SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-Q


(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, 1998 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                                    (I.R.S. Employer
incorporation or organization)                               Identification No.)


115 Perimeter Place, Suite 911
Atlanta, Georgia                                                           30346
(Address of principal executive officers)                             (Zip code)


                                 (770) 481-1800
              (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:

The number of shares  outstanding  the issuer's $ .01 per value Common Stock, as
of the latest practicable date of June 30, 1998, was 10,816,156 shares.

                                     - 1 -

<PAGE>


                          POWERHOUSE TECHNOLOGIES, INC.
                                AND SUBSIDIARIES

                                      INDEX


                                                                            Page

PART I. FINANCIAL INFORMATION

ITEM 1. Consolidated Financial Statements

        Statements of Earnings
        Six Months Ended June 30, 1998 and 1997
        Three Months Ended June 30, 1998 and 1997                              4

        Balance Sheets
        June 30, 1998 and December 31, 1997                                    5

        Statement of Stockholders' Equity
        Six Months Ended June 30, 1998                                         6

        Statements of Cash Flows
        Six Months Ended June 30, 1998 and 1997                                7

        Notes to Consolidated Financial Statements                             8

ITEM 2. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations                                                         13

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk            20


PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings                                                     20

ITEM 2. Changes in Securities                                                 20

ITEM 3. Defaults Upon Senior Securities                                       20

ITEM 4. Submission of Matters to a Vote of Security Holders                   20

ITEM 5. Other Information                                                     20

ITEM 6. Exhibits and Reports on Form 8-K                                      21

Signatures                                                                    22

                                     - 2 -

<PAGE>


     Powerhouse Technologies,  Inc. (the "Company") was incorporated in Delaware
in May 1991. The Company acts as a holding company for ten active  corporations.
Unless the context  otherwise  requires,  references  to the  "Company" or "PTI"
refer to Powerhouse Technologies, Inc. and its subsidiaries. References to "AWI"
refer to Automated  Wagering  International,  Inc.,  one of the Company's  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
"UWS" or "United Tote" refer to United  Wagering  Systems,  Inc.,  the Company's
third principal operating  subsidiary whose operating units provide computerized
pari-mutuel  wagering  systems  for horse and  greyhound  racetracks,  off-track
betting  facilities and jai alai frontons.  The Company also owns and operates a
racetrack  facility in Sunland Park, New Mexico,  which is accounted for as part
of the UWS operating  segment.  References to the  "Subsidiaries"  refer to AWI,
VLC, UWS 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                      Three Months Ended
                                                                   June 30,                               June 30,
                                                                   --------                               --------
                                                            1998                 1997              1998              1997
                                                            ----                 ----              ----              ----
<S>                                                        <C>                  <C>               <C>               <C>

REVENUES:
   On-line lottery                                         $53,709              48,907            24,445            25,913
   Gaming machine and route operations                      31,166              31,501            16,787            13,762
   Wagering systems and racetrack operations                13,889              14,737             7,302             7,466
                                                           -------              ------            ------            ------
     Total revenues                                         98,764              95,145            48,534            47,141
                                                           -------              ------            ------            ------

COSTS AND EXPENSES:
   On-line lottery                                          33,323              32,312            14,216            17,157
   Gaming machine and route operations                      18,376              16,555            10,330             7,317
   Wagering systems and racetrack operations                10,876              10,904             5,377             5,265
                                                           -------              ------            ------            ------
                                                            62,575              59,771            29,923            29,739
                                                           -------              ------            ------            ------
   Gross profit                                             36,189              35,374            18,611            17,402

   OTHER OPERATING EXPENSES
   Selling, general and administrative                      17,306              15,240             8,780             7,546
   Research and development                                  5,024               4,843             2,459             2,346
   Depreciation and amortization                             9,667              11,841             4,847             5,806
                                                           -------              ------            ------            ------
                                                            31,997              31,924            16,086            15,698
                                                           -------              ------            ------            ------

Earnings from operations                                     4,192               3,450             2,525             1,704
                                                           -------              ------            ------            ------

OTHER INCOME (EXPENSE):
   Interest and other income                                   607                 390               239               155
   Interest expense                                         (1,553)             (2,010)             (763)           (1,016)
                                                           -------              ------            ------            ------
                                                              (946)             (1,620)             (524)             (861)
                                                           -------              ------            ------            ------
Earnings before income taxes and
     extraordinary items                                     3,246               1,830             2,001               843

Income tax expense                                           1,333               1,046               701               343
                                                           -------              ------            ------            ------

Net earnings before extraordinary items                      1,913                 784             1,300               500

Extraordinary gain, net                                        ---              13,269               ---               ---
                                                           -------              ------            ------            ------

Net earnings                                               $ 1,913              14,053             1,300               500
                                                           =======              ======            ======            ======

Net earnings per share (Basic and Diluted):
     Before extraordinary item                                $.18                 .07               .12               .05
     From extraordinary item                                   ---                1.28               ---               ---
                                                              ----                ----              ----              ----
                                                              $.18                1.35               .12               .05
                                                              ====                ====              ====              ====

Weighted average shares:
     Basic                                                  10,567              10,338            10,667            10,254
     Potential Common Stock                                    340                  31               276                52
                                                            ------              ------            ------            ------
     Diluted                                                10,907              10,369            10,943            10,306
                                                            ======              ======            ======            ======
</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,
                                                                          1998               1997
                                                                          ----               ----
<S>                                                                    <C>                 <C>

ASSETS
     Current assets:
         Cash and cash equivalents                                     $  8,255             13,772
         Restricted short-term deposits                                   3,078              1,423
         Accounts receivable, net                                        20,687             25,839
         Current installments of notes receivable, net                    3,769              3,192
         Inventories                                                     21,902             15,942
         Prepaid expenses                                                 1,679              1,037
         Deferred income taxes                                           13,423             14,944
                                                                       --------            -------
     Total current assets                                                72,793             76,149
                                                                       --------            -------

     Property, plant and equipment                                      156,385            152,074
         Less accumulated depreciation                                  (94,685)           (88,914)
                                                                       --------            -------
              Net property, plant and equipment                          61,700             63,160
                                                                       --------            -------

     Restricted cash deposits                                               415              2,408
     Notes receivable, excluding current installments                     2,334              2,547
     Goodwill, net                                                        8,905              9,314
     Intangible and other assets, net                                    11,843             11,319
                                                                       --------            -------
                                                                       $157,990            164,897
                                                                       ========            =======
LIABILITIES
     Current liabilities:
         Current installments of long-term debt                        $  4,172              4,381
         Accounts payable                                                 6,565              9,513
         Accrued expenses                                                20,149             25,205
                                                                       --------            -------
              Total current liabilities                                  30,886             39,099
                                                                       --------            -------

     Long-term debt, excluding current installments                      28,788             31,446
     Deferred income taxes                                               11,867             12,206
                                                                       --------            -------
              Total liabilities                                          71,541             82,751
                                                                       --------            -------

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                                                             114                110
     Paid-in capital                                                     92,980             89,427
     Deferred restricted stock compensation                              (1,384)              (217)
     Accumulated deficit                                                 (5,280)            (7,193)
                                                                       --------            -------
              Total stockholders' equity                                 86,449             82,146
                                                                       --------            -------
                                                                       $157,990            164,897
                                                                       ========            =======
</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,
  1997                             $19               110         89,427           (217)       (7,193)        82,146

Net earnings                       ---               ---            ---            ---         1,913          1,913

Restricted stock
 issued                            ---                 1          1,399         (1,400)          ---            ---

Amortization of
  deferred
  restricted stock
  compensation                     ---               ---            ---            233           ---            233

Proceeds from
 sale of common
 stock                             ---                 3          2,154            ---           ---          2,157



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

June 30,1998                       $19               114        92,980          (1,384)       (5,280)        86,449
                                   ===               ===        ======          ======        ======         ======

----------------------------------------------------------------------------------------------------------------------
</TABLE>


1998 Share Data (1)
<TABLE>
<CAPTION>

                                                             Series A                           Common
Balance                                             Preferred Stock Issued                    Stock Issued
-------                                             ----------------------                    ------------
<S>                                                          <C>                                <C>

Beginning of period                                          1,912,728                          11,023,406
Restricted Common Stock issued                                     ---                             108,000
Common Stock issued                                                ---                             230,204
                                                             ---------                          ----------

June 30, 1998                                                1,912,728                          11,361,610
                                                             =========                          ==========
</TABLE>

(1)  1,912,728  shares of Series A Preferred  Stock and 545,454 shares of Common
     Stock are held in treasury as collateral  for a note payable (see Note 2 to
     consolidated Financial Statements).

          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,
                                                                   -------------------------
                                                                    1998                1997
                                                                    ----                ----
<S>                                                               <C>                 <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
     Net earnings                                                 $ 1,913              14,053
         Adjustments to reconcile net earnings to net cash
           provided by operating activities:
              Depreciation and amortization                         9,667              11,841
              Extraordinary gain, net                                 ---             (13,269)
              Other, net                                              297                 171
     Changes in operating assets and liabilities:
         Receivables, net                                           4,789               2,038
         Inventories                                               (5,510)              6,481
         Prepaid expenses                                            (642)               (120)
         Accounts payable                                          (2,948)             (1,496)
         Accrued expenses                                          (4,576)              1,894
         Income taxes                                               1,182               4,850
                                                                   ------              ------
Net cash provided by operating activities                           4,172              26,443
                                                                   ------              ------

CASH FLOWS FROM INVESTING ACTIVITIES:
         Capital expenditures                                      (7,468)             (4,717)
         Expenditures on intangible and other non-current assets   (1,743)               (828)
         Proceeds from sales of equipment                             141                 ---
         Change in restricted cash deposits                           338                   2
                                                                   ------              ------

Net cash used in investing activities                              (8,732)             (5,547)
                                                                   ------              ------

CASH FLOWS FROM FINANCING ACTIVITIES:
         Net payments on notes payable                                ---              (7,650)
         Proceeds from issuance of long-term debt                     ---                 643
         Repayments of long-term debt                              (3,114)             (5,678)
         Proceeds from sale of Common Stock                         2,157                 ---
                                                                   ------             -------

Net cash used in financing activities                                (957)            (12,685)
                                                                   ------             -------

Net increase (decrease) in cash and cash equivalents               (5,517)              8,211

Cash and cash equivalents, beginning of period                     13,772               4,322
                                                                   ------              ------

Cash and cash equivalents, end of period                          $ 8,255              12,533
                                                                  =======              ======
</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
     Powerhouse  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  June  30,  1998  and  the
     consolidated  statements  of  earnings  and cash  flows  for the  six-month
     periods  ended June 30,  1998 and 1997 and the  consolidated  statement  of
     stockholders' equity for the six-month period ended June 30, 1998 have been
     prepared by the Company in accordance  with generally  accepted  accounting
     principles  ("GAAP"),  for  interim  financial  reporting,   and  with  the
     instructions  to Form 10-Q and Article 10 of Regulation  S-X.  Accordingly,
     they do not include all of the information  and footnotes  required by GAAP
     for complete annual  financial  statements.  The financial  statements have
     been prepared without audit and, in the opinion of management,  include 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.  The December 31, 1997 consolidated  balance
     sheet was derived from consolidated  financial  statements  audited by KPMG
     Peat Marwick LLP in connection with the Company's annual audit. For further
     information see the Company's 1997 Annual Report on Form 10-K.

     b.   Earnings Per Share

          Basic  earnings  per share  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  earnings per
     share reflects the potential dilution of securities that could share in the
     earnings  of the  Company.  Potential  common  stock is  excluded  from the
     weighted   average  share   calculations   when  the  inclusion   would  be
     anti-dilutive.

     c.   Accounting Pronouncements Not Yet Adopted

          The  American  Institute  of  Certified  Public  Accountants   (AICPA)
     Accounting  Standards  Executive  Committee  (AcSEC)  issued  Statement  of
     Position 98-5 (SOP),  Reporting on the Costs of Start-Up Activities,  which
     requires companies to expense start-up costs (including organization costs)
     as incurred. The SOP is effective for fiscal years beginning after December
     15, 1998 with early  adoption  permitted.  As of June 30, 1998, the Company
     has capitalized approximately $0.2 million of start-up costs related to the
     development  of a casino in Sunland Park,  New Mexico (see Note 6). Current
     plans for the casino  development  reflect  approximately  $1.0  million of
     anticipated  start-up costs. The Company has capitalized  start-up costs in
     conjunction  with the  implementation  of its  long-term  contracts  in the
     on-line lottery and wagering  systems  segments.  The Company's  accounting
     policy for start-up  costs  incurred to  implement  its  long-term  service
     contracts is not affected by the SOP.

          Statement of Financial Accounting Standards No. 133 ("Statement 133"),
     issued  June 1998,  establishes  accounting  and  reporting  standards  for
     derivative  instruments,  including certain derivative instruments embedded
     in other  contracts,  .  (collectively  referred to as derivatives) and for
     hedging  activities.  It requires an entity to recognize all derivatives as
     either assets or  liabilities  in the  statement of financial  position and
     measure those  instruments  at fair value.  This statement is effective for
     fiscal years  beginning  after June 15,  1999.  Initial  application  of it
     should be as of the beginning of an entity's  fiscal  quarter.  To date the
     Company  has  not  held  any  derivative  instruments,   including  certain
     derivative instruments embedded in other contracts.

                                     - 8 -

<PAGE>



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



     d.   Management estimates.

          The  preparation of financial  statements in conformity with generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that affect the reported amounts of assets and liabilities and
     disclosure  of  contingent  assets  and  liabilities  at  the  date  of the
     financial  statements  and the  reported  amounts of revenues  and expenses
     during  the  reporting  period.  Actual  results  could  differ  from those
     estimates.

     e.   Reclassifications.

          Certain   reclassifications   have  been  made  to  the  December  31,
     1997amounts to conform to the 1998 presentation.  The Company  reclassified
     approximately  $3.0  million of  estimated  taxes  payable from a valuation
     account reducing current deferred tax assets to accrued liabilities.

2.   EXTRAORDINARY ITEM - 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").  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  terms  of  the  Company's  on-line  lottery
contracts.  In 1996,  the Company  withheld  certain  payments to EDS due to EDS
performance  issues and related on-line lottery customer  disputes.  In mid-1996
the  contract  with EDS was  terminated  and EDS filed a  complaint  against the
Company  seeking  payment of outstanding  fees. On January 30, 1997, the Company
and EDS settled all claims  against each other and agreed to transition  the EDS
services to the Company. The settlement resulted in a net of taxes extraordinary
gain on debt  extinguishment of approximately $13.3 million ($1.28 per basic and
diluted  share)  for the  Company.  The  terms of the  settlement  included  the
redemption  by the  Company of all of the Common  and Series A  Preferred  Stock
owned by EDS, the transfer to the Company of certain  inventories  and property,
plant and  equipment  used in the  provision of EDS services to on-line  lottery
customers and the  extinguishment of approximately  $38.0 million of outstanding
fees in  exchange  for a note  payable  with an initial  present  value of $26.1
million.  The note payable  calls for interest  payments  only through 1998 with
provisions for acceleration upon sale of assets securing the note, and principal
and  interest  payments in years  three  through  maturity in 2004.  The note is
secured by the  redeemed  Common  Stock and Series A  Preferred  Stock,  certain
inventories,  fixed  assets  and  software  technology  and  carries  prepayment
provisions  upon the  disposal of  substantially  all the assets or stock of the
Company or certain of its  subsidiaries.  The transition of the EDS services and
related employees to the Company was completed in 1997.

3.   INVENTORIES

     A summary of inventory follows:

                                                  June 30,          December 31,
                                                    1998                1997
                                                    (000)               (000)
         Manufacturing:
              Raw materials                       $ 9,884               6,703
              Work-in-process                       1,244                 662
              Finished goods                        9,299               7,427
         Customer service and other                 1,475               1,150
                                                  -------              ------
                                                  $21,902              15,942
                                                  =======              ======

                                     - 9 -

<PAGE>


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


4.   LONG-TERM DEBT

     A summary of  long-term  debt,  including  capitalized  lease  obligations,
follows:
<TABLE>
<CAPTION>

                                                                                       June 30,     December 31,
                                                                                         1998           1997
                                                                                         ----           ----
                                                                                         (000s)         (000s)
<S>                                                                                     <C>             <C>

     Note payable at implicit rate of prime (8.5%) at December 31, 1997 with
       interest only payments  through  1998.  Thereafter  due in monthly
       installments, including interest, through January 2004. Secured by
       certain inventories, property and equipment, intangible
       assets and treasury stock (See Note 2.)                                          $25,646         25,850
     8.25% note payable in monthly installments including interest,
       through September 2001                                                             4,590          4,940
     7.2% to 12.25% capital lease obligations, due in monthly
       installments of $4,573 to $26,567 including interest
       maturing through April 2002                                                          792          1,152
     9.0% note payable in monthly installments including interest
       through December 1998, secured by assets leased to others
       (See Note 7.)                                                                      1,931          2,615
     LIBOR (5.58%) at December 31, 1997) plus 3.25% notes payable in
       equivalent monthly installments of $250,000 plus interest through
       February 1998.  Secured by stock of certain subsidiaries                             ---          1,270
                                                                                        -------         ------

                                                                                         32,959         35,827

     Less current installments                                                            4,171          4,381
                                                                                        -------         ------

     Long-term debt, excluding current installments                                     $28,788         31,446
                                                                                        =======         ======
</TABLE>

     The Company  maintains a credit facility with U. S. Bank, N. A.,  (formerly
known as First Bank,  N.A). In conjunction  with the Company's  settlement  with
EDS,  effective  January 30, 1997 (see Note 2), the credit  facility  with U. S.
Bank,  N.A.  was  amended  to,  among  other  things,  allow for the pari  passu
securitization of certain assets of the Company by EDS, extend the maturity date
of the revolving  line of credit to February 28, 1998,  and increase the line of
credit from $17.5 million to $19.5  million.  At June 30, 1998,  $9.5 million of
the revolving line of credit is committed  under the Company's  bonding  program
and the balance of $10.0 million is available for working capital. The revolving
line of credit  bears  interest at LIBOR (5.6% at June 30,  1998) plus 3.25% and
carries a commitment fee of .25% on the unadvanced  amount. The credit agreement
contains certain restrictive covenants, including leverage and cash flow ratios,
restricting  a change in  control,  restricting  the  payment of  dividends  and
maintaining  minimum  stockholders'  equity.  On February 28,  1998,  the credit
agreement  with U. S. Bank was  amended  to extend  the  expiration  date of the
revolving line of credit to August 31, 1998.

     The Company is  currently  negotiating  a $100 million  credit  facility to
replace its credit facility with U. S. Bank,  refinance  substantially all other
long-term debt and provide capital for the implementation of new on-line lottery
contracts.  The credit  facility will not be finalized  until  completion of due
diligence and agreement on definitive terms with respect to the financing. While
no  assurances  can be  given  that  the  credit  facility  will  be  finalized,
management is not aware of any reason to conclude that it will not be finalized.

5.   STOCKHOLDERS' EQUITY

     In February  1998, the Company  effected a secondary  offering of currently
outstanding shares held by an investor group  representing  approximately 15% of
the  Company's  outstanding  common stock

                                     - 10 -

<PAGE>


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


(approximately  1.5 million shares).  Approximately,  220,000  additional shares
were  issued  pursuant to the  exercise  of an option  granted by Company to the
underwriters.

6.   COMMITMENTS AND CONTINGENCIES

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

     The Company is obligated to provide services and/or equipment under certain
of its contracts with customers.  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  estimated
liabilities to fulfill the terms of these  contracts when a loss is probable and
can be reasonably estimated.

     The Company  continues  to conduct a  comprehensive  review of its computer
systems to identify  the systems that could be affected by the "Year 2000" issue
and has developed a preliminary  plan to address the issue.  The Year 2000 issue
is pervasive and complex,  as virtually  every  computer  system,  including the
Company's  internal  systems,  systems  delivered to customers,  and  suppliers'
systems,  will be affected in some way by the  rollover  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 operations problems for
the Company's computer systems.  However,  if such modifications and conversions
are not completed  properly or in a timely manner,  or third-party  software and
systems relied on by the Company fail, the Year 2000 issue could have a material
impact on the business and operations of the Company. The costs of modifications
and  conversions  are not  anticipated  to be  material,  and  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, 1998,  the Company had  collateral  in
support  of  the  various  bonds  outstanding  consisting  of  $2.0  million  of
restricted  deposits and $7.5 million of irrevocable  standby letters of credit.
Should the Company fail to meet contractually  specified  obligations during the
contract term,  the lottery  authority may assess damages and exercise its right
to collect on the  applicable  bond. The Company has had disputes with customers
over implementation schedules,  deliverables and other issues. The Company works
with these customers to resolve these differences;  however,  should the Company
be unable to resolve any disputes in a mutually satisfactory manner, the Company
may  suffer  negative  consequences  in its  relationships  with these and other
customers and its pursuit of future  business.  The ultimate cost to the Company
of such  damages  (if any)  would be net of its  claims  under  risk  management
policies in effect as appropriate.

     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  unsuccessfully  protested by a competitor  twice,  and the  competitor has
filed another appeal that delayed contract  negotiations.  The previous contract
expired on of June 30,  1996.  The Company is  continuing  the  operation of the
current on-line lottery system under the terms of the expired contract  extended
to the  earlier of the  implementation  of a new  agreement  or January 1, 2000.
Under  the  terms  of  the  Florida   request  for  proposal,   sizable  capital
expenditures in advance of any capital generated by a contract, and in excess of
current credit facilities, may be required to fulfill its terms.

     The Company has entered into a contract  with the  Pennsylvania  Lottery 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  are  required in advance of any  anticipated  capital
generated  by  the  new  Pennsylvania   contract.   Total  capital  expenditures
anticipated for the Pennsylvania

                                     - 11 -

<PAGE>


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


contract  implementation are estimated at $46.0 million with approximately $25.0
million anticipated by January 1999.

     The Company is  currently  negotiating  a $100 million  credit  facility to
replace its credit facility with U. S. Bank,  refinance  substantially all other
long-term debt and provide capital for the implementation of new on-line lottery
contracts.  The credit  facility will not be finalized  until  completion of due
diligence and agreement on definitive terms with respect to the financing. While
no  assurances  can be  given  that  the  credit  facility  will  be  finalized,
management is not aware of any reason to conclude that it will not be finalized.

     The recovery of a  significant  amount of the  Company's  investment in the
racetrack  operations in Sunland Park, New Mexico is largely contingent upon the
implementation  of  gaming at the  racetrack.  In March,  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 actions of the state's  recently  appointed  board to oversee the
gaming and other regulatory  matters.  While the Company intends to file for the
necessary licenses and approvals and believes it meets the appropriate  criteria
and  standards,  no assurances can be given that the licenses and approvals will
be  granted.  The  Company is not aware of any reason it would not  receive  the
necessary licenses or approvals.  Consequently,  the Company does not anticipate
that any revenues  will be generated  from the approved  gaming until the fourth
quarter of 1998 at the earliest.  The Company developed  architectural plans for
casino gaming at the  racetrack  facility and has  initiated  construction.  The
Company's  investment in the racetrack operations is approximately $19.4 million
and current  plans call for  approximately  $7.0 million of  additional  capital
expenditures for facility enhancements, gaming machines and related equipment to
be funded from operations.

     A significant percentage of the Company's consolidated revenues are derived
from  sales  to  customers  in  jurisdictions  that  have  enacted   legislation
permitting various types of gaming.  Such enacted  legislation may change due to
political  and  economic  conditions  within the  jurisdiction  and 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 10% of the Company's consolidated revenues in 1997. 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.  The Company  historically  has not attempted to hedge the
risks of fluctuating  exchange rates given the currencies involved and the terms
of payment granted to its customers.

     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. 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 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 or liquidity.

                                     - 12 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

General
-------

     The Company derives its revenues principally from four business segments in
the gaming and wagering  industry.  Two of the business  segments operate in the
pari-mutuel wagering market and are combined for financial reporting purposes as
the wagering systems and racetrack  operations  segment.  The Company  develops,
manufactures,  sells,  services and operates gaming and wagering  systems in the
on-line  lottery,  video  lottery  and casino  gaming and  pari-mutuel  wagering
markets.

     Revenues from the on-line  lottery segment are generated from the rendering
of services and the sale or supply of  computerized  on-line lottery systems and
components  to  government-authorized  lotteries.  Service  revenues  have  been
derived  primarily from service  contracts.  These contracts are typically of at
least five years'  duration,  and are  generally  based upon a  percentage  of a
lottery's gross on-line lottery sales.  These  percentages vary depending on the
size of the lottery and the scope of services  provided to the lottery.  Product
sale revenues have been derived primarily from the installation and licensing of
new on-line  lottery  systems and sales of lottery  terminals  and  equipment in
connection with the expansion of existing lottery programs.  The size and timing
of these  transactions  result in  variability  in product  sales  revenues from
period  to  period.  The  segment  revenue  will  also  experience  fluctuations
depending on contract start and end dates and relative sizes of jackpots and the
number of terminals  on-line and selling tickets in the states which the Company
operates. The Company expects on-line lottery services revenue to continue to be
a significant component of total revenues.  On-line lottery revenue is generated
by the Company's AWI subsidiary.

     The Company  expects the on-line  lottery  segment to remain a  significant
segment of the Company.  The  segment's  growth is dependent  upon  management's
ability to selectively bid and win domestic  lottery  contracts and aggressively
pursue and win  international  on-line lottery  opportunities  as well as expand
services to existing customers.  On-line lottery contracts for a number of state
lotteries  will  re-bid  over the next  several  years.  Due to the high cost of
procuring  new  lottery  contracts,  the  Company is  targeting  states  that it
believes  will  establish  a bidding  process  based  exclusively  on  technical
capability,  price and service.  This strategy allows the Company to efficiently
allocate  its  resources  so  that  it  may  also  pursue  international  growth
opportunities.  The Company is currently pursuing  potential  opportunities in a
number of  international  jurisdictions  that are expected to implement  on-line
lottery programs.

     Revenue from the gaming machine and route  operations  segment  consists of
sales and lease of gaming  machines,  sales of  parts,  central  control  system
hardware  and  software,  service  of  terminals,  license  fees,  and  from the
operation of gaming machine  routes in video lottery and casino gaming  markets.
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.  If  jurisdictions  approve
legislation for new or expanded gaming  operations and if the Company is awarded
a contract in any such  jurisdictions,  the segment  may  experience  a surge in
sales revenue that may or may not subsequently decline dramatically depending on
the  jurisdiction and gaming venue. The Company expects gaming machine and route
operations revenue to continue to be a major component of total revenues. Gaming
machine revenue is primarily generated by the Company's VLC subsidiary.

     Wagering  systems  revenue  is  generated   primarily  from  a  contractual
percentage of handle processed through computerized pari-mutuel wagering systems
from contracts with over 120 horse and dog racing facilities in North America as
well as sales and lease of pari-mutuel  wagering systems.  Racetrack  operations
revenue is derived from the ownership  and operation of a horse racing  facility
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  betting handle.  Due to
the volatility  within gaming venues during the last several years,  the Company
cannot  predict the  magnitude of any  resulting  effects on this segment of its
business.  The Company expects wagering systems and racetrack operations revenue
to be a significant component of total revenues.

                                     - 13 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

     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 location's 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
pari-mutuel  wagering  equipment  at the  racetracks  at which the Company has a
contract as well as direct costs of equipment sales.

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

     Research and development ("R&D") 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 R&D costs are labor,
material,  consulting,  occupancy  and other  expenses  associated  with the R&D
efforts.  Certain development costs are capitalized in accordance with Statement
of Financial  Accounting  Standards Board Statement No. 86 for certain  software
developed for sale or lease.

Second Quarter 1998 Compared with Second Quarter 1997
-----------------------------------------------------

     Consolidated  revenues  increased by $1.4 million,  or 3%, to $48.5 million
from $47.1 million in the second  quarter 1997.  The  consolidated  gross profit
increased by $1.2  million,  or 7%, to $18.6  million from $17.4  million in the
second  quarter  1997.  Earnings  from  operations  were $2.5 million in 1998 as
compared to $1.7 million in 1997. Consolidated net earnings were $1.3 million as
compared to $.5 million in the second quarter 1997.

                                 On-line Lottery

     Total revenues from the on-line lottery segment  decreased by $1.5 million,
or 6% to $24.4  million  from  $25.9  million in the second  quarter  1998.  The
decrease  reflects lower recorded  revenues from product sales and installations
of on-line lottery systems to customers in Norway and Chile. While revenues from
product sales  declined in the second  quarter 1998  compared to 1997,  revenues
from a number of the Company's domestic lottery customers  increased as a result
of higher lottery jackpots, primarily Powerball(R), in the second quarter 1998.

     In the second quarter 1998,  revenues from lottery system  enhancements and
product sales,  primarily to international  customers in Chile and Norway,  were
$1.4  million as compared to $4.8  million in 1997.  The gross profit on on-line
lottery system and equipment sales was 54% in the second quarter 1998 and 36% in
1997.

     Additionally,  the Company's on-line lottery system  MasterLink(R)  affords
the Company  the  ability to develop  add-on  products  and  services as well as
modify the system for game changes such as the recent change in the Powerball(R)
lottery  game.  Given the  maturity of the  on-line  lottery  industry,  lottery
authorities and service providers are in need of ways to increase lottery ticket
sales and reduce  costs.  While no assurance can be given,  the Company  expects
that its on-going  efforts to develop new  products and services  every year for
its existing customers will enhance revenues and reduce operating costs.

     The expiration  date of the current  contract with the Florida  Lottery was
extended  from  June  30,  1996,  as a result  of a delay of the  award of a new
contract.  On September 2, 1997, the Company was

                                     - 14 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

notified by the Florida  Lottery  that AWI had been  selected as the most highly
qualified bidder for the award of a new five-year contract. The notification was
pursuant to a re-evaluation  caused by an earlier protest by a competitor of the
Florida  Lottery's  previous  selection of the Company.  The  competitor  (GTECH
Holdings Corporation) protested the Florida Lottery's re-selection of the AWI as
the most qualified  bidder. On March 23, 1998, the Lottery dismissed the protest
and re-awarded the contract to the Company.  The competitor  filed its notice of
appeal of this order on March 24,  1998.  On January 5, 1998 the Company and the
Florida  Lottery  entered  into an interim  contract to continue  operating  the
Florida   Lottery's   on-line   system  until  the  earlier  of  the  award  and
implementation  of a new  agreement  or January 1, 2000.  Under the terms of the
Florida  request for proposal,  sizable  capital  expenditures in advance of any
capital generated by a contract, and in excess of current credit facilities, may
be  required  to fulfill  its terms.  See  discussion  of credit  facilities  in
Management's Discussion of Liquidity and Capital Resources.

     The gross profit margin for on-line lottery  revenues was 42% in the second
quarter 1998 as compared to 34% in 1997.  The gross  profit  margin from on-line
lottery service revenues was 41% in the second quarter 1998 and 33% in 1997. The
increase is partially  attributable to the $195.0 million  Powerball(R)  jackpot
experienced  in the second  quarter  1998.  In late 1997 the Multi State Lottery
Association  ("MUSL")  modified  the  Powerball(R)  lottery game to increase the
statistical  expectation of higher jackpots. Four of the Company's seven on-line
lottery contract customers are members of the MUSL, which includes a total of 20
states  plus the  District  of  Columbia.  The  Company is  optimistic  that the
Powerball(R)  game  modification  will result in periodically  higher  jackpots,
which  results  in higher  revenues  and gross  profit  margins  to the  Company
although there can be no assurance that this will happen.

                       Gaming Machine and Route Operations

     Revenue from the gaming machine and route operations  segment  increased by
$3.0 million,  or 22%, to $16.8 million from $13.8 million in the second quarter
of 1997.  The  increase  in revenues  in the second  quarter of 1998  reflects a
higher  level of gaming  machine  and related  parts sales in the Nevada  casino
market  where  the  Company   began   selling   gaming   machines  in  mid-1996.
Additionally,   the  Company  sold   approximately  200  gaming  machines  to  a
pari-mutuel  racetrack  facility  in West  Virginia in the second  quarter  1998
reflecting the Company's progress in the development of casino  opportunities at
racetracks.

     Revenue was  recognized  on delivery  of  approximately  1,320 units in the
second  quarter  1998 as  compared  to 1,060  units in  1997.  Revenue  from the
Company's  route  operations was $4.3 million in the second quarters of 1998 and
1997.  Revenue  from leases of gaming  machines  was $2.0  million in the second
quarter 1998 as compared to $2.5  million in 1997.  The decrease in revenue from
leasing  arrangements  primarily reflects the reduction in gaming machines under
lease from approximately  4,100 units at March 1, 1997 to approximately 3,400 at
June 30, 1998.  In March 1997,  the lease  agreements  for  approximately  2,200
gaming machines with the Oregon Lottery expired. The Lottery exercised an option
to purchase 1,375 of the expired lease machines.

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

                                     - 15 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

     The gross profit margin on gaming machine and route operations  revenue was
39% in the second quarter 1998 as compared to 47% in 1997. The decrease reflects
a combination of higher revenues from leasing gaming machines and parts sales in
the second  quarter 1997 coupled  with lower gross  profit  margins  attained on
sales in the casino market in the second  quarter 1998.  The gross profit margin
from route  operations  revenue  was 27% in the second  quarter  1998 and 28% in
1997.  Revenue  from  leasing  of gaming  machines  has  minimal  direct  costs.
Depreciation expense of gaming machines under lease and revenue share agreements
is recorded as a  component  of  depreciation  and  amortization  expense in the
Company's consolidated financial statements.  Although there can be no assurance
given,  the Company  expects  gross profit margin levels to remain near or above
40% for the segment.

                    Wagering Systems and Racetrack Operations

     Revenue  from  the  wagering  systems  and  racetrack   operation  segments
decreased  by $0.2  million  to $7.3  million  from $7.5  million  in the second
quarter 1997.  Revenue from wagering systems service  contracts was $5.1 million
in the second quarters of 1998 and 1997.  Racetrack  operation  revenue was $1.8
million in the second quarters of 1998 and 1997.  Sales of pari-mutuel  wagering
systems  equipment  were $0.4 million in the second  quarter 1998 as compared to
$0.6 million in 1997.

     The gross profit margin from wagering systems revenue was 38% in the second
quarter  1998  compared  to 39% in  1997.  The  negative  gross  profit  for the
racetrack  operations  in Sunland  Park,  New  Mexico was $(0.2)  million in the
second quarter 1998 as compared to $(0.1) in 1997.

     The Company  expects the wagering  systems  segment to remain a significant
segment.  However,  declines in attendance at pari-mutuel facilities has created
increased  pricing  pressures for the Company and its  competitors.  The Company
does not  anticipate  those  pricing  pressures  to decrease in the near future.
Accordingly,  the Company plans to maintain  profitability by improving customer
service while  attempting  to maintain or reduce  operating  costs.  The Company
believes that expansion of video gaming at racetracks could increase  attendance
and on-track wagering at racetracks.  A number of jurisdictions  have considered
or are considering  gaming at racetracks.  The Company provides wagering systems
and service to over 120 of the approximate  350 pari-mutuel  facilities in North
America.

     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 casino  style  gaming at the  racetrack.  In March 1997,  the
legislature   of  New  Mexico  voted  to  allow  casino  gaming  at  pari-mutuel
racetracks,  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 actions of the state's  appointed  board to oversee the gaming and
other  regulatory  matters.  While the  Company  intends  to file the  necessary
licenses  and  approvals  and  believes it meets the  appropriate  criteria  and
standards,  no assurances  can be given that the licenses and approvals  will be
granted.  The  Company is not aware of any  reason it would not be  granted  the
necessary licenses or approvals.

     The Company does not  anticipate  that any revenues will be generated  from
gaming at Sunland  Park until fourth  quarter of 1998 or first  quarter of 1999.
The Company  developed  architectural  plans for casino  gaming at the racetrack
facility and has begun construction.  The Company's  investment in the racetrack
operations   is   approximately   $19.4  million  and  current  plans  call  for
approximately  $7.0  million of  additional  capital  expenditures  for facility
enhancements,  gaming  machines and related  equipment.  Included in the capital
expenditures  for  the  facility  is  approximately  $1.0  million  of  start-up
expenditures  that are subject to the  requirements of the AICPA's  Statement of
Position  98-5(SOP  98-5).  SOP 98-5  requires  that  start-up  expenditures  be
expensed as incurred  effective for fiscal years  beginning  after  December 15,
1998 with early application  permitted.  Accordingly,  the start-up expenditures
incurred,  prior to  adoption  of SOP 98-5,  for the  casino  will be charged to
expense as a cumulative  effect of a change in  accounting  principle net of tax
effects.

                                     - 16 -

<PAGE>

                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

Selling, General and Administrative Expenses
--------------------------------------------

     Selling,  general and  administrative  ("SG&A") expenses  increased by $1.3
million, or 17%, to $8.8 million in the second quarter 1998 from $7.5 million in
1997.  The increase  reflects the Company's  continued  increased  marketing and
business development efforts. The increase was primarily in casino market of the
gaming machine  segment.  The Company  anticipates SG&A expenses to remain at or
above current  levels given a  continuation  of strategic  business  development
plans.

Research and Development
------------------------

     In the second quarter 1998,  the Company  expended $2.5 million on research
and  development  activities  as compared to $2.3 million in 1997. In the second
quarter  1997 the Company  capitalized  approximately  $0.3  million of software
development  costs.  The  Company  continues  to develop and enhance its central
system and gaming and wagering  terminal  software and games as well as terminal
hardware  for all three  operating  segments.  A number of software  development
projects are currently  being  monitored for  technological  feasibility and the
Company may capitalize  additional  software  development  costs as the projects
continue.   Research  and  development   expenditures  were  5.2%  and  5.5%  of
consolidated revenues in the second quarters of 1998 and 1997, respectively.

Depreciation and Amortization
-----------------------------

     Depreciation and amortization  decreased by $1.0 million to $4.8 million in
second  quarter  1998 from $5.8  million  in 1997.  The  decrease  is  primarily
attributable  to a reduction  in the number of gaming  machine  terminals  under
lease with the Oregon Lottery as discussed earlier and extensions of a number of
on-line  lottery  contracts  that occurred in 1997.  The lottery  authorities in
Delaware, Florida and South Dakota exercised extension options in 1997 or in the
case of Minnesota,  executed a new contract  using a  substantial  amount of the
equipment from the previous contract.  The Company records  depreciation expense
on equipment  placed in service  pursuant to on-line lottery  contracts over the
estimated  useful life of the  equipment  equal to the contract  term  including
exercised extension options.

Six Months Ended June 30, 1998 and 1997
---------------------------------------

     Consolidated  revenues  increased by $3.6 million,  or 4%, to $98.8 million
from $95.2  million in the first six months of 1997.  The overall  gross  profit
increased by $.8 million,  or 2%, to $36.2 million from $35.4 million in the six
months ended June 30, 1997.  The Company had net earnings  before  extraordinary
items of $1.9  million  in the first  six  months  of 1998 as  compared  to $0.8
million in 1997.

                                 On-line Lottery

     Total revenues from the on-line lottery segment  increased by $4.8 million,
or 10%, to $53.7  million from $48.9  million in 1997.  The  increase  primarily
reflects  increased  lottery  ticket  sales for the  multi  state  lottery  game
Powerball(R) which experienced relatively higher jackpots in the 1998 period. In
addition,  the Company recorded higher sales of on-line lottery  equipment sales
in the six months  ended June 30,  1998 to  customers  in  Minnesota,  Chile and
Norway.

     The gross profit margin in the on-line lottery segment was 42% in the first
six  months of 1998 as  compared  to 34% in the first  six  months of 1997.  The
increase  primarily reflects increased lottery ticket sales for Powerball(R) and
higher relative gross profit margins on sales of lottery  systems  equipment and
software  enhancements.  The gross profit margin from on-line lottery  equipment
and system  sales was 37% on $8.3  million of revenue in the first six months of
1998,  as compared to gross  profit  margin of 37% on $5.5 million of revenue in
1997.

                       Gaming Machine and Route Operations

     Revenue from the gaming machine and route operations  segment  decreased by
$0.3 million, or 1%, to $31.2 million from $31.5 million in the first six months
of 1997. The Company experienced notable

                                     - 17 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

increases in sales to the Nevada  casino  market in the first six months of 1998
over 1997 levels. These increases were offset by lower sales in the Quebec video
lottery market. Additionally, the Company sold approximately 200 gaming machines
to a pari-mutuel  racetrack facility in West Virginia in the second quarter 1998
reflecting progress in the development of casino opportunities at racetracks.

     Revenue was  recognized on shipments of 2,146 units in the first six months
of 1998 as compared to 3,657 units in 1997. In the first six months of 1997, the
Company sold approximately  1,400 gaming machines to the Oregon Lottery pursuant
to the  exercise of an option to purchase  the  machines  contained in the lease
agreement  with the Oregon  Lottery.  The lease term on the gaming  machines had
expired and the Lottery purchased the used terminals at fair value in accordance
with the agreement.  Absent the sale of previously leased gaming machines,  both
the number of units and revenue  amounts for the six months  ended June 30, 1998
would have been comparable.

     Revenue from leasing and revenue sharing  arrangements  was $4.7 million in
the first six months of 1998 as compared to $5.5 million in 1997. The lease term
on  approximately  2,200 gaming machines leased to the Oregon Lottery expired in
March 1997.  As discussed  above,  a  significant  number of the  machines  were
purchased by the Lottery.

     The gross  profit  margin  from the gaming  machine  segment was 41% in the
first six months of 1998 as compared  to 47% in 1997.  The  reduction  primarily
reflects  lower lease revenue in the 1998 period as well unmatched 1997 sales of
chipsets and parts at relatively higher gross profit margins. Management expects
gross  profit  margins  from gaming  machine and router  operations  revenues to
remain at or above the 40% mark.  The gross profit margin from route  operations
was 27% in the first six months of 1998 and 28% in 1997.

                    Wagering Systems and Racetrack Operations

     Revenue from the wagering systems and racetrack operation segments combined
was $13.9  million in the first six months of 1998 as compared to $14.7  million
in 1997. Revenue from wagering systems service contracts was $9.1 million in the
first six  months of 1998 and  1997.  Revenue  from  sales of  wagering  systems
equipment  was $0.7  million in the first six months of 1998 as compared to $1.8
million in 1997.  Revenue from the racetrack  operations  in Sunland  Park,  New
Mexico  was $4.2  million in the first six  months of 1998 as  compared  to $4.0
million in 1997.

     The gross profit margin from wagering  systems revenue was 35% in the first
six months of 1998 and 1997. The gross profit margin on wagering systems service
revenue  fluctuates  from quarter to quarter  primarily based on the pari-mutuel
racing  seasons of  customer  racetracks.  Management  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 $0.7 million was 42% in
the first six months of 1998,  as  compared  to 51% on $1.8  million of sales in
1997.  The  Company  experienced  a negative  gross  profit  from the  racetrack
operations  of  approximately  $0.5  million in the first six months of 1998 and
$0.2 million in 1997.

Selling, General and Administrative
-----------------------------------

     Total  selling,  general  and  administrative  (SG&A)  expenses  were $17.3
million in the six months  ended June 30,  1998 and $15.2  million in 1997.  The
$2.1 million increase reflects the Company's  continued  increased marketing and
business development efforts and is in line with management's expectations.  The
increase  was  primarily in casino  market of the gaming  machine  segment.  The
Company  anticipates  SG&A expenses to remain at or above current levels given a
continuation of strategic business development plans.

Research and Development
------------------------

     Research  and  development  expense,  net of amounts  capitalized  was $5.0
million in the first six

                                     - 18 -

<PAGE>


                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

months of 1998 as compared to $4.8 million in 1997. The Company capitalized $0.5
million  in the  first  six  months  of 1997.  Total  research  and  development
expenditures  approximated 5.1% of consolidated revenues in the first six months
of 1998 and 5.6% in 1997.

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

     In the six months  ended June 30,  1998 the Company  generated  nearly $4.2
million of cash from  operations  as  compared  to $26.4  million  in 1997.  The
reduction  reflects a number of fluctuations in operating assets and liabilities
representing  a reduction  in cash  provided  by  operations.  The  fluctuations
include an increase in inventory  levels and  decreases in accounts  payable and
accrued  liabilities  as well as a decrease  in income  tax  refund  receivables
offset by  decreases  in  accounts  receivable.  Working  capital  increased  by
approximately  $4.9 million from  December 31, 1997 to $41.9 million at June 30,
1998.  Approximately $9.2 million was invested in property,  plant and equipment
and intangible and other assets in the first six months 1998 as compared to $5.5
million in 1997.  Approximately  $3.8 million has been  expended for the initial
implementation  cost of the on-line  lottery system in  Pennsylvania  later this
year. Additionally, the wagering systems segment has expended approximately $3.1
million to  manufacture  and install new tote equipment in 1998. The Company has
expended over $0.8 million on the  development  of the casino at Sunland Park in
the first six months of 1998.  The Company  anticipates  expending an additional
$7.0 million on the casino development before start-up anticipated in the fourth
quarter 1998 or first quarter 1999.

     The note payable to EDS arising from the settlement  discussed in Note 2 to
the  Consolidated  Financial  Statements is secured by certain assets  including
on-line lottery equipment inventories with a carrying value of approximately $.7
million at June 30,  1998.  The note  payable  ($25.6  million at June 30, 1998)
provides for acceleration of payment on the note equal to 30% of the sales price
of the equipment as well as proceeds in excess of certain  levels from licensing
the Company's  MasterLink(R)  software.  The note also provides for acceleration
payments for a change in control of the Company.

     The Company  repaid  long-term debt of $3.1 million in the six months ended
June 30, 1998  including the  outstanding  term loans with U. S. Bank  (formerly
known as First Bank N.A.).  On  February  28,  1998,  the Company and U. S. Bank
extended  the  expiration  date  of  the  Company's  credit  facility  agreement
including the revolving line of credit and bonding  program letters of credit to
August 31, 1998. The revolving line of credit has $10.0 million available to the
Company for working capital.

     The Company is  currently  negotiating  a $100 million  credit  facility to
replace  its credit  facility  with U. S. Bank that  expires  August  31,  1998,
refinance  substantially  all other  long-term debt and provide  capital for the
implementation of new on-line lottery contracts. The credit facility will not be
finalized  until  completion of due diligence and agreement on definitive  terms
with respect to the financing.  While no assurances can be given that the credit
facility  will be  finalized,  management is not aware of any reason to conclude
that it will not be finalized.

     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  unsuccessfully  protested by a competitor  twice,  and the  competitor has
filed  another  appeal that 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 previous
contract  expired on 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  expiring the earlier of either the implementation of a new
agreement or January 1, 2000.

     In  November  1997,  the  Company  was  awarded a new  seven-year  contract
commencing in January 1999 to continue  providing  equipment and services to the
Pennsylvania  Lottery.  Current estimates of total capital  expenditures for the
on-lottery system, under the contract are $46.0 million over a five- year period
with as much as $25.0 million expended by January 1999.

                                     - 19 -

<PAGE>

                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not Applicable


                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     No  significant  changes have occurred with regard to legal  proceedings as
disclosed in Part 1, Item 3, of the Company's December 31, 1997 Form 10-K.

ITEM 2. CHANGES IN SECURITIES

     None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None

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

     The Company's  Annual Meeting of Stockholders was held on June 4, 1998, and
in  connection  therewith,  proxies  were  solicited by  management  pursuant to
Regulation  14 under  the  Securities  Exchange  Act of 1934.  An  aggregate  of
10,802,821 shares of the Company's common stock were outstanding and entitled to
vote at the meeting,  of which  9,463,074 were present in person or by proxy. At
the meeting the following  matters were submitted to a vote by the stockholders,
with the results indicated below:

        1.  Election  of three  directors  to serve  until  the year 2000 Annual
Meeting of Stockholders.

            Nominee                     For                        Withheld
            -------                     ---                        --------

            Richard R. Burt          9,157,467                      335,268
            Patricia Becker          9,198,892                      293,843
            Richard M. Haddrill      9,157,959                      334,776

        2.  Amendment to the  Company's  1994 Stock  Incentive  Plan to  fix the
maximum number of shares that any eligible  employee may receive pursuant to the
plan at 40% of the maximum  number of shares  authorized  for issuance under the
plan.

                For                    Against               Abstained/Not Voted

             8,105,396               1,234,036                      123,642

ITEM 5. OTHER INFORMATION

     In June 1998,  the Company  filed a statement of claim  against the Ontario
Lottery  Corporation  for damages  incurred  as a result of the Ontario  Lottery
Corporation's  termination  of the  request  for  proposals  for  video  lottery
terminals and central system.

     In  April  1998,  the  Company  announced  that  it has  received  ISO-9002
certification.

     In May 1998, the Company  announced  that AWI, with its consortium  partner
Applied Gaming Solutions of Canada Inc., were selected to supply on-line lottery
equipment  and  services for a program in Vietnam.  The Contract  award for this
pilot is expected to provide AWI with approximately $5 million in revenue by the
end of 1998, subject to final contract negotiations.

                                     - 20 -

<PAGE>

                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

     In June 1998, the Company announced that its gaming machine division,  VLC,
has signed a letter of intent to provide its Advanced  Gaming  System(TM)  (AGS)
central  control  system and 4,300  site  controllers  to  Quebec,  Canada-based
CASILOC Inc. for the monitoring and control of 15,000 gaming  machines  operated
by La Societe  des  Loteries  Video du Quebec  Inc.  (SLVQ).  The  software  and
hardware  order,  valued at CAD18.7  million,  will be delivered over a two-year
period and has an additional annual maintenance fee for the next seven years.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     a.   Listing of Exhibits

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

     b.   Reports on Form 8-K

          On July 1, 1998,  the  Company  filed a current  report on Form 8-K to
report its announcement that it expects to exceed consensus  analysts' estimates
for the second  quarter  ending June 30, 1998 and reporting on the status of its
Sunland Park Casino opening and other business developments.

                                     - 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:    August 13, 1998            /S/ SUSAN J. CARSTENSEN
                                    --------------------------------------------
                                    Susan J. Carstensen, Chief Financial Officer
                                    and Treasurer (authorized to sign on behalf
                                    of Registrant)


















                                     - 22 -