


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                              ---------------------

                                    FORM 10-K

(Mark One)

  X    Annual Report pursuant to Section 13 or 15(d) of the Securities  Exchange
-----
Act of 1934 for the fiscal year ended December 31, 1997 or

     Transition  Report  pursuant  to  Section  13 or  15(d)  of the  Securities
-----
Exchange Act of 1934 for the transition period from             to

Commission file number 0-19322

                          POWERHOUSE TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)

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

         Delaware                                                     81-0470853
(State or other jurisdiction of                                 (I.R.S. Employer
incorporation or organization)                               Identification No.)

2311 South Seventh Avenue
Bozeman, Montana                                                           59715
(Address of principal executive offices)                              (Zip Code)

                                 (406) 585-6600
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None
Securities  registered  pursuant to Section 12(g) of the Act: Common Stock, $.01
par value

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

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

     The aggregate  market value of voting stock held by  non-affiliates  of the
registrant as of March 2, 1998,  was  approximately  $134,904,000  (based on the
last sale price of such stock as reported by NASDAQ  National  Market  System on
such date).

     The number of shares outstanding of the registrant's common stock, $.01 par
value ("Common Stock"), as of March 2, 1998, was 10,477,952.



                                      - 1 -

<PAGE>


                                TABLE OF CONTENTS

                                     PART I

                                                                          Page

ITEM 1.  Business                                                            3
ITEM 2.  Properties                                                         28
ITEM 3.  Legal Proceedings                                                  28
ITEM 4.  Submission of Matters to a Vote of Security Holders                29

                                     PART II

ITEM 5.  Market for Registrant's Common Equity
         and Related Stockholder Matters                                    30
ITEM 6.  Selected Financial Data                                            31
ITEM 7.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                                33
ITEM 7a. Quantitative and Qualitative Disclosures About Market Risk         41
ITEM 8.  Financial Statements and Supplementary Data                        42
ITEM 9.  Changes in and Disagreements with Accountants
         on Accounting and Financial Disclosure                             67

                                    PART III

ITEM 10. Directors and Executive Officers of the Registrant                 67
ITEM 11. Executive Compensation                                             70
ITEM 12. Security Ownership of Certain Beneficial
         Owners and Management                                              74
ITEM 13. Certain Relationships and Related Transactions                     76

                                                          PART IV

ITEM 14. Exhibits, Financial Statement Schedules,
         and Reports on Form 8-K                                            77

Signatures                                                                  79


     Certain   statements  in  this  Annual  Report  on  Form  10-K   constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933  and  Section  21E of the  Securities  Exchange  Act of  1934.  Such
forward-looking  statements  involve known and unknown risks,  uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company,  or industry  results,  to be materially  different from any future
results,   performance,   or   achievements   expressed   or   implied  by  such
forward-looking  statements.  Such factors include, among others, the following:
general economic and business  conditions;  competitive factors in the industry,
including additional competition from existing competitors or future entrants to
the industry; social and economic conditions;  local, state and federal laws and
regulations;  changes in business  strategy or development  plans; the Company's
indebtedness;  quality of  management;  availability,  terms and  deployment  of
capital; business abilities and judgment of personnel; availability of qualified
personnel; and other factors.

                                     - 2 -

<PAGE>


                                     PART I

ITEM 1. BUSINESS

     Powerhouse Technologies,  Inc. (the "Company") was incorporated in Delaware
in May 1991. The Company acts as a holding company for ten active  corporations.
Unless the context  otherwise  requires,  references in the form 10-K for fiscal
year ended 1997 ("Form  10-K") to the  "Company"  or "PTI"  refer to  Powerhouse
Technologies, Inc. and its subsidiaries;  references to "AWI" refer to Automated
Wagering  International,  Inc., one of the Company's  four  principal  operating
subsidiaries,  which provides on-line lottery systems and services  primarily to
governmental  lottery  authorities;  references  to "VLC" refer to Video Lottery
Consultants,   Inc.,   another  of  the  Company's  three  principal   operating
subsidiaries,  which develops, manufactures and markets video lottery and casino
gaming  machines and central  control  systems;  references  to "UWS" or "United
Tote" refer to United  Wagering  Systems,  Inc., the Company's  third  principal
operating  subsidiary  whose  operating units provide  computerized  pari-mutuel
wagering  systems  for  horse  and  greyhound   racetracks,   off-track  betting
facilities and jai alai frontons. The Company also owns and operates a racetrack
facility in Sunland Park, New Mexico,  which is accounted for as part of the UWS
operating  segment.  References  to the  "Subsidiaries"  refer to AWI, VLC, UWS,
Sunland Park and the other subsidiaries of the Company.  The Company's principal
executive  offices are located at 2311 South Seventh  Avenue,  Bozeman,  Montana
59715, and its telephone number is (406) 585-6600.

Certain Recent Developments

     On January 30, 1997 the Company and  Electronic  Data  Systems  Corporation
("EDS")  reached  an  agreement  to settle  all  claims  against  each other and
transition all services and employees back to the Company.  In January 1994, EDS
purchased  545,454 shares of the Company's  Common Stock and 1,912,728 shares of
the Company's preferred stock (the "Preferred Stock").  The Company and EDS also
effected a ten year  agreement  which,  among  other  things,  called for EDS to
provide  to  the  Company  enhanced   computing,   communications,   system  and
engineering and field  maintenance  services  primarily related to AWI. In early
1996 the Company  withheld  payments to EDS primarily due to performance  issues
and related  on-line  lottery  customer  disputes.  The terms of the  settlement
included  the  receipt by the Company of all of the Common and  Preferred  Stock
shares owned by EDS, certain property and equipment used by EDS in the provision
of services to the Company and the  extinguishment  of approximately $38 million
of  outstanding  fees in return for a $26 million note payable,  by the Company,
which matures in 2004. As a result of the  redemption of the EDS shares,  EDS no
longer has a right to  representation  on the Company's Board of Directors.  The
transition  of services and related  employees  to the Company was  completed in
1997. (See Note 2 to the Company's Consolidated Financial Statements.)

     On March 21, 1997, the New Mexico  legislature voted to allow certain types
of  casino  gaming  at  pari-mutuel  racetracks  in New  Mexico,  including  the
Company's  racetrack at Sunland Park, New Mexico.  Under this  legislation,  the
Company  will be  permitted  to operate up to 300 video  gaming  machines at its
Sunland  Park  racetrack  for up to twelve  hours per day.  The Company does not
anticipate  that casino  gaming at Sunland  Park will be  operational  until the
third or fourth  quarter of 1998.  The  implementation  of racetrack  gaming is,
however,  subject to formation of a gaming control board, equipment procurements
and other regulatory  conditions,  including the granting of necessary licenses.
At December 31, 1997 the Company's investment in the racetrack was approximately
$20.8 million, and the Company anticipates  expending an additional $8.0 million
for facility enhancements,  gaming machines and related equipment in the future.
The  recovery  of a  significant  amount  of  the  Company's  investment  in the
racetrack operations in New Mexico is largely contingent upon the implementation
of gaming legislation in that state.

     On November 14, 1997, the Company announced that AWI had been granted a new
five-year  award,  with options for up to an additional  five years, to continue
operating  Pennsylvania's  lottery system.  In its decision  granting the award,
Pennsylvania   Secretary  of  Revenue   Robert  A.  Judge,   Sr.   accepted  the
recommendation of its six-member Lottery review committee,  which favored AWI on
all criteria.  The Committee's  report  specifically  ranked AWI superior in all
evaluation  categories including technical and pricing. AWI has been the on-line
lottery provider for  Pennsylvania  since the inception of its lottery system in
1975 and operates 7,040 terminals throughout the State.

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     On  January  2,  1998,  the  Company  announced  that  its name  change  to
Powerhouse  Technologies,  Inc. from Video Lottery  Technologies,  Inc.,  became
effective  January 1, 1998 and that it had begun trading on the Nasdaq  National
Market under the new ticker symbol PWRH.

     On February 10, 1998,  the Company  announced the completion of a secondary
offering  of  approximately  14.5% of the  Company's  outstanding  common  stock
(approximately   1.5  million  shares).   The  shares  were  marketed  and  sold
principally to a variety of institutional  investors. The shares were offered by
an investor  group headed by William  Spier.  Pursuant to an agreement  with the
Company,  Mr. Spier agreed to resign as a director of the Company effective upon
disposition of the shares. In addition, he is subject to certain restrictions on
his ability to acquire Company securities in the future.


                             Business of the Company

Powerhouse Technologies, Inc.

     The Company  conducts its operations  primarily  through four  wholly-owned
subsidiaries, AWI, VLC, UWS (the latter more commonly known by the trade name of
its principal  subsidiary,  United Tote) and Sunland Park. The Company develops,
manufactures,  sells and  operates  gaming and  wagering  systems in the on-line
lottery, video lottery and casino gaming and pari-mutuel wagering markets.

Automated Wagering International, Inc.

     AWI develops, manufactures,  installs and operates computer-based,  on-line
systems and is  presently  operating  systems for state  lotteries  in Delaware,
Florida, Maryland, Minnesota, Montana, Pennsylvania and South Dakota. An on-line
lottery  system  consists of terminals  located in numerous  retail  outlets,  a
telecommunications   network,  a  central  computer  system  and  communications
equipment  software  as well as the  software  to operate the system and process
sales and  validation  of lottery  game  tickets.  In the United  States,  AWI's
products and  services are  typically  marketed to lottery  authorities  through
long-term  contracts,   awarded  through  a  competitive  bidding  process.  AWI
typically  maintains  ownership  of the lottery  system and  operates it for the
state  in  return  for  a  percentage  of  lottery  ticket  sales.   In  foreign
jurisdictions, lottery equipment and systems are often sold and related software
is licensed to lottery  authorities.  The Company  acquired  AWI  pursuant to an
asset purchase  agreement in 1992.  Internationally,  AWI has sold and currently
supports and/or maintains on-line lottery systems to customers in Norway, Canada
and Chile.

     Governments in  approximately  80 countries have authorized  lottery games,
such  as  lotto,  numbers  and  keno as well  as  instant  "scratch-off"  games,
primarily  as a means of  generating  non-tax  revenues.  In the United  States,
lottery  revenues are frequently  designated for  particular  purposes,  such as
education,  economic  development,  conservation,  transportation and aid to the
elderly. Many states have become increasingly  dependent on their lotteries,  as
revenues from lottery  ticket sales have become a significant  source of funding
for  designated  programs.  In  fiscal  1970,  only two  states  had  authorized
traditional  lotteries,  selling an aggregate of $49.2 million in tickets. As of
the end of 1997, 38  jurisdictions  in the United States were operating  on-line
lottery  systems,  with  aggregate  lottery  sales  in  excess  of $34  billion.
Worldwide lottery sales, excluding North America, exceeded $81 billion in 1997.

     There are many types of  government-authorized  lotteries in the world. The
Company  categorizes  traditional (as opposed to video) lottery systems into two
principal groups: "on-line" and "off-line."

     An on-line lottery system is generally used to conduct games such as lotto,
sports pools,  daily  numbers and keno in which  lottery  players make their own
selections.  Various  games of chance are offered  involving  the  selection  of
numbers from a field of possible numbers.  A lottery player requests the desired
numbers and  purchases  the lottery  ticket  from the  clerk-activated  terminal
provided by the Company or other lottery  vendor to a lottery  ticket  retailer.
The  amount  wagered  per  transaction  is  determined  by  individual   lottery
authorities  and is usually $.50 to $1.00 per wager.  The lottery  terminals are
typically   located  in  high-traffic   retail  outlets,   such  as  newsstands,
convenience stores, gas stations,  food stores, tobacco shops and liquor stores,
which are  selected by the lottery  authorities  to sell  tickets on the lottery
authority's  behalf.  The  data  is  entered  either  manually  by  keyboard  or
automatically  through a mark sense reader or scanner.  The wager information is
then  transmitted via  communication  lines to the

                                     - 4 -

<PAGE>


central computer system where the information is verified,  recorded and stored.
Winners  are able to claim  their  prizes  within  minutes of the drawing of the
winning number for the game selected.

     Off-line  lotteries  feature games which are not computerized and typically
feature instant ticket games in which players remove  coatings from  pre-printed
tickets  ("scratchers"),  which  account for  substantially  all of the off-line
lottery  sales in the United  States.  Outside of the  United  States,  off-line
lotteries also include  traditional  on-line games (numbers,  lotto, etc.) which
are  offered  through  a  manual,   off-line  system.  Players'  selections  are
accumulated  and delivered to a central  processing  location where the bets are
entered into the computer.

     All of the United  States  jurisdictions  operating  traditional  lotteries
currently  include  on-line  lottery as part of their  operations.  Outside  the
United States,  many countries have  government-operated  or privately  licensed
lotteries,  most of which have  historically  been  off-line.  Approximately  85
foreign lottery authorities have implemented on-line lottery systems.

     There are several  advantages to on-line  lotteries as compared to off-line
lotteries. Most importantly,  wagers can be accepted and processed by an on-line
lottery system until minutes before a drawing.  In cases where a large prize has
attracted substantial wagering interest, the extended sales period increases the
potential for higher lottery revenue. Unlike instant games or scratchers,  where
the  number of  winning  tickets  and  amount of awards  must be  determined  in
advance,  on-line  lotteries  allow for the  rollover  of lottery  jackpots.  In
addition,  on-line lottery systems provide greater reliability and security than
either off-line  numbers games or scratchers,  allow a wider variety of games to
be offered,  and automate  accounting and  administrative  procedures  which are
otherwise performed manually.  Instant ticket game revenues have been growing at
a faster rate than total domestic U. S. lottery  revenues  because of relatively
higher  payout  percentages  and the  increasing  automation  of instant  ticket
validation  and  accounting  systems.  Such games compete with the on-line games
provided on the Company's systems.

     Typically  50% of the gross  revenues  of a  domestic  on-line  lottery  is
returned to the players in the form of prizes. Approximately 15% is used to fund
the operations of the lottery,  including the expenses of the lottery authority,
costs of advertising,  payments to  point-of-purchase  retailers and payments to
vendors such as AWI. The remaining  amount,  approximately  35%, is available to
the state to  support  specific  public  programs  or as a  contribution  to the
state's general fund.

     In the United  States,  products  and services  are  typically  marketed to
lottery authorities through long-term  contracts,  awarded through a competitive
bidding  process  pursuant to which the lottery  vendor  supplies,  installs and
operates  the  lottery  system  for the state or  jurisdiction  in return  for a
percentage of ticket sales.  The vendor  generally  retains title to the lottery
system. Once a contract is awarded to a lottery vendor, that vendor is typically
the  sole  provider  of  on-line   lottery   services  and  operations  to  that
jurisdiction for a specified time period within a defined geographic territory.

     The  international   market,  as  well  as  a  minority  of  United  States
jurisdictions,  is  typically  characterized  by on-line  lottery  system  sales
instead of  long-term  contracts.  The  Company  or other  vendor  develops  and
installs  the  on-line  lottery  system  and  trains  lottery  personnel  in the
operation  of the system  for a fixed fee.  Other  services,  such as  equipment
maintenance  and  ticket  stock  production,  may be  available  under  separate
contracts.

     United  States.  AWI derives  revenue  primarily  from contracts with state
lottery organizations  throughout the United States.  Revenue consists primarily
of a  contractual  percentage  of lottery  ticket sales in each state as well as
revenue from  installation  and sales of on-line  lottery systems and equipment.
The segment  experiences  fluctuations  in revenue levels  depending on relative
sizes of  jackpots,  the number of  terminals  on-line and the volume of tickets
sold in the  states in which the  Company  operates  as well as on the timing of
on-line  lottery  systems and  equipment  sales and  installations.  The Company
expects lottery  services  revenue to continue to be a significant  component of
its total  revenues.  The table below sets forth the lottery  authorities in the
United  States  with  which AWI  presently  has  facilities  management  lottery
contracts.  The table also sets  forth  information  regarding  the term of each
contract  and,  as of  December  31,  1997,  the  approximate  number  of retail
terminals  installed in each  jurisdiction,  and the  revenues  generated by the
lottery operations.

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<PAGE>

<TABLE>
<CAPTION>
                                                                                                         Total On-Line
                              Date of             Expiration           Lottery            Terminals           Lottery
                           Com-mencement           Date of            Authority         Operating at         Revenues
                             of Current            Current            Extension       December 31, 1997      in 1997(2)
     Jurisdiction             Contract            Contract(1)          Options                             (in millions)
     ------------             --------            -----------          -------                             -------------
<S>                             <C>                 <C>           <C>                         <C>              <C>


Delaware                        10/1994              9/2002              ---                     470           $    80
Florida(3)                       4/1988              1/2000              ---                  10,850             1,454
Maryland                         7/1996              7/2001       1 three-year plus            3,880             1,038
                                                                      2 one-year
Minnesota                        5/1990              8/2002              ---                   1,940                96
Montana                         11/1996             11/1998              ---                     620                22
Pennsylvania(4)                  1/1989             12/1998              ---                   7,040             1,298
South Dakota                     7/1990              5/1999           six months                 640                13
</TABLE>
----------
(1)  Expiration  dates do not  reflect the  exercise of the lottery  authority's
     extension  options.
(2)  Figures are provided for each state's fiscal year ended June 30, 1997.
(3)  The Florida State Lottery  accounted for 33% of AWI's total revenue  during
     1997.  AWI has been selected for the award of a new  five-year  contract to
     continue  operating  Florida's  lottery system. A competitor of the Company
     has protested the award. The lottery is expected to release its final order
     regarding  the  protest  in the near  future.  If the  award is  ultimately
     upheld, the Florida Lottery may commence  negotiations with the Company for
     a new five-year contract.  The Company will continue to operate the lottery
     system  until  the  implementation  of the new  contract  under an  interim
     agreement.  The current interim  agreement  expires upon the earlier of the
     award and implementation of a new agreement or January 1, 2000.
(4)  The  Pennsylvania  State Lottery has awarded AWI a new  five-year  contract
     commencing  January  1999  to  continue  operating  Pennsylvania's  lottery
     system.  The  Pennsylvania  State Lottery  accounted for 24% of AWI's total
     revenues during 1997.

     Facility  Management  Contracts.  All of  AWI's  current  domestic  lottery
contracts are facilities management contracts under which AWI installs, operates
and  maintains a lottery  network  while  retaining  ownership or control of the
lottery terminal network. The facilities  management contracts typically have an
initial term of  approximately  five years,  and  generally  contain one or more
options permitting the lottery authority to extend the initial contract term for
additional  periods of up to five years in total. Prior to the expiration of the
initial or extended  term, a lottery  authority is generally  required by law to
commence a competitive bidding process for a new lottery contract.  There can be
no assurance that AWI will win a new contract in connection with this process.

     AWI installs and commences operations of a lottery network generally within
six to twelve months after being awarded a new lottery  contract and,  following
the  start-up  of the lottery  network,  is  responsible  for all aspects of the
network's  operations.  AWI operates lottery networks in each  jurisdiction with
two or more central computer systems. In addition,  AWI employs a dedicated work
force in each jurisdiction,  consisting of a site manager,  computer and hotline
operators, customer service and terminal replacement and repair technicians. The
equipment used in any  jurisdiction  must typically  comply with  specifications
established by that jurisdiction.  New contracts typically require new equipment
of recent manufacture. Terminal equipment is typically depreciated over the term
of the  related  contract,  including  extensions  upon their  exercise,  by the
lottery authority.  Under certain of AWI's facility  management  contracts,  the
lottery  authority has the option to purchase  AWI's  lottery  system during the
contract term at a predetermined price. AWI's role with respect to the continued
operation  of a lottery  system in the event of the  exercise  of such  purchase
option is defined as part of the purchase option with fees and services included
with the original bid. Exercise of such an option could substantially change the
anticipated profitability of the contract to AWI.

     Under many of AWI's facilities management contracts,  the lottery authority
has the option to require  AWI to install  additional  terminals  and/or add new
lottery games. Such installation may require significant capital expenditures by
AWI. However,  since AWI's revenues from such contracts  generally depend on the
level of lottery  ticket sales,  and such sales are  generally  increased by the
addition of new retail outlets and games,  such expenditures have generally been
recovered  through the revenues  generated

                                     - 6 -

<PAGE>


by the  additional  equipment or games and  revenues  from  existing  equipment,
although  there is no assurance this will continue to be the case. The potential
additional  terminals and new games are agreed to in the bidding  process and as
such are taken into  consideration  when  determining  the  vendor's  fee in the
original bid.

     AWI's contracts with the state lotteries  contain  provisions for assertion
of  liquidated  damages  against  AWI for  failure to meet  certain  performance
standards.  These conditions  include  aggressive  implementation  schedules and
ongoing  performance  standards and failure to perform may result in substantial
monetary liquidated damages, as well as contract termination. Liquidated damages
ranging from $5,000 to $250,000 per day for late system start-up and from $1,000
to $15,000 per minute for system downtime  beyond a stipulated  grace period are
common to the domestic market.  Although the actual  liquidated  damages imposed
can be subject to negotiation,  such provisions present an ongoing potential for
substantial expense. Damages, if assessed, are usually due within 30 days or may
be deducted from revenues  otherwise earned from the lottery.  Failure to repair
terminals within a specified time period may subject AWI to damages. The Company
maintains  errors and omissions  coverage under risk  management  policies which
would cover certain but not all claims.

     Various state on-line lottery contracts contain  provisions under which AWI
may be subject to monetary  penalties for central  computer  downtime,  terminal
failures, delays in servicing inoperable terminals within specified time periods
and ticket stock shortages among other things.  Penalties paid or accrued by AWI
with respect to its contracts were  approximately  1.3% of its revenues in 1997,
3.9% in 1996 and .2% in 1995.

     Typically,  state lottery contracts also reserve the right to terminate the
contract for cause  (i.e.,  failure of the vendor to  substantially  perform any
material  requirement)  after notice and a cure period.  The state also reserves
the right to cancel a contract if the state enacts a statute  which  removes the
authority or ability of the state to conduct a lottery.  In general, a state may
also terminate a contract  without cause or for the  convenience of the lottery,
typically  with at least 12  months  prior  written  notice.  Reasonable  costs,
excluding  anticipatory  profits,  will  be  reimbursed  to the  vender  for all
terminations except for a material breach.

     In addition to potentially  significant capital requirements to manufacture
and install lottery systems,  lottery contracts  generally require the vendor to
post a substantial  bond securing its  performance.  The terms of such bonds may
require significant collateral in the form of cash, cash equivalents or lines of
credit. (See Note 15 to Consolidated Financial Statements.)

     Products and Services.  In 1971,  AWI designed and  installed,  for the New
Jersey State Lottery,  the country's first on-line  lottery  system.  Since that
time, AWI has developed and installed many system and service features that have
subsequently become common in the lottery industry, such as the internal control
system,  down-line loading for terminals, the cathode ray tube terminal operator
display,  microfiche data storage for lottery  records,  instant game accounting
and integrated computerized terminal maintenance control.

     In September 1993, the Company  introduced its  MasterLink(R)  system.  The
Company's  first  U.  S.  application  of the  MasterLink(R)  system  was to the
Delaware  Lottery  which  awarded a five-year  contract to AWI in January  1994.
Since  that  time,  the  Company  has  introduced  an  enhanced  version  of its
MasterLink(R)  system to five additional  jurisdictions.  The express purpose of
the  MasterLink(R)  system is to manage an  organization's  lottery  and  gaming
machines.  These gaming machines might include  teller-activated  lottery ticket
terminals,  video  lottery  gaming  machines,  player-activated  sports  betting
terminals,  instant ticket vending machines and other electronic  gaming-related
devices.  The MasterLink(R)  system allows an organization to monitor the status
and  performance  of  the  gaming  machines  within  its  jurisdiction,  conduct
accounting of and billing on the revenue from the gaming  machines,  and control
their configuration and operations. The MasterLink(R) system is intended to be a
flexible, cost-effective means of providing these capabilities.

     The lottery  network  marketed by AWI consists of the  following  principal
elements:

                                     - 7 -

<PAGE>


     Terminals.  AWI  designs  and  manufactures  the  terminals  used  in  its
     networks.  The  terminals  are  designed  for  maximum  security,   minimum
     processing time and flexibility to allow for  customization  of application
     functions to each lottery's specifications.

     Software.  AWI designs  and  provides  all  application  software  for its
     lottery  networks.  AWI's  software is  designed  to provide the  following
     network  characteristics:   rapid  processing,  storage  and  retrieval  of
     transaction  data in high volumes;  the ability to down-line load, i.e., to
     reprogram the lottery terminals from the central computer  installation via
     the  communications  network to add new games and  feature a high degree of
     security and redundancy to guard against  unauthorized access and tampering
     and to ensure continued  operations  without data loss; and a comprehensive
     management information and control system.

     Central  Computers.  Each of AWI's  lottery  networks  contain  one or more
     central  computer   installations  to  which  the  lottery   terminals  are
     connected. AWI's prior generation central control system is designed to run
     on the  Cyber  930,  but the  MasterLink(R)  system is  designed  to run on
     UNIX-based central computer systems such as IBM RS/6000 systems, instead of
     the  proprietary   Cyber-series  computers.   The  specifications  for  the
     configuration  of AWI's  central  computer  installations  are  designed to
     provide continuous availability,  high data handling capability and maximum
     security.

     Communications.  AWI's lottery  terminals  are  typically  connected to the
     central computer installations by dedicated telephone lines owned or leased
     by the  jurisdiction  in which the network is located in  conjunction  with
     proprietary   network   communications   controllers  and  monitored  by  a
     proprietary  network  management  system.  Due to  the  varying  nature  of
     telecommunications  services  available in lottery  jurisdictions,  AWI has
     developed the capability to interface  with a wide range of  communications
     networks.  AWI also has the  expertise to provide and  integrate  alternate
     technologies, such as microwave and radio transmission, integrated services
     digital networking (ISDN), and data over voice.

     Game Design.  An important  factor in  maintaining  and  increasing  public
     interest in lottery  games is  innovation  in game  design.  The  principal
     characteristics  of game design  include  frequency  of  drawing,  types of
     prizes,  cost per play and  setting  of  appropriate  odds.  The  Company's
     MasterLink(R)  system and  Ovation(TM)  line of  terminals  are designed to
     efficiently  permit the development  and rapid  deployment of new games and
     targeted on-line game-related promotions.  For example, in 1996 the Company
     introduced its keno module in Maryland, where keno accounts for over 20% of
     total handle. The Company believes that these  capabilities  should enhance
     the ability of the lottery  authority to increase on-line ticket sales, and
     result in more  revenue for the  Company.  These  capabilities  should also
     enhance the  Company's  success  rate in  competing  for  domestic  lottery
     contracts. There can be no assurance, however, that either will happen.

     Competition.  Competition  is intense in the  traditional  on-line  lottery
business.  It is not  unusual in the United  States  for  contract  awards to be
challenged  by  unsuccessful  vendors.  Relatively  few  new  or  rebid  on-line
contracts are awarded each year.  Although  price is a  significant  competitive
factor, other important  competitive factors are the ability to optimize lottery
revenues through game design;  customer  marketing  support;  the dependability,
security,  technological  sophistication  and upgrade capability of the network;
and the experience and reputation of the vendor.

     AWI's  principal  competitor in the on-line  lottery  business,  GTECH,  is
significantly  larger,  having  supplied  lottery systems to 29 of the 38 United
States on-line  lottery  jurisdictions.  This  competitor also has a substantial
international presence. The market dominance of this competitor further enhances
its competitive  position.  Other competitors include  International Lottery and
Totalizer  Systems,   Inc.,   Scientific  Games,  Inc.,  Autotote   Corporation,
International  des  Jeux  (Lotto  France),   EssNet/Alcatel  and  several  other
companies.

     In  jurisdictions  with  on-line and video  lottery  gaming  products,  the
products  may  compete  with  each  other  for  entertainment  dollars  spent on
wagering.

                                     - 8 -

<PAGE>



Video Lottery Consultants, Inc.

     VLC  develops,  manufactures  and markets  video gaming  machines,  central
control systems and related services for the gaming machine industry. The gaming
machine  industry  includes both video lottery and casino gaming  venues.  Video
lottery gaming is the use of video gaming  machines to provide low stakes gaming
entertainment  to  enhance  revenue  for  states  and other  jurisdictions.  The
machines, offering games, including poker, blackjack, bingo and keno, as well as
spinning reel games, are generally located in age-controlled establishments such
as bars,  taverns as well as  restaurants  and  convenience  stores.  The gaming
machine  industry  is subject  to  governmental  regulation  and  taxation  and,
depending on the  jurisdiction,  may be monitored  and  controlled  by a central
computer system.  Video lottery gaming programs provide substantial  incremental
sources of revenue to the governmental  jurisdictions without increasing general
taxation.

     In addition,  VLC sells its video gaming machines to land-based,  riverboat
and Native American casinos.  The Company holds licenses to sell gaming machines
in Nevada,  Mississippi and New Jersey,  the three largest casino markets in the
U. S., as well as in most other major casino jurisdictions.

     Currently  seven U. S. states,  five states in  Australia,  eight  Canadian
provinces,  Iceland,  Norway,  Sweden and South Africa have  authorized  various
levels and forms of video lottery  gaming.  While there can be no assurance that
other  jurisdictions  will  introduce  video  lottery  systems or that  existing
jurisdictions will continue  operations,  based on its current market share, VLC
should  continue to be a  significant  supplier of machines and central  control
systems to this segment of the industry.

     The video lottery gaming market is different from the casino market and the
traditional lottery market. Unlike video gaming machines designed for the casino
market, most video lottery gaming machines are located in places where gaming is
not the principal  attraction (i.e., bars and restaurants).  The stakes on video
lottery  gaming  machines  typically  range  from  $0.25 to $2.50 per play,  and
payoffs  typically  are  capped  at  $100  to  $1,000.  In  addition,   in  most
jurisdictions, the payment of jackpots differs as compared to traditional gaming
machines.  After inserting money into a video lottery gaming machine, the player
receives  credits  to play the  machine.  Player  losses are  deducted  from the
credits and winnings are added to the credit, instead of any coins being dropped
into a tray.  When the player is  finished,  the video  lottery  gaming  machine
prints  out a ticket  showing  the  remaining  amount of  credit.  The ticket is
redeemable for cash at the establishment's  register.  More recently, some video
lottery  jurisdictions,  like  Delaware,  have moved  into the more  traditional
casino environment with state-owned casinos at pari-mutuel facilities (primarily
racetracks).  The  machines  in these  locations  pay out in coins to a  hopper.
Compared to most traditional lottery games, video lottery provides the potential
for a higher level of instant  gratification  for winners.  Video lottery offers
players a payback percentage of 80% to 94%, which is lower than most traditional
casino games,  but greater than  traditional  state  lotteries  where payback is
typically about 50%.

     There are two basic  private  sector  ownership  structures  in which video
lottery gaming is implemented:

     (1) Private sector  ownership - The gaming  machines may be owned either by
     the owners of the  establishments  in which the gaming machines are placed,
     by the  operators/distributors of coin-operated machine routes who contract
     with location owners to install,  service and maintain the gaming machines.
     This private sector ownership structure has been adopted in Montana,  South
     Dakota,  Louisiana,  West Virginia,  New  Brunswick,  Prince Edward Island,
     Victoria and South Australia.

     (2)  Government  sector  ownership - This form of ownership is effective in
     the Canadian provinces of Alberta, Saskatchewan,  Newfoundland, Nova Scotia
     and Quebec and in Northern Territories, Australia. The province of Ontario,
     Canada has passed video lottery gaming legislation and is in the process of
     implementation  which is expected  to occur in the latter half of 1998.  In
     Oregon,  the  government  has  leased  rather  than  purchased  the  gaming
     machines.  In  Delaware  and Rhode  Island,  the  contractor  shares in the
     revenue stream with the state while maintaining ownership.

     In 1996 and 1997 certain jurisdictions, most notably Louisiana and Alberta,
Canada,  allowed  voters to decide on the  continued  operation of video lottery
locations  and casinos in their cities and  counties.  In

                                     - 9 -

<PAGE>


Louisiana,  voters in approximately  one-half of the state's parishes (counties)
voted to ban video lottery operations. Existing locations in these parishes will
be allowed to operate for  approximately  two years before the machines  must be
removed. In Alberta, one city has voted to date, and voters there gave the local
casino  seven days to remove  machines.  More cities in Alberta are  expected to
carry out voting in the spring.

     The approval of gaming in new land-based  casino  jurisdictions,  riverboat
gaming,  Native  American  casino gaming and networked video lottery systems has
driven gaming  equipment  demand growth during the 1990s.  In the United States,
casino  video  gaming  is  permitted  in  Colorado,   Illinois,  Indiana,  Iowa,
Louisiana, Mississippi,  Missouri, Montana, Nevada, New Jersey and South Dakota,
as well as on Native  American lands in some of those and in several  additional
states including Arizona,  Connecticut,  Iowa, Michigan,  Minnesota, New Mexico,
North Dakota, Oregon and Wisconsin. Outside the United States, Canada, Australia
and France are the most developed,  but Asia, South Africa and South and Central
America are all expanding or exploring  gaming  operations.  While 20-30% of the
demand for casino gaming  machines  relates to  replacement  sales,  most of the
growth stems from the development of new casinos.

     Casino gaming is considered a subset of consumer entertainment expenditure.
Its  contribution  is  significant  with $48.5 billion in U. S. gaming  industry
revenue in 1997. This figure dwarfs the $5.9 billion spent on movies,  the $12.5
billion spent on recorded music, the $7.2 billion spent at theme parks and other
amusement  activities and the $15.5 billion spent on spectator  sports and other
live  events.  With this  evidence  for the  intrinsic  demand for  gaming,  the
expected  growth  drivers  for the  industry  are  twofold  - a strong  consumer
appetite  for the product  coupled  with a desire by state  governments  to find
alternative  revenue sources.  These indicators point toward continued expansion
of casino style gaming,  although there can be no assurance that this trend will
continue.

     Although a significant  percentage of Nevada's current machine mix consists
of video gaming  machines,  the Company will still be competing for casino floor
space with  traditional  slots.  Most of the existing video gaming  machines are
video poker machines and do not offer  multiple games as the Company's  machines
do.

     Market  Overview.   Replacement  product  demand  for  gaming  machines  is
anticipated to accelerate in 1998.  This creates an opportunity  for the Company
to introduce new games and capitalize on its superior  machine  performance  and
advanced  technology.  Future  replacement  demand  will  accelerate  as  gaming
equipment  in markets  opened in 1991  gradually  reach  replacement  age. It is
estimated  that the base slot  machine  replacement  market  should reach 82,000
units in the United States by the end of the decade.  Adding  17,000  government
systems machine  replacements brings the total gaming machine replacement demand
to an estimated 95,000 to 100,000 units by the year 2000.

     Australia continues to show strong growth potential.  Victoria,  Australia,
authorized private sector placement of 5,000 terminals when operations commenced
in August 1992. In addition,  the Victoria  Government  lifted its moratorium on
gaming  machine  placements,  raising the level of  permissible  terminals  from
20,000 to 27,000 in 1996.  The  Company  recently  was  granted a license in New
South Wales,  Australia which  represents a 70,000 machine  market.  The Company
entered  into  technology  agreements  with  Datacraft   Technologies  Pty  Ltd,
pertaining  to the  manufacturing  of the Company's  gaming  machines for use in
Australia.  These  agreements  terminated  in April 1997.  The Company  plans to
distribute its own gaming machines in Australia.  Additional  growth is expected
in Ontario,  Canada and South Africa. There can be no assurance,  however, as to
any such growth prospects.

     The  Company  commenced  sales of its  gaming  machines  to  state-licensed
casinos in Colorado in the third  quarter of 1994.  The  Company  began  selling
machines  in the Nevada  market in May 1996.  Additionally,  the  Company  began
selling  gaming  machines  in New  Jersey  in July 1996  through a  distribution
arrangement with Surfside Casino Products. The Company has entered the riverboat
market in Iowa, Indiana, Louisiana and Mississippi.

     In the Native  American  market,  the Company has entered into  distributor
agreements  to market video  gaming  machines to casinos in  Connecticut,  Iowa,
Michigan,  Minnesota,  New Mexico, North Dakota, South Dakota and Wisconsin. The
Company has placed  additional  machines at Native American  casinos in Arizona,
Mississippi, North Carolina and Oregon.

                                     - 10 -

<PAGE>


     The Company believes casino gaming at pari-mutuel  racetracks may expand as
more  jurisdictions  pass  legislation  allowing  gaming.  The Company  plans to
leverage the  relationships  developed with the pari-mutuel  racetracks  through
United Tote to attempt to gain  entrance  into these new  markets.  On March 21,
1997,  the New Mexico  legislature  voted to allow casino gaming at  pari-mutuel
racetracks in New Mexico, including the Company's racetrack at Sunland Park, New
Mexico.  Under this legislation,  the Company will be permitted to operate up to
300 video gaming  machines at its Sunland Park  racetrack for up to twelve hours
per day. The Company does not anticipate that casino gaming at Sunland Park will
be operational until the third or fourth quarter of 1998. The  implementation of
racetrack  gaming is,  however,  subject to formation of a gaming control board,
equipment procurements and other regulatory  conditions,  including the grant of
necessary  licenses.  At  December  31,  1996 the  Company's  investment  in the
racetrack was approximately $20.8 million, and the Company anticipates expending
an  additional  $8.0  million for  facility  enhancements,  gaming  machines and
related  equipment in the future.  The recovery of a  significant  amount of the
Company's  investment  in the  racetrack  operations  in New  Mexico is  largely
contingent upon the  implementation of gaming  legislation in that state.  There
can be no  assurance  that the Company  will be able to satisfy  the  regulatory
conditions  or  be  granted  the  necessary   licenses  or  that  the  necessary
implementation  can  be  completed  on  schedule.   Further,  casino  gaming  at
racetracks  is a new business for the Company,  and the Company has never before
owned or  operated  a casino.  No  assurance,  therefore,  can be given that the
Company's gaming operations at Sunland Park will be profitable to the Company.

     Video Lottery  Markets.  The following table, as of December 31, 1997, sets
forth certain information concerning the number of Company and non-Company video
lottery gaming  machines in operation in the  jurisdictions  that currently have
video lottery operations:

<TABLE>
<CAPTION>
                                                                  Central                                VLC Share
                            Commencement    Ownership             Control       Number of      ------------------------
Jurisdiction(1)                  Date       Structure             System        Terminals(2)   Terminals(3)           %
---------------                  ----       ---------             ------        ------------   ------------        ----
<S>                              <C>        <C>                   <C>             <C>             <C>              <C>

Alberta, Canada                  1992       Government             GTECH            5,941          3,974           66.9
Atlantic Canada(4)               1990       Private/Government     VLC              9,860          2,889           29.3
Delaware(5)                      1995       Government             AWI                335            275           82.1
Iceland                          1991       Charitable             VLC                500            450           90.0
Louisiana                        1992       Private                IGT             14,850          8,836           59.5
Montana(6)                       1985       Private(11)            None            16,150          4,785           29.6
Northern Territory               1996       Government             VLC                400             80           20.0
Oregon(7)                        1992       Government             IGT(12)          9,074          4,368           48.1
Quebec                           1994       Government             VLC             15,339          6,530           42.6
Rhode Island(8)                  1992       Government             GTECH            1,628            440           27.0
Saskatchewan                     1993       Government             GTECH            3,566          1,148           32.2
South Australia                  1994       Private                VLC              9,259          1,000           10.8
South Dakota(9)                  1989       Private                VLC              8,045          7,641           95.0
Victoria, Australia(10)          1995       Private                VLC             11,731          1,396           11.9
Victoria, Australia(10)          1995       Trust                  VLC             11,248          4,994           44.4
West Virginia                    1997       Government             GTECH            3,000            152            5.1
                                                                                ---------        -------          -----
         Total                                                                    120,926         48,958           40.5
                                                                                  =======         ======           ====
</TABLE>
----------
(1)  Excludes several other  jurisdictions  in which the Company  currently does
     not participate,  including Manitoba,  Sweden, Queensland and Tasmania even
     though the Company is licensed in Tasmania.
(2)  Estimated number in operation as of December 1997.
(3)  Number of VLC gaming machines sold may vary from number in operation.
(4)  Total number of gaming  machines and number of VLC gaming machines based on
     information  provided by Atlantic Lotto.  Atlantic  Canada  encompasses the
     provinces of New  Brunswick,  Newfoundland,  Nova Scotia and Prince  Edward
     Island.  New  Brunswick  and Prince  Edward  Island have  adopted a private
     ownership  structure,  while  in the  provinces  of  Newfoundland  and Nova
     Scotia,  the gaming  machines are owned by the  government or its appointed
     agent.
(5)  VLC supplies  video  machines to Dover Downs (120) and Delaware Park (155).
     IGT supplies video machines to Harrington Midway (60). There are also 2,245
     mechanical spinning reel games at the three racetracks.

                                     - 11 -

<PAGE>


(6)  Total  number of video  lottery  gaming  machines  and number of VLC gaming
     machines  based on number of gaming  machines  licensed,  according  to the
     Montana Gambling Control Division and VLC shipment reports.
(7)  Total number of gaming  machines and number of VLC gaming machines based on
     contract  with  Oregon  State  Lottery.
(8)  Video lottery operations are authorized at only two pari-mutuel  facilities
     to which the Company is one of four suppliers.
(9)  Total number of gaming machines based on information  provided by the South
     Dakota  Lottery.  Number  of VLC  gaming  machines  based  on VLC  shipment
     reports.
(10) Tattersall  Sweep  Consultation  (the  lottery) and TABCORP (the  off-track
     racing  association)  are  the  two  approved  operators  in the  state  of
     Victoria.
(11) Private includes coin operators and/or location owners.
(12) International Game Technology.  In 1995, the system contract was awarded to
     GTECH. Transition of the central system operation to GTECH has not yet been
     completed.

     Gaming Machines and Game Software.  The Company through its VLC subsidiary,
seeks to capture a significant  portion of the market for its gaming machines by
offering a technologically  advanced and reliable machine to the operator, and a
fun, fast, easy game to the player.  The Company's current  generation of gaming
machines   incorporates   interactive   touchscreen   control  technology  on  a
multi-color  video  display.  Each gaming machine is capable of storing over 100
different games in memory, based on the games' memory requirements.  The machine
can present up to twelve different games selected through a menu format, such as
poker,  blackjack,  bingo and keno and spinning reel games.  The player can vary
the  amount of each  wager.  The number of games that may be offered on a gaming
machine,  the  specific  games  and the  amount  that a  player  can  wager  are
determined by the regulating authority in each jurisdiction.

     The gaming  machines  also  incorporate a variety of  menu-driven  internal
accounting,  security and  diagnostic  features,  such as on screen  accounting,
audit and game  statistics.  The machines  have  redundant  and  self-correcting
memory  and  self-diagnostic   circuitry  designed  for  reliability  in  widely
dispersed  locations.  The gaming machines are manufactured with a set of custom
components that can interface with various  peripheral devices (such as coin and
bill  acceptors,  coin  hoppers,  printers and ticket  dispensers)  in a modular
design for ease of maintenance and flexibility of configuration.

     The Company  recently  introduced its Winning  Touch(R)  Power  Series(TM),
VLC's next  generation  gaming  machine,  an  enhanced  graphics  version of its
Winning Touch(R) gaming machine.  Besides  offering an enhanced  graphics engine
and  improved  sound  capabilities,   this  machine's  design  provides  greater
flexibility,  capacity and more efficient software development capabilities than
its  predecessor.  The Power Series(TM) has been approved by the State of Nevada
for sale in that state. The Company's gaming machines typically sell for between
$4,500 and $7,900,  depending on the configuration and generation of the machine
and volume of purchases.

     The  innovative  graphics  and  advanced  technology  that  have  been  key
contributors  to VLC's  success in the video  lottery  market  will  benefit the
Company as it seeks to gain market share in the casino  marketplace.  The games,
the players,  and the operator's needs such as enhanced  reliability and revenue
generation,  are the same for both  industries.  The  knowledge  and  experience
acquired  through  its video  lottery  operations  should  enable VLC to further
enhance  the  superior  playability  and  appeal of its  machines  in the casino
markets.

     The Company  produces  software chip sets with new gaming  features for its
customers.  The  Company  expects  these new  software  chip sets to  provide an
increasing portion of the Company's revenue in the future as customers request a
more varied library of games and increased reporting  features.  Once a new game
is developed,  the ease with which the Company's  video machine  software can be
changed is an attractive selling point.

     Marketing and Distribution.  The Company must obtain a license and approval
of its gaming machines before it can sell machines in either the casino or video
lottery markets.  The following chart

                                     - 12 -

<PAGE>


shows the  jurisdictions  where VLC or the  Company  currently  is  licensed  or
authorized  to conduct  business and where  license  applications  are filed and
approval is pending:

<TABLE>
<CAPTION>

            CURRENT JURISDICTIONS IN WHICH THE COMPANY OR CERTAIN SUBSIDIARIES ARE LICENSED TO
                                            CONDUCT BUSINESS
 ----------------------------------------------------------------------------------------------------
                                   UNITED STATES
                 Casino (c)/                        Native American
Video Lottery    Riverboat (r)       Charitable         Market                     INTERNATIONAL
-------------    -------------       ----------         ------                     -------------
<S>              <C>                 <C>            <C>                          <C>
Delaware         Colorado (c)        Mississippi    Arizona                    Australia
Louisiana        Indiana (r)                          Ak-Chin                    New South Wales
Montana          Iowa (r)                             Fort McDowell              South Australia
Oregon           Louisiana (r)                        Gila River                 Western Australia
Rhode Island     Mississippi (r)                      Tonto Apache               Tasmania
South Dakota     Nevada (c)                           White Mountain Apache      Victoria
West Virginia    New Jersey (c)                       Yavapai-Apache             Northern Territory
                 South Dakota (c)                   Connecticut                Canada
                                                      Mashantucket-Pequod        Alberta
                                                      Mohegan                    New Brunswick
                                                    Louisiana                    Newfoundland
                                                      Coushatta                  Nova Scotia
                                                      Tunica-Biloxi              Ontario
                                                    Michigan                     Prince Edward Island
                                                      Bay Mills                  Quebec
                                                    Minnesota                    Saskatchewan
                                                    Mississippi                Iceland
                                                      Choctaw                  Norway
                                                    New Mexico                 Peru
                                                      Acoma                    South Africa
                                                      Pojoaque                   Mpumalanga
                                                      Pueblo of Isleta         -----------------------
                                                      Pueblo of Sandia              LICENSE
                                                      San Juan Pueblo          APPLICATIONS FILED:
                                                      Santa Ana                Taos
                                                      Tesque Pueblo            Nova Scotia
                                                    North Carolina             Pascua
                                                      Eastern Band of          Yaqui, Arizona
                                                        Cherokee               Gauteng, South Africa
                                                    Oregon                     Quebec (Casino)
                                                      Coquille                 Queensland, Australia
                                                      Cow Creek
                                                      Grande Ronde
                                                      Siletz
                                                      Umatilla
                                                      Umpqua
                                                      Warm Springs
                                                    Wisconsin
</TABLE>

     The marketing  and  distribution  of gaming  machines is controlled to some
extent by the statutory and regulatory  structure adopted in each  jurisdiction.
The Company  markets its gaming  machines  both through a direct sales force and
distributors. Currently, sales are made through distributors in Louisiana, South
Australia,  New  Jersey and a number of Native  American  markets.  In  deciding
whether to use a distributor in a new jurisdiction,  the Company will consider a
variety of factors, including existing relationships with operators and location
owners,  the ability of a distributor  to service the market after the sale, the
distributor's financial condition,  any regulatory constraints and the long-term
economics to the Company of direct sales as opposed to sales to distributors.

                                     - 13 -
<PAGE>


     The Company's  gaming machines are typically  covered by a 90-day parts and
labor  warranty.  The Company  provides  after-market  parts and service to coin
operators and other  servicing  agents.  These  after-market  parts and services
include  technical repair and hardware and software  upgrades and  enhancements.
The Company's maintenance staff also provides follow-up services with respect to
updates to hardware and software on the Company's gaming machines.

     Central  Control  Systems.  The Company  derives  revenues from its central
control system software through the grant of licenses to use the software and by
providing  installation  and maintenance  services with respect to the software.
Video lottery gaming  machines can be operated  either through a central control
system  controlled by a  governmental  authority or on a stand-alone  basis.  In
every video lottery gaming jurisdiction except Montana,  the gaming machines are
connected to a central  control  system.  The Company  believes that the greater
control and monitoring  ability  offered  through  central  control systems will
encourage  new  jurisdictions  to  adopt a video  lottery  program  and use such
systems.  Similar  technology can also be used by casinos as monitoring  ability
and the use of progressives become increasingly important. The Company's central
control systems are designed with features intended to appeal to the concerns of
the operator, including:

     Security.  To  ensure  security  of  communications,  VLC's  machines  have
     sophisticated features, including encryption, sequencing and timing of data
     transmissions.

     Control.  Each gaming  machine on the system must be enabled by a call from
     the central site before it is capable of displaying a playable game and can
     be disabled by the central control system at any time.

     Compatibility.  The Company's central control system allows gaming machines
     made by other manufacturers to run on the system.

     Economy of Operation.  The Company's central control system can be operated
     in a dial-up format which is economical to install and operate  compared to
     either a traditional  on-line lottery system (using  dedicated  lines) or a
     stand-alone  system of  non-communicating  gaming  machines.  However,  the
     system can run in a real-time  environment  (on-line) should a jurisdiction
     require this feature.

     Reports and Audits.  The central site receives  on-demand reports from each
     gaming machine on the system and  automatically  audits the  programming of
     every machine on a daily basis.

     Electronic  Funds  Transfer.  The  central  control  system is  capable  of
     processing  EFT  functions  which  translate  to easier and  quicker  funds
     collection.

     Flexibility.  The system is designed to be flexible so as to meet the needs
     of various sized markets, to accommodate regulatory changes and to adapt to
     new game designs and features.

     The  Company's  central  control  system  software is marketed  through the
Company's direct sales force. The marketing  efforts for a video lottery central
control  system  typically  begin when a  legislative  body is  considering  the
adoption  of video  lottery  enabling  legislation.  Once  enabling  legislation
calling for a central  control  system is adopted,  the selection of the central
control  system is  normally  accomplished  through a formal  bid  process  that
involves submittal of proposals followed by a competitive evaluation period. The
Company's   marketing  efforts  for  its  lottery  products  and  services  also
frequently involve top management in addition to the Company's  marketing staff.
The Company  also  retains  persons who are  registered  as lobbyists in a given
jurisdiction.

     The Company  designed and installed  software for the video lottery central
control systems in South Dakota, Loto Quebec, the Atlantic Lottery  Commission's
("ALC,"  the   regulatory   body   governing   lotteries   in  eastern   Canada)
multi-jurisdictional  system now  covering  four  provinces  in eastern  Canada,
Tattersalls and TABCORP in Victoria,  Australia,  Independent Gaming Corporation
in South  Australia  and the  Northern  Territory  Racing & Gaming  Authority of
Northern Territory,  Australia, the Norwegian Red Cross and the Icelandic Gaming
Fund Raising in Iceland. The Company's  MasterLink(R) system is state-of-the-art
technology,  utilizing an IBM UNIX platform or DEC ALPHA platform as is the case
with ALC,  and offers

                                     - 14 -

<PAGE>


customers the opportunity to operate on-line lottery functions and video lottery
terminals from a single central system.

     The first video gaming  machine  application  of the  MasterLink(R)  system
running  concurrently with the traditional  on-line lottery  application  became
operational in Delaware in December 1995, when the gaming facilities licensed by
the Delaware State Lottery at two of the state's  pari-mutuel tracks opened. The
system is  successfully  reporting  data from both  video  gaming  machines  and
spinning reel slot machines as well as the on-line lottery.

     The video gaming application of the MasterLink(R)  system is being marketed
as a stand-alone  system under the name Advanced  Gaming System.  This system is
modular in design and provides  for the  addition of expansion  modules to allow
for progressives, player tracking, casino management systems and slot accounting
systems.  The Advanced Gaming System ("AGS") is being marketed to new as well as
existing  customers.  The AGS was  successfully  installed  in  Iceland in 1997.
Development  work is  underway  to  provide  the  Company's  AGS to  Tabcorp  in
Victoria, Australia in mid-1998.

     Video  gaming  customers  look for a variety of  features  in video  gaming
products. The technology in current machines will develop and improve over time,
forcing  manufacturers  to invest in ongoing  game  development.  VLC's  Winning
Touch(R)  gaming machine  contains  libraries with numerous game  variations and
allows for swift  reprogramming  to provide  the newest  games.  In  addition to
offering  expansive  product  lines,  casinos  require  customized  services for
specific  requests,  including video graphics,  game development and floor space
design.

     As video gaming becomes more  widespread  and players become  accustomed to
the ever-improving graphics and interactive features of video games, the Company
believes that video gaming  machines will make up a larger segment of the gaming
environment.  Because of this, the focus of research and development is shifting
toward more emphasis on software development. The same shift is happening on the
central system side as both video lottery  jurisdictions and casinos demand more
reporting  features,  downloadable games and additional forms of jackpotting and
linked progressives.

     Competition.  The Company competes with domestic and foreign  manufacturers
of video gaming  equipment and providers of traditional  on-line lottery systems
and  casino-based  gaming systems in the sale of its gaming machines and central
control  system  software.  Many  of  the  Company's  competitors  have  greater
financial and other  resources than the Company.  The Company faces  competition
from  companies  marketing  complete  video  lottery  gaming  systems  and  from
companies  marketing  only video lottery  gaming  machines as well as increasing
competition in the casino gaming  market.  Among the Company's  competitors  are
International Game Technology,  Inc., Alliance Gaming, Atronic,  Silicon Gaming,
Spielo Gaming International, WMS Industries, Casino Data Systems, Aristocrat and
GTECH.

     Significant  factors which  influence  the purchase of gaming  machines and
central  control  systems  include  price,  reliability,  technical  capability,
security,  overall  earnings power of the product and the experience,  financial
condition  and  reputation of the  manufacturer  and  distributor.  In addition,
gaming  authorities  may impose other  qualifications  and  requirements  on the
Company and its  competitors in the supply of video gaming products and services
and may also consider the performance record and reputation for integrity of the
vendor.

     Route  Operations.  Through  three of its  subsidiaries,  the Company owns,
operates  and  maintains  video  lottery  and  amusement  machines  in  business
establishments  located in three areas in southern Montana. The Company believes
its  route  operations,   in  addition  to  generating   recurring  revenue  and
predictable  operating  profit,  enable the Company to understand  the needs and
preferences of players and coin operators by providing  testing  grounds for new
hardware and software  concepts.  This  research  enables the Company to observe
player  response  to  various  terminal  configurations  and to use this data to
improve its terminal design.

     The Company's route operations primarily utilize  coin-operated video poker
and  video  keno  machines.   The  amusement  machines  consist  principally  of
coin-operated video machines, pinball machines, pool tables, CD players and juke
boxes.  Based on its familiarity with the relatively small number of competitors
of its  route  operations  and its  familiarity  with  substantially  all of the
potential  locations for video lottery machines in the market areas, the Company
believes that its route operations have a

                                     - 15 -

<PAGE>


significant  share of the video lottery  machine  market in Montana.  During the
year ended December 31, 1997, the route operations generated approximately $17.7
million or 9% of the Company's consolidated revenues.

     The Company enters into agreements  with owners of business  establishments
to install video lottery gaming and amusement machines at their businesses.  The
number of machines per location is determined by available space, customer base,
competition,  preference of the owner of the establishment,  and, in the case of
video lottery gaming machines,  licensing limitations.  The agreements typically
provide for revenue  sharing with the location  owner based upon a percentage of
the net revenues generated by the Company's machines. In certain instances,  the
Company or one of its  subsidiaries may assist the location owner with obtaining
financing  relating  to the  location,  including  providing  a guaranty of such
financing.  The agreements require the Company to install,  maintain and service
machines installed at the location.

     The Company's route  operations  compete  directly with other machine route
businesses, including numerous small route operators and several route operators
similar in size to the Company's route  operations,  and with companies  selling
video lottery gaming machines directly to location owners. The principal factors
of competition for route operations are the reputation of the route operator and
the  quality  and  earnings  potential  of the  machines  offered  by the  route
operator,  the  service  provided  by the  route  operator  and the terms of its
agreement with the location owner.

United Wagering Systems, Inc.

     The Company  acquired UWS in 1994 pursuant to a stock  purchase  agreement.
United Tote develops, manufactures,  operates and sells computerized pari-mutuel
wagering systems commonly referred to as "totalisators"  for horse and greyhound
racetracks,  off-track  wagering  facilities  and jai  alai  frontons  in  North
America, South America, Spain, the Caribbean and the Philippines.  A totalisator
system  supports  pari-mutuel  wagering by controlling the acceptance of wagers,
calculating odds and payout,  cashing winning tickets,  and performing  assorted
management,  accounting and reporting functions. Each system consists of central
processing computers,  betting terminals,  proprietary software, tote boards and
other displays and video equipment. The products and services of United Tote are
typically  marketed to domestic  facilities under long-term  service  contracts.
Compensation is usually based on a minimum fee plus a percentage of the wagering
volume of the facility.  International customers typically purchase the hardware
and a license to use the proprietary software for the system's operation. United
Tote also provides wagering  terminals for use in casino  race/sportsbooks.  See
Note 2 to the Consolidated Financial Statements

     The market for pari-mutuel wagering systems in North America includes horse
and greyhound racetracks, a growing number of off-track betting (OTB) facilities
and jai alai  frontons.  Pari-mutuel  wagering is authorized in 43 states in the
United States, all provinces in Canada, and many foreign countries.  Pari-mutuel
wagering  is a form of  wagering  in which  patrons  bet  against  each other in
separate pools,  rather than against the operator of the facility or with preset
odds. As a result, wagering odds are determined by the size of the pools and the
distribution  of dollars  established  by the patrons'  wagers.  The odds change
continually  until betting closes at the start of a race or event.  The odds and
payout  information are conveyed to the public and updated frequently on display
boards and on video monitors located at various places  throughout the facility.
The facility operator administers the pool and is compensated by a percentage of
the gross monies wagered at the facility (the "handle"). There are approximately
350  pari-mutuel  wagering  facilities  in North  America  and  numerous  others
worldwide.

     While  on-track  attendance  and handle from  pari-mutuel  wagering at live
events in the  United  States has  markedly  decreased  over the last  decade as
jurisdictions  have  legalized  other  forms of  gaming,  there  has also been a
substantial  increase in simulcast and off-track wagering handle during the same
period. Due to the significant  increase of alternate forms of gaming during the
last several years, there can be no assurance that such historical patterns will
remain the same in the future,  nor can the Company predict the magnitude of any
resulting net economic effects on this segment of its business.

     Computerized   pari-mutuel  wagering  systems,   commonly  referred  to  as
totalisators, support pari-mutuel wagering by accepting wagers, calculating odds
and payouts,  distributing  such data to display systems,  verifying and cashing
winning tickets,  and performing assorted  management,  accounting and reporting
functions.  Totalisator  systems can be used to serve  on-track,  off-track  and
inter-track  wagering.

                                     - 16 -

<PAGE>


On-track  wagering is conducted  on the  premises of a racetrack  where the live
race is taking place. Off-track wagering takes place somewhere other than at the
live racetrack,  most commonly at off-track  betting  facilities,  most of which
televise  the event taking  place.  OTB systems  generally  combine or commingle
wagers from the remote locations into common pari-mutuel pools maintained at the
host track.  Inter-track  wagering is similar to  off-track  wagering in that it
entails the combination of wagering pools from different locations into a common
pool at the host track, the significant  difference being the location where the
wagering  occurs.  Inter-track  wagering occurs at one racetrack when it accepts
bets on a live racing event  occurring at another  track.  An event is televised
from the host track where the race is  transmitted to one or more "guest" tracks
and the wagers from the guest tracks are then typically  transmitted to the host
track's computer system and combined with the host track's pari-mutuel pool. The
host track's central computer calculates the merged or combined pool and returns
that information to the guest tracks. As a result,  betting patrons at the guest
tracks  are in the  pari-mutuel  pool of the  host  track  and  they may in some
instances receive the same payout for winning wagers as they would have received
had they attended the live racing event at the host track.

     The most common  form of  totalisator  system used in North  America is the
computerized  "sell/cash"  system that allows  patrons to place bets and to cash
winning  tickets at the same window.  A typical  sell/cash  system consists of a
central computer,  as many as a thousand  electronic  ticket issuing  terminals,
display equipment and associated peripheral equipment.  The system also includes
proprietary  software to carry out the complex,  high speed  wagering  functions
required  by  modern  pari-mutuel  betting.  The  totalisator  terminal  is  the
interface  between the system and pari-mutuel  customer.  The terminals are most
commonly operated by pari-mutuel  tellers employed by the racetrack  although in
recent  years a growing  number of terminals  are now  operated  directly by the
patrons or accept pre-marked betting slips the patrons have prepared.  After the
terminal  accepts the  wagering  information,  the  terminal  transmits  it to a
central  computer  system  consisting  of one or more central  processing  units
("CPUs")  which  perform the bulk of the  computer  calculations  for the system
along with generating management reports.

     The CPUs authorize the issuance of a printed  ticket,  aggregate the wagers
into pools and calculate the resulting odds. The CPUs communicate the calculated
odds for display on video monitors or totalisator boards and calculate the final
odds and payout  amounts  when the racing  event is complete and the results are
official.  The winning patrons present their tickets to the pari-mutuel  tellers
or self-service  terminals.  The terminals read and then  communicate the ticket
number from the winning  tickets to the CPUs,  which  calculate  and display the
payout  amount to the clerk who pays the  patron or on a  self-service  terminal
which can issue a credit  voucher to the  patron  that may be cashed at a teller
window  or  utilized  in a  self-service  terminal.  Off-track  betting  systems
typically  include  terminals at several  different OTB facilities or racetracks
and a CPU which communicates with the wagering systems at the on-track locations
via telephone lines.

     Domestic Contracts.  United Tote provides  pari-mutuel wagering services to
most North American  customer  facilities  under  long-term  service  contracts,
typically with 5-7 year terms under which the Company  provides the  pari-mutuel
wagering computer system, as well as the operations, maintenance and supervisory
personnel  necessary  to operate the system,  while the mutuel  clerks who issue
tickets on the  teller-operated  terminals  to the patrons of the  facility  are
employed by the facility. Under such service contracts, the Company at all times
retains ownership of the equipment and is entitled to liquidated  damages in the
event a customer cancels the contract without cause.

     Service contract revenues received by United Tote from the operation of its
pari-mutuel  wagering  systems  are  generally  based upon a  percentage  of the
handle,  subject in most  instances  to  minimum  fees.  Minimum  fees under the
service  contracts  are  generally  based on the  number  of days  the  facility
operates,  as well as other factors,  including the type of system and number of
terminals  installed at the facility and the reliability of the predicted number
of racing days to occur during the term of the contract.

     United  Tote  makes   certain   warranties   regarding  the  operation  and
reliability of its wagering systems. In the event of system failure, United Tote
is generally  responsible for certain liquidated  damages,  subject to a maximum
daily and/or annual  amount.  In some  instances,  United Tote may be liable for
tickets  paid  in  error  or  for  counterfeit   tickets  if  processed  by  the
totalisator.  Liquidated  damages paid or accrued by United Tote with respect to
its pari-mutuel contracts were approximately 1.0% of its revenues for 1997, 0.3%
for 1996 and 1.6% for 1995.

                                     - 17 -

<PAGE>


     With the growth of simulcasting,  many of United Tote's racetrack customers
and most of its OTB customers operate throughout the year.  Facilities which are
seasonal,  generally  contract for services only during their operating  season,
allowing United Tote to move its equipment and personnel to other  facilities at
the close of an  operating  season at a seasonal  facility,  forming  "circuits"
among such facilities.

     United  Tote  provides   pari-mutuel  wagering  services  to  over  120  of
approximately 350 pari-mutuel facilities in North America. The installed base of
terminals in use was approximately 8,200 at December 31, 1997.

     In some limited instances, North American facilities purchase a pari-mutuel
wagering system from United Tote. In such cases, the Company usually enters into
separate service and maintenance agreements for the system.

     Until  recent  years,  United Tote had  historically  focused on  providing
services to small and medium-sized  racetracks;  however,  since the addition of
contracts  with all of the  Kentucky  thoroughbred  racetracks  and the Kentucky
statewide  OTB  network in 1994,  United  Tote has  demonstrated  its ability to
perform at large customer facilities.  The capabilities of United Tote's Horizon
System were again demonstrated by handling the  record-setting  123rd running of
the Kentucky Derby at Churchill  Downs in 1997,  where $15.9 million was wagered
at the track;  an additional  $60.7 million was wagered  through hubs throughout
the country for another North American  single-day record of $76.6 million total
combined  system  handle.   United  Tote  recently  signed  multi-year  contract
extensions to its existing  totalisator  service  contracts with Churchill Downs
and Turfway Park racetrack, located in Florence, Kentucky.

     International   Sales.   United  Tote  has   customers   in   international
marketplaces,  including Canada, Jamaica, Spain, Mexico, Argentina,  Ecuador and
the  Philippines.  Internationally,  there has been growth in the utilization of
on-line  wagering  systems in  established  markets.  As economic and  political
situations improve, new market opportunities open up for U. S. suppliers in less
developed countries where there is an increasing demand for advanced technology.

     Wagering systems for facilities  outside of North America have historically
been sold rather than operated  pursuant to service  contracts.  Such sales have
been made on a direct sale basis with payments to the Company  generally made in
U. S. dollars. Upon the sale of a system, United Tote also charges the purchaser
a license fee for use of the Company's  proprietary system software and provides
technical  assistance and support.  The personnel of the Company  participate in
the  installation  and  commissioning of these systems but typically the systems
are  thereafter  operated by the  personnel of the  customers who are trained at
United Tote serviced facilities.

     Products. United Tote introduced its System 1000 in 1981 and over the years
has expanded  its  presence  throughout  the United  States and Canada.  Through
incorporating new technology and utilizing more efficient hardware,  United Tote
continues to offer the wagering industry an affordable  sell/cash system to both
small and medium-sized tracks. With approximately 1,600 System 1000 terminals in
service at customer locations throughout the world, the System 1000 terminal has
proven  to be  extremely  durable  in  the  racetrack  environment.  Repair  and
maintenance services are performed at the Montana headquarters of the Company.

     The newest  wagering  system  developed by United Tote, the Horizon System,
first introduced in 1993, features the dual-purpose  VERSA(TM)  terminal,  which
has both a self-service and teller-operated mode, allowing the racetrack to make
full use of all terminals,  even on slow race days. The VERSA(TM)  terminal thus
allows for  significant  labor savings and flexibility  and  versatility.  Other
terminals in the Horizon System family are the portable wireless ULTIMA(TM); the
cashless account-betting  PROFILE(TM);  and a bill-accepting module to convert a
VERSA(TM)  into  a  touch-screen,  self-service  terminal.  Approximately  6,600
VERSA(TM) terminals are presently in service at customer locations.  In 1995, an
enhanced  version of the  VERSA(TM) as well as a color  version were  developed.
Those new model  terminals  have been produced  since 1996 and are in service at
customer locations.

     United Tote  believes  that its ability to attract new and retain  existing
wagering system  customers  depends in part on the continuous  incorporation  of
innovative  technological  advances to improve its  product  lines.  The Company
maintains a development program directed toward new products and the improvement
and refinement of its present products to expand their uses and applications.

                                     - 18 -

<PAGE>


     Competition.  Because of the  highly  regulated  nature of the  pari-mutuel
industry and critical  functions  of the  products  supplied,  vendors must meet
thresholds of  reliability,  customer  service and  reputation  ahead of product
design and price.  Unexpected  shutdown  of a wagering  system  could  result in
significant  loss of revenues so customers will typically only utilize  wagering
systems from suppliers with proven abilities at similar size wagering facilities
(both in terms of number of terminals and total handle).

     United  Tote's  principal  competitors  are  Autotote,  AmTote and, at some
facilities,  a limited  number of other smaller,  local and regional  companies.
Competition outside of North America is more fragmented,  with competition being
provided by several  international  and regional  companies.  No single  company
maintains a dominant market position internationally, although certain companies
possess regional strengths.

Sunland Park

     The Company's  racetrack  operation is located in Sunland Park, New Mexico,
adjacent to El Paso,  Texas.  In 1997 the State of New Mexico  recently voted to
allow casino  gaming at  pari-mutuel  racetracks  in New Mexico,  including  the
Company's  racetrack in Sunland Park, New Mexico.  The  legislation  permits the
Company to operate up to 300 gaming machines per pari-mutuel  racetrack facility
for up to twelve hours per day. The  implementation  of gaming is subject to the
timing and satisfaction of conditions of the legislation,  including the state's
formation of a separate board to oversee the gaming and other regulatory matters
(including  the  grant  of  necessary  licenses  to the  Company).  Two  million
residents live within a 100-mile radius of Sunland Park, which area includes the
cities of El Paso, Texas and Juarez, Mexico. The Company had architectural plans
developed  for  casino  gaming  at the  racetrack  facility  and  has  initiated
construction.  Current  plans  call for  approximately  $8.0  million of capital
expenditures for facility enhancements, gaming machines and related equipment.

     Competition. Sunland Park does not have direct competition for horse racing
in the El Paso area, although there is an operating greyhound racing facility in
Juarez, Mexico which also offers sports/race wagering on simulcast racing events
and sporting  events.  Ruidoso Downs, a horse racing  facility in Ruidoso Downs,
New Mexico,  competes in the same general  market as Sunland Park, but currently
the  racing  dates  at the two  tracks  do not  conflict.  Also,  The  Downs  at
Albuquerque,  New Mexico,  historically  has  competed  to some  extent  against
Sunland Park,  commencing in January and  continuing  through the end of Sunland
Park's season. However, in 1998 the racing dates for The Downs at Albuquerque do
not conflict with Sunland Park. If the racing dates or schedules of either other
track are expanded or altered so that a direct conflict between Sunland Park and
the others  occurs,  it is likely that there would be some effect on  operations
and revenues of Sunland Park.

     While  Texas  permits  pari-mutuel  wagering,   there  are  no  pari-mutuel
racetracks in direct  competition with Sunland Park's geographic area,  although
there has been some effect upon the number and  quality of horses  available  to
run at  Sunland  Park.  Sunland  Park  also  competes  against  other  forms  of
entertainment,  including  sporting  events.  The States of New Mexico and Texas
currently authorize limited forms of gambling,  such as a state lottery,  bingo,
and Native  American  casinos,  all of which compete for the leisure  dollar and
which have had a significant negative effect on attendance and handle at Sunland
Park in recent years.

Manufacturing

     The  Company's  primary  manufacturing  facility  is  located  in  Bozeman,
Montana.  The Company's  manufacturing  operations consist primarily of assembly
and  testing of its  on-line  lottery,  video  gaming and  pari-mutuel  wagering
systems  machines.  The  Company  purchases  most of the parts,  components  and
subassemblies  (some of which are designed by the Company) from outside  sources
and then  assembles  them into finished  products.  The Company  generally  uses
standard parts and  components  that are available  from multiple  sources.  The
Company has contracted  with third parties for the assembly of gaming  machines,
which the Company  utilizes when  conditions  warrant and/or when  contractually
required.  The  Company  also  has  contracted  with  outside  sources  for  the
manufacture of some of its components.  The Company has historically experienced
low turnover among its work force.

                                     - 19 -

<PAGE>


Research and Development

     The  future  success of the  Company  depends  to a large  extent  upon its
ability to design, manufacture and market technologically sophisticated products
that  achieve  high  levels of player  acceptance.  The  Company's  business  is
characterized   by  rapidly   changing   technology  and  frequent  new  product
introductions and  enhancements.  The development of a successful new product or
product  design by a competitor  would  adversely  affect sales of the Company's
products and force it to respond quickly with its own competing products.  There
can be no  assurance  that  the  Company  will  be  successful  in  identifying,
developing  and marketing new products or enhancing its existing  products.  The
Company's business will be adversely affected if the Company  experiences delays
in developing new products or  enhancements  or if such products or enhancements
do  not  meet  and  receive  all  regulatory   approvals  and/or  gain  customer
acceptance.

     In 1997,  the Company  expended  $9.8  million (net of  capitalization)  on
research and development activities as compared to $8.0 million in 1996 and $8.9
million in 1995. The Company capitalized  approximately $1.0 million in 1997 and
$4.1 million in 1996 and $2.7 million in 1995 of software  development  costs in
conjunction with the development of the Company's  MasterLink(TM) central system
software.  In 1997 the Company  implemented  new  modules and other  significant
enhancements  in a number of on-line  lottery  systems  provided to domestic and
international   customers.    Research   and   development   expenditures   were
approximately  5.5%,  6.8% and 6.4% of  consolidated  revenues in 1997, 1996 and
1995, respectively.  Additionally,  the Company spends significant resources and
capital on improvement of existing products, services and techniques for current
customers.

     The Company is currently  conducting a comprehensive review of its computer
systems to identify  the systems that could be affected by the "Year 2000" issue
and is developing  an  implementation  plan to resolve the issue.  The Year 2000
issue is pervasive and complex,  as virtually  every  computer  operation of the
Company,  including  both internal  systems and systems  delivered to customers,
will be affected in some way by the  roll-over  of the  two-digit  year value to
"00." Computer systems that do not properly recognize date-sensitive information
could generate  erroneous data or cause a complete system  failure.  The Company
believes  that,  with  modification  of existing  computer  systems,  updates by
vendors and  conversion to new software in the ordinary  course of its business,
the Year 2000  issue  will not pose  significant  operational  problems  for the
Company's computer systems.  However,  if such modifications and conversions are
not completed timely or properly, the Year 2000 issue may have a material impact
on the business and operations of the Company.  The costs of  modifications  and
conversions are not anticipated to be material, but will principally represent a
re-deployment of existing or otherwise  planned  resources.  No assurance can be
given that the Company will successfully avoid any problems  associated with the
Year 2000 issue.

Intellectual Property

     The Company may seek and, in some cases, has sought, patents and copyrights
with respect to various  aspects of its games and on some of the technology used
in its products.  No assurance can be given that any patent  applications  filed
will be granted,  that the patents or  copyrights  will not be infringed or that
other  parties  will not develop  similar  technology  that will not violate the
patents. The Company believes that its technical know-how, trade secrets and the
creative  skills of its  personnel  are more  important  to its success than any
benefit  which patent  protection  may afford.  The Company  typically  requires
persons such as  customers,  employees,  licensees and  subcontractors  who have
access   to   proprietary   information   concerning   its   products   to  sign
confidentiality  and non-disclosure  agreements,  which prohibit the use of this
information  other than for the specific  purpose for which it is provided,  and
the Company relies on such agreements,  other security measures and trade-secret
laws to protect such proprietary information.

     The Company has pending  applications  for  registration  of  trademarks in
connection  with its products in the United States,  Australia and other foreign
countries.  The  Company  intends to file  additional  applications  to register
trademarks  in the  United  States  and other key  jurisdictions  as  considered
necessary. The Company also relies on the laws of trade secrets and copyright to
protect  its  proprietary  rights to its central  control  system  software  and
various other software programs.

                                     - 20 -

<PAGE>


Employees

     As of December 31, 1997, the Company employed approximately 1,380 people on
a full and part-time basis. Approximately 525, 200, and 480 were employed in the
on-line lottery,  gaming machine and wagering  systems and racetrack  operations
segments,  respectively.  Another 175 people provided  corporate  manufacturing,
finance and  administration  and national  marketing  services to the  operating
segments. Approximately 220 were part-time employees in the wagering systems and
racetrack operations segment.

     The  Company  has  no  collective  bargaining  agreements  with  any of its
employees and believes that its overall relations with employees are good.

Government Regulation

     In  the  United  States,  lotteries  are  not  permitted  unless  expressly
authorized  by law in  such  jurisdiction.  Currently,  there  are  thirty-eight
lotteries  operating in the United  States and  District of Columbia.  All these
lotteries  operate a traditional  lottery,  namely,  offering  lotto and instant
scratch-off  games.  Video lottery,  involving  video  simulated games of chance
played on gaming devices,  is not authorized under traditional  lottery statutes
in the majority of these jurisdictions.  There are presently seven video lottery
operations in the United  States.  Legislation  in each  jurisdiction  generally
specifies  certain standards to ensure the security and integrity of the lottery
operation that include,  but are not limited to: the minimum percentage of gross
revenues paid back to players in prize money;  the  percentage of gross revenues
paid to a state  purpose;  randomness  of play;  goods and services  regarded as
major  procurements  requiring state bids; and suitability  standards for agents
and  vendors of major  procurements.  Policy  and  management  decisions  of the
lottery  operations  are  generally  governed by a  commission  appointed by the
governor  of  each  state  with  the   day-to-day   operations  of  the  lottery
administered  by  a  director  appointed  either  by  the  governor  or  lottery
commission. The lottery commission and director of each state generally exercise
significant authority, including the determination of the types of games played,
the price of tickets,  the manner in which the lottery is marketed and selection
of vendors of equipment and services.

     To ensure the integrity of their  lottery  operations,  most  jurisdictions
require detailed  background  disclosure and investigations of vendors providing
goods  and  services  under a  contract  award  for a major  procurement,  which
typically  include:  on-line  computer  systems  and  services;  instant  ticket
printing;  ticket validation  systems;  gaming devices;  drawing equipment;  and
advertising  services.  Background  investigations  typically  are  conducted on
company subsidiaries,  affiliates, officers, directors, and stockholders who own
5% or more of the  outstanding  capital  stock of the  Company  for  purposes of
meeting  suitability  standards  defined under statute and  regulations  of each
jurisdiction.   Additionally,   vendors   are   required  to  respond  and  meet
comprehensive  standards as described  in a lottery's  request for  proposals or
invitations for bid for the goods and services  contracted.  Failure on the part
of a vendor to meet suitability standards or provider requirements as delineated
in the request for proposals could jeopardize the award of a lottery contract to
the  Company or provide  grounds  for the  termination  of an  existing  lottery
contract.

     The award of lottery  contracts  and ongoing  operations  of  lotteries  in
international  jurisdictions also are highly regulated,  although the operations
typically vary from lotteries in the United  States.  In addition,  restrictions
are  often   imposed  on  foreign   corporations   seeking  to  do  business  in
international jurisdictions.

     The manufacture, distribution and operation of gaming devices or facilities
are subject to extensive federal, state, provincial and local regulation.  These
regulations vary from jurisdiction to jurisdiction.  All  jurisdictions  require
various  licenses,  permits and  approvals to be held by companies and their key
personnel  in  connection  with the  manufacture,  distribution  or operation of
gaming devices or facilities. Generally, gaming devices may not be manufactured,
distributed or operated  unless such licenses are obtained from the  appropriate
regulatory  authorities of the jurisdictions.  Changes in such laws, regulations
and procedures could have an adverse effect on the Company's operations.

     The  Federal  Gambling  Devices  Act of 1962 (the  "Federal  Act") makes it
unlawful for a person to manufacture, deliver or receive gaming machines, gaming
machine  devices and  components  thereof  across  interstate  lines unless that
person has first  registered  with the  Attorney  General of the United  States.
Certain of the Company's  subsidiaries  are so  registered  and must renew their
registrations  annually.  In

                                     - 21 -

<PAGE>


addition,  various record keeping and equipment identification  requirements are
imposed by the Federal  Act.  Violation of the Federal Act may result in seizure
or forfeiture of equipment, as well as other penalties.

     The U. S.  Congress  has created the  National  Gambling  Impact and Policy
Commission  to conduct a  comprehensive  study of all  matters  relating  to the
economic  and  social  impact of  gaming  in the  United  States.  The  enabling
legislation  provides that, not later than two years after the enactment of such
legislation,  the commission would be required to issue a report  containing its
findings and  conclusions,  together with  recommendations  for  legislation and
administrative  actions.  Any such  recommendations,  if enacted into law, could
adversely  affect the gaming industry and have a material  adverse effect on the
Company's business, financial condition or results of operations.

     From time to time,  certain  legislators  have proposed the imposition of a
federal tax on gross gaming revenues.  No specific  proposals for the imposition
of such a federal tax are currently pending.  However, no assurance can be given
that such a tax will not be  imposed  in the  future.  Any such tax could have a
material  adverse  effect on the  Company's  business,  financial  condition  or
results of operations.

     Although the regulatory  schemes in the  jurisdictions in which the Company
sells or operates  video  lottery  gaming  machines or systems  (the  "Operating
Jurisdictions")  are not identical,  their material attributes are substantially
similar, as described below.

     The manufacture,  sale and distribution of gaming devices,  including video
lottery terminals,  and the ownership and operation of gaming facilities in each
Operating Jurisdiction,  are subject to various state, provincial, county and/or
municipal  laws,  regulations  and  ordinances,  which are  administered  by the
relevant  regulatory  agency or agencies  in that  Operating  Jurisdiction  (the
"Department").  These laws,  regulations  and ordinances  primarily  concern the
responsibility,   financial   stability  and   character  of  gaming   equipment
manufacturers,  distributors  and  operators,  as  well as  persons  financially
interested or involved in gaming or liquor operations.

     No manufacturing,  distributing,  owning or operating of gaming devices may
be conducted  unless proper licenses and approvals are obtained.  An application
for a license or approval  may be denied for failure to satisfy any  standard or
requirement as determined by the Department. In order to ensure the integrity of
the video  lottery  gaming  system,  most  jurisdictions  have the  authority to
conduct  background  investigations  of  the  Company,  its  key  personnel  and
significant  stockholders.  The  Department  may at any  time  revoke,  suspend,
condition,  limit or restrict a license for any cause deemed in violation of its
law or  regulations.  Fines for violation of gaming laws or  regulations  may be
levied against the holder of a license and persons involved.  In September 1992,
the Victoria Gaming Commission of Victoria, Australia, removed VLC from the roll
of approved  gaming  manufacturers,  which  prohibited  the Company  from making
future  sales of  gaming  equipment  in  Victoria.  This  decision  was based on
concerns regarding the former CEO and then majority  stockholder of the Company.
After severing all his business  relationships with the Company, VLC applied and
was approved for placement on the roll of approved  manufacturers in Victoria in
December 1993. The Alcohol, Racing and Gaming Board (RACJ) of Montreal,  Quebec,
initially  rejected  VLC's  application  as  a  manufacturer  of  video  lottery
equipment in December 1993. The RACJ  reconsidered its earlier decision based on
assurances  that the former CEO had also sold his entire stock  ownership in the
Company in severing all business  relationships with the Company. In March 1994,
the RACJ granted VLC a manufacturer  license.  VLC remains in good standing with
the Victoria Gaming  Commission and the RACJ. Other than the above two licensing
matters, the Company and its key personnel have been approved for licensing upon
completed  application in all operating  jurisdictions  in which the Company has
applied. Suspension or revocation of such licenses could have a material adverse
effect upon the Company's  future  operations and the experience in Victoria and
Quebec  indicates  that there can be no assurance  that the Company will receive
necessary or appropriate  licenses,  permits or approvals or, if received,  that
such licenses,  permits or approvals will be renewed or retained. The actions of
any licensing  authority may be  considered by regulatory  authorities  in other
jurisdictions.  Similarly,  the  rejection or  termination  of the Company,  its
personnel,  or major  stockholders  in any other  jurisdiction  may have adverse
consequences in other jurisdictions.

     In addition to the  Operating  Jurisdictions,  the Company  will seek to do
business  in  other   jurisdictions  if  they  authorize  video  lottery  gaming
operations  in  the  future.  The  Company  cannot  predict  the  nature  of the
regulatory  scheme in any such  jurisdiction.  Certain states do have regulatory
schemes  currently  in place which  authorize  forms of video  gaming other than
video lottery,  such as video poker.

                                     - 22 -

<PAGE>


There can be no assurance  that the Company will obtain the necessary  licenses,
permits or approvals to conduct business in any new jurisdiction.

     The Company  regularly  engages  public  affairs  advisors and lobbyists in
various  United States  jurisdictions  to advise  legislators  and the public in
connection with lottery legislation and to advise the Company in connection with
contract  proposals.  Officers  of the  Company  may  make  authorized  campaign
contributions to various candidates of political parties.

     The  process by which  lottery  contract  awards are made may be subject to
intense  scrutiny and review by federal,  state and provincial  authorities  not
directly related to lottery authorities. It is impossible to predict the impact,
if any, on the Company of any such review of lottery procurement decisions.

     In certain  jurisdictions,  the Company's  pari-mutuel  wagering segment is
also subject to extensive state regulatory and licensing requirements similar to
the  Company's  on-line  lottery  and video  gaming  machine  subsidiaries.  The
Company's  racetrack  operations  in Sunland  Park,  New Mexico,  are subject to
regulation of the New Mexico Racing Commission and other authorities.

Nevada Regulatory Matters

     The  manufacture,  sale and  distribution  of gaming devices and associated
equipment  for use or play in Nevada or for  distribution  outside of Nevada and
the  operation of slot  machine  routes in Nevada are subject to: (i) The Nevada
Gaming Control Act and the  regulations  promulgated  thereunder  (collectively,
"Nevada  Act");  and  (ii)  various  local  ordinances  and  regulations.   Such
activities  are subject to the  licensing and  regulatory  control of the Nevada
Gaming Commission ("Nevada  Commission"),  the Nevada State Gaming Control Board
("Nevada  Board"),  and  various  local,  city and  county  regulatory  agencies
(collectively referred to as the "Nevada Gaming Authorities").

     The laws,  regulations  and  supervisory  procedures  of the Nevada  Gaming
Authorities  are based upon  declarations  of public  policy which are concerned
with, among other things:  (i) the prevention of unsavory or unsuitable  persons
from having a direct or indirect  involvement  with gaming,  or manufacturing or
locations,  practices,  associations and activities  related to the operation of
licensed  gaming  establishments  and the  manufacture or distribution of gaming
devices and equipment;  (ii) the  establishment  and  maintenance of responsible
accounting practices and procedures; (iii) the maintenance of effective controls
over the  financial  practices of  licensees,  including  the  establishment  of
minimum  procedures for internal  fiscal affairs and the  safeguarding of assets
and  revenues,  providing  reliable  record  keeping and requiring the filing of
periodic  reports with the Nevada  Gaming  Authorities;  (iv) the  prevention of
cheating  and  fraudulent  practices;  and (v) to  provide a source of state and
local  revenues  through  taxation  and  licensing  fees.  Change in such  laws,
regulations  and  procedures  could  have an  adverse  effect  on the  Company's
manufacturing, distribution and slot route operations.

     The Company is  registered by the Nevada  Commission  as a publicly  traded
corporation (a "Registered  Corporation") and has been found suitable to own the
stock of two wholly-owned subsidiaries, VLC and VLC of Nevada, Inc. (the "Nevada
Subsidiary")  which are each licensed as a  manufacturer  and  distributor.  The
Nevada  Subsidiary is also licensed as an operator of a slot machine route. As a
registered corporation,  the Company is required periodically to submit detailed
financial and operating  reports to the Nevada  Commission and furnish any other
information  which the Nevada  Commission  may  require.  No person may become a
stockholder  of, or receive  any  percentage  of profits  from VLC or the Nevada
Subsidiary without first obtaining licenses and approvals from the Nevada gaming
authorities.  The Company,  VLC and the Nevada Subsidiary have obtained from the
Nevada  gaming  authorities  the  various  registrations,   approvals,  permits,
findings of suitability and licenses  (collectively ("Gaming Licenses") in order
to engage in manufacturing,  distribution and slot route activities in Nevada as
applicable.

     All gaming  devices and cashless  wagering  systems that are  manufactured,
sold or distributed for use or play in Nevada,  or for  distribution  outside of
Nevada,  must be manufactured by licensed  manufacturers and distributed or sold
by licensed  distributors.  All gaming devices  manufactured  for use or play in
Nevada must be approved by the Nevada Commission before distribution or exposure
for play. The approval process for gaming devices  includes  rigorous testing by
the Nevada  Board,  a field trial and a  determination  as to whether the gaming
device meets strict technical standards that are set forth in the regulations of
the Nevada Commission. Associated equipment must be administratively approved by
the

                                     - 23 -

<PAGE>


Chairman of the Nevada Board  before it is  distributed  for use in Nevada.  The
Winning Touch (R) gaming machine has been approved by the Nevada Commission.

     The Nevada Gaming  Authorities  may  investigate  any  individual who has a
material  relationship to, or material involvement with, the Company, the Nevada
Subsidiary or VLC in order to determine  whether such  individual is suitable or
should be  licensed  as a business  associate  of a gaming  licensee.  Officers,
directors  and  certain  key  employees  of the  Nevada  Subsidiary  and VLC are
required to file  applications  with the Nevada  Gaming  Authorities  and may be
required  to be licensed or found  suitable  by the Nevada  Gaming  Authorities.
Officers,  directors  and key  employees  of the  Company who are  actively  and
directly involved in the licensed activities of the Nevada Subsidiary or VLC may
be required to be licensed or found  suitable by the Nevada Gaming  Authorities.
The Nevada  Gaming  Authorities  may deny an  application  for licensing for any
cause which they deem  reasonable.  A finding of  suitability  is  comparable to
licensing,  and both  require  submission  of detailed  personal  and  financial
information followed by a thorough investigation. The applicant for licensing or
a finding of suitability must pay all the costs of the investigation. Changes in
licensed  positions  must be reported to the Nevada  Gaming  Authorities  and in
addition to their  authority to deny an application for a finding of suitability
or licensure,  the Nevada Gaming  Authorities have  jurisdiction to disapprove a
change in a corporate position.

     If the Nevada Gaming  Authorities were to find an officer,  director or key
employee   unsuitable   for  licensing  or  unsuitable  to  continue   having  a
relationship with the Company,  the Nevada Subsidiary,  VLC, or the subsidiaries
involved would have to sever all  relationships  with such person.  In addition,
the Nevada Commission may require the Company,  VLC and the Nevada Subsidiary to
terminate  the  employment  of  any  person  who  refuses  to  file  appropriate
applications.  Determination  of  suitability  or  of  questions  pertaining  to
licensing are not subject to judicial review in Nevada.

     The Company,  VLC and the Nevada Subsidiary are required to submit detailed
financial  and operating  reports to the Nevada  Commission.  Substantially  all
material loans, leases,  sales of securities and similar financing  transactions
by VLC and the Nevada  Subsidiary  are required to be reported to or approved by
the Nevada Commission.

     If it were determined that the Nevada Act was violated by the Company,  the
Nevada Subsidiary or VLC, the licenses they hold could be limited,  conditioned,
suspended  or  revoked,   subject  to  compliance  with  certain  statutory  and
regulatory procedures. In addition, the Nevada Subsidiary,  VLC, the Company and
persons  involved  could be  subject  to  substantial  fines  for each  separate
violation  of the  Nevada  Act  at the  discretion  of  the  Nevada  Commission.
Limitation,  conditioning or suspension of the licenses held by the Company, the
Nevada  Subsidiary  or VLC could (and  revocation  of any license  would) have a
materially  adverse effect on the Company's  manufacturing  and  distribution of
gaming machines.

     Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his/her suitability  determined as a beneficial holder of the Company's
voting  securities  if the Nevada  Commission  has  reason to believe  that such
ownership  would  otherwise be  inconsistent  with the declared  policies of the
state of Nevada.  The applicant must pay all costs of investigation  incurred by
the Nevada Gaming Authorities in conducting any such investigation.

     The Nevada Act  requires any person who  acquires  beneficial  ownership of
more than 5% of a  Registered  Corporation's  voting  securities  to report  the
acquisition to the Nevada  Commission.  The Nevada Act requires that  beneficial
owners of more than 10% of a Registered Corporation's voting securities apply to
the Nevada Commission for a finding of suitability  within thirty days after the
Chairman of the Nevada  Board mails the written  notice  requiring  such filing.
Under  certain  circumstances,  an  "institutional  investor," as defined in the
Nevada  Act,  which  acquires  more  than 10%,  but not more  than  15%,  of the
Registered  Corporation's  voting  securities may apply to the Nevada Commission
for a waiver of such finding of suitability if such institutional investor holds
the voting  securities for investment  purposes only. An institutional  investor
shall not be deemed to hold voting securities for investment purposes unless the
voting  securities were acquired and are held in the ordinary course of business
as an  institutional  investor  and not for the purpose of causing,  directly or
indirectly,  any of the following:  the election of a majority of the members of
the  board  of  directors  of the  Registered  Corporation;  any  change  in the
Registered  Corporation's  corporate charter,  bylaws,  management,  policies or
operations,  or in any of its gaming  affiliates,  or any other action which the
Nevada   Commission  finds  to  be  inconsistent  with  holding  the

                                     - 24 -

<PAGE>


Registered   Corporation's  voting  securities  for  investment  purposes  only.
Activities  which  are  not  deemed  to  be  inconsistent  with  holding  voting
securities for investment purposes only include: (i) voting on all matters voted
on by  stockholders;  (ii) making financial and other inquiries of management of
the type normally made by securities analysts for informational purposes and not
to cause a change in its  management,  policies  or  operations;  and (iii) such
other  activities as the Nevada  Commission may determine to be consistent  with
such investment  intent.  If the beneficial holder of voting securities who must
be found  suitable  is a  corporation,  partnership  or  trust,  it must  submit
detailed  business  and  financial  information  including a list of  beneficial
owners. The applicant is required to pay all costs of investigation.

     Any person who fails or refuses to apply for a finding of  suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or  the  Chairman  of the  Nevada  Board,  may be  found  unsuitable.  The  same
restrictions apply to a record owner if the record owner,  after request,  fails
to identify the  beneficial  owner.  Any  stockholder  found  unsuitable and who
holds,  directly or  indirectly,  any  beneficial  ownership of the Common Stock
beyond such period of time as may be prescribed by the Nevada  Commission may be
guilty of a criminal offense. The Company will be subject to disciplinary action
if, after it receives  notice that a person is unsuitable to be a stockholder or
to have any other relationship with the Company,  the Nevada Subsidiary,  VLC or
the Company (i) pays that person any dividend or interest upon voting securities
of the Company, (ii) allows that person to exercise, directly or indirectly, any
voting  right  conferred  through  securities  held by that  person,  (iii) pays
remuneration in any form to that person for services  rendered or otherwise,  or
(iv) fails to pursue all lawful  efforts to require  such  unsuitable  person to
relinquish  his  voting  securities,  including,  if  necessary,  the  immediate
purchase of said voting securities for cash at fair market value.

     The Nevada  Commission  may, in its  discretion,  require the holder of any
debt security of a Registered Corporation to file applications,  be investigated
and be found  suitable to own the debt security of a Registered  Corporation  if
the Nevada  Commission  has reason to believe that his  acquisition of such debt
security would otherwise be  inconsistent  with the declared policy of the State
of Nevada.  If the Nevada  Commission  determines that a person is unsuitable to
own such security,  then pursuant to the Nevada Act, the Registered  Corporation
can be  sanctioned,  including the loss of its  approvals,  if without the prior
approval of the Nevada  Commission,  it: (i) pays to the  unsuitable  person any
dividend,  interest, or any distribution whatsoever;  (ii) recognizes any voting
right by such unsuitable  person in connection with such securities;  (iii) pays
the unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable  person  by  way  of  principal,  redemption,  conversion,  exchange,
liquidation, or similar transaction.

     The  Company,  VLC,  and the Nevada  Subsidiary  are required to maintain a
current  stock  ledger in Nevada  which may be  examined  by the  Nevada  Gaming
Authorities at any time. If any securities are held in trust by an agent or by a
nominee,  the record  holder may be  required to  disclose  the  identity of the
beneficial  owner to the  Nevada  Gaming  Authorities.  A  failure  to make such
disclosure may be grounds for finding the record holder unsuitable.  The Company
is also required to render maximum assistance in determining the identity of the
beneficial  owner.  The Nevada  Commission  has the power to  require  the stock
certificates of the Company to bear a legend  indicating that the securities are
subject to the Nevada  Act.  However,  to date,  the Nevada  Commission  has not
imposed such a requirement on the Company.

     The Company may not make a public  offering of its  securities  without the
prior approval of the Nevada Commission if the securities or proceeds  therefrom
are intended to be used to construct,  acquire or finance  gaming  facilities in
Nevada,  or to retire or extend  obligations  incurred for such  purposes.  Such
approval, if given, does not constitute a finding, recommendation or approval by
the Nevada  Commission or the Nevada Board as to the accuracy or adequacy of the
prospectus  or  the   investment   merits  of  the   securities   offered.   Any
representation to the contrary is unlawful.

     Changes  in   control  of  a   Registered   Corporation   through   merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person  whereby  he  obtains  control,  may not occur
without the prior approval of the Nevada Commission. Entities seeking to acquire
control of a Registered Corporation must satisfy the Nevada Board and the Nevada
Commission in a variety of stringent standards prior to assuming control of such
Registered  Corporation.  The Nevada  Commission  may also  require  controlling
stockholders,   officers,   directors  and  other  persons   having  a  material
relationship or involvement with the entity proposing to acquire control,  to be
investigated  and  licensed  as part of the  approval  process  relating  to the
transaction.

                                     - 25 -

<PAGE>


     The  Nevada  legislature  has  declared  that some  corporate  acquisitions
opposed by management,  repurchases of voting  securities and corporate  defense
tactics affecting Nevada corporate gaming licensees, and Registered Corporations
that are  affiliated  with  those  operations,  may be  injurious  to stable and
productive  corporate gaming. The Nevada Commission has established a regulatory
scheme to ameliorate the potentially adverse effects of these business practices
upon Nevada's gaming industry and to further  Nevada's policy to: (i) assure the
financial  stability of corporate  gaming licensees and their  affiliates;  (ii)
preserve the beneficial  aspects of conducting  business in the corporate  form;
and (iii) promote a neutral  environment for the orderly governance of corporate
affairs.  Approvals  are,  in certain  circumstances,  required  from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting  securities above the current market price thereof and before a corporate
acquisition  opposed  by  management  can be  consummated.  The  Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's  Board of Directors in response to a tender offer made directly to
the Registered Corporation's  stockholders for the purposes of acquiring control
of the Registered Corporation.

     License fees and taxes,  computed in various ways  depending on the type of
gaming or  activity  involved,  are  payable  to the State of Nevada  and to the
counties and cities in which gaming  operations  are to be conducted.  Depending
upon the particular fee or tax involved, these fees and taxes are payable either
monthly,  quarterly or annually and are based upon either:  (i) a percentage  of
the gross  revenues  received;  or (ii) the number of gaming  devices  operated.
Annual fees are also payable to the State of Nevada for renewal of licenses as a
manufacturer, distributor and operator of a slot machine route.

     Any person who is licensed, required to be licensed,  registered,  required
to be registered,  or is under common  control with such persons  (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of  investigation by
the Nevada Board of their  participation  in such foreign gaming.  The revolving
fund is  subject  to  increase  or  decrease  in the  discretion  of the  Nevada
Commission.  Thereafter, Licensees are required to comply with certain reporting
requirements   imposed  by  the  Nevada  Act.  Licensees  are  also  subject  to
disciplinary  action by the Nevada Commission if it knowingly  violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming  operations,  engages in activities that
are  harmful to the state of Nevada or its ability to collect  gaming  taxes and
fees, or employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.

Native American Gaming Regulations

     Gaming on Native American lands is extensively regulated under federal law,
tribal-state  compacts and tribal law. The Indian Gaming  Regulatory Act of 1988
("IGRA") provides the framework for federal and state control over all gaming on
Native American  lands.  IGRA regulates the conduct of gaming on Native American
lands  and the  terms  and  conditions  of  contracts  with  third  parties  for
management of gaming  operations.  IGRA  established  the National Indian Gaming
Commission  ("NIGC")  to  operate  as an  independent  agency,  within the U. S.
Department   of  the   Interior,   to  exercise   primary   federal   regulatory
responsibility  over  such  gaming.  The NIGC is  delegated  authority  to issue
regulations  governing tribal gaming  activities,  approve tribal ordinances for
regulating  Class II and Class III gaming,  approve  management  agreements  for
gaming facilities, conduct investigations and monitor tribal gaming generally.

     The IGRA  classifies  games that may be conducted on Native  American lands
into three categories.  "Class I Gaming" includes social games solely for prizes
of minimal value,  or traditional  forms of Native American Gaming engaged in by
individuals  as  part  of,  or  in  connection   with,   tribal   ceremonies  or
celebrations.  "Class II Gaming" includes bingo, pulltabs,  lotto, punch boards,
tip jars,  instant bingo,  and other games similar to bingo,  if those games are
played at the same location as bingo is played.  "Class III Gaming" includes all
other  commercial  forms of gaming,  such as table  games,  slots,  video casino
games,  and other  commercial  gaming  (e.g.,  sports  betting  and  pari-mutuel
wagering).

     Class  I  Gaming  on  Native   American   lands  is  within  the  exclusive
jurisdiction  of the Native American tribes and is not subject to the provisions
of IGRA.  Class II Gaming is permitted on Native American lands if (a) the state
in which the Native  American  lands lie permits  such gaming for any purpose by
any person, organization or entity; (b) the gaming is not otherwise specifically
prohibited on Native  American lands by

                                     - 26 -

<PAGE>


federal law; (c) the gaming is conducted in accordance  with a tribal  ordinance
or resolution  which has been approved by the NIGC; (d) a Native  American tribe
has sole proprietary  interest and responsibility for the conduct of gaming; (e)
the primary management  officials and key employees are tribally  licensed;  and
(f) several other  requirements are met. Class III Gaming is permitted on Native
American lands if the  conditions  applicable to Class II Gaming are met and, in
addition,  the gaming is  conducted in  conformance  with the terms of a written
agreement  between a tribal  government  and the  government of the state within
whose boundaries the tribe's lands lie (a "tribal-state compact").

     IGRA requires states to negotiate in good faith with Native American tribes
that seek to enter  into a  tribal-state  compact  for the  conduct of Class III
Gaming.  Such tribal-state  compact may include provisions for the allocation of
criminal and civil jurisdiction  between the state and the Native American tribe
necessary  for the  enforcement  of such laws and  regulations,  taxation by the
Native  American  tribe of such activity in amounts  comparable to those amounts
assessed by the state for comparable activities,  remedies for breach, standards
for the  operation of such  activity  and  maintenance  of the gaming  facility,
including  licensing,  and any other  subjects that are directly  related to the
operation of gaming  activities.  The terms of  tribal-state  compacts vary from
state to state.  Compacts within one state tend to be  substantially  similar to
each other.  Compacts usually specify the types of permitted games,  entitle the
states to inspect casinos,  require  background  investigations and licensing of
casino employees and vendors,  and may require the tribe to pay a portion of the
state's expenses for establishing and maintaining regulatory agencies.

Other Jurisdictions and Government Approvals

     Most of the other  jurisdictions  in which the Company and its subsidiaries
conduct  business or intend to conduct  business in the future  require  various
licenses,  permits,  findings of  suitability or other  approvals  (collectively
"Government  Approvals") in connection with the manufacture and/or  distribution
of gaming  devices or  provision  of goods or services to the Lottery and Racing
Industries.  Some  jurisdictions  allow the Company to operate under a temporary
Government  Approval  or on a  transactional  basis  during  the  pendency  of a
comprehensive   background   investigation.   While  the  Company  has  received
Government  Approvals  in  all of  the  jurisdictions  in  which  the  Company's
applications  have been acted  upon,  there can be no  assurance  that  required
Government approvals will be given or renewed in the future.

     Most of the jurisdictions in which the Company and its subsidiaries conduct
business or intend to conduct  business in the future  require gaming devices to
meet certain standards and specifications  established by each jurisdiction.  In
addition,  most jurisdictions require gaming devices to be reviewed and approved
either by the regulatory  agency or an independent  testing  laboratory prior to
the gaming  devices  being sold or offered  for public  play.  The  Company  has
received or is seeking such approvals for its gaming  devices,  but there can be
no assurance that such approvals will be maintained or that additional requisite
approvals will be obtained.

Additional Financial Information

     Certain  financial  information for each of the Company's last three fiscal
years with respect to industry segments and foreign and domestic  operations and
export  sales is set  forth in Note 4 of the  Company's  Consolidated  Financial
Statements.

                                     - 27 -

<PAGE>


ITEM 2.  PROPERTIES

     The Company's executive offices,  principal  manufacturing and distribution
facilities  occupy  approximately  82,000 square feet in a building owned by the
Company and located in Bozeman, Montana. The Company leases approximately 38,000
square feet  serving as a  warehouse/assembly  facility in the Bozeman  area and
approximately  8,000  square  feet  serving as  executive  offices  in  Atlanta,
Georgia.

     The Company's on-line lottery services  subsidiary,  AWI, leases facilities
in New Jersey  located in a complex of which AWI occupies  approximately  43,000
square feet and in Arden  Hills,  Minnesota,  where AWI  occupies  approximately
13,000  square  feet.  In  connection   with  its   operations  in  the  various
jurisdictions,  AWI occupies approximately 40 additional sites, most of which it
holds under lease.  The Company leases space in Reno (4,800 square feet) and Las
Vegas (13,900 square feet), Nevada, Biloxi,  Mississippi (1,000 square feet) and
Victoria, Australia (1,000 square feet), primarily for product sales and support
as well as assembly,  repair and storage of video gaming machine products.  Also
in Bozeman,  Montana,  the Company leases approximately 5,300 square feet out of
which it  operates  one of its  route  businesses.  The  Company  also  owns two
buildings, one in Billings, Montana and one in Livingston, Montana, out of which
it operates its other two route businesses.

     The Company  also leases  approximately  1,500  square feet of office space
near Baltimore,  Maryland for the administrative  offices of United Tote. United
Tote leases  approximately  12,100 square feet in San Diego,  California,  which
primarily  houses the  subsidiary's  research and  development  activities,  and
leases  approximately  2,900  square  feet of space  in  Winnipeg,  Canada,  for
administrative and repair services.

     The  Company's  racetrack  facility in Sunland Park,  New Mexico,  rests on
approximately  153 acres and contains in excess of 330,000 square feet inclusive
of the  grandstand,  stables,  barns,  offices,  etc. The racetrack  itself is a
one-mile oval track.

ITEM 3.  LEGAL PROCEEDINGS

     A class action,  alleging  violations of the federal  antitrust  laws,  was
filed in June 1994, in the federal  district  court in South Dakota  against the
Company and certain video lottery gaming machine  operators in South Dakota by a
group of other video lottery gaming  machine  operators,  alleging,  among other
things,  a combination  and  conspiracy to  unlawfully  restrain  trade in video
lottery  gaming  machines by fixing lease prices for such  machines,  allocating
territories  and  refusing  to deal with  other  operators.  Unspecified  treble
damages were sought,  along with injunctive relief to bar the alleged practices.
On  November  6, 1996,  the South  Dakota  federal  district  court  granted the
Company's and other defendants'  motion for summary judgment,  dismissing,  with
prejudice,  all claims of the  plaintiffs  in this  matter.  In  December  1996,
plaintiffs  filed an appeal of this ruling with the Eighth  Circuit of the U. S.
Court of Appeals. On August 29, 1997, the Court of Appeals affirmed the judgment
of the district court, and on September 29, 1997, the Court of Appeals issued an
order denying a rehearing in this matter.  The plaintiff  filed a petition for a
writ of  certiorari  with the United  States  Supreme  Court which was denied on
February 23, 1998.

     On  December  1996,  a  purported  class  action  was filed in the Court of
Chancery,  Delaware State Court,  directing the Company and certain officers and
directors of the company to fulfill their  fiduciary  obligations by effecting a
transaction for the acquisition of the Company.  On January 2, 1997, the Company
and certain  other  officers  and  directors  of the  Company  filed a motion to
dismiss the matter.  This matter has been  informally  stayed for an  indefinite
period of time by agreement of the parties.

     In January  1998, a breach of contract  claim was filed against the Company
and  AWI in the U.  S.  District  Court,  Southern  District  of New  York by MR
International, Inc. and American Lottery Systems. The plaintiffs allege that the
Company and AWI  breached  their  obligations  in a joint  venture in the Rostov
Region of the Republic of Russia.  The complaint  seeks  monetary  damages.  The
Company  believes the claim is entirely  without merit and intends to vigorously
defend the action.

     Although the Company is a party in various  other claims and legal  actions
arising in the ordinary course of business, in the opinion of management,  after
consultation with legal counsel, the ultimate disposition of these other matters
as they are currently  understood will not likely have a material adverse effect
on the  financial  position or results of  operations  of the  Company.

                                     - 28 -

<PAGE>


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

     The company's Annual Meeting of Stockholders was held on November 14, 1997,
and in connection  therewith,  proxies were solicited by management  pursuant to
Regulation  14 under  the  Securities  Exchange  Act of 1934.  An  aggregate  of
10,318,730 shares of the company's common stock were outstanding and entitled to
vote at the meeting,  of which  9,848,520 were present in person or by proxy. At
the meeting the following  matters were submitted to a vote by the stockholders,
with the results indicated below:

     1.   Election of one  director to serve until the year 2000 Annual  Meeting
          of Stockholders.

               Nominee                    For                    Withheld

               John Hardesty           7,817,167                 2,031,353

     2.   Ratification  of  appointment  of KPMG Peat Marwick LLP as independent
          auditors for the year ending December 31, 1997.

               For                      Against              Abstained/Not Voted

            8,233,194                  1,592,028                    23,298

     3.   Amendment  to  the  Company's   1991  Employee   Stock  Purchase  Plan
          eliminating  certain  restrictions and increasing the number of shares
          available for issuance to Plan  Participants  for Purchase Period 1996
          and for subsequent Purchase Periods by 500,000 shares,  which increase
          would result in a total of 700,000 shares available for issuance under
          the plan:

               For                       Against             Abstained/Not Voted

            4,663,628                   2,416,283                   68,375

     4.   Amendment to the Company's  1994 Stock  Incentive Plan to increase the
          number of available  shares  issuable  thereunder  by 500,000  shares,
          which  increase would result in a total of 1,500,000  shares  issuable
          under the plan,  and to allow for the issuance of restricted  stock in
          lieu of cash compensation to non-employee directors:

               For                       Against             Abstained/Not Voted

            4,058,276                   3,009,675                   80,335

     5.   Amendment to the Company's  Certificate of Incorporation to change the
          name of the Company to reflect more  accurately  the  diversity of the
          Company's operations.

               For                       Against             Abstained/Not Voted

            7,223,840                   2,540,944                   41,348

                                     - 29 -

<PAGE>


                                     PART II

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

     The  Company's  Common  Stock  trades on The Nasdaq  Stock Market under the
symbol PWRH.  From July 24, 1991 until December 31, 1997,  the Company's  Common
Stock  traded  under the symbol  VLTS.  Prior to that time,  there was no public
market for the Common Stock. The following table sets forth the high and low bid
prices for the common shares for the periods indicated as reported by Nasdaq.

     YEAR                                           High                 Low

     1997

          Quarter ended December 31, 1997          $12.75               $8.75
          Quarter ended September 30, 1997         $11.38               $5.94
          Quarter ended June 30, 1997               $6.25               $3.50
          Quarter ended March 31, 1997              $4.88               $3.25

     1996
          Quarter ended December 31, 1996           $5.75               $3.00
          Quarter ended September 30, 1996          $4.75               $2.88
          Quarter ended June 30, 1996               $6.88               $3.75
          Quarter ended March 31, 1996              $7.38               $4.38

     As of March 2, 1998, there were  approximately 701 holders of record of the
Company's  Common Stock.  Since its  formation in May 1991,  the Company has not
paid any dividends to its stockholders.  The Company currently intends to retain
any earnings to help finance the growth and development of its business and does
not  anticipate  paying cash  dividends on its capital stock in the  foreseeable
future.  Any future  determination  as to the payment of dividends on its Common
Stock  will  depend,  among  other  things,  on  the  future  earnings,  capital
requirements and financial  condition of the Company,  and on such other factors
as the Company's  Board of Directors  may consider  relevant.  In addition,  the
existing  bank line of credit  held by the  Company  restricts  the  payments of
dividends  by  the  Company.   (See  Note  11  to  the  Consolidated   Financial
Statements.)

                                     - 30 -

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

     The selected  data  presented  below for, and as of the end of, each of the
years in the  five-year  period ended  December  31, 1997,  are derived from the
consolidated  financial  statements  of  the  Company  and  subsidiaries,  which
financial  statements  have been audited by KPMG Peat  Marwick LLP,  independent
certified  public  accountants.  The  consolidated  financial  statements  as of
December 31, 1997 and 1996, and for each of the years in the  three-year  period
ended December 31, 1997, and the report thereon,  are included elsewhere in this
Form  10-K.  The  selected  consolidated   financial  data  should  be  read  in
conjunction with the consolidated  financial statements and notes thereto of the
Company and "Item 7. Management's Discussion and Analysis of Financial Condition
and  Results of  Operations"  included  elsewhere  in this Form  10-K.
<TABLE>
<CAPTION>
                         Selected Financial Information
                 (Dollars in thousands, except per share data)
                                                                          Years Ended December 31,
OPERATIONS DATA                                          1997          1996          1995           1994          1993
---------------                                          ----          ----          ----           ----          ----
<S>                                                   <C>            <C>           <C>            <C>           <C>
REVENUES:
On-line lottery                                       $ 94,771        88,843        91,653        101,559       115,544
Gaming machine and route operations                     75,221        60,186        61,398         68,571        59,069
Wagering systems and racetrack operations(1)            26,943        27,652        28,111         18,652           ---
                                                      --------       -------       -------        -------       -------
         Total revenues                                196,935       176,681       181,162        188,782       174,613

COSTS OF REVENUES
On-line lottery                                         62,558        59,333        59,438         62,397        67,985
Gaming machine and route operations                     44,530        32,911        35,991         39,815        35,074
Wagering systems and racetrack operations               19,893        20,104        22,286         13,992           ---
                                                      --------       -------       -------        -------       -------
                                                       126,981       112,348       117,715        116,204       103,059
                                                      --------       -------       -------        -------       -------
Gross profit                                            69,954        64,333        63,447         72,578        71,554
OTHER OPERATING EXPENSES:
Selling, general and administrative                     31,655        28,697        31,140         34,000        30,362
Research and development                                 9,788         7,969         8,888          8,513         6,629
Other charges                                              ---        34,135         2,763         23,994           ---
Depreciation and amortization                           21,995        23,822        22,587         20,694        18,033
                                                      --------       -------       -------        -------       -------
                                                        63,438        94,623        65,378         87,201        55,024
                                                      --------       -------       -------        -------       -------

Earnings (loss) from operations                          6,516       (30,290)       (1,931)       (14,623)       16,530
                                                      --------       -------       -------        -------       -------

Other income (expense)                                  (2,869)       (2,694)       (1,833)          (242)       (9,032)
                                                      --------       -------       -------        -------       -------

Earnings (loss) before income taxes and
     extraordinary items                                 3,647       (32,984)       (3,764)       (14,865)        7,498
Income tax benefit (expense)                             1,135         8,753           846         (1,303)       (3,152)
                                                      --------       -------       -------        -------       -------

Net earnings(loss) from continuing operations            4,782       (24,231)       (2,918)       (16,168)        4,346
Reversal of (provision for) loss on discontinuance
     of wagering systems operations, net(1)                ---         5,482        (5,482)           ---           ---
                                                      --------       -------       -------        -------       -------

Net earnings (loss) before extraordinary items           4,782       (18,749)       (8,400)

Extraordinary gain, net                                 13,269         4,014           ---            ---           ---
                                                      --------       -------       -------        -------       -------

Net earnings (loss)                                   $ 18,051       (14,735)       (8,400)       (16,168)        4,346
                                                      ========       =======       =======        ========      =======

Earnings (loss) per share data:
Basic:
Continuing operations                                    $0.46         (2.28)        (0.28)         (1.56)         0.35
                                                         -----         -----         -----          -----          ----
Net earnings (loss)                                      $1.75         (1.39)        (0.80)         (1.56)         0.35
                                                         =====         =====         =====          =====          ====

Diluted:
Continuing operations                                    $0.46         (2.28)        (0.28)         (1.56)         0.35
                                                         -----         -----         -----          -----          ----
Net earnings (loss)                                      $1.72         (1.39)        (0.80)         (1.56)         0.35
                                                         =====         =====         =====          =====          ====

Weighted average shares:
Basic                                                   10,329        10,635        10,555         10,337        12,286
                                                        ------        ------        ------         ------        ------
Diluted                                                 10,489        10,635        10,555         10,337        12,293
                                                        ======        ======        ======         ======        ======
</TABLE>
                                     - 31 -

<PAGE>

<TABLE>
<CAPTION>

                                                                                   December 31,
BALANCE SHEET DATA                                        1997         1996          1995           1994         1993
                                                          ----         ----          ----           ----         ----
<S>                                                   <C>            <C>           <C>            <C>           <C>


Working capital                                       $ 37,050        28,083        19,987         23,344        51,458
Total assets                                           161,397       168,043       165,851        174,032       139,513
Total long-term debt(1)(2)
  (excluding current  installments)                     31,446         9,312        12,885          9,060           855
Stockholders' equity                                    82,146        72,231        86,448         94,112       108,215
</TABLE>
----------

(1)  Wagering  systems and racetrack  operations  revenue and costs since May 3,
     1994. (See Note 2 to the Consolidated Financial Statements.)

(2)  On January 30, 1997, the Company and EDS reached an agreement to settle all
     claims against each other. The agreement,  among other things, provided for
     the extinguishment of outstanding fees of approximately $38.0 million for a
     note payable of  approximately  $26.1 million  which matures in 2004.  (See
     Note 2 to the Consolidated Financial Statements.)

                                     - 32 -

<PAGE>



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

                              Results of Operations

     The following  table  presents for the years  indicated,  the percentage of
revenues  represented  by certain  operational  data, as well as the  percentage
change in such items.

<TABLE>
<CAPTION>

                                                  Percentage (%) of Total Revenues
                                                  --------------------------------             Percentage (%) Increase
                                                            Years Ended                              (Decrease)
                                                              December 31,                   --------------------------
                                                      -----------------------------          Year 1997        Year 1996
                                                     1997         1996       1995            Over 1996        Over 1995
                                                     ----         ----       ----            ---------        ---------
<S>                                                <C>            <C>        <C>               <C>             <C>    <C>

Revenues:
On-line lottery                                     48.0           50.3       50.6                6.8            (3.2)
Gaming machine and route operations                 38.2           34.1       33.9               24.9            (2.0)
Wagering systems and racetrack operations           13.8           15.6       15.5               (2.9)           (1.4)
                                                   -----          -----      -----
                                                   100.0          100.0      100.0              (11.4)           (2.5)
                                                   -----          -----      -----

Costs and expenses:
On-line lottery                                     31.8           33.6       32.8                5.6            (0.2)
Gaming machine and route operations                 22.6           18.6       19.9               35.3            (8.6)
Wagering systems and racetrack operations           10.1           11.4       12.3               (1.0)           (9.9)
Selling, general and administrative                 16.0           16.2       17.1               10.1            (7.7)
Research and development                             5.0            4.5        4.9               22.5           (10.1)
Other charges                                        ---           19.3        1.5             (100.0)        1,117.9
Depreciation and amortization                       11.2           13.5       12.5               (7.6)            5.3
                                                   -----          -----      -----

                                                    96.7          117.1      101.0               (8.0)           13.0
                                                   -----          -----      -----

Earnings (loss) from operations                      3.3          (17.1)      (1.0)            (121.5)        1,489.5

Other expense, net                                  (1.5)          (1.5)      (1.0)               7.4            50.0
                                                   -----          -----      -----
Net earnings (loss) before income taxes,
  discontinued operations and extraordinary
  items                                              1.8          (18.6)      (2.0)            (110.9)          789.2
                                                   =====          =====      =====
</TABLE>

     As a holding  company  whose  principal  assets are the  securities  of its
on-line and video lottery and gaming subsidiaries, the Company's ability to meet
debt service obligations and pay operating expenses and dividends, if authorized
by the  Company's  board of  directors,  depends  primarily  on the  receipt  of
sufficient   dividends   from  such   on-line  and  video   lottery  and  gaming
subsidiaries.  In  addition,  gaming  statutes and license  requirements  in the
jurisdictions  in which the  Company's  subsidiaries  currently  operate  or may
operate  in the  future  may  require  the  maintenance  of  minimum  amounts of
statutory  capital and place certain  restrictions  upon the amount of dividends
that the Company's subsidiaries may pay.

     The success of the Company will be dependent, to a significant extent, upon
the continued services of a relatively small group of executive  personnel.  The
loss  or  unavailability  of one or  more  of  such  executive  officers  or the
inability to attract or retain key employees in the future could have an adverse
effect upon the Company's operations.

     Revenue  from  the  on-line  lottery  segment   consists   primarily  of  a
contractual  percentage  of lottery  ticket sales in states in which the Company
operated as well as revenue from on-line  lottery  equipment  sales and software
license fees.  The segment  revenue will  experience  fluctuations  depending on
contract  start and end dates and  relative  sizes of jackpots and the number of
terminals  on-line  and  selling  tickets  in the  states in which  the  Company
operates. The Company expects on-line lottery services revenue to continue to be
a significant component of total revenues.  On-line lottery revenue is generated
by the Company's AWI subsidiary.

                                     - 33 -

<PAGE>


     Revenue from the gaming machine and route  operations  segment  consists of
sales and lease of gaming  machines,  sales of  parts,  central  control  system
hardware  and  software,  service  of  terminals,  license  fees,  and  from the
operation of gaming machine routes.  Route operations revenue consists primarily
of gaming  machine  wagers net of pay-outs to patrons  and state  gaming  taxes.
Revenue  from  gaming  machine  sales  is  subject  to  potentially  significant
fluctuations.  When  and if new  jurisdictions  approve  legislation  for new or
expanded gaming  operations or when the Company first enters a new jurisdiction,
and if the Company is awarded a contract in any such jurisdictions,  the segment
may experience a surge in sales revenue that may or may not subsequently decline
dramatically depending on the jurisdiction and gaming venue. The Company expects
gaming machine and route operations  revenue to continue to be a major component
of  total  revenues.  Gaming  machine  revenue  is  primarily  generated  by the
Company's VLC subsidiary.

     The Company is actively seeking to expand its video and on-line lottery and
gaming operations into jurisdictions that have legalized gaming. There can be no
assurance,  however,  that the Company will be able to identify or capitalize on
any opportunities in suitable  markets.  The Company's ability to expand will be
dependent  upon a number of  factors,  many of which are  beyond  the  Company's
control,  including  negotiating  acceptable  terms,  securing  required  state,
foreign, and local licenses, permits, and approvals, securing adequate financing
on acceptable terms, voter and other political  approvals,  demographic  trends,
and consumers' gaming preferences.  As a result,  there can be no assurance that
the Company will be able to develop new markets for its products.  See "Business
--  Contracts."  In  addition,  the Company may incur costs in  connection  with
pursuing new video and on-line lottery and gaming  opportunities  that it cannot
recover  and may be  required  to  expense  certain  of these  costs,  which may
negatively affect the Company's reported  operating  performance for the periods
during which such costs are expensed.

     Revenue  from  wagering  systems  and  racetrack  operations  is  generated
primarily from a contractual percentage of handle processed through computerized
pari-mutuel   wagering  systems  from  over  120  contracts  in  North  America,
international sales and lease of pari-mutuel wagering systems, and ownership and
operation of a racetrack in Sunland Park, New Mexico.  While on-track attendance
and handle from pari-mutuel wagering in the United States has markedly decreased
over the last  decade as  jurisdictions  have  legalized  other forms of gaming,
there has also been a substantial  increase in simulcast and off-track  wagering
handle  during the same  period.  Due to the  significant  increase of alternate
forms of gaming during the last several  years,  there can be no assurance  that
such historical patterns will remain the same in the future, nor can the Company
predict the magnitude of any  resulting net economic  effects on this segment of
its business.  The Company  expects  wagering  systems and racetrack  operations
revenue to be a significant component of total revenues.

     Gross  profit for each  segment  is herein  defined  as  revenues  for that
segment less the corresponding  costs and expenses  (excluding  depreciation and
amortization  expense  and any  special or other  charges).  Costs and  expenses
related to on-line  lottery  revenue  include  all  direct  costs and  allocated
indirect  costs  involved in  operating  the on-line  lottery  equipment in each
jurisdiction  in which the Company has a contract as well as costs of  equipment
sales, inclusive of materials, labor and allocated manufacturing overhead. Costs
and  expenses  related  to  gaming  machine  revenue  include  direct  costs  of
production,  including labor, and allocated  manufacturing  overhead.  Costs and
expenses related to route operations  include the locations owners' share of the
net machine revenues.  Costs and expenses related to wagering systems operations
include  direct and allocated  indirect costs  associated  with the operation of
totalisator  equipment at the  racetracks at which the Company has a contract as
well as direct costs of equipment sales.

     Selling,  general  and  administrative  expenses  consist  of labor  costs,
professional  fees, repairs and maintenance  expense,  promotion and advertising
costs,  occupancy  and other  costs,  other  than  those  included  in costs and
expenses  applicable  to the  determination  of gross profit as defined above or
research and development as discussed below.

     Research and development costs represent costs incurred to gain and develop
new knowledge  applicable to the Company's  various gaming systems  inclusive of
software and  hardware  technology.  Included in the costs are labor,  material,
consulting,  occupancy  and other  expenses  associated  with the  research  and
development  efforts.  Development  costs are  capitalized  in  accordance  with
Statement of Financial  Accounting  Standards Board Statement No. 86 for certain
software developed for sale or lease.

                                     - 34 -

<PAGE>


     Other charges include  special and unusual charges  recorded by the Company
for restructurings,  asset valuation impairments,  liquidated damage assessments
and other  contract  losses.  The Company  excludes these other charges from the
calculation of gross profit due to the nature of each charge as disclosed in the
discussion of gross profit margin for each segment of the Company's  operations.
Such other  charges  are  considered  special  and unusual in nature and are not
associated  with the revenue stream of any segment of the Company's  operations.
Accordingly,  the Company  believes  that the inclusion of such other charges in
the  determination  of gross profit would not be indicative of past,  current or
future gross profit margins.

1997 Compared with 1996

     Consolidated  revenues  increased  by $20.3  million  , or 11%,  to  $196.9
million from $176.6 million in 1996. The consolidated  gross profit increased by
$5.6 million,  or 9%, to $69.9 million from $64.3 million in 1996. Earnings from
operations  were $6.5 million in 1997 as compared to a loss from  operations  of
$30.3 million in 1996. The 1996 loss from  operations  included $34.1 million of
special and unusual charges recorded by the Company discussed below.  Absent the
special and unusual  charges,  1996  earnings  from  operations  would have been
approximately $3.8 million. Earnings from operations as a percentage of revenues
was 3.3% in 1997 as  compared  to 2.2% in 1996  without  the special and unusual
charges.

     In 1996, the Company  withheld certain payments to EDS primarily due to EDS
performance  issues and related on-line lottery customer  disputes.  In mid-1996
the  agreement  between  EDS and the  Company  was  terminated  and EDS  filed a
complaint  against the Company seeking  payment of outstanding  fees. On January
30, 1997,  the Company and EDS settled all claims  against each other and agreed
to transition  the EDS services and personnel to the Company.  The transition of
the EDS  services  and related  employees  to the Company was  completed  in the
second  quarter of 1997 and has resulted in lower  operating  costs and improved
customer service.

On-line Lottery

     Total revenues from the on-line lottery segment  increased by $5.9 million,
or 7%, to $94.7 million from $88.8 million in 1996. The increase reflects higher
revenues from certain domestic  on-line lottery  contracts as well revenues from
the Company's  installation and sale of an on-line lottery system in Chile. 1996
on-line  lottery  revenues  include  approximately  $7.3  million  from  lottery
contracts with the Arizona and Washington  lottery  authorities.  Both contracts
terminated in 1996.

     The Company  expects the on-line  lottery  segment to remain a  significant
segment of the Company,  and the segment's growth is dependent upon management's
strategy to selectively bid on domestic lottery contracts and continue to pursue
international  on-line  lottery  opportunities.  On-line  lottery  contracts for
twelve state lotteries will be up for procurement  over the next three years two
of which  are the  Company's.  Due to the high  cost of  procuring  new  lottery
contracts,  the Company  intends to target those  states which it believes  will
establish a bidding process based exclusively on technical capability, price and
service.  This strategy allows the Company to efficiently allocate its resources
so that it may also pursue  international growth  opportunities.  The Company is
currently  pursuing a number of  jurisdictions  worldwide  that are  expected to
implement on-line lottery programs within the next two years. In 1997,  revenues
from  lottery  systems  sales to  international  customers  was $8.7  million as
compared to $3.1 million in 1996.

     Additionally,   the  Company's   sophisticated   on-line   lottery   system
MasterLink(TM)  affords the Company the ability to develop  add-on  products and
services. Given the maturity of the on-line lottery industry, states are in need
of ways to increase  lottery ticket sales and reduce costs.  The Company expects
to develop new products and  services  every year for its existing  customers as
well as reduce operating costs.

     The expiration  date of the current  contract with the Florida  Lottery was
extended  from  June  30,  1996,  as a result  of a delay of the  award of a new
contract.  On September 2, 1997, the Florida  Lottery  notified the Company that
the Company had been selected as the most highly  qualified bidder for the award
of a new five-year  contract  pursuant to a re-evaluation  that resulted from an
earlier protest by a competitor,  GTECH  Corporation,  of the Florida  Lottery's
previous  selection  of the Company.  GTECH  Corporation  protested  the Florida
Lottery's re-selection of the Company as the most qualified bidder.  On

                                     - 35 -

<PAGE>


March 23, 1998, the Lottery dismissed the protest and re-awarded the contract to
the  Company.  GTECH  filed its  notice of appeal of this order on March 24. The
Florida Lottery may commence contract  negotiations with the Company.  GTECH has
petitioned  the  Lottery  to stay  these  negotiations.  On  January 5, 1998 the
Company and the Florida  Lottery  entered  into an interim  contract to continue
operating the Lottery's on-line system until the earlier of either the award and
implementation of a new agreement or through January 1, 2000. Under the terms of
the Florida  request for proposal,  sizable  capital  expenditures  in excess of
current  credit   facilities  would  be  required  to  fulfill  its  terms.  The
availability of and terms of new financing are subject to numerous uncertainties
and cannot be reasonably predicted.

     The gross  profit  margin for on-line  lottery  revenues was 34% in 1997 as
compared to 33% in 1996.  The gross profit margin from on-line  lottery  service
revenues was 33% in 1997 and 1996. The gross profit on on-line lottery  terminal
and system sales was 48% in 1997 and 12% in 1996.  Gross profit margins from the
Company's  lottery  contract in Maryland,  implemented  in the third  quarter of
1996, have been less than anticipated,  however, the Company is working with the
Maryland  Lottery to reduce  operating costs and enhance revenues to the Company
and the  lottery.  The Company  expects to  increase  gross  profit  margins for
on-line lottery revenues over time.

     In 1996, the Company  recorded  approximately  $31.0 million of special and
unusual  charges  associated  with the  on-line  lottery  segment.  The  charges
consisted of $18.0 million for inventory reserves and write-downs,  $8.4 million
for  contractual  liabilities  and  settlement of customer  disputes which arose
primarily during the Company's former  relationship  with EDS discussed  earlier
and $4.6 million for  impairment  of intangible  and other assets  related to an
on-line lottery contract.  These charges have been excluded in the determination
of gross  profit  due to their  unusual  nature  and are not  considered  by the
Company to be indicative of anticipated future operating results.

Gaming Machine and Route Operations

     Revenue from the gaming machine and route operations  segment  increased by
$15.0 million,  or 25%, to $75.2 million from $60.2 million in 1996. Revenue was
recognized  on  shipments  of 7,047  units in 1997 as compared to 6,235 units in
1996.  Revenues from route  operations  was $17.7 million in 1997 as compared to
$16.5 million in 1996.  Revenue from leases of gaming machines was $11.0 million
in 1997 as compared to $10.7 million in 1996.

     The  increase in  revenues  over 1996 levels  reflects  increased  sales in
international  markets of Quebec,  Canada and South  Africa as well as  domestic
jurisdictions  of Nevada,  New Jersey and Minnesota.  These increased  levels of
sales were offset by  reductions  in sales in  international  markets of Norway,
Peru and Alberta, Canada.

     The Company  expects  the gaming  machine  and route  operation  segment to
remain a significant segment of the Company's operations. The growth and success
of the segment is  dependent  upon the  Company's  ability to expand its leading
position in the worldwide  video lottery  gaming market,  penetrate  established
casino markets such as Nevada and New Jersey and the growth of new markets.  The
Company believes that new markets such as Ontario,  Canada and South Africa, and
the  replacement  of older gaming  machines  and systems in Australia  and North
America  will  provide  for  future  growth   opportunities   for  the  Company.
Penetration and growth of sales to established casino markets such as Nevada and
New Jersey is primarily  dependent on the Company's  ability to gain  visibility
and  acceptance  of  its  gaming  machines  in  the  markets  while  offering  a
competitive  price. The Company believes that its gaming machines are capable of
producing  greater  than  average  play  and net win  amounts  reflecting  their
superior   graphics  and  playability.   Developing   casino   opportunities  at
pari-mutuel  racetracks is dependent initially upon the enactment of legislation
to allow gaming at racetrack facilities. A small number of states, including New
Mexico, Iowa, West Virginia,  Delaware,  Rhode Island and Louisiana have enacted
legislation to allow gaming at racetracks and the Company  anticipates the trend
to continue although there can be no assurance of it continuing.

     The gross profit margin on gaming machine and route operations  revenue was
41% in 1997 as compared  to 46% in 1996.  The  decrease  reflects  the  relative
higher  revenues from sales in Quebec,  Canada which have  historically  carried
lower gross profit  margins for the Company.  The gross profit margin from route
operations  revenue  was 27% in 1997 and 29% in 1996.  Revenue  from  leasing of
gaming machines has minimal ongoing direct costs. Depreciation expense of gaming
machines under lease

                                     - 36 -

<PAGE>


and revenue  share  agreements  is recorded as a component of  depreciation  and
amortization  expense  in  the  Company's   consolidated  financial  statements.
Although  there can be no  assurance  given,  the Company  expects  gross profit
margin levels in this segment to remain above 40%.

Wagering Systems and Racetrack Operations

     Revenues from wagering systems service  contracts was $17.6 million in 1997
as compared to $18.4 million in 1996.  The decrease is the result of the closure
of two customer  facilities in Wisconsin and Texas, the loss of two customers to
competitors,  and decreased  revenues from a Philippine  customer resulting from
contractual  handle rate  decreases and a currency  devaluation  in Asia.  These
decreases were partially offset by increased  revenues  generated from the start
up of live racing at Lone Star Park in Texas, additional services under existing
contracts, and increased fees as a result of increased levels of simulcasting in
the industry.  In 1997,  United Tote signed contracts with two new customers and
renewed  contracts  with  seventeen  existing  customers.  Included  in contract
renewals in 1997 were extension of contracts with Churchill Downs, Turfway Park,
and the Red Mile in Kentucky.  Pari-mutuel wagering systems equipment sales were
$2.5  million in 1997 as compared to $2.1 million in 1996.  Racetrack  operation
revenues  were $6.8  million  in 1997 and $7.2  million  in 1996.  The  decrease
reflects the  Company's  decision in 1997 to hold fewer live racing days,  which
are not profitable.

     The gross profit from wagering  systems service  contracts was $6.2 million
in 1997  compared  to $7.0  million in 1996.  The  decrease is the result of the
closure of two  customer  facilities  in  Wisconsin  and Texas,  the loss of two
customers to  competitors,  and decreased  revenues  from a Philippine  customer
resulting  from  contractual  handle  rate  decreases  and  the  Asian  currency
devaluation.  Increased  operating  expenses  related  to  implementation  of  a
comprehensive  employee training program, and liquidated damages payments to two
customers  also  contributed  to the  decreased  margins.  Pari-mutuel  wagering
systems  equipment sales generated $1.2 million of gross profit in 1997 compared
with $.9 million in 1996.  Gross profit for the racetrack  operations  was $(.3)
million in 1997 and 1996.

     The Company  expects the wagering  systems  segment to remain a significant
segment.  Recent  declines in general  attendance at pari-mutuel  facilities has
created increased pricing pressures for the Company and its pari-mutuel wagering
systems  supplier  competitors.  The Company does not  anticipate  those pricing
pressures  to decrease in the near  future.  Accordingly,  the Company  plans to
maintain  profitability  by improving  customer  service  while  maintaining  or
reducing operating costs.  Additionally,  as discussed in the gaming machine and
route  operations  segment,  a number of  jurisdictions  have  recently  enacted
legislation   allowing  casino  style  gaming  at  pari-mutuel   racetracks  and
facilities.  The  Company  believes  that  this  expansion  of video  gaming  at
racetracks will increase attendance at racetracks. The Company provides wagering
systems and service to over 120 of the approximate 350 pari-mutuel facilities in
North  America,  including  Churchill  Downs  which  has  consistently  set  new
attendance and wagering records with the Company's wagering system and services.

Selling, General and Administrative Expenses

     Selling,  general and  administrative  ("SG&A") expenses  increased by $3.0
million,  or 10%,  to $31.7  million  from $28.7  million in 1996.  The  Company
expended more capital and  resources for marketing and proposal  efforts in 1997
over 1996 levels.  The  increased  expenditures  were in the  Company's  on-line
lottery and gaming machine  segments which account for over 86% of the Company's
1997 consolidated  revenues.  The Company anticipates 1998 selling,  general and
administrative  expenses  to grow with  anticipated  business  growth and future
development.

Research and Development

     In 1997,  the Company  expended  $9.8  million (net of  capitalization)  on
research and  development  activities  as compared to $8.0 million in 1996.  The
Company capitalized  approximately $1.0 million in 1997 and $4.1 million in 1996
of  software  development  costs  in  conjunction  with the  development  of the
Company's MasterLink(R) central system software. In 1997 the Company implemented
new modules and other  significant  enhancements  in a number of on-line lottery
systems  provided  to  domestic  and  international   customers.   Research  and
development  expenditures  were  approximately  5.5%  and  6.8% of  consolidated
revenues in 1997 and 1996, respectively.  The Company plans to increase research
and development efforts to maintain and improve its competitive position.

                                     - 37 -

<PAGE>


1996 Compared with 1995

     Total revenue in 1996  decreased by $4.5 million  (2.5%) to $176.7  million
from $181.2 million in 1995.  The overall gross profit  increased by $.9 million
(1.4%) to $64.3 million from $63.4  million in 1995.  The Company had a net loss
from continuing operations of $24.2 million in 1996 as compared to net loss from
continuing  operations  of $2.9 million in 1995.  The increase in loss  reflects
significant  special and other  unusual  charges  recorded  in 1996.  Absent the
special  and other  unusual  charges,  the Company  would have had net  earnings
before  income taxes of $1.2 million in 1996 and a net loss before  income taxes
of $1.0 million in 1995. The  improvement  reflects the $.9 million  increase in
gross profit and  reductions in selling,  general and  administrative  costs and
research and development costs, net of capitalization.

                                 On-line Lottery

     Revenue from the on-line lottery  segment  decreased by $2.9 million (3.1%)
to $88.8  million from $91.7  million in 1995.  Included in the on-line  lottery
revenue in 1996 and 1995 is $4.4  million  and $5.3  million,  respectively,  of
revenue from international on-line lottery equipment sales.

     The Company  experienced  a decline in revenues  from its contract with the
Florida  Lottery of  approximately  $5.0 million from 1995 levels as a result of
lower lottery ticket sales and a reduction in the  contractual  fee  percentage.
The  expiration of the contract with the Florida  Lottery was extended from June
30,  1996 as a result of a delay of the  award of a new  contract.  The  Florida
Lottery  contract  accounted for  approximately  34% or more of on-line  lottery
revenues in the last three years.

     The Company's contract with the Washington Lottery expired in June 1996 and
the new contract was awarded to a  competitor.  The contract  accounted for $5.7
million (6.5%) and $10.4 million (11.3%) of on-line lottery revenues in 1996 and
1995, respectively.

     In December 1995, the Delaware  Lottery  implemented a video gaming program
which is centrally  controlled  and monitored by the Company's  on-line  lottery
system in the  state.  The  implementation  of the video  gaming  program is the
primary reason for a $5.1 million increase in revenues from 1995 levels from the
contract  with the  Delaware  Lottery.  The  implementation  of the video gaming
program in Delaware  has also  resulted in  additional  lease  revenues  for the
Company's gaming machine segment.

     In the third quarter 1996 the Company implemented an on-line lottery system
under  contract  with the  Maryland  Lottery.  The new contract  generated  $2.9
million of on-line lottery revenue from start-up through December 31, 1996.

     The gross profit margin of the on-line  lottery  segment was 33% in 1996 as
compared to 35% in 1995.  The gross  profit  margin on  services  revenue in the
on-line lottery segment was 33% in 1996 as compared to 36% in 1995. The decrease
is primarily  attributable to a contractual  reduction in the fee structure with
the  Florida  Lottery  in  1996.  Management  does  not  anticipate  significant
fluctuations in gross profit margins in the near future. The gross profit margin
on on-line  central system and equipment sales was 30% and 20% in 1996 and 1995,
respectively.

     The Company paid or accrued  approximately  $81.6 million and $70.3 million
to EDS for costs and expenses in 1996 and 1995, respectively. Of those costs and
expenses  approximately $9.7 million and $2.7 million were capitalized primarily
in conjunction with software development and deferred start-up costs in 1996 and
1995, respectively.

Gaming Machine and Route Operations

     Revenue from the gaming machine and route operations  segment  decreased by
$1.2 million,  or 2%, to $60.2 million from $61.4 million in 1995.  The decrease
reflects significant  reductions in sales in Louisiana and Quebec. The decreases
were offset by increased sales in international  markets involving Norway, Peru,
Victoria and South Australia and Alberta,  Canada, as well as increased sales in
domestic jurisdictions of Nevada and Delaware.

                                     - 38 -

<PAGE>


     Revenue  was  recognized  on delivery of 6,235 units in 1996 as compared to
7,772 in 1995.  Included in the total units were  approximately 917 and 1,562 of
royalty  unit sales in 1996 and 1995,  respectively.  Additionally,  the Company
delivered  1,175 gaming machines under lease  arrangements to the Oregon,  Rhode
Island and  Delaware  lotteries  in 1996 as  compared to 1,570  gaming  machines
delivered to the Oregon, Rhode Island and Delaware lotteries in 1995.

     The gross profit margin from the gaming  machine  segment,  which  includes
equipment sales and contract  revenue,  as well as leases revenue,  increased to
45% from 41% in 1995. The increase is primarily  attributable to the lower sales
levels in Louisiana  and Quebec which  historically  carry lower margins for the
Company  relative to other  jurisdictions  and higher software sales which carry
higher gross profit margins.  The gross profit margin from route  operations was
29% in 1996 as compared to 28% in 1995.

Wagering Systems and Racetrack Operations

     Revenue  from  the  wagering  systems  and  racetrack   operations  segment
decreased by $.5 million,  or 1.6%, to $27.6 million from $28.1 million in 1995.
The  decrease  is  attributable  to a decline  in  revenues  from the  racetrack
operations at Sunland Park, New Mexico of approximately $.9 million offset by an
increase of $.4 million in revenues generated from wagering systems services and
equipment  sales.  The decline in revenue at Sunland Park is the result of lower
handle and attendance and lower revenues resulting from a shorter 1996-1997 live
racing season.  The increase in revenues for wagering systems is attributable to
revenues from additional  services under existing  contracts,  renegotiation  of
existing  contracts  under more  favorable  terms and increased  interface  fees
resulting  from  increased  levels of  simulcasting.  Lost  revenues from closed
customer  facilities  were  offset  by  these  increases  as well as  additional
revenues  generated  at  customer  facilities  that are now open year  round for
simulcasting and the addition of new customers.

     The number of customer  contracts declined in 1996 primarily due to closing
of six customer  facilities in Kansas,  South Dakota,  Texas, and Wisconsin.  In
1996,  United  Tote  signed  contracts  with  five new  customers,  and  renewed
contracts with six U. S. customers and seven Canadian customers.

     The gross profit margin from the wagering systems and racetrack  operations
segment was 27% in 1996 as compared to 21% in 1995. The gross profit margins for
wagering  systems services and equipment sales were 38% in 1996 and 30% in 1995.
The  increase in margin is due to increases in the  simulcasting  and  interface
revenues which carry higher margins, combined with lower operating expenses from
wagering systems.  The Sunland Park racetrack  operations yielded negative gross
profit of $.3 million in 1996 and $.2 million in 1995.

                       Selling, General and Administrative

     Total selling,  general and  administrative  expenses ("SG&A") decreased by
$2.4 million (7.7%) to $28.7 million from $31.1 million in 1995. The decrease is
primarily attributable to administrative head-count reductions, cost containment
measures and lower trade show spending  offset in part by  additional  marketing
efforts primarily in casino markets.

     As a percentage  of sales,  SG&A expenses were 16.2% in 1996 as compared to
17.2% in 1995.

                            Research and Development

     In 1996,  the Company  expended  $8.0  million (net of  capitalization)  on
research  and  development  activities  as  compared  to  $8.9  million  (net of
capitalization) in 1995. The Company capitalized  approximately $4.1 million and
$2.7 million,  respectively,  of the development  costs primarily in conjunction
with  the  development  of the  Company's  MasterLinkTM  system  central  system
software.   The  new  modules  and  significant   enhancements  related  to  the
MasterLinkTM  system in 1996 were  implemented  with the  Delaware  and Maryland
on-line lottery systems in 1996. The Delaware Lottery installation was the first
installation of the video gaming module of the MasterLinkTM system. The Maryland
on-line lottery system reached start-up in the third quarter of 1996.

                                     - 39 -

<PAGE>


                                  Other Charges

     In 1996,  the  Company  recorded  approximately  $34.1  million  of special
charges  consisting of  approximately  $18.0  million for inventory  write-downs
primarily related to the on-line lottery segment,  $8.4 million  associated with
on-line lottery  customer  disputes and contract  liabilities,  $4.6 million for
impairment of intangible  and other assets for an on-line  lottery  contract and
$3.1 million  related to the wagering  systems segment as discussed in Note 2 to
the Consolidated Financial Statements.

     The  Company's   1995   consolidated   statement  of  operations   includes
approximately  $2.8 million of unusual  reserves and write-offs  associated with
exit costs and charges and asset impairments related to five contracts.

Liquidity and Capital Resources

     In 1997 the Company  generated  $35.9  million of cash from  operations  as
compared to $18.7  million in 1996.  Approximately  $8.9 million was invested in
property,  plant and  equipment  and  intangible  and other assets in 1997.  The
amount includes approximately $4.7 million related to the manufacture,  purchase
and installation of pari-mutuel  wagering equipment by Company's wagering system
segment and  approximately  $1.0  million  for  additional  enhancements  to the
Company's MasterLink(TM) on-line lottery central system software.

     In 1996 the Company withheld payments to EDS due to disputes with customers
over performance issues the Company had with EDS (see Note 2 to the Consolidated
Financial Statements).  At December 31, 1996, the Company had a recorded balance
payable to EDS of $38.0 million which, in conjunction with the settlement of the
disputes in January 1997,  was replaced with a note payable with a face value of
$27.0 million  amortizing  from January 1999 through  2004.  The note payable is
secured by certain assets including on-line lottery equipment inventories with a
carrying  value of  approximately  $.7 million at December  31,  1997.  The note
payable  provides  for  acceleration  of payment on the note equal to 30% of the
sales price of the  equipment  as well as  proceeds in excess of certain  levels
from licensing the Company's MasterLink(TM) software.

     The Company  repaid  long-term debt of $11.2 million in 1997 in addition to
paying  off the  December  31,  1996  revolving  line of credit  balance of $7.7
million.  On February 28, 1998,  the Company and First Bank,  N.A.  extended the
expiration  date of the Company's  revolving  line of credit to August 31, 1998.
The  revolving  line of credit has $10.0  million  available  to the Company for
working capital.

     Working  capital,  defined  as current  assets  less  current  liabilities,
increased by $9.0 million to $37.1  million from the December 31, 1996 amount of
$28.1 million.  The increase is primarily reflected in cash and cash equivalents
which were $13.8  million at December  31,  1997 as compared to $4.3  million at
December 31, 1996.

     At December 31, 1997 as compared to 1996, the Company reflected both higher
trade accounts and notes receivable and accounts payable and accrued liabilities
reflecting relatively higher fourth quarter sales of gaming machines and related
parts to international jurisdictions, including South Africa and Quebec, Canada.

     At December 31, 1997 the Company's  balance of current  deferred  taxes was
$11.4  million as compared  to deferred  and  refundable  income  taxes of $19.1
million at  December  31,  1996.  The  Company  received  the  refund  amount of
approximately $3.6 million in March 1997.  Additionally,  the taxable portion of
the  extraordinary  gain  recognized in the first quarter of 1997 related to the
settlement  with EDS was offset with net  operating  loss  carryforward  amounts
generated in previous years.  The utilization of the loss  carryforward  amounts
reduced related recorded deferred tax assets. The Company has approximately $8.9
million of remaining net  operating  loss  carryforward  amounts at December 31,
1997 of which the  utilization  of  approximately  $2.9  million  is  subject to
significant  limitations  including  the  generation  of  taxable  income of the
Company's wagering systems segment.

     The Company,  in 1996,  was named the  successful  bidder for a new on-line
lottery contract with the Florida Lottery.  The award by the Florida Lottery was
unsuccessfully  protested by a competitor and the competitor has filed an appeal
which has  delayed  contract  negotiations.  Under the new  contract,  AWI

                                     - 40 -

<PAGE>


would provide  services to the Florida  Lottery for five more years with options
for two  extensions of two additional  years each. The existing  contract had an
expiration date of June 30, 1996. AWI is continuing the operation of the current
on-line  lottery system under the terms of the expired  contract under temporary
extension.

     In  November  1997,  the  Company  was  awarded  a new  five-year  contract
commencing in January 1999 to continue operating the Pennsylvania  Lottery.  The
current contract expires in December 1998.

     Also, the Company has had  architectural  plans developed for casino gaming
at the  racetrack  facility  in Sunland  Park,  New  Mexico,  and has  initiated
construction.  Current  plans  call for  approximately  $8  million  of  capital
expenditures for facility  enhancements,  gaming machines and related equipment.
Sizable  capital  expenditures  in  excess of  current  capital  sources  may be
required in advance of any  anticipated  capital  generated  by a new Florida or
Pennsylvania contract and the Company does not anticipate that any revenues will
be  generated  from  casino  gaming at  Sunland  Park  until the third or fourth
quarter of 1998.

     Accordingly,  the Company may need additional  financing,  the availability
and the terms of which are subject to various  uncertainties,  with no assurance
that such financing can be obtained.  Historically, the Company has met its cash
flow requirements  primarily with cash provided by operations,  public offerings
of equity  securities,  and from  borrowing  from  financial  institutions.  The
Company does not have any significant off balance sheet financing in the form of
operating leases at December 31, 1997.  Primarily all operating leases disclosed
in  Note  9  to  the  Consolidated  Financial  Statements  are  for  office  and
warehousing space.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not applicable

                                     - 41 -

<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                                                           Page
Index to Consolidated Financial Statements

Independent Auditors' Report                                                 43

Consolidated Financial Statements:
  Statements of Operations for the years
         ended December 31, 1997, 1996 and 1995                              44
  Balance Sheets as of December 31, 1997 and 1996                            45
  Statements of Stockholders' Equity for the years
         ended December 31, 1997, 1996 and 1995                              46
  Statements of Cash flows for the years
         ended December 31, 1997, 1996 and 1995                              47

Notes to Consolidated Financial Statements                                   48

All  schedules are omitted  because the  information  prescribed  thereon is not
applicable nor required or is furnished in the consolidated financial statements
or notes thereto.
                                     - 42 -

<PAGE>


KPMG Peat Marwick LLP
     1000 First Interstate Center
     401 N. 31st Street
     P. O. Box 7108
     Billings, MT 59103






                          INDEPENDENT AUDITORS' REPORT

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

     We have audited the accompanying  consolidated balance sheets of Powerhouse
Technologies,  Inc. and  subsidiaries  as of December 31, 1997 and 1996, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the years in the  three-year  period ended  December 31, 1997.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
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 Powerhouse
Technologies,  Inc.  and  subsidiaries  as of December 31, 1997 and 1996 and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally  accepted
accounting principles.



                                           /S/ KPMG PEAT MARWICK  LLP


Billings, Montana
February 20, 1998
     except for the last paragraph of Note 11
     as to which the date is February 28, 1998

                                     - 43 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands except for share data)
<TABLE>
<CAPTION>
                                                                      Years Ended December 31
                                                                      -----------------------
                                                            1997               1996              1995
                                                            ----               ----              ----
                                                           (000s)             (000s)            (000s)
<S>                                                      <C>                 <C>               <C>

REVENUES:
   On-line lottery                                       $ 94,771             88,843            91,653
   Gaming machine and route operations                     75,221             60,186            61,398
   Wagering systems and racetrack operations               26,943             27,652            28,111
                                                         --------            -------           -------
     Total revenues                                       196,935            176,681           181,162

COSTS OF REVENUES:
   On-line lottery                                         62,558             59,333            59,438
   Gaming machine and route operations                     44,530             32,911            35,991
   Wagering systems and racetrack operations               19,893             20,104            22,286
                                                          -------            -------           -------
                                                          126,981            112,348           117,715
                                                          -------            -------           -------
     Gross Profit                                          69,954             64,333            63,447

OTHER OPERATING EXPENSES:
   Selling, general and administrative                     31,655             28,697           31,140
   Research and development                                 9,788              7,969            8,888
   Other charges                                              ---             34,135            2,763
   Depreciation and amortization                           21,995             23,822           22,587
                                                          -------            -------          -------
                                                           63,438             94,623           65,378
                                                          -------            -------          -------

Earnings (loss) from operations                             6,516            (30,290)          (1,931)
                                                          -------            -------          -------

OTHER INCOME (EXPENSE):
   Interest and other income                                1,021              1,060            1,244
   Interest expense                                        (3,890)            (3,754)          (3,077)
                                                          -------            -------          -------
                                                           (2,869)            (2,694)          (1,833)
                                                          -------            -------          -------

Earnings (loss) before income taxes and extraordinary
   items                                                    3,647            (32,984)          (3,764)

Income tax benefit                                          1,135              8,753              846
                                                          -------            -------          -------

Net earnings (loss) from continuing operations              4,782            (24,231)          (2,918)

Reversal of (provision for) loss on discontinuance of
   wagering systems operations, net                           ---              5,482           (5,482)
                                                          -------            -------          -------

Net earnings (loss) before extraordinary items              4,782            (18,749)          (8,400)

Extraordinary gain, net                                    13,269              4,014              ---
                                                          -------            -------          -------

Net earnings (loss)                                       $ 18,051           (14,735)          (8,400)
                                                          ========           =======          =======

EARNINGS (LOSS) PER SHARE DATA:
Basic:
Continuing operations                                        $0.46             (2.28)           (0.28)
Net earnings (loss)                                          $1.75             (1.39)           (0.80)
                                                             =====             =====            =====

Diluted:
Continuing operations                                        $0.46             (2.28)           (0.28)
Net earnings (loss)                                          $1.72             (1.39)           (0.80)
                                                             =====             =====            =====

Weighted average shares:
Basic                                                       10,329            10,635           10,555
Diluted                                                     10,489            10,635           10,555
                                                            ======            ======           ======
</TABLE>


          See accompanying notes to consolidated financial statements.

                                     - 44 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands except for share data)
<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                              1997                    1996
                                                                             (000s)                  (000s)
                                                                             ------                  ------
<S>                                                                         <C>                      <C>

ASSETS
   Current assets:
     Cash and cash equivalents                                              $ 13,772                   4,322
     Restricted cash deposits                                                  1,423                   1,364
     Accounts receivable, net                                                 25,839                  19,353
     Current installments of notes receivable, net                             3,192                   2,818
     Inventories                                                              15,942                  18,297
     Prepaid expenses                                                          1,037                   1,027
     Income tax refund receivable                                                ---                   3,551
     Deferred income taxes                                                    11,444                  15,500
                                                                            --------                 -------
   Total current assets                                                       72,649                  66,232
                                                                            --------                 -------

   Property, plant and equipment                                             152,074                 153,124
     Less accumulated depreciation                                           (88,914)                (78,417)
                                                                            --------                 -------
       Net property, plant and equipment                                      63,160                  74,707
                                                                            --------                 -------

   Restricted cash deposits                                                    2,408                   2,521
   Notes receivable, excluding current installments                            2,547                   2,216
   Goodwill, net                                                               9,314                  10,134
   Intangible and other assets, net                                           11,319                  12,233
                                                                            --------                 -------
                                                                            $161,397                 168,043
                                                                            ========                 =======
LIABILITIES
   Current liabilities:
     Notes payable                                                               ---                   7,650
     Current installments of long-term debt                                 $  4,381                  10,604
     Accounts payable                                                          9,513                   6,646
     Accrued expenses                                                         21,705                  13,249
                                                                            --------                 -------
       Total current liabilities                                              35,599                  38,149
                                                                            --------                 -------

   Long-term debt, excluding current installments                             31,446                   9,312
   Due to EDS                                                                    ---                  38,025
   Deferred income taxes                                                      12,206                  10,326
                                                                            --------                 -------
       Total liabilities                                                      79,251                  95,812
                                                                            --------                 -------

Commitments and contingencies (Note 15)

STOCKHOLDERS' EQUITY
   Preferred stock, $.01 par value.  Authorized 8,087,272 shares; no
     shares issued                                                               ---                     ---
   Series A Junior Preferred stock, $.01 par value, convertible non-
     cumulative.  Authorized 1,912,728 shares                                     19                      19
   Common stock, $.01 par value.  Authorized 25,000,000 shares                   110                     108
   Paid-in capital                                                            89,427                  97,765
   Deferred restricted stock compensation                                       (217)                   (417)
   Accumulated deficit                                                        (7,193)                (25,244)
                                                                            --------                 -------
       Total stockholders' equity                                             82,146                  72,231
                                                                            --------                 -------
                                                                            $161,397                 168,043
                                                                            ========                 =======
</TABLE>



          See accompanying notes to consolidated financial statements.

                                     - 45 -

<PAGE>




                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                      (in thousands except for share data)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                      Series A                                 Deferred
                                      Preferred      Common                    Restricted                          Total
                                        Stock         Stock       Paid-in     stock compen-     Accumulated     stockholders'
                                      par value     par value     capital       sation            deficit          equity
                                       (000s)        (000s)       (000s)        (000s)            (000s)           (000s)
------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>           <C>           <C>          <C>             <C>               <C>

December 31, 1994                         $19           106         97,637       (1,527)          (2,109)          94,126

Net loss                                  ---           ---            ---          ---           (8,400)          (8,400)

Amortization of deferred restricted
     stock compensation                   ---           ---            ---           324             ---              324

Rescission of deferred restricted stock
     compensation                         ---           ---           (750)          750             ---              ---

Stock issued under stock purchase
     plan                                 ---             1            397           ---             ---               398
                                        -----         -----         ------        ------         -------           -------

December 31, 1995                          19           107         97,284          (453)        (10,509)           86,448

Net loss                                  ---           ---            ---           ---         (14,735)          (14,735)

Amortization of deferred restricted
     stock compensation                   ---           ---            133            36             ---               169

Stock issued under stock purchase
     plan                                 ---             1            348           ---             ---               349
                                        -----         -----         ------        ------         -------           -------

December 31, 1996                          19           108         97,765          (417)        (25,244)           72,231

Net earnings                              ---           ---            ---           ---          18,051            18,051

Stock options exercised and shares
     issued under stock purchase plan     ---             2            762           ---             ---               764

Shares redeemed pursuant to
     EDS settlement                       ---           ---         (9,100)          ---             ---            (9,100)

Amortization of deferred restricted
     stock compensation                   ---           ---            ---           200             ---               200
                                        -----         -----         ------        ------         -------           -------

December 31, 1997                         $19           110         89,427          (217)         (7,193)           82,146
                                        =====         =====         ======        ======         =======           =======
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
Share Amounts                             1995                           1996                           1997
                               --------------------------   ---------------------------     ----------------------------------
                                 Series A        Common        Series A         Common         Series A           Common
Balance                        Preferred Stock   Stock      Preferred Stock     Stock       Preferred Stock       Stock
------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>         <C>             <C>           <C>               <C>              <C>

Beginning of year                  1,912,728   10,633,544      1,912,728     10,682,109        1,912,728        10,829,184
Stock options exercised and
     shares issued                       ---       98,565            ---        117,075              ---           194,222
Restricted stock issued (rescinded)      ---      (50,000)           ---         30,000              ---               ---
                                   ---------   ----------      ---------     ----------        ---------        ----------
End of year                        1,912,728   10,682,109      1,912,728     10,829,184        1,912,728        11,023,406
                                   =========   ==========      =========     ==========        =========        ==========
</TABLE>
----------
(1)  1,912,728  shares of Series A Preferred  Stock and 545,454 shares of Common
     Stock are held in treasury as  collateral  for a note  payable  pursuant to
     terms reached in a settlement agreement in 1997 (see Notes 2 and 11).
(2) See Note 16.

          See accompanying notes to consolidated financial statements.

                                     - 46 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                       Years Ended December 31
                                                                       -----------------------
                                                           1997                  1996                1995
                                                           ----                  ----                ----
                                                          (000s)                (000s)              (000s)
<S>                                                      <C>                   <C>                  <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
     Net earnings (loss)                                 $18,051               (14,735)             (8,400)
     Adjustments to reconcile net loss to
         net cash provided by operating
         activities:
         (Reversal of) provision for loss on sale of
              wagering systems operations                    ---                (5,482)              5,482
         Depreciation and amortization                    21,995                23,822              22,587
         Other charges                                       ---                34,135               2,763
         Extraordinary gain, net                         (13,269)               (4,014)                ---
         Other, net                                          337                    79                 (51)
     Changes in operating assets and liabilities:
         Sales of receivables                                ---                 1,467               2,340
Receivables, net  (7,191)                                  1,942                (7,503)
         Inventories                                       5,709                (3,489)              6,923
         Prepaid expenses                                    (10)                  235                 103
         Accounts payable                                  2,867                 2,006             (12,616)
         Accrued expenses                                  6,649               (10,854)             (7,045)
         Income taxes                                        806                (6,411)             (2,640)
                                                         -------               -------             -------
Net cash provided by operating activities                 35,944                18,701               1,943
                                                         -------               -------             -------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Expenditures on property, plant and equipment        (6,977)              (25,522)            (19,047)
     Expenditures on intangible and other assets          (1,974)              (10,037)             (3,541)
     Proceeds from sales of equipment                        117                   109                 386
     Change in restricted cash deposits                      (70)                  700                 182
                                                         -------               -------             -------
Net cash used in investing activities                     (8,904)              (34,750)            (22,020)
                                                         -------               -------             -------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Net (payments) proceeds from notes payable           (7,650)                 (600)              8,250
     Proceeds from issuance of long-term debt                643                 4,365              24,287
     Repayments of long-term debt                        (11,220)              (13,079)            (14,735)
     Amounts payable to EDS                                  ---                27,343                 ---
     Common stock sold under employee benefit plans          637                   349                 398
                                                         -------               -------             -------
Net cash provided by (used in) financing activities      (17,590)               18,378              18,200
                                                         -------               -------             -------

Net increase (decrease) in cash and cash equivalents       9,450                 2,329              (1,877)

Cash and cash equivalents, beginning of year               4,322                 1,993               3,870
                                                         -------               -------             -------

Cash and cash equivalents, end of year                   $13,772                 4,322               1,993
                                                         =======               =======             =======
</TABLE>









          See accompanying notes to consolidated financial statements.

                                     - 47 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of consolidation.  The consolidated financial statements include
the accounts of Powerhouse Technologies,  Inc. and subsidiaries (the "Company").
Prior to January 1, 1998 the  Company was known as Video  Lottery  Technologies,
Inc. All significant intercompany balances and transactions have been eliminated
in consolidation.

     Revenue  recognition.  Revenue  from  the sale of  video  gaming  machines,
on-line  lottery  terminals and related parts is recognized upon delivery to the
customer.  Revenue from sales of on-line  lottery and video gaming  central site
systems and equipment is recognized using the percentage of completion method of
accounting for long-term construction type contracts where costs to complete can
reasonably be estimated or upon  acceptance of the system when costs to complete
cannot  reasonably be estimated.  Prior to revenue  recognition on system sales,
costs  incurred  are applied  against  progress  billings  and recorded as a net
accrued liability or other current asset as appropriate.

     On-line  lottery  and  wagering  systems  contract  services  revenues  are
recognized as the services are  performed and primarily  relate to revenues from
long-term contracts which require  installation and operation of on-line lottery
and pari-mutuel wagering networks.  Revenues under these contracts are generally
based on a percentage of sales volume,  which may fluctuate over the life of the
contracts.

     Route operations revenue consists primarily of video machine gaming wagers,
net  of  payouts  and  state  gaming  taxes,  generated  under  revenue  sharing
agreements with route customers.  Route operations revenue is recorded weekly as
the revenues are earned.

     Revenue from  racetrack  operations  primarily  represents  commissions  on
wagers  placed  on  live  and  simulcast  pari-mutuel  racing  at the  Company's
racetrack in Sunland Park, New Mexico, and is recorded on the day of each race.

     Equipment  leased to others is accounted for as operating  leases,  whereby
monthly rentals are recorded as income when earned.

     Cash and  cash  equivalents.  Cash  deposits  and all  highly  liquid  debt
instruments  with  maturities  of  three  months  or less  are  considered  cash
equivalents in the statements of cash flows.

     Restricted cash deposits. Cash deposits expected to be refunded or released
within one year are considered restricted short-term deposits.  The deposits are
primarily  for bonds that are required by customers  for proposals and long-term
contracts.

     Accounts and notes  receivable.  Accounts and notes receivable are recorded
at cost, less the related allowance for doubtful accounts. (See Note 5.)

     Inventories.  The Company  manufactures  inventories  for sale and lease as
well as use in the provision of services under long-term contracts.  Inventories
purchased and  manufactured for use in the provision of services are transferred
to property, plant and equipment when placed in service pursuant to the terms of
such long-term contracts. Inventories are carried at the lower of cost or market
value.  Cost is  determined  using the first-in,  first-out  method and includes
materials, labor and allocated indirect manufacturing overhead.

     Property,  plant and equipment.  Property, plant and equipment is stated at
cost.  Equipment  acquired  under capital leases is recorded at the lower of the
present  value of minimum  lease  payments at the beginning of the lease term or
the fair market value of the asset at the inception of the lease.

     Depreciation  of  property,  plant and  equipment is  calculated  using the
straight-line  method over the estimated  useful lives of the assets or the life
of the related contract (including contract extensions) as follows:

                                     - 48 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Item                                                       Estimated life
     ----                                                       --------------
     Wagering systems and on-line lottery equipment                3 - 7 years
     Buildings and improvements                                   7 - 40 years
     Machinery and equipment                                      3 - 10 years
     Game operations equipment                                         7 years
     Furniture and fixtures                                       5 - 10 years

     Equipment under capital leases is depreciated on a straight-line basis over
the shorter of the lease term or estimated useful life of the asset.

     Goodwill,  intangible  and other assets.  Goodwill,  which  represents  the
excess of purchase price over fair value of net assets acquired, is amortized on
a  straight-line  basis  through  2009,  the  expected  period to be  benefited.
Accumulated  amortization was $3.0 million at December 31, 1997 and $2.2 million
at December 31, 1996.

     Intangible  and  other  assets  are  stated  at  cost  net  of  accumulated
amortization.  Intangible and other assets are amortized  over their  respective
economic  useful  lives  ranging up to ten years.  Accumulated  amortization  of
intangible and other assets was  approximately  $6.9 million and $9.9 million at
December 31, 1997 and 1996, respectively.  In 1997, a non-compete agreement with
the sellers of the Company's on-line lottery subsidiary purchased by the Company
in 1992 expired.  Accordingly,  the cost and  accumulated  amortization  of $5.0
million were written off in 1997.

     In June  1995,  the  Company  adopted  Statement  of  Financial  Accounting
Standards Board Statement No. 121,  "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived  Assets to Be Disposed of" ("SFAS No. 121 "). SFAS No.
121 requires that  long-lived  assets and certain  identifiable  intangibles  be
reviewed for impairment  whenever  events or changes in  circumstances  indicate
that the carrying amount of an asset may not be  recoverable.  In performing the
review for recoverability,  the Company estimates the future cash flows expected
to result from the use of the asset and its eventual disposition.  If the sum of
these expected future cash flows  (undiscounted and without interest charges) is
less than the carrying amount of the asset,  the asset is considered  "impaired"
and an impairment loss is recognized.  Measurement of the impairment loss amount
is based on the fair value of the asset.  Fair  value is  measured  based on the
present value of the expected future net cash flows  calculated using a discount
rate commensurate with the risks involved.

     Foreign  currency  translations  and  transactions.  Gains and losses  from
foreign  currency  transactions  and  remeasurements  are included in results of
operations.

     Income taxes.  Deferred tax assets and  liabilities  are recognized for the
estimated future consequences  attributable to differences between the financial
statement  carrying  amounts of assets and liabilities and their  respective tax
bases.  The current and  noncurrent  portions of these  deferred  tax assets and
liabilities  are  classified  in the  balance  sheet  based  on  the  respective
classification  of the assets and  liabilities  which give rise to such deferred
income taxes.

     Earnings per share.  In the fourth  quarter,  1997, the Company adopted the
accounting  principles  of the Financial  Accounting  Standards  Board  ("FASB")
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),  "Earnings
per Share," issued in February,  1997, which changes the standards for computing
earnings per share ("EPS") by replacing the  presentation  of primary EPS with a
presentation of basic EPS. SFAS No. 128 requires dual  presentation of basic and
diluted EPS by entities with complex capital  structures.  Basic EPS includes no
dilution and is computed by dividing income available to common  stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS  reflects  the  potential  dilution  of  securities  that could share in the
earnings of an entity. SFAS No. 128 replaces Accounting Principles Board Opinion
15 and is effective for  financial  statements  issued for periods  ending after
December 15, 1997. The Company has a complex capital  structure as defined under
SFAS  No.  128.  Consequently,   the  generation  of  earnings  from  continuing
operations results in a dual presentation of basic and diluted EPS. SFAS No. 128
requires restatement of prior period EPS

                                     - 49 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


presentations.  Diluted weighted average common shares includes potential common
stock of approximately  160,000 shares for the year ended December 31, 1997. The
Company had losses from  continuing  operations  in 1996 and 1995.  Accordingly,
potential   common  stock  has  been  excluded   from  weighted   average  share
computations   for  those  years  because  their   inclusion   would  have  been
anti-dilutive.

     Fair  value of  financial  instruments.  The  carrying  value of  financial
instruments,  consisting  primarily of cash,  accounts  receivable  and accounts
payable,  approximates  fair value due to the liquid nature of the  instruments.
(See Notes 5 and 11 for fair value  estimates of notes  receivable and long-term
debt.)

     Stock based compensation  plans. The Company applies Accounting  Principles
Board Opinion 25 and related  interpretations  in accounting for its stock based
compensation plan. Accordingly,  no compensation cost has been recognized in the
consolidated financial statements of operations for options granted and employee
stock purchase shares issued pursuant to the Company's plans. (See Note 13.)

     Reclassifications. Certain reclassifications have been made to the 1996 and
1995 amounts to conform to the 1997 presentation.

     Accounting  pronouncements  not yet  adopted.  The Company has  capitalized
start-up  costs in  conjunction  with its  long-term  contracts  in the  on-line
lottery and wagering  systems  segments in accordance with Statement of Position
(SOP) 81-1.  The  American  Institute of Certified  Public  Accountants  (AICPA)
Accounting  Standards Executive Committee (AcSEC) approved for issuance the SOP,
Reporting on the Costs of Start-Up Activities,  which will require that start-up
costs  (including  organization  costs) be  expensed  as  incurred.  The SOP was
approved by the FASB in February 1998 and it is  anticipated  that the final SOP
would be  released  in the second  quarter of 1998 and be  effective  for fiscal
years beginning after December 15, 1998. Depending on the level of the Company's
future start-up activities,  this change in accounting method may be material to
results of operations,  however, would not affect the Company's cash flows. (See
Note 8.)

     Management 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.

     Segment  Information.  In June 1997, the FASB issued Statement of Financial
Accounting  Standards Number 131 (SFAS No. 131),  "Disclosures about Segments of
an Enterprise and Related  Information." SFAS No. 131 establishes  standards for
the way public business  enterprises are to report  information  about operating
segments in annual financial statements and requires those enterprises to report
selected  information  about  operating  segments in interim  financial  reports
issued to stockholders.  It also establishes  standards for related  disclosures
about products and services, geographic areas, and major customers. SFAS No. 131
is effective for financial  statements for periods  beginning after December 15,
1997.  Earlier  application is encouraged.  The Company adopted SFAS No. 131 for
the year ended  December  31, 1997.  The  adoption did not affect the  Company's
historical presentation of segment data.

(2)  EXTRAORDINARY ITEMS

     In January 1994,  Electronic  Data Systems  Corporation  ("EDS")  purchased
545,454  shares  of the  Company's  Common  Stock  and  1,912,728  shares of the
Company's  Series A Junior  Preferred  Stock  ("Series A Preferred  Stock").  In
conjunction  with the stock  sale to EDS in 1994,  the  Company  entered  into a
ten-year agreement with EDS which, among other things, called for EDS to provide
to the Company enhanced  computing,  communications,  system and engineering and
field  maintenance  services  under the lottery  services  subsidiary's  on-line
lottery contracts.  In 1996, the Company withheld certain payments to EDS due to
EDS  performance  issues and  related  on-line  lottery  customer  disputes.  In
mid-1996 the contract with EDS was terminated and EDS filed a complaint  against
the Company  seeking  payment of  outstanding  fees.  On January 30,  1997,  the
Company and EDS settled all claims  against each other and

                                     - 50 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


agreed to transition the EDS services to the Company. The settlement resulted in
a net of taxes  extraordinary gain on debt extinguishment of approximately $13.3
million  ($1.29 and $1.26 per basic and  diluted  share,  respectively)  for the
Company.  The terms of the settlement  included the redemption by the Company of
all of the Common and Series A Preferred Stock owned by EDS, the transfer to the
Company of certain inventories  (approximately $1.2 million) and property, plant
and equipment (approximately $2.7 million) used in the provision of EDS services
to on-line  lottery  customers and the  extinguishment  of  approximately  $38.0
million of outstanding  fees in exchange for a note payable with a present value
of $26.1 million. The note payable calls for interest payments only through 1998
with  provisions  for  acceleration  upon sale of assets  securing the note, and
principal  and interest  payments in years three through  maturity in 2004.  The
note is secured by the  redeemed  Common  Stock and  Series A  Preferred  Stock,
certain inventories, fixed assets and software technology and carries prepayment
provisions  upon the  disposal of  substantially  all the assets or stock of the
Company or certain of its  subsidiaries.  The transition of the EDS services and
related employees to the Company was completed in 1997.

     The Company paid or accrued  approximately  $81.6 million and $70.3 million
to EDS for costs and expenses in 1996 and 1995, respectively. Of those costs and
expenses  approximately $5.1 million and $2.7 million were capitalized primarily
in conjunction with software development and deferred start-up costs in 1996 and
1995, respectively.

     In May 1994, the Company  completed the purchase of all of the  outstanding
stock of United Wagering Systems,  Inc. ("UWS").  The original purchase price of
$29.6 million  included  $19.6 million in cash and the issuance of $10.0 million
notes, payable over a three-year period. The Company also assumed liabilities of
approximately $23.4 million and, in connection with the transaction,  recorded a
significant  amount of  goodwill.  At the time of the  acquisition  of UWS,  the
Company  anticipated  profits  from  the  ongoing  operations  of UWS as well as
potential  growth for pari-mutuel  contracts and operations and favorable gaming
legislation in New Mexico and other jurisdictions.

     During 1995,  the Company did not pay  principal  and interest  obligations
under the terms of the promissory  notes to the sellers in the aggregate  amount
of $10.0 million,  which had been issued in conjunction  with the acquisition of
UWS in 1994, because of disputes related to the acquisition.  In March 1996, the
Company reached an agreement with the sellers  settling all  outstanding  claims
and disputes, including dismissal of all outstanding litigation,  resulting in a
net of taxes  extraordinary  gain of $4.0  million  ($.37 per basic and  diluted
share) gain on debt extinguishment.

     The  Company,  in the fourth  quarter  1995,  made a decision  to sell UWS,
exclusive of the racetrack in Sunland Park, New Mexico. The Company entered into
a non-binding  letter of intent in the fourth  quarter 1995 for the sale of this
segment;  however,  this transaction was abandoned because final terms could not
be negotiated. The Company continued to review other potential opportunities for
the sale of this  operation  through the second  quarter 1996;  however,  due to
operational improvements and industry and market conditions, the Company decided
to no longer  actively  pursue the  disposal of the  wagering  systems  segment.
Accordingly, the results of operations of the wagering systems segment have been
reclassified to continuing  operations in all periods  presented.  The estimated
provision for loss on disposal of approximately $5.5 million ($.52 per basic and
diluted  share),  recorded in 1995,  was reversed in the third  quarter of 1996.
Concurrent  with the  reversal,  the Company  recorded an  impairment  charge on
long-lived assets of the wagering systems segment of approximately $2.8 million.
Additionally,  in 1996  the  Company  implemented  a  restructuring  plan of the
manufacturing  and repair and  maintenance  operations  of the wagering  systems
segment inclusive of closing a facility in Shepherd,  Montana. The manufacturing
of wagering system terminals is now performed in the Company's Bozeman,  Montana
facility.  Costs  and  expenses  recorded  in the  third  quarter  1996  for the
restructuring plan were approximately $0.3 million.

(3)  BUSINESS SEGMENTS

     The Company  operates  principally  in three business  segments:  the sale,
design,  manufacture,  installation  and  operation  of on-line  lotteries;  the
design, manufacture,  marketing and leasing of video gaming machines and central
control  systems and related  services;  and the design,  manufacture,  sale and

                                     - 51 -

<PAGE>



                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


operation of computerized  pari-mutuel wagering systems for dog and horse racing
tracks.  These  segments  operate  throughout the United States and on a limited
international basis.
<TABLE>
<CAPTION>
                                                                      Years Ended December 31
                                                                      -----------------------
                                                               1997               1996               1995
                                                               ----               ----               ----
                                                              (000s)             (000s)             (000s)
<S>                                                          <C>                 <C>               <C>
Revenues:
On-line lottery                                              $ 94,771             88,843            91,654
Gaming machine and route operations                            80,084             64,530            62,889
Wagering systems and racetrack operations                      26,960             27,652            28,111
         Less intercompany revenues                            (4,880)            (4,344)           (1,492)
                                                             --------            -------           -------
              Total revenues                                 $196,935            176,681           181,162
                                                             ========            =======           =======

Operating profit (loss):
On-line lottery                                              $  4,896            (29,449)           (3,464)
Gaming machine and route operations                            10,727              9,433            13,171
Wagering systems and racetrack operations                      (1,491)            (3,995)           (3,832)
General corporate expenses                                     (7,866)            (6,826)           (8,011)
         Intercompany profit                                      250                547               205
                                                             --------            -------           -------
              Total operating profit (loss)                  $  6,516            (30,290)           (1,931)
                                                             ========            =======           =======

Operating profit (loss) before "other charges":
On-line lottery                                              $  4,896              1,623               967
Gaming machine and route operations                            10,727              9,433            11,894
Wagering systems and racetrack operations                      (1,491)              (932)           (3,569)
General corporate expenses                                     (7,866)            (6,826)           (8,665)
         Intercompany profit                                      250                547               205
                                                             --------            -------           -------
              Total operating profit before "other charges"  $  6,516              3,845               832
                                                             ========            =======           =======

Capital expenditures:
On-line lottery                                              $  1,043             16,271             8,079
Gaming machine and route operations                             1,419              5,809             5,354
Wagering systems and racetrack operations                       4,159              3,455             4,762
Corporate                                                         548                403             1,353
         Less intercompany step-up in basis                      (192)              (416)             (501)
                                                             --------            -------           -------
              Total capital expenditures                     $  6,977             25,522            19,047
                                                             ========            =======           =======

Depreciation and amortization:
On-line lottery                                              $ 12,509             14,248            14,242
Gaming machine and route operations                             4,345              4,908             3,772
Wagering systems and racetrack operations                       5,011              5,086             4,658
Corporate                                                         563                501               621
         Less depreciation on intercompany step-up basis         (433)              (921)             (706)
                                                             --------            -------           -------
              Total depreciation and amortization            $ 21,995             23,822            22,587
                                                             ========            =======           =======

Identifiable assets:
On-line lottery                                              $ 46,380             62,350            77,548
Gaming machine and route operations                            56,430             45,656            34,905
Wagering systems and racetrack operations                      43,433             42,692            46,106
Corporate                                                      16,621             19,067             9,546
         Less intercompany step-up in basis                    (1,467)            (1,722)           (2,254)
                                                             --------            -------           -------
              Total identifiable assets                      $161,397            168,043           165,851
                                                             ========            =======           =======
</TABLE>

Operating  profit  (loss)  before  "other  charges"  excludes  special and other
charges discussed in Note 14.

                                     - 52 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The gaming  machine and route  operations  segment  includes  revenues from
royalties  of  approximately  $0.6  million and $3.6  million in the years ended
December 31, 1996 and 1995, respectively.  Revenues from sales of units pursuant
to royalty  arrangements have minimal related direct costs. In 1996 and 1995 the
Company earned revenues under a royalty  arrangement with an Australian  company
which was terminated in 1997.

     Total  identifiable  assets of the racetrack  operations were approximately
$20.8  million,  $22.7 million and $23.9 million at December 31, 1997,  1996 and
1995,  respectively.  Revenue related to racetrack  operations was approximately
$6.8 million,  $7.2 million and $8.0 million and net losses related to racetrack
operations were approximately $1.5 million, $1.6 million and $1.3 million in the
years ended December 31, 1997, 1996 and 1995, respectively.

A summary of revenues and related direct costs of revenues follows:
<TABLE>
<CAPTION>
                                            Years Ended December 31,
                                            ------------------------
                                     1997               1996               1995
                                     ----               ----               ----
                                    (000s)             (000s)             (000s)
<S>                                <C>                 <C>               <C>
Revenues:
         Services                  $128,136            126,543           127,634
         Tangible products           57,752             39,438            46,728
         Lease                       10,700             6,800
                                   --------            -------           -------
                                   $196,935            176,681           181,162
                                   ========            =======           =======

Costs of revenues:
         Services $                  89,430             86,864            87,394
         Tangible products           37,551             25,484            30,321
         Lease                          ---                ---               ---
                                   --------            -------           -------
                                   $126,981            112,348           117,715
                                   ========            =======           =======

Gross profit:
         Services $  38,706          39,679             40,240
         Tangible products           20,201             13,954            16,407
         Lease                       11,047             10,700             6,800
                                   --------            -------           -------
                                   $  69,954            64,333            63,447
                                   =========           =======           =======
</TABLE>


(4)  REVENUE CONCENTRATION

     The Company  derives  its  revenues  from  equipment  and system  sales and
services to customers primarily in jurisdictions that have enacted  governmental
legislation and/or regulatory controls over various types of gaming and wagering
activities.  The Company recorded revenues from customers or distributors within
a specific gaming or wagering jurisdiction,  subject to separately  identifiable
governmental  legislation,  which  accounted  for more than 10% of the Company's
consolidated revenues as follows:

                                         Years Ended December 31,
                                         ------------------------
                                  1997               1996               1995
                                  ----               ----               ----
                                 (000s)             (000s)             (000s)

         Florida                $31,528             30,203            35,247
         Pennsylvania            23,042             23,164            22,101
         Montana                 20,700             19,748            19,523

     Revenues  from the on-line  lottery and  wagering  systems  segments of the
company are  primarily  derived from  contracts  with terms up to ten years with
varying options for extensions and renewals.

                                     - 53 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The Company's  contract with the Florida  Lottery  expired in June 1996 and
the Company was named the successful  bidder for a new on-line lottery contract.
The award by the Florida  Lottery was  unsuccessfully  protested by a competitor
and the competitor has filed an appeal which has delayed contract  negotiations.
Under the new award,  the Company would provide  services to the Florida Lottery
for five more years with options for  extensions.  The Company is continuing the
operation of the current  on-line  lottery system under the terms of the expired
contract under temporary extension.  In November 1997, the Company was awarded a
new  five-year  contract  commencing  in January 1999 to continue  operating the
Pennsylvania Lottery system. The current contract expires in December 1998.

     Montana   revenue   includes  total  revenues  from  route   operations  of
approximately $17.7 million,  $16.5 million and $15.3 million in the years ended
December 31, 1997, 1996 and 1995, respectively.

     Export Sales.  The Company had total export sales from the United States of
approximately  $37.0  million,  $28.6 million and $30.2 million during the years
ended December 31, 1997, 1996 and 1995, respectively.

(5)  NOTES AND ACCOUNTS RECEIVABLE

     A summary of receivables follows:

                                                          December 31,
                                                          ------------
                                                  1997                    1996
                                                  ----                    ----
                                                  (000s)                 (000s)

         Trade                                   $26,946                 20,444
         Notes receivable                          5,964                  5,260
                                                 -------                 ------
                                                  32,910                 25,704
         Less allowance for doubtful accounts     (1,332)                (1,317)
                                                 -------                 ------

                                                 $31,578                 24,387
                                                 =======                 ======

     The Company finances sales of gaming machine and wagering systems equipment
to certain customers  meeting minimum credit  standards.  Installment notes bear
interest at rates of up to 18% and  generally  mature within one to seven years.
The Company  estimates the fair value of gross notes  receivable at December 31,
1997 to  approximate  carrying value of the associated  notes  receivable.  This
estimate is based on current  discount  rates for  instruments of similar credit
quality available in the secondary market.

     At December 31, 1997,  approximately 34% of the Company's  receivables were
from various governments or their designated agencies.

     Amounts charged to expense for estimated bad debts were  approximately  $.1
million,  $.2 million and $.6 million in the years ended December 31, 1997, 1996
and 1995,  respectively.  The Company  wrote off  previously  reserved  doubtful
accounts of  approximately  $.1 million,  $2.1 million and $20,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.

                                     - 54 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(6)  INVENTORIES

     A summary of inventories, net of valuation reserves, follows:

                                                   December 31,
                                                   ------------
                                          1997                        1996
                                          ----                        ----
                                         (000s)                      (000s)
     Manufacturing:
          Raw materials                 $ 6,703                      5,462
          Work-in-process                   662                        733
          Finished goods                  7,427                     11,322
     Customer service and other           1,150                        780
                                        -------                     ------
                                        $15,942                     18,297
                                        =======                     ======

     The Company had reserves for inventories of approximately  $8.2 million and
$14.2 million at December 31, 1997 and 1996, respectively,  primarily related to
finished goods. The Company charged to expense approximately $.1 million,  $18.0
million and $1.0 million in the years ended  December  31, 1997,  1996 and 1995,
respectively,  for reserves and  impairments of  inventories.  Of these charges,
$18.0  million and $0.5  million in the years ended  December 31, 1996 and 1995,
respectively,  related to the termination of three on-line lottery  projects for
which  inventory was  specifically  procured.  As of December 31, 1997,  on-line
inventory was approximately $1.6 million.

     The Company wrote off previously reserved inventories of approximately $6.1
million,  $9.0  million and $0.2  million in the years ended  December 31, 1997,
1996  and  1995,  respectively,  as the  applicable  inventories  were  sold  or
otherwise disposed of. At December 31, 1997 and 1996, respectively,  the Company
had  approximately 600 and 500 finished video gaming machines located in various
casino gaming locations,  under trial  arrangements with customers,  included in
inventories.

(7)  PROPERTY, PLANT AND EQUIPMENT

     A summary of property, plant and equipment follows:

                                                             December 31,
                                                             ------------
                                                        1997             1996
                                                        ----             ----
                                                       (000s)           (000s)

     Wagering systems and on-line lottery equipment  $108,985          103,573
     Land, buildings and improvements                  14,543           14,280
     Machinery and equipment                            6,605            5,931
     Gaming operations equipment                       20,220           27,676
     Furniture and fixtures                             1,721            1,664
                                                     --------          -------
                                                     $152,074          153,124
                                                     ========          =======

     In 1997 the Company  transferred to inventory gaming  operations  equipment
with a net book value of  approximately  $2.2 million due to the  expiration  of
lease  agreements.  In 1996, the Company  transferred  on-line lottery equipment
with  a  net  book  value  of  approximately  $2.4  million  to  inventories  in
conjunction  with the termination of an on-line lottery  contract.  During 1995,
the Company transferred  approximately $1.0 million of game operations equipment
from  inventory to property,  plant and  equipment in  conjunction  with leasing
activities  and $3.9  million  from  inventory  to  property  and  equipment  in
connection with  installations  of terminals  under on-line  lottery  contracts.
Other additions to gaming operations  equipment and on-line lottery equipment in
the  three-years  ended  December  31, 1997,  are  included in the  Consolidated
Statements of Cash Flows as expenditures on property, plant and equipment.

     Gaming  operations  equipment at December 31, 1997 and 1996 includes  video
gaming machines with an aggregate cost of approximately  $13.4 million and $20.9
million,  respectively,  and a carrying value

                                     - 55 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


of approximately $7.8 million and $11.9 million,  respectively,  which are under
lease or revenue sharing agreements with customers. For the years ended December
31,  1997,   1996  and  1995,   depreciation   expense  on  this  equipment  was
approximately  $2.3 million,  $2.8 million and $2.0 million,  respectively.  Two
lease  agreements  provide rent payments to the Company based on a percentage of
net gaming receipts. One of the two agreements is on a month-to-month basis, the
other is for a five-year  period  ending in December  2000 with  provisions  for
three one-year extensions.  Another agreement is a master lease whereby terminal
lease terms are for one year, with four consecutive  automatic one-year renewals
with decreasing  lease  payments,  with an option by the lessee to terminate the
lease at the end of each such year. Future lease receipts, by the Company, under
the contractual  lease  agreements,  assuming  renewals,  based on the terminals
delivered through December 31, 1997, are approximately as follows:

     Year ending December 31,                      (000s)
          1998                                     $6,355
          1999                                      5,423
          2000                                      4,753
          2001                                        386
                                                   ------
                                                  $16,917
                                                  =======

(8)  INTANGIBLE AND OTHER ASSETS

     A summary of intangible and other assets, net of amortization, follows:

                                                      December 31,
                                                      ------------
                                                1997                 1996
                                                ----                 ----
                                               (000s)               (000s)

     Software development costs               $ 8,849                9,059
     Deferred start-up costs and other          2,470                3,174
                                              -------               ------
                                              $11,319               12,233
                                              =======               ======

     The Company capitalized  approximately $1.0 million,  $4.1 million and $2.7
million of software development costs in the years ended December 31, 1997, 1996
and 1995,  respectively.  The costs are primarily  related to the development of
the MasterLink(TM) system.

     Total  amortization  expense  of  intangible  and other  assets  (including
Goodwill) was approximately $3.7 million, $4.2 million and $3.4 million in 1997,
1996  and  1995,  respectively.  Amortization  of  software  development  costs,
included in total amortization  expense,  was approximately  $1.5 million,  $1.3
million and $0.9 million in 1997, 1996 and 1995, respectively.

(9)  LEASE OBLIGATIONS

     The Company has noncancelable  operating leases for office space, equipment
and  vehicles  which  expire at various  dates  over the next six years.  Future
minimum lease payments under  noncancelable  operating leases as of December 31,
1997, are approximately as follows:

     Year ending December 31,                 (000s)

          1998                                $4,328
          1999                                 2,270
          2000                                 1,263
          2001                                   572
          2002                                   207
          Thereafter                              23

     In 1997, 1996 and 1995, rental expense was approximately $4.7 million, $0.8
million and $0.6 million, respectively.

                                     - 56 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(10) ACCRUED EXPENSES

     A summary of accrued expenses follows:

                                                              December 31,
                                                              ------------
                                                         1997            1996
                                                        (000s)          (000s)

     Labor and benefits                                $ 5,911           1,962
     Deferred revenue and estimated costs to complete
          long-term contract obligations                 4,835           3,711
     Other, combined                                    10,959           7,576
                                                       -------          ------
                                                       $21,705          13,249
                                                       =======          ======

(11) LONG-TERM DEBT

     A summary of  long-term  debt,  including  capitalized  lease  obligations,
follows:
<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                                     ------------
                                                                                1997              1996
                                                                                ----              ----
                                                                                (000s)            (000s)
<S>                                                                            <C>                <C>

     Note payable at implicit rate of prime (8.5%) at December 31, 1997 with
          interest only payments  through  1998.  Thereafter  due in monthly
          installments, including interest, through January 2004. Secured by
          certain inventories, property and equipment, intangible
          assets and treasury stock (See Note 2.)                              $25,850               ---
     8.25% note payable in monthly installments including interest,
          through September 2001 (See Note 2.)                                   4,940             5,729
     7.2% to 12.25% capital lease obligations, due in monthly
          installments of $4,573 to $26,567 including interest
          maturing through April 2002                                            1,152             1,753
     9.0% note payable in monthly installments including interest
          through December 1998, secured by assets leased to others
          (See Note 7.)                                                          2,615             5,164
     LIBOR (5.58%) at December 31, 1997) plus 3.25% notes payable in
          equivalent monthly installments of $250,000 plus interest through
          February 1998.  Secured by stock of certain subsidiaries               1,270             7,270
                                                                               -------            ------

                                                                                35,827            19,916

     Less current installments                                                   4,381            10,604
                                                                               -------            ------

     Long-term debt, excluding current installments                            $31,446             9,312
                                                                               =======            ======
</TABLE>

                                     - 57 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The aggregate maturities of long-term debt are as follows:

     Year ending December 31,                                 (000s)

          1998                                                 $4,381
          1999                                                  6,938
          2000                                                  6,829
          2001                                                  6,212
          2002                                                  5,520
          Thereafter                                            5,947
                                                              -------
                                                              $35,827

     Cash paid for interest was  approximately  $2.0  million,  $2.6 million and
$2.8 million for the years ended December 31, 1997, 1996 and 1995, respectively.

     Based on interest rates  currently  available to the Company for borrowings
with similar terms and maturities,  the fair value of long-term debt at December
31, 1997 approximates carrying value.

     The  Company   maintains  a  credit  facility  with  First  Bank,  N.A.  In
conjunction with the Company's  settlement with EDS,  effective January 30, 1997
(see Note 2), the credit  facility  with First Bank,  N.A. was amended to, among
other things,  allow for the pari passu  securitization of certain assets of the
Company by EDS,  extend the  maturity  date of the  revolving  line of credit to
February 28, 1998,  and increase the line of credit from $17.5  million to $19.5
million.  First Bank was granted  35,000 shares,  with a value of  approximately
$127,000,  of the Company's common stock in conjunction  with the amendment.  At
December 31, 1997,  $9.5  million of the  revolving  line of credit is committed
under  the  Company's  bonding  program  and the  balance  of $10.0  million  is
available for working capital.  In addition to the revolving line of credit, the
facility is structured with two three-year  term loans payable through  February
1998.  The revolving  line of credit bears  interest at LIBOR (5.58% at December
31,  1997) plus 3.25% and  carries a  commitment  fee of .25% on the  unadvanced
amount. The credit agreement contains certain restrictive  covenants,  including
leverage and cash flow ratios, restricting a change in control,  restricting the
payment of dividends and maintaining minimum stockholders' equity.

     On February  28,  1998,  the credit  agreement  with First Bank,  N.A.  was
amended to extend the expiration  date of the revolving line of credit to August
31, 1998.

(12) INCOME TAXES

     Income tax expense (benefit) from operations consists of the following:
<TABLE>
<CAPTION>
                                                         Years Ended December 31,
                                                         ------------------------
                                                 1997              1996             1995
                                                 ----              ----             ----
                                                (000s)            (000s)           (000s)
<S>                                            <C>               <C>              <C>

     Current:
          Federal                              $   343           (3,533)          (1,219)
          State                                  1,281               70              ---
          Foreign                                  (14)             ---              582
                                               -------           ------           ------
                                                 1,610           (3,463)            (637)
                                               -------           ------           ------
     Deferred:
          Federal                                5,348           (3,614)             307
          State                                    555           (1,602)            (516)
          Foreign                                   33              (74)             ---
                                               -------           ------           ------
                                                 5,936           (5,290)            (209)
                                               -------           ------           ------
                                                 7,546            8,753             (846)
     Less tax expense on extraordinary items     8,681              ---              ---
                                               -------           ------           ------
                                               $(1,135)          (8,753)            (846)
                                               =======           ======           ======
</TABLE>

                                     - 58 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The  provision  for income tax expense  (benefit)  differs  from the amount
which would be provided by applying the Federal statutory income tax rate of 35%
to income or loss from  continuing  operations  before  extraordinary  items and
before income taxes as follows:

<TABLE>
<CAPTION>
                                                         Years Ended December 31,
                                                         ------------------------
                                                 1997              1996             1995
                                                 ----              ----             ----
                                                (000s)            (000s)           (000s)
<S>                                            <C>               <C>              <C>

     Current:

     Computed expected tax expense (benefit)    $1,276           (8,403)          (3,236)
     Extraordinary gain                          7,683           (1,345)             ---
     State taxes, net of Federal impact          1,193             (996)            (335)
     Change in valuation reserve                (3,000)           1,582            1,772
     Tax exempt interest income                    ---              ---              (10)
     Non-deductible expenses                       281              219              371
     Goodwill amortization                         287              287              287
     Foreign taxes                                  19              (74)             582
     Foreign sales credit                          ---              ---             (277)
     Other, net                                   (193)             (23)             ---
                                                ------           ------            -----
                                                $7,546           (8,753)            (846)
                                                ======           ======            =====
</TABLE>

     The tax effects of temporary  differences and carryforwards  that give rise
to deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
                                                                        December 31,
                                                                        ------------
                                                                   1997             1996
                                                                   ----             ----
                                                                   (000s)          (000s)
<S>                                                              <C>             <C>

     Deferred tax assets:
          Allowance for doubtful accounts                       $   507              501
          Inventory reserves                                      3,237            4,844
          Net operating loss carryforward and tax credits         7,867           13,643
          Accrued liabilities                                     3,688            3,367
                                                                -------          -------
          Deferred tax assets                                    15,299           22,355
                                                                -------          -------
          Less valuation reserve                                 (3,855)          (6,855)
                                                                -------          -------
          Net deferred tax assets                                11,444           15,500
                                                                -------          -------

     Deferred tax liabilities:
          Fixed assets, principally depreciation                 (9,367)          (7,798)
          Deferred costs                                         (3,202)          (3,547)
          Lease obligations                                         128              639
          Other                                                     235              380
                                                                -------          -------
          Net deferred tax liabilities                          (12,206)         (10,326)
                                                                -------          --------
          Net deferred income tax asset (liability)             $  (762)         $  5,174
                                                                =======          ========
</TABLE>

     The  ultimate  realization  of deferred  tax assets is  dependent  upon the
existence of, or  generation  of,  taxable  income in the periods in which those
temporary differences and carryforwards are deductible. Management considers the
scheduled  reversal of deferred tax liabilities,  taxes paid in carryback years,
projected  future  taxable  income and tax  planning  strategies  in making this
assessment.  Based upon the level of historical  taxable income and  projections
for future  taxable  income  over the periods  the net  deferred  tax assets are
deductible, at December 31, 1997, management has established a valuation reserve
for  deferred  tax assets for which it is more  likely than not that the Company
will not realize the benefits of these deductible differences and carryforwards.
This  valuation  reserve is evaluated  and  adjusted as facts and  circumstances
affecting the Company's tax situation  evolve and the  likelihood of recovery of
deferred tax assets  changes.  During the fourth  quarter of 1997 the  valuation
reserve  was  adjusted as a result of

                                     - 59 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


the Company's 1997  cumulative  earnings  substantiating  that it is more likely
than not that a portion of the deductible differences will be realized.

     The Tax Reform Act of 1986 expanded the corporate  alternative  minimum tax
(AMT).  Under the Act, the Company's tax liability is the greater of its regular
tax or the AMT. The Company is subject to the AMT primarily due to  depreciation
limitations for AMT purposes.  The AMT actually paid will be allowed as a credit
against  regular  tax in the future to the extent  future  regular  tax  expense
exceeds AMT. At December 31, 1997, the Company had approximately $1.6 million of
AMT credit  carryforwards  which are available to reduce future federal  regular
income taxes over an indefinite  period. In addition,  at December 31, 1997, the
Company had  approximately  $8.9  million of net  operating  loss  carryforwards
primarily for federal regular income tax purposes which expire in 2011.

     Net cash received from prior period refunds was approximately  $1.9 million
in 1997 and $2.4 million in 1996.  Cash paid for income taxes was  approximately
$1.5 million during 1995.

(13) BENEFIT PLANS

     In May 1994, the Board of Directors  adopted the 1994 Stock  Incentive Plan
(the "Plan") which was approved by the Company's stockholders. The Plan provides
for the  granting of  options,  stock  appreciation  rights,  restricted  stock,
performance units and performance shares to employees,  consultants and advisors
of the Company  and the  granting of options to  non-employee  directors  of the
Company (collectively or individually, "Awards"). In 1997, an additional 500,000
shares were  authorized by a vote of  stockholders  bringing the total number of
shares  authorized  for issuance  under the Plan to  1,500,000.  At December 31,
1997, the remaining  number of shares  available for issuance under the Plan was
approximately  526,000.  The Plan replaces the 1992 Stock  Incentive  Plan which
replaced the 1991 Stock Option Plan.  No further  stock  options will be granted
under the 1991 and 1992 plans. All stock options presently outstanding under the
1991 and 1992 plans will  continue to be governed by the terms of the 1991 Stock
Option Plan and 1992 Stock Incentive Plan.

     Options  granted under the Plan are  designated as either  incentive  stock
options or as non-incentive stock options. The term of the option may not exceed
10  years  from  the  date  the  option  is  granted  or 15 years in the case of
non-incentive stock options governed by pre-1994 plans.  Incentive stock options
owned by  stockholders  with more than 10% of the total combined voting power of
all classes of stock of the Company  shall be granted at an option  price of not
less than 100% of the fair market  value at the grant date,  and the term of the
option may not exceed 5 years from the date of grant.

     In February  1993,  the Board of  Directors  adopted a  Non-Employee  Stock
Option Plan whereby  non-employee  directors of the Company elected or appointed
after  January  1, 1993  shall  receive a  one-time  grant of options to acquire
20,000 shares of Common Stock. The exercise,  pricing, vesting, duration and all
other  terms  and  conditions  applicable  to  each  option  granted  under  the
Non-Employee Stock Option Plan shall be in accordance with the provisions of the
1992 Stock Incentive Plan.

     All options  currently  outstanding  are 100%  exercisable  no later than 4
years after grant date.

                                     - 60 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                                              Weighted Average
                                                 Options       Exercise Price
                                                 -------      ----------------
     Year ended December 31, 1995
     ----------------------------
     Outstanding, beginning of year         1,211,369              $12.12
          Granted                              70,000                8.33
          Exercised                               ---                 ---
          Cancelled                          (361,587)              14.20
                                            ---------
     Outstanding, end of year                 919,782               11.45
                                            =========
     Exercisable, end of year                 539,657               12.44
                                            =========

     Year ended December 31, 1996
     ----------------------------
          Granted                             352,500                4.78
          Exercised                               ---                 ---
          Cancelled                          (348,693)              11.74
                                            ---------
     Outstanding, end of year                 923,589                8.76
                                            =========
     Exercisable, end of year                 547,749                9.67
                                            =========

     Year ended December 31, 1997
     ----------------------------
          Granted                             232,000                5.58
          Exercised                           (26,698)               7.23
          Cancelled                          (126,208)               8.95
                                            ---------
     Outstanding, end of year               1,002,683                8.04
                                            =========
     Exercisable, end of year                 644,011                8.96
                                            =========

     Information  regarding options  outstanding and exercisable at December 31,
1997, follows:
<TABLE>
<CAPTION>
                                         Options Outstanding              Options Exercisable
      Range of           --------------------------------------------    -----------------------
      Exercise                    Weighted Average  Weighted Average            Weighted Average
        Price            Number    Exercise Price   Remain Life (Yrs)    Number  Exercise Price
      ----------         ------   ----------------  -----------------    ------ ----------------
<S>   <C>              <C>               <C>                             <C>           <C>
      $3.00 - 5.00       299,800         $4.08                9.6        142,800       $4.23
      $5.00 - 10.00      457,168          7.70                8.1        305,496        8.31
      $10.00 - 15.00     201,715         12.85                6.2        186,715       13.06
      $15.00 - 28.00      44,000         16.47                6.4          9,000       20.81
                       ---------                                         -------
                       1,002,683                              8.0        644,011
                       =========                              ===        =======
</TABLE>


     A stock purchase plan was  established  in 1991,  which is available to all
permanent full-time employees. The Stock Purchase Plan provides for the purchase
of the  Company's  Common Stock  through  payroll  deductions  of up to 3% of an
employee's  current  compensation.  In  addition,  the  Company  may  make  cash
contributions  to each employee's  stock purchase account in an amount up to 50%
of each  payroll  deduction  credited to the  account.  In 1997,  an  additional
500,000  shares were  authorized  by a vote of  stockholders  bringing the total
number of shares  authorized  for  issuance  under  the Stock  Purchase  Plan to
700,000. Under the Stock Purchase Plan, the Company will offer to sell shares of
its Common  Stock at the end of each one year  period (the  "Purchase  Period"),
which  begins  January  1 and ends  December  31 of each  year.  Shares  will be
purchased at the lesser of 85% of the fair market value of the Company's  Common
Stock on the first or last day of the Purchase Period. There were 132,524 shares
at $3.35 per share  purchased in January of 1998 for the 1997  Purchase  Period;
117,075  shares at $2.98 per share  purchased  in  January  of 1997 for the 1996
Purchase  Period;  and 98,565 shares at $4.04 per share  purchased in January of
1996 for the 1995 Purchase  Period.  Under the Stock  Purchase Plan, the Company
contributed  approximately  $149,000,  $117,000 and $102,000 for 1997,  1996 and
1995, respectively. Remaining authorized shares available for issuance under the
plan were approximately 270,000 at December 31, 1997.

     The Company  applies  Accounting  Principles  Board  Opinion 25 and related
interpretations  in  accounting  for stock  option and employee  stock  purchase
benefit plans.  Accordingly,  no  compensation

                                     - 61 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



cost has been recognized in the Company's  consolidated  statement of operations
for options granted and shares purchased under the plans. Had compensation  cost
for the  options  granted  and the  shares  of  Common  Stock  issued  under the
Company's  employee stock purchase plan been determined  based on the fair value
at the grant  dates for  awards  under the plans  consistent  with the method of
Financial  Accounting  Standards Board Statement 123, the Company's net earnings
(loss) and per share  amounts  would  have been as  reflected  in the  pro-forma
amounts indicated below:

                                          1997           1996           1995
                                          ----           ----           ----
                                          (000s)         (000s)         (000s)

     Net  earnings (loss)                $17,637        (15,352)       (8,843)
                                         =======        =======        ======

     Net earnings (loss) per share:

     Basic                                 $1.71          (1.44)         (.84)
                                           =====          =====          ====

     Diluted                               $1.68          (1.44)         (.84)
                                           =====          =====          ====

     The fair value of the options granted and shares issued under the Company's
employee stock  purchase  plans in the three years ending  December 31, 1997 was
estimated using the Black-Scholes model with the following assumptions for 1997,
1996 and 1995:  dividend  yield of 0%;  expected life of 5 years and a risk-free
interest rate of 6%. The volatility  factor applicable to 1997 pro-forma amounts
is  129%.  The  volatility   factor   applicable  to  1996  and  1995  pro-forma
calculations  is 57%.  The effects of applying  Financial  Accounting  Standards
Board  Statement No. 123 in this  pro-forma  disclosure may not be indicative of
future results.

     In 1992,  the Board of Directors  adopted a 401(K)  employee  savings plan.
Employees are eligible to  participate  in the 401(K) plan after  completing one
year of service,  working more than 1,000 hours per year and having attained the
age of twenty-one years.  Employer  contributions  are  discretionary  under the
plan.  Employer  contributions  under  the  plan  were  approximately  $607,000,
$237,000 and $206,000 for 1997, 1996 and 1995, respectively.

(14) OTHER CHARGES

     A summary of other charges follows:
<TABLE>
<CAPTION>
                                                            Years Ended December 31,
                                                            ------------------------
                                                      1997           1996             1995
                                                      ----           ----             ----
                                                      (000s)         (000s)          (000s)
<S>                                                   <C>            <C>             <C>

     Inventory impairments                            $  ---         18,000            550
     Customer disputes and contract liabilities          ---          8,435          1,763
     Restructuring charges and long-lived
        assets impairments                               ---          7,700            450
                                                      ------         ------          -----
                                                      $  ---         34,135          2,763
                                                      ======         ======          =====
</TABLE>


     In 1996 the Company recorded approximately $34.1 million of special charges
for restructuring  costs and asset impairments,  consisting of $18.0 million for
inventory value  impairments  primarily  related to the on-line lottery segment,
$8.4 million  associated  with on-line  lottery  customer  disputes and contract
liabilities,  $4.6 million for  impairment of intangible and other assets for an
on-line lottery contract and approximately  $3.1 million related to the wagering
systems  segment as discussed  in Note 2. The  impairment  losses of  long-lived
assets  were  measured  based on the fair  value of each  asset.  Fair value was
calculated  based on the present  value of expected  future net cash flows.  The
$4.6 million impairment related to an on-line lottery contract that did not meet
Company  expectations  of  profitability  levels.  The $2.8  million  impairment
discussed  in  Note 2 was a  result  of the  Company's  decision  to  replace  a

                                     - 62 -

<PAGE>

                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




predecessor model of a wagering systems terminal. Approximately $21.2 million of
the charges were recorded in the fourth  quarter of 1996,  primarily  related to
the Company's  revised  strategies  and resulting  estimates  regarding  on-line
lottery operations.

     During the three-year  period ended December 31, 1996, the Company recorded
approximately  $22.7  million of  charges  representing  impairments  to on-line
lottery equipment inventories. An aggressive revenue growth strategy in 1994 led
the Company to procure or commit to procure  significant  levels of inventory in
advance of  obtaining  a contract  to operate an on-line  lottery  system in the
United  Kingdom.  The Company was  notified  in May 1994 that the  contract  was
awarded to a competitor.  In the fourth quarter of 1994, the Company  recorded a
$4.1 million charge  representing costs to retrofit  inventories  related to the
United  Kingdom  procurement  for which  there was no other  demand in the U. S.
market.  The Company  anticipated demand from a customer in Norway for a portion
of such  inventories.  The carrying value of inventories  related to the on-line
lottery  segment was  approximately  $19.3 million at December 31, 1994, and the
Company believed that potential market opportunities at that time indicated that
such  inventory  value would be recovered.  In the second  quarter of 1995,  the
Company  recorded an  additional  $0.6 million  charge to  inventories  due to a
reduction  in estimated  demand by its Norway  customer.  The carrying  value of
inventories  related to the  on-line  lottery  segment was  approximately  $15.9
million at December 31,  1995,  and  potential  sales  opportunities  in various
international markets indicated that the remaining value could be recovered.  In
the second  quarter  1996,  the Company  recorded an  additional  charge of $1.1
million to inventories for another identified reduction in demand. In the fourth
quarter of 1996, the Company determined that the remaining  inventory related to
the United  Kingdom  procurement  had no  remaining  market value and charged to
expense  approximately $10.4 million. At December 31, 1996,  inventories related
to the  on-line  lottery  segment  had a carrying  value of  approximately  $2.9
million.

     The Company's  domestic  growth strategy led to the contracts being awarded
to the Company by the Arizona and Kentucky lottery  authorities during 1995. The
Arizona  lottery  system  was  implemented  in late 1995.  However,  a number of
factors, including a short development and installation period, led to the early
termination  of the  contract  by the  Arizona  Lottery  in  1996.  The  Company
recognized an impairment charge of $4.0 million on equipment inventory to reduce
the carrying value to net realizable value for used equipment. Also in 1996, the
Company  and the  Kentucky  Lottery  agreed to  terminate  efforts to finalize a
contract.  The Company incurred  approximately  $2.5 million that was charged to
expense as a result of the agreement.

     The United  Kingdom,  Arizona  and  Kentucky  on-line  inventory  which the
Company  had  planned  to place in service to  perform  specific  contracts  was
reviewed in light of existing  market  conditions and written down to its market
value.  Following  these charges and  write-offs  attributable  to  unsuccessful
business ventures,  the Company revised its international  strategy from selling
long-term  service  agreements to  principally  one of selling  on-line  lottery
equipment and licensing technology to use the equipment to partners.  While this
strategy  may  result in lower  gross  revenues,  costs of sales  and  operating
profits, it limits the Company's capital at risk and is considered by management
to be a more effective growth strategy at this time.

     Domestically,  the Company has  adopted a strategy of  selectively  bidding
opportunities  where  the  customer  requirements  best fit  with the  Company's
products and services.  There can be no assurance that these revised  strategies
will be successful.

     In 1995,  the Company  recorded  approximately  $2.8 million of special and
other  unusual  charges  associated  with  exit  costs  and  charges  and  asset
impairments  related  to five  contracts.  In the second  quarter  of 1995,  the
Company  determined  that  continuing  to expend  capital  resources  on certain
domestic and international  contract  prospects was not in the best interests of
the Company and, to terminate such activities, recorded the necessary charges to
write down  applicable  investments  in  long-lived  assets to fair value and to
record estimated  liabilities.  Approximately  $2.5 million of such charges were
related to the on-line  lottery  segment and $0.3  million  were  related to the
wagering systems segment.

                                     - 63 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(15) COMMITMENTS AND CONTINGENCIES

     The  Company  has  employment  agreements  with  certain  of its  executive
officers that provide for lump sum severance payments and accelerated vesting of
options and  restricted  stock upon  termination  of  employment  under  certain
circumstances or a change in control, as defined.

     During 1996 and 1995, the Company sold notes receivable from gaming machine
equipment  sales,   with  a  face  value  of  $1.5  million  and  $2.3  million,
respectively,  to banks and other  third  parties.  The notes are secured by the
underlying equipment. The receivables sold are subject to recourse provisions in
the event of default by the  primary  obligor.  The  outstanding  balance of the
notes receivable sold with recourse was  approximately  $1.8 million at December
31, 1997. The Company has  established  reserves for estimated  losses under the
recourse  provisions  of $.3 million at December 31, 1997. At December 31, 1997,
the Company had guaranteed or pledged security for the indebtedness of others in
the amount of  approximately  $2.6 million  (including  notes receivable sold to
banks and other third parties).

     The Company is obligated to provide services and/or equipment under certain
of its  contracts.  In addition,  the various  state  on-line  lottery and video
gaming  contracts  contain  provisions under which the Company may be subject to
monetary penalties for central computer downtime,  terminal failures,  delays in
servicing  inoperable  terminals  within specified time periods and ticket stock
shortages  among other things.  The Company accrues any net losses in fulfilling
the terms of these  contracts  when the loss is probable  and can be  reasonably
estimated (see Note 14).

     The Company is currently  conducting a comprehensive review of its computer
systems to identify  the systems that could be affected by the "Year 2000" issue
and is developing  an  implementation  plan to resolve the issue.  The Year 2000
issue is pervasive and complex,  as virtually  every  computer  operation of the
Company,  including  both internal  systems and systems  delivered to customers,
will be affected in some way by the  roll-over  of the  two-digit  year value to
"00." Computer systems that do not properly recognize date-sensitive information
could generate  erroneous data or cause a complete system  failure.  The Company
believes  that,  with  modification  of existing  computer  systems,  updates by
vendors and  conversion to new software in the ordinary  course of its business,
the Year 2000  issue  will not pose  significant  operational  problems  for the
Company's computer systems.  However,  if such modifications and conversions are
not completed timely or properly, the Year 2000 issue may have a material impact
on the business and operations of the Company.  The costs of  modifications  and
conversions are not anticipated to be material, but will principally represent a
re-deployment of existing or otherwise  planned  resources.  No assurance can be
given that the Company will successfully avoid any problems  associated with the
Year 2000 issue.

     The Company  typically posts bid,  litigation,  and  performance  bonds for
on-line lottery  contracts.  At December 31, 1997, the Company had collateral in
support  of  the  various  bonds  outstanding  consisting  of  $2.0  million  of
restricted  deposits and $7.5 million of irrevocable  standby letters of credit.
Should the Company fail to meet contractually  specified  obligations during the
contract term,  the lottery  authority may assess damages and exercise its right
to collect on the  applicable  bond. The Company has had disputes with customers
over implementation schedules,  deliverables and other issues. The Company works
with these customers to resolve these differences;  however,  should the Company
be unable to resolve any disputes in a mutually satisfactory manner, the Company
may  suffer  negative  consequences  in its  relationships  with these and other
customers and its pursuit of future  business.  The ultimate cost to the Company
of such  damages  (if any)  would be net of its  claims  under  risk  management
policies in effect as appropriate.

     Historically, the Company has met its cash flow requirements primarily with
cash provided by operations,  public  offerings of equity  securities,  and from
borrowings  from  financial  institutions.  The Company,  in 1996, was named the
successful  bidder for a new on-line lottery  contract with the Florida lottery.
The award by the Florida  Lottery was  unsuccessfully  protested by a competitor
and the competitor has filed an appeal which has delayed contract  negotiations.
The existing  contract had an expiration  date of June 30, 1996.  The Company is
continuing the operation of the current  on-line  lottery system under

                                     - 64 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



the terms of the expired  contract under  temporary  extension.  The Company has
submitted a bid and been awarded a contract with the Pennsylvania Lottery for an
on-line lottery contract to replace the contract the Company  currently has with
the lottery.  The current  contract  expires in December 1998.  Sizable  capital
expenditures  in excess of current capital sources may be required in advance of
any anticipated  capital  generated by a new Florida or  Pennsylvania  contract.
Accordingly, the Company may need additional financing, the availability and the
terms of which are subject to various uncertainties, with no assurance that such
financing can be obtained.

     The recovery of a  significant  amount of the  Company's  investment in the
racetrack  operations in Sunland Park, New Mexico is largely contingent upon the
implementation  of gaming at the  racetrack.  On March 21, 1997,  the New Mexico
legislature  voted to allow  casino  gaming  at  pari-mutuel  racetracks  in New
Mexico,  including  the Company's  racetrack in Sunland  Park.  The bill allows,
among other things,  the operation of up to 300 gaming  machines per pari-mutuel
racetrack  facility for up to twelve hours per day. The implementation of gaming
is subject to the timing and  satisfaction  of  conditions  of the  legislation,
including the state's  formation of a separate  commission to oversee the gaming
and other regulatory  matters  (including the grant of necessary licenses to the
Company).  Consequently,  the Company does not anticipate that any revenues will
be generated from the approved gaming until the third or fourth quarter of 1998.
The Company  has had  architectural  plans  developed  for casino  gaming at the
racetrack facility and has initiated  construction.  The Company's investment in
the racetrack  operations is approximately  $20.8 million and current plans call
for   approximately   $8.0   million  of  capital   expenditures   for  facility
enhancements,   gaming  machines  and  related   equipment  to  be  funded  from
operations.

     A significant percentage of the Company's consolidated revenues are derived
from  sales  to  customers  in  jurisdictions  that  have  enacted   legislation
permitting various types of gaming.  Such enacted  legislation may change due to
political and economic  conditions  within the  jurisdiction  which could have a
material  adverse  effect upon the Company's  financial  position and results of
future operations.

     International  sales  denominated  in  foreign  currencies   accounted  for
approximately  $20.3  million or 10% of the Company's  consolidated  revenues in
1997 and $16.6 million or 9% of  consolidated  revenues in 1996.  Management can
give no  assurances  that  changes  in  currency  and  exchange  rates  will not
materially  affect  the  Company's  revenues,  costs,  cash  flows and  business
practices and plans.  Additional  risks inherent in the Company's  international
business   activities   generally  include   unexpected  changes  in  regulatory
requirements,  tariffs and other trade barriers, delays in receiving payments on
accounts  receivable  balances,  reimbursement  approvals (both governmental and
private), difficulties in managing international operations, potentially adverse
tax  consequences,  restrictions  on repatriation of earnings and the burdens of
complying with a wide variety of foreign laws and regulations.  In addition, the
Company's foreign operations would be affected by general economic conditions in
the  international  markets  in  which  the  Company  does  business,  such as a
prolonged economic downturn in Europe or the Asian-Pacific  region. There can be
no assurances  that such factors will not have a material  adverse effect on the
Company's  future  international  revenues and,  consequently,  on the Company's
business,  financial condition, results of operations or cash flows. The Company
has not historically  attempted to hedge the risks of fluctuating exchange rates
given the currencies involved and the terms of payment granted to its customers.

     In January  1998, a breach of contract  claim was filed against the Company
and  AWI in the U.  S.  District  Court,  Southern  District  of New  York by MR
International, Inc. and American Lottery Systems. The plaintiffs allege that the
Company and AWI  breached  their  obligations  in a joint  venture in the Rostov
Region of the Republic of Russia.  The complaint  seeks  monetary  damages.  The
Company  believes the claim is entirely  without merit and intends to vigorously
defend the action.

     The Company is involved in various other claims and legal  actions  arising
in the  ordinary  course  of  business.  In the  opinion  of  management,  after
consultation with legal counsel, the ultimate disposition of these other matters
will not have a material adverse effect on its consolidated  financial  position
or results of operations.

                                     - 65 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(16) SUBSEQUENT EVENT

     On  February  10,  1998,  the  Company  effected a  secondary  offering  of
currently   outstanding   shares   held  by  an  investor   group   representing
approximately 14.5% of the Company's outstanding common stock (approximately 1.5
million  shares).  The shares were marketed and sold principally to a variety of
institutional investors.  Pursuant to an agreement with the Company, the head of
the investor  group  William  Spier  resigned as a director of the  Company.  In
addition,  the group is subject to certain restrictions regarding the ability to
acquire Company  securities in the future.  Approximately .2 million  additional
shares   were  issued   pursuant   to  the   exercise  of  an  option  to  cover
over-allotments by the underwriters.

                                     - 66 -

<PAGE>



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

     None


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

     The directors and executive officers of the Company are as follows:

     Name                        Age               Position

     Richard R. Burt (2)(3)       51  Chairman and Director
     James J. Davey (1)(2)        56  Vice Chairman and Director
     Patricia W. Becker (1)(2)(3) 46  Director
     John R. Hardesty             58  Director
     Richard M. Haddrill(3)       44  President, Chief Executive Officer,
                                      Treasurer and Director
     Dennis V. Gallagher          45  General Counsel
     Michael L. Eide              48  President, Video Lottery Consultants, Inc.
     Susan J. Carstensen          34  Chief Financial Officer
--------------------
(1)  Member of the Audit Committee.
(2)  Member of the Compensation Committee.
(3)  Member of the Executive Committee.

     Richard R. Burt became a director  and  chairman of the Company on December
15,  1994.  Mr. Burt is a founder  and the  chairman  of IEP  Advisors,  Inc. in
Washington  D.C., a consulting and merchant banking firm. From 1991 to 1994, Mr.
Burt was a partner in McKinsey & Co., a world-wide  management  consulting firm.
During the period from 1989 to 1991, Mr. Burt served as the Chief  Negotiator in
the Strategic Arms Reduction  Talks (START) with the former Soviet Union. He was
the U.S.  Ambassador to the Federal  Republic of Germany from 1985 to 1989.  Mr.
Burt was the Assistant Secretary of State for European and Canadian Affairs from
1983 to 1985, and served as Director of  Politico-Military  Affairs from 1981 to
1983. Mr. Burt also serves as the Chairman of the Board of Weirton Steel,  Inc.,
a  tin-plate  manufacturer,  and serves on the Board of  Directors  of the Paine
Webber Mutual Funds,  Hollinger  International,  a company owning  newspapers in
Europe, Canada,  Australia and the United States, and Archer Daniels Midland, an
agri-business  company.  In  addition,  Mr.  Burt  is a  member  of the  Textron
Corporation's   International  Advisory  Council  and  the  Bank  of  Montreal's
International  Advisory Board. (See Item 11 - Compensation  Committee Interlocks
and Insider Participation.)

     James J. Davey was elected as a director of the Company effective  February
25, 1993,  and was elected as vice chairman on May 31, 1994. He first joined the
Company as chief  operating  officer in October 1992.  Mr. Davey served as chief
executive  officer from February 25, 1993 until May 31, 1994,  and from February
24, 1994 until May 31,  1994,  he also served as  president.  From  October 1992
until  February  1993,  Mr. Davey served as president of the  Company's  on-line
lottery services  subsidiary,  AWI. From 1986 to October 1992, Mr. Davey was the
director for the Oregon State  Lottery.  From 1985 to 1986, Mr. Davey was deputy
director and assistant  director of administration for the Oregon State Lottery.
From 1980  through  1984,  Mr.  Davey  served as  administrator  for the  Oregon
Department of Revenue.

     Patricia  W.  Becker  was  appointed  to the Board of  Directors  effective
January 18, 1995 to fill a newly  created  position  thereon.  Ms. Becker is the
owner of Patricia Becker & Associates, a consulting firm. She is a consultant to
the Company and serves as chair of its Compliance  Committee.  Ms. Becker served
as the chief of staff to Bob Miller,  Governor of Nevada,  from  October 1993 to
January 1995. Prior to that, she was senior vice president,  general counsel and
secretary  of  Harrah's  Casino  Hotels  from  June  1989 to July  1993 and vice
president,  general  counsel and  secretary  from 1984 to 1989.  Ms.  Becker was

                                     - 67 -

<PAGE>



deputy and chief deputy attorney  general assigned to the Nevada Gaming Division
from 1979 until she was appointed to the State Gaming Control  Board,  where she
served  until  September  1984.  Ms.  Becker is a vice  chair for the Gaming Law
Section of the American Bar  Association,  a past  president of the Nevada Trial
Lawyers Association and treasurer and a trustee of the International Association
of Gaming  Attorneys.  Ms. Becker  currently serves on the Board of Directors of
Fitzgeralds Gaming Company, a Nevada based company which owns casinos. (See Item
11 Compensation Committee Interlocks and Insider Participation.)

     John R. Hardesty was appointed to the Board of Directors effective December
18,  1996 to fill a vacancy  thereon  created by the  resignation  of Jeffrey D.
Cushman.  Mr. Hardesty is chairman of Electro  Dynamics Crystal  Corporation,  a
manufacturer  of  electronic  components  for the  communication  industry.  Mr.
Hardesty also owns 100% of Thermo  Dynamics,  Inc., a manufacturer  of synthetic
quartz for the electronics industry and investments,  J.G. Inmobiliaria SA De.CV
and  Inmobiliaria  San  Pancho,  Mexican  corporations  which  hold real  estate
investments;  and Zona  Virtual  SA  De.CV,  a Mexican  corporation  which is an
internet  provider and computer  sales and service  company in Puerto  Vallerta,
Mexico.  Mr. Hardesty serves as a director of LeTeko,  Inc., a gold  exploration
company.  From  1988  until  its sale in 1995,  Mr.  Hardesty  was the owner and
chairman of Dixson Inc., a manufacturer of electronic  instruments for the heavy
duty truck market and process control market.

     Richard M. Haddrill was appointed as chief executive officer of the Company
on June 18, 1997 and as  president  of the Company and to its Board of Directors
on August 21, 1996. He filled the Board vacancy  created by the  resignation  of
Stephen  Vanderwoude.  In  addition,  on June 18,  1997 he was  appointed  chief
executive  officer  of the  Company's  Automated  Wagering  International,  Inc.
("AWI") subsidiary,  and has served as president of AWI since December 1996. Mr.
Haddrill  joined the Company in December  1994 as the Company's  executive  vice
president  of  operations  and  chief  financial  officer.  He  served  as chief
financial  officer until May 15, 1997. In December 1994,  Mr.  Haddrill was also
appointed  treasurer of the Company.  In August 1995, Mr. Haddrill was appointed
to the Board of Directors of the Company's United Wagering Systems, Inc. ("UWS")
subsidiary,  and  assumed  the  position  of chief  executive  officer of UWS in
February  1996.  From July 1992 until  November  1994,  Mr.  Haddrill  served as
executive   vice   president  --  corporate  and   president  of   international
subsidiaries  for  Knowledgeware,  Inc., a provider of  application  development
software and services worldwide. Prior to joining Knowledgeware, Inc. in 1991 as
an executive vice president and chief  financial  officer,  Mr. Haddrill was the
managing  partner of the Colorado and New Mexico offices of the accounting  firm
of Ernst & Young from August 1989 to October 1991 and held various  positions as
a partner or employee with Ernst & Young from January 1975 to September 1989.

     Dennis V. Gallagher was appointed secretary of the Company on May 15, 1997,
and as general counsel to the Company on February 10, 1997. From July 1993 until
February 1997, Mr.  Gallagher was vice president and general counsel of Harrah's
Riverboat  Casino  Entertainment  Division located in Memphis,  Tennessee.  From
November  1984 until July  1993,  he served as  associate  general  counsel  and
assistant  secretary  of  Harrah's  Hotels  and  Casinos  in Reno,  Nevada.  Mr.
Gallagher  was the Chief of the  Investigations  Division  of the  Nevada  State
Gaming Control Board from November 1983 until November 1984.

     Michael L. Eide has served as  president  and a director  of the  Company's
wholly-owned subsidiary, Video Lottery Consultants, Inc. ("VLC"), since December
1, 1994.  Prior to that time he served as treasurer and chief financial  officer
of the Company from May 1991 until  December 1994 and assistant  secretary  from
October 1992 through December 1994. He has also held the positions of secretary,
treasurer  and  assistant  secretary  with VLC during the period  November  1990
through  December 1994.  From 1977 to December 1988, Mr. Eide was a principal in
the accounting firm of Neil, Williamson, Eide and Staker in Bozeman, Montana.

     Susan J. Carstensen was appointed chief financial  officer on May 15, 1997.
Ms. Carstensen was vice president,  finance of the Company from November 7, 1996
to May 15, 1997.  From June 1995 to November 1996 she was  corporate  controller
for the  Company.  From  February  1995 to June  1995  she was the  director  of
internal audit for the Company.  Ms.  Carstensen  managed the cost and financial
accounting for Martin Marietta  Astronautics Group in Denver,  Colorado from May
1991 through February 1995. From August 1985 through May 1991 Ms. Carstensen was
with the accounting firm of Ernst & Young in Denver, Colorado.

                                     - 68 -

<PAGE>


     During  fiscal year 1997,  directors  who were not employees of the Company
received $15,000 annually for serving on the Board of Directors, plus $1,000 for
each  Board  meeting  and  $1,000  for each  Audit,  Compensation  of  Executive
Committee  meeting attended.  A non-employee  director serving as chairperson of
the Company's Board of Directors  receives  $30,000 annually for serving in such
capacity.  Each  non-employee  director  who  serves as the  chairperson  of any
committee of the Board of  Directors  receives a further fee of $7,500 per annum
for his or her services in such capacity.  The Strategic  Planning Committee was
abolished  effective  January  31,  1997.  Directors  are  also  reimbursed  for
out-of-pocket  expenses  incurred in attending  Board of Directors and committee
meetings. As non-employee  directors,  Mr. Spier was granted an option under the
Company's 1991 Stock Option Plan to purchase 10,000 shares of Common Stock at an
exercise price of $14.00 per share,  which options will expire 3 months from his
resignation.  (See Item 13 -- Certain  Relationships and Related  Transactions.)
Mr.  Burt was  granted  an  option to  purchase  10,000  shares of Common  Stock
pursuant to the Company's 1994 Stock  Incentive  Plan, and an option to purchase
20,000  shares   pursuant  to  the  Company's  1993  Stock  Incentive  Plan  for
Non-Employee Directors,  with both options having an exercise price of $8.25 per
share;  and Ms. Becker was granted an option to purchase 10,000 shares of Common
Stock  pursuant  to the  Company's  1994 Stock  Incentive  Plan and an option to
purchase  20,000 shares  pursuant to the Company's 1993 Stock Incentive Plan for
Non-Employee Directors,  with both options having an exercise price of $9.28 per
share. On August 12, 1996,  concurrent with his becoming a non-employee director
as a result of the  expiration of his  employment  agreement in August 1996, Mr.
Davey  received an option to purchase  10,000 shares of Common Stock pursuant to
the Company's 1994 Stock  Incentive Plan and an option to purchase 20,000 shares
pursuant to the Company's 1993 Stock Incentive Plan for Non-Employee  Directors,
with both options having an exercise  price of $3.41 per share.  On December 18,
1996,  concurrent  with his  becoming  a  non-employee  director,  Mr.  Hardesty
received an option to purchase  10,000  shares of Common  Stock  pursuant to the
Company's  1994 Stock  Incentive  Plan and an option to purchase  20,000  shares
pursuant to the Company's 1993 Stock Incentive Plan for Non-Employee  Directors,
with both options having an exercise price of $4.13 per share. Directors who are
employees of the Company  receive no  additional  compensation  for serving as a
director, except that all directors and executive officers receive up to $10,000
in reimbursement of their expenses in connection with matters related to various
regulatory  disclosure  requirements and up to $1,500 per quarter  thereafter to
keep such information current.

Section 16(a) - Beneficial Ownership Reporting Compliance

     Section  16(a) of the  Securities  Exchange  Act of 1934,  as amended  (the
"Exchange Act"),  requires the Company's directors and executive  officers,  and
persons who own more than ten  percent of a  registered  class of the  Company's
equity  securities,  to file by specific  dates with the SEC initial  reports of
ownership  and reports of changes in  ownership of Common Stock and other equity
securities of the Company on Forms 3, 4 and 5.  Officers,  directors and greater
than  ten-percent  stockholders  are required by SEC  regulations to furnish the
Company  with  copies of all  Section  16(a)  forms  they file.  The  Company is
required  to report any  failure to file by the  relevant  due date any of these
reports based solely on the Company's review of copies of such reports furnished
to it and written  representations  received by the Company that the filing of a
Form 5 was not required. Based upon this review, the Company is not aware of any
person who at any time  during  1997,  was a director,  officer or a  beneficial
owner of ten  percent or more of any class of equity  securities  of the Company
registered  pursuant to the  Exchange  Act who failed to file on a timely  basis
reports  required by Section 16(a) of the Exchange Act during 1997,  except that
Michael L. Eide,  president of VLC,  filed a Form 4 with respect to an option to
purchase  stock under the  Company's  stock  incentive  plan,  and a Form 5 with
respect to his wife's  purchase  of stock  under the  Company's  Employee  Stock
Purchase Plan, after the due date for filing the Forms 4 and 5.

                                     - 69 -

<PAGE>


ITEM 11. EXECUTIVE COMPENSATION

     The  following  table sets  forth  certain  information  for the year ended
December 31, 1997 and for years ended December 31, 1996 and 1995  concerning the
compensation  of the chief  executive  officer as of  December  31, 1997 and the
three most highly compensated  executive officers of the Company (other than the
chief executive  officer) who were serving as executive  officers as of December
31, 1997.
<TABLE>
<CAPTION>
                           SUMMARY COMPENSATION TABLE

                                                                      Long Term Compensation
                                                                      ----------------------
                                                           Other             Awards
                                   Annual Compensation     Annual            ------               All Other
Name and                    ---------------------------    Compen-    Restricted Stock Options    Compen-
Principal Position          Year   Salary $     Bonus $    sation $   Stock $(1)    (Shares)      sation $
------------------          ----   --------     -------    --------   ---------- -------------    ---------
<S>                         <C>    <C>          <C>        <C>          <C>          <C>              <C>

Richard M. Haddrill         1997   260,523      430,000    154,189(2)       ---          ---          ---
  President, Chief          1996   202,133      150,000        ---      133,200      140,000          ---
  Executive Officer and     1995   200,000      150,000        ---          ---          ---          ---
  Treasurer

Michael L. Eide             1997   203,256      126,000        ---          ---        8,000          ---
  President - VLC           1996   203,256       40,000        ---          ---       20,000          ---
                            1995   207,620          ---        ---          ---          ---          ---

Dennis V. Gallagher         1997   155,770       61,000     53,956(2)       ---       20,000          ---
  General Counsel

Susan J. Carstensen         1997   100,031       48,000        ---          ---       18,000          ---
  Chief Financial Officer   1996    69,276        5,000        ---          ---          ---          ---
                            1995    55,308          ---      4,405(2)       ---          ---          ---
</TABLE>
-------------------
(1)  With respect to Mr.  Haddrill's  restricted stock holdings,  of the initial
     grant in 1994 of 70,000 shares,  17,500 remained  restricted as of December
     31,  1997  with  a  market  value  of   approximately   $203,438  and  such
     restrictions on the 17,500 shares will lapse in November 1998. Mr. Haddrill
     was also awarded 30,000 shares of restricted  Common Stock in 1996,  20,000
     of which remained restricted as of December 31, 1997 with a market value of
     approximately $232,500 and such restrictions on 10,000 shares will lapse in
     September  1998 and  1999.  (See  "Employment  and Other  Contracts.")  All
     dividends  declared  and paid by the  Company,  if any,  on the  restricted
     stock,  shall be held by the Company until such restrictions  thereon lapse
     at which time the dividends, without interest thereon, shall be paid.
(2)  Relocation allowance.

STOCK OPTIONS

     As a result of approval of the Company's  1994 Stock  Incentive Plan at the
Annual Meeting of  Stockholders  on June 15, 1994, no further grants may be made
pursuant to the 1992 Stock  Incentive  Plan. The Company's 1994 Stock  Incentive
Plan provides,  among other things,  for the grant of options to purchase shares
of Common Stock.

                                     - 70 -

<PAGE>


Option Grants in Last Fiscal Year

     The following table sets forth  information with respect to options granted
under the Company's 1994 Stock Incentive Plan to each of the executive  officers
and directors named in the Summary Compensation Table above during 1997.

<TABLE>
<CAPTION>
                            OPTION GRANTS DURING 1997

                                             Individual Grants
                                             -----------------                   Potential Realizable Value
                       Number of      Percent of                                  at Assumed Annual Rates
                       Securities   Total Options                               of Stock Price Appreciation
                       Underlying     Granted to     Exercise                        for Option Term(2)
                         Options      Employees        Price        Expiration  ----------------------------
Name                   Granted(3)      in 1997     (per Share)(1)       Date       5%               10%
-------------------    ----------   -------------   -------------   ----------  -------           -------
<S>                       <C>            <C>          <C>            <C>         <C>              <C>

Michael L. Eide            8,000         3.4%         $3.81          02/27/07    19,181            48,609

Dennis V. Gallagher       20,000         8.6%         $3.81          02/27/07    47,953           121,523

Susan J. Carstensen       10,000         4.3%         $3.81          02/27/07    23,977            60,761
                           8,000         3.4%         $9.91          09/18/07    49,840           126,305
</TABLE>
-------------------
(1)  All  options  were  granted at an  exercise  price equal to the fair market
     value of the Common  Stock on the date of grant.  Such  options  may not be
     exercised later than 10 years, or earlier than one year,  after the date of
     grant.
(2)  These amounts represent certain assumed rates of appreciation  only. Actual
     gains,  if any,  on stock  option  exercises  are  dependent  on the future
     performance of the Common Stock and overall market conditions.  The amounts
     reflected in this table may not necessarily be achieved.
(3)  These options vest over a period of three years.

The following table provides certain  information with respect to the number and
value of  unexercised  options  outstanding  as of December 31, 1997. No options
were exercised by the named executives during the year ended December 31, 1997.
<TABLE>
<CAPTION>
                        Aggregated 1997 Option Exercises
                       and December 31, 1997 Option Values

                       Number of Unexercised Options
                            (in Common Shares)       Value of Unexercised In-the-Money
                           at December 31, 1997       Options at December 31, 1997(1)
                       ----------------------------- ---------------------------------
                         Exercisable/Unexercisable       Exercisable/Unexercisable
                       ----------------------------- ---------------------------------
<S>                            <C>                           <C>

   Richard M. Haddrill         202,800/70,000                $832,893/$251,475
   Michael L. Eide              58,666/21,334                $203,396/$144,304
   Dennis V. Gallagher             ---/20,000                     ---/$156,250
   Susan J. Carstensen             ---/18,000                     ---/$ 91,875
</TABLE>
----------
(1)  Options  are in the  money  if the  fair  market  value  of the  underlying
     securities  exceeds the  exercise or base price of the option.  Fair market
     value of the Common Stock  underlying  the options on December 31, 1997 was
     $11.625, the average of the high and low reported sales price on the Nasdaq
     National Market System on that date, which does not exceed the base price.

DEFINED BENEFIT AND LONG-TERM COMPENSATION PLAN

     The  Company  does not have any defined  benefit,  actuarial  or  long-term
incentive plan.

                                     - 71 -

<PAGE>


                     EMPLOYMENT AND CERTAIN OTHER CONTRACTS

     Employment Agreement with Richard M. Haddrill:  Pursuant to the terms of an
employment  agreement  with Mr.  Haddrill  approved by the Board of Directors on
February 26, 1998,  Mr.  Haddrill  serves the Company as its president and chief
executive  officer.   Unless  sooner  terminated  pursuant  to  its  terms,  the
employment  agreement  terminates  on January 1, 2002 and is subject to one-year
extensions  thereafter.  The employment  agreement provides for a base salary of
$380,000.  Mr.  Haddrill is eligible to receive  annual  bonuses up to twice the
base salary if certain  performance  criteria are  satisfied  for such year.  In
addition,  Mr.  Haddrill was awarded  100,000 shares of restricted  Common Stock
that vest at the rate of one-fourth  annually over the next four years beginning
on January 1, 1999 and options to purchase  50,000  shares of Common Stock at an
exercise  price of $11.48 per share,  the  average of the  closing  value of the
Common Stock for the 30 trading days  immediately  preceding  the date of grant.
The employment  agreement further provides that if Mr. Haddrill's  employment is
terminated for any reason,  then all unvested  restricted shares shall revert to
the  Company.  In  addition,  the  employment  agreement  provides  that  if Mr.
Haddrill's  employment is terminated  for "cause" (as defined in the  employment
agreement) or by him other than for "good reason" (as defined in the  employment
agreement),  then all unvested  options  shall be forfeited.  If Mr.  Haddrill's
employment  is  terminated  for any other  reason,  then  certain of the options
become  exercisable.  All such options become immediately  exercisable,  and all
restrictions on restricted stock held by Mr. Haddrill  immediately lapse, upon a
"change in control" (as defined in the employment  agreement) of the Company. In
addition,  if Mr. Haddrill's  employment is terminated for any reason other than
"cause"  or if  he  terminates  his  employment  for  "good  reason"  (including
termination in certain  circumstances  following a change in control),then he is
entitled to receive  all  accrued  but unpaid  salary and bonus and to receive a
lump sum equal to two times the sum of the total base salary plus annual  bonus,
as well as  payment  of  certain  benefits  through  the  remaining  term of the
employment  agreement.  Mr. Haddrill is entitled to the reimbursement of certain
relocation  expenses  and  other  business  expenses.  Finally,  the  employment
agreement  provides  that Mr.  Haddrill  will not compete with the Company for a
period of 18 months following his termination.

     Agreement  with  Dennis V.  Gallagher:  On January  24,  1997,  the Company
entered into an agreement  with Mr.  Gallagher to provide legal  services to the
Company as its general counsel. The agreement provides Mr. Gallagher with a base
salary of  $180,000  and a cash  bonus  potential  of  $100,000  based  upon the
Company's  executive  incentive  compensation  plan.  In  addition,   under  the
agreement,  Mr.  Gallagher was awarded  options to purchase 20,000 shares of the
Company's  Common  Stock  within  sixty  days of his date of  employment  and an
additional  option to purchase  10,000  shares no later than  February 28, 1998,
both  grants  at fair  market  value as of the date of grant  and to vest over a
three-year  period  from  the  date of  grant.  Mr.  Gallagher  is  entitled  to
reimbursement of his relocation  expenses.  In the event  termination is without
cause after  February  8, 1998,  he will  continue  to be paid his then  current
salary for a period of six months following termination. In the event there is a
change of control of the Company and Mr. Gallagher's employment is terminated by
the Company  without good cause,  or by Mr.  Gallagher  for certain  reasons set
forth in the  agreement,  within one year then Mr.  Gallagher  is entitled to an
amount equal to one-half  his base salary in effect at the date of  termination.
Mr.  Gallagher  also  agreed to  certain  confidentiality,  non-competition  and
similar provisions.

     Agreement  with Michael L. Eide: On January 17, 1995,  the Company  entered
into an agreement  with Mr. Eide to provide for the  continuance of his position
as president  of VLC. If Mr. Eide is removed from his position  with the Company
without  cause,  he will  receive  his then  current  salary for a period of six
months following  termination.  In the event there is a change of control of the
Company and Mr. Eide's  employment  is  terminated  by the Company  without good
cause, or by Mr. Eide for certain  reasons set forth in the agreement,  then Mr.
Eide is entitled to an amount  equal to twice his annual  salary.  Mr. Eide also
agreed to certain confidentiality, non-competition and similar provisions.

     Agreement  with Susan J.  Carstensen:  On  December  5, 1996,  the  Company
entered into an agreement with Ms. Carstensen. If Ms. Carstensen is removed from
her position with the Company  without cause,  she will receive her then current
salary for a period of six months following termination. In the event there is a
change of control of the Company and Ms.  Carstensen's  employment is terminated
by the Company without good cause, or by Ms.  Carstensen for certain reasons set
forth in the  agreement,  then Ms.  Carstensen is entitled to an amount equal to
one-half  of  her  annual  salary.   Ms.   Carstensen  also  agreed  to  certain
confidentiality,  non-competition and similar provisions.

                                     - 72 -

<PAGE>


Compensation Committee Interlocks and Insider Participation

     Richard R.  Burt,  who became the  chairman  of the Board of  Directors  in
December 1994, is the chairman and a founder of IEP Advisors,  Inc. (IEP), which
has been  retained by the Company to provide  consulting  services and to assist
the Company in connection with its  international  activities since October 1994
at a rate of $15,000 per month plus expenses.  The Company paid IEP an aggregate
of  approximately  $180,000  for 1997.  The current  contract  with IEP Advisors
terminates in October 1998 unless  terminated upon 30 days notice by the Company
or IEP.

     In addition,  Mr. Burt and the Company entered into a consulting  agreement
in  November  1994,  under which Mr.  Burt is to provide  advice and  assistance
relating  to the  promotion  of the  Company's  business  and to  assist  in the
development of business  opportunities for the Company.  The agreement  provides
for a per day  rate of  $1,000  for each day such  services  are  performed  and
reimbursement of out-of-pocket  expenses. The agreement is separate and distinct
from Mr. Burt's duties and  responsibilities  as a director of the Company.  The
agreement  further  provides for termination of the agreement by Mr. Burt or the
Company,  without  penalty,  upon 90 days' prior written notice.  During 1997 an
aggregate of approximately $2,000 was paid pursuant to the agreement.

     In December  1995 the Company  entered  into a  consulting  agreement  with
Patricia  W.  Becker,  a director  of the  Company,  for the period of two years
commencing  January 16, 1995. In September  1997 the Board renewed the agreement
for an additional  period of one year.  The  agreement  provides that Ms. Becker
shall serve as the chairperson of the Compliance  Committee of the Company,  and
otherwise  provide advice and assistance to the Company on matters of regulatory
compliance  and such other  matters as requested by the Company.  The  agreement
provides for an annual retainer fee of $75,000 plus a per day rate of $1,000 for
each  day  such  services  are  performed  and  reimbursement  of  out-of-pocket
expenses.  The agreement is separate and distinct from Ms.  Becker's  duties and
responsibilities  as a director of the Company.  The agreement  further provides
for termination of the agreement by Ms. Becker or the Company,  without penalty,
upon 90 days' prior  written  notice.  The Company paid Ms.  Becker an aggregate
amount of approximately  $133,000 during the fiscal year ended December 31, 1997
pursuant to the agreement.

     None of the  executive  officers  of the Company has served on the board of
directors of any other entity that has had any of such entity's  officers  serve
either on the Board of Directors or the Company's Compensation Committee.

                                     - 73 -

<PAGE>



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding the beneficial
ownership  of the  Common  Stock as of March 2, 1998 by (i) each  person  owning
beneficially  more than five  percent  of the  outstanding  shares of the Common
Stock, (ii) each director and director nominee of the Company, (iii) each person
named in the Summary  Compensation Table appearing elsewhere herein and (iv) all
executive  officers  and  directors of the Company as a group.  The  information
under this caption is based on representations made to the Company by individual
directors or nominees  and/or  filings  made with the SEC.  Each person has sole
investment  and voting  power with  respect  to the shares  indicated  except as
otherwise shown.
<TABLE>
<CAPTION>

         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                                                                           Number of Shares         Percent of Class
                                                                           ----------------         ----------------
                                                                         Beneficially Owned(1)      March 2, 1998(1)
                                                                         ---------------------      ----------------
<S>                                                                          <C>        <C>                 <C>

R. B. Haave Associates, Inc............................................      1,017,700  (2)                 9.71%
   36 Grove St., New Canaan, CT 06840
Fir Tree Partners (Fir Tree, Inc. d/b/a Fir Tree Partners).............        781,900  (3)                 7.46%
   1211 Ave of the Americas, 29th Floor
   New York, NY 10036
Richard M. Haddrill+, ++...............................................        466,646  (4)(5)              3.98%
Michael L. Eide++......................................................        202,473  (6)(7)              1.83%
John R. Hardesty+......................................................         93,945  (8)                  .90%
Patricia W. Becker+....................................................         30,000  (9)                     *
Richard R. Burt+.......................................................         30,000  (9)                     *
James Davey+...........................................................         26,243  (8)                     *
Dennis V. Gallagher++..................................................          6,666  (10)                    *
Susan J. Carstensen ++.................................................          5,758  (11)                    *
All directors and executive officers as a group........................        861,731  (4)(5)(6)(7)(8)     8.22%
                                                                                        (9)(10)(11)
</TABLE>
----------
+    Director of the Company
++   Executive Officer of the Company
*    Denotes less than 1%

(1)  Based on 10,477,952  shares of Common Stock  outstanding as of the close of
     business on March  2,1998  which  excludes  545,454  shares of Common Stock
     which are  deemed  authorized  but  unissued  pursuant  to the terms of the
     settlement  agreement  with EDS. (See Note 16 to the Notes to  Consolidated
     Financial  Statements.)  The share  holdings  in this table do not  include
     rights to receive stock or options  granted under various  Company plans to
     directors  and executive  officers  that do not vest or become  exercisable
     within 60 days of March 1,1998.
(2)  R. B. Haave  Associates,  Inc. is an Investment  Advisor  registered  under
     Section 203 of the Investment Advisors Act of 1940, with sole power to vote
     or to  direct  the  vote  and  sole  power  to  dispose  or to  direct  the
     disposition  of the shares.  R. B. Haave  Associates,  Inc.'s  holdings are
     reported  pursuant to amendment to Schedule 13G dated  January 27, 1998, as
     an amendment to the initial Schedule 13D, as filed on March 22, 1996.
(3)  Fir  Tree,  Inc.  is a New  York  corporation  doing  business  as Fir Tree
     Partners ("Fir Tree Partners"), of which Mr. Jeffrey Tannenbaum is the sole
     shareholder,  executive  officer,  director and principal.  Mr.  Tannenbaum
     acquired the shares  through his position as principal of Fir Tree Partners
     for an institutional  account for which Fir Tree Partners serves as trading
     advisor  and for the account of the Fir Tree Value  Fund,  L.P.  ("Fir Tree
     Value  Fund") of which Mr.  Tannenbaum  is the  general  partner.  Fir Tree
     Partner's  holdings  are  reported  pursuant to amendment to Form 13D dated
     August 4,  1995,  as an  amendment  to the  initial  Form 13D,  as filed on
     October 12,  1994.  Fir Tree  Partners is the  beneficial  owner of 781,900
     shares of Common Stock of which 498,930  shares are  beneficially  owned by
     Fir Tree Partners

                                     - 74 -

<PAGE>


     in its  capacity as  investment  advisor to Fir Tree LDC, a Cayman  Islands
     limited  duration  company  ("Fir Tree  LDC").  Jeffrey  Tannenbaum  is the
     investment  advisor  of Fir Tree  LDC and,  as  such,  retains  voting  and
     dispositive  power over the  shares,  and 282,970  shares are  beneficially
     owned by Fir Tree Partners for the account of the Fir Tree Value Fund.
(4)  Includes 100,000 shares of restricted stock of the Company vesting in equal
     installments  on each of January 1,  1999,  2000,  2001 and 2002 and 70,000
     shares of restricted stock of the Company vesting in equal  installments on
     each of  November  1,1995,  1996,  1997  and  1998  and  30,000  shares  of
     restricted  stock of the Company  vesting in equal  installments on each of
     September 9, 1997,  1998 and 1999. The 100,000  shares of restricted  stock
     vesting through 2002 are subject to approval by stockholders.
(5)  Includes  options to purchase  252,800  shares of Common  Stock,  currently
     exercisable or which will be exercisable  within 60 days,  granted pursuant
     to the Company's 1994 Stock Incentive  Plan.  50,000 of the options granted
     are subject to approval of stockholders.
(6)  Includes  options  to  purchase  2,000  shares  of Common  Stock  currently
     exercisable  granted  pursuant to the Company's  1991 Stock Option Plan and
     65,999 currently exercisable under the Company's 1994 Stock Option Plan.
(7)  Includes  12,318  shares  held  by Mr.  Eide's  son as to  which  Mr.  Eide
     disclaims beneficial ownership.
(8)  Includes  options  to  purchase  7,500  shares  of Common  Stock  currently
     exercisable granted pursuant to the Company's 1994 Stock Incentive Plan and
     options to purchase  15,000  shares of Common Stock  currently  exercisable
     pursuant  to the  Company's  1993  Stock  Incentive  Plan for  Non-Employee
     Directors.
(9)  Includes  options  to  purchase  10,000  shares of Common  Stock  currently
     exercisable or which will be exercisable  within 60 days,  granted pursuant
     to the Company's 1994 Stock  Incentive Plan and options to purchase  20,000
     shares of Common Stock  currently  exercisable or which will be exercisable
     within 60 days,  pursuant to the Company's  1993 Stock  Incentive  Plan for
     Non-Employee Directors.
(10) Includes options to purchase 6,666 shares of Common Stock granted under the
     Company's 1994 Incentive Stock Plan currently  exercisable or which will be
     exercisable within 60 days.
(11) Includes options to purchase 3,333 shares of Common Stock granted under the
     Company's 1994 Incentive Stock Plan currently  exercisable or which will be
     exercisable within 60 days.

                                     - 75 -

<PAGE>



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During 1997 the Company and its  subsidiaries  have had no  transactions in
which any director of the Company,  or any member of the immediate family of any
such director,  had a material direct or indirect interest  reportable under the
applicable rules of the SEC except as follows:

     William  Spier  served as a director  of the  Company  from July 1991 until
February 13, 1998. On February 23, 1993, Mr. Spier,  on behalf of himself and an
investor group (the "Spier Group")  executed a Stockholders'  Agreement with the
Company. The Stockholders' Agreement,  among other things, limited the manner of
disposition  of shares of Common Stock held by these  parties,  prohibited  them
from  soliciting  proxies in  opposition  to the Board of  Directors,  subjected
certain proposals by these persons of merger or similar  transactions to consent
by unaffiliated  directors and stockholders,  limited the right of these persons
to acquire  additional shares (other than pursuant to certain options granted by
Larry Lippon,  the Company's  former chief executive  officer,  or the Company),
granted these persons the right to require the Company to register  their shares
under the Securities Act of 1933,  provided for the  reimbursement of certain of
the expenses of these  persons  (estimated  to be  approximately  $85,000),  and
granted  these  persons the right to appoint one person in addition to Mr. Spier
to the Board of Directors.  In connection with this Agreement,  William P. Lyons
was  appointed to the Board of Directors.  Mr. Lyons  resigned from the Board of
Directors on July 30, 1997. In addition,  the Stockholders'  Agreement fixed the
size of the Board of Directors  at six members,  although the Board of Directors
(including  Mr.  Spier)  subsequently  increased  the size of the Board to seven
members  by a  unanimous  vote.  Pursuant  to the  terms  of  the  Stockholders'
Agreement,  that  agreement  was to terminate  when the  aggregate  ownership of
voting stock of the Company  beneficially  owned by the Spier Group is less than
5% of all then outstanding shares.

     On December 3, 1997,  the Company  entered into an agreement with Mr. Spier
with  respect  to the  exercise  of his  demand  registration  rights  under the
Stockholder's  Agreement,  which provided that the  registration  include in the
offering  all shares of  Company's  Common Stock held by Mr. Spier and the Spier
Group.  It further  provided  that Mr. Spier resign as a director of the Company
effective  immediately  when the  aggregate  ownership  of  voting  stock of the
Company  beneficially  owned by the Spier Group  became less than 5% of all then
outstanding  shares,  and  provided  for a mutual  release  of  claims,  certain
restrictions on Mr. Spier's ability to acquire company securities in the future,
and the  reimbursement of expenses to Mr. Spier in connection with the Company's
regulatory  disclosure   requirements   consistent  with  Company  policies  and
procedures.  The  shares  were  marketed  and sold  principally  to a variety of
institutional  investors. The sale of all the Spier Group stock was completed on
February 10, 1998.

     Except as  otherwise  disclosed  herein,  during  1997 the  Company and its
subsidiaries  have not had  transactions  in which any executive  officer of the
Company,  or any member of the immediate  family of any such executive  officer,
had a material direct or indirect interest reportable under the applicable rules
of the SEC.

     For certain additional  information  regarding  transactions  involving the
Company and its officers and directors,  see "Item 10. Executive  Compensation -
Compensation Committee Interlocks and Insider Participation."

                                     - 76 -

<PAGE>


                                     PART IV

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

     (a) 1.  Financial  Statements  (See page 42 for the  Index to  consolidated
financial statements)

             Independent Auditors' Report
             Consolidated Financial Statements:
             Statements of Operations for the years
                 ended December 31, 1997, 1996 and 1995
             Balance  Sheets as of December 31, 1997 and 1996
             Statements of Stockholders' Equity for the years
                 ended December 31, 1997, 1996 and 1995
             Statements of Cash Flows for the years
                 ended December 31, 1997, 1996 and 1995
             Notes to Consolidated Financial Statements

     (a)  2. Financial Statement Schedules

     All schedules are omitted because the information prescribed thereon is not
applicable nor required or is furnished in the consolidated financial statements
or notes thereto.

     (a)  3. Listing of Exhibits

              3.1    Certificate of  Incorporation  of Company  (incorporated by
                     reference  to  Exhibit  3.1 to the  Company's  Registration
                     Statement on Form S-18  (Registration  No.  33-41000)  (the
                     1991 Registration Statement)

              3.2    Bylaws of the Company (incorporated by reference to Exhibit
                     3.2 to the 1991 Registration Statement)

              4.1    Specimen  form of the  Company's  Common Stock  Certificate
                     (incorporated  by  reference  to  Exhibit  4.1 to the  1991
                     Registration Statement)

              4.2    Certificate  of Designation  for Series A Junior  Preferred
                     Stock (incorporated by reference to Exhibit 4.2 to the 1993
                     Form 10-K)

              10.1   Video  Lottery  Technologies,  Inc.  1991 Stock Option Plan
                     (incorporated  by  reference  to  Exhibit  10.1 to the 1991
                     Registration Statement)

              *10.2  Video  Lottery  Technologies,   Inc.  1991  Employee  Stock
                     Purchase Plan (amended June 18, 1997)

              *10.3  1992 Video Lottery Technologies, Inc. Stock Incentive Plan

              *10.4  1993 Video  Lottery  Technologies,  Inc.  1993 Stock Option
                     Plan for Non-Employee Directors

              *10.5  1994  Powerhouse  Technologies,  Inc. Stock  Incentive Plan
                     (amended June 18, 1997 and February 13, 1998)

              10.6   Form of  Indemnification  Agreement between the Company and
                     its  directors and officers  (incorporated  by reference to
                     Exhibit 10.3 to the 1991 Registration Statement)

              10.7   Credit  Agreement  dated  February  16,  1995,  made by the
                     Company to First Bank National Association (incorporated by
                     reference to Exhibit 10.9 to the 1994 Form 10-K.)

              10.8   Revolving  Note,  dated  February  16,  1995,  made  by the
                     Company to First Bank National Association (incorporated by
                     reference to Exhibit 10.10 to the 1994 Form 10-K.)

              10.9   Term Notes A and B, dated  February 16,  1995,  made by the
                     Company to First Bank National Association (incorporated by
                     reference to Exhibit 10.11 to the 1994 Form 10-K.)

                                     - 77 -

<PAGE>


              10.10  Pledge  Agreement,  dated  February 16,  1995,  made by the
                     Company to First Bank National Association (incorporated by
                     reference to Exhibit 10.12 to the 1994 Form 10-K.)

              10.11  Amendment No. 1 to First Bank National  Association  Credit
                     Agreement and Waiver  (incorporated by reference to Exhibit
                     10.13 to the 1995 Form 10-K.)

              10.12  Amendment  No. 1 to Borrower  Pledge  Agreement to Borrower
                     Pledge Agreement to First Bank National  Association Credit
                     Agreement  (incorporated  by reference to Exhibit  10.14 to
                     the 1995 Form 10-K.)

              10.13  Amendment No. 2 to First Bank National  Association  Credit
                     Agreement  (incorporated  by reference to Exhibit  10.15 to
                     the 1995 Form 10-K.)

              10.14  Settlement Agreement - between Video Lottery  Technologies,
                     Inc.,  and the  Shelhamers  (incorporated  by  reference to
                     Exhibit 10.16 to the 1995 Form 10-K.)

              10.15  Master   Settlement   Agreement  -  between  Video  Lottery
                     Technologies,  Inc. and Electronic Data Systems Corporation
                     (incorporated  by reference  to Form 8-K dated  January 30,
                     1997.)

              10.16  Amendment No. 3 to First Bank National  Association  Credit
                     Agreement  (incorporated  by reference to Exhibit  10.18 to
                     the 1996 Form 10-K)

              10.17  Waiver  and   Amendment   No.  4  to  First  Bank  National
                     Association Credit Agreement  (incorporated by reference to
                     Exhibit 10.19 to the 1996 Form 10-K)

              10.18  Consent,  Waiver and Amendment No. 5 to First Bank National
                     Association Credit Agreement  (incorporated by reference to
                     Exhibit 10.20 to the 1996 Form 10-K)

              *10.19 Letter  Agreement and Waiver  extending First Bank National
                     Association Credit Agreement

              *10.20 International  Equity  Partners  Related  Party  Consulting
                     Agreement dated September 18, 1997

              10.21  Richard  R.  Burt  Related   Party   Consulting   Agreement
                     (incorporated  by  reference  to Exhibit  10.22 to the 1996
                     Form 10-K)

              *10.22 Patricia W. Becker Related Party Consulting Agreement dated
                     September 18, 1997

              *10.23 Richard M. Haddrill  Employment  Agreement dated January 1,
                     1998

              10.24  Dennis V. Gallagher Employment  Agreement  (incorporated by
                     reference to Exhibit 10.25 to the 1996 Form 10-K)

              10.25  Michael  L.  Eide  Employment  Agreement  (incorporated  by
                     reference to Exhibit 10.26 to the 1996 Form 10-K)

              10.26  Susan J. Carstensen  Employment Agreement  (incorporated by
                     reference to Exhibit 10.28 to the 1996 Form 10-K)

              *22.1  List of Subsidiaries

              *24.1  Independent Auditors' Consent

              *EX-27 Financial Data Schedule (For SEC Use Only)

     (b) Reports on Form 8-K filed during the last quarter of the period covered
by this report:

     Form 8-K dated  December 22, 1997,  reporting  the change of the  Company's
name to Powerhouse Technologies, Inc. effective January 1, 1998.

     (c) Exhibits  required by Item 601 of  Regulation  S-K: The exhibits  filed
herewith and  incorporated  by reference  herein are set forth in Item  14(a)(3)
above.

     (d) See page 42 for the  Index to  consolidated  financial  statements  and
financial statement schedules.

*Filed herewith

                                     - 78 -

<PAGE>







                                   SIGNATURES

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

                                         POWERHOUSE TECHNOLOGIES, INC.



Date:  March 30, 1998                    /s/ RICHARD M. HADDRILL
                                         ------------------------------------
                                         Richard M. Haddrill
                                         President and Chief Executive Officer




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

Signature                 Title                                  Date
---------                 -----                                  ----


/s/ SUSAN J. CARSTENSEN   Chief Financial Officer (Principal     March 30, 1998
-----------------------      Accounting Officer)
    Susan J. Carstensen


/s/ RICHARD R. BURT       Chairman and Director                  March 23, 1998
-----------------------
    Richard R. Burt


/s/ JAMES J. DAVEY        Vice Chairman and Director             March 30, 1998
-----------------------
    James J. Davey


/s/ RICHARD M. HADDRILL   President, Chief Executive Officer     March 30, 1998
-----------------------      Treasurer and Director
    Richard M. Haddrill


/s/ PATRICIA W. BECKER    Director                               March 23, 1998
-----------------------
    Patricia W. Becker


/s/ JOHN R. HARDESTY      Director                               March 23, 1998
-----------------------
    John R. Hardesty

                                     - 79 -

