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 SEPTEMBER 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:  10,325,396  shares of Common
Stock, $.01 par value, outstanding as of September 30, 1997.

                                     - 1 -

<PAGE>


                          POWERHOUSE TECHNOLOGIES, INC.
                                AND SUBSIDIARIES

                                      INDEX


PART I.  FINANCIAL INFORMATION
                                                                            Page

ITEM 1.  Financial Statements

         Consolidated Statements of Earnings
         Nine Months Ended September 30, 1997 and 1996
         Three Months Ended September 30, 1997 and 1996                        4

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

         Consolidated Statement of Stockholders' Equity
         Nine Months Ended September 30, 1997                                  6

         Consolidated Statements of Cash Flows
         Nine Months Ended September 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                                            13

Signatures                                                                    22


                                     - 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"
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>
                                                       Nine Months Ended             Three Months Ended
                                                         September 30,                   September 30,
                                                       1997           1996           1997           1996
                                                       ----           ----           ----           ----
<S>                                                  <C>            <C>              <C>           <C>

REVENUES:
   On-line lottery                                   $ 71,671        65,790          22,764        20,437
   Gaming machine and route operations                 51,627        43,560          20,126        13,107
   Wagering systems and racetrack operations           21,322        21,534           6,585         7,390
                                                    ---------       -------          ------        ------
     Total revenues                                   144,620       130,884          49,475        40,934
                                                     --------       -------          ------        ------

COSTS AND EXPENSES:
   On-line lottery                                     48,244        42,596          15,932        15,235
   Gaming machine and route operations                 28,790        23,283          12,235         7,222
   Wagering systems and racetrack operations           15,300        15,408           4,396         4,996
   Selling, general and administrative                 22,983        21,618           7,743         6,409
   Research and development                             7,122         5,062           2,279         1,938
   Other charges                                          ---        12,935             ---         4,700
   Depreciation and amortization                       16,943        17,315           5,102         5,853
                                                     --------       -------          ------        ------
     Total costs and expenses                         139,382       138,217          47,687        46,353
                                                     --------       -------          ------        ------

Earnings (loss) from operations                         5,238        (7,333)          1,788        (5,419)
                                                    ---------       -------          ------        ------

OTHER INCOME (EXPENSE):
   Interest and other income                              709           751             319           311
   Interest expense                                    (2,978)       (2,911)           (968)         (735)
                                                    ---------       -------          ------        ------
                                                       (2,269)       (2,160)           (649)         (424)
                                                    ---------       -------          ------        ------
Earnings (loss) before income taxes and
     extraordinary items                                2,969        (9,493)          1,139        (5,843)

Income tax (expense) benefit                           (1,595)        1,198            (549)          532
                                                    ---------       -------          ------        ------

Net earnings (loss) before extraordinary items          1,374        (8,295)            590        (5,311)

Reversal of provision for loss on discontinuance
     of wagering systems operations                       ---         5,482             ---         5,541
                                                  -----------       -------          ------        ------

Net earnings (loss) before extraordinary items          1,374        (2,813)            590           230

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

Net earnings (loss)                                  $ 14,643         1,201             590           230
                                                     ========       =======          ======        ======

Net earnings (loss) per share:
     Before extraordinary items                         $ .13          (.66)            .06           .02
      Discontinued operations                             ---           .44             ---           ---
     From extraordinary items                            1.28           .32             ---           ---
                                                        -----          ----            ----          ----
                                                        $1.41           .10             .06           .02
                                                        =====          ====            ====          ====

Weighted average shares                                10,406          12,598        10,524        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>
                                                                       September 30,      December 31,
                                                                           1997               1996
                                                                           ----               ----
<S>                                                                       <C>                 <C>
ASSETS
     Current assets:
         Cash and cash equivalents                                        $ 18,048              4,322
         Restricted short-term deposits                                        765              1,364
         Accounts receivable, net                                           21,863             19,353
         Current installments of notes receivable, net                       2,559              2,818
         Inventories                                                        14,354             18,297
         Prepaid expenses                                                    1,418              1,027
         Income tax refund receivable                                          ---              3,551
         Deferred income taxes                                              11,178             15,500
                                                                          --------            -------
     Total current assets                                                   70,185             66,232
                                                                          --------            -------

     Property, plant and equipment                                         150,991            153,124
         Less accumulated depreciation                                     (84,715)           (78,417)
                                                                          --------            -------
              Net property, plant and equipment                             66,276             74,707
                                                                          --------            -------

     Restricted cash deposits                                                2,437              2,521
     Notes receivable, excluding current installments                        2,718              2,216
     Goodwill, net9,519                                                     10,134
     Intangible and other assets, net                                       11,513             12,233
                                                                          --------            -------
                                                                          $162,648            168,043
                                                                          ========            =======
LIABILITIES
     Current liabilities:
         Notes payable                                                    $    ---              7,650
         Current installments of long-term debt                              6,095             10,604
         Accounts payable                                                    5,275              6,646
         Accrued expenses                                                   24,612             13,249
         Income taxes payable                                                4,499                ---
                                                                          --------            -------
              Total current liabilities                                     40,481             38,149
                                                                          --------            -------

     Long-term debt, excluding current installments                         32,028              9,312
     Other liabilities                                                         ---             38,025
     Deferred income taxes                                                  12,032             10,326
                                                                          --------            -------
              Total liabilities                                             84,541             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                                                        88,847             97,765
     Deferred restricted stock compensation                                   (267)              (417)
     Accumulated deficit                                                   (10,601)           (25,244)
                                                                          --------            -------
              Total stockholders' equity                                    78,107             72,231
                                                                          --------            -------
                                                                          $162,648            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                                       Restricted                       Total
                             Preferred          Common                         Stock         Accumu-          Stock
                               Stock             Stock          Paid-in       Compen-         lated          holders'
                             par value         par value        Capital        sation        Deficit          Equity
------------------------------------------------------------------------------------------------------------------------
<S>                           <C>                <C>            <C>            <C>          <C>               <C>

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

Net earnings                  ---                ---               ---          ---          14,643           14,643

Stock options
 exercised/shares             ---                  1               182          ---             ---              183
 issued

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

Amortization of
  deferred
  restricted stock
  compensation                ---                ---               ---          150             ---              150
                              ---                ---            ------          ---          ------           ------
September 30,
  1997                        $19                109            88,847         (267)        (10,601)          78,107
                              ===                ===            ======         ====         =======           ======
------------------------------------------------------------------------------------------------------------------------
</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                    ---                 ---
Stock options exercised/
     shares issued                             ---                     42                    ---                 ---
Shares redeemed pursuant
     to EDS settlement                         ---                    ---                 (1,913)               (545)
                                             -----                 ------                 ------                ----

End of period                                1,913                 10,871                 (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>
                                                                          Nine Months Ended September 30,
                                                                          -------------------------------
                                                                             1997                1996
                                                                             ----                ----
<S>                                                                         <C>                 <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
     Net earnings                                                           $14,642               1,201
         Adjustments to reconcile net earnings to net cash
           provided by operating activities:
              Reversal of provision for loss on discontinuance
               of operations                                                    ---              (5,482)
              Depreciation and amortization                                  16,943              17,315
              Other charges                                                     ---              12,935
              Extraordinary gain, net                                       (13,269)             (4,014)
              Other, net                                                        211                 ---
     Changes in operating assets and liabilities:
         Receivables, net                                                    (2,678)             (2,845)
         Inventories                                                          7,296              (4,109)
         Prepaid expenses                                                      (391)               (244)
         Accounts payable                                                    (1,371)              1,658
         Due to EDS                                                             ---              26,495
         Accrued expenses                                                     9,397              (5,749)
         Income taxes                                                         5,397              (1,060)
                                                                            -------             -------
Net cash provided by operating activities                                    36,177              36,101
                                                                            -------             -------

CASH FLOWS FROM INVESTING ACTIVITIES:
         Capital expenditures                                                (5,824)            (23,928)
         Expenditures on intangible and other non-current assets             (1,511)             (9,860)
         Proceeds from sales of equipment                                        87                  22
         Restricted cash deposits                                               560               2,150
                                                                            -------             -------

Net cash used in investing activities                                        (6,688)            (31,616)
                                                                            -------             -------

CASH FLOWS FROM FINANCING ACTIVITIES:
         Net payments on notes payable                                       (7,650)               (750)
         Proceeds from issuance of long-term debt                               643               4,364
         Repayments of long-term debt                                        (8,812)             (9,307)
         Proceeds from stock options exercised                                   56                 ---
                                                                            -------             -------

Net cash used in financing activities                                       (15,763)             (5,693)
                                                                            -------             -------

Net increase (decrease) in cash and cash equivalents                         13,726              (1,208)

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

Cash and cash equivalents, end of period                                    $18,048                 785
                                                                            =======             =======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      - 7 -

<PAGE>


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

 
1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     a.   Presentation

          The consolidated  financial  statements  include the accounts of Video
     Lottery   Technologies,   Inc.  and  its  subsidiaries   (collectively  the
     "Company").  All significant  inter-company  balances and transactions have
     been eliminated in consolidation.

          The  consolidated  balance  sheet  as of  September  30,  1997 and the
     consolidated  statements  of operations  and cash flows for the  nine-month
     periods ended September 30, 1997 and 1996 and the consolidated statement of
     stockholders'  equity for the  nine-month  period ended  September 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.   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  stockholders.  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,  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.

                                      - 8 -

<PAGE>

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

 
          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 the
Company's 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 repurchase by the Company of all of the Common and Series A Preferred  Stock
owned by EDS (545,454 common and 1,912,728 preferred shares),  the return to the
Company of 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 repurchased  Common
Stock and  Series A  Preferred  Stock,  certain  inventories,  fixed  assets and
software  technology  and carries  prepayment  provisions  upon the  disposal of
substantially  all  the  assets  or  stock  of the  Company  or  certain  of its
subsidiaries.  The  transition of the EDS services and related  employees to the
Company was 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.

     The Company,  in the fourth quarter 1995, decided to sell UWS, exclusive of
Sunland Park; however,  due to operational  improvements and industry and market
conditions,  the Company  subsequently  decided to no longer actively pursue the
disposal of the wagering systems segment. In accordance with

                                      - 9 -

<PAGE>


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

 
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:

                                             September 30,         December 31,
                                                  1997                 1996
                                                  ----                 ----
     Manufacturing:
          Raw materials                        $5,278,000            5,462,000
          Work-in-process                         330,000              733,000
          Finished goods                        6,779,000           11,322,000
     Ticket paper                               1,547,000              610,000
     Customer service and other                   420,000              170,000
                                              -----------           ----------
                                              $14,354,000           18,297,000
                                              ===========           ==========

5.   LONG-TERM DEBT
<TABLE>
<CAPTION>
                                                                                 September 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)                                         $25,738,000            ---
     8.25% note payable in monthly installments, including interest,
          through September 2001 (see Note 3)                                       5,115,000      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 May 2002                                                          1,314,000      1,753,000
     9.0% note payable in monthly installments including interest
          through December 1998, secured by assets leased to others                 3,186,000      5,164,000
     LIBOR plus 3.25% notes payable in equivalent monthly
          installments of $250,000 plus interest through February
          1998.  Secured by stock of certain subsidiaries                           2,770,000      7,270,000
                                                                                  -----------     ----------

                                                                                   38,123,000     19,916,000

     Less current installments                                                      6,095,000     10,604,000
                                                                                  -----------     ----------

     Long-term debt, excluding current installments                               $32,028,000      9,312,000
                                                                                  ===========     ==========
</TABLE>

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

     Twelve months ending September 30,
          1998                                           $6,095,000
          1999                                            6,299,000
          2000                                            7,165,000
          2001                                            6,646,000
          2002                                            5,808,000
          Thereafter                                      6,110,000
                                                         ==========

                                      - 10 -

<PAGE>


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

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

6.   COMMITMENTS AND CONTINGENCIES

     The recovery of a  significant  amount of the  Company's  investment in the
racetrack  operations in Sunland Park, New Mexico is largely contingent upon the
implementation  of gaming  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 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 had
architectural  plans  developed for casino gaming at the racetrack  facility and
has initiated construction. The Company's investment in the racetrack operations
is approximately  $20.0 million at September 30, 1997 and current plans call for
approximately  $8,000,000  of capital  expenditures  for facility  enhancements,
gaming machines and related equipment.

     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  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  $2,962,000 at September
30, 1997. The Company has  established  reserves for estimated  losses under the
recourse  provisions.  At September  30,  1997,  the Company had  guaranteed  or
pledged  security for the  indebtedness of others in the amount of approximately
$3,860,000  (including $2,962,000 notes receivable sold to banks and other third
parties).

     The Company  typically posts bid,  litigation,  and  performance  bonds for
on-line lottery contracts.  At September 30, 1997, the Company had collateral in
support of the various bonds outstanding consisting of

                                      - 11 -

<PAGE>

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

 
$2,750,000 of restricted  deposits and $9,500,000 of irrevocable standby letters
of credit.  First Bank,  N. A.,  requires the Company to maintain  $2,000,000 of
restricted deposits as collateral for the irrevocable letters of credit.  Should
the Company fail to meet contractually specified obligations during the contract
term, the lottery authority may assess damages and exercise its right to collect
on the  applicable  bond.  The  Company has had  disputes  with  customers  over
implementation schedules,  deliverables and other issues. The Company works with
these  customers to resolve these  differences;  however,  should the Company be
unable to resolve any disputes in a mutually  satisfactory  manner,  the Company
may  suffer  negative  consequences  in its  relationships  with these and other
customers and its pursuit of future  business.  The ultimate cost to the Company
of such  damages  (if any)  would be net of its  claims  under  risk  management
policies.

     Historically, the Company has met its cash flow requirements primarily with
cash provided by operations,  public  offerings of equity  securities,  and from
borrowings  from  financial  institutions.  The Company,  in 1996, was named the
successful  bidder for a new on-line lottery  contract with the Florida lottery.
The award by the Florida Lottery was  unsuccessfully  protested by a competitor,
and the competitor has filed an appeal which has delayed contract  negotiations.
The existing contract had an expiration date of June 30, 1996. AWI is continuing
the  operation  of the current  on-line  lottery  system  under the terms of the
expired contract under temporary  extension.  The Company has submitted a bid to
the Pennsylvania Lottery for an on-line lottery contract to replace the contract
the Company  currently  has with the lottery.  The current  contract  expires in
December 1998. Sizable capital expenditures in excess of current capital sources
may be required in advance of any anticipated capital generated by a new Florida
or  Pennsylvania  contract.   Accordingly,   the  Company  may  need  additional
financing,  the  availability  and the terms of which  are  subject  to  various
uncertainties, with no assurance that such financing can be obtained.

     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/or 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  $13.9 million or 10% of the Company's total revenues for the nine
months ended  September 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.

     The Company is involved in various 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.

                                      - 12 -

<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 systems and equipment,
primarily in  international  markets.  The segment  experiences  fluctuations in
revenue  levels  based on relative  sizes of awards or  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  systems  and  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,  service  and lease of video  gaming  machines,  sales of parts,  central
control system site hardware and software,  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 due to
the timing of orders from new  jurisdictions,  timing of  replacement  orders or
expansion  or  contraction  of gaming in  jurisdictions  in which the Company is
licensed.  The Company  expects gaming machine 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 percentage of handle processed through computerized pari-mutuel
wagering   systems  from   approximately   120   racetracks  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 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 the revenue from the  wagering  systems and
racetrack  operations segments to be a significant  component of total revenues.
Wagering  systems  revenue is  generated by United  Tote.  Racetrack  operations
revenue is generated by Sunland Park.

     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  including
software and  hardware  technology.  Included in the costs are labor,  material,
consulting, occupancy and other expenses associated with the

                                      - 13 -

<PAGE>

                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


research  and  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.

Third Quarter 1997 Compared with Third Quarter 1996
---------------------------------------------------

     Consolidated  revenue in the third quarter 1997  increased by $8.5 million,
or 21%,  to $49.5  million  from $41.0  million in 1996.  Overall  gross  profit
increased by $3.4 million,  or 25%, to $16.9 million from $13.5 million in 1996.
Consolidated  net  earnings  were $.6 million in the third  quarter 1997 and $.2
million in 1996.  The increase in the gross profit level  reflects  increases in
both the on-line  lottery and gaming machine  segments  discussed  below. In the
third quarter 1996, the Company recorded  approximately  $4.7 million of pre-tax
special  charges  related to disputes with on-line  lottery  customers and asset
impairments  in the wagering  systems  segment.  The Company  also  recorded the
reversal of a $5.5 provision for loss on  discontinuance of the wagering systems
segment.  Excluding  the special  charges and  reversal of loss  provision,  the
Company would have experienced a net loss of  approximately  $2.5 million in the
third quarter 1996.

                                 On-line Lottery

     Revenue from the on-line lottery subsidiary increased by $2.3 million, 11%,
to $22.7 million from $20.4 million in the third quarter of 1996.  Revenues from
on-line  lottery  equipment  and  system  sales  were $2.1  million in the third
quarter 1997 as compared to $1.7 million in 1996. The increase reflects revenues
from new customers as well as additional  revenue from existing  customers.  The
Company  implemented  an  on-line  lottery  system in Chile  for a new  customer
resulting in additional revenue from equipment and systems sales.  Additionally,
operations  under the contract with the Maryland  Lottery which commenced in the
middle of the third quarter 1996  resulted in additional  revenue to the Company
in the third  quarter 1997.  These gains in revenue  generation  were  partially
offset by lower on-line lottery equipment sales in Norway.

     The gross profit margin from on-line lottery  revenues was 30% in the third
quarter 1997 as compared to 26% in the third quarter 1996.  The 26% gross profit
margin in 1996 reflects  unusually  high  operating  costs  associated  with the
Company's  relationship  with EDS in 1996 coupled with  relatively  lower handle
levels.  The Company's  contract  with the Maryland  Lottery is not resulting in
gross profit  levels the Company  expected.  The Company  anticipates  the gross
profit margin levels to improve as the system operation matures;  however, there
can be no assurance of such improvements

     In 1996,  the  Company  was named the  successful  bidder for a new on-line
lottery contract with the Florida Lottery.  The award by the Florida Lottery was
unsuccessfully protested by a competitor, and the competitor has filed an appeal
which has  delayed  contract  negotiations.  Under the new  contract,  AWI would
provide services to the Florida Lottery for five more years with options for two
extensions of two additional years each. The existing contract had an expiration
date of June 30, 1996.  AWI is continuing  the operation of the current  on-line
lottery  system  under  the  terms  of  the  expired  contract  under  temporary
extension.

                                      - 14 -

<PAGE>

                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


     The Company has submitted a bid to the Pennsylvania  Lottery for an on-line
lottery  contract to replace the  contract  the Company  currently  has with the
lottery. The current contract expires in December 1998.

     In the quarter ended September 30, 1996, the Company  recorded $1.6 million
of special and other charges  consisting of inventory  write-offs  and reserves,
and  write-offs of deferred  start-up  costs in  conjunction  with the Company's
agreement  with  the  Kentucky  Lottery  Corporation  not to  proceed  with  the
finalization  of a contract which was previously  awarded to the Company.  These
charges have been excluded from the  determination  of gross profit due to their
nature and the Company  believes they are not indicative of  anticipated  future
gross profits.

                       Gaming Machine and Route Operations

     Revenue from the gaming machine and route operations  segment  increased by
$7.0 million, or 53%, to $20.1 million from $13.1 million in 1996.

     Revenue was  recognized  on shipments  of 1,989 units in the third  quarter
1997 as compared to 739 units in 1996. The Company had  approximately  500 units
at customer  locations  under trial  arrangements  at September 30, 1997.  Trial
units are  recorded as  inventory  until sold.  Revenue from leasing and revenue
sharing  arrangements  was $3.0 million on 4,090 units in the third quarter 1997
as compared to $2.7 million on 5,765 units in 1996.

     In August  1997,  the  Company  announced  receipt  of an order  from South
African Video Gaming Corp. (SAVGC) for 600 gaming machines and the Company's VLC
Advanced   Gaming   System(TM)   (AGS),   with  annual   maintenance,   totaling
approximately  $4  million.  SAVGC is applying  for several  licenses to operate
gaming machines and central control systems.

     In October  1997,  the  Company  announced  that VLC and  Tabcorp  Holdings
Limited of Melbourne,  Australia have entered into a long-term technology supply
agreement  regarding  VLC's AGS. The  agreement  gives  Tabcorp a  non-exclusive
license for VLC's AGS, including location and wide-area progressive jackpotting,
in the state of Victoria,  Australia.  The initial phase of the  agreement  will
provide  approximately  $3.5  million of revenue and may provide for  additional
fees for new jurisdictions and system enhancements.

     The  following   table  reflects   domestic  and  foreign  revenue  sources
representing  10% or more of the  segment's  revenues for the third  quarters of
1997 and 1996 (amounts in millions):
<TABLE>
<CAPTION>

                                         Three Months Ended September  30,
                               ------------------------------------------------------
                                1997           1996         $ Change         % Change
                                ----           ----         --------         --------
<S>                            <C>             <C>            <C>              <C>

     Domestic:
          Montana              $ 0.3            0.9           (0.6)            (66.7)
          Montana routes         4.5            4.3            0.2               4.7
          Oregon                 1.4            1.7           (0.3)            (17.6)
          Other, combined        7.4            2.7            4.7             174.1
                               -----           ----           ----
                                13.6            9.6            4.0              41.7
                               -----           ----           ----
     Foreign:
          Quebec                 5.6            0.1            5.5               ---
          Other, combined        0.9            3.4           (2.5)            (73.5)
                               -----           ----           ----
                                 6.5            3.5            3.0              85.7
                               -----           ----           ----

                               $20.1           13.1            7.0              53.4
                               =====           ====           ====             =====
</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
39% in the third quarter 1997 as compared to

                                     - 15 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


45% in the third quarter 1996.  The decline in the gross profit margin  reflects
the  relatively  higher  revenue  from sales to Quebec which carry a lower gross
profit  margin.  The gross profit  margin from route  operations  was 27% in the
third quarter of 1997 and 28% in 1996.

                    Wagering Systems and Racetrack Operations

     Revenue  from  the  wagering  systems  and  racetrack   operation  segments
decreased by $.8 million, or 11%, to $6.6 million from $7.4 million in the third
quarter of 1996.  Decreased  revenues due to customer  racetrack  closures  were
partially offset by increased revenues from new and existing customers.  Revenue
from sales of wagering systems equipment was $.4 million in the third quarter of
1997 and $.7 million in 1996.  Revenue from the racetrack  operations in Sunland
Park, New Mexico was approximately $1.3 million in the third quarter of 1997 and
$1.4 million in the third quarter of 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 the  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,
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 gross profit margin on wagering  systems  service and  equipment  sales
revenues  was 40% in the  third  quarter  1997 as  compared  to 39% in the third
quarter of 1996.  The gross profit margin on wagering  systems  service  revenue
fluctuates  primarily  based  on the  pari-mutuel  racing  seasons  of  customer
racetracks.  Typically,  the wagering  systems  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  margin  from
racetrack  revenues was 7% in the third  quarter 1997 and 4% in 1996.  The gross
profit margin  improvement  reflects  management's  efforts to reduce  operating
costs at the racetrack and restructure  activities that historically resulted in
lower profit margins.

     The Company  recorded  other charges of  approximately  $3.1 million in the
quarter ended September 30, 1996 associated with its wagering  systems  segment.
Approximately  $2.8 million of such other  charges  represented  impairments  of
long-lived assets recorded in conjunction with the Company's  strategic decision
to retain and  operate  the  wagering  systems  segment  previously  reported as
discontinued. See Note 3 to the Consolidated Financial Statements. Additionally,
the Company  consolidated  the  manufacturing  operations of this segment to the
Company's Bozeman, Montana facility, which resulted in employee terminations and
other incremental costs of approximately $0.3 million.  These other charges have
been excluded from the determination of gross profit due to their unusual nature
and are not  considered by the Company to be indicative  of  anticipated  future
operating results.

     The pari-mutuel  industry on-track  attendance has experienced  significant
declines in the past  decade  partially  replaced  by an  increase in  off-track
wagering and  inter-track  wagering.  The Company views the integration of video
gaming at pari-mutuel facilities as an area for continued growth as evidenced by
gaming legislation  currently being implemented in the state of New Mexico where
the Company's racetrack is located.

     The recovery of a  significant  amount of the  Company's  investment in the
racetrack  operations in Sunland Park, New Mexico is largely contingent upon the
implementation  of gaming  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

                                      - 16 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


other  things,  the  operation  of up to 300  gaming  machines  per  pari-mutuel
racetrack  facility for up to twelve hours per day. The implementation of gaming
is subject to the timing and  satisfaction  of  conditions  of the  legislation,
including the state's  formation of a separate  commission to oversee the gaming
and other regulatory  matters  (including the grant of necessary licenses to the
Company).  Consequently,  the Company does not anticipate that any revenues will
be  generated  from the  approved  gaming  until  mid-1998.  The Company has had
architectural  plans  developed for casino gaming at the racetrack  facility and
has initiated construction.  The Company's investment in the racetrack operation
is approximately  $20.0 million at September 30, 1997 and current plans call for
approximately  $8,000,000  of capital  expenditures  for facility  enhancements,
gaming machines and related equipment.

                       Selling, General and Administrative

     Selling,  general and  administrative  ("SG&A") expenses  increased by $1.3
million to $7.7 million in the third  quarter 1997 from $6.4 million in 1996. As
a percentage of sales, SG&A remained at 16% in the comparative periods. The $1.3
million   increase   over  1996  levels   includes   increased   personnel   and
administrative  costs  associated with the  development of the Company's  gaming
machine sales and customer  service efforts as well as increased  infrastructure
costs  related to the  transition  of on-line  lottery  services from EDS to the
Company in 1997.  The Company  expects SG&A costs to remain at or above  current
levels for the near future.

                            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 third quarter 1997 as compared to $1.9 million in the third quarter 1996.
The Company  capitalized  $.3 million in the third quarter 1997 and $1.0 million
in  1996.  Total  research  and  development  expenditures  approximated  5%  of
consolidated  revenues in the third  quarter of 1997 and 7% in the third quarter
of 1996.  Management  plans to  continue  to expend  similar  levels on  product
research and development in the foreseeable future.

Nine Months Ended September 30, 1997 and 1996
---------------------------------------------

     Consolidated revenues increased by $13.7 million, or 10%, to $144.6 million
from $130.9  million in the first nine months of 1996.  The overall gross profit
increased by $2.7  million,  or 5%, to $52.3  million from $49.6  million in the
nine months  ended  September  30,  1996.  The Company had net  earnings  before
extraordinary items of $1.4 million in the first nine months of 1997 as compared
to a net loss of $8.3 million in the first nine months of 1996.  Included in the
1996  results of  operations  were  special,  pre-tax  charges of $12.9  million
related to the on-line lottery segment.  Excluding the special  charges,  net of
estimated tax benefits,  and extraordinary  items, the first nine months of 1996
would have reflected a net loss of approximately $.5 million.

                                 On-line Lottery

     Total revenues from the on-line lottery segment  increased by $5.9 million,
or 9%, to $71.7 million from $65.8 million in 1996. Revenue from on-line lottery
equipment  and system sales was $7.6 million in the first nine months of 1997 as
compared to $2.6 million in the first nine months of 1996. The increase reflects
increased  revenues from contracts with certain  domestic  on-line  lotteries as
well as  additional  revenue from the  successful  implementation  of an on-line
lottery system in Chile.  The $5.9 million  increase in on-line lottery revenues
for the nine months ended  September  30, 1997 is net of a $7.3 million  decline
attributable  to two state  contracts  terminated in mid-1996.  On-line  lottery
service  revenues were $64.1 million in the nine months ended September 30, 1997
and $63.2  million in the nine months ended  September  30, 1996.  Revenues from
equipment  sales and on-line lottery system  installations  were $7.6 million in
the nine months  ended  September  30, 1997 and $2.6  million in the nine months
ended September 30, 1996.

                                      - 17 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


     The gross profit margin for on-line  lottery  revenues was 33% in the first
nine months of 1997 as  compared  to 35% in the first nine  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  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 that contract.

     The Company  recorded  other charges of  approximately  $9.8 million in the
nine months  ended  September  30,  1996  associated  with the  on-line  lottery
segment.  The charges were primarily  associated with customer disputes stemming
from performance  issues with Electronic Data Systems  Corporation  ("EDS") with
which the Company had contracted to perform  certain  services for the Company's
customers. Such other charges have been excluded from the determination of gross
profit  due to  their  nature  and  are  not  considered  by the  Company  to be
indicative of anticipated future operating results.

     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
$8.1  million,  or 19%, to $51.6  million  from $43.5  million in the first nine
months of 1996.

     Revenue was recognized on shipments of 4,122 units in the first nine months
of 1997 as  compared to 3,252 units in 1996.  Revenue  from  leasing and revenue
sharing  arrangements  was $8.4  million  in the  first  nine  months of 1997 as
compared to $7.7 million in 1996.

                                      - 18 -

<PAGE>

                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


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

     Domestic:
          Montana                    $ 2.6            2.5             0.1                  4.0
          Montana routes              13.2           12.2             1.0                  8.2
          Oregon                       6.1            4.8             1.3                 27.1
          Other, combined             18.0            8.7             9.3                106.8
                                     -----           ----            ----
                                      39.9           28.2            11.7                 41.5
                                     -----           ----            ----
     Foreign:
          Quebec                       8.8            2.0             6.8                340.0
          Other, combined              2.9           13.3           (10.4)               (78.2)
                                     -----           ----           -----
                                      11.7           15.3            (3.6)               (23.5)
                                     -----           ----           -----

                                     $51.6           43.5             8.1                 18.6
                                     =====           ====           =====                =====
</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
44% in the first nine  months of 1997 and 47% in the first nine  months of 1996.
The decrease  reflects  relatively higher sales to Quebec which results in lower
gross  profit  margins  for the  Company.  The gross  profit  margin  from route
operations  was 27% in the first  nine  months of 1997 and 29% in the first nine
months of 1996.

                    Wagering Systems and Racetrack Operations

     Revenue  from the wagering  systems and  racetrack  operation  segments was
$21.3  million in the first nine months of 1997 as compared to $21.5  million in
1996.  Revenues  from the racetrack  operations in Sunland Park,  New Mexico was
$5.4 million in the first nine months of 1997 as compared to $5.5 million in the
first nine months of 1996.  Revenue from sales of wagering systems equipment was
$2.1 million in the first nine months of 1997 as compared to $1.7 million in the
first nine months of 1996.

     The gross profit margin from wagering  systems  service  revenue was 37% in
the first  nine  months of 1997 as  compared  to 39% in 1996.  The  decrease  is
attributable  to  increased  operating  costs in 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. Management does
not anticipate any significant increase in gross profit margin levels on service
revenue in the near future. The gross profit margin from equipment sales of $2.1
million  was 49% in the first  nine  months of 1997 as  compared  to 40% on $1.7
million of sales in the first nine  months of 1996.  The Company  experienced  a
negative gross profit from the racetrack operations of approximately $.1 million
in the first nine months of 1997 and 1996.

     The Company  recorded  other charges of  approximately  $3.1 million in the
nine months  ended  September  30, 1996  associated  with its  wagering  systems
segment.   Approximately   $2.8  million  of  such  other  charges   represented
impairments  of long-lived  assets  recorded in  conjunction  with the Company's
strategic decision to retain and operate the wagering systems segment previously
reported as discontinued.  See Note 3 to the Consolidated  Financial Statements.
Additionally,  the Company  consolidated  the  manufacturing  operations of this
segment to the Company's Bozeman,  Montana facility,  which resulted in employee
terminations and other  incremental costs of approximately  $0.3 million.  These
other charges have been excluded from the  determination  of gross profit due to
their unusual  nature and are not  considered by the Company to be indicative of
anticipated future operating results.

                                      - 19 -

<PAGE>
                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


                       Selling, General and Administrative

     Total  selling,  general and  administrative  (S,G&A)  expenses  were $23.0
million in the nine months  ended  September  30, 1997 and $21.6  million in the
nine months ended  September  30,  1996.  As a  percentage  of  revenues,  S,G&A
expenses  were 16% in the first nine  months of 1997 as compared to 17% in 1996.
The $1.4 million  increase  over 1996 levels  reflects  increased  personnel and
related  administrative  costs  associated with the development of the Company's
gaming  machine  sales  and  customer  service  efforts  as  well  as  increased
infrastructure  costs related to the transition of on-line lottery services from
EDS to the Company.

                            Research and Development

     Research  and  development  expense,  net of  amounts  capitalized  for the
development of MasterLink(R)  Advanced Gaming System software,  was $7.1 million
in the first nine months of 1997 as compared to $5.1  million in the same period
in 1996.  The Company  capitalized  $.8 million in the first nine months of 1997
and  $3.6  million  in  1996.   Total  research  and  development   expenditures
approximated 6% of consolidated revenues in the first nine months of 1997 and 7%
of consolidated revenues in 1996.

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

     Working  capital,  defined  as current  assets  less  current  liabilities,
increased  by $1.6  million to $29.7  million at  September  30, 1997 from $28.1
million at December 31, 1996. Cash generated from operations of $36.2 million in
the nine months ended September 30, 1997 was used to repay interest-bearing debt
of approximately $16.5 million,  invest in additional  long-lived capital assets
of approximately $7.3 million and increase cash and cash equivalent  balances by
$13.7 million to a balance of $18.0 million at September 30, 1997.

     Inventory  levels  decreased  by $3.9  million to $14.4  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 nine months of 1997 as a result of the Company's  improved cash
and debt positions.  Total  liabilities  decreased by $11.3 million in the first
nine 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  nine  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  September  30,  1997 the full $10.0  million  was  available  to the
Company.  The Company's revolving line of credit agreement with First Bank, N.A.
expires in February  1998.  The Company  expects to extend or replace the credit
facility prior to its expiration;  however,  its extension or replacement cannot
be assured.

     The recovery of a  significant  amount of the  Company's  investment in the
racetrack  operations in Sunland Park, New Mexico is largely contingent upon the
implementation  of gaming  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 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 had
architectural plans developed for casino gaming at the racetrack facility and

                                      - 20 -

<PAGE>

                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


has initiated construction. The Company's investment in the racetrack operations
is approximately  $20.0 million at September 30, 1997 and current plans call for
approximately  $8,000,000  of capital  expenditures  for facility  enhancements,
gaming machines and related equipment.

     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  $3.0 million at  September  30, 1997 and $4.7 million at December
31,  1996.  At  September  30,  1997,  the Company had a reserve of $0.3 million
established for any losses under the recourse  provisions  which reflects a $0.1
million  reduction  from the  December  31,  1996  balance of $0.4  million.  At
September  30,  1997 and  December  31,  1996,  respectively,  the  Company  had
guaranteed or pledged  security for the  indebtedness of others in the amount of
approximately  $3.9 million and $5.8 million (including notes receivable sold to
banks and other third parties).

     Historically, the Company has met its cash flow requirements primarily with
cash provided by operations,  public  offerings of equity  securities,  and from
borrowings  from  financial  institutions.  The Company,  in 1996, was named the
successful  bidder for a new on-line lottery  contract with the Florida Lottery.
The award by the Florida  Lottery was  unsuccessfully  protested by a competitor
and the competitor has filed an appeal which has delayed contract  negotiations.
Under the new contract,  AWI would provide  services to the Florida  Lottery for
five more years with options for two  extensions of two  additional  years each.
The existing contract had an expiration date of June 30, 1996. AWI is continuing
the  operation  of the current  on-line  lottery  system  under the terms of the
expired contract under temporary  extension.  The Company has submitted a bid to
the Pennsylvania Lottery for an on-line lottery contract to replace the contract
the Company  currently  has with the lottery.  The current  contract  expires in
December 1998. Sizable capital expenditures in excess of current capital sources
may be required in advance of any anticipated capital generated by a new Florida
or  Pennsylvania  contract.   Accordingly,   the  Company  may  need  additional
financing,  the  availability  and the terms of which  are  subject  to  various
uncertainties, with no assurance that such financing can be obtained.

                                      - 21 -

<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)

                                      - 22 -