<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB/A
                                   (Mark One)
   [X] AMENDMENT NO 2 TO THE 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, 1998
                         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)

                        1370 W. San Marcos Blvd, Ste 100
                          San Marcos, California 92069
                     --------------------------------------
             (Address of registrant's executive offices) (Zip Code)
            Former address: 8444 Miralani Drive, San Diego, CA 92126
       Registrant's telephone number, including area code: (760) 510-4900
                     Former telephone number: (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 [ ].

     The Registrant's revenues for fiscal year ended December 31, 1998 were
                                   $14,768,000

       The aggregate market value of the registrant's common stock held by
      nonaffiliates of the Registrant is $18,271,000 as of March 5, 1999.

 The number of shares outstanding of the Registrant's common stock is 10,098,921
                              as of March 5, 1999.
<PAGE>   2
1. DESCRIPTION OF BUSINESS

     Any forward-looking statements in this release are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Act of 1995.
Investors are cautioned that actual results may differ substantially from such
forward-looking statements. Forward-looking statements involve risks and
uncertainties including, but not limited to, continued acceptance of the
company's products and services in the marketplace, competitive factors, new
products and technological changes, the company's successful entry into new
markets, the company's successful transition to its next generation product
line, dependence upon third-party vendors, a limited number of customers,
political and other uncertainties related to customer purchases, and other risks
detailed in the company's periodic filings with the Securities and Exchange
Commission.

     This amendment is filed as a result of a restatement of The Company's 1998
and 1997 financial statements. The Company has determined that long-term leases
made to Solutioneering in 1998 and 1997, originally accounted for as a
sales-type lease, should have been accounted for as operating leases. The leased
vending machines have been included as "Property under lease agreement with
Solutioneering," a non-performing asset in the Company's balance sheet.
Additionally, the Company has added disclosures to provide information regarding
segments in accordance the Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related Information.
The Company has three reportable business segments: Products, Financing and
Service. Certain other reclassifications have also been made to conform to the
new segment reporting. See, LEGAL PROCEEDINGS, MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS herein and Note 8 to
the Financial Statements for a further discussion concerning Solutioneering and
Note 2 to the Financial Statements to view the impact of the restatement on the
1998 and 1997 financial statements.

A. GENERAL

     On-Point Technology Systems, Inc., (the "Company" or "On-Point"), is
headquartered in San Marcos, California and was incorporated in Nevada in March
of 1990. On-Point 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"), and
prepaid phone card vending terminals (the "Debit Card Retailer" or "DCR"). 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 the
Company is starting to expand its marketing efforts to lotteries run by other
foreign governments and their licensees. The DCR terminals are sold or leased
principally to commercial customers in the United States and, to a lessor
extent, to governmental entities and their licensees in Asia and South America.

     During 1996, the Board of Directors appointed Frederick Sandvick, the
current Chief Executive Officer and Chairman of the Board of the Company, to
oversee the development of the new strategic plans. The Company underwent a
right sizing effort during 1996 and 1997, which reduced personnel and overhead
costs and reassigned duties to other personnel to achieve greater efficiencies.
The Company's right sizing enabled the Company to improve operating margins and
dramatically reduce general and administrative expenses.

     During 1998, management assessed that, notwithstanding the efficiencies
achieved due to right sizing, if the Company did not advance its current
products increasing competitive pressures and technological advancements would
likely bring lower margins in 1999 and beyond. Based on this assessment,
management chose to begin investing a significantly larger amount of its
resources in 1998 into the development of what management believes will be the
next generation lottery products. Management focused on the Company's lottery
products first because they believed the lottery market to be the largest, most
stable industry to deploy its products. Management believes that the overall
market for the Company's next generation products is in excess of $200 million
per year worldwide. However, although management believes its next generation


                                       2
<PAGE>   3
products will be well positioned to take advantage of this large lottery market,
there can be no assurances as to the amount of revenues the Company's next
generation lottery products will generate.

     Based on extensive market research, management identified design
specifications for a new generation of lottery products. Research and
development costs were substantially increased from $253 thousand in 1996, to
$582 thousand in 1997 and $1.4 million in 1998. The increase was achieved by
augmenting core engineering staff using onsite contract employees, under Company
supervision and review. Contract employees were used to provide the greater
flexibility and cost control needed for the Company's changing efforts. As a
result of its development efforts, On-Point intends to introduce in 1999 its
next generation lottery products. Its principal products will be: (i) the
Company's next generation automated self-service instant ticket lottery vending
terminal ("PlayPoint"); and (ii) the Company's first automated instant ticket
lottery counter-top dispensing terminal ("CounterPoint"). PlayPoint will provide
advanced electronic, software, communication and dispensing capabilities as well
as new ergonomically designed features to generate increased impulse purchasing.
Management believes PlayPoint will be far superior to the Company's existing ITR
terminal.

     CounterPoint is designed to be the most flexible, automated counter-top
dispensing system available. Although currently no lottery has deployed any
significant number of automated counter-top dispensing systems, management
believes that many of CounterPoint's proprietary features, which were not
previously available to lotteries, will enhance the Company's ability to deploy
this new product to lotteries worldwide. However, although management believes
the lotteries can receive many new benefits from deploying this product, there
can be no assurances that any lottery will order this new product.

     As a result of its focus on its development efforts in 1998 for new
products for the lottery market, the Company did not aggressively market its DCR
or other non-lottery products other than to existing customers. However, the
Company continued to ship DCR terminals to Solutioneering, Inc., a prepaid phone
card company, as they expanded their retail outlets. Solutioneering subsequently
filed for bankruptcy protection in 1999, due to a number of market factors
including their inability raise additional capital needed to support operations.

     Additionally, the Company has also added disclosures to provide information
regarding segments in accordance the Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Company has three reportable business segments: Products,
Financing and Service. A discussion of each segment follows:

B. PRODUCT SEGMENT

     The Company markets, manufactures and sells products to two industry
sectors: (i) State and foreign lotteries and (ii) commercial customers. A
discussion of Company products in each industry sector follows:

(1) LOTTERY PRODUCTS

     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 On-Point.


                                       3
<PAGE>   4
     As of December 1998, lotteries were operated in 38 states, the District of
Columbia and five provinces of Canada. Lotteries are also operated in Europe,
Asia, Central America and South America. 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 approximate 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 continue to 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") 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. During
1998, the Company did not sell its PTR or VTR terminals and, to date, this
market has been limited.

     INSTANT TICKET RETAILER From its inception through December 31, 1998, the
Company had sold or leased approximately 14,000 ITR terminals, of which
approximately 850 were sold or leased during 1998. Since the Company received
its first contract from the State of Virginia in 1991, the Company has since
signed contracts to provide terminals to numerous state lottery customers
including California, Missouri, Washington, Pennsylvania, New York, Illinois,
Connecticut, the Provinces of Ontario and Quebec, and other foreign countries.
An order has been received from the French Lottery, the largest instant ticket
lottery in the world, to provide for up to 2,500 terminals, with an initial
shipment of 500 in 1999. This order provides for up to $10 million in revenue
from 1999 to 2002. The ITR terminals have been placed in supermarkets,
convenience stores, bowling alleys, restaurants with bars, and other locations.
The Company also may enter into service contracts in connection with sales of
ITR terminals pursuant to which it receives monthly maintenance fees (see
"Service Segment" herein).

     ITR 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 and 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). 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. During 1998, the Company began
shipments of its ITR-8500SL terminal, which can vend as many as 15 instant
ticket games in a smaller footprint than its previous 12-game model.


                                       4
<PAGE>   5
     The Company intends to transition the marketing of all its existing models
of ITR terminals to the new PlayPoint technology, once development is completed.
The existing ITR terminals will continue to be marketed to developing countries
in South America and Asia. Management believes PlayPoint will be far superior to
any existing model and, therefore, be the preferred model of choice by the
lotteries in the future. PlayPoint will provide advanced electronic, software,
communication and dispensing capabilities as well as new ergonomically designed
features. PlayPoint will be capable of dispensing both instant tickets and
pull-tab tickets. PlayPoint will also be capable of dispensing up to 20 instant
ticket games, another industry first for dispensing technology; however, no
assurances can be given to the ultimate market acceptance of the new models.

     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 fifteen 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.

(2) COMMERCIAL PRODUCTS

     Currently the only commercial product manufactured and marketed consists of
DCR vending machines, marketed principally for the resale of prepaid phone
cards. The Company is seeking to augment this business with vending machines to
dispense such items as smart cards, credit cards, combination cellular phone and
prepaid phone card dispensing units.

     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. 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


                                       5
<PAGE>   6
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.

     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 1998 the Company expanded its DCR
product line to include 3 and 8 bin terminals in response to the specific
application needs of its customers.

     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". Total foreign DCR sales accounted for $662 thousand in 1998 and $1.1
million in 1997.

     DEBIT CARD RETAILER 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. To date, these terminals have been
placed in many different types of establishments where there is a market for
prepaid phone or debit cards. Company sales of DCR products and services totaled
$660,000 and $1.1 million for the years ended December 31, 1998 and 1997
respectively.

     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 that 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.

     Management believes that the DCR market, much like the lottery ITR market,
has become extremely competitive. In addition, technological advances may modify
the market over the next few years. In 1999 management intends on reevaluating
the potential of the DCR market and determine whether new developments may be
necessary to stay competitive and attain a continuing market share.


                                       6
<PAGE>   7
C. FINANCING SEGMENT

     The Company offers in-house financing for both lottery and commercial
customers under two types of contractual arrangements: Sales-type Lease
Agreements and Operating Lease Agreements.

     Sales-type Lease Agreements Under the typical Sales-type Lease 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.

     Operating Lease Agreements While the Operating Lease Agreements are similar
to the Sales-type Lease Agreements with respect to the Company's installation,
maintenance and service obligations, they are for shorter terms, and ownership
of the terminals remains with the Company after the lease term. The lease amount
may or may not include the monthly maintenance fee. Typically, the lessee is
given the option to extend the leases in one-year increments

D. SERVICE SEGMENT

     The Company currently provides ITR service in the states of: Connecticut,
Delaware, Missouri, New York, Virginia, and Washington, which are provided
through service facilities at its San Marcos, California headquarters and in the
states of Connecticut, Missouri, New York, Virginia and Washington. These
facilities provide installation and relocation services, perform repairs 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.

     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 monitors 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.

     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.

E. SUPPORT

MARKETING AND SALES

     The Company markets its products domestically through an in-house marketing
and sales staff and internationally primarily through distributorships. The
Company solicits interest in its terminals primarily at trade shows and through
direct contact with customers. The initial marketing package consists of product


                                       7
<PAGE>   8
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.

     MARKETING TO LOTTERIES 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.

     MARKETING OF DCR TERMINALS Three distinct groups of potential customers
have been targeted 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, but these customers
normally have limited capital. The Company's future efforts will be limited to
vertical distributorship and joint venture relationships that will increase its
presence in the DCR market place with limited credit exposure; however, there
can be no assurance that the Company will be successful in developing these
relationships.

     INTERNATIONAL MARKETING 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 1998 the Company
delivered terminals to various lotteries and telecommunication service providers
for market testing. Nonetheless, the Company's foreign operations are relatively
small, and no assurance can be provided that a meaningful international market
for the Company's terminals will develop. 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. The Company can terminate
this agreement at its option. 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.

RESEARCH AND DEVELOPMENT

     Research and Development expenditures totaled $1.4 million and $582
thousand in 1998 and 1997,


                                       8
<PAGE>   9
respectively. The 1998 expenditures were primarily directed towards the
development of PlayPoint together with the associated development of the
Company's first counter-top dispenser, CounterPoint. PlayPoint features advanced
electronic, software, communication and dispensing capabilities. The Company
believes that its recently developed dispensing system, which will be
incorporated into PlayPoint and CounterPoint, is the most advanced, space
efficient and cost effective dispenser of instant tickets in the world. In
addition, the PlayPoint cabinet has been ergonomically designed to not only
generate increased impulse purchasing desires, but to fully comply with all ADA
established guidelines.

     Patents have been filed and/or received for PlayPoint's and CounterPoint's
proprietary features. These include:

     On-Line Instant Ticket, Patent 5,772,510 - awarded June 1998 Other patents
     filed in 1997/1998 but still pending:

          -    Helical separator/dispenser, 3345-2170,

          -    ITDS cash voucher system, 3345-2140

          -    PlayPoint designs, 3345-2230

          -    GamePoint design, 3345-2180

          -    CounterPoint Design, 3345-2210

     All of the patents pending have been designed to protect the Company's
proprietary designs from use by competitors. As these products are still
in development, the Company has not yet generated any income from any of patent
applications filed in 1997 or 1998, nor from Patent 5,772,510 awarded in June
1998. None of the patent applications would have a material impact on future
sales, if they were not rewarded. Patent 5,772,510, however, is expected to
become important as the Company begins to market is on-line capabilities in 2000
and beyond.

     None of the Company's research and developments costs were borne directly
by the Company's customers. The Company's research and development department,
augmented by contract employees, 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.

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 Marcos facility. Key
vendors include California Chassis, which currently produces cabinets and Mars,
which provides the majority of the bill acceptors. All components and parts are
available from multiple sources, and the loss of any key vendors would not have
a significant impact on the Company or its operations.

EMPLOYEES

     As of March 1, 1999, the Company had 106 full-time employees, of whom 18
were in executive or administrative positions, 19 in quality control and
production, 3 in research and development, 59 in field service, 6 in the
warehouse and 1 in maintenance. In addition, the Company employed 20 people on a
part-time basis in its field service department. None of the Company's employees
are currently represented by a


                                       9
<PAGE>   10
union, and the Company believes that its relations with its employees are good.

FACILITIES

     The Company occupies approximately 32,000 square feet of space in San
Marcos, California. The premises include office, manufacturing and warehouse
space. The Company currently pays monthly rent of $15,663 for this space. This
lease terminates January 31, 2009. The Company believes that its facilities are
adequate to meet its anticipated needs through the term of the lease.

F. OTHER BUSINESS INFORMATION

     BACKLOG The Company's potential backlog of orders at December 31, 1998
totaled approximately 2,000 ITR's. The backlog consists of contracts awarded,
which determines the pricing for a maximum number of units which may be
purchased over the term of the contract, usually three - five years. 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.

     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, in the Provinces of
Ontario and Quebec and in several other foreign countries. In addition, the
Company generally enjoys repeat or renewal orders from existing customers and is
conducting tests with overseas lottery organizations. Interlott Technologies,
Inc. ("ILI") has sold or leased machines in twenty-two 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 are 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. At present, the Company's principal competitors are
Marketing & Vending Concepts, ILI, VendTek and Opal, in addition a number of
smaller vending machine companies. 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. 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.

     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 1998, revenues from three
customers individually exceeded 10% of total revenues and in total comprised 58%
of total revenues. Revenues from two customers individually exceeded 10% of
total revenues in 1997 and in total comprised 44% of total revenues in 1997. See
Note 1 the Financial Statements.


                                       10
<PAGE>   11
     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.

     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.

ITEM 2. DESCRIPTION OF PROPERTIES

     At March 1, 1999 the Company had the following properties under lease:

Office, manufacturing, R & D and warehouse space in San Marcos, California
Office, repair depot and warehouse space in Syracuse, New York
Office, repair depot and warehouse space in Arnold, Missouri
Office, repair depot and warehouse space in Richmond, Virginia
Office, repair depot and warehouse space in Olympia, Washington

ITEM 3. LEGAL PROCEEDINGS

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


                                       11
<PAGE>   12
     On January 11, 1999, the Company filed an action against Solutioneering,
Inc. in Superior Court of California, County of San Diego. A first amended
complaint of said action was filed on February 9, 1999. The action arises from
the lease to Solutioneering a total of 2,193 prepaid phone card vending
terminals under a March 1, 1995 Master Lease Agreement and two amendments
thereto (the "Agreement"). In the action, the Company asserts that
Solutioneering has breached the Agreement and has claimed damages of
approximately $9 million. The Company's net balance sheet carrying value of the
Solutioneering leased machines at December 31, 1998 is approximately $3.3
million. The Company believes the underlying value of the Company's equipment at
Solutioneering exceeds the carrying value on the Company's books. Solutioneering
subsequently sought bankruptcy protection in 1999 and the Company is pursuing
its claim through the courts.

     On January 23, 1996, the Company's principal competitor, Interlott
Technologies, Inc. ("ILI"), filed a civil action against the Company in the
Common Pleas Court of Hamilton County, Ohio. The action arose from an agreement
in principle between Interlott Technologies, Inc. and the Company, which was
signed on March 23, 1995 regarding a proposed merger transaction. The Company
asserted a counterclaim against ILI seeking declaratory judgment with regard to
certain aspects of the agreement, seeking to recover the Company's own costs and
expenses, and seeking compensatory damages from ILI for certain competition and
torturous interference with business relations. The parties reached a full and
complete settlement of this action on March 4, 1999. No liability was admitted
by either party pursuant to the settlement and the settlement had no material
adverse effect on the Company's results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

None.


                                       12
<PAGE>   13
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, markdowns or
          commissions and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                             1998                                 1997
                                     High              Low                 High           Low
          --------------------------------------------------------------------------------------
<S>                               <C>               <C>               <C>               <C>
          First Quarter           $ 3 13/16         $ 1 3/4           $ 2 1/32          $ 5/8
          Second Quarter          $ 3               $ 1 3/4           $ 3               $ 1 3/16
          Third Quarter           $ 2 1/16          $ 1 9/32          $ 2 13/16         $ 1 5/8
          Fourth Quarter          $ 2 9/16          $ 1               $ 3 1/4           $ 1 5/8
          --------------------------------------------------------------------------------------
</TABLE>


     b) The number of stockholders of record of the Company's common stock, par
value $.01 per share, as of March 5, 1999, was 289. The approximate number of
beneficial shareholders was 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 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 had a
one-year term and 65,000 shares had a two-year term. All of the warrants have
been exercised.

     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.


                                       13
<PAGE>   14
     In May 1997, GMB Capital Partners received a warrant to purchase 45,000
shares of the Company's Common Stock at $2.52 per share in consideration for
facilitating financing for the Company. The warrant as 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 had a one-year term and have been exercised.

     In January 1998, Vanguard Strategies, Inc. and Mr. Robert L. Burr, former
Chairman of the Board and former President and Chief Executive Officer, were
each granted stock options for 50,000 shares of the Company's Common Stock at
$2.88 per share pursuant to an agreement to terminate their respective rights in
the Company's international operations. The options expire on December 31, 2002
and vest 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.

     In April 1998, Darius Anderson and James Bouskos each received an option to
purchase 10,000 shares of the Company's Common Stock at $2.09 per share pursuant
to their appointment as Advisory Directors. The options vest by April 1999 and
expire in April 2001.

     In May 1998, Allan Halladay and Brian Roberts each received an option to
purchase 50,000 shares of the Company's Common Stock at $2.09 per share pursuant
to their assignment of certain intellectual property to the Company. The options
vest the earlier of April 1, 2001 or upon the satisfaction of certain
performance conditions. The options expire on December 31, 2001.

     In July 1998, Coast Business Credit received a warrant to purchase 10,000
shares of the Company's Common Stock at $1.63 per share pursuant to an amendment
to a financing agreement entered into with the Company. The warrant became
exercisable in July 1998 and expires on July 5, 2000, as amended.

     In September 1998, Elizabeth Williams received an option to purchase 5,000
shares of the Company's Common Stock at $1.66 per share pursuant to a consulting
agreement entered into with the Company. The option vests over 2 1/2 years and
expires on September 30, 2003.

     In October 1998, Robert Burr received an option to purchase 50,000 shares
of the Company's Common Stock at $2.00 per share pursuant to his consulting
agreement with the Company. The option vests on March 31, 2001, or earlier, if
certain conditions are met. The option expires on September 30, 2001.

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

     GENERAL The Company's revenues through 1998 have been generated from (i)
sales of vending terminals (ii) operating leases of vending terminals, (iv)
financing income from sales-type leases, (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


                                       14
<PAGE>   15
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 over the past two years through its line of credit, as well as through
its existing cash flow and equity financing.

     RESTATEMENT Subsequent to the issuance of the 1998 financial statements,
the Company determined that long-term leases of vending machines to
Solutioneering, Inc. should have been recorded as operating leases, rather than
as sales type leases. In 1997, the Company and Solutioneering entered into a
long-term lease arrangement pursuant to which the Company furnished
Solutioneering with 2,033 vending machines during 1997 and 1998, including 1,198
refurbished machines that had been previously returned to the Company from
another DCR customer, Fone America. The Company's management has concluded that
based on the financial condition of Solutioneering at the inception of the
lease, the lease should have been accounted for as an operating lease, as the
collectibility of the lease payments was not reasonably predictable.

     Revenues previously recorded as sales-type transactions of $1.9 million in
1998 and $3.5 million in 1997, have been reversed, the leased equipment has been
capitalized, depreciation is being taken over the estimated useful life of the
assets, and operating lease revenue has been recorded only to the extent of cash
receipts from Solutioneering of $205 thousand in 1997. The net impact of all
adjustments to Solutioneering was a decrease in net income of $2.1 million in
1998 and $1.4 million in 1997. The Company's net balance sheet carrying value of
the Solutioneering leased machines at December 31, 1998 is approximately $3.3
million. The net assets have been separately classified as "Property under lease
agreement with Solutioneering" as a non-current asset, since the assets are
non-performing and are not available for sale or lease. See also Note 8 to the
Financial Statements.

     In addition, the Company has reclassified $855 thousand in 1998 and $284
thousand in 1997 from cost of sales to selling, general and administrative
expense as amounts representing bad debt expenses. Interest income, attributable
to sales-type lease financing, of $330 thousand in 1998 and $123 in 1997 was
also reclassified from other (income) expenses to revenues.

     Additionally, the Company has applied the provisions of SFAS 123,
"Accounting for Stock Based Compensation" to options and warrants granted to the
Chief Executive Officer and to Vanguard a company wholly owned by him, for
transactions not related to normal employee duties and to options and warrants
granted to other outside parties in fiscal years 1996 through 1998. The
additional expense in 1998 and 1997 was $120 thousand and $197 thousand,
respectively, of which $70 thousand and $161 thousand, respectively, were
attributable to grants to the Chief Executive Officer, including Vanguard
Securities (See Note 12 of the Financial Statements).

     The Company has also added its disclosures to provide information
regarding segments, and has provided disclosures for three reporting segments:
Products, Financing and Service. Segment reporting is included as Note 3 of the
Financial Statements.

     As a result, the 1997 and 1998 financial statements have been restated from
amounts previously reported to properly reflect these transactions,
reclassifications and disclosures.

     The effects of the restatement are presented in Note 2 of the Financial
Statements and have been reflected herein.

     1998 COMPARED TO 1997 The 1998-1997 comparison is based, where applicable,
on segment reporting, which is included as Note 3 to the Financial Statements.
1998 revenues increased by approximately $534 thousand or 4% from 1997, due to
(1) a $140 thousand decrease in product sales resulting


                                       15
<PAGE>   16
from a decrease in the number of units sold and (2) a $701 thousand increase in
service revenue resulting from an increase in both volume and price due to new
contracts and existing contract renegotiations. The product mix among segments
sectors is dependent upon new product orders received, which may vary from year
to year, based on which lotteries place new requests for bid and on the
Company's competitive success.

     Cost of sales, as a percentage of sales, decreased by 1% from 69% in 1997
to 68% in 1998 due to the following: (1) product cost of sales as a percentage
of revenues decreased 10% from 73% in 1997 to 63% in 1998 due primarily to a
change in the mix of products sold; (2) financing cost of sales increased 8%, as
a percentage of revenues, from 33% in 1997 to 41% in 1998 due primarily to the
decrease in revenue recognized during 1998 as compared to 1997 and the increase
in depreciation expense incurred on the Property under lease agreement with
Solutioneering; and (3) service cost of sales decreased 2% as a percentage of
revenues from 96% in 1997 to 94% in 1998 due to a combination of renegotiated
contract pricing and as a result of the preventative maintenance program
initiated in 1997. Management anticipates that 1999 margins will continue to be
lower as a result of increased competitive pressures on bid prices.

     Based on the above, gross profit increased by $313 thousand, from $4.4
million in 1997 to $4.7 million in 1998. The Company has invested in its next
generation lottery products, intended to produce higher margins. However, no
assurances can be given that higher margins will be achieved.

     Operating expenses, as a percentage of sales, increased by 7 % as a result
of the following: (1) a $823 thousand increase in research and development.
Research and development activities increased although the number of personnel
decreased, as a majority of the work was performed by contracted services; and
(2) a $352 thousand increase in provision for doubtful accounts. The Company
anticipates continued increased development efforts until the introduction of
its next generation lottery products in 1999. Thereafter, the extent of its
development efforts will depend on management's evaluation of the positioning of
its other products. Bad debt expenses $206 thousand and $284 thousand from Fone
America in 1998 and 1997, respectively, and $649 thousand from US Telecard in
1998, relating to sales made in prior years. Additional detail on Fone America
is included in Note 8 to the Financial Statements.

     As a result of the above factors, the Company incurred a loss from
operations of $130 thousand in 1998, a decline of $915 thousand from 1997's
operating income of $785 thousand.

     Total other expense decreased by $324 thousand in 1998 due to (1) lower
interest expense resulting from the payoff of various notes payable during the
year and (2) a $143 thousand reduction in costs associated with the disposal of
fixed assets in 1997 that did not occur in 1998.

     As a net result of the above-described factors, the Company incurred a net
loss of $404 thousand in 1998, versus net income of $171 in 1997, a decrease of
$575.

     LIQUIDITY AND CAPITAL RESOURCES In 1998, the Company generated
approximately $1.1 million of net cash from operating activities which was used
in combination with the $2.2 million provided by financing activities to finance
$3.5 million in investing activities. In 1997, the Company generated
approximately $2.4 from financing activities that was used to provide $2.3
million for investing activities. Working capital was approximately $4.1 million
at December 31, 1998 an increase of approximately $2.5 million over the
approximate $1.6 million at December 31, 1997. The increase in working capital
included an increase in accounts receivable of $1.1 million, the net investment
in the current portion of sales-type leases of $700 thousand and inventories of
$200 thousand and a decrease in accrued expenses of $500 thousand. The
receivable increase was due primarily to a $1.1 million product sale in November
and December, 1998 to the State Lottery of Virginia.

     The Company completed an equity financing and a debt financing during the
second quarter of 1997. The equity financing, representing a private placement
of $800 thousand of equity Units, was subsequently registered with the SEC. The
Units consisted 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

                                       16
<PAGE>   17
investment. Each Class A Warrant was 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 is exercisable to purchase one share of Common Stock at a price of $2.00
per share expiring March 18, 1999. Net proceeds to the Company from the private
placement approximated $684 thousand in 1997. The Company received an additional
$911 thousand in cash in 1998 from the exercise of warrants from the private
placement.

     On May 5, 1997, the Company entered into a Loan and Security Agreement for
a revolving line of credit whereby the Company could borrow up to $3 million.
Such agreement was amended on July 7, 1998 to increase the borrowing limit to $5
million. The loan bears interest at prime plus 2%, which is reduced by .5%
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, 1998, the Company had borrowed approximately $3.9 million under this
Agreement. There were no covenants as of December 31, 1997. As of December 31,
1998 the line requires the Company to maintain a minimum of $5.5 million of
equity, as defined. The Company was in compliance with this debt covenant at
December 31, 1998.

     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 $5 million debt financing to maintain its
current level of operations. However, in order to accommodate recent contract
awards from the French, Missouri, Illinois and California lotteries for up to
6,000 ITR's with a potential value of $28 million over the next three years,
together with other growth related opportunities in 1999 and beyond, the Company
plans to seek additional financing during 1999. The initial order under these
contracts is projected at $7 million.

     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 that have a surplus of funds available prior to year-end may
accelerate their purchases of new equipment, while states that experience a
shortage of funds available may delay their purchases until the next fiscal
year.

     YEAR 2000 COMPLIANCE The Year 2000 computer issue creates potentially
significant risks for the Company. If ITR or DCR terminals that the Company
supplies to customers or management information systems that the Company uses
internally do not correctly recognize and process date information beyond the
year 1999, there could be an adverse impact on customers' and/or the Company's
operations. The Company is actively managing its program to assess the
capability of its ITR and DCR products and its interfaces to customer systems to
handle the Year 2000. With respect to customer systems, the major challenge for
the Company in remediating the Year 2000 issue is the coordination that is
required with customers, suppliers and employees. The Company has established a
Year 2000 project team and a program office at its corporate headquarters, made
up of dedicated and shared resources, to provide the guidance and support
necessary to accomplish the Year 2000 initiative. The Company's Year 2000
program consists of the following phases:

     -    The inventory phase consists of compiling a comprehensive list of
          software and hardware technologies in use by the Company. This phase
          is complete.

     -    The assessment phase consists of determining the compliance status of
          each technology identified in the inventory phase and of contacting
          key vendors and customers to determine any unresolved problems. This
          phase is complete.

     -    The planning phase consists of developing plans to upgrade hardware
          and/or software to Year 2000 compliance and of developing alternative
          processing due to any key vendor and customer unresolved Y2K problems.
          This phase is complete.


                                       17
<PAGE>   18
     -    The implementation phase consists of executing the tasks identified in
          the planning phase. This phase is complete.

     -    The quality assurance phase consists of testing and validating systems
          replaced or modified as part of the implementation phase. This phase
          will be completed concurrently as new chips are put in service at
          customer sites and are scheduled for completion by the end of November
          1999.

     -    The special case phase consists of developing and implementing
          specific plans for any Year 2000 issues that cannot be handled by the
          previous phases. This phase will include monitoring each site for
          change control, contingency planning, monitoring vendor compliance
          issues and other matters that may arise. This phase is scheduled to
          start in September 1999.

     The Company is actively working with and seeking to enlist the cooperation
of its customers to ensure integration with their systems and telecommunications
networks. The Company is also actively working with critical suppliers of
products and services to determine that the suppliers' operations and the
products and services they provide are Year 2000 capable. This is an ongoing
process.

     The majority of the internal management information systems in use by the
Company (including Fourth Shift accounting software, Novell and various
Microsoft products) have received year 2000 certification from the Information
Technology Association of America. During 1998 the Company tested its central
network system hardware and software as well as the hardware and software of
each of its computer workstations. As a result, minor expenditures, under $25
thousand total cost, have been made to upgrade certain computer hardware, PC
software and fax equipment to make them year 2000 compliant. The Company
believes that it will be Year 2000 compliant with respect to its existing
computer hardware, software and fax equipment by the end of November 1999 and,
therefore, believes that potential risks, including any potential third party
risks, relating to year 2000 issues to be minimal. The Company's telephone
system was not year 2000 compliant at December 31, 1998 and was upgraded in
March 1999 at a cost of $13 thousand.

     The contingency plan consists of identifying alternates based on a worse
case scenario, including identifying alternative MIS processing sites and field
service routines to address potential customer problems.

     Year 2000 issues could have a significant impact on the Company's
operations and its financial condition and results if unforeseen needs or
problems arise, or systems operated by third parties are not Year 2000
compliant. Based on currently available information, management does not believe
that the Year 2000 matters discussed above will cause significant operational or
financial problems for the Company; and that the risks of any Y2K problems, if
any, will be minimized by the Company's contingency plans, however there can be
no assurance that this will be the case.

ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS

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


                                       18
<PAGE>   19
                          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. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the two years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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 consolidated financial statements present fairly, in all
material respects, the financial position of On-Point Technology Systems, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1998 in conformity with accounting principles generally accepted in
the United States of America.

As discussed in Note 2, the accompanying 1998 and 1997 consolidated financial
statements have been restated.


Deloitte & Touche LLP
San Diego, California
March 25, 1999 (except for the effects of matters disclosed in Note 2, as to
which the date is March 15, 2000)


                                       19
<PAGE>   20
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997



<TABLE>
<CAPTION>
                                                                                                    1998              1997
                                                                                                    ----              ----
              Assets     Thousands of dollars, except share amounts                        (As restated -  See Note 2)
<S>                                                                                              <C>               <C>
              Cash and cash equivalents                                                          $    129          $    273
              Accounts receivable, net                                                              2,744             1,644
              Inventories                                                                           3,143             2,933
              Net investment in sales-type leases                                                   1,586               872
              Other current assets                                                                    122                88
              -------------------------------------------------------------------------------------------------------------
              Total current assets                                                                  7,724             5,810
              -------------------------------------------------------------------------------------------------------------
              Plant, property and equipment, net                                                      422               582
              Net investment in sales-type leases                                                   2,723             2,423
              Property under operating leases, net                                                  1,852             2,575
              Property under lease agreement with Solutioneering, net                               3,255             2,644
              Other assets                                                                            368               768
              -------------------------------------------------------------------------------------------------------------
              Total assets                                                                       $ 16,344          $ 14,802
              ==============================================================================================================
              Liabilities and shareholders' equity
              -------------------------------------------------------------------------------------------------------------
              Accounts payable                                                                   $  1,190          $  1,118
              Current portion of long term debt                                                       104               277
              Accrued expenses                                                                      2,372             2,862
              -------------------------------------------------------------------------------------------------------------
              Total current liabilities                                                             3,666             4,257
              -------------------------------------------------------------------------------------------------------------
              Long-term debt                                                                        3,872             2,371
              -------------------------------------------------------------------------------------------------------------
              Shareholders' equity:
                     Preferred stock, no par value, 2,000,000 shares
                         Authorized, no shares issued or outstanding                                   --                --
                     Common stock, $.01 par value, 20,000,000 shares
                         Authorized, 10,094,826 and 9,421,255 shares issued and                       101                94
                         outstanding,  respectively
                     Additional paid-in capital                                                    31,256            30,227
                     Accumulated deficit                                                          (22,551)          (22,147)
              -------------------------------------------------------------------------------------------------------------
              Total shareholders' equity                                                            8,806             8,174
              -------------------------------------------------------------------------------------------------------------
              Total liabilities and shareholders' equity                                         $ 16,344          $ 14,802
              ==============================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       20
<PAGE>   21
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997



<TABLE>
<CAPTION>
                                                                                            1998             1997
                                                                                            ----             ----

                                                                                         (As restated - See Note 2)
               THOUSANDS OF DOLLARS/SHARES, EXCEPT PER SHARE AMOUNTS
               --------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>               <C>
               Revenues                                                                   $ 14,768          $14,234
               Cost of sales                                                                10,044            9,823
               --------------------------------------------------------------------------------------------------------
               Gross profit                                                                  4,724            4,411
               --------------------------------------------------------------------------------------------------------
               Operating expenses:
                    Selling, general and administrative                                      3,449            3,044
                    Research and development                                                 1,405              582
               --------------------------------------------------------------------------------------------------------
               Total operating expenses                                                      4,854            3,626
               --------------------------------------------------------------------------------------------------------
               Income (loss) from operations                                                  (130)             785
               --------------------------------------------------------------------------------------------------------
               Other expenses:
                    Interest expense                                                           237              418
                   Other                                                                        17              160
               --------------------------------------------------------------------------------------------------------
               Total other expenses                                                            254              578
               --------------------------------------------------------------------------------------------------------
               Income (loss) before provision for income tax                                  (384)             207
               Provision for income taxes - current                                             20               36
               --------------------------------------------------------------------------------------------------------
               Net income (loss)                                                          $   (404)         $   171
               ========================================================================================================

               Earnings per share:
                    Basic:
                                 Earnings (loss) per share                                ($  0.04)         $  0.02
               ========================================================================================================
                                 Weighted average shares                                     9,882            9,011
               ========================================================================================================
                    Diluted:
                                 Earnings (loss) per share                                ($  0.04)         $  0.02
               ========================================================================================================
                                 Weighted average shares and assumed
                                 conversions                                                 9,882           10,850
               ========================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements


                                       21
<PAGE>   22
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997






<TABLE>
<CAPTION>
                                                                                    (As restated - See Note 2)
                                                              -----------------------------------------------------------------
                                                                       Common Stock           Additional
             Thousands shares/dollars                          --------------------------      Paid-in     Accumulated
                                                                   Shares        Amount        Capital       Deficit     Total
             ------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>            <C>           <C>          <C>           <C>
             BALANCE, JANUARY 1, 1997                              8,187          $82         $ 29,157      ($22,318)    $6,921
             ------------------------------------------------------------------------------------------------------------------
             Issuance of common stock, net of $116
                  issuance costs                                   1,067           11              673                      684
             Exercise of stock warrants                              142            1              100                      101
             Exercise of stock options                                25                            25                       25
             Issuance of stock options and warrants
                  for services provided                                                            272                      272
             Net income                                                                                          171        171
             ------------------------------------------------------------------------------------------------------------------
             BALANCE, DECEMBER 31, 1997                            9,421           94           30,227       (22,147)     8,174
             ------------------------------------------------------------------------------------------------------------------
             Exercise of stock warrants                              669            7              904                      911
             Exercise of stock options                                 5                             5                        5
             Issuance of stock options and warrants
                  for services provided                                                            120                      120
             Net loss                                                                                           (404)      (404)
             ------------------------------------------------------------------------------------------------------------------
             BALANCE, DECEMBER 31, 1998                           10,095        $ 101         $ 31,256       ($22,551)   $8,806
             ==================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements


                                       22
<PAGE>   23
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997



<TABLE>
<CAPTION>
                                                                                                 (As restated - See Note 2)
             THOUSAND OF DOLLARS                                                                     1998           1997
             -------------------------------------------------------------------------------------------------------------
<S>                                                                                                  <C>          <C>
             Cash flows from operating activities:
                      Net income (loss)                                                              $ (404)        $ 171
                      Adjustments to reconcile net income (loss) to net cash
                          provided by (used in)operating activities:
                          Depreciation and amortization                                                2,000        1,683
                          Issuance of options and warrants for services provided                         120          272
                          Provision for doubtful accounts                                                713          361
                          Changes in assets and liabilities:
                               Accounts receivable                                                     (960)        (407)
                               Inventories                                                             (210)        (476)
                               Other current and other assets                                            299          451
                               Accounts payable                                                           72      (1,563)
                               Accrued expenses and other liabilities                                  (490)        (304)
                               Deferred income                                                                      (518)
             ------------------------------------------------------------------------------------------------------------
             Net cash provided by (used in) operating activities                                       1,140        (330)
             ------------------------------------------------------------------------------------------------------------
             Cash flows from (used in) investing activities:
                      Purchases of plant, property and equipment                                       (283)        (176)
                      Net investment in sales-type leases                                            (1,890)        (521)
                      Investment in property under operating leases                                    (224)      (1,188)
                      Property under lease agreement with
                           Solutioneering                                                            (1,212)        (536)
                      Fixed asset disposals                                                               81           99
             ------------------------------------------------------------------------------------------------------------
             Net cash used in investing activities                                                   (3,528)      (2,322)
             ------------------------------------------------------------------------------------------------------------
             Cash     flows from financing activities: Proceeds from issuance of
                      common stock:
                           Equity financing                                                                           684
                           Exercise of warrants and options                                              916          126
                      Proceeds from line of credit, net                                                1,605        2,267
                      Advances on notes payable                                                                       655
                      Repayment of notes payable                                                       (277)      (1,311)
             ------------------------------------------------------------------------------------------------------------
             Net cash provided by financing activities                                                 2,244        2,421
             ------------------------------------------------------------------------------------------------------------
             Decrease in cash and cash equivalents                                                     (144)        (231)
             ------------------------------------------------------------------------------------------------------------
             Cash and cash equivalents at beginning of year                                              273          504
             ------------------------------------------------------------------------------------------------------------
             Cash and cash equivalents at end of year                                                   $129         $273
             ============================================================================================================
             Supplemental cash flow information:
                      Cash paid during the period for interest                                          $306        $ 281
                      Cash paid during the period for income taxes                                      $117         $ 27
             Supplemental disclosure of non-cash activities:
                      Cost basis of machines returned from Fone America
                          transferred from net investment in sales-type leases
                          to property under
                          lease agreement with Solutioneering                                          $  23      $ 2,337
                      Increase (decrease) of reserves for inventory obsolescence                       $(368)        $561
             ------------------------------------------------------------------------------------------------------------
</TABLE>

             See accompanying notes to consolidated financial statements


                                       23
<PAGE>   24
ON-POINT TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Organization On-Point Technology Systems, Inc. and subsidiaries, formerly
Lottery Enterprises, Inc. (collectively, the "Company" or "On-Point") designs,
manufactures, and services vending terminals for the retail sale and leasing.
Its Instant Ticket Retailer (ITR) product line sells or leases instant-winner
lottery terminals to state and provincial governments in the United States and
Canada and to foreign governments and their licensees. Its Debit Card Retailer
(DCR) product line sells or leases vending machines for prepaid telephone cards
and other specialty retail products generally to commercial customers in the
United States and in foreign markets.

     Liquidity The Company completed an equity financing and a debt financing in
1997. The equity financing, which was subsequently registered with the SEC, was
a 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 is 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 was exercisable to purchase one share of Common Stock at a
price of $2.00 per share expiring March 18, 1999. Net proceeds to the Company in
1997 from the private placement was $684 thousand. The Company received $911
thousand in cash in 1998 from the exercise of warrants from the private
placement.

     On May 5, 1997, the Company entered into a Loan and Security Agreement for
a revolving line of credit whereby the Company could borrow up to $3,000,000.
Such agreement was amended on July 7, 1998 to increase the borrowing limit to
$5,000,000. The loan bears interest at Prime plus 2%, which is reduced by .5%
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, 1998, the Company had borrowed approximately $3.9 million under this
Agreement. The Company was in compliance with loan covenants as of December 31,
1998 and 1997. See Note 5 and 10.

     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 $5 million debt financing to maintain its
current level of operations.

     Principles of Consolidation The consolidated financial statements include
the accounts of the Company and all majority owned subsidiaries after
elimination of significant inter-company balances and transactions.

     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.

     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.

     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.

     Leases Property held under lease agreements are stated at cost.
Depreciation is provided using the straight-line method, over estimated useful
lives of 4 - 5 years.

     Revenue Recognition Under provision of SFAS No. 131, the Company has three
reportable business segments: Products, Financing and Service. Segment
information is included as Note 3. Revenue recognition for each segment is as
follows:




                                       24
<PAGE>   25
     PRODUCTS

     Revenues from terminal sales are recognized upon shipment, except where
     contract terms require the Company to provide installation, in which cases
     revenue is recognized when the product is installed. Revenues from
     sales-type leases are recognized at the present value of the future minimum
     payments and are recorded as product sales.

     FINANCING

     Income from operating leases is recognized as rentals are due according to
     provisions of the leases. Units under operating leases are treated as
     depreciable assets and depreciated over their useful lives, with
     depreciation on such units charged to cost of sales.

     Interest income is recognized on sales-type leases as earned, based on
     amortization schedules. The difference between the total future minimum
     payments plus the residual value of the equipment and the present value is
     recorded as unearned income and amortized over the term of the lease so as
     to produce a constant rate of return.

     SERVICE

     The Company employs a field service department to service DCR terminals
     sold or leased to customers. Most service agreements provide for a
     preventive maintenance visit at regular intervals (e.g. every 60 to 120
     days), covers all labor costs, costs to repair and replace parts, and
     provides for emergency visits if the terminal is non-operational. Income is
     recognized monthly, ratably over the lease term, for all DCR sales. When a
     terminal is leased to a customer, the service fee is separately identified
     in the lease agreement or included as a component of a single lease
     payment. If service is included as a component of a single lease, a service
     fee is estimated and classified as deferred executory costs. All service
     revenue is recognized ratably over the service agreement. The Company
     provides reserves for the estimated amount of future losses on any service
     contract.

     All ITR and DCR sales include a warranty, ranging from one to three years,
     which includes free repair or replacement of defective parts and may
     include associated labor costs. Future warranty costs are estimated and
     charged to income at time of sale, unless the lease includes a service
     component, in which case the estimated costs reduces the minimum lease
     payment. On-Point has no commitment under any lease to guarantee
     performance in a manner more extensive than the typical product warranty or
     which effectively protects the lessee from obsolescence.

     Research and Development Research and development costs are expensed as
incurred.

     Significant Customers and Concentration of Credit Revenues from the state
lotteries of Virginia, Illinois and Washington individually accounted for 23%,
23% and 12% respectively of total revenue in 1998. Revenues from the state
lotteries of Virginia and Illinois individually totaled 29% and 15%,
respectively of total revenue in 1997. These customers accounted for 18% and 53%
of the Company's receivables at December 31, 1998 and 1997. No DCR customers
accounted for 10% or more of revenues in either 1998 or 1997. Foreign sales
amounted to $800 thousand in 1998 (5% of total revenues), of which $622 thousand
was in Hong Kong, and $1.2 million in 1997 (9% of total), of which $478 thousand
was in Hong Kong and $557 thousand was in Brazil.

     Income Taxes Deferred income taxes are recorded to reflect the tax
consequences on future years of differences between the tax bases 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 ("FASB") 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 excludes dilution and is computed using the weighted average
shares of common stock outstanding plus contingently issuable shares. Diluted
EPS is computed using the weighted average shares outstanding plus additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, using the treasury stock method.


                                       25
<PAGE>   26
<TABLE>
<CAPTION>
                                                  Income                               Per-Share
                                                  (Loss)               Shares           Amount
                                                -----------          ----------       ----------
For the year ended December 31, 1998:
-------------------------------------
<S>                                             <C>                   <C>               <C>
BASIC EPS
(Loss) available to common stockholders         ($  404,000)          9,881,622         ($0.04)

EFFECT OF DILUTIVE SECURITIES
None
                                                -----------          ----------         ------

DILUTED EPS
(Loss) available to common stockholders
     plus assumed conversions                   ($  404,000)          9,881,622         ($0.04)
                                                ===========          ==========         ======

For the year ended December 31, 1997:
BASIC EPS                                       $   171,000           9,011,055         $ 0.02
Income available to common stockholders

EFFECT OF DILUTIVE SECURITIES
Warrants                                                              1,166,395
Stock Options                                                           672,558
                                                -----------          ----------         ------

DILUTED EPS
Income available to common stockholders
      plus assumed conversions                  $   171,000          10,850,008         $ 0.02
                                                ===========          ==========         ======
</TABLE>


     Options to purchase 462,000 and 2,083,835 shares of the Company's Common
Stock and warrants to purchase 45,000 and 2,911,958 shares of the Company's
Common Stock were outstanding during 1997 and 1998, respectively, but were not
included in the computation of diluted EPS because the Company incurred a net
loss in 1998 and the exercise price was greater than the average market price of
the common shares.

     Fair Value of Financial Instruments 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, accounts payable and
accrued expenses carrying cost reasonably approximates their fair value because
of the short maturities of these investments.

     The Company believes that the carrying amount of its outstanding debt at
December 31, 1998 and 1997 is a reasonable estimate of its fair value based on a
review of borrowing rates available to the Company at December 31, 1998 and 1997
for loans with similar terms and average maturities.

     Impairment of Long-Lived Assets 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.

     Recently Issued Accounting Standards

     In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income," which establishes standards for reporting and the display of
comprehensive income and its components in a full set of general-purpose
financial statements. This Statement requires that an enterprise classify items
of other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
balance sheet. This Statement is effective for


                                       26
<PAGE>   27
fiscal years beginning after December 15, 1997. The Company does not have any
items of other comprehensive income. As such, the implementation of SFAS 130
will not have an impact on the financial statements

     In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires the entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in fair value of these derivatives
("hedge accounting") depends on the intended use and designation. An entity that
elects to apply hedge accounting is required to establish at the inception of
its hedge the method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective aspects
of the hedge. These methods must be consistent with the entity's approach to
managing risk. The Company has not yet evaluated the effect of adopting SFAS
133.

     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. This includes the use of standard costs for product sales;
establishment of reserves for inventory obsolescence and reserves for bad debts.
Actual results could differ from those estimates.


2. RESTATEMENT OF FINANCIAL STATEMENTS

     Subsequent to the issuance of its 1998 financial statements, the Company
determined that long-term leases of vending machines to Solutioneering, Inc.
should have been recorded as operating leases, rather than as sales type leases.
In 1997, the Company and Solutioneering entered into a long-term lease
arrangement pursuant to which the Company furnished Solutioneering with 2,033
vending machines during 1997 and 1998, including 1,198 refurbished machines that
had been previously returned to the Company from another DCR customer, Fone
America. The Company's management has concluded that based on the financial
condition of Solutioneering at the inception of the lease, the lease should
have been accounted for as an operating lease, as the collectibility of the
lease payments was not reasonably predictable.

     Revenues previously recorded as sales-type transactions of $1.9 million in
1998 and $3.5 million in 1997, have been reversed, the leased equipment has been
capitalized, depreciation is being taken over the estimated useful life of the
assets, and operating lease revenue has been recorded only to the extent of cash
receipts from Solutioneering of $205 thousand in 1997. The net impact of all
adjustments to Solutioneering was a decrease in net income of $2.1 million in
1998 and $1.4 million in 1997. The Company's net balance sheet carrying value of
the Solutioneering leased machines at December 31, 1998 is approximately $3.3
million. The leased vending machines have been separately classified as
"Property under lease agreement with Solutioneering" as a non-current asset,
since the assets are non-performing and are not available for sale or lease. See
also Note 8.

     In addition, the Company has reclassified $855 thousand in 1998 and $284
thousand in 1997 from cost of sales to selling, general and administrative
expense for amounts representing bad debt expenses. Interest income,
attributable to sales-type lease financing, of $330 thousand in 1998 and $123 in
1997 was also reclassified from other (income) expenses to revenues.

     Additionally, the Company has applied the provisions of SFAS 123,
"Accounting for Stock Based Compensation" to options and warrants granted to the
Chief Executive Officer and to Vanguard Securities, a company wholly owned by
him, as transactions not related to normal employee duties and to options and
warrants granted to other outside parties in fiscal years 1996 through 1998. The
additional expense in 1998 and 1997 was $120 thousand and $197 thousand,
respectively, of which $70 thousand and $161 thousand, respectively, were
attributable to grants to the Chief Executive Officer, including Vanguard
Securities (See Note 12 of the Financial Statements).

     The Company has also added its disclosures to provide information
regarding segments, and has provided disclosures for three reporting segments:
Products, Financing and Service. Segment reporting is included as Note 3 of the
Financial Statements.


                                       27
<PAGE>   28
     As a result, the 1997 and 1998 financial statements have been restated from
amounts previously reported to properly reflect these transactions,
reclassifications and disclosures.  A summary of the significant effects of the
restatement is as follows:

<TABLE>
<CAPTION>
                                                                                       1998                           1997
                                                                                       ----                           ----
                                                                         As Previously         As        As Previously         As
                                                                           Reported         Restated        Reported       Restated
                                                                           --------         --------        --------       --------
              YEAR ENDED DECEMBER 31:
              -----------------------

<S>                                                                      <C>                <C>          <C>               <C>
              Revenues                                                      $ 16,416        $ 14,768        $ 17,439        $ 14,234
              Cost of sales                                                   11,538          10,044          12,566           9,823
              ----------------------------------------------------------------------------------------------------------------------
              Gross profit                                                     4,878           4,724           4,873           4,411
              Operating expenses                                               4,018           4,854           3,145           3,626
              ----------------------------------------------------------------------------------------------------------------------
              Income from operations                                             860           (130)           1,728             785
              Other income (expense)                                             871           (254)           (120)           (578)
              ----------------------------------------------------------------------------------------------------------------------
              Income (loss) before income taxes                                1,731           (384)           1,608             207
              Provision for income taxes                                          20              20              36              36
              ----------------------------------------------------------------------------------------------------------------------
              Net income (loss)                                              $ 1,711        ($  404)          $1,572            $171
              ======================================================================================================================

              Net income (loss) per share - basic                             $ 0.17        ($ 0.04)          $ 0.17          $ 0.02
              Net income (loss) per share - diluted                           $ 0.15        ($ 0.04)          $ 0.15          $ 0.02

              DECEMBER 31:
              Accounts receivable                                            $ 2,744        $ 2,744          $ 1,961         $ 1,644
              Inventories                                                      3,143          3,143            2,704           2,933
              Net investment in sales-type leases                              1,586          1,586            1,638             872
              ----------------------------------------------------------------------------------------------------------------------
              Total current assets                                             7,724          7,724            6,664           5,810
              ----------------------------------------------------------------------------------------------------------------------
              Net investment in sales-type leases                              8,911          2,723            5,364           2,423
              Property under operating leases, net                             2,013          1,852            2,657           2,575
              Property under lease agreement with Solutioneering, net                         3,255                            2,644
              Other assets                                                       502            368              768             768
              ----------------------------------------------------------------------------------------------------------------------
              Total assets                                                  $ 19,572       $ 16,344         $ 16,035        $ 14,802
              ======================================================================================================================

              Stockholders' Equity                                          $ 12,005        $ 8,806          $ 9,378         $ 8,174
              ======================================================================================================================
</TABLE>

3. SEGMENT INFORMATION

     The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which changes the way the Company reports
information about its operating segments. The Company has three reportable
segments: product sales, financing and service. The product segment includes all
products sold by the Company, including ITR and DCR vending machines via product
sales and sales-type lease agreements. The financing segment includes revenues
and expenses associated with (1) financing the sale of units via sales-type
leases and (2) operating leases. The service segment includes revenues and
expenses associated with its service and warranty contracts.

                     The Company evaluates performance for each segment based on
gross profits.

<TABLE>
<CAPTION>
                                                                                                                 Non-
                                                                  Products       Financing       Service       Allocated     Total
                                                                  --------       ---------       -------       ---------     -----
              1998
<S>                                                                <C>             <C>            <C>                        <C>
              OPERATING DATA:
              Revenues                                             $5,870          $3,823         $5,075                     $14,768
              Gross profit                                          2,177           2,252            295                       4,724
              Income (loss) from operations                          (78)           (160)            108                       (130)

              BALANCE SHEET DATA  (AT END OF PERIOD):
              Assets (allocated by segment)                        $4,883          $9,766         $1,076          $  619     $16,344
              CASH FLOW INFORMATION:
              Depreciation and amortization                          $342          $1,571            $87                     $ 2,000
              Capital expenditures                                    283                                                        283
</TABLE>

                                       28
<PAGE>   29
<TABLE>
<CAPTION>
<S>                                                                <C>             <C>            <C>                        <C>
              1997
              OPERATING DATA:
              Revenues                                             $6,010          $3,850         $4,374                     $14,234
              Gross profit                                          1,642           2,592            177                       4,411
              Income (loss) from operations                           383             428           (26)                         785

              BALANCE SHEET DATA  (AT END OF PERIOD):
              Assets (allocated by segment)                        $3,448          $9,188         $1,037          $1,129     $14,802
              CASH FLOW INFORMATION:
              Depreciation and amortization                        $  425          $1,258                                    $ 1,683
              Capital expenditures                                    176                                                        176
</TABLE>


     Total assets for the segments excludes cash, other current assets and other
assets, as such assets are not specifically identifiable to a particular
segment. Selling, general and administrative expense, excluding specifically
identified amounts, has been allocated based on the percentage of the total
assets of the respective segment divided by the total assets of all segments.

4. OTHER FINANCIAL DATA.

     Details concerning certain balance sheet accounts and operating income
detail as of December 31, 1998 and 1997 follows

<TABLE>
<CAPTION>
                                                                                 1998              1997
                                                                                 ----              ----
                      Accounts receivable:
<S>                                                                            <C>               <C>
                          Trade accounts receivable                            $  2,896          $  1,938
                           Less allowance for doubtful accounts                    (152)             (294)
                                                                               --------------------------
                           Total                                               $  2,744          $  1,644
                                                                               ==========================

                      Inventories:
                           Materials                                           $  2,843          $  2,805
                           Work-in-process                                          274               220
                           Finished goods                                           619               869
                           Reserve for obsolescence                                (593)             (961)
                                                                               --------------------------
                           Total                                               $  3,143          $  2,933
                                                                               ==========================

                      Property, plant and equipment:
                           Computers and equipment                             $  1,236          $  1,162
                           Furniture and fixtures                                   325               332
                           Tooling                                                  248               324
                           Building and improvements                                 51                37
                                                                               --------------------------
                                                                                  1,860             1,855
                           Less accumulated depreciation                         (1,438)           (1,273)
                                                                               --------------------------
                           Total                                               $    422          $    582
                                                                               ==========================

                      Other assets:
                           Patents                                             $    715          $    677
                           Deposits                                                 134               628
                           Other                                                    198               136
                                                                               --------------------------
                                                                                  1,047             1,441
                           Less accumulated amortization                           (679)             (673)
                                                                               --------------------------
                           Total                                               $    368          $    768
                                                                               ==========================


                      Operating Income Detail:
                      Revenues:
                           Products                                            $  5,870          $  6,010
                           Financing:
                                Operating lease rentals                           3,493             3,727
</TABLE>


                                       29
<PAGE>   30
<TABLE>
<S>                                                                            <C>               <C>
                                Interest income                                     330               123
                                                                               --------------------------
                                Total financing                                   3,823             3,850
                           Service                                                5,075             4,374
                                                                               --------------------------
                           Total revenues                                        14,768            14,234
                                                                               --------------------------
                      Cost of sales
                           Products                                               3,693             4,368
                           Financing                                              1,571             1,258
                           Service                                                4,780             4,197
                                                                               --------------------------
                           Total cost of sales                                   10,044             9,823
                                                                               --------------------------
                      Gross Profit                                                4,724             4,411
                      Operating expenses:
                           Research and development                               1,405               582
                           Bad debt expense                                         713               361
                           Depreciation                                           2,000             1,683
                           Less depreciation included in cost of sales           (1,785)           (1,529)
                           Other Selling, general and administrative              2,521             2,529
                                                                               --------          --------
                      Total operating expenses                                    4,854             3,626
                                                                               --------          --------
                      Income (loss) from operations                            $   (130)         $    785
                                                                               ==========================
</TABLE>

5. DEBT Debt consists of the following as of December 31, 1998 and 1997

<TABLE>
<CAPTION>
                                                        1998           1997
                                                        ----           ----
<S>                                                    <C>            <C>
                      Revolving line of credit         $3,872         $2,267
                      Notes payable                       104            381
                                                       ---------------------
                      Total debt                        3,976          2,648
                       Less current portion               104            277
                                                       ---------------------
                       Long Term Debt                  $3,872         $2,371
                                                       =====================
</TABLE>

     The Company entered into a loan and security agreement on May 5, 1997,
which provided for a revolving credit line of up to $3,000,000, which was
amended on July 7, 1998 to increase the borrowing limit to $5,000,000. The line
bears interest at prime plus 2%, or 9.75% at December 31, 1998, which is reduced
by .5% annually if the Company meets certain performance benchmarks, matures on
March 31, 2000 and is secured by virtually all of the Company's assets. There
were no covenants as of December 31, 1997. As of December 31, 1998 the line
requires the Company to maintain a minimum of $5.5 million of equity, as
defined. The Company was in compliance with this debt covenant at December
31, 1998.

     Notes payable at December 31, 1998 and 1997 consist of notes to various
financial institutions, which bear interest at rates ranging from 8.8% to 14.8%.
All but one note payable, totaling $104 thousand was paid off during 1998.

     Future principal payments on debt as of December 31, 1998, are as follows
(in thousands):

<TABLE>
                      Year ending December 31,
<S>                                                 <C>
                               1999                 $  104
                               2000                  3,872
                                                    ------
                                                    $3,976
                                                    ======
</TABLE>

6. 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, 1998 and 1997 consisted of
approximately $4.9 million and $5.0 million, respectively, less accumulated
depreciation of approximately $3.1 million and $2.4 million at December 31, 1998
and 1997, respectively.

     Approximate future minimum lease payments receivable by the Company under
operating leases as of December 31, 1998, are as follows (in thousands):

       Year ending December 31,
<TABLE>
<CAPTION>
<S>                                                       <C>
             1999                                         $ 1,735
</TABLE>


                                       30
<PAGE>   31
     Current operating leases may be extended in one-year increments, upon
expiration of current leases. The Company believes that the net book value is
fully recoverable through future lease receipts and underlying value of the
assets as of December 31, 1998 and 1997.

7. 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 $1.9 million and $1.5 million of revenues related to sales-type
leases for the years ended December 31, 1998 and 1997, respectively. These
non-cancelable leases expire over the next one to five years.

     The following lists the components of the net investment in sales-type
leases as of December 31, 1998 and 1997 (in thousands):

<TABLE>
<CAPTION>
                                                                            1998            1997
                                                                          ------------------------
<S>                                                                       <C>              <C>
                 Net minimum lease payments receivable                    $ 4,212          $ 3,157
                 Estimated unguaranteed residual value                      1,278            1,071
                 Less unearned interest income                               (314)            (659)
                 Less reserves for sales-type leases                         (867)            (274)
                                                                          ------------------------
                 Net investment in sales-type leases                      $ 4,309          $ 3,295
                                                                          ========================

             ales-type leases consist of:
                 Net investment in sales-type leases - short term          $1 586          $   872
                 Net investment in sales-type leases - long term            2,723            2,423
                                                                          ------------------------
                 Net investment in sales-type leases, as above            $ 4,309          $ 3,295
                                                                          ========================
</TABLE>

     The minimum lease payments are recorded net of future estimated service and
warranty costs of $828 in 1998 and $830 in 1997, which are deferred and recorded
as income on a monthly basis over the term of the agreement. Future minimum
lease payments excluding service payments, due from customers under sales-type
leases as of December 31, 1998, are as follows (in thousands):

<TABLE>
<CAPTION>
              Year ending December 31,
<S>                                              <C>
                    1999                         $ 2,590
                    2000                           1,217
                    2001                             405
                                                 -------
                                                 $ 4,212
                                                 =======
</TABLE>

     The amortization of unearned income for sales-type leases amounted to
approximately $330 thousand and $123 thousand for the years ended December 31,
1998 and 1997, respectively.

8. PROPERTY UNDER LEASE AGREEMENT WITH SOLUTIONEERING

     As part of its effort to increase its presence in the DCR marketplace, the
Company entered into an agreement with Solutioneering, Inc. ("Solutioneering")
to provide up to an additional 2000 DCR terminals under long-term lease
arrangements. Under the arrangement, the Company would be Solutioneering's
exclusive DCR provider. Although the Company realized Solutioneering was
undercapitalized, the Company believed the deployment of the DCR terminals to
retail locations under relatively long-term lease agreements would create
adequate underlying value to support repayment of the Company's leases should
Solutioneering fail to pay. While Solutioneering defaulted on its obligations in
1997, the Company did not foreclose on the equipment leased to Solutioneering
primarily because management believed the underlying value of Solutioneering's
leased locations could be sold in one package for an amount in excess of the
total obligations owed by Solutioneering. The Company also believes that the
fair value of the Company's leased assets held by Solutioneering exceeded the
carrying amount of the leased assets as of December 31, 1998 and 1997. When
Solutioneering was unwilling to accept terms offered by a prospective buyer in
early 1999, the Company subsequently filed suit to collect the amounts due.

     In 1997 and 1998, the Company shipped a total of 2033 DCR terminals to
Solutioneering. Of the terminals shipped in 1997 and 1998, 1198 were refurbished
machines that had been previously returned to the Company from another DCR
customer, Fone America.




                                       31
<PAGE>   32
     The vending machine leased to Solutioneering have been classified as
"Property under lease agreement with Solutioneering" as the property is
non-performing and unavailable for lease. This property is being depreciated
over a five-year estimated useful life. The depreciation expense is classified
as cost of sales, consistent with other operating leases. Operating lease
revenues have been recognized only for cash payments received from
Solutioneering of $205 thousand in 1997.

     The activity in the Property under Lease agreements with Solutioneering is
summarized as follows:

<TABLE>
<CAPTION>
                                                                                  1998           1997
                                                                                  ----           ----
<S>                                                                             <C>              <C>
                      Balance - beginning of year                               $2,644           $ --
                      Additions:
                           DCR's returned from Fone America                         23           $2,337
                           Manufactured and other                                1,240              536
                      Less: accumulated depreciation                              (652)            (229)
                                                                                -----------------------
                      Balance - end of year                                     $3,255           $2,644
                                                                                =======================
</TABLE>


     Fone America returned 1,266 DCR terminals during 1997 and 1998 under an
agreement with the Company to partially satisfy their outstanding receivable
balance. The Fone America net receivable balance was $2.4 million at December
31, 1996, which consisted of the net unamortized balance of net investment in
sales type leases for prior years' sales to Fone America, less reserves for
refurbishment costs and bad debt. The following summarizes the activity in the
Fone America receivable balance during 1997 and 1998:

<TABLE>
<CAPTION>
                                                                                          1998            1997
                                                                                          ----            ----
<S>                                                                                     <C>            <C>
                      Receivable balance, beginning of year                             $ 989          $3,326
                      Less: reserves for refurbishment                                   (476)           (933)
                      Less: reserves for bad debts                                       (284)             --
                                                                                        ----------------------
                      Net receivable balance, beginning of year                           229           2,393
                      Plus: utilization of reserve for refurbishment                       --             457
                      Less: cost basis of returned terminals                              (23)         (2,337)
                      Less: bad debt expense                                             (206)           (284)
                                                                                        ----------------------
                      Net receivable balance - end of year                              $  --          $   229
                                                                                        ======================
</TABLE>

     A bad debt reserve was established as of December 31, 1997 of $284
thousand. As Fone America returned terminals, the Company reduced the Fone
America receivable balance with an estimated cost basis per terminal. This
estimated cost basis represented the lower of cost or fair value of the returned
terminals. The resulting cost basis ranged from $1,340 for a 2-bin terminal to
$2,386 for a 4-bin terminal. The balance of $206 thousand, after all machines
were returned, was charged to bad debts in 1998.


     9. 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>
                                                                                                    1998             1997
                                                                                                    ----             ----
<S>                                                                                                <C>               <C>
                      Tax expense (benefit) computed at the statutory federal rate
                           rate of 34%                                                             $(131)            $ 70
                      State income tax expense, net of federal income tax effect                      20               36
                      Expenses not deductible for income tax purposes                                 (6)              (9)
                      Change in valuation allowances for deferred income tax assets                  137              (61)
                                                                                                   ----------------------
                      Provision for income taxes - current                                         $  20             $ 36
                                                                                                   ======================
</TABLE>




                                       32
<PAGE>   33
     The components of the income tax expense for the year ended December 31,
1998 and 1997 consists of the following


<TABLE>
<CAPTION>
                                                                  1998        1997
                                                                  ----        ----
<S>                                                               <C>         <C>
                      Current:
                           Federal                                 $ --        $ --
                           State                                     20          36
                                                                   ----------------
                                                                     20          36
                      Deferred:
                           Federal                                   --          --
                           State                                     --          --
                                                                   ----------------
                                                                     --          --
                                                                   ----------------
                      Provision for income taxes - current         $ 20        $ 36
                                                                   ================
</TABLE>



                     Deferred income tax assets and the related valuation
              allowance as of December 31, 1998 and 1997, result from the
              following temporary differences:

<TABLE>
<CAPTION>
                                                                            1998            1997
                                                                            ----            ----
<S>                                                                       <C>             <C>
                      Net operating loss carryforwards                    $ 5,475         $ 3,128
                      Inventory and other reserves                            868           3,250
                      Valuation allowance                                 (6,343)         (6,378)
                                                                          ------          -------
                      Net deferred income tax assets                      $  --           $  --
                                                                          ======          =======
</TABLE>


     Due to significant losses for income tax reporting purposes prior to 1998
as well as the other issues currently being addressed by the Company, management
has concluded that it is more likely than not that the deferred tax assets will
not be realized and that a valuation allowance is needed to reduce the carrying
value of deferred income tax assets to zero.

     At December 31, 1998, the Company has $14.6 million of operating loss
available to offset future federal taxable income, which expire during the years
2011 through 2018.

10. 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. No shares
have ever been issued.

     Stock Warrants Exercised In 1998, various warrants were exercised to
purchase the Company's Common Stock for total proceeds of $911 thousand.
Warrants from the private placement, discussed in Note 1, were exercised to
purchase 540,986 shares of the Company's Common Stock at $1.25 per share. Other
warrants were exercised to purchase 25,000, 37,500 and 65,000 shares of the
Company's Common Stock at $1.24, $1.25 and $.69 per share, respectively. In
1997, two warrants were exercised to purchase the Company's Common Stock for
total proceeds of $101 thousand. The warrants were exercised to purchase 100,000
and 42,630 shares of the Company's Common Stock at $.69 and $.75 per share,
respectively.

     Stock Option Plans The Company has two employee option plans whereby
options to purchase 1,972,500 shares of the Company's common stock may be
granted to certain executives and 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. Information regarding these option plans,
options, including options outstanding for non-employees of 424,000 and 306,500
shares outstanding as of December 31, 1998 and 1997 respectively follows:




                                       33
<PAGE>   34
<TABLE>
<CAPTION>
                                                                             1998                            1997
                                                                             ----                            ----
                                                                                    Weighted                          Weighted
                                                                                     Average                           Average
                                                                                    Exercise                           Exercise
                                                                    Shares            Price            Shares           Price
                                                                    ------            -----            ------           -----
<S>                                                                <C>              <C>             <C>               <C>
         Outstanding at January 1                                  1,280,380          $1.44          1,171,577          $2.21
              Granted                                                882,000           1.88            367,080           1.13
              Exercised                                               (5,085)          0.90            (25,000)          1.00
              Expired                                                (50,000)          2.00                 --             --
              Forfeited                                              (23,460)          2.21           (233,277)          4.83
                                                                  ----------          -----         ----------          -----
         Outstanding at December 31                                2,083,835          $1.61          1,280,380          $1.44
                                                                  ==========          =====         ==========          =====

         Options exercisable at year end                           1,095,376          $1.47            806,190          $1.72
         Weighted average fair value per share of options
              granted during the year                                                 $0.76                            $0.48
</TABLE>

     The following table summarizes information about fixed-price stock options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
                                                   Options Outstanding                          Options Exercisable
                                      --------------------------------------------------  --------------------------------
                                          Number        Weighted Ave    Weighted-Average     Number       Weighted-Average
                   Range of           Outstanding at     Remaining         Exercise       Outstanding at        Exercise
               Exercise Prices           12/31/98     Contractual Life      Price            12/31/98           Price
               ---------------           --------     ----------------      -----            --------           -----
<S>                                   <C>             <C>               <C>               <C>             <C>
                 $0.80 - 1.00           1,071,835        6.1 years          $ 0.82           945,376           $ 0.81
                 1.41 - 1.81              470,000          4.6                1.50            20,000             1.81
                 2.00 - 2.09              292,000          3.2                2.07            10,000             2.03
                 2.25 - 2.88              150,000          3.5                2.78            20,000             2.44
                     7.45                 100,000          5.8                7.45           100,000             7.45
                                        ---------          ---              ------         ---------           ------
                 $0.80 - 7.45           2,083,835          5.2              $ 1.61         1,095,376           $ 1.47
                                        =========          ===              ======         =========           ======
</TABLE>

     The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" for employee stock option plans.
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 1998 and 1997
consistent with the provisions of SFAS No. 123, the Company's net earnings
(loss) and earnings (loss) per share would have been reduced to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
                                                    1998                                         1997
                                                    -----                                        ----
                              Net                 Per Share                Net                Per Share
                              Loss          Basic          Diluted       Earnings        Basic         Diluted
                              ----          -----          -------       --------        -----         -------
<S>                          <C>            <C>            <C>            <C>            <C>            <C>
         As Reported         $(404)         $(0.04)        $(0.04)        $ 171          $0.02          $0.02
                             =====          =====          =====          =====          =====          =====

         Pro Forma           $(484)         $(0.05)        $(0.05)        $ (41)         $(0.01)        $(0.01)
                             =====          =====          =====          =====          =====          =====
</TABLE>

     In 1998 the fair value of options granted to employees is estimated as
approximately $0.71 per share 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%; expected volatility of 51%; risk free interest
rate of 4.68%; and expected lives of 4.65 years. In 1997 the fair value of
options granted is estimated as approximately $0.51 per share 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%; expected
volatility of 70%; risk free interest rate of 5.71%; and expected lives of 3.02
years.

     Other Stock Options

     In October 1998, Robert Burr, a former Chairman of the Board, President and
CEO of the Company, received a three-year option to purchase 50,000 shares of
the Company's Common Stock at $2.00 per share pursuant to his consulting
agreement with the Company. The option vests on March 31, 2001, or earlier, if
certain conditions are met. The fair value of the option totaled $24 thousand,
$2 thousand of which was expensed during the year ended December 31, 1998. The
remainder will be expensed over 37 months.

                                       34
<PAGE>   35
     In September 1998, a consultant received an option to purchase 5,000 shares
of the Company's Common Stock at $1.66 per share pursuant to a consulting
agreement entered into with the Company. The option vests over 2 1/2 years. The
fair value of the option totaled $5 thousand at the date of grant; $700 of which
was expensed to selling, general and administrative expense during the year
ended December 31, 1998. The remainder will be expensed to selling, general and
administrative expense over the remaining 26 month term of the consulting
agreement.

     In May 1998, two individuals, one of whom is an officer of the Company,
each received an option to purchase 50,000 shares of the Company's Common Stock
at $2.09 per share pursuant to their assignment of certain intellectual property
to the Company. The options vest the earlier of April 1, 2001, or upon the
satisfaction of certain performance conditions. No expense was recorded as the
fair value of the options granted were in exchange for intellectual property.

     In April 1998, two advisory board members of the Company each received
three-year options to purchase 10,000 shares of the Company's Common Stock at
$2.88 per share pursuant to their appointment as Advisory Directors. The options
vest in April 1999. The fair value of the options totaled $12 thousand; $5
thousand of which was expensed to selling, general and administrative expense
during the year ended December 31, 1998. The remainder will be expensed to
selling, general and administrative expense over the remaining term of their
appointment as advisory board members, which expire in 1999.

     In March 1998, Vanguard Strategies, Inc. and Mr. Robert L. Burr were each
granted five-year stock options for 50,000 shares of the Company's Common Stock
at $2.88 per share pursuant to an agreement to terminate their respective rights
in the Company's international operations. The options 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. The fair value of the
options totaled $110 thousand; $18 thousand of which was
expensed to selling, general and administrative expense during the year ended
December 31, 1998. The expense is being recorded over the 60 month term of the
agreement.

     In January 1998, a consultant received an option to purchase 10,000 shares
of the Company's Common Stock at $2.09 per share pursuant to a consulting
agreement. The option vests over two years. The fair value of the options
totaled $7 of which $4 thousand was expensed to
selling, general and administrative expense in 1998. The remaining $3 thousand
will be expensed in 1999.

     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 vested in 1998.

     Stock Warrants

     In July 1998, Coast Business Credit received a warrant to purchase 10,000
shares of the Company's Common Stock at $1.63 per share pursuant to a financing
agreement entered into with the Company. The warrant has a two-year term and
became exercisable in July 1998. The fair value of the warrant totaled $5
thousand at the date of grant of which $1 thousand was expensed to selling,
general and administrative expense during 1998. The remaining balance will be
expensed over 18 months.

     In May 1997, GMB Capital received a warrant to purchase 45,000 shares of
the Company's Common 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. The fair value of the warrant totaled $35 thousand at
the date of grant, of which $11 thousand and $8 thousand were expensed to
selling, general and administrative expense during 1998 and 1997, respectively.
The remaining balance will be expensed over 16 months.

     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 had a one-year term and expired in May 1998. The fair
value of the warrants totaled $88 thousand at the date of grant, which was
expensed to selling, general and administrative expense during 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. The fair value of the warrant totaled $44
thousand at the date of grant, of


                                       35
<PAGE>   36
which $15 thousand and $10 thousand were expensed to selling, general and
administrative expense during 1998 and 1997, respectively. The remaining balance
will be expensed over 16 months.

     In January 1997, the Chairman and 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. The fair value of the warrant totaled $178 thousand
at the date of grant; $59 thousand of which was expensed to selling, general and
administrative expense in each of the years ended December 31, 1998 and 1997.
The remaining balance will be expensed in 1999.

     In January 1997, Vanguard Strategies, Inc. ("VSI"), a corporation
wholly-owned by the Chief Executive Officer, 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. The fair value of the warrant
totaled $102 thousand at the date of grant, which was expensed to selling,
general and administrative expense during the year ended December 31, 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. The warrant has a four-year term and became exercisable in January
1997. The fair value of the warrant totaled $6 thousand at the date of grant,
which was expensed to selling, general and administrative expense during 1997.

11. COMMITMENTS AND CONTINGENCIES

     Lease Commitments The Company leases facilities under operating leases
expiring at various dates through January 2009. Rent expense for such facilities
totaled $244 thousand and $264 thousand for the years ended December 31, 1998
and 1997, respectively. Future minimum rentals under noncancelable operating
leases as of December 31, 1998 are as follows (in thousands):

<TABLE>
<S>                                                                          <C>
          1999                                                   $   254
          2000                                                       283
          2001                                                       279
          2002                                                       253
          2003                                                       215
          Thereafter                                               1,073
                                                                  -------
                                                                  $ 2,357
                                                                  =======
</TABLE>

     Customer Dispute Since 1994, the Company had 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 was estimated at more than $1.9 million. The CSL had refused
to honor the claim and had 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 CSL withheld payment of more that $300 thousand in
outstanding invoices for products and services from the Company. No amounts
related to this receivable were recorded in the accompanying financial
statements as of December 31, 1997. During 1998, the Company amicably resolved
the dispute and received a payment of approximately $350,000 from the CSL.

     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.

     On January 11, 1999, the Company filed an action against Solutioneering,
Inc. in Superior Court of California, County of San Diego. A first amended
complaint of said action was filed on February 9, 1999. The action arises from
the lease to Solutioneering of a total of 2,193 prepaid phone card vending
terminals (2,033 of which were shipped in 1997 - 1998) under a March 1, 1995
Master Lease Agreement and two amendments thereto (the "Agreement"). In the
action, the Company asserts that Solutioneering has breached the Agreement and
has claimed damages of approximately $9 million. The Company's net balance sheet
carrying value of the Solutioneering leased machines at December 31, 1998 is
approximately $3.3 million. The Company believes the underlying value of the
Company's equipment at Solutioneering exceeds the carrying value on the
Company's books.

     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


                                       36
<PAGE>   37
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 judgment 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 judgment 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 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.

     Executive Compensation Agreement The Company has an employment agreement
with the Company's Chief Executive Officer (the "CEO") for a three-year term
commencing January 9, 1996, which automatically extends annually an additional
year unless notice has otherwise been given by the Company. As of December 31,
1998, the term expires on December 2001. While the Company is committed under
the agreement to provide for an annual base salary of at least $300 thousand,
plus a bonus equal to 5% of the first million of the Company's pre-tax income
and 7% thereafter, only $177 thousand and $141 thousand was paid to Mr. Sandvick
in salary in 1998 and 1997, respectively, and no bonuses were paid to Mr.
Sandvick in either year.

     The employment agreement with the CEO also provides for severance upon
termination by the Company without cause or termination by the CEO for "good
reason," as defined, in the amount equal to the base salary the CEO would have
earned during the 36 month period commencing on the date of termination plus
three times the CEO's average annual bonus received over the prior three fiscal
years. The CEO would also have the right to receive all other benefits that
would have been received under his employment arrangement for that 36-month
period. Further, all shares underlying outstanding stock options granted to the
CEO would become fully exercisable for a period of 18 months after termination.

12. RELATED PARTY TRANSACTIONS

     On January 8, 1996, the Company entered into an agreement with Vanguard
Strategies, Inc. ("VSI"), a private strategic planning company, in which VSI
would assist the Company as its exclusive consultant for at least 120 days in
negotiating debt and equity financing and in developing the Company's strategic
plans. VSI is wholly owned by Frederick Sandvick, the Company's Chief Executive
Officer. In January 1996, VSI assisted the Company in obtaining a $450,000 loan
from U.S. Mortgage Bankers Corp. ("USMBC"). The president of USMBC is related to
Mr. Sandvick. As compensation for these services, VSI was granted warrants,
subject to the Company receiving financing of at least $1.5 million, to purchase
up to 450,000 shares of common stock of the Company at a price of $.60 per share
exercisable for five years.

     In July 1996, VSI was granted an additional warrant to purchase 250,000
shares of the Company's common stock at a price of $.69 pursuant to the
extension of the USMBC promissory note under this agreement. The Company
recognized $80 thousand of compensation expense related to the 1996 warrants. In
January 1997, Mr. Sandvick 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. The fair value of the
warrant totaled $178 thousand at the date of grant; $59


                                       37
<PAGE>   38
thousand of which was expensed to selling, general and administrative expense in
each of the years ended December 31, 1998 and 1997.

     In January 1997, VSI was granted an additional warrant to purchase 250,000
shares of the Company's common stock at a price of $.72 pursuant to the
extension of the USMBC promissory note under this agreement. The warrant has a
five-year term and became exercisable in January 1997. The fair value of this
warrant totaled $102 thousand at the date of grant, which was expensed during
the year ended December 31, 1997.

     In connection with the engagement of VSI to raise capital for the Company
and pursue other business restructuring alternatives and the continuing
arrangements with Mr. Burr, VSI and Mr. Burr were provided an option to purchase
80% (40% each) of a subsidiary to be formed to carry on the Company's
international operations. The option was provided to VSI and Mr. Burr as an
incentive for them to aggressively pursue international sales. 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 and for future consulting service, VSI and Mr. Burr were each granted
options to purchase 50,000 shares of the Company's common stock at $2.88 per
share, the closing market price of the Company's common stock on such date. The
options expire on December 31, 2002 and vest at the earlier on 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. The fair value of the options totaled $130
thousand at the date of grant; $22 thousand of which was expensed during the
year ended December 31, 1998.

13. SUBSEQUENT EVENT

     The Company reached a full and complete settlement with Interlott
Technologies on March 4, 1999 regarding the civil action filed on January 23,
1996 (See Note 11). No liability was admitted by either party pursuant to the
settlement and the settlement had no material adverse effect on the Company's
results of operations.


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

     None

                                       38
<PAGE>   39
PART III.

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors

     The names, ages and positions of the directors (1), executive officers and
key employees of the Company are as follows:

<TABLE>
<CAPTION>
                    Name                              Age     Position
                    --------------------              ---     -------------------------------------------
<S>                                                    <C>    <C>
                    Frederick Sandvick                 41     Chief Executive Officer and Chairman of the Board
                    John H. Olbrich (2) (3)            36     Director
                    Ed M Bacani (2) (3)                60     Director
                    Kenneth Hoitt                      51     Chief Financial Officer, Secretary and Treasurer
                    Brian J. Roberts                   51     Senior Vice President
</TABLE>

                    (1)  Each director of the Company holds office until the
                         next annual meeting of shareholders and until a
                         successor has been elected and qualified, or until his
                         earlier resignation or removal.

                    (2)  Audit Committee Member.

                    (3)  Compensation Committee Member.

     Frederick Sandvick has been the Chief Executive Officer and Chairman of the
Board of the Company since January 1996. Mr. Sandvick is President and the
principal stockholder of Vanguard Strategies, Inc., a privately held strategic
planning company he founded in 1995. From 1990 to 1995, Mr. Sandvick was
Executive Vice President and Chief Financial Officer of Jackpot Enterprises,
Inc., a company listed on the NYSE and engaged in the gaming/entertainment
industry.

     John H. Olbrich has been the owner and President of U.S. Mortgage Bankers
Corporation, a residential mortgage brokerage firm since 1991. Mr. Olbrich has
been in the real estate mortgage business for approximately 12 years. Mr.
Olbrich is Mr. Sandvick's half brother. See "Certain Relationships and Related
Transactions", herein.

     Ed M. Bacani has been the owner of Bacani Accountancy, an accounting and
business-consulting firm, since October 1995. From 1989 to 1995, Mr. Bacani was
the managing partner of the San Diego office of J.H. Cohn & Co., a national
accounting firm. Mr. Bacani is a certified public accountant. Mr. Bacani was
appointed to the Board in April 1998.

     Kenneth Hoitt has been Chief Financial Officer of the Company since
February 1996. From 1992 to February 1996 Mr. Hoitt was the owner of Planning
Strategies, a privately held consulting firm which provided business planning
services. From 1988 to 1992, Mr. Hoitt was Chief Financial Officer, Treasurer
and Corporate Secretary for International Lottery and Totalizator Systems, Inc.,
a manufacturer of computer - based ticket processing systems.

     Brian J. Roberts has been the Company's Senior Vice President since July
1996. From December 1994 to July 1996, Mr. Roberts was the Company's Director of
Marketing and Business Development. From 1984 to 1994, Mr. Roberts was a Vice
President of International Lottery and Totalizator Systems, Inc.

ITEM 10. MANAGEMENT REMUNERATION AND TRANSACTIONS

EXECUTIVE COMPENSATION

     The following information relates to compensation of the Company's Chief
Executive Officer for the Company's fiscal years ended December 31, 1998, 1997
and 1996. No other executive officer of the Company received total annual salary
and bonuses in excess of $100,000 during those fiscal years.

     The Compensation Committee did not have a substantial role in setting
compensation in 1998, 1997 and 1996 because the Chief Executive Officer was
engaged pursuant to an employment agreement, which fixed compensation. The role
of the Compensation Committee and its policies will continue to increase as
employment agreements expire and compensation packages are negotiated with key
executives.


                                       39
<PAGE>   40
                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                 Annual Compensation                       Long-Term Compensation Awards
                                       ------------------------------------   -----------------------------------------------------
               Name and                                            Other      Restricted    Securities    Long-Term        All
               Principal                                          Annual        Stock       Underlying    Incentive       Other
               Position         Year   Salary ($)  Bonus ($)   Compensation   Awards ($)     Options/        Plan      Compensation
                                                                ($) (1) (2)                   SAR's (#)   Payouts ($)   ($) (2) (3)
               --------         ----   ----------  ---------   ------------   ----------     --------     -----------  ------------
<S>                             <C>    <C>         <C>         <C>            <C>         <C>             <C>          <C>
          Frederick Sandvick    1998   176,909 (4)    0          70,006          0          290,000 (3)        0             0
                                1997   141,000        0         168,012          0          750,000 (2)        0             0
                                1996   191,129        0               0          0        1,570,000 (2)        0             0
</TABLE>

(1)  Includes a $7,243 car allowance in 1997 to cover automobile expenses.

(2)  Includes options to purchase 870,000 shares of common stock which vested
     pursuant to Mr. Sandvick's employment agreement, warrants to purchase
     500,000 shares of common stock in connection with a guarantee of a
     performance bond in 1997 and warrants to purchase 700,000 shares of common
     stock in 1996 and 250,000 shares in 1997 granted to Vanguard Strategies,
     Inc. (see "Certain Relationships and Related Transactions" herein). The
     calculated fair value of the options and warrants described above included
     in "Other Annual Compensation" was $70,006 in 1998 and $160,769 in 1997.

(3)  Includes options to purchase 240,000 shares of common stock granted to Mr.
     Sandvick and options to purchase 50,000 shares of common stock granted to
     Vanguard Strategies, Inc (see "Certain Relationships and Related
     Compensation" herein).

(4)  While the terms of the contract called for an annual salary of $255,000,
     plus a performance bonus, only $176,909 was paid to Mr. Sandvick in 1998.
     Mr. Sandvick subsequently waived all accrued pay and bonuses accrued as of
     December 31, 1998.

EMPLOYMENT AGREEMENTS

     Mr. Sandvick serves as Chairman of the Board and Chief Executive Officer of
the Company pursuant to a three-year employment agreement commencing on January
9, 1996. The agreement has been extended for three additional years and will
terminate unless further extended or sooner terminated, on December 31, 2001.
The term of the agreement is automatically extended annually for an additional
year unless notice is given by either party that such party does not wish to
extend the agreement term. The agreement provides for an annual base salary of
$180,000 through June 30, 1996 with $30,000 annual increases thereafter. The
agreement provides for an increase in the annual base salary to at least
$300,000 per year if the Company's pre tax income as defined, for any calendar
year equals or exceeds $2 million. Mr. Sandvick is entitled to an annual bonus
equal to 5% of the first $10 million of the Company's pre tax income and 7% of
the Company's pre tax income in excess of $10 million. Pursuant to the
agreement, on the commencement of employment Mr. Sandvick was granted a ten-year
option to acquire 870,000 shares of the Company's common stock at a price of
$.80 per share, such price representing the greater of (1) the closing price on
the date of stock holder approval of the First Amendment to the Company's 1994
Stock Option Plan or (2) the average of the closing sales price for the 20
trading days preceding the effective date of the agreement. One-third of the
shares subject to the option award became exercisable on January 9, 1996 and
one-third of the shares became exercisable over the next two years in equal
annual increments. Mr. Sandvick is also entitled to participate in other
employee benefit plans and the Company is obligated to reimburse Mr. Sandvick
for, or pay directly, the costs of a personal plan of disability providing for
$15,000 per month disability benefits.

     The employment agreement with Mr. Sandvick also provides for severance upon
termination by the Company without cause or termination by Mr. Sandvick for
"good reason" in the amount equal to the base salary Mr. Sandvick would have
earned during the 36 month period commencing on the date of termination plus
three times Mr. Sandvick's average annual bonus received over the prior three
fiscal years. Mr. Sandvick would also have the right to receive all other
benefits that would have been received under his employment arrangement for that
36-month period. Further, all shares underlying outstanding stock options
granted to Mr. Sandvick would become fully exercisable for a period of 18 months
after termination. Mr. Sandvick shall have "good reason" to terminate his
employment if, among other events, (i) the Company fails to comply with any
material provision of the employment agreement; (ii) the Company gives Mr.
Sandvick notice of nonrenewable; or (iii) for any reason within one year
following the occurrence of a change in control, as defined. Change in control
occurs if (i) any person, excluding existing relationships, becomes the
beneficial owner of securities representing 20% or more of the combined voting
power of the Company's then outstanding voting securities; (ii) a change occurs
in the majority of the Board of Directors; (iii) the stockholders approve a
merger in which at least 51% of the Company's combined voting power is given to
a new entity not in the Company's control or the effect of such merger is that
any person acquires 20% or more of the combined voting power of the Company. On
January 27, 1997,


                                       40
<PAGE>   41
the Company hired Michael Wright to serve as the Company's President. Mr. Wright
served as President from January 27 to December 25, 1997 during which time Mr.
Sandvick's annual salary was reduced by $84,000.

OPTION GRANTS IN FISCAL 1998

     The following table represents certain information regarding stock option
grants to each of the Named Executive Officers during the fiscal year ended
December 31, 1998.

<TABLE>
<CAPTION>
                                                                                  Individual Grants
                                               ------------------------------------------------------------------------------------
                                                    Number of          Percent of Total
                                                    Securities        Options Granted To
                                               Underlying Options    Employees in Fiscal     Exercise of Base
                           Name                      Granted                 Year            Price ($/Share)       Expiration Date
                           ----                      -------                 ----            ---------------       ---------------
<S>                                            <C>                   <C>                     <C>                   <C>
              Frederick Sandvick                     240,000                  43                  $1.41               09/30/03
</TABLE>

OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR-END OPTION VALUES

     The following table presents certain information regarding stock option
exercises during fiscal 1998.

<TABLE>
<CAPTION>
                                  Shares                         Number of Securities
                                 Acquired                       Underlying Unexercised                 Value of Unexercised
                                    on          Value           Options/SARs at FY-End                      In-the-Money
                                 Exercise    Realized      ---------------------------------      ----------------------------
            Name                    (#)         ($)        Exercisable          Unexercisable     Exercisable     Unexercisable
           -----                    ---         ---        -----------          -------------     -----------     -------------
<S>                              <C>         <C>           <C>                   <C>               <C>               <C>
       Frederick Sandvick            0           0         2,320,000 (1)         290,000 (2)       2,788,420         119,040
</TABLE>

(1)  Includes options to purchase 870,000 shares of common stock which vested
     pursuant to Mr. Sandvick's employment agreement, warrants to purchase
     500,000 shares of common stock in connection with a guarantee of a
     performance bond and warrants to purchase 950,000 shares of common stock
     granted to Vanguard Strategies, Inc. (see "Certain Relationships and
     Related Transactions" herein).

(2)  Includes options to purchase 240,000 shares of common stock granted to Mr.
     Sandvick and options to purchase 50,000 shares of common stock granted to
     Vanguard Strategies, Inc. in 1998 (see "Certain Relationships and Related
     Transactions" herein).

COMPENSATION OF DIRECTORS

     During 1998, 1997 and 1996 each outside director was automatically granted
10,000 shares of the Company's common stock pursuant to the July 26, 1996
amendment to the 1994 Stock Option Plan for Directors which provided a formula
for granting options to outside directors. In addition, each outside director,
other than Mr. John Robinson, received an additional grant of 10,000 shares of
the Company's common stock in lieu of cash compensation for serving as a
director pursuant to the August 28, 1997 amendment to the 1994 Stock Option Plan
for Directors which modifies the formula for granting options to outside
directors by providing for the grant of options in lieu of cash compensation for
serving as director. Mr. Robinson was paid $2,500 in March 1998 for services as
a Director during the period July 26, 1996 through August 27 1997 pursuant to
the compensation arrangement in effect during that service period.

1993 STOCK OPTION PLAN

     On March 1, 1993, the Company adopted the 1993 Stock Option Plan (the
"Plan") under which 472,500 shares of common stock may be issued to officers and
other key employees who have substantial responsibility for the direction and
management of the Company. Options issued under the Plan are either incentive
stock options under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), or non-qualified stock options, as determined in the discretion of
the Compensation Committee of the Board of Directors of the Company at the time
the options are granted. In addition, the Compensation Committee, subject to the
provisions of the Plan, has authority to determine the employees to whom options
will be granted, the time or times at which options will issue, the exercise
price of granted options and any conditions for their exercise. The Plan
requires that the exercise price of stock options be not less than the fair
market value on the date of grant and that stock options expire not later than
ten years from the date of grant. In addition, the Plan provides that no
incentive stock options may be granted to any employee who owns more that 10% of
the Company's voting securities unless the exercise price is a least 110% of the
fair market value of the underlying common stock and the option expires on
before five years from the date of grant. The Plan contains an anti-dilution


                                       41
<PAGE>   42
provision whereby the shares of common stock, which underlie outstanding
options, are increased proportionately in the event of a stock split or
dividend. As of December 31, 1998, 459,920 options have been granted under this
Plan.

1994 STOCK OPTION PLAN

     On April 21, 1994, the Company adopted the 1994 Stock Option Plan (the
"Plan") under which 525,000 shares of common stock may be issued to officers and
other key employees who have substantial responsibility for the direction and
management of the Company. On January 8, 1996 the plan was amended to increase
the shares available for issuance to 1,500,000. Such amendment was approved by
the stockholders on July 26, 1996. Options issued under the Plan are either
incentive stock options under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), or non-qualified stock options, as determined in the
discretion of the Compensation Committee of the Board of Directors of the
Company at the time the options are granted. In addition, the Compensation
Committee, subject to the provisions of the Plan, has authority to determine the
employees to whom options will be granted, the time or times at which options
will issue, the exercise price of granted options and any conditions for their
exercise. The Plan requires that the exercise price of stock options be not less
than the fair market value on the date of grant and that stock options expire
not later than ten years from the date of grant. In addition, the Plan provides
that no incentive stock options may be granted to any employee who owns more
than 10% of the Company's voting securities unless the exercise price is at
least 110% of the fair market value of the underlying common stock and the
option expires on or before five years from the date of grant. The Plan contains
an anti-dilution provision five years from the date of grant. The Plan contains
an anti-dilution provision whereby the shares of common stock, which underlie
outstanding options, are increased proportionately in the event of a stock split
or dividend. As of December 31, 1998, 1,165,000 options have been granted under
this plan.

1994 STOCK OPTION PLAN FOR DIRECTORS

     On April 21, 1994, the Company adopted the 1994 Stock Option Plan for
Directors (the "Directors' Plan") under which 525,000 shares of common stock may
be issued to Directors of the Company. Options issued under the Directors' Plan
are non-qualified stock options. The Board of Directors, excluding outside
Directors who are eligible for the Directors' Plan, subject to the provisions of
the Directors' Plan, has authority to determine the outside Directors to whom
Options will be granted, the time or times at which options will issue, the
exercise price of granted options and any conditions for their exercise. The
Directors' Plan requires that the exercise price of stock options be not less
than the fair market value on the date of grant and that stock options expire
not later than ten years from the date of grant. The Directors' Plan contains an
anti-dilution provision whereby the shares of common stock, which underlie
outstanding options, are increased proportionately in the event of a stock split
or dividend. As of December 31, 1998, 80,000 options have been granted under
this plan.

BONUS POLICY

     While the Company has no established policy, other than as provided in the
Chief Executive Officer's employment agreement, to award cash or stock bonuses
to its officers, it may elect to pay bonuses to reward the performance of its
officers. The Company awarded cash bonuses of approximately $108 thousand and
$14 thousand in 1998 and 1997, respectively. No cash bonuses were awarded in
1996.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth, as of March 5, 1999, the shares of the
Company's Capital Stock beneficially owned by each 5% beneficial owner, by each
Director or nominee, by each named executive officer individually, and by all
Directors and executive officers as a group:


                                       42
<PAGE>   43
<TABLE>
<CAPTION>
                                                                            Number of Shares             Percentage
                                                                              Beneficially                   Of
                    Name and Address of Beneficial Owner                        Owned (1)                  Class
                    ------------------------------------                        ---------                  -----
<S>                                                                         <C>                          <C>
                    Robert and Catherine Burr (2)
                    5168 Renaissance Drive
                    San Diego, CA 92122                                          784,662                   5.11%

                    Frederick Sandvick (3)
                    108 Ivy Street
                    San Diego, CA 92101                                         2,600,000                  20.26%

                    John H. Olbrich (4)
                    3256 Loma Vista Drive
                    Jamul, CA 91935                                              241,667                   1.88%

                    Ed M. Bacani (5)
                    8076 el Extenso Court
                    San Diego, CA 92119                                          12,000                    0.09%

                    All directors and executive officers as a
                    group (5 persons)                                           3,791,165                  29.54%
</TABLE>

(1)  Unless otherwise indicated, all shares are owned beneficially and of
     record.

(2)  Of the shares of common stock reflected in the table above, 7,984 are
     registered in Mr. Burr's name, and 35,556 are held as community property by
     Mr. and Mrs. Burr. The table includes 741,122 shares held by The Burr
     Family Trust. Mr. and Mrs. Burr, as trustees of the trust, exercise sole
     voting and investment control over these 741,122 shares of common stock.

(3)  Of the shares of common stock reflected in the table above, 40,000 are
     registered in Mr. Sandvick's name. The table includes options to purchase
     870,000 shares of common stock which vested pursuant to Mr. Sandvick's
     employment agreement, warrants to purchase 500,000 shares of common stock
     in connection with a guarantee of a performance bond and warrants to
     purchase 950,000 shares of common stock granted to Vanguard Strategies,
     Inc. The table also includes options to purchase 240,000 shares of common
     stock and options to purchase 50,000 shares of common stock granted to Mr.
     Sandvick in 1998 (see "Certain Relationships and Related Transactions"
     herein).

(4)  Of the shares of common stock reflected in the table above, 141,667 are
     registered in Mr. Olbrich's name. The table includes warrants to purchase
     50,000 shares of common stock and options to purchase 50,000 shares of
     common stock.

(5)  The number includes 2,000 shares of common stock owned by Mrs. Bacani to
     which Mr. Bacani disclaims any beneficial ownership and options to purchase
     10,000 shares of common stock.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     In April 1995, Mr. Robinson, who was then an outside Director of the
Company, loaned the Company $250,000 at an interest rate of 10% per annum and
secured by a certain lease agreement and related equipment. The remaining
principal and interest on this loan totaling $118,745 was paid to Mr. Robinson
in May 1997. Mr. Robinson received a warrant to purchase 25,000 shares of the
Company's common stock at $2.50 per share as additional consideration for the
loan.

     On January 8, 1996, the Company entered into an agreement with Vanguard
Strategies, Inc. ("VSI"), a private strategic planning company, in which VSI
would assist the Company as its exclusive consultant for at least 120 days in
negotiating debt and equity financing and in developing the Company's strategic
plans. Mr. Sandvick is the president and principal stockholder of VSI. In
January 1996 VSI assisted the Company in obtaining a $450,000 loan from U.S.
Mortgage Bankers Corp. ("USMBC"). The president of USMBC is related to Mr.
Sandvick'. As compensation for these services, VSI was granted warrants, subject
to the Company receiving financing of at least $1.5 million, to purchase up to
450,000 shares of common stock of the Company at a price of $0.60 per share
exercisable for five years. In July 1996, VSI was granted


                                       43
<PAGE>   44
an additional warrant to purchase 250,000 shares of the Company's common stock
at a price of $0.69 pursuant to the extension of the USMBC promissory note under
this agreement. In January 1997, VSI was granted an additional warrant to
purchase 250,000 shares of the Company's common stock at a price of $.72
pursuant to the extension of the USMBC promissory note under this agreement.

     In connection with the engagement of VSI (an unaffiliated third party prior
to entering into the agreement) to raise capital for the Company and pursue
other business restructuring alternatives and the continuing arrangements with
Mr. Burr, VSI and Mr. Burr were provided an option to purchase 80% (40% each) of
a subsidiary to be formed to carry on the Company's international operations.
The option was provided to VSI and Mr. Burr as an incentive for them to
aggressively pursue international sales. 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 were each granted options to purchase 50,000 shares of the Company's
common stock at $2.88 per share, the closing market price of the Company's
common stock on such date. The options were to expire on December 31, 2002 and
vest at the earlier on 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.


                                       44
<PAGE>   45
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

A) EXHIBITS

Exhibit
Numbers       Description of Documents

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       ITR Sale and Lease Agreement, dated as of April 19, 1994, between
             Registrant and the State of Missouri)

10.3.2       Amendment No. 1 to ITR Sale and Lease Agreement between Registrant
             and the State of Missouri

10.3.3       Amendment No. 2 to ITR Sale and Lease Agreement between Registrant
             and the State of Missouri

10.3.4       Amendment No. 3 to ITR Sale and Lease Agreement between Registrant
             and the State of Missouri

10.3.5       Amendment No. 4 to ITR Sale and Lease Agreement between Registrant
             and the State of Missouri

10.3.6       Amendment No. 5 to ITR Sale and Lease Agreement between Registrant
             and the State of Missouri

10.3.7       Amendment No. 6 to ITR Sale and Lease Agreement between Registrant
             and the State of Missouri

10.4         ITR Sales and Service Agreements dated March 21, 1991 between
             Registrant and the Commonwealth of Virginia, as amended (C)

10.4.1       ITR Sales and Service Agreement dated October 1, 1998 between
             Registrant and the Commonwealth Virginia

10.4.2       Amendment No. 1 to ITR Sales and Lease Agreement between Registrant
             and the Commonwealth of Virginia

10.4.3       Amendment No. 2 to ITR Sales and Lease Agreement between Registrant
             and the Commonwealth of Virginia

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)

10.5.2       ITR Lease machines and Purchase Parts Agreement for the California
             State Lottery dated September 16, 1998 between the Registrant and
             GTECH.

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)


                                       45
<PAGE>   46
10.10        Technology Transfer Agreement, dated as of April 9, 1993, between
             the 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)

10.26        Amendment Nos. 1, 2 and 3 to Loan and Security Agreement between
             Registrant and Coast Business Credit (L)

10.27        Master Lease Agreement dated March 1, 1995 between the Registrant
             and Solutioneering, Inc.

10.27.1      Amendment No. 1 to Master Lease Agreement dated December 24, 1996

10.27.2      Amendment No. 2 to Master Lease Agreement dated December 24, 1997

10.28        Distributor Agreement between the Registrant and Editec, dated
             December 30, 1997

10.28.1      Agreement for the French Lottery Contract dated February 24, 1998
             between the Registrant and Editec

10.29        Contract between the Registrant and The French Lottery, dated
             January 25, 1999

10.30        Service Agreement for the Illinois Lottery between the Registrant
             and IGOR, dated July 15, 1994

10.30.1      ITR Sale and Lease Agreement between the Registrant and Illinois
             State Lottery, dated July 1, 1994

24.1         Power of attorney (reference is made to Page II-5 of the
             Registration Statement as originally filed.) (A)


                                       46
<PAGE>   47
Codes for documents included by reference to previous filings

(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 Sep 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) Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
the year ended December 31, 1997.

(L) Incorporated by reference to Registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1998


B) REPORTS ON FORM 8-K

February 18, 2000 - Form 8K was filed, reporting that the Company was in the
process of restating its financial statements for 1997 and 1998. No exhibits or
financial statements were attached.


                                       47
<PAGE>   48
                                   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 28, 2000                     By:  /s/Frederick Sandvick
                                             ---------------------------------
                                             Frederick Sandvick
                                             Chief Executive Officer and
                                             Chairman of the Board of Directors

  Dated:  March 28, 2000                     By:  /s/Samuel W. Stearman
                                             ---------------------------------
                                             Samuel  W. Stearman
                                             Chief Financial
                                             and Accounting Officer

                                             By:  /s/Samuel W. Stearman


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 28, 2000                     By:  /s/John H. Olbrich
                                             --------------------------------
                                             John H. Olbrich, Director



  Dated: March 28, 2000                      By/s/Richard Mahon
                                             --------------------------
                                             Richard Mahon, Director



                                       48