<PAGE>
 
                      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, 1996           Commission File No.0-21754

                               SODAK GAMING, INC.
             (Exact name of registrant as specified in its charter)
 
        SOUTH DAKOTA                                      46-0407053
(State or other jurisdiction of           (I.R.S. Employer Identification No.)
Incorporation or organization)
 
    5301 S. HIGHWAY 16
  RAPID CITY, SOUTH DAKOTA                                              57701
  (Address of principal executive offices)                           (Zip Code)
 
Registrants 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 registrants knowledge, in the registrants 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 21, 1997 was approximately $144,865,143 (based on the
last sale price of such stock as reported on the Nasdaq National Market).

The number of shares outstanding of the registrants common stock, as of March
21, 1997, was: Common Stock, $0.001 par value: 22,757,688 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information from the Registrants definitive Proxy
Statements to be filed with the Commission within 120 days after the close of
the Registrants fiscal year.
<PAGE>
 
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
 
                                     PART I

<S>       <C>                                              <C>  
Item 1.   Business                                          3     
Item 2.   Properties                                       24     
Item 3.   Legal Proceedings                                24     
Item 4.   Submission of Matters to a Vote of Security      25     
          Holders                                                 
                                                                  
                               PART II                            

Item 5.   Market for Registrants Common Stock and          25     
          Related Stockholder Matters                             
Item 6.   Selected Financial Data                          26     
Item 7.   Managements Discussion and Analysis of                  
          Financial Condition and Results of               27     
          Operations                                              
Item 8    Consolidated Financial Statements                36     
Item 9    Changes in and Disagreements with Accountants    56     
          on Accounting and Financial Disclosures                 
                                                                  
                                                                  
                              PART III                            
                                                                  
Item 10.  Directors and Executive Officers of the          56     
          Registrant                                              
Item 11.  Executive Compensation                           56     
Item 12.  Security Ownership of Certain Beneficial         56     
          Owners and Management                                   
Item 13.  Certain Relationships and Related Transactions   56     
                                                                  
                                                                  
                               PART IV                            
Item 14.  Exhibits, Consolidated Financial Statement       56     
          Schedule and Reports on Form 8-K                        
                                                                  
          Signatures                                       59      
 </TABLE>
<PAGE>
 
                                     PART I

ITEM 1.  BUSINESS

GENERAL

  Sodak Gaming, Inc. (the Company or Sodak) is a leading distributor 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; and 4) the Miss Marquette riverboat casino entertainment facility
(Miss Marquette) 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, which is effective through
May 1998 and continues thereafter until canceled by either party (see
Relationship with IGT, page 7 for discussion of this agreement).  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), to Native Americans,
aboriginal peoples and native peoples in Canadian provinces, and to non-Native
American purchasers in South Dakota, North Dakota and Wyoming.  The Company also
has an agreement to sell and distribute IGT gaming equipment in Mexico.

  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
provides and markets 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 in North America, such
as the Harrahs Phoenix Ak-Chin casino in Arizona, from which the Company
participates in Harrahs management fee.

  In conjunction with its distribution of gaming equipment, the Company also
offers its customers gaming machine installation and repair services, systems
and machine training, demographic and market information, administrative support
including advice and recommendations concerning casino design and layout and
professional assistance pertaining to legal and regulatory issues.

  In August 1996, the Company announced it had 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 (see Gaming
Operations, page 20 for discussion). The Company subsequently entered into a
joint venture agreement with IGT and Dreamport, Inc. (a wholly-owned subsidiary
of GTECH Holdings Corporation) to proceed with the development and operations of
this system. The three companies will share equally in the investment funding,
expenses and profits of the CBF project.

                                      -3-
<PAGE>
 
BUSINESS STRATEGY

  After its inception in 1989, the Companys sole line of business was the
marketing and distribution of gaming equipment to Native American casinos. Since
1993, the Company has been diversifying its revenue base and has focused on the
development of gaming opportunities that generate recurring revenue sources. The
Companys business strategy is to maintain its dominant market share in the
product sales jurisdictions it serves, to expand its wide area progressive
systems, to maintain and increase its gaming operations and participations in
expanding domestic and international gaming jurisdictions, and to increase and
strengthen its strategic alliances with other companies in the gaming industry.

  The Companys business lines are: (i) product sales and financing and wide area
progressive systems and (ii) gaming operations, which includes gaming
participations, riverboat and land-based casino operations, and gaming hall and
route operations. 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 machines
in Native American casinos; 3) expanding its gaming hall, route and casino
operations in Latin America; and 4) continuing its pursuit of domestic gaming
operations. However, there can be no assurance that such growth may occur in the
future, due primarily to gamings dependence on its regulatory status and public
acceptance.

  An important element of the Companys long term strategy is to facilitate the
expansion of gaming in current and new jurisdictions in the United States and
other countries. The Company will continue 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.

PRODUCT SALES STRATEGY

  The Company believes it will be able to maintain its dominant market share in
the distribution of gaming machines to the Native American gaming market in
North America. In 1996, the Company continued to expand its product line to
include various gaming-related and nongaming-related products and supplies. As
part of this strategy, the Company initiated a single source supplier marketing
campaign promoting the ability to provide customers with the gaming industrys
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, cage and count room
functions, and business and administrative functions.

  The Company believes that it is positioned to implement its business 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, Mosler,
Reldom, Nederlander Entertainment, and other vendors.

                                      -4-
<PAGE>
 
  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, technical support and service, its knowledge
and understanding of customer needs, and the offering of creative customer
financing. Sodak continues to obtain licenses 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.

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.

WIDE AREA PROGRESSIVE SYSTEMS STRATEGY

  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 IGTs proprietary systems. The Company expects to
place additional machines and to introduce new systems in the future and
believes that as the Native American gaming industry 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 two new systems in 1996, Dollars Deluxe and Fabulous 50s. In
addition, in March 1997, the Company introduced the Wheel of Fortune system and
intends to also introduce the systems Wheel of Gold and High Rollers in 1997.
Additional systems may be considered for introduction in the future.

GAMING OPERATIONS STRATEGY

  By augmenting revenue sources and adding the recurring revenue streams to its
revenue base, the Company believes it will strengthen its financial performance.
The Companys gaming operations strategy is three-fold: 1) to continue to
participate in ventures to finance the development, construction and equipping
of Native American casinos; 2) to expand gaming operations in Latin America and
pursue new opportunities there; and 3) to expand current domestic gaming
operations and pursue additional operations as opportunities emerge.

PARTICIPATIONS INVOLVING NATIVE AMERICAN CASINOS

  The Company plans to continue to participate in ventures 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 guarantee of third party loans to tribes.  For its involvement,
the Company may receive an inducement payment, guaranty fees, or may receive a
participation in the payments made 

                                      -5-
<PAGE>
 
by such tribes under the management arrangements. The Company currently
participates in a management fee of Harrahs Entertainment, Inc. (Harrahs) in
conjunction with Harrahs Phoenix Ak-Chin casino and is currently providing
financing for other casinos. The Company anticipates the pursuit of similar
arrangements with both tribes and management companies such as Harrahs.

INTERNATIONAL GAMING OPERATIONS

  The Companys strategy is to expand gaming operations into new markets and
thereby increase recurring revenue. As part of this strategy, the Company has
entered emerging gaming markets in Latin America, where it develops and operates
gaming halls and routes and a casino. Currently, the Companys intent is to
expand its casino, gaming hall and route operations in Latin America. Sodak
believes that its entry into 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 it had entered into an agreement with
the CBF to own and operate linked progressive video gaming systems in Brazil
(see Gaming Operations, page 20 for discussion). The Company subsequently
entered into a joint venture agreement with IGT and Dreamport to proceed with
the development and operations of this system. The three companies will share
equally in the investment funding, expenses and profits of the CBF project.

  Under federal Brazilian law known as the Zico law, sports organizations
involved with Olympic or other world-class competition are permitted to be
involved with certain gaming operations.  The permissible games include bingo,
keno and bingo similar games, including video machine versions of such games.

  The CBF is able to engage in such gaming activities because its sponsors the
Brazilian mens and womens Olympic and world cup soccer teams. More than 15,000
soccer clubs and 200,000 players are affiliated with the CBF, which is a
governing body for soccer, comparable in function to the combination of the
National Football League and the National Collegiate Athletic Association in the
United States. The operation of the system is subject to the CBF obtaining
regulatory approval in each state where the proposed system is to be offered.
Project documentation and requests for regulatory authorization have been
submitted for approval in four states or jurisdictions: Rio de Janeiro, Goias,
the Federal District of Brasilia, and Minas Gerais. In addition, as of March 21,
1997, regulatory approval was also being pursued in the states of Sao Paulo and
Rio Grande de Sul. However, there can be no assurance that such approvals will
be obtained, that systems will become operational in the time frame required by
the CBF agreement or that the CBF project or other Brazilian video gaming
systems will be profitable.

  The Company anticipates that a number of factors could contribute to the
successful introduction and operation of the CBF project: 1) the high level of
public acceptance of gaming; 2) the popularity of soccer; 3) the distinguished
reputation of the CBF and its proposed use of its proceeds from the project to
advance athletic, educational and social programs; and 4) the collective
capabilities of the three companies Sodak, IGT and Dreamport affiliated under
the joint venture agreement.

                                      -6-
<PAGE>
 
DOMESTIC GAMING OPERATIONS

  The Companys domestic gaming operations strategy is to improve operating
performance of the Miss Marquette 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.

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, Harrahs, and Dreamport. The Company will continue
to seek additional strategic alliances as opportunities emerge.

RELATIONSHIP WITH IGT

  IGT is the worlds largest producer of computer-based casino gaming products
and proprietary gaming systems. The Company is IGTs largest customer and enjoys
a mutually beneficial contractual and business relationship with IGT.
Approximately 71% of the Companys product sales in 1996 were derived from the
sale of gaming machines manufactured by IGT under its exclusive distributorship
agreement with IGT. Pursuant to its agreement with IGT, 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.

  Sodaks 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 to expand the
territory and extend the term. The following is a brief description of the
current distributorship agreement with IGT, effective May 5, 1993.

  Sodak holds the sole and exclusive right to distribute IGT manufactured or
assembled gaming devices, slot machines, terminals developed and offered by IGT
as video terminals for a lottery, and IGT distributed gaming machines designed
or manufactured by others (collectively products) in the United States and
Canada subject to the following exceptions: (i) the Company may not distribute
IGT products to non-Native American gaming purchasers other than in South
Dakota, North Dakota and Wyoming, (ii) the exclusive right to distribute IGT
products in Canada is granted only for the sale and distribution to Native
Americans, aboriginal peoples, or Native peoples in Canadian Provinces where
gaming activity is approved by appropriate governmental authorities and Sodak is
licensed or approved to conduct business, and (iii) Sodak may not distribute new
IGT products to anyone in Nevada, New Jersey and Hawaii. The current
distributorship agreement with IGT has a five-year term through May 5, 1998 and
continues thereafter on a year-to-year basis until canceled by either party.
Through a separate agreement, the Company also has exclusive distribution rights
in Mexico. As of March 21, 1997, gaming devices were not legal in Mexico;
however, legislative action to allow casinos was under consideration by the
national legislature.

                                      -7-
<PAGE>
 
  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.

  IGT may terminate its distributorship agreement with Sodak if any one of the
following events occurs: (i) the Company has failed to maintain its image,
ethics, reputation or customer relations in accordance with industry standards,
(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 prohibited by the
distributorship agreement, (iv) the Company has failed to comply with IGT
policies, (v) the Company has failed to establish and maintain sufficient
facilities in any jurisdiction in which it distributes, or (vi) 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 distributes. IGT may only terminate the distributorship agreement after
giving Sodak 90 days written notice of the event of termination. IGTs written
notice must include a description of the nature of the activity giving rise to
the event of default and the action necessary to correct such activity. Sodak
has 90 days from receipt of IGTs written notice to correct the activity which
IGT claims gives rise to termination of the distributorship agreement.

  IGT may also terminate the distributorship agreement with the Company upon 90
days written notice if ownership in or control over Sodak 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 and such ownership or control influence is not forthwith
removed.  In addition, IGT may terminate the distributorship agreement upon 90
days written notice if Michael G. Wordeman, chief executive officer of the
Company, fails to maintain a substantial (5% or more) ownership of Sodak or
ceases his substantial involvement in the operation of the Company (including
without limitation his resignation or termination from his position as chief
executive officer) for any reason other than death or total disability, without
the prior written consent of IGT.

  Either party may terminate the agreement upon written notice delivered to the
other party if one of the following occurs: (i) the other party has failed to
observe all applicable laws or obtain any necessary license or approval from
each gaming regulatory authority in each applicable jurisdiction within the
territory covered by the agreement and such failure materially affects the
performance of such other party, provided that, in the event of the inability of
Sodak to obtain a license or approval in a jurisdiction within the territory and
such inability does not materially affect IGTs business elsewhere, IGT may
terminate the right of Sodak to distribute only in that jurisdiction if such
failure is not corrected by Sodak within 60 days after notice from IGT, (ii) the
other party becomes insolvent, or files a petition for adjudication as bankrupt
or insolvent, or executes an assignment for the benefit of creditors, or has a
receiver appointed for it for any reason, or (iii) the other party materially
breaches the agreement.

  On September 30, 1993, the Company entered into an exclusive distributor
agreement with IGT to provide and market IGTs proprietary wide area progressive
systems to Native American casinos.  

                                      -8-
<PAGE>
 
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.

  The Company also has entered into a joint venture with IGT and Dreamport to
develop and operate the CBF project. The three companies will share equally in
the investment funding, expenses and profits of this project. The joint venture
also may pursue other Brazilian video gaming opportunities in addition to the
CBF project (see Gaming Operations, page 20 for discussion).

RELATIONSHIP WITH HARRAHS

  Harrahs, one of the leading casino entertainment companies in the United
States, has a 14% equity interest in Sodak. On October 30, 1992, Harrahs, the
Company and all shareholders of the Company as of such date, executed a
Stockholders Agreement. Under the Stockholders Agreement, Sodak has agreed to
use its best efforts to identify Native American gaming management contract
opportunities in the United States and Canada and inform Harrahs of such
opportunities. If Harrahs 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
Harrahs under the applicable management contract, regardless of whether or not
the Company participates in the financing of such project. If Sodak participates
in the financing of the project, Sodak would be entitled to a larger portion of
the casino management fees. Sodaks participation with Harrahs in any such
project, including the type and amount of financing involved, as well as certain
other applicable terms, will be negotiated on a project by project basis between
Sodak and Harrahs.

RELATIONSHIP WITH DREAMPORT

  Dreamport, Inc. provides gaming technology and a comprehensive array of
management, development and strategic planning services to the gaming and
entertainment market. It is a wholly owned subsidiary of GTECH Holdings
Corporation, a leading provider of lottery and video lottery services worldwide.
In January 1997, the Company entered into a joint venture with Dreamport and IGT
to proceed with the development and operations of the CBF project. The three
companies will share equally in the investment funding, expenses and profits of
this project. The joint venture also may pursue other Brazilian video gaming
opportunities in addition to the CBF project (see Gaming Operations, page 20 for
discussion).

GAMING MARKETS

GENERAL

  The gaming entertainment industry is growing at a rapid pace, 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 Christiansen/Cummings
Associates and published in the August 1996 issue of International Gaming and
Wagering Business, Native American casinos accounted for approximately $4
billion in casino revenue, or approximately one-fifth of total U.S. casino
revenue.  With the addition of Kansas in 1996, 16 states now permit Indian
casinos with electronic gaming machines.  The Class III compacts increased to
164 in 1996, indicating that the Indian gaming segment continues to grow.  The
riverboat casino market increased in 1996, as the number of operations increased
in 1996 to 

                                      -9-
<PAGE>
 
approximately 75 in six states. According to the above-referenced survey,
casinos account for approximately half of the revenue derived from wagering
activities, and gaming machines are a major part of casino operations. 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 Canada 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.

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 has risen to 164 as of March 21, 1997.
As of the same date, there were a significant number of tribal-state compacts
under negotiation 

                                      -10-
<PAGE>
 
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 143 Native American groups seeking federal
recognition as Indian tribes.

     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.

     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. Although 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
Secretary has not prescribed such regulations and the National Governors'
Association has asserted that the Secretary has no authority to do so.

     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 January 22, 1996, a federal judge approved
a stipulation whereby the U.S. Attorney's Office will not seize any equipment,
institute criminal actions, or close casinos until final resolution of the issue
by the federal court system or the New Mexico 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.

     The scope of gaming is being litigated in numerous states. The California
Supreme Court in Western Telcon v. California State Lottery declared the
California lottery's keno machines illegal, weakening tribal arguments that
tribes should be entitled to compacts that include gaming machines. In Rumsey
Indian Rancheria of Winton Indians v. Wilson, the Ninth Circuit Court issued a
very narrow scope of gaming decision, finding that "IGRA does not require a
state to negotiate over one form of gaming activity simply because it has
legalized another, albeit similar form of gaming." Following the Rumsey and
Western Telcon decisions, the governor of California entered into compact
negotiations with the Pala Band of Mission Indians, basing technical
specifications for electronic devices on the Western Telcon Supreme Court
decision.

                                      -11-
<PAGE>
 
     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 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 105/th/ Congress, two 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. The second bill would impose a tax on the revenue of Indian gaming
operations.

     There can be no assurance that tribal-state compacts will be modified or
negotiated in a manner favorable to the Company 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.

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 system. 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.

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.

                                      -12-
<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 75 riverboat casinos were in operation at the end of 1996 and several major
riverboat operations are scheduled to open in 1997 and 1998.

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.

BRAZILIAN VIDEO GAMING SYSTEMS

     The Brazilian federal government allows qualifying sports organizations to
offer certain kinds of gaming entertainment, the proceeds from which may be used
to fund that organization's functions and programs. Under a Brazilian federal
law known as the "Zico" law, sports organizations involved with Olympic or other
world-class competition are permitted to be involved with certain gaming
operations. The permissible games include bingo, keno and "bingo similar" games,
including video machine versions of such games. The Company has entered into an
agreement with the CBF to provide and operate a linked video gaming system.
Subsequently, the Company entered into a joint venture with IGT and Dreamport to
develop and operate the system. The proposed system will feature a variety of
"bingo similar" games with a progressive prize structure, provided that such
authorizations is obtained from state regulatory authorities. The joint venture
also may pursue other Brazilian video gaming opportunities in addition to the
CBF project (see "Gaming Operations," page 20 for discussion).

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.

                                      -13-
<PAGE>
 
BUSINESS LINES

     The Company derives revenue from the following lines of business: 1)
product sales, financing and wide area progressive systems and 2) gaming
operations, which includes gaming participations, casinos, gaming halls and
route operations. For the year ended December 31, 1996, Sodak generated revenue
from the following sources:

<TABLE>
<CAPTION>
               ---------------------------------------------------------------------------    
                                                                                    PERCENT      
                                                                       REVENUE     OF TOTAL      
               SODAK REVENUE BY SOURCE - 1996                        ($ MILLION)    REVENUE        
               ---------------------------------------------------------------------------- 
               <S>                                                    <C>               <C>             
                                                                                           
               Product sales                                                               
                    Gaming machines                                   $    75.5         49%     
                    Accessories and ancillary products                     29.0         19%     
               Wide area progressive systems                                8.1          5%     
               Financing and other                                          6.0          4%     
                                                                 --------------------------                                    
                    SUBTOTAL, PRODUCT SALES, WIDE AREA                                          
                         PROGRESSIVE SYSTEMS AND FINANCING                118.6         77%     
                                                                                                
               Gaming operations                                                                
                    Domestic gaming operations                             20.2         13%     
                    International gaming operations                        15.8         10%     
                                                                 --------------------------      
                    SUBTOTAL, GAMING OPERATIONS                            36.0         23%   
                                                                 --------------------------     
               TOTAL REVENUE                                          $   154.6        100%   
                                                                 ==========================      
               ---------------------------------------------------------------------------- 
</TABLE>

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
machines 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.

                                      -14-
<PAGE>
 
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, and custom-designed signs 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 nine salespersons, each with
responsibility for a separate geographic region. The Company also employs a vice
president of sales and a sales administrator to oversee its salespersons. The
salespersons and vice president of sales are primarily compensated on a
commission basis. Sodak currently operates a sales office in Rapid City, South
Dakota. Salespersons are also based in Arizona, Minnesota, Wisconsin and Canada.
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 its inventory and its 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.

     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. All gaming
machines are covered by a 90 day parts warranty provided by the Company. The
Company also offers to service the gaming machines it distributes for a fee. In
addition, the Company provides a toll-free 24-hour service and support "hot
line" to assist casino 

                                      -15-
<PAGE>
 
technicians with troubleshooting and identification of problems with equipment
and systems. The Company also provides extensive technical training to casino
personnel and conducts semi-annual site visits to assure a high quality level of
service and support to casinos.

     Sodak also assists its customers with marketing and casino support
services. The Company employs 13 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 and to assist
customers in the development, design and layout of their casinos and for
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.

     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 1996, 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 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.

     The Company has distributed gaming equipment to 89 Native American gaming
customers. In 1996, approximately $101 million or 97% of the Company's product
sales was derived from Native American gaming and approximately 63% was derived
from Native American gaming in Arizona, Connecticut, Michigan and Ontario. The
Company expects its future sales may be concentrated in other states as compacts
become effective and new casinos become operative in those states.

                                      -16-
<PAGE>
 
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 nationwide and to casinos in Deadwood, South Dakota. The number of
machines on the systems was 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. On March 7, 1997, the Company introduced
Wheel of Fortune to Native American casinos where wide area progressive systems
are permitted. Additional systems, such as High Rollers and Wheel of Gold also
are expected to be introduced in 1997. To support its wide area progressive
systems, the Company has a vice president overseeing a staff of two
salespersons, a systems supervisor and an administrative assistant who are
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 1997 as it proceeds with its strategy
to place additional systems and gaming machines 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. In particular, the Company is pursuing the
introduction of wide area progressive systems in Mississippi and Minnesota. In
addition, the Company is pursuing the resumption of machine placements in
casinos in New Mexico where pending legal action has postponed their
installation until the legal appeals are exhausted or the legislature authorizes
existing or new compacts (see "Native American Gaming," page 11 for discussion
of New Mexico). 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

     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
startup 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 (see "Participations involving Native
American Casinos," page 18 for discussion).

                                      -17-
<PAGE>
 
     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 have 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, 1996, 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, 1996, 1995, and 1994, the Company financed
approximately 22%, 52%, and 45%, 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. In certain circumstances, the Company may
enter into sales contracts whereby the timing of the repayment of the contract
price will be based on the net win of the gaming machines. However, the total
amount to be repaid to Sodak under such a contract would be fixed.

     In 1996, the Company recognized financing income in conjunction with loans
provided to the Cypress Bayou Casino in Louisiana, the Cities of Gold Casino in
New Mexico and the Cliff Castle Casino in Arizona (see "Participations involving
Native American Casinos" below).

GAMING OPERATIONS

     The Company's gaming operations are: 1) participations in ventures to
finance the development, construction and equipping of Native American casinos;
2) gaming operations in Latin America; and 3) domestic gaming operations.

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 directly. The Company could loan money to the tribes or could
guarantee third party loans. For its involvement, the Company may receive an
inducement payment, guaranty fees or a participation in the payments made by a
tribe under its management agreement.

                                      -18-
<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 1996, 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. For the guaranty and other assistance the Company provided Harrah's in
obtaining the management contract (which expires in 2001), the Company receives
13/1//3% of Harrah's management fees from Harrah's Phoenix Ak-Chin casino, which
opened December 27, 1994.

     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 loan was used to construct Phase II
of the Cypress Bayou Casino owned by the Chitimacha Tribe of Louisiana. The
Company is the guarantor of this debt and receives a loan guarantee fee based on
a percentage of the outstanding loan balance. As of March 21, 1997, the
outstanding loan balance was approximately $2.0 million. Royal has a five year
agreement to manage, operate and maintain the bingo and Class III gaming
facility on the Chitimacha reservation in Charenton, Louisiana.

     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 includes interest
at a fixed rate of 12% and is payable in 24 equal consecutive monthly payments
beginning July 1995. As of March 21, 1997, the outstanding loan balance was
approximately $0.3 million.

INTERNATIONAL GAMING OPERATIONS

     As part of its strategy to increase its recurring revenue sources, the
Company expanded its operation of gaming halls and routes in Peru, established a
gaming hall in Brazil, and established a casino in Ecuador.

                                      -19-
<PAGE>
 
     PERU. The Company operates gaming halls and route operations in Peru. At
December 31, 1996, the Company had approximately 1,300 gaming machines in place
in 21 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, Piura, Sullana and Tumbas.

     In October 1996, the Peruvian government imposed a 200% increase in the 
per-machine tax in order to fund the formation of a federal gaming regulatory
agency. This new regulatory structure is expected to replace various municipal
regulatory authorities. In January 1997, the Peruvian government announced
regulatory changes in conjunction with the transfer of gaming regulatory
authority to the federal government. Included in these changes were minimum
machine requirements at gaming halls. By July 31, 1997, gaming halls in Lima
must have at least 120 machines per location and gaming halls in other cities
must have at least 80 machines per location. The Company anticipates that it
will reallocate its 1,300-machine base to fewer locations to accommodate the
regulatory requirement.

     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 10 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. This gaming hall
represents the Company's initial entry into the Brazilian market.

     In August 1996, the Company announced that it had entered into an agreement
with the CBF to provide and operate a video gaming system in Brazil. Under a
Brazilian federal law known as the "Zico" law, sports organizations involved
with Olympic or other world-class competition are permitted to be involved with
certain gaming operations. The permissible games include bingo, keno and "bingo
similar" games, including video machine versions of such games. The Company
enlisted the technical expertise of IGT for the initial stage of planning and
development for an on-line system.

     The Company subsequently entered into a joint venture agreement in January
1997 with IGT and Dreamport to proceed with the development and operations of
this system. The three companies will share equally in the investment funding,
expenses and profits of the CBF project. Under the terms of the joint venture,
the Company is to provide the administration of the CBF agreement and serve as
the primary liaison to the CBF, obtain contracts with retailers, and coordinate
delivery and equipment installation schedules. IGT is to provide video gaming
machines, game development, training for installation and field service of the
equipment, and the warehousing and delivery of equipment. Dreamport is to
provide communications methodology, technology and licensing, ongoing field
service, and central systems operations, control and support. In addition, the
joint venture may pursue other Brazilian video gaming opportunities.

     The Company anticipates that a number of factors could contribute to the
successful introduction and operation of the CBF project, including: 1) the high
level of public acceptance of gaming; 2) the popularity of soccer; 3) the
distinguished reputation of the CBF and its proposed use of its proceeds from
the project to advance athletic, educational and social programs; and 4) the
collective capabilities of the three companies - Sodak, IGT and Dreamport -
affiliated under the joint venture agreement.

                                      -20-
<PAGE>
 
     The operation of the system is subject to the CBF obtaining regulatory
approval in each state where the proposed system is to be offered. The Company's
initial agreement with the CBF provided for the system to be operational by
March 30, 1997. In February 1997, the agreement was revised to provide for
systems to be operational no later than 180 days after regulatory authorization
is obtained by the CBF. Project documentation and requests for regulatory
authorization have been submitted for approval in four states or jurisdictions:
Rio de Janeiro, Goias, the Federal District of Brasilia, and Minas Gerais. In
addition, as of March 24, 1997, regulatory approval was also being pursued in
the states of Sao Paulo and Rio Grande de Sul. However, there can be no
assurance that such approvals will be obtained, that systems will become
operational in the time frame required by the CBF agreement or that the CBF
project or other Brazilian video gaming systems will be profitable.

     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.

     DOMESTIC GAMING OPERATIONS

     The Company's U.S. gaming operations strategy is to improve the operating
performance of the Miss Marquette and to seek additional opportunities to
operate and/or participate in casinos and other gaming entertainment facilities.

     THE 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 earnings 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, 

                                      -21-
<PAGE>
 
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, which is reported as goodwill in the consolidated
balance sheets.

     The riverboat has 682 gaming machines and 35 table games, 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 have been implemented to improve the financial performance,
including new management, a revitalized marketing program, reconfigured floor
layouts and the addition of poker tables and other table games.

     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 reapproved by the voters in 2002.

COMPETITION

     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., which was acquired in 1996 by Alliance Gaming
Corporation, a Nevada-based gaming machine route operator. The Company's other
competitors include, but are not limited to, Aristocrat, Casino Data Systems,
Sigma, Video Lottery Technologies, Universal and WMS Industries.

     The Company's primary competition in wide area progressive systems is
Casino Data Systems' "Cool Millions," which became operational in Native
American casinos in certain states in 1996. Depending on regulatory approval and
on public acceptance, this system or others could become 

                                      -22-
<PAGE>
 
available at other Native American casinos. 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.

     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.

     The riverboat casino market is highly competitive. As of December 31, 1996,
approximately 75 river boat 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.

     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 "International Operations," page 34 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.

                                      -23-
<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 is expected to be
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 "The Miss Marquette," page 21 for a listing of
the properties).

ITEM 3.  LEGAL PROCEEDINGS

     On April 26, 1994, the Company was named as a defendant in a class action
lawsuit filed in the United States District Court, Middle District of Florida,
by William A. Poulos and William Ahearn, respectively, each of whom sought to
assert claims on behalf of themselves and "all other similarly situated" parties
(the plaintiffs). Each of the plaintiffs filed suit against Sodak and
approximately 41 other defendants (each a "defendant" and collectively "the
defendants"). These two lawsuits were ordered consolidated by the Court, and the
action has been transferred to the United States District Court, District of
Nevada, for further proceedings. Each defendant is involved in the gaming
business as either a gaming machine manufacturer, distributor, or casino
operator. The class action lawsuit arises out of alleged fraudulent marketing
and operation of casino video poker machines and electronic slot machines. The
plaintiffs allege that the defendants have engaged in a course of fraudulent and
misleading conduct intended to induce people into playing their gaming machines
based on a false belief concerning how those machines actually operate as well
as the extent to which there is actually an opportunity to win on any given
play. 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.

     The lawsuit is currently in discovery limited to various issues of
jurisdiction, class certification and venue. The Company believes the
plaintiffs' lawsuit to be without merit. The Company intends to vigorously
pursue all legal defenses available to it and has various motions pending.

     On September 26, 1995, another RICO-based class action was filed in the
United State District Court, District of Nevada, by Larry Schreier, which named
the Company as a defendant, along with the same 41 other defendants (each a
"defendant" and collectively "the defendants"). The plaintiff in this action is
a resident of Tulsa, Oklahoma, and purports to bring this action on behalf of
himself and "all other similarly situated" parties (the plaintiffs), namely, all
members of "casino card clubs" and players in "video poker tournaments," which
would appear to be a sub-class of plaintiffs within the two prior class actions
identified above and which are presently pending against the Company in the
District of Nevada. Except for the identification of the class which the
plaintiff seeks to represent, all substantive allegations of this action are
virtually identical to the consolidated Poulos/Ahearn actions. The Company
believes this lawsuit is also without merit.

                                      -24-
<PAGE>
 
     This latest action is presently in its initial pleading phase, with answers
or dispositive motions yet to be filed on behalf of the Company. The Company
intends to vigorously pursue all legal defenses available to it and to shortly
file various dispositive motions on its behalf.

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:

<TABLE>
<CAPTION>
          -------------------------------------------------------------
                                      1996                  1995  
                                ---------------------------------------
                                  High      Low        High       Low    
                                ---------------------------------------
          <S>                   <C>         <C>        <C>        <C> 
          First Quarter         $ 14 1/8    10 1/8      8 3/4     5 1/4
          Second Quarter          17 1/2     9 1/8      9 1/8     5 1/2
          Third Quarter           27 1/2    15 1/4     10 5/8     8             
          Fourth Quarter          24 3/4    13         11 7/8     8 7/8 
          -------------------------------------------------------------     
</TABLE>

     As of March 1, 1997 there were approximately 5,000 beneficial owners of
Sodak Gaming, Inc.'s common stock. The closing price of the Company's common
stock on March 1, 1997 was $ 14 3/8.

     The Company did not pay cash dividends in 1996 or 1995 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 738, South St. Paul, MN
55075-0738; telephone (612) 450-4064.

                                      -25-
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
          (In thousands, except                                                                                                    
          per share amounts)                    1996        1995        1994         1993       1992                               
          ------------------------------------------------------------------------------------------                               
                                                                                                                                   
          <S>                               <C>          <C>         <C>           <C>        <C> 
           Revenue                          $154,619      93,294      84,494       68,894     48,158                               
           Income from operations             20,932      20,180      14,779       10,352      4,982                               
           Net earnings /(1)/                 13,233      12,893       9,897        7,055      2,311                               
           Earnings per share /(1)/             0.58        0.57        0.44         0.37       0.16                               
           Working capital                    37,728      37,501      29,703       63,642     10,589                               
           Total assets                      170,281     138,055     118,083       96,234     27,312                               
           Long-term debt                     27,189      18,044         600          851        931                               
           Shareholders' equity              107,237      94,261      81,357       71,459     13,155                                
</TABLE> 
 
          (1)  On October 16, 1992, the Company's status as an S Corporation was
               terminated. The Company paid S Corporation dividends of
               $5,169,831 in 1992 and paid a cash dividend of $259,982 in 1993.
               For the year 1992, net earnings and earnings per share are
               reflected on a pro forma basis "as if" the Company had been
               responsible for paying income taxes.
 
                                     -26-
<PAGE>
 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS

GENERAL

     After its inception in 1989, the Company's sole line of business was the
marketing and distribution of gaming equipment to Native American casinos. Since
1993, the Company has been diversifying its revenue base and has focused on the
development of gaming opportunities that generate recurring revenue sources.

     The Company's strategy is to expand gaming operations into new markets and
to increase recurring revenue. As part of this strategy, the Company has entered
emerging gaming markets in Latin America, where it develops, equips and operates
gaming halls and routes and a casino. In August 1996, the Company announced it
had 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 (see Note 12, page 53 for discussion). The Company
subsequently entered into a joint venture agreement with IGT and Dreamport (a
wholly-owned subsidiary of GTECH Holdings) to proceed with the development and
operations of this system. The three companies will share equally in the
investment funding, expenses and profits of the CBF project.

INTRODUCTION

     Sodak Gaming, Inc. was in its eighth year of operation and its fourth year
as a publicly traded company in 1996. The Company's core business is
distributing gaming equipment and ancillary products and providing wide area
progressive systems to Native American casinos in North America. The number of
revenue sources increased in 1996 with the acquisition of Gamblers Supply
Management Company (GSMC) (see Note 2, page 45 for discussion); the addition of
a gaming hall in Rio de Janeiro, Brazil, and a casino in Quito, Ecuador; and the
expansion of gaming halls and route operations in Peru.

     Revenue and income increased to record levels in 1996 due to the record
level of product sales as the result of record machine shipments; the expansion
of the wide area progressive systems; the July 1, 1996 acquisition of GSMC,
which operates the Miss Marquette riverboat casino and entertainment facility
located on the Mississippi River near Marquette, Iowa (see Note 2, page 45 for
discussion); and the expansion of gaming operations in Latin America. In
addition, other ongoing business activities included a participation in Harrah's
management fee from Harrah's Phoenix Ak-Chin casino in Arizona and income from
financing product sales and casino ventures.

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. The Company continued its strategy of augmenting
product sales revenue with recurring revenue streams offered by gaming
operations and wide area progressive systems. Total revenue increased 66% to
$154.6 million in 1996, compared to $93.3 million 

                                     -27-
<PAGE>
 
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 220 used machines) in 1996 compared to
approximately 8,500 machines (including 430 used machines) in 1995. 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 does not anticipate that product sales
in 1997 will attain last year's record level. 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.

     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 cost of products increased to 77.7% in 1996, from 76.1% 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 242% to $36.0 million in 1996, from
$10.5 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. The Company believes that gaming
operations revenue and margins may increase as Latin American operations mature.
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

     THE MISS MARQUETTE. GSMC, the management company of the Miss Marquette, was
acquired on July 1, 1996, and was accounted for using the purchase method of
accounting (see Note 2, page 45 for discussion). Accordingly, the operations of
the Miss Marquette since July 1, 1996, are included in the consolidated
statements of earnings. The riverboat casino and entertainment facility has 682
machines and 35 table games and is located on the Mississippi River at
Marquette, Iowa. 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 

                                     -28-
<PAGE>
 
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.

     PARTICIPATION WITH HARRAH'S. The Company recognized revenue of $1.6 million
in 1996 compared to $1.5 million in 1995 as its share of Harrah's Entertainment,
Inc.'s (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).

INTERNATIONAL GAMING OPERATIONS

     As part of its strategy to increase its recurring revenue sources, the
Company expanded its operation of gaming halls and routes in Peru, established a
gaming hall in Brazil, and established a casino in Ecuador.

     PERU. The Company operates gaming halls and route operations in Peru.
Revenue increased 433% to $12.4 million in 1996 compared to $2.3 million in 1995
and direct operating costs increased $9.2 million to $11.4 million in 1996
compared to $2.2 million in 1995. These increases are 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. In October 1996, the
Peruvian government imposed a 200% increase in the per-machine tax in order to
fund the formation of a federal gaming regulatory agency. This new regulatory
structure is expected to replace various municipal regulatory authorities.

     In January 1997, the Peruvian government announced regulatory changes in
conjunction with the transfer of gaming regulatory authority to the federal
government. Included in these changes were minimum machine requirements at
gaming halls. By July 31, 1997, gaming halls in Lima must have at least 120
machines per location and gaming halls in other cities must have at least 80
machines per location. The Company anticipates that it will reallocate its 
1,300-machine base to fewer locations to accommodate the regulatory requirement.

     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.
The Company anticipates an improvement in operating margin as the operation
matures. However, there can be no assurance that such improvement will be
realized due primarily to gaming's dependence on its regulatory status and
public acceptance.

     In August 1996, the Company announced that it had entered into an agreement
with the CBF to provide and operate a video gaming system in Brazil. The Company
subsequently entered into a joint venture agreement in January 1997 with IGT and
Dreamport to proceed with the development and operations of this system. The
three companies will share equally in the investment funding, expenses and
profits of the CBF project (see Note 12, page 53 for discussion).

     The operation of the system is subject to the CBF obtaining regulatory
approval in each state where the proposed system is to be offered. The Company's
initial agreement with the CBF provided for the system to be operational by
March 30, 1997. In February 1997, the agreement was revised to 

                                     -29-
<PAGE>
 
provide for systems to be operational no later than 180 days after regulatory
authorization is obtained by the CBF. Project documentation and requests for
regulatory authorization have been submitted for approval in four states or
jurisdictions: Rio de Janeiro, Goias, the Federal District of Brasilia, and
Minas Gerais. In addition, as of March 10, 1997, regulatory approval was also
being pursued in the states of Sao Paulo and Rio Grande de Sul. However, there
can be no assurance that such approvals will be obtained or that systems can
become operational in the indicated time frame.

     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 10 table games. Revenue in 1996 was $0.9 million and direct costs associated
with the operation were $1.1 million. Operating results reflect the start-up
status of the casino, and the Company anticipates an improvement in operating
margins as the operation matures. However, there can be no assurance that such
improvement will be realized due primarily to gaming's dependence on its
regulatory status and public acceptance.

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 is 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. On March 7, 1997, the Company
introduced Wheel of Fortune to Native American casinos where wide area
progressive systems are permitted. Based on current market trends, the Company
anticipates increased revenue from its wide area progressive systems in 1997 as
it proceeds with its strategy to place additional systems and machines 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.

FINANCING

     Financing income on notes receivable and other financing arrangements
increased 10% to $5.9 million in 1996, compared to $5.4 million in 1995. This
increase was primarily due to an increase in financing arrangements entered into
during 1995, which financing continued to generate income in 1996. In 1996,
financed sales as a percentage of all product sales decreased compared to 1995.

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

                                     -30-
<PAGE>
 
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. These
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 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 45 for discussion).  The Company believes that
interest and financing costs will continue to increase in future years as the
Company pursues its growth strategy.

INCOME FROM OPERATIONS

     The cumulative effect of the above described changes resulted in a 4%
increase in income from operations to $20.9 million in 1996, from $20.2 million
in 1995. As a percentage of revenue, income from operations decreased to 13.5%
in 1996, from 21.6% 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 36.8% and 36.4% of
earnings before income taxes in 1996 and 1995, respectively.

RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1995
COMPARED TO THE YEAR ENDED DECEMBER 31, 1994

     Net earnings for 1995 increased 30% to $12.9 million, or $0.57 per share,
compared to net earnings of $9.9 million, or $0.44 per share, in 1994.  Gaming
operations, wide area progressive systems and financing revenue were the primary
contributors to the increase in net earnings.  The Company continued its
strategy of augmenting product sales revenue with recurring revenue streams
offered by gaming operations and wide area progressive systems.  These recurring
revenue sources made significant contributions to net earnings and were more
evident in 1995 with a full year of 

                                     -31-
<PAGE>
 
revenue relating to the Miss Marquette riverboat lease (see Note 2, page 45 for
discussion), a full year of participation in Harrah's management fees with
Harrah's Phoenix Ak-Chin casino, as well as the Company's continued expansion in
the Latin American market.

     Total revenue increased 10% to $93.3 million in 1995, compared to $84.5
million in 1994. Total costs and expenses increased at a slower rate than total
revenue in 1995, thereby improving operating margins compared to 1994. Total
costs and expenses increased 5% to $73.1 million in 1995, compared to $69.7
million in 1994.

PRODUCT SALES

     Revenue from product sales decreased 5% to $73.2 million in 1995, compared
to $76.9 million in 1994. This decrease was due to a 21% decrease in machine
sales revenue to $49.5 million in 1995, compared to $62.9 million in 1994, which
was somewhat offset by a 68% increase in ancillary gaming and non-gaming product
sales revenue to $23.6 million in 1995, compared to $14 million in 1994. In
1995, 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) decreased 27% to
approximately 8,500 machines (including 430 used machines) in 1995 compared to
approximately 11,700 machines in 1994.  The majority of the decline in gaming
machine sales was due to a reduction of sales in the states of Arizona and
Louisiana, where in 1994 those markets accounted for a larger volume of machine
sales due to the opening of new casinos.  During 1995, the Company partially
offset this decrease in volume through increased sales in Connecticut and
Oregon, and entry into the new markets of New Mexico and North Carolina.

     The cost of product sales decreased 6% to $55.7 million in 1995, from $59.3
million in 1994.  This decrease was attributable to the decreased sales volume
of machines. As a percentage of product sales revenue, the cost of products
decreased to 76.1% in 1995, from 77.1% in 1994. The higher margin was due
primarily to an increase in the percentage of sales financed, which generally do
not qualify for discounts.  While product sales revenue declined 5%, gross
margin on product sales decreased only 1% to $17.5 million in 1995, from $17.7
million in 1994.

GAMING OPERATIONS

     Gaming operations revenue increased 132% to $10.5 million in 1995, from
$4.5 million in 1994.

DOMESTIC GAMING OPERATIONS

     THE MISS MARQUETTE. Revenue from the Miss Marquette increased $5.1 million
to $6.7 million in lease revenue in 1995 compared to $1.6 million in 1994 (see
Note 2, page 45 for discussion). The increase in revenue was due to an entire
year of lease income in 1995, where 1994 revenue consisted of lease income for
only three months.

     PARTICIPATION WITH HARRAH'S. The Company recognized revenue of $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, which opened December 27, 1994.

                                     -32-
<PAGE>
 
INTERNATIONAL GAMING OPERATIONS

     PERU. In May 1995, the Company began operations of gaming halls and routes
in Peru. At December 31, 1995, a total of 440 machines in 8 locations were
operating. Revenue of $2.3 million was earned and $2.2 million in direct costs
were incurred.

WIDE AREA PROGRESSIVE SYSTEMS

     Wide area progressive systems revenue increased ten-fold to $4.1 million in
1995 compared to $0.3 million in 1994. Wide area progressive systems operations
began in August 1994. At December 31, 1995, approximately 800 machines were
connected to the systems, compared to approximately 120 at December 31, 1994. At
December 31, 1995, the Company was operating wide area progressive systems in
Arizona (which permits the operation of intrastate systems in lieu of interstate
systems), Connecticut, Iowa, Louisiana, Michigan, New Mexico, North Dakota,
South Dakota and Wisconsin and the systems available were Megabucks,
Quartermania and Nickelmania.

FINANCING

     Financing income on notes receivable and other financing arrangements
increased 99% to $5.4 million in 1995, compared to $2.7 million in 1994. This
increase was primarily due to an increase in financing arrangements entered into
and an increase in effective interest rates.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expenses increased 40% to $14.5 million
in 1995, from $10.3 million in 1994.  This increase resulted primarily from
increases in compensation, professional fees, depreciation, provision for
doubtful accounts, insurance, travel and other expenses associated with the
development of new markets, including gaming operations in the United States,
and other countries, primarily in Latin America.

INTEREST AND FINANCING COSTS

     Interest and financing costs increased to $0.7 million in 1995, from  $0.1
million in 1994, as a result of the increase in interest and financing costs
attributed to borrowings for development of markets in the United States and
Latin America, the financing of sales and construction of new facilities.

INCOME FROM OPERATIONS

     The cumulative effect of the above described changes resulted in a 37%
increase in income from operations to $20.2 million in 1995, from $14.8 million
in 1994. As a percentage of revenue, income from operations increased to 21.6%
in 1995, from 17.5% in 1994.

OTHER

     Other income, which consisted primarily of interest income, decreased to
$0.1 million in 1995, from $0.7 million in 1994.

     Earnings before income taxes increased 31% to $20.3 million in 1995,
compared to $15.5 million in 1994. Provision for income taxes was $7.4 million
in 1995, compared to $5.6 million in 1994, representing 36.4% and 36.2% of
earnings before income taxes in 1995 and 1994, respectively.

                                     -33-
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

WORKING CAPITAL

     Working capital increased slightly to $37.7 million at December 31, 1996,
compared to $37.5 million at December 31, 1995.  The increase in current assets
of $9.9 million was mostly offset by an increase in current liabilities of $9.7
million.

CASH FLOWS

     During 1996, the Company's cash and cash equivalents increased $3.1 million
to $4.1 million. Cash provided by operating activities was $14.0 million in 1996
compared to $13.5 million used in 1995. The cash flows from operations for 1996
were primarily affected by net income and changes in receivables, inventories,
accounts payable and accrued income taxes and liabilities.

     Cash used in investing activities amounted to $15.4 million in both 1996
and 1995. Cash used in investing activities consisted primarily of $9.7 million
and $8.2 million used to purchase property and equipment in 1996 and 1995,
respectively; $5.5 million and $4.8 million advanced on notes receivable for
customer financing in 1996 and 1995, respectively; $3.5 million and $0.9 million
increase in other assets in 1996 and 1995, respectively; and $2.6 million and
$4.8 million increase in amounts due from riverboat lessee, prior to the
acquisition of GSMC (see Note 2, page 45 for discussion) in 1996 and 1995,
respectively. The majority of the property and equipment purchases was the
result of the expansion of Latin American gaming operations. The increase in
other assets during 1996 was primarily due to capitalizing start-up costs
associated with the CBF Project (see Note 12, page 53 for discussion). Cash used
in investing activities was partially offset by $4.9 million and $3.0 million in
payments received on notes receivable from casino development financing in 1996
and 1995, respectively.

     Financing activities provided $5.2 million cash in 1996 compared to $17.4
million provided in 1995, primarily from the net proceeds of long-term
borrowings under a revolving credit facility in both years.  The increase in
debt is primarily due to investments associated with development and expansion
of gaming in Latin America.

INTERNATIONAL OPERATIONS

     Approximately 10% of total revenue in 1996 was derived outside of the
United States, compared to 2% in 1995. 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.

                                     -34-



<PAGE>
 
IMPACT OF INFLATION

     Inflation has not had a significant effect on the Company's operations
during the three years ended December 31, 1996.

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.

                                     -35-

<PAGE>
 
ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS


                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE> 
<CAPTION>  
     <S>                                                                  <C>
     Consolidated Statements of Earnings for the years ended
        December 31, 1996, 1995 and 1994                                  37

     Consolidated Balance Sheets at December 31, 1996 and 1995            38
     
     Consolidated Statements of Shareholders' Equity for the years ended  40
        December 31, 1996, 1995 and 1994

     Consolidated Statements of Cash Flows for the years ended
        December 31, 1996, 1995 and 1994                                  41

     Notes to Consolidated Financial Statements for the years ended
        December 31, 1996, 1995 and 1994                                  42

     Independent Auditors' Report                                         55
</TABLE>

                                     -36-
<PAGE>
 
                      SODAK GAMING, INC. AND SUBSIDIARIES

                      Consolidated Statements of Earnings

                 Years ended December 31, 1996, 1995 and 1994

<TABLE> 
<CAPTION> 
                                                                                        1996         1995         1994
---------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>             <C>          <C>  
Revenue:
  Product sales                                                                 $ 104,511,557   73,172,664   76,924,388
  Gaming operations                                                                36,000,601   10,524,435    4,545,000
  Wide area progressive systems                                                     8,148,990    4,097,323      291,987
  Financing income on notes receivable and other
   financing arrangements                                                           5,925,221    5,378,422    2,707,543
  Other                                                                                32,328      120,910       25,281
-----------------------------------------------------------------------------------------------------------------------
       Total revenue                                                              154,618,697   93,293,754   84,494,199
-----------------------------------------------------------------------------------------------------------------------

Costs and expenses:
  Cost of product sales                                                            81,171,390   55,665,392   59,273,498
  Gaming operations                                                                29,786,157    2,192,250            0
  Selling, general and administrative                                              20,444,756   14,531,355   10,347,718
  Interest and financing costs                                                      2,284,139      724,814       93,665
-----------------------------------------------------------------------------------------------------------------------
       Total costs and expenses                                                   133,686,442   73,113,811   69,714,881
-----------------------------------------------------------------------------------------------------------------------

Income from operations                                                             20,932,255   20,179,943   14,779,318
-----------------------------------------------------------------------------------------------------------------------

Other income (expense):
  Interest income                                                                      45,404      112,116      734,732
  Other                                                                               (51,347)     (16,508)           0
-----------------------------------------------------------------------------------------------------------------------
       Total other income (expense)                                                    (5,943)      95,608      734,732
-----------------------------------------------------------------------------------------------------------------------

Earnings before income taxes                                                       20,926,312   20,275,551   15,514,050

Provision for income taxes (note 8)                                                 7,693,684    7,382,210    5,616,928
-----------------------------------------------------------------------------------------------------------------------

Net earnings                                                                    $  13,232,628   12,893,341    9,897,122
-----------------------------------------------------------------------------------------------------------------------

Earnings per common and common equivalent share                                 $        0.58         0.57         0.44
-----------------------------------------------------------------------------------------------------------------------

Weighted average number of common and common
  equivalent shares outstanding                                                    22,965,940   22,772,318   22,720,800
-----------------------------------------------------------------------------------------------------------------------
</TABLE> 
 
The accompanying notes are an integral part of the consolidated financial
statements.
 

                                      -37-
<PAGE>
 
                      SODAK GAMING, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                           December 31, 1996 and 1995

<TABLE>
<CAPTION>
                     Assets                    1996               1995
----------------------------------------------------------------------------
<S>                                            <C>           <C>          
Current assets:
  Cash and cash equivalents                    $  4,077,107      974,221
  Receivables:
    Trade accounts, net of allowance for 
      doubtful accounts of $910,000 in 1996 and
        $820,000 in 1995                         20,258,980   15,971,347
    Short-term notes receivable (note 3)            391,018    1,846,213
    Notes receivable, current                    23,197,351   25,610,033
      maturities (note 4)                            
    Net investment in direct financing-type 
      lease, current maturities (note 2)                  0      626,693
    Accrued interest                                570,024      322,012  

  Inventories:
    Gaming machines                              16,410,597   12,798,282
    Parts and other gaming accessories            4,225,674    2,530,500
  Prepaid expenses                                1,674,172    1,080,934 
  Refundable income taxes                           875,000            0 
  Deferred income taxes (note 8)                    553,000      528,000 
----------------------------------------------------------------------------
              Total current assets               72,232,923   62,288,235
----------------------------------------------------------------------------

Property and equipment:
    Land and improvements                         1,357,616      628,143 
    Buildings and improvements                   17,758,478    5,640,453   
    Leasehold improvements                        1,083,466            0 
    Riverboat                                    13,687,115            0   
    Gaming operations equipment                  23,314,614    4,674,004
    Office furniture and equipment                2,496,142    1,791,327
    Transportation equipment                      2,150,488    1,837,565
    Shop equipment                                  503,652      346,789
----------------------------------------------------------------------------
                                                 62,351,571   14,918,281
    Less accumulated depreciation and
       amortization                              (4,410,249)  (1,245,004)
----------------------------------------------------------------------------
              Total property and equipment, net  57,941,322   13,673,277
---------------------------------------------------------------------------- 
 
Other assets:
    Notes receivable, net of current 
       maturities (note 4)                       26,657,133   26,164,915
    Net investment in direct financing-type
        lease, net of current maturities
         (note 2)                                         0   13,355,447
    Amounts due from riverboat lessee (note 2)            0   19,950,823
    Real estate held for sale                       596,658    1,140,435
    Goodwill, net (note 2)                        8,155,401            0
    Other assets, net                             4,697,196    1,481,885
----------------------------------------------------------------------------
              Total other assets                 40,106,388   62,093,505
----------------------------------------------------------------------------
                                               $170,280,633  138,055,017
============================================================================
</TABLE> 

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

                                      -38-
<PAGE>
 
<TABLE> 
<CAPTION> 
            Liabilities and Shareholders' Equity                                  1996                 1995
-----------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                    <C> 
Current liabilities:
 Accounts payable--trade:    
   International Game Technology                                           $  24,179,321          18,851,615
   Other                                                                       4,149,104           3,383,055
 Current maturities of
   long-term debt (note 7)                                                     1,751,000              56,891  
 Income taxes payable                                                            161,615             993,718
 Accrued liabilities                                                           4,263,912           1,502,170
-----------------------------------------------------------------------------------------------------------------
              Total current liabilities                                       34,504,952          24,787,449
-----------------------------------------------------------------------------------------------------------------

Long-term debt, net of current maturities (note 7)                            27,188,869          18,043,977

Deferred income taxes (note 8)                                                 1,350,000             963,000

Shareholders' equity:
   Preferred stock at $0.001 par value, 25,000,000 shares
       authorized, none issued and outstanding                                         0                   0
   Common stock at $0.001 par value; 75,000,000 shares
       authorized, 22,757,688 and 22,722,276 shares
       issued and outstanding at December 31, 1996 and 1995, 
       respectively                                                               22,758              22,722
   Additional paid-in capital                                                 64,072,273          63,702,619
   Retained earnings                                                          43,767,878          30,535,250
   Cumulative translation adjustment                                            (626,097)                  0
-----------------------------------------------------------------------------------------------------------------
              Total shareholders' equity                                     107,236,812          94,260,591
-----------------------------------------------------------------------------------------------------------------

Commitments and contingencies (notes 7, 11 and 12)
-----------------------------------------------------------------------------------------------------------------
                                                                           $ 170,280,633         138,055,017         
=================================================================================================================
</TABLE> 

                                      -39-
<PAGE>
 
                      SODAK GAMING, INC. AND SUBSIDIARIES
 
                Consolidated Statements of Shareholders' Equity
 
                 Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                          Common stock          Additional               Cumulative        Total
                                    ------------------------
                                                        Par       paid-in     Retained   translation    shareholders'
                                         Shares        value      capital     earnings    adjustment       equity
----------------------------------------------------------------------------------------------------------------------
<S>                                 <C>                <C>       <C>          <C>        <C>            <C>
Balance, December 31, 1993              22,716,932      $22,718  63,691,936    7,744,787              0    71,459,441
 
     Net earnings                                0            0           0    9,897,122              0     9,897,122
---------------------------------------------------------------------------------------------------------------------- 

Balance, December 31, 1994              22,716,932       22,718  63,691,936   17,641,909              0    81,356,563
 
     Net earnings                                0            0           0   12,893,341              0    12,893,341
     Restricted stock awards                 5,344            4      10,683            0              0        10,687
---------------------------------------------------------------------------------------------------------------------- 

Balance, December 31, 1995              22,722,276       22,722  63,702,619   30,535,250              0    94,260,591
 
     Net earnings                                0            0           0   13,232,628              0    13,232,628
     Restricted stock awards, net             (216)           0      10,688            0              0        10,688
     Stock options exercised                35,628           36     249,788            0              0       249,824
     Tax benefits of stock options
          exercised (note 8)                     0            0     109,178            0              0       109,178
     Foreign currency
          translation adjustment                 0            0           0            0       (626,097)     (626,097)
---------------------------------------------------------------------------------------------------------------------- 

Balance, December 31, 1996              22,757,688      $22,758  64,072,273   43,767,878       (626,097)  107,236,812
======================================================================================================================
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
 
                                     -40-
<PAGE>
 
                      SODAK GAMING, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                                           1996           1995          1994
----------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>            <C>           <C>
Cash flows from operating activities:
 Net earnings                                                          $ 13,232,628    12,893,341     9,897,122
 Adjustments to reconcile net earnings to net
  cash provided by (used in) operating activities:
   Depreciation and amortization                                          3,778,657       713,682       356,303
   Provision for doubtful accounts                                        2,787,550       300,000       175,102
   Deferred income taxes                                                    362,000       584,000        14,000
   Restricted stock awards                                                   10,688        10,687             0
   Loss on sale of property and equipment                                    51,347             0             0
   Gross profit on sales financed through notes receivable               (5,665,754)   (9,685,245)   (7,479,152)
   Changes in operating assets and liabilities, net of acquisition:
    Receivables                                                          (6,811,207)    2,020,840   (17,257,144)
    Purchase of inventories sold under financed sales                   (16,818,168)  (27,682,849)  (21,653,039)
    Payments received on notes
     receivable relating to financed sales                               26,220,774    20,065,536    25,351,725
    Inventories                                                          (7,924,906)   (1,151,424)   (9,014,022)
    Prepaid expenses                                                       (310,522)     (520,295)      (68,784)
    Accounts payable                                                      5,725,318   (10,740,888)   10,932,478
    Accrued liabilities                                                     943,417       772,985       200,962
    Income taxes payable, net of refundable income taxes                 (1,597,925)   (1,077,535)    1,036,247
----------------------------------------------------------------------------------------------------------------
      Net cash provided by (used in)
        operating activities                                             13,983,897   (13,497,165)   (7,508,202)
----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
 Cash advanced on notes receivable                                       (5,514,902)   (4,762,032)  (11,532,379)
 Payments received on notes receivable                                    4,923,709     3,002,166     7,808,722
 Investment in direct financing-type lease                                        0             0   (14,293,965)
 Principal payments received on
  direct financing-type lease                                               338,057       171,825       140,000
 Purchases of property and equipment                                     (9,748,295)   (8,214,695)   (2,518,238)
 Proceeds from sale of property and equipment                               501,801             0             0
 Increase in amounts due from riverboat lessee, prior to
  acquisition (note 2)                                                   (2,630,945)   (4,751,760)  (15,199,063)
 Purchase of subsidiary, net of cash acquired (note 2)                      237,571             0             0
 Increase in other assets                                                (3,485,578)     (888,756)     (609,537)
----------------------------------------------------------------------------------------------------------------
       Net cash used in investing  activities                           (15,378,582)  (15,443,252)  (36,204,460)
----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
 Proceeds from long-term borrowings                                      52,750,000    27,500,000             0
 Principal repayments of long-term debt                                 (47,799,594)  (10,052,190)     (278,626)
 Net proceeds from exercise of stock options                                249,824             0             0
----------------------------------------------------------------------------------------------------------------
      Net cash provided by (used in)
       financing activities                                               5,200,230    17,447,810      (278,626)
----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents               (702,659)            0             0
----------------------------------------------------------------------------------------------------------------
      Net increase (decrease) in cash and cash equivalents                3,102,886   (11,492,607)  (43,991,288)
 
Cash and cash equivalents, beginning of year                                974,221    12,466,828    56,458,116
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                                 $  4,077,107       974,221    12,466,828
================================================================================================================
Supplemental disclosure of cash flow information:
 Cash paid during the year for interest (net of amount capitalized)    $  1,719,226       669,065        59,604
 Cash paid during the year for income taxes                               9,038,787     7,875,745     4,566,681
 
Supplemental disclosure of non-cash investing activities:
 Gaming machine inventory transferred to gaming
  operations equipment                                                    2,948,027     2,478,225             0
</TABLE>

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

                                      -41-
<PAGE>
 
                      SODAK GAMING, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

(1)  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     NATURE OF BUSINESS

     Sodak Gaming, Inc. (the Company) is a leading distributor 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; 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, which
          is effective through May 1998 and continues thereafter until 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), to Native Americans, aboriginal peoples and
          native peoples in Canadian provinces, and to non-Native American
          purchasers in South Dakota, North Dakota and Wyoming. The Company also
          has an agreement to sell and distribute IGT gaming equipment in
          Mexico. The agreements restrict the Company from selling competing
          products and is subject to review and renewal upon significant change
          in control of the Company, or the employment status of the chief
          executive officer.

     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 provides and markets 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.
          Commission revenue from product sales is recognized when earned.

     Revenue from casinos, gaming halls and route operations consists primarily
          of net gaming wins.

     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.

                                      -42-
<PAGE>
 
     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 Statement of Financial Accounting Standard
          (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 debts 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:

<TABLE>
<CAPTION>
                                                 Years
               ---------------------------------------
               <S>                               <C>  
               Land improvements                    15
               Buildings and improvements        15-39
               Leasehold improvements                5
               Riverboat                            25
               Gaming operations equipment        5-10
               Office furniture and equipment     7-10
               Transportation equipment           5-20
               Shop equipment                      5-7 
</TABLE>

     GOODWILL

     Goodwill represents the excess of the purchase price of Gamblers Supply
          Management Company (GSMC) over the fair value of the net assets
          acquired and is being amortized using the straight-line method over 15
          years. The Company evaluates goodwill for impairment periodically by
          comparing the estimated future cash flows, excluding interest costs,
          with the carrying value of goodwill.

                                      -43-
<PAGE>
 
     PRE-OPENING AND START-UP COSTS

     Pre-opening and start-up costs incurred in connection with the development
          of new casinos, gaming halls and the project with the Confederacao
          Brasileira de Futebol (CBF or Brazilian Soccer Federation) (Note 12)
          are capitalized until the casinos, gaming halls and CBF project become
          operational. These costs are amortized on a straight-line basis over
          the term of the leases or contracts, but not more than five years.
          Recoverability of these costs is assessed on an ongoing basis and
          writedowns to net recoverable values are recorded as necessary. Pre-
          opening and start-up costs, net of amortization, are included in other
          assets in the consolidated balance sheets.

     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

     Earnings per share is computed by dividing net earnings by the weighted
          average number of common and common equivalent shares outstanding.
          Common equivalent shares include the impact of outstanding dilutive
          stock options.

     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.

                                      -44-
<PAGE>
 
     LONG LIVED ASSETS

     In March 1995, SFAS No. 121, Accounting for the Impairment of Long-Lived
          Assets and for Long-Lived Assets to be Disposed Of, was issued. SFAS
          No. 121 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.
          During 1996, the Company adopted this statement and the effect of the
          adoption was not material.

(2)  ACQUISITION

     In 1994, the Company acquired and refurbished the Miss Marquette riverboat
          for $14.3 million which the Company leased to 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 earnings 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, which is reported as goodwill in the
          consolidated balance sheets.

     Prior to July 1, 1996, the lease arrangement with GSMC was accounted for as
          a direct financing-type lease, and the net investment was as follows
          at December 31, 1995:

<TABLE>
<CAPTION>
                                                                             1995         
          ----------------------------------------------------------  --------------      
          <S>                                                         <C>                 
          Total remaining minimum lease payments                       $  16,250,000      
          Estimated unguaranteed residual value of the riverboat          12,245,163                    
          Less unearned income                                           (14,513,023)     
          ----------------------------------------------------------  --------------      
               Net investment in the direct                                               
                   financing-type lease                                   13,982,140      
          Less current maturities                                           (626,693)     
          ----------------------------------------------------------  --------------      
               Net investment in direct financing-type                                    
                   lease, net of current maturities                    $  13,355,447       
          ----------------------------------------------------------  --------------      
</TABLE>

                                      -45-
<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.

<TABLE>
<CAPTION>
                                                                   1996         1995           
          ------------------------------------------------------------------------------       
          <S>                                                 <C>            <C>               
          Total revenue                                       $ 166,261,589  121,803,061       
          Net earnings                                           12,005,633   11,046,701       
          Earnings per common and common equivalent share              0.52         0.49        
</TABLE>

(3)  SHORT-TERM NOTES RECEIVABLE

     Installment notes receivable with original maturities, or anticipated
          maturities, of less than one year are summarized as follows at
          December 31:

<TABLE>
<CAPTION>
                                                      1996      1995           
          -------------------------------------------------------------        
          <S>                                      <C>        <C>              
          Various short-term installment notes     $ 391,018    333,985        
          Notes receivable, repaid in 1996                 0  1,512,228        
          -------------------------------------------------------------        
                                                                               
                                                   $ 391,018  1,846,213        
          -------------------------------------------------------------         
</TABLE>

(4)  NOTES RECEIVABLE

     Notes receivable with original maturities greater than one year result 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
          12%, or variable rates, generally adjusted monthly, ranging from prime
          to prime plus 4%. Maturities are generally from 24 to 36 months. The
          following is a summary of notes receivable at December 31:

<TABLE>                                                                     
<CAPTION>                                                                   
                                                                 1996          1995          
          ----------------------------------------------------------------------------       
          <S>                                              <C>             <C>               
          Notes receivable on installment sales            $  40,848,738    44,366,508       
          Notes receivable on loans to gaming ventures         9,005,746     7,408,440       
          ----------------------------------------------------------------------------       
                                                              49,854,484    51,774,948       
          Less current maturities                            (23,197,351)  (25,610,033)      
          ----------------------------------------------------------------------------       
                                                                                             
                                                           $  26,657,133    26,164,915       
          ----------------------------------------------------------------------------       
</TABLE>

          All notes receivable have been evaluated for collectibility under SFAS
          No.'s 114 and 118.

     As of December 31, 1996, there are notes receivable from a customer
          totaling approximately $5.8 million whose original terms have been
          modified providing for an extended period of repayment. The interest
          rate has not been modified and, based on the Company's analysis and
          credit review, the entire balance of these notes receivable, including
          interest during the periods of delay in payment, will be collected.

                                      -46-
<PAGE>


(5)  CONCENTRATIONS OF CREDIT RISK
 
     A significant portion of the Company's trade accounts receivable, short-
        term notes receivable, notes receivable, and accrued interest
        receivable, are due from customers located on Native American lands. The
        receivables are generally secured by the gaming equipment sold.
        Concentrations of credit risk as a percentage of total receivables, are
        as follows as of December 31 (1995 excludes amounts due from riverboat
        lessee note 2):

<TABLE>
<CAPTION>
                                         1996   1995
       ---------------------------------------------
       <S>                               <C>    <C> 
       Native American gaming-related      86%    94%
       Other                               14%     6%
       ---------------------------------------------
                                                    
                                          100%   100%
       --------------------------------------------- 
</TABLE>

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

(6)  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

       The carrying amount approximates fair value because of the short term
          maturity of those instruments.

       TRADE ACCOUNTS RECEIVABLE, SHORT-TERM NOTES RECEIVABLE, NOTES RECEIVABLE,
          ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND NOTES PAYABLE

       The carrying amounts of trade accounts receivable, short-term notes
          receivable, accounts payable and accrued liabilities approximate fair
          value because of the short maturity of those instruments.

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

                                      -47-
<PAGE>
 
(7)  LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                                   1996                  1995
-------------------------------------------------------------------------------------------------
<S>                                                            <C>                    <C>               
       Note payable to bank under a $50 million long-term
         revolving credit facility with terms as explained 
         below                                                 $  23,250,000          17,500,000
 
       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                                                   546,324             600,868
 
       Notes payable to the former shareholders of GSMC in
         monthly installments of $137,880, including interest
         at 8% through July 1999; unsecured                        3,849,982                   0
 
       Contract payable in monthly installments of $12,668,
         including interest at 9% through January 2005;
         secured by real estate                                      870,926                   0
 
       Various other secured notes payable                           422,637                   0
-------------------------------------------------------------------------------------------------
                                                                  28,939,869          18,100,868
       Less current maturities                                    (1,751,000)            (56,891)
-------------------------------------------------------------------------------------------------

                                                                 $27,188,869          18,043,977
-------------------------------------------------------------------------------------------------
</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 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
       $1,875,000 quarterly beginning in June 1997. The unused portion of the
       revolving credit facility is subject to a commitment fee, based on a
       calculation as defined in the agreement.

     Interest is payable based on variable rates which, at the Company's option,
       are based on prime rate, federal funds rate plus 1% or a Eurodollar rate
       plus an applicable margin. Amounts borrowed are secured by substantially
       all Company assets, excluding real estate, but including a first
       preferred ship mortgage on the Miss Marquette riverboat.

                                      -48-
<PAGE>
 
     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 debt to EBITDA ratio and foreign subsidiary
       investment ratios, with which the Company is in compliance.

     Principal maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
               Year                                         Amount
       -------------------------------------------------------------------------
       <S>                                              <C> 
               1997                                     $   1,751,000     
               1998                                         5,298,000 
               1999                                        11,796,000 
               2000                                         7,689,000 
               2001                                         1,988,000 
               Thereafter                                     417,869  
</TABLE>

(8)  INCOME TAXES

     A reconciliation of the statutory federal income tax rate of 35% to the
       Company's actual rate based on earnings before income taxes for the years
       ended December 31, 1996, 1995 and 1994 is summarized as follows:

<TABLE>
<CAPTION>
                                                                                 1996              1995              1994
       ----------------------------------------------------------------------------------------------------------------------
       <S>                                                                       <C>               <C>               <C> 
       Statutory federal rate                                                    35.0%             35.0%             35.0%
       State income taxes, net of federal income tax benefit                      1.3               1.6               2.7
       Tax-exempt income                                                          0.0              (0.1)             (1.5)
       Other                                                                      0.5              (0.1)              0.0
       ----------------------------------------------------------------------------------------------------------------------

                                                                                 36.8%             36.4%             36.2%
       ----------------------------------------------------------------------------------------------------------------------
</TABLE> 

     The provision for income taxes for the years ended December 31, 1996,
       1995 and 1994 is summarized as follows:

<TABLE> 
<CAPTION> 
                                                                   1996          1995           1994
        --------------------------------------------------------------------------------------------
        <S>                                            <C>                  <C>            <C>      
                                                                                                    
                   CURRENT:                                                                        
                    Federal                            $      6,617,268     6,271,730      4,957,000
                    State                                       400,765       447,762        645,928
                    Foreign                                     313,651        78,718              0
        --------------------------------------------------------------------------------------------
                       Total current                          7,331,684     6,798,210      5,602,928
        --------------------------------------------------------------------------------------------
                                                                                                    
                   DEFERRED:                                                                       
                    Federal                                     337,000       544,000         13,000
                    State                                        25,000        40,000          1,000
        --------------------------------------------------------------------------------------------
                       Total deferred                           362,000       584,000         14,000
        --------------------------------------------------------------------------------------------
                                                                                                    
                                                       $      7,693,684     7,382,210      5,616,928
        --------------------------------------------------------------------------------------------
</TABLE>

                                      -49-
<PAGE>
 
     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.

     Deferred tax assets and liabilities consist of the following:

<TABLE>
<CAPTION>
                                                    1996      1995  
       -------------------------------------------------------------
       <S>                                      <C>          <C>    
       DEFERRED TAX ASSETS:                                         
          Inventory allowance                   $   148,000  139,000
          Allowance for doubtful accounts           299,000  299,000
          Other                                     106,000   90,000
       -------------------------------------------------------------
                                                                    
                                                $   553,000  528,000
       ------------------------------------------------------------- 
                                                                    
       DEFERRED TAX LIABILITIES:                                    
          Property and equipment                $ 1,350,000  963,000
       ------------------------------------------------------------- 
</TABLE>

(9)  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.


(10) LINES OF BUSINESS AND GEOGRAPHICAL DATA

     The Company operates predominantly in the lines of business of product
       sales and systems and gaming operations in 1996 and 1995. Prior to 1995,
       the Company's business was primarily in the product sales and systems
       line of business. The product sales and systems line of business consists
       of product sales, wide area progressive systems and customer financing.
       The gaming operations line of business includes gaming halls and route
       operations and casino entertainment facilities as discussed in Note 1.

                                      -50-
<PAGE>
 
     Summarized financial information by line of business for 1996 and 1995 is
as follows:

<TABLE>
<CAPTION>
                                                
                                Product Sales     Gaming                              
                                 and Systems    Operations    Corporate   Consolidated                                       
       -------------------------------------------------------------------------------
       <S>                      <C>             <C>          <C>          <C>         
       1996:                                                                          
       Revenue                    $118,618,096   36,000,601           0    154,618,697
       Income from operations       24,363,219    5,356,203  (8,787,167)    20,932,255
       Identifiable assets          93,261,578   65,006,461  12,012,594    170,280,633
       Capital expenditures            252,500    8,227,592   1,268,203      9,748,295
       Depreciation and                                                               
          amortization                 236,400    2,671,148     871,109      3,778,657
                                                                                      
       1995:                                                                          
       Revenue                      82,769,319   10,524,435           0     93,293,754
       Income from operations       19,305,216    8,266,566  (7,391,839)    20,179,943
       Identifiable assets          86,368,986   40,327,450  11,358,581    138,055,017
       Capital expenditures          2,308,000    2,284,363   3,622,332      8,214,695
       Depreciation and                                                               
          amortization                 151,700      183,278     378,704        713,682 
</TABLE>

     The Company's international operations consist of gaming operations in
       Latin America beginning in 1995. Summarized financial information by
       geographic area for 1996 and 1995 follows:

<TABLE>
<CAPTION>
                                           North America  Latin America   Consolidated
       -------------------------------------------------------------------------------
       <S>                              <C>               <C>             <C>         
       1996:                                                                          
       Revenue                          $    138,825,947     15,792,750    154,618,697
       Income (loss) from operations          21,026,854        (94,599)    20,932,255
       Identifiable assets                   149,212,150     21,068,483    170,280,633
                                                                                      
       1995:                                                                          
       Revenue                                90,995,975      2,297,779     93,293,754
       Income from operations                 20,137,693         42,250     20,179,943
       Identifiable assets                   131,805,555      6,249,462    138,055,017 
</TABLE>

     The Company had one customer who accounted for 15.5% of total revenue in
       1996.  The Company had no significant customers in 1995 or 1994.

(11) 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.

                                      -51-
<PAGE>
 
           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>
                                                                                Weighted
                                                                                 Average
                                              Shares of Common Stock          Exercise Price
                                             -----------------------
                                             Available for                      of Shares
                                             Option/Award    Under Plan        Under Plan
---------------------------------------------------------------------------------------------
<S>                                        <C>               <C>               <C>           
Outstanding at December  31, 1993          1,492,000           8,000              $10.75
      Granted                                (93,296)         93,296                8.56
      Canceled                                     0               0         
      Exercised                                    0               0         
---------------------------------------------------------------------------------------------
Outstanding at December 31, 1994           1,398,704         101,296                8.73
      Granted                               (221,600)        221,600                6.30
      Canceled                                     0               0
      Exercised                                    0               0
---------------------------------------------------------------------------------------------
Outstanding at December 31, 1995           1,177,104         322,896                7.06
     Granted                                (358,000)        358,000               13.20
     Canceled                                  8,640          (8,640)              11.45
     Exercised                                     0         (35,628)               7.00
---------------------------------------------------------------------------------------------
Outstanding at December 31, 1996             827,744         636,628              $10.46
---------------------------------------------------------------------------------------------
</TABLE> 
 
     The following table summarizes information concerning currently outstanding
and exercisable options:

<TABLE> 
<CAPTION> 
                       Options Outstanding                      Option Exercisable
              ---------------------------------------   ----------------------------------
                             Weighted
                              Average     Weighted                    Weighted
Range of                     Remaining     Average                     Average
Exercise         Number     Contractual   Exercise        Number       Exercise 
 Prices       Outstanding      Life        Price        Exercisable     Price
------------------------------------------------------------------------------------------
<S>           <C>          <C>            <C>           <C>           <C> 
$ 5 to $10    279,628          4.7         $ 7.00       100,780        $ 7.47
$10 to $15    357,000          6.5          13.17        39,000         12.59
------------------------------------------------------------------------------------------
              636,628                                   139,780
------------------------------------------------------------------------------------------
</TABLE>

                                      -52-
<PAGE>
 
     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 123, Accounting for Stock Based Compensation, the Company's 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 1996 and 1995 is estimated as $6.03 to $8.26 and $2.95
           to $3.83, respectively, on the date of grants using the Black-Scholes
           option-pricing model with the following assumptions: dividend yield -
           -  none, volatility of 54.09%, risk-free interest rate of 5.6%,
           assumed forfeitures rate of 5% and expected life of 4.5 to 8 years.

     Proforma net earnings reflects only options granted in 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 Company has granted 5,344 shares of restricted stock to officers and
           key employees pursuant to the Long-Term Incentive Stock Option Plan.
           The shares typically vest over a four-year period, and as of December
           31, 1996, 2,444 restricted shares were outstanding.

     RETIREMENT PLAN

     In January 1994, the Company adopted a 401(k) defined contribution benefit
           plan for its employees. The board of directors approved a
           discretionary matching contribution of up to 6% of employee
           compensation. The amount of expense recognized as a result of these
           matching contributions was approximately $268,000, $195,000 and
           $151,000 in 1996, 1995 and 1994, respectively. Employees vest in
           Company contributions over a seven year period of employment.

(12) COMMITMENTS AND CONTINGENCIES

     During 1996 the Company entered into an agreement with the CBF to own and
           operate, on behalf of the CBF, linked progressive video gaming
           systems in Brazil. In January 1997 the Company, IGT and Dreamport (a
           wholly-owned subsidiary of GTECH Holdings) formed a joint venture for
           purposes of development and operation of the CBF project under which
           equity, loans and profits will be shared equally. Under the terms of
           the joint venture agreement, the Company has committed to provide
           initial equity and loans of up to $4 million. As of December 31, 1996
           the Company has incurred start-up costs associated with the CBF
           project of approximately $3.2 million which are included in other
           assets in the consolidated balance sheets.

     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 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. As of December 31, 1996, financing under
           this guaranty had been paid in full, and during the years ended
           December 31, 1996 and 1995, the Company recognized income of
           approximately $1,624,000 and $1,515,000, respectively, related to
           this agreement.

                                      -53-
<PAGE>
 
     During 1994, the Company assisted a casino management company in acquiring
           $8 million in financing from a financial institution. The Company
           also guaranteed the $8 million debt and in return receives a loan
           guarantee fee based on a percentage of the outstanding loan balance.
           As of February 14, 1997, the outstanding loan balance was
           approximately $3.6 million, and during the years ended December 31,
           1996, 1995 and 1994, the Company recognized income of approximately
           $185,000, $251,000 and $39,000, respectively, related to this
           agreement.

(13) 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 1996,
           1995 and 1994. Amounts are in thousands, except for per share data.

<TABLE>
<CAPTION>
                                 FIRST   SECOND    THIRD   FOURTH
                                QUARTER  QUARTER  QUARTER  QUARTER
------------------------------------------------------------------
<S>                           <C>        <C>      <C>      <C>      
1996:
   Total revenue              $  21,549   34,799   63,110   35,161
   Income from operations         4,274    6,401    8,261    1,996
   Net earnings                   2,698    4,081    5,220    1,234
   Earnings per share              0.12     0.18     0.23     0.05
 
1995:
   Total revenue                 13,192   24,488   24,488   31,125
   Income from operations         2,093    4,839    5,854    7,395
   Net earnings                   1,383    3,056    3,717    4,737
   Earnings per share              0.06     0.13     0.16     0.21
 
1994:
   Total revenue                  6,463   23,261   25,274   29,496
   Income from operations           422    3,669    3,433    7,255
   Net earnings                     413    2,502    2,375    4,607
   Earnings per share              0.02     0.11     0.10     0.20
</TABLE>

                                      -54-
<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, 1996 and 1995, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sodak
Gaming, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.



                                    \s\ KPMG Peat Marwick LLP


Minneapolis, Minnesota
February 14, 1997

                                      -55-
<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 1996 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.
 
 
                                    PART IV

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

  (A) 1. CONSOLIDATED FINANCIAL STATEMENTS

         The following financial statements are incorporated herein by
               reference:

            Consolidated Statements of Earnings for the years ended
                    December 31, 1996, 1995 and 1994

            Consolidated Balance Sheets at December 31, 1996 and 1995

            Consolidated Statements of Shareholders' Equity for the years
                    ended December 31, 1996, 1995 and 1994

            Consolidated Statements of Cash Flows for the years ended
                    December 31, 1996, 1995 and 1994

            Notes to Consolidated Financial Statements

            Independent Auditors' Report

  (A) 2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

            Independent Auditors' Report on Consolidated Financial Statement
                    Schedule

            Schedule II - Valuation and Qualifying Accounts

  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.

                                      -56-
<PAGE>
 
(A) 3. 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).

*   10.4  1993 Directors' Stock Option Plan, as amended (Incorporated by
          reference to the Company's Registration Statement on Form 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).

                                      -57-
<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).

   11.1   Calculation of Earnings Per Share of Common Stock.

   13.1   1996 Annual Report to Shareholders.

   22.1   Subsidiaries of the registrant.

   23.1   Consent of KPMG Peat Marwick LLP.

   24.1   Powers of Attorney.

   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   Dock Site 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, 1996.

                                      -58-
<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 24, 1997.                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           )
                          (principal accounting officer)    )
                                                            ) By  /s/ Michael G. Wordeman
                                                                  -----------------------------
Roland W. Gentner*        President, Chief Operating        )     Michael G. Wordeman
                          Officer and Director              )     Pro se and Attorney-in-Fact
                                                            )
Thomas Celani*            Director                          )     March 24, 1997
                                                            )
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.

                                      -59-
<PAGE>

         INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE



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

Under the date of February 14, 1997, we reported on the consolidated balance 
sheets of Sodak Gaming, Inc. and subsidiaries (the Company) as of December 31, 
1996 and 1995, and the related consolidated statements of earnings,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996, 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 14, 1997
<PAGE>
 
                                  Schedule II

                              Sodak Gaming, Inc.

                       VALUATION AND QUALIFYING ACCOUNTS
 
 
<TABLE>
<CAPTION>
 ------------------------------------------------------------------------------------------------------------ 
                   Column A                      Column B        Column C          Column D       Column E
-------------------------------------------------------------------------------------------------------------
 
                                                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, 1994:                                                       
     Allowances deducted from asset accounts:                                       
          Allowance for doubtful accounts         $375,000    175,102              15,102/(1)/        535,000
                                                                                    
                                                                                      
YEAR ENDED DECEMBER 31, 1995:                                                       
    Allowances deducted from asset accounts:                                        
          Allowance for doubtful accounts          535,000    300,000              15,000/(1)/        820,000
                                                                                    
                                                                                      
YEAR ENDED DECEMBER 31, 1996:                              
    Allowances deducted from asset accounts:               
          Allowance for doubtful accounts          820,000  2,787,550           2,697,550/(1)/        910,000
 </TABLE> 
 
 
/(1)/ Accounts deemed uncollectible
 
--------------------------------------------------------------------------------

                                      -61-
<PAGE>
 
                                 EXHIBIT INDEX
                               SODAK GAMING, INC.

                           Annual Report on Form 10-K
                                      for
                          Year Ended December 31, 1996

<TABLE>
<CAPTION>
 Exhibit                                                      
 Number                                                       
---------                                                     
<S>        <C>                                                    
11.1       Calculation of Earnings Per Share of Common Stock  
22.1       Subsidiaries of the registrant.                    
23.1       Consent of KPMG Peat Marwick LLP                   
24.1       Powers of Attorney                                 
27         Financial Data Schedule 
</TABLE>