,298)      $ 23,199,735
                                                                     ----------      --------       ------------
</TABLE>


See accompanying notes to financial statements.

                                       34

<PAGE>


                          INTERLOTT TECHNOLOGIES, INC.

                             Statement of Cash Flows

                  Years ended December 31, 2002, 2001 and 2000
<TABLE>
<CAPTION>
                                                                                          2002           2001          2000
                                                                                      -----------     ----------    -----------
<S>                                                                                   <C>             <C>           <C>
Cash flows from operating activities:
    Net income                                                                        $ 3,090,645      1,949,306    3,610,199
    Adjustments to reconcile net income to net cash
      provided by operating activities:
        Net book value of equipment disposals                                                   -              -         86,499
        Depreciation and amortization                                                   7,247,227      7,315,089      6,622,439
        Principal portion of sales type leases received                                 2,557,262      1,551,262      1,441,971
        Increase (decrease) in deferred income tax liability                            1,397,576       (229,991)       194,400
        Gain on sale of equipment under sales type lease                               (3,436,490)      (916,039)      (301,019)
        Decrease (increase) in accounts receivable                                        478,262     (1,785,465)      (710,448)
        Decrease in inventories - net of leased equipment returned                      2,232,557      1,118,671        651,645
        (Increase) decrease in prepaid expenses and other asset                           (25,064)       312,870           (565)
        (Increase) decrease in deferred tax asset                                        (326,250)        48,750              -
        Increase in accounts payable                                                      413,531        206,138        261,853
        Increase in accounts payable - related parties                                     63,350        137,214            822
        Increase (decrease) in accrued expenses                                           216,959       (460,624)       565,546
        (Decrease) in income taxes payable                                               (158,378)      (404,220)      (867,681)
-------------------------------------------------------------------------------------------------------------------------------
              Net cash provided by operating activities                                13,751,187      8,842,961     11,555,661
-------------------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
    Cost of leased machines                                                            (5,481,016)    (7,979,117)    (9,580,471)
    Acquisition of business                                                                     -    (13,486,146)             -
    Purchases of property and equipment                                                   (10,616)      (198,289)      (717,027)
-------------------------------------------------------------------------------------------------------------------------------
              Net cash used in investing activities                                    (5,491,632)   (21,663,552)   (10,297,498)
-------------------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
    (Increase) in notes receivable from shareholder                                             -              -       (280,000)
    (Decrease) increase in notes payable                                               (2,945,242)    14,158,048       (907,417)
    Repayment of subordinated term note                                                (5,000,000)             -              -
    Proceeds from exercise of stock options                                                58,287          4,500         51,096
    Proceeds from Employee Stock Purchase Plan                                             60,290         51,279              -
    Payments for Treasury Stock repurchased                                               (63,403)             -              -
    Repayment of long-term debt                                                           (27,227)      (902,549)      (207,698)
    Payments of notes payable - related parties                                          (460,100)             -              -
    ---------------------------------------------------------------------------------------------------------------------------
              Net cash (used in) provided by financing activities                      (8,377,395)    13,311,278     (1,344,019)
-------------------------------------------------------------------------------------------------------------------------------

(Decrease) increase in cash                                                              (117,840)       490,687        (85,856)
Cash at beginning of year                                                                 537,332         46,645        132,501
-------------------------------------------------------------------------------------------------------------------------------
Cash at end of year                                                                   $   419,492        537,332         46,645
-------------------------------------------------------------------------------------------------------------------------------

Supplemental disclosures of cash flow information:
    Net book value of leased equipment returned from the field                        $    44,738      2,404,876      1,357,572
    Interest paid                                                                     $ 2,264,269      2,021,966      1,578,357
    Notes payable to stockholders issued in exchange for redeemable preferred stock   $         -              -      1,335,000
    Income taxes paid                                                                 $ 1,290,347        646,336      1,847,415
    Interest swap liability                                                           $    83,616        580,174              -

Business combination accounted for as a purchase
    Accounts receivable                                                               $         -      1,043,852              -
    Inventory                                                                         $         -      3,422,053              -
    Lease acquisition costs                                                           $         -      4,281,005              -
    Goodwill                                                                          $         -      4,739,236              -
                                                                                       ----------     -------------------------
                                                                                      $         -     13,486,146              -
</TABLE>

                                       35
<PAGE>

                          NOTES TO FINANCIAL STATEMENTS

(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (a)      BUSINESS DESCRIPTION

                  Interlott Technologies, Inc. (the Company), a Delaware
                  corporation, designs, manufactures, leases, sells and services
                  vending machines for use in connection with public lotteries
                  operated by states and foreign public entities, as well as for
                  use by providers of prepaid telephone cards.

         (b)      REVENUE RECOGNITION


                  The Company derives revenues from delivery of products and
                  services in the form of sales, sales type leases, operating
                  leases, maintenance fees and extended warranties. All products
                  and services are provided under the terms of a written
                  contract with a contractually fixed and determinable price.
                  Payment terms are also defined under the contracts and
                  collectibility is reasonably assured. Revenues from sales of
                  ITVMs and spare parts are recognized when title to the product
                  passes to the customer or when the products are delivered to
                  the customer in accordance with the terms of the contract.
                  Revenues from sales type leases are recorded in the same
                  manner as direct sales and are recognized when products are
                  delivered to the customer. Revenues from operating leases,
                  maintenance services and extended warranties are recognized
                  over time, typically monthly, during the period of time when
                  the services are provided.


         (c)      OPERATING AND SALES TYPE LEASES

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

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


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


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

                                       36

<PAGE>


         (d)      INVENTORIES

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

         (e)      PROPERTY AND EQUIPMENT

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

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

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

         (f)      PRODUCT DEVELOPMENT RIGHTS

                  Product development rights represent the exclusive rights to
                  certain patents and other related manufacturing technologies
                  to manufacture and assemble the Company's instant ticket
                  vending machines (ITVMs). The asset is amortized on the
                  straight-line method over fifteen years, which represents the
                  lower of the remaining life of the patents or the estimated
                  remaining life of the technology currently in use.

         (g)      INCOME TAXES

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

         (h)      DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

                  SFAS No. 107, Disclosure About Fair Value of Financial
                  Instruments, defines the fair value of a financial instrument
                  as the amount at which the instrument could be exchanged in a
                  current transaction between willing parties. The carrying
                  amounts as of December 31, 2002 and 2001 of cash, accounts
                  receivable, accounts payable, accounts payable - related
                  parties, accrued expenses and income taxes payable approximate
                  fair value due to the short maturity of these investments. The
                  carrying

                                       37

<PAGE>


                  amount of notes payable approximate fair value, as such
                  borrowings bear interest at the Company's current rates for
                  such types of instruments.

         (i)      STOCK INCENTIVE PLANS

                  On January 1, 1996, the Company adopted SFAS No. 123,
                  Accounting for Stock-Based Compensation, which permits
                  entities to recognize compensation expense over the vesting
                  period of the fair value of all stock-based awards on the date
                  of grant. Alternatively, SFAS No. 123 allows entities to
                  continue to apply the provisions of APB Opinion No. 25 and
                  provide pro forma net income and pro forma earnings per share
                  disclosures for employee stock option grants as if the
                  fair-value-based method defined in SFAS No. 123 had been
                  applied. The Company has elected to continue to apply the
                  provisions of APB Opinion No. 25 and provide the pro forma
                  disclosures of SFAS No. 123.

         (j)      RESEARCH AND DEVELOPMENT COSTS

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

         (k)      EARNINGS PER SHARE

                  Basic earnings per share is based upon the weighted average
                  number of common shares outstanding. Diluted earnings per
                  share is based upon the weighted average number of common
                  shares outstanding, including the effects of all dilutive
                  potential common shares outstanding.

         (l)      USE OF ESTIMATES

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

         (m)      ACCOUNTS PAYABLE

                  Accounts payable included $752,043 and $518,642, respectively,
                  of outstanding checks at December 31, 2002 and 2001.

         (n)      INTANGIBLE ASSETS

                  Amortization of goodwill was calculated on the straight line
                  method based on a 20 year life.

                  On July 20, 2001, the Financial Accounting Standards Board
                  (FASB) issued SFAS No. 141, Business Combinations and SFAS No.
                  142, Goodwill and Other Intangible Assets. SFAS No. 141
                  requires that the purchase method of accounting be used for
                  all business combinations initiated after September 30, 2001.
                  The Company adopted

                                       38

<PAGE>



                  SFAS No. 141 on July 1, 2001. The change had no material
                  effect on the Company's financial position or results of
                  operations.

                  SFAS No. 142 requires that goodwill and intangible assets with
                  indefinite useful lives no longer be amortized, but instead
                  tested for impairment at least annually in accordance with the
                  provisions of SFAS No. 142. SFAS No. 142 also requires that
                  intangible assets with definite useful lives be amortized over
                  their respective estimated useful lives to their estimated
                  residual values, and reviewed for impairment in accordance
                  with SFAS No. 121, Accounting for the Impairment of Long Lived
                  Assets and for Long-Lived Assets to Be Disposed Of. At this
                  time, the Company believes that no impairment exists. Because
                  the Company is a single reporting unit, market capitalization
                  is considered an indicator of potential impairment.

                  The Company adopted SFAS No. 142 on January 1, 2002, as
                  required. There was no amortization of goodwill in 2000 or
                  2002. Had amortization of goodwill not been taken during 2001,
                  the Company's net income and earnings per share would have
                  been increased to the pro forma amount presented below:

                  <TABLE>
                  <CAPTION>
                                                                       2001
                  <S>                             <C>              <C>
                  Net income                      As reported      $1,949,306
                                                  Pro forma         2,059,249
                  Basic earnings per share        As reported             .30
                                                  Pro forma               .32
                  Diluted earnings per share      As reported             .30
                                                  Pro forma               .31
                  </TABLE>


         (o)      ACCOUNTS RECEIVABLE



                  Accounts receivable are reflected net of allowances for
                  doubtful accounts of $53,332 and $203,101 at December 31, 2002
                  and December 31, 2001, respectively.



                  The adequacy of the allowance for doubtful accounts is
                  determined at each balance sheet date by reviewing individual
                  past due invoices on a customer-by-customer basis, identifying
                  the issue related to the delinquent payment and evaluating the
                  probable resolution of that issue. The significant majority of
                  Interlott's accounts receivable are from state lotteries and
                  collection of undisputed items is rarely a problem. There are,
                  however, instances where an invoiced item may be disputed by a
                  lottery and in many cases these issues must be resolved
                  through discussions and negotiations with regard to contract
                  interpretations.



         (p)      RECLASSIFICATION


                  Common stock and additional paid-in capital have been adjusted
                  to report the stock split made in 2000.

                                       39

<PAGE>

(2)      INVESTMENT IN SALES TYPE LEASES

         The Company leases ITVMs to several state lotteries under sales type
         leases. The components of the net investment in sales type leases at
         December 31, 2002 and 2001 were as follows:

<TABLE>
<CAPTION>
                                                            2002          2001
<S>                                                     <C>           <C>
Minimum lease payments receivable                       $15,649,566   $ 9,082,572
Less unearned revenue on lease payments receivable        2,906,706     1,164,356
                                                        -----------   -----------
                                                         12,742,860     7,918,216
Less current portion                                      2,588,005     2,299,706
                                                        -----------   -----------
Investment in sales type leases, less current portion   $10,154,855   $ 5,618,510
                                                        ===========   ===========
</TABLE>

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

         <TABLE>
         <CAPTION>
         YEARS ENDING DECEMBER 31,
         -------------------------
         <S>                         <C>
                  2003               $ 4,210,275
                  2004                 3,663,375
                  2005                 3,019,494
                  2006                 2,769,256
                  2007                 1,974,242
                  2008                    12,924
                                     -----------
                                     $15,649,566
                                     ===========
         </TABLE>

(3)      INVENTORIES

         Inventories at December 31, 2002 and 2001 consisted of the following:

         <TABLE>
         <CAPTION>
                                  2002         2001
         <S>                          <C>           <C>
         Finished goods               $ 1,721,996   $ 2,255,882
         Work in process                  396,719       531,355
         Raw materials and supplies     6,321,756     7,841,053
                                      -----------   -----------
                                      $ 8,440,471   $10,628,290
                                      ===========   ===========
         </TABLE>

(4)      LEASED MACHINES

         At December 31, 2002 and 2001, the Company leased ITVMs to various
         state lotteries under operating leases. The leases generally provide
         for the lotteries to make monthly or quarterly payments for rentals of
         the ITVMs over various lease terms. The components of the net
         investment in operating leases, which include estimated residual
         values, at December 31, 2002 and 2001 were as follows:

                                       40

<PAGE>


         <TABLE>
         <CAPTION>
                                              2002             2001
         <S>                              <C>              <C>
         Leased machines                  $35,113,524      $33,759,213
         Less accumulated depreciation     21,836,911       15,876,044
                                          -----------      -----------
                                          $13,276,613      $17,883,169
                                          ===========      ===========
         </TABLE>

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

         <TABLE>
         <CAPTION>
         YEARS ENDING DECEMBER 31,
         -------------------------
         <S>                          <C>
                2003                  $11,500,139
                2004                    4,957,683
                2005                      484,035
                2006                      394,200
                2007                      197,100
                                      -----------
                                      $17,533,157
                                      ===========
         </TABLE>

(5)      NOTES PAYABLE TO FINANCIAL INSTITUTIONS

         In January 2001, the Company entered into a $25 million three year
         revolving credit facility with a bank. Initial proceeds from the note
         were used to retire the Company's prior revolving credit facility. In
         conjunction with the establishment of the facility, the Company opened
         a lockbox and controlled disbursement account under which all lockbox
         receipts are recorded as payments against the facility and presented
         checks are recorded as draws on the facility. Borrowings under the
         credit facility are collateralized by all assets of the Company and an
         assignment of proceeds from lease agreements. The terms of the credit
         facility require the Company to maintain a cash balance at all times
         equal to .875% of the total amount of the facility. Additionally, the
         Company must comply with certain loan covenants which include, among
         other things, a minimum ratio of funded debt to EBITDA and a minimum
         tangible net worth requirement. At December 31, 2002, the Company was
         in full compliance with the requirements of the covenants.

         In June 2001, in connection with the acquisition of the lottery assets
         of On-Point Technology Systems, Inc., the Company increased the credit
         facility from $25 million to $30 million, and completed a mezzanine
         financing of junior debt in the form of a term note due June 30, 2003
         in the principal amount of $5 million with the same bank. The rate of
         interest on the credit facility is based on the prime rate or LIBOR
         rate adjusted up or down depending on the Company's funded debt to
         EBITDA ratio. The current rate is LIBOR plus 2.0% (3.4% at December 31,
         2002). The $5 million term note was paid off on August 13, 2002.

         At December 31, 2002, the Company had borrowings of $21,310,417
         outstanding with additional borrowings of $8,689,583 available under
         the revolving credit facility. The credit facility expires on May 31,
         2004.

                                       41

<PAGE>


(6)    NOTES PAYABLE - RELATED PARTIES

         The Company had the following notes payable to related parties at
         December 31, 2002 and 2001:

         <TABLE>
         <CAPTION>
                                                                  2002             2001
         <S>                                                    <C>              <C>
         Notes payable to former preferred stockholders, in
         the principal amount of $1,335,000 due in annual
         installments limited in the aggregate with the
         stockholder note identified in the immediately
         following paragraph to twenty-five percent (25%)
         of the net profits, if any, of the Company from
         its business operations as reported in the
         Company's annual financial statements. The notes
         were issued in exchange for shares of redeemable
         preferred stock. Payments began April 2, 2001. The
         notes do not provide for any interest and are
         unsecured.                                             $ 22,776         $482,876

         Note payable to a stockholder, in the original
         amount of $79,000, due and limited in the
         aggregate with the preferred stockholder notes
         identified in the preceding paragraph to
         twenty-five percent (25%) of the net profits of
         the Company, if any, from its business operations
         as reported in the Company's annual financial
         statements. Payments began April 2, 2001. The note
         does not provide for any interest and is
         unsecured.                                                1,348           28,575
                                                                --------         --------
                                                                  24,124          511,451
         Less current portion                                     24,124          487,327
                                                                --------         --------
                                                                $      -         $ 24,124
                                                                ========         ========
         </TABLE>

(7)      ADDITIONAL FINANCIAL INSTRUMENT

         The Company entered into an interest rate swap agreement with a total
         notional principal amount of $5 million at July 3, 2001 which expires
         on May 31, 2004 and an interest rate swap agreement with a total
         notional principal amount of $10 million at November 7, 2002 which also
         expires on May 31, 2004. The objective of these agreements is to
         convert a portion of the Company's floating rate revolving credit
         facility to a fixed rate. The estimated fair value of the interest rate
         swap agreements was approximately ($453,484) at December 31, 2002. The
         estimated fair value is based upon appropriate market information and
         projected interest rate changes obtained from a reputable institution.
         The estimated amount of deferred loss on the hedge to be reclassified
         to earnings in 2003 is $320,000.

                                       42

<PAGE>


(8)      Income Taxes

         Income tax expense is summarized as follows:

         <TABLE>
         <CAPTION>
                                     YEAR ENDED DECEMBER 31,
                             ------------------------------------
                                 2002         2001         2000
         <S>                 <C>          <C>          <C>
         Current:
           Federal           $  651,622   $  851,391   $1,629,300
           State and local      234,264      264,899      352,899
         Deferred:
           Federal            1,059,448      181,261      194,400
                             ----------   ----------   ----------
                             $1,945,334   $  935,029   $2,176,599
                             ==========   ==========   ==========
         </TABLE>

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


         <TABLE>
         <CAPTION>
                                                                2002         2001            2000
         <S>                                                <C>           <C>            <C>
         Federal income tax expense at
           the statutory rate                               $ 1,712,233   $   980,674    $ 1,967,500
         Officers life insurance                                  8,000         8,000          8,000
         Amortization of product development rights                   -      (199,654)        25,000
         State and local taxes, net of federal benefit          145,244       174,833        232,900
         Other                                                   79,857       (28,824)       (56,801)
                                                            -----------   -----------    -----------
                                                            $ 1,945,334   $   935,029    $ 2,176,599
                                                            ===========   ===========    ===========
         </TABLE>


         The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities at
         December 31, 2002 and 2001 are presented below:

         <TABLE>
         <CAPTION>
                                                              2002           2001
         <S>                                              <C>            <C>
         Deferred tax assets:
           Bad debt allowance                             $    18,100    $    69,000
           Investment in sales type leases                    333,000        601,800
           Net operating loss carryforwards                   127,400        182,300
           Inventory valuation reserve                        286,100        156,000
           Change in accounting for patent amortization             -        184,100
           Interest rate swap agreement                       154,200        197,300
           Accrued expenses                                    82,900         75,400
                                                          -----------    -----------
              Total gross deferred tax assets             $ 1,001,700    $ 1,465,900
                                                          ===========    ===========

         Deferred tax liabilities:
           Property and equipment, principally due to
             differences in depreciation                  $ 2,405,000    $ 1,754,800
           Involuntary conversion of assets                    97,700         97,700
                                                          -----------    -----------
              Total gross deferred tax liabilities          2,502,700      1,852,500
                                                          -----------    -----------
              Net deferred tax liabilities                $(1,501,000)   $  (386,600)
                                                          ===========    ===========
         </TABLE>

         In assessing the realizability of deferred tax assets, management
         considers whether it is more likely than not that some portion or all
         of the deferred tax assets will not be realized.

                                       43

<PAGE>


         The ultimate realization of deferred tax assets is dependent upon the
         generation of future taxable income during the periods in which those
         temporary differences become deductible. Management considers the
         scheduled reversal of deferred tax liabilities, projected future income
         and tax planning strategies in making this assessment.

         At December 31, 2002, the Company had net operating loss carryforwards
         for federal income tax purposes of approximately $374,800 which are
         available to offset future federal taxable income, if any, through
         2009. However, due to an ownership change on September 25, 1992,
         utilization of these carryforwards is subject to certain annual
         limitations.

(9)      STOCK INCENTIVE PLANS

         The Company's 1994 Stock Incentive Plan was amended and restated
         effective December 29, 2000. The Company also has a 1994 Directors
         Stock Incentive Plan under which options were granted prior to the
         amendment of the 1994 Stock Incentive Plan. Stock options are granted
         with an exercise price equal to the stock's fair market value at the
         date of grant. Options vest at the rate of 25% per year beginning one
         year from the date of grant, subject to the recipient's continued
         employment or service to the Company, and must be exercised within 10
         years after that date.

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

         A summary of the status of the Company's stock options as of December
         31, 2002, 2001 and 2000 and the changes therein for the years then
         ended is presented below:

<TABLE>
<CAPTION>
                                              2002                      2001                    2000
                                     -----------------------   ---------------------   ---------------------
                                                    WEIGHTED                WEIGHTED                WEIGHTED
                                                     AVERAGE                AVERAGE                  AVERAGE
                                                    EXERCISE                EXERCISE                EXERCISE
                                       SHARES         PRICE     SHARES        PRICE     SHARES        PRICE
                                     ---------      --------   -------      --------   -------      --------
<S>                                  <C>            <C>        <C>          <C>        <C>          <C>
Outstanding at beginning of year       791,300      $   4.37   502,800      $   3.92   513,100      $   3.91
Granted                                267,000          5.40   290,850          5.25         -             -
Exercised                               11,750          3.06     1,000          3.25     7,000          5.02
Forfeited                                2,150          3.83     1,350          3.53     3,300          3.22
                                     ---------      --------   -------      --------   -------      --------
Outstanding at end of year           1,044,400          4.68   791,300          4.37   502,800          3.92

Options exercisable at year-end        629,525          4.30   476,525          4.24   434,850          4.27
                                     ---------      --------   -------      --------   -------      --------
Weighted-average fair value of
     options granted during the
     Year                                           $   2.86                $   4.31                     N/A
</TABLE>

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

                                       44

<PAGE>



         <TABLE>
         <CAPTION>
                                                                     2002              2001              2000
         <S>                                   <C>              <C>               <C>               <C>
         Net income                            As reported      $   3,090,645     $   1,949,306     $   3,610,199
                                               Pro forma            2,741,573         1,691,799         3,593,958
         Basic earnings per share              As reported                .48               .30               .56
                                               Pro forma                  .42               .26               .56
         Diluted earnings per share            As reported                .46               .30               .56
                                               Pro forma                  .41               .26               .55
         </TABLE>

         The fair value of options granted during 2002 and 2001 was estimated on
         the grant date using the Black-Scholes option-pricing model with the
         following weighted-average assumptions: no dividends paid, as it has
         been the Company's policy not to declare or pay dividends and the
         Company does not anticipate paying dividends in the foreseeable future;
         expected volatility of 36% and 76%, respectively, based on the
         calculated volatility of the Company's stock; risk-free rates of return
         of 3.46% and 4.81%, respectively; and expected lives of 10 years. No
         options were granted in 2000.

         Information about stock options outstanding at December 31, 2002 is as
         follows:

         <TABLE>
         <CAPTION>
                                             Options Outstanding                   Options Exercisable
                                 ------------------------------------------  -----------------------------
                                                  Weighted-
                                                   Average        Weighted-                       Weighted-
                                                  Remaining        Average                         Average
             Range of              Number        Contractual       Exercise        Number         Exercise
         Exercise Prices         Outstanding        Life            Price       Exercisable        Price
         ---------------         -----------     -----------      ---------     -----------       ---------
         <S>                     <C>             <C>              <C>           <C>               <C>
          $2.41 - 4.32              406,450         4.40            $3.60         378,575          $3.68
          $5.07 - 5.75              637,950         7.68             5.36         250,950           5.37
                                  ---------         ----            -----         -------          -----
                                  1,044,400         6.41            $4.68         629,525          $4.35
                                  =========         ====            =====         =======          =====
         </TABLE>


                                       45

<PAGE>

(10)     EARNINGS PER SHARE

         <TABLE>
         <CAPTION>
                                                                        Net                              Per
                                                                      Earnings          Shares          Share
         2000                                                        (Numerator)      (Denominator)     Amount
                                                                  ---------------    -------------     ------
         <S>                                                      <C>                <C>               <C>
         Basic earnings per share:
            Net earnings available to common stockholders         $     3,610,199      6,422,914        $0.56

         Diluted earnings per share:
           Effect of dilutive stock options                                               71,592
           Earnings available to common stockholders
              and assumed conversions                                   3,610,199      6,494,506         0.56

         2001
         Basic earnings per share:
            Net earnings available to common stockholders               1,949,306      6,436,801         0.30

         Diluted earnings per share:
              Effect of dilutive stock options                                           119,484
              Earnings available to common stockholders
                 and assumed conversions                                1,949,306      6,556,285         0.30

         2002
         Basic earnings per share:
            Net earnings available to common stockholders               3,090,645      6,455,930         0.48

         Diluted earnings per share:
            Effect of dilutive stock options                                             232,959
            Earnings available to common stockholders
               and assumed conversions                            $     3,090,645      6,688,889        $0.46
         </TABLE>

         Options to purchase 0, 394,800 and 243,950 shares of common stock were
         outstanding in 2002, 2001 and 2000, respectively, but were not included
         in the computation of diluted earnings per share because the options'
         exercise prices were greater than the average market price of the
         common shares.

(11)     NONCASH INVESTING ACTIVITIES

         Leased machines with net book values of $44,738 in 2002 and $2,404,876
         in 2001 were returned to the Company's inventories upon lease
         expirations. The Company refurbished many of these returned machines
         and also used parts from others in the manufacturing of certified new
         machines, a large portion of which were sold or deployed in 2002 under
         new leases.

                                       46

<PAGE>

(12)     RELATED PARTY TRANSACTIONS

         Accounts payable - related parties of $380,855 and $317,505 at December
         31, 2002 and 2001, respectively, represent management fees and expenses
         payable to a company owned 100% by the majority stockholder as well as
         parts expenses payable to an entity which is owned by a director.

         Amounts expensed related to the company owned by the majority
         stockholder were $36,000 for each of the years ended December 31, 2002,
         2001 and 2000, respectively.

         The entity owned by a director supplies the Company with certain parts
         for its dispensing mechanisms. In addition, on January 13, 1994, the
         Company entered into a manufacturing and license agreement with this
         entity pursuant to which the Company purchased an exclusive license to
         make, use and sell pull-tab lottery ticket dispensing mechanisms
         produced by this entity. The Company had purchases from this entity
         which were charged to cost of revenues of approximately $5,120,953,
         $5,240,275 and $6,205,187 for the years ended December 31, 2002, 2001
         and 2000, respectively.

         Interest expense arising from notes payable-related parties amounted to
         $0, $0 and $4,510 for the years ended December 31, 2002, 2001 and 2000,
         respectively.

(13)     CUSTOMER AND SUPPLIER CONCENTRATIONS

         A significant portion of the Company's revenues are derived from a
         limited number of state lottery authorities or their representatives.
         In each of the years ended December 31, 2002, 2001 and 2000, a single
         customer generated 16%, 17% and 19%, respectively, of the machine lease
         revenues. In addition, single state contracts generated 32%, 59% and
         76% of the machine sales revenues for the years ended December 31,
         2002, 2001 and 2000, respectively. Future revenue from machine sales
         and leases is dependent upon winning awards in a competitive bidding
         process.

         The Company currently purchases certain components used in its vending
         machines, including components used in its burster mechanism, from
         single suppliers. The purchase of components from outside suppliers on
         a sole source basis subjects the Company to certain risks, including
         the continued availability of suppliers, price increases and potential
         quality assurance problems. Because other suppliers exist that can
         duplicate these components should the Company elect or be forced to use
         a different supplier, the Company does not believe that a 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
         production, which could adversely affect the Company's ability to make
         timely deliveries of vending machines and to obtain new contracts.

(14)     LEASE COMMITMENTS

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

                                       47

<PAGE>


         <TABLE>
         <CAPTION>
         December 31,
         ------------
         <S>             <C>
            2003         $382,682
            2004          341,749
            2005           75,558
                         --------
                         $799,989
                         ========
         </TABLE>

(15)     COMMITMENTS AND CONTINGENT LIABILITIES

         As of December 31, 2002, the Company had outstanding approximately
         $3,734,000 in purchase commitments for raw materials which are used in
         the manufacturing of ITVMs. Management intends to utilize these
         commitments as machines are produced.

(16)     EMPLOYEE BENEFIT PLANS

         In 1999, the Company established a savings plan intended to qualify
         under sections 401(a) and 401(k) of the Internal Revenue Code. The plan
         covers substantially all employees of the Company. Under this plan, the
         Company's expenses in 2002 and 2001 were $68,319 and $51,109,
         respectively, which represented one half of the employees'
         contributions not exceeding 4% of gross pay.

         The Company has an Employee Stock Purchase Plan under section 423 of
         the Internal Revenue Code. The Plan provides substantially all
         employees of the Company with an opportunity to purchase, through
         payroll deductions, shares of the Company's common stock. The purchase
         price per share is the lower of 85% of the closing market price of the
         common stock on the first day of the calendar quarter or 85% of the
         closing market price of the common stock on the last day of the
         calendar quarter. 50,000 shares of common stock of the Company are
         reserved for issuance under this plan.

(17)     ACQUISITION

         On June 1, 2001, the Company completed the acquisition of the lottery
         assets of On-Point Technology Systems, Inc. of San Marcos, California.
         Through the purchase, the Company acquired all of the lottery assets of
         On-Point, including patents, technology, accounts receivable,
         inventory, service contracts, and lease contracts for the New York,
         Illinois, Virginia and Missouri state lotteries.


         The purchase price included approximately $13 million paid at closing,
         deferred payments of $9 million payable, subject to adjustment, over 5
         years, and an earn-out of up to $6 million based upon certain future
         revenues. The $9 million in deferred payments is based on certain gross
         profit benchmarks from new product sales related to the four lottery
         contracts acquired from On-Point. These gross profit benchmarks are
         cumulative and, due to failure to realize the projected amounts, only
         $29,000 has been paid to date. Because these payments are contingent
         upon future performance, amounts will only be recorded as earned. The
         Company believes that it is probable that some payments may be required
         in the future although the amount is undeterminable at this point in
         time.


                                       48

<PAGE>


         In addition, at the closing the Company and On-Point entered into a
         separate agreement to market a patented design for an on-line activated
         instant lottery ticket.

         The acquisition was accounted for as a purchase. The total costs of the
         acquisition were allocated to tangible and intangible assets acquired
         based upon their respective fair values. The allocation of the purchase
         price and goodwill are summarized as follows:

         <TABLE>
         <S>                            <C>
         Accounts Receivable            $ 1,043,852
         Inventory                        3,422,053
         Lease acquisition costs          4,281,005
         Goodwill                         4,739,236
                                        -----------
                                        $13,486,146
                                        ===========
         </TABLE>

         The following table provides certain information, on a pro forma
         (unaudited) basis, concerning the impact of the acquisition on results
         of operations had the transaction been completed on January 1, 2000.


         <TABLE>
         <CAPTION>
                                                12/31/2001      12/31/2000
                                                ----------      ----------
         <S>                                   <C>             <C>
         Revenues
          As reported                          $42,715,686     $42,589,090
          Pro forma                             45,659,686      52,882,080

         Income before extraordinary items
          As reported                          $ 1,949,306     $ 3,610,199
          Pro forma                              2,347,206         747,443

         Net income
          As reported                          $ 1,949,306     $ 3,610,199
          Pro forma                              2,347,206         747,443

         Basic and diluted earnings
             per share
          As reported                          $      0.30     $      0.56
          Pro forma                            $      0.36     $      0.12
         </TABLE>

(18)     SUBSEQUENT EVENTS

         On March 17, 2003, the Company entered into an agreement to be acquired
         by GTECH Holdings Corporation (NYSE: GTK). The agreement calls for each
         share of the Company's common stock to be changed into the right to
         receive $9.00 in cash, GTECH common stock or a combination of the two,
         with 51.5% of the aggregate merger consideration to be paid in GTECH
         common stock and the balance in cash. Including estimated assumed debt
         of approximately $21 million, the transaction would have a total value
         of approximately $85 million. The transaction, which is subject to the
         approval of the Company's shareholders,

                                       49

<PAGE>

         regulatory approvals and certain other closing conditions, is expected
         to be completed by late July 2003. Approval of GTECH shareholders is
         not required.


QUARTERLY FINANCIAL DATA



(in thousands, except per share data)



<TABLE>
<CAPTION>
          2002                FIRST       SECOND      THIRD       FOURTH
------------------------------------------------------------------------
<S>                          <C>         <C>         <C>         <C>
Net sales                    $11,142     $10,151     $14,420     $16,291
Gross profit                   3,207       2,912       3,805       4,900
Net income                       522         185         782       1,601
Basic income per share          0.08        0.03        0.12        0.25
Diluted income per share        0.08        0.03        0.12        0.24
------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
          2001                FIRST       SECOND      THIRD       FOURTH
------------------------------------------------------------------------
<S>                          <C>         <C>         <C>         <C>
Net sales                    $ 7,811     $15,273     $ 9,705     $ 9,927
Gross profit                   2,350       4,310       2,407       2,255
Net income                       196       1,335          85         333
Basic income per share          0.03        0.21        0.01        0.05
Diluted income per share        0.03        0.20        0.01        0.05
------------------------------------------------------------------------
</TABLE>


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

                  None

                                       50

<PAGE>

                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

         The directors and executive officers of the Company (at March 20, 2003)
are as follows:

<TABLE>
<CAPTION>
      Name                 Age                                  Title
      ----                 ---                                  -----
<S>                        <C>              <C>
L. Rogers Wells            65               Chairman of the Board and Director

Gary S. Bell               52               Director

Kazmier J. Kasper          56               Director

H. Jean McEntire           57               Director

David F. Nichols           41               President, Chief Executive Officer and Director

Edmund F. Turek            76               Director

John J. Wingfield          56               Director

Thomas W. Stokes           39               Chief Operating Officer

Dennis W. Blazer           55               Chief Financial Officer
</TABLE>

         Mr. Wells is Chairman of the Board and served as Chief Executive
Officer of the Company until 1999. He has been the principal stockholder of the
Company since 1992. Mr. Wells served as a director of the Company from 1992, and
as Chairman of the Board and Chief Executive Officer of the Company from 1993,
until his resignation from these positions in October 1994. He was re-elected to
these positions in February 1995. In addition, 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., which
invests in and provides financing to various businesses. 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.

         Mr. Bell has been Secretary and Treasurer of the Company since 1993. He
is President of International Investments, Inc., an investment company owned by
Mr. L. Rogers Wells, Jr., and previously served as Chief Financial Officer of
that company from 1995 until 1997 and during 1993 and 1994. He has been an
independent business and financial consultant since 1994

                                       51

<PAGE>

and holds various business interests in a number of small, closely-held
partnerships and corporations. Mr. Bell was a commercial loan officer for
Peoples Bank & Trust Company, Greensburg, Kentucky from 1997 to 1999. From 1982
until 1993, he served in various positions with The New Farmers National Bank of
Glasgow and its holding company, Commonwealth Bancorp, including Executive Vice
President and Chief Credit Officer of The New Farmers National Bank of Glasgow
from 1986 until 1993. Mr. Bell also served as Chief Credit Officer of Bowling
Green Bank & Trust Company, N.A., another subsidiary of Commonwealth Bancorp,
from 1991 until 1993. Mr. Bell has been a director of the Company since 1993.

         Mr. Kasper has been President and owner of Algonquin Industries, Inc.
and Hi-Tech Metals, Inc. in Bellingham, Massachusetts since 1974. These two
companies manufacture machine parts for the computer, optic, robotic, gaming,
environmental, biomedical and electromechanical industries. Mr. Kasper has been
a director of the Company since 1993.

         Ms. McEntire has been a director of the Company since 1993. She was a
consultant to the Company for special projects related to marketing from 1997 to
1998 and was the Company's Vice President - Marketing from 1993 to 1997 and its
Director of Retailer Relations from 1992 until 1993. In these capacities, she
was primarily responsible for marketing to the lotteries and vendor support
services for the Company. Ms. McEntire served from 1983 to 1987 as Regional
Manager and then as Regional Coordinator of the Ohio Lottery Commission. From
1987 to 1989 she was Account Manager for British American Banknote, a Canadian
manufacturer of instant lottery tickets. In 1989, she served as a consultant for
the Ohio Department of Rehabilitation and Corrections, Bureau of Community
Services. Ms. McEntire returned to the Ohio Lottery in 1990 as Deputy Director
of Sales. From 1998 until August 2002 she served as Project Coordinator for the
Coalition of Neighborhoods, a charitable agency that services and coordinates
neighborhood activities. Since August 2002, Mrs. McEntire has been the Regional
Director of the Ohio Civil Rights Commission.

         Mr. Nichols has been President of the Company since 1997 and Chief
Executive Officer since 1999. Mr. Nichols served as Senior Vice President of
Sales and Marketing of the Company from 1994 to 1997 and as Vice President --
Operations of the Company from 1993 until 1994. From 1991 to 1992, he was
Executive Director of the Board of Tax Appeals of the Commonwealth of Kentucky.
From 1990 to 1991, Mr. Nichols was Principal Assistant to the Secretary of
Finance and Administration for the Commonwealth of Kentucky, and from 1989 to
1990 he was Principal Assistant to the Kentucky Office for Social Security.
During 1988, Mr. Nichols was Deputy Director of the Kentucky Democratic Party.
Mr. Nichols has been a director of the Company since 1997.

         Mr. Turek was Vice Chairman of the Board of Directors of the Company
from 1997 until 1999 and has been a director of the Company since 1990. Mr.
Turek served as Chairman of the Board, President and Chief Executive Officer of
the Company from 1990 to 1992 and continued to serve as President of the Company
until 1997, when he was appointed Vice Chairman. Mr. Turek began to develop the
Company's instant ticket vending machine in 1987 and has guided product
development through several models for instant ticket, telephone and smart card
dispensing. 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. Prior to that time Mr. Turek held

                                       52

<PAGE>

management, product development and operations positions with various companies
in the computer and aerospace industries.

         Mr. Wingfield has been Vice President of A.G. Edwards & Sons, Inc., a
stock brokerage firm, since 1995. Mr. Wingfield is Manager of A.G. Edwards'
Louisville office and its satellite office in New Albany, Indiana. He was First
Vice President of Stifel, Nicolaus & Company Incorporated, a stock brokerage
firm, from 1985 until 1995 and has been a registered stock broker since 1973.
Mr. Wingfield has been a director of the Company since 1994.

         Mr. Stokes has been Chief Operating Officer since 2000. Prior to that,
Mr. Stokes had served as the Company's Vice President of Operations since 1997,
as Director of Operations from 1996 to 1997 and as Purchasing Manager from 1993
to 1995. From 1988 to 1992, he served as unit controller for a food management
company.

         Mr. Blazer has been Chief Financial Officer of the Company since 1998.
From 1973 to 1998, he served in various capacities for The Plastic Moldings
Corporation, most recently as Vice President of Finance and Administration. Mr.
Blazer previously served as an auditor and tax consultant with Ernst & Ernst,
certified public accountants. Mr. Blazer is a certified public accountant.

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

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934 and the related
regulations of the Securities and Exchange Commission require that the Company's
executive officers and directors, as well as any persons who beneficially own
more than 10% of the Company's Common Stock, file reports of their ownership of
the Company's Common Stock with the SEC and the American Stock Exchange. These
persons are required to furnish the Company with copies of all Section 16(a)
reports they file. Based on its review of reports and written representations
received by it, the Company believes that all Section 16(a) filing requirements
were complied with on a timely basis for 2002. An error in Mr. Wells' Form 5 for
fiscal year 2001, relating to shares transferred as part of a settlement, was
subsequently corrected.

ITEM 11.          EXECUTIVE COMPENSATION

SUMMARY OF COMPENSATION

         The following table sets forth, for the years indicated, compensation
paid by the Company for services in all capacities to Mr. Wells, the Company's
Chairman of the Board; to Mr. Nichols, the Company's Chief Executive Officer;
and to the Company's two other executive officers. These persons are sometimes
referred to as the "named executive officers."

                                       53

<PAGE>

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                  LONG-TERM
                                                                  ---------
                                                                 COMPENSATION
                                                                 ------------
                                                                    AWARDS
                                                                    ------
                                        ANNUAL COMPENSATION       SECURITIES
                                        -------------------       UNDERLYING
NAME AND PRINCIPAL POSITION    YEAR     SALARY($)  BONUS($)       OPTIONS(#)
---------------------------    ----     ---------  --------       ----------
<S>                            <C>      <C>        <C>           <C>
L. Rogers Wells, Jr.           2002     $350,000   $    -0-        134,000
Chairman of the Board          2001     $350,000   $    -0-         25,000
                               2000     $350,000   $    -0-            -0-

David F. Nichols               2002     $226,317   $139,400         25,000
President; Chief               2001     $220,000   $ 49,531        212,500
Executive Officer              2000     $120,000   $100,000            -0-

Dennis W. Blazer               2002     $102,019   $ 27,500         17,000
Chief Financial Officer        2001     $ 99,000   $ 16,500          8,500
                               2000     $ 96,577   $ 22,000            -0-

Thomas W. Stokes               2002     $118,518   $ 31,500         20,000
Chief Operating Officer        2001     $ 88,077   $ 18,000         10,000
                               2000     $ 85,500   $ 25,000            -0-
</TABLE>

STOCK OPTIONS

         The following table presents information on option grants made during
2002 to the named executive officers.

                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                             Individual Grants(1)
                         --------------------------------------------------------------------------------------------
                         Number of                                                      Potential Realizable Value at
                         Securities     % of Total                                         Assumed Annual Rates of
                         Underlying      Options         Exercise                        Stock Price Appreciation for
                          Options       Granted to       or Base                                 Option Term
                          Granted      Employees in       Price        Expiration       -----------------------------
Name                        (#)        Fiscal Year       ($/Sh)           Date              5% ($)         10% ($)
---------------------------------------------------------------------------------------------------------------------
<S>                      <C>           <C>               <C>           <C>              <C>               <C>
L. Rogers Wells, Jr.      134,000         60.36           5.40           3/5/12           1,178,668       1,876,832

David F. Nichols           25,000         11.26           5.40           3/5/12             219,901         350,155

Dennis W. Blazer           17,000          7.66           5.40           3/5/12             149,533         238,106

Thomas W. Stokes           20,000          9.00           5.40           3/5/12             175,921         280,124
</TABLE>

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

                                       54

<PAGE>

(1)      All options become exercisable at the rate of 25% of the shares per
         year beginning on the first anniversary of the date of grant. Each
         option becomes exercisable in full (i) if the beneficial ownership of
         Common Stock of L. Rogers Wells falls below 50.1% and a third party
         (other than Mr. Wells, the Company or an employee benefit plan of the
         Company) becomes the beneficial owner of 30% or more of the Company's
         Common Stock without the approval of the Board of Directors; (ii) in
         the event of certain situations involving the merger, consolidation or
         liquidation of the Company or the sale or other disposition of all or
         substantially all of its assets; or (iii) if during any fiscal year,
         the individuals making up the Board of Directors at the beginning of
         such year cease to constitute a majority of the Board of Directors.

         The table below sets forth information regarding the number and value
of the unexercised stock options held by the named executive officers at
December 31, 2002. No options were exercised by the named executive officers
during 2002.

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                            AND FY-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                                                       Value of
                                                                                                     Unexercised
                                                                        Number of Securities        In-the-Money
                                                  Value Realized ($)   Underlying Unexercised          Options
                                                                        Options at FY-End (#)     at FY-End ($)(1)
                                                   (Market Price on
                            Shares Acquired on      Exercise Less            Exercisable/            Exercisable/
          Name                 Exercise (#)        Exercise Price)          Unexercisable           Unexercisable
------------------------------------------------------------------------------------------------------------------
<S>                         <C>                   <C>                  <C>                        <C>
L. Rogers Wells, Jr.                -                     -                177,000/149,000         268,701/61,509

David F. Nichols                    -                     -                212,750/118,750         253,201/85,859

Dennis W. Blazer                    -                     -                  17,000/22,500          28,101/12,254

Thomas W. Stokes                    -                     -                  21,500/26,750          43,085/15,351
</TABLE>

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

(1)      This value is computed by subtracting the option exercise price from
         the market price of the Common Stock on December 31, 2002 and
         multiplying that figure by the total number of unexercised options.

EMPLOYMENT AGREEMENT

         Effective January 1, 2001, the Company entered into an employment
agreement with Mr. Nichols for an initial five-year term. Beginning on the
fourth anniversary of the agreement and on each subsequent anniversary, the term
of the agreement will be extended for an additional year if neither party gives
written notice to the contrary. The agreement provides for a minimum annual base
salary of $220,000, for cost-of-living increases and for annual

                                       55

<PAGE>

consideration for performance increases. Under the agreement, Mr. Nichols is
entitled to a bonus of 2 1/2% of the Company's net after tax income plus 5% of
any year-over-year after tax net income growth. If the Company terminates the
agreement for any reason other than "cause" (as defined in the agreement),
disability or death, it will pay Mr. Nichols the greater of (1) two times the
sum of his then-current base salary plus the amount of his immediately preceding
bonus or (2) his then-current base salary plus immediately preceding bonus for
each year remaining in the then-current term of the agreement. The Company also
will provide Mr. Nichols with continued health and life insurance benefits
through the end of the then-current term of the agreement and will pay him the
value of any forfeited or lost pension, profit sharing and similar benefits
which would have accrued and vested had he remained employed until that time.
Similar benefits are payable if Mr. Nichols resigns within 90 days after a
change of control of the Company (as defined in the agreement) or if his
employment is actually or constructively terminated within two years after a
change of control; in such an event, Mr. Nichols also is entitled to a gross-up
for any taxes imposed as a result of the "excess parachute payments" provisions
of the Internal Revenue Code.

DIRECTOR COMPENSATION

         Directors who are not employees of the Company receive a fee of $1,000
for each meeting of the Board of Directors or Board committee attended in person
or by telephone. Directors who are employees of the Company receive no
directors' fees. The Company paid a total of $11,000 in directors' fees in 2002.

         Each non-employee member of the Board of Directors -- Gary S. Bell,
Kazmier J. Kasper, H. Jean McEntire, Edmund F. Turek and John J. Wingfield -
receives an annual grant of options to purchase shares of Common Stock. The
option grants for 2002 were made on March 6, 2002. Each non-employee director
received an option for 9,000 shares of Common Stock. The exercise price of each
option is equal to the fair market value of the Common Stock on the date of
grant. The options vest at the rate of 25% per year beginning one year after the
date of grant and expire ten years from the date of grant.

         Edmund F. Turek, the Company's founder, retired as an employee in 1999.
Mr. Turek now has a consulting arrangement with the Company pursuant to which he
was paid $120,000 during 2002.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         A principal function of the Company's Compensation Committee is to
establish the compensation of the executive officers of the Company. The
Chairman of the Committee, Gary S. Bell, served during 2002 as Secretary and
Treasurer of the Company (in a non-employee capacity) and also served as
President of International Investments, Inc. International Investments is owned
by L. Rogers Wells, Jr., the Company's Chairman of the Board. Additionally, the
Company had an arrangement with International Investments under which it paid
International Investments $3,000 per month (for a total of $36,000 in 2002) for
consulting services provided to the Company by Mr. Bell. This arrangement was
terminated as of December 31, 2002.

                                       56
<PAGE>

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                  AND RELATED STOCKHOLDER MATTERS

         The following table sets forth information, as of March 15, 2003,
regarding the beneficial ownership of the Company's Common Stock by (a) each
person who is known by the Company to own more than 5% of the Common Stock, (b)
each director and person named in the Summary Compensation Table individually
and (c) all directors and executive officers as a group.

<TABLE>
<CAPTION>
                                            SHARES     PERCENT
                                         BENEFICIALLY  OF CLASS
NAME OF BENEFICIAL OWNER                   OWNED (1)    OWNED
-------------------------                ------------  --------
<S>                                      <C>           <C>
Lloyd I. Miller III                        664,800(2)    10.3%
L. Rogers Wells, Jr.                     3,652,300(3)    54.8%
Edmund F. Turek                            334,500(4)     5.1%
Gary S. Bell                                32,500           *
Dennis W. Blazer                            25,969           *
Kazmier J. Kasper                           36,500           *
H. Jean McEntire                            21,750           *
David F. Nichols                           233,136        3.5%
Thomas W. Stokes                            28,112           *
John J. Wingfield                           39,500           *
All directors and executive officers as  4,404,267       62.0%
a group (9 persons)
</TABLE>

------------------
*        Less than one percent.

(1)      Except as noted below, the named persons have sole voting and
         investment power with regard to all shares shown as beneficially owned
         by them. Includes the following numbers of shares which may be acquired
         upon exercise of stock options which were exercisable on, or became
         exercisable within 60 days after, March 15, 2003: Mr. Wells, 210,500
         shares; Mr. Turek, 54,500 shares; Mr. Bell, 32,500 shares; Mr. Blazer,
         21,250 shares; Mr. Kasper, 32,500 shares; Ms. McEntire, 21,750 shares;
         Mr. Nichols, 229,000 shares; Mr. Stokes, 26,250 shares; Mr. Wingfield,
         32,500 shares; and all directors and executive officers as a group,
         648,750 shares.

(2)      Mr. Miller reports having sole voting and dispositive power over
         417,800 shares and shared voting and dispositive power over 247,000
         shares. Mr. Miller's address is 4550 Gordon Drive, Naples, Florida
         34102.

(3)      Mr. Wells' address is 7697 Innovation Way, Mason, Ohio 45040.

(4)      Includes 65,000 shares owned by Mr. Turek's wife. Mr. Turek's address
         is 7697 Innovation Way, Mason, Ohio 45040.

                                       57
<PAGE>

EQUITY COMPENSATION PLAN INFORMATION

         The Company has three compensation plans under which shares of its
common stock may be issued: the 1994 Stock Incentive Plan; the 1994 Directors
Stock Incentive Plan, under which options were granted to the Company's
nonemployee directors prior to 2000; and the Employee Stock Purchase Plan. Each
of these plans has been approved by stockholders. The Company has no equity
compensation plans or arrangements that have not been approved by stockholders.

         The following table provides information concerning the Company's
equity compensation plans as of December 31, 2002. Additional shares authorized
for issuance under the 1994 Stock Incentive Plan as amended and restated
effective January 15, 2003, and stock options granted on that date, are not
included.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
                                                                    Number of securities
                                                                    remaining available for
                                                                    future issuance under
                     Number of securities to  Weighted-average      equity compensation
                     be issued upon exercise  exercise price of     plans (excluding
                     of outstanding options,  outstanding options,  securities reflected
Plan category        warrants and rights      warrants and rights   in column (a))
-------------------------------------------------------------------------------------------
<S>                  <C>                      <C>                   <C>
Equity compensation
plans approved by           1,070,511               $  4.68                 201,594
security holders
-----------------------------------------------------------------------------------

Equity compensation
plans not approved                 --                    --                      --
by security holders
-----------------------------------------------------------------------------------
Total                       1,070,511               $  4.68                 201,594

-----------------------------------------------------------------------------------
</TABLE>

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Algonquin Industries, Inc. and Hi-Tech Metals, Inc., of each of which
Kazmier J. Kasper, a director of the Company, is President and owner, sell the
Company some of the components of the burster mechanisms and other dispensing
mechanisms used in the Company's machines. During 2002, the Company paid an
aggregate of $5,120,953 to Algonquin Industries and Hi-Tech Metals for these
mechanisms. The Company currently plans to continue purchasing all of these
mechanisms from Algonquin Industries and Hi-Tech Metals. The Company believes
that the purchases are on terms no less favorable than would be obtainable from
unaffiliated third parties.

ITEM 14.          CONTROLS AND PROCEDURES

         As of December 31, 2002, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures.
Based on that evaluation, the Company's management,

                                       58

<PAGE>


including the CEO and CFO, concluded that the Company's disclosure controls and
procedures were effective as of December 31, 2002. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to December 31, 2002.


                                     PART IV


ITEM 15.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
                  8-K

         (a)      Documents Filed as Part of This Report.

                  1.       Financial Statements

                           Independent Auditors' Report of Grant Thornton LLP

                           Balance Sheets at December 31, 2001 and 2002

                           Statements of Income for each of the years in the
                           three-year period ended December 31, 2002

                           Statements of Stockholders' Equity for each of the
                           years in the three-year period ended December 31,
                           2002

                           Statements of Cash Flows for each of the years in the
                           three-year period ended December 31, 2002

                           Notes to Financial Statements

                  2.       Financial Statement Schedules

                           The following financial statement schedule is set
                           forth on page S-1 of this report:

                                    Schedule II - Valuation and Qualifying
                                    Accounts

                           All other schedules have been omitted because they
                           are not required or are inapplicable or because the
                           information required is included in the financial
                           statements or notes thereto.

                  3.       Exhibits

                           See Index of Exhibits (page E-1) for a list of the
                           exhibits filed with and incorporated by reference in
                           this report.

         (b)      Reports on Form 8-K. None.

                                       59

<PAGE>

                                   SIGNATURES


         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized, on August 4,
2003.


                                INTERLOTT TECHNOLOGIES, INC.

                                By: /s/ L. Rogers Wells, Jr.
                                    ------------------------
                                    L. Rogers Wells, Jr.
                                    Chairman of the Board




                                       60

<PAGE>


                                 CERTIFICATIONS

I, David F. Nichols, certify that:

         1.       I have reviewed this annual report on Form 10-K of Interlott
Technologies, Inc.;

         2.       Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3.       Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;

         4.       The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

         a)       designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this annual report is being prepared;

         b)       evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         c)       presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

         5.       The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):

         a)       all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

         b)       any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

         6.       The registrant's other certifying officer and I have indicated
in this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.


Date: August 4, 2003


 /s/ David F. Nichols
---------------------------
Chief Executive Officer


                                       61

<PAGE>

I, Dennis W. Blazer, certify that:

         1.       I have reviewed this annual report on Form 10-K of Interlott
Technologies, Inc.;

         2.       Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3.       Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;

         4.       The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

         a)       designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this annual report is being prepared;

         b)       evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         c)       presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

         5.       The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):

         a)       all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

         b)       any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

         6.       The registrant's other certifying officer and I have indicated
in this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.


Date: August 4, 2003


 /s/ Dennis W. Blazer
---------------------------
Chief Financial Officer

                                       62

<PAGE>

                          FINANCIAL STATEMENT SCHEDULE

                          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

2000           $  158,793  $   90,000  $        0  $    2,921  $  245,872
-------------------------------------------------------------------------
2001              245,872     180,000           0     222,771     203,101
-------------------------------------------------------------------------
2002              203,101     244,742           0     394,511      53,332
-------------------------------------------------------------------------

Inventory
valuation
reserve

2000           $1,000,286  $  401,292  $        0  $  920,494  $  481,084
-------------------------------------------------------------------------
2001              481,084     465,110           0     221,279     724,915
-------------------------------------------------------------------------
2002              724,915     540,882           0     158,132   1,107,665
-------------------------------------------------------------------------
</TABLE>

                                      S-1

<PAGE>

                          INTERLOTT TECHNOLOGIES, INC.

                                INDEX OF EXHIBITS

The following exhibits are filed with or incorporated by reference in this
report. Where the exhibit is incorporated by reference from a previously filed
document, that document is identified in parenthesis. Unless otherwise
indicated, each document incorporated by reference was filed by the Company.

<TABLE>
<CAPTION>
EXHIBIT NO.  DESCRIPTION
-----------  -----------
<S>          <C>
   2.1       Agreement and Plan of Merger dated as of March 17, 2003 by and
             among GTECH Holdings Corporation, Bengal Acquisition Co. and
             Interlott Technologies, Inc. (Current Report on Form 8-K dated
             March 17, 2003).

   2.2       Stockholder Voting and Option Agreement dated as of March 17, 2003
             among GTECH Holdings Corporation, Bengal Acquisition Co. and L.
             Rogers Wells, Jr. (Current Report on Form 8-K dated March 17,
             2003).

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

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

   4.1       Credit Agreement dated January 25, 2001 between the Company and
             Fifth Third Bank (Annual Report on Form 10-K for the year ended
             December 31, 2000).

   4.2       Security Agreement dated January 25, 2001 between the Company and
             Fifth Third Bank (contained in Exhibit 4.3).

   4.3       Mortgage of Intellectual Property dated January 25, 2001 between
             the Company and Fifth Third Bank (Annual Report on Form 10-K for
             the year ended December 31, 2000).

   4.4       Third Amendment dated May 31, 2001 to Credit Agreement between the
             Company and Fifth Third Bank (Quarterly Report on Form 10-Q for the
             quarter ended June 30, 2001).

   4.5       Amended and Restated Revolving Note dated June 1, 2001 from the
             Company to Fifth Third Bank (Quarterly Report on Form 10-Q for the
             quarter ended June 30, 2001).
</TABLE>

                                      E-1

<PAGE>


<TABLE>
<S>          <C>
   4.6       Security Agreement dated as of May 31, 2001 between the Company and
             Fifth Third Bank (Quarterly Report on Form 10-Q for the quarter
             ended June 30, 2001).

   4.7       Fourth Amendment dated October 3, 2001 to Credit Agreement between
             the Company and Fifth Third Bank (Annual Report on Form 10-K for
             the year ended December 31, 2001).

   4.8       Fifth Amendment dated March 21, 2002 to Credit Agreement between
             the Company and Fifth Third Bank (Annual Report on Form 10-K for
             the year ended December 31, 2001).

   4.9       Sixth Amendment dated October 23, 2002 to Credit Agreement between
             the Company and Fifth Third Bank (Quarterly Report on Form 10-Q for
             the quarter ended September 30, 2002).

  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" (Registration Statement
             on Form S-1, No. 33-75142).

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

  10.3       Asset Purchase Agreement dated February 23, 2001 between the
             Company and On-Point Technology Systems, Inc. (the Current Report
             on Form 8-K of On-Point Technology Systems, Inc. dated February 23,
             2001 and filed March 9, 2001).

  10.4       Management Compensatory Plans

             (a)     1994 Stock Incentive Plan, as amended and restated (Proxy
                     Statement for 2001 Annual Meeting of Stockholders).

             (b)     1994 Directors Stock Incentive Plan (Registration Statement
                     on Form S-1, No. 33-75142).

             (c)     Employment Agreement dated as of January 1, 2001 between
                     the Company and David F. Nichols (Annual Report on Form
                     10-K for the year ended December 31, 2000).

  23.1       Consent of Grant Thornton LLP -- filed herewith.

  24.1       Powers of Attorney -- previously filed.

  99.1       Certification under Section 906 of the Sarbanes-Oxley Act of 2002 -
             furnished herewith.
</TABLE>


                                      E-2