SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)
[x]   ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

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

                         Commission file number: 0-25624

                                LOTTOWORLD, INC.
                 (Name of small business issuer in its charter)

                 Florida                                 65-0399794
      (State or other jurisdiction of         (IRS Employer Identification No.)
      Incorporation or organization)

           2150 Goodlette Road
               Suite 200
            Naples, Florida                                34102
  (Address of principal executive offices)              (Zip Code)

Issuer's Telephone number: (941) 643-1677

Securities registered under 12 (b) of the Exchange Act:          None
Securities registered under Section 12(g) of the Exchange Act:   Common Stock 
                                                                 $.001 par value
                                                         The Nasdaq Stock Market

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.  Yes    No X
                                                              ---   ---
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  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [X]

The Registrant's operating revenues for its most recent year were:  $ 902,336

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
Registrant,  based on the  average of the  closing  bid and asked  prices of the
Registrant's  Common  Stock in the  over-the-counter  market as  reported by the
Nasdaq Stock  Market,  Inc. on March 21, 1997,  was  approximately  $ 3,792,442.
Shares of voting  stock held by each officer and director and by each person who
owns 5% or more of the outstanding  voting stock have been excluded in that such
persons may be deemed to be affiliates. The determination of affiliate status is
not necessarily conclusive.

As of March 21, 1997,  6,609,541 shares of Common Stock,  $.001 par value,  were
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE
None

                           LOCATION OF EXHIBIT INDEX

The index of exhibits is contained in Part IV herein on page number 15.

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:    YES    NO X
                                                     ---   ---


<PAGE>
 
                                TABLE OF CONTENTS


                                     
<TABLE>
<CAPTION>

<S>         <C>                                                                                     <C>   
                                                                                                   Page
                                                                                                   ----
PART I:   
            Item 1.  Business ...................................................................... 1
            Item 2.  Properties .................................................................... 4
            Item 3.  Legal Proceedings ............................................................. 4
            Item 4.  Submission of Matters to a Vote of Shareholders................................ 4

PART II:
            Item 5.  Market for Registrant's Common Equity and Related Stockholder
                     Matters ....................................................................... 4
            Item 6.  Management's Discussion and Analysis of Financial Condition and
                     Results of Operations ......................................................... 5
            Item 7.  Financial Statements .......................................................... 9
            Item 8.  Changes in and Disagreements with Accountants on Accounting and
                     Financial Disclosure .......................................................... 9

PART III:
            Item 9.  Directors, Executive Officers, Promoters and Control Persons; Compliance
                     With Section 16(a) of the Exchange Act ........................................ 9
            Item 10. Executive Compensation ........................................................11
            Item 11. Security Ownership of Certain Beneficial Owners and Management ................13
            Item 12. Certain Relationships and Related Transactions ................................14

PART IV:
            Item 13. Exhibits, and Reports on Form 8-K .............................................15

SIGNATURES .........................................................................................17

</TABLE>
















<PAGE>
                                     PART I

ITEM 1.     BUSINESS

                                 COMPANY PROFILE

      LottoWorld,  Inc., a Florida  corporation  (the  "Company") was founded in
1993 as Dynamic  World  Distributors,  Inc. and changed its name to  LottoWorld,
Inc. in April 1995. The Company publishes and distributes LottoWorld magazine, a
publication  directed at lottery  players,  primarily  through  subscription and
retail  sales at  checkout  and  service  counters.  The 100+  page,  four color
magazine,  which currently is published  monthly in a digest size format,  deals
with all aspects of state lottery  games,  information  and news.  LottoWorld is
nationally  distributed  in 48 states,  the  District of Columbia  and in twelve
foreign  countries.  At present  there are over 50,000  subscribers  and monthly
newstand  distribution  of the  magazine is over 35,000  copies per issue in one
national edition.

      On April 8, 1996,  the New York State  Division of Lottery  announced that
Lottery  Players  Publishing  Company,   Inc.  (a  wholly-owned   subsidiary  of
LottoWorld,  Inc.) had won the  award to  publish  a  monthly  New York  Lottery
magazine  based on the  Company's  response to a Request for  Proposal.  Initial
projections for the monthly magazine, NEW YORK PLAYERS MONTHLY, was to have been
650,000 copies distributed at more than 12,000 lottery retailers  throughout the
state.  On May 23, 1996, the New York Lottery  increased the initial  projection
from  650,000  copies  monthly to a minimum of  approximately  1,100,000  copies
monthly  beginning in October 1996.  The January 1997 issue had a circulation in
excess of 1,128,000.

      The NEW YORK PLAYERS  MONTHLY is a free 48-page,  four color,  digest-size
magazine  offering lottery players  information  about new and existing New York
lottery  games,  profiles of lottery  winners  throughout  the state,  and state
lottery news.
                              BUSINESS DEVELOPMENT

      The initial roll-out phase of the magazine resulted in the inaugural issue
of LottoWorld  magazine in August 1993. During this stage, the Company published
a 16-24 page monthly  magazine with a monthly print order of 20,000 copies.  The
Company  self-distributed the magazine primarily in Southwest Florida,  Atlanta,
Georgia and Minneapolis, Minnesota.

      The  intermediate  roll-out  phase  began in  October  1993 and  continued
through March 1995. During this period,  the magazine increased to 100 pages per
issue and the  national  edition  was  supplemented  with three  separate  state
editions (Florida,  Georgia and Texas). During this phase, the Company increased
monthly  prints  to   approximately   80,000  to  100,000  copies  and  expanded
distribution to 30 wholesalers in eight states.

      In December  1994,  the Company  entered  into a one-year  agreement  with
International  Circulation  Distributors The Hearst Corporation  ("ICD") for the
national distribution of LottoWorld.  The Company, in January 1995, also entered
into a contract  with Time  Distribution  Services,  Inc.  ("TDS") to obtain the
approvals necessary to position the magazine in supermarket  check-out lanes and
similar  locations and perform  certain  follow-up  marketing and  merchandising
functions.

      The national  roll-out phase was targeted at 23 lottery states  (primarily
east  of the  Mississippi  River)  As  part  of  this  phase,  LottoWorld  began
publishing  the  magazine  every two  weeks in 16  separate  editions  that were
distributed through 171 wholesalers in 23 states.

      Due to the inherent time delay between the time a magazine is delivered to
the store, placed into the check-out counter pocket,  purchased by the consumer,
and unsold copies  returned to the  wholesaler  and reports and payments made to
the national  distributor,  a minimum of four months will  transpire  before the
publisher has any reasonable  basis upon which to analysis sales of a particular

                                      -1-



<PAGE>

issue.  In July  1995,  the  Company  began to suspect  substantial  differences
between  reports as to the number of  properly  placed and logoed  pockets  with
actual magazine sales reports.

      Because the Company  was unable to  reconcile  reports as to the number of
available  pockets  with  corresponding  sales  reports for these  pockets,  the
Company  began  to send  its own  employees  and,  in  some  cases,  independent
contractors,  to stores  purported  to have pockets  available  for the magazine
and/or  in  which  the  magazine  was  already  in  place.  The  result  of this
investigation was a determination by the Company that the Company was printing a
significantly  greater  quantity of  magazines  than were  necessary to fill the
actual number of available pockets.

      As soon as it was  apparent  that the  Company was  printing an  excessive
number of copies of the magazine,  the Company immediately reduced the frequency
of issues from every two weeks to monthly  and the number of copies  printed for
each issue from approximately 400,000 copies to approximately 210,000 copies. In
addition,  the Company adopted a new strategic plan that  significantly  reduced
expenditures  (including a lay-off of six  employees and an across the board 15%
salary  reduction),  set magazine print orders to verified pocket  availability,
accelerated  development of a controlled circulation magazine to be published in
cooperation with State Lotteries and began to implement a subscription marketing
program with Publishers Clearing House and other national companies.

      At  1,100,000  copies  monthly the Company  believes  the NEW YORK PLAYERS
MONTHLY  will be the largest  newsstand  distributed  magazine in New York state
(more than twice the size of TV Guide's New York newsstand  circulation).  Based
on  advertising  revenue  generated  by other  publications  with a  minimum  of
circulation of at least 1,100,000 copies monthly,  the Company estimates revenue
from the NEW YORK  PLAYERS  MONTHLY  MAGAZINE  could be in excess of  $3,700,000
annually.  There can be no assurance that the NEW YORK PLAYERS MONTHLY  magazine
will generate revenue at the levels of similarly sized publications.

                               CURRENT BUSINESS

            Through  Lottery  Players  Publishing  Company,   Inc.  ("LPPC")  (a
wholly-owned  subsidiary of LottoWorld,  Inc.) the Company enters into exclusive
contractual  agreements with individual  state lottery  authorities to publish a
48-page, four color, digest-size magazine specifically tailored to offer lottery
players  information  about new and existing lottery games,  profiles of lottery
winners throughout the state and state lottery news.

      The primary  benefit of this program to state lottery  authorities is that
they receive,  without any cost,  an efficient and effective  means of educating
and  communicating  with their  lottery  players.  The  primary  benefits to the
Company  are:  (i) a unique cost  effective or free  distribution  system;  (ii)
potential advertising revenue; (iii) instant circulation; and (iv) a monopoly.

      With respect to the distribution  system,  the program is designed so that
each state lottery is responsible for  distribution  of their magazine,  without
cost to LPPC,  to each  retail  lottery  location  statewide  and to display the
magazine with lottery  tickets.  In the  aggregate,  there are more than 220,000
retail  lottery  ticket  locations  in  the  38  states.   Concerning  potential
advertising revenue,  there can be no assurance that advertising revenue will be
generated  in excess of  expenses  associated  with the  program.  However,  the
Company has devoted  significant  personnel  and capital  resources  to generate
advertising  revenue.  Although  advertising  revenue to-date has been less than
expected,  the  Company  believes  advertising  sales  should  increase  as  the
advertising  community  becomes  aware  of  the  aggregate  circulation  of  the
magazines  within the program (the circulation goal for 1997 is 1,900,000 copies
monthly) and third party advertising research  corroborates  readership patterns
and demographic information usually required by advertisers.

      LPPC now has exclusive  contracts to publish magazines in conjunction with
state  lotteries in New York,  West  Virginia , Georgia and Nebraska  totaling a
combined  1,800,000 copies  distributed  monthly.  Under these  Agreements,  the
Company does not have to begin publishing the magazine until there is sufficient
advertising to pay for the printing.

Nebraska.   On January 15, 1997, the Nebraska Lottery signed an exclusive  three
year contract with LPPC to publish new monthly  magazine,  the NEBRASKA  LOTTERY
PLAYERS DIGEST.  Specifically  tailored for the Nebraska  Lottery,  the NEBRASKA
LOTTERY  PLAYERS  DIGEST  will have an initial  circulation  of  150,000  copies
monthly and will be  available at over 1,300  Nebraska  lottery  ticket  outlets
statewide.

                                      -2-


<PAGE>

Georgia.    On December 24, 1996,  the  Georgia  Lottery  Corporation  signed an
exclusive  three year  contract with LPPC to publish a monthly  Georgia  Lottery
magazine similar in format to the NEW YORK PLAYERS MONTHLY.  Initial projections
are for  distribution  of 400,000 copies monthly which will be available to more
than 5,700 retailers throughout Georgia.

West VirginiOn  January 17, 1997, the West Virginia  Lottery signed an exclusive
three  year  agreement  with LPPC to  publish a monthly  West  Virginia  Lottery
magazine titled,  WEST VIRGINIA LOTTERY PLAYERS DIGEST.  Initial projections are
for distribution of 150,000 copies monthly to all lottery  retailers  throughout
the state.

LOTTOWORLD MAGAZINE
-------------------

      LOTTOWORLD(R)  magazine continues to experience  increasing  subscriptions
sales and steady newsstand sales.  Primarily due to the very significant capital
outlays necessary to successfully maintain a traditional newsstand  distribution
system and promotional campaigns, the Company has decided to conserve capital in
this area and focus  expansion of  LOTTOWORLD(R)  magazine  circulation  through
various subscription sales vehicles.

Subscription.    Monthly  subscribers   to   LOTTOWORLD(R)   magazine   numbered
approximately  64,900 at year end 1996. Current  subscription sales programs for
LOTTOWORLD(R)  magazine  include:  (i) the national  Publishers  Clearing  House
Sweepstakes  (PCH) mailing in March 1997,  which PCH estimates could generate up
to 45,000 new subscribers; (ii) full-page advertising for LOTTOWORLD(R) magazine
subscriptions  in each issue of the NEW YORK PLAYERS  MONTHLY;  (iii) $3 Billion
Lotto Club promotions  sponsored by civic  organization  like the Kiwanis Clubs;
and (iv) through various promotional activities of telemarketing organizations.

Newsstand.   Effective with the March 1997 edition, the single issue cover price
of  LOTTOWORLD(R)  magazine was increased from $1.95 to $2.49 per copy.  Further
changes to be  instituted  with this issue include  consolidation  of 8 separate
state/regional editions to a single national edition and reduction of the number
of copies  printed for newsstand  sales to more closely  match actual  newsstand
sales.  Monthly newsstand sales have been averaging  approximately 22,000 copies
monthly.

SUPPLIERS

      The printing of both magazines is done by S. Rosenthal & Company, Inc., of
Cincinnati,  Ohio. S Rosenthal is a national  publications  printing company who
has printed  LOTTOWORLD since August 1994. The contract with S. Rosenthal is for
a period of five years and pursuant to the  agreement,  S.  Rosenthal  purchases
required  amounts of paper for the Company and passes the increases or decreases
in paper  prices  on to the  Company  as the  paper  is used.  There is a 30 day
minimum  advance  notice  required  for any change in paper  prices The  Company
considers its  relationship  with S. Rosenthal to be excellent and has no reason
to believe that the paper  supplied by S.  Rosenthal or the printing  operations
will become  unavailable  in the  future.  However,  there are many  publication
printers to which the Company can engage should it be necessary.

      The processing of subscriptions  and the preparation of mailing labels for
LOTTOWORLD  is done by the  largest  fulfillment  house  in the  United  States,
Neodata,  located in  Boulder,  Colorado  under a three year  contract at prices
which the Company feels is very favorable. Relations with Neodata are excellent.

TRADEMARKS AND SERVICE MARKS

      The Company has various trademark and service marks to protect proprietary
interests of the Company.  The Company  perceives  these  trademark  and service
marks to be highly  important to the Company's  business and vigorously  polices
and  defends  these  rights.  Each  magazine  contains  notice of the  Company's
trademark  and  service  marks  and  a  notice  of  the   prohibitions   against
unauthorized  duplication,  distribution  and  exhibition.  However,  since  the
playing  methods  and  game  strategies  in  the  Company's  magazines  are  not
protectible  under  trademark and service mark laws, the Company cannot preclude
other parties from

                                      -3-

<PAGE>

offering   instructional   aids  which  might  also  employ  these  methods  and
strategies.  Furthermore,  there  can be no  assurance  that any  action  by the
Company  against an infringer  will be  successful,  or that any recovery by the
Company will adequately compensate it for any damages it might incur.

COMPETITION

      The  Company is aware of only a few  competitors  in its  market,  none of
which has product lines or  distribution  channels  which are  comparable to the
Company's. However, there can be no assurance that other competitors,  which may
have greater  financial and other resources than the Company,  will not be drawn
into the market, or that the Company's  resources and marketing  strategies will
allow the Company to compete successfully.

GOVERNMENT REGULATION

      Lotteries,  and activities  associated therewith,  such as promotion,  are
subject to  substantial  regulation  under  federal laws and by each state which
conducts  a  lottery.  The  application  of such  regulation  is  subject to the
interpretation   by,  and  the  enforcement  policy  of,  each  state's  lottery
commission and/or attorney general. The Company actively attempts to comply with
all applicable laws and has no knowledge of any regulatory  action that has been
taken  or  threatened   that  would  impact  the   activities  of  the  Company.
Nevertheless, there can be no assurance that such regulatory action could not be
taken.  Any  regulatory  action could have a material  effect upon the Company's
business.

EMPLOYEES

      As of March 3, 1997,  the  Company  employed  36  persons,  of which 2 are
part-time  employees.  All  full-time  employees  are salaried and all part-time
employees are paid on an hourly basis.  The Company  provides life insurance for
its full-time  employees in addition to medical  insurance  premiums.  Employees
with less than two years service pay a portion of the premium.

      None of the  Company's  employees  are  represented  by a  union,  and the
Company  does  not  anticipate  any  union  organization  activities  among  its
employees.

ITEM 2.     PROPERTIES

      The Company owns no real estate.  The Company leases  approximately  8,100
square feet of office space in Naples,  Florida from an unaffiliated  party at a
monthly  rental of $ 10,829 plus operating  costs.  The leases expire in January
1999,  and provide for increases in the operating  costs.  The space is used for
the Company's  administrative,  editorial and  production  offices.  The Company
expects this facility will be adequate for the foreseeable  future.  The Company
also leases an approximately 1,700 square foot warehouse in Naples, Florida from
an unaffiliated  party for a monthly rental of $675. This lease expired on March
31,  1997 and the  Company  expects  to renew  this  lease for  another  year at
approximately the same rental.

      The Company also leases approximately 1,466 square feet of office space at
420  Lexington  Avenue,  New York,  NY at a monthly  rental  of  $2,565.50  plus
electricity.  In  addition,  the Company  will pay any  increases in real estate
taxes and operating  expenses.  The lease  expires on May 30, 2002.  The Company
uses this facility for its New York advertising  sales staff and feels the space
is adequate for its needs.


ITEM 3.     LEGAL PROCEEDINGS

      The Company is not a party to, nor is any of its  property the subject of,
any material legal proceeding.

                                      -4-


<PAGE>

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

      The Company  did not submit any  matters to a vote of security  holders in
the fourth quarter of 1996.

                                     PART II

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

      The Company's  common stock trades on The Nasdaq  SmallCap  Market tier of
The Nasdaq Stock Market under the symbol LTTO.  The  following  table sets forth
the high and low sales prices for the period indicated:

         Period                 High              Low         Last
         ------                 ----              ---         ----
1995:
      First Quarter           $ 9.00            $7.00       $8.50
      Second Quarter          $10.25            $8.625      $9.75
      Third Quarter           $10.25            $6.00       $6.00
      Fourth Quarter          $ 7.00            $4.00       $4.75

1996
      First Quarter           $5.75             $3.00       $3.5157
      Second Quarter          $4.75             $1.25       $1.875
      Third Quarter           $2.5625           $1.4063     $1.75
      Fourth Quarter          $1.875            $1.00       $1.25

      At December 31, 1996,  the Company had 196 holders of record of its common
stock and, the Company estimates,  approximately 500 to 900 beneficial owners of
its common stock.

      The Company has never paid or declared  any cash  dividends  on its common
stock and does not contemplate  paying any cash dividends on its common stock in
the foreseeable  future.  Holders of the Company's  common stock are entitled to
receive  dividends  when and as declared by the Board of Directors  out of funds
legally available. All accrued and unpaid dividends on the Company's outstanding
shares of Series A Convertible Preferred Stock must be paid before dividends are
paid on common stock.

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

RESULTS OF OPERATIONS

      The statements  contained in this filing that are not historical facts are
forward-looking  statements.  Actual  results may differ  materially  from those
projections in the forward-looking statements.  These forward-looking statements
involve risks and uncertainties including,  without limitation,  those mentioned
in previous  filings with the  Securities  and Exchange  Commission  under "Risk
Factors".  The  Company  cannot  assure  that it will be able to  anticipate  or
respond  timely to changes in any of the risk  factors  mentioned  above,  which
could adversely affect operating results in one or more fiscal quarters. Results
of  operations  in any past period  should not be  considered  indicative of the
results to be expected for future periods. Fluctuations in operating results may
also result in fluctuations in the price of the Company's common stock.

      The following  discussion should be read in conjunction with the Financial
Statements and the Notes thereto appearing elsewhere in this Form 10-KSB.








                                       -5-


<PAGE>

      For the year ended December 31, 1995,  the Company had operating  revenues
of $797,000;  operating expenses of $6,439,000; an operating loss of $5,641,000;
and a net  loss of  $5,595,000.  The loss  per  share  was  $2.21.  The  Company
attributes approximately  $1,327,000 of production,  $1,500,000 of distribution,
marketing and merchandising;  and $750,000 of promotion expense to be associated
with the failure to timely place  LOTTOWORLD  magazine in retail sales locations
because pockets were not properly prepared to accept delivery of the magazine.

      For the year ended December 31, 1996,  the Company had operating  revenues
of $902,000;  operating expenses of $5,331,000;  an operating loss of $4,429,000
and a net loss of  $4,359,000.  The loss per  share of common  stock was  $0.92.
Included in the operating expenses are: $550,000 attributable to the start-up of
the  NEW  YORK  LOTTERY  PLAYERS  MONTHLY;  $500,000  attributable  to  investor
relations; as well as a net cost of the initial program with Publishers Clearing
House ("PCH") of approximately  $350,000.  It is customary,  in the industry, to
lose money in the first year of a PCH subscription.  The Company, depending upon
renewal  rates,  hopes to have a positive cash flow beginning in the second year
of a subscription.

      Newsstand sales increased by $95,000, of which $18,000 was attributable to
a cover price  increase  which took place with the June 1996 issue of LOTTOWORLD
magazine. By effective management of the distribution of the newsstand copies of
LOTTOWORLD MAGAZINE, sales were increased despite the reduction in the number of
copies  printed  and  distributed  each month.  The  newsstand  distribution  of
LOTTOWORLD  decreased steadily from 193,000 copies in February to 150,000 copies
in July to finally  101,000  copies with the January 1997 issue.  Subsequent  to
year end,  these  decreases  continued  and the April 1997 issue had a newsstand
distribution of 35,000 copies with no anticipated  significant  reduction in the
number of copies sold.

      Advertising  sales  decreased  $60,000  from  $281,000  for the year ended
December 31, 1995 to $221,000 for the year ended  December 31, 1996. The Company
attributes this decrease to the uncertainty of the newsstand sales of LOTTOWORLD
magazine following the announcement of the problems with the distribution of the
magazine which was made in the Fall of 1995. Advertising is usually purchased in
advance  and the  Company  has found it  difficult  to regain  lost  sales,  but
projects  advertising  revenues to increase  significantly in the second half of
1997  due to  increased  ad pages  sold at rates  which  reflect  the  increased
circulation  of the NEW YORK  LOTTERY  PLAYERS  MONTHLY.  The  Company  projects
advertising  revenues of $167,000  and  $4,258,000  in 1997 for  LOTTOWORLD  and
Lottery Players Publishing Company  respectively.  This takes into consideration
projected  revenues  for  magazines  to be  published  for  New  York;  Georgia,
beginning in July 1997;  Virginia and  Massachusetts,  beginning in August 1997;
Kentucky and  Nebraska,  beginning in  September;  West Virginia and New Jersey,
starting in October, and Iowa, Michigan and Florida, beginning in December 1997.
As of March 21, 1997, contracts for publishing these various magazines have been
received from New York, Georgia, Nebraska and West Virginia.

      Other  operating  income rose by $70,000  from  $129,000  to $199,000  and
consists of various  different  products  which are sold  through the  magazines
published  by the  Company.  No one product  accounts for more than 10% of total
revenues.

      Operating expenses of the Company have been reduced by $1,108,000 from the
preceding  year  from  $6,438,000  in 1995 to  $5,331,000  in 1996.  Production,
distribution and editorial  expenses have decreased a net of $372,000 even after
giving effect to the costs associated with the NEW YORK LOTTERY PLAYERS MONTHLY,
which  was   introduced  in  October  1996,  and  which  amounted  to  $335,000.
Circulation  expenses for the year ended  December  31, 1996 are $621,000  lower
than the preceding year. This is largely  attributable to the non-renewal of the
marketing and merchandising contract with Time Distribution  Services,  Inc. and
the  reduction  of the  fees  charged  by  ICD/The  Hearst  Corporation  for the
distribution  of the magazine.  Costs for  fulfillment  of  LOTTOWORLD  magazine
increased  due to the  additional  subscriptions  received from PCH. The cost of
fulfilling  each  subscription  was reduced from $1.80 per name per year to $.84
per name per year.


                                      -6-


<PAGE>

      For the year ended December 31, 1995, the Company spent almost  $1,000,000
to promote LOTTOWORLD magazine when it began its check-out counter sales program
in 1995.  These sums did not have to be expended again as the check-out  counter
program was dropped due to the failure of TDS to properly  and  completely  rack
and logo the  check-out  positions it had secured for the Company.  For the year
ended December 31, 1996, the Company spent  $555,000 on  advertising,  promotion
and business development, a reduction of $800,000 from the previous year.

      Administrative  expenses  increased  55%  over  the  previous  year,  from
$1,252,000 for the year ended December 31, 1995 to $1,938,000 for the year ended
December 31, 1996.  Of the increase of  $686,000,  $500,000 is  attributable  to
funds expended for investor relations.  The Company has actively participated in
a variety of efforts to acquaint  more people with the Company and will continue
this  activity for the  foreseeable  future.  The Company will have  $500,000 in
similar  expenses during the first two quarters of fiscal 1997. Also included in
administrative  expenses for the current year was $116,600 in executive salaries
for the president and publisher of Lottery Players Publishing Company.

LIQUIDITY AND CAPITAL RESOURCES:

      The following table represents the capital resources of the Company:

                                                             December 31,
                                                   ----------------------------
                                                        1996             1995
                                                      --------         -------

Current Assets                                     $  1,012,000    $  1,097,000
Current Liabilities                                   1,212,000       1,099,000
                                                   ------------    ------------

                  Working Capital (Deficiency)     $   (200,000)   $     (2,000)
                                                   ------------    ------------

Common Shareholders' Equity
       Common stock                                $      6,100    $      3,100
       Common stock subscribed                             --         1,316,200
       Additional paid-in capital                    12,492,000       7,933,800
       Accumulated deficit                          (12,248,300)     (7,789,500)
       Less treasury stock                              (34,100)           --
       Less unpaid stock subscriptions                     --          (866,200)
                                                   ------------    ------------

                                                   $    215,700    $    597,400
                                                   ------------    ------------

      Cash  used in  operations  during  1996  was  $3,291,000  as  compared  to
$5,138,000  used in operations in 1995. The decrease is primarily due to a lower
net  loss in 1996 and an  increase  in the  deferred  revenues  attributable  to
increased subscriptions.

      The Company used $39,000 for investing  activities during 1996 compared to
$411,000  used in 1995.  In 1995 the Company  was  acquiring  equipment  for the
distribution  of LOTTOWORLD and furniture and equipment for the increased  staff
anticipated  when the Company had its national  roll-out in June 1995.  When the
Company  experienced the problems with the distribution,  it was determined that
the Company no longer  needed to complete the  acquisition  of this  equipment ,
which it halted in 1995. The Company was able to meet all its requirements  with
no additional acquisitions of furniture or equipment.

      Cash  provided  by  financing  was  $3,149,000  in 1996  compared  to cash
provided by financing  of  $5,806,000  in 1995.  Most of the funds were from the
issuance of common stock in both periods. Cash used to reduce long-term debt was
$16,600 in 1996 and $8,300 in 1995.

                                      -7-


<PAGE>

      The  Company   does  not  have  any  material   commitments   for  capital
expenditures  at December 31, 1996.  The Company  believes that it does not have
the capital resources and liquidity  necessary to meet all of the obligations or
its  projections  during  1997  and  feels it will  need to raise  approximately
$4,000,000 in additional financing to meet its goals.

      On March 12, 1996,  the Company sold 180,000 shares of its common stock to
a private  investor  at the price of $3.75 per share.  The net  proceeds  to the
Company was $607,500. This sale was subject to a price adjustment based upon the
market performance of the Company's stock in a period subsequent to the sale and
based upon that price adjustment, another 120,000 shares were issued for a total
of 300,000  shares.  These  securities  were sold pursuant to an exemption  from
registration  under  Regulation S  promulgated  by the  Securities  and Exchange
Commission.

      As of March 31,  1996,  the  Company  entered  into  agreements  with four
unrelated parties to promote the Company through various means,  including,  but
not limited to, investment shows,  magazine articles,  and radio interviews.  In
return these parties received 666,667 shares of the Company's common stock which
had a market value of $1,000,000. Those shares were subsequently registered on a
Form S-8 Registration Statement (file number: 333-03931 filed on May 17, 1996).

      On June 28, 1996, the Company sold  1,188,164  shares at a price of $1.625
per  share  and the net  proceeds  to the  Company  from  this  transaction  was
$1,718,382,  exclusive  of legal fees of  $13,472.  These  securities  were sold
pursuant to an exemption from registration under Regulation D promulgated by the
Securities and Exchange Commission.

      On September  12, 1996,  the Company sold  1,188,164  shares at a price of
$1.625 per share and the net proceeds to the Company from this  transaction  was
$537,282.  These securities were sold pursuant to an exemption from registration
under  Regulation D promulgated by the Securities  and Exchange  Commission.  As
compensation  for acting as Selling Agent for the above two sales,  a registered
broker-dealer  received warrants  entitling it to purchase 155,966 shares of the
Company's  common stock for $1.65 per share.  The warrant is  exercisable  for a
period of five years from the date of grant.  On October 10,  1996,  the Company
filed  a  Registration  Statement  on  Form  S-3  (file  number:  333-13863)(the
"Registration  Statement") to register the above two transactions as well as the
shares underlying the warrants issued to the Selling Agent.

      The  Registration  Statement was amended on February 14, 1997 and again on
April 9, 1997 to  include  333,340  shares of the  common  stock of the  Company
issued to  Dennis B.  Schroeder  and A.  Richard  Holman,  the  Company's  Chief
Executive Officer and President  respectively,  on November 10, 1995 in exchange
for an aggregate  amount of  $1,000,020 of the  Company's  secured  subordinated
promissory notes. The Registration Statement, as amended, includes 56,000 shares
of the common  stock of the  Company  issued to  Parkway  Financial  Group,  the
landlord of the premises rented in Naples,  Florida for the executive offices of
the Company, in exchange for four months rent, valued at $56,000.

TRANSACTIONS SUBSEQUENT TO DECEMBER 31, 1996

      In various  private  transactions,  the Company  either sold shares of its
common stock for cash or  exchanged  shares of its common stock for payments due
certain vendors of the Company in lieu of a cash payment of those payables.

      In January 1997 the Company exchanged 56,000 shares of its common stock in
payment of rent on its executive  offices for a period of four months.  The rent
for this period would be $56,000.  In a series of transactions with individuals,
the Company sold 178,188  shares of the Company's  common stock for an aggregate
amount of $163,000.  In March 1997, the Company  exchanged 200,000 shares of its
common stock for printing services worth an estimated $101,000.

      On April 9, 1997,  the  Company  acquired  2,666,666  shares of the common
stock of Sound Money Investors,  Inc.  ("SMI")with a market value of $500,000 in
exchange for 516,129 shares of common stock of the Company.

                                      -8-


<PAGE>

      The following  table sets forth at December 31, 1996; (i) the total assets
and the capitalization of the Company; and (ii) the pro-forma  capitalization to
give effect to the subsequent transactions:

                                                         December 31, 1996
                                                 ------------------------------ 
                                                      Actual          Pro-forma
                                                 ------------      ------------
Total assets                                     $  2,436,000      $  3,140,700

Long-Term Debt, less current maturities                 8,000             8,000

Redeemable convertible preferred stock              1,000,000         1,000,000

Common Shareholders' Equity
     Common stock                                       6,100             7,100
     Additional paid-in capital                    12,492,000        13,311,200
     Accumulated deficit                          (12,248,300)      (12,248,300)
     Less, treasury stock                             (34,100)          (34,100)
                                                 ------------      ------------
                                                 $    215,700      $  1,035,900
                                                 ============      ============



ITEM 7.     FINANCIAL STATEMENTS

      All  financial  statements  required to be filed  hereunder  are  attached
hereto following the signature page.

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

None

                                    PART III

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

      (a)   IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS.

            DIRECTORS.

      The present term of office of each director will expire at the next Annual
Meeting of Shareholders.  The name and position with the Company and age of each
director and the period during which each director has served are as follows:

                                                                        Director
Name and Position, if any, in the Company                Age              Since
-----------------------------------------                ---            --------
Dennis B. Schroeder                                   
  (Publisher, Chairman of the Board and Chief         
  Executive Officer)                                      59              1993
A. Richard Holman                                     
  (Editor-in-Chief and President)                         53              1993
James D. Cullen                                           42              1995






                                  -9-


<PAGE>
            EXECUTIVE OFFICERS.

      The executive  officers of the Company are elected by the Company's  Board
of Directors and serve at the discretion of the Board of Directors.  The current
executive officers of the Company are as follows:

                                                                        Officer
Name of Executive Officer and Position in Company        Age             Since
-------------------------------------------------        ---            -------
Dennis B. Schroeder
  (Publisher, Chairman of the Board, and Chief 
  Executive Officer)                                      59              1993
A. Richard Holman
  (Editor-in-Chief and President)                         53              1993
Judith A. Schroeder
  (Secretary/Treasurer and Vice President)                55              1993
Bonnie Fussell
  (President, Lottery Players Publishing Company, Inc.
  A wholly-owned subsidiary of the Company)               57              1996
Stuart Dubow
  (Chief Financial Officer and Senior Vice President)     53              1994
Barry A. Miller
  (Managing Editor and Senior Vice President)             54              1994


                       BUSINESS EXPERIENCE

      The following is a brief account of the business  experience  for the last
five years of each director and executive officer of the Company:

Name of Director or Executive   Principal Occupation During the Last Five Year
-----------------------------   ------------------------------------------------

Dennis B. Schroeder             Publisher,  Chairman  of  the  Board  and  Chief
                                Executive  Officer of the  Company  since it was
                                founded in 1993;  Chief  Executive  Officer  and
                                Chairman  of the  Board of  Financial  Marketing
                                Consultants,  Inc. ("FMC"), FMC provides new and
                                developing  business with marketing  strategies,
                                business plans,  capital structure  analysis and
                                assistance  and advice in obtaining  private and
                                public investor financing, since 1991.

A. Richard Holman               Editor-in-Chief   and  President  since  it  was
                                founded  in  1993;   President,   Home  Services
                                Alliance  from  1992 to 1993;  President  of FMC
                                since 1993.

James D.  Cullen                Attorney-at-law,  specializing in the  areas  of
                                corporate  and  transactional  matters,  Naples,
                                Florida,  since 1992;  Associate General Counsel
                                and Vice  President  of  Investments,  Transmark
                                USA, Inc., an international  investment  holding
                                company, from 1991 to 1992.

Judith A. Schroeder             Secretary/Treasurer  and  Vice  President of the
                                Company since 1993;  Secretary/Treasurer  of FMC
                                since 1991.

Bonnie Fussell                  President of  Lottery Players Publishing Company
                                since  August   1996;   President  of  Louisiana
                                Lottery  from March 1992 to July 1996;  Chief of
                                Staff, Louisiana State Police,  February 1962 to
                                February 1992.

                                      -10-


<PAGE>

Stuart Dubow                    Chief   Financial   Officer  and   Senior   Vice
                                President of the Company  since 1994;  President
                                of Mercury Lighting Corp-oration, a manufacturer
                                of electric light sockets, from 1991 to 1994.

Barry A. Miller                 Managing Editor and Senior Vice President of the
                                Company   since   1994;   President   and  Chief
                                Executive Officer of World Steel, Inc., a trader
                                of steel, from 1991 to 1993.

              (b)    IDENTIFY SIGNIFICANT EMPLOYEES

Not applicable

              (c)    FAMILY RELATIONSHIPS

Judith A. Schroeder is the wife of Dennis B. Schroeder.

              (d)    INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

None

              (e)    COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

      Section 16(a) of the  Securities  Exchange Act of 1934 requires  Company's
officers  and  directors  and  persons  who own  more  than ten  percent  of the
Company's  outstanding  common stock to file reports of ownership and changes in
ownership  with  the  Securities  and  Exchange  Commission  ("SEC").  Officers,
directors  and  greater  than  ten  percent  shareholders  are  required  by SEC
regulations  to furnish the company with copies of all Section  16(a) forms they
file.

      Based solely on a review of Forms 3 and 4 furnished to the Company  during
the  Company's  fiscal year ended  December 31, 1996,  there were no  directors,
officers, or more than 10% shareholders of the Company who failed to timely file
a Form 3 or Form 4.


ITEM 10.    EXECUTIVE COMPENSATION

      (a) AND (b) GENERAL AND SUMMARY COMPENSATION TABLE

      The following table shows all plan and non-plan  compensation  paid by the
Company and its subsidiary for services rendered for the year ended December 31,
1996. No executive officer earned in excess of $100,000.

<TABLE>
<CAPTION>
                                            SUMMARY COMPENSATION TABLE

                                                                      Long Term Compensation
                                                                      -----------------------   
                                           Annual Compensation                Awards
                                 ----------------------------------   -----------------------
Name and                                             Other Annual      Restricted     Options     All Other
Principal Position      Year     Salary     Bonus    Compensation     Stock Awards    Granted    Compensation
----------------------  ----     ------    -------   --------------   ------------    -------    ------------
<S>                     <C>      <C>          <C>          <C>             <C>        <C>             <C>    
Dennis B. Schroeder     1996     $87,182                                              100,000
Publisher, Chairman     1995     $76,750      0            0               0           33,401         0
of the Board, Chief     1994     $76,750      0            0               0             0            0
Executive Officer
</TABLE>





                                  -11-


<PAGE>

      (c) and (d) STOCK OPTION AND STOCK APPRECIATION RIGHTS

            STOCK OPTION PLANS

      In August 1993, the Company's Board of Directors and shareholders  adopted
the Company's 1993 Stock Option Plan (the"Plan") which provides for the granting
of stock  options to key  employees,  consultants  and  directors.  The Plan was
amended by the  shareholders in 1995 to increase the aggregate  number of shares
of common stock  reserved for issuance  from 100,000  shares to 350,000  shares.
Shares covered by expired or terminated stock options may be used for subsequent
awards under the Plan.

      The Plan is currently  administered  by the Company's  Board of Directors.
The Board has the power to select  recipients,  make awards of stock options and
adopt regulations and procedures for the Plan.

      The  Plan  permits  the  award  of both  stock  options  that  qualify  as
"incentive  stock options " ("ISOs") under the Internal Revenue Code and options
that do not so qualify  ("non-qualified  options").  ISOs differ as to their tax
treatment and are subject to a number of limitations  under the Internal Revenue
Code.  The exercise price on  non-qualified  options may not be less than 85% of
the fair market  value of the stock on the date the option is granted.  ISOs may
not be granted  with an exercise  price less than the fair  market  value of the
common  stock on the date of the  grant (or for an  option  granted  to a person
holding more than 10% of the Company's  voting  stock,  at less than 110% of the
fair  market  value.) An  optionee is not taxed on the grant of either an ISO or
non-qualified  option.  An optionee is taxed on the exercise of a  non-qualified
option in the amount of the "spread"  between the  exercise  price of the option
and the fair market value of the underlying  shares at the time of the exercise.
This  amount is taxed as  ordinary  income and the  Company is entitled to a tax
deduction of this amount.  In the case of an ISO, an optionee  generally  has no
tax on the exercise and is only taxed upon a sale of the shares  purchased  upon
exercise of the option.  If the shares are held for the time required  under the
Internal Revenue Code, all of the gain is taxed as a long-term  capital gain. In
that event, the Company is not entitled to any deduction.

      The  options  expire  between  one and four  years from the date of grant.
Options granted under the Plan are not transferable  except:  (i) in the case of
death  of the  optionee;  (ii) by laws of  descent  and  distribution;  or (iii)
pursuant to a qualified  domestic  relations order, and each option provides for
early  expiration  upon the  death of the  optionee  or,  for  employees  of the
Company, upon termination of the optionee's employment with the Company.

      At December  31,  1996,  there was  outstanding  under the Plan options to
acquire 186,668 shares of common stock at exercise prices ranging from $1.00 per
share to $5.50 per share,  the price  determined by the Board of Directors to be
the fair  market  value of the shares on the date of the grant  (except  for 10%
shareholders whose options are at 110% of the fair market value).

      The following  table  contains  information  concerning the grant of stock
options by the Company in 1996 to each  executive  officer  named in the Summary
Compensation Table and each director:
<TABLE>
<CAPTION>
                                Option Grants in Last Fiscal Year
                                ---------------------------------

                                      Individual Grants
---------------------------------------------------------------------------------------------
                                            Percentage of
                            Options         Total Options         Exercise or
                            Granted         Granted               Base Price      Expiration
      Name                 In 1996(1)       Employees in 1996      Per Share        Date
----------------------    -----------       -----------------    ------------     ----------
<S>                            <C>               <C>                <C>             <C> 
Dennis B. Schroeder            33,401            4.58%              $5.50           3/1/98
                               75,000           10.29%              $1.65           5/31/2000
                               25,000            3.43%              $1.88           7/29/99

A. Richard Holman              22,267            3.06%              $5.50           3/1/98
                               75,000           10.29%              $1.65           5/31/2000
                               25,000            3.43%              $1.88           7/29/99

                                      -12-

<PAGE>

James D. Cullen                50,000            6.86%              $3.50           3/1/99
                               50,000            6.86%              $1.65           5/31/99
                               15,000            2.06%              $5.00           7/1/98
</TABLE>

(1)   The exercise  price may be paid in cash or by such other method  permitted
      by the Board of Directors,  including (a) tendering (either actually or by
      attestation) shares of LottoWorld,  Inc. common stock already owned having
      a fair market value equal to the cash  exercise  price of the option being
      exercised, (b) surrendering another LottoWorld, Inc. award having a market
      value on the date of  exercise  equal  to the cash  exercise  price of the
      option being exercised, or (c) any combination of the foregoing.

                 Aggregate Option Exercises in Last Fiscal Year
                        and Fiscal Year End Option Values

      The  following  table  contains  information  concerning  options  held at
December  31,  1996 by each  of the  executive  officers  named  in the  Summary
Compensation Table and director:
                                                                   Value of
                                                   Number of      Unexercised
                                                  Unexercised    In the Money
                       Shares Acquired    Value     Options        Options
      Name               On Exercise    Realized  At Year-End    At Year-End
-------------------    ---------------  --------  -----------    -----------
Dennis B. Schroeder           0             0       193,401*          0
A. Richard Holman             0             0       157,267*          0
James D. Cullen               0             0       170,000*          0

*  All options shown are exercisable as of December 31, 1996.

      (i)   REPORT ON REPRICING OF OPTIONS

      On  February  8, 1996,  the Board of  Directors  voted to reprice  all the
options which were issued to employees of the Company at the time of the Initial
Public Offering of the Company.  The option price at that time,  March 10, 1995,
was $7.00  (except  for 10%  holders,  for  which the price was 110% of  market.
Included in this repricing were the Chairman and Chief Executive Officer and the
President of the Company.

<TABLE>
<CAPTION>
                                      Ten-Year Option/SAR Repricings

                                       Number of                                                Length of
                                       Securities   Market Price   Exercise                     Original
                                       Underlying   Of stock at    Price at                     Option Term
                                       Options/     Time of        Time of                      Remaining at
                                       SARs         Repricing or   Repricing or   New           Date of
                                       Repriced or  Amendment      Amendment      Exercise      Repricing or
Name                     Date          Amended         $              $           Price ($)     Amendment
----                    -------       ----------    -----------    -----------    ---------     -------------
<S>                     <C>             <C>          <C>            <C>            <C>           <C>    
Dennis B. Schroeder     2/8/96          33,401       $5.00          $7.70          $5.50         2 years
Chairman and Chief
Executive Officer

A. Richard Holman       2/8/96          22,267       $5.00          $7.70          $5.50         2 years

</TABLE>


ITEM 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      (a) and (b) Security Ownership of Certain Beneficial Owners and Management





                                  -13-

<PAGE>

      The following  table sets forth as of March 21, 1997, the number of shares
of the Company's $0.001 par value common stock owned by each person who owned of
record, or was known to own  beneficially,  more than 5% of the number of shares
of the Company's  outstanding  common stock,  sets forth the number of shares of
the  Company's  outstanding  common  stock  beneficially  owned  by  each of the
Company's directors, and sets forth the number of shares of the Company's common
stock  beneficially  owned by all of the  Company's  directors and officers as a
group:


<TABLE>
<CAPTION>
                                                            Presently
                                                            Exercisable  Presently
Name of                              Percent      Common     Options     Convertible
Beneficial              Total           Of        Shares       And       Preferred    Beneficial
 Owners (1)            Ownership      Class        Owned     Warrants      Stock      Ownership
----------------       ---------     -------      ------     --------    -----------  ---------
<S>                    <C>            <C>       <C>           <C>           <C>         <C>
Perkins Capital
Management(2)            615,832        9.3                                             615,832

Dennis B.
Schroeder(2)(3)(4)       961,541       14.1      718,142      193,401        49,998

A. Richard
Holman(2)(5)             627,665        7.0      470,398      157,267

James D.
Cullen(2)(6)(7)          172,610        2.6        2,000      170,000                       610

All Directors and
executive officers
as a group
(7 persons)            2,173,816       28.9    1,192,540      875,668        49,998         610
____________________

(1)         All beneficial  owners listed have sole voting and/or investment power with respect
            to the shares shown unless otherwise indicated.

(2)         The address for Perkins Capital Management,  Inc. is 730 East Lake Street, Wayzata,
            MN, 55391-1769. The address for Messrs. Schroeder,  Holman and Cullen is Suite 200,
            2150 Goodlette Road, Naples, FL 34102.

(3)         Includes  193,401 shares of common stock  underlying  presently  exercisable  stock
            options that have exercise prices between $1.50 per share and $5.50 per share.

(4)         Represents  shares of common  stock  underlying  shares of Series A 10%  Redeemable
            Convertible Preferred Stock with a par value of $0.01 per share, a redeemable value
            of $6.00 per share, convertible into common stock at $.96 per share.

(5)         Includes  157,267 shares of common stock  underlying  presently  exercisable  stock
            options that have exercise prices between $1.50 per share and $5.50 per share.

(6)         Includes  170,000 shares of common stock  underlying  presently  exercisable  stock
            options that have exercise prices between $1.50 per share and $5.50 per share.

(7)         Includes  10 shares  beneficially  held by his son and over which he has voting and
            investment power.

</TABLE>




                                      -14-


<PAGE>

ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      James D. Cullen, a director, was paid $92,500 for legal services performed
on behalf of the Company.

                                     PART IV

ITEM 13.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a)(1) The following financial statements are filed herewith in ITEM 7.

            (i)   Balance Sheets as of December 31, 1996 and 1995
            (ii)  Statements of Operations for the years ended December 31, 1996
                  and 1995.
            (iii) Statements of Common  Shareholders  Equity for the years ended
                  December 31, 1996 and 1995
            (iv)  Statements of Cash Flows for the years ended December 31, 1996
                  and 1995
            (v)   Notes to financial statements

     (a)(2) The following exhibits are submitted herewith:

3.1   Articles of  Incorporation  of Registrant,  with  amendments.  Filed as an
      Exhibit  to the  Company's  Registration  Statement  on Form  SB-2,  dated
      January  17,  1995,  (File No.  33-88462-a)  and  incorporation  herein by
      reference.

3.2   By-Laws of Registrant.  Filed as an Exhibit to the Company's  Registration
      Statement on Form SB-2, dated January 17, 1995, (File No.  33-88462-a) and
      incorporation herein by reference.

4.1   Form of Common  Stock  Certificate.  Filed as an Exhibit to the  Company's
      Registration  Statement on Form SB-2,  dated  January 17, 1995,  (File No.
      33-88462-a) and incorporation herein by reference.

10.1  Employment  Contract of Dennis B. Schroeder,  with attached  agreements to
      grant  stock  options.  Filed  as an  Exhibit  to  Amendment  No. 1 to the
      Company's Registration Statement on Form SB-2, dated February 17, 1995 and
      incorporated herein by reference.

10.2  Employment  Contract of A. Richard  Holman,  with  attached  agreements to
      grant  stock  options.  Filed  as an  Exhibit  to  Amendment  No. 1 to the
      Company's Registration Statement on Form SB-2, dated February 17, 1995 and
      incorporated herein by reference.

10.3  Employment  Contract of Stuart Dubow. Filed as an Exhibit to the Company's
      Registration  Statement on Form SB-2,  dated  January 17, 1995,  (File No.
      33-88462-a) and incorporation herein by reference.

10.4  Employment Contract of Barry Miller.  Filed as an Exhibit to the Company's
      Registration  Statement on Form SB-2,  dated  January 17, 1995,  (File No.
      33-88462-a) and incorporation herein by reference.


10.7  Stock Option Plan of the Registrant.  Filed as an Exhibit to the Company's
      Registration  Statement on Form SB-2,  dated  January 17, 1995,  (File No.
      33-88462-a) and incorporation herein by reference.

10.9  Form of Stock Option  Agreement  between  Registrant and each of Dennis B.
      Schroeder,  A. Richard Holman, and James D. Cullen. Filed as an Exhibit to
      the Company's Registration Statement on Form SB-2, dated January 17, 1995,
      (File No. 33-88462-a) and incorporation herein by reference.

10.18 Form of Common Stock Warrant  between the Company and purchasers of Units.
      Filed as an Exhibit to the Company's  Registration Statement on Form SB-2,
      dated January 17, 1995, (File No. 33-88462-a) and incorporation  herein by
      reference.
                                  -15-


<PAGE>

10.19 Lease between the Company and Parkway Financial Center commencing February
      1, 1994,  as amended.  Filed as an Exhibit to the  Company's  Registration
      Statement on Form SB-2, dated January 17, 1995, (File No.  33-88462-a) and
      incorporation herein by reference.

10.21 Printing  Agreement  between the Company and S. Rosenthal & Company,  Inc.
      dated November 15, 1994. Filed as an Exhibit to the Company's Registration
      Statement on Form SB-2, dated January 17, 1995, (File No.  33-88462-a) and
      incorporation herein by reference.

10.22 Stock Option Agreement  between Dennis B. Schroeder and A. Richard Holman.
      Filed as an  Exhibit  to  Amendment  No. 2 to the  Company's  registration
      Statement on Form SB-2,  dated March 1, 1995, and  incorporated  herein by
      reference.

10.23 Lease between the Company and Parkway  Financial Center  commencing May 1,
      1995.  Filed as an Exhibit on the  Company's  Annual Report on Form 10-KSB
      for the fiscal year ended  December  31, 1995 and  incorporated  herein by
      reference.

10.24 Distribution  Agreement between the Company and International  Circulation
      Distributors - The Hearst  Corporation,  dated February 20, 1996. Filed as
      an Exhibit on the  Company's  Annual  Report on Form 10-KSB for the fiscal
      year ended December 31, 1995 and incorporated herein by reference.

10.25 Form of Stock Option  Agreement  between the Registrant and each of Stuart
      Dubow and Barry Miller. Filed as an Exhibit on the Company's Annual Report
      on  Form  10-KSB  for  the  fiscal  year  ended   December  31,  1995  and
      incorporated herein by reference.

10.26 Exchange Agreement between the Company and each of Dennis B. Schroeder and
      A.  Richard  Holman dated  November  10, 1995.  Filed as an Exhibit on the
      Company's  Annual Report on Form 10-KSB for the fiscal year ended December
      31, 1995 and incorporated herein by reference.

10.31 Employment  Contract between the Company and Bonnie Fussell dated June 25,
      1996.

10.32 Form of contract  between  Lottery  Players  Publishing  Company,  Inc., a
      wholly-owned  subsidiary of the Company,  and the New York State  Lottery,
      the Georgia  Lottery,  the Nebraska  Lottery and the West Virginia Lottery
      for the publication of a monthly magazine.

21    List of subsidiaries  

27    Financial Data Schedule


      (b)   There were no Reports on Form 8-K for the quarter ended December 31,
            1996
















                                      -16-


<PAGE>

                                   SIGNATURES

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


                                    LottoWorld, Inc.

                                    By:     Dennis B. Schroder
                                         -----------------------------
                                         Dennis B. Schroeder
                                         Chief Executive Officer

                                    By:     Stuart Dubow
                                         -----------------------------
                                         Stuart Dubow
                                         Chief Financial Officer

                                    Date: April 15, 1997

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


S/ Dennis B. Schroeder                                Date: April 15, 1997
----------------------------------------
Dennis B. Schroeder, Chief Executive
Officer and a director

S/A. Richard Holman                                   Date: April 15, 1997
----------------------------------------
A. Richard Holman, President and
a director

 S/ James D. Cullen                                   Date: April 15, 1997
----------------------------------------
James D. Cullen, a director

















                                      -17-


<PAGE>










                        LOTTOWORLD, INC. AND SUBSIDIARY


                         CONSOLIDATED FINANCIAL REPORT


                               DECEMBER 31, 1996








<PAGE>



                          INDEX TO FINANCIAL STATEMENTS


--------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT                                              F - 2
--------------------------------------------------------------------------------

FINANCIAL STATEMENTS

  Consolidated balance sheets as of December 31, 1996 and 1995            F - 3

  Consolidated statements of operations for the years ended
  December 31, 1996 and 1995                                              F - 4

  Consolidated statements of common shareholders' equity for the
  years ended December 31, 1996 and 1995                                  F - 5

  Consolidated statements of cash flows for the years ended
  December 31, 1996 and 1995                                              F - 7

  Notes to consolidated financial statements                              F - 9

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
































                                      F-1

<PAGE>



                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Shareholders
LottoWorld,  INC. and Subsidiary
Naples, Florida

We have audited the accompanying consolidated balance sheets of LottoWorld, Inc.
and  subsidiary as of December 31, 1996 and 1995,  and the related  consolidated
statements of  operations,  common  shareholders'  equity and cash flows for the
years then ended.  These  financial  statements  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of LottoWorld, Inc. and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for the years then  ended,  in  conformity  with  generally
accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 9 to the
financial statements, the Company has suffered recurring losses from operations.
This raises substantial doubt about the Company's ability to continue as a going
concern.  Management's  plans in regard to these  matters are also  described in
Notes 9 and  10.  The  consolidated  financial  statements  do not  include  any
adjustments that might result from the outcome of this uncertainty.



                                                  /s/ McGladery & Pullen LLP



Naples, Florida
March 21, 1997, except for Note 10
  as to which the date is April 8, 1997






                                      F-2

<PAGE>

LOTTOWORLD, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995

<TABLE>
<CAPTION>

ASSETS                                                                      1996             1995
----------------------------------------------------------------------------------------------------
<S>                                                                   <C>              <C>  
Current Assets
   Cash and cash equivalents                                          $     137,752    $    318,963
   Accounts receivable, less allowance for doubtful accounts
      1996 $-0-; 1995 $65,800                                               324,297         159,479
   Stock subscriptions receivable (Note 5)                                     -            449,980
   Prepaid expenses (Note 2)                                                549,664         168,412
                                                                      ------------------------------
              Total current assets                                        1,011,713       1,096,834
Restricted cash - redeemable convertible preferred stock
   (Note 4)                                                               1,000,020       1,000,020
Accounts receivable, officers                                                58,375          58,375
Furniture, Fixtures and Equipment, less accumulated depreciation
   1996 $221,723; 1995 $106,050 (Note 3)                                    338,729         556,253
Other Assets                                                                 26,820          10,101
                                                                      ------------------------------
                                                                      $   2,435,657    $  2,721,583
                                                                      ==============================
LIABILITIES AND SHAREHOLDERS' EQUITY                         
Current Liabilities
   Current maturities of long-term debt (Note 3)                      $      16,667    $     16,667
   Accounts payable (Note 10)                                               757,789         851,673
   Accrued expenses                                                          45,724          56,302
   Deferred revenue                                                         366,372         149,549
   Dividends payable                                                         25,000          25,000
                                                                      ------------------------------
              Total current liabilities                                   1,211,552       1,099,191
                                                                      ------------------------------
Long-Term Debt, less current maturities (Note 3)                              8,383          25,050
                                                                      ------------------------------
Commitments (Note 7)
Redeemable convertible preferred stock, $.01 par value, 250,000
   shares authorized, 166,670 shares issued and outstanding
   (Note 4)                                                               1,000,020       1,000,020
                                                                      ------------------------------
Common Shareholders' Equity
   Common stock, $.001 par value, 10,000,000 shares authorized;
      6,164,853 and 3,106,022 shares issued                                   6,165           3,106
   Common stock subscribed, 637,500 shares (Note 5)                            -          1,316,230
   Additional paid-in capital                                            12,491,870       7,933,759
   Accumulated deficit                                                  (12,248,259)     (7,789,523)
   Less cost of 11,500 common shares acquired                               (34,074)           - 
   Less subscriptions for 387,500 shares (Note 5)                              -           (866,250)
                                                                      ------------------------------
                                                                            215,702         597,322
                                                                      ------------------------------
                                                                      $   2,435,657    $  2,721,583
                                                                      ==============================
See Notes to Consolidated Financial Statements.

</TABLE>

                                      F-3


<PAGE>

LOTTOWORLD, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996 and 1995

<TABLE>
<CAPTION>
                                                                  1996              1995
------------------------------------------------------------------------------------------
<S>                                                        <C>              <C>   
Revenue:
   Magazine sales                                          $     482,213    $     387,123
   Advertising                                                   221,060          280,657
   Other                                                         199,063          129,686
                                                           -------------------------------
                                                                 902,336          797,466
                                                           -------------------------------

Operating expenses:
   Production, distribution and editorial                      2,127,824        2,500,252
   Circulation                                                   710,405        1,331,594
   Advertising, promotion and business development               554,663        1,354,530
   Selling, general and administrative                         1,938,382        1,252,399
                                                           -------------------------------
                                                               5,331,274        6,438,775
                                                           -------------------------------

              Operating loss                                  (4,428,938)      (5,641,309)
                                                           -------------------------------

Other income (expense):
   Interest income                                                73,725          133,727
   Interest expense                                               (3,521)         (87,609)
                                                           -------------------------------
                                                                  70,204           46,118
                                                           -------------------------------

              Net loss                                     $  (4,358,734)   $  (5,595,191)
                                                           ==============================

Net loss per common share                                  $       (0.92)   $       (2.21)

Weighted average number of common shares outstanding           4,841,564        2,576,152

See Notes to Consolidated Financial Statements.

</TABLE>















                                       F-4


<PAGE>

LOTTOWORLD, INC. AND SUBSIDIARY

CONSOLIDATED  STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
Years Ended December 31, 1996 and 1995

<TABLE>
<CAPTION>

                                                                      Common       Additional
                                                        Common        Stock          Paid-in
                                                        Stock       Subscribed       Capital
----------------------------------------------------------------------------------------------
<S>                                               <C>           <C>              <C>           
Balance, December 31, 1994                        $     1,885   $           -    $    2,095,394
   Common stock issued (1,221,090 shares)               1,221               -         5,838,365
   Stock subscriptions (Note 5)                            -         1,316,230              -        
   Dividend distributions                                  -                -               - 
   Net loss                                                -                -               -
                                                  ---------------------------------------------
Balance, December 31, 1995                              3,106        1,316,230        7,933,759
   Common stock issued (3,058,831 shares)               3,059         (449,980)       4,558,111
   Common stock subscriptions expired                      -          (866,250)             -
   Treasury shares purchased (11,500 shares)               -                -               -
   Dividend distributions                                  -                -               -  
   Net loss                                                -                -               -
                                                  ---------------------------------------------
Balance, December 31, 1996                        $     6,165   $           -    $   12,491,870
                                                  =============================================

See Notes to Consolidated Financial Statements.

</TABLE>































                                      F-5


<PAGE>





                                         Common            Total
     Accumulated         Treasury         Stock         Shareholders'
      (Deficit)           Stock       Subscriptions        Equity
---------------------------------------------------------------------
          
$     (2,094,330)    $        -      $           -     $       2,949
              -               -                  -         5,839,586
              -               -            (866,250)         449,980
        (100,002)             -                  -          (100,002)
      (5,595,191)             -                  -        (5,595,191)
---------------------------------------------------------------------
      (7,789,523)             -            (866,250)         597,322
              -               -                  -         4,111,190
              -               -             866,250               -
              -           (34,074)               -           (34,074)
        (100,002)             -                  -          (100,002)
      (4,358,734)             -                  -        (4,358,734)
---------------------------------------------------------------------
$    (12,248,259)    $    (34,074)    $          -     $     215,702
=====================================================================











































                                     F-6


<PAGE>


LOTTOWORLD, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                               
                                                                          1996             1995
--------------------------------------------------------------------------------------------------
<S>                                                                <C>              <C>   
Cash Flows From Operating  Activities
  Net loss                                                         $  (4,358,734)   $  (5,595,191)
  Adjustments to reconcile net loss to
     net cash used in operating activities:
     Depreciation                                                        115,673           96,108
     Common stock issued in exchange for vendor services                 761,400               -
     Changes in assets and liabilities:
       (Increase) decrease in:
          Accounts receivable                                           (164,818)         (90,618)
          Accounts receivable, officers                                       -           (58,375)
          Prepaid expenses                                               118,748         (166,072)
          Other assets                                                   (16,719)          (1,534)
       Increase in:
          Accounts payable and accrued expenses                           36,607          588,624
          Deferred revenue                                               216,823           88,896
                                                                   --------------------------------
             Net cash used in operating activities                    (3,291,020)      (5,138,162)
                                                                   --------------------------------

Cash Flows Used In Investing Activities
  Purchase of furniture, fixtures and equipment                          (39,218)        (411,011)
                                                                   --------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from long-term debt                                                -            50,000
  Proceeds from secured subordinated promissory notes
      from officers                                                           -         1,000,020
  Principal payments on long-term debt                                   (16,667)          (8,283)
  Proceeds from issuance of common stock                               3,299,770        4,839,566
  Purchase of treasury stock                                             (34,074)              -  
  Dividends paid on redeemable convertible preferred stock              (100,002)         (75,002)
                                                                   --------------------------------
             Net cash provided by financing activities                 3,149,027        5,806,301
                                                                   --------------------------------

             Net increase (decrease) in cash and cash equivalents       (181,211)         257,128

Cash and cash equivalents:
   Beginning                                                              318,963           61,835
                                                                   ---------------------------------
   Ending                                                          $      137,752   $      318,963
                                                                   =================================

                                  (Continued)








                                      F-7


<PAGE>

LOTTOWORLD, INC. AND SUBSIDIARY

CONSOLIDATED  STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1996 and 1995
                                                                           1996             1995
----------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
   Cash payments for interest                                       $       3,521   $       89,421

 Supplemental Schedule of Noncash Investing And
  Financing Activities
   Common stock issued for prepaid expenses                               500,000               -
   Notes payable converted to common stock                                     -         1,000,020
   Furniture and equipment acquired through accounts payable                   -           141,069
   Dividends payable                                                           -            25,000

See Notes to Consolidated Financial Statements.


</TABLE>















































                                      F-8


<PAGE>


LOTTOWORLD, INC. AND SUBSIDIARY


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

NOTE 1.  NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS:  The  Company's  principal  business is the  publishing  and
distribution of  magazines  ("LottoWorld(R)")  that report  on legally  operated
state  lotteries  throughout  the United States and Canada.  On May 15, 1995 the
Company  changed its name to LottoWorld,  Inc. from Dynamic World  Distributors,
Inc.  Effective  February 22, 1996,  the Company  incorporated  Lottery  Players
Publishing  Company to publish news and information  regarding state  sanctioned
lotteries.

A summary of the Company's significant accounting policies follows:

  PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
  accounts of LottoWorld, Inc. and its wholly-owned subsidiary,  Lottery Players
  Publishing   Company,   Inc.  All   significant   intercompany   balances  and
  transactions have been eliminated in consolidation.

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

  REVENUE  RECOGNITION:  Magazine sales, less provisions for estimated  returns,
  are recorded at the time of shipment.  Provisions  for  estimated  returns are
  based on the Company's  actual  experience.  Magazine  subscription  sales are
  deferred and  recognized  ratably over the  subscription  period.  Advertising
  revenue is recognized upon publication of the advertisement.

  FAIR  VALUE OF  FINANCIAL  INSTRUMENTS:  Cash and cash  equivalents,  accounts
  receivable,  stock subscriptions  receivable,  accounts receivable   officers,
  accounts  payable  and  dividends  payable  are  reflected  in  the  financial
  statements  at  fair  value  as a  result  of  the  rapid  turnover  of  these
  instruments.  The  Company's  long-term  debt is  reflected  in the  financial
  statements at fair value based on the borrowing rates  currently  available to
  the Company for loans with similar terms and maturities.

  CASH AND CASH  EQUIVALENTS:  For purposes of reporting cash flows, the Company
  considers money market funds to be cash equivalents. The Company maintains its
  cash in bank deposit  accounts which, at times,  may exceed  federally-insured
  limits.  The  Company has not  experienced  any losses on such  accounts.  The
  Company believes it is not exposed to any significant credit risk on cash.

  FURNITURE,  FIXTURES AND  EQUIPMENT:  Furniture,  fixtures and  equipment  are
  stated at cost.  Depreciation is computed using the straight-line  method over
  the estimated useful lives of five to seven years.

  INCOME  TAXES:  Deferred  taxes are provided on the liability  method  whereby
  deferred tax assets are recognized for deductible  temporary  differences  and
  operating loss and tax credit  carryforwards  and deferred tax liabilities are
  recognized  for  taxable   temporary   differences.   Temporary   differences,
  consisting   primarily  of  the  provision  for  estimated  returns,  are  the
  differences  between the reported  amounts of assets and liabilities and their
  tax bases.  Deferred tax assets are reduced by a valuation  allowance when, in
  the opinion of management, it is more likely than not that some portion or all
  of the  deferred  tax assets  will not be  realized.  Deferred  tax assets and
  liabilities  are  adjusted for the effects of changes in tax laws and rates on
  the date of enactment.

                                      F-9


<PAGE>

LOTTOWORLD, INC. AND SUBSIDIARY


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


NOTE 1.   NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

  NET LOSS PER COMMON SHARE:  The net loss per common share amounts are computed
  using the weighted  average  number of common  shares  outstanding  during the
  period  after  adjusting  for the effect of the  convertible  preferred  stock
  dividend requirement.

  STOCK-BASED COMPENSATION:  In October 1995, the Financial Accounting Standards
  Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
  123, Accounting for Stock-Based  Compensation,  which establishes a fair value
  based method for financial  accounting and reporting for stock-based  employee
  compensation  plans and for  transactions in which an entity issues its equity
  instruments to acquire goods and services from nonemployees.  However, the new
  standard allows compensation to continue to be measured by using the intrinsic
  value based method of accounting  prescribed by  Accounting  Principles  Board
  Opinion  ("APBO")  No.  25,  Accounting  for Stock  Issued to  Employees,  but
  requires  expanded  disclosures.  The Company has elected to continue to apply
  the  intrinsic  value based method of accounting  for stock options  issued to
  employees. Accordingly, compensation cost for stock options is measured as the
  excess,  if any, of the quoted market price of the Company's stock at the date
  of grant over the amount an employee must pay to acquire the stock.

  RECLASSIFICATION:  Certain  reclassifications  have  been  made  to  the  1995
  financial   statements   to   conform   with   the  1996   presentation.   The
  reclassifications  had no effect on the net loss for the year  ended  December
  31, 1995.


NOTE 2.   CONSULTING AGREEMENTS

Effective July 1, 1996, the Company entered into various  consulting  agreements
to provide public relations services and other consulting  services for the term
of one year. In  consideration  for these  services,  the Company issued 666,667
shares of common stock  valued at  $1,000,000.  Included in prepaid  expenses is
$500,000 related to these agreements as of December 31, 1996.


NOTE 3.   LONG-TERM DEBT

Long-term  debt as of December  31, 1996  consisted  of a note payable to a bank
payable in monthly  installments of $1,389, plus interest at prime plus 2%, with
final  payment  due in  June  1998  and  collateralized  by  equipment.  Minimum
principal  payments  required on  long-term  debt as of December 31, 1996 are as
follows:

Year Ending
December 31,                                                         Amount
--------------------------------------------------------------------------------
1997                                                               $    16,667
1998                                                                     8,383
                                                                   -------------
                                                                   $    25,050
                                                                   =============





                                      F-10


<PAGE>

LOTTOWORLD, INC. AND SUBSIDIARY


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

NOTE 4.  REDEEMABLE CONVERTIBLE PREFERRED STOCK

During the year ended  December 31, 1994,  the Company  issued 166,670 shares of
mandatorily  redeemable  convertible  preferred stock for total consideration of
$1,000,020.  This stock pays an annual cumulative dividend of $.60 per share and
is  convertible  into common stock on a one for one share basis.  The  preferred
stock is subject to  mandatory  redemption  at $6.00 per share for any shares of
convertible preferred stock which remain outstanding on December 15, 1998.


NOTE 5.   COMMON  SHAREHOLDERS'  EQUITY,  STOCK  OPTIONS AND WARRANTS

COMMON STOCK TRANSACTIONS:  During the year ended December 31, 1996, the Company
issued  1,859,664  shares of common stock for $2,849,790 from private  placement
offerings.  The prices paid ranged from $1.625 per share to $2.25 per share.  In
addition,  the Company issued  911,667  shares in exchange for various  services
totaling  $1,261,400  at prices  ranging from $1.00 per share to $1.82 per share
(See Note 2).

On March 10, 1995 and March 17, 1995 for the overallotment  option,  the Company
issued 787,750 shares of common stock for total consideration of $4,592,086, net
of offering costs and commissions, resulting from the initial public offering on
Form SB-2 at $7.00 per share.  The Company also issued  433,340 shares of common
stock during 1995 for total net proceeds of $1,247,500  resulting from a private
placement of its stock and  conversion of debt to equity at prices  ranging from
$2.75 to $3.00 per share. In addition, in December 1995, stock subscriptions for
637,500 shares were issued to entities unrelated to the Company for net proceeds
of  $1,316,230 at prices  ranging from $2.00 to $2.75 per share.  Certain of the
subscriptions  provided for  adjustment  of the number of shares to be issued in
the event of decreases in the price of the Company's stock. The Company received
$449,980 on January 26, 1996 for 287,500 of the shares subscribed. Subscriptions
for the remaining 350,000 shares were canceled for non-payment.

STOCK  WARRANTS:  As  compensation  for acting as Selling  Agent,  a  registered
broker-dealer  received warrants  entitling it to purchase 155,966 shares of the
Company's common stock for $1.65 per share. The warrants were issued in 1996 and
are exercisable for a period of five years from the date of grant.

STOCK OPTIONS:  The Company adopted a stock option plan in 1993 for the grant of
options to certain key employees,  consultants and directors. In March 1995, the
stock  option  plan was  amended  whereby  the number of shares  authorized  for
issuance was increased from 100,000 shares to 350,000 shares.  Option prices may
not be less than the fair market value at the date of the grant.  In addition to
the stock option plan, the Company has granted  options to certain key employees
and consultants. All stock options outstanding are currently exercisable.













                                      F-11


<PAGE>

LOTTOWORLD, INC. AND SUBSIDIARY


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

NOTE 5.    COMMON SHAREHOLDERS' EQUITY, STOCK OPTIONS AND WARRANTS (CONTINUED)

Information regarding stock options is summarized below:

<TABLE>
<CAPTION>
                                                                              Weighted-
                                                                                Average
                                                            Stock     Other    Exercise
                                                            Option    Stock      Price
                                                             Plan    Options   Per share
                                                          -------------------------------
<S>                                                          <C>      <C>      <C> 
Shares under option:                                
  Outstanding and exercisable as of December 31, 1994          5,000  260,000  $    3.63
  Granted                                                    115,168   86,000       6.71
  Exercised                                                       -        -          -
  Canceled                                                   (11,000) (10,000)      7.73
                                                          --------------------
  Outstanding and exercisable as of December 31, 1995        109,168  336,000       4.83                                
  Granted                                                    181,668  741,500       3.18
  Exercised                                                       -        -          - 
  Canceled                                                   104,168  206,500       6.99
                                                          --------------------
  Outstanding and exercisable as of December 31, 1996        186,668  871,000       2.76
                                                          ====================
</TABLE>

Weighted fair value per option for options granted
  during the period ended:
  December 31, 1995                                                 $      -  
  December 31, 1996                                                 $     .07
Fair value of warrants issued during the year 
  ended December 31, 1996                                           $  35,471


                                                   Stock            Other
                                                  Option            Stock
                                                   Plan            Options
                                              ---------------------------------
Option price per share:
  As of December 31, 1995                     $1.00 - $10.00     $1.50 - $10.00
  As of December 31, 1996                     $1.00 - $ 5.50     $1.50 - $ 5.00
Expiration date:
  As of December 31, 1995                       1997 - 1999       1998 - 1999
  As of December 31, 1996                       1997 - 2000       1997 - 2000
                                                           










                                      F-12


<PAGE>

LOTTOWORLD, INC. AND SUBSIDIARY


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

NOTE 5.    COMMON SHAREHOLDERS' EQUITY, STOCK OPTIONS AND WARRANTS (CONTINUED)

Additional  information  regarding  stock  options as of December 31, 1996 is as
follows:

   Option Price           Number        Weighted-Average    Weighted-Average
     Per Share          of Shares        Exercise Price     Remaining Life
--------------------------------------------------------------------------------
       $1.00               5,000             $1.00           1.00 years   
   $1.50 - $2.50         737,000              1.87           2.36 years
       $3.50              50,000              3.50           2.25 years   
   $5.00 - $5.50         265,668              5.10           1.72 years

No compensation  cost for the grant of stock options and warrants was recognized
for the years ended  December 31, 1996 and 1995. Had  compensation  cost for the
stock  option plans and warrants  been  determined  based on the grant date fair
values of awards  (the  method  described  in SFAS No.  123),  there would be no
significant  effect on the  reported  net loss for the year ended  December  31,
1995.  The  reported  net  loss and loss per  common  share  for the year  ended
December  31,  1996 would have been  increased  to the pro forma  amounts  shown
below:

Net loss:
  As reported                                                    $ (4,358,734)
  Pro forma                                                        (4,455,342)
Loss per common share:
  As reported                                                         (0.92)
  Pro forma                                                           (0.94)

The  fair  value  of each  grant  is  estimated  at the  grant  date  using  the
Black-Sholes  option pricing model,  the method  described in SFAS No. 123, with
the following  weighted-average  assumptions for grants after December 31, 1994:
dividend  rate of 0%, price  volatility  of 35%, risk free interest rate of 5.5%
and expected lives ranging from 3 to 4 years.

The effects of applying SFAS No. 123 are not indicative of future amounts since,
among other reasons,  options are exercisable  over several years and additional
awards generally are granted each year.



















                                      F-13


<PAGE>

LOTTOWORLD, INC. AND SUBSIDIARY


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

NOTE 6.   INCOME TAXES

Effective in April 1994 the Company's  Subchapter S election was terminated.  No
provision for income taxes is reflected in the  statements of operations for the
years ended December 31, 1996 and 1995 due to losses  incurred.  Deferred income
taxes related to net operating loss  carryforwards  have not been recognized due
to uncertainty of realization.  The valuation  allowance for deferred tax assets
increased from approximately $2,300,000 as of December 31, 1995 to approximately
$3,750,000 as of December 31, 1996. The net operating loss carry  forwards as of
December 31, 1996 expire as follows:

Year Expires                                                        Amount
--------------------------------------------------------------------------------
2009                                                             $ 1,519,737
2010                                                               5,253,641
2011                                                               4,221,572
                                                                 ------------
                                                                 $10,994,950
                                                                 ============

The amount and  availability  of the net  operating  loss  carryforwards  may be
subject to limitations set forth by the Internal  Revenue Code.  Factors such as
the number of shares  ultimately  issued within a three-year  look-back  period;
whether there is a deemed more than 50 percent change in control; the applicable
long-term  tax  exempt  bond  rate;  continuity  of  historical  business;   and
subsequent  income of the  Company  all enter  into the  annual  computation  of
allowable annual utilization of the carryforwards.


NOTE 7.   COMMITMENTS

OPERATING  LEASES:  The Company leases office space under  operating  leases. In
accordance  with these  leases,  the Company  paid no rent for a 6-month  period
during  the  initial  year of the  lease.  Rental  expense  is  recognized  on a
straight-line basis over the lease term.

As of December 31, 1996,  future  minimum  rental  payments  required  under all
leases with initial or remaining terms in excess of one year are as follows:

Year Ending
December 31,                                                         Amount
--------------------------------------------------------------------------------
1997                                                             $   196,962
1998                                                                 196,962
1999                                                                  44,634
2000                                                                  30,786
2001                                                                  30,786
Thereafter                                                            12,827
                                                                 ------------
                                                                 $   512,957
                                                                 ============

Rent expense  amounted to $165,376 and $131,800 for the years ended December 31,
1996 and 1995, respectively.








                                      F-14

<PAGE>

LOTTOWORLD, INC. AND SUBSIDIARY


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

NOTE 7.    COMMITMENTS (CONTINUED)

NATIONAL   DISTRIBUTION:   The  Company  has  an  agreement  with  International
Circulation  Distributors - The Hearst  Corporation  ("Hearst") for the national
distribution  of LOTTOWORLD(R) which expires  February  1998.  The  agreement as
amended,  requires  a  payments  of  $500,000  and  $75,000  in  1995  and  1996
respectively and payments of $63,000 in 1997.

STATE LOTTERY  PUBLICATIONS:  The Company has entered into agreements to publish
lottery  publications  for the states of New York,  Georgia,  Nebraska  and West
Virginia.  The Company will produce the  publications  at no cost to the various
states with the individual  states being  responsible  for  distribution  of the
publications.  The agreement  with the New York state  lottery  provides for the
payment  of royalty  and  license  fees of $.02 per copy  based on an  estimated
average  circulation  in excess of  1,000,000  copies  per  month.  The  Company
receives all advertising revenue from the publications.

EMPLOYMENT  AGREEMENTS:  The Company has entered into employment agreements with
the Chairman of the Board and President.  Each agreement  provides for an annual
base salary and  incentive  bonuses  conditioned  upon the  Company's  achieving
certain  levels of annual  after-tax  earnings  and  certain  levels of  monthly
circulation of  LOTTOWORLD(R)  magazine.  Pursuant to the earnings  bonus,  each
employee will receive a bonus of two percent of annual after-tax earnings at the
end of the fiscal year in which the Company's  first annual  after-tax  earnings
are  $3,000,000  or more.  In addition,  for each  subsequent  year in which the
Company's  annual   after-tax   earnings   increase  by  additional   $3,000,000
increments,  each  employee  will receive a one-time  bonus of between three and
five percent of such increase.  Pursuant to the circulation bonus, each employee
will  receive  $.10 per copy  the  first  time  monthly  sales of  LOTTOWORLD(R)
magazine  reach  500,000  copies.  In addition,  the first time in which monthly
sales of LOTTOWORLD(R)  magazine reach 1,000,000 copies, and for each subsequent
1,000,000 copies,  up to 6,000,000,  each employee will receive a one-time bonus
ranging from $.12 to $.15 per additional copy.

The  agreements  also  provide  that the  Company  will  grant an option to each
employee for 50,000  shares at the end of the fiscal year in which the Company's
annual  after-tax  earnings first are $3,000,000 or more. In addition,  for each
subsequent year in which the Company's annual after-tax  earnings increase by an
additional $3,000,000,  the Company will grant an option to each employee for an
additional  50,000  shares.  The  agreements  also provide that the Company will
grant an option to each employee for 25,000 shares at the end of the first month
in which the  Company  first  sells  500,000  or more  copies  of  LOTTOWORLD(R)
magazine,  and at the end of each  subsequent  month that  monthly  sales of the
magazine increase by an additional 500,000 copies.

The  agreements  also  restrict  the  employee  from  engaging  in  business  in
competition  with the Company  during the term of the agreement and for a period
of two years after  termination of employment for any reason.  These  agreements
were entered  into on January 1, 1994,  are in effect for a period of 84 months,
and renewable at the option of the Company for an additional 12-month period.

The Company also has employment  agreements  with its Chief  Financial  Officer,
Managing  Editor,  Advertising  Director,  and Marketing  Director which contain
nondisclosure and noncompetition provisions benefiting the Company.









                                      F-15

<PAGE>

LOTTOWORLD, INC. AND SUBSIDIARY


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

NOTE 8.   RELATED PARTY TRANSACTIONS

Accounts receivable, officers are noninterest-bearing and due on demand.

The Company issued 12% secured subordinated promissory notes totaling $1,000,020
to its Chief Executive  Officer and President during 1995. In November 1995, the
notes  were  converted  to  333,340  shares of common  stock at $3.00 per share.
Interest expense related to the shareholder loans totaled $80,000.

The Company incurred legal costs with a director totaling  approximately $92,500
and $58,000 for the years ended December 31, 1996 and 1995, respectively.


NOTE 9.   CONTINUED EXISTENCE


The Company has had cumulative losses since inception  aggregating  $12,048,255.
The Company  continues to raise capital through offerings of its common stock to
fund  operations.  The  Company  believes  that it does  not  have  the  capital
resources and liquidity  necessary to meet all of it obligations and projections
during  1997.  The Company  estimates it will  require  additional  financing of
approximately $4,000,000. The Company has retained several investment bankers to
assist in  raising  the  requisite  capital.  The  Company  anticipates  it will
generate significant  increases in advertising revenue as a result of publishing
magazines  for  various  state  lottery  authorities.  In  addition  the Company
anticipates it will generate  operating  income and additional  working  capital
from increases in magazine sales and reductions in operating expenses.


NOTE 10.  SUBSEQUENT EVENTS

The Company sold 178,188  shares of its common stock for an aggregate  amount of
$163,000 in 1997 in a private placement of its securities under Regulation D. In
addition,  the Company exchanged 256,000 shares of its common stock for printing
services  and rent  valued at  $157,000,  of which  approximately  $116,000  was
included in accounts payable as of December 31, 1996.

On April 8, 1997, the Company  acquired  4,000,000 shares of the common stock of
Sound Money Investors, Inc. ("SMII") with a market value of $500,000 in exchange
for  516,129  shares  of  common  stock of the  Company  with a market  value of
$500,000.  SMII is a financial  communications  company which  provides news and
investor  information to individual  investors,  holds conferences for investors
and broker  dealers,  and provides  media and  financial  relations  services to
private and publicly-traded companies. During 1996, certain stockholders of SMII
received common stock of the Company in  consideration  for consulting  services
(see Note 2).















                                            F-16