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, 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


                        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   X    No
                           -----     -----

Applicable only to corporate issuers:

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

                                      - 1 -

<PAGE>



                        VIDEO LOTTERY TECHNOLOGIES, INC.
                                AND SUBSIDIARIES

                                      INDEX


PART I.   FINANCIAL INFORMATION
                                                                            Page

ITEM 1.   Financial Statements

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

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

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

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

          Notes to Consolidated Financial Statements                           8

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

ITEM 3.   Quantitative and Qualitative Disclosures About Market Risk          18


PART II.  OTHER INFORMATION

ITEM 1.   Legal Proceedings                                                   19

ITEM 2.   Changes in Securities                                               19

ITEM 3.   Defaults Upon Senior Securities                                     19

ITEM 4.   Submission of Matters to a Vote of Securities Holders               19

ITEM 5.   Other Information                                                   19

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


Signatures                                                                    22

                                      - 2 -

<PAGE>



     Video  Lottery  Technologies,  Inc. (the  "Company")  was  incorporated  in
Delaware in May 1991.  The Company acts as a holding  company for eleven  active
corporations. Unless the context otherwise requires, references to the "Company"
or  "VLT"  refer to  Video  Lottery  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

                VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
                             STATEMENTS OF EARNINGS
                    (in thousands except for per share data)
<TABLE>
<CAPTION>

                                                       Six Months Ended June 30,        Three Months Ended June 30,
                                                             1997               1996               1997             1996
                                                             ----               ----               ----             ----
<S>                                                        <C>                  <C>               <C>               <C>

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

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

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

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

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

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

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

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

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

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

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

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

          See accompanying notes to consolidated financial statements.


                                      - 4 -

<PAGE>



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

                                                                                         June 30,         December 31,
                                                                                            1997               1996
                                                                                            ----               ----
<S>                                                                                        <C>                 <C>

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

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

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

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

Commitments and contingencies

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

          See accompanying notes to consolidated financial statements.


                                      - 5 -

<PAGE>



                VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
                        STATEMENT OF STOCKHOLDERS' EQUITY
                                 (in thousands)

<TABLE>
<CAPTION>

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

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

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

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

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

June 30, 1997                 $19           109          97,891         (9,100)         (317)          (11,191)       77,411
                              ===           ===          ------         ======          ====           =======        ======
------------------------------------------------------------------------------------------------------------------------------

1997 Share Data
                                                                                             Treasury Stock
                                                                                      -----------------------------
                                         Series A                  Common                Series A            Common
Balance                          Preferred Stock Issued         Stock Issued          Preferred Stock        Stock
-------                          ----------------------         ------------          ---------------        -----

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

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


          See accompanying notes to consolidated financial statements.


                                      - 6 -

<PAGE>



                VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
                            STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                                            Six Months Ended June 30,
                                                                                            -------------------------
                                                                                             1997              1996
                                                                                             ----              ----
<S>                                                                                         <C>               <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
     Net earnings                                                                           $14,053              971
     Adjustments to reconcile net earnings to net cash
         provided by operating activities:
         Depreciation and amortization                                                       11,841           11,462
         Other charges                                                                          ---            8,235
         Extraordinary gain, net                                                            (13,269)          (4,014)
         Other, net                                                                             171                5
     Changes in operating assets and liabilities:
         Receivables, net                                                                     2,038           (1,658)
         Inventories                                                                          6,481           (4,245)
         Prepaid expenses                                                                      (120)             106
         Accounts payable                                                                    (1,496)          32,507
         Accrued expenses                                                                     1,894           (2,949)
         Income taxes                                                                         4,850              375
                                                                                            -------          -------
Net cash provided by operating activities                                                    26,443           40,795
                                                                                            -------          -------

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

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

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

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

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

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

          See accompanying notes to consolidated financial statements.


                                      - 7 -

<PAGE>


                VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     a. Presentation

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

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

     b.   Earnings (Loss) Per Common Share

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

     c.   Reclassifications

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

     d.   Accounting Pronouncements Not Yet Adopted

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

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

                                      - 8 -

<PAGE>


                VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


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

2.   EDS SETTLEMENT

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

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

3.   BUSINESS COMBINATION AND SETTLEMENT

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

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

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



                                      - 9 -

<PAGE>


                VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


4.   INVENTORIES

     A summary of inventory follows:
<TABLE>
<CAPTION>

                                                        June 30,           December 31,
                                                          1997                 1996
                                                          ----                 ----
<S>                                                    <C>                  <C>

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

</TABLE>

5.   LONG-TERM DEBT
<TABLE>
<CAPTION>

                                                                                          June 30,          December 31,
                                                                                            1997                1996
                                                                                            ----                ----
<S>                                                                                      <C>                  <C>

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

                                                                                          41,145,000         19,916,000

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

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

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

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

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



                                     - 10 -

<PAGE>


                VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


6.   COMMITMENTS AND CONTINGENCIES

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

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

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

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

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

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


                                     - 11 -

<PAGE>


                VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


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

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

                                     - 12 -

<PAGE>


                VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES


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

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

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

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

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

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

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

                                     - 13 -

<PAGE>


                VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES


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

     Other charges include  special and unusual charges  recorded by the Company
for restructurings,  asset valuation impairments,  liquidated damage assessments
and other  contract  losses that are  considered  by the Company to be operating
expenses not specifically attributable to normal individual segment revenues.

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

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

                                 On-line Lottery

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

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

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

                       Gaming Machine and Route Operations

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

     Revenue was  recognized  on shipments of 1,059 units in the second  quarter
1997 as compared to 1,133 units in 1996.  Included in the total units were 0 and
18 royalty unit sales in the quarters ended

                                     - 14 -

<PAGE>


                VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES


June 30, 1997 and 1996, respectively. The Company had approximately 371 units at
customer  locations  under trial  arrangements  at June 30,  1997.  Revenue from
leasing and revenue sharing  arrangements was $2.5 million on 4,090 units in the
second quarter 1997 as compared to $2.6 million on 5,765 units in 1996.

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

<TABLE>
<CAPTION>
                                                           Three Months Ended June  30,
                                     -----------------------------------------------------------------
                                      1997                1996            $ Change            % Change
                                      ----                ----            --------            --------
<S>                                  <C>                  <C>                <C>               <C>

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

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

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

                    Wagering Systems and Racetrack Operations

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

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

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

                                     - 15 -

<PAGE>


                VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES


on $.6 million of sales in 1996. The Company experienced a negative gross profit
from the  racetrack  operations  of  approximately  $.1  million  in the  second
quarters of 1997 and 1996.

                       Selling, General and Administrative

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

                            Research and Development

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


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

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

                                 On-line Lottery

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

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

                                     - 16 -

<PAGE>


                VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES


levels from the contract. The gross profit margin from on-line lottery equipment
and system  sales was 37% on $5.5  million of revenue in the first six months of
1997 as compared to 43% on $.9 million of revenue in 1996.

                       Gaming Machine and Route Operations

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

     Revenue was  recognized on shipments of 3,657 units in the first six months
of 1997 as compared to 2,507 units in 1996.  Included in the total units were 75
and 120  royalty  unit  sales in the six months  ended  June 30,  1997 and 1996,
respectively.  Revenue from leasing and revenue  sharing  arrangements  was $5.5
million in the first six months of 1997 as compared to $5.1 million in 1996.

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

                                                           Six Months Ended June 30,
                                     -----------------------------------------------------------------
                                      1997                1996            $ Change            % Change
                                      ----                ----            --------            --------
<S>                                  <C>                  <C>                <C>               <C>

     Domestic:
          Montana                    $ 2.2                 1.6                0.6                37.5
          Montana routes               8.7                 8.0                0.7                 8.8
          Oregon                       4.6                 3.1                1.5                48.4
          Other, combined             10.9                 6.1                4.8                78.7
                                     -----                ----               ----              ------
                                      26.4                18.8                7.6                40.4
                                     -----                ----               ----              ------
     Foreign:
          Quebec                       3.2                 2.0                1.2                60.0
          Peru                         ---                 3.5               (3.5)             (100.0)
          Other, combined              2.9                 6.2               (2.3)              (37.0)
                                     -----                ----               ----              ------
                                       5.1                11.7               (6.6)              (56.4)
                                     -----                ----               ----              ------

                                     $31.5                30.5                1.0                 3.3
                                     =====                ====               ====              ======
</TABLE>

     The gross profit margin from the gaming  machine  segment,  which  includes
equipment  sales and contract  revenue as well as royalty and lease revenues was
47% in the first six months of 1997 and 1996. The gross profit margin from route
operations was 28% in the first six months of 1997 and 1996.

                    Wagering Systems and Racetrack Operations

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

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

                                     - 17 -

<PAGE>



revenue in the near future. The gross profit margin from equipment sales of $1.8
million  was 51% in the first  six  months  of 1997 as  compared  to 40% on $1.0
million of sales in 1996.  The Company  experienced a negative gross profit from
the racetrack operations of approximately $.2 million in the first six months of
1997 and 1996.

                       Selling, General and Administrative

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

                            Research and Development

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

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

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

     Inventory  levels  decreased  by $3.3  million to $15.0  million from $18.3
million at December 31, 1996. The reduction  primarily reflects sales of on-line
lottery equipment to international jurisdictions.

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not Applicable

                                     - 18 -

<PAGE>




                           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, 1996 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

     None

ITEM 5. OTHER INFORMATION

     On April 1, 1997, the Company announced that AWI had signed a new five-year
contract,  totaling an estimated  $45.0 million,  to continue to provide on-line
services for the Minnesota  State  Lottery  after AWI was deemed the  successful
proposer in the Lottery's  competitive bidding process. AWI has been the on-line
system services  provider for Minnesota  during the past seven years.  Under the
new contract,  which begins in August 1997, the Lottery will continue to use the
existing  central  control  system  and  terminals  to  service  more than 1,900
retailers in the state.

     On April 23, 1997, the Company's subsidiary, United Tote Company, announced
the successful  installation and operation of its Horizon SystemTM and family of
pari-mutuel  wagering  terminals for the  inaugural  weekend of Lone Star Park's
live race meet located in Grand Prairie,  Texas halfway  between Dallas and Fort
Worth.  Total  combined  system  handle was a record $2.7  million.  United Tote
installed  500  state-of-the-art  wagering  terminals  for  Lone  Star's  73-day
inaugural  thoroughbred  meet.  United  Tote  has  been  servicing  Lone  Star's
simulcasting center, the Post Time Pavilion, since it opened on May 3, 1996 with
record attendance and handle numbers.

     On April 24, 1997, a subsidiary  of the Company  announced  that the Nevada
Gaming  Commission   unanimously   approved  VLC  for  permanent   licensing  to
manufacture and distribute its gaming equipment in Nevada.  The Company was also
granted a slot route  operator  license to own and operate gaming machine routes
in Nevada. VLC obtained temporary  licensing in the state in 1995 and the Nevada
Gaming Commission  unanimously  approved VLC's multi-game  touchscreen  machine,
Winning  Touch(R),  for sale to Nevada casinos last April.  The Winning Touch(R)
machine embraces  state-of-the-art  touchscreen  technology pioneered by VLC and
allows  players to operate the game solely by touching the screen.  Unlike other
touchscreen  machines  currently on the market,  Winning Touch(R) has no buttons
and  offers  players  an  entire  menu of games  available  on one  machine.  In
addition, the Company's subsidiary, VLC, gained approval from the Ontario Gaming
Control Commission as a casino  gaming-related  supplier  authorized to sell its
gaming devices in the province.

     On May 8, 1997, the Company announced that the Florida  Administrative  Law
Judge has  recommended  to the Florida  Lottery  that the  evaluation  committee
reconvene to reevaluate certain limited aspects of both proposals  submitted for
operation of the Lottery.  The judge did not reverse the Lottery's  selection of
the Company's  subsidiary  AWI, found AWI to be fully  qualified  and,  further,
found AWI's proposal to fully comply with the  requirements  of the Lottery.  On
November 1, 1996, the Florida Lottery awarded a new five-year contract to AWI to
continue operating its lottery system.

     On May 29, 1997, the Company's subsidiary, VLC, announced its participation
in the newly  opened  Crown  Casino in  Melbourne,  Australia.  The $2.5 billion
casino in downtown Melbourne opened May 8 is a complete  entertainment  facility
containing 40 restaurants, 14 movie theaters, four night clubs, designer shops

                                     - 19 -

<PAGE>



and a 1,000-room  hotel.  Of the 2,500 gaming machines in operation in the Crown
Casino, VLC has supplied 450 Winning Touch(R) machines.  Currently in Australia,
VLC participates in the gaming markets in Victoria,  South  Australia,  Northern
Territory and West Australia.  In Victoria, VLC has supplied 7,000 of the 24,000
total gaming  machines in  operation  and in South  Australia,  VLC has supplied
1,000 of the 10,000 gaming machines in operation. VLC has been in the Australian
market since 1992, and has placed machines in the Lassiters,  Burswood, Adelaide
and  Crown  casinos.  VLC,  which  designed  and  installed  the  world's  first
state-wide  gaming  control  system in 1989,  has also  installed  four  central
control  systems  in the  Australia  states of  Victoria,  South  Australia  and
Northern  Territory.  The  control  system  links  gaming  machines to a central
computer  system  providing  control and  monitoring of security,  integrity and
accounting data on a jurisdiction-wide basis.

     On June 4, 1997, the Company  announced that AWI entered into a contract to
provide  its  MasterLink(R)   gaming  technology  and  support  services  to  an
established lottery in Latin America in connection with a leading Latin American
information  technologies  services  company's  contract  to  provide an on-line
lottery system.  The contract is expected to provide a minimum of $12 million in
revenue for AWI over its eight-year term.  Additional  revenue is expected based
on the planned expansion of the original system.  In addition,  the contract can
be renewed for an additional  five-year  term.  On June 20, 1997,  AWI announced
that  the  contract  was  executed  with  SONDA,  S.A.  and that AWI will be the
sub-contractor  to SONDA for its contract  with Loteria de  Concepcion,  both of
which are  headquartered  in Santiago,  Chile,  to upgrade the  technology of an
existing lottery. Loteria de Concepcion, the oldest lottery in Chile which began
in 1921,  provides revenue to the Red Cross,  University de Concepcion and other
educational institutions throughout Chile.

     On  June 6,  1997,  the  Company's  subsidiary,  VLC,  announced  that  the
Mpumalanga Gaming Board approved VLC for a license to manufacture, maintain, and
supply  gaming  devices to license  holders in the  Mpumalanga  Province,  South
Africa.

     On June 19, 1997,  VLC  announced  Nevada field trials for its new enhanced
graphics Winning Touch(R) Power(TM) gaming machine.  The field trials are taking
place at Sam's Town Hotel & Gambling  Hall in Las Vegas and the Holiday  Hotel &
Casino  in Reno.  The  processing  speed  and  capacity  utilized  in the  Power
Series(TM)  surpasses that used in standard video gaming machines,  enabling the
Power Series(TM) to offer superior graphics and animation.  The machine provides
256 colors from a palette of over one quarter million  available  colors and has
sound  capabilities  which can reproduce  virtually any music,  voice,  or other
sound effects.

     On July 1, 1997 the Company  announced that Richard M. Haddrill,  President
of the Company,  has assumed the additional  title and  responsibility  of Chief
Executive  Officer  for the  Company.  On July 2, 1997,  the  Company  announced
organizational  changes at the Company and at it  subsidiaries  AWI, United Tote
and VLC.  Chuck  Brooke,  the  Company's  Senior Vice  President  of  Government
Relations,  will assume the additional  responsibilities of Government Sales for
all of the Company's  subsidiaries,  as well as direct  Corporate  Marketing and
Public  Relations for the Company.  Ron Utterback has joined the Company as Vice
President of International Sales. John Beach was appointed AWI's Chief Operating
Officer and Bob Evers was  appointed  Vice  President  for Domestic  Operations.
Michael  Eide,  President  of VLC,  will  also  head up the  development  of the
Company's  new gaming  business at Sunland Park  Racetrack in New Mexico.  Duane
Frahm will become VLC's Vice President of Sales based in Bozeman. Don Fuller has
been  promoted  to  Chief  Operating  Officer  of  United  Tote.  Bob  Campbell,
previously  with AmTote,  was made Vice  President of Operations at United Tote,
and Kit Kotz,  formerly  with  AutoTote,  will serve as legal counsel for United
Tote.  Additionally,  in May 1997,  Susan J. Carstensen was made Chief Financial
Officer and Dennis V. Gallagher was made Secretary of VLT.

     On July 7, 1997,  the Company's  subsidiary,  VLC,  announced  that Mick D.
Roemer, a former senior executive with  International  Game Technology,  will be
joining VLC as Vice President of Nevada Sales and Operations based in Las Vegas.

     On July 9, 1997,  the Company's  subsidiary,  VLC,  announced  that Casiloc
Inc., a subsidiary of Loto Quebec,  had ordered 1,175  Winning  Touch(R)  gaming
machines and approximately 5,000 bill acceptor  assemblies.  The gaming machines
will be assembled in Quebec.  The order  represents  a total  purchase  price in
excess of $10 million.  Currently,  VLC supplies  Winning  Touch(R) video gaming
machines to seven of the eight  Canadian  provinces  that allow  video  lottery.
Winning  Touch(R)  machines  comprise more than one-third of all gaming machines
operated throughout Canadian video lottery programs.  Additionally, VLC provides
wide area  central  control  systems  to five of the eight  Canadian  provinces,
including Quebec.


                                     - 20 -

<PAGE>



     On July 29, 1997 the Company's  subsidiary,  AWI,  announced the successful
conversion  of the  Norsk  Tipping  AS  Lottery's  on-line  games to  AWI's  new
MasterLink(R)  system with a transparent  launch on Jun 16, 1997.  The Norwegian
Lottery now has its wide array of products including sports betting, lotto games
and player  registration  operating on  state-of-the-art  IBM UNIX systems.  The
MasterLink(R) upgrade allows game construction through a parameter driven engine
that  facilitates new game  introduction  and changes  allowing Norsk Tipping to
remain in a leadership position in the lottery  marketplace.  The new technology
also provides operational and maintenance benefits.

     On August 12, 1997 the Company's  subsidiary,  VLC, announced receipt of an
order from South  African  Video Gaming Corp.  (SAVGC) for 600 Winning  Touch(R)
gaming  machines and the Company's  VLC Advanced  Gaming  SystemTM,  with annual
maintenance, totaling approximately $4 million. SAVGC, associated with the South
African  Clothing  and Textile  Worker's  Union,  will be  applying  for several
licenses to operate gaming machines and central control systems.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     a.   Listing of Exhibits

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

          EX-27.1 Financial Data Schedule - Restated (For SEC Use Only)

     b.   Reports on Form 8-K

          Form 8-K dated August 6, 1997, and exhibits, reporting the resignation
          of Board member William P. Lyons, Jr.

                                     - 21 -

<PAGE>


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.

                                    VIDEO LOTTERY TECHNOLOGIES, INC.



Date:   August 12, 1997             /S/ SUSAN J. CARSTENSEN
                                    --------------------------------------------
                                    Susan J. Carstensen, Chief Financial Officer
                                    (authorized to sign on behalf of Registrant)

                                     - 22 -