<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31,1998

              [ ] 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)

                 10830 MILLINGTON COURT, CINCINNATI, OHIO 45242
          (Address of principal executive offices, including zip code)

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

      TITLE OF EACH CLASS          NAME OF EACH EXCHANGE ON WHICH REGISTERED
 Common Stock, $.01 Par Value                  American Stock Exchange

        SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

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

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

The aggregate market value of the Registrant's outstanding Common Stock held by
non-affiliates of the Registrant on March 22, 1999 was $9,630,000. There were
3,210,000 shares of Common Stock outstanding as of March 22, 1999.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's 1998 Annual Report are incorporated by reference in
Part II hereof. Portions of the Registrant's Proxy Statement for the 1999 Annual
Meeting of Stockholders to be held on May 6, 1999 are incorporated by reference
in Part III hereof.


<PAGE>   2


                          INTERLOTT TECHNOLOGIES, INC.
                           ANNUAL REPORT ON FORM 10-K
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
ITEM                                                                                                         PAGE
NUMBER                                                                                                       NUMBER
------                                                                                                       ------
<S>                                                                                                          <C>
PART I............................................................................................................3

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

   2.      Properties............................................................................................20

   3.      Legal Proceedings.....................................................................................20

   4.      Submission of Matters to a Vote of Security Holders...................................................21

   4(A).   Executive Officers of the Registrant..................................................................21

PART II..........................................................................................................22

   5.      Market for the Registrant's Common Stock and Related Stockholder Matters..............................22

   6.      Selected Financial Data...............................................................................22

   7.      Management's Discussion and Analysis of Financial Condition and Results of Operations.................22

   7(A).   Quantitative and Qualitative Disclosures About Market Risk............................................27

   8.      Financial Statements and Supplementary Data...........................................................27

   9.      Changes In and Disagreements With Accountants on Accounting and Financial Disclosure..................27

PART III.........................................................................................................28

   10.     Directors and Executive Officers of the Registrant....................................................28

   11.     Executive Compensation................................................................................28

   12.     Security Ownership of Certain Beneficial Owners and Management........................................28

   13.     Certain Relationships and Related Transactions........................................................28

PART IV..........................................................................................................28

   14.     Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................28

           SIGNATURES............................................................................................32

           INDEX OF FINANCIAL STATEMENT SCHEDULES.................................................................1

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


<PAGE>   3

                                     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 without the assistance of an employee of the
lottery instant ticket retailer or agent, thereby permitting the retailer or
agent to sell tickets without disrupting the normal duties of its employees.

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

         As of December 31, 1998, the Company had sold or leased 15,045 ITVMs
under agreements with 23 different state lotteries and seven international
jurisdictions, or their licensees or contractors. The Company was awarded four
of the six contracts that were awarded to the industry in 1998. Additionally,
lotteries in four states and five international jurisdictions currently are
testing the Company's products and services or have requested the Company to
provide ITVMs for testing.

         The Company continually seeks to enhance its existing product lines and
develop new products. In 1998, the Company introduced its Modular Vending
Platform to increase over-the-counter instant ticket sales and reduce ticket
shrinkage. Also in 1998, the Company introduced the Automated Communication
System, which significantly increases and enhances the flow of information
between the ITVMs in the field and the lotteries.

         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. Sales of the Company's PCDMs began in the latter part
of 1995, and as of December 31, 1998, the Company had sold or leased a total of
851 PCDMs. PCDM revenues in 1998 represented 2.3% of total revenues.

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



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<PAGE>   4

INDUSTRY OVERVIEW

         ITVMs

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

         ITVMs were first deployed to serve the instant lottery market in 1991,
and the market for ITVMs has grown rapidly in subsequent years. The number of
installed ITVMs has increased from approximately 900 in two states in 1991 to
approximately 25,000 in 31 states, the District of Columbia and eight
international jurisdictions as of December 31, 1998. Four states and five
international jurisdictions currently are testing or preparing to test ITVMs in
the field, and the Company believes that several other states and international
jurisdictions are considering the use of ITVMs. Additionally, because states
that utilize ITVMs typically introduce the ITVMs into the instant ticket
distribution system in stages (preferring to test retail reception to a limited
initial deployment of ITVMs before fully committing funds to the deployment of a
significantly larger number of ITVMs), the Company believes that states
currently utilizing ITVMs represent a growing market for the Company's ITVMs.

         PCDMs

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

         The use of PCDMs as a method of distribution of prepaid telephone
calling cards has paralleled the market acceptance of the card. PCDMs are now
being used successfully to sell prepaid telephone calling cards in truck stops,
military bases, convenience stores, airports, and numerous other types of retail
locations. The Company believes that the sale of prepaid long distance telephone
calling cards and the use of PCDMs are in the very early stages of market
development in the United States and anticipates the continued development of
the market.

BUSINESS STRATEGY

         The Company's business strategy involves the following elements:

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



                                      -4-
<PAGE>   5

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

          -       Continued product innovation and technological advances.
                  Management believes that the Company's products are more
                  technologically advanced than the products of its competitors
                  and that the technological superiority of the Company's ITVM
                  is a principal reason for its success to date. To further
                  expand the Company's market opportunities, the Company
                  continually seeks to enhance its existing products and develop
                  complementary products that offer the superior operating
                  performance of its ITVMs and PCDMs. For example, the Company
                  has developed a new Modular Vending Platform ("MVP") for use
                  in convenience stores and grocery check-out lanes which should
                  increase sales and reduce ticket shrinkage. The Company also
                  has enhanced its software to interact with currency acceptors
                  of international currency and display messages in several
                  languages. Finally, the Company has improved its on-line
                  communications system through the new Automated Communication
                  System that significantly increases and enhances the flow of
                  information between the ITVMs in the field and the lotteries.

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

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

PRODUCTS

         The ITVM

         In 1987, Edmund F. Turek, who currently serves as a director of and
consultant to the Company, developed the technology for what the Company
believes to be 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. Unlike the products of some of the Company's competitors,
the burster technology in the Company's ITVMs automatically separates one
scratch-off instant ticket from another along the perforations between tickets
to help prevent tearing of the tickets or scarring of the latex on the tickets.
The Company's burster technology, which the Company believes to be the most
technologically advanced scratch-off dispensing system in the ITVM industry,
also enables the Company's 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



                                      -5-
<PAGE>   6

retailer or agent. This feature allows lotteries to purchase virtually any known
type of scratch-off instant ticket from their instant ticket manufacturer
without having to request from the manufacturer major alterations in the ticket
perforations. For example, the Company's ITVM, unlike the products of the
Company's competitors, can dispense recyclable scratch-off tickets without
tearing or scarring the tickets. The Company believes that lotteries will
increasingly require the use of recyclable tickets in their ITVMs. This feature
also is particularly beneficial to 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 proven record of
reliability. Based on an analysis of actual field service data regarding the
dispensing of approximately 55 million scratch-off instant tickets by the
Company's ITVMs during a 48-week period, the Company determined that the Mean
Time Between Failure of these ITVMs is approximately 3.78 years and that the
Mean Time to Repair is approximately 15 minutes. The data indicated that these
ITVMs dispense an average of 392,800 scratch-off instant tickets between
failures. The Company believes that it has developed an ITVM that has proven to
be reliable and that requires less maintenance than the products of its
competitors. The Company believes that the reliability of its ITVMs and the
lower maintenance requirements distinguish the Company's ITVMs for scratch-off
tickets from those of its competitors. See "Competition" below.

         The Company's ITVM for scratch-off tickets has the capacity to dispense
tickets from one to 16 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 16 different instant-winner games with a single ITVM. The ITVM
can accommodate up to 16,000 tickets in the 16-game unit and can dispense all
tickets in the bin without manual intervention. When all of the tickets in a bin
have been dispensed, tickets can be easily reloaded by an employee of the
retailer or agent. This is in contrast to the products of the Company's
competitors, which the Company believes require the retailer or other agent to
tape the last few tickets in each bin to the next pack of tickets provided by
the retailer or other agent. The ability of the Company's ITVM to dispense every
ticket in each bin not only facilitates the ticket reloading process but also
enhances the accuracy of the inventory and accounting functions.

         All of the Company's ITVMs accept bills in $1, $2, $5, $10 and $20
denominations and, in some applications, accept international currency. The size
of the Company's ITVM for scratch-off tickets varies from 69 inches tall, 28
inches wide and 24 inches deep for a 16-game unit to 19.75 inches tall, 15.5
inches wide and 20.5 inches deep for a countertop unit.

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

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

         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



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<PAGE>   7

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 11 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.

         The Company incorporates a common electronic system in all of its
equipment. This enables the Company to efficiently develop common software and
to realize cost efficiencies in acquiring electronic components.

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

         The PCDM

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

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

         The Company's PCDMs have the capacity to dispense cards from two to six
different bins. The PCDM can accommodate up to 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.



                                      -7-
<PAGE>   8

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

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

MARKETING AND SALES

         ITVMs

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

         The focus of the Company's marketing strategy is on the superior
performance and reliability of its ITVMs, as well as continued competitive
pricing. Information developed through actual field use and product field tests
demonstrates that a significant factor in increasing instant ticket sales is the
reliability of the ITVM. Increased maintenance visits impair the ITVM "uptime,"
which in turn reduce ticket sales. The Company believes that its ITVMs, based on
actual field performance and product testing, are the most reliable and
technologically superior in the industry. Management believes that actual field
demonstrations comparing the Company's ITVMs with those of its competitors are
the Company's best method of marketing. The Company has been awarded contracts
to provide ITVMs for 13 of the last 17 state lotteries that have requested bid
proposals and 4 of the 6 domestic ITVM contracts that were awarded in 1998.

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

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



                                      -8-
<PAGE>   9

laws of their respective jurisdictions in selecting an ITVM manufacturer, the
lotteries may solicit the opinions of the lottery retailers concerning the ITVMs
under consideration by the lottery because the retailers are directly affected
by the selection decision. The Company believes that retailers' opinions may be
a significant factor in a customer's decision regarding which manufacturer's
ITVM to deploy in its instant ticket distribution system.

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

         PCDMs

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

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

CONTRACTS

         ITVMs

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



                                      -9-
<PAGE>   10

Generally, an evaluation committee comprised of key lottery staff members
appraises the proposals based on an established point system, and the contract
is awarded to the company with the most points.

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

         The Company offers lotteries a choice of three types of contracts: (i)
Standard Lease Agreements, (ii) Sales Agreements, and (iii) Percentage Lease
Agreements. ITVM lease revenues as a percentage of the Company's total revenues
were 63.3%, 67.3% and 57.9% in 1996, 1997 and 1998, respectively.

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

         As noted above, the lease payments provided for in the typical Standard
Lease Agreement are fixed in most cases during the term of the agreement, and
these agreements typically permit the lottery to order additional ITVMs at any
time during the lease term. If the lottery orders a significant number of ITVMs
near the end of the lease term, the Company would have to incur significant
manufacturing costs but may receive lease payments for only a relatively short
period of time through the remainder of the lease term. However, the Company
believes that it is more likely that the lottery would elect to extend the lease
term rather than return the ITVMs after only a short period of use.
Additionally, the Company is unable to pass along to the lottery any 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 a vendor to maintain and
service the ITVMs, although some lotteries provide the maintenance and service
with their own service staffs. The lottery generally will enter into a parts
replacement contract with the vendor for replacement parts.

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

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

         The Company's contracts generally have an initial term of one to five
years with options to extend the duration of the contracts for periods between
one and five years. The option extensions generally are at the



                                      -10-
<PAGE>   11

lottery's discretion and are exercised under the same terms and conditions as
the original contract. As of December 31, 1998, the initial term of five of the
Company's contracts had expired, and in each case, the lottery exercised its
option to extend the term. The Company's contracts with lotteries, like most
other types of state contracts, typically permit a lottery to terminate the
contract upon 30 days written notice for any reason. Upon termination of a lease
contract, the lottery would return the leased equipment to the Company. It is
uncertain, however, whether the Company would be able to re-lease or sell any
ITVMs that may be returned to the Company following the expiration or
cancellation of a lease. To date, no lottery has terminated its contract with
the Company. Upon termination of a contract, the lottery may award new contracts
through a competitive bid process.

         As noted above, the Company believes that 31 states and the District of
Columbia utilize ITVMs in some manner as part of their instant ticket
distribution system. The Company's ITVMs have been deployed in 23 of those
states as well as seven international jurisdictions, and four additional states
and five international jurisdictions currently are testing the Company's ITVMs
or have requested that the Company provide ITVMs for testing. Set forth below is
certain information regarding the Company's contract status and the number of
Company ITVMs sold or leased in each of these jurisdictions as of December 31,
1998. All of the Company's existing contracts, except for the contract with the
Maryland Lottery, have provisions that allow the lotteries to order additional
ITVMs in the future.

<TABLE>
<CAPTION>
                                                                                                   NO. OF ITVMS
   STATE                        STATUS OF CONTRACT AWARD                 TYPE OF CONTRACT          SOLD OR LEASED
   -----                        ------------------------                 ----------------          --------------

<S>                       <C>                                            <C>                       <C>
Arizona                   Awarded in October 1993; renewed through       Standard Lease/                  221
                          June 1999.                                     Maintenance

Colorado                  Awarded in June 1996; renewed through June     Standard Lease/                  484
                          2000.                                          Maintenance

District of Columbia      Awarded December 1997; renewed through         Standard Lease                    8
                          December 2000.

Florida                   Awarded September 1996; renewed through June   Standard Lease/                 734
                          2000.                                          Maintenance

Georgia (1)               Awarded in May 1993; renewed through May       Standard Lease/                 500
                          2003.                                          Maintenance

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

Indiana                   Awarded in July 1995; expired in October       Standard Lease                  700
                          1997, with two one-year renewals at the
                          option of the lottery; both renewal options
                          have been exercised.

Iowa                      Awarded in August 1994; expired in December    Standard Lease/                 531
                          1998, with two one-year renewals at the        Maintenance
                          option of the lottery; both renewal options
                          have been exercised through December 2000.
</TABLE>



                                      -11-
<PAGE>   12

<TABLE>
<S>                       <C>                                            <C>                           <C>
Kansas                    Awarded July 1997; expired July 1998 with      Standard Lease/                   74
                          five one-year renewals at the option of the    Maintenance
                          lottery; renewed through July 1999.

Kentucky                  Purchased in June 1991.                        Sales                            912

Maine                     Awarded in July 1995; expired in July 1998,    Standard Lease/                  198
                          with two one-year extensions at the            Maintenance
                          lottery's option; renewed through July 1999.

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

Minnesota                 Awarded in December 1996; expires three        Standard Lease/                   10
                          years from acceptance of each ITVM, with two   Maintenance
                          one-year renewals at the option of the
                          lottery

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

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

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

New York (3)              Awards of purchase contracts made in May       Sales/Maintenance/             3,139
                          1992 and January 1993; deployment completed    Standard Lease
                          in June 1992 and February 1993,
                          respectively; initial one-year purchase and
                          three-year maintenance contract entered into
                          in March 1995, with a one-year renewal
                          option by the lottery; initial five-year
                          lease contract awarded in January 1997 for
                          up to 1,000 units, with a one-year renewal
                          option as mutually agreed

Ohio                      Awarded in January 1992; extended in June      Standard Lease/                1,681
                          1993 and June 1995; expired in June 1997;      Maintenance
                          new contract awarded April 1997; extended
                          through June 1999, with two two-year
                          extensions at the option of the lottery

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

Rhode Island (4)          Awarded in June 1994; renewed through June     Standard Lease/                  170
                          1999                                           Maintenance
</TABLE>



                                      -12-
<PAGE>   13

<TABLE>
<S>                       <C>                                            <C>                       <C>
Texas                     Awarded in January 1995; renewed through       Standard Lease/                1,466
                          February 1999; leased on month-to-month        Maintenance
                          basis pending award of new contract.

Washington                Awarded in December 1998; expires in           Standard Lease/                  136
                          December 2002, with two one year renewal       Maintenance
                          options.

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

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

Brazil                    Purchase orders received in October 1996 and   Sales                            104
                          October 1998.

Denmark                   Purchase order received in April 1998          Sales                            100

Iceland                   Purchase orders issued in January and          Sales                             31
                          October 1997

Israel                    Purchase order issued in July 1997             Sales                             40

Quebec                    Purchase order received in June 1998           Sales                             50

Western Australia         Purchase order received in May 1995            Sales                              8

         Total Sold or Leased                                                                          13,019
                                                                                                       ======
</TABLE>

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

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

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

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

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

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

                                    * * * * *



                                      -13-
<PAGE>   14

         Substantially all of the Company's revenues are derived from its
contracts with a limited number of state lottery authorities or their
representatives for the lease, sale or service of ITVMs. In particular, during
1998, the Company's contract with the New York Lottery accounted for 24% of the
Company's revenues, and contracts with the Texas Lottery and the Ohio Lottery
accounted for 16% and 14% of the Company's revenues, respectively.

         PCDMs

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

         Unlike the Company's experience in the ITVM industry in which a lottery
typically enters into a lease or sales contract with the successful bidder, most
purchasers of the Company's PCDMs to date have ordered PCDMs solely through
purchase orders rather than contracts, although several customers entered into a
lease agreement for PCDMs. Like contracts with the lotteries, however, these
purchase orders may contain stringent installation, performance and service
requirements. As of December 31, 1998, the Company had sold 756 PCDMs and had 95
PCDMs under lease.

MANUFACTURING PROCESS

         The manufacturing process consists of purchasing component parts,
assembling the ITVMs and PCDMs and then testing the final products. Generally,
the Company's machines use components which are built to Company specifications
and are available from multiple sources. The Company has a strict policy of
product procurement that emphasizes quality, satisfactory inventory of raw
materials, and cost. The Company has a primary vendor and secondary suppliers
for most of its components, and the Company typically has been able to obtain
adequate supplies of required components on a timely basis from its suppliers
or, when necessary, from alternative sources of supply. However, certain
important components, such as components of the Company's ITVM burster, PTVM
dispensing mechanism and PCDM dispensing mechanism currently are purchased from
a single source. The purchase of components from single-source suppliers
subjects the Company to certain risks, including the continued availability of
suppliers, price increases, potential quality assurance problems and lead time
considerations. Because other suppliers exist that can duplicate these
components should the Company elect or be forced to use a different supplier,
the Company does not believe that any such change in suppliers would result in
the termination of a production contract. However, the Company could experience
a delay of 30 to 60 days in the production of machines should it elect or be
forced to use other suppliers for these components. Such a delay adversely could
affect the Company's ability to make timely deliveries of machines and to obtain
new contracts. The single-source supplier of certain components of the Company's
burster mechanism, PTVM dispensing mechanism and PCDM dispensing mechanism is
Algonquin Industries, Inc. Kazmier J. Kasper, a director of the Company, is the
President and owner of Algonquin Industries. See "Item 13. Certain Relationships
and Related Transactions. "

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



                                      -14-
<PAGE>   15

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

         The Company's manufacturing facility is located in Cincinnati, Ohio and
has the capacity to produce and provide inventory for approximately 300 machines
per week. The Company believes that this facility is suitable and adequate for
its current and anticipated manufacturing needs at the present time.

RESEARCH AND NEW PRODUCT DEVELOPMENT

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

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

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

         The Company has incorporated its patented pull-tab lottery ticket
dispensing mechanism into a combination ITVM which also contains the Company's
patented burster mechanism. The Company currently has approximately 30
combination ITVMs under lease to two state lotteries. 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.

         The Company has developed the MVP to address the specific needs of
convenience store and grocery check-out lanes. The MVP may be installed in a
variety of configurations including under-the-counter. This new technology
reduces ticket shrinkage and increases sales volume of instant tickets and may
also be tied into the Point of Service register.



                                      -15-
<PAGE>   16

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

         Research and development expenditures were $665,449, $545,039 and
$618,819 for 1996, 1997 and 1998, respectively. The Company expects that its
research and development efforts for the foreseeable future will be conducted by
both Company employees and independent contractors.

CUSTOMER SERVICE AND PRODUCT REPAIR

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

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

         The Company generally grants a 360-day repair or replacement warranty
covering all parts and components of its machines. However, the warranty period
may vary depending on the bid specifications. In certain circumstances, the
Company may warrant the product for the complete life of the contract. In these
instances, the contract generally will be a lease with the Company retaining
ownership of the machine. Provisions for estimated warranty costs are recorded
at the time of sale and are periodically adjusted to reflect actual experience.
See Note 1 of Notes to Financial Statements contained in the Company's 1998
Annual Report, which is filed as Exhibit 13 to this report.

PATENTS, TRADEMARKS AND COPYRIGHTS

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

         The Company owns by assignment U.S. Patent No. 4,982,337 entitled
"System for Distributing Lottery Tickets." The assignment is recorded at the
PTO. This patent is for the Company's burster technology, which is the key
component of the Company's ITVM. The patent expires no later than December 31,
2007. The Company believes this patent is essential to the Company's business.
Additionally, the Company has developed improvements to the burster technology
disclosed in this patent and the patent application on those improvements has
issued as U.S. Patent No. 5,836,498. The improved burster provides for an
increased range of operation for reliable and effective separation of the
adjacent tickets along the lines of weakness. Additionally, foreign patent
applications are pending on these improvements.

         The Company has developed a new system designed specifically for retail
sale of lottery tickets and other items at the retail point of sale. The system
utilizes the Company's burster technology and includes other modular



                                      -16-
<PAGE>   17

and distributed components that can be adapted for use at the point of sale. The
Company has a pending patent application at the PTO on this technology as well
as corresponding foreign pending patent applications.

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

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

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

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

         The dispensing technology used in the Company's PTVM and PCDM was
developed by Algonquin Industries, Inc. and is licensed to the Company pursuant
to an exclusive license agreement with Algonquin Industries. Algonquin
Industries has been granted six U.S. Patents and one is pending for these
mechanisms. Under the terms of the license agreement, the Company is the sole
entity entitled to use this technology on its ITVMs. See "Item 13. Certain
Relationships and Related Transactions."

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

         The Company has obtained federal registration in the United States of
the following trademarks: INTERLOTT, INTERLOTT and design, and INSTANT SUCCESS.
The Company also has obtained registration of the trademark INTERLOTT in
international class 9 on June 21, 1994. This registration will remain in force
for ten years. The Company does not deem the trademarks to be critical to the
future of its business.



                                      -17-
<PAGE>   18

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

COMPETITION

         Competition in the markets for the Company's ITVM and PCDM is based on
a number of factors, including technological features, product quality and
reliability, price, compatibility, ease of installation and use, marketing and
distribution capabilities, product delivery time, and service and support. The
Company is aware of four manufacturers of ITVMs and approximately four
manufacturers of PCDMs in the United States, and competition among these
manufacturers is intense. Of the four ITVM competitors, the Company has the
largest share of the ITVM market in the United States. 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.

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

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

GOVERNMENT REGULATION

         ITVMs

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

         Currently, 37 states and the District of Columbia have enacted
legislation to allow for the operation of a lottery, and 31 of these
jurisdictions utilize ITVMs in some manner as part of their instant ticket
distribution process. The operation of the lotteries in each of these
jurisdictions is strictly regulated. The formal rules and regulations governing
lotteries vary from jurisdiction to jurisdiction but typically authorize the
lottery, create the governing authority, dictate the 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. No assurance can be given that
there will not be an adverse change in the



                                      -18-
<PAGE>   19

lottery laws of any jurisdiction in which the Company does business. Although
the Company believes that it is unlikely that states which have enacted
legislation that expressly authorize the use of ITVMs will adopt legislation in
the foreseeable future that prohibits the use of ITVMs, there can be no
assurance that such legislation will not be adopted in one or more jurisdictions
in the foreseeable future.

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

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

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

         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.

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

         PCDMs

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

BACKLOG

         The Company's backlog of ITVMs committed for production as of December
31, 1998 was approximately $5,640,000, which was equal to the total base lease
payments or sales value for the 897 ITVMs that were committed for production but
had not been shipped to the Washington Lottery as of December 31, 1998. At
December 31, 1997, the backlog of ITVMs committed for production was
approximately $4,250,000, which was equal to the total base lease payments or
sales value for the 847 ITVMs that were committed for production but had not
been shipped to the Maryland and Ohio Lotteries as of December 31, 1997. See
"Lottery Contracts." It is anticipated that substantially all of the Company's
backlog at December 31, 1998 will be shipped on or before June 30, 1999. The
Company had no backlog of PCDMs committed for production at December 31, 1998.



                                      -19-
<PAGE>   20

         The Company has entered into various lease or sales agreements that
permit the lotteries, at their sole option, to lease or purchase up to a total
of 2,500 additional ITVMs as of December 31, 1998. However, the Company does not
include these additional ITVMs in backlog ITVMs that may be sold or leased under
existing contracts unless the Company has received a firm order for the ITVMs.
Due to the relatively large size of individual orders, the small number of
customers and the long sales cycle of the lottery industry, management considers
backlog to be an indicator of current activity and not necessarily predictive of
future orders.

EMPLOYEES

         The Company utilizes a work force of full-time employees supported from
time to time by temporary or contract manufacturing and engineering personnel.
As of December 31, 1998, the Company had 194 full-time employees, of which 78
were manufacturing employees, 7 were engineering employees, 84 were service
employees, 15 were clerical and administrative employees and 10 were executives
or senior managers. Two of the executives and senior managers were devoted to
sales and 8 were devoted to management and administration. The Company intends
to increase sales and marketing personnel during 1999 through the addition of
one employee, to increase engineering personnel through the addition of one
employee and to increase management and administrative personnel through the
addition of two employees.

         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 executive offices are located in approximately 11,750
square feet of leased space in Cincinnati, Ohio. This facility houses the
Company's executive, administrative, sales, engineering and service personnel.
The lease for this facility expires on December 31, 1999.

         The Company's manufacturing and distribution facilities are in a
facility containing approximately 35,000 square feet of leased space located a
very short distance from the Company's executive offices. The facility is
comprised of approximately 5,000 square feet of office space and approximately
30,000 square feet of manufacturing space with the capacity to produce and
provide inventory for approximately 300 machines per week. The lease for this
facility also expires on December 31, 1999. The Company believes that these two
facilities are suitable for and adequate to support its operations for the
foreseeable future.

         The Company also leases approximately 1,000 square feet of warehouse
and office space in Alpharetta, Georgia for the purpose of storing and repairing
ITVMs used in connection with the Georgia Lottery. Scientific Games, Inc.
provides this space to the Company at no cost under the terms of the Company's
contract with Scientific Games. The lease has been renewed through May 2003. See
"Item 1. Business -- Contracts -- ITVMs." The Company believes that this
facility is suitable for and adequate to support its operations for the Georgia
Lottery.

ITEM 3.           LEGAL PROCEEDINGS

         In January 1996, the Company filed a lawsuit in the United States
District Court for the Southern District of Ohio against Lottery Enterprises,
Inc. ("LEI, " now known as On-Point Technology Systems, Inc.) to collect sums
that the Company alleged were owed to it under an Agreement in Principle dated
March 23, 1995, relating to the Company's potential acquisition of LEI by merger
(the "Transaction"). The parties did not consummate the Transaction. The
Agreement in Principle required LEI to reimburse the Company's reasonable
out-of-pocket expenses incurred in connection with the Transaction in the event
the parties failed to execute a definitive merger agreement within 120 days of
March 23, 1995, and the primary reason that the parties did not execute a
definitive merger agreement was other than a breach of the Agreement in
Principle by the Company. The Agreement in Principle also required LEI to pay
the Company a "break-up fee" in the event that, within one year after the
termination or abandonment of the Transaction by LEI, LEI entered into a binding
commitment to engage in a



                                      -20-
<PAGE>   21

recapitalization, debt issuance or working capital financing other than in the
ordinary course of business, and the primary reason for the termination or
abandonment of the Transaction was other than termination or breach of the
Agreement in Principle by the Company. The Company sought reimbursement of
approximately $241,000 in out-of-pocket expenses and a break-up fee exceeding
$988,000.

         LEI denied any liability to the Company and also asserted counterclaims
against the Company for unfair competition and tortious interference seeking
unspecified money damages exceeding $500,000. LEI claimed that the Company had
competed unfairly with LEI and had wrongfully interfered with LEI's business by
misrepresenting Lei's financial condition to the Pennsylvania state lottery
agency and by utilizing information about LEI received during the due diligence
conducted in connection with the Transaction. LEI also claimed that it was
entitled to recover from the Company unspecified costs and expenses that it
incurred in connection with the Transaction and sought a declaration from the
Court that it was not obligated to pay the Company a break-up fee under the
Agreement in Principle.

         In 1997, the Court ruled that the Company was entitled to summary
judgement in its favor on LEI's counterclaims for unfair competition and
tortious interference. The Court also ruled that within one year after the
Transaction was abandoned or terminated, LEI did enter into a recapitalization,
debt issuance or working capital financing other than in the ordinary course of
business. The Court left open the question whether LEI had abandoned or
terminated the Transaction (as opposed to the Company), and the question of
whether LEI was obligated to reimburse the Company's out-of-pocket expenses
incurred in connection with the Transaction, both of which were to be determined
at trial.

         On March 4, 1999, the Company and LEI entered into a confidential
settlement agreement that resolved all claims asserted in the lawsuit on
satisfactory terms.

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, 1998.

ITEM 4(A).        EXECUTIVE OFFICERS OF THE REGISTRANT

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

         L. Rogers Wells, Jr., age 61, is Chairman of the Board and Chief
Executive Officer of the Company and has been the principal stockholder of the
Company since purchasing 80% of the Common Stock of the Company in September
1992. Mr. Wells served as a director of the Company from 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, including the Company. See "Item
13. Certain Relationships and Related Transactions." Mr. Wells has been active
in various other industries, including manufacturing, mining, explosives and
banking. From 1987 through 1991, Mr. Wells served as Secretary of Finance and
Administration for the Commonwealth of Kentucky, and from 1989 through 1991
served as Secretary to the Governor's Executive Cabinet. During his tenure as
Secretary of Finance and Administration, Mr. Wells served as Chairman of various
finance and development authorities, including the Kentucky Rural Economic
Development Authority, the Kentucky Infrastructure Authority and the Kentucky
Housing Corporation.

         Edmund F. Turek, age 72, was Vice Chairman of the Board of Directors of
the Company from May 1997 through February 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 February 1990 to September 1992 and



                                      -21-
<PAGE>   22

continued to serve as President of the Company until May 1997, when he was
appointed Vice Chairman of the Company. Mr. Turek became a consultant to the
Company in February 1999. See Item 13. "Certain Relationships and Related
Transactions." Mr. Turek began to develop the Company's ITVM in 1987 and has
guided the product through six generations to the current model. Mr. Turek was
Vice President of Peripheral Products in the computer division of SCI Systems,
Inc. from 1984 to 1989 where he developed business opportunities in the
commercial market for the design and manufacture of computer products. From 1953
to 1984, Mr. Turek held management, product development and operations positions
with various companies in the computer and aerospace industries.

         David F. Nichols, age 37, has been President of the Company since May
1997 and was appointed a director in December 1997. Mr. Nichols served as Senior
Vice President of Sales and Marketing of the Company from August 1994 to May
1997 and as Vice President-Operations of the Company from March 1993 until
August 1994. From December 1991 to December 1992, he was Executive Director of
the Board of Tax Appeals of the Commonwealth of Kentucky. From March 1990 to
December 1991, he was Principal Assistant to the Secretary of Finance and
Administration for the Commonwealth of Kentucky, and from March 1989 to March
1990, he was Principal Assistant to the Kentucky Office for Social Security.
From June 1988 to December 1988, he was Deputy Director of the Kentucky
Democratic Party.

         Thomas W. Stokes, age 35, has been Vice President of the Company since
May 1997. Mr. Stokes served as Director of Operations from January 1996 to May
1997 and as Purchasing Manager from March 1993 to December 1995. From 1988 to
1992, he served as unit controller for a food management company.

         Dennis W. Blazer, age 51, has been Chief Financial Officer of the
Company since July 1998. From December 1973 to July 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.

                                     PART II

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

         Information relating to the market for, holders of and dividends paid
on the Company's Common Stock is set forth under the caption "Corporate Data and
Shareholder Information" on the inside back cover page of the Company's 1998
Annual Report. Such information is incorporated herein by reference. The 1998
Annual Report is filed as Exhibit 13 to this report.

ITEM 6.           SELECTED FINANCIAL DATA

         Selected financial data for the Company for each year of the five-year
period ended December 31, 1998 is set forth under the caption "Selected
Financial Data" on page 7 of the 1998 Annual Report. Such financial data is
incorporated herein by reference.

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

         A discussion of Interlott's financial condition and results of
operations as of the dates and for the periods covered by the financial
statements contained in the 1998 Annual Report is set forth under the caption
"Management's Discussion and Analysis" on pages 7 through 9 of the 1998 Annual
Report. Such discussion is incorporated herein by reference.



                                      -22-
<PAGE>   23

         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:

         -        our dependence on a small number of major customers;

         -        relatively long sales cycles;

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

         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. The market for ITVMs has grown
rapidly since first deployed to serve instant lotteries in 1991. As of December
31, 1998, 31 states, the District of Columbia and eight international
jurisdictions used ITVMs as part of their instant ticket distribution system. We
leased or sold ITVMs in 23 of those states and in seven international
jurisdictions. Similarly, the use of PCDMs to distribute prepaid telephone
calling cards has grown significantly in the last few years. We have marketed
PCDMs since 1995, and as of December 31, 1998, we had sold or leased 851 PCDMs.
However, the popularity of instant lottery games and prepaid telephone calling
cards and the demand for ITVMs and PCDMs may not continue and, as a result, we
may not be able to successfully market and sell our products. Although the total
dollar amount of instant ticket sales continues to increase, the rate of
increase has declined from 23.7% to 6.9% for the lottery industry's fiscal year
ended June 30, 1992 through June 30, 1997. It is critical to our continued
success that we develop relationships with additional lotteries and telephone
companies and that additional states authorize instant lotteries.

         WE DEPEND ON LARGE CONTRACTS FROM A LIMITED NUMBER OF ITVM CUSTOMERS.

         We have traditionally derived a significant portion of our revenues
from a limited number of state lottery authorities or their representatives for
the lease, sale or service of ITVMs. In particular, during 1998, a contract with
the New York Lottery accounted for 24% of our total revenues. Additionally, a
contract with the Texas Lottery accounted for 16% of our machine lease revenues
in 1998, and a contract with the Ohio Lottery generated 14% of our machine sale
revenues in 1998. 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



                                      -23-
<PAGE>   24

by a patent that expires on December 31, 2007. Additionally, we have four other
patents and one pending patent application with the United States Patent and
Trademark Office. 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.

         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 cannot assure you that we could re-lease or sell any ITVMs
that may be 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 December 31, 1998, Mr. L. Roger Wells, Jr. beneficially owned
51.6% of the outstanding common stock. As a result, Mr. Wells may be able to
exert significant influence over the election of directors and the outcome of
certain corporate actions requiring stockholder approval. This concentration of
ownership in a single stockholder also can delay or prevent a change of control.

         OUR ITVM LEASE CONTRACTS MAY RESULT IN LOSSES.

         Our ITVM lease revenues as a percentage of our total revenues were
63.3% in 1996, 67.3% in 1997 and 57.9% in 1998. Our standard lease agreements
provide for fixed lease payments during the term of the agreement and typically
permit the lottery to order additional ITVMs at any time during the lease term.
If a lottery orders a large number of ITVMs near the end of the lease term, we
would incur significant manufacturing costs but may receive lease payments for
only a relatively short period of time through the remainder of the lease term.


                                      -24-
<PAGE>   25

Additionally, we are unable to pass along to the lottery any increases in
manufacturing and service costs during the term of the 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
ITVM.

         THE ITVM AND PCDM MARKETS ARE VERY COMPETITIVE.

         The ITVM and PCDM markets are relatively new markets that have grown
rapidly in recent years. We may not be able to compete successfully against
current or future competitors, many 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 competitive 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 any such 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 more than 30
to 60 days could have a material adverse effect on our business, financial
condition and results of operation.

         WE MAY NOT BE ABLE TO RETAIN OUR KEY EXECUTIVES AND RESEARCH AND
DEVELOPMENT PERSONNEL.

         As a small company with only 194 employees, our success depends in
large part on the continued service of our key management, sales, product
development and operational personnel, including Mr. L. Rogers Wells, Jr., our
Chairman and Chief Executive Officer, and David F. Nichols, our President. We do
not currently have employment agreements with any of our employees. Our success
also depends on our ability to attract and retain additional personnel with a
variety of skills, especially engineering and marketing expertise. Our inability
to hire and retain qualified personnel would likely have a material adverse
effect on our current business, any new product development efforts and future
business prospects.

         THE SUCCESS OF OUR INTERNATIONAL OPERATIONS IS SUBJECT TO MANY
UNCERTAINTIES.

         In each of 1997 and 1998, our sales and leases of ITVMs and PCDMs
outside the United States represented an immaterial percentage of our total
revenues. However, we intend to increase our marketing activities in
international jurisdictions, including expansion into several countries. Our
ability to expand our business into international markets may be adversely
affected by the following:

         -        customizing our products for use in international countries;

         -        longer accounts receivable payment cycles;



                                      -25-
<PAGE>   26

         -        difficulties in managing international operations;

         -        availability of trained personnel to install and implement our
                  systems;

         -        exchange rate fluctuations;

         -        political instability;

         -        tariffs and other trade barriers;

         -        potentially adverse tax obligations;

         -        restrictions on the repatriation of earnings; and

         -        the burdens of complying with a wide variety of international
                  laws and regulations.

         In addition, the laws of some countries do not protect our intellectual
property rights to as great an extent as the laws of the United States. Such
factors could have a material adverse effect on our international revenues and
earnings and our overall financial performance.

         FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE COULD NEGATIVELY AFFECT OUR
BUSINESS.

         The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips that store dates as two digits
rather than four (e.g., "99" for 1999). On January 1, 2000, these systems and
equipment may read "00" as the year 1900 instead of the year 2000. This problem
could result in an interruption in, or failure of, certain of our normal
business activities and operations.

         We have analyzed the Year 2000 issue with respect to the hardware and
software we use to provide our products and services and our computerized
information and operating systems. We do not believe that the costs necessary to
resolve the known Year 2000 problems will be material to our operating results.
If our projected timetable or cost estimates are incorrect, our business,
financial condition and results of operation could be negatively affected. We
are also discussing the Year 2000 issues with our significant customers,
manufacturers and suppliers. If they are unprepared for Year 2000 problems, our
business activities and operations could be negatively affected. We are not yet
certain to what extent our significant customers, manufacturers and suppliers
are Year 2000 compliant. If their systems are not timely converted or if their
converted systems are not compatible with ours, we may experience a significant
number of operational inconveniences and inefficiencies for us and our customers
that may divert our time and attention and financial and human resources from
our ordinary business activities. Any Year 2000 problems we have may result in a
materially adverse affect 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.

         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.

         FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD ADVERSELY
AFFECT OUR STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.

         The market price of our common stock could drop as a result of sales of
large numbers of shares in the market, or the perception that such sales could
occur. This is particularly true due to our relatively small number of
stockholders and the resulting low trading volume of our common stock in the
public market. These factors also



                                      -26-
<PAGE>   27

could make it more difficult for us to raise funds through future offerings. Our
principal stockholder, Mr. L. Rogers Wells, Jr., owns a majority of our common
stock.

         We have 3,210,000 shares of common stock outstanding. Approximately
1,400,800 of these shares are freely transferable without restriction or further
registration under the Securities Act of 1933. The remaining 1,809,200 shares
outstanding are held by our executive officers and directors and will become
eligible for sale in the future without registration under the Securities Act at
such times and in such amounts as permitted by Securities and Exchange
Commission Rule 144 or an exemption under the Securities Act. In addition, we
have registered under the Securities Act 320,000 shares of common stock issuable
under our two stock incentive plans.

         OUR FORWARD LOOKING STATEMENTS MAY BE INCORRECT.

         Some of the statements in this report and in our 1998 Annual Report are
forward looking statements about what may happen in the future. 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 above.
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 actual results could be very different from and worse than our
expectations as expressed in our forward looking statements.

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

         Not applicable.

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The following financial statements of the Company and the independent
auditors' report thereon, which are set forth on pages 9 through 16 of the 1998
Annual Report, are incorporated herein by reference:

         Balance Sheets at December 31, 1997 and 1998

         Statements of Income for each of the years in the three-year period
         ended December 31, 1998

         Statements of Stockholders' Equity for each of the years in the
         three-year period ended December 31, 1998

         Statements of Cash Flows for each of the years in the three-year period
         ended December 31, 1998

         Notes to Financial Statements

         The Company is not required to provide supplementary financial
information specified by Item 302 of Regulation S-K.

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

         Within the two-year period ended December 31, 1998 and subsequently,
the Company had no change in independent accountants or disagreements with
independent accountants on accounting and financial disclosure.


                                      -27-
<PAGE>   28

                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information relating to the directors of the Company will be set forth
under the captions "Proposal 1 -- Election of Directors -- Nominees" and
"Proposal 1 -- Election of Directors -- Information Regarding Nominees and
Continuing Directors" in the Company's Proxy Statement for its 1999 Annual
Meeting of Stockholders to be held on May 6, 1999. Such information is
incorporated herein by reference. Pursuant to Instruction 3 to Item 401(b) of
Regulation S-K and General Instruction G(3) to Form 10-K, information relating
to the executive officers of the Company is set forth in Part 1, Item 4(A) of
this report under the caption "Executive Officers of the Registrant."
Information regarding compliance with Section 16(a) of the Securities Exchange
Act of 1934, as amended, by directors and executive officers of the Company and
beneficial owners of more than 10% of the Company's Common Stock will be set
forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement referred to in this Item 10 above. Such
information is incorporated herein by reference.

ITEM 11.          EXECUTIVE COMPENSATION

         Information relating to executive compensation will be set forth under
the captions "Proposal 1 -- Election of Directors -- Director Compensation" and
"Executive Compensation" in the Proxy Statement referred to in Item 10 above.
Such information (other than the subsection of "Executive Compensation" entitled
"Compensation Committee Report on Executive Compensation") is incorporated
herein by reference.

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information regarding ownership of the Company's Common Stock as of
December 31, 1998 by certain persons will be set forth under the caption "Stock
Ownership" in the Proxy Statement referred to in Item 10 above. Such information
is incorporated herein by reference.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                     PART IV

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

         (a)      Documents Filed as Part of This Report.

                  1.       Financial Statements

                           The following financial statements of the Company and
                           the independent auditors' report thereon are included
                           in the Company's 1998 Annual Report and are
                           incorporated by reference in Item 8 hereof:

                           Balance Sheets at December 31, 1997 and 1998

                           Statements of Income for each of the years in the
                           three-year period ended December 31, 1998



                                      -28-
<PAGE>   29

                           Statements of Stockholders' Equity for each of the
                           years in the three-year period ended December 31,
                           1998

                           Statements of Cash Flows for each of the years in the
                           three-year period ended December 31, 1998

                           Notes to Financial Statements

                  2.       Financial Statement Schedules

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

                           Schedule II - Valuation and Qualifying Accounts

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

                  3.       Exhibits

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

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

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

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

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

                           4.3      Loan Agreement dated October 29, 1997
                                    between the Company and Mercantile Business
                                    Credit Inc (Exhibit 4.3 to the Company's
                                    Annual Report on Form 10-K for the year
                                    ended December 31, 1997).

                           4.3(a)   Revolving Credit Note dated October 29, 1997
                                    between the Company and Mercantile Business
                                    Credit Inc. (Exhibit 4.3(a) to the Company's
                                    Annual Report on Form 10-K for the year
                                    ended December 31, 1997).



                                      -29-
<PAGE>   30

                           4.3(b)   Security Agreement dated October 29, 1997
                                    between the Company and Mercantile Business
                                    Credit Inc. (Exhibit 4.3(b) to the Company's
                                    Annual Report on Form 10-K for the year
                                    ended December 31, 1997).

                           4.3(c)   Patent, Trademark and License Security
                                    Agreement dated October 29, 1997 between the
                                    Company and Mercantile Business Credit Inc.
                                    (Exhibit 4.3(c) to the Company's Annual
                                    Report on Form 10-K for the year ended
                                    December 31, 1997).

                           4.3(d)   First Amendment to the Loan Agreement dated
                                    October 29, 1998 between the Company and
                                    Mercantile Business Credit, Inc.-- filed
                                    herewith.

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

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

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

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

                          10.4      Management Contracts and Compensatory Plans

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

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

                                    (c)      Employment Agreement effective
                                             February 1, 1995 between L. Rogers
                                             Wells, Jr. and the Company (Exhibit
                                             10.4(c) to the Company's Annual
                                             Report on Form 10-K for the year
                                             ended December 31, 1997).

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

                          13        1998 Annual Report -- filed herewith*.

                          23        Consent of KPMG LLP -- filed herewith.

                          24        Powers of Attorney -- filed herewith.

                          27        Financial Data Schedule (for SEC use only)
                                    -- filed herewith.



                                      -30-
<PAGE>   31

         (b)      Reports on Form 8-K. No Current Reports on Form 8-K were filed
by the Company during the quarter ended December 31, 1998.

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

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

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

* Except for portions of the 1998 Annual Report that are expressly incorporated
by reference into this Annual Report on Form 10-K, the 1998 Annual Report is
furnished to the Commission solely for the information of the Commission and not
deemed to be "filed" with the Commission for purposes of the Securities Exchange
Act of 1934, as amended.















                                      -31-
<PAGE>   32


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 25, 1999.

                                    INTERLOTT TECHNOLOGIES, INC.
                                    (REGISTRANT)


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

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 25, 1999.

    Signature                                     Title

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


/s/ Edmund F. Turek            Director
-------------------------
Edmund F. Turek


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


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


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


H. Jean Marshall *             Director
-------------------------
H. Jean Marshall


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


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


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




                                      -32-
<PAGE>   33


                     INDEX OF FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
                                                                         Page
                                                                         ----

<S>                                                                      <C>
Report of Independent Auditors ...........................................S-2

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










































                                      S-1
<PAGE>   34




                          Independent Auditors' Report


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

Under date of February 26, 1999, we reported on the balance sheets of Interlott
Technologies, Inc. as of December 31, 1997 and 1998, and the related statements
of income, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998, as contained in the 1998 annual
report to stockholders. These financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K for the year 1998.
In connection with our audits of the aforementioned financial statements, we
also audited the related financial statement schedule as listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.

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


                                                             KPMG LLP


Cincinnati, Ohio
February 26, 1999



















                                       S-2

<PAGE>   35



                          INTERLOTT TECHNOLOGIES, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS




<TABLE>
<CAPTION>
COLUMN A                 COLUMN B                   COLUMN C                 COLUMN D        COLUMN E
-----------------------------------------------------------------------------------------------------------
                                                  ADDITIONS
DESCRIPTION             BALANCE AT        CHARGED TO       CHARGED TO       DEDUCTIONS      BALANCE AT
                        BEGINNING         COSTS AND          OTHER                              END
                        OF PERIOD          EXPENSES         ACCOUNTS                         OF PERIOD
-----------------------------------------------------------------------------------------------------------

Allowance for
doubtful accounts

<S>                     <C>               <C>              <C>              <C>             <C>
1996                     101,613             57,500            0              43,688           115,425
-----------------------------------------------------------------------------------------------------------
1997                     115,425             52,500            0              74,424            93,501
-----------------------------------------------------------------------------------------------------------
1998                      93,501             60,000            0                   0           153,501
-----------------------------------------------------------------------------------------------------------

Inventory valuation
reserve

1996                           0            275,000            0                  0            275,000
-----------------------------------------------------------------------------------------------------------
1997                     275,000                  0            0                  0            275,000
-----------------------------------------------------------------------------------------------------------
1998                     275,000            933,110            0                  0          1,208,110
-----------------------------------------------------------------------------------------------------------
</TABLE>









                                      S-3


<PAGE>   36


                          INTERLOTT TECHNOLOGIES, INC.

                                INDEX OF EXHIBITS


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

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

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

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

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

4.3            Loan Agreement dated October 29, 1997 between the
               Company and Mercantile Business Credit, Inc. (Exhibit
               4.3 to the Company's Annual Report on Form 10-K for
               the year ended December 31, 1997).

4.3(a)         Revolving Credit Note dated October 29, 1997 between
               the Company and Mercantile Business Credit, Inc.
               (Exhibit 4.3(a) to the Company's Annual Report on
               Form 10-K for the year ended December 31, 1997).

4.3(b)         Security Agreement dated October 29, 1997 between the
               Company and Mercantile Business Credit, Inc. (Exhibit
               4.3(b) to the Company's Annual Report on Form 10-K
               for the year ended December 31, 1997).

4.3(c)         Patent, Trademark and License Security Agreement
               dated October 29, 1997 between the Company and
               Mercantile Business Credit, Inc. (Exhibit 4.3(c) to
               the Company's Annual Report on Form 10-K for the year
               ended December 31, 1997).

4.3(d)         First Amendment to the Loan Agreement dated October
               29, 1998 between the Company and Mercantile Business
               Credit, Inc. -- filed herewith.

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



                                      E-1
<PAGE>   37

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

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

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

10.4           Management Contracts and Compensatory Plans

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

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

               (c)      Employment Agreement effective February 1,
                        1995 between L. Rogers Wells and the Company
                        (Exhibit 10.4(c) to the Company's Annual
                        Report on Form 10-K for the year ended
                        December 31, 1997).

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

13             1998 Annual Report-- filed herewith*.

23             Consent of KPMG LLP-- filed herewith.

24             Powers of Attorney-- filed herewith.

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


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

* Except for portions of the 1998 Annual Report that are expressly incorporated
by reference into this Annual Report on Form 10-K, the 1998 Annual Report is
furnished to the Commission solely for the information of the Commission and not
deemed to be "filed" with the Commission for purposes of the Securities Exchange
Act of 1934, as amended.



                                      -2-