SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-Q/A

                                 Amendment No. 1
                             (Part I; Items 1 and 2)

(Mark One)


  X  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
-----
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 OR


     TRANSITION  REPORT  PURSUANT  TO  SECTION  13  OR  15(d) OF  THE SECURITIES
-----
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO 


Commission file number 0-19322


                          POWERHOUSE TECHNOLOGIES, INC.
              (Formerly known as Video Lottery Technologies, Inc.)
             (Exact name of registrant as specified in its charter)


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


2311 South Seventh Avenue
Bozeman, Montana                                                           59715
(Address of principal executive officers)                             (Zip code)

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


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

Applicable  only to  issuers  involved  in  bankruptcy  proceedings  during  the
preceding five years:

Indicate  by check mark  whether  the  registrant  has filed all  documents  and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court.  Yes         No
                            -----      -----

Applicable only to corporate issuers:

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest  practicable  date:  10,318,730  shares of Common
Stock, $.01 par value, outstanding as of June 30, 1997.

                                      - 1 -

<PAGE>



                          POWERHOUSE TECHNOLOGIES, INC.
                                AND SUBSIDIARIES

                                      INDEX


PART I.     FINANCIAL INFORMATION
                                                                            Page

ITEM 1.     Financial Statements

            Consolidated Statements of Earnings
            Six Months Ended June 30, 1997 and 1996
            Three Months Ended June 30, 1997 and 1996                          4

            Consolidated Balance Sheets
            June 30, 1997 and December 31, 1996                                5

            Consolidated Statement of Stockholders' Equity
            Six Months Ended June 30, 1997                                     6

            Consolidated Statements of Cash Flows
            Six Months Ended June 30, 1997 and 1996                            7

            Notes to Consolidated Financial Statements                         8

ITEM 2.     Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                         14

Signatures                                                                    21

                                      - 2 -

<PAGE>



     Powerhouse Technologies,  Inc. (the "Company") was incorporated in Delaware
in  May  1991.  The  Company  acts  as  a  holding  company  for  eleven  active
corporations. Unless the context otherwise requires, references to the "Company"
or "VLT" refer to Powerhouse Technologies, Inc. and its subsidiaries; references
to "AWI" refer to Automated Wagering  International,  Inc., one of the Company's
three principal operating  subsidiaries,  which provides on-line lottery systems
and services primarily to governmental lottery authorities;  references to "VLC"
refer to  Video  Lottery  Consultants,  Inc.,  another  of the  Company's  three
principal operating subsidiaries, which designs, manufactures and markets casino
and video lottery gaming  machines and central  control  systems;  references to
"United Tote" refer to the Company's third principal operating  subsidiary whose
operating units provide computerized  pari-mutuel wagering systems for horse and
greyhound  racetracks,  off-track betting facilities and jai alai frontons.  The
Company also owns and operates a racetrack facility in Sunland Park, New Mexico,
which is combined  with United Tote to form the wagering  systems and  racetrack
operation  segments for reporting  purposes.  References  to the  "Subsidiaries"
refer to AWI, VLC, United Tote,  Sunland Park and the other  subsidiaries of the
Company.

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

                                      - 3 -

<PAGE>



                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                             STATEMENTS OF EARNINGS
                    (in thousands except for per share data)
<TABLE>
<CAPTION>
                                              Six Months Ended June 30,  Three Months Ended June 30,
                                              -------------------------  ---------------------------
                                                 1997          1996          1997          1996
                                                 ----          ----          ----          ----
<S>                                            <C>            <C>           <C>           <C>

REVENUES:
   On-line lottery                             $48,907        45,353        25,913        22,121
   Gaming machine and route operations          31,501        30,453        13,762        15,642
   Wagering systems and racetrack operations    14,737        14,144         7,466         7,442
                                               -------        ------        ------        ------
     Total revenues                             95,145        89,950        47,141        45,205
                                               -------        ------        ------        ------

COSTS AND EXPENSES:
   On-line lottery                              32,312        27,361        17,157        12,861
   Gaming machine and route operations          16,555        16,061         7,317         7,880
   Wagering systems and racetrack operations    10,904        10,412         5,265         5,009
   Selling, general and administrative          15,240        15,209         7,546         7,530
   Research and development                      4,843         3,124         2,346         1,932
   Other charges                                   ---         8,235           ---         2,235
   Depreciation and amortization                11,841        11,462         5,806         5,597
                                               -------        ------        ------        ------
     Total costs and expenses                   91,695        91,864        45,437        43,044
                                               -------        ------        ------        ------

Earnings (loss) from operations                  3,450        (1,914)        1,704         2,161
                                               -------        ------        ------        ------

OTHER INCOME (EXPENSE):
   Interest and other income (expense)             390           381           155          (108)
   Interest expense                             (2,010)       (2,176)       (1,016)       (1,240)
                                               -------        ------        ------        ------

                                                (1,620)       (1,795)         (861)       (1,348)
                                               -------        ------        ------        ------

Earnings (loss) before income taxes and
     extraordinary items                         1,830        (3,709)          843           813

Income tax (expense) benefit                    (1,046)          666          (343)         (319)
                                               -------        ------        ------        ------

Net earnings (loss) before extraordinary items     784        (3,043)          500           494

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

Net earnings                                   $14,053           971           500           494
                                               =======       =======        ======        ======

Net earnings (loss) per share:
   Before extraordinary items                    $ .07          (.24)          .05          .04
   From extraordinary items                       1.28           .32           ---          ---
                                                 -----          ----          ----         ----
                                                 $1.35           .08           .05          .04
                                                 =====          ====           ===          ===

Weighted average shares                         10,386        12,595        10,371       12,595
                                                ======        ======        ======       ======
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      - 4 -

<PAGE>



                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                                 BALANCE SHEETS
                        (in thousands except share data)
<TABLE>
<CAPTION>

                                                                        June 30,         December 31,
                                                                         1997               1996
                                                                         ----               ----
<S>                                                                    <C>                  <C>
ASSETS
     Current assets:
         Cash and cash equivalents                                      $ 12,533               4,322
         Restricted short-term deposits                                    1,364              1,364
         Accounts receivable, net                                         16,998             19,353
         Current installments of notes receivable, net                     2,378              2,818
         Inventories                                                      14,965             18,297
         Prepaid expenses                                                  1,148              1,027
         Income tax refund receivable                                        ---              3,551
         Deferred income taxes                                            10,793             15,500
                                                                        --------            -------
     Total current assets                                                 60,179             66,232
                                                                        --------            -------

     Property, plant and equipment                                       150,537            153,124
         Less accumulated depreciation                                   (80,641)           (78,417)
                                                                        --------            -------
              Net property, plant and equipment                           69,896             74,707
                                                                        --------            -------

     Restricted cash deposits                                              2,431              2,521
     Notes receivable, excluding current installments                      2,973              2,216
     Goodwill, net                                                         9,724             10,134
     Intangible and other assets, net                                     11,383             12,233
                                                                        --------            -------
                                                                        $156,586            168,043
                                                                        ========            =======
LIABILITIES
     Current liabilities:
         Notes payable                                                  $    ---              7,650
         Current installments of long-term debt                            8,646             10,604
         Accounts payable                                                  5,150              6,646
         Accrued expenses                                                 17,281             13,249
         Income taxes payable                                              4,123                ---
                                                                        --------            -------
              Total current liabilities                                   35,200             38,149
                                                                        --------            -------

     Long-term debt, excluding current installments                       32,499              9,312
     Other liabilities                                                       ---             38,025
     Deferred income taxes                                                11,476             10,326
                                                                        --------            -------
              Total liabilities                                           79,175             95,812
                                                                        --------            -------

Commitments and contingencies

STOCKHOLDERS' EQUITY
     Preferred stock, $.01 par value.  Authorized 10,000,000
         shares; no shares issued                                            ---                ---
     Series A Junior Preferred stock, $.01 par value, convertible
         non-cumulative.  Authorized 1,912,728 shares                         19                 19
     Common stock, $.01 par value.  Authorized 25,000,000
         shares                                                              109                108
     Paid-in capital                                                      97,891             97,765
     Treasury stock                                                       (9,100)               ---
     Deferred restricted stock compensation                                 (317)              (417)
     Accumulated deficit                                                 (11,191)           (25,244)
                                                                        --------            -------
              Total stockholders' equity                                  77,411             72,231
                                                                        --------            -------
                                                                        $156,586            168,043
                                                                        ========            =======
</TABLE>


                               See accompanying notes to consolidated  financial
statements.


                                                           - 5 -

<PAGE>



                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                        STATEMENT OF STOCKHOLDERS' EQUITY
                                 (in thousands)
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------------
                           Series A
                           Preferred                                                Restricted                         Total
                             Stock        Common                                       Stock           Accumu-         Stock-
                              par          Stock        Paid-in       Treasury        Compen-           lated         holders'
                             value       par value      Capital        Stock          sation           Deficit         Equity
---------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>          <C>         <C>           <C>               <C>           <C>             <C>

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

Net earnings                    ---           ---           ---            ---            ---           14,053         14,053

Shares redeemed
 pursuant to EDS
 settlement                     ---             1           126        (9,100)            ---              ---         (8,973)

Amortization of
  deferred
  restricted stock
  compensation                  ---           ---           ---            ---            100              ---            100
                               ----          ----        ------        -------           ----          -------         ------

June 30, 1997                   $19           109        97,891        (9,100)           (317)         (11,191)        77,411
                                ===           ===        ------        ======            ====          =======         ======
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 Share Data
                                                                                                Treasury Stock
                                                                                                --------------
                                            Series A                 Common                 Series A          Common
Balance                              Preferred Stock Issued       Stock Issued          Preferred Stock        Stock
-------                              ----------------------       ------------          ---------------        -----
<S>                                          <C>                      <C>                    <C>               <C>

Beginning of period                          1,913                    10,829                    ---             ---
Shares redeemed pursuant
 to EDS settlement                             ---                        35                 (1,913)           (545)
                                             -----                    ------                 ------            ----

End of period                                1,913                    10,864                 (1,913)           (545)
                                             =====                    ======                 ======            ====
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      - 6 -

<PAGE>



                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                            STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                    Six Months Ended June 30,
                                                                    -------------------------
                                                                    1997                1996
                                                                    ----                ----
<S>                                                                <C>                 <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net earnings                                                  $14,053                 971
     Adjustments to reconcile net earnings to net cash
         provided by operating activities:
         Depreciation and amortization                              11,841              11,462
         Other charges                                                 ---               8,235
         Extraordinary gain, net                                   (13,269)             (4,014)
         Other, net                                                    171                   5
     Changes in operating assets and liabilities:
         Receivables, net                                            2,038              (1,658)
         Inventories                                                 6,481              (4,245)
         Prepaid expenses                                             (120)                106
         Accounts payable                                           (1,496)             32,507
         Accrued expenses                                            1,894              (2,949)
         Income taxes                                                4,850                 375
                                                                   -------             -------
Net cash provided by operating activities                           26,443              40,795
                                                                   -------             -------

CASH FLOWS FROM INVESTING ACTIVITIES:
         Capital expenditures                                       (4,717)            (20,998)
         Expenditures on intangible and other noncurrent assets       (828)             (8,176)
         Proceeds from sales of equipment                              ---                  22
         Change in restricted cash deposits                             (2)                852
                                                                   --------            -------
Net cash used in investing activities                               (5,547)            (28,300)
                                                                   -------             -------

CASH FLOWS FROM FINANCING ACTIVITIES:
         Net payments on notes payable                              (7,650)             (8,250)
         Proceeds from issuance of long-term debt                      643               4,251
         Repayments of long-term debt                               (5,678)             (6,251)
                                                                   -------             -------

Net cash used in financing activities                              (12,685)            (10,250)
                                                                   -------             -------

Net increase in cash and cash equivalents                            8,211               2,245

Cash and cash equivalents, beginning of period                       4,322               1,993
                                                                   -------             -------

Cash and cash equivalents, end of period                           $12,533               4,238
                                                                   =======             =======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      - 7 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     a.   Presentation

          The  consolidated   financial   statements  include  the  accounts  of
     Powerhouse  Technologies,   Inc.  and  subsidiaries  (the  "Company").  All
     significant  intercompany balances and transactions have been eliminated in
     consolidation.

          The   consolidated   balance  sheet  as  of  June  30,  1997  and  the
     consolidated  statements  of  operations  and cash flows for the  six-month
     periods  ended June 30,  1997 and 1996 and the  consolidated  statement  of
     stockholders' equity for the six-month period ended June 30, 1997 have been
     prepared by the Company,  without audit. In the opinion of management,  all
     adjustments  (consisting of normal recurring accruals) necessary to present
     fairly the financial  position,  results of operations and cash flows as of
     and for the  periods  indicated  have been  made.  The  December  31,  1996
     consolidated   balance  sheet  was  derived  from  consolidated   financial
     statements  audited  by  KPMG  Peat  Marwick  LLP in  connection  with  the
     Company's annual audit.

     b.   Earnings (Loss) Per Common Share

          Earnings  per common share is computed by dividing net earnings by the
     weighted  average number of common shares  outstanding and the common stock
     equivalents of convertible  preferred  stock and stock options  outstanding
     using the treasury stock method. Common stock equivalents are excluded from
     the loss per share calculation when the effect is anti-dilutive.

     c.   Reclassifications

          Certain  reclassifications  have  been  made to the  1996  amounts  to
     conform to the 1997 presentation. See Note 3.

     d.   Accounting Pronouncements Not Yet Adopted

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

          In June  1997,  the FASB  issued  SFAS  No.  131,  "Disclosures  about
     Segments  of  an  Enterprise  and  Related   Information".   Statement  131
     establishes standards for the way public business enterprises are to report
     information  about operating  segments in annual  financial  statements and
     requires those  enterprises to report selected  information about operating
     segments  in interim  financial  reports  issued to  shareholders.  It also
     establishes  standards for related disclosures about products and services,
     geographic  areas,  and major  customers.  Statement  131 is effective  for
     financial statements for periods beginning after December 15, 1997. Earlier
     application is encouraged. In the initial year of application,  comparative
     information for earlier years is to be restated, unless it is impracticable
     to do so. Statement 131 need not be applied to interim financial statements
     in the initial year of its application,

                                      - 8 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


     but  comparative  information  for interim  periods in the initial  year of
     application  shall be reported in financial  statements for interim periods
     in the second year of application.

     The  Company  has  capitalized  start-up  costs  in  conjunction  with  its
     long-term contracts in the on-line lottery and wagering systems segments in
     accordance  with  Statement of Position  (SOP) 81-1.  The AICPA  Accounting
     Standards  Executive  Committee  (AcSEC)  approved  for  issuance  the SOP,
     Reporting  on the Costs of Start-Up  Activities,  which will  require  that
     costs incurred during a start-up activity (including organization costs) be
     expensed as incurred. Before issuance, the SOP must be reviewed and cleared
     by the FASB. If cleared by the FASB, it is  anticipated  that the final SOP
     would be released in the second quarter of 1998 and be effective for fiscal
     years  beginning  after  December 15,  1998.  Depending on the level of the
     Company's  start-up  activities,  this change in  accounting  method may be
     material.

2.   EDS SETTLEMENT

     In January 1994,  Electronic  Data Systems  Corporation  ("EDS")  purchased
545,454  shares of the Company's  Common Stock and 1,912,728  shares of Series A
Junior  Preferred  Stock  (Series A Preferred  Stock),  each at a share price of
$27.50.  The Series A  Preferred  Stock was  convertible  to an equal  number of
shares of Common Stock after ninety days prior written notice.

     In conjunction with the stock sale to EDS in 1994, the Company entered into
a ten-year  agreement  with EDS which,  among  other  things,  called for EDS to
provide  to  the  Company  enhanced   computing,   communications,   system  and
engineering  and  field   maintenance   services  under  the  lottery   services
subsidiary's  on-line lottery  contracts.  In 1996, the Company withheld certain
payments to EDS  primarily  due to EDS  performance  issues and related  on-line
lottery customer disputes.  In mid-1996 the contract with EDS was terminated and
EDS filed a complaint  against the Company seeking payment of outstanding  fees.
On January 30, 1997,  the Company and EDS settled all claims  against each other
and  agreed to  transition  the EDS  services  to the  Company.  The  settlement
resulted  in a net  of  taxes  extraordinary  gain  on  debt  extinguishment  of
approximately  $13,269,000 for the Company.  The terms of the settlement include
the receipt by the Company of all of the common and  preferred  shares  owned by
EDS  (545,454  common  and  1,912,728   preferred  shares)  certain  inventories
(approximately  $1,200,000)  and property,  plant and  equipment  (approximately
$2,700,000)  used in the provision of EDS services to on-line lottery  customers
and the  extinguishment  of  approximately  $38,000,000 of  outstanding  fees in
return for a note payable with a present value of $26,100,000.  The note payable
calls for  interest  payments  only for the first  two years and  principal  and
interest payments in years three through seven  (maturity).  The note is secured
by the  2,458,182  shares  of  redeemed  Common  and  Preferred  Stock,  certain
inventories,  fixed  assets  and  software  technology  and  carries  prepayment
provisions  upon the  disposal of  substantially  all the assets or stock of the
Company or certain of its  subsidiaries.  The transition of the EDS services and
related  employees  to the Company  was  substantially  completed  in the second
quarter of 1997.

3.   BUSINESS COMBINATION AND SETTLEMENT

     On  May  3,  1994,  the  Company  completed  the  purchase  of  all  of the
outstanding  stock of United  Wagering  Systems,  Inc.  ("UWS"),  which included
United Tote and Sunland Park. The original  purchase price included the issuance
of $10,000,000 notes, payable over a three-year period.

     During the fourth quarter 1994 and the first quarter 1995, certain negative
developments  affecting United Tote and the pari-mutuel wagering industry became
increasingly  apparent.  During  1995,  the  Company did not pay  principal  and
interest  obligations under the terms of the promissory notes to the sellers. On
March 25, 1996, the Company  reached an agreement with the sellers  settling all
outstanding  claims  and  disputes,   including  dismissal  of  all  outstanding
litigation, resulting in a $4,014,000 extraordinary gain on debt extinguishment.


                                      - 9 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


     The  Company,  in the fourth  quarter  1995,  made a decision  to sell UWS,
exclusive  of the  racetrack  in  Sunland  Park,  New  Mexico;  however,  due to
operational improvements and industry and market conditions, the Company decided
to no longer actively pursue the disposal of the wagering  systems  segment.  In
accordance  with the  requirements  outlined in Financial  Accounting  Standards
Board Emerging Issues Task Force issue No. 90-16  "Accounting  for  Discontinued
Operations  Subsequently  Retained,"  the results of  operations of the wagering
systems segment have been  reclassified to continuing  operations in all periods
presented.

4.   INVENTORIES

     A summary of inventory follows:

                                            June 30,           December 31,
                                              1997                 1996
                                              ----                 ----
         Manufacturing:
              Raw materials                $4,984,000            5,462,000
              Work-in-process                 393,000              733,000
              Finished goods                7,103,000           11,322,000
         Ticket paper                       2,049,000              610,000
         Customer service and other           436,000              170,000
                                          -----------           ----------
                                          $14,965,000           18,297,000
                                          ===========           ==========

5.   LONG-TERM DEBT
<TABLE>
<CAPTION>
                                                                                  June 30,     December 31,
                                                                                    1997          1996
                                                                                    ----          ----
<S>                                                                             <C>             <C>

     Note payable  at  prime  with  interest  only  payments  through  1998.
          Thereafter  due  in  monthly  installments,   including  interest,
          through January 2004. Secured by certain inventories, property and
          equipment, intangible assets
          and treasury stock (see Note 2)                                       $26,263,000            ---
     8.25% note payable in monthly installments, including interest,
          through September 2001 (see Note 3)                                     5,290,000      5,729,000
     7.2% to 11.0% capital lease obligations, due in monthly install-
          ments of $4,573 to $26,567 including interest, maturing
          through March 2002                                                      1,785,000      1,753,000
     9.0% note payable in monthly installments including interest
          through December 1998, secured by assets leased to others               3,537,000      5,164,000
     LIBOR plus 2.25% notes payable in equivalent monthly
          installments of $250,000 plus interest through February
          1998.  Secured by stock of certain subsidiaries                         4,270,000      7,270,000
                                                                                -----------     ----------

                                                                                 41,145,000     19,916,000

     Less current installments                                                    8,646,000     10,604,000
                                                                                -----------     ----------

     Long-term debt, excluding current installments                             $32,499,000      9,312,000
                                                                                ===========     ==========
</TABLE>




                                     - 10 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


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

     Twelve months ending June 30,
          1998                                              $8,646,000
          1999                                               4,124,000
          2000                                               6,431,000
          2001                                               6,450,000
          2002                                               5,896,000
          Thereafter                                         9,598,000
                                                            ==========

     The Company  maintains a revolving line of credit with First Bank,  N.A. Of
the  $19,500,000  line,  $9,500,000  is committed  under the  Company's  bonding
program and $10,000,000 is available for working capital.  At June 30, 1997, the
full $10,000,000 was available for the Company to draw on.

6.   COMMITMENTS AND CONTINGENCIES

     The  Company  periodically  sells  notes  receivable  from  gaming  machine
equipment  sales to banks and other third parties.  The notes are secured by the
underlying equipment. The receivables sold are subject to recourse provisions in
the event of default by the  primary  obligor.  The  outstanding  balance of the
notes  receivable  sold with recourse was  approximately  $2,707,000 at June 30,
1997.  The Company has  established  reserves  for  estimated  losses  under the
recourse  provisions.  At June 30, 1997,  the Company had  guaranteed or pledged
security  for  the  indebtedness  of  others  in  the  amount  of  approximately
$3,636,000  (including $2,707,000 notes receivable sold to banks and other third
parties).

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

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

     The Company  typically posts bid,  litigation,  and  performance  bonds for
on-line  lottery  contracts.  At June 30, 1997,  the Company had  collateral  in
support of the various bonds outstanding  consisting of $3,350,000 of restricted
deposits and $7,500,000 of  irrevocable  standby  letters of credit.  Should the
Company fail to meet  contractually  specified  obligations  during the contract
term, the lottery authority may assess damages and exercise its right to collect
on the  applicable  bond.  The  Company has had  disputes  with  customers  over
implementation schedules,  deliverables and other issues. The Company works with
these  customers to resolve these  differences;  however,  should the Company be
unable to resolve any disputes in a mutually  satisfactory  manner,  the Company
may suffer negative consequences in its relationships with these

                                     - 11 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


and other customers and its pursuit of future business. The ultimate cost to the
Company  of  such  damages  (if  any)  would  be net of its  claims  under  risk
management policies.

     Historically, the Company has met its cash flow requirements primarily with
cash provided by operations,  public  offerings of equity  securities,  and from
borrowings  from  financial  institutions.  The Company,  in 1996, was named the
successful  bidder for a new on-line lottery  contract with the Florida lottery.
The award by the Florida  Lottery has been  protested  by a  competitor.  If the
award is upheld, the Company will begin negotiations of a new contract.  Sizable
capital  expenditures  in excess of current  capital  sources may be required in
advance  of any  anticipated  capital  generated  by the new  Florida  contract,
accordingly, the Company may need additional financing, the availability and the
terms of which are subject to various uncertainties, with no assurance that such
financing can be obtained.

     The  recovery  of a  significant  amount  of the  Company's  investment  of
approximately  $20.0 in the racetrack  operations in Sunland Park, New Mexico is
largely  contingent upon the  implementation of gaming legislation in the state.
On March 21, 1997,  the New Mexico  legislature  voted to allow casino gaming at
pari- mutuel  racetracks in New Mexico,  including  the  Company's  racetrack in
Sunland Park.  The bill allows,  among other things,  the operation of up to 300
video gaming machines per pari-mutuel  racetrack facility for up to twelve hours
per day. The  implementation of gaming is subject to the timing and satisfaction
of conditions of the legislation,  including the state's formation of a separate
commission to oversee the gaming and other  regulatory  matters  (including  the
grant of necessary licenses to the Company).  Consequently, the Company does not
anticipate  that any revenues will be generated  from the approved  gaming until
mid-1998.  The Company has developed preliminary  architectural plans for casino
gaming at the racetrack facility.

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

     International  sales  denominated  in  foreign  currencies   accounted  for
approximately  $4.7 million or 5% of the  Company's  total  revenues for the six
months  ended June 30, 1997 and $16.6  million or 9% of total  revenues  for the
fiscal year ended  December 31, 1996.  Management  can give no  assurances  that
changes in currency and exchange rates will not materially  affect the Company's
revenues,  costs, cash flows and business practices and plans.  Additional risks
inherent in the Company's  international  business activities  generally include
unexpected changes in regulatory requirements, tariffs and other trade barriers,
delays in  receiving  payments on accounts  receivable  balances,  reimbursement
approvals   (both   governmental   and   private),   difficulties   in  managing
international operations, potentially adverse tax consequences,  restrictions on
repatriation  of earnings  and the burdens of  complying  with a wide variety of
foreign laws and  regulations.  In addition,  the Company's  foreign  operations
would be affected by general economic conditions in the international markets in
which the Company does business, such as a prolonged economic downturn in Europe
or the Asian-Pacific  region.  There can be no assurances that such factors will
not  have a  material  adverse  effect  on the  Company's  future  international
revenues and,  consequently,  on the Company's  business,  financial  condition,
results of operations or cash flows. The Company has not historically  attempted
to hedge the risks of fluctuating  exchange rates given the currencies  involved
and the terms of payment granted to its customers.

     As previously  reported,  a purported class action,  alleging violations of
the federal  antitrust  laws,  was filed in June 1994,  in the federal  district
court in South  Dakota  against the Company and certain  video  lottery  machine
operators in South Dakota by a group of other video lottery  machine  operators,
alleging,  among other  things,  a  combination  and  conspiracy  to  unlawfully
restrain  trade in video  lottery  machines  by  fixing  lease  prices  for such
machines,  allocating  territories  and  refusing to deal with other  operators.
Unspecified treble damages were sought,  along with injunctive relief to bar the
alleged  practices.  On November 6, 1996,  the court  granted the  Company's and
other defendants' motion for summary judgment and dismissed, with prejudice, all
claims of the plaintiffs.  In December 1996,  plaintiffs filed an appeal of this
ruling with the Eighth Circuit of the U. S. Court of Appeals. The Company cannot
predict the outcome of the appeal.


                                     - 12 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


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




















                      [This space intentionally left blank]

                                     - 13 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     Revenue  from  the  on-line  lottery  segment   consists   primarily  of  a
contractual  percentage  of  lottery  ticket  sales in seven  states  as well as
revenue from  installation and sales of on-line lottery  equipment  primarily in
international  markets.  The segment experiences  fluctuations in revenue levels
based on relative sizes of jackpots, the number of terminals on-line and tickets
sold in the states in which the  Company  operates  and on the timing of on-line
lottery equipment sales and  installations.  The Company expects on-line lottery
services  revenue  to  continue  to be a  significant  component  of  its  total
revenues. On-line lottery revenue is generated by AWI.

     Revenue from the gaming machine and route  operations  segment  consists of
sales and lease of video gaming machines,  sales of parts,  central control site
hardware  and  software,  service  of  terminals,  license  fees,  and  from the
operation of gaming machine routes.  Route operations revenue consists primarily
of gaming  machine  wagers net of pay-outs to patrons  and state  gaming  taxes.
Revenue  from  gaming  machine  sales  is  subject  to  potentially  significant
fluctuations.  When  and if new  jurisdictions  approve  legislation  for  video
lottery  gaming  operations  or forms of casino  gaming,  and if the  Company is
awarded a contract in any such jurisdictions, the segment may experience a surge
in sales  revenue  that may or may not  decline  dramatically  depending  on the
jurisdiction  and gaming venue.  Gaming  machine and route  operations  includes
lease revenue which is derived from the lease of terminals to the Oregon,  Rhode
Island and  Delaware  lotteries.  The Company  expects  video  lottery and route
operations  revenue  to  continue  to be a  significant  component  of its total
revenues. Gaming machine revenue is primarily generated by VLC.

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

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

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

     Research and development costs represent costs incurred to gain and develop
new knowledge  applicable to the Company's  various gaming systems  inclusive of
software and  hardware  technology.  Included in the costs are labor,  material,
consulting, occupancy and other expenses associated with the research and

                                     - 14 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


development  efforts.   Development  costs  are  capitalized  and  amortized  in
accordance with Statement of Financial  Accounting Standards Board Statement No.
86 for certain software developed for sale or lease.

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

Second Quarter 1997 Compared with Second Quarter 1996
-----------------------------------------------------

     Consolidated  revenue in the second quarter 1997 increased by $1.9 million,
or 4%, to $47.1  million  from  $45.2  million  in 1996.  Overall  gross  profit
decreased by $2.1 million,  or 11%, to $17.4 million from $19.5 million in 1996.
Consolidated net earnings were $.5 million in the second quarters ended June 30,
1997 and 1996.  The decrease in the gross profit level  reflects  reductions  in
both the on-line  lottery and gaming machine  segments  discussed  below. In the
second quarter 1996, the Company recorded  approximately $2.2 million of pre-tax
special charges related to disputes with on-line lottery customers.

                                 On-line Lottery

     Revenue from the on-line lottery subsidiary increased by $3.8 million, 17%,
to $25.9  million from $22.1 million in the second  quarter  1996.  The increase
reflects  new  sources of  revenues  from two  customers  as well as  additional
revenue from previously existing  customers.  The Company performed in excess of
40% of the work to install and implement an on-line  lottery system in Chile for
a new customer in the second quarter resulting in approximately  $2.9 million of
revenue.  Additionally,  operations under the contract with the Maryland Lottery
commenced in the third quarter 1996 resulting in $ 2.1 million in revenue in the
second  quarter  1997.  The  Company  sold an  additional  500  on-line  lottery
terminals  in Norway in the three  months  ended June 30,  1997 and  experienced
increased revenues from its contract with the Delaware Lottery for the operation
of the  gaming  machine  central  system  through  the  Company's  MasterLink(R)
Advanced Gaming System software  technology.  These gains in revenue  generation
were offset  partially due to the expiration of the Company's  contract with the
State of Washington in June 1996.

     In 1996,  the  Company  was named the  successful  bidder for a new on-line
lottery  contract  by the Florida  Lottery.  The award is being  protested  by a
competitor. If the award is upheld, the Company will begin negotiations of a new
contract  with  the  Florida  Lottery.  The  existing  contract  had an  initial
expiration date of June 30, 1996. AWI is continuing the operation of the current
on-line lottery system under the existing contract.

     The gross profit  margin was 34% in the second  quarter 1997 as compared to
42% in the second quarter 1996. The decrease is primarily  attributable to lower
margins  attained on the revenues  from the contract  with the Maryland  Lottery
implemented in the third quarter 1996. The Company  anticipates the gross profit
margin levels to improve as the system operation matures;  however, there can be
no assurance of such improvements.  The lower gross profit margins in the second
quarter 1997 also reflect lower-than-normal fees for services provided by EDS in
the second  quarter  1996 in  conjunction  with the  termination  of  agreements
between the Company and EDS discussed  earlier.  The expiration of the Company's
contract  with the  Washington  Lottery  in June  1996 also  contributed  to the
decline in gross profit margins due to the relatively  higher margin levels from
the contract.  The gross profit margin from equipment  sales of $4.7 million was
36% in the second  quarter  1997 as  compared  to 28% on $.4 million of sales in
1996.

     In the second quarter of 1996,  the Company  recorded $2.2 million of other
special charges for contingent liabilities of approximately $1.1 million and for
an inventory  impairment of $1.1 million due to customer disputes resulting from
performance  issues with EDS and a reduction in market value of on-line  lottery
inventories.  The Company excludes these special charges from the  determination
gross profit due to

                                     - 15 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


their  nature  and  believes   that  the   inclusion  of  such  charges  in  the
determination  of gross  profit  would not be  indicative  of past,  current  or
anticipated future gross profit margins.

                       Gaming Machine and Route Operations

     Revenue from the gaming machine and route operations  segment  decreased by
$1.8 million,  or 12%, to $13.8 million from $15.6 million in 1996. The decrease
reflects  the 1996 sales of gaming  machines  and system  equipment  to Peru and
Norway without corresponding sales in 1997.

     Revenue was  recognized  on shipments of 1,059 units in the second  quarter
1997 as compared to 1,133 units in 1996.  Included in the total units were 0 and
18  royalty  unit  sales  in  the  quarters   ended  June  30,  1997  and  1996,
respectively. Revenues from sales of units pursuant to royalty arrangements have
minimal related direct costs. The Company  previously earned revenues from sales
of units  under a royalty  arrangement  with an  Australian  company  in certain
Australian  jurisdictions.  The royalty  arrangement  was  terminated  effective
mid-1997.  The Company had approximately  371 units at customer  locations under
trial  arrangements  at June 30, 1997.  Revenue from leasing and revenue sharing
arrangements  was $2.5  million  on 4,090  units in the second  quarter  1997 as
compared to $2.6 million on 5,765 units in 1996.

     The  following   table  reflects   domestic  and  foreign  revenue  sources
representing  10% or more of the segment's  revenues for the second  quarters of
1997 and 1996 (amounts in millions):
<TABLE>
<CAPTION>
                                                      Three Months Ended June  30,
                                 1997          1996              $ Change            % Change
                                 ----          ----              --------            --------
<S>                              <C>            <C>                <C>                <C>

     Domestic:
          Montana                $ 1.6           1.0                0.6                 60.0
          Montana routes           4.3           4.0                0.3                  7.5
          Oregon                   1.0           1.4               (0.4)               (28.6)
          Other, combined          6.3           3.9                2.4                 61.5
                                 -----          ----               ----
                                  13.2          10.3                2.9                 28.2
                                  ----          ----               ----
     Foreign:
          Norway                   ---           1.8               (1.8)              (100.0)
          Peru                     ---           2.6               (2.6)              (100.0)
          Other, combined          0.6           0.9               (0.3)               (33.3)
                                 -----          ----               ----
                                   0.6           5.3               (4.7)               (88.7)
                                 -----          ----               ----

                                 $13.8          15.6               (1.8)               (11.5)
                                 =====          ====               ====               ======
</TABLE>

     The gross profit margin from the gaming  machine  segment,  which  includes
equipment  sales and contract  revenue as well as royalty and lease revenues was
47% in the second  quarter 1997 as compared to 50% in the second  quarter  1996.
The gross profit margin from route  operations was 28% in the second quarters of
1997 and 1996.

                    Wagering Systems and Racetrack Operations

     Revenue from the wagering systems and racetrack operation segments remained
at approximately $7.5 million in the second quarters of 1997 and 1996. Decreased
revenues due to customer  racetrack  closures were offset by increased  revenues
from new and existing  customers.  Revenues  from the  racetrack  operations  in
Sunland Park, New Mexico was  approximately  $1.8 million in the second quarters
of 1997 and 1996.  Revenue  from sales of  wagering  systems  equipment  was $.6
million in the second quarters of 1997 and 1996.

     The Company  believes that a growing market exists for video lottery gaming
at  pari-mutuel  racetracks,  which have suffered from  declining  attendance in
recent  years due to  proliferation  of casino  gaming  outside of Las Vegas and
Atlantic City. To permit the racing  industry to become more  competitive,  some
states have enacted  legislation that allows video gaming devices at racetracks,
a trend  that the  Company  believes  will  continue.  The  Company  intends  to
participate in this growth by supplying its gaming machines and systems,

                                     - 16 -

<PAGE>


     POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


partnering  with or  purchasing  racetracks  and  owning and  operating  its own
facility,  Sunland Park. The Company is the only full service supplier of gaming
and pari-mutuel systems and services to racetracks in North America and believes
it has a  competitive  advantage  due  to  its  existing  United  Tote  customer
relationships in the pari-mutuel industry.

     The  recovery  of a  significant  amount  of the  Company's  investment  of
approximately  $20.0  million in the racetrack  operations in Sunland Park,  New
Mexico is largely  contingent upon the  implementation of gaming  legislation in
the state of New Mexico.  On March 21, 1997 the New Mexico  legislature voted to
allow casino  gaming at  pari-mutuel  racetracks  in New Mexico,  including  the
Company's racetrack. The bill allows, among other things, the operation of up to
300 gaming  machines  per facility for up to twelve hours per day. The legal and
regulatory   processes   necessary  to  implement  the  gaming  legislation  are
progressing  as expected.  The Company has developed  preliminary  architectural
plans and performed additional market research in anticipation of a 1998 opening
of casino operations at the racetrack facility.

     The gross profit margin from wagering  systems  service  revenue was 37% in
the second quarter 1997 as compared to 44% in 1996. The decrease is attributable
to increased  operating  costs related to start-up of operations for live racing
at Lone Star Park in Texas, the newest  thoroughbred  racetrack in North America
as well as higher operating costs in certain other states.  Also contributing to
the decrease is the closure of two customer  racetracks which carried relatively
higher gross profit margins. The gross profit margin on wagering systems service
revenue fluctuates primarily based on the pari-mutuel racing seasons of customer
racetracks.  Typically,  the segment experiences  relatively higher revenues and
gross  profit  margins in the second and third  quarters of the  calendar  year.
Management  does not anticipate this trend to change in the near future and does
not anticipate any significant increase in gross profit margin levels on service
revenue in the near future. The gross profit from equipment sales of $.6 million
was 58% in the second quarter 1997 as compared to 40% on $.6 million of sales in
1996.  The  Company  experienced  a negative  gross  profit  from the  racetrack
operations of approximately $.1 million in the second quarters of 1997 and 1996.

                       Selling, General and Administrative

     Total  selling,  general  and  administrative  (S,G&A)  expenses  were $7.5
million in the second  quarters ended June 30, 1997 and 1996. As a percentage of
revenues,  S,G&A expenses were 16% in the second quarter 1997 as compared to 17%
in the second quarter 1996.

                            Research and Development

     Research  and  development  expense,  net of  amounts  capitalized  for the
development of MasterLink(R)  Advanced Gaming System software,  was $2.3 million
in the second  quarter  1997 as compared to $1.9  million in the second  quarter
1996.  The Company  capitalized  $.3 million in the second  quarter 1997 and $.9
million in 1996. Total research and development expenditures  approximated 6% of
consolidated  revenues in the second quarters of 1997 and 1996. Management plans
to continue to expend similar levels on product  research and development in the
foreseeable future.


Six Months Ended June 30, 1997 and 1996
---------------------------------------

     Consolidated  revenues  increased by $5.1 million,  or 6%, to $95.1 million
from $90.0 million in the first six months of 1996.  All segments of the Company
experienced  higher revenue  levels.  The overall gross profit  decreased by $.7
million (2%) to $35.4  million  from $36.1  million in the six months ended June
30, 1996. The Company had net earnings before extraordinary items of $.8 million
in the first six  months of 1997 as  compared  to a net loss of $3.0  million in
1996.  Included in the 1996 results of operations were special,  pre-tax charges
of $8.2 million  related to the on-line lottery  segment.  Excluding the special
charges, net of estimated tax benefits,  the first six months of 1996 would have
reflected net earnings before  extraordinary items of approximately $2.0 million
versus the loss of $ 3.0  million.  The  decreases in the gross profit level and
earnings  before  extraordinary  items is primarily  attributable to the on-line
lottery segment as discussed below.


                                     - 17 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


                                 On-line Lottery

     Total revenues from the on-line lottery segment  increased by $3.5 million,
or 8%, to $48.9  million from $45.4 million in 1996.  The increase  reflects new
sources of  revenues  from two  customers  as well as  additional  revenue  from
previously  existing  customers.  The Company  performed in excess of 40% of the
work to  install  and  implement  an on-line  lottery  system in Chile for a new
customer  in the second  quarter  resulting  in  approximately  $2.9  million of
revenue.  Additionally, the contract with the Maryland Lottery, which started-up
in the third  quarter 1996  resulted in $4.2 million of revenue in the first six
months of 1997. The Company sold an additional 500 on-line lottery  terminals in
Norway in the six months ended June 30, 1997 and experienced  increased revenues
from its  contract  with the Delaware  Lottery for the  operation of the State's
gaming  machine  central  system  through the Company's  MasterLink(R)  Advanced
Gaming System software technology. These gains in revenue generation were offset
partially  by the  expiration  of the  Company's  contract  with  the  State  of
Washington in June 1996 which generated approximately $5.5 million of revenue in
the first six months of 1996.

     The gross profit margin in the on-line lottery segment was 34% in the first
six  months of 1997 as  compared  to 40% in the first  six  months of 1996.  The
decrease is primarily  attributable  to lower  margins  attained on the revenues
from the contract  with the Maryland  Lottery  implemented  in the third quarter
1996. The Company  anticipates  the gross profit margin levels to improve as the
system  operation  matures;   however,   there  can  be  no  assurance  of  such
improvements.  The lower  gross  profit  margins in the first six months of 1997
also reflect  lower-than-normal  fees for services provided by EDS in the second
quarter 1996 in  conjunction  with the  termination  of  agreements  between the
Company  and EDS in  1996,  discussed  in Note 2 to the  Consolidated  Financial
Statements. The expiration of the Company's contract with the Washington Lottery
in June 1996 also  contributed to the decline in gross profit margins due to the
relatively higher margin levels from the contract.  The gross profit margin from
on-line lottery equipment and system sales was 37% on $5.5 million of revenue in
the first six  months of 1997 as  compared  to 43% on $.9  million of revenue in
1996.

     In the six months  ended June 30,  1996,  the Company  recorded  cumulative
special  and other  charges  of $8.2  million  consisting  of $1.8  million  for
inventory  impairments and $6.4 million related to customer  disputes  resulting
from  performance  issues with EDS.  The Company  has  excluded  these costs and
charges  from the  determination  of gross  profit  due to their  nature and the
Company believes such charges are not indicative of past, current or anticipated
future gross profit margins.

     In 1996, the Company  withheld certain payments to EDS primarily due to EDS
performance  issues and related on-line lottery customer  disputes.  In mid-1996
the  agreement  between  EDS and the  Company  was  terminated  and EDS  filed a
complaint  against the Company seeking  payment of outstanding  fees. On January
30, 1997,  the Company and EDS settled all claims  against each other and agreed
to transition  the EDS services and  personnel to the Company.  The terms of the
settlement include the receipt by the Company of all of the common and preferred
stock of the  Company  owned by EDS  (545,454  common  and  1,912,728  preferred
shares), certain property, plant and equipment used in the provision of services
to on-line  lottery  customers and the  extinguishment  of  approximately  $38.0
million of  outstanding  fees payable to EDS in  consideration  of the Company's
$26.1 million promissory note. The note calls for interest payments only for the
first two years and principal and interest payments in years three through seven
(maturity).  the note is secured by the 2,458,182  shares of redeemed common and
preferred stock, certain inventories,  fixed assets and software technology, and
carries prepayment  provisions upon the disposal of substantially all the assets
or stock of the Company's on-line lottery subsidiary.  The transition of the EDS
services  and  related  employees  to the Company  was  completed  in the second
quarter of 1997 and is expected to lower  operating  costs and improve  customer
service.

                       Gaming Machine and Route Operations

     Revenue from the gaming machine and route operations  segment  increased by
$1.0 million, or 3%, to $31.5 million from $30.5 million in the first six months
of 1996.


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<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


     Revenue was  recognized on shipments of 3,657 units in the first six months
of 1997 as compared to 2,507 units in 1996.  Included in the total units were 75
and 120  royalty  unit  sales in the six months  ended  June 30,  1997 and 1996,
respectively. Revenues from sales of units pursuant to royalty arrangements have
minimal related direct costs. The Company  previously earned revenues from sales
of units  under a royalty  arrangement  with an  Australian  company  in certain
Australian  jurisdictions.  The royalty  arrangement  was  terminated  effective
mid-1997. Revenue from leasing and revenue sharing arrangements was $5.5 million
in the first six months of 1997 as compared to $5.1 million in 1996.

     The  following   table  reflects   domestic  and  foreign  revenue  sources
representing  10% or more of the segment's  revenues for the first six months of
1997 and 1996 (amounts in millions):
<TABLE>
<CAPTION>
                                                      Six Months Ended June  30,
                                 1997           1996        $ Change        % Change
                                 ----           ----        --------        --------
<S>                              <C>             <C>    <C>     <C>    <C>     <C>
     Domestic:
          Montana                $ 2.2            1.6            0.6             37.5
          Montana routes           8.7            8.0            0.7              8.8
          Oregon                   4.6            3.1            1.5             48.4
          Other, combined         10.9            6.1            4.8             78.7
                                 -----           ----           ----
                                  26.4           18.8            7.6             40.4
                                 -----           ----           ---- 
     Foreign:
          Quebec                   3.2            2.0            1.2             60.0
          Peru                     ---            3.5           (3.5)          (100.0)
          Other, combined          2.9            6.2           (2.3)           (37.0)
                                 -----           ----           ----
                                   5.1           11.7           (6.6)           (56.4)
                                 -----           ----           ----

                                 $31.5           30.5            1.0              3.3
                                 =====           ====           ====           ======
</TABLE>
     The gross profit margin from the gaming  machine  segment,  which  includes
equipment  sales and contract  revenue as well as royalty and lease revenues was
47% in the first six months of 1997 and 1996. The gross profit margin from route
operations was 28% in the first six months of 1997 and 1996.

                    Wagering Systems and Racetrack Operations

     Revenue  from the wagering  systems and  racetrack  operation  segments was
$14.7  million in the first six months of 1997 as compared  to $14.1  million in
1996.  Revenues  from the racetrack  operations in Sunland Park,  New Mexico was
$4.0  million in the first six  months of 1997 as  compared  to $4.1  million in
1996.  Revenue from sales of wagering systems  equipment was $1.8 million in the
first six months of 1997 as compared to $1.0 million in 1996.

     The gross profit margin from wagering  systems  service  revenue was 35% in
the first  six  months  of 1997 as  compared  to 39% in 1996.  The  decrease  is
attributable to increased  operating costs in the second quarter of 1997 related
to start-up of operations for live racing at Lone Star Park in Texas, the newest
thoroughbred  racetrack in North  America as well as higher  operating  costs in
certain other states.  Also  contributing  to the decrease is the closure of two
customer  racetracks which carried  relatively higher gross profit margins.  The
gross profit margin on wagering  systems  service revenue  fluctuates  primarily
based on the pari-mutuel racing seasons of customer racetracks.  Typically,  the
segment  experiences  relatively higher revenues and gross profit margins in the
second and third quarters of the calendar year.  Management  does not anticipate
this trend to change in the near future and does not anticipate any  significant
increase gross profit margin levels on service  revenue in the near future.  The
gross profit  margin from  equipment  sales of $1.8 million was 51% in the first
six months of 1997 as  compared  to 40% on $1.0  million  of sales in 1996.  The
Company  experienced a negative  gross profit from the  racetrack  operations of
approximately $.2 million in the first six months of 1997 and 1996.

                                     - 19 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


                       Selling, General and Administrative

     Total  selling,  general and  administrative  (S,G&A)  expenses  were $15.2
million  in the six months  ended June 30,  1997 and 1996.  As a  percentage  of
revenues, S,G&A expenses were 16% in the first six months of 1997 as compared to
17% in 1996.

                            Research and Development

     Research  and  development  expense,  net of  amounts  capitalized  for the
development of MasterLink(R)  Advanced Gaming System software,  was $4.8 million
in the first six months of 1997 as compared to $3.1 million in 1996. The Company
capitalized  $.5  million  in the first six  months of 1997 and $3.1  million in
1996.   Total  research  and   development   expenditures   approximated  7%  of
consolidated  revenues  in the first six  months of 1997 and 8% of  consolidated
revenues in 1996.

Liquidity and Capital Resources
-------------------------------

     Working  capital,  defined  as current  assets  less  current  liabilities,
decreased by $3.1 million to $25.0  million at June 30, 1997 from $28.1  million
at December  31, 1996 as current  assets were used to pay down  long-term  debt.
Cash generated from operations of $26.4 million in the six months ended June 30,
1997 was used to repay  interest-bearing debt of approximately $12.7 million and
invest in additional long-lived capital assets of approximately $5.5 million and
increase cash balances by $8.2 million to a balance of $12.5 million at June 30,
1997.

     Inventory  levels  decreased  by $3.3  million to $15.0  million from $18.3
million at December 31, 1996. The reduction  primarily reflects sales of on-line
lottery  equipment  to  international  jurisdictions.  The Company  manufactures
inventories for sale and lease as well as use in the provision of services under
long-term  contracts.  Inventories  purchased  and  manufactured  for use in the
provision of services are  transferred  to property,  plant and  equipment  when
installed pursuant to the terms of such long-term contracts.

     Management  believes that its position to obtain capital resources improved
during the first six months of 1997 as a result of the  Company's  improved cash
and debt positions.  Total  liabilities  decreased by $16.6 million in the first
six months of 1997 due to the settlement  between the Company and EDS and due to
the  repayments  made on  interest-bearing  debt noted  above.  Included  in the
repayments  of  interest-bearing  debt in the first six  months of 1997,  is the
pay-down of the Company's  revolving line of credit with First Bank, N.A. Of the
$19.5  million  revolving  line of  credit,  $9.5  million is  committed  to the
Company's  bonding  program and $10.0 million is available  for working  capital
needs. At June 30, 1997 the full $10.0 million was available for the Company.

     During  1996,  the  Company  sold  notes  receivable  from  gaming  machine
equipment  sales,  with a face value of $1.5  million  to banks and other  third
parties. The notes are secured by the underlying equipment. The receivables sold
are  subject to  recourse  provisions  in the event of  default  by the  primary
obligor.  The outstanding balance of the notes receivable sold with recourse was
approximately  $2.7  million at June 30, 1997 and $4.7  million at December  31,
1996.  At June 30, 1997,  the Company had a reserve of $0.4 million  established
for any losses under the recourse provisions.  At June 30, 1997 and December 31,
1996,  respectively,  the Company had  guaranteed  or pledged  security  for the
indebtedness  of others in the amount of  approximately  $3.6  million  and $5.8
million (including notes receivable sold to banks and other third parties).

     In 1996,  the  Company  was named the  successful  bidder for a new on-line
lottery  contract  by the Florida  Lottery.  The award is being  protested  by a
competitor.  If the award is upheld,  the Company will begin  negotiating  a new
contract  which may  require  significant  capital  resources  in advance of any
anticipated  capital generated by a new contract.  Accordingly,  the Company may
need additional  financing,  the availability and the terms of which are subject
to various uncertainties, with no assurance that such financing can be obtained.


                                     - 20 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

SIGNATURES


Pursuant to the  requirements  of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned  thereunto
duly authorized.

                                    POWERHOUSE TECHNOLOGIES, INC.



Date:     February 8, 1998          /S/ SUSAN J. CARSTENSEN
                                    --------------------------------------------
                                    Susan J. Carstensen, Chief Financial Officer
                                    (authorized to sign on behalf of Registrant)

                                     - 21 -