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                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, D.C 20549

                                   FORM 10-KSB

(MARK ONE)
[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
         SECURITIES EXCHANGE ACT OF 1934    [FEE REQUIRED]
[   ]    TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
         ACT OF 1934                        [NO FEE REQUIRED]

                     FOR FISCAL YEAR ENDED DECEMBER 31, 1997

                         COMMISSION FILE NUMBER 0-21738

                        ON-POINT TECHNOLOGY SYSTEMS, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

                NEVADA                                    33-0423037
--------------------------------------------    --------------------------------
(State of incorporation)                        (I.R.S. Employer Identification)

         8444 Miralani Drive
         San Diego, California                              92126
-------------------------------------------     --------------------------------
(Address of registrant's executive offices)              (Zip Code)

Registrant's telephone number, including area code            (619) 621-5050
                                                    ----------------------------

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

 Title of each class                            Name of each exchange on
                                                which registered
      None                                              None

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

                     Common Stock, par value $.01 per share

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

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 if 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 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 [X].

The Registrant's revenues for fiscal year ended December 31, 1997 were
$17,439,000

The aggregate market value of the registrant's common stock held by
nonaffiliates of the Registrant is $30,426,000 as of March 2, 1998.

The number of shares outstanding of the Registrant's common stock is 9,509,255
as of March 2, 1998.

Documents Incorporated by Reference: The information required by Part III of
this Report on Form 10-KSB is incorporated by reference from the Registrant's
definitive 1998 proxy statement to be filed in accordance with Rule 240. 14a-101
not later than April 30, 1998.




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ITEM 1.    DESCRIPTION OF BUSINESS

GENERAL        On-Point Technology Systems, Inc., formerly Lottery Enterprises,
Inc. (the "Company" or "ONPT"), is headquartered in San Diego, California and
was incorporated in Nevada in March of 1990. ONPT designs, manufactures, sells,
leases, and services high-security automated point of sale transaction vending
terminals for the sale of instant-winner lottery tickets (the "Instant Ticket
Retailer" or "ITR(R)"), pull-tab lottery tickets (the "Pull-Tab Retailer" or
"PTR(TM)"), prepaid phone cards and "smart cards" (the "Debit Card Retailer" or
"DCR(TM)") and vending terminals that dispense high value products such as cell
phones and pagers. The Company's ITR and DCR terminals accept bills of various
denominations, provide a secure means of product distribution and include
software which automatically accounts for product sales and inventories. The ITR
terminals are sold or leased to state and provincial governments in the United
States and Canada and to other foreign governments and their licensees. The DCR
terminals are sold or leased to commercial customers and to governmental
entities and their licensees. The Company has also developed two additional
products, the "Multiple Product Retailer" or "MPR(TM)" machine, which vends both
lottery tickets and prepaid phone cards, and the Billpayer (TM) which allows
customers to pay utility bills from remote locations. In addition, the Company
has introduced certain specially designed dispensing technology to South
America, Asia, and Europe.

         On January 9, 1996, the Board of Directors appointed Frederick Sandvick
as the President, Chief Executive Officer and Chairman of the Board of the
Company to oversee the strategic plans of the Company, to consider all the
business issues of the Company and to develop and implement plans to handle such
issues. Mr. Sandvick is an attorney and certified public accountant as well as
the president of Vanguard Strategies, Inc. ("VSI"), a private strategic planning
company. From 1990 to 1995, Mr. Sandvick was an executive officer with a New
York Stock Exchange listed company in the gaming industry. The Board of
Directors considered many options and believed that the appointment of Mr.
Sandvick was the most effective first step towards implementing its strategic
plans and enhancing shareholder value.

         During 1996, the Company restructured its operations and improved its
financial position. During the first and second quarters of 1996, the Company
underwent a "right sizing" effort in order to provide its high quality products
and services at lower costs. In that process, the Company moved its corporate
offices and production to new facilities which were better suited to fit the
Company's administrative and manufacturing needs, and were less expensive to
operate. The Company also reduced personnel and overhead costs and reassigned
duties to other personnel to achieve greater efficiencies. The Company's
restructured operations enabled the Company to improve operating margins and
dramatically reduce general and administrative expenses. The above described
restructuring was accomplished without any recapitalization or debt issuance
that was not in the Company's ordinary course of business.

         The Company's strategic plans include diversifying its product lines
and enhancing its existing products. In that regard, during 1996 the Company
changed its corporate name to On-Point Technology Systems, Inc. from Lottery
Enterprises, Inc. in order to obtain broader recognition by current and
potential customers of the Company's expanding line of technologies and to
provide the capital markets with a better definition of the Company's identity.

         During 1997, the Company increased revenue by 47% primarily as a result
of both ITR and DCR product sales. The increases in sales combined with
continued operating efficiencies effected during 1996 allowed the Company to
generate substantial income increases in 1997. Through December 31, 1997, the
Company had reported seven consecutive profitable quarters as well as seven
straight comparative increases in quarterly earnings.


                                       2


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INSTANT TICKET RETAILER     GENERAL   In March 1991, the Company received its
first contract to install up to 2,000 ITR terminals from the State of Virginia.
The Company has since signed contracts to provide terminals to numerous state
lottery customers including California, Missouri, Washington, Pennsylvania, New
York, Illinois, Connecticut, and the Provinces of Ontario and Quebec, as well as
certain foreign countries. Pursuant to these contracts, from its inception
through December 31, 1997, the Company had sold or leased approximately 13,200
ITR terminals, of which 1,200 were sold or leased during 1997. The ITR terminals
have been placed in supermarkets, convenience stores, bowling alleys,
restaurants with bars, and other locations. The Company also enters into service
contracts in connection with sales of ITR terminals pursuant to which it
receives monthly maintenance fees (see "Customer Service, Training and Product
Repair" herein).

         THE INDUSTRY   Lotteries are operated by state and foreign governmental
authorities 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, in
general it is estimated from industry reports that about 50% of gross lottery
revenues in the United States is returned to the public in the form of prizes.
Approximately 33% is used to support specific public programs or is contributed
to the state's general fund. Typically, 5% to 6% is reserved for
point-of-purchase commissions for the retailer, and the remainder is used to
fund lottery operations, including the cost of advertising and, depending upon
the state and the type of lottery, amounts paid to vendors such as ONPT.

         As of December 1997, lotteries were operated in 37 states, the District
of Columbia and five provinces of Canada. Government lotteries can be
categorized into three principal groups: the traditional draw-type games,
on-line games and "instant" ticket games. Traditional lotteries, in which
drawings are held once a week, while popular abroad, are rare in the United
States. On-line varieties generally refer to computerized games such as lotto
and daily pick 3/4/5/6 games, in which players make their own selections.
Alternatively, they involve low-stakes video gambling, such as poker, blackjack,
bingo and keno. 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.

         On-line lotteries generate significantly more revenue than both the
draw-type and instant ticket games. The Company estimates from industry reports
that on-line ticket sales account for approximately 60% of total U.S. lottery
sales and that scratch-off games (the type of instant winner game predominantly
used by state lotteries) hold an approximately 40% market share. The instant
ticket games' market share has increased over the past several years as lottery
organizations have realized that the more instant games being sold at one time
increases sales. Some states currently offer up to 30 different games
simultaneously. Notwithstanding the current prevalence of on-line games, the
Company believes that instant ticket games offer a significant potential for
market growth. Of the states conducting instant ticket lotteries, 29 currently
use terminals to dispense instant tickets. Traditionally, instant winner tickets
had been manually dispensed by the retailer. This distribution method, in
addition to being labor intensive, requires the retailer to maintain rigorous
inventory, accounting and security controls, because the tickets are treated as
cash equivalents. The Company's ITR terminals provide additional security and
automate these procedures, resulting in greater efficiencies and flexibility to
offer multiple games simultaneously.

         Recent advances in print technology have improved the security of Pull
Tab tickets to the levels demanded by the lottery industry. As a result several
U.S lottery jurisdictions have introduced Pull Tab ticket games. The Company's
PTR terminals and Versatile Ticket Retailer ("VTR(TM)") terminals, which
dispense both instant tickets and pull tab tickets, bring the same benefits of
increased security, automated accounting and enhanced promotion at the point of
sales to Pull Tab tickets as the ITR terminals have provided to instant tickets.

         THE ITR, PTR & VTR LOTTERY TERMINALS   In 1990 the Company introduced
the ITR-7000 terminal, which was replaced with the upgraded ITR-7500 in August
1992. This series of products has been installed at sites throughout the United
States. In 1995 the Company introduced the esthetically updated ITR-8500
terminal. In 1996 the Company developed the first 12 bin ITR terminal. This
product, another ONPT innovation, allows lotteries to vend up to 12 different
games simultaneously. During 1996 the Company also developed the 8 bin slim-line
terminal (which dispenses 8 games in a terminal that requires half the retail
space of previous 8 bin models). The slim-line terminal has the smallest
serviceable footprint in the industry. During 1997, as a result of the average
mean time to failure rate of the Company's dispenser being in excess of nine
years, the Company was able to initiate a program of retrofitting older
terminals to incorporate new technologies.

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         The Company believes that the lottery terminals substantially expand
the market for retail sales of instant winner lottery tickets, in that they are
designed to streamline and enhance the operation and marketing of instant winner
tickets by providing greater opportunity for the impulse purchase. The lottery
terminals are designed to provide secure, high visibility points of presence at
the point of sale while using a minimum of floor space. The terminals are
available in several models which house four to twelve games. The units are
available in counter-top and stand alone models (the latter incorporating a
security storage cabinet). All models accept bills in $1, $5, $10, and $20
denominations and can be manufactured to accommodate coins or foreign currency.

         The customer inserts a bill in the terminal, receives credit, and then
selects from among any or all of the games offered by pressing the button
located immediately under the appropriate ticket display. The terminals
generally dispense either a single ticket or a string of uncut tickets, which
move past a window, allowing the customer to view the purchase. Based on its
knowledge and experience the Company believes that customers prefer to see the
actual tickets being dispensed. The Company's patented Windows feature is unique
in this regard among similar products available to lottery jurisdictions. The
Company's lottery terminals incorporate other patented features which in the
Company's opinion enhance the likelihood of impulse purchases of game tickets.

         Each lottery terminal includes a display, which shows instructional and
promotional information to the customer. The terminal can also be equipped with
the "Grabber", a multi-color LED sign, which is mounted on top of the terminal
and includes a built-in memory. The Grabber provides the ability to promote new
games or winning jackpots at the point of sale. A customized message typically
is input prior to installation of the terminals. These messages can be changed
on-site using a hand-held remote control or from remote locations with the
Company's optional Shadow communication program described below.

         The Company also manufactures a Pull-Tab Ticket Retailer and combined
machines, Multiple Product Retailers, which share the ITR's basic electronic and
software architecture. Pull-Tab tickets are similar to instant winner lottery
tickets in that they have perforated tabs which are broken open to reveal
printed play symbols. In most cases, three matching symbols on one line indicate
a winner. Sales of break-open tickets are traditionally most successful in
on-premises beer and liquor outlets, bingo parlors or any retail outlet where
people gather socially and stay for an extended period of time. Break-open
tickets have been popular in Canada for some time and are now common in the
United States as well. In many cases these games are operated by nonprofit
organizations without the participation of state lotteries. However, as the
popularity of break-open tickets has increased, more lotteries are considering
adding them to their product line.

DEBIT CARD RETAILER     GENERAL   In 1993 the Company recognized the potential
to utilize its lottery technology in the evolving prepaid phone card industry
and developed its DCR-2000 debit card vending machine. Although prepaid phone
cards have only been available in the U.S. since early 1992, their use has been
growing at a steady pace. In 1997, the estimated size of the debit card market
has grown to over $2 billion, with projected growth to $10 billion by the year
2000. Prepaid phone cards are issued in various denominations by telephone
companies and may be dispensed from as many as four bins in the Company's
machines. The Company expects that the principal markets for its DCR terminals
will be with telephone companies both domestically and in Europe, Asia, and
Latin America. The Company has signed contracts to provide DCR terminals to a
number of customers. Pursuant to these contracts, from its inception through
December 31, 1997, the Company had sold or leased approximately 5200 DCR
terminals, of which 1700 were sold or leased during 1997. To date, these
terminals have been placed in many different types of establishments where there
is a market for prepaid phone or debit cards. The Company also enters into
service contracts in connection with sales of DCR terminals pursuant to which it
receives maintenance fees per month per machine (see "Customer Service, Training
and Product Repair" herein).

         THE INDUSTRY   Prepaid phone cards are sold by telephone companies
worldwide. These cards contain a pre-programmed amount of credit and can be
inserted into certain pay telephones. The customer can use all or a portion of
the credit on the card to make telephone calls. These card-receptive pay
telephones do not hold cash, thus eliminating security or internal theft
concerns for the owners of the telephones. The cards are either disposable or
reusable and are sold in varying denominations. Since the service is prepaid,
telephone companies often offer discounted rates to card users. Telephone
companies also derive revenue from the sale of advertising space on the cards
which defrays their cost of any discount given. In the United States the
industry is still in the early growth stages and card reader telephones are not
in abundance. Therefore, most of the prepaid calling cards in use in the United
States use an "800" number that is called for verification of the card by
entering a PIN number located on the card.

         Prepaid telephone cards generally allow card purchasers to buy blocks
of calling time at a discount. The cards are more convenient, and the use of
prepaid cards eliminates the need to maintain cash on hand to feed the pay
telephone when making a call. Prepaid cards also reduce the risk of credit card
fraud or theft, since a theft of a prepaid phone card results only in the loss
of the face value of the card less any time already used.


                                       4
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         Recent studies indicate that in the United States only a small
percentage of the public have used or are aware of prepaid phone cards.
Therefore, distribution is essential to gaining public awareness. Dispensing
machines are an important element of the distribution network, providing visual
recognition and 24-hour convenient access to the product. An important aspect of
the vending machine is that its design must promote product awareness to
effectively sell cards, not merely dispense them. In 1997 the Company repackaged
its DCR technology into a new cabinet styling.

         In many foreign countries, especially those less developed than the
United States, the majority of residents do not own telephones and rely on
public pay telephones. Management estimates that commercial and government
entities in over 100 countries now use or are in the process of evaluating the
purchase of telephones equipped to accept prepaid phone cards. The Company
believes many of these entities are looking to dispensing machines capable of
handling prepaid phone cards to widen the acceptance and availability of the
prepaid phone cards. The foreign market for prepaid phone card vending machines
is in its infancy, however, and there can be no assurances this Company will be
successful in developing this market.

         In addition to prepaid phone cards, there are many other debit cards
which can be dispensed using the DCR terminal, including bus and subway passes.
Several countries have begun using a multi-purpose debit card to provide easy
access to pay telephones, gasoline pumps, subway passes, and bus passes. The
Company is providing terminals to both Hong Kong and Brazil that dispense such
multi-purpose cards, or different types of cards or passes, including "smart
cards".

         THE DCR TERMINAL   The Company believes that the DCR terminal
substantially expands the distribution potential of prepaid phone cards. Similar
to the lottery terminals, the DCR terminal is designed to provide high security
and high visibility using a minimum of floor or counter-top space. The terminals
are available in several models, which house either one, two or more bins and
are able to accept various denominations of foreign and domestic currency. The
terminals can be manufactured to accommodate coins and to make change. The
customer inserts a bill or coin into the DCR terminal, receives credit, and then
selects the denomination of prepaid phone card or other card/pass by pressing
the button located immediately under the appropriate card display. The terminal
dispenses a single card to the buyer.

         Each bin in a DCR terminal stores approximately 400 cards, depending on
the thickness of the cards, thus providing a maximum capacity of about 1,600
cards in the Company's 4-bin terminal. As with the ITR terminal, the DCR machine
includes a display which shows instructional and promotional messages and can
also be equipped with the "Grabber," a multi-color LED sign, which is mounted on
top of the terminal and includes a built in memory. A customized message
typically is input prior to installation of the terminals. These messages can be
changed on site using a hand-held remote control or loaded from a remote site
with the Company's optional "Shadow" communication program described below.


ADDITIONAL PRODUCT FEATURES   The lottery and DCR terminals are designed to
satisfy the stringently high security demands of state lottery authorities and
commercial customers. The terminals can be bolted to the floor, wall or counter
to prevent removal. Each machine is equipped with an alarm which is triggered
unless the correct password is entered within a specified time period of opening
any of the terminal's doors. The alarm will also sound if power is interrupted
or the terminal is tipped beyond a critical angle. The terminal's doors are
inset to prevent prying or tampering, and the display windows are made from
one-half inch thick lexan. Every terminal has two unique, serialized keys, one
of which opens the bill acceptor door and the other of which provides access to
the terminal ticket or card dispensers, electronics and base storage cabinet.

         Each terminal is controlled by a software system that provides security
and tracks the accounting and inventory of each bin. This software enables the
customer to generate a variety of reports. Every report contains the date and
time, the customer number and terminal serial number, as well as sales data for
each ticket bin and a total for the entire terminal. These reports generally
describe sales by day, week or month, the current inventory of tickets, and an
audit transaction report, which gives a breakdown of the last three
transactions, thus allowing a customer to determine whether reported
malfunctions in fact occurred. Additional functions of the software are the
production of cash management and audit reports.

         The Company produces a Network Monitoring and Reporting System software
package called "Shadow". This optional software allows customers to monitor
sales and inventory remotely by means of a modem using non-dedicated, regular
telephone lines. This feature permits a central "PC" computer to collect all of
the sales and inventory information from any one locality with a single
telephone call. This software facilitates the preparation of reports, which can
be broken down by customer number, bin number, location category (i.e.,
convenience stores, bars, nightclubs, etc.), and geographic location. In
addition, informational and promotional messages may be automatically downloaded
to the optional Grabber display during connection to the terminal. Messages may
be sent to a specific machine or to an entire group of machines within a
specific customer, region or state. The Shadow software can be used to notify
customers of the need to replenish depleted ticket or card stocks, schedule
maintenance and assist in trouble shooting repairs.

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         The Company also has a remote control unit that allows the retailer to
disable the terminal for any reason. For example, if the retailer sees that
minors are attempting to purchase lottery tickets or that anyone is attempting
to vandalize the equipment, he can turn off the terminal at a distance of up to
one hundred feet.

         The Company continues to work on improving the lottery and DCR
terminals and developing new features (see "Research and Development" herein).


LOTTERY AND DCR CONTRACTS        The Company generally conducts business
primarily under three types of contractual arrangements: (a) Sales Agreements,
(b) Standard Lease Agreements, and (c) Alternate Lease Agreements.

         SALES AGREEMENTS   Under the typical Sales Agreement, the Company
installs and maintains lottery and/or DCR terminals and provides ancillary
support services to customers. These contracts generally provide for scaled
payments, based upon the type of terminal purchased and the total number of
terminals sold under the agreement. In addition, the Sales Agreements typically
provide for the payment of monthly service fees for product repair, routine
maintenance and customer service activities (based upon the number of terminals
installed). In many cases the service portion of the contract extends beyond the
period provided by the contract for the sale of terminals.

         STANDARD LEASE AGREEMENTS   While the Standard Lease Agreements are
similar to the Sales Agreements with respect to the Company's installation,
maintenance and service obligations, they are distinguishable primarily by the
fact that the Company continues to own the terminals during the lease term and
that monthly lease payments are made, instead of payment in a lump sum. The
lease amount may or may not include the monthly maintenance fee. Typically, the
lessee is given the option to purchase the terminals at the end of the lease
term, either at a set amount or at fair market value at the time of sale.

         ALTERNATE LEASE AGREEMENTS   In addition to the purchasing and
leasing programs described above, the Company offers a unique approach to the
installation, sale and marketing of lottery or DCR terminals. This program is a
modified leasing arrangement. In general, the program relieves the customer from
the day to day details associated with the marketing and sale of instant tickets
or prepaid phone cards from the Company's terminals. Under these lease
agreements, the Company is entitled to a stated percentage of the revenues
generated from terminal sales or a minimum monthly payment, whichever is
greater. Company personnel assume responsibility for servicing the terminals,
maintaining distribution and inventory records, providing repair and
preventative maintenance, collecting money and distributing the collected funds.


MARKETING AND SALES      The Company markets its products, both domestically and
internationally, primarily through an in-house marketing and sales staff. The
Company solicits interest in its terminals primarily at trade shows and through
direct contact with customers. The initial marketing package consists of product
brochures and other supportive documentation, e.g., sales analysis of other
customer installations. References from other customers using the Company's
terminals are routinely supplied, along with an offer to demonstrate and test
the terminals. Where possible, print advertising is keyed to feature articles in
trade journals, particularly advertisements targeting the prepaid phone card
market.

         LOTTERY TERMINALS   Once a state lottery has accepted vending as a
distribution tool, the process is opened to competitive bidding. In the United
States, lottery authorities commence the contract award process by issuing a
request for proposal, which constitutes an invitation for bids from interested
vendors. The requests for proposal usually stipulate certain requirements, such
as product specifications, performance capabilities, delivery and service
requirements. The requests also specify various insurance, bonding,
indemnification and liquidated damage provisions. Each vendor's reply is
evaluated on the basis of various criteria, including bid price, product
quality, performance capability (measured in part by demonstrated experience in
performing comparable projects), security, integrity, and experience. In
addition, state lottery authorities consider the applicant's affirmative action
policies and use of minority, handicapped, and women-owned subcontractors and
suppliers. Lottery authorities also show a preference for vendors that use
in-state subcontractors and suppliers. To assist it's marketing to state
lotteries, the Company has employed registered lobbyists and paid consultants in
certain states. Although the Company believes there remains a substantial market
for lottery terminals, no assurances can be given that lottery authorities will
award new contracts or order additional terminals.

         Due to the particularly sensitive nature and high profile of gambling
activities, state lottery authorities are directed by statute to act in a manner
which promotes and ensures the integrity, security, honesty and fairness of
their operations. Thus, applicants typically must provide detailed financial and
historical information concerning their business operations and principals, and
certain employees must consent to background investigations.

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         DCR TERMINALS     Three distinct groups of potential customers are
primarily targeted by the Company for the sale or lease of DCR terminals: major
telephone companies, medium-sized telephone companies and long-distance
resellers. To the Company's knowledge, the major telephone companies, AT&T, MCI
and Sprint, have not yet implemented any significant marketing plans involving
the use of vending terminals to distribute prepaid phone cards on a large scale
basis. However, the medium-sized telephone groups have been pursuing vending
contracts for prepaid phone cards. Similar to the sales process with state
lotteries, many of these companies seek requests for proposals from vending
companies and require testing prior to awarding contracts. The contract process
permits more flexibility and creativity; however, it requires greater marketing
time and energy to win contracts. Long distance resellers, smaller telephone
companies, and pay telephone route operators are seeking vending contracts. The
Company intends to seek out additional vertical distributorship and joint
venture relationships to increase its presence in the DCR market place; however,
there can be no assurance that the Company will be successful in developing
these relationships.


FOREIGN OPERATIONS     GENERAL  Internationally, lottery authorities and foreign
telephone companies do not typically use a formal bidding process, but rather
negotiate proposals with one or more potential vendors. In 1997 the Company
delivered terminals to Brazil and Hong Kong as well as to several European
countries for market testing. Nonetheless, the Company's foreign operations are
relatively new, and no assurance can be provided that a meaningful international
market for the Company's terminals will develop. Pursuant to an agreement with
VSI, the Company agreed to form a subsidiary to transact all international
business. The agreement provided that upon the occurrence of certain events,
including the Company meeting certain pre tax income requirements, VSI and Mr.
Robert L. Burr would each have the right to acquire 40% of such subsidiary the
Company had. However, on March 19, 1998 the Company and VSI entered into an
agreement whereby the original agreement with VSI referred to above was
terminated. Pursuant to the termination agreement, VSI and Mr. Burr have each
been granted options to purchase 50,000 shares of the Company's common stock at
$2.88 per share. The options expire on December 31, 2002 and vest at the earlier
of June 30, 2002 (subject to certain conditions) or March 31 following the
fiscal year end during which cumulative gross revenues for fiscal years
beginning in 1998 from Central and South America exceed $5,000,000.

         BRAZIL      In June 1995 the Company entered into a distributor
agreement with a Brazilian corporation, to distribute the Company's products on
an exclusive basis in Brazil.

         EUROPE      In December 1997 the Company entered into a distributor
agreement with Editec, a French Corporation, to distribute the Company's
products on an exclusive basis throughout most of Western Europe.

         MEXICO      The Company purchased a 50% interest in LEI Mexico, S.A de
CV., a Mexican corporation ("LEI Mexico"), for $500 thousand in October 1994 and
subsequently wrote down the 50% interest to zero value in 1995. The Company and
LEI Mexico entered into an exclusive distributorship agreement whereby the
Company agreed to only sell machines in Mexico to or through LEI Mexico and LEI
Mexico agreed to use only the Company's equipment in its vending operations. The
Company can terminate this agreement at its option. The Company intends to
explore various alternatives available in the pursuit of business opportunities
in the Mexican market.


CUSTOMER DEPENDENCY     The Company's products are sold or leased to a limited
number of customers worldwide. As a result, the Company has experienced
fluctuations in its financial results and capital expenditures because of the
timing of significant individual contract awards and customer orders as well as
associated product delivery schedules. The Company's sales cycle can, at times,
be relatively long due to the lead time required for business opportunities to
result in signed sales or lease agreements. In 1997, revenues from three
customers individually exceeded 10% of total revenues and in total comprised 57%
of total revenues. Revenues from two customers individually exceeded 10% of
total revenues in 1996 and in total comprised 37% of total revenues in 1996. One
of the Company's principal customers has generated a significant long term lease
receivable with the Company and is currently seeking additional capital to
expand its business and to finance past and future equipment leases from the
Company. Although the Company has received indications that this financing will
in all likelihood be completed, there can be no assurance to that effect, and
the failure of this customer to raise additional capital could have a material
adverse affect on the Company's financial results in 1998.

BACKLOG      The Company's backlog of firm orders at December 31, 1997 totaled
approximately 800 ITR terminals and 1,200 DCR terminals. The rate at which the
Company receives orders from its customers is affected from time to time by the
nature of the Company's market. State lottery authorities are allocated budgets
on an annual basis, and their desire and ability to order products from vendors,
including the Company, can be affected by the status of the budgetary process at
any given time. For example, a lottery which has not spent its budget as the end
of a budgetary year approaches may be encouraged to place orders with vendors,
whereas a lottery which has exhausted its budget may not be able to place orders
until the beginning of a new budgetary year.

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MANUFACTURING AND SUPPLY     The Company's lottery and DCR terminals are
designed in a modular form to facilitate manufacturing assembly and
serviceability. The Company uses vendors to manufacture and supply some
components and sub-assemblies, including the bill acceptor and electronic
modules. Final assembly and quality control of the terminals is performed by
Company personnel at its San Diego facility.

CUSTOMER SERVICE, TRAINING AND PRODUCT REPAIR     The Company maintains service
facilities at its San Diego, California headquarters and in the states of
Connecticut, Missouri, New York, Pennsylvania, Virginia and Washington. These
facilities, and several smaller ones, oversee installations, coordinate repair,
and respond to service calls. The Company maintains toll-free telephone lines
staffed by service personnel to assist retailers and, where possible, resolve
minor service problems over the telephone. If the problem cannot be resolved
easily, a field technician is immediately paged and a service call scheduled.
Each agreement provides for a specified response or service time. A function of
the field service operation is to provide installation and retailer training on
the operation and use of the machine. The Company generally provides a warranty
period of one year on its terminals and provides an option for an extended
warranty period if purchased by the customer.

         The modular designs of the terminals promote cost-effective, timely
repair. All three of the major modular components (the currency acceptor, ticket
dispenser, and electronics module) are easily removed from the terminal. Service
technicians are instructed to replace malfunctioning components if they are
unable to repair a machine within 30 minutes. Any replaced parts are sent to the
service center, where they are examined and repaired in-house or returned to the
manufacturer.

         The Company has developed a computer program to identify dispenser
malfunctions from remote locations via the optional Shadow software. This
IBM-compatible program enables a customer to interrogate each ITR or DCR
terminal within a given district to identify problems as diverse as a blocked or
damaged sensor or an inoperable gate mechanism. If a malfunction is detected, a
report is automatically generated, giving the machine location and serial
number, and identifying the type of problem. Although this technology is
available from the Company, to date most customers have elected not to purchase
and install such technology.

         Company service technicians also perform routine preventative
maintenance of machines. If required, by agreement, each terminal is subject to
on-site cleaning and diagnostic testing of key components. In addition, on-site
modifications or upgrades may be performed.

         The Company's administrative staff closely monitor any problems with
terminals in the field. Service reports are forwarded to engineering, quality
control and production on a weekly and monthly basis. The Field Service
Department is also responsible for pre-installation site surveys to check for
space, telephone service and power.

         Since its first contract with the Virginia State Lottery in 1991 the
Company has provided services to install, train, repair and perform preventative
maintenance of its products. From 1991 to 1997, the service function of the
Company has expanded as new contracts have required. The Company believes that
its service organization is larger than any of its direct manufacturing
competitors. The Company currently provides ITR service in the states of:
Connecticut, Delaware, Missouri, New York, Pennsylvania, Virginia, and
Washington. In early 1997, a significant customer's Alternative Lease Agreement
with regard to DCR's, which involved a nationwide service program, was
terminated.

         Since 1994, the Company has sought reimbursement from the California
State Lottery for the supply and installation of out-of-warranty spare parts and
related sales tax pursuant to its service contract. The Company's claim for
reimbursement is estimated at more than $1.9 million. The California State
Lottery has refused to honor the claim and has responded with a claim of $1.7
million in liquidated damages for the Company's alleged delay in responding to
service calls in 1995. Moreover, the California State Lottery has withheld
payment of more that $300 thousand in outstanding invoices for products and
services from the Company. The Company contends that the liquidated damage
provision in the service contract is unenforceable because it is impermissibly
punitive and unconscionable and that the liquidated damage claims by California
are unrelated to any real damages, if any, experienced by the California State
Lottery for delayed service call responses. With respect to the quality of the
Company's products and services, the Company notes that the California State
Lottery itself in September 1995 confirmed that the Company manufactured "good"
ITR terminals and that the Company had been "responsive to CSL needs and
concerns and have provided a good level of service overall." The Company also
asserts that the California State Lottery has significantly limited the
Company's cash flow since 1994 by failing to recognize its spare parts
obligation which now totals an estimated $1.9 million and by withholding other
payments due to the Company. The Company is presently examining its legal
options and is analyzing how much of its lost revenues and business
opportunities as well as its cash flow problems and stock price drop in 1995 are
related to the California State Lottery's actions. The Company is also
attempting to negotiate a fair resolution of all claims with the California
State Lottery. To date no legal action has been brought by either party and both
parties are seeking to resolve this matter amicably.

                                       8

<PAGE>

COMPETITION     The Company believes that it possesses a strong competitive
position in the sale of lottery terminals. The Company has established a
reputation for providing quality terminals and service. As a consequence, the
Company has been able to secure contracts in eleven states, the Provinces of
Ontario and Quebec as well as customers in several foreign countries. In
addition, the Company enjoys repeat or renewal orders from existing customers
and is conducting tests with overseas lottery organizations. However, as a
result of the proposed merger with Interlott Technologies, Inc. ("ILI"), in 1995
the Company's marketing was impacted as the Company terminated bid protests and
no-bid other contracts due to a belief on the part of management and the Board
of Directors that the merger was going to be consummated and a consequent desire
not to hinder the merger process by competitive actions. The Company believes
that its marketing efforts, subsequent to 1995, have not been impacted by these
terminated bid protests and no-bids. ILI has sold or leased machines in fourteen
states, while the next largest current competitor, International Products of
America, has sold machines pursuant to a contract with one state. Nevertheless,
a substantial risk of new market entrants by domestic and foreign competitors
exists. While the Company believes that it possesses a strong competitive
position by virtue of its proprietary position, installed base and reputation,
there can be no assurance that a better capitalized competitor will not
successfully establish itself in the market or develop a machine which renders
the Company's technology obsolete. The instant ticket market may also face
competition from other types of lottery products.

         In the United States, the prepaid phone card and, more generally, the
debit card market is relatively new. Consequently, it is difficult to identify
all the competitors in this market. Nonetheless, the Company believes it
possesses a strong competitive position in the sale of DCR terminals within the
United States and overseas. Currently, the Company believes it has the largest
installed base of DCR terminals in the market place. At present, the Company's
principal competitors are Marketing & Vending Concepts, ILI, VendTek and Opal.
There are a number of smaller vending machine companies in the market which
management believes currently lack the product quality and reliability to
significantly impact its sales efforts. There is also a substantial risk of
additional market entry by domestic and foreign competitors, especially if the
United States customer's response to the use of debit cards and pre-paid phone
cards is favorable. Internationally, the Company has been successful in selling
its DCR terminals into Brazil and Hong Kong. While the Company believes that it
possesses an advantage in obtaining future customers by virtue of its
proprietary position and installed base, there can be no assurance that a better
capitalized competitor will not successfully establish itself in the market or
develop a machine which renders the Company's technology obsolete. The prepaid
phone card and debit card market may also face competition from other types of
products.


RESEARCH AND DEVELOPMENT     Research and Development expenditures totaled $582
thousand and $253 thousand in 1997 and 1996, respectively. None of these costs
were borne directly by the Company's customers. The Company's research and
development department designs hardware and software for new products, and
maintains hardware and software support for existing products. Software is
continually enhanced to satisfy customer requests. Many new features have
evolved from the sales process (e.g., access code requirements, security
features such as alarm and theft detection, report capabilities, and display
features). Once developed, these features generally are incorporated as standard
items in the product line. Software upgrades have included diagnostics for field
service and memory management and configuration control. Hardware enhancements
included features to provide local control, remote control and speech functions,
and memory upgrades for software and data storage. Other hardware developments
have focused on the physical size, look and ergonomics of the machines, and
conformance with the requirements of the American Disabilities Act.


GOVERNMENT REGULATION     Lotteries are not permitted in the United States
unless expressly authorized by legislation in the subject jurisdiction. Once
authorized, the award of lottery contracts and ongoing state operations are
highly regulated. State rules and regulations specify, among other things, the
qualifications of lottery directors, the prize structure, the allocation of
revenue, the types of games and amounts of wagers permitted, the manner in which
the lottery is marketed, and the procedures for selecting vendors of equipment
and services.

         To ensure the integrity of the contract award and subsequent contract
performance, jurisdictions typically conduct background investigations of, and
require detailed disclosure on a continuous basis from, vendors and their
affiliates, subcontractors, officers, directors, and principal shareholders
(including 5% shareholders of publicly traded corporations). Background
investigations of vendors' employees are also generally conducted, and most
states reserve the right to require the removal of employees they deem to be
unsuitable or whose presence they believe may adversely affect the operational
security or integrity of the lottery.


                                       9

<PAGE>

         The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it
unlawful for a person to manufacture, deliver or receive gaming machines or
similar devices across interstate lines unless that person has first registered
with the Attorney General of the United States. The Company has registered under
the Federal Act and must renew its registration annually. The Federal Act also
imposes various record keeping and equipment identification requirements.
Violation of the Federal Act may result in seizure or forfeiture of equipment,
as well as other penalties. As of the date of this filing, the Company believes
that it is in substantial compliance with these provisions.

         The international jurisdictions in which the Company operates or
intends to market its 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.

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

         It remains unclear what telecommunication regulations, if any, relate
to the sale of prepaid phone cards or to the dispensing of those cards using
vending machines. There appears to be a strong movement towards requiring
certification as a reseller in states where entities sell prepaid phone cards.
Vermont prohibits the sale of these cards from any venue. In addition, some
states subject DCR terminals and machines to use or similar taxes.


EMPLOYEES     As of March 1, 1998, the Company had 140 full-time employees, of
whom 18 were in executive or administrative positions, 22 in quality control and
production, 7 in research and development, 86 in field service, 6 in the
warehouse and 1 in maintenance. In addition, the Company employed 21 people on a
part-time basis in its field service department. None of the Company's employees
are currently represented by a union, and the Company believes that its
relations with its employees are good.


FACILITIES     The Company occupies approximately 28,000 square feet of space in
San Diego, California. The premises include office, manufacturing and warehouse
space. The Company currently pays monthly rent of $13,607 for this space. This
lease terminates December 31, 1998. The Company believes that its facilities are
adequate to meet its anticipated needs through the term of the lease.

ITEM 2.       DESCRIPTION OF PROPERTIES

At March 1, 1998 the Company had the following properties under lease:

Office, manufacturing, R & D and warehouse space in San Diego, California at an
annual rent of $135,699 through December 31, 1998.

Warehouse space in San Diego, California on a month-to-month basis at an annual
rent of $6,600.

Office, repair depot and warehouse space in Syracuse, New York on a
month-to-month basis at an annual rent of $13,200.

Office, repair depot and warehouse space in St. Ann, Missouri at an annual rent
of $6,600 through October 1998.

Office, repair depot and warehouse space in Richmond, Virginia on a
month-to-month basis at an annual rent of $23,603.

Office, repair depot and warehouse space in Southington, Connecticut at an
annual rent of $8,004 through January 1999.

Office, repair depot and warehouse space in Olympia, Washington at an annual
rent of $9,600 through June 1999.

Office, repair depot and warehouse space in York Haven, Pennsylvania at an
annual rent of $11,940 through April 1998.

ITEM 3.       LEGAL PROCEEDING

         The Company is a party to legal proceedings in the ordinary course of
its business, the most significant of which is described below.

                                       10

<PAGE>

         On January 23, 1996, the Company's principal competitor, ILI, filed an
action against the Company in the Common Pleas Court of Hamilton County, Ohio.
The action arises from an agreement in principle between ILI and the Company
which was signed on March 23, 1995. The agreement in principle related to a
proposed merger transaction between ILI and the Company. After certain due
diligence and negotiations, in July 1995 the parties decided not to proceed with
the transaction reflected in the agreement in principle. In the action, ILI
contends that, under the agreement in principle, the Company is responsible to
pay ILI's reasonable fees and expenses in connection with the proposed merger
because the transaction did not proceed due to the Company's actions. In
addition, ILI contends that another provision of the agreement in principle
obligates the Company to pay a "break-up fee" in the event the Company entered
into a "binding commitment to engage in a recapitalization, debt issuance or
working capital financing other than in the ordinary course of business within
one year of the public announcement of such abandonment or termination [of the
proposed merger transaction]." The Company denies these contentions and believes
that ILI failed to exercise its best efforts in good faith to negotiate a
transaction. In the action, ILI seeks reimbursement of alleged fees and expenses
of $240 thousand, payment of a break-up fee in the amount of $989 thousand and
reasonable attorney's fees. The Company removed ILI's action to the United
States District Court for the Southern District of Ohio on February 26, 1996. On
March 4, 1996 the Company filed an answer denying all liability to ILI. The
Company also asserted a counterclaim against ILI seeking a declaratory judgment
that the break-up fee has not been triggered under the terms of the agreement in
principle, seeking to recover the Company's own costs and expenses in connection
with the proposed merger agreement as a result of ILI's breach of the agreement
in principle and seeking compensatory damages from ILI for unfair competition
and tortious interference with business relations. The Company's counterclaim
sought compensatory damages in excess of $500 thousand, plus attorney's fees,
costs and reimbursement of the merger related expenses. In February 1997 the
court rendered judgement on behalf of ILI with regard to certain expenses
incurred by it during the merger negotiations in the amount of approximately
$238,000. However, upon motion by the Company, the court reconsidered this
ruling and reversed its ruling that the Company is legally responsible for fees
relating to the Merger. Following the court's ruling, ILI filed another brief
requesting the court to reconsider its reversal of the summary judgement on the
issue of Merger costs. In March 1998, the court rendered summary judgement on
behalf of ILI with regard to the Company's claims of unfair competition and
tortuous interference with business relations. The Company believes that no
amounts are owed by it to ILI under the agreement in principle. The Company is
contesting the lawsuit vigorously and intends to appeal the court's ruling with
regard to its claims of unfair competition and tortuous interference with
business relations.


ITEM 4.       SUBMISSION OF MATTERS TO A  VOTE OF STOCKHOLDERS

None.





                                       11

<PAGE>



PART II

ITEM 5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         a)     The Company's common stock is traded in the over-the-counter
market (NASDAQ symbol: ONPT). The following table sets forth the high and low
bid prices for the Company's common stock, as reported on NASDAQ, for the
quarters presented. The bid prices represent inter-dealer quotations, without
adjustments for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.

                            Fiscal 1997                       Fiscal 1996
                        High            Low              High             Low

First Quarter           2 1/32          5/8              1 1/4            5/8
Second Quarter          3               1 3/16           1 1/16           5/8
Third Quarter           2 13/16         1 5/8            15/16            15/32
Fourth Quarter          3 1/4           1 5/8            3/4              1/2


         b)     The number of stockholders of record of the Company's common
stock, par value $.01 per share, as of March 2, 1998, was 287. The approximate
number of beneficial shareholders is 2400.

         c)     The Company has never paid any cash dividends on its common
stock and does not anticipate that it will do so in the foreseeable future. The
future payment of dividends, if any, on the common stock is within the
discretion of the Board of Directors and will depend on the Company's earnings,
its capital requirements, financial condition and other relevant factors.


         Following are unregistered sales of securities issued by the Registrant
during the last three years. These securities were issued pursuant to Section
4(2) of the Securities Act of 1933, as amended. No placement agent was engaged
in connection with such issuances and no commissions or discounts were paid to
any person.

         In October 1995, Mr. Marshall Geller, former interim President and
Chief Executive Officer of the Company, was granted a stock option for 100,000
shares of the Company's Common Stock at $7.45 per share pursuant to his
engagement as the interim President and Chief Executive Officer of the Company.
The option expires in September 2004 and vested immediately.

         In April 1995, Mr. John Robinson, a former outside Director of the
Company, received a warrant to purchase 25,000 shares of the Company's Common
Stock at $2.50 per share pursuant to a loan agreement entered into with the
Company. The warrant has a five year term and became exercisable in September
1995.

         In June 1995, Mr. Marshall Geller, former interim President and Chief
Executive Officer of the Company, and Mr. Arthur Laffer, former outside Director
of the Company, received 101,000 and 75,000 shares, respectively, of the
Company's Common Stock in consideration of payment of a Company account payable
in the amount of $86,691.

         In October 1995, Mr. Robert Burr, former Chairman of the Board and
former President and Chief Executive Officer of the Company, was granted a stock
option for 50,000 shares of the Company's Common Stock at $2.00 per share
pursuant to a consulting agreement entered into with the Company. The option has
a three year term and vested on the grant date.

         In January and July 1996, Vanguard Strategies, Inc. received warrants
to purchase 450,000 and 250,000 shares, respectively, of the Company's Common
Stock at $.60 and $.69, respectively, pursuant to a consulting agreement entered
into with the Company. Mr. Sandvick, Chief Executive Officer of the Company, is
the President and principal shareholder of Vanguard Strategies, Inc. The
warrants have a five year term and warrants to purchase 200,000 shares became
exercisable in January 1996 and warrants to purchase 500,000 shares became
exercisable in July 1996.

         In August 1996, Metal Masters, Inc. received warrants to purchase
165,000 shares of the Company's Common Stock at $.69 pursuant to a settlement of
a legal action. The warrants became exercisable in August 1996 and 100,000
shares have a one year term and 65,000 shares have a two year term.


                                       12

<PAGE>

         In January 1997, Frederick Sandvick, Chief Executive Officer of the
Company, received a warrant to purchase 500,000 shares of the Company's Common
Stock at $.63 per share pursuant to his personal guaranty and indemnity in
connection with a $2,000,000 performance bond. The warrant has a five year term
and became exercisable in January 1997.

         In January 1997, Vanguard Strategies, Inc. received a warrant to
purchase 250,000 shares of the Company's Common Stock at $.72 per share pursuant
to a consulting agreement entered into with the Company. The warrant has a five
year term and became exercisable in January 1997.

         In January 1997, S & H Systems, Inc. received a warrant to purchase
4,000 shares of the Company's Common Stock at $1.00 per share pursuant to a
consulting agreement entered into with the Company. The warrant has a four year
term and became exercisable in January 1997.

         In May 1997, GMB Capital Partners received a warrant to purchase 45,000
shares of the Company's Stock at $2.52 per share in consideration for
facilitating financing for the Company. The warrant has a three year term and
became exercisable in May 1997.

         In May 1997, Coast Business Credit received a warrant to purchase
50,000 shares of the Company's Common Stock at $2.00 per share pursuant to a
financing agreement entered into with the Company. The warrant has a three year
term and became exercisable in May 1997.

         In May 1997, Capital Structures Corporation and Colliers Iliff Thorn
each received a warrant to purchase 25,000 shares of the Company's Common Stock
at $1.24 per share pursuant to a commission settlement agreement entered into
with the Company. The warrants have a one year term and became exercisable in
May 1997.


ITEM 6.       MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL The Company's revenues through 1997 have been generated from (i) sales
of vending terminals (ii) leases of vending terminals (iii) performance of
service on vending terminals, and (iv) sales of associated parts.

         The Company's products are sold or leased to a limited number of
customers worldwide. As a result, the Company has experienced fluctuations in
its financial results and capital expenditures because of the timing of
significant individual contract awards and customer orders as well as associated
product delivery schedules. The Company's sales cycle can, at times, be
relatively long due to the lead time required for business opportunities to
result in signed sales or lease agreements. Operating results may be affected by
such lead time as well as working capital requirements associated with
manufacturing vending terminals pursuant to new orders, increased competition,
and the extended time which may elapse between the customer's firm order and the
receipt of revenue from the sale or lease of the applicable vending terminals.
In addition, there has been an accelerating trend by customers to lease rather
than purchase vending terminal equipment. Leasing vending terminals requires the
Company to invest capital or otherwise finance the manufacture of the vending
terminals. The Company has obtained the resources necessary to finance its
expanding base of leased terminals through the sale of certain leases to a
financing company, an equity financing and a debt financing.

1997 COMPARED TO 1996   1997 revenue increased by approximately $5.6 million or
47% over 1996, with approximately $5.2 million of the increase representing
volume and $400 thousand representing price increases. The volume increase is
due primarily to a greater number of vending terminal sales and sales-type lease
arrangements, rather than operating lease arrangements, with one state lottery
customer and one DCR customer. In total, the Company installed or shipped
approximately 2900 units in 1997 versus approximately 1700 units in 1996, an
increase of approximately 1200 units. Operating lease revenue grew by
approximately $1.3 million over 1996, reflecting a higher base of installed
machines and additional revenue from lease extensions. Service revenue declined
by approximately $800 thousand from 1996 due primarily to the loss of a service
contract with one DCR customer.

         Cost of revenue, as a percentage of sales, improved by 1 percentage
point from 73% in 1996 to 72% in 1997 reflecting the change in product mix
between years.

         Operating expenses, as a percentage of sales, declined by 13 percentage
points from 31% in 1996 to 18% in 1997. The decline reflects management's
continuing efforts to control selling, general and administrative expense
levels. Partially offsetting the reduction in selling, general and
administrative expense was an increase in research and development costs as a
result of increased new product development activities.

                                       13

<PAGE>

         As a result of the above factors, 1997 income from operations of
approximately $1.7 million represents an improvement of approximately $2.2
million from the 1996 operating loss of approximately $500 thousand.

         Total other income and expense decreased by $764 thousand with:
interest income down $426 thousand due to less amortization of unearned income
on sales type leases, interest expense higher by $162 thousand due primarily to
increased borrowings associated with the equipment manufacturing costs
underlying long-term lease agreements, and "other" costs higher by $176 thousand
reflecting losses on asset disposals.

         As a net result of the above described factors, the Company generated
$1.57 million of net income in 1997, an increase of $1.44 million from 1996.

LIQUIDITY AND CAPITAL RESOURCES   In 1997 the Company generated approximately
$300 thousand of net cash from operating activities which, when combined with
the approximate $2.5 million of net cash provided by financing activities and
approximately $200 thousand reduction in cash and cash equivalents, was used for
financing activities. In 1996 the Company used $1.3 million of net cash for
operating activities, principally for the reduction of accounts payable and
accrued expenses. Net cash provided by financing activities for 1996 was $1.3
million, while net cash used by investing activities was $1.5 million. The
principal investing activity in 1997 and 1996 was the net payment of costs
associated with the equipment underlying long term lease agreements, both sales
type and operating, which totaled approximately $2.9 million in 1997 and $2
million in 1996. Working capital of approximately $3.1 million at December 31,
1997 represents an increase of approximately $2.8 million over the approximate
$300 thousand at December 31, 1996.

         The Company completed an equity financing and a debt financing during
the second quarter of 1997. On April 7, 1997 the Company completed the private
placement of $800 thousand of equity Units. The Units consist of one share of
Common Stock of the Company per $0.75 of equity investment, one-half Class A
Warrants per $1.00 of equity investment and one Class B Warrant per $1.00 of
equity investment. Each Class A Warrant will be exercisable to purchase one
share of Common Stock at a price of $1.25 per share for a period of one year
while each Class B Warrant will be exercisable to purchase one share of Common
Stock at a price of $2.00 per share for a period of eighteen months. Net
proceeds to the Company from the private placement approximated $673 thousand.
On May 5, 1997, the Company entered into a Loan and Security Agreement for a
revolving line of credit whereby the Company can borrow up to $3 million. The
loan bears interest at prime plus 4%, which is reduced by 1% annually if the
Company meets certain performance benchmarks, matures on March 31, 2000 and is
secured by virtually all of the Company's assets. At December 31, 1997, the
Company had borrowed approximately $2.3 million under this Agreement.

         Management believes the Company has sufficient liquidity, because of
its existing stream of contractual lease payments, its current working capital,
and its available borrowings under its $3 million normal course debt financing,
to maintain its planned activities in 1998. However, the Company may seek
additional debt or equity financing to facilitate expansion opportunities and
potential acquisitions or for contingencies. See Note 10 of Notes to the
Consolidated Financial Statements in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1997 for potential other matters which could
affect the Company's liquidity.

IMPACT OF INFLATION     Inflation has not had any significant effect on the
Company's operating costs. However, the sales price, lease payment and service
fees contained in the Company's agreements with various states are fixed and the
Company will be unable to pass along any increases in manufacturing and service
costs during the term of these agreements.

SEASONALITY OF BUSINESS     The Company's operations may be affected by the
fiscal year ends of its state lottery customers, which generally occur on June
30. States which have a surplus of funds available prior to year-end may
accelerate their purchases of new equipment, while states which experience a
shortage of funds available may delay their purchases until the next fiscal
year.

YEAR 2000 COMPLIANCE     As is the case with most other companies using
computers in their operations, the Company is in the process of addressing the
Year 2000 problem. The Company's primary accounting and operational software
provider has received year 2000 certification from the Information Technology
Association of America. The total cost estimate to upgrade certain computer
hardware is not expected to exceed $25 thousand.

ITEM 7.       CONSOLIDATED FINANCIAL STATEMENTS

The Consolidated Financial Statements are filed as part of this Annual Report on
Form 10-KSB.



                                       14



<PAGE>





                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------





To the Board of Directors and Shareholders of On-Point Technology Systems, Inc.
and Subsidiaries:

We have audited the accompanying consolidated balance sheets of On-Point
Technology Systems, Inc. (formerly Lottery Enterprises, Inc.) and subsidiaries
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity, 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of On-Point Technology Systems, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.






Deloitte & Touche LLP
San Diego, California
March 20, 1998









                                       15


<PAGE>
<TABLE>

               ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<CAPTION>

                                                                                                   December 31,
                                                                                            ------------------------
Assets        THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS                                    1997               1996
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>                <C>
Current assets:
                  Cash and cash equivalents, including restricted cash of
                       $469 in 1996                                                         $273               $504
                  Accounts receivable, net                                                 1,961              1,334
                  Inventories                                                              2,704              2,457
                  Net investment in sales-type leases                                      1,638              1,752
                  Other current assets                                                        88                618
--------------------------------------------------------------------------------------------------------------------
Total current assets                                                                       6,664              6,665
--------------------------------------------------------------------------------------------------------------------
Plant, property and equipment, net                                                           582                825
Net investment in sales-type leases                                                        5,364              3,643
Property held for operating leases, net                                                    2,657              2,389
Other assets                                                                                 768                789
--------------------------------------------------------------------------------------------------------------------
Total assets                                                                             $16,035            $14,311
====================================================================================================================
Liabilities and shareholders' equity
--------------------------------------------------------------------------------------------------------------------
Current liabilities:
                  Current portion of notes payable                                          $277               $971
                  Accounts payable                                                         1,118              2,681
                  Accrued expenses                                                         2,134              2,227
                  Deferred income                                                             -                 518
--------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                                  3,529              6,397
--------------------------------------------------------------------------------------------------------------------
Notes payable, net of current portion                                                      2,371                 54
--------------------------------------------------------------------------------------------------------------------
Other liabilities                                                                            757                939
--------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
                  Preferred stock, no par value, 2,000,000 shares
                      authorized, no shares issued or outstanding                             -                  -
                  Common stock, $0.01 par value, 20,000,000 shares
                     authorized, 9,421,255 shares issued and outstanding                      94                 82
Additional paid-in capital                                                                30,030             29,157
Accumulated deficit                                                                      (20,746)           (22,318)
--------------------------------------------------------------------------------------------------------------------
Total shareholders' equity                                                                 9,378              6,921
--------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                                               $16,035            $14,311
====================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS










</TABLE>



                                       16




<PAGE>
<TABLE>


               ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<CAPTION>



                                                                                           Years ended December 31,
                                                                                           -------------------------
THOUSANDS OF DOLLARS/SHARES, EXCEPT PER SHARE AMOUNTS                                       1997               1996
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>                <C>
Revenues                                                                                 $17,439            $11,868
Cost of revenues                                                                          12,566              8,645
--------------------------------------------------------------------------------------------------------------------
Gross profit                                                                               4,873              3,223
--------------------------------------------------------------------------------------------------------------------
Operating expenses:
                  Selling, general and administrative                                      2,563              3,479
                  Research and development                                                   582                253
--------------------------------------------------------------------------------------------------------------------
Total operating expenses                                                                   3,145              3,732
--------------------------------------------------------------------------------------------------------------------
Income (loss) from operations                                                              1,728               (509)
--------------------------------------------------------------------------------------------------------------------
Other income (expenses)
                  Interest income                                                            458                884
                  Interest expense                                                          (418)              (256)
                  Other                                                                     (160)                16
--------------------------------------------------------------------------------------------------------------------
Total other income (expense)                                                                (120)               644
--------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes                                                   1,608                135
--------------------------------------------------------------------------------------------------------------------
Provision for income taxes                                                                    36                  -
--------------------------------------------------------------------------------------------------------------------
Net income                                                                                $1,572               $135
====================================================================================================================


Earnings per share:
    Basic:
                  Earnings per share                                                       $0.17              $0.02
====================================================================================================================
                  Weighted average shares                                                  9,011              8,187
====================================================================================================================
    Diluted:
                  Earnings per share                                                       $0.15              $0.02
====================================================================================================================
                  Weighted average shares                                                 10,839              8,313
====================================================================================================================
SEE ACCOMPANYING NOTE TO CONSOLIDATED FINANCIAL STATEMENTS





</TABLE>



                                       17



<PAGE>



<TABLE>


               ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>




                                                                                          Years Ended December 31,
                                                                                          ------------------------
THOUSAND OF DOLLARS                                                                          1997            1996
------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>              <C>
          Net income                                                                       $1,572            $135
          Adjustments to reconcile net income to net cash provided
               by (used for) operating activities:
               Depreciation and amortization                                                1,489           1,471
               Non-cash charges, primarily changes in reserves                                (45)           (726)
               Changes in assets and liabilities:
                    Accounts receivable                                                      (627)           (488)
                    Inventories                                                              (247)            163
                    Accounts payable                                                       (1,563)           (425)
                    Accrued expenses                                                         (275)         (1,098)
                    Deferred income                                                          (518)           (229)
                    Other                                                                     551            (150)
------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities                                          297          (1,347)
------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
------------------------------------------------------------------------------------------------------------------
          Purchases of plant, property and equipment                                         (176)            (75)
          Net investment in sales-type leases                                              (1,607)           (834)
          Investment in property held for operating leases                                 (1,305)         (1,157)
          Fixed asset disposals                                                                99             608
------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities                                                     (2,995)         (1,458)
------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
------------------------------------------------------------------------------------------------------------------
          Proceeds from issuance of common stock                                              810               -
          Proceeds from issuance of warrants                                                    -              80
          Proceeds from debt financing                                                        655             767
          Proceeds from sale of leases                                                          -           1,270
          Proceeds from line of credit, net                                                 2,267               -
          Repayment of notes payable                                                       (1,311)           (792)
------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                                   2,467           1,325
------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents                                                        (231)         (1,480)
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period                                              504           1,984
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                                   $273            $504
==================================================================================================================
Supplemental schedule of non-cash transations:
          Warrants issued for services provided                                               $75              $0
==================================================================================================================
Supplemental cash flow information:
          Cash paid during the period for interest                                           $281            $101
==================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


</TABLE>







                                       18

<PAGE>
<TABLE>




               ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDER' EQUITY



<CAPTION>


                                                                                          Additional
                                                            Common Stock                     Paid-in       Accumulated
THOUSANDS SHARES/DOLLARS                             Shares             Amount               Capital           Deficit        Total
------------------------------------------------------------------------------------------------------------------------------------
<S>              <C>                                 <C>                 <C>                 <C>             <C>             <C>
Balance, January 1, 1996                             8,187               $82                 $29,077         ($22,453)       $6,706
------------------------------------------------------------------------------------------------------------------------------------
               Warrants issued in compensation
                    for services                     -                     -                      80                 -           80
               Net income                            -                     -                       -               135          135
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996                           8,187                82                  29,157           (22,318)       6,921
------------------------------------------------------------------------------------------------------------------------------------
               Warrants issued in compensation
                    for services                     -                     -                      75                 -           75
               Issuance of common stock, net of
                    issuance costs of $116           1,067                11                     673                 -          684
               Exercise of stock warrants              142                 1                     100                 -          101
               Exercise of stock options                25                 -                      25                 -           25
               Net income                                -                 -                       -             1,572        1,572
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997                           9,421               $94                 $30,030          ($20,746)      $9,378
====================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



</TABLE>



                                       19
<PAGE>



               ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
               --------------------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                     YEARS ENDED DECEMBER 31, 1997 AND 1996
                     --------------------------------------



1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         ORGANIZATION   On-Point Technology Systems, Inc. and subsidiaries,
formerly Lottery Enterprises, Inc. (collectively, the "Company" or "ONPT")
designs, manufactures, and services vending terminals for the retail sale and
leasing of instant-winner lottery tickets (the "Instant Ticket Retailer" or
"ITR(R)") and for the retail sale and leasing of prepaid telephone calling cards
(the "Debit Card Retailer" or "DCR(TM)"). The ITR terminals are sold or leased
to state and provincial governments in the United States and Canada and to
foreign governments and their licensees. DCR terminals are generally sold or
leased to commercial customers.

         LIQUIDITY   The Company completed an equity financing and a debt
financing during the second quarter of 1997. On April 7, 1997 the Company
completed the private placement of $800 thousand of equity Units. The Units
consist of one share of Common stock of the Company per $0.75 of equity
investment, one-half Class A Warrant per $1.00 of equity investment and one
Class B Warrant per $1.00 of equity investment. Each Class A Warrant will be
exercisable to purchase one share of Common Stock at a price of $1.25 per share
for a period of one year while each Class B Warrant will be exercisable to
purchase one share of Common Stock at a price of $2.00 per share for a period of
eighteen months. Net proceeds to the Company from the private placement
approximated $673 thousand. On May 5, 1997, the Company entered into a Loan and
Security Agreement for a revolving line of credit whereby the Company can borrow
up to $3,000,000. The loan bears interest at Prime plus 4% which is reduced by
1% annually if the Company meets certain performance benchmarks, matures on
March 31, 2000 and is secured by virtually all of the Company's assets. At
December 31, 1997, the Company had borrowed approximately $2.3 million under
this Agreement.

         Management believes the Company has sufficient liquidity because of its
existing stream of contractual lease payments, its current working capital, and
its available borrowings under its $3 million normal course debt financing to
maintain its planned activities in 1998. However, the Company may seek
additional debt or equity financing to facilitate expansion opportunities and
potential acquisitions or for contingencies. See Note 10 for potential other
matters which could affect the Company's liquidity.

         PRINCIPLES OF CONSOLIDATION   The consolidated financial statements
include the accounts of the Company and all majority owned subsidiaries after
elimination of all significant inter-company balances and transactions.
Investments of 50 percent or less in affiliated companies are accounted for on
the equity method.

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

         CASH AND CASH EQUIVALENTS   Cash equivalents consist of highly liquid
investments purchased with original maturities of three months or less and which
are readily convertible into cash.

         Included in the Company's cash and cash equivalents balance at December
31, 1996 is approximately $469 thousand of cash collected by the Company under
its "Super Agent" DCR programs. The Company acts as trustee over the cash until
it is distributed to the venture partners on a monthly basis. The Company has
recorded a corresponding payable for these amounts which is included in accounts
payable.

         ACCOUNTS RECEIVABLE   Accounts receivable consists of amounts due to
the Company from its normal business activities. The Company maintains an
allowance for doubtful accounts to reflect the expected uncollectibility of
accounts receivable based on collection history. The Company's concentration of
credit risk related to accounts receivable balances is limited due to the
geographical diversity of customers making up the Company's customer base, thus
spreading the credit risk. Bad debt expense was $62 thousand and $83 thousand in
1997 and 1996, respectively.

                                       20

<PAGE>

         Included in accounts receivable are unbilled receivables representing
amounts billable in accordance with specific contract terms. Substantially all
unbilled receivables at December 31, 1997 are expected to be collected within
one year.

         INVENTORIES   Inventories include the cost of material, direct labor,
manufacturing overhead, parts and supplies, and terminals assembled or in the
process of assembly. Inventories are stated at the lower of cost, on a first-in,
first-out basis or market.

         PROPERTY, PLANT AND EQUIPMENT   Property, plant and equipment are
stated at cost. Depreciation is provided using the straight-line method, over
estimated useful lives of 2 to 10 years. Maintenance and repairs are expensed as
incurred.

         REVENUE RECOGNITION AND SIGNIFICANT CUSTOMERS    Revenues from terminal
sales are recognized when terminals are shipped or installed in accordance with
the terms of specific contracts.

         Revenues from sales-type leases are recognized at the present value of
the future minimum payments for terminals, when such terminals are installed.
The difference between the total future minimum payments plus the residual value
of the equipment and the present value of such amounts is recorded as unearned
income and amortized over the term of the lease so as to produce a constant rate
of return. Any unearned income is recognized immediately upon the sale of the
associated lease receivable.

         The Company also leases products under leases accounted for as
operating leases. Terminals under operating leases are recorded net of
accumulated depreciation. Income from operating leases is recognized as rentals
become receivable according to provisions of the leases.

         Revenues arising from the sale of service and maintenance contracts are
recognized ratably over the terms of the individual contracts. Any estimated
losses on such contracts are charged to operations when identified.

         The Company's 1997 revenues include ITR sales and service to the state
lottery of Virginia, to the state lottery of Illinois, and to a DCR customer,
Solutioneering, a telecommunications industry company that markets prepaid phone
cards. Revenues from each of these customers individually exceeded 10% of total
revenues in 1997 and in total comprised 56% of total revenues in 1997. Amounts
receivable from these customers represented 44% of accounts receivable as of
December 31, 1997. The Company's 1996 revenues include ITR sales and service to
the state lottery of Illinois and to a DCR customer, Fone America. Revenues from
each of these customers individually exceeded 10% of total revenues in 1996 and
in total comprised 37% of total revenues in 1996. Amounts receivable from these
customers represented 13% of accounts receivable as of December 31, 1996.

         One of the Company's principal customers has generated a significant
long term lease receivable with the Company and is currently seeking additional
capital to expand its business and to finance past and future equipment leases
from the Company.  Although the Company has received indications that this
financing will in all likelihood be completed, there can be no assurance to
that effect, and the failure of this customer to raise additional capital could
have a material adverse affect on the Company's financial results in 1998.

         RESEARCH AND DEVELOPMENT  Research and development costs are expensed
as incurred.

         INCOME TAXES   Deferred income taxes are recorded to reflect the tax
consequences on future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end. If it is
more likely than not that some portion or all of a deferred income tax asset
will not be realized, a valuation allowance is recognized.

         PER SHARE INFORMATION   In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
128 "Earnings per Share" establishing standards for computing and presenting
Basic Earnings Per Share ("Basic EPS") and Diluted Earnings Per Share ("Diluted
EPS"). Basic EPS is computed on the basis of the weighted average shares of
common stock outstanding plus contingently issuable shares. Diluted EPS is
computed on the basis of weighted average shares outstanding plus contingently
issuable shares and the additional common shares that would have been
outstanding if dilutive potential common shares had been issued, using the
treasury stock method.

         STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123   In October 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation."
SFAS No. 123 requires expanded disclosures for the stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees," which recognizes compensation cost
based on the intrinsic value of equity instrument awarded. The Company elected
to continue to apply APB Opinion No. 25 to its stock based compensation awards
to employees and has disclosed the pro forma effect on net income and earnings
per share.


                                       21

<PAGE>

         FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The following disclosure of estimated fair value was determined by available
market information and appropriate valuation methodologies; however,
considerable judgment is necessary to interpret market data and develop the
related estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts that could be realized upon
disposition of the financial instruments. The use of market assumptions and or
estimation methodologies may have a material effect on estimated fair value
amounts.

         Cash and cash equivalents, accounts receivable, inventories, investment
in sales type leases, accounts payable and accrued expenses carrying cost
reasonably approximates their fair value because of the short maturities of
these investments.

         Other assets are carried at cost or net amortized cost, which, in
management's opinion, is less than fair value.

         The Company believes that the carrying amount of its outstanding notes
payable at December 31, 1997 and 1996 is a reasonable estimate of their fair
value. This was determined based on a review of borrowing rates available to the
Company at December 31, 1997 and 1996 for loans with similar terms and average
maturities.

         The Company periodically assesses its ability to recover the carrying
value of its long-lived assets. If management concludes that the carrying value
will not be recovered, an impairment write down is recorded to reduce the asset
to its estimated fair value.


2.       OTHER FINANCIAL DATA   Following are details concerning certain
balance sheet accounts as of December 31, 1997 and 1996 (in thousands):

                                                  1997               1996
                                              ------------       ------------
     Accounts receivable:
     Trade billed                                   $1,861            $1,238
     Trade unbilled                                    394               292
                                               ------------      ------------
                                                     2,255              1530
     Less allowance for doubtful accounts             (294)             (196)
                                               ------------      ------------
               Total                                $1,961            $1,334
                                               ============      ============

     Inventories:
     Materials                                      $1,844            $1,840
     Work-in-process                                   220               345
     Finished goods                                    640               272
                                               ------------      ------------
               Total                                $2,704            $2,457
                                               ============      ============

     Property, plant and equipment:
     Computers and equipment                        $1,162            $1,405
     Furniture and fixtures                            332               332
     Tooling                                           324               308
     Building and improvements                          37                35
                                               ------------      ------------
                                                     1,855             2,080
     Less accumulated depreciation                  (1,273)           (1,255)
                                               ------------      ------------
               Total                                  $582              $825
                                               ============      ============

     Other assets:
     Patents                                          $677              $677
     Software development costs                        268               268
     Deposits                                          628               720
     Other                                             136                 3
                                               ------------      ------------
                                                     1,709             1,668
     Less accumulated amortization                    (941)             (879)
                                               ------------      ------------
                Total                                 $768              $789
                                               ============      ============

3.       NOTES PAYABLE   Notes payable at December 31, 1997 and 1996 consists
of notes aggregating $2,648 thousand and $1,025 thousand, respectively. The
notes bear interest at rates ranging from 0% to 15%. Included in notes payable
is a Loan and Security Agreement entered into by the Company on May 5, 1997 for
a revolving line of credit whereby the Company can borrow up to $3 million. The
loan bears interest at prime plus 4% which is reduced by 1% annually if the
Company meets certain performance benchmarks, matures on March 31, 2000 and is
secured by virtually all of the Company's assets. At December 31, 1997, the
Company had borrowed approximately $2.3 million under this Agreement.


                                       22

<PAGE>

         Future principal payments on notes payable as of December 31, 1997, are
as follows (in thousands):

Year ending December 31,

         1998                                $ 277
         1999                                  104
         2000                                2,267
                                           -------
                                           $ 2,648
                                           =======

4.      OTHER LIABILITIES   Other liabilities at December 31, 1997 and 1996
included $757 thousand and $939 thousand, respectively, of various accrued
expenses payable at dates beyond December 31, 1998 and 1997, respectively.

5.      OPERATING LEASES   The Company leases certain of its vending
terminals to customers under agreements accounted for as operating leases. The
net investment in vending terminals held under operating leases at December 31,
1997 and 1996 consisted of approximately $5.1 million and $3.9 million,
respectively, less accumulated depreciation and reserves of approximately $2.4
million and $1.5 million at December 31, 1997 and 1996, respectively.

         Approximate future minimum lease payments receivable by the Company
under operating leases as of December 31, 1997, are as follows (in thousands):

Year ending December 31,

         1998                               $2,936
         1999                                1,116
         2000                                  147
                                           -------
                                            $4,199
                                           =======

6.        SALES-TYPE LEASES   The Company leases certain of its vending
terminals under agreements accounted for as sales-type leases. Included in
product sales are approximately $5 million and $3 million of revenues related to
sales-type leases for the years ended December 31, 1997 and 1996, respectively.
These non-cancelable leases expire over the next one to five years.
<TABLE>

         The following lists the components of the net investment in sales-type
leases as of December 31, 1997 and 1996 (in thousands):
<CAPTION>

                                                             1997            1996
                                                         ------------    ------------
   <S>                                                        <C>             <C>
   Total minimum lease including service payments to
      be received                                             $9,453          $9,358
   Less amounts representing estimated executory
     costs, including profit                                    (830)         (3,537)
                                                         ------------    ------------
   Net minimum lease payments receivable                       8,623           5,821
   Estimated unguaranteed residual value                       1,071           1,839
   Less unearned interest income                              (2,418)         (1,013)
   Less reserves for sales-type leases                          (274)         (1,252)
                                                         ------------    ------------
   Net investment in sales-type leases                        $7,002          $5,395
                                                         ============    ============
</TABLE>

         Future minimum lease including service payments due from customers
under sales-type leases as of December 31, 1997, are as follows (in thousands):

Year ending December 31,

         1998                             $3,107
         1999                              2,534
         2000                              1,950
         2001                              1,220
         2002                                642
                                         --------
                                          $9,453
                                         ========


                                       23

<PAGE>

         The amortization of unearned income for sales-type leases amounted to
approximately $458 thousand and $842 thousand for the years ended December 31,
1997 and 1996, respectively, which is included in interest income.

7. LEASE FINANCING...During 1996 the Company's financing efforts included the
sales of leases for which the Company received approximately $1.3 million. The
sale of these leases resulted in a losses of $34 thousand in 1996, which is
included in the "other" category of other income (expense). The security
agreement with MLC Group, Inc. ("MLC"), purchaser of the leases, provides a
security interest in collateral relating to the specific state lottery lease
contracts for leases sold to MLC.


8. INCOME TAXES Following is a reconciliation of the income tax benefit expected
(based on the statutory federal income tax rate) to the actual income tax
provision recorded (in thousands):
<TABLE>
<CAPTION>

                                                                          1997              1996
                                                                      ------------      ------------
      <S>                                                                   <C>                <C>
      Tax benefit (expense) computed at the statutory federal
          rate of 34%                                                       $(547)             $(49)
      State income tax benefit, net of federal income tax effect              (95)              (11)
      Expenses not deductible for income tax
          purposes                                                             (9)              (13)
      Change in valuation allowance for
          deferred income tax assets                                          615                73
                                                                      ------------      ------------
      Provision for income taxes                                             $(36)              $ -
                                                                      ============      ============
</TABLE>
<TABLE>
<CAPTION>

         Deferred income tax assets and the related valuation allowance as of
December 31, 1997 and 1996, result from the following temporary differences:

                                                                          1997              1996
                                                                      ------------      ------------
      <S>                                                                   <C>               <C>
      Net operating loss carryforwards                                     $1,638            $2,803
       Inventory and other reserves                                         4,412             2,666
      Valuation allowance                                                  (6,050)           (5,469)
                                                                      ------------      ------------
      Net deferred income tax assets                                          $ -               $ -
                                                                      =============     ============
</TABLE>

         Management believes future taxable income of the Company may be
adequate to utilize a portion of the Company's net operating loss carryforwards
and realize a portion of the related deferred income tax asset. However, due to
significant losses for income tax reporting purposes in 1996 as well as the
other issues currently being addressed by the Company, management has concluded
that a valuation allowance is needed to reduce the carrying value of deferred
income tax assets to zero.

         At December 31, 1997, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $4.6 million available to
offset future federal taxable income which expire during the years 2011 and
2012.


9.       SHAREHOLDERS' EQUITY

         PREFERRED STOCK   The Company is authorized to issue up to two million
shares of preferred stock without further shareholder approval; the rights,
preferences and privileges of which would be determined at the time of issuance.

         STOCK OPTION PLANS   The Company has employee option plans whereby
options to purchase 1,972,500 shares of the Company's common stock may be
granted to certain employees, and an option plan for directors under which
options for 525,000 shares of the Company's common stock may be issued to
directors of the Company.

         The Company has three fixed option plans which reserve shares of common
stock for issuance to executives, key employees and directors. The Company has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
for the stock option plans. Had compensation for the Company's three stock
option plans been determined based on the fair value at the grant date for
awards in 1997 and 1996 consistent with the provisions of SFAS No. 123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:

                                       24

<PAGE>
<TABLE>
<CAPTION>

                                   1997                                     1996
                           Net               Per Share               Net           Per
                        Earnings         Basic     Diluted        Earnings        Share
                        --------         -----     -------        --------        -----
    <S>                  <C>             <C>         <C>            <C>           <C>
    As Reported          $1,572          $0.17       $0.15          $135          $0.02
                         ======          =====       =====          ====          =====

    Pro Forma            $1,321          $0.15       $0.12          $100          $0.01
                         ======          =====       =====          ====          =====
</TABLE>

         In 1997 the fair value of options granted is estimated as approximately
$391 thousand on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for the grants; dividend
yield of 0%; forfeiture rate of 26%; expected volatility of 70%; risk free
interest rate of 5.69%; and expected lives of 1.77 years. In 1996 the fair value
of options granted is estimated as approximately $168 thousand on the date of
the grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants; dividend yield and forfeiture rate
of 0%; expected volatility of 69.93%; risk free interest rate of 5.94%; and
expected lives of 2 years.

         In January 1997, three consultants were granted options to purchase a
total of 30,000 shares of the Company's common stock at $.90 per share. 25,000
shares vested in 1997 and the remaining 5,000 shares will vest in 1998. In
October 1995, pursuant to an agreement, a former officer was granted an option
to purchase 50,000 shares of the Company's common stock at $2.00 per share. This
option vested on the date of grant. In October 1994, pursuant to an agreement,
an officer of the Company was granted an option to purchase 100,000 shares of
the Company's common stock at $7.45 per share. This option vested on the date of
the grant.
<TABLE>

         Information regarding these option plans for 1997 and 1996 follows:
<CAPTION>

                                                1997                                    1996
                                                     Weighted Average                         Weighted Average
                                         Shares       Exercise Price              Shares       Exercise Price
                                      --------------------------------         ---------------------------------
<S>                      <C>           <C>                <C>                   <C>                <C>
  Outstanding at January 1             1,171,577          $2.21                   796,585          $7.54
  Granted                                367,080           1.13                   890,000            .80
  Exercised                              (25,000)          1.00                     --               --
  Forfeited                             (233,277)          4.83                  (515,008)          8.03
                                      -----------                              -----------
  Outstanding at December 31           1,280,380           1.63                 1,171,577           2.21
                                      ===========                              ===========

<CAPTION>

<S>                                         <C>                                      <C>
Option price range, December 31             $.80 - $7.54                             $.80 - $7.86
Options available for grant, December 31       1,372,120                                1,475,923
</TABLE>

Options granted in 1996 included 870,000 shares issued at $.80 per share to
Frederick Sandvick, the Company's Chief Executive Officer and Chairman of the
Board of Directors, pursuant to a three year employment agreement.
<TABLE>

         The following table summarizes information about fixed-price stock
options outstanding at December 31, 1997:
<CAPTION>

            Shares                 Options                 Exercise               Remaining
         Outstanding             Exercisable               Price ($)             Life (Years)
       -----------------         -----------             -----------             ------------
<S>        <C>                     <C>                    <C>    <C>                <C> <C>
           50,000                  50,000                     2.00                    1
           30,000                  25,000                      .90                    2
           60,000                  20,000                 1.00 - 2.44               2 - 3
          170,380                  31,190                      .90                    3
          100,000                 100,000                     7.54                    7
          870,000                 580,000                      .80                    8
</TABLE>


                                       25

<PAGE>


         STOCK WARRANTS   In January 1997, the Chief Executive Officer of the
Company, received a warrant to purchase 500,000 shares of the Company's Common
Stock at $.63 per share pursuant to his personal guaranty and indemnity in
connection with a $2,000,000 performance bond. The warrant has a five year term
and became exercisable in January 1997. In January 1997, Vanguard Strategies,
Inc. ("VSI") received a warrant to purchase 250,000 shares of the Company's
Common Stock at $.72 per share pursuant to a consulting agreement entered into
with the Company. The warrant has a five year term and became exercisable in
January 1997. In 1996, solely as compensation and not with respect to any
recapitalization, the Company issued warrants to purchase 865,000 shares of the
Company's common stock at prices ranging from $.60 - $.69 for terms of one to
five years. VSI received 700,000 of these warrants pursuant to an agreement with
the Company under which VSI, as exclusive consultant, assisted the Company in
negotiating financing arrangements. The Company's Chief Executive Officer and
Chairman of the Board of Directors, is the president and principal stockholder
of VSI. The Company recognized $80 thousand of compensation expense related to
the 1996 VSI warrants.

10.      COMMITMENTS AND CONTINGENCIES

         PURCHASE AND LEASE COMMITMENTS   As of December 31, 1997 and 1996, the
Company had purchase commitments for production materials of approximately zero
and $600 thousand, respectively. Purchases against such commitments were
approximately $600 thousand in both 1997 and 1996.

         The Company leases facilities under operating leases expiring at
various dates through June 1999. Rent expense for such facilities totaled $264
thousand and $199 thousand for the years ended December 31, 1997 and 1996,
respectively. Future minimum rentals under noncancelable operating leases as of
December 31, 1997 are $161 thousand and $5 thousand for the years ending
December 31, 1998 and 1999, respectively.

         CUSTOMER DISPUTE   Since 1994, the Company has sought reimbursement
from the California State Lottery ("CSL") for the supply and installation of
out-of-warranty spare parts and related sales tax pursuant to its service
contract. The claim is estimated at more than $1.9 million. The California State
Lottery has refused to honor the claim and has responded with a claim of $1.7
million in liquidated damages for the Company's alleged delay in responding to
service calls in 1994 and 1995. Further, the California State Lottery has
withheld payment of more that $300 thousand in outstanding invoices for products
and services from the Company. The Company contends that the contracts
liquidated damage claim is unenforceable because it is impermissibly punitive,
unconscionable and unrelated to any real damages, if any, experienced by the
California State Lottery for delayed service call responses. The Company notes
that the California State Lottery in September 1995 confirmed that ONPT
manufactured good ITR terminals during the three years of the contract and that
ONPT had been "responsive to CSL needs and concerns and have provided a good
level of service overall." The Company also asserts that the California State
Lottery has significantly limited the Company's cash flow since 1994 by failing
to recognize its spare parts obligation which now totals an estimated $1.9
million and by withholding other payments due to the Company. The Company is
presently examining its legal options and is analyzing how much of its lost
revenues and business opportunities as well as its cash flow problems and stock
price drop are related to the California State Lottery's actions. The Company is
also attempting to negotiate a fair resolution of all claims with the California
State Lottery. To date no legal action has been brought by either party and both
parties are seeking to resolve this matter amicably. No amounts related to this
receivable have been recorded in the accompanying financial statements.

         LEGAL PROCEEDINGS   The Company is a party to legal proceedings in the
ordinary course of its business, the most significant of which is described
below.





                                       26


<PAGE>

         On January 23, 1996, the Company's principal competitor, ILI, filed an
action against the Company in the Common Pleas Court of Hamilton County, Ohio.
The action arises from an agreement in principle between ILI and the Company
which was signed on March 23, 1995. The agreement in principle related to a
proposed merger transaction between ILI and the Company. After certain due
diligence and negotiations, in July 1995 the parties decided not to proceed with
the transaction reflected in the agreement in principle. In the action, ILI
contends that, under the agreement in principle, the Company is responsible to
pay ILI's reasonable fees and expenses in connection with the proposed merger
because the transaction did not proceed due to the Company's actions. In
addition, ILI contends that another provision of the agreement in principle
obligates the Company to pay a "break-up fee" in the event the Company entered
into a "binding commitment to engage in a recapitalization, debt issuance or
working capital financing other than in the ordinary course of business within
one year of the public announcement of such abandonment or termination [of the
proposed merger transaction]." In the action, ILI seeks reimbursement of alleged
fees and expenses of $240 thousand, payment of a break-up fee in the amount of
$989 thousand and reasonable attorney's fees. The Company removed ILI's action
to the United States District Court for the Southern District of Ohio on
February 26, 1996. On March 4, 1996 the Company filed an answer denying all
liability to ILI. The Company also asserted a counterclaim against ILI seeking a
declaratory judgment that the break-up fee has not been triggered under the
terms of the agreement in principle, seeking to recover the Company's own costs
and expenses in connection with the proposed merger agreement and seeking
compensatory damages from ILI for unfair competition and tortuous interference
with business relations. The Company's counterclaim sought compensatory damages
in excess of $500 thousand, plus attorney's fees, costs and reimbursement of the
merger related expenses. In February 1997 the court rendered judgement on behalf
of ILI with regard to certain expenses incurred by it during the merger
negotiations in the amount of approximately $238,000. However, upon motion by
the Company, the court reconsidered this ruling and reversed its ruling that the
Company is legally responsible for fees relating to the merger. Following the
court's ruling, ILI filed another brief requesting the court reconsider its
reversal of the summary judgement on the issue of merger costs. In March 1998,
the court rendered summary judgment on behalf of ILI with regard to the
Company's claims of unfair competition and tortuous interference with business
relations. The Company believes that no amounts are owed by it to ILI under the
agreement in principle. The Company is contesting the lawsuit vigorously and
intends to appeal the court's ruling with regard to its claims of unfair
competition and tortuous interference with business relations.


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

                  None

PART III.

ITEM 9.           DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 10.          MANAGEMENT RENUMERATION AND TRANSACTIONS

ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


         The information required by items 9, 10, 11 and 12 are incorporated by
reference from the 1998 Proxy Statement to by filed with the Securities and
Exchange Commission within 120 days of the end of the fiscal year covered by
this report.



                                       27

<PAGE>
<TABLE>


ITEM 13.      EXHIBITS AND REPORTS ON FORM 8-K AND 8-K/A
a)Exhibits:
  ---------
<CAPTION>

Exhibit Numbers                     Description of Documents
---------------                     ------------------------
<S>                        <C>
  3.1                      Amended and Restated Articles of Incorporation of Registrant (B)
  3.1.1                    Amended and Restated Articles of Incorporation dated March 1, 1993 (D)
  3.1.2                    Certificate of Amendment to Articles of Incorporation dated August 6, 1996 (H)
  3.2                      Restated By-Laws of Registrant (C)
  3.2.1                    Restated By-Laws dated March 1, 1993 and Amendment thereto dated May 27, 1993 (D)
  3.3                      Certificate of corporate status dated August 3, 1993 (D)
  4.1                      Specimen Stock Certificate (C)
  4.2                      Form of Representative's Warrant (C)
 10.1                      Employment Agreement dated July 1, 1991, between Registrant and Robert L.
                                Burr, and the January 11 and April 21, 1993, amendments thereto (A)
 10.2                      Employment Agreement dated July 1, 1991, between Registrant and John F.
                                Winchester, and the April 21, 1993, amendment thereto (A)
 10.3                      ITR Sale and Lease Agreement, dated as of January 12, 1993, between
                                Registrant and the State of Missouri (C)
 10.3.1                    Amendment No.1 to ITR Sale and Lease Agreement between Registrant and
                                the State of Missouri (C)
 10.4                      ITR Sales and Service Agreements dated March 21, 1991 between
                                Registrant and the Commonwealth of Virginia, as amended (C)
 10.5                      ITR Sales Agreement dated August 13, 1992 between Registrant and the
                                California State Lottery, as amended (A)
 10.5.1                    Extension of ITR Sales Agreement between Registrant and the California Lottery (C)
 10.6                      ITR Sale and Lease Agreement, dated as of April 9, 1993, between
                                Registrant and the State of Washington (A)
 10.7                      Form of Indemnification Agreement between Registrant and its officers and directors (C)
 10.8                      1993 Stock Option Plan (A)
 10.8.1                    First Amendment to 1993 Stock Option Plan (C)
 10.9                      Line of Credit Agreement between Registrant and the Bank of America (A)
 10.10                     Technology Transfer Agreement, dated as of April 9, 1993, between
                                Registrant and certain of its shareholders (confidential treatment requested
                                as to certain portions) (B)
 10.11                     Agreement to Purchase and Sale of Assets, dated February 9, 1993, between
                                Registrant, CVS and Michael C. Brown (confidential treatment requested as
                                to certain portions) (B)
 10.12                     Documents relating to purchase of ITR terminals by the Province of Ontario (B)
 10.13                     Stock Option Agreement between Robert L. Burr and the Trust, as amended (C)
 10.14                     Lease with regard to 9190 Activity Road, San Diego, CA premises (D)
 10.15                     1993 Stock Option Plan (D)
 10.16                     1994 Stock Option Plan (E)
 10.17                     1994 Stock Option Plan for Directors (E)
 10.18                     Agreement to acquire 50% of LEI Mexico (E)
 10.19                     Agreement to sell machines to LEI Mexico (E)
 10.20                     John Robinson Note (F)
 10.21                     Employment agreement with Frederick Sandvick (G)
 10.22                     Loan Agreement between Registrant and U.S. Mortgage Bankers Corporation (I)
 10.23                     Employment Agreement with Michael Wright (I)
 10.24                     Loan and Security Agreement between Registrant and Coast Business Credit (J)
 10.25                     Termination of Agreement between Registrant and Vanguard Strategies, Inc. (K)
 24.1                      Power of attorney (reference is made to Page II-5 of the Registration
                                    Statement as originally filed.) (A)
</TABLE>

(A)  Incorporated by reference to Registrant's Registration Statement on Form
          S-2 dated April 23,1993 (Registration No. 33-61442)
(B)  Incorporated by reference to Registrant's Amendment No. 1 to the
          Registration Statement on Form S- 2 filed on June 1, 1993.
(C)  Incorporated by reference to Registrant's Amendment No. 2 to the
          Registration Statement on Form S- 2 filed on June 21, 1993.
(D)  Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
          the year ended December 31, 1993.
(E)  Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
          the year ended December 31, 1994.
(F)  Incorporated by reference to Registrant's Quarterly Report on Form 10-QSB
          for the quarter ended June 30, 1995.
(G)  Incorporated by reference to Registrant's Quarterly Report on Form 10-QSB
          for the quarter ended March 31, 1996
(H)  Incorporated by reference to Registrant's Quarterly Report on Form 10-QSB
          for the quarter ended September 30, 1996
(I)  Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
          the year ended December 31, 1996. (J) Incorporated by reference to
          Registrant's Quarterly Report on Form 10-QSB for the quarter ended
          June 30, 1997.
(K)  Included herein.


b)REPORTS ON FORM 8-K: The Registrant did not file any reports on Form 8-K
during the last quarter for the year for which this report is filed.


                                       28

<PAGE>



                                   SIGNATURES

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

                                   ON-POINT TECHNOLOGY SYSTEMS, INC.


Dated: March 30, 1998              By: /s/  Frederick Sandvick
                                       ---------------------------------
                                       Frederick Sandvick
                                       Chief Executive Officer and
                                       Chairman of  the Board of Directors


Dated: March 30, 1998              By: /s/  Kenneth Hoitt
                                       ---------------------------------
                                       Kenneth Hoitt
                                       Chief Financial and Accounting Officer



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




Dated: March 30, 1998              By: /s/  John H. Olbrich
                                       ---------------------------------
                                       John H. Olbrich, Director


Dated: March 30, 1998              By: /s/  James M. Bouskos
                                       ---------------------------------
                                       James M. Bouskos, Director








                                       29