SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997          Commission File No. 0-21754

                               SODAK GAMING, INC.
             (Exact name of registrant as specified in its charter)

                                  SOUTH DAKOTA
         (State or other jurisdiction of Incorporation or organization)


                                   46-0407053
                      (I.R.S. Employer Identification No.)


                          5301 S. HIGHWAY 16                          57701
                       RAPID CITY, SOUTH DAKOTA                    (Zip Code)
                    (Address of principal executive offices)

Registrant's telephone number, including area code:  (605) 341-5400
Securities registered pursuant to Section 12(b) of the Act:  NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                          Common Stock $0.001 par value
                                (Title of class)

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 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 the registrant's definitive proxy 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 20, 1998 was approximately $77,796,411 (based on the last
sale price of such stock as reported on the Nasdaq National Market).

The number of shares outstanding of the registrant's common stock, as of March
20, 1998, was: Common Stock, $0.001 par value: 22,758,408 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information from the Registrant's definitive Proxy
Statements to be filed with the Commission within 120 days after the close of
the Registrant's fiscal year.


<PAGE>


                                TABLE OF CONTENTS
<TABLE>
<CAPTION>


                    PART I

<S>             <C>                                                                  <C>
Item 1.         Business                                                               3

Item 2.         Properties                                                            26

Item 3.         Legal Proceedings                                                     26

Item 4.         Submission of Matters to a Vote of Security Holders                   27


                    PART II

Item 5.         Market for Registrant's Common Stock and Related Stockholder Matters  27

Item 6.         Selected Financial Data                                               28

Item 7.         Management's Discussion and Analysis of Financial Condition
                    and Results of Operations                                         29

Item 8.         Consolidated Financial Statements                                     40

Item 9.         Changes In and Disagreements With Accountants on Accounting
                    and Financial Disclosures                                         61



                   PART III

Item 10.        Directors and Executive Officers of the Registrant                    61

Item 11.        Executive Compensation                                                61

Item 12.        Security Ownership of Certain Beneficial Owners and Management        61

Item 13.        Certain Relationships and Related Transactions                        61


                    PART IV
Item 14.        Exhibits, Consolidated Financial Statement Schedule
                    and Reports on Form 8-K                                           62

                Signatures                                                            65
</TABLE>

<PAGE>


                                     PART I

ITEM 1. BUSINESS

INTRODUCTION

      Sodak Gaming, Inc. (the Company or Sodak) is a leading distributor and
financier of gaming equipment and a broad range of gaming-related products and
services and a provider of wide area progressive systems, primarily to Native
American casinos. In addition, the Company operates: 1) gaming halls and route
operations in Peru beginning in May 1995; 2) a casino entertainment facility in
Quito, Ecuador beginning in March 1996; 3) a gaming hall in Rio de Janeiro,
Brazil beginning in June 1996, which was converted to a route operation in
December 1997; and 4) the MISS MARQUETTE riverboat casino entertainment facility
(MISS MARQUETTE) in Marquette, Iowa beginning in July 1996.

      Product sales are primarily derived from the sale and distribution of
gaming equipment manufactured by International Game Technology (IGT) under an
exclusive distributorship agreement. The distributorship agreement has recently
been extended to May 2001, at which time it continues for two-year renewal
periods unless canceled by either party. The agreement grants the Company the
exclusive right to distribute IGT manufactured or assembled gaming machines to
casinos located on Native American lands in the United States (except Nevada,
New Jersey and Hawaii) and to non-Native American purchasers in South Dakota,
North Dakota and Wyoming. The agreement restricts the Company from selling
competing products and is subject to review and renewal upon significant change
in control of the Company (see "Relationship with IGT" on page 7).

      The Company also has an exclusive agreement with IGT to provide and market
wide area progressive systems to Native American casinos. This agreement
continues as long as a progressive system is operating. The Company also has an
exclusive agreement with IGT to provide and market a wide area progressive
system to casinos in Deadwood, South Dakota.

      The Company has distributorship arrangements with several other
manufacturers and suppliers of gaming-related equipment and products.

      The Company provides financing for its product sales and participates in
the development, equipping and financing of gaming ventures, such as the
Harrah's Phoenix Ak-Chin casino in Arizona, from which the Company participates
in Harrah's management fee.

      In October 1997, the Company announced it has agreed to form a venture
with Hollywood Casino Corporation (Hollywood) and New Orleans Paddlewheels (NOP)
to develop a hotel, dining, retail and riverboat casino entertainment complex on
the Red River in downtown Shreveport, Louisiana.

<PAGE>

BUSINESS STRATEGY

      The Company's business strategy is to maintain its dominant share of
gaming equipment sales in the Native American market, to expand its wide area
progressive systems, to maintain and increase its gaming operations in expanding
domestic and international gaming jurisdictions, and to increase and strengthen
its strategic alliances with other companies in the gaming industry.

      The Company's business lines are: (i) product sales; (ii) wide area
progressive systems; (iii) gaming operations, which includes a riverboat casino,
a land-based casino, and gaming hall and route operations; and (iv) financing.
Management believes future growth may come from: 1) maintaining its dominant
market share in gaming machine sales and expanding its product lines; 2) placing
additional wide area progressive systems and additional machines on the systems
in Native American casinos; and 3) continuing its pursuit of gaming operations.
However, there can be no assurance that such growth may occur in the future, due
primarily to gaming's dependence on its regulatory status and public acceptance.


PRODUCT SALES STRATEGY

      The Company believes it will continue to maintain its dominant market
share in the distribution of gaming machines to the Native American gaming
market. In 1997, the Company maintained its extensive product line of
gaming-related and nongaming-related products and supplies. The Company's
strategy is to be a "single source supplier" that provides customers with the
gaming industry's most comprehensive selection of products, systems and services
used by casino entertainment complexes, including their food and beverage
services, lounges, entertainment venues, gift shops and promotional functions,
and cage and count room functions.

      The Company believes that it is positioned to implement its product sales
strategy as a result of its excellent reputation in the Native American gaming
market coupled with its extensive product lines, marketing expertise and
customer assistance and support after the sale. These factors have enabled Sodak
to develop strong alliances and distributorship agreements with leading
manufacturers in the industry, including IGT, Mikohn Gaming, Brandt, and other
vendors.

      Sodak believes it holds a competitive advantage in the Native American
gaming market due to several reasons, including effective business relationships
with Native American tribes, strong business alliances in the gaming industry,
its comprehensive offering of products, customer technical support and service,
its knowledge and understanding of customer needs, and the offering of creative
customer financing. Sodak continues to comply with licensing requirements with
states and with resident Native American tribes that have licensing
requirements. This enables Sodak to be in a position to distribute gaming
machines and related products to Native American tribes as soon as possible
following approval of any new tribal-state compacts.

      The Company continues to provide funds and legal support to assist Native
American tribes in negotiating tribal-state compacts and obtaining regulatory
approvals to commence casino operations. In order to develop and enhance its
relationships with Native American tribes, Sodak will continue to share with
Native American tribes its information and knowledge of the Native American
gaming industry. The legal, compliance and government affairs staff continues to
provide objective information and support to regulatory entities and legislative
bodies.

<PAGE>

WIDE AREA PROGRESSIVE SYSTEMS STRATEGY

      The Company's wide area progressive system strategy is to place additional
wide area progressive systems and additional machines on such systems in
jurisdictions permitting the operation of wide area progressive systems. In
August 1994, the Company implemented the first federally approved interstate
wide area progressive systems for Native American casinos as the exclusive
licensing agent for IGT's proprietary systems. The Company believes that as
Native American gaming continues to expand and as the gaming public desires
higher jackpot payouts, the demand for wide area progressive systems could
increase. Consistent with this strategy, the Company introduced new systems in
1997: WHEEL OF FORTUNE (one interstate system and one intrastate system for
casinos in Arizona), WHEEL OF GOLD, HIGH ROLLERS and TOTEM POLE. In January
1998, the JEOPARDY system was added.


GAMING OPERATIONS STRATEGY

      The Company's gaming operations strategy is to pursue additional gaming
operations as opportunities emerge, to implement measures improving operating
performance and to execute cost-saving policies and marketing strategies. By
augmenting revenue sources and adding recurring revenue streams to its revenue
base, the Company believes it will strengthen its financial performance.


DOMESTIC GAMING OPERATIONS

      The Company's domestic gaming operations strategy is to improve operating
performance of the MISS MARQUETTE after replacing top management in the first
quarter of 1998 and implementing cost-saving policies and new marketing
strategies; and to seek additional opportunities to operate and/or participate
in casinos and other gaming entertainment facilities. The Company believes it is
well-positioned to do so because of its strategic alliances with other gaming
companies and because of its knowledge of gaming products and systems, its
understanding of regulatory and governmental processes, and its marketing and
gaming development expertise.

      In October 1997 the Company announced it had entered into an agreement
with Hollywood and NOP to develop a riverboat casino and land-based facilities
in Shreveport, Louisiana. The project plan submitted to the Louisiana Gaming
Control Board (LGCB) proposes land-based facilities encompassing a 65,000 square
foot Hollywood theme pavilion, three restaurants, a casino studio store and a
300 room hotel with one hundred suites. The proposed riverboat casino is to be a
state of the art vessel with 30,000 square feet of gaming space accommodating
1,800 gaming positions. Finally, the proposed project includes 1,500 parking
spots with 25,000 square feet of retail and entertainment space on the ground
level of the parking structure. The LGCB approved the proposed project berth at
Shreveport subject to and conditioned on the LGCB approval of all transfers of
ownership, suitability of the parties, and acquisition of all permits and
approvals necessary to complete the project.

      The gaming license for the proposed project is currently held by a
partnership entity owned equally by Hilton Hotels (Hilton) and NOP. The license
was originally designated for a site in New Orleans. Hilton, NOP and the City of
New Orleans are negotiating an exit agreement to move the license to Shreveport.
Upon receipt of LGCB approval, NOP and Hilton would transfer ownership interest
in the partnership entity to Sodak and Hollywood so that NOP, Sodak and
Hollywood would each own one-third of the partnership entity. Although the
project received preliminary approval by the LGCB at its November 18, 1997
meeting, there can be no assurance that final regulatory approval will be
obtained.



<PAGE>


INTERNATIONAL GAMING OPERATIONS

      The Company's international gaming strategy is to expand its gaming hall
and route operations and to implement cost-control policies to improve operating
performance in Latin America. The Company is involved in emerging gaming markets
in Latin America, where it develops and operates gaming halls and routes and a
casino. The Company also has reduced staff to improve operating performance in
Latin America. Sodak believes that its involvement in international markets is
supported by its knowledge of gaming products and systems, its understanding of
regulatory and governmental processes, and its marketing and gaming development
expertise.

      In August 1996 the Company announced that it entered into an agreement
with Confederacao Brasileira de Futebol (CBF) to own and operate linked
progressive video gaming systems in Brazil. The Company subsequently entered
into a joint venture agreement with IGT and the Dreamport division of GTECH
Holdings Corporation to proceed with the development and operations of this
system. However, in March 1998, the parties terminated the joint venture due to
ongoing uncertainties pertaining to the regulatory status of the proposed gaming
operation (see "Gaming Operations," page 20). The Company, while remaining
prepared to proceed with development of the Brazilian video gaming project under
the terms of its agreement with the CBF, believes that the ability to obtain
requisite legal and regulatory approvals is questionable. However, the Company
believes that opportunities to engage in Brazilian gaming operations still exist
under other laws and regulations permitting gaming. Furthermore, the Brazilian
federal legislature is considering legislation that would expand the scope of
legal gaming in that country.

      The Brazilian federal legislature is considering the legalization of
casino gaming. In 1996, the House of Deputies passed legislation that would
authorize casino gaming and the Senate currently is proceeding with its
consideration of similar legislation. Such legislation, if approved by the
Senate, would then require presidential signature to become law.


FINANCING STRATEGY

      The Company provides equipment financing to serve customers and to
facilitate the sales process. The Company is creative with financing
arrangements, allowing customers' repayment schedules to coincide with cash
flows of their casino operations. On a case-by-case basis, the Company may
provide interim financing for the planning, development and construction phases
of casino projects, thereby expediting these projects.


PARTICIPATIONS INVOLVING NATIVE AMERICAN CASINOS

      The Company plans to continue to finance the development, construction and
equipping of Native American casinos. Such financing could be in conjunction
with management contracts entered into between the casino management company and
the tribes owning such casinos or with the tribes directly. The Company expects
that its involvement could be in the form of loans, or the guaranty of third
party loans to tribes or their management companies. For its involvement, the
Company may receive an inducement payment, financing and guaranty fees, or a
participation in the payments made by such tribes under the casino management
arrangements. The Company currently participates in a management fee of Harrah's
Entertainment, Inc. (Harrah's) in conjunction with Harrah's Phoenix Ak-Chin
casino and also is currently providing financing for other casinos. The Company
anticipates the pursuit of similar arrangements with both tribes and management
companies.

<PAGE>

ALLIANCES WITH INDUSTRY LEADERS

      The Company has established key alliances with several gaming industry
companies as part of its strategy to augment its recurring revenue sources.
Among these alliances are IGT, Harrah's, Hollywood and NOP. In 1997, the Company
also entered into a joint venture agreement with Dreamport, a subsidiary of
GTECH Holdings Corporation; however, this agreement was terminated in March 1998
(see "Gaming Operations," page 20). The Company will continue to seek additional
strategic alliances as opportunities emerge.


RELATIONSHIP WITH IGT

      IGT is one of the world's largest manufacturers of computerized casino
gaming products and proprietary gaming systems. The Company is IGT's largest
customer and enjoys a mutually beneficial contractual and business relationship
with IGT. Approximately 67% of the Company's product sales revenue in 1997 were
derived from the sale of gaming machines manufactured by IGT under its exclusive
distributorship agreement with IGT. Pursuant to this agreement, the Company has
agreed not to directly or indirectly solicit orders for, sell, lease or promote
the sale of any products that compete with or are similar to products offered by
IGT in territories covered under the agreement.

      Sodak's original distributorship agreement with IGT, which was entered
into on August 10, 1989, provided the Company with the exclusive right to
distribute IGT gaming machines in Deadwood, South Dakota for a one-year period.
The distributorship agreement with IGT has been modified several times. The
following is a brief description of the current distributorship agreement with
IGT, effective March 1998.

      Sodak holds the sole and exclusive right to distribute IGT manufactured or
assembled gaming devices, slot machines, and IGT-distributed gaming machines
designed or manufactured by others (collectively "products"), in North Dakota,
South Dakota and Wyoming and for Native American reservations in the United
States subject to the following exception: Sodak may not distribute new IGT
products to anyone in Nevada, New Jersey and Hawaii. The new distributorship
agreement with IGT has a three-year term through May 31, 2001 and continues
thereafter for consecutive two-year renewals unless canceled by either party.
Under the recently modified agreement, the Company will no longer be IGT's
exclusive representative in Mexico, Canadian First Nations jurisdictions or any
other international jurisdiction.

      Pursuant to its agreement with IGT, the Company purchases products from
IGT at fixed discounts from the then current retail list price as established by
IGT from time to time, plus freight and delivery charges. Payment by Sodak for
IGT machines must be made in full within 90 days for direct shipments to Sodak
customers and 135 days for Sodak stock inventories. Payments for products
related to wide area progressive systems must be paid in full within 180 days.
Payments made within 20 days of delivery qualify for an additional discount.

      IGT may terminate its distributorship agreement with the Company if any
one of the following events occurs: (i) if ownership in or control over the
Company is held by or passed to any single person or business entity, which
ownership or control in the reasonable belief of IGT materially jeopardizes any
IGT license or approval or creates a material conflict of interest in such
person or business entity with IGT and its products; (ii) the Company has failed
to use its best efforts to attain a reasonable level of sales performance or
service of IGT products; (iii) the Company has directly or indirectly offered
any non-IGT products which directly compete with IGT products to the extent such
competitive activity is

<PAGE>

prohibited by the distributorship agreement; or (iv) the Company has failed to
comply with IGT policies. IGT may only terminate the distributorship agreement
after giving the Company 90 days written notice of the event of termination. The
Company has 90 days from receipt of IGT's written notice to correct the activity
which IGT claims gives rise to termination of the distribution agreement

      IGT may also terminate the distributorship agreement if: (i) the Company
is licensed in Nevada as a gaming machine manufacturer or distributor of gaming
equipment unless the Company and IGT otherwise agree; or (ii) the Company fails
to operate a majority of IGT products at its gaming operations, unless: x) IGT
will not sell such equipment at a price equal to or lower than to other retail
customers in such jurisdiction, or y) the Company's operation is conducted
pursuant to paragraph 1.B. of the distributorship agreement.

      The Company or IGT may terminate if: (i) the other party has failed to
maintain its image, ethics, reputation or customer relations in accordance with
industry standards; and (ii) the Company has failed to observe all applicable
laws or obtain necessary licenses or approvals from each gaming regulatory
authority in each applicable jurisdiction in which it distribute. The
distributorship agreement may only be terminated if, within ninety days receipt
of written notice, the offending party fails to correct the activity which the
non-offending party claims gives rise to the right to terminate.

      The Company also has an IGT Software Distribution and License Agreement,
under which the Company is licensed to copy and sell software developed by IGT
for use in any IGT 80960 microprocessor platform machine, including "Vision
Series," "Game King" and "IGame." The software controls both the base game and
the game-within-a-game (also called bonus game) features of the gaming
equipment. It can be upgraded as enhancements and new games are introduced. The
software agreement presently is scheduled for renewal in May 1999 but is
expected to be revised to coincide with the May 2001 renewal date of the
exclusive distribution agreement.

      On September 30, 1993, the Company entered into an exclusive distributor
agreement with IGT to provide and market IGT's proprietary wide area progressive
systems to Native American casinos. This agreement continues as long as any of
the progressive systems are operating. The Company also provides and markets an
IGT proprietary progressive system to casinos in Deadwood, South Dakota.


RELATIONSHIP WITH HARRAH'S

      Harrah's, one of the leading casino entertainment companies in the United
States, has a 14% equity interest in Sodak. On February 5, 1998, Harrah's and
the Company executed an Indian Gaming Development Agreement, pursuant to which
Sodak has agreed to use its best efforts to identify Native American gaming
management contract opportunities in the United States and Canada and inform
Harrah's of such opportunities. If Harrah's is selected by the Native American
tribe to manage a Native American gaming project presented by the Company, the
Company will be entitled to a fee equal to a portion of any casino management
fees earned by Harrah's under the applicable management contract, regardless of
whether or not the Company participates in the financing of such project. The
agreement specifies that Harrah's will assist the Company with the sale and
distribution of products in Native American casinos as long as no conflicts of
fiduciary obligations exist. The agreement also validates the Company's
continued participation in Harrah's management fee in connection with the
Harrah's Phoenix Ak-Chin casino entertainment complex in Arizona.

<PAGE>

RELATIONSHIP WITH HOLLYWOOD CASINO CORPORATION AND NEW ORLEANS PADDLEWHEELS,
INC.

      Hollywood, a publicly traded company based in Dallas, Texas, owns and
operates movie memorabilia-themed gaming entertainment properties and hotels in
Tunica, Mississippi, and Aurora, Illinois. NOP, a privately held company, is a
tour and excursion vessel operator in Louisiana.

      In October 1997, the Company announced it had entered into an agreement
with Hollywood and NOP to develop a riverboat casino and land-based facilities
in Shreveport, Louisiana. The project plan submitted to the LGCB proposes
land-based facilities encompassing a 65,000 square foot Hollywood theme
pavilion, three restaurants, a casino studio store and a 300 room hotel with one
hundred suites. The proposed riverboat casino is to be a state of the art vessel
with 30,000 square feet of gaming space accommodating 1,800 gaming positions.
Finally, the proposed project would include 1,500 parking spots with 25,000
square feet of retail and entertainment space on the ground level of the parking
structure. The LGCB approved the proposed project berth at Shreveport subject to
and conditioned on the LGCB approval of all transfers of ownership, suitability
of the parties, and acquisition of all permits and approvals necessary to
complete the project.

      The gaming license for the proposed project is currently held by a
partnership entity owned equally by Hilton and NOP. The license was originally
designated for a site in New Orleans. Hilton, NOP and the City of New Orleans
are negotiating an exit agreement to move the license to Shreveport. Upon
receipt of LGCB approval, NOP and Hilton would transfer ownership interest in
the partnership entity to Sodak and Hollywood so that NOP, Sodak and Hollywood
would each own one-third of the partnership entity. Although the project
received preliminary approval by the LGCB at its November 18, 1997 meeting,
there can be no assurance that final regulatory approval will be obtained.


GAMING MARKETS

GENERAL

      The gaming entertainment industry is growing both in the United States and
abroad. Native American casinos are a major segment of the industry. According
to estimates in a study conducted by the General Accounting Office of the U.S.
Federal Government, Native American casinos accounted for approximately $4.5
billion in casino revenue, or approximately one-fifth of total U.S. casino
revenue in 1996. In 1997, 18 states permitted Indian casinos with electronic
gaming machines. The Company provides gaming equipment in 16 of those 18 states.
In March 1998, California became the 19th state to enter into a compact with a
Native American community. The number of Class III compacts increased to 171 as
of September 1997, indicating that the potential for growth in the Indian gaming
segment continues.

      The riverboat casino market grew in 1997, as the number of operations
increased to more than 80 (including dockside operations) in six states. Other
popular forms of wagering include lotteries, bingo, parimutuels, sports
bookmaking and card rooms. The gaming sector continues to grow internationally
as well, with many countries in Eastern Europe, Asia, the Pacific Rim, Africa
and Central and Latin America emerging as potentially large gaming markets.

      The Company has positioned itself as a major provider of products and
systems to the Native American gaming market in the United States and intends to
seek, on its own or through joint venture arrangements, opportunities to engage
or participate in gaming operations domestically and in Latin America.

<PAGE>

NATIVE AMERICAN GAMING

      Prior to 1981, casino-style gaming in the United States, such as slot
machines, blackjack, poker, roulette and craps, was the realm of the traditional
gaming markets of Nevada and Atlantic City, New Jersey. In 1981, however, the
Seminole Tribe of Florida established its right to conduct high-stakes bingo
games on its reservation. Bingo is currently conducted by a significant number
of Native American tribes throughout the United States. As bingo games on tribal
property expanded, tribes also began offering other gaming activities, such as
draw poker and other card games. Such expanded activities led to litigation
regarding the permitted scope of Native American gaming. In 1987, the Supreme
Court ruled that if a state regulates rather than prohibits any form of gaming,
Native American tribes have the right to conduct gaming on Native American land,
free of state restrictions. In response to this Supreme Court decision, the
United States Congress enacted the Indian Gaming Regulatory Act of 1988 (IGRA),
which established basic regulations and oversight responsibilities for Native
American gaming.

      IGRA was adopted to promote tribal economic development and
self-sufficiency, while attempting to balance these goals against legitimate
state and federal regulatory concerns. Due to their generally remote locations,
Native American tribes have had few opportunities for economic development and
high unemployment has been a significant problem on Native American
reservations. Native American casinos have provided tribal members with jobs and
revenue for economic development and infrastructure, such as schools, health
care facilities and water treatment and sewage systems.

      Pursuant to IGRA, Class III gaming, which includes slot machines,
blackjack, roulette, craps and all other forms of gaming not defined as Class I
or Class II, may be conducted pursuant to agreements between Native American
tribes and states. These agreements, called tribal-state compacts, must be
approved by the Secretary of the Department of Interior (the Secretary). The
tribal-state compact for a Native American casino typically describes the types
of casino games to be offered by such casino and the terms and conditions under
which each casino game will be operated. Native American tribes must negotiate
compacts with their host states before Class III gaming is permitted to be
conducted.

      Prior to the enactment of IGRA in 1988, Native American casinos were not
required to operate under Secretary approved tribal-state compacts. At the end
of 1988, no tribal-state compacts had been approved by the Secretary and no
Native American casinos were operating under approved tribal-state compacts. The
number of approved tribal-state compacts had risen to 171 as of September 1997.
As of the same date, there were a significant number of tribal-state compacts
under negotiation or renegotiation and in many cases subject to litigation.
There are currently more than 300 federally recognized Native American tribes in
31 of the contiguous United States, as well as 155 Native American groups
seeking federal recognition as Indian tribes as of September 1997.

      During the past several years, many significant cases involving Native
American gaming were decided by both federal and state courts. The courts
addressed issues of state and tribal sovereign immunity, the scope of Class III
gaming, the authority of governors to enter into binding gaming compacts, and
the authority of the Secretary of the Interior to take land into trust for
Native Americans. There have been a number of recent court decisions, many of
which are under appeal, regarding litigation between certain Native American
tribes and the States of Kansas, Maine, Mississippi, New Mexico, Oklahoma, Rhode
Island and Texas, which potentially could have an impact on the state's
willingness to negotiate compacts with tribes.

<PAGE>

      On March 27, 1996, the U.S. Supreme Court held in SEMINOLE TRIBE OF
FLORIDA V. FLORIDA ET AL. that states and governors cannot be compelled to
negotiate with tribes. The Supreme Court determined that Congress did not have
the power to abrogate the state's sovereign immunity to suits by tribes, in
essence declaring unconstitutional IGRA's provision that states can be sued for
failure to negotiate in good faith. As a result, tribes currently have no legal
right to compel a state to negotiate a tribal-state compact. IGRA provides that
the Secretary of the Interior can prescribe regulations governing tribal gaming
on tribal lands in the event tribes and states fail to negotiate a compact. The
National Governors' Association has asserted that the Secretary has no authority
to do so.

      In January 1998, the Secretary published proposed regulations and
requested public comment. The proposed regulations provide a process by which
the Secretary may prescribe regulations under which a Tribe may operate Class
III gaming when an arbitrator or court has determined that a state has failed to
negotiate a compact in good faith. Several legislative measures have been
introduced in the Congress that would block such regulations. In addition, the
Secretary presently is prohibited by law to take any definitive action before
September 30, 1998.

      The authority of state governors to bind states to tribal gaming compacts
has been challenged in several state courts. Some courts have found that
governors have such authority while other courts have found such authority
lacking. In New Mexico, the State Supreme Court held that the governor lacked
the authority to enter into gaming compacts without the authorization or
approval of the state legislature. On March 21, 1997, the New Mexico legislature
passed legislation authorizing the governor to bind the state to tribal gaming
compacts under certain conditions. Similarly, the Rhode Island Supreme Court
held that the governor lacked authority to bind the state to the 1994 compact he
had entered into with the Narragansett Tribe.

      In March 1998, the Pala Band of Mission Indians signed a compact with the
state of California. The compact provides for a total of 19,900 gaming devices
in the state, with no more than 975 machines per tribe, subject to renegotiation
in March 1999. These machines would have to meet technical specifications that
conform to California law, primarily that the machines be linked to a central
processing and monitoring system and that payouts would be "non-banked," that
is, payouts are self-funded rather than casino-funded (as is the case with
stand-alone slot machines) because they are derived from the amount of play on
such systems.

      A number of other matters continue to affect Native American gaming in
California, where several Native American casinos have been in operation outside
the regulatory structure of the Indian Gaming Regulatory Act. The four United
States Attorneys in California outlined their intended enforcement plans
regarding such operations following the completion of the compact. Spokespersons
for several Native American tribes had indicated in public statements that legal
action could be taken to challenge the terms of the compact signed with the Pala
Band. Furthermore, several tribes are pursuing a ballot initiative that would
allow an unlimited number of stand-alone, non-banked gaming machines. Such an
initiative would appear on the November 1998 ballot if the state's requirements
for a ballot initiative are met.

      The authority of the Secretary of the Department of Interior to take land
into trust for reservation and gaming purposes was challenged in 1995. On
November 7, 1995, the Court of Appeals for the Eighth Circuit (South Dakota)
ruled that the section of the Indian Reorganization Act which grants the
Secretary of Interior authority to take land into trust for Indians is
unconstitutional. On October 15, 1996, the United States Supreme Court reversed
both Appeals Court and district court rulings, and directed the

<PAGE>

Secretary of the Interior to reconsider the trust land acquisition under new
rules promulgated by the Secretary while the case was under appeal. Essentially
the Supreme Court's action constitutes an affirmation of the constitutionality
of the Indian Reorganization Act of 1934 when the Secretary promulgates and
follows appropriate rules.

      In the 105th Congress, several bills affecting Indian gaming have been
introduced. One would amend IGRA, placing a two year moratorium on all new Class
III operations and changing the composition of the National Indian Gaming
Commission. Another bill would renew a prohibition on the Secretary of the
Interior to issue final procedures on resolving tribal/state compact conflicts.
Another bill would prohibit "economically self sufficient" tribes from taking
land into trust outside current reservations. Another bill would eliminate
tribal sovereign immunity relating to tort claims, state taxation, law suits,
contract claims and other matters.

      There can be no assurance that tribal-state compacts will be modified or
negotiated in a manner that allows the Company to continue conducting business
in any states in the future. In addition, due to many continuing disputes
involving the compacting process, legislation is being proposed and hearings are
being conducted at the federal level in an attempt to address these issues.

      The National Gambling Impact Study Commission, authorized and funded by
the U.S. government, began conducting meetings in June 1997. This nine member
commission is to conduct a comprehensive legal and factual study of the social
and economic impacts of gambling in the United States on federal, state, local
and native American tribal governments and communities and social institutions
generally. A report on its findings is expected in 1999. Any recommendation by
the commission would then require congressional action and approval to become
effective.


WIDE AREA PROGRESSIVE SYSTEMS

      Wide area progressive systems link gaming machines in various casinos to a
central computer. The systems build large "progressive" jackpots which increase
with every wager made throughout the systems. Eventually a jackpot is won, and a
new jackpot is created and grows in size as play on the system continues. The
systems are designed to increase gaming machine play for participating casinos
by giving the players the opportunity to win jackpots substantially larger than
those available from gaming machines which are not linked to a progressive
system. In 1986, IGT introduced the first electronically-linked, inter-casino
gaming machine systems offered to the gaming industry. In 1994, the Company
implemented the first federally approved interstate wide area progressive
systems as the exclusive licensing agent for IGT's proprietary wide area
progressive systems for Native American casinos nationwide. IGT periodically
introduces new proprietary systems, which the Company would then offer to Native
American casinos.


CASINO GAMING

      Casino or "Las Vegas style" gaming generally involves the operation of
slot and video machines, blackjack, poker, craps, roulette, and other table
games and gaming devices, in a single facility. The exact types of games used
will vary from one market to the next, but casinos generally are distinguished
from other types of gaming operations by the fact that they offer both table
games and electronic gaming devices in one location. Casino gaming has been
allowed in Nevada since 1931 and in Atlantic City, New Jersey since 1978. Native
American casinos have been operating under the terms of the Indian Gaming and
Regulatory Act since 1989.

<PAGE>

RIVERBOAT GAMING

      Starting in 1991, several states have permitted the establishment of
gaming operations on riverboat facilities. Riverboat casinos currently are
operating in six states: Illinois, Indiana, Iowa, Louisiana, Mississippi and
Missouri. More than 80 riverboat casinos (including dockside facilities) were in
operation at the end of 1997 and additional major riverboat operations are
scheduled to open in 1998 and 1999.

      The Company owns and operates the MISS MARQUETTE riverboat casino on the
Mississippi River in Marquette, Iowa. In early 1998, the Iowa Legislature began
considering legislation which would place a five-year moritorium on new
riverboat licenses. Some versions of this legislation would restrict riverboats
to the Mississippi and Missouri Rivers, and would prohibit expansion of existing
gaming facilities for five years. As of March 18, 1998, the Legislature did not
take final action on any casino-related bill.

      The Company's ability to operate the MISS MARQUETTE is subject to a public
referendum of Clayton County, Iowa voters in November 2002. Clayton County
originally approved such a referendum with an approval of 60.5% of the voters in
May 1994 to allow the operation of the MISS MARQUETTE.


GAMING HALLS

      Gaming halls are operations that provide only slot machines and/or other
gaming machines or devices and do not offer the table games commonly found in
casinos. These operations are prevalent in many Latin American gaming markets.


VIDEO GAMING SYSTEMS

      Video gaming systems are operations that consist of video gaming devices
placed at multiple locations within a jurisdiction. These devices are linked to
a central computer that typically tracks activity at each machine and at each
location. The appeal of a system is the accountability and the operational
management advantage provided by the system information. A system of this type
may also provide the foundation for implementation of a wide area progressive
system (see page 12). These systems are most typically used in state video
lotteries.


ROUTE OPERATIONS

      Route operations consist of gaming machines placed at multiple locations
by a route operator who shares in the gaming revenue with the establishment
owner. The route operator typically is responsible for the operation, servicing
and money collection from the machines.

<PAGE>


BUSINESS LINES

      The Company derives revenue from the following lines of business: 1)
product sales; 2) wide area progressive systems; 3) gaming operations, which
includes domestic and international casinos, gaming halls and route operations;
and 4) financing income. For the year ended December 31, 1997, Sodak generated
revenue from the following sources:

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

                                                  REVENUE        PERCENT OF
      SODAK REVENUE BY SOURCE - 1997          ($ MILLION)    OF TOTAL REVENUE
      ----------------------------------------------------   -----------------

      Product sales
           Gaming machines(1)                    $   46.8                 34%
           Ancillary products                        14.9                 11%
                                              ------------   -----------------
               SUBTOTAL, PRODUCT SALES               61.7                 45%

      Wide area progressive systems                  13.3                 10%

      Gaming operations
           Domestic gaming operations                32.3                 23%
           International gaming operations           22.5                 16%
                                              ------------   -----------------
               SUBTOTAL, GAMING OPERATIONS           54.8                 39%

      Financing income                                7.8                  6%
                                              ------------   -----------------

      TOTAL REVENUE                             $   137.6                100%
                                              ============   =================

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

(1) includes used machine sales revenue of $5.3 million.


PRODUCT SALES

      The products presently distributed by the Company can be classified into
two categories: gaming machines and gaming-related and nongaming-related
products and supplies.


GAMING MACHINES

      The Company distributes IGT-manufactured electronic gaming machines and
video gaming machines, with variations of design, payment features and token,
coinage and currency acceptance. New game "personalities" and themes are
introduced periodically in order to satisfy customer demand and to compete with
product designs introduced by competitors. The variety of gaming machines,
styles and types allows a casino manager to create the optimum mix of games to
attract the gaming public.

      The gaming machines distributed by Sodak include a wide variety of game
types, innovative designs, self-diagnostic capabilities and various accounting
and data retention functions. Replacement occurs as a result of technological
advances, new designs, improvements and the development of new games. Both slot
machines and video gaming machines are manufactured in various sizes and colors
and are offered in several designs including upright, slant top and drop-in-bar.
IGT gaming machines may be special ordered, with design and configuration
customized to a customer's particular requirements. The variety of gaming
machine styles and types are designed to allow each subassembly to be
individually repaired or replaced. The Company believes the modular nature of
the machines minimizes down time in the event of a product failure and enables
the Company to replace the failed part without requiring the customer to remove
the machine from operation while the part is repaired.

<PAGE>

      In 1997, IGT introduced additional gaming machines to their product line,
including a new "Vision Series" which features full-motion video screens and
stereo sound systems. The video technology allows for a `game within a game'
(also called `bonus game') features that add another dimension of gaming
entertainment to the machine play. The screen may also be used to provide
information, promotional messages and forms of visual entertainment. IGT also
added more features and game choices to its "iGame" interactive multi-game video
gaming platform.


GAMING-RELATED AND NONGAMING-RELATED PRODUCTS AND SUPPLIES

      The Company provides a full range of gaming related products including
gaming machine stands, chairs and stools, custom-designed signs and other
products as a complement to its gaming machine sales. Other products include
lock assemblies, table games and supplies, coin handling equipment and supplies,
carts and banks, and other miscellaneous casino products. Such gaming related
products are purchased on a wholesale basis from various manufacturers and
distributors. The gaming related products are either shipped directly from such
suppliers to Sodak's customers or, particularly in the case of gaming machine
stands, are shipped from Sodak's inventory. The Company's customers have not
experienced any significant difficulty receiving timely delivery. Because of the
generic nature of these products, the Company does not have to rely on a single
supplier for any of these goods.

      The Company provides a full range of non-gaming related products and
supplies for a modern casino entertainment complex, including furnishings,
equipment and supplies for restaurants and lounges and for business and
administrative functions. These products and supplies are usually shipped
directly from such suppliers to Sodak's customers, but in some instances are
shipped from Sodak's inventory. The Company's customers have not experienced any
significant difficulty receiving timely delivery. Because of the generic nature
of many of these products and supplies, the Company does not have to rely on a
single supplier for any of these goods.


PRODUCT SALES, DISTRIBUTION, MARKETING AND SUPPORT

      The Company's sales force consists of six salespersons, each with
responsibility for a separate geographic region, and a vice president of sales
to oversee its salespersons. The salespersons and vice president of sales are
primarily compensated on a commission basis. Salespersons are based in South
Dakota, Arizona, Minnesota and Wisconsin. The warehouse facility for gaming
machines and spare parts inventories is located in Rapid City, South Dakota.

      The Company's distribution system responds to customer orders for gaming
machines either out of existing inventory or through purchase orders placed with
IGT. Although the gaming machines may be shipped directly to the customer from
IGT's manufacturing facilities in Reno, Nevada, the Company maintains an
inventory of gaming machines generally ranging from 1,500 to 3,000 machines to
facilitate its customers' short-term demands. Customer demand can be
accommodated in as little as two weeks due to the Company's inventory and
responsive custom assembly capability, compared to a typical delivery time of 12
to 14 weeks from a manufacturer. By maintaining a comprehensive inventory, the
Company has not experienced significant backlogs nor does it currently have any
backlog. The Company believes that its inventory management strategy and ability
to forecast customer demand will enable it to minimize backlogs. The Company
believes that its ability to provide prompt delivery of gaming machines is an
important part of the Company's business strategy.

<PAGE>

      Sodak also assists its customers with marketing and casino support
services. The Company employs seven people in its marketing and casino support
services departments. The Company utilizes a variety of methods to market gaming
products, including the publication of a guide to the Native American gaming
business, advertisements in industry trade publications and participation in
select trade shows. The marketing and casino support services departments have
responsibility for generating and tracking demographic data, assisting customers
in the design and casino floor layout of their casinos based on the proposed
slot mix, and providing general support services to the sales force. Marketing
personnel assist customers with the coordination of casino design and themes. In
summary, the Company assists customers with market research, custom designs,
casino floor layouts, product recommendations and strategies that are geared
toward optimizing earnings at their casinos. The Company also offers its
customers creative financing arrangements to facilitate the product sales
function (see "Financing Income,"page 21).

      The Company considers its customer service department an important aspect
of the overall marketing strategy. Company representatives are present at the
customer's location at the time of delivery of the gaming machines to install
the machines, to perform quality assurance testing, and to provide training
relating to the machines. The Company provides a 90 day parts and service
warranty for all gaming machines. The Company also offers, for a fee, to service
the gaming machines it distributes. In addition, the Company provides a
toll-free 24-hour service and support "hot line" to assist casino technicians
with troubleshooting and identification of problems with equipment and systems.
The Company also provides customers extensive technical training and conducts
semi-annual site visits to assure a high quality level of service and support to
casinos.

      Sodak believes it enjoys a competitive advantage in the Native American
gaming market due in large part to the Company's marketing strategy. The
Company's marketing and sales efforts begin long before the advent of any
contractual relationship. Sodak's sales and marketing strategy includes placing
its salespeople in their designated regions before tribal-state compact
negotiations begin and providing assistance to the Native American tribes on an
as needed basis. The Company believes that it is the best source for current
information and statistics on the Native American gaming industry. It shares
this knowledge without charge with the Native American tribes who participate,
or are considering participating, in the gaming industry.

      The Company has sold gaming machines and related products to compacted
Native American casinos in the following 16 states: Arizona, Colorado,
Connecticut, Iowa, Kansas, Louisiana, Michigan, Minnesota, Mississippi, Montana,
New Mexico, North Carolina, North Dakota, Oregon, South Dakota and Wisconsin.
The Company also has sold gaming machines and related products to First Nations
casinos in Ontario and Saskatchewan, Canada. In 1997, the Company was also
active in states where compacts were under negotiation, pending approval or
undergoing legal action, including Arizona, California, Indiana, Massachusetts,
Michigan, New Mexico, New York, South Dakota and Washington. In addition, the
Company intends to continue to engage outside legal counsel and consultants for
monitoring of regulatory issues in an attempt to facilitate the tribal-state
compacting process in several states. The Company believes that its sales and
marketing strategy fosters an early and trustful relationship with the Native
American tribes and that this relationship gives Sodak an advantage over its
competitors. The Company intends to continue its regulatory and legal support
efforts to facilitate future tribal-state compacting processes.

<PAGE>

      The Company has distributed gaming equipment to 90 Native American gaming
customers. In 1997, approximately $54.9 million or 89% of the Company's product
sales was derived from Native American gaming and approximately 82% of machine
shipments were to Native American casinos in Arizona, Kansas, Louisiana,
Michigan, Minnesota, New Mexico and North Carolina. The Company expects its
future sales may be concentrated in other states as compacts become effective
and new casinos become operative in those states.


WIDE AREA PROGRESSIVE SYSTEMS

      The Company offers wide area progressive systems as the exclusive
licensing agent for IGT's proprietary wide area progressive systems for Native
American casinos in jurisdictions which allow such systems and to casinos in
Deadwood, South Dakota. The number of machines on Native American wide area
progressive systems was approximately 1,700 at December 31, 1997 compared to
approximately 1,200 at December 31, 1996. For the same time periods, Deadwood
casinos had 60 and 38 machines, respectively, on one system. In 1997, the
Company offered wide area progressive systems in Arizona (which permits the
operation of intrastate systems in lieu of interstate systems), Connecticut,
Iowa, Kansas, Louisiana, Michigan, Minnesota, New Mexico, North Dakota, Oregon,
South Dakota and Wisconsin. At December 31, 1997, 13 systems were in operation:
MEGABUCKS (one interstate and one intrastate), DOLLARS DELUXE, FABULOUS 50'S,
QUARTERMANIA (one interstate and two intrastate), NICKELMANIA, WHEEL OF FORTUNE
(one interstate and one intrastate), HIGH ROLLERS, WHEEL OF GOLD and TOTEM POLE.
In January 1998, a JEOPARDY interstate system became operational. Additional
systems are expected to be introduced in 1998. To support its wide area
progressive systems, the Company has a vice president overseeing a staff of two
salespersons, a marketing specialist, a systems supervisor, a part-time
financial analyst, and two administrative assistants. The Company is responsible
for obtaining contracts to place systems at new casinos, introducing new systems
to casinos offering wide area progressives, and providing marketing information
and support to all wide area progressive systems customers. In addition, a
Company financial analyst provides customers with studies to optimize the
earning power of such systems relative to their entire casino floor.

      Based on current market trends, the Company anticipates increased revenue
from its wide area progressive systems in 1998 as it proceeds with its strategy
to place additional systems and additional gaming machines on the systems in
jurisdictions currently permitting the operation of wide area progressive
systems. The Company believes additional jurisdictions may authorize the
operation of such systems, thereby enabling additional growth. However, there
can be no assurance that necessary regulatory approvals will be obtained in
those prospective jurisdictions. Furthermore, public acceptance of these systems
and the entry of competing systems of other gaming companies could affect the
Company's future revenue.


GAMING OPERATIONS


DOMESTIC GAMING OPERATIONS

      The Company's U.S. gaming operations strategy is to improve the operating
performance of the MISS MARQUETTE after replacing top management in the first
quarter of 1998 and by implementing cost-saving policies and new marketing
strategies; and to seek additional opportunities to operate and/or participate
in casinos and other gaming entertainment facilities.

<PAGE>

      MISS MARQUETTE. In 1994, the Company acquired and refurbished the MISS
MARQUETTE riverboat for $14.3 million which the Company leased to Gamblers
Supply Management Company (GSMC), an unrelated third party, beginning October 1,
1994, under a long-term lease agreement. In addition, the Company loaned $7.5
million to GSMC to fund costs incurred by GSMC to develop and construct dockside
facilities and related amenities and financed $5.7 million of gaming equipment.
The lease required scheduled lease payments of the greater of an aggregate of
$25 million or 50% of defined net income from casino operations determined
annually, during the first 43 months of the lease and 50% of the defined net
income from casino operations thereafter.

      On July 1, 1996, the Company acquired all of the outstanding shares of
common stock of GSMC for $1 million in cash. The acquisition was accounted for
using the purchase method of accounting, and accordingly the consolidated
statements of operations include the results of operations of GSMC beginning on
July 1, 1996. The fair value of the tangible assets acquired totaled $23.3
million and consisted of gaming machines, gaming equipment, and dockside
facilities, which include a 24-room hotel, parking lots, marina, restaurant,
lounge and other support facilities and related furniture, fixtures and
equipment. The liabilities assumed were valued at $8.2 million, excluding $22.6
million owed to the Company, and consisted of trade accounts payable, accrued
expenses and notes payable, including $4.2 million of notes payable to the
former shareholders.

      In December 1997, as a result of changing economic conditions and
competitive environments, the Company re-evaluated the recoverability of its
investment in the MISS MARQUETTE. The carrying value of MISS MARQUETTE goodwill,
property and equipment was reduced to reflect a remaining carrying value equal
to the estimated future discounted cash flows of such assets. This resulted in a
non-cash pre-tax charge to operations of the MISS MARQUETTE of $8.6 million.
Factors leading to the impairment charge were that earnings and earnings before
interest, taxes, depreciation and amortization (EBITDA) were less than expected
as well as the effects of increased competition.

      The MISS MARQUETTE has 698 gaming machines and 36 table games and is
located on a picturesque stretch of the Mississippi River near Marquette, Iowa.
The 228-foot riverboat, with 18,747 square feet on three levels, has a capacity
of 1,125 passengers and cruises the Mississippi daily during the summer months,
weather permitting.

      Since assuming full responsibility for the MISS MARQUETTE'S operation, a
number of steps are being implemented to improve the financial performance,
including the replacement of top management in the first quarter of 1998 and
implementation of cost-saving policies and new marketing strategies.

      A license to conduct a gaming operation on an excursion vessel in any
county in Iowa is issued only if the county electorate approves the gaming
operation. Clayton County, where the MISS MARQUETTE is docked, held and approved
a referendum in 1994. The proposition is required by law to be resubmitted to
the Clayton County electorate at the general election in 2002 and at each
subsequent eight-year interval. There can be no assurance that the operation of
the MISS MARQUETTE will be re-approved by the voters in 2002.

<PAGE>

      PROPOSED SHREVEPORT RIVERBOAT CASINO, LODGING, DINING AND RETAIL COMPLEX.
In October 1997, the Company entered into an agreement with Hollywood and NOP to
develop a riverboat casino, hotel and retail complex in Shreveport, Louisiana.
The proposed project, to be managed by Hollywood, is pending regulatory approval
by the LGCB. The project is to be financed by an equity investment from the
joint venture partners equal to approximately 25% of the total estimated project
cost; the remaining 75% is to be financed through a debt offering. In the first
quarter of 1998, the project was estimated to cost approximately $165 million.
The Company's participation in the project is contingent upon 1) obtaining
regulatory approval of the project by the LGCB; 2) the Company's obtaining a
gaming license in Louisiana; and 3) the joint venture's obtaining necessary debt
financing. Construction is expected to commence upon finalization of regulatory
approvals and financing arrangements and is expected to take approximately 15
months.


INTERNATIONAL GAMING OPERATIONS

      PERU. The Company operates gaming halls and route operations in Peru. At
December 31, 1997, the Company had approximately 1,150 gaming machines in place
in 15 locations. Six of these locations are in Lima, the largest city and
capital of Peru; other sites are located in other major cities, including
Arequipa, Chiclayo, Huancayo, Huaral, Piura, Sullana, Talara, Trujillo and
Tumbes.

      In the fall of 1996, the Peruvian government announced that it would
implement regulatory changes in conjunction with the transfer of gaming
regulatory authority to the federal government and imposed a 200% increase in
the per-machine tax which became effective in October 1996. Among other
regulatory changes announced in January 1997 were (i) minimum machine
requirements at gaming halls (in Lima, gaming halls must have at least 120
machines per location and gaming halls in other cities must have at least 80
machines per location); and (ii) a requirement that machine refurbishments must
be certified by manufacturers and that all machines show pay tables in Spanish.
The Company continues its efforts to comply with these requirements and expects
to be in full compliance within the time frame allowed by the regulators.

      ECUADOR. The Company established a casino operation in Quito, Ecuador, in
March 1996. The casino is located in the Crowne Plaza Hotel and has 150 machines
and 12 table games. The Ecuadoran gaming market has limited opportunities and,
accordingly, the Company presently has no expansion plans.

      BRAZIL. The Company established a gaming hall with 200 machines in the
Arpoador district of Rio de Janeiro in June 1996. Arpoador is an upscale,
"trendy" and tourist-oriented section of Rio de Janeiro. In December of 1997 the
Company renegotiated its agreement with the bingo hall and sponsoring sports
federation at the Arpoador gaming hall. Under the new agreement, the Company has
retained 172 machines in the gaming hall in return for a share of the machine's
revenue. The Company will no longer have responsibility for the gaming hall's
operations. The revised agreement expires September 1999.

      In August 1996 the Company announced that it had entered into an agreement
with the Brazilian Soccer Federation (CBF) to provide and operate a video gaming
system in Brazil. The CBF agreement is reliant on a federal Brazilian law known
as "Lei Zico." Lei Zico governs the activities of soccer clubs and other sports
organizations and authorizes properly registered sports organizations to offer
certain games of chance as fund-raising vehicles. The permissible games include
bingo, keno, and "similar" games which are video machine versions of such games.
The federal authorization grants the individual states the authority to issue
specific regulations and licenses based on the merits

<PAGE>

of projects presented to state authorities. The Company enlisted the technical
expertise of IGT for the initial stage of planning and development of an on-line
system linking machines with "similar" games.

      In January 1997, the Company subsequently entered into a joint venture
with Dreamport and IGT to proceed with the development and operations of the CBF
project. Under the joint venture agreement, the three companies were to share
equally in the investment funding, expenses and profits of this project. The
joint venture agreement also provided for the pursuit of other Brazilian video
gaming opportunities in addition to the CBF project (see below). During the
first quarter of 1998, the parties of the joint venture terminated their joint
venture to operate linked gaming systems in Brazil. The parties to the agreement
mutually agreed to the termination, exercised under terms of the joint venture
agreement, due to ongoing uncertainties pertaining to the regulatory status of
proposed gaming operations. The Company's agreement with IGT under which IGT
would provide the Company gaming equipment, gaming systems and the operation of
wide area linked central gaming system for the CBF project was not terminated.

      Legislation known as "Lei Pele" was pending the president's signature as
of March 18, 1998. If enacted, it would replace Lei Zico and would outlaw the
"games of similar" currently authorized under Lei Zico. Should Lei Pele be
signed into law in this form, it could materially affect the CBF agreement as
well as Sodak's participation at the Arpoador gaming hall in Rio de Janeiro. The
outcome of this legislation is not presently known and the impact on the Company
(if any) cannot be determined.

      The operation of the proposed CBF gaming system is subject to CBF
obtaining regulatory approval in each state where the proposed system is to be
offered. Prior to the pending Lei Pele legislation, the Company had been
unsuccessful in receiving the requisite state regulatory approval for the CBF
project in any of the states in which approval was sought. The Company is
monitoring the pending legislation to determine the ultimate impact on the CBF
project and the machines in place at Arpoador.

      The Company is also investigating other opportunities in Brazil to operate
video gaming devices. Legislation to authorize casinos was passed by the House
of Deputies in 1996. This legislation is currently under consideration in the
Brazilian Senate. It has been approved by the Constitution and Justice
Commission of the Senate and is presently being considered by the Economic
Commission. If approved by the Economic Commission in its current form, the bill
will go to the President for signature.

      The casino legislation, in its present form, would allow one casino in
each Brazilian state. The casinos must be located in what have been officially
defined as tourist areas by the Brazilian government.

      CZECH REPUBLIC TV BINGO LOTTERY. In 1994, Sodak entered into an agreement
with T.V. Bingo, s.r.o. and its management company, Double Eagle Entertainment
Corporation, to become the exclusive supplier of all gaming-related supplies,
including lottery tickets and equipment, for a television bingo lottery system
in the Czech Republic. In connection with the supply and services agreement,
Sodak was to receive a percentage of TV Bingo's revenue from lottery ticket
sales beginning in May 1995. The Company had advanced development funding and
had provided lottery tickets as part of its supply and service obligations under
the agreement. The television bingo lottery project was canceled and ceased
production in 1996. The Company has not received or recognized any revenue from
lottery ticket sales and in the third quarter of 1996 wrote off $2.7 million of
receivables relating to its development.

<PAGE>

FINANCING INCOME

      As part of its product sales strategy, the Company provides financing,
primarily equipment financing, to Native American casinos. The Company has taken
a creative financing approach which structures the terms of loans to the cash
flow performance of casino operations. The Company has also been willing to
provide 100% equipment financing to make casino projects feasible when no
start-up capital or alternative financing arrangements were available. In
addition to equipment financing, the Company, on a case-by-case basis, has
provided financing guaranties and interim financing for the planning,
development and construction phases of casino projects, thereby expediting these
projects. These arrangements are sometimes linked to participations which
provide recurring revenue to the Company.

      In spite of the uncertainties of financing arrangements with Native
American tribes, the Company believes that providing financing to Native
American tribes has been an important part of its marketing strategy. Because
the revenue generated from Native American casinos has been large in relation to
the cost of the gaming equipment, Sodak believes that the risks associated with
100% financing arrangements that allow Native American tribes to pay for gaming
equipment from future cash flow have been acceptable and manageable. Where
repayment has been over a period of more than 90 days following the sale of
equipment, the Company has taken steps it believes were reasonably available to
preserve its right to repossess the equipment in the event of a default in
payment by the tribe. Nevertheless, the Company has confronted all the usual
risks associated with financing activities. As of December 31, 1997, the Company
had not experienced any significant losses associated with these risks.

      The Company offers various deferred payment arrangements to its gaming
equipment customers, including installment sales contracts. Cash contracts
generally require payment within 90 days of delivery of the equipment. Certain
cash contracts require a down payment prior to delivery. Installment contracts
require payments on the gaming machines over a period generally ranging from one
to three years, which payments include a principal component and interest
component. The Company generally charges an interest rate on its customer
financing of one to four percentage points over the prime lending rate. In each
of the years ended December 31, 1997, 1996, and 1995, the Company financed
approximately 34%, 22%, and 52%, respectively, of its product sales.

      In the near term, management believes that repayment terms on its sales
contracts will continue to be approximately one to three years and that interest
charges on its sales contracts will continue to be approximately one to four
percent above the prime lending rate.


PARTICIPATIONS INVOLVING NATIVE AMERICAN CASINOS

      The Company continues to pursue opportunities to participate in ventures
to finance the development, interim construction and equipping of Native
American casinos. Financing arrangements may be in conjunction with management
contracts entered into between the casino manager and the tribes owning such
casinos or with the tribes or their management companies directly. The Company
could loan money or guarantee third party loans. For its involvement, the
Company may receive an inducement payment, financing and guaranty fees or a
participation in the payments made by a tribe under its management agreement.

<PAGE>

      The development and construction of Native American casinos involves risks
similar to those associated with other real estate development projects,
including site selection considerations, requirements of governmental agencies
such as the Environmental Protection Agency, receipt of construction permits,
weather-related delays, labor difficulties and materials shortages. In addition,
the Company cannot obtain a mortgage on tribal land or buildings to secure its
loans or guaranties. Therefore, if a gaming activity fails to develop or ceases
to operate for any reason, the Company's prospects for recovery are minimal.

      The Company is from time to time presented with opportunities to
participate in the planning, development and financial arrangements of Native
American casinos. In 1997, the Company entered into or continued its involvement
in the following Native American casino projects:

      HARRAH'S PHOENIX AK-CHIN. Harrah's manages and operates the casino and
entertainment complex owned by the Ak-Chin Community near Phoenix, Arizona.
Sodak assisted Harrah's with financial arrangements for the project, serving as
a guarantor for one-half of a third party loan of $26.2 million to finance the
costs to develop, construct and equip the casino. The loan has been fully
repaid. As consideration for the loan guaranty and other assistance the Company
provided Harrah's in obtaining the management agreement, the Company receives 4%
of the distributable net income of the gaming operation over the term of the
management contract and any extensions thereto. The current management agreement
expires December 1999.

      CYPRESS BAYOU CASINO. In September 1994, Sodak assisted a casino
management company, Royal Associates Management, Inc. (Royal), in acquiring $8
million in financing from a financial institution. The Company also guaranteed
the debt. The loan was used to construct Phase II of the Cypress Bayou Casino
owned by the Chitimacha Tribe of Louisiana. The loan guaranty agreement was
revised in December 1997, allowing management to borrow back prepaid amounts
with a maximum allowable loan balance of $4.3 million. In return for the
guaranty, the Company receives a loan guaranty fee based on a percentage of the
outstanding loan balance, and additionally, a lesser percentage of the unused
maximum allowable loan balance. As of February 16, 1998, the outstanding loan
balance was $1.9 million.

      CITIES OF GOLD CASINO. In May 1995, the Company loaned $2 million to the
Pojoaque Pueblo for construction and start-up costs relating to the Cities of
Gold Casino located near Santa Fe, New Mexico. The loan, which carried an
interest rate of 12%, was payable in 12 equal consecutive installments beginning
November 1995 and was repaid in full in 1996.

      CLIFF CASTLE CASINO. During 1995, the Company advanced funds totaling
approximately $1.6 million to the Yavapai Apache tribe for construction of the
Cliff Castle Casino located near Camp Verde, Arizona. The loan, which carried an
interest rate of 12%, was payable in 24 equal consecutive monthly installments
beginning July 1995 and was repaid in full in 1997.

      QUECHAN INDIAN TRIBE. In April 1996, the Company entered into a $6.9
million Loan Agreement with Pacific Coast Gaming Corporation (PCG) to fund
gaming equipment and casino development for the Quechan Indian Tribe's casino
project at the Fort Yuma Indian Reservation in Arizona. The note carried an
interest rate of 13.5% and was payable in 48 equal monthly installments
beginning October 1996. In March 1997, the Company sold the note to PDS
Financial Corporation at a premium of $0.4 million.

<PAGE>

      SAC & FOX NATION OF MISSOURI. In February 1997, the Company entered into a
$5 million Loan Agreement with Michels Development Company (MDC) to fund gaming
equipment and casino development for the Sac & Fox Nation's casino project in
Brown County Kansas. The $5 million is comprised of $2.5 million product sales
financing, $2 million loan for development of the casino project and a $0.5
million fee payable to the Company as an inducement for entering into the loan
agreement. The $5 million note carried an interest rate of 11.5% and was payable
in 60 equal monthly installments beginning June 1997. In March 1997, the Company
sold the note to PDS Financial Corporation at a premium of $0.2 million.

      SAC & FOX NATION OF MISSOURI. In November , 1997, the Company entered into
a $15.1 million Construction Loan and Refinancing Agreement with MDC to fund
gaming equipment and casino development for phase II of the Sac & Fox Nation's
casino project in Brown County Kansas. The $15.1 million is comprised of $8.6
million bank debt refinancing, $1 million product sales financing, $4 million
loan for development of phase II of the casino project and $1.5 million
transaction and financial services fees payable to the Company for entering into
the Agreement. The $15.1 million note carries an interest rate of 11.5% interest
and is payable in 60 equal monthly installments beginning February 1998. The
$1.5 million transaction and financial service fees will be recognized as
financing income over the 60 month term of the note.


COMPETITION

PRODUCT SALES

      The gaming machine industry is highly competitive. The Company's gaming
machine distribution business faces direct competition from distributors and
manufacturers that make direct sales of gaming machines and related products
including competitors with significant financial and other resources. The
Company believes that competition is based primarily on the ability to provide
gaming machines with high player appeal, and to a lesser extent on price. Player
appeal is a key element because it combines the machine design, hardware,
software and play features that ultimately improve the earning power of gaming
machines and the customers' satisfaction level.

      The Company believes it distinguishes itself from its competition on the
basis of its effective business relationships with customers, its gaming
equipment offerings, the quality and extensiveness of its product lines,
delivery time, the level of technical support and service provided, and the
legal, regulatory and government relations assistance provided. The Company also
believes that its good working relationships with tribes and its ability to
provide financing for the equipment it distributes distinguishes the Company
from its competitors. The Company's primary competitor in gaming machine sales
is Bally Gaming, Inc. (Bally), a subsidiary of Alliance Gaming Corporation. The
Company's other competitors include, but are not limited to, Anchor Gaming
(Anchor), Aristocrat, Casino Data Systems (CDS), Sigma, Video Lottery
Consultants (a subsidiary of Video Lottery Technologies), Universal and WMS
Industries.

<PAGE>

WIDE AREA PROGRESSIVE SYSTEMS

      The primary factor influencing the play on progressive systems is enhanced
player appeal resulting from the large jackpot payouts. The systems also appeal
to the casino operator due to the games' earning premiums and because they
emphasize strong security and control features.

      The Company's primary competition in wide area progressive systems are
Anchor, Bally and CDS. CDS' "Cool Millions" competes with "Megabucks" and
"Dollars Deluxe." In addition, CDS has developed a 25-cent slot progressive game
to compete with "Quartermania." Anchor's stand-alone version of games, such as
"Totem Pole" and "Wheel of Gold," also compete in this market. Depending on
regulatory approval and on public acceptance, these systems or others could
become available at Native American casinos where such systems are approved by
regulators.

      Bally could become a competitor in the progressive systems business due to
the expiration of an agreement between IGT and Bally in December 1997. In 1992,
IGT and Bally settled a lawsuit relating to a United States patent owned by IGT.
Under the terms of the expired settlement agreement, Bally had been precluded
from producing and marketing wide area progressive system machines.

      The Company provides marketing and advertising support for its wide area
progressive systems and competes on the basis of the progressive systems' brand
names, product quality and reliability, large jackpot awards, the frequency of
jackpot "hits," and player appeal.


RIVERBOATS

      The riverboat and dockside casino market is highly competitive. As of
December 31, 1997, more than 80 such casinos were in operation in the United
States. They were located in Illinois, Indiana, Iowa, Louisiana, Mississippi and
Missouri. Approximately six riverboats are located on the Mississippi River
along the Illinois-Iowa and Iowa-Wisconsin borders. The MISS MARQUETTE is
located the farthest north of the Mississippi River-based riverboats. One
riverboat, the DIAMOND JO, is docked in Dubuque, Iowa, approximately 50 miles
south of the MISS MARQUETTE. In addition, the Dubuque vicinity has a greyhound
dog racing track which now has gaming machines competing with area casinos. In
early 1998, a number of legislative proposals were under consideration by the
Iowa Legislature, pertaining to moratoriums on new riverboat casino licenses and
the expansion of gaming.

      The Shreveport/Bossier City riverboat casino market is located in
northwest Louisiana and serves the northwestern Louisiana and Dallas metro area
markets. Gaming began in this market in April of 1994, with the opening of the
Harrah's property. At the end of 1997, there were four riverboat casinos in
operation, with a total of approximately 5,200 gaming positions. In late 1997,
the Binion's Horseshoe in Bossier City opened a luxury 606-room hotel and
expanded pavilion. In January 1998, Binion's put into service a new gaming
vessel with approximately 1,850 gaming positions, increasing the market supply
by more than 500 gaming positions. The Shreveport/Bossier City market has been
the highest performing gaming market in the state of Louisiana, currently
supplying 35% of the state's total gaming positions and generating nearly 50% of
the state's total annual gaming revenues.

      The Company's proposed joint venture project with Hollywood and NOP would
be the first riverboat casino in the Shreveport/Bossier City market to open
initially with a full-service hotel, retail shopping facilities and three
restaurants. The project is to be operated by Hollywood, under a management
services agreement and be operated with their movie memorabilia theme. In
addition, the

<PAGE>

project is to be adjacent to the Harrah's Shreveport riverboat casino. These two
properties would be the only side-by-side gaming operations in the marketplace,
offering patrons a choice and variety of gaming experience in the same location.
The property would also be situated across the street from the Shreveport
Convention Center and within blocks of the planned Shreve Square retail and
restaurant corridor.


INTERNATIONAL MARKETS

      The international marketplace for gaming is both highly competitive and
uncertain. Gaming halls and casinos are allowed in Peru. Gaming halls have slot
and video machines and are generally smaller in scale than casinos. They must be
operated in association with hotels, discotheques and other regulated
environments. Casinos are permitted in major hotels. In Ecuador, casinos are
allowed in luxury hotels and bingo halls are also allowed in other locations.
The Company's operations in Peru and Ecuador face competition from local
operating companies, manufacturer/ operators (primarily foreign companies) and
manufacturers who provide equipment with terms tied to machine performance. The
Company believes the quality and player appeal of the equipment it is operating
and providing on a route basis and its ability to provide an appealing
environment and pleasing customer service distinguishes the Company from its
competitors.

      A number of factors make conducting business in international markets
challenging, including governmental regulatory authority, the stability of
political and monetary systems, the business and investment climate, and
cultural considerations (see "Gaming Operations," page 19 for discussion). Sodak
believes its product line and its expertise in dealing with government officials
and regulatory authorities make the Company competitive in penetrating emerging
foreign gaming markets.


OTHER

      The Native American gaming industry competes with other forms of gaming
including: bingo and pulltab games; riverboat gaming; parimutuel betting on
horse racing, dog racing and jai-alai; and state-sponsored lotteries. A
consequence of the growth in Native American gaming has been the increased
pressure on state legislatures to allow competitive gaming activity by
non-Native Americans. Several states, including Colorado, Iowa, Illinois,
Indiana, Louisiana, Mississippi, Missouri, Nevada, New Jersey and South Dakota,
have approved and many other states are considering approval of non-Native
American land-based casinos, riverboat gaming or dockside casinos. Increased
pressure is also present for approval of gaming machines for bars, restaurants,
racetracks and resorts in a number of states. In addition, non-gaming
entertainment competes with the gaming industry for the public's disposable
income. To the extent these other forms of entertainment and non-Native American
gaming affect the demand for Native American gaming, the opportunities the
Company has to sell gaming equipment and participate in Native American casino
development projects, may be affected.

<PAGE>

ITEM 2. PROPERTIES
      In October 1995, the company moved into its newly constructed, 75,000
square-foot corporate headquarters, systems operations, and warehouse facility
in Rapid City, South Dakota. A 20,000 square-foot addition was completed in the
summer of 1997. The Company also owns a 20,000 square foot warehouse facility in
Rapid City, which formerly housed the assembly and distribution functions. The
Company expects to sell this warehouse facility. The Company also owns
properties in Marquette, Iowa, in connection with the MISS MARQUETTE riverboat
casino (see "Gaming Operations," page 18 for a listing of the properties).


ITEM 3. LEGAL PROCEEDINGS
      On April 26, 1994, William Poulos filed a class action lawsuit in the
United States District Court for the Middle District of Florida, Case No.
94-478-CIV-ORL-22 (the Poulos case). The Complaint in the Poulos case alleges
violations of 18 U.S.C. ss. 1962(a), (c), and (d), the Racketeering Influenced
and Corrupt Organizations Act, and pendent state law claims. The approximately
41 named defendants in the Poulos case consist of the manufacturers and
distributors of electronic gaming devices, and companies who are parents and/or
affiliates of the entities which operate and/or provide the electronic gaming
devices for play by the public.

      On May 10, 1994, William Ahearn filed a class action lawsuit in the United
States District Court for the Middle District of Florida, Case No.
94-532-CIV-ORL-22 (the Ahearn case). The named defendants and claims made in the
Poulos and Ahearn cases are virtually identical. On June 30, 1994, the Poulus
and Ahearn cases were consolidated. On December 9, 1994, the Poulos and Ahearn
cases were transferred to the United States District Court for the District of
Nevada pursuant to 28 U.S.C. ss. 1404(a).

      On November 29, 1994, William Poulos filed a second class action lawsuit
in the United States District Court for the Middle District of Florida, Case No.
94-1259-CIV-ORL-22 (the Cruise Ship case). The allegations made in the Cruise
Ship case are virtually identical to the allegations in the Poulos and Ahearn
cases. The defendants in the Cruise Ship case consist of manufacturers and
distributors of electronic gaming devices, and the operators of cruise ships and
cruise ship casinos where the devices are available for play by passengers. On
September 14, 1995, the Cruise Ship case was transferred to the United States
District Court for the District of Nevada pursuant to 28 U.S.C. ss. 1404(a).

      On September 26, 1995, Larry Schreier filed a class action lawsuit in the
United States District Court for the District of Nevada. Except for alleging a
smaller and more precisely defined class of plaintiffs, the Schreier case is
virtually identical to the Poulos and Ahearn cases.

         The Poulos, Ahearn, Cruise Ship and Schreier cases have been
consolidated and assigned to visiting United States District Court Judge David
A. Ezra. Sodak is a named defendant in the Poulos, Ahearn, and Schreier cases.

      The plaintiffs allege that the defendants actions constitute violations of
the Racketeer Influenced and Corrupt Organizations Act (RICO) and give rise to
claims of common law fraud and unjust enrichment. The plaintiffs are seeking
monetary damages in excess of $1 billion and are asking that any damage awards
be trebled under applicable federal law.

<PAGE>

      The Company's responsive pleadings included motions to dismiss based upon
lack of jurisdiction and transfer of venue, act of state, failure to state a
claim, motion to strike, and motion to stay. Merits and expert discovery
continues.

      The Defendants argued a variety of motions to dismiss and also procedural
motions before the Court on November 3, 1997. The Court ruled on the same
issuing various Orders which were entered and served on December 19, 1997. The
most significant rulings were that the Court ordered Plaintiffs to file an
Amended Complaint by January 9, 1998, and the Plaintiffs wire fraud count
against Defendants was dismissed with prejudice (cannot be relitigated).
Additional matters will be raised with the Court and it is anticipated that the
Court will be issuing a new timetable for filing motions, discovery and trial.

      The Company believes the Consolidated action is without merit. The Company
is vigorously pursuing all legal defenses available to it and is participating
in the defense as fully as possible through counsel and the defendants steering
committee which was created pursuant Court Order.


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

            None.

                                    PART II

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

      The Company's common stock trades on the Nasdaq National Market under the
symbol SODK. A two-for-one stock split of the Company's common stock was
effected September 27, 1996. The following table sets forth the high and low
sales price of the common stock (adjusted to reflect the aforementioned stock
split) on the Nasdaq composite tape:

      --------------------------------------------------------------------------
                                    1997                         1996
                         -------------------------     -------------------------
                         High          Low             High          Low
                         -----------   -----------     ------------  -----------

      First Quarter    $ 18 3/8        10 1/2         14 1/8         10 1/8
      Second Quarter     16 5/8         9 7/8         17 1/2          9 1/8
      Third Quarter      15 3/8         9 15/16       27 1/2         15 1/4
      Fourth Quarter     14 3/8         5 3/8         24 3/4         13
      --------------------------------------------------------------------------

      As of March 13, 1998 there were approximately 5,200 beneficial owners of
Sodak Gaming, Inc.'s common stock. The closing price of the Company's common
stock on March 20, 1998 was $7 1/16.

      The Company did not pay cash dividends in 1997 or 1996 and does not
anticipate paying cash dividends in the near future.

      The Company's registrar of stock and transfer agent is Norwest Bank
Minnesota, N.A., Stock Transfer Department, P.O. Box 64854, South St. Paul, MN
55164-0854; telephone (612) 450-4064.

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

            The following table summarizes selected items from the Company's
Consolidated Financial Statements as of and for the years ended December 31:



<TABLE>
<CAPTION>
             In thousands, except per share amounts                      1997         1996        1995        1994        1993
             ------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>             <C>          <C>         <C>       <C>
             Revenue                                                  $ 137,578       154,587      93,172      84,469    68,832
             Income (loss) from operations                                 (223)       20,901      20,059      14,754    10,290
             Earnings (loss) before cumulative effect of
              accounting change                                            (576)       13,233      12,893       9,897     7,055
             Net earnings (loss)                                         (3,707)       13,233      12,893       9,897     7,055
             Earnings (loss) per share before cumulative effect
              of accounting change                                        (0.02)         0.58        0.57        0.44      0.37
             Earnings (loss) per share                                    (0.16)         0.58        0.57        0.44      0.37
             Working capital                                             21,571        37,728      37,501      29,703    63,642
             Total assets                                               165,156       169,475     138,055     118,083    96,234
             Long-term debt                                              19,818        27,189      18,044         600       851
             Shareholders' equity                                       101,798       106,431      94,261      81,357    71,459
             Dividends paid                                                   0             0           0           0       260
</TABLE>

<PAGE>

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

INTRODUCTION

      Sodak Gaming, Inc. was in its ninth year of operation and its fifth year
as a publicly traded company in 1997. The Company's core business is
distributing gaming equipment and ancillary products as well as providing wide
area progressive systems to Native American casinos. Further, the Company is
involved in the following gaming operations: the MISS MARQUETTE riverboat casino
and entertainment facility located on the Mississippi River near Marquette,
Iowa; gaming hall and route operations in Peru; a casino in Quito, Ecuador; and
a video bingo gaming hall in Rio de Janeiro, Brazil, which was converted to a
route operation in December 1997. In addition, other ongoing business activities
included a participation in Harrah's Entertainment, Inc.'s (Harrah's) management
fee from Harrah's Phoenix Ak-Chin casino in Arizona and income from financing
product sales and casino ventures. In October 1997, the Company announced it has
agreed to form a venture with Hollywood Casino Corporation (Hollywood) and New
Orleans Paddlewheels (NOP) to develop a hotel, dining, retail and riverboat
casino entertainment complex on the Red River in downtown Shreveport, Louisiana.

      In 1997, the Company experienced a 41% decline in revenue from product
sales compared to 1996. However, revenue from another element of the Company's
core business, wide area progressive systems, increased 64%. Gaming operations,
while experiencing revenue growth of 59%, produced lower operating margins than
anticipated due to factors ranging from unusually severe winter weather at the
MISS MARQUETTE to significant regulatory restructuring in Peru.

      Financial performance in 1997 was also impacted by the following: First,
the Company changed its method of accounting for pre-opening and start-up costs,
and for the amortization of such costs (see Note 15, page 58). An after-tax
charge of $2.2 million, or ($0.10) per share, reflected the 1997 consequence of
this accounting change, and an after-tax charge of $3.1 million, or ($0.14) per
share, to 1997 operations reflected the cumulative effect of applying this
accounting change to amounts capitalized in previous years. Second, in
consideration of changing economic conditions and competitive environments, the
Company took after-tax charges in 1997 amounting to $6.0 million, or ($0.26) per
share, relating to the impairment of the recoverability of certain long-lived
assets, primarily related to the MISS MARQUETTE (see Note 3, page 49). Third,
after-tax charges amounting to $1.2 million, or ($0.05) per share, were taken in
1997 for inventory reserves and charges related to international operations. Due
in large part to the combined impact of these charges, the Company reported a
loss of ($3.7) million, or ($0.16) per share, in 1997.

      The process of a corporate-wide reorganization began in the fall of 1997
and restructuring efforts are continuing. Certain departments were consolidated
and staffing was reduced to facilitate cost savings at the corporate level.
Certain Latin American activities were scaled back along with staffing cuts. The
Company also replaced top management at the MISS MARQUETTE in the first quarter
of 1998 and is executing cost-saving policies and new marketing strategies at
the MISS MARQUETTE.

<PAGE>

RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1997
COMPARED TO THE YEAR ENDED DECEMBER 31, 1996

      The year 1997 reflected a ($3.7) million loss, or ($0.16) per share,
compared to earnings of $13.2 million, or $0.58 per share, in 1996. The decrease
in operational results was due primarily to a decrease in 1997 product sales
revenue, a decrease in gaming operations margins and the charges taken in 1997
for: 1) an accounting change related to pre-opening and start-up costs; 2)
impairment of long-lived assets; and 3) inventory reserves and charges related
to international operations. These charges are described in the preceding
introduction.

      Total revenue decreased 11% to $137.6 million in 1997, compared to $154.6
million in 1996. The decrease is primarily attributable to a substantial
decrease in product sales revenue. The Company continued its strategy of
augmenting product sales revenue with recurring revenue streams generated by
gaming operations and wide area progressive systems. Recurring revenue sources
accounted for 51% of total revenue in 1997 compared to 29% in 1996. Total costs
and expenses, including all the charges described above other than the
cumulative effect of the accounting change for pre-opening and start-up costs,
increased 3% in 1997 to $137.8 million compared to $133.7 million in 1996.


PRODUCT SALES

      Revenue from product sales decreased 41% to $61.7 million in 1997, from
$104.5 million in 1996, which was a record year for product sales. The decrease
was due to a 38% decrease in machine sales revenue (including used machine
sales) to $46.8 million in 1997 compared to $75.5 million in 1996 and a 49%
decrease in ancillary gaming and non-gaming product sales revenue to $14.9
million in 1997 compared to $29.0 million in 1996. In 1997, the Company
continued its strategy of being a full-service provider to its customers by
offering an extensive product line that included gaming related and non-gaming
related products and supplies.

      New gaming machine shipments decreased 50% to approximately 6,200 machines
in 1997 compared to 12,400 machines in 1996. In 1997, 33% of new machine
shipments were to casinos in Arizona and New Mexico and another 49% of the new
machine shipments were to Kansas, Louisiana, Michigan, Minnesota and North
Carolina. In 1996, 59% of the new machine shipments were to casinos in
Connecticut, Michigan and Ontario; another 31% of the shipments were to Arizona,
Kansas, Mississippi, North Dakota and Wisconsin. The Company anticipates that
new unit shipments in 1998 may approximate 1997 new unit shipments. Growth in
gaming in Native American jurisdictions is outside the control of the Company
and is influenced by the legal, electoral and regulatory processes of those
jurisdictions. In 1997, the Company also sold approximately 1,800 used machines,
compared to approximately 200 used machines in 1996.

      The cost of product sales decreased 41% to $48.3 million in 1997, from
$81.2 million in 1996. This decrease was attributable to the decreased sales
volume of machines and other products. The gross margin on product sales
decreased to 21.7% in 1997, compared to 22.3% in 1996. The decrease in the gross
margin was primarily due to a $1.0 million inventory reserve charge taken in the
fourth quarter of 1997.

<PAGE>

GAMING OPERATIONS

      Gaming operations revenue increased 59% to $54.8 million in 1997, compared
to $34.4 million in 1996. This increase was primarily attributable to the July
1, 1996 acquisition of Gamblers Supply Management Company (GSMC) (twelve months'
revenue from the MISS MARQUETTE riverboat casino operation were recognized in
1997 compared to six months in 1996) and the growth of gaming operations in
Latin America. Direct costs of gaming operations increased 84% to $54.8 million
in 1997, compared to $29.8 million in 1996. The Company believes that gaming
operations revenue and margins may increase as regulatory issues stabilize and
improved management efforts at the MISS MARQUETTE take effect. However, there
can be no assurance that such revenue and margin improvement will be realized
due primarily to gaming's dependence on its regulatory status and public
acceptance.


DOMESTIC GAMING OPERATIONS

      MISS MARQUETTE. GSMC, the management company of the MISS MARQUETTE, was
acquired on July 1, 1996. The acquisition was accounted for using the purchase
method of accounting (see Note 2, page 48). Accordingly, the operations of the
MISS MARQUETTE since July 1, 1996, are included in the consolidated statements
of operations. The riverboat casino and entertainment facility has 698 machines
and 36 table games and is located on the Mississippi River at Marquette, Iowa.
Revenue from the MISS MARQUETTE amounted to $32.3 million in 1997 compared to
$15.3 million for the period July 1, 1996, through December 31, 1996. Direct
operating costs were $30.8 million in 1997 compared to $14.7 million for the
period July 1, 1996, through December 31, 1996. Prior to its acquisition, the
Company leased the riverboat vessel to GSMC. Therefore, 1996 gaming operations
revenue included lease revenue relating to the MISS MARQUETTE of $3.3 million
for the period January 1, 1996, through June 30, 1996.

      The carrying value of the goodwill and property and equipment of the MISS
MARQUETTE was adjusted to the present value of the estimated future cash flows
of the MISS MARQUETTE. The total effect of the asset impairment related to the
MISS MARQUETTE was an after-tax charge to 1997 earnings of $5.7 million (see
Note 3, page 49).

      Management is implementing measures to improve operating performance of
the MISS MARQUETTE, including the replacement of top management in the first
quarter of 1998 and execution of cost-saving policies and new marketing
strategies. However, there can be no assurance that such improvement will be
realized due to the public's acceptance of gaming and other factors affecting
performance.


INTERNATIONAL GAMING OPERATIONS

      PERU. The Company operates gaming halls and route operations in Peru. In
the fall of 1996, the Peruvian government announced that it would implement
regulatory changes in conjunction with the transfer of gaming regulatory
authority to the federal government and imposed a 200% increase in the
per-machine tax which became effective in October 1996. Among other regulatory
changes announced in January 1997 were (i) minimum machine requirements at
gaming halls (in Lima, gaming halls now must have at least 120 machines per
location and gaming halls in other cities must have at least 80 machines per
location); and (ii) a requirement that machine refurbishments must be certified
by manufacturers and that all machines show pay tables in Spanish. The Company
continues its efforts to comply with these requirements and expects to be in
full compliance within the time frame allowed by the regulators.

<PAGE>

      Revenue increased 19% to $14.8 million in 1997 compared to $12.4 million
in 1996. This resulted primarily from an increase in the average number of
machines in operation throughout 1997 as compared to 1996. Direct operating
costs increased 37% to $15.7 million in 1997 compared to $11.4 million in 1996
as a result of the increase in the average number of machines in operation, the
increase in the gaming tax, increased advertising and promotion, the expensing
of leasehold improvements and pre-opening costs at locations where leases were
terminated in order to comply with new regulations, increased administrative and
reorganization costs relating to regulatory changes, and carrying costs
associated with certain locations whose openings were affected by regulatory and
licensing delays. The number of machines in operation at December 31, 1997 was
approximately 1,150 at 15 locations. Approximately 1,300 machines at 21
locations were in operation at December 31, 1996.

      The Company incurred $0.2 million in pre-opening and start-up costs
related to Peru in 1997, which have been expensed in 1997 in conjunction with
the Company's accounting change related to pre-opening and start-up costs. Such
costs incurred in Peru prior to January 1, 1997 amounting to $0.8 million, net
of $0.1 million income tax benefit, were also charged to 1997 operating results
through a cumulative effect of an accounting change (see Note 15, page 58).

      BRAZIL. The Company established a gaming hall in the Arpoador district of
Rio de Janeiro in June 1996. In December 1997, the agreement between the Company
and the owners of the gaming hall was revised such that the operation is now a
route operation with 172 machines. Revenue increased 129% to $5.7 million in
1997 compared to $2.5 million in 1996. Direct costs of the Arpoador operation
increased 153% to $6.4 million in 1997 compared to $2.5 million in 1996. The
increases in revenue and direct costs were attributable to a full year of
operations in 1997 compared to a half year in 1996. Direct costs in 1997 also
increased due to accruals relating primarily to ambiguous regulations pertaining
to gaming taxes.

      In 1996, the Company entered into an agreement with the Confederacao
Brasileira de Futebol (CBF, or the Brazilian Soccer Federation) to own and
operate linked progressive video gaming systems in Brazil. Subsequent to that
agreement the Company entered into a joint venture agreement with IGT and the
Dreamport division of GTECH Holdings Corporation to proceed with the development
and operations of this system. In the first quarter of 1998, the Company, IGT
and Dreamport mutually agreed to terminate the joint venture on terms provided
in the agreement, due to ongoing uncertainties pertaining to the regulatory
status of the proposed gaming operations. The Company, while remaining prepared
to proceed with development of the Brazilian video gaming project under the
terms of its agreement with the CBF, believes that the ability to obtain
requisite legal and regulatory approvals is questionable. However, the Company
believes that opportunities to engage in Brazilian gaming operations still exist
under other laws and regulations permitting gaming. Furthermore, the Brazilian
federal legislature is considering legislation that would expand the scope of
legal gaming in that country.

      The Company incurred $3.0 million in pre-opening and start-up costs
related to Brazil in 1997, which have been expensed in 1997 as selling, general
and administrative expenses in conjunction with the Company's accounting change
related to pre-opening and start-up costs. Such costs incurred in Brazil prior
to January 1, 1997, amounting to $2.3 million, net of $1.2 million income tax
benefit, were also charged to 1997 operating results through a cumulative effect
of an accounting change (see Note 15, page 58).

<PAGE>

      ECUADOR. The Company established a casino operation in Quito, Ecuador, in
March 1996. The casino is located in the Crowne Plaza Hotel and has 150 machines
and 12 table games. Revenue increased 117% to $2.0 million in 1997 as compared
to $0.9 million in 1996. Direct costs increased 68% to $1.9 million in 1997 as
compared to $1.1 million in 1996.


WIDE AREA PROGRESSIVE SYSTEMS

      Wide area progressive systems revenue increased 64% to $13.3 million in
1997 compared to $8.1 million in 1996. The increase is a result of the increase
in both the number of systems offered and the number of machines on the systems.
Comparing December 31, 1997 to December 31, 1996, the Company implemented
systems in one new state, Minnesota; five new systems became operational: WHEEL
OF FORTUNE (one interstate and one intrastate), WHEEL OF GOLD, HIGH ROLLERS and
TOTEM POLE; and the number of machines on the systems increased to approximately
1,700 at the end of 1997 from approximately 1,200 at the end of 1996. At
December 31, 1997, the Company offered wide area progressive systems in Arizona
(which permits the operation of intrastate systems in lieu of interstate
systems), Connecticut, Iowa, Kansas, Louisiana, Michigan, Minnesota, New Mexico,
North Dakota, Oregon, South Dakota and Wisconsin. At December 31, 1997, 13
systems were in operation: MEGABUCKS (one interstate and one intrastate),
DOLLARS DELUXE, FABULOUS 50'S, QUARTERMANIA (one interstate and two intrastate),
NICKELMANIA, WHEEL OF FORTUNE (which began interstate operations in March 1997
and intrastate operations in September 1997), WHEEL OF GOLD (which began
operating in July 1997), HIGH ROLLERS (which began operating in August 1997) and
TOTEM POLE (which began operating in December 1997).

      Based on current market trends, the Company anticipates increased revenue
from its wide area progressive systems in 1998 as it proceeds with its strategy
to place additional systems and machines in jurisdictions currently permitting
the operation of wide area progressive systems. However, there can be no
assurance that necessary regulatory approvals will be obtained in those
prospective jurisdictions. Furthermore, public acceptance of these systems and
the entry of competing systems of other gaming companies could affect the
Company's future revenue.


FINANCING INCOME

      Financing income increased 4% to $7.8 million in 1997 from $7.5 million in
1996. Financing income results from interest income on notes receivable, fees
charged in association with financing arrangements and the Company's portion of
the management fee from Harrah's Phoenix Ak-Chin. Interest income on notes
receivable and fees charged in association with financing arrangements remained
stable, amounting to $5.9 million in both 1997 and 1996.

      The Company recognized revenue of $1.9 million in 1997 compared to $1.6
million in 1996 as its share of Harrah's management fee from the Harrah's
Phoenix Ak-Chin casino located near Phoenix, Arizona (Harrah's is a 14%
shareholder of the Company). This fee is earned in conjunction with financing
guaranties provided to Harrah's by the Company during the initial development
and early operations phases of the facility. The guaranty expired in 1996 when
the construction loan was paid off in full. As consideration for the loan
guaranty, the Company receives, from Harrah's, 4% of the distributable net
income of the gaming operation over the term of the management contract and any
extensions thereto. The current management agreement expires December 1999.
There can be no

<PAGE>

assurance that Harrah's management contract will be extended or that the terms
of any extension will not be materially changed.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

      Selling, general and administrative expenses increased 6% to $21.7 million
in 1997, from $20.4 million in 1996. As a percentage of total revenue, selling,
general and administrative expenses increased to 16% in 1997 compared to 13% in
1996. This increase is attributable to the accounting change whereby pre-opening
and start-up costs were expensed in 1997, while 1996 selling, general and
administrative expenses do not reflect 1996 pre-opening and start-up costs (such
amounts were reflected as a charge to 1997 earnings via cumulative effect of an
accounting change). The 1997 pre-opening and start-up costs reflected in
selling, general and administrative expenses amounted to $3.0 million. The
Company's selling, general and administrative expenses are consistent with the
Company's growth philosophy, ongoing strategy to establish gaming operations and
other recurring revenue sources and pursuit of potential new gaming
jurisdictions.

INTEREST AND FINANCING COSTS

      Interest and financing costs increased 62% to $3.7 million in 1997
compared to $2.3 million in 1996. The increase in interest and financing costs
was primarily attributable to increased borrowings for working capital needs and
the assumption of debt in connection with the acquisition of GSMC (see Note 2,
page 48). The Company believes that interest and financing costs will continue
to increase in future years as the Company pursues its growth strategy.

INCOME (LOSS) FROM OPERATIONS

      The combined effect of the above described changes resulted in a loss from
operations of ($0.2) million in 1997, compared to income from operations of
$20.9 million in 1996. The decrease is due to a variety of reasons as described
in the preceding sections. Management has taken steps in the fourth quarter of
1997 and first quarter of 1998 to control the costs of gaming operations and
selling, general and administrative expenses, within the framework of the
Company's long-term growth objectives. Having taken such action, management
believes the Company will return to profitability in 1998. However, there can be
no assurance that such results will be achieved due to the public's acceptance
of gaming, competition factors and potential gaming regulation changes on a
by-jurisdiction basis in the environments in which the Company operates.

OTHER

      Other income in 1997 includes $0.5 million of income recognized as a
result of the sale of receivables at a premium. Earnings before income taxes and
the cumulative effect of an accounting change decreased 98% to $0.4 million in
1997, compared to $20.9 million in 1996. Provision for income taxes was $1.0
million in 1997, compared to $7.7 million in 1996, representing 251% and 37% of
earnings before income taxes in 1997 and 1996, respectively. The unusually high
effective income tax rate in 1997 is due primarily to the establishment of a
valuation allowance for certain deferred tax benefits that were generated in
1997 related to foreign operations.

<PAGE>

RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1996
COMPARED TO THE YEAR ENDED DECEMBER 31, 1995

      Net earnings for 1996 increased 3% to $13.2 million, or $0.58 per share,
compared to net earnings of $12.9 million, or $0.57 per share, in 1995. Product
sales and wide area progressive systems were the primary contributors to the
increase in net earnings. Total revenue increased 66% to $154.6 million in 1996,
compared to $93.2 million in 1995. The Company continued its strategy of
augmenting product sales revenue with recurring revenue streams offered by
gaming operations and wide area progressive systems. Recurring revenue sources
accounted for 29% of total revenue in 1996 as compared to 16% in 1995. Total
costs and expenses increased 83% to $133.7 million in 1996, compared to $73.1
million in 1995.


PRODUCT SALES

      Revenue from product sales increased 43% to $104.5 million in 1996
compared to $73.2 million in 1995. The increase was due to a 52% increase in
machine sales revenue to $75.5 million in 1996 compared to $49.5 million in 1995
and a 23% increase in ancillary gaming and non-gaming product sales revenue to
$29.0 million in 1996 compared to $23.6 million in 1995. In 1996, the Company
continued its strategy of being a full-service provider to its customers by
expanding its product line to include additional gaming related and non-gaming
related products and supplies.

      Gaming machine shipments (including commission sales) increased 48% to
approximately 12,600 machines (including approximately 200 used machines) in
1996 compared to approximately 8,500 machines (including approximately 400 used
machines) in 1995. The cost of product sales increased 46% to $81.2 million in
1996, from $55.7 million in 1995. This increase was attributable to the
increased sales volume of machines and other products. As a percentage of
product sales revenue, the gross margin on product sales decreased to 22.3% in
1996, from 23.9% in 1995. The decrease in the gross margin was primarily due to
a decrease in the percentage of financed product sales, which generally have
higher margins.


GAMING OPERATIONS

      Gaming operations revenue increased 282% to $34.4 million in 1996, from
$9.0 million in 1995. This increase was primarily attributable to the July 1,
1996 acquisition of GSMC and the growth of gaming operations in Latin America.
Direct costs of gaming operations increased $27.6 million to $29.8 million in
1996, compared to $2.2 million in 1995.


DOMESTIC GAMING OPERATIONS

      MISS MARQUETTE. Revenue from the MISS MARQUETTE amounted to $15.3 million
and direct operating costs were $14.7 million for the period July 1, 1996,
through December 31, 1996. Attendance and revenue were adversely affected by
unusually severe winter storms during November and December of 1996. Prior to
its acquisition, the Company leased the riverboat vessel to GSMC. Therefore,
gaming operations revenue includes lease revenue relating to the MISS MARQUETTE
of $3.3 million in 1996 for the period January 1, 1996, through June 30, 1996,
compared to $6.7 million for the entire year of 1995.

<PAGE>

INTERNATIONAL GAMING OPERATIONS

      PERU. In May 1995, the Company began operations of gaming halls and routes
in Peru. Revenue increased 433% to $12.4 million in 1996 compared to $2.3
million in 1995 and direct operating costs increased 422% to $11.4 million in
1996 compared to $2.2 million in 1995. These increases were due to the increase
in machine placements, which increased to 1,300 in 21 locations at December 31,
1996, compared to 440 in 8 locations at December 31, 1995.

      BRAZIL. The Company established a gaming hall with 200 machines in the
Arpoador district of Rio de Janeiro in June 1996. Revenue and direct costs both
were $2.5 million in 1996, reflecting the start-up status of the gaming hall.

      ECUADOR. The Company established a casino operation in Quito, Ecuador, in
March 1996. The casino is located in the Crowne Plaza Hotel and had 150 machines
and 10 table games. Revenue in 1996 was $0.9 million and direct costs associated
with the operation were $1.1 million. Operating results reflected the start-up
status of the casino.


WIDE AREA PROGRESSIVE SYSTEMS

      Wide area progressive systems revenue increased 99% to $8.1 million in
1996 compared to $4.1 million in 1995. This increase was a result of the
increase in the number of machines on the systems to approximately 1,200 at
December 31, 1996 compared to approximately 800 at December 31, 1995. In 1996,
the Company offered wide area progressive systems in Arizona (which permits the
operation of intrastate systems in lieu of interstate systems), Connecticut,
Iowa, Kansas, Louisiana, Michigan, New Mexico, North Dakota, Oregon, South
Dakota and Wisconsin. At December 31, 1996, eight systems were in operation:
MEGABUCKS (one interstate and one intrastate), DOLLARS DELUXE, FABULOUS 50'S,
QUARTERMANIA (one interstate and two intrastate) and NICKELMANIA.


FINANCING INCOME

      Financing income increased 10% to $7.5 million in 1996 from $6.9 million
in 1995. Interest income on notes receivable and fees charged in association
with financing arrangements increased 10% to $5.9 million in 1996 as compared to
$5.4 million in 1995. The increase was due primarily to an increase in financing
arrangements entered into. The Company recognized revenue of $1.6 million in
1996 compared to $1.5 million in 1995 as its share of Harrah's management fee
from the Harrah's Phoenix Ak-Chin casino located near Phoenix, Arizona.


SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

      Selling, general and administrative expenses increased 41% to $20.4
million in 1996, from $14.5 million in 1995. Included in this $5.9 million
increase was the third-quarter write off of $2.7 million of receivables relating
to the development of a television video bingo lottery system in the Czech
Republic. This increase also included increases in compensation (including
increased sales commissions related to the increased product sales), related
employee costs and benefits, depreciation, and expenses associated with the
development of new markets, including gaming operations in the United States and
Latin America. As a percentage of total revenue, selling, general and
administrative expenses decreased to 13% in 1996 compared to 16% in 1995.

<PAGE>

INTEREST AND FINANCING COSTS

      Interest and financing costs increased to $2.3 million in 1996, from $0.7
million in 1995. The increase in interest and financing costs was primarily
attributable to increased borrowings for the expansion of gaming operations in
Latin America and for the assumption of debt in connection with the acquisition
of GSMC (see Note 2, page 48).


INCOME FROM OPERATIONS

      The combined effect of the above described changes resulted in a 4%
increase in income from operations to $20.9 million in 1996, from $20.1 million
in 1995. As a percentage of revenue, income from operations decreased to 13.5%
in 1996, from 21.5% in 1995. The decrease in the operating margin was primarily
the result of the following: i) gaming operations margins were affected by newly
established operations in Brazil and Ecuador; ii) the gross margin on product
sales decreased to 22.3% in 1996, compared to 23.9% in 1995; iii) the higher
selling, general and administrative expenses experienced due primarily to the
$2.7 million charge for the write off of receivables relating to the development
of a television video bingo lottery system in the Czech Republic; and iv)
unusually severe weather conditions in the Midwestern region of the United
States in November and December 1996, which adversely affected the revenue of
the MISS MARQUETTE and wide area progressive systems.

OTHER

      Earnings before income taxes increased 3% to $20.9 million in 1996,
compared to $20.3 million in 1995. Provision for income taxes was $7.7 million
in 1996, compared to $7.4 million in 1995, representing 37% and 36% of earnings
before income taxes in 1996 and 1995, respectively.


LIQUIDITY AND CAPITAL RESOURCES

WORKING CAPITAL

      Working capital decreased to $21.6 million at December 31, 1997, compared
to $37.7 million at December 31, 1996. The decrease is attributable to a
decrease in current assets of $7.1 million and an increase in current
liabilities of $9.0 million.

CASH FLOWS

      During 1997, the Company's cash and cash equivalents decreased $0.1
million to $4.0 million at December 31, 1997 from $4.1 million at December 31,
1996. Cash provided by operating activities was $14.2 million in 1997 compared
to $14.0 million in 1996. While the Company incurred a net loss of ($3.7)
million in 1997, the pre-tax $9.2 million asset impairment charges (see Note 3,
page 49) and pre-tax $4.4 million cumulative effect of the accounting change for
pre-opening and start-up costs (see Note 15, page 58) were non-cash in nature
and did not decrease operating cash flows. Other significant items affecting
operating cash flows were depreciation and amortization, provision for doubtful
accounts, an increase in deferred tax assets and changes in operating assets and
liabilities.

<PAGE>

      Cash used in investing activities amounted to $9.0 million in 1997 and
$15.4 million in 1996. Cash used in investing activities consisted primarily of
$10.0 million and $9.7 million used to purchase property and equipment in 1997
and 1996, respectively, and $14.5 million and $5.5 million advanced on notes
receivable for casino development financing in 1997 and 1996, respectively. The
majority of the property and equipment purchases was the result of expansion of
gaming operations in Latin America, the addition of office space at corporate
headquarters and the costs associated with the development of a Company-wide
information system. Also in 1996, other assets increased by $3.5 million
primarily due to capitalizing pre-opening and start-up costs associated with the
CBF project (such costs incurred prior to January 1, 1997 have been recognized
as a charge to 1997 earnings via the cumulative effect of an accounting
change--see Note 15, page 58) and amounts due from riverboat lessee increased by
$2.6 million, prior to the acquisition of GSMC (see Note 2, page 48). These uses
were partially offset by payments received on notes receivable from casino
development financing amounting to $16.3 million and $4.9 million in 1997 and
1996, respectively.

      Financing activities used $5.5 million of cash in 1997 compared to $5.2
million cash provided in 1996. These activities resulted from net borrowings and
repayments on the Company's credit facility. Also in 1997, the Company completed
a sale-leaseback transaction that provided $7.5 million (see Note 10, page 52).

INTERNATIONAL OPERATIONS

      Approximately 16% of total revenue in 1997 was derived outside of the
United States, compared to 10% in 1996. International operations are subject to
certain risks, including but not limited to unexpected changes in regulatory
requirements, fluctuations in exchange rates, tariffs and other barriers, and
political and economic instability. There can be no assurance that these factors
will not have an adverse impact on the Company's operating results. To date, the
Company has not experienced significant translation or transaction losses
related to foreign exchange fluctuations due to the limited size of its
international operations. As the Company continues to expand its international
operations, exposure to gains and losses on foreign currency transactions may
increase. The Company has not yet engaged, but may in the future engage, in
currency hedging transactions intended to reduce the effect of fluctuations in
foreign currency exchange rates.

IMPACT OF INFLATION

      Inflation has not had a significant effect on the Company's operations
during the three years ended December 31, 1997.

YEAR 2000 COMPLIANCE

      In conjunction with the development of a Company-wide information system,
the Company anticipates to be in compliance with Year 2000 requirements. Costs
related to compliance are not expected to be significant.

<PAGE>

CAUTIONARY NOTICE

      This report contains forward-looking statements reflecting the Company's
expectations or beliefs concerning future events which could materially affect
Company performance in the future. Terms indicating future expectation, optimism
about future potential, anticipated growth in revenue, earnings of the Company's
business lines and like expressions typically identify such statements. Actual
results and events may differ significantly from those discussed in
forward-looking statements.

      All forward-looking statements are subject to the risks and uncertainties
inherent with predictions and forecasts. They are necessarily speculative
statements, and unforeseen factors, such as competitive pressures, changes in
regulatory structure, failure to gain the approval of regulatory authorities,
changes in customer acceptance of gaming, general risks associated with the
conduct of international business (such as foreign currency exchange rate
fluctuation, changes of governmental control or laws, changes in relations
between the United States and other countries, or changes in economic
conditions) could cause results to differ materially from any that may be
expected.

      Forward-looking statements are made in the context of information
available as of the date stated. The Company undertakes no obligation to update
or revise such statements to reflect new circumstances or unanticipated events
as they occur.

<PAGE>

ITEM 8.   FINANCIAL STATEMENTS

<TABLE>

8 (a)        INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                                  Page
                                                                                                       -------

<S>                                                                                                        <C>
             Consolidated Statements of Operations for the years ended
                  December 31, 1997,  1996, and 1995                                                       41

             Consolidated Balance Sheets at December 31, 1997 and 1996                                     42

             Consolidated Statements of Shareholders' Equity for the years ended
                  December 31, 1997, 1996 and 1995                                                         43

             Consolidated Statements of Cash Flows for the years ended
                  December 31, 1997, 1996 and 1995                                                         44

             Notes to Consolidated Financial Statements for the years ended
                  December 31, 1997, 1996 and 1995                                                         45

             Independent Auditors' Report                                                                  60

8(b)         AUDITED FINANCIAL STATEMENTS OF SODAK GAMING PERU S.A., A WHOLLY-OWNED
                 SUBSIDIARY OF THE COMPANY



             The following financial statements are set forth under Item 14(a)3:

                   Report of Independent Public Accountants                                                66

                   Statement of Operations for the Year ended December 31, 1997                            67

                   Balance Sheet at December 31, 1997                                                      68

                   Statement of Shareholders' Deficit for the Year ended December 31, 1997                 69

                   Statement of Cash Flows for the Year ended December 31, 1997                            70

                   Notes to Financial Statements for the year ended December 31, 1997                      71


</TABLE>


<PAGE>



<TABLE>
<CAPTION>
                                                                   SODAK GAMING, INC.
                                                         CONSOLIDATED STATEMENTS OF OPERATIONS
                                                      Years ended December 31, 1997, 1996 and 1995


In thousands, except share and per share amounts                                          1997              1996              1995
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                     <C>                <C>
REVENUE:
    Product sales                                                                $      61,683           104,512            73,173
    Gaming operations                                                                   54,756            34,377             9,009
    Wide area progressive systems                                                       13,329             8,149             4,097
    Financing income                                                                     7,810             7,549             6,893
-----------------------------------------------------------------------------------------------------------------------------------
                 Total revenue                                                         137,578           154,587            93,172
-----------------------------------------------------------------------------------------------------------------------------------

COSTS AND EXPENSES:
    Cost of product sales                                                               48,302            81,171            55,665
    Gaming operations                                                                   54,841            29,786             2,192
    Selling, general and administrative                                                 21,716            20,445            14,531
    Interest and financing costs                                                         3,704             2,284               725
    Impairment of long-lived assets (note 3)                                             9,238                 0                 0
-----------------------------------------------------------------------------------------------------------------------------------
                 Total costs and expenses                                              137,801           133,686            73,113
-----------------------------------------------------------------------------------------------------------------------------------

INCOME (LOSS) FROM OPERATIONS                                                            (223)            20,901            20,059
-----------------------------------------------------------------------------------------------------------------------------------

Other income
    Gain on sale of receivables                                                            537                 0                 0
    Other, net                                                                              68                26               216
-----------------------------------------------------------------------------------------------------------------------------------
                 Total other income                                                        605                26               216
-----------------------------------------------------------------------------------------------------------------------------------

EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE                    382            20,927            20,275

Provision for income taxes (note 11)                                                       958             7,694             7,382
-----------------------------------------------------------------------------------------------------------------------------------

EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE                            (576)            13,233            12,893

Cumulative effect of change in accounting principle related to pre-opening
    and start-up costs, net of income tax effect (note 15)                             (3,131)                 0                 0
-----------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS)                                                              $     (3,707)            13,233            12,893
===================================================================================================================================

EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED:
    EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF
        ACCOUNTING CHANGE                                                        $      (0.02)              0.58              0.57
    CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                              (0.14)              0.00              0.00
-----------------------------------------------------------------------------------------------------------------------------------
    NET EARNINGS (LOSS)                                                          $      (0.16)              0.58              0.57
===================================================================================================================================

WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
     SHARES OUTSTANDING (NOTE 18)                                                  22,896,076        22,965,940         22,772,318

</TABLE>

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

<PAGE>

<TABLE>
<CAPTION>
                                                                   SODAK GAMING, INC.
                                                              CONSOLIDATED BALANCE SHEETS
                                                               December 31, 1997 and 1996

In thousands, except shares                                                                           1997             1996
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>                  <C>
ASSETS
Current assets:
    Cash and cash equivalents                                                                    $   3,942            4,077
    Current trade, notes and interest receivables (notes 4 and 6)                                   36,137           44,417
    Inventories (note 8)                                                                            22,294           20,637
    Prepaid expenses                                                                                   756            1,674
    Refundable income taxes                                                                            663              875
    Deferred income taxes (note 11)                                                                  1,319              553
----------------------------------------------------------------------------------------------------------------------------
                 Total current assets                                                               65,111           72,233
Property and equipment, net (note 9)                                                                59,739           57,135
Notes receivable, net of current maturities (notes 5 and 6)                                         38,723           26,657
Goodwill, net (notes 2 and 3)                                                                            0            8,155
Deferred income taxes (note 11)                                                                        789                0
Other assets, net                                                                                      794            5,295
----------------------------------------------------------------------------------------------------------------------------
                                                                                                 $ 165,156          169,475
============================================================================================================================


LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                                             $  32,379           28,328
    Current maturities of long-term debt (note 10)                                                   3,634            1,751
    Income taxes payable                                                                                75              162
    Deferred financing fee revenue                                                                   1,846               25
    Accrued payroll and payroll related costs                                                        1,986            1,695
    Other accrued liabilities                                                                        3,620            2,544
----------------------------------------------------------------------------------------------------------------------------
                 Total current liabilities                                                          43,540           34,505

Long-term debt, net of current maturities (note 10)                                                 19,818           27,189
Deferred income taxes (note 11)                                                                          0            1,350
----------------------------------------------------------------------------------------------------------------------------
                 Total liabilities                                                                  63,358           63,044
----------------------------------------------------------------------------------------------------------------------------

Shareholders' equity:
    Preferred stock, $0.001 par value, 25,000,000 shares authorized,
        none issued and outstanding                                                                      0                0
    Common stock, $0.001 par value; 75,000,000 shares authorized,
        22,758,408 and 22,757,688 shares issued and outstanding at
        December 31, 1997 and 1996, respectively                                                        23               23
    Additional paid-in capital                                                                      64,088           64,072
    Retained earnings                                                                               40,061           43,768
    Cumulative translation adjustment                                                               (2,374)          (1,432)
----------------------------------------------------------------------------------------------------------------------------
                 Total shareholders' equity                                                        101,798          106,431
----------------------------------------------------------------------------------------------------------------------------

Commitments and contingencies (notes 10, 14 and 16)                                             $  165,156          169,475
============================================================================================================================


</TABLE>

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

<PAGE>


<TABLE>
<CAPTION>
                                                      SODAK GAMING, INC.
                                       Consolidated Statements of Shareholders' Equity
                                        Years ended December 31, 1997, 1996, and 1995


                                            -------------------------------------------------------------------------------------
                                                  Common stock
                                            ----------------------------
                                                                                                        Cumulative      Total
                                                                   Par       Additional   Retained     translation  shareholders'
In thousands, except shares                        Shares        value  paid-in capital   earnings      adjustment    equity
---------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>              <C>             <C>        <C>                <C>        <C>
Balance, December 31, 1994                     22,716,932       $  23           63,692     17,642             0          81,357
    Net earnings                                        0           0                0     12,893             0          12,893
    Restricted stock awards                         5,344           0               11          0             0              11
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995                     22,722,276          23           63,703     30,535             0          94,261
    Net earnings                                        0           0                0     13,233             0          13,233
    Restricted stock awards, net                    (216)           0               10          0             0              10
    Stock options exercised                        35,628           0              250          0             0             250
    Tax benefits of stock
        options exercised (note 14)                     0           0              109          0             0             109
    Foreign currency translation
        adjustment                                      0           0                0          0        (1,432)         (1,432)
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996                     22,757,688          23           64,072     43,768        (1,432)        106,431
    Net loss                                            0           0                0     (3,707)            0          (3,707)
    Restricted stock awards                           250           0               12          0             0              12
    Stock options exercised                           470           0                4          0             0               4
    Foreign currency translation
        adjustment                                      0           0                0          0          (942)           (942)
---------------------------------------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31, 1997                     22,758,408       $  23           64,088     40,061        (2,374)        101,798
=================================================================================================================================

</TABLE>

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

<PAGE>


<TABLE>
<CAPTION>
                                                                   SODAK GAMING, INC.
                                                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                      Years ended December 31, 1997, 1996 and 1995

In thousands                                                                                      1997        1996        1995
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>             <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net earnings (loss)                                                                       $  (3,707)      13,233       12,893
    Adjustments to reconcile net earnings (loss) to net
        cash  provided by (used in) operating activities:
        Impairment of long-lived assets                                                           9,238            0            0
        Pre-tax cumulative effect of change in accounting principle                               4,409            0            0
        Depreciation and amortization                                                             6,524        3,779          713
        Provision for doubtful accounts                                                             882        2,788          300
        Deferred income taxes                                                                    (2,905)         362          584
        Restricted stock awards                                                                      12           10           11
        Gain on sale of receivables                                                                (537)           0            0
        Loss on sale of property and equipment                                                        0           51            0
        Changes in operating assets and liabilities:
           Trade and accrued interest receivables                                                 2,625       (6,811)       2,021
           Notes receivable relating to financed sales                                           (2,323)       3,737      (17,302)
           Inventories                                                                           (6,659)      (7,925)      (1,151)
           Prepaid expenses                                                                         918         (311)        (520)
           Accounts payable                                                                       4,026        5,725      (10,741)
           Accrued liabilities                                                                    1,618          944          773
           Income taxes payable, net of refundable income taxes                                     125       (1,598)      (1,078)
----------------------------------------------------------------------------------------------------------------------------------
                 Net cash provided by (used in) operating activities                             14,246       13,984      (13,497)
----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Cash advanced on notes receivable                                                           (14,469)      (5,515)      (4,762)
    Payments received on notes receivable                                                        16,293        4,924        3,002
    Principal payments received on direct-financing type lease                                        0          338          172
    Purchases of property and equipment                                                          (9,959)      (9,748)      (8,215)
    Proceeds from sale of property and equipment                                                      0          502            0
    Increase in amounts due from riverboat lessee, prior to acquisition (note 2)                      0       (2,631)      (4,752)
    Purchase of subsidiary, net of cash acquired (note 2)                                             0          238            0
    Increase in other assets                                                                       (840)      (3,486)        (889)
----------------------------------------------------------------------------------------------------------------------------------
                 Net cash used in investing activities                                           (8,975)     (15,378)     (15,444)
----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from long-term borrowings                                                           41,300       52,750       27,500
    Principal repayments of long-term debt                                                      (54,328)     (47,800)     (10,052)
    Proceeds from sale-leaseback transaction (note 10)                                            7,540            0            0
    Net proceeds from exercise of stock options                                                       4          250            0
----------------------------------------------------------------------------------------------------------------------------------
                 Net cash provided by (used in) financing activities                             (5,484)       5,200       17,448
----------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                         78         (703)           0
----------------------------------------------------------------------------------------------------------------------------------
                 Net increase (decrease) in cash and cash equivalents                              (135)       3,103      (11,493)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                      4,077          974       12,467
----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                                        $   3,942        4,077          974
==================================================================================================================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid during the year for interest (net of amount capitalized)                        $   3,162        1,719          669
    Cash paid during the year for income taxes                                                    2,460        9,039        7,876
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITY:
    Gaming machine inventory transferred to gaming operations equipment                               0        2,948        2,478

</TABLE>


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


<PAGE>


                               SODAK GAMING, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  Years ended December 31, 1997, 1996 and 1995



(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Sodak Gaming, Inc. (the Company) is a leading distributor and financier of
gaming equipment and a broad range of gaming-related products and services and a
provider of wide area progressive systems, primarily to Native American casinos.
In addition, the Company operates: 1) gaming halls and route operations in Peru
beginning in May 1995; 2) a casino entertainment facility in Quito, Ecuador
beginning in March 1996; 3) a gaming hall in Rio de Janeiro, Brazil beginning in
June 1996, which was converted to a route operation in December 1997; and 4) a
riverboat casino entertainment facility in Marquette, Iowa beginning in July
1996.

A significant amount of product sales is derived from the sale and distribution
of gaming equipment manufactured by International Game Technology (IGT) under an
exclusive distributorship agreement. The term of the most recent distributorship
agreement is for three years ending May 2001, at which time it continues for
two-year renewal periods unless canceled by either party. The agreement allows
the Company the exclusive right to distribute IGT manufactured or assembled
gaming machines to casinos located on Native American lands in the United States
(except Nevada, New Jersey and Hawaii) and to non-Native American purchasers in
South Dakota, North Dakota and Wyoming. The agreement restricts the Company from
selling competing products and is subject to review and renewal upon significant
change in control of the Company.

The Company has an exclusive agreement with IGT to provide and market wide area
progressive systems to Native American casinos. This agreement continues as long
as a progressive system is operating. The Company also has an exclusive
agreement with IGT to provide and market a wide area progressive system to
casinos in Deadwood, South Dakota.

The Company has distributorship arrangements with several other manufacturers
and suppliers of gaming related equipment and products.


PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.


REVENUE RECOGNITION

Revenue from product sales is recognized upon delivery to customers.

Gaming operations revenue consists primarily of gaming revenue from casinos,
gaming halls and route operations. In accordance with industry practice, the
Company recognizes as gaming revenue the net wins from gaming activities, which
is the difference between gaming wins and losses. The Company recognizes as
revenue total net win from gaming devices from route operations which operate
under revenue-sharing arrangements (revenue-sharing expenses related to route
operations are accounted for as an expense of gaming operations).

<PAGE>

Revenue from wide area progressive systems consists of the Company's portion of
fees for providing and marketing wide area progressive systems and is recognized
when earned.

Financing income results from interest income on notes receivable, fees charged
in association with financing arrangements and the Company's portion of the
management fee from a Native American casino that results from the Company
having guaranteed a portion of the initial debt related to that casino.
Financing income is recognized when earned on an accrual basis and, when
applicable, in accordance with Statement of Financial Accounting Standards
(SFAS) No. 91, ACCOUNTING FOR NONREFUNDABLE FEES AND COSTS ASSOCIATED WITH
ORIGINATING OR ACQUIRING LOANS AND INITIAL DIRECT COSTS OF Leases. Deferred
financing fee revenue as separately stated on the balance sheets represents
financing fees that will be recognized as revenue over the life of the
associated loans in accordance with SFAS No. 91.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents includes cash on hand, demand deposits, and short-term
investments with original maturities of three months or less.

NOTES RECEIVABLE

Notes receivable are recorded at cost, less the related allowance for doubtful
accounts. The Company measures its estimates of impaired loans in accordance
with SFAS No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, as amended
by SFAS No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN--INCOME
RECOGNITION AND DISCLOSURES. Management, considering current information and
events regarding the borrowers ability to repay their obligations, considers a
note impaired when it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the note agreement. When a
loan is considered to be impaired, the amount of impairment is measured based on
the present value of expected future cash flows discounted at the note's
effective interest rate. Impairment losses, if any, are included in the
allowance for doubtful accounts through a charge to bad debt expense. Cash
receipts on impaired notes receivable are applied to reduce the principal amount
of such notes until the principal has been recovered, and are recognized as
interest income thereafter. All notes receivable have been evaluated for
collectibility under SFAS No.'s 114 and 118.

INVENTORIES

Inventories are stated at the lower of cost or market. Gaming machine costs are
determined on a specific identification basis. Costs of other inventories are
determined using the first-in, first-out method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is provided principally
on a straight-line basis in amounts sufficient to relate the cost of depreciable
assets to operations over the following estimated useful lives:

                                                                         Years
-------------------------------------------------------------------------------
Land improvements                                                           15
Buildings and improvements                                               15-39
Leasehold improvements                                                    3-10
Riverboat                                                                   25
Gaming operations equipment                                               5-10
Office furniture and equipment                                            5-10
Transportation equipment                                                  5-20
Shop equipment                                                             5-7
===============================================================================

<PAGE>

PRE-OPENING AND START-UP COSTS

In 1997, the Company changed its method of accounting for pre-opening and
start-up costs and for the amortization of such costs. The impact of the
accounting change is described in Note 15.


INCOME TAXES

The Company provides for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. Deferred tax assets and liabilities are recognized
for the expected future tax consequences arising from temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.


STOCK-BASED COMPENSATION

The Company has adopted the disclosure requirements under SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. As permitted under SFAS No. 123, the
Company applies Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for its
plans. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock.


EARNINGS PER SHARE

Effective for the fourth quarter of 1997, the Company adopted the provisions of
SFAS No. 128, EARNINGS PER SHARE. SFAS No. 128 requires the reporting of basic
earnings per share and diluted earnings per share. Basic earnings per share is
computed by dividing net earnings for the period by the weighted average common
shares outstanding for the period. Diluted earnings per share is computed in the
same fashion, except that any potential dilutive shares are added to the
denominator of that calculation. During the years ended December 31, 1997, 1996
and 1995, the only dilutive item present in the Company's capital structure is
stock options and restricted shares outstanding. The provisions of SFAS No. 128
have been applied to all periods presented in the accompanying financial
statements.


USE OF ESTIMATES

The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.


FOREIGN CURRENCY TRANSLATION

The financial statements of foreign subsidiaries have been translated into U.S.
dollars for consolidated reporting purposes in accordance with SFAS No. 52,
FOREIGN CURRENCY TRANSLATION. All asset and liability accounts have been
translated using the current exchange rate at the balance sheet date. Income
statement amounts have been translated using the average monthly exchange rates.
The gains and losses resulting from translation adjustments are reflected as a
component of shareholders' equity. The gains and losses from foreign currency
transactions are included in net earnings and are insignificant for all years
presented.

<PAGE>

LONG-LIVED ASSETS

The Company follows the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which requires that long-lived assets and certain identifiable intangibles to be
held and used or disposed of by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable based on future undiscounted cash flows.


SEGMENT REPORTING

The Company adopted the provisions of SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION, during 1997. SFAS No. 131 requires
disclosure of factors used to identify an enterprise's reportable segments and
the types of products and services from which each reportable segment derives
its revenues, as well as selected financial data related to each reportable
segment. The reporting methodology required by SFAS No.
131 has been applied to all years presented.


NEW ACCOUNTING PRONOUNCEMENT

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
REPORTING COMPREHENSIVE INCOME. This statement requires companies to classify
items of other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position, and is effective for the Company's year ending
December 31, 1998. Management intends to comply with the disclosure requirements
of this statement.


RECLASSIFICATIONS

Certain 1996 and 1995 amounts have been reclassified to conform to the current
year presentation.


(2) ACQUISITION

In 1994, the Company acquired and refurbished the MISS MARQUETTE riverboat for
$14.3 million. The Company leased the MISS MARQUETTE to Gamblers Supply
Management Company (GSMC), an unrelated third party, beginning October 1, 1994,
under a long-term lease agreement. In addition, the Company loaned $7.5 million
to GSMC to fund costs incurred by GSMC to develop and construct dockside
facilities and related amenities and financed $5.7 million of gaming equipment.
The lease required scheduled lease payments of the greater of an aggregate of
$25 million or 50% of defined net income from casino operations determined
annually, during the first 43 months of the lease and 50% of the defined net
income from casino operations thereafter.

On July 1, 1996, the Company acquired all of the outstanding shares of common
stock of GSMC for $1 million in cash. The acquisition was accounted for using
the purchase method of accounting, and accordingly the consolidated statements
of operations include the results of operations of GSMC beginning on July 1,
1996. The fair value of the tangible assets acquired totaled $23.3 million and
consisted of gaming machines, gaming equipment, and dockside facilities, which
include a 24-room hotel, parking lots, marina, restaurant, lounge and other
support facilities and related furniture, fixtures and equipment. The
liabilities assumed were valued at $8.2 million, excluding $22.6 million owed to
the Company, and consisted of trade accounts payable, accrued expenses and notes
payable, including $4.2 million of notes payable to the former shareholders. At
December 31, 1996 the excess purchase price over the fair value of the net
assets acquired was approximately $8.2 million, net of accumulated amortization
of approximately $281,000. As described in note 3, the Company has deemed
certain long-lived assets related to GSMC, including the goodwill, to be
impaired in 1997.

<PAGE>

The following unaudited pro forma information has been prepared as if the
acquisition of GSMC had occurred at the beginning of 1996 and 1995. The pro
forma information is presented for informational purposes only and is not
necessarily indicative of the results of operations had the acquisition been
made as of those dates.

In thousands, except per share amounts              1996           1995
--------------------------------------------------------------------------------

Total revenue                                    $  166,262       121,803
Net earnings                                         12,006        11,047
Basic and diluted earnings per share                   0.52          0.49
================================================================================


(3) IMPAIRMENT OF LONG-LIVED ASSETS

In the fourth quarter of 1997, in recognition of changing economic conditions
and competitive environments, the Company re-evaluated the recoverability of
certain of its long-lived assets. In December 1997, the Company recorded a
non-cash pre-tax charge to operations resulting from impairment of certain
long-lived assets of approximately $9.2 million. In accordance with SFAS No.
121, the carrying values of the impaired assets were reduced to reflect a
remaining carrying value equal to the estimated future discounted cash flows
related to the impaired assets. This impairment charge was primarily related to
MISS MARQUETTE goodwill and property and equipment. Factors leading to the
impairment charge in 1997 were that earnings and earnings before interest,
taxes, depreciation and amortization (EBITDA) at the MISS MARQUETTE were less
than those experienced prior to the Company's acquisition, as well as the
effects of increased competition.


(4) CURRENT TRADE, NOTES AND INTEREST RECEIVABLES

Current trade, notes and interest receivables with original maturities, or
anticipated maturities, of less than one year, and the current portion of
long-term notes receivable are summarized as follows at December 31:

    In thousands                                                1997      1996
    --------------------------------------------------------------------------

    Trade accounts receivable                            $    17,384    21,169
    Various short-term installment notes receivable            1,490       391
    Current maturities of long-term notes receivable          17,785    23,197
    Accrued interest receivable                                1,038       570
    --------------------------------------------------------------------------
                                                              37,697    45,327
    Less allowance for doubtful accounts                      (1,560)     (910)
    --------------------------------------------------------------------------
                                                         $    36,137    44,417
    ==========================================================================


<PAGE>


(5) NOTES RECEIVABLE

Notes receivable with original maturities greater than one year result primarily
from the financing of sales of gaming equipment to customers on an installment
basis and from loans to casino management companies and operators. These notes
earn interest at fixed rates ranging from 8% to 13%, or variable rates,
generally adjusted monthly, ranging from prime to prime plus 4%. Maturities of
notes receivable from financed sales generally are 24 to 36 months, while
maturities of other loans are up to 60 months. The following is a summary of
notes receivable at December 31:

    In thousands                                          1997          1996
    -------------------------------------------------------------------------

    Notes receivable on financed sales               $   41,634        45,513
    Notes receivable on loans--gaming-related            14,874         4,341
    --------------------------------------------------------------------------
                                                         56,508        49,854
             Less current maturities                    (17,785)      (23,197)
             -----------------------------------------------------------------
                                                     $   38,723        26,657
             =================================================================


(6) CONCENTRATIONS OF CREDIT RISK

A significant portion of the Company's trade accounts and notes receivable
disclosed in Notes 4 and 5 are due from customers located on Native American
lands. The receivables are generally secured by the gaming equipment sold and,
in certain instances, revenues derived from casino operations.
Concentrations of credit risk as a percentage of total receivables, are as
follows at December 31:


                                              1997                      1996
--------------------------------------------------------------------------------
Native American gaming-related                 80%                       86%
Other gaming-related                           20%                       14%
--------------------------------------------------------------------------------
                                              100%                      100%
================================================================================

Because of the uncertain application of federal and state laws to Native
American tribes in the case of amounts advanced to Native American communities,
the Company's ability to collect these amounts receivable is dependent upon the
future cash flows from the Native American communities' casino operations,
rather than the general credit of the tribes.


(7) DISCLOSURES ABOUT FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practical to estimate that
value:


CASH EQUIVALENTS; CURRENT TRADE, NOTES AND INTEREST RECEIVABLES; NOTES
RECEIVABLE; ACCOUNTS PAYABLE; ACCRUED LIABILITIES; AND NOTES PAYABLE

The carrying amounts of cash equivalents, current trade, notes and interest
receivables, accounts payable and accrued liabilities approximate fair value
because of the short maturity of those instruments.

Management estimates that notes receivable and notes payable approximate fair
value as they generally include variable interest rates.

<PAGE>

(8) INVENTORIES

Inventories consist of the following at December 31:

    In thousands                                1997           1996
    -----------------------------------------------------------------
    Gaming machines                          $  19,682         16,411
    Parts and other gaming accessories           2,612          4,226
    -----------------------------------------------------------------
                                             $  22,294         20,637
    =================================================================


(9) PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31:

    In thousands                                             1997          1996
    ---------------------------------------------------------------------------
    Land and improvements                                 $ 1,551         1,358
    Buildings and improvements                             18,932        17,758
    Leasehold improvements                                  1,761         1,083
    Riverboat                                              13,687        13,687
    Gaming operations equipment                            23,252        22,509
    Office furniture and equipment                          2,982         2,496
    Transportation equipment                                2,305         2,150
    Shop equipment                                            522           504
    Systems, in progress                                    3,018             0
    ---------------------------------------------------------------------------
                                                           68,010        61,545
    Less accumulated depreciation and amortization         (8,271)       (4,410)
    ---------------------------------------------------------------------------
                                                          $59,739        57,135
    ===========================================================================

Included in property and equipment is $7.5 million of furniture and equipment
relating to a capital lease obligation (see Note 10), with accumulated
amortization of approximately $0.7 million at December 31, 1997.

<PAGE>

(10) LONG-TERM DEBT

Long-term debt consists of the following at December 31:

<TABLE>
<CAPTION>
                                                                                                   In thousands
                                                                                           ------------------------
                                                                                                1997          1996
      -------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>              <C>
      Note payable to bank under a long-term revolving credit facility with terms as
           explained below                                                                $   12,500       23,250
      Capital lease obligation as explained below                                              7,018            0

      Note payable to bank in monthly installments of $8,312 including interest
           at 7.45% through November 1998 with a balloon payment of
           approximately $425,000 due
           December 1998; secured by certain transportation equipment                            484          546
      Notes payable to the former shareholders of GSMC due in monthly installments of
           $137,880 including interest
           at 8% through July 1999; unsecured                                                  2,453        3,850
      Contract payable in monthly installments of $12,668 including interest at 9%
           through January 2005; secured by real estate                                          794          871
      Various other secured notes payable                                                        203          423
      -------------------------------------------------------------------------------------------------------------
                                                                                              23,452       28,940
      Less current maturities                                                                 (3,634)      (1,751)
      -------------------------------------------------------------------------------------------------------------
                                                                                          $   19,818       27,189
      =============================================================================================================

</TABLE>

REVOLVING CREDIT FACILITY

The Company holds a $50 million long-term revolving credit facility from a
syndicate of banks. The revolving line has two components: a $20 million tranche
(Tranche A) to be used for general corporate purposes and letters of credit; and
a $30 million tranche (Tranche B) for acquisitions and major capital equipment
expenditures. Tranche A matures in February 1999, plus two one-year renewal
options subject to bank approval, and Tranche B matures in February 2001. The
amount available under Tranche B is reduced by $1.875 million quarterly
beginning in June 1997. As a result, the maximum credit amount under the
revolving credit facility was $44.4 million at December 31, 1997. The unused
portion of the revolving credit facility is subject to a commitment fee, based
on a calculation as defined in the agreement. In addition to the $12.5 million
loan outstanding, the Company has $10.0 million in letters of credit outstanding
at December 31, 1997.

Interest is payable based on variable rates which, at the Company's option, are
based on prime rate (which was 8.5% at December 31, 1997) or a Eurodollar rate
plus an applicable margin (which was 7.875% at December 31, 1997). Amounts
borrowed are secured by substantially all Company assets, excluding real estate,
but including a first preferred ship mortgage on the MISS MARQUETTE riverboat.

Among other restrictions, the revolving credit facility calls for maintenance of
certain financial ratios and covenants, which include a tangible net worth
floor, a liquidity ratio, a cash flow coverage ratio, a leverage ratio, a funded
debt ratio and foreign subsidiary investment ratios. As of December 31, 1997,
the Company was not in compliance with two of these covenants but has received
waivers for such non-compliance as of that date.

<PAGE>

CAPITAL LEASE OBLIGATION

During 1997, the Company entered into a sale-leaseback arrangement involving the
sale of certain GSMC furniture and equipment for $7.5 million, which
approximated book value at the time of the sale. The transaction was accounted
for as a financing, whereby the property remains on the books and continues to
be depreciated. A financing obligation representing the proceeds was recorded
and is reduced based on payments under the arrangement. The financing
arrangement requires 48 monthly payments of $233,452, including interest at 21%
per annum, through July 2001. Upon expiration of the arrangement, the Company
will own the furniture and equipment. Future minimum lease payments related to
this arrangement are as follows for the years ended December 31:

    In thousands
    --------------------------------------------------------------------
    Year                                                       Amount
    --------------------------------------------------------------------
    1998                                                   $    2,802
    1999                                                        2,802
    2000                                                        2,802
    2001                                                        1,634
    --------------------------------------------------------------------
    Total minimum lease payments                               10,040
    Less amounts representing interest                         (3,022)
    --------------------------------------------------------------------
    Present value of minimum lease payments                     7,018
    Less current maturities                                    (1,466)
    --------------------------------------------------------------------
    Long-term capital lease obligation                     $    5,552
    ====================================================================


Principal maturities of long-term debt, including the capital lease obligation,
are as follows for the years ended December 31:

    In thousands
    ---------------------------------------------------------------------
    Year                                                         Amount
    ---------------------------------------------------------------------

    1998                                                   $      3,634
    1999                                                          5,976
    2000                                                          9,910
    2001                                                          3,514
    2002                                                            124
    Thereafter                                                      294
    =====================================================================



(11) INCOME TAXES

A reconciliation of income taxes based on the statutory rate of 35% to the
Company's actual income taxes based on earnings before income taxes and
cumulative effect of accounting change for the years ended December 31, 1997,
1996 and 1995 is summarized as follows:

<TABLE>
<CAPTION>

    In thousands                                                1997     1996    1995
    ----------------------------------------------------------------------------------
<S>                                                           <C>       <C>     <C>
    Federal income taxes at statutory federal rate            $  134    7,324   7,096
    State income taxes, net of federal income tax benefit         65      277     317
    Change in valuation allowance for deferred tax assets        811        0       0
    Foreign                                                      122      314      78
    Other                                                       (174)    (221)   (109)
    ----------------------------------------------------------------------------------
    Provision for income taxes                                $  958    7,694   7,382
    ==================================================================================

</TABLE>

<PAGE>

The provision for income taxes for the years ended December 31, 1997, 1996 and
1995 is summarized as follows:


<TABLE>
<CAPTION>

   In thousands                                                1997       1996     1995
    --------------------------------------------------------------------------------------
<S>                                                        <C>            <C>      <C>
    CURRENT:
       Federal                                             $   2,333      6,617    6,272
       State                                                     130        401      448
       Foreign                                                   122        314       78
    --------------------------------------------------------------------------------------
                Total current                                  2,585      7,332    6,798
    --------------------------------------------------------------------------------------
    DEFERRED:
       Federal                                                (2,875)       337      544
       State                                                     (30)        25       40
    --------------------------------------------------------------------------------------
                Total deferred                                (2,905)       362      584
    --------------------------------------------------------------------------------------
    Total tax expense (benefit)                                 (320)     7,694    7,382
    Less tax benefit related to cumulative effect of
        accounting change (note 15)                            1,278          0        0
    --------------------------------------------------------------------------------------
                Provision for income taxes                 $     958      7,694    7,382
    ======================================================================================

</TABLE>


Deferred tax assets and liabilities consist of the following at December 31:

<TABLE>
<CAPTION>

    In thousands                                                          1997      1996
    --------------------------------------------------------------------------------------
<S>                                                                  <C>               <C>
    DEFERRED TAX ASSETS:
           Allowance for impairment                                  $   3,242         0
           Allowance for inventory                                         539       148
           Allowance for doubtful accounts                                 530       299
           Foreign property and equipment                                  372         0
           Pre-opening and start-up cost write-offs                        480         0
           Other                                                           262       106
    --------------------------------------------------------------------------------------
                Total deferred tax assets                                5,425       553
                Less valuation allowance                                  (811)        0
    --------------------------------------------------------------------------------------
                Deferred tax assets, net of valuation allowance          4,614       553
                Less current deferred tax assets                        (1,319)     (553)
    --------------------------------------------------------------------------------------
                Long-term deferred tax assets                            3,295         0

    DEFERRED TAX LIABILITIES, PRIMARILY PROPERTY AND EQUIPMENT          (2,506)   (1,350)
    --------------------------------------------------------------------------------------
                Net long-term deferred tax assets (liabilities)      $     789    (1,350)
    ======================================================================================
</TABLE>

The Company established a valuation allowance in the current year due to
uncertainties surrounding the ultimate realization of foreign loss carryforwards
and reversals of the timing differences related to the foreign pre-opening and
start-up cost write-offs. The Company believes it is more likely than not to
realize the remaining net deferred tax assets based on: 1) the future reversing
effects of deductible temporary differences being offset by reversing taxable
temporary differences; 2) the extended period that is available to realize the
reversing effects of the deductible temporary differences; and 3) the Company's
expected future generation of taxable income adequate to realize the deferred
tax benefits.


<PAGE>


(12) STOCK SPLIT

On August 30, 1996 the Company's board of directors approved a two-for-one stock
split in the form of a stock dividend, effected by a distribution on September
27, 1996 of one additional share for each share owned by shareholders of record
on September 13, 1996. The $0.001 par value per share of the Company's common
stock was unchanged by the stock split. The par value of the additional shares
issued as a result of the stock split was capitalized into common stock in the
consolidated balance sheets by means of a transfer from additional paid-in
capital. All references in these consolidated financial statements to number of
common shares and earnings per share have been restated to give retroactive
effect to the stock split.


(13) LINES OF BUSINESS AND GEOGRAPHICAL DATA

The Company operates predominantly in the lines of business of product sales,
wide area progressive systems, financing and gaming operations. All lines of
business segments are described in the "organization" section of note 1.
Summarized financial information by line of business for 1997, 1996 and 1995 is
as follows:

<TABLE>
<CAPTION>
                                                                                               Gaming Operations
                                                                                   -------------------------------------------
                                                                                                 Peru gaming
                                                         Wide area                               hall and         Other
                                              Product   progressive     Financing  GSMC - MISS   route            gaming
In thousands                                  sales       systems       income     MARQUETTE     operations     operations
------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>                    <C>            <C>          <C>            <C>             <C>
1997:
Revenue                              $        61,683        13,329         7,810        32,312         14,777          7,667
Direct costs                                 (48,302)            0             0       (27,896)       (13,893)        (7,605)
Selling, general and administrative           (6,544)       (1,475)            0           (40)          (157)        (3,032)
Interest and financing costs                       0             0        (2,595)       (1,109)             0              0
Impairment of long-lived assets                    0             0             0        (8,751)             0              0
Depreciation and amortization                   (240)          (67)            0        (2,936)        (1,776)          (735)
------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations        $         6,597        11,787         5,215        (8,420)        (1,049)        (3,705)
==============================================================================================================================
Cumulative effect of change in
   accounting principle (note 15)    $             0             0             0             0           (819)        (2,312)
==============================================================================================================================

Identifiable assets                  $        32,765         9,485        57,285        35,772         11,507          3,862
==============================================================================================================================

Capital expenditures                 $           198           843             0           575          2,711             37
==============================================================================================================================


1996:
Revenue                              $       104,512         8,149         7,549        18,584         12,396          3,397
Direct costs                                 (81,171)            0             0       (13,260)       (10,289)        (3,273)
Selling, general and administrative           (6,879)         (983)            0           (48)           (72)            (3)
Interest and financing costs                       0             0        (2,052)         (232)             0              0
Depreciation and amortization                   (240)            0             0        (1,421)        (1,143)          (400)
------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations        $        16,222         7,166         5,497         3,623            892           (279)
==============================================================================================================================

Identifiable assets                  $        35,971         7,645        49,646        43,918         11,817          8,465
==============================================================================================================================

Capital expenditures(1)              $           253             0             0           378          6,213          4,539
==============================================================================================================================


1995:
Revenue                              $        73,173         4,097         6,893         6,712          2,324              0
Direct costs                                 (55,665)            0             0             0         (2,009)             0
Selling, general and administrative           (6,104)         (750)            0           (37)           (56)             0
Interest and financing costs                       0             0          (725)            0              0              0
Depreciation and amortization                   (120)            0             0             0           (183)             0
------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations        $        11,284         3,347         6,168         6,675             76              0
==============================================================================================================================

Identifiable assets                  $        29,305         3,994        53,070        34,028          5,569            409
==============================================================================================================================

Capital expenditures(1)              $         2,308             0             0             0          4,763              0
==============================================================================================================================

</TABLE>

[WIDE TABLE CONTINUED FROM ABOVE]


In thousands                          Corporate  Consolidated
----------------------------------------------------------------
1997:
Revenue                                      0        137,578
Direct costs                                 0        (97,696)
Selling, general and administrative     (9,391)       (20,639)
Interest and financing costs                 0         (3,704)
Impairment of long-lived assets           (487)        (9,238)
Depreciation and amortization             (770)        (6,524)
----------------------------------------------------------------
Income (loss) from operations          (10,648)          (223)
================================================================
Cumulative effect of change in
   accounting principle (note 15)            0         (3,131)
================================================================

Identifiable assets                     14,480        165,156
================================================================

Capital expenditures                     5,595          9,959
================================================================


1996:
Revenue                                      0        154,587
Direct costs                                 0       (107,993)
Selling, general and administrative    (11,645)       (19,630)
Interest and financing costs                 0         (2,284)
Depreciation and amortization             (575)        (3,779)
----------------------------------------------------------------
Income (loss) from operations          (12,220)        20,901
================================================================

Identifiable assets                     12,013        169,475
================================================================

Capital expenditures(1)                  1,313         12,696
================================================================


1995:
Revenue                                    (27)        93,172
Direct costs                                 0        (57,674)
Selling, general and administrative     (7,054)       (14,001)
Interest and financing costs                 0           (725)
Depreciation and amortization             (410)          (713)
----------------------------------------------------------------
Income (loss) from operations           (7,491)        20,059
================================================================

Identifiable assets                     11,680        138,055
================================================================

Capital expenditures(1)                  3,622         10,693
================================================================


(1) Includes non-cash transfers of gaming machine inventory to gaming operations
equipment.
<PAGE>


Summarized financial information by geographic area for 1997, 1996 and 1995
follows:

<TABLE>
<CAPTION>
    In thousands                        North America    Latin America    Consolidated
    -----------------------------------------------------------------------------------
<S>                                      <C>                 <C>            <C>
    1997:
    Revenue                              $ 115,134           22,444         137,578
    Income (loss) from operations            4,531           (4,754)           (223)
    Identifiable assets                    149,787           15,369         165,156
    1996:
    Revenue                                138,794           15,793         154,587
    Income from operations                  20,288              613          20,901
    Identifiable assets                    149,193           20,282         169,475
    1995:
    Revenue                                 90,848            2,324          93,172
    Income from operations                  19,983               76          20,059
    Identifiable assets                    132,077            5,978         138,055
    ===================================================================================

</TABLE>

The Company had one customer who accounted for 15.5% of total revenue in 1996.
The Company had no customers who exceeded 10% of revenue in 1997 or 1995.


(14) EMPLOYEE BENEFIT PLANS

LONG-TERM INCENTIVE AND STOCK OPTION PLANS

In 1993, the Company adopted a Long-Term Incentive and Stock Option Plan under
which the Company may grant up to 1,200,000 shares for incentive stock options
to employees and nonqualified stock options and performance awards to employees
and non-employees. Options have been granted at fair market value on the date of
grant, become exercisable in four annual installments and expire five to ten
years from date of grant. Also in 1993, the Company adopted a Directors' Stock
Option Plan, which was amended in 1995, under which options to purchase up to
300,000 shares may be granted to non-employee directors. The Directors' Stock
Option Plan provides for an annual grant of 10,000 options to each non-employee
director. The options granted under the Directors' Stock Option Plan are
exercisable after six months and expire five years from date of grant.

Information with respect to shares under the plans is as follows:

<TABLE>
<CAPTION>
                                                  Shares of common stock
                                           -------------------------------
                                                                                 Weighted average
                                           Available for                            exercise price of
                                           option/award       Under Plan          shares under Plan
    --------------------------------------------------------------------------------------------------
<S>                                               <C>               <C>               <C>
    Outstanding at December 31, 1994             1,398,704          101,296       $   8.73
          Granted                                 (221,600)         221,600           6.30
          Canceled                                       0                0            n/a
          Exercised                                      0                0           8.00
    --------------------------------------------------------------------------------------------------
    Outstanding at December 31, 1995             1,177,104          322,896           7.06
          Granted                                 (358,000)         358,000          13.20
          Canceled                                   8,440           (8,440)         11.45
          Exercised                                      0          (35,628)          7.00
    --------------------------------------------------------------------------------------------------
    Outstanding at December 31, 1996               827,544          636,828          10.46
          Granted                                 (381,240)         381,240          16.24
          Canceled                                   6,000           (6,000)         16.08
          Exercised                                      0             (470)          9.44
    --------------------------------------------------------------------------------------------------
    Outstanding at December 31, 1997               452,304        1,011,598       $  12.60
    ==================================================================================================

</TABLE>

<PAGE>

The following table summarizes information concerning currently outstanding and
exercisable options:

<TABLE>
<CAPTION>
                                            Options outstanding                                Options exercisable
                           ------------------------------------------------------------   ------------------------------

                                                        Weighted         Weighted                         Weighted
       Range of Exercise                            average remaining     average           Number         average
       Prices               Number outstanding       contractual life   exercise price    exercisable    exercise price
       -----------------------------------------------------------------------------------------------------------------

<S>                                <C>                     <C>           <C>                <C>             <C>
         $     5 to 10             279,598                 3.7           $   7.00           168,424         $   7.25
              10 to 15             398,000                 5.4              13.05           163,750            12.77
              15 to 20             334,000                 7.9              16.77                 0               --
       -----------------------------------------------------------------------------------------------------------------
                                 1,011,598                                                  332,174
========================================================================================================================
</TABLE>


The company applies APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations in accounting for its plans. Accordingly,
no compensation expense has been recognized for its stock based compensation
plans other than for restricted stock. Had compensation cost for the Company's
other stock option plans been determined based upon the fair value at the grant
date for awards under those plans consistent with the methodology prescribed
under SFAS No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION, the Company's net
loss and loss per share would have been increased by approximately $1.2 million,
or $0.05 per share in 1997, and net earnings and earnings per share would have
been reduced by approximately $0.7 million, or $0.03 per share in 1996 and $0.2
million, or $0.01 per share in 1995. The fair value of the options granted
during 1997, 1996 and 1995 is estimated as $6.42 to $8.77, $6.03 to $8.26 and
$2.95 to $3.83, respectively. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following average assumptions:

<TABLE>
<CAPTION>
                                                         1997           1996          1995
     ------------------------------------------------------------------------------------------
<S>                                                      <C>              <C>          <C>
     Expected dividend yield                             0.0%             0.0%         0.0%
     Expected stock price volatility                    62.6%            54.1%        54.1%
     Risk-free interest rate                             5.6%             5.6%         5.6%
     Expected average life of options (years)            4           4.5 to 8     4.5 to 8
     ------------------------------------------------------------------------------------------
</TABLE>


Proforma net earnings reflects only options granted in 1997, 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the proforma net earnings amounts
presented because compensation cost is reflected over the options vesting period
and compensation cost for options granted prior to January 1, 1995 is not
considered.

The exercise of stock options which have been granted under the Company's stock
option plans may result in compensation which is included in the taxable income
of the applicable employees and deductible by the Company for income tax
purposes. Income tax benefits realized for the year ended December 31, 1996 of
approximately $109,000 have been reflected as an increase in additional paid-in
capital in accordance with APB Opinion No. 25.


RETIREMENT PLAN

In January 1994, the Company adopted a 401(k) defined contribution benefit plan
for its employees. In accordance with plan provisions, the Company provides a
discretionary matching contribution of up to 6% of employee compensation. In
July 1997, the employees of the Company's MISS MARQUETTE riverboat casino
operation became eligible to participate in the plan. The amount of expense
recognized as a result of matching contributions was approximately $511,000,
$268,000 and $195,000 in 1997, 1996 and 1995, respectively. Employees vest in
Company contributions over a seven year period of employment.

<PAGE>

(15) CHANGE IN ACCOUNTING METHOD

During the fourth quarter of 1997, the Company changed its accounting method for
costs of pre-opening and start-up activities to capitalizing such costs
subsequent to obtaining all regulatory approvals and authorizations for the
underlying project and expensing such costs immediately upon opening the new
operation. The Company's previous accounting method had been to capitalize such
costs from inception until the project became operational, at which time the
capitalized costs were amortized over a period not to exceed five years. The
Company adopted this new accounting method because it conforms to the industry
practice of major gaming companies, and retroactively applied the change to
previously reported quarterly data, effective January 1, 1997. As a result of
this accounting change, there are no such capitalized costs on the balance sheet
at December 31, 1997.

The effect of adopting this new accounting method reduced 1997 earnings (loss)
before cumulative effect of the accounting change by approximately $2.2 million,
comprised of an increase in gaming operations and selling, general and
administrative expenses of approximately $3.2 million, net of tax benefits of
approximately $1.0 million.

The cumulative effect of this accounting change, reflected as a charge to 1997
earnings (loss) in the amount of approximately $3.1 million, is comprised of
approximately $4.4 million of such costs capitalized at January 1, 1997 (which
were included in other assets on the balance sheet as of December 31, 1996), net
of tax benefits of approximately $1.3 million. If the new method of accounting
for pre-opening and start-up costs had been in effect in years prior to 1997,
such costs comprising the cumulative of the accounting change would have been
reflected primarily as 1996 expenses.


(16) COMMITMENTS AND CONTINGENCIES

During 1994, the Company assisted a casino management company in acquiring $8
million in financing from a financial institution. The Company also guaranteed
the debt. The loan guaranty agreement, as subsequently revised, allows the
casino management company to borrow back prepaid amounts, and at December 31,
1997 the maximum allowable loan balance was $4.3 million. In return for the
guaranty, the Company receives a loan guaranty fee based on a percentage of the
outstanding loan balance, and additionally, a lesser percentage of the unused
maximum allowable loan balance. As of February 16, 1998, the outstanding loan
balance was $1.9 million, and during the years ended December 31, 1997, 1996 and
1995, the Company recognized income of approximately $64,000, $185,000 and
$251,000, respectively, related to this agreement.

In October 1997, the Company entered into an agreement with Hollywood Casino
Corporation and New Orleans Paddlewheels to develop a riverboat casino, hotel
and retail complex in Shreveport, Louisiana. The proposed project, to be managed
by Hollywood, is pending regulatory approval by the Louisiana Gaming Control
Board (LGCB). The project is to be financed by an equity investment from the
joint venture partners equal to approximately 25% of the total estimated project
cost; the remaining 75% is to be financed through a debt offering. In the first
quarter of 1998, the project was estimated to cost approximately $165 million.
The Company's participation in the project is contingent upon: 1) obtaining
regulatory approval of the project by the LGCB; 2) the Company's obtaining a
gaming license in Louisiana; and 3) the joint venture's obtaining necessary debt
financing. Construction is expected to commence upon finalization of regulatory
approvals and financing arrangements and is expected to take approximately 15
months.

<PAGE>

(17) RELATED PARTY TRANSACTION

As part of an agreement with a corporate shareholder (14% ownership), the
Company guaranteed financing relating to a portion of the construction cost of a
Native American casino facility, managed by the shareholder, that opened in
December 1994. As of December 31, 1996, financing under this guaranty had been
paid in full. As consideration for the loan guaranty, the Company receives, from
the shareholder, 4% of the distributable net income of the gaming operation over
the term of the management contract and any extensions thereto. The current
management agreement expires December 1999. The Company's share of distributable
net income related to this agreement during the years ended December 31, 1997,
1996 and 1995 of approximately $1.9 million, $1.6 million and $1.5 million,
respectively, is included in financing income on the statements of operations.


(18) COMMON SHARES OUTSTANDING

The following is a reconciliation of basic weighted average shares outstanding
to diluted weighted average shares outstanding for the years ended December 31:

<TABLE>
<CAPTION>
                                                            1997            1996           1995
     --------------------------------------------------------------------------------------------
<S>                                                   <C>             <C>            <C>
     Weighted average common shares
        outstanding for basic EPS calculation         22,758,186      22,737,580     22,722,276
     Adjustments for common share
        equivalents (stock options)                      137,890         228,360         50,042
     --------------------------------------------------------------------------------------------
     Weighted average common shares outstanding
        for diluted EPS calculation                   22,896,076      22,965,940     22,772,318
     ============================================================================================

</TABLE>

(19) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The Company operates on a calendar year basis. The following table sets forth
selected historical operating results for each quarter of 1997, 1996 and 1995.

<TABLE>
<CAPTION>
                                                             First     Second     Third   Fourth
In thousands, except per share amounts                      Quarter    Quarter  Quarter   Quarter(2)
-----------------------------------------------------------------------------------------------------
<S>                                                        <C>           <C>       <C>      <C>
1997(1):
     Total revenue                                         $  29,100     33,338    35,636   39,504
     Income (loss) from operations                               492      2,840     5,082   (8,637)
     Earnings (loss) before cumulative effect of
           accounting change                                     585      1,670     3,216   (6,047)
     Cumulative effect of accounting change                   (3,131)         0         0        0
     Net earnings (loss)                                      (2,546)     1,670     3,216   (6,047)
     Basic and diluted earnings (loss) per share               (0.11)      0.07      0.14    (0.26)
1996:
     Total revenue                                         $  21,542     34,791    63,102   35,152
     Income from operations                                    4,267      6,393     8,253    1,988
     Net earnings                                              2,698      4,081     5,220    1,234
     Basic and diluted earnings per share                       0.12       0.18      0.23     0.05
1995:
     Total revenue                                         $  13,166     24,462    24,476   31,068
     Income from operations                                    2,067      4,813     5,842    7,337
     Net earnings                                              1,383      3,056     3,717    4,737
     Basic and diluted earnings per share                       0.06       0.13      0.16     0.21
======================================================================================================

</TABLE>

(1) As restated for the accounting change described in note 15.
(2) During the fourth quarter of 1997, an asset impairment charge amounting to
    $9.2 million on a pre-tax basis ($6.0 million after-tax) was recognized
    (see Note 3), and other pre-tax charges amounting to $1.9 million ($1.2
    million after-tax) were taken, primarily for inventory reserves and
    accruals relating to international operations.


<PAGE>


                          INDEPENDENT AUDITORS' REPORT




The Board of Directors and Shareholders
Sodak Gaming, Inc.:


      We have audited the accompanying consolidated balance sheets of Sodak
Gaming, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' 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 did not audit the financial
statements of Sodak Gaming Peru S.A., a wholly-owned subsidiary, which
statements reflect 7.0% of total consolidated assets as of December 31, 1997 and
10.7% of total consolidated revenues for the year then ended. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Sodak Gaming Peru
S.A., is based solely on the report of the other auditors.

      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 and the report of the other auditors provide a
reasonable basis for our opinion.

      In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Sodak Gaming, 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.

      As discussed in Note 15 to the consolidated financial statements, the
Company changed its method of accounting for pre-opening and start-up costs in
1997.



                            \s\ KPMG Peat Marwick LLP

Minneapolis, Minnesota
February 16, 1998


<PAGE>



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

            None.




                                    PART III


ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11.    EXECUTIVE COMPENSATION

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Items 10, 11, 12 and 13 is incorporated by reference
from the 1997 Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days of the end of the fiscal year covered by this report.


<PAGE>


                                     PART IV

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

<TABLE>
<CAPTION>

(a)    1.   CONSOLIDATED FINANCIAL STATEMENTS                                         PAGE
<S>    <C>                                                                            <C>
            The following financial statements are set forth under Item 8(a):

            Consolidated Statements of Operations for the years ended
                        December 31, 1997, 1996 and 1995                               41

            Consolidated Balance Sheets at December 31, 1997 and 1996                  42

            Consolidated Statements of Shareholders' Equity for the years ended
                        December 31, 1997, 1996 and 1995                               43

            Consolidated Statements of Cash Flows for the years ended
                        December 31, 1997, 1996 and 1995                               44

            Notes to Consolidated Financial Statements for the years ended
                        December 31, 1997, 1996 and 1995                               45

            Independent Auditors' Report                                               60

(a)   2.    CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

            Independent Auditors' Report on Consolidated Financial Statement Schedule  75

            Schedule II - Valuation and Qualifying Accounts                            76
</TABLE>

All other supplemental financial schedules are omitted as the required
information is not applicable, i.e. amounts are insufficient to require
submission or the information is included in the consolidated financial
statements or notes thereto.



(a)    3.   INDEX OF AUDITED FINANCIAL STATEMENTS OF SODAK GAMING PERU S.A., a
            wholly-owned subsidiary of the Company

<TABLE>

<S>                                                                                               <C>
             Report of Independent Public Accountants                                             66

             Statement of Operations for the Year ended December 31, 1997                         67

             Balance Sheet at December 31, 1997                                                   68

             Statement of Shareholders' Deficit for the Year ended December 31, 1997              69

             Statement of Cash Flows for the Year ended December 31, 1997                         70

             Notes to Financial Statements for the year ended December 31, 1997                   71

</TABLE>

<PAGE>


         (a) 4.    EXHIBITS

        Exhibit
         Number
       --------

         2.1      Stock Purchase Agreement, dated as of July 1, 1996, by and
                  among John Parker, John Nix and Gamblers Supply Management
                  Company (Incorporated by reference to Exhibit 2 to the
                  Company's Form 8-K/A dated July 1, 1996, File No. 0-21754).

         3.1      Amended and Restated Articles of Incorporation (Incorporated
                  by reference to Exhibit 3.1 to the Company's Registration
                  Statement on Form S-1, File No. 33-62188).

         3.2      Restated Bylaws of the company, as amended to date
                  (Incorporated by reference to Exhibit 3.2 to the Company's
                  Form 10-K for the year ended December 31, 1994, File No.
                  0-21754).

         4.1      Articles IV, V and IX of the Amended and Restated Articles of
                  Incorporation (see Exhibit 3.1).

         4.2      Specimen certificate for shares of Common Stock of the company
                  (Incorporated by reference to Exhibit 4.2 to the Company's
                  Registration Statement on Form S-1, File No. 33-62188).

         10.1     Exclusive Distributor Agreement between the Company and
                  International Game Technology (Incorporated by reference to
                  Exhibit 10.1 to the Company's Registration Statement on Form
                  S-1, File No. 33-62188) (Portions of this exhibit are subject
                  to a confidential treatment request pursuant to Rule 24b-2 of
                  the Securities Exchange Act of 1934, as amended).

         10.2     Stockholders Agreement between Harrah's Club, the Company,
                  Michael G. Wordeman, Roland W. Gentner, David B. Harcourt and
                  Thomas Celani (Incorporated by reference to Exhibit 10.2 to
                  the Company's Registration Statement on Form S-1, File No.
                  33-62188).

       * 10.3     1993 Long-Term Incentive and Stock Option Plan (Incorporated
                  by reference to Exhibit 10.3 to the Company's Registration
                  Statement on Form S-1, File No. 33-62188). 1993 Directors'
                  Stock Option Plan, as amended (Incorporated by reference to
                  the Company's Registration Statement on Form

       * 10.4     S-8, File No. 33-92524).


       * 10.5     Employment Agreement for Michael G. Wordeman (Incorporated by
                  reference to Exhibit 10.6 to the Company's Registration
                  Statement on Form S-1, File No. 33-62188).

       * 10.6     Employment Agreement for Roland W. Gentner (Incorporated by
                  reference to Exhibit 10.7 to the Company's Registration
                  Statement on Form S-1, File No. 33-62188).

         10.7     Purchase Agreement dated February 25, 1994, as amended on
                  March 8, 1994, by and between the Company and Grand Romance,
                  Inc. for the purchase of the vessel GRAND ROMANCE
                  (Incorporated by reference to Exhibit 10.7 to the Company's
                  Annual Report on Form 10-K for the year ended December 31,
                  1993, File No. 0-21754)

         10.8     Exclusive Distributorship Agreement between the Company and
                  International Game Technology dated September 26, 1994
                  (Incorporated by reference to Exhibit 10.1 to the Company's
                  Form 10-Q for the quarter ended September 30, 1994, File No.
                  0-21754) (Portions of this exhibit are subject to a
                  confidential treatment request pursuant to Rule 24b-2 of the
                  Securities Exchange Act of 1934, as amended)

         10.9     Contribution and Indemnity Agreement among the Company, The
                  Promus Companies Incorporated, Embassy Suites, Inc., Harrah's
                  Arizona Corporation, and Harrah's Club dated August 19, 1993
                  (Incorporated by reference to Exhibit 10.9 to the Company's
                  Form 10-K for the year ended December 31, 1994, File No.
                  0-21754).

         10.10    Riverboat Bareboat Charter between the Company and Gamblers
                  Supply Management Company dated June 28, 1994 (Incorporated by
                  reference to Exhibit 10.10 to the Company's Form 10-K for the
                  year ended December 31, 1994, File No. 0-21754).

         10.11    Loan Agreement between the Company and Gamblers Supply
                  Management Company dated March 23, 1994 (Incorporated by
                  reference to Exhibit 10.11 to the Company's Form 10-K for the
                  year ended December 31, 1994, File No. 0-21754).

<PAGE>

       Exhibit
       Number
       (cont'd)
     ------------

         10.12    Loan Modification Agreement between the Company and Gamblers
                  Supply Management Company dated December 16, 1994
                  (Incorporated by reference to Exhibit 10.12 to the Company's
                  Form 10-K for the year ended December 31, 1994, File No.
                  0-21754).

         10.13    Exclusive Distributorship Agreement Among the Company and
                  International Game Technology, dated March 12, 1998 (portions
                  of this exhibit are subject to confidential request pursuant
                  to Rule 24b-2 of the Securities Act of 1934, as amended).

         11.1     Calculation of Earnings (Loss) Per Share of Common Stock.

         18.1     Letter of KPMG Peat Marwick LLP Regarding Change in Accounting
                  Method.

         21.1     Subsidiaries of the registrant.

         23.1     Consent of KPMG Peat Marwick LLP.

         23.2     Consent of Arthur Andersen.

         24.1     Powers of Attorney.

         27.1     Financial Data Schedule (EDGAR Filing only).

         99.1     Management Agreement, dated as of June 10, 1994, by and
                  between Gamblers Supply Management Company and Marquette
                  Gaming Corporation (Incorporated by reference to Exhibit 99(a)
                  to the Company's Form 8-K/A dated July 1, 1996, File No.
                  0-21754).

         99.2     DockSite Agreement, dated as of June 10, 1994, by and between
                  the City of Marquette, Iowa and Gamblers Supply Management
                  Company (Incorporated by reference to Exhibit 99(b) to the
                  Company's Form 8-K/A dated July 1, 1996, File No. 0-21754).

         99.3     Non-Negotiable Promissory Note dated July 1, 1996, between
                  Gamblers Supply Management Company and John E. Nix guaranteed
                  by Sodak, Gaming, Inc. (Incorporated by reference to Exhibit
                  99(c) to the Company's Form 8-K/A dated July 1, 1996, File No.
                  0-21754).

         99.4     Non-Negotiable Promissory Noted dated July 1, 1996 between
                  Gamblers Supply Management Company and John T. Parker
                  guaranteed by Sodak Gaming, Inc. (Incorporated by reference to
                  Exhibit 99(d) to the Company's Form 8-K/A dated July 1, 1996,
                  File No. 0-21754).

         99.5     Audited Financial Statements of Gamblers Supply Management
                  Company for the years ended December 31, 1995 and January 1,
                  1995 (Incorporated by reference to Exhibit 99(e) to the
                  Company's Form 8-K/A dated July 1, 1996, File No. 0-21754).


         *        Items that are management contracts or compensatory plans or
                  arrangements required to be filed as an exhibit to this form
                  pursuant to Item 14(c) of the Form 10-K.

            (b)    REPORTS ON FORM 8-K

            No report on Form 8-K was filed during the three month period ended
            December 31, 1997.


<PAGE>



                                   SIGNATURES


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



Dated:      March 20, 1998.         SODAK GAMING, INC.



                                    By \s\ Michael G. Wordeman
                                       ------------------------------------
                                       Michael G. Wordeman,
                                       Chairman of the Board of Directors,
                                       Chief Executive Officer and Director


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

<TABLE>
<CAPTION>
              Signature                                      Title
---------------------------             --------------------------------------------------
<S>                                     <C>
Michael G. Wordeman*                    Chairman of the Board, Chief Executive Officer   )
                                        (principal executive officer) and Director       )
                                                                                         )
David R. Johnson*                       Chief Financial Officer                          )
                                        (principal financial officer)                    )
                                                                                         )
Clayton R. Trulson*                     Vice President, Finance                          )   By     \s\ Michael G. Wordeman
                                        (principal accounting officer)                   )          --------------------------------
                                                                                         )          Michael G. Wordeman
Roland W. Gentner*                      President, Chief Operating                       )          Pro se and Attorney-in-Fact
                                        Officer and Director                             )
Thomas Celani*                          Director                                         )          March 20, 1998
                                                                                         )
Colin V. Reed*                          Director                                         )
                                                                                         )
Manuel Lujan, Jr.*                      Director                                         )
Ronnie Lopez*                           Director                                         )

</TABLE>

*By Power of Attorney filed with this report as Exhibit 24.1 hereto.


<PAGE>




                               SODAK GAMING, INC.

             AUDITED FINANCIAL STATEMENTS OF SODAK GAMING PERU S.A.



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



The Board of Directors and Shareholders
Sodak Gaming Peru S.A.:


We have audited the accompanying balance sheet of Sodak Gaming Peru S.A. (a
subsidiary of Sodak Gaming, Inc., a United States Corporation) as of December
31, 1997, and the related statements of operations, shareholders' deficit and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sodak Gaming Peru S.A. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.

As discussed in Note 6 to the financial statements, during 1997 the Company
changed its method of accounting for start-up costs.



\s\ Arthur Andersen


Lima, Peru
February 4, 1998

<PAGE>


<TABLE>
<CAPTION>
                                        SODAK GAMING PERU S.A.

                                       STATEMENT OF OPERATIONS
                                     Year ended December 31, 1997


<S>                                                                                          <C>
U.S. Dollars in thousands
------------------------------------------------------------------------------------------------------------
REVENUE FROM SLOT AND ROUTE OPERATIONS                                                       $  14,778
------------------------------------------------------------------------------------------------------------

COSTS AND EXPENSES:
    Location operating                                                                           7,437
    Location rent                                                                                4,149
    Selling, general and administrative                                                          2,229
    Depreciation and amortization                                                                1,737
------------------------------------------------------------------------------------------------------------
                 Total costs and expenses                                                       15,552
------------------------------------------------------------------------------------------------------------


OPERATING LOSS                                                                                    (774)
------------------------------------------------------------------------------------------------------------

Other expenses                                                                                      47
------------------------------------------------------------------------------------------------------------

LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE                               (821)

Provision for income taxes (note 5)                                                                  0
------------------------------------------------------------------------------------------------------------

LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                                (821)

Cumulative effect of change in accounting principle related to pre-opening
    and start-up costs (note 6)                                                                   (733)
------------------------------------------------------------------------------------------------------------

NET LOSS                                                                                     $  (1,554)
============================================================================================================

</TABLE>



The accompanying notes are an integral part of the financial statements.

<PAGE>



<TABLE>
<CAPTION>
                                        SODAK GAMING PERU S.A.
                                            BALANCE SHEET
                                          December 31, 1997

U.S. Dollars in thousands, except shares
---------------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>
ASSETS
Current assets:
    Cash and cash equivalents                                                                   $      693
    Receivables (note 2)                                                                               347
    Prepaid expenses                                                                                   161
    Refundable income taxes                                                                            165
---------------------------------------------------------------------------------------------------------------
                 Total current assets                                                                1,366
---------------------------------------------------------------------------------------------------------------

Leasehold improvements and equipment:
    Leasehold improvements                                                                           1,373
    Gaming operations equipment (note 7)                                                            10,931
---------------------------------------------------------------------------------------------------------------
                                                                                                    12,304
    Less accumulated depreciation and amortization                                                  (2,482)
---------------------------------------------------------------------------------------------------------------
                 Total property and equipment, net                                                   9,822
---------------------------------------------------------------------------------------------------------------

Deferred income taxes (note 5)                                                                           -
Other assets, primarily location rent deposits                                                         375
---------------------------------------------------------------------------------------------------------------
                                                                                                $   11,563
===============================================================================================================


LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
    Accounts payable                                                                            $      191
    Accrued liabilities                                                                                605
---------------------------------------------------------------------------------------------------------------
                 Total current liabilities                                                             796

Long-term debt due to parent company (note 4)                                                       12,976
---------------------------------------------------------------------------------------------------------------

                 Total liabilities                                                                  13,772
---------------------------------------------------------------------------------------------------------------

Commitments and contingencies (notes 7 and 8)

Shareholders' deficit:
    Common stock, $0.45 par value; 109,270 shares authorized,
        issued and outstanding                                                                          49
    Accumulated deficit                                                                               (422)
    Cumulative translation adjustment                                                               (1,836)
---------------------------------------------------------------------------------------------------------------
                 Total shareholders' deficit                                                        (2,209)
---------------------------------------------------------------------------------------------------------------
                                                                                                $   11,563
===============================================================================================================

</TABLE>


The accompanying notes are an integral part of the financial statements.


<PAGE>



                             SODAK GAMING PERU S.A.
                       STATEMENT OF SHAREHOLDERS' DEFICIT
                          Year ended December 31, 1997



<TABLE>
<CAPTION>
                                                    Common       Retained earnings         Cumulative                 Total
                                                  stock at            (accumulated        translation         shareholders'
U.S. Dollars in thousands                        par value                deficit)         adjustment              deficit
---------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>                        <C>                <C>                       <C>
Balance, December 31, 1996                    $         49               1,132              (1,256)                   (75)
    Net loss                                             0              (1,554)                  0                 (1,554)
    Foreign currency translation
        adjustment                                       0                   0                (580)                  (580)
---------------------------------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31, 1997                    $         49                (422)             (1,836)                (2,209)
===========================================================================================================================

</TABLE>

The accompanying notes are an integral part of the financial statements.


<PAGE>



                             SODAK GAMING PERU S.A.
                             STATEMENT OF CASH FLOWS
                          Year ended December 31, 1997
<TABLE>
<CAPTION>

U.S. Dollars in thousands
-------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                                                 $    (1,554)
    Adjustments to reconcile net loss to net
        cash  provided by operating activities:
        Depreciation and amortization                                                              1,737
        Cumulative effect of change in accounting policy                                             733
        Provision for doubtful accounts                                                               50
        Changes in operating assets and liabilities:
           Receivables                                                                               (20)
           Prepaid expenses                                                                          311
           Refundable income taxes                                                                  (165)
           Other assets                                                                             (640)
           Accounts payable                                                                           37
           Accrued liabilities                                                                        70
           Income taxes payable                                                                     (162)
-------------------------------------------------------------------------------------------------------------
                 Net cash provided by operating activities                                           397
-------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of leasehold improvements and equipment                                             (2,711)
-------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from long-term borrowings from parent company                                         2,090
-------------------------------------------------------------------------------------------------------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                          26
-------------------------------------------------------------------------------------------------------------
                 Net decrease in cash and cash equivalents                                          (198)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                         891
-------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                                       $       693
=============================================================================================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid during the year for income taxes                                               $       375


</TABLE>

The accompanying notes are an integral part of the financial statements.



<PAGE>


                             SODAK GAMING PERU S.A.

                          Notes to Financial Statements
                          Year ended December 31, 1997

(1)         ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Sodak Gaming Peru S.A. (the Company) is incorporated under Peruvian law and
operates gaming halls and route operations in Peru. The Company rents the
locations it operates from third parties for either a percentage of the revenues
derived from the operation or a fixed periodic rental payment. Route operations
involve the Company providing machines to third party location operators for a
percentage of the revenues derived from the operation.

The Company had 15 operating locations with approximately 1,150 machines and 21
operating locations with approximately 1,300 machines at December 31, 1997 and
1996, respectively.

The Company and its parent company, Sodak Gaming International, Inc., are
wholly-owned subsidiaries of a United States corporation, Sodak Gaming, Inc.
(collectively, "parent"). All amounts reported in the accompanying financial
statements are in U.S. Dollars.


REVENUE RECOGNITION

In accordance with industry practice, the Company recognizes as gaming revenue
the net wins from gaming activities, which is the difference between gaming wins
and losses.


LOCATION RENT EXPENSE

Revenue sharing expenses related to gaming halls and route operations are
accounted for as location rent expense. Location rent expenses also include the
cost of fixed rental payment arrangements, as well as other direct location
related expenses. All location rental agreements with third party location
providers provide the Company with the right to terminate the rental arrangement
within 2-3 months.


CASH AND CASH EQUIVALENTS

Cash and cash equivalents includes cash on hand, demand deposits, and short-term
investments with original maturities of three months or less.


LEASEHOLD IMPROVEMENTS AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is provided principally
on a straight-line basis in amounts sufficient to relate the cost of depreciable
assets to operations over the following estimated useful lives:

                                                                     Years
--------------------------------------------------------------------------------
Leasehold improvements                                               3-10
Gaming operations equipment                                          5-10

Included in gaming operations equipment are parts and supplies of approximately
$447,000, net of an obsolescence reserve of $142,000.

Maintenance and minor renewals are charged to expense as incurred. Improvements
and refurbishments are capitalized and amortized over the above stated lives.

<PAGE>

PRE-OPENING AND START-UP COSTS

In 1997, the Company began expensing the costs of start-up activities as
incurred. As disclosed in note 6, this is a change in accounting method from
prior years.


INCOME TAXES

The Company provides for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES. Deferred tax
assets and liabilities are recognized for the expected future tax consequences
arising from temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.


LONG LIVED ASSETS

SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, requires that long-lived assets and certain
identifiable intangibles to be held and used or disposed of by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company has
applied the provisions of SFAS No. 121 and does not believe that any material
impairment currently exists related to its long lived assets.


USE OF 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.


FOREIGN CURRENCY TRANSLATION

The Company's financial statements have been translated into U.S. dollars in
accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION, considering the local
currency (Nuevos Soles) as the functional currency. All asset and liability
accounts have been translated using the current exchange rate at the balance
sheet date. Income statement amounts have been translated using the average
monthly exchange rates. The gains and losses resulting from translation
adjustments are reflected as a component of shareholders' equity (deficit). The
gains and losses from foreign currency transactions are included in net loss and
were insignificant in 1997.




<PAGE>



(2) RECEIVABLES

Receivables result primarily from; 1) amounts due from route operations in the
ordinary course of such operations and 2) advances to location providers for the
Company's operations (such advances are generally made to allow the location
providers to improve the properties prior to and after operations commence). All
receivables have maturity dates less than one year, and no interest is charged
on receivables. Receivables are summarized as follows at December 31, 1997:

          U.S. Dollars in thousands
          ----------------------------------------------------------------------

          Amounts due from route operations               $            236
          Location advances                                            200
          ----------------------------------------------------------------------
                                                                       436
          Less allowance for doubtful accounts                         (89)
          ----------------------------------------------------------------------
                                                          $            347
          ======================================================================



(3) DISCLOSURES ABOUT FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash equivalents, receivables, accounts payable and
accrued liabilities approximate fair value because of the short maturity of
those instruments.

The carrying amount of long-term debt due to parent company approximates fair
value as the debt has a variable interest rate.


(4) LONG-TERM DEBT DUE TO PARENT COMPANY

Long-term debt consists of amounts due to the Company's parent that have
resulted from cash advances and gaming equipment transfers. No interest was
charged on the long-term debt during 1997. Beginning in 1998, interest is to be
charged at the prime rate plus one half percent. The debt has no fixed maturity
date, however it is expected to be paid in full prior to December 31, 2002.


(5) INCOME TAXES

No provision for current income taxes was provided in 1997 as a consequence of
the losses realized by the Company.

Deferred income taxes consist of the following at December 31, 1997:

      U.S. Dollars in thousands
      -------------------------------------------------------------------------

      Allowance for inventory                                          $   48
      Allowance for doubtful accounts                                      17
      Property and equipment                                              372
      Pre-opening expenses                                                324
      Tax loss carry forward                                               27
      -------------------------------------------------------------------------
      Gross deferred tax assets                                           788
      Less valuation allowance                                           (788)
      -------------------------------------------------------------------------
      Net deferred tax assets                                          $   --
      =========================================================================

The Company provided a valuation allowance for the deferred tax assets as a
result of uncertainties surrounding the ultimate realization of the reversals of
the timing differences that created the deferred tax assets.


<PAGE>


(6) CHANGE IN ACCOUNTING METHOD

During the fourth quarter of 1997, the Company changed its accounting method for
costs of pre-opening and start-up activities to capitalizing such costs
subsequent to obtaining all regulatory approvals and authorizations for the
underlying project and expensing such costs upon opening the new operation. The
Company's previous accounting method had been to capitalize project pre-opening
and start-up costs from inception until the project became operational, at which
time the capitalized costs were amortized over a period not to exceed five
years. The Company adopted this new accounting method because it conforms to the
industry practice of major gaming companies, and applied the change in treatment
of pre-opening and start-up costs beginning at the start of the reporting period
in which the change was adopted, effective January 1, 1997.

The effect of adopting this new accounting method increased 1997 loss before
cumulative effect of the accounting change by approximately $234,000.

The cumulative effect of this accounting change, reflected as a charge to 1997
net loss, amounted to approximately $733,000.

(7) REGULATORY REQUIREMENT


During the first quarter of 1997, Peruvian authorities issued a ruling
applicable to companies engaged in the slot machine business stating that
operating locations within Lima must have at least 120 machines, while operating
locations outside of Lima must have at least 80 machines. The authorities
further required that all machines in operating locations must be less than five
years old, or have been refurbished (as certified by the machine manufacturer)
within the past five years. During 1997, in order to comply with these new
requirements, the Company closed certain locations, while opening other new
locations.

During 1998, the Company plans to spend approximately $875,000 to refurbish any
machines it has in operating locations (or in storage before being placed in
service) to be in compliance with the new requirements.


(8) COMMITMENTS AND CONTINGENCIES

The Company leases certain operating locations under operating leases with
variable or fixed monthly payments. Under the terms of the lease agreements,
there are no material guaranteed future minimum lease payments.



<PAGE>




    INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE





The Board of Directors and Shareholders
Sodak Gaming, Inc.:

Under the date of February 16, 1998, we reported on the consolidated balance
sheets of Sodak Gaming, Inc. and subsidiaries (the Company) as of December 31,
1997 and 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997, which are included in the annual report on Form
10-K. In connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related consolidated financial statement
schedule as listed in the index at Item 14 (a)(2). This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.

In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.



                            \s\ KPMG Peat Marwick LLP





Minneapolis, Minnesota
February 16, 1998



<PAGE>


                                   Schedule II

                               SODAK GAMING, INC.

                        VALUATION AND QUALIFYING ACCOUNTS




<TABLE>
<CAPTION>


----------------------------------------------------------------- --------------------- --------------- ----------------
             Column A                                  Column B              Column C        Column D         Column E
----------------------------------------------------------------- --------------------- --------------- ----------------

In thousands
                                                      BALANCE AT           ADDITIONS--
                                                       BEGINNING            CHARGED TO                       BALANCE AT
       DESCRIPTION                                     OF PERIOD       COSTS AND EXPENSES      DEDUCTIONS    END OF PERIOD
       -----------                                   ------------    ------------------      ----------    -------------
<S>                                                       <C>                      <C>           <C>                <C>
YEAR ENDED DECEMBER 31, 1995:
Allowances deducted from asset accounts:
          Allowance for doubtful accounts                 $  535                   300           15(1)              820


YEAR ENDED DECEMBER 31, 1996:
Allowances deducted from asset accounts:
          Allowance for doubtful accounts                    820                 2,788        2,698(1)              910


YEAR ENDED DECEMBER 31, 1997:
Allowances deducted from asset accounts:
          Allowance for doubtful accounts                    910                   882          232(1)            1,560
=======================================================================================================================

</TABLE>

(1) Accounts deemed uncollectible
---------------------------------

<PAGE>


                                  EXHIBIT INDEX
                               SODAK GAMING, INC.

                           Annual Report on Form 10-K
                                       for
                          Year Ended December 31, 1997


                                                                    Sequentially
     Exhibit                                                          Numbered
     Number                                                             Page
    ---------                                                       ------------

      10.13    Exclusive Distributorship Agreement Among the Company
               and International Game Technology                            79

      11.1     Calculation of Earnings (Loss) Per Share of Common Stock     92

      18.1     Letter of KPMG Peat Marwick LLP Regarding Change in
               Accounting Method                                            93

      21.1     Subsidiaries of the Registrant                               94

      23.1     Consent of KPMG Peat Marwick LLP                             95

      23.2     Consent of Arthur Andersen                                   96

      24.1     Powers of Attorney                                           97

      27.1     Financial Data Schedule (EDGAR Filing only)                  98


<PAGE>


                                  EXHIBIT INDEX
                               SODAK GAMING, INC.

                           Annual Report on Form 10-K
                                       for
                          Year Ended December 31, 1997
                                                                    Sequentially
      Exhibit                                                         Numbered
      Number                                                            Page
     ----------                                                      ----------

      10.13    Exclusive Distributorship Agreement Among the Company
               and International Game Technology


      11.1     Calculation of Earnings (Loss) Per Share of Common Stock

      18.1     Letter of KPMG Peat Marwick LLP Regarding Change in
               Accounting Method

      21.1     Subsidiaries of the Registrant

      23.1     Consent of KPMG Peat Marwick LLP

      23.2     Consent of Arthur Andersen

      24.1     Powers of Attorney

      27.1     Financial Data Schedule (EDGAR Filing only)