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 SEPTEMBER 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 September 30, 1998, was 10,818,821 shares.

                                     - 1 -
<PAGE>


                          POWERHOUSE TECHNOLOGIES, INC.
                                AND SUBSIDIARIES

                                      INDEX


                                                                            Page

PART I.   FINANCIAL INFORMATION

ITEM 1.   Consolidated Financial Statements

          Statements of Earnings
          Nine Months Ended September 30, 1998 and 1997
          Three Months Ended September 30, 1998 and 1997                       4

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

          Statement of Stockholders' Equity
          Nine Months Ended September 30, 1998                                 6

          Statements of Cash Flows
          Nine Months Ended September 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                                           14

ITEM 3.   Quantitative and Qualitative Disclosures About Market Risk          21


PART II.  OTHER INFORMATION

ITEM 1.   Legal Proceedings                                                   21

ITEM 2.   Changes in Securities                                               21

ITEM 3.   Defaults Upon Senior Securities                                     21

ITEM 4.   Submission of Matters to a Vote of Security Holders                 21

ITEM 5.   Other Information                                                   22

ITEM 6.   Exhibits and Reports on Form 8-K                                    22

Signatures                                                                    23

                                     - 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>

                                                               Nine Months Ended                    Three Months Ended
                                                                 September 30,                        September 30,
                                                                 -------------                        -------------
                                                             1998                1997              1998              1997
                                                             ----                ----              ----              ----
<S>                                                       <C>                  <C>                <C>               <C>

REVENUES:
   On-line lottery                                        $ 79,337              71,671            25,628            22,764
   Gaming machine and route operations                      46,353              51,627            15,187            20,126
   Wagering systems and racetrack operations                20,847              21,322             6,958             6,585
                                                          --------             -------            ------            ------
     Total revenues                                        146,537             144,620            47,773            49,475
                                                          --------             -------            ------            ------

COSTS AND EXPENSES:
   On-line lottery                                          47,892              48,244            14,569            15,932
   Gaming machine and route operations                      27,573              28,790             9,197            12,235
   Wagering systems and racetrack operations                15,602              15,300             4,726             4,396
                                                          --------             -------            ------            ------
                                                            91,067              92,334            28,492            32,563
                                                          --------             -------            ------            ------
   Gross profit                                             55,470              52,286            19,281            16,912

   OTHER OPERATING EXPENSES
   Selling, general and administrative                      26,784              22,983             9,478             7,743
   Research and development                                  7,509               7,122             2,485             2,279
   Depreciation and amortization                            14,576              16,943             4,909             5,102
                                                          --------             -------            ------            ------
                                                            48,869              47,048            16,872            15,124
                                                          --------              ------            ------            ------

Earnings from operations                                     6,601               5,238             2,409             1,788
                                                          --------             -------            ------            ------

OTHER INCOME (EXPENSE):
   Interest and other income                                 1,013                 709               406               319
   Interest expense                                         (2,318)             (2,978)             (765)             (968)
                                                          --------             -------            ------            ------
                                                            (1,305)             (2,269)             (359)             (649)
                                                          --------             -------            ------            ------
Earnings before income taxes and
     extraordinary items                                     5,296               2,969             2,050             1,139

Income tax expense                                          (2,216)             (1,595)             (883)             (549)
                                                          --------             -------            ------            ------

Net earnings before extraordinary items                      3,080               1,374             1,167               590

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

Net earnings                                              $  3,080              14,643             1,167               590
                                                          ========             =======            ======            ======

Earnings per share:
     Basic                                                   $0.29                1.42              0.11              0.06
     Diluted                                                 $0.28                1.41              0.11              0.06
                                                             =====                ====              ====              ====

Weighted average shares:
     Basic                                                  10,602              10,310            10,673            10,255
     Potential Common Stock                                    306                  88               240               237
                                                            ------              ------            ------            ------
     Diluted                                                10,908              10,398            10,913            10,492
                                                            ======              ======            ======            ======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                      - 4 -

<PAGE>


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

                                                                         September 30,       December 31,
                                                                              1998               1997
                                                                              ----               ----
<S>                                                                        <C>                 <C>
ASSETS
     Current assets:
         Cash and cash equivalents                                         $  8,786             13,772
         Restricted short-term deposits                                       3,482              1,423
         Accounts receivable, net                                            16,402             25,839
         Current installments of notes receivable, net                        4,718              3,192
         Inventories                                                         23,790             15,942
         Prepaid expenses                                                     2,050              1,037
         Deferred income taxes                                                9,926             11,444
                                                                           --------            -------
     Total current assets                                                    69,154             72,649
                                                                           --------            -------

     Property, plant and equipment                                          161,572            152,074
         Less accumulated depreciation                                      (97,620)           (88,914)
                                                                           --------            -------
              Net property, plant and equipment                              63,952             63,160
                                                                           --------            -------

     Restricted cash deposits                                                   413              2,408
     Notes receivable, excluding current installments                         3,299              2,547
     Goodwill, net                                                            8,701              9,314
     Intangible and other assets, net                                        12,854             11,319
                                                                           --------            -------
                                                                           $158,373            161,397
                                                                           ========            =======
LIABILITIES
     Current liabilities:
         Current installments of long-term debt                            $  5,669              4,381
         Accounts payable                                                     6,544              9,513
         Accrued expenses                                                    18,468             21,705
                                                                           --------            -------
              Total current liabilities                                      30,681             35,599
                                                                           --------            -------

     Long-term debt, excluding current installments                          27,647             31,446
     Deferred income taxes                                                   12,263             12,206
                                                                           --------            -------
              Total liabilities                                              70,591             79,251
                                                                           --------            -------

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                                                         92,993             89,427
     Deferred restricted stock compensation                                  (1,231)              (217)
     Accumulated deficit                                                     (4,113)            (7,193)
                                                                           --------            -------
              Total stockholders' equity                                     87,782             82,146
                                                                           --------            -------
                                                                           $158,373            161,397
                                                                           ========            =======
</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                       ---             ---              ---            ---         3,080          3,080

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

Amortization of
  deferred
  restricted stock
  compensation                     ---             ---              ---            386           ---            386

Proceeds from
 sale of common
 stock                             ---               2            2,078            ---           ---          2,080

Stock options
 exercised and
 shares issued
 under stock
 purchase plan                     ---               1               89            ---           ---             90
                                   ---             ---           ------          -----         -----         ------

September 30, 1998
                                   $19             114           92,993         (1,231)       (4,113)        87,782
                                   ===             ===           ======         ======        ======         ======
----------------------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>

1998 Share Data (1)

                                                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                                  ---                     232,869
                                               ---------                  ----------

September  30, 1998                            1,912,728                  11,364,275
                                               =========                  ==========
</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 Notes 2
     and 4 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>

                                                                      Nine Months Ended September 30,
                                                                      -------------------------------
                                                                         1998                 1997
                                                                         ----                 ----
<S>                                                                     <C>                 <C>    <C>    <C>    <C>    <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
     Net earnings                                                       $ 3,080              14,642
         Adjustments to reconcile net earnings to net cash
           provided by operating activities:
              Depreciation and amortization                              14,576              16,943
              Extraordinary gain, net                                       ---             (13,269)
              Other, net                                                    323                 211
     Changes in operating assets and liabilities:
         Receivables, net                                                 7,318              (2,678)
         Inventories                                                     (7,367)              7,296
         Prepaid expenses                                                (1,014)               (391)
         Accounts payable                                                (3,008)             (1,371)
         Accrued expenses                                                (6,181)              9,397
         Income taxes                                                     5,323               5,397
                                                                        -------              ------
Net cash provided by operating activities                                13,050              36,177
                                                                        -------              ------

CASH FLOWS FROM INVESTING ACTIVITIES:
         Capital expenditures                                           (13,439)             (5,824)
         Expenditures on intangible and other non-current asse           (3,278)             (1,511)
         Proceeds from sales of equipment                                   374                  87
         Change in restricted cash deposits                                 (65)                560
                                                                        -------              ------

Net cash used in investing activities                                   (16,408)             (6,688)
                                                                        -------              ------

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                                    (3,798)             (8,812)
         Proceeds from sale of common stock                               2,170                  56
                                                                        -------             -------

Net cash used in financing activities                                    (1,628)            (15,763)
                                                                        -------             -------

Net (decrease) increase in cash and cash equivalents                     (4,986)             13,726

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

Cash and cash equivalents, end of period                                $ 8,786              18,048
                                                                        =======              ======
</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  September  30,  1998 and the
     consolidated  statements  of  earnings  and cash  flows for the  nine-month
     periods ended September 30, 1998 and 1997 and the consolidated statement of
     stockholders'  equity for the  nine-month  period ended  September 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. Accordingly, the Company will adopt
     the  SOP in the  fourth  quarter  1998 or the  first  quarter  1999.  As of
     September 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. The Company  currently holds no
     derivative   instruments  or  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 revenues,  expenses, assets
     and   liabilities  and  disclosure  of   contingencies   in  the  financial
     statements. Actual results could differ from those estimates.

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 was fully paid in October  1998.
     (See note 4.) The  transition of the EDS services and related  employees to
     the Company was completed in 1997.

3.   INVENTORIES

     A summary of inventory follows:

                                         September 30,        December 31,
                                              1998                1997
                                              ----                ----
                                              (000)               (000)
         Manufacturing:
              Raw materials                 $10,715               6,703
              Work-in-process                 1,805                 662
              Finished goods                  9,817               7,427
         Customer service and other           1,453               1,150
                                            -------              ------
                                            $23,790              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>

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

     Note payable paid in October 1998 (See Note 2.)                      $25,779            25,850
     8.25% note payable in monthly installments including interest,
          through September 2001                                            4,415             4,940
     4.95% to 10.4% various notes and capital lease obligations,
          due in monthly installments of $4,573 to $26,567 including
          interest maturing through September 2001                            996               584
     9.0% to 12.25% notes payable paid in October 1998                      2,126             3,183
     LIBOR (5.58%) at December 31, 1997) plus 3.25% notes payable
          paid in February 1998                                               ---             1,270
                                                                          -------            ------

                                                                           33,316            35,827

     Less current installments                                              5,669             4,381
                                                                          -------            ------

     Long-term debt, excluding current installments                       $27,647            31,446
                                                                          =======            ======
</TABLE>

     In October 1998, the Company  completed  negotiations  for a $100.0 million
credit  facility with Lehman  Brothers,  Inc. The credit  facility  replaces the
credit facility with U. S. Bank and, among other things,  provides for two $25.0
million term loans maturing in five and six years, respectively, and a revolving
line of credit for $50.0 million  expiring  September 30, 2003. At the Company's
option, the credit facility bears interest at a Base Rate approximating prime or
LIBOR  (approximately  5.4%  at the  closing  date  in  October  1998)  plus  an
applicable  margin  percentage.  The margin  percentage above the LIBOR rate may
fluctuate  between  1.75%  and 2.75%  depending  on the  Company's  Consolidated
Leverage  Ratio  as  defined  in the  credit  facility  agreements  collectively
referred  to as the  ("Credit  Agreement").  The Company may utilize up to $15.0
million  of the $50.0  million  revolving  line of credit to  collateralize  its
bonding  program.   Contractual  obligations  at  September  30,  1998  required
approximately $8.0 million in outstanding letters of credit. The credit facility
carries  customary  restrictive  covenants  including but not limited to minimum
leverage  and cash flow  ratios,  limitations  on domestic  and foreign  capital
investments,  restrictions  on change in  control,  restrictions  on payments of
dividends,  maintenance  of  minimum  consolidated  net  worth,  limitations  on
additional debt, liens and asset  dispositions.  Upon closing,  in October,  the
Company  advanced on the two $25.0 million term loans. The proceeds were used to
pay off existing debt of  approximately  $27.9  million and provide  capital for
existing  commitments to manufacture and implement the on-line lottery system in
Pennsylvania and continue the development of the Company's gaming machine casino
at the racetrack in Sunland Park, New Mexico.

     The combined maturity of the term loans is as follows:       (000's)

         Year 1                                                    $2,750
         Year 2                                                     2,750
         Year 3                                                     4,000
         Year 4                                                     4,000
         Year 5                                                    12,750
         Year 6                                                    23,750
                                                                   ------
                                                                  $50,000
                                                                  =======

                                     - 10 -

<PAGE>


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


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  (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.  In August 1998, the Company's
Board of  Directors  authorized  the  repurchase  of up to $10.0  million of the
Company's  outstanding Common Stock. In August 1998, the Company entered into an
agreement to repurchase 285,000 shares of the Company's Common Stock that closed
in October 1998 for approximately $2.3 million.

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 Year 2000 issue is pervasive and complex.  Virtually every  information
technology  ("IT") system,  including the Company's  internal  systems,  systems
delivered to customers,  and suppliers'  systems, as well as non-IT systems will
be affected in some way by the  rollover  of the  two-digit  year value to "00".
Non-IT systems include  manufacturing systems and physical facilities including,
but not limited to,  security  systems and  utilities.  The result  could create
errors  in  information  or  system  failures.   Recognizing  this  uncertainty,
management  has and is  continuing  to  actively  analyze,  assess  and plan for
various Year 2000  issues.  Management  has  appointed a task force that reports
periodically  to the Company's CEO and Board of Directors,  and has also engaged
outside consultants to assist and advise management in this assessment process.

     The  Company's  Year 2000 team has  completed  an  inventory  of all of its
computer  systems and technology  that may be impacted by Year 2000 issues.  The
programming  and  testing  of mission  critical  systems  is  anticipated  to be
complete by the end of 1998 and contingency  plans are planned for completion by
April  1999.  The Company  plans to replace or upgrade  those  systems  that are
identified as non-Year 2000 ready during the remainder of 1998 and calendar 1999
at an incremental cost of approximately  $0.5 million.  Non-IT system issues are
more  difficult  to identify and  resolve.  The Company is actively  identifying
non-IT Year 2000 issues  concerning  its products and  services,  as well as its
physical  facility  locations.  As  non-IT  areas  are  identified,   management
formulates the necessary  actions to ensure  minimal  disruption to its business
processes.  Although management believes that its efforts will be successful and
the costs will be immaterial to its consolidated  financial position and results
of  operations,  it also  recognizes  that any  failure or delay  could  cause a
disruption in its business and may have a significant financial impact.

     The  Company has  evaluated  its  strategy  and legal  obligations  for any
communication to its customers. The Year 2000 readiness of its customers varies,
and the Company is  encouraging  its customers to evaluate and prepare their own
systems.  In many cases the Company is assisting  customers by providing  new or
modified systems to resolve Year 2000 issues.

     The Company is also assessing the Year 2000 readiness of its key suppliers.
The  Company's  direction  in this effort is to ensure the adequacy of resources
and supplies to minimize any potential business interruptions.  Management plans
to complete this part of its Year 2000 readiness plan in the first

                                     - 11 -

<PAGE>


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


or second quarter of calendar 1999. As part of the Company's  contingency plans,
management will, as considered necessary, begin to identify and communicate with
alternative  suppliers  to ensure  the  continuation  of its  critical  business
operations.

     The Company believes that because of modifications already made and current
plans for additional  modifications  of existing  computer  systems,  updates by
vendors  and  conversion  to new  software,  the Year 2000  issue  will not pose
significant operations problems for the Company.  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 September 30, 1998, the Company had collateral in
support  of  the  various  bonds  outstanding  consisting  of  $2.8  million  of
restricted  deposits  and  approximately  $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.

     In October  1998,  the Company  announced  that AWI and the  Department  of
Lottery of the State of Florida  have signed a nine-year  agreement  under which
AWI will  provide a new  on-line  lottery  system and  related  services  to the
Florida Lottery.  The Florida Lottery had originally awarded the contract to AWI
in  October  1996.  Subsequent  to the  announcement,  the losing  vendor  filed
unsuccessful protests, and an attempt to enjoin the contract was rejected by the
Florida district court, allowing the parties to negotiate and finalize the terms
of the  nine-year  agreement.  The protest is still being  pursued by the losing
vendor.

     The Company has entered into a contract  with the  Pennsylvania  Lottery to
replace the contract the Company  currently has with the  Pennsylvania  Lottery.
The current contract expires in December 1998.

     In October 1998,  the Company  announced  that AWI had been selected by the
State of Indiana to provide a new on-line  lottery  system and related  services
for the Hoosier Lottery.

     Total  capital  requirements  for the  Company  including  Sunland  Park is
estimated at approximately $90.0 to $100.0 million through the year 2000.

     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  appointed  board to oversee the gaming and
other regulatory matters. While the Company is filing 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.  The  Company  does  not  anticipate  that any  revenues  will be
generated from the approved  gaming until the first quarter of 1999. The Company
has  expended  approximately  $2.4  million  for  development  of the  racetrack
facility for casino gaming. The Company's investment in the racetrack operations
and casino development

                                     - 12 -


<PAGE>

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

is  approximately  $20.0 million and current plans call for  approximately  $6.0
million of additional capital  expenditures for the casino  development,  gaming
machines and related equipment.

     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.

                                     - 13 -

<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, 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 are derived
primarily from service contracts. These contracts are typically of at least five
years'  duration  with  various  extension  options  available  to  the  lottery
authority,  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 are  anticipated to be up for 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,
replace or expand existing 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 rendering  services
pursuant to  contracts  with over 120 horse and dog racing  facilities  in North
America  as well as  sales  and  lease  of  pari-mutuel  wagering  systems  both
domestically  and  internationally.  Service  revenues are generally  based on a
percentage of wagers placed on races.  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

                                     - 14 -

<PAGE>

                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

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.

     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  unusual  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.

Third Quarter 1998 Compared with Third Quarter 1997
---------------------------------------------------

     Consolidated  revenues decreased by $1.7 million, or 3.4%, to $47.8 million
from $49.5  million in the third  quarter 1997.  The  consolidated  gross profit
increased by $2.4 million,  or 14.2%, to $19.3 million from $16.9 million in the
third  quarter  1997.  Earnings  from  operations  were $2.4  million in 1998 as
compared to $1.8 million in 1997.  Earnings before  depreciation,  amortization,
interest and taxes were $7.3 million in the third  quarter 1998 and $6.9 million
in 1997.

                                 On-line Lottery

     Total revenues from the on-line lottery segment  increased by $2.8 million,
or 12.3% to $25.6 million from $22.8 million in the third quarter 1997. Revenues
from the Company's  domestic lottery  customers  increased as a result of higher
lottery  jackpots,  including the multi-state  game  Powerball(R),  in the third
quarter 1998,  while recorded  revenues from product sales and  installations of
on-line  lottery  systems to customers in Norway and Chile declined in the third
quarter 1998 compared to 1997.

     In the third quarter 1998,  revenues from lottery system  enhancements  and
product sales,  primarily to international  customers in Chile and Norway,  were
$0.2 million as compared to $2.0 million in 1997.

     In October  1998,  the Company  announced  that AWI and the  Department  of
Lottery of the State of Florida  have signed a nine-year  agreement  under which
AWI will  provide a new  on-line  lottery  system and  related  services  to the
Florida Lottery.  The Florida Lottery had originally awarded the contract to AWI
in  October  1996.  Subsequent  to the  announcement,  the losing  vendor  filed
unsuccessful protests, and an attempt to enjoin the contract was rejected by the
Florida district court, allowing the parties to negotiate and finalize the terms
of the  nine-year  agreement.  The protest is still being  pursued by the losing
vendor.

     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.

                                     - 15 -

<PAGE>

                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

     In October 1998,  the Company  announced  that AWI had been selected by the
State of Indiana to provide a new on-line  lottery  system and related  services
for the Hoosier Lottery.

     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. These
game changes and system  enhancements  which impact  total  amounts  wagered may
result in periodic fluctuations in revenues and gross margins to the Company.

     The gross profit margin for on-line  lottery  revenues was 43% in the third
quarter 1998 as compared to 30% in 1997.  The gross  profit  margin from on-line
lottery service  revenues was 45% in the third quarter 1998 and 27% in 1997. The
increase is partially attributable to the large Powerball(R) jackpot experienced
in the third quarter 1998,  which  contributed  to higher levels of wagering and
the  achievement  of operating cost  efficiencies.  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 U. S.
on-line lottery contract customers are members of the MUSL. The Company believes
that the Powerball(R)  game  modification  should result in periodically  higher
jackpots,  which can result 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  decreased by
$4.9  million,  or 24%, to $15.2 million from $20.1 million in the third quarter
of 1997. The decrease reflects the anticipated effect of the cancellation of the
anticipated  Ontario  video  lottery  program  in April of this  year and a $5.6
million sale in Quebec in 1997. Sales in the casino markets, however,  continued
to increase with over $5.5 million of gaming  machine sales in the quarter ended
September 30, 1998 compared to $3.9 million in 1997.

     Revenue was recognized on delivery of approximately  994 units in the third
quarter 1998 as compared to 1,989 units in 1997.

     Revenue from the Company's  route  operations was $4.3 million in the third
quarter of 1998 and $4.5 million in 1997. Revenue from leases of gaming machines
was $2.0 million in the third  quarter 1998 as compared to $3.0 million in 1997.
The  decrease  in revenue  from  leasing  arrangements  primarily  reflects  the
reduction  in gaming  machines  under lease in 1998  compared to 1997.  In March
1997, the lease  agreements  for  approximately  2,200 gaming  machines with the
Oregon Lottery expired and 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 game playability, reliability
and enhanced graphics. 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.

                                     - 16 -

<PAGE>

                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES



     In October 1998,  the Company  announced that VLC had signed a new contract
to  provide  gaming  machine  monitoring  software  to  the  Independent  Gaming
Corporation  Ltd. (IGC) of South  Australia.  VLC will upgrade the IGC's current
monitoring  system technology with VLC's Advanced Gaming System (AGS) which will
monitor, control and provide accounting for IGC's 11,000 gaming-machine network.
The software order and seven-year  maintenance  contract is expected to generate
in excess of $4 million in revenues for VLC.

     The gross profit margin on gaming machine and route operations  revenue was
39% in the third  quarters of 1998 and 1997.  The gross profit margin from route
operations  revenue was 28% in the third  quarter 1998 and 27% 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 40% for the segment.

                    Wagering Systems and Racetrack Operations

     Revenue  from  the  wagering  systems  and  racetrack   operation  segments
increased by $0.4 million to $7.0 million from $6.6 million in the third quarter
1997.  Revenue from wagering  systems service  contracts was $5.8 million in the
third quarter of 1998 and $5.2 million in 1997.  Racetrack operation revenue was
$1.3  million in the third  quarter of 1998 and $1.4  million in 1997.  Sales of
pari-mutuel  wagering  systems  equipment were $0.8 million in the third quarter
1998 as compared to $0.4 million in 1997.

     The gross profit margin from wagering  systems revenue was 39% in the third
quarters  1998 and 1997.  The racetrack  operations in Sunland Park,  New Mexico
resulted in no gross profit in the third quarter 1998 and $0.2 million 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  contingent  upon the
implementation  of casino gaming  machines 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 the first  quarter of 1999.  The Company  developed
architectural plans for casino gaming at the racetrack facility and has expended
approximately  $2.4 million on  construction.  The  Company's  investment in the
racetrack  operations is approximately  $20.0 million and current plans call for
approximately  $6.0  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

                                     - 17 -

<PAGE>

                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

(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  in either the
fourth quarter 1998 or first quarter 1999.

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

     Selling,  general and  administrative  ("SG&A") expenses  increased by $1.8
million,  or 23%, to $9.5 million in the third quarter 1998 from $7.7 million in
1997.  The increase  reflects the Company's  continued  increased  marketing and
business development efforts. The increase was primarily in the casino market of
the gaming machine  segment and on-line lottery sales  initiatives.  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 third  quarter 1998,  the Company  expended $2.5 million on research
and  development  activities  as compared to $2.3 million in 1997.  In the third
quarter  1997 the Company  capitalized  approximately  $0.2  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% of consolidated revenues
in the third quarters of 1998 and 1997.

Nine Months Ended September 30, 1998 and 1997
---------------------------------------------

     Consolidated  revenues increased by $1.9 million,  or 1%, to $146.5 million
from $144.6  million in the first nine months of 1997.  The overall gross profit
increased by $3.2  million,  or 6%, to $55.5  million from $52.3  million in the
nine months ended September 30, 1997.  Earnings before  interest,  depreciation,
and amortization and income taxes was $21.2 million in 1998 as compared to $22.1
million in 1997.

                                 On-line Lottery

     Total revenues from the on-line lottery segment  increased by $7.6 million,
or 11%, to $79.3  million from $71.7  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.

     The gross profit margin in the on-line lottery segment was 40% in the first
nine months of 1998 as  compared  to 33% in the first nine  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 34% on $8.5 million of revenue in the first nine months of
1998,  as compared to gross  profit  margin of 43% on $7.5 million of revenue in
1997.

                       Gaming Machine and Route Operations

     Revenue from the gaming machine and route operations  segment  decreased by
$5.2  million,  or 10%, to $46.4  million  from $51.6  million in the first nine
months of 1997.  The decrease  reflects  lower sales in the Quebec video lottery
market and the anticipated effect of the cancellation of the anticipated Ontario
video lottery program. The Company,  however,  experienced a notable increase in
casino game and system sales with $16.1 million in 1998 compared to $9.5 million
in 1997.  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.

                                     - 18 -

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                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


     Revenue was recognized on shipments of 3,152 units in the first nine months
of 1998 as compared  to 5,556  units in 1997.  In the first nine 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.

     Revenue from leasing and revenue sharing  arrangements  was $6.7 million in
the first nine  months of 1998 as compared  to $8.5  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 Oregon Lottery.  The remaining  terminals have been sold in the
ordinary course of business in other video lottery markets after refurbishment.

     The gross  profit  margin  from the gaming  machine  segment was 41% in the
first nine months of 1998 as compared to 44% 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.  To date,  the
Company has  experienced  lower gross profit  margins on sales in casino  gaming
markets.  Management  expects gross profit margins from gaming machine and route
operations  revenues to remain near the 40% level.  The gross profit margin from
route operations was 27% in the first nine months of 1998 and 28% in 1997.

                    Wagering Systems and Racetrack Operations

     Revenue from the wagering systems and racetrack operation segments combined
was $20.8  million in the first nine months of 1998 as compared to $21.3 million
in 1997.  Revenue from wagering  systems service  contracts was $14.0 million in
the first nine months of 1998 and $13.8 in 1997.  Revenue from sales of wagering
systems  equipment was $1.3 million in the first nine months of 1998 as compared
to $2.1 million in 1997. Revenue from the racetrack  operations in Sunland Park,
New Mexico was $5.5 million in the first nine months of 1998 as compared to $5.4
million in 1997.

     The gross profit margin from wagering  systems revenue was 36% in the first
nine months of 1998 and 37% in 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 selling,  general and administrative  gross
profit  margin  levels on service  revenue in the near future.  The gross profit
margin from equipment  sales of $1.3 million was 31% in the first nine months of
1998,  as  compared  to 49% on $2.1  million  of  sales  in  1997.  The  Company
experienced  a  negative   gross  profit  from  the   racetrack   operations  of
approximately  $0.5 million in the first nine months of 1998 and $0.1 million in
1997.

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

     Total SG&A expenses  were $26.8 million in the nine months ended  September
30, 1998 and $23.0  million in 1997.  The $3.8  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 the casino
market of the gaming machine segment and on-line lottery sales initiatives.  The
Company also suffered losses on foreign currency exchange rate changes over 1997
levels.  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 $7.5
million in the first nine months of 1998 as  compared  to $7.1  million in 1997.
The Company  capitalized  $0.8  million in the first nine months of 1997.  Total
research and development expenditures approximated 5.1% of consolidated revenues
in the first nine months of 1998 and 5.5% in 1997.

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                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


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

     Depreciation and amortization decreased by $2.3 million to $14.6 million in
the nine  months  ended  September  30,  1998 from $16.9  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.

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

     In  the  nine  months  ended  September  30,  1998  the  Company  generated
approximately $13.1 million of cash from operations as compared to $36.2 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  $1.4 million from December 31, 1997 to $38.5 million
at September 30, 1998.  Inventories increased by $7.8 million in the nine months
ended  September  30, 1998,  reflecting  an expansion  of the  Company's  gaming
machine  product  line  and  casino  market  penetration  efforts.  The  Company
considers  the  investment  in the  expanded  product  line  to be  recoverable;
however, no assurance can be given that customers and gaming patrons will prefer
the new products.

     Approximately  $16.7 million was invested in property,  plant and equipment
and  intangible  and other  assets in the first nine  months 1998 as compared to
$7.3  million in 1997.  Approximately  $6.5  million has been  expended  for the
initial  implementation  cost of the on-line  lottery system in  Pennsylvania in
1998. Additionally, the wagering systems segment has expended approximately $3.6
million to  manufacture  and install new tote equipment in 1998. The Company has
expended  approximately $2.4 million on the development of the casino at Sunland
Park in the first nine months of 1998.  The  Company  anticipates  expending  an
additional $6.0 million on the casino development before start-up anticipated in
the fourth quarter 1998 or first quarter 1999.

     In October  1998,  the Company  announced  that AWI and the  Department  of
Lottery of the State of Florida  have signed a nine-year  agreement  under which
AWI will  provide a new  on-line  lottery  system and  related  services  to the
Florida Lottery.  The Florida Lottery had originally awarded the contract to AWI
in  October  1996.  Subsequent  to the  announcement,  the losing  vendor  filed
unsuccessful protests, and an attempt to enjoin the contract was rejected by the
Florida district court, allowing the parties to negotiate and finalize the terms
of the  nine-year  agreement.  The protest is still being  pursued by the losing
vendor.

     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.

     In October 1998,  the Company  announced  that AWI had been selected by the
State of Indiana to provide a new on-line  lottery  system and related  services
for the Hoosier Lottery.

     Total  capital  requirements  for the  Company  including  Sunland  Park is
estimated at  approximately  $90.0 to $100.0 million  through the year 2000. The
Company  expects to fund these capital  requirements as well as the Sunland Park
casino  development  through a combination  of the new credit  facility and cash
flow from  operations;  however,  the  Company  cannot  provide  assurance  that
anticipated cash flows will be adequate.

                                     - 20 -

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                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

     In October 1998, the Company  completed  negotiations  for a $100.0 million
credit  facility with Lehman  Brothers,  Inc. The credit  facility  replaces the
credit facility with U. S. Bank and, among other things,  provides for two $25.0
million term loans maturing in five and six years, respectively, and a revolving
line of credit for $50.0 million  expiring  September 30, 2003. At the Company's
option, the credit facility bears interest at a Base Rate approximating prime or
LIBOR  (approximately  5.4%  at the  closing  date  in  October  1998)  plus  an
applicable  margin  percentage.  The margin  percentage above the LIBOR rate may
fluctuate  between  1.75%  and 2.75%  depending  on the  Company's  Consolidated
Leverage  Ratio  as  defined  in the  credit  facility  agreements  collectively
referred  to as the  ("Credit  Agreement").  The Company may utilize up to $15.0
million  of the $50.0  million  revolving  line of credit to  collateralize  its
bonding  program.   Contractual  obligations  at  September  30,  1998  required
approximately $8.0 million in outstanding letters of credit. The credit facility
carries  customary  restrictive  covenants  including but not limited to minimum
leverage  and cash flow  ratios,  limitations  on domestic  and foreign  capital
investments,  restrictions  on change in  control,  restrictions  on payments of
dividends,  maintenance  of  minimum  consolidated  net  worth,  limitations  on
additional debt, liens and asset  dispositions.  Upon closing,  in October,  the
Company  advanced on the two $25.0 million term loans. The proceeds were used to
pay off existing debt of  approximately  $27.9  million and provide  capital for
existing  commitments to manufacture and implement the on-line lottery system in
Pennsylvania and continue the development of the Company's gaming machine casino
at the racetrack in Sunland Park, New Mexico.

     The Company repaid  long-term debt of $3.8 million in the nine months ended
September 30, 1998 including the outstanding term loans with U. S. Bank .

     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  (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.  In August 1998, the Company's
Board of  Directors  authorized  the  repurchase  of up to $10.0  million of the
Company's  outstanding Common Stock. In October, the Company repurchased 285,000
shares for approximately $2.3 million.

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,
except for the following:

     In August  1998,  the U. S.  District  Court,  South  District  of New York
dismissed, without prejudice, the action filed against the Company and AWI by MR
International, Inc. and American Lottery Systems.

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

                                     - 21 -

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                 POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES


ITEM 5.   OTHER INFORMATION

     In September 1998, the Company announced the appointment of Christer Roman,
Senior Vice  President of Product and Business  Development,  and Alan  Rassaby,
Senior Vice President of Legal and Administration.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K


     a.   Listing of Exhibits

          10.1 Credit   Agreement  and  related   documents   among   Powerhouse
               Technologies, Inc., Lehman Brothers Inc., Lehman Commercial Paper
               Inc., and Canadian  Imperial Bank of Commerce dated as of October
               9, 1998

          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.

     On August  19,  1998,  the  Company  filed a current  report on Form 8-K to
report announcement of agreement for a $100 million credit facility arranged and
syndicated by Lehman Brothers, Inc.

     On August  31,  1998,  the  Company  filed a current  report on Form 8-K to
report that pursuant to a letter agreement with U. S. Bank National Association,
formerly known as First Bank National Association, the Company's existing credit
facility had been extended through October 31, 1998.

                                     - 22 -

<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.

                          POWERHOUSE TECHNOLOGIES, INC.



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

                                     - 23 -