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                     U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

(Mark one):

     [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
         OF 1934.

                     For the fiscal year ended May 31, 2000.

     [   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934.

         For the transition period from ____________ to _______________

                           COMMISSION FILE NO. 0-24919

                             MDI ENTERTAINMENT, INC.
                             -----------------------
                 (Name of small business issuer in its charter)


         DELAWARE                                          73-1515699
         --------                                          ----------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)


                             MDI ENTERTAINMENT, INC.
                                 201 ANN STREET

                           HARTFORD, CONNECTICUT 06103
               (Address of principal executive offices) (Zip Code)

                    Issuer's telephone number (860) 527-5359

Securities registered under Section 12(b) of the Exchange Act:

     Title of each Class            Name of each exchange on which registered

Securities registered under Section 12(g) of the Exchange Act:

                     COMMON STOCK, PAR VALUE $.001 PER SHARE

                     ---------------------------------------
                                (Title of Class)

               ---------------------------------------------------
                                (Title of Class)

================================================================================
<PAGE>

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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

     Check if disclosure of delinquent filers in response to Item 405 of the
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

     State issuer's revenues for its most recent fiscal year. $ 5,498,485
                                                              -----------

     Aggregate market value of voting stock held by non-affiliates of registrant
as of August 23, 2000: $17,285,604
                        ----------
     Shares of Common Stock outstanding as of August 23, 2000: 9,796,069
                                                              ----------


                       DOCUMENTS INCORPORATED BY REFERENCE

                                 Not Applicable

     Transitional Small Business Disclosure Format (check one): Yes ; No X
                                                                      ----


<PAGE>

                                     10-KSB

                                TABLE OF CONTENTS

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

                                     PART I

Item 1.  Description of Business

Item 2.  Description of Property

Item 3.  Legal Proceedings

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

                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

Item 6.  Management's Discussion and Analysis of Plan of Operation

Item 7.  Financial Statements

Item 8.  Changes In and Disagreements with Accountants on Accounting and
         Financial Disclosure

                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act

Item 10. Executive Compensation

Item 11. Security Ownership of Certain Beneficial Owners and Management

Item 12. Certain Relationships and Related Transactions

Item 13. Exhibits and Reports on Form 8-K


<PAGE>

     This Annual Report on Form 10-KSB contains statements which constitute
forward-looking statements. These statements appear in a number of places in
this Form 10-KSB and include statements regarding the intent, belief or current
expectations of MDI Entertainment, Inc. together with its subsidiary (referred
in this report as "we","us" and "our") with respect to (i) our financing plans,
(ii) trends affecting our financial condition or results of operations, (iii)
the impact of competition, and (iv) the expansion of certain operations.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
the actual results may differ materially from those in the forward-looking
statements as a result of various factors. The information contained in this
Form 10-KSB, including, without limitation, the information under "Risk
Factors," "Management's Discussion and Analysis of Plan of Operations" and
"Description of Business" identifies important factors that could cause or
contribute to such differences. See "Description of Business--Risk Factors--All
forward-looking statements should be read with caution."

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS


     MDI Entertainment, Inc. specializes in creating, marketing and implementing
entertainment-based promotions to North American lotteries. Our principal
business has been the scratch ticket segment of the government lottery industry,
although we have run on-line entertainment-based promotions with a lotto and
daily numbers type games featuring our licensed Harley-Davidson(R) logo. Our
lottery promotions feature well-known brand names and entertainment properties
licensed to us and designed to attract new lottery players while providing a new
experience for existing lottery players. Our current promotions feature a wide
variety of such brand names and entertainment properties including:

o       Wheel of Fortune(R)
o       Jeopardy(TM)
o       Harley-Davidson(R)
o       Twilight Zone(TM)
o       Times Square 2000(TM)
o       Betty Boop(TM)
o       Louisville Slugger(R)
o       Dick Clark's American Bandstand(R)
o       The Nashville Network(R)/TNN
o       Country Music Television(R)/CMT
o       Heroes of Space(TM)
o       James Bond 007(TM)
o       The Pink Panther(TM)
o       The Outer Limits(TM)
o       Dale Earnhardt(R)
o       Dale Earnhardt, Jr.(R)
o       Jeff Burton(R)
o       Mark Martin(R)
o       Bill Elliott(R)
o       Matt Kenseth(R)
o       Let's Get Ready To Rumble(R)
o       Hummer(R)
o       Sports Legends(R)
o       Ray Charles(R)
o       SPAM(R)
o       CowParade(R)
o       Hollywood Sign(TM)and Hollywood Walk of Fame(TM).
o       Elvis Presley(R)


                                       -1-

<PAGE>

     The scratch tickets feature the licensed properties, usually displaying a
scene and/or logo from the entertainment-based and brand name properties. Prizes
awarded in such promotions typically include a number of "second chance" prizes
related to the licensed property, including collectible logo bearing merchandise
such as Harley-Davidson(R) T-shirts and caps, and other related merchandise such
as posters, money clips, telephones and, in the case of Harley-Davidson(R),
Harley-Davidson 1200 Sportster motorcycles. We currently derive most of our
revenues from the sale to the lotteries of such merchandise. Merchandise
associated with the licensed properties accounted for 87% of revenues for the
fiscal year ended May 31, 2000 and 90% of revenues for the fiscal year ended May
31, 1999.

     We offer a full range of services, including ticket and point of sale
design, prize structure development, promotional event planning, market
research, fulfillment services, customer service support and second chance
drawing assistance.

RECENT DEVELOPMENTS

TERMINATED MERGER

     On January 26, 2000, we entered into an Agreement and Plan of Merger with
the Lottery Channel, Inc. This merger agreement contemplated that we would
acquire Lottery Channel, a company incorporated in Delaware in 1986 as an
entertainment company providing cable television programming focusing on
state-sponsered lotteries. It has been operating from production studios at
Century III at Universal Studios in Orlando, Florida since April 1997.
Headquartered in Cincinnati, Ohio, Lottery operates two websites,
www.lottery.com and www.gameland.com, headquartered in Cincinnati, Ohio and
Richmond, Virginia, respectively. Persuant to the merger agreement, among other
things, (a) Lottery Channel would have been merged into MDI Acquisition, Inc.(b)
each outstanding share of Lottery Channel common stock at the effective time of
the merger (other than shares held in Lottery Channel's treasury) would have
been converted into one share of our common stock and (c) each option or right
to acquire Lottery Channel common stock would have become an option or right to
acquire one share of our common stock, with an aggregate of 13,000,000 shares of
our common stock to be issued to current stockholders of Lottery Channel or
reserved for issuance to holders of options or rights of Lottery Channel.

     On August 25, 2000, we sent a notice of termination to Lottery Channel
terminating the Merger agreement. Subsequently, by letter dated August 28, 2000,
Lottery Channel responded by purporting to terminate the merger agreement due to
our breach. The letter claimed that we are responsible for all cost and expenses
incurred in connection with the transaction. We dispute this assertion.
Discussions concerning a possible alternative transaction have been terminated.

     We will pursue alternative Internet strategies. Over the past six months,
discussions with potential strategic investors have made it very apparent to us
that the value of our licensed lottery brands and our ability to aggregate
data on lottery players through our second-chance drawings provides us an ideal
platform for crafting an Internet strategy that is not solely dependent on the
retail sales of lottery tickets over the Internet.

     It is our intention to continue to work with lotteries and suppliers to the
industry, including our strategic partner Scientific Games International to
develop extended play Internet accessible games from our brands and to assist
lotteries and others in compiling data to initiate one-to-one communications
with their players through the Internet.

     We are is uniquely situated to execute this business plan and exploit this
marketplace as it relates to lotteries and their players. Our 30 lottery
licenses for well-known entertainment properties, cultural icons and
personalities provide us with the largest single library of proprietary lottery
game content in the world.

     We regularly receive millions of entries for our second-chance drawings.
That data, subject to the lottery's privacy policy and the players' consent can
be retrieved, stored and shared with lotteries to enable them to use the
Internet to communicate with their players. We believe the execution of this
strategy will provide us with far greater potential to increase shareholder
value through lottery Internet applications.

     We have written off approximately $727,000 of expenses relating to the
proposed merger transaction.
                                       -2-

<PAGE>

NEW LICENSES

     In the past year we have entered into 11 new licenses and renewed three
licenses.

ELVIS PRESLEY(R): He has been named "Entertainer of the Century" and "Artist of
the Century" and he is forever the "King of Rock and Roll." Elvis Presley also
represents a licensed entertainment property for which there is significant
pent-up demand among lottery customers. July 2000 represented a milestone in our
business as we successfully concluded a four-year initiative and entered into a
three-year agreement with Elvis Presley Enterprises, Inc. to license Elvis
Presley lottery promotions to lotteries throughout the world. VIP trips to Elvis
Presley's Graceland in Memphis will be a cornerstone of lottery promotions
developed around the brand, and a wide selection of Elvis merchandise will be
used in the promotions.

HOLLYWOOD SIGN(TM) AND HOLLYWOOD WALK OF FAME(TM): We have entered into a
three-year agreement with the Hollywood, California Chamber of Commerce, through
Global Icons, Inc., to represent the brands that are recognized worldwide as the
umbrella symbols of the American entertainment industry - the Hollywood Sign and
the Hollywood Walk Of Fame. Our contract includes the rights to use the names of
many of the famous celebrities whose achievements have been recognized with
stars on the Walk Of Fame. These rights are worldwide.

DALE EARNHARDT(R) AND OTHER NASCAR(R) DRIVERS: Sports icons represent one of our
categories of lottery entertainment and there is arguably no more popular
spectator sport in the United States than NASCAR Winston Cup Series auto racing,
with its millions of fiercely loyal fans who spend hundreds of millions each
year on driver merchandise. As we continue to pursue rights to represent the
NASCAR brand, we moved forward into the category by entering into agreements
with six of the most popular and successful drivers on the NASCAR circuit. The
group is led by the driver whose merchandise makes up the lion's share of sales
of all NASCAR-related consumer goods, "The Intimidator" Dale Earnhardt, who is
seeking a record-breaking eighth Winston Cup Series title in the 2000 racing
season. Other drivers in the group include "Little E" Dale Earnhardt, Jr.,
"Million Dollar Bill" Elliott, Mark Martin, Jeff Burton and the leading
candidate for Rookie Of The Year in Winston Cup racing this season, Matt
Kenseth. The agreement with the drivers is for two years. In the final quarter
of fiscal year 2000, the Wisconsin Lottery became the first to launch an instant
scratch game called Race For Cash, featuring four of the drivers.

RAY CHARLES(R) -- we have entered into a one year agreement, with two one year
options, with the legendary musical artist Ray Charles, whose popularity
transcends generations, transcends music categories and transcends global
boundaries. The innovative contract with Mr. Charles adds a new element to our
exclusive lottery product offerings. In addition to developing lottery games
featuring Ray Charles, we provide lotteries and their advertising agencies with
exclusive access to Mr. Charles for the purpose of developing corporate
advertising campaigns for their lotteries. During the last fiscal year, three
such campaigns were produced or contracted for by the Georgia Lottery, New
Jersey Lottery and Wisconsin Lottery. Additionally, the Georgia Lottery
introduced a Ray Charles "Georgia On My Mind" instant scratch game.

SPAM(R): We have entered into a two-year contract with Hormel through the
Beanstalk Group to represent SPAM, canned luncheon meat-turned-worldwide pop
culture icon. With humor an integral part of the Hormel marketing strategy for
SPAM, the brand provides us with a property that fits one of the established
categories of instant scratch tickets - whimsical, fun themes. The Minnesota
Lottery became the first to offer a SPAM scratch ticket during fiscal year
2000, enjoying successful sales and positive press, including a feature on CNN.

LET'S GET READY TO RUMBLE(R): If there is a significant competition for which
promoters want to generate crowd excitement these days, chances are good that
the competition will begin with a tuxedoed Michael Buffer making an appearance
and intoning, "Ladies and gentlemen. Let's get ready to rumble!" Capitalizing on
his status as the world's most famous ring announcer, we have entered into a
three-year agreement with Michael Buffer Enterprises to represent Mr. Buffer and
his famous sports preamble as a lottery game theme. We will also manage Mr.
Buffer's participation in lottery advertising related to the brand. We expect
this property to be successful both as a sports icon and as a pop culture icon.

COWPARADE(R): With its phenomenal growth as a pop culture art event over the
past two years, and the fact that bovine images are often incorporated into
whimsical lottery games with names like "Cash Cow" and "Moolah Mania", we have
entered into a two-year agreement for CowParade(R) through King Features
Syndicate. The contract will enable lotteries to incorporate images of "cow art"
that are created for various CowParade public art exhibits into CowParade
instant scratch games.

                                       -3-

<PAGE>

RETAINED LICENSES

HARLEY-DAVIDSON(R): The world's hottest licensed lottery property over the past
three years will continue to bring lottery players fun, entertainment and the
chance to win a Harley-Davidson motorcycle in the current fiscal year and
beyond. Harley-Davidson Motor Company, Inc. has notified us of its intent to
renew its existing licensing agreement with us beyond the current expiration
date of December 31, 2000. The renewal contract is currently being negotiated
with Harley-Davidson's licensing agent, The Beanstalk Group.

WHEEL OF FORTUNE(R)AND JEOPARDY!(TM): We have reached an agreement with Columbia
Tristar Television, a division of Sony Picture Studios, to renew its contract to
represent the popular game show themes, Wheel of Fortune and Jeopardy!, to the
lottery industry. The renewal contract is currently being drafted.

TWILIGHT ZONE(TM): Another one of our original licensed properties, the
legendary science fiction brand Twilight Zone, has been approved in principal
for renewal by Viacom Consumer Products. Terms of the renewal are now under
review by Viacom and CBS Cable.

     We cannot assure you if these contracts will be negotiated on the same
terms or if the contract renewals will be successful.

MARKET EXPANSION

     We continue to seek opportunities to expand the market for our licensed
lottery properties. During the fiscal year 2000 we added six North American
lottery jurisdictions to our growing customer base: Atlantic (Canada) Lottery,
Georgia Lottery, Kentucky Lottery, Minnesota Lottery, New York Lottery and
Western Canada Lottery.

     We continue to seek entertainment and cultural icon properties with
worldwide consumer appeal, in addition to properties with regional appeal in
off-shore geographical locations. We expect that two of our recently acquired
properties, Elvis Presley and Hollywood, will provide the company with very
compelling offerings for the international market. Additionally, we are
negotiating with King Features Syndicate to extend the territory of our rights
to the Betty Boop property to take advantage of international lottery
opportunities. We have established a relationship with executives representing
all of the provincial lotteries in China, and hosted a delegation at our
Hartford offices in July, 2000. We are currently exploring opportunities to
market our properties throughout China.

     Our strategic alliance with leading lottery supplier, Scientific Games
International, continues to create new opportunities to reach off-shore markets.
MDI and Scientific Games jointly exhibited in Glasgow, Scotland in June 2000 at
the inaugural conference of the newly established World Lottery Association.
Additionally, we initiated meetings with Camelot, Ltd., which manages games for
the Great Britain Lottery, to explore marketing opportunities in Great Britain.

                                       -4-

<PAGE>

EXTENSION OF SERVICES

     The acquisition of licenses for celebrities Ray Charles and Michael Buffer
has created a new business opportunity for us, providing exclusive and
affordable access to well-known commercial spokespersons for use in lottery
advertising campaigns that may or may not be directly associated with licensed
lottery games. During fiscal year 2000, three such campaigns were initiated or
produced for introduction in fiscal year 2001 featuring entertainer Ray Charles.
Wisconsin and Georgia Lotteries utilized Mr. Charles for corporate image
advertising. The New Jersey Lottery acquired the services of Mr. Charles to
initiate a new umbrella advertising campaign and theme song ("For Every Dream
There's A Jackpot") during its 30th anniversary celebration.

     We continue to capitalize on our internal resources to extend new marketing
support services to our lottery customers, as part of our lottery contracts. In
fiscal 2000, several lotteries have utilized our expertise in the area of
lottery marketing, advertising and print production to purchase collateral
advertising for their licensed game promotions through us. We also continue to
offer consumer research services to our lottery customers.

     We have realized new operational efficiencies during fiscal year 2000 by
incorporating Internet communication into our product development functions,
saving time and shipping expenses by introducing Internet file transfer protocol
and e-mail to facilitate product and promotion review and approvals between MDI
and lotteries, ad agencies, ticket printers and licensors.

PRODUCT AND SERVICE MARKETING

     Our role as the leading supplier of licensed properties to the lottery
industry is firmly in place. We have now done business with over 80% of the
North American lottery industry. Since September 1, 1999, over 40 new MDI
licensed lottery promotions have been initiated or are in final planning stages
and expected to be launched in fiscal years 2000 and 2001 in 24 lottery
jurisdictions, including 13 lotteries which previously had not purchased
licensed promotions from us. See "Contracts with Lotteries."

     A new opportunity for us to strengthen our relationship with domestic
lotteries arose during calendar 2000 when NASPL, the North American
lottery trade organization, changed its previous policy of seeking underwriting
support from lottery suppliers via sponsorships at its annual conference and
trade show. In January 2000 NASPL launched a new trade journal (including a
feature article about MDI), a monthly publication of news about industry
activity and issues. Beginning in September 2000, the magazine will accept
advertising from lottery suppliers. We have entered into a one-year contract for
the outside back cover of the magazine, the premier advertising space in the
publication

     During fiscal 2000 we strengthened our marketing communications resources
by establishing a relationship with The George Group, a Florida-based public
relations firm whose principal was the Communications Director of the Florida
Lottery for over 12 years. The Internet has opened another new marketing
communications channel for us. In July 2000, we introduced a weekly e-mail
newsletter for lottery professionals, focused on news about our licensed lottery
properties. Each week over 700 lottery professionals around the world are
receiving the newsletter via e-mail distribution to their desktops.

                                       -5-

<PAGE>

INDUSTRY OVERVIEW

     State, local and foreign governmental authorities operate lotteries and
their licensees in over 155 jurisdictions. Governments use lotteries primarily
as a means of generating non-tax revenues. In the United States, lottery
revenues frequently are designated for particular purposes, such as education,
economic development, conservation, transportation and aid to the elderly. Many
states have become increasingly dependent on lotteries as a significant source
of funding for these purposes.

     While the specific amounts vary substantially from state to state,
according to LaFleur's Lottery World 1999 Fast Facts (an industry report),
approximately 52% of gross lottery revenues in the United States is returned to
the public in the form of prizes. Approximately 32% of such revenues is used to
support specific public programs or is contributed to the state's general fund.
Typically, 5% to 6% of such revenues is reserved for point-of-purchase
commissions for the retailer, and the remainder of such revenues is used to fund
lottery operations, including the cost of advertising.

     Government lotteries can be categorized into two principal groups: on-line
games and "instant" or "scratch" ticket games. On-line varieties generally refer
to games such as lotto, sports pools, daily numbers and keno in which players
make their own selections. Instant ticket games consist of preprinted tickets in
which players scratch off a coating or pull off tabs to determine whether they
have purchased a winning ticket. Instant ticket games generally have several
tiers of cash prizes, ranging from $1.00 up to $100,000. Occasionally, instant
ticket games provide for second chance drawings that give scratch ticket
purchasers a "second chance" to win prizes on non-winning tickets. Second chance
drawing prizes range from cash prizes or spots as contestants on game shows to
various types of merchandise and trips.

     We are a leader in designing and marketing instant scratch ticket games
based on licensed brand names (such as Harley-Davidson(R) or Louisville Slugger
(R)) and entertainment properties (such as James Bond 007(TM) or Wheel of
Fortune(R)). We attempt to identify properties for licensing that have a large
selection of logo bearing products available that appeal to the 18 years of age
and older population, and our instant ticket promotions typically include logo
bearing merchandise related to such promotion as prizes. In certain of our
lottery promotions, merchandise is awarded as first prizes, such as Harley
Davidson(R) motorcycles. In most of our designed games, second chance prizes
typically include logo bearing merchandise such as posters, T-shirts, caps,
jackets, watches, clocks, money clips, telephones, playing cards, film cells,
video and music collections, stadium blankets, carryall bags, credit cards with
prepaid credit, trips and electronic games. We generate most of our revenues
from the sale of such merchandise to the government agency sponsoring the
lottery.

                                       -6-

<PAGE>

     Cooperative marketing partnerships are not new to the lottery industry.
Lotteries have been securing licensed brand names in exchange for advertising
for years in hopes of expanding the player base by attracting non-players who
have positive feelings about a particular brand. Licensing the rights for
trademarked entertainment material, however, is relatively new. For the most
part, the practice of purchasing the right to place a popular brand name on a
lottery ticket gained acceptance with the introduction and subsequent sales
success of the Monopoly(R) game in 1989. Since then, lottery jurisdictions have
secured a wide variety of brands and properties for licensed lottery games. The
rights to use or license a particular property can be secured by a lottery
directly from the entity that owns the property or from companies like ours.

     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, although there was a slight decrease
from 1997 to 1998. Lotteries typically introduce between 25 and 50 new instant
games a year. Currently, lotteries operate in 37 states, the District of
Columbia and all provinces of Canada as compared to 29 states and all provinces
of Canada as of June 30, 1989. According to LaFleur's Lottery World 1999 Fast
Facts and LaFleur's 1991 North American Gambling Abstract, instant ticket games
now comprise approximately 39% of total lottery sales in the United States as
compared to approximately 26% in 1990. Factors contributing to the growth in the
popularity and success of such games include more sophisticated marketing
techniques, the introduction of new state instant ticket lotteries, lotteries
offering multiple games simultaneously, increased technological advances in the
distribution of instant tickets, lotteries offering a variety of instant ticket
price points (a $1.00 ticket, a $2.00 ticket, a $3.00 ticket, a $5.00 ticket, a
$10.00 ticket and even a $20.00 ticket, which the Connecticut Lottery selected
to use with our Times Square 2000(TM) licensed property, with related increases
in the potential prize money) and higher prize pay-outs to lottery consumers.

LOTTERY PROMOTIONS

     We believe that to achieve and sustain growth in the lottery business we
must offer promotions which will attract new or lapsed lottery players while
maintaining or increasing play by current lottery players. Our principal
strategy is to enhance the entertainment value and attractiveness of our
promotions by licensing well known brand names and entertainment properties and
designing games based on such properties. Such games are targeted to niche
markets (such as Pink Panther(TM) fans or Harley-Davidson(R) motorcycle
enthusiasts) to appeal to new or infrequent players while also appealing to the
core player base.

LICENSED-BASED GAMES

     Over the past three years, we have secured rights to and targeted specific
properties for instant lottery theme games and promotions that have broad appeal
and significant brand loyalty and that enable us to market collectible logo
bearing merchandise tied directly to the property or brand. The properties are
specifically selected because they possess a substantial following that can aid
a lottery in attracting new players while at the same time providing a different
experience for many existing players. Currently, we have licensing agreements
with 24 companies for 28 licenses. Licenses are generally held between one and a
half and three years. We are seeking to extend four of our licenses
that were due to expire during fiscal 2000. We hold three licenses with three
companies that each resulted in 10% or more of revenues in fiscal
2000. Three licenses resulted in 10% or more of our revenues in fiscal
1999. We continually seek to add to our licensed properties and, to this end,
have contacted, and continue to contact, potential licensors.

                                       -7-

<PAGE>

     We derive most of our revenues from the sale to the lotteries of logo
bearing material (such as T-shirts, posters, hats, playing cards, telephones,
film cells, stadium blankets, carryall bags, money clips, jackets, electronic
games, watches, clocks, motorcycles and credit cards with prepaid credit) used
as second chance prizes. We typically order such merchandise directly from the
licensor or its authorized representatives at wholesale rates, thereby
generating additional income for the licensor either from direct sales or
royalty income. Typically, we rely on third parties for data entry and
verification of the names and addresses on winning tickets, and work with a
third party fulfillment house to deliver prizes to winning lottery players.
Inventory of prizes is typically held and shipped to prize winners by the
fulfillment house. See "-Risk Factors-We may be unable to provide merchandise
to the lotteries when needed."

     Our licensing agreements for the targeted properties generally require us
to pay the licensor between 10% to 50% of the gross licensing fees we receive
from contracts with the lotteries. Certain agreements also require us to pay the
licensor an additional 20% of the gross royalty fees received by us from the
printing of the instant tickets, while certain other agreements increase the
percentage of the licensing fees instead. One licensing agreement requires a
50/50 share of gross profit. The agreements generally require an initial payment
upon signing, which is usually credited against other payments that become due
during the term of the license. One agreement required us to issue common stock
and warrants to purchase common stock upon signing. While all the licensing
agreements grant us the right to market merchandise to the lotteries, certain
agreements require that a minimum amount of merchandise be purchased. The term
of the license agreements usually ranges between 1.5 to 3 years and they are
sometimes terminable upon the occurrence of certain events. The licenses are
typically exclusive for lottery scratch tickets, and such exclusivity is
generally for the United States and Canada. In some cases, the licenses are
limited to certain regions. We are attempting to acquire worldwide rights for
any new licenses and are seeking to obtain worldwide rights on existing
licenses.

     We have also obtained patents on play styles or formats for instant games
based on existing games of chance or probability games. Such games include Jacks
Or Better(TM), Hold'Em Poker(TM), Black Jack, Roulette, Draw
Poker, and Spin 2 Pick(TM). See "-Intellectual Property." Promotions associated
with such games generate revenues from licensing fees and royalties rather than
from merchandise sales. We do not currently derive significant revenues from
such games.

CONTRACTS WITH LOTTERIES

     Our contracts with the lotteries provide for services that are tailored to
the preferences of the lotteries and include ticket and point of sale design,
prize structure development, promotional event planning, market research,
customer service support, second chance drawing assistance and fulfillment
services. The lottery contracts generally provide us with two sources of revenue
which consist of (1) license and royalty fees for the use of the entertainment
properties and (2) mark-up on the sale and fulfillment of collectible and logo
bearing merchandise. See "-Licensed-Based Games."

     We have had contracts with over 80% of all North American lotteries,and
currently have over 40 promotions that are in progress or scheduled for
introduction during fiscal 2001 in 15 state lotteries. In addition, we are
scheduled to launch our fourth Canadian promotion in October 2000. Those states
in which we have or have previously had promotions are as follows:

                                      -8-

<PAGE>

         State              No Current          Promotions in
                         Promotions (But         Progress or
                            Promotions          scheduled for
                         Previously Sold        Introduction
  ----------------------------------------------------------------
  Arizona                                             X
  ----------------------------------------------------------------
  Colorado                      X
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  Connecticut                                         X
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  Delaware                      X
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  Florida                       X
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  Georgia                       X
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  Idaho                         X
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  Illinois                      X
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  Indiana                                             X
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  Iowa                          X
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  Kansas                        X
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  Kentucky                                            X
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  Louisiana                                           X
  ----------------------------------------------------------------
  Maine                                               X
  ----------------------------------------------------------------
  Maryland                      X
  ----------------------------------------------------------------
  Minnesota                                           X
  ----------------------------------------------------------------
  Missouri                                            X
  ----------------------------------------------------------------
  Montana                       X
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  Nebraska                                            X
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  New Hampshire                 X
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  New Jersey                                          X
  ----------------------------------------------------------------
  New York                      X
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  Ohio                                                X
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  Oregon                                              X
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  Pennsylvania                                        X
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  Rhode Island                                        X
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  South Dakota                  X
  ----------------------------------------------------------------
  Texas                         X
  ----------------------------------------------------------------
  Vermont                       X
  ----------------------------------------------------------------
  Virginia                      X
  ----------------------------------------------------------------
  Washington                    X
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  Wisconsin                                           X
  ----------------------------------------------------------------

                                       -9-

<PAGE>

     We derived more than 10% of our revenue in fiscal 2000 from contracts with
the following lotteries: New Jersey, Connecticut and Wisconsin. In fiscal 1999
we had contracts representing more than 10% of our revenue with the Wisconsin
and Pennsylvania lotteries.

GOVERNMENT REGULATION

     Lotteries are not permitted in the various states and jurisdictions of the
United States unless expressly authorized by legislation in the subject
jurisdiction. Currently, 37 states and the District of Columbia have enacted
legislation to allow for the operation of a lottery. 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 administering
the lottery, dictate the prize structure, establish allocation of revenues,
determine the type of games permitted, detail appropriate marketing structures,
specify procedures for selecting vendors and define the qualifications of
lottery personnel.

     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 stockholders 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 of the persons associated with us to obtain or
retain approval in any jurisdiction could have a material adverse effect on us.
Generally, regulatory authorities have broad discretion when granting such
approvals. Although we have never been disqualified from a lottery contract as a
result of a failure to obtain any such approvals, we cannot assure you that such
approvals will be obtained or retained in the future.

     We have retained governmental affairs representatives in various
jurisdictions of the United States to monitor legislation, advise us on contract
proposals, and assist with other issues that may affect us. We believe we have
complied with all applicable state regulatory provisions relative to disclosure
concerning our activities.

     We have employed registered lobbyists and retained paid consultants in
certain states. Failure to comply with state regulatory provisions relating to
the activities of our advisors could adversely affect our ability to bid
successfully upon lottery contracts.

     The international jurisdictions in which we intend to market our products
have similar legislation and regulations governing lottery operations. In
addition, restrictions are often imposed on foreign corporations seeking to do
business in such jurisdictions. Failure to comply with these provisions could
result in contract cancellation or the institution of legal proceedings.

     Laws and regulations of individual states and countries are subject to
change. We cannot assure you that any such change would not adversely affect us.
Our failure to comply with such laws and regulations could have an adverse
impact on our operations.

                                      -10-

<PAGE>

COMPETITION

     We are aware of several other companies which design and promote lottery
games based on licensed brands. However, each is marketing to a particular
niche. Telecom Productions, Inc. licenses a variety of brand name board games,
including Monopoly(R), Trivial Pursuit(R) and Battleship(R). Promo-Travel
represents a cruise line, various casino-theme properties, such as "Caesar's
Palace," table games like "Let It Ride" and "Caribbean Stud" and the slot
machine "Megabucks." More recently, Promo-Travel has attempted to secure
entertainment-based licenses and has negotiated with several of the same license
holders with whom we have had discussions and entered into agreements with.
Several other companies have made one-shot or sporadic licensing efforts. To
date, we have not failed to acquire the rights to any brand name or
entertainment property that we have sought. However, it is possible that, as the
potential for increased revenues rise, new competitors may enter this market
that have considerably greater financial and other resources, experience and
customer recognition than we do and may compete with us in both obtaining
licenses to brand names or entertainment properties and supplying lottery
products to the lottery jurisdictions.

     In addition, to the best of our knowledge, no other company has ever
attempted to utilize substantial quantities of merchandise with a licensed
lottery game. We have positioned ourselves to utilize such merchandise prizes.
Between 1989 and 1996, the majority of our lottery business had been the
distribution of videos, compact discs and audiocassettes as second-chance
prizes. We distributed nearly five million such prizes and experienced little to
no competition in this area of the business.

INTELLECTUAL PROPERTY

     In 1996, we created our Licensed and Patented Games division. To launch
this division, we purchased the assets of a games development company, Vegas
Pull Tabs, Inc. d/b/a GameMakers and Consultants, an unaffiliated third party.
Those assets consisted primarily of a U.S. patent for a series of instant
games.  Due to this acquisition, we own patents for certain game formats or
playstyles of Jacks Or Better(TM), and Hold'Em Poker(TM), (based on
pre-existing games of chance) Black Jack, Roulette and Draw Poker
(based on pre-existing probability games). We currently derive less than one
percent of our revenue from such games.

     In 1998, we developed an on-line lottery game with the trademarked name
Pick 2 Spin(TM). We have the exclusive rights to the trademarked name and have
filed a patent application for certain game elements. The Pick 2 Spin(TM) is a
two-digit numbers game, which combines two random drawings with a wheel spin.
With top prize game odds of one in 10,000, the Pick 2 Spin(TM) features a top
prize of $20,000. We began marketing the game to North American lotteries in
January 1999 and do not currently derive any revenues from the game.

     Bonus Games, a Tennessee partnership, is the owner of the trademarked name
Jacks Or Better(TM). We have the exclusive license to the trademark name as it
pertains to scratch-off instant lottery tickets sold to North American lotteries
pursuant to an agreement with Bonus Games dated July 17, 1996. The agreement
terminated on August 1, 2000 and we are currently negotiating a renewal of this
agreement. We cannot assure you that we will be able to renew the license on an
exclusive basis, on favorable terms or at all. Stuart Entertainment, Inc. is the
owner of the the trademarked name Bonanza Bingo(TM). Our license with Stuart
Entertainment, Inc. for the use of Bonanza Bingo(TM) expired on December 31,
1999 and is not being renewed.

                                      -11-

<PAGE>

HISTORY AND ORGANIZATION

     We are a Delaware corporation originally incorporated on December 29, 1994
under the name Puff Process, Inc. Our name was changed to MDI Entertainment,
Inc. and a one share for one hundred reverse stock split was effected in
connection with the purchase, in August 1997, of both Media Drop-In Productions
Inc., a Delaware corporation ("MDIP"), and MDI-Missouri, Inc., a Missouri
corporation, in exchange for 4,800,000 shares of our common stock and notes in
the aggregate principal amount of $300,000. The acquisition was effected through
reverse mergers with two of our wholly-owned subsidiaries. These transactions
resulted in a change in control, with Steven Saferin holding approximately 56%
of the outstanding shares of our common stock. See "-Risk Factors-Existing
stockholders are able to exercise control over us." Pre-merger holders of Puff
Process, Inc. held approximately 32.1% of the outstanding shares of Common Stock
immediately after the merger.

     MDIP was incorporated in Texas in 1986 and reincorporated in Delaware in
1989. MDI-Missouri was incorporated in Missouri in 1995 to operate our Missouri
lottery program. MDI-Missouri was collapsed into MDIP after the Missouri lottery
contract ended in 1999. MDI-Texas, LLC, a company of which MDIP owned 66.7%, was
formed in 1995 to operate our Texas lottery program. MDI-Texas was collapsed
into MDIP after the Texas lottery contract ended.

     Steven M. Saferin, President, Chief Executive Officer and Director, founded
MDIP in 1986. It's initial mission was the production and sale of quality
drop-in or vignette programming (30-second programs produced in a donut format
to allow an advertiser to insert its commercial in the "hole" of the donut).
MDIP produced a series of vignettes which it sold to Fortune 500 companies,
other nationally known companies and government agencies. In 1989, MDIP began
the development of its first video premium promotion.

     MDIP began focusing on lottery promotions in 1987 when it marketed a
drop-in series titled "The New Millionaires" to state lotteries. In 1990, it
created and began marketing its Instant Entertainment Connection ("IEC") lottery
promotion. This promotion, tied to an instant or scratch ticket, allowed
lotteries to offer second-chance entertainment prizes, such as video tapes,
compact discs and audio cassettes, to players with non-cash winning tickets. To
date, this promotion has been utilized by 21 U.S. lotteries, with nearly 5
million prizes distributed to lottery players in those states. We have begun
marketing this promotion on a limited basis internationally. In 1996, we changed
our focus to concentrate on lottery games designed around licensed brand names
and entertainment properties, leveraging off of the experience and reputation
gained from the IEC promotions. See"-Lottery Promotions."

POTENTIAL EXPANSION OF BUSINESS

     We are currently evaluating several unrelated opportunities in the lottery
industry. Our track record of success, innovation and reputation for integrity
in the industry results in our receiving numerous unsolicited approaches for
joint ventures and other business relationships. We anticipate that over the
next several years we will attempt to introduce additional unrelated products to
the lottery industry, but there can be no assurance that we will do so or that
such efforts will be successful.

                                      -12-

<PAGE>

     We have begun to analyze opportunities presented by our current and
potential products with international lotteries. Several of our current licenses
permit us to market the property outside the United States. We have had
discussions with certain of our other license holders about acquiring
international rights on a country-by-country basis. We cannot assure you that
such rights will be obtained. We are seeking full international rights, if
appropriate, for all new properties and have acquired such rights for Elvis
Presley(R) and the Hollywood Sign(R) and Hollywood Walk of Fame(R) We have
commenced a limited international marketing effort and expect to expand it in
the year ahead.

     We have also begun to investigate licensing opportunities outside the
lottery industry. Specifically, we opened negotiations with license holders
relative to licensing their properties for radio station promotions. We cannot
assure you that such negotiations will be successful or, if successful, will
result in the actual development and sale of such promotions.

     We are also evaluating other non-licensing entertainment related
opportunities. Our contract arrangement with Mr. Ray Charles is an example of
this type of additional promotional offering.

     We are at an early stage with respect to the opportunities described
above, and we have not yet determined whether to pursue any such opportunities,
the cost associated therewith or the sources of funding therefor. We will likely
pursue opportunities with respect to international lotteries; however, such
pursuits depend upon our evaluation of the costs of international fulfillment,
including import and export duties, foreign taxation issues, currency exchange
issues and the costs of marketing and developing our reputation in international
lottery jurisdictions.

     We have invested significant resources in developing a catalog and
E-Commerce business strategy called "lotteryprizeshop.com". This initiative
permits lottery players of our licensed games to use non-winning tickets for
discounts off the purchase of branded merchandise. This initiative can only be
implemented with the approval of each lottery and we expect to compensate the
lottery for their approval. We are continuing to examine other Internet lottery
initiatives both inside and outside the framework of current legislation.

EMPLOYEES

     As of August 23, 2000, we had 16 full-time employees and one part-time
employee, approximately four of whom were employed in the area of sales and
marketing, five in operations and seven in administration. Our employees are not
represented by a union or governed by a collective bargaining agreement. We have
entered into employment agreements with Steven M. Saferin and Kenneth M.
Przysiecki. See "Executive Compensation-Employment Agreements." We have also
entered into a consulting agreement with 1010 Productions, Inc., the president
and sole shareholder of which is Linda Kesterson Saferin, spouse of Steven M.
Saferin, and former employee, officer and director of MDIP. See "Certain
Relationships and Related Transactions."

                                      -13-

<PAGE>

RISK FACTORS

     All forward-looking statements should be read with caution.
     -----------------------------------------------------------
          Statements in this Annual Report on Form 10-KSB under the captions
     "Description of Business," "Management's Discussion and Analysis or Plan of
     Operations," and elsewhere in this Form 10-KSB, as well as statements made
     in press releases and oral statements that may be made by us or by
     officers, directors or employees acting on our behalf, that are not
     statements of historical fact, constitute forward-looking statements within
     the meaning of the Private Securities Litigation Reform Act of 1995. Such
     forward-looking statements involve known and unknown risks, uncertainties
     and other factors, including those described in this Form 10-KSB under the
     caption "Risk Factors," that could cause our actual results to be
     materially different from the historical results or from any future results
     expressed or implied by such forward-looking statements. In addition to
     statements which explicitly describe such risks and uncertainties, readers
     are urged to consider statements labeled with the terms "believes,"
     "belief," "expects," "plans," "anticipates," or "intends," to be uncertain
     and forward-looking. All cautionary statements made in this Form 10-KSB
     should be read as being applicable to all related forward-looking
     statements wherever they appear. Investors should consider the following
     risk factors as well as the risks described elsewhere in this Form 10-KSB.

     We have had losses.
     --------------------
          Although we had net income of $1,159,646 for the fiscal year ended May
     31, 1999, we incurred a net loss of $(1,985,105) for the fiscal year ended
     May 31, 2000. We cannot assure you that we will operate profitably in the
     near future or at all.

     We have a negative net worth.
     ------------------------------
          We have a negative net worth of $(1,424,756) as of May 31, 2000. We
     cannot assure you that we will be able to operate profitably in the future
     or at all.

     We may continue to need financing or additional equity to meet our
     ------------------------------------------------------------------
     future capital requirements.
     ----------------------------
          As of May 31, 2000, our current liabilities (including "billings in
     excess of costs and estimated earnings on uncompleted contracts" totalling
     $1,733,288) exceeded our current assets by $1,719,399 and our total
     liabilities exceeded our total assets by $1,424,756. We raised $1,750,000
     on August 4, 1999, through the sale of Series A Convertible Preferred Stock
     in a private sale to an investor. See Note (6) to the financial statements
     for details on this transaction. We raised an additional $750,000 from the
     issuance of a convertible subordinated debenture in September of 1999. See
     Note (4) to the financial statements for details on this transaction.
     However, we will require additional financing to meet our needs.
     We have not determined the amount we may seek to raise or the form of this
     financing (i.e. debt or equity). We cannot assure you that we will obtain
     additional financing for future operations or capital needs on favorable
     terms if at all.

     We may be unable to maintain or renew all our current licenses.
     ---------------------------------------------------------------
          Our success will be dependent upon maintaining our current licenses
     for the rights to use names and well known logo bearing merchandise. The
     terms of the current licenses are generally for 1.5 to 3 years, although
     they may be terminated sooner under certain circumstances. We cannot assure
     you that the current licenses will be renewed once they expire.

                                      -14-

<PAGE>

     We may be unable to provide merchandise to the lotteries when needed.
     ---------------------------------------------------------------------
          We supply the lotteries with logo bearing merchandise related to our
     contracts with them. We obtain approximately 95% of this merchandise from
     authorized representatives of the licensor. We cannot assure you that the
     logo bearing merchandise will be available from such authorized
     representatives when needed by us to satisfy our obligations to the
     lotteries.

     We may be unable to acquire new licenses.
     ------------------------------------------
          Our success is dependent on our ability to obtain rights to use well
     known entertainment and other similar properties for use on lottery tickets
     and related merchandise. We cannot assure you that we will continue to
     obtain such licenses on favorable terms or at all.

     We depend on customer relationships with North American lotteries.
     -------------------------------------------------------------------
          Many of our licensing rights are, by design, currently limited to
     United States, North American or worldwide lotteries. There are currently
     38 United States lotteries and five additional Canadian lotteries. The
     extremely limited potential customer base means that if any target lottery
     refuses to purchase a particular promotion from us or if it only uses a
     promotion once, there may be a significant negative impact on our revenue
     and earnings. The three state lotteries that purchased promotions
     accounting for the highest percentage of our revenues during fiscal 2000
     were New Jersey, Connecticut and Wisconsin with 19%, 15% and 14%,
     respectively. We cannot assure you that these lotteries will maintain the
     same level of promotions or that other lotteries will increase promotions
     beyond current levels, or enter into contracts with us at all.

     We have no on-going sources of revenue.
     ----------------------------------------
          Our revenues are derived on a contract-by-contract basis from state
     lotteries. There are no regular on-going sources of revenue at the present
     time and we must continually create and market new promotions to our
     lottery customers. Lotteries frequently move start dates for promotions
     thereby causing gaps in our cash flow. Moreover, the useful life of a
     license is generally relatively short as the novelty of the game or the
     popularity of the licensed material wanes over time. We may depend on a
     particular promotion in any given year, and a decrease in sales of the
     promotion or the loss of the underlying license would seriously impact our
     revenues and earnings.

     We may be adversely affected by government regulation of lotteries and
     ----------------------------------------------------------------------
     gambling.
     ---------
          Since most lotteries are government agencies with lottery executives
     appointed by the state's governor or other high ranking official,
     opportunities or projects in progress can be slowed after an election if
     the incumbent governor is not reelected.

          There is a growing concern in the United States about the explosion of
     gaming. The creation of The National Gambling Impact Study Commission and
     its released report, may negatively impact state lotteries and
     other gaming activities and hence our business. We cannot assure you that
     there will not be an adverse change in the lottery laws of any jurisdiction
     in which we do business. In addition, we cannot predict the nature of the
     regulatory process in any jurisdiction that may authorize the use of
     instant tickets in the future. Any such regulatory process may be
     burdensome to us and our customers or their key personnel and could include
     requirements that we would be unable to satisfy. See "Government
     Regulation."

                                      -15-

<PAGE>

     Existing stockholders are able to exercise control over us.
     ------------------------------------------------------------
          Our officers and directors beneficially own approximately 45% of the
     outstanding Common Stock and Steven M. Saferin owns approximately 39%. Our
     Certificate of Incorporation does not provide for cumulative voting for the
     Board of Directors. As a result, Steven M. Saferin and management  have
     substantial influence over the election of a majority of our directors and
     the outcome of issues submitted to a vote of our stockholders. See
     "Security Ownership of Certain Beneficial Owners and Management."

     The loss of the services of Steven M. Saferin could harm our business.
     ----------------------------------------------------------------------
          Our success depends to a significant extent on the performance and
     continued service of Steven M. Saferin, an officer and director. MDIP has
     entered into an employment agreement with Mr. Saferin which expires on
     August 8, 2002 or three years from the date we first file a registration
     statement with the SEC registering all of his shares, whichever is later.
     We do not carry key man insurance. See "Executive Compensation-Employment
     Agreements."

     Intense competition could reduce our market share.
     ---------------------------------------------------
          We have traditionally acquired exclusive rights to license
     entertainment and other properties to the U.S. lottery industry. We have
     faced only one situation in which there was substantial competition in
     acquiring such rights and we were the successful bidder for these rights.
     However, there are several organizations that also design and promote
     lottery games and promotions based on licensed brands. One of these
     companies is pursuing the types of entertainment properties we have
     targeted. In addition, it is possible that potential licensors may design
     their own lottery games and seek to market them directly to the lotteries,
     thus bypassing us. Other potential sources of competition are the printers
     of instant tickets who, to improve their own competitive standing, might
     attempt to acquire licensing rights for various properties to offer
     exclusively to their lottery customers and enhance their competitive
     bidding for lottery printing contracts. See "Competition."

     We do not anticipate paying any dividends.
     -------------------------------------------
          We have never paid any cash or other dividends on our Common Stock. At
     present, we do not anticipate paying dividends on our Common Stock in the
     foreseeable future and intend to devote any earnings to the development of
     our business. Investors who anticipate the need for immediate income from
     their investment should refrain from purchasing our Common Stock.

     We indemnify our directors and officers against certain expenses and
     --------------------------------------------------------------------
     liabilities.
     -------------
          So far as permitted by the Delaware General Corporation Law, our
     Certificate of Incorporation and By-Laws provide that we will indemnify our
     directors and officers against expenses and liabilities they incur to
     defend, settle or satisfy any civil or criminal action brought against them
     on account of their being or having been directors or officers unless, in
     any such action, they are adjudged to have acted with gross negligence or
     to have engaged in willful misconduct. As a result of such provisions,
     stockholders may be unable to recover damages against our directors and
     officers for actions taken by them which constitute negligence or a
     violation of their fiduciary duties, which may reduce the likelihood of
     stockholders instituting derivative litigation against directors and
     officers and may discourage or deter stockholders from suing our directors,
     officers, employees and agents for breaches of their duty of care, even
     though such action, if successful, might otherwise benefit us and our
     stockholders.

                                      -16-

<PAGE>

     Lotteries' desire to sell tickets over the Internet
     ---------------------------------------------------
          Currently no North American lottery sells tickets over the Internet
     although all have web sites. There is legislation pending in Congress
     which, if passed as currently drafted, would outlaw Internet sales of
     lottery tickets. Our role as an Internet games supplier will be affected
     by such legislation and/or a lottery's willingness to actually offer
     tickets over the internet.

     Future sales of common stock by our existing stockholders could adversely
     --------------------------------------------------------------------------
     affect our stock price.
     ------------------------
          The market price of our Common Stock could decline as a result of
     sales of a substantial number of shares of our Common Stock in the market,
     or the perception that such sales could occur. Such sales also might make
     it more difficult for us to sell equity securities in the future at a time
     and at a price that we deem appropriate. As of the date of this Form
     10-KSB, we had 9,796,069 outstanding shares of Common Stock, as well as 507
     shares of Series A Preferred Stock, convertible into 507,000 shares of
     Common Stock. Of these shares, 4,809,322 shares of Common Stock are freely
     tradeable.

          As of the date of this Form 10-KSB, options to purchase a total of
     974,166 shares of our Common Stock are outstanding. Of such options,
     options to purchase 317,500 shares are currently exercisable. In addition,
     warrants to purchase a total of 817,895 shares of our Common Stock are
     outstanding and all of such warrants are exercisable.

          Shares issued upon the exercise of such options and warrants or
     conversion of the Series A Preferred Stock will be eligible for resale in
     the public market from time to time.

          We have filed a registration statement covering shares of our Common
     Stock reserved for issuance in connection with the conversion of our Series
     A Preferred Stock. All shares covered by that registration statement are
     freely tradeable. If a large number of such shares are sold in the public
     market, the price of our Common Stock may fall.

     There are certain anti-takeover effects associated with the issuance of
     -----------------------------------------------------------------------
     "Blank Check" preferred stock.
     ------------------------------
          Our Certificate of Incorporation authorizes our Board of Directors to
     issue up to 5,000,000 shares of "blank check" preferred stock, of which
     2,027 shares has been designated Series A Preferred Stock. Of the Series A
     Preferred Stock, 507, shares are  outstanding. The Board of Directors,
     without stockholder approval, may fix all the rights of the
     preferred stock. The issuance of such stock could, among other results,
     negatively affect the voting power of the holders of common stock.

                                      -17-

<PAGE>

     Under certain circumstances, the issuance of the preferred stock would make
it more difficult for a third party to gain control of us, discourage bids for
the Common Stock at a premium, or otherwise adversely affect the market price of
our Common Stock. Such provisions may discourage attempts to acquire us.

     We have no arrangement, commitment or understanding with respect to the
issuance of our preferred stock, other than with respect to the Series A
Preferred Stock. We cannot assure you, however, that we will not, in the future,
issue additional shares of preferred stock.

ITEM 2.  DESCRIPTION OF PROPERTY.

     We maintain our executive offices in approximately 5,179 square feet of
space in Hartford, Connecticut pursuant to a lease expiring on December 31,
2004. We are renting an additional 1,200 square feet of space in the same
building to conduct lottery drawings and for records storage. We do not have an
option to renew. Monthly lease payments are approximately $6,551 per month.

ITEM 3.  LEGAL PROCEEDINGS.

     As of the date of this Form 10KSB, we are not a party to any pending
litigation.

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

     There were no matters submitted to a vote of stockholders during the fourth
quarter of the fiscal year ended May 31, 2000.

                                      -18-

<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.


PRICE RANGE OF COMMON STOCK

     Our Common Stock commenced trading on the OTC Bulletin Board on August 8,
1997 under the symbol "MDIH" and commenced trading on the Nasdaq SmallCap Market
on July 18, 2000 under the symbol "LTRY." The following table sets forth, for
the fiscal periods indicated, the high and low bid prices of a share of Common
Stock as reported by the OTC Bulletin Board under the previous symbol MDIH. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.

    FISCAL YEAR 1999

             1st Quarter ...........................   $1            $    1/4
             2nd Quarter ...........................   $    3/4      $   5/16
             3rd Quarter ...........................   $1- 9/32      $  33/64
             4th Quarter ...........................   $1-  5/8      $  17/32

    FISCAL YEAR 2000

             1st Quarter ...........................   $2-  3/8      $  25/32
             2nd Quarter ...........................   $1-11/16      $  15/16
             3rd Quarter ...........................   $12- 5/8      $  25/32
             4th Quarter ...........................   $14- 7/8      $3-13/16


     As of August 23, 2000, the high and low bid prices per share of Common
Stock as reported by the Nasdaq SmallCap Market under the symbol LTRY were
$3.625 and $3.031, respectively and there were approximately 1,128 holders of
record of the Common Stock.

     We have not paid dividends on the Common Stock since inception and do not
intend to pay any dividends to our stockholders in the foreseeable future. We
currently intend to retain earnings, if any, for the development of our
business. The declaration of dividends in the future will be at the election of
the Board of Directors and will depend upon our earnings, capital requirements,
financial position, general economic conditions, and other factors the Board of
Directors deems relevant.

SALE OF PREFERRED STOCK

     We received gross proceeds of $1,750,000 on August 4, 1999 from the private
sale to an investor of 2,027 shares of Series A Preferred Stock (the "Preferred
Stock"), representing approximately 20% of our outstanding Common Stock on an as
converted basis. The Preferred Stock has a liquidation preference of
approximately $863 per share and pays a dividend at the rate of 5% per annum,
payable in cash or Common Stock at our option and is convertible into an
aggregate of 2,027,000 shares of Common Stock, subject to adjustment under
certain circumstances. As of the date of this Form 10-KSB, 507 shares of
preferred stock remain outstanding. The holders of the Preferred Stock are
entitled to certain rights of first refusal as to new securities issued by us,
subject to certain exclusions. We may not create or increase the authorized
number of shares of any class or series of stock ranking prior to or on parity
with the Preferred Stock either as to dividends or liquidation without approval
of a majority of the holders of the Preferred Stock.

     In connection with the placement, we paid Venture Partners Capital, LLC, a
registered broker-dealer, a $140,000 cash fee and issued a seven-year warrant to
purchase 566,875 shares of Common Stock at $1.31 per share.

                                      -19-

<PAGE>

ISSUANCE OF A SUBORDINATED CONVERTIBLE DEBENTURE

     On September 21, 1999, we issued a subordinated convertible debenture to
Scientific Games, Inc. for $750,000. The Debenture bears interest at 7% per
annum and is payable semi-annually, on June 30 and December 31 of each year,
until its maturity on September 21, 2009. The Debenture is convertible at the
option of Scientific Games at the rate of $2.00 per share of common stock,
subject to adjustment under certain circumstances, into an aggregate of 375,000
shares of common stock and is convertible at our option at any time after the
earlier of (a) September 21, 2001 or (b) after the underlying common stock is
registered pursuant to the Securities Act of 1933, as amended, and the price of
the Company's common stock exceeds $3.00 per share. As of the date of this
Form 10-KSB, the Debenture has not been converted.

     In addition, on September 21, 1999, Steven M. Saferin sold to Scientific
Games 333,333 shares of his common stock at a price of $1.50 per share. In
connection with this placement, we paid Venture Partners Capital, LLC, a
registered broker-dealer, a $62,000 cash fee and issued it a seven year warrant
to purchase 226,020 shares of Common Stock at $1.25 per share.

     Generally accepted accounting principles require that the interest rate on
debt represent a fair market rate for "comparable" debt instruments. We have
determined that a fair market rate for this debt would approximate 10% and,
therefore, have discounted the carrying value of the liability, with the
offsetting credit reflected as additional paid-in capital.

WARRANTS

     During the fiscal year ended May 31, 2000, we issued warrants to purchase
226,020 shares of common stock at an exercise price of $1.25 for services
rendered in connection with the placement of our convertible subordinated
debenture.

     In addition, we issued 566,875 warrants at an exercise price of $1.31 in
connection with the preferred stock sale discussed above.

     We also issued warrants to purchase 25,000 shares of common stock at an
exercise price of $1.56 to a public relations firm for services related to
investor relations.

     All of such warrants were outside of our 1998 Stock Options and Award Plan.

                                      -20-

<PAGE>

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

     All statements contained herein that are not historical facts, including
but not limited to, statements regarding our current business strategy and our
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Generally, the words "anticipates,"
"believes," "estimates," "expects" and similar expressions as they relate to us
and our management are intended to identify forward looking statements. Actual
results may differ materially. Among the factors that could cause actual results
to differ materially are those set forth under the caption "Description of
Business-Risk Factors." We wish to caution readers not to place undue reliance
on any such forward-looking statements, which statements speak only as of the
date made.

     Our principal business has been the scratch ticket segment of the
government lottery industry. We are a leader in designing and marketing instant
scratch ticket games based on licensed brand names and entertainment properties
and our lottery promotions feature such properties licensed by us. Prizes
awarded in such promotions typically include a number of "second chance" prizes
related to the licensed property, including collectible logo bearing merchandise
such as logo bearing T-shirts and caps, and other related merchandise such as
posters, money clips, telephones, playing cards, film cells, stadium blankets,
carryall bags, jackets, electronic games, video and music collections, watches,
clocks, credit cards with prepaid credit, trips and, in the case of
Harley-Davidson(R), Harley-Davidson 1200 Sportster motorcycles.

     We developed our strategy of identifying such properties in early 1996.
Prior to that time, we had developed a series of promotions that utilized
popular videotapes, compact discs and audiocassettes as second chance lottery
prizes. Those promotions enabled us to develop an expertise in sourcing and
distributing products as second chance lottery prizes and to develop a
reputation with lottery personnel as a reliable organization attuned to the
special needs of lotteries and their players.

     The financial results of the last fiscal year are not comparable with or
indicative of the results of the current 2001 fiscal year or, we believe, other
future years. Fiscal 1999 reflects full integration of our licensing strategy.

     We derive over ninety-five percent (95%) of our revenues from lotteries in
two distinct ways. First, we will usually charge a lottery a license and royalty
fee to utilize a particular licensed property as a lottery game. License fees
are a fixed assessment while royalties are a percentage of the printing cost of
the tickets. Contracts for licensed properties typically include an up-front
license fee and a royalty based on the manufacturing cost of tickets.
Manufacturing costs of tickets usually range from $10.00 per thousand to $30.00
per thousand. Actual costs depend on the size of the ticket and the quantity
printed. Ticket quantities range from about one million to as many as 60 million
with an average quantity of about five million.

     Our second source of lottery revenue is the sale of logo bearing
merchandise to the lottery as second-chance prizes. In merchandise-based lottery
games, between 5% to 10% of a lottery's prize fund is typically used for the
purchase of merchandise related to the property the lottery is utilizing.
Typically, we purchase merchandise from other licensees of the property and
resell the merchandise to the lottery at a price that is designed to include
overhead costs, profit, shipping and handling and any marketing support we
provide the lottery such as brochures, posters or other advertising assistance
for which there are no separate charges.

     Our success is dependent on our ability to maintain and secure licensed
properties, sell these properties to lotteries and the performance of the
properties once they are introduced as lottery games to players. We believe that
revenues will fluctuate as individual license-based promotions commence or wind
down and terminate. In addition, our licenses (which are generally for 1.5 to 3
years) terminate at various times over the next several years. Moreover, the
useful life of a license is generally relatively short as the novelty of the
game or the popularity of the licensed material wanes over time. The timing of
agreements with the lotteries to run promotions, the acquisition of new licenses
and the commencement of new promotions is unpredictable. Accordingly, period to
period comparisons may not be indicative of future results.

     We are in continuous negotiations to obtain additional properties and
expect to reach several agreements over the next six to 12 months; however we
cannot assure you that such agreements will actually be reached. Some of these
agreements may require the expenditures of significant up-front advances.

                                      -21-

<PAGE>
<TABLE>

                                                          Twelve months ended May 31, 2000 and May 31, 1999
                                                          ---------------------------------------------------

                                                                  2000           %               1999            %
<S>                                                           <C>              <C>            <C>              <C>
Total revenue                                                 $ 5,498,485      100.0%         $ 7,204,712      100.0%

Cost of revenues                                                3,534,545       64.3%           3,668,266       50.9%
                                                      ----------------------------------------------------------------------

   Gross profit                                                 1,963,940       35.7%           3,536,446       49.1%


Selling, general and administrative expenses                    3,105,526       56.5%           2,302,752       32.0%
Terminated merger expenses                                        727,025       13.2%                   -        0.0%
                                                      ----------------------------------------------------------------------

   Operating (loss) profit                                     (1,868,611)     -34.0%           1,233,694       17.1%

Interest expense                                                   89,758        1.6%              28,200        0.4%
Interest income                                                   (34,811)      -0.6%             (20,487)      -0.3%
Other expense                                                      57,218        1.0%              10,976        0.1%
Minority interest                                                       -        0.0%                (341)       0.0%
                                                      ----------------------------------------------------------------------

   (Loss) income before provision for income taxes             (1,980,776)     -36.0%           1,215,346       16.9%

Provision for income taxes                                          4,329        0.1%              55,700        0.8%
                                                      ----------------------------------------------------------------------

   Net (loss) income                                          $(1,985,105)     -36.1%         $ 1,159,646       16.1%
                                                      ======================================================================



</TABLE>

                                      -22-

<PAGE>

Year Ended May 31, 2000 Compared to Year Ended May 31, 1999
----------------------------------------------------------------------------

     Results for the fiscal year ended May 31, 2000 ("FY 00") reflected a net
loss of $(1,985,100) compared to net income for the fiscal year ended May 31,
1999 ("FY 99") of $1,159,600. The net loss in FY 00 was primarily attributable
to two factors. First, $727,000 of this loss was attributable to the write-off
of costs associated with the proposed merger with The Lottery Channel, which was
terminated on August 25, 2000. Generally accepted accounting principles require
the write-off of these costs since the merger agreemnet was terminated. A more
comprehensive discussion of this issue may be found in "Recent Developments".

     Also associated with the merger was the significant management time spent
attempting to consummate the merger. This commitment of effort did not allow
management to focus on current operations but rather forced management to focus
on developing marketing strategies and plans for integrating Lottery's
operations and personnel with ours. We presented a unified posture, at every
lottery forum attended, to explain the benefits and synergy of this potential
combination. As a result of these efforts, less time was spent on our core
business.

     Secondly, in light of the increased competition in marketing of licensed
properties and a limited life span of licensed promotions, we believed it
imperative that we offer the largest and best inventory of licensed properties
to our customers to remain competitive. To this end, marketing efforts in the
second half of FY 00 were divided between obtaining new sales contracts and
obtaining new licensed properties. Our current inventory of licensed properties
has increased from 16 in FY 99 to 28 in FY 00 and includes such properties as
Elvis Presley (acquired 1st Qtr FY 01) and Ray Charles. The underlying strategy
is to be able to offer our customers the highest quality, recognizable
properties with a strong backing of available licensed merchandise.

     Despite the diversion of marketing efforts, contracts launched in the
fourth quarter of FY 00 are expected to generate $2.7 million in gross revenue
over the term of the contracts. In addition, we have signed contracts, expected
to generate $3.2 million in gross revenue that will launch in the fiscal year
ending May 31, 2001. Not included in the $3.2 million backlog are four games to
be selected as part of multi-game packages with the states of New Jersey and
Wisconsin. Actual revenue recognition for these contracts will vary depending on
actual launch dates and the duration of the game, but we are greatly encouraged
by the backlog and the diverse properties it represents.

     We also have begun to add sales personnel and change our sales strategy. We
are moving toward a regional sales concept, putting our sales personnel closer
to our lottery customers not only to sell, but to provide a greater level of
customer service. We expect the new sales personnel to be in place in the second
quarter of FY 01.

     This new complement to our sales and marketing team will enhance our
ability to market new property licenses that were obtained during FY 00
including entertainers such as Ray Charles; NASCAR Drivers including Dale
Earnhardt, Jr., Bill Elliott, Jeff Burton, Mark Martin and Matt Kenseth; sports
related licenses such as Sports Legends and Let's Get Ready to Rumble; and local
and special interest licenses such as CowParade.

     In addition, we are excited at the prospects offered by the acquisition of
the Elvis Presley property in the 1st Qtr FY 01. We anticipate this license will
secure lottery licensing contracts well in excess of lottery contracts secured
with our Harley-Davidson and Wheel of Fortune properties which amounted to $8.3
million and $2.9 million in gross revenue, respectively, from inception of the
licensed properties to May 31, 2000.

     Total revenue for FY 00 was $5,498,500 as compared to $7,204,700 for FY 99,
a decrease of $1,706,200 (24%) for the reasons discussed above. Revenue during
FY 00 was derived primarily from sales based on three entertainment-based or
brand name properties including Harley-Davidson(R) (44% of revenue), Wheel of
Fortune(R) (19% of revenue) and Times Square 2000(R) (10% of revenue). The
remaining 27% of revenue was derived from eight other properties. In FY 99, 98%
of revenue was obtained from only four properties. This change reflects the
diverse property offerings that are now being marketed and accepted by the
lotteries. For the last two fiscal years, Harley-Davidson(R) and Wheel of
Fortune(R) have accounted for over half of our revenue.

     Cost of revenues for FY 00 was $3,534,500 (64% of revenue) compared to
$3,668,300 (50.9% of revenue) for FY 99. The major costs of revenue include
merchandise awarded as prizes, fulfillment of the prizes to lottery winners and
project marketing costs associated with creating and printing brochures,
mailers, posters, and catalogs. However, in FY 99, $154,900 of commissions owed
to Mr. Saferin from the previous year were relinquished by him which
reduced cost of revenues by that amount. Had this reduction in expense not
occurred, cost of revenues would have been $3,823,200 (53.1%)in FY 99.

     Due to new commission arrangements with our strategic alliance partner,
Scientific Games, Inc. and increasing royalty costs associated with existing
licenses that have been renewed and for new licenses, it has become harder to
achieve our corporate goal of 40% gross profit margin (60% cost of revenue
ratio). Although the majority of our promotions this fiscal year achieved this
goal, the few that did not drove our average margin down.

     As a result of the increasing costs discussed above, our gross profit
decreased to $1,963,900 (35.7% of revenue) for FY 00 compared to $3,536,400
(49.1% of revenue) for FY 99.

                                      -23-

<PAGE>

     Selling, general and administrative expenses for FY 00 were $3,105,500
(56.5% of revenue) compared to $2,302,800 (32% of revenue) in FY 99. Although
revenue decreased by 24% for FY 00, actual expenses increased by 34% as compared
to FY 99. This increase, of approximately $786,000 was due primarily to
increases in variable expense categories. Consulting and lobbying (for enabling
Internet lottery activity) increased costs by $190,500. New project marketing
such as penetrating the European market and appearances at significantly more
conventions and trade shows increased expenses by $87,400. These increases were
necessitated in order to put us in front of the industry as we emerge as the
premier licensing company to the lotteries. We also made appearances with "The
Lottery Channel" to begin displaying Internet enabled games and opportunities to
the industry.

     Although SEC and investor related expenses increased by $163,300, $75,000
of this increase is nonrecurring and was related to amortizing costs associated
with becoming a public reporting company which has now been fully amortized.
Of investor related expenses, $32,800 are attributable to the increase in value
of warrants issued in exchange for services, which did not require a cash
outlay.

     Another nonrecurring expenditure was related to becoming Y2K compliant,
which increased computer-consulting services, by $30,000 over FY 99. We also
incurred $18,000 of non-capitalizable website expenditures, which although new
for FY 00 will continue in the future.

     Two fixed expense categories within selling, general and administrative
expenses that increased were salaries (and related fringe benefits) which
increased by $229,200 and rent which increased by $40,000. The salary increase
was 21.5%, of which, $117,600 (representing 11.0 % of this increase) is
attributable to an increase in the value of employees' stock options and did not
require a cash outlay. The remainder of the increase (representing 10.5% of this
overall increase) represented the hiring of one new employee and salary
increases. Rent increased due to additional space requirements for storage and
to conduct second chance lottery drawings and the part time usage of rental
facilities in both New York and Hartford to reduce hotel expenses for out of
town visitations.

     The preceding items accounted for most of the increases. There are other
expenses which either decreased or had moderate increases. The biggest decrease
was in legal and accounting costs associated with SEC reporting which declined
by approximately $54,000. Much more of this work is now being done internally.

     Terminated merger costs totaled $727,000 for FY 00, which have been written
off as discussed previously.

     The operating loss was $(1,868,600) for FY 00 as compared to an operating
profit of $1,233,700 for FY 99. This was principally due to the factors
described above.

     Interest expense was $89,800 for FY 00 compared to $28,200 for FY 99. This
increase was attributable to the issuance of a convertible subordinated
debenture. See "Description of Business - Issuance of a Subordinated Convertible
Debenture."

     Interest income was approximately $34,800 for the FY 00 period compared to
$20,500 for FY 99.

     Other expense for FY 00 was $57,200 compared to $11,000 for FY 99. The
expense for FY 00 was primarily attributable to a $60,000 favorable settlement
of a lawsuit we instituted, which after legal costs resulted in a net expense of
$51,000. The expense for FY 99 was due to the disposal of a fixed asset at less
than recorded book value.

     The minority interest of MDI-Texas owned by third parties was eliminated in
FY 00 as the corporation was collapsed in FY 99 due to the completion of a
contract with the Texas lottery.

                                      -24-

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     As of May 31, 2000, we had cash of $313,400 compared to $340,400 as of May
31,1999. Receivables from lottery clients were $801,300 as of May 31, 2000
compared to $817,600 as of May 31, 1999. This is a $43,300 decrease in combined
cash and receivables at May 31, 2000 compared to May 31, 1999.

     On May 31, 2000, we had a net working capital deficit of $1,719,400.
However, $1,733,300 of this deficit was "billings in excess of costs and
estimated earnings on uncompleted contracts". "Billings in excess of costs and
estimated earnings on completed contracts" represents unrecognized revenue
(i.e., revenue that we have already been paid or billed for but which cannot be
recognized until we purchase the contracted merchandise for a game drawing.
Accordingly, such liability will not adversely impact cash flow except to the
extent that we need to purchase merchandise and incur subsequent fulfillment
costs relative to this revenue, which generally approximates 50% of this
revenue.

     This deficit is due to significantly higher accounts payable and accrued
expenses at May 31, 2000 of $1,228,000 compared to $678,500 at May 31, 1999.
Approximately $490,000 is related to legal, accounting and financial consulting
fees related to the terminated merger with the Lottery Channel which would have
been paid at the merger closing. These fees will be paid over a six to nine
month period, and therefore will not severely impact immediate cash flow.

     Our indebtedness as of May 31, 2000 was $835,537, consisting primarily of
a convertible subordinated debenture with a carrying value of $540,000 and a
note payable to Steven Saferin, President and CEO, with a remaining balance of
$254,287. The terms of the debenture provide for semiannual payments of interest
only until the debenture's maturity in September 2009.  The note payable to
Steven Saferin originated from the conversion of $600,000 of accrued commissions
owed to an outside third party in January 1999. On January 19, 2000, Mr. Saferin
exchanged a portion of his stock in exchange for the remaining principal of the
note.  The note was rewritten and bears interest at 8% per annum and is payable
in monthly installments of $14,300 with the final payment date of December 1,
2001. The note is secured by liens on substantially all of our assets. The note
held by Steven Saferin contains more favorable repayment terms than the
obligation it replaced.

     The cash requirements of funding our growth have historically exceeded cash
flow from operations. Therefore, to address our immediate needs, we entered into
an agreement for a $500,000 line of credit in February 2000 with Fleet Bank. The
line is secured by liens on substantially all of our assets. Interest on the
line is at the Bank's prime rate plus .75%. This line expires on September 30,
2000. We are in default of certain financial covenants. Therefore Steven M.
Saferin, President and Chief Executive Officer has agreed to lend us up to
$500,000 to fund our immediate cash flow needs. Current borrowings against the
Fleet line amount to $95,000 as of this filing. We are also continuing to seek
additional equity investors for our long term needs.

     We do not have any material capital commitments and do not currently
anticipate making any substantial expenditure other than in the normal course of
business. We have undertaken an aggressive program of acquiring new licenses,
some of which may require substantial up front payments. Several such licenses
have been obtained at a cost of $80,000 in the fourth quarter of FY 00 and
approximately $180,000 in the first quarter of FY 01.

RECENTLY ISSUED ACCOUNTING STANDARDS

     In June 1998, the Financial Accounting Standards Board (FASB) issued FASB
No.133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. In June 1999, the FASB
issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities- Deferral of Effective Date of SFAS No. 133." This has resulted in
the deferral of SFAS No. 133 to fiscal years beginning after June 15, 2000. The
adoption of SFAS No. 133, as amended by SFAS No. 138, is not expected to have a
material impact on the Company's financial condition or results of operations.

                                      -25-

<PAGE>

     In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No 101, "Revenue Recognition in Financial Statements"
("SAB No. 101"). SAB No. 101, among other things, provides guidance on revenue
recognition. SAB No. 101 was adopted by the Company on January 1, 2000 The
cumulative effect of applying SAB No. 101 did not have an effect on the
Company's operating results or financial position upon adoption.


ITEM 7.  FINANCIAL STATEMENTS.

     The Financial Statements and Notes thereto can be found beginning on page
F-1, "Index to Consolidated Financial Statements," following Part III of this
Annual Report on Form 10-KSB.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

     Not applicable

                                      -26-

<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.

              Our directors and executive officers are as follows:

       Name                     Age               Position
       ----                     ---               --------
Steven M. Saferin               51        President, Chief Executive Officer and
                                          Director
Kenneth M. Przysiecki           56        Chief Financial Officer, Secretary and
                                          Director
Robert J. Wussler               63        Director
S. David Fineman                54        Director
Todd P. Leavitt                 49        Director
William G. Malloy               54        Director
Charles W. Kline                40        Vice President of Sales and Marketing
Robert R. Kowalczyk             53        Vice President and General Manager


COMMITTEES

     The Board of Directors at their April 27, 1999 quarterly meeting
established the following committees and appointed members:

Audit Committee:                S. David Fineman
                                Robert J. Wussler

Compensation Committee:         Steven M. Saferin
                                Todd P. Leavitt

Executive Committee:            Steven M. Saferin
                                S. David Fineman
                                Kenneth M. Przysiecki

BIOGRAPHIES

Steven M. Saferin
-----------------

     Mr. Saferin has been the President, Chief Executive Officer and a member of
our Board of Directors since August 1997. Since January 1986, Mr. Saferin has
been President and Chief Executive Officer of MDIP, which today is our wholly
owned subsidiary of MDI. In this capacity, Mr. Saferin has been primarily
responsible for product development, marketing and sales. Mr. Saferin conceived
and led MDIP's entry into the lottery industry and has since been the key
employee in revising, refining and creating new products and marketing
initiatives for us to offer to the lottery industry. Prior to founding MDIP, Mr.
Saferin was Director of Program Acquisitions at ESPN from 1982 to 1986. He
supervised a 16 person department in the areas of product acquisition and
scheduling. From 1978 to 1982, Mr. Saferin was active in cable television
franchising as a Vice President with both Viacom Communications and Warner Amex
Cable. In those capacities, he supervised cable television franchising
activities in dozens of major markets. Prior to entering business, Mr. Saferin
was an Attorney-Advisor to the Cable Television Bureau of the Federal
Communications Commission, as well as a member of the law department at Viacom
International, Inc. Mr. Saferin received a B.A. in journalism from American
University and received his J.D. after attending the Georgetown University and
the University of Maryland Schools of Law.

                                      -27-

<PAGE>

Kenneth M. Przysiecki
---------------------

     Mr. Przysiecki has been our Chief Financial Officer, Secretary and a member
of our Board of Directors since August 1997. Since August 1994, Mr. Przysiecki
has been Chief Financial Officer of MDIP. Prior to joining MDIP, Mr. Przysiecki
was involved in several business start-ups that required his financial planning,
negotiating and systems implementation skills. He was a Senior Manager for
Noreika, Rosenfeld and Hupp, a C.P.A. firm, from 1989 to 1992 and was employed
as Vice President of Finance for Keeney Manufacturing Company, from 1976 until
1988. He received his C.P.A. while employed at Arthur Andersen & Co. from 1972
to 1976, and received his B.S. in Business Administration from American
International College.


Robert J. Wussler
-----------------

     Mr. Wussler has been a member of our Board of Directors since August 1997.
He has been Chairman of the Board of Directors of U.S. Digital Communications,
Inc., a telecommunications company, since March 1997, and President and Chief
Executive Officer of this company since June 1998. He has also been President
and Chief Executive Officer of The Wussler Group, which owns several
telecommunications ventures, since February 1992. From June 1995 to June 1998,
Mr. Wussler served as President and Chief Executive Officer of Affiliate
Enterprises, Inc., a privately held company which acts as the syndication branch
of 51 media companies. Prior to his current activities he was the President and
Chief Executive Officer of Comsat Video, the international satellite
telecommunications company from 1990 to 1993. Mr. Wussler is one of the founders
of CNN (Cable News Network) having founded the network when he was Senior
Executive Vice President with Turner Broadcasting from 1980 to 1990. During his
tenure with Turner Broadcasting, he was also President of the Atlanta Braves
professional baseball team and the Atlanta Hawks professional basketball team.
Prior to joining the Turner organization, Mr. Wussler was President of Columbia
Broadcasting System (CBS) Television, a position he attained from his start in
the CBS mailroom. Mr. Wussler is also an independent business consultant having
directed such projects as the establishment of a French-Kuwaiti television
network in 1993 and the acquisition of MetroMedia Enterprises. He was the
founding Chairman of International TelCell which later became a part of
MetroMedia International Group in 1993. Mr. Wussler also advised and guided the
first African American professional basketball ownership group in the finance,
purchase, management and resale of the Denver Nuggets franchise of the National
Basketball Association. Mr. Wussler also serves on the Board of Directors of
Streammedia Communications, Inc., Converge Global, Inc., Visual Display and
TIS Worldwide.
                                      -28-

<PAGE>

S. David Fineman
----------------

     Mr. Fineman has been a member of our Board of Directors since November
1998. He is the managing attorney and founder of Fineman & Bach, P.C., a
Philadelphia, PA law firm since 1986. Mr. Fineman represents a variety of
clients, including governmental authorities and private clients dealing with the
government. He has an active litigation practice and represents clients
throughout the United States and Japan in both the Federal and State courts. Mr.
Fineman has served as special counsel to the Philadelphia Parking
Authority, the Secretary of Banking of the Commonwealth of Pennsylvania, and the
Insurance Commissioner of the Commonwealth of Pennsylvania. In 1995, he was
nominated by President Clinton and confirmed by the United States Senate to a
nine-year term on the Board of Governors of the United States Postal Service, a
nine member Board which directs and controls the expenditures, reviews practices
and policies, and establishes basic objectives and long-range goals for the
Postal Service. He presently serves as chairman of its compensation committee.
In 1994, Mr. Fineman was appointed to the Industry Policy Advisory Committee, a
CEO-level committee which advises the Secretary of Commerce and the U.S. Trade
Representative on international trade policy issues. Mr. Fineman received a B.A.
from American University and received his J.D., with honors, from George
Washington University Law School.


Todd P. Leavitt
---------------

     Mr. Leavitt has been a member of our Board of Directors since November
1998. He founded and has been Managing Director of Tulip Media Ltd. since May
1998. Tulip Media furnishes services in areas of feature film, television and
video production and distribution as well as media consulting services to a
variety of United States and international companies engaged in the
entertainment industry. Prior to establishing Tulip Media, Mr. Leavitt served as
Chairman of the Alliance Television Group, supervising all television production
and distribution activities on behalf of Alliance Communications Corporation,
from 1995 to May 1998. Previously, Mr. Leavitt was Executive Vice President of
NBC Studios, the in-house production arm of the NBC Television Network, from
1990 to 1995. Prior to joining NBC, Mr. Leavitt had been Executive Vice
President of Reeves Entertainment Group. Mr. Leavitt is a Phi Beta Kappa
graduate of Kenyon College, Gambier, Ohio, and received a law degree from the
New York University School of Law.

William G. Malloy
------------------

     Mr. Malloy has been a member of the Board of Directors since September
1999. Mr. Malloy currently serves on the Board of Directors of Autotote
Corporation (NYSE: TTE). Prior to the merger of Autotote and Scientific
Games, Inc.(NYSE: SG), he was Chairman of the Board, President and Chief
Executive Officer of Scientific Games Holdings Corp. (NYSE:SG) Scientific
Games is a $230 million per year publicly held company in the international
lottery industry. Scientific Games' core strengths include marketing and
the application of advance computer technology to complex printing
processes and customer support systems. Prior to becoming the Scientific
Games' President and Chief Executive officer in December 1990, Mr. Malloy
was the company's Vice President, Treasurer and Chief Financial Officer
from 1988 to 1990. Prior to joining Scientific Games, Mr. Malloy held
several positions from 1975 to 1987 with Bally Manufacturing Corporation,
Scientific Games' former parent company. His various responsibilities
included sales, finance, planning, operations and information systems. Mr.
Malloy has directed various manufacturing, distribution, financing and
service businesses. Industry groups with which he has experience include
consumer durable goods, vending, commercial video amusement, printing,
regulated gaming and software development. In addition, he is a seasoned
international businessman and has extensive experience with various
government regulated procurement processes. Mr. Malloy also serves on the
Board of Directors of the Georgia Chamber of Commerce, Drugs Don't Work in
Georgia and the Upper Chattahoochee Riverkeeper. Mr. Malloy received his
Bachelor of Science degree in Business Administration from Northern
Illinois University and his Master of Science in Management (MBA) from
Northwestern University's J. L. Kellogg Graduate School of Management in
Evanston, Illinois.
                                      -29-

<PAGE>

Charles W. Kline
----------------

     Mr. Kline joined us as Vice President of Sales and Marketing in February
1998.Prior to joining us, Mr. Kline was Executive Director of the Pennsylvania
State Lottery, the nation's sixth largest lottery from 1992 to 1997. As
Executive Director, Mr. Kline oversaw the entire $1.7 billion sales operation.
During his five year tenure, Mr. Kline was credited with not only reversing a
3-year slide in sales, but also engineering and implementing a program that
caused the lottery to undergo five consecutive years of sales growth. Prior to
this post, Mr. Kline served in a variety of key positions in state government.
Mr. Kline received a B.A. in Public Service and a Masters in Public
Administration, both from the Pennsylvania State University.


Robert R. Kowalczyk
-------------------

     Mr. Kowalczyk joined us as Vice President and General Manager in November
1997. Prior to joining us, Mr. Kowalczyk was Vice President and Management
Supervisor of Yaffe and Company Advertising of Southfield, Michigan from 1995 to
1997. At Yaffe, Mr. Kowalczyk supervised the $10 million advertising and
promotions account and aided the product planning for the Michigan State
Lottery. Mr. Kowalczyk also supervised the agency's business development and
research functions, and participated in the account planning and management for
clients, including health care, financial services and various retail chains.
Prior to his time in Michigan, Mr. Kowalczyk managed product planning and
marketing, research and the $32 million advertising and promotional budgets for
the Florida Lottery from 1991 to 1995. Under his direction, the lottery reversed
a decline in sales growth in that category. Previous to that, Mr. Kowalczyk was
the Marketing Director for the Ohio Lottery Commission from 1987 to 1991. He
successfully expanded the entire lottery market by introducing instant
scratch-off game marketing strategies that have been emulated by virtually every
lottery in the years that followed. During his tenure, Ohio Lottery sales
increased an average of 16% per year, instant ticket sales increased  58% per
year and profitability increased at the rate of 4% per year. Mr. Kowalczyk
received his Associate Degree from Lorain County Community College and earned
his Executive M.B.A. from the Weatherhead School of Management, Case Western
Reserve University, Cleveland, Ohio.

     Each director holds office until our annual meeting of stockholders and
until his successor is duly elected and qualified. Officers are elected by the
Board of Directors and hold office at the discretion of the Board of Directors.
There are no family relationships between any of our directors or executive
officers.

                                      -30-

<PAGE>

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.

     Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our directors and executive officers, and persons who
beneficially own more than ten percent of a registered class of our equity
securities, to file with the SEC initial reports of ownership and reports of
changes in ownership of Common Stock and our other equity securities. Officers,
directors, and persons who beneficially own more than ten percent of a
registered class of our equities are required by the regulations of the
Commission to furnish us with copies of all Section 16(a) forms they file. To
our knowledge, based solely on review of the copies of such reports furnished to
the Company, during the fiscal year ended May 31, 2000, all Section 16(a) filing
requirements applicable to our officers, directors, and greater than ten percent
beneficial owners were complied with, except that a Form 4 was filed late by
Robert R. Kowalczyk.

ITEM 10. EXECUTIVE COMPENSATION.

EXECUTIVE COMPENSATION

     The following table sets forth the annual and long-term compensation for
services in all capacities for the fiscal year ended May 31, 2000 paid to Steven
M. Saferin, President and Chief Executive Officer and a director, Kenneth M.
Przysiecki, Chief Financial Officer, Secretary and a director, Robert R.
Kowalczyk, Vice President and General Manager and Charles W. Kline, Vice
President of Sales and Marketing. No other executive officer received
compensation exceeding $100,000 during the fiscal year ended May 31, 2000.

                                      -31-

<PAGE>

<TABLE>

SUMMARY COMPENSATION  TABLE



NAME AND PRINCIPAL        FISCAL                                               LONG-TERM COMPENSATION
    POSITION               YEAR     ANNUAL COMPENSATION                                AWARDS

                                   SALARY        BONUS        OTHER ANNUAL    RESTRICTED    SECURITIES   LONG-TERM      ALL OTHER
                                                              COMPENSATION       STOCK      UNDERLYING   INCENTIVE     COMPENSATION
                                                               (1) AND (2)      AWARD (S)     OPTIONS/     PLAN            (3)
                                                                                                SARS      PAYOUTS
------------------------------------------------------------------------------------------------------------------------------------
<S>                       <C>      <C>          <C>              <C>                  <C>        <C>         <C>         <C>
Steven Saferin,           2000     $330,750 (4)       -                  -            -           -          -           $4,374
President/CEO and         1999     $300,000 (4)       -          ($154,885)(5)        -           -          -           $5,029
Director                  1998     $300,000 (4)       -           $114,885            -           -          -           $3,654

Kenneth M. Przysiecki,    2000     $143,500      $5,000            $23,087            -           -          -           $3,990
Chief Financial Officer,  1999     $136,000      $4,000            $29,084            -           -          -           $4,080
Secretary and Director    1998     $102,000      $2,500            $37,106            -           -          -           $3,030

Robert R. Kowalczyk,      2000     $114,000     $20,181                  -            -           -          -           $3,169
Vice President and        1999     $104,000      $2,300                  -            -           -          -           $3,120
General Manager           1998      $69,238           -                  -            -           -          -           $1,200

Charles W. Kline,         2000     $114,000      $2,500                  -            -           -          -           $3,560
Vice President of         1999     $108,000      $2,000                  -            -           -          -             $540
Sales and Marketing       1998      $29,077           -                  -            -           -          -                -

</TABLE>

(1)     Represents revenue-based commissions accrued pursuant to employment
        agreements. As of May 31, 2000, $9,092 of accrued commissions were owed
        to Mr Przysiecki. Mr Saferin waived commissions owed him under his
        employment agreement for fiscal 2000.

(2)     Excludes prerequisites and other personal benefits, securities and
        properties otherwise categorized as salary or bonuses which, in the
        aggregate, did not exceed the lesser of either $50,000 or 10% of the
        total annual salary reported for such person.

(3)     Represents amounts contributed pursuant to our 401(k) Savings Plan.

(4)     Excludes amounts paid to Mr. Saferin's mother and the company owned by
        his spouse. Such amounts aggregated $110,000 in each of fiscal 2000,
        1999, 1998.

(5)     Such amount reflects a waiver of commissions previously owed to Mr.
        Saferin that he has relinquished.

                                      -32-

<PAGE>

DIRECTOR COMPENSATION

     Upon election or appointment to the Board of Directors, non-employee
directors are granted non-qualified options to purchase 150,000 shares of Common
Stock at the fair market value of the Common Stock on the date of grant. In
September 1998, Mr. Wussler received stock options outside of the Plan (defined
below) for 300,000 shares of Common Stock at an exercise price of $0.37 per
share as compensation for his services as one of our outside directors. Messrs.
Leavitt and Fineman each received stock options pursuant to the Plan for 150,000
shares of Common Stock at an exercise price of $0.33 per share as compensation
for their services as outside directors. Mr. Malloy received options to purchase
132,500 shares of common stock at $1.38 per share pursuant to the Plan and
options to purchase an additional 17,500 shares of common stock at 1.38 per
share outside of the Plan as compensation for his services as an outside
director.

OPTION AND AWARD PLAN

     On September 22, 1998, our Board of Directors adopted our 1998 Stock Option
and Award Plan (the "Plan") The stockholders approved the Plan on February 9,
1999. The Plan provides for the grant of stock awards and options for up to
800,000 shares of Common Stock to those employees, officers, directors,
consultants or other individuals or entities eligible under the Plan to receive
stock awards or options (each, a "Plan Participant"). Options may be either
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or non-qualified options.
Incentive stock options may be granted only to our employees, while
non-qualified options may be issued to non-employee directors, consultants and
others, as well as to our employees. Stock awards consist of the sale or
transfer by us to a Plan Participant of one or more shares of Common Stock
which, unless otherwise determined by the Board of Directors or committee
administering the Plan, are subject to transfer restrictions and our right to
repurchase if certain conditions specified in the award are not satisfied prior
to the end of a restriction period. The plan provides for automatic grants of
non-qualified stock options to purchase 150,000 shares of Common Stock to each
non-employee director upon his election or appointment to the Board of Directors
at the fair market value of the Common Stock on the date of the grant. Such
options vest in equal installments over three years. No Plan Participant may
receive more than an aggregate of 250,000 shares of Common Stock by grant of
options and/or stock awards during the term of the Plan.

     The Plan is administered by the Board of Directors or a committee thereof
(the "Plan Administrator), which determines, among other things, those
individuals who receive options or awards, the time period during which the
options may be partially or fully exercised, the terms of the restrictions, if
any, on awards, the number of shares of Common Stock issued as an award or
issuable upon the exercise of each option and the option exercise price and the
award and repurchase prices.

                                      -33-

<PAGE>

     The exercise price per share of Common Stock subject to an incentive option
may not be less than the fair market value per share of Common Stock on the date
the option is granted. The per share exercise price of the Common Stock subject
to a non-qualified option may be established by the Plan Administrator. The
aggregate fair market value (determined as of the date the option is granted) of
Common Stock for which any person may be granted incentive stock options which
first become exercisable in any calendar year may not exceed $100,000. No person
who owns, directly or indirectly, at the time of the granting of an incentive
stock option to such person, 10% or more of the total combined voting power of
all our classes of stock (a "10% Stockholder") shall be eligible to receive any
incentive stock options under the Plans, unless the exercise price is at least
110% of the fair market value of the shares of Common Stock subject to the
option, determined on the date of grant. Non-qualified options are not subject
to such limitation.

     No stock option may be transferred by a Plan Participant other than by will
or the laws of descent and distribution, and, during the lifetime of a Plan
Participant, the option will be exercisable only by the Plan Participant. In the
event of termination of employment other than by death or disability, the Plan
Participant will have no more than three months after such termination during
which the Plan Participant shall be entitled to exercise the option, unless
otherwise determined by the Plan Administrator. Upon termination of employment
of a Plan Participant by reason of death or permanent disability, such Plan
Participant's options remain exercisable for one year thereafter to the extent
such options were exercisable on the date of such termination.

     Options under the Plan must be issued within 10 years from the Plan's
effective date which is September 22, 1998. Incentive stock options granted
under the Plan, cannot be exercised more than 10 years from the date of grant.
Incentive stock options issued to a 10% Stockholder are limited to five-year
terms. All options granted under the Plan provide for the payment of the
exercise price in cash or by delivery to us of shares of Common Stock having a
fair market value equal to the exercise price of the options being exercised, or
by a combination of such methods. Therefore, a Plan Participant may be able to
tender shares of Common Stock to purchase additional shares of Common Stock and
may theoretically exercise all of such Plan Participant's stock options with no
investment.

     Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by us become available again for issuance under the Plan.

     As of August 23, 2000, we have issued options to purchase all 800,000
shares of Common Stock under the Plan, which includes grants to (1) the Chief
Executive Officer and President for options to purchase 225,000 shares of Common
Stock, (2) other executive officers for options to purchase 80,000 shares of
Common Stock, (3) employees for options to purchase 62,500 shares of Common
Stock and (4) three outside directors for options to purchase a total of 432,500
shares of Common Stock. As of such date, options to purchase 317,500 shares of
Common Stock have been issued to two directors outside of the Plan. Options to
purchase 143,334 shares were exercised pursuant to the Plan in fiscal 2000.
142,128 resulting shares were issued to the participants as a result of
exercising their options.  The difference between the number of shares issued
and the number of options exercised was attributable to the "cashless" exercise
of options by participants.

401(k) SAVINGS PLAN

     In fiscal 1996, we adopted a 401(k) savings plan whereby participants can
elect to defer up to a specified maximum of their compensation and we will match
their contribution up to 3% of the employee's base salary. In fiscal 2000 we
contributed $19,631 to the plan and in fiscal 1999 we contributed $14,687 to the
plan.

                                      -34-

<PAGE>

EMPLOYMENT AGREEMENTS

Steven M. Saferin

     MDIP entered into an employment agreement with Mr. Saferin, guaranteed by
us, which expires on the later of August 8, 2002 or three years from the date we
first file a registration statement with the SEC registering all of the shares
of common or preferred stock owned by Mr. Saferin, and our shares are being
traded on the New York Stock Exchange, the American Stock Exchange or the Nasdaq
Stock Market. See "Description of Business-Risk Factors-The loss of the services
of Steven M. Saferin could harm our business." Pursuant to his employment
agreement, Mr. Saferin receives an annual base salary of $300,000, which may be
increased each year in an amount between 5% and 10% of the salary of the
immediately preceding year. In addition, Mr. Saferin is entitled to a bonus
equal to 2% of the gross revenues, up to a maximum amount of $335,000 over the
term of the agreement. The employment agreement is terminable by MDIP for "good
cause" and by Mr. Saferin for "good reason" upon the occurrence of certain
events. In the event that MDIP terminates Mr. Saferin's employment without "good
cause" or Mr. Saferin resigns for "good reason," MDIP shall pay an amount equal
to the present value sum of the salary fixed at the salary rate on the date of
termination or resignation which Mr. Saferin would have received through August
7, 2002 had his employment not been terminated. The agreement does not contain
any terms regarding non-competition after the termination of Mr. Saferin's
employment.

Kenneth M. Przysiecki

     MDIP and Mr.Saferin have entered into an employment agreement with Mr.
Przysiecki, as amended, renewable yearly starting from October 1 of each
year. Pursuant to his employment agreement, Mr. Przysiecki receives an
annual base salary of $136,000, which may be increased each year. Mr.
Przysiecki is entitled to a bonus equal to 0.5% of all trade revenue. Mr.
Przysiecki's employment may be terminated by him or MDIP at any time upon
sixty days' prior written notice. However, if employment is terminated by
MDIP upon notice, or because of Mr. Przysiecki's death or disability, Mr.
Przysiecki is entitled to severance pay equal to one year of his current
base salary. The employment agreement provides that Mr. Przysiecki will not
compete with MDIP in North America for eighteen months after the
termination of his employment. A state court, however, may determine not to
enforce such non-compete clause as against public policy.


                                      -35-

<PAGE>

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

PRINCIPAL STOCKHOLDERS

     The following table sets forth information known to us, as of August 10,
2000, regarding the beneficial ownership of our voting securities by (i) each
person who is known by us to own of record or beneficially more than 5% of the
outstanding Common Stock, (ii) each of our directors and the Named Executive
Officers, as defined in Item 6, and (iii) all directors and executive officers
of as a group. Unless otherwise indicated, each of the stockholders listed in
the table below has sole voting and dispositive power with respect to shares
beneficially owned by such stockholder.

                                          NUMBER OF SHARES           PERCENT
NAME OF BENEFICIAL OWNER (1)             BENEFICIALLY OWNED         OF CLASS (2)
----------------------------             ------------------         ------------

Steven M. Saferin                           3,870,169(3)             39.2%
Robert J. Wussler                             300,000                 3.1%
Kenneth M. Przysiecki                         240,000                 2.4%
Charles Kline                                   8,392                 0.1%
Robert R. Kowalczyk                            10,000                 0.1%
Todd P. Leavitt                                50,000(4)              0.5%
S. David Fineman                               50,000                 0.5%
William G. Malloy                              50,000(5)              0.5%
International Capital Partners, LLC           836,115(6)              8.5%
Scientific Games, Inc.                        608,333(7)              6.0%
All directors and executive
officers as a group (8 persons)             4,578,561                46.1%

(1)     The address for Messrs. Saferin, Malloy, Wussler, Przysiecki, Kline,
        Kowalczyk, Leavitt and Fineman is c/o MDI Entertainment, Inc., 201 Ann
        Street, Hartford, Connecticut 06103. The address for International
        Capital Partners, LLC is c/o Foley, Hoag & Eliot, LLP, One Post Office
        Square, Boston, MA 02109.  The address for Scientific Games, Inc. is
        1500 Bluegrass Lakes Parkway, Alpharetta, GA  30004

(2)     Shares of Common Stock are deemed outstanding for purposes of computing
        the percentage of beneficial ownership if such shares of Common Stock
        are exercisable or convertible within 60 days of the date of this Form
        10-KSB.

(3)     Includes 75,000 shares of Common Stock which are subject to currently
        exercisable options.

(4)     Represents 50,000 shares of Common Stock beneficially owned directly by
        the Leavitt Family Trust.

(5)     Represents 50,000 shares of Common Stock which are subject to currently
        exercisable options.  Mr. Malloy is President and Chief Executive
        Officer of Scientific Games, Inc., which beneficially owns 608,333
        shares of Common Stock

(6)     Includes 507,000 shares of Common Stock issuable upon conversion of 507
        shares of Series A Preferred Stock.

(7)     Includes 275,000 shares of Common Stock issuable upon conversion of a
        convertible subordinated debenture.



                                      -36-

<PAGE>

         ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Many of the following transactions occurred before, or as a result of, the
reverse mergers of MDIP and MDIM with and into us in August 1997.

     Since August 1994, our subsidiary, MDIP, has retained 1010 Productions,
Inc. ("1010") to consult in the areas of trade show activities, software
development, systems design, purchasing and product fulfillment. The president
and sole shareholder of 1010 is Linda Kesterson Saferin, spouse of Steven M.
Saferin, and former employee, officer and director of MDIP. 1010 is currently
paid $8,167 per month plus expenses and is retained until December 31, 2000
pursuant to its current consulting agreement with us.

     MDIT, a company of which MDIP previously owned 66.7%, and MDIM, a company
of which Mr. Saferin previously owned 91%, have paid MDIP an aggregate
management fee of $10,200 in fiscal 1999 to operate the Texas and Missouri
lottery programs. MDIT and MDIM have both been collapsed into MDIP now that the
Texas and Missouri lottery contracts have ended.

     As a result of the reverse mergers of MDIP and MDIM with and into us in
August 1997, we executed a promissory note to Agostino T. Galluzzo in the amount
of $27,000. The note has an annual interest rate of 10% (which started on
December 7, 1997) and will be paid in thirty-six equal monthly installments
(beginning September 1998). Mr. Galluzzo was a minority stockholder of MDIP and
MDIM. In addition, Mr. Galluzzo received 433,876 shares of our Common Stock in
such mergers.

     On June 1, 1998, Steven M. Saferin guaranteed our $500,000 performance bond
provided to the Wisconsin lottery.

     On September 23, 1998, Steven M. Saferin guaranteed our $130,000
performance bond provided to the Louisiana lottery.

     Fineman & Bach, P.C., a Philadelphia PA law firm that S. David Fineman, one
of our directors is associated with, from time to time does legal work for us.

     Tulip Media Ltd., a Los Angeles, CA entertainment company that Todd
Leavitt, one of our directors, is associated with, from time to time does work
in the entertainment field for us.

     In October 1999, William G. Malloy was invited to join our Board of
Directors. Mr. Malloy is President and Chief Executive Officer of Scientific
Games, Inc. which executed a strategic alliance with us. In connection with such
alliance, Scientific Games purchased a $750,000 convertible subordinated
debenture from us. In addition, Steven M. Saferin sold 333,333 shares of Common
Stock held by him to Scientific Games.

     On January 19, 2000, Steven Saferin exchanged a portion of his stock for a
note held by a third party and made by us with a remaining principal of
$316,038. The note bears interest at 8% per annum and is payable in monthly
installments of $14,300 with a final payment date of December 1, 2001. The note
is secured by liens on substantially all of our assets.

     On May 31, 2000 Steven Saferin loaned the President and Chief Executive
Officer of The Lottery Channel, Inc. $108,000 personally for the operational
needs of The Lottery Channel. Mr. Saferin received a promissory note bearing
interest of 11% per annum.

     On September 1, 2000 Steven Saferin loaned the Corporation $260,000 and
received a note payable on demand, bearing interest at a rate of 10% per annum.
On September 8, 2000, as part of a loan transaction, the note was replaced with
a note secured by substantially all of our assets, payable on January 31, 2001,
which bears interest at a rate of 10% per annum.

     Steven M. Saferin is entitled to a commission equal to 2% of our gross
revenue, persuant to his employment agreement. Mr. Saferin waived the right to
approximately $110,000 and $144,000 of commissions in FY 00 and FY 99,
respectively.

                                      -37-

<PAGE>

  ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K.


  EXHIBIT NO.     DESCRIPTION

3.1     Certificate of Incorporation of MDI Entertainment, Inc. (f/k/a Puff
        Process Inc.) dated December 29, 1994, as amended.(2)
3.2     Certificate of Amendment to the Certificate of Incorporation of MDI
        Entertainment, Inc. dated February 28, 1999.(3)
3.3     Amended and Restated By-Laws of MDI Entertainment, Inc. dated April
        27, 1999.(5)
3.4     Certificate of Designations, Preferences and Rights of Series A
        Preferred Stock, dated August 4, 1999.(4)
4.1     Registration Rights Agreement dated August 8, 1997, between MDI
        Entertainment Inc., Steven M. Saferin and Agostino T. Galluzzo.(1)
4.2     1998 Stock Option and Award Plan, dated September 22, 1998.(1)
4.3     Registration Rights Agreement dated August 4, 1999 between MDI
        Entertainment, Inc. and International Capital Partners, LLC.(4)
4.4     Stock Purchase Agreement dated August 4, 1999 between MDI Entertainment,
        Inc. and International Capital Partners, LLC.(4)
4.5     Convertible Subordinated Debenture Purchase Agreement dated September
        21, 1999 between MDI Entertainment, Inc. and Scientific Games, Inc. (6)
4.6     Convertible Subordinated Debenture dated September 21, 1999 between MDI
        Entertainment, Inc. and Scientific Games, Inc. (6)
4.7     Purchase Agreement dated September 21, 1999 between Steven M. Saferin
        and Scientific Games, Inc. (6)
4.8     Stockholders' Agreement dated as of January 26, 2000 between MDI
        Entertainment, Inc., MDI Acquisition, Inc. and certain parties listed
        therein. (7)
4.9     Stockholders' Agreement dated January 26, 2000 between The Lottery
        Channel, Inc. and certain parties listed therein. (7)
4.10    Letter Agreement dated January 26, 2000 between Steven M. Saferin and
        MDI Entertainment, Inc. (7)
4.11    Letter Agreement dated January 26, 2000 between Roger W. Ach, II and MDI
        Entertainment, Inc. (7)
10.1    Second Amended and Restated Employment Agreement dated August 8, 1997,
        as amended, between Media Drop-In Productions, Inc. and Steven M.
        Saferin.(1)
10.2    Employment Agreement dated April 30, 1996, as amended, between
        Media Drop-In Productions, Inc., Kenneth Przysiecki and Steven M.
        Saferin.(1)
10.3    First Amended and Restated Consulting Agreement dated August 8,
        1997, between Media Drop-In Productions, Inc. and 1010 Productions,
        Inc.(1)
10.4    Lease dated June 1992, as amended, between Ann Street Limited
        Partnership by Tunxis Management Co., II, and Media Drop-In Productions,
        Inc.(1)
10.5    Amended Lease Agreement between KWK IV, LLC. and Media Drop-In
        Productions,Inc. dated March 25, 1999.(5)
10.6    Agreement and Plan of Reorganization dated August 8, 1997, between
        MDI Entertainment, Inc., MDI-Connecticut, Inc., MDI-Missouri, Inc. (DE),
        Media Drop-In Productions, Inc., MDI-Missouri, Inc. (MO), Steven M.
        Saferin and Agostino T. Galluzzo.(2)
10.7    Commission Agreement dated December 20, 1994, between Media Drop-In
        Productions, Inc. and Stamford Media Group, LLC.(2)
10.8    Letter of Intent dated July 31, 1998, between MDI Entertainment,
        Inc., Fancaster, Inc. and Craig Krueger.(2)
10.9    Strategic Alliance Agreement, dated September 2, 1999 between MDI
        Entertainment, Inc. and Scientific Games, Inc. (6)
10.10   Agreement and Plan of Merger dated as of January 26, 2000 between MDI
        Entertainment, Inc., MDI Acquisition, Inc. and The Lottery Channel, Inc.
        (7)
10.11   Press release dated 8/28/00, "MDI Entertainment Terminates Merger
        Agreement with The Lottery Channel.(8)
21.1    Subsidiaries of MDI Entertainment, Inc.(9)
27.1    Financial Data Schedule.(9)

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


<PAGE>

(1)     Incorporated by reference from the Company's Form 10-SB, filed
        September 28, 1998.
(2)     Incorporated by reference from the Company's Amendment No. 1 to the
        Form 10-SB, filed February 1, 1999.
(3)     Incorporated by reference from the Company's Form 10-QSB for the
        period ended February 28, 1999.
(4)     Incorporated by reference from the Company's Form 8-K filed August
        12, 1999.
(5)     Incorporated by reference from the Company's Form 10-KSB filed August
        27, 1999.
(6)     Incorporated by reference from the Company's Form 8-K filed October 4,
        1999.
(7)     Incorporated by reference from the Company's Form 8-K filed February 7,
        2000.
(8)     Incorporated by reference from the Company's From 8-K filed August 29,
        2000
(9)     Filed herewith.







<PAGE>

                                 SIGNATURE PAGE

               In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

 MDI ENTERTAINMENT, INC.
<TABLE>

<S>                                   <C>                                    <C>
             SIGNATURE                               TITLE                        DATE

   /s/ Steven M Saferin               President, Chief Executive             August 23, 2000
------------------------------------  Officer  and Director
Steven M. Saferin

</TABLE>

     In accordance with the Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant in the capacities and
on the dates indicated.

<TABLE>

<S>                                   <C>                                    <C>
             SIGNATURE                               TITLE                        DATE



   /s/ Steven M. Saferin              President, Chief Executive Officer     August 23, 2000
------------------------------------  and Director
Steven M. Saferin                     (Principal Executive Officer)


   /s/ Kenneth M Przysiecki           Chief Financial Officer, Secretary     August 23, 2000
------------------------------------  and Director
Kenneth M. Przysiecki                 (Principal Financial Officer)


   /s/ Robert J. Wussler              Director                               August 23, 2000
------------------------------------
Robert J. Wussler

   /s/ S. David Fineman               Director                               August 23, 2000
------------------------------------
S. David Fineman

   /s/ Todd Leavitt                   Director                               August 23, 2000
------------------------------------
Todd Leavitt

   /s/ William G. Malloy              Director                               August 23, 2000
------------------------------------
William G. Malloy

</TABLE>

<PAGE>










                          INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                               -----------------------------


     F-3                Report of Independent Public Accountants

     F-4 and F-5        Consolidated Balance Sheets

     F-6                Consolidated Statements of Operations

     F-7                Consolidated Statements of Shareholders' Deficit

     F-8                Consolidated Statements of Cash Flows

     F-9 - F-20         Notes to Consolidated Financial Statements














                                       F-1

<PAGE>













                     MDI ENTERTAINMENT, INC. AND SUBSIDIARY
                    ----------------------------------------


                        CONSOLIDATED FINANCIAL STATEMENTS

                           AS OF MAY 31, 2000 AND 1999

                                  TOGETHER WITH

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS





















                                       F-2

<PAGE>




To the Board of Directors and Shareholders of
MDI Entertainment, Inc.:

We have audited the accompanying consolidated balance sheets of MDI
Entertainment, Inc. and subsidiary as of May 31, 2000 and 1999 and the related
consolidated statements of operations, shareholders' deficit and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MDI Entertainment,
Inc. and subsidiary as of May 31, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.

Hartford, Connecticut
August 23, 2000, except for Note 12, as
   to which the date is August 28, 2000

                                       F-3

<PAGE>




Item 1.   Financial Statements

                                     MDI ENTERTAINMENT, INC. AND SUBSIDIARY
                                    ----------------------------------------

                                          CONSOLIDATED BALANCE SHEETS

                                          AS OF MAY 31, 2000 AND 1999


<TABLE>

                          ASSETS                                         2000                  1999

CURRENT ASSETS:
<S>                                                                    <C>                   <C>
  Cash and cash equivalents                                            $ 313,435             $ 340,350
  Accounts receivable                                                    801,286               817,614
  Inventory                                                              254,187                57,596
  Other current assets                                                   266,743                58,253
                                                                   --------------        --------------

        Total current assets                                           1,635,651             1,273,813
                                                                   --------------        --------------

PROPERTY AND EQUIPMENT, at cost:
  Equipment                                                              228,842               354,890
  Furniture and fixtures                                                 102,391               101,737
                                                                   --------------        --------------

                                                                         331,233               456,627
  Less:  Accumulated depreciation                                       (184,126)             (350,605)
                                                                   --------------        --------------

                                                                         147,107               106,022
                                                                   --------------        --------------

OTHER ASSETS:
  Licensing costs, net (Note 2)                                          348,604               189,488
  Other (Note 1)                                                         438,621               260,039
                                                                   --------------        --------------

        Total other assets                                               787,225               449,527
                                                                   --------------        --------------

                                                                     $ 2,569,983           $ 1,829,362
                                                                   ==============        ==============

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

                                                       F-4

<PAGE>

                                    MDI ENTERTAINMENT, INC. AND SUBSIDIARY
                                    ----------------------------------------

                                          CONSOLIDATED BALANCE SHEETS

                                          AS OF MAY 31, 2000 AND 1999




          LIABILITIES AND SHAREHOLDERS' DEFICIT                          2000                  1999

CURRENT LIABILITIES:
  Billings in excess of costs and estimated earnings
     on uncompleted contracts (Note 1)                               $ 1,733,288           $ 1,695,886
  Deferred revenue (Note 1)                                              190,547               268,405
  Current portion of long term debt (Note 3)                             195,848               365,911
  Accounts payable                                                       867,439               364,909
  Accrued expenses                                                       360,606               313,550
  Income taxes payable (Note 7)                                                -                55,729
  Dividends payable (Note 6)                                               7,322                     -
                                                                   --------------        --------------

        Total current liabilities                                      3,355,050             3,064,390

LONG-TERM DEBT AND NOTES PAYABLE                                          99,689               229,702
  less current portion above (Note 3)

SUBORDINATED CONVERTIBLE DEBENTURE (Note 4)                              540,000                     -

MINORITY INTEREST                                                              -                34,927
                                                                   --------------        --------------

        Total liabilities                                              3,994,739             3,329,019

COMMITMENTS AND CONTINGENCIES (Notes 1,
  5, 8, and 10)

SHAREHOLDERS' DEFICIT (Notes 4, 5 and 6):

  Common stock (authorized 25,000,000 shares;
   issued and outstanding 8,987,446 shares)                                8,987                 7,777
  Convertible preferred stock-Series A                                         1                     -
  Additional paid-in capital                                           2,473,154               348,348
  Accumulated deficit                                                 (3,906,898)           (1,855,782)
                                                                   --------------        --------------

       Total shareholders' deficit                                    (1,424,756)           (1,499,657)

                                                                     $ 2,569,983           $ 1,829,362
                                                                   ==============        ==============


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

</TABLE>

                                                       F-5

<PAGE>

<TABLE>

                                      MDI ENTERTAINMENT, INC. AND SUBSIDIARY
                                     ----------------------------------------

                                      CONSOLIDATED STATMENTS OF OPERATIONS

                                    FOR THE YEARS ENDED MAY 31, 2000 AND 1999


                                                                                   2000                      1999

<S>                                                                                 <C>                      <C>
REVENUES                                                                            $ 5,498,485              $ 7,204,712

COST OF REVENUES                                                                      3,534,545                3,668,266
                                                                            --------------------       ------------------

    Gross profit                                                                      1,963,940                3,536,446

SELLING, GENERAL AND ADMINISTRATIVE
  EXPENSES                                                                            3,105,526                2,302,752
TERMINATED MERGER EXPENSES (Note 12)                                                    727,025                        -

                                                                            --------------------       ------------------
     Operating (loss) profit                                                         (1,868,611)               1,233,694

INTEREST EXPENSE, net                                                                    54,947                    7,713

OTHER EXPENSE                                                                            57,218                   10,976

MINORITY INTEREST                                                                             -                     (341)
                                                                            --------------------       ------------------

     (Loss) income before provision for income taxes                                 (1,980,776)               1,215,346

PROVISION FOR INCOME TAXES                                                                4,329                   55,700
                                                                            --------------------       ------------------

     Net (loss) income                                                             $ (1,985,105)             $ 1,159,646
                                                                            ====================       ==================

Basic (Loss) Earnings Per Common Share (Note 1)                                    $      (0.25)             $      0.15
                                                                            ====================       ==================

Diluted (Loss) Earnings Per Common Share (Note 1)                                  $      (0.25)             $      0.14

                                                                            ====================       ==================


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

</TABLE>

                                                        F-6

<PAGE>

<TABLE>

                                                    MDI ENTERTAINMENT, INC. AND SUBSIDIARY
                                                    ----------------------------------------

                                               CONSOLIDATED STATMENTS OF SHAREHOLDERS' DEFICIT

                                                    FOR THE YEARS ENDED MAY 31, 2000 AND 1999





                                                      Shares               Par Value $.001
                                          --------------------------  -----------------------
                                               *
                                          Convertible        **       Preferred              Additional
                                         Preferred Stock   Common       Stock      Common     Paid In      Accumulated
                                            Series A       Stock      Series A      Stock     Capital        Deficit        Total
                                        --------------- ------------ ----------- ----------  -----------  -------------  -----------

<S>                                           <C>       <C>            <C>       <C>        <C>          <C>            <C>

BALANCE, May 31, 1998                             -   $ 7,776,500      $ -       $7,777     $ 348,348    $(3,015,428)   $(2,659,303)

   Net Income                                     -             -        -            -             -      1,159,646      1,159,646
                                        --------------- ------------ ----------- ----------  -----------  -------------  -----------
BALANCE, May 31, 1999                             -     7,776,500        -        7,777       348,348     (1,855,782)    (1,499,657)

Proceeds from sale of
   Preferred stock - Series A, net            2,027             -        2            -     1,393,600              -      1,393,602
   of expenses of $356,398

Imputed interest on
 convertible debenture (Note 4)                   -             -        -            -       225,625              -        225,625

   Net loss                                       -             -        -            -             -     (1,985,105)    (1,985,105)

Dividends on preferred stock                                                                                 (66,011)       (66,011)

Conversion of series A convertible
 preferred stock to common stock             (1,012)    1,012,000       (1)       1,012        (1,011)             -               -


Stock options excercised                          -       158,598                   158        42,191              -         42,349

Compensation attributable to
 employee stock options                           -             -        -            -       117,600              -        117,600


Warrants issued in connection with
issuance of subordinated debenture
and preferred stock                               -             -        -            -       962,730              -        962,730

Additional cost of preferred stock
   attributable to warrants                       -             -        -            -      (674,580)             -       (654,580)

Preferred stock dividend
   paid in common stock                           -        40,348        -           40        58,651              -         58,691

                                          ------------------------------------------------------------------------------------------
BALANCE, May 31, 2000                         1,015     8,987,446      $ 1       $8,987    $2,473,154    $(3,906,898)   $(1,424,756)
                                          ==========================================================================================


*    5,000,000 shares of preferred stock authorized
**  25,000,000 shares of common stock authorized


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

</TABLE>

                                                        F-7

<PAGE>

<TABLE>

                                           MDI ENTERTAINMENT, INC. AND SUBSIDIARY
                                          ----------------------------------------

                                            CONSOLIDATED STATMENT OF CASH FLOWS

                                         FOR THE YEARS ENDED MAY 31, 2000 AND 1999

                                                                                             2000                      1999
                                                                                       -----------------         -----------------
<S>                                                                                        <C>                        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net (loss) income                                                                     $ (1,985,105)              $ 1,159,646
     Adjustments to reconcile net (loss) income to net
         cash used for operating activities:
              Minority interest                                                                       -                      (341)
              Depreciation and amortization                                                      91,226                   140,412
              Loss on disposal of assets                                                              -                    10,976
              Stock based compensation                                                          150,350                         -
              Change in assets and liabilities:
                Decrease(increase)in accounts receivable                                         16,328                  (500,016)
                (Increase) decrease in inventory                                               (196,591)                  360,055
                Increase in licensing costs                                                    (159,116)                  (80,339)
                Increase in other assets                                                        (21,844)                 (235,446)
                Increase in accounts payable                                                    467,602                    18,418
                Increase (decrease) in accrued expenses                                          46,133                  (256,615)
                (Decrease) increase in income taxes payable                                     (54,802)                   55,729
                Decrease in deferred revenue                                                    (77,858)               (2,637,642)
                Increase in billings in excess of costs
                  and estimated earnings on uncompleted contracts                                37,402                 1,695,886
                                                                                       -----------------         -----------------
           Net cash used for operating activities                                            (1,686,275)                 (269,277)
                                                                                       -----------------         -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment                                                          (89,401)                  (45,630)
                                                                                       -----------------         -----------------


           Net cash used for investing activities                                               (89,401)                  (45,630)
                                                                                       -----------------         -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Repayment of debt                                                                          (300,077)                 (305,141)
    Proceeds from exercise of  common stock options                                              42,349                         -
    Proceeds from sale of preferred stock                                                     1,750,000                         -
    Costs associated with sale of convertible preferred stock                                  (356,400)                        -
    Proceeds from subordinated convertible debenture                                            750,000                         -
    Costs associated with issuance of subordinated convertible debenture                       (137,113)                        -
                                                                                       -----------------        ------------------
           Net cash provided by (used for) financing activities                               1,748,761                  (305,141)
                                                                                       -----------------         -----------------

NET DECREASE IN CASH                                                                            (26,915)                 (620,048)

CASH, beginning of the year                                                                     340,350                   960,398

                                                                                       -----------------         -----------------
CASH, end of the year                                                                      $    313,435               $   340,350
                                                                                       =================         =================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid for:
         Interest                                                                          $     52,202               $    34,237
         Income taxes                                                                      $     57,152               $     2,319
    Non-cash items:
         Conversion of accrued commissions to note payable                                 $          -               $   600,000
         Preferred stock dividend paid in common stock                                     $     58,650               $         -
         Imputed interest on subordinated covertible debenture                             $     15,625               $         -
         Expenses related to warrants                                                      $     32,750               $         -


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

</TABLE>

                                                                F-8

<PAGE>

                     MDI ENTERTAINMENT, INC. AND SUBSIDIARY
                    ----------------------------------------


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2000 AND 1999




(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:


    ORGANIZATION

    MDI Entertainment, Inc. (the "Company") is a Delaware corporation
    incorporated on December 29, 1994 under the name Puff Process, Inc. In
    August 1997, the Company purchased 100% of the shares of Media Drop-In
    Productions, Inc., a Delaware corporation (Media Drop-In Productions, Inc.
    had a 66.7% owned subsidiary, MDI-Texas, Inc.,) and MDI-Missouri, Inc., a
    Missouri corporation (herein collectively referred to as "MDI"), in exchange
    for 4,800,000 shares of the Company's common stock and notes payable to the
    shareholders of MDI for an aggregate of $300,000. In connection with this
    acquisition, the name of the Company was changed to MDI Entertainment, Inc.
    Both MDI-Texas, Inc. and MDI-Missouri, Inc. ceased to operate as of May 31,
    1999 as the state lottery promotions these companies were established to
    operate were completed. Since the Company had minimal assets, liabilities
    and no business activities prior to its acquisition of MDI, this transaction
    was accounted for as a "reverse merger," with MDI as the successor
    corporation. Therefore, these financial statements reflect the historical
    cost basis of MDI. All inter-company transactions have been eliminated in
    the accompanying financial statements.

    MDI's principal activity has been the development and sale of entertainment
    based promotions to North American lotteries. MDI is positioned to create a
    wide variety of additional entertainment promotions. MDI has established
    itself as a source for the creation, supply and administration of
    entertainment based lottery promotions.

    In 1996, MDI created its Licensed and Patented Games division ("LPG"). MDI
    capitalized on current trends in the lottery industry to base some instant
    games on pre-existing games of chance and well-known brands and logos. MDI
    has acquired the rights to numerous well-known entertainment properties to
    license as lottery theme games and promotions. Included among the properties
    already licensed are "Star Trek," "Wheel of Fortune," "Jeopardy," "Pepsi,"
    "Louisville Slugger" and "Harley-Davidson."

    INVENTORIES

    Inventories represent merchandise used in the Company's entertainment-based
    promotions. The inventory is stated at the lower of cost or market using the
    first-in, first-out method.

                                       F-9

<PAGE>

    PROPERTY AND EQUIPMENT

    Property and equipment are recorded at cost. Expenditures for repairs and
    maintenance are charged to expense as incurred. For assets sold or otherwise
    disposed of, the cost and related accumulated depreciation are removed from
    the accounts, and any resulting gain or loss is reflected in income for the
    period.

    Depreciation is calculated on a straight-line basis over the estimated
    useful life of the asset. Furniture and fixtures are depreciated over seven
    years and office equipment is depreciated over five years.

    LICENSING COSTS

    The Company reviews its capitalized marketing costs quarterly to determine
    if an impairment has occurred. The Company recognizes that an impairment has
    occurred when the license is no longer expected to result in a lottery
    contract. No impairment loss was recognized for the years ended May 31, 2000
    and 1999.

    OTHER ASSETS

    Other assets are primarily comprised of prepaid financing costs related to
    the subordinated convertible debenture, which are being amortized over the
    term of the debentures.

    REVENUE AND COST RECOGNITION

    Revenue is derived from various lottery game contracts (mainly with states)
    between the Company and the lotteries. The Company has agreed to provide
    second chance prize packages consisting of grand prizes and various
    merchandise prizes. The Company also provides marketing support related to
    each of the games and obtains the appropriate licenses for the right to use
    these properties. Many of the lottery contracts require the lotteries to pay
    the Company upon signing of the contract; therefore, the Company defers this
    revenue and recognizes the revenue based on the terms of the applicable
    game.

    Revenues from the lottery game contracts that are greater than one year are
    recognized on the percentage-of-completion method, determined by the
    percentage of costs incurred to date to estimated total costs on a specific
    contract basis. This method is utilized as management considers costs
    incurred to be the best available measure of progress on these contracts.
    Contract costs include all direct costs. General and administrative costs
    are charged to expense as incurred. Provisions for estimated losses on
    uncompleted contracts are made in the period in which such losses are
    determined. As of May 31, 2000, no losses were expected from existing
    contracts.

    The liability "billings in excess of costs and estimated earnings on
    uncompleted contracts" represents billings in excess of revenues recognized.

                                      F-10

<PAGE>

    As of May 31, 2000, billings in excess of costs and estimated earnings on
    uncompleted contracts was as follows:

<TABLE>


         LOTTERY              GAME            BILLINGS      REVENUE           BILLINGS IN EXCESS OF
                                              TO DATE       EARNED            ESTIMATED EARNINGS ON
                                                                              UNCOMPLETED CONTRACTS
<S>                <C>                   <C>           <C>                       <C>
    Wisconsin          Wheel of Fortune     $  510,000    $  430,887                $  79,113
    Wisconsin          Star Trek               475,000       405,594                   69,406
    Wisconsin          Harley Davidson       1,270,605     1,184,110                   86,495
    Wisconsin          Pepsi                 1,012,215       841,710                  170,505
    Arizona            Star Trek               130,250       105,514                   24,736
    Rhode Island       Harley Davidson         144,160       102,309                   41,851
    New Jersey         Harley Davidson         633,234       480,354                  152,880
    New Jersey         Jeopardy                517,400       337,038                  180,362
    New Jersey         Louisville Slugger      518,580       201,747                  316,833
    Connecticut        Harley Davidson         236,483       228,310                    8,173
    Connecticut        Times Square 2000       550,000       549,590                      410
    Iowa               Louisville Slugger       63,672        52,154                   11,518
    Indiana            Harley Davidson         239,780        88,314                  151,466
    Indiana            Wheel of Fortune        195,406       185,331                   10,075
    Pennsylvania       Wheel of Fortune        230,000       227,897                    2,103
    Missouri           Wheel of Fortune        165,000       164,514                      486
    Western Canada     Harley Davidson         128,440       116,020                   12,420
    Ohio               Harley Davidson         392,500        77,321                  315,179
    Maine              Harley Davidson         134,000        34,723                   99,277
                                           ---------------------------------------------------
                       Total                $7,546,725    $5,813,437               $1,733,288
                                           ===================================================


</TABLE>

    Approximately 47.1% of revenue for the year ended May 31, 2000 was
    derived from contracts with three state lotteries.

    As of May 31, 1999, billings in excess of costs and estimated earnings on
    uncompleted contracts was as follows:

<TABLE>



                                                                              BILLINGS IN EXCESS OF
                                              BILLINGS      REVENUE           ESTIMATED EARNINGS ON
    LOTTERY              GAME                 TO DATE       EARNED            UNCOMPLETED CONTRACTS
        <S>           <C>                    <C>          <C>                 <C>
    Wisconsin         Wheel of Fortune       $  510,000   $  303,920          $  206,080
    Wisconsin         Star Trek                 475,000      242,312             232,688
    Wisconsin         Holiday Harley            525,688      441,700              83,988
    Wisconsin         Harley Davidson         1,276,100    1,105,370             170,730
    Wisconsin         Pepsi                   1,012,215      608,498             403,717
    Virginia          Star Trek                 310,500      239,273              71,227
    Virginia          Harley Davidson           400,014      157,148             242,866
    Louisiana         Harley Davidson           129,847       84,262              45,585
    Arizona           Star Trek                 130,250      104,960              25,290
    New Hampshire     Harley Davidson           128,250        9,446             118,804
    Rhode Island      Harley Davidson           126,000       26,346              99,654
    Iowa              Louisville Slugger         63,672       14,136              49,536
    Australia         Instant Entertainment
                              Connection            -            -               (54,279)
                                             ----------   ----------          ----------
                          Total              $5,087,536   $3,337,371          $1,695,886
                                             ==========   ==========          ==========
</TABLE>

                                      F-11

<PAGE>

    EARNINGS (LOSS) PER SHARE

    Basic earnings per common share are based on the average number of common
    shares outstanding during the fiscal period. Diluted earnings per common
    share include, in addition to the above, the dilutive effect of common share
    equivalents during the year. For the year ended May 31, 1999, common share
    equivalents represented dilutive stock options using the treasury method.
    For the year ended May 31, 2000, options to purchase 974,166 shares of
    common stock, preferred stock convertible into 1,015,000 shares of common
    stock, subordinated debenture convertible into 375,000 shares of common
    stock and warrants to purchase 817,895 shares of common stock were excluded
    from the calculation of the diluted loss per share since their inclusion
    would be anti-dilutive. The (loss) income available to common shareholders
    and the number of shares used in the earnings (loss) per common share and
    earnings (loss) per dilutive share computation for 2000 and 1999 was as
    follows:


                                               YEARS ENDED
                                                 MAY 31,
                                     ------------------------------
                                         2000             1999

     Net (loss) income               $ (1,985,105)     $ 1,159,646

     Preferred stock dividends             66,011                -
                                     -------------     -----------
     Net (loss) income applicable
      to common shareholders         $ (2,051,116)     $ 1,159,646
                                     =============     ===========


                                               YEARS ENDED
                                                 MAY 31,
                                     ------------------------------
                                         2000             1999

    Basic:

    Average number of common
       shares outstanding              8,276,356         7,776,500

    Dilutive:

    Dilutive effect of options,
    warrants and
    convertible                              Not           528,078
    securities                        Applicable

                                     ------------    --------------
    Average dilutive common
    shares outstanding                 8,276,356         8,304,578
                                     ============    ==============


    RECENT ACCOUNTING PRONOUNCEMENTS

    In June 1998,  the  Financial  Accounting  Standards  Board  (FASB)  issued
    Statement of Financial  Accounting  Standard No. 133,  "Accounting for
    Derivative Instruments and Hedging Activities" ("SFAS No. 133"). This
    statement establishes accounting and reporting  standards for derivative
    instruments  and for hedging activities.  Adoption of SFAS 133 was required
    beginning with the first quarter of fiscal  2000.  In June 1999,  the FASB
    issued SFAS No. 137  "Accounting  for Derivative  Instruments  and Hedging
    Activities-  Deferral of Effective Date of SFAS No. 133." This has resulted
    in the deferral of SFAS No. 133 to fiscal years beginning  after
    June 15, 2000.  The adoption of SFAS No. 133, as amended by SFAS No. 138,
    is not expected to have a material  impact on the  Company's financial
    condition  or  results of operations.

    In December 1999, the Securities and Exchange Commission ("SEC") issued
    Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
    Statements" ("SAB No. 101"). SAB No. 101, among other things, provides
    guidance on revenue recognition. SAB No. 101 was adopted by the Company on
    January 1, 2000. The cumulative effect of applying SAB No. 101 did not
    have an effect on the Company's operating results or financial position
    upon adoption.

    USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

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

                                      F-12

<PAGE>

(2) LICENSING COSTS

    The Company capitalizes costs associated with obtaining the exclusive right
    to use and to sublicense the use of licensed properties, as defined in
    license agreements. These costs, which in most cases are advances against
    future license royalty payments, are applied to cost of sales as the games
    are launched. Approximately 74.0% of revenues are derived from three
    licensed properties which expire within six months to four years.

    At May 31, 2000, the following costs have been capitalized:

        Louisville Slugger License                           $ 20,000
        Harley Davidson Commercial                             48,666
        Heros of Space License                                 10,000
        Hummer/Humvee License                                  10,000
        Pink Panther License                                    5,000
        Outer Limits License                                    5,000
        Country Music License                                  15,000
        TNN Trademark License                                  15,000
        James Bond 007 License                                 20,000
        Dale Earnhardt, Inc. License                           25,000
        Dale Earnhardt, Jr. License                            32,500
        World Cup License                                      37,500
        Ray Charles Entertainment License                      30,400
        King Features License                                  15,000
        The Buffer License                                     15,000
        Hormel License                                         47,500
        Hollywood Walk of Fame License                         15,000
        Elliott Racing License                                  7,500
        Rousch Racing License                                  37,892
        CowParade License                                       5,000
                                                    ------------------
                                                              416,958

        Less-accumulated amortization                         (68,354)
                                                    ------------------
                                                             $348,604
                                                    ==================

     At May 31, 1999, the following costs have been capitalized:

        Wheel of Fortune License                             $ 10,000
        Star Trek License                                      85,000
        Rock and Roll Hall of Fame License                     10,000
        Patented Games                                         83,135
        Harley Davidson License                               100,000
        Louisville Slugger License                             20,000
        Times Square 2000 License                              10,000
        Harley Davidson Commercial                             48,666
        Heros of Space License                                 10,000
        Hummer/Humvee License                                   2,500
                                                    ------------------
                                                              379,301

        Less-accumulated amortization                        (189,813)
                                                    ------------------
                                                             $189,488
                                                    ==================


                                      F-13

<PAGE>
<TABLE>

(3) LONG-TERM DEBT AND NOTES PAYABLE

    Long-term debt and notes payable consist of the following:

                                                       2000              1999
                                                       ----              ----
        <S>                                            <C>             <C>

        Promissory note payable bearing interest
        at a rate of 3% above prime rate;
        principal and interest of $27,895 payable
        monthly through December 15, 2000
        (see Note 9)                                  $     -          $ 485,363

        Term note payable bearing no interest;
        principal of $5,000 payable monthly
        through December 1, 2000                       30,000             90,000

        Promissory note payable to stockholder
        bearing interest at a rate of 8%;
        principal and interest of $14,300
        payable monthly through December 1, 2001      254,287                  -
        (See Note 9)

        Promissory note payable bearing interest
        at 10%; principal of $750
        payable monthly through August 2002            11,250             20,250

                                                     ---------         ---------
                                                      295,537            595,613

        Less - current maturities                    (195,848)          (365,911)
                                                     ---------         ---------

                                                     $ 99,689          $ 229,702
                                                     =========         =========
</TABLE>

        Repayments of long-term debt for each of the next 5 years and thereafter
        are as follows:

                          YEAR ENDING
                            MAY 31,

                             2001 .........................$195,848
                             2002 .........................  99,689
                                                        ------------
                                                           $295,537
                                                        ============

    The Company's line of credit with Fleet is secured by liens on substantially
    all of the Company's assets.

    The Company secured a line of credit of $ 500,000 with Fleet Bank in
    February 2000. Interest on the line of credit is at the Bank's prime rate
    plus .75% (9.5% at May 31, 2000). There were no advances under the line at
    May 31, 2000. The line of credit expires on September 30, 2000. As of
    August 23, 2000 the Company is in default of the line's financial covenants
    and $95,000 was borrowed against this line as of that date. Steven M.
    Saferin, President and Chief Executive Officer has advised the Company that
    he is personally prepared to commit up to $500,000 to fund the Company's
    immediate cash flow needs and repay such indebtedness.

                                      F-14

<PAGE>

(4) SUBORDINATED CONVERTIBLE DEBENTURE

    On September 21, 1999, the Company issued a subordinated convertible
    debenture (the "Debenture") to Scientific Games, Inc. for $750,000. The
    Debenture bears interest at 7% per annum and is payable semi-annually, on
    June 30 and December 31 of each year, until its maturity on September 21,
    2009. The Debenture is convertible at the option of Scientific Games at the
    rate of $2.00 per share of common stock, subject to adjustment under certain
    circumstances, into an aggregate of 375,000 shares of common stock and
    convertible at the Company's option at any time after the earlier of (a)
    September 21, 2001 or (b) when the underlying common stock is registered
    pursuant to the Securities Act of 1933, as amended, and the price of the
    Company's common stock exceeds $3.00 per share.

    Generally accepted accounting principles require that the interest rate on
    debt represent a fair market rate for "comparable" debt instruments. The
    Company has determined that a fair market rate for this debt would be
    approximately 10% and therefore has discounted the carrying value of the
    liability, with the offsetting credit reflected as additional paid-in
    capital.

<TABLE>

    <S>                                                                          <C>
    Face amount of  subordinated convertible debenture                           $750,000

    Less:
    Imputed interest discount (difference between 10% fair market rate
    and 7% stated rate)                                                          (225,625)
                                                                        ------------------

    Discounted debenture value                                                   $524,375
    Discount amortized through May 31, 2000                                        15,625
                                                                        ------------------
    Balance at May 31, 2000                                                      $540,000
                                                                        ==================
</TABLE>

    Each quarter, the imputed interest for that quarter is amortized with a
    corresponding increase in the debenture until it matures on September 21,
    2009 or is converted into common stock.

(5) STOCK OPTION AND AWARD PLAN and WARRANTS

       Stock Option and Award Plan

       On September 22, 1998, the Board of Directors approved the 1998 Stock
       Option and Award Plan (the Plan) which provides for up to 800,000
       incentive and nonqualified common stock options. Options granted under
       the Plan to directors, selected employees, officers, agents, consultants,
       and independent contractors of the Company are exercisable for a period
       determined by the Company, but in no event longer than ten years from
       date of grant, subject to certain conditions.

       During fiscal 2000, the Company  awarded  options to purchase 17,500
       shares of common stock to a director at an exercise  price of $1.38
       outside the plan. These options are  exercisable  under the same terms
       as options under the Plan. The company also issued warrants to
       purchase 25,000 shares of common stock at an exercise price of $1.56
       for investor relation services provided by a third party.

                                      F-15

<PAGE>

       The Company has adopted the provisions of Statement of Financial
       Accounting Standards No. 123, ("Accounting for Stock-Based
       Compensation") (SFAS No. 123). The Company accounts for stock-based
       compensation for employees under Accounting Principles Board Opinion No.
       25 and includes only disclosures required under SFAS No. 123,
       "Accounting for Stock-Based Compensation". The Company has computed the
       pro forma disclosures required under SFAS No. 123 for options granted
       as of May 31, 2000 and 1999 using the Black-Scholes option pricing model
       as prescribed by SFAS No. 123. For purposes of this calculation, the
       fair value of each option grant is estimated on the grant date using
       the Black-Scholes option-pricing model with the following assumptions:


                                                    2000              1999

       Risk free interest rate ................  6.14% - 6.47%   5.10% - 5.62%
       Expected dividend yield ................             0%              0%
       Expected lives .........................   5 - 10 years    5 - 10 years
       Expected volatility ....................           131%            119%
       Fair value .............................          $1.34   $0.28 - $0.32

       Had compensation cost for the Company's stock option plans been
       determined consistent with SFAS No. 123, the Company's pro forma net
       (loss) income would have been as follows:

                                                         2000           1999
                                                         ----           ----
         Net (loss)income:
           As reported .............................$ (1,985,105)  $1,159,646
           Pro forma ................................ (1,994,262)   1,066,346

         Basic earnings (loss) per common shares:

           As reported .................................$ (.25)        .15
           Pro forma ...................................  (.25)        .14

         Diluted earnings (loss) per common shares:

           As reported .................................$ (.25)        .14
           Pro forma ...................................  (.25)        .13

       The pro-forma information is not indicative of future years.

                                      F-16

<PAGE>

       The following table summarizes both stock option activities under and
       outside the Plan during the years ended May 31, 2000 and 1999:

<TABLE>

                                                            2000                                       1999
                                                 ----------------------------------      --------------------------------------
                                                                Weighted Average                            Weighted Average
                                                 Shares          Exercise Price             Shares           Exercise Price
<S>                                             <C>                 <C>                    <C>                     <C>
     Outstanding, at beginning of year           967,500            $ .28 -.32                   -                 $    -

                   Granted                       150,000                1.38               967,500                 $ 0.34
                   Exercised                    (143,334)               0.33                     -                      -
                   Cancelled                                               -                     -                      -
                                              -------------  -----------------------    ----------------  ---------------------

     Outstanding, at end of year                 974,166              $ 0.50               967,500                 $ 0.34
                                              =============  =======================    ================  =====================

     Options exercisable at end of year          317,500              $ 0.43               300,000                 $ 0.37
                                              =============  =======================    ================  =====================

     Weighted average fair value options
      granted during the year                    150,000              $ 1.34               967,500                 $ .28 -.32
                                              =============  =======================    ================  =====================
</TABLE>

     Total compensation expense recorded in the accompanying statements of
     operations associated with employee stock options was $117,600 and $0 for
     the years ended May 31, 2000 and 1999, respectively.

     Warrants

     As of May 31, 2000, the Company has issued and outstanding warrants to
     purchase 817,895 shares of common stock at exercise prices that range
     from $1.25 per share to $1.56 per share.

     As of May 31, 2000, the Company has the following outstanding warrants:

<TABLE>

         Year     Expiration                                                                        Exercise     Number of
        Issued      Date                  Description                                                Price        Warrants
         <S>        <C>        <C>                                                                    <C>         <C>
         1999       2004       For investor relations services                                        $1.56        25,000
         1999       2006       For placement costs of preferred stock                                 $1.31       350,000
         1999       2006       For placement costs of preferred stock                                 $1.31       216,875
         1999       2006       For placement costs of convertible subordinated debenture              $1.25        46,447
         1999       2006       For placement costs of convertible subordinated debenture              $1.25       179,573

</TABLE>

(6) CONVERTIBLE PREFERRED STOCK - SERIES A

    On August 4, 1999, the Company finalized a $1,750,000 private sale to an
    investor of 2,027 shares of Series A Preferred Stock, representing
    approximately 20% of the outstanding common stock of the Company on an as
    converted basis. The preferred stock has a liquidation preference of
    $1,750,000, pays a dividend of 10% per annum, payable in cash or common
    stock at the Company's option, and is convertible into an aggregate of
    2,027,000 shares of the Company's common stock, subject to adjustment under
    certain circumstances. In September 1999, the dividend rate was
    prospectively reduced to 5% per annum in connection with the Company's
    filing of a registration statement with respect to the resale of the common
    stock underlying the preferred stock. The holders of the preferred stock are
    entitled to a right of first refusal on new securities issued by the
    Company, subject to certain exclusions. The Company may not create or
    increase the authorized number of shares of any class or series of stock
    ranking prior to or on parity with the preferred stock either as to
    dividends or liquidation without approval of a majority of the holders of
    the preferred stock. During fiscal year 2000, 1,012 shares of the preferred
    stock were converted into 1,012,000 shares of common stock.

                                      F-17

<PAGE>

(7) INCOME TAXES

    The Company accounts for income taxes in accordance SFAS No. 109,
    "Accounting for Income Taxes" which requires that a deferred tax liability
    or asset be recognized for the estimated future tax effects attributable to
    temporary differences between the Company's financial statements and its tax
    return. SFAS No.109 provides for recognition of a deferred tax asset for all
    future deductible temporary differences that, more likely than not, will
    provide the Company a future benefit. As of May 31, 2000 and 1999, the
    Company had a deferred tax asset of approximately $2,589,000 and $1,780,000,
    respectively, primarily as a result of net operating loss carryforwards. The
    Company has established a valuation allowance for the full amount of this
    deferred tax asset. The Company has net operating loss carryforwards
    amounting to approximately $6,352,000 and $4,367,000 at May 31, 2000 and
    1999, respectively. These carryforwards expire beginning in 2006. Useage of
    the NOL's is limited in the event certain ownership changes occur. The tax
    expense recorded by the Company for the years ended May 31, 2000 and 1999
    was primarily for minimum state income taxes.

(8) COMMITMENTS

    The Company leases office equipment, office space and vehicles under
    long-term leases which expire during the next one to five years. Rent
    expense totaled $100,483 and $61,415 in 2000 and 1999, respectively. The
    following is a schedule of future minimum rental payments required under
    operating leases that have initial or remaining noncancelable lease terms in
    excess of one year as of May 31, 2000:

                      2001 .......................   85,745
                      2002 .......................   84,338
                      2003 .......................   82,633
                      2004 .......................   78,764
                      2005 .......................   46,827
                                                  -----------
                                                   $378,307
                                                  ===========


    MDI has agreed to provide the Wisconsin Lottery (the Lottery) a performance
    bond acceptable to the Lottery in the amount of $500,000. The Company has
    also provided a $130,000 performance bond to the Louisiana Lottery. The
    President and Chief Executive Officer of the Company has personally
    guaranteed these performance bonds.

                                      F-18

<PAGE>

(9) COMMISSION AGREEMENT:

    In December, 1994, MDI entered into a commission agreement with a media
    company to assist in the procurement of video and audio entertainment media.
    The term of the agreement was from December 15, 1994 through December 14,
    1997. Commissions of 5.33% were required to be paid on monthly cash receipts
    in excess of $337,500. If at the end of the term, the aggregate cash
    collections were less than $27,300,000, then the media company could renew
    the Agreement for an additional year or periods of one year until MDI
    reaches $27,300,000. There were no commissions paid in 2000 and
    approximately $186,000 was paid in 1999.

    The Company could have elected not to renew this agreement and would then be
    required to deliver to the media group a promissory note in the amount of
    $808,250, less previously paid commissions, bearing interest at a rate of 3%
    above prime rate, payable over 24 months. The Company had renewed the
    agreement through December 14, 1998. However, since the Company had
    significantly reduced the utilization of this media company, they accrued
    the $786,287 minimum fee owed to them and charged it to cost of revenues for
    the year ended May 31, 1998.

    During 1999, the Company entered into a formal note agreement with the media
    group to repay the remaining outstanding balance due to them in the amount
    of $600,000. During 2000, the Company's President and Chief Executive
    Officer, purchased the remaining balance of the note payable ($316,038) from
    the media group. The new note bears interest at an 8% interest rate instead
    of 10.75% and its maturity was extended to December 2001 from December 2000
    (see Note 3).

(10)RELATED PARTY TRANSACTIONS

    In 2000 and 1999, the Company incurred commission expense of $110,000 and
    $144,000 and wage expense of $330,750 and $300,000, respectively, to the
    President of the Company, in accordance with his Employment Agreement. The
    agreement contemplates a $300,000 salary for the 12-month period ended
    February 28, 1998. On March 1, 1998, and each anniversary thereafter, the
    President's salary may be increased 5% or an equation based on the consumer
    price index. In no event shall the increase exceed 10% in any one year. In
    addition, the President receives a commission equal to 2% of gross revenues
    of the Company (not to exceed $335,000 over the term of the employment
    contract). The President waived the right to approximately $110,000 and
    $144,000 of commissions in 2000 and 1999, respectively.  The contract began
    August 8, 1997 and terminates the later of August 7, 2002 or three years
    from the date the Company files a registration statement with the Securities
    and Exchange Commission registering his shares of common stock if such
    shares are traded on Nasdaq.

    The Company has retained 1010 Productions, Inc. (1010) to consult in the
    areas of trade shows, software development, systems design, purchasing and
    product fulfillment. The President and sole shareholder of 1010 is the wife
    of the President of the Company. 1010 is currently paid $8,167 per month
    plus expenses and is retained until December 31, 2000 pursuant to a
    consulting agreement.

    In September 1999, The Company entered into a Strategic Alliance with
    Scientific Games, Inc. ("SGI"). SGI will utilize its sales and marketing
    force to market, license and sell MDI's products and deliverables to SGI's
    customers. In payment of these services, SGI is to receive a commission
    based on (1) gross revenues received from the sale of merchandise products
    by MDI and (2) gross revenues received from license and royalty fees.

                                      F-19

<PAGE>

(11)EMPLOYEE BENEFIT PLAN

    In fiscal 1996, the Company adopted a 401(k) savings plan, whereby
    participants can elect to defer up to a specified minimum of their
    compensation and the Company will match their contribution up to 3% of the
    employee's base compensation. In fiscal 2000 and 1999, the Company
    contributed $19,631 and $14,687 to the plan, respectively.

(12)TERMINATED MERGER EXPENSES

    The Company entered into an Agreement and Plan of Merger with The Lottery
    Channel, Inc. and the Company's wholly-owned subsidiary (established to
    facilitate the merger), MDI Acquisition, Inc. dated as of January 26, 2000.
    The obligations of MDI Acquisition, Lottery Channel and the Company to
    effect the merger were subject to the fulfillment of a number of conditions
    including, among others, the consummation of certain contemplated
    investments and receipt of third party consents. Certain of such conditions
    were not met and on August 25, 2000, the Company sent a notice of
    termination to The Lottery Channel, Inc. terminating the Agreement and Plan
    of Merger dated January 26, 2000. In accordance with generally accepted
    accounting principles, $727,000 of costs related to the proposed merger
    were written off, as reflected in the accompanying financial statements.
    Subsequently, by letter dated August 28, 2000, Lottery Channel responded
    by purporting to terminate the merger agreement due to MDI's breach. The
    letter claimed that the Company was responsible for all cost and expenses
    incurred in connection with the transaction. The Company disputes this
    assertion.

                                      F-20

<PAGE>

                                 EXHIBITS INDEX

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



EXHIBIT NO.     DESCRIPTION

3.1     Certificate of Incorporation of MDI Entertainment, Inc. (f/k/a Puff
        Process Inc.) dated December 29, 1994, as amended.(2)
3.2     Certificate of Amendment to the Certificate of Incorporation of MDI
        Entertainment, Inc. dated February 28, 1999.(3)
3.3     Amended and Restated By-Laws of MDI Entertainment, Inc. dated April
        27, 1999.(5)
3.4     Certificate of Designations, Preferences and Rights of Series A
        Preferred Stock, dated August 4, 1999.(4)
4.1     Registration Rights Agreement dated August 8, 1997, between MDI
        Entertainment Inc., Steven M. Saferin and Agostino T. Galluzzo.(1)
4.2     1998 Stock Option and Award Plan, dated September 22, 1998.(1)
4.3     Registration Rights Agreement dated August 4, 1999 between MDI
        Entertainment, Inc. and International Capital Partners, LLC.(4)
4.4     Stock Purchase Agreement dated August 4, 1999 between MDI
        Entertainment, Inc. and International Capital Partners, LLC.(4)
4.5     Convertible Subordinated Debenture Purchase Agreement dated September 21
        , 1999 between MDI Entertainment, Inc. and Scientific Games, Inc. (6)
4.6     Convertible Subordinated Debenture dated September 21, 1999 between MDI
        Entertainment, Inc. and Scientific Games, Inc. (6)
4.7     Purchase Agreement dated September 21, 1999 between Steven M. Saferin
        and Scientific Games, Inc. (6)
4.8     Stockholders' Agreement dated as of January 26, 2000 between MDI
        Entertainment, Inc., MDI Acquisition, Inc. and certain parties listed
        therein. (7)
4.9     Stockholders' Agreement dated January 26, 2000 between The Lottery
        Channel, Inc. and certain parties listed therein. (7)
4.10    Letter Agreement dated January 26, 2000 between Steven M. Saferin and
        MDI Entertainment, Inc. (7)
4.11    Letter Agreement dated January 26, 2000 between Roger W. Ach, II and MDI
        Entertainment, Inc. (7)
10.1    Second Amended and Restated Employment Agreement dated August 8,
        1997, as amended, between Media Drop-In Productions, Inc. and Steven M.
        Saferin.(1)
10.2    Employment Agreement dated April 30, 1996, as amended, between
        Media Drop-In Productions, Inc., Kenneth Przysiecki and Steven M.
        Saferin.(1)
10.3    First Amended and Restated Consulting Agreement dated August 8,
        1997, between Media Drop-In Productions, Inc. and 1010 Productions,
        Inc.(1)
10.4    Lease dated June 1992, as amended, between Ann Street Limited
        Partnership by Tunxis Management Co., II, and Media Drop-In Productions,
        Inc.(1)
10.5    Amended Lease Agreement between KWK IV, LLC. and Media Drop-In
        Productions,Inc. dated March 25, 1999.(5)
10.6    Agreement and Plan of Reorganization dated August 8, 1997, between
        MDI Entertainment, Inc., MDI-Connecticut, Inc., MDI-Missouri, Inc. (DE),
        Media Drop-In Productions, Inc., MDI-Missouri, Inc. (MO), Steven M.
        Saferin and Agostino T. Galluzzo.(2)
10.7    Commission Agreement dated December 20, 1994, between Media Drop-In
        Productions, Inc. and Stamford Media Group, LLC.(2)
10.8    Letter of Intent dated July 31, 1998, between MDI Entertainment,
        Inc., Fancaster, Inc. and Craig Krueger.(2)
10.9    Strategic Alliance Agreement, dated  September 2, 1999 between MDI
        Entertainment, Inc. and Scientific Games, Inc. (6)
10.10   Agreement and Plan of Merger dated as of January 26, 2000 between MDI
        Entertainment, Inc., MDI Acquisition, Inc. and The Lottery Channel, Inc.
        (7)
10.11   Press release dated 8/28/00, "MDI Entertainment Terminates Merger
        Agreement with The Lottery Channel.(8)
21.1    Subsidiaries of MDI Entertainment, Inc.(9)
27.1    Financial Data Schedule.(9)

<PAGE>

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

(1)     Incorporated by reference from the Company's Form 10-SB, filed
        September 28, 1998.
(2)     Incorporated by reference from the Company's Amendment No. 1 to the
        Form 10-SB, filed February 1, 1999.
(3)     Incorporated by reference from the Company's Form 10-QSB for the
        period ended February 28, 1999.
(4)     Incorporated by reference from the Company's Form 8-K filed August
        12, 1999.
(5)     Incorporated by reference from the Company's Form 10-KSB filed August
        27, 1999.
(6)     Incorporated by reference from the Company's Form 8-K filed October 4,
        1999.
(7)     Incorporated by reference from the Company's Form 8-K filed February 7,
        2000.
(8)     Incorporated by reference from the Company's From 8-K filed August 29,
        2000
(9)     Filed herewith.