POWERHOUSE TECHNOLOGIES INC /DE, 424B4, 1998-02-10

POWERHOUSE TECHNOLOGIES INC /DE
424B4, 1998-02-10
CALCULATING & ACCOUNTING MACHINES (NO ELECTRONIC COMPUTERS)

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<PAGE> 1

Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-41417

PROSPECTUS
1,468,026 SHARES

[POWERHOUSE LOGO]
COMMON STOCK
---------------------

This Prospectus relates to 1,468,026 shares of the Common Stock, $.01 par
value per share ("Common Stock"), of Powerhouse Technologies, Inc. (the
"Company") (such shares of Common Stock and being hereinafter referred to as the
"Shares") being offered (the "Offering") on behalf of certain stockholders of
the Company (the "Selling Stockholders").

The Common Stock is quoted on the Nasdaq National Market System ("Nasdaq
NMS") under the symbol "PWRH". On February 9, 1998, the closing price of the
Common Stock on the Nasdaq NMS was $12.
---------------------

SEE "RISK FACTORS" COMMENCING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
---------------------

NEITHER THE NEVADA STATE GAMING CONTROL BOARD NOR THE NEVADA GAMING COMMISSION,
NOR THE MISSISSIPPI GAMING COMMISSION, NOR ANY OTHER GAMING AUTHORITY HAS PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE INVESTMENT MERITS OF THE
SECURITIES OFFERED HEREBY. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
=====================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............. $11.75 $0.705 $0.00 $11.045
- ------------------------------------------------------------------------------------------------------------------
Total(3).............. $17,249,306 $1,034,958 $0 $16,214,347
==================================================================================================================
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the
underwriters named herein (the "Underwriters") against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Plan of Distribution." The Selling Stockholders have also agreed to
reimburse the Underwriters for their fees and expenses in connection with
this Offering up to $150,000.
(2) Before deducting expenses (other than expenses of the Underwriters and
counsel and other advisors to the Selling Stockholders) payable by the
Company estimated to be $175,000. None of the proceeds from the sale of the
Shares will be received by the Company (assuming the Underwriters'
over-allotment option is not exercised). See "Selling Stockholders" and
"Plan of Distribution".
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 220,204 shares of the Common Stock solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $19,836,703,
$1,190,202 and $2,432,153, respectively. See "Plan of Distribution".
---------------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters,
and subject to approval of certain legal matters by counsel and subject to the
right of the Underwriters to reject any order in whole or in part and certain
other conditions. It is expected that delivery of certificates for the shares of
Common Stock subject to the Offering will be made on or about February 13, 1998
through the facilities of The Depository Trust Company or at the offices of Bear
Stearns Securities Corp., 1 Metrotech Center No., Brooklyn, New York 11201, as
agent for the Underwriters.
---------------------
GERARD KLAUER MATTISON & CO., INC.
LADENBURG THALMANN & CO. INC.

THE DATE OF THIS PROSPECTUS IS FEBRUARY 10, 1998
<PAGE> 2

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET SYSTEM OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET SYSTEM IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. SEE "PLAN OF DISTRIBUTION".
<PAGE> 3

AVAILABLE INFORMATION

The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the United States Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company may be
inspected at the public reference facilities of the Commission located at
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, at the New York
Regional Office of the Commission, Seven World Trade Center, Suite 1300, New
York, New York 10048, and at the Chicago Regional Office of the Commission, 500
West Madison Street, Suite 1400, Chicago, Illinois 60621. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.

The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act, with respect to the
registration of the Shares. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. Statements contained in this Prospectus or in any
document incorporated by reference herein as to the contents of any contract or
other documents referred to herein or therein are not necessarily complete and,
in each instance, reference is made to the copy of such documents filed as an
exhibit to the Registration Statement or such other documents, which may be
obtained from the Commission as indicated above upon payment of the fees
prescribed by the Commission. Each such statement is qualified in its entirety
by such reference.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. Copies of such reports, proxy statements and other
information filed by the Company, other than exhibits to such documents unless
such exhibits are specifically incorporated herein by reference, are available
without charge upon written or oral request from the Chief Financial Officer of
the Company, 2311 South Seventh Avenue, Bozeman, Montana 59715, Telephone (406)
585-6600.

The following documents filed by the Company with the Commission under the
Exchange Act are incorporated herein by reference:

(a) The Company's Annual Report on Form 10-K for the year ended
December 31, 1996, as amended by the Company's Form 10-K/A for the year
ended December 31, 1996, filed with the Commission on February 9, 1998;

(b) The Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997, June 30, 1997 and September 30, 1997, as amended by
the Company's Forms 10-Q/A for the quarters ended March 31, 1997, June 30,
1997 and September 30, 1997, respectively, each filed with the Commission
on February 9, 1998;

(d) The Company's Current Report on Form 8-K, filed with the
Commission on February 7, 1997;

(e) The Company's Current Report on Form 8-K, filed with the
Commission on August 6, 1997;

(f) The Company's Current Report on Form 8-K, filed with the
Commission on December 31, 1997;

(g) The Company's Proxy Statement dated December 31, 1996 related to
the Annual Meeting of Stockholders held on January 10, 1997;

(ii)
<PAGE> 4

(h) The Company's Proxy Statement dated October 15, 1997 related to
the Annual Meeting of Stockholders held on November 14, 1997; and

(i) The description of the Common Stock contained in the Registration
Statement on Form 8-A filed with the Commission on June 3, 1991 under
Section 12(g) of the Exchange Act.

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date hereof shall be deemed to be
incorporated by reference in this Prospectus and to be a part of this Prospectus
from the date of filing thereof. Any statement contained in a document
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statements so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.

Except for the historical information contained herein, the matters
discussed in this Prospectus under "Risk Factors," in addition to certain
statements contained elsewhere in this Prospectus or in the Company's filings
under the Exchange Act, are "Forward-Looking Statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 and are thus prospective.
Such forward-looking statements are subject to risks, uncertainties and other
factors which could cause actual future results or trends to differ materially
from future results or trends expressed or implied by such forward-looking
statements. The most significant of such risks, uncertainties and other factors
are discussed in this Prospectus under "Risk Factors" and prospective investors
are urged to carefully consider such factors. Updated information will be
periodically provided by the Company as required by the Securities Act and the
Exchange Act. The Company, however, undertakes no obligation to publicly release
the results of any revisions to such forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.

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

(iii)
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and in the documents
incorporated in this Prospectus by reference. Prospective investors should
carefully review the matters set forth under "Risk Factors" before making a
decision with respect to an investment in the Shares. Unless otherwise indicated
herein, all information in this Prospectus assumes the Underwriters'
over-allotment option will not be exercised and that no outstanding options or
warrants will be exercised. All references in this Prospectus Summary to the
term "EBITDA" (as defined) in reference to a business segment exclude any
allocation of corporate overhead.

THE COMPANY

Powerhouse Technologies, Inc. (formerly known as Video Lottery
Technologies, Inc.) (collectively, with its subsidiaries, the "Company") is a
diversified gaming company offering a broad selection of products and services
to a variety of customers, including domestic and international lottery
agencies, casino gaming companies, racetracks and route operators. The Company
is the leading worldwide developer and supplier of video lottery gaming machines
and system software and one of the leading developers and suppliers of
equipment, software systems and related services for on-line lotteries and
pari-mutuel systems. In addition, the Company owns and operates Sunland Park
racetrack in New Mexico and intends to open a casino at such facility with 300
gaming machines in the third or fourth quarter of 1998. For the fiscal year
ended December 31, 1996, the Company's total revenue and EBITDA (excluding
special and other charges of $34.1 million) were $176.7 million and $27.7
million, respectively, and for the nine month period ended September 30, 1997,
the Company's total revenue and EBITDA were $144.6 million and $22.2 million,
respectively.

The Company's subsidiary, Automated Wagering International, Inc. ("AWI"),
is the second largest supplier of on-line lottery services and equipment in the
United States. AWI designs, manufactures, assembles, installs, operates and
maintains on-line, computer-based networks for seven state lotteries in the
United States. AWI created the world's first on-line lottery system in 1971.
Over the past two and one-half years, AWI's technology has consistently received
the highest rating in procurements in which AWI competed to install and operate
on-line lottery systems. AWI attributes its recent success to its MasterLink(R)
on-line lottery system, which it believes is the most technologically advanced
system currently available, and to its ability to install systems quickly and
provide products and services which enable its customers to increase revenue and
lower operating costs. For the fiscal year ended December 31, 1996, AWI's total
revenue and EBITDA (excluding special and other charges of $31.0 million) were
$88.8 million and $15.8 million, respectively, and for the nine month period
ended September 30, 1997, AWI's total revenue and EBITDA were $71.7 million and
$12.7 million, respectively.

Through its Video Lottery Consultants division ("VLC"), the Company is the
leading supplier of video lottery gaming machines and central computer systems
with a worldwide market share of approximately 40% for video lottery gaming
machines in the markets in which it participates and approximately 57% for
central control systems. Video lottery gaming machines enhance revenue for
states and other jurisdictions by providing low stakes entertainment gaming. The
machines offer video versions of games such as poker, blackjack, bingo, keno,
and spinning reel games, and are generally located in age-controlled
establishments such as bars, taverns, racetracks and restaurants. Gaming
machines in a given jurisdiction are typically linked to a computer network or
central control system that provides security, accounting, integrity and other
administrative functions. Currently, seven states in the United States, five
states in Australia, eight Canadian provinces, Iceland, Norway, Sweden and South
Africa have authorized video lottery gaming either on a jurisdiction-wide basis
or in certain locations.

VLC attributes its success in the video lottery market to its superior
technology, game design and customer service. The Company's Winning Touch(R)
machine was the first gaming machine designed to be played solely by touching
the video monitor. Since the introduction of Winning Touch(R) in 1988, VLC has
placed over 55,000 Winning Touch(R) machines in video lottery venues worldwide.
In 1997, the Company introduced its Winning Touch(R) Power Series(TM) gaming
machine which offers superior graphics, sound and
1
<PAGE> 6

animation compared to traditional gaming machines. The Company believes that its
Power Series(TM) gaming machines will allow VLC to increase its penetration of
the casino markets. To date, the Company has installed over 2,250 Winning
Touch(R) gaming machines in over 200 casino properties worldwide. In addition,
VLC's Advanced Gaming System, which VLC is marketing to new and existing
customers, is the only central control system currently communicating with both
gaming machines and mechanical slot machines. This system is also able to
communicate with more machines manufactured by other suppliers than any other
control system and will include advanced functionality that will permit
progressive games and player tracking. For the fiscal year ended December 31,
1996, VLC's total revenue and EBITDA were $60.2 million and $14.4 million,
respectively, and for the nine month period ended September 30, 1997, VLC's
total revenue and EBITDA were $51.6 million and $11.8 million, respectively.

The Company, through its subsidiary United Wagering Systems, Inc. ("UWS" or
"United Tote"), is a leading provider of wagering systems, terminals and service
to over 120 of approximately 350 pari-mutuel facilities in North America.
Pari-mutuel systems control the acceptance of wagers, calculate odds and payout,
cash winning tickets and perform assorted management, accounting and reporting
functions. Each system consists of central processing computers and peripherals,
betting terminals, proprietary software, tote boards and other displays.
Excluding Sunland Park, for the fiscal year ended December 31, 1996, UWS's total
revenue and EBITDA (excluding special and other charges of $3.1 million) were
$20.5 million and $5.1 million, respectively, and for the nine month period
ended September 30, 1997, UWS's total revenue and EBITDA were $15.9 million and
$4.1 million, respectively.

UWS also owns and operates Sunland Park, a thoroughbred and quarter-horse
racetrack located in Sunland Park, New Mexico, adjacent to El Paso, Texas. The
racetrack typically hosts live racing from December through May of each year and
participates in an inter-track wagering network with other racetracks for the
entire year. The State of New Mexico recently enacted legislation permitting the
operation of up to 300 gaming machines at each pari-mutuel racetrack facility
within the state for up to twelve hours per day. The implementation of racetrack
gaming is, however, subject to formation of a gaming commission and other
regulatory conditions, including the grant of necessary licenses. Consequently,
the Company anticipates that its casino at Sunland Park will become operational
in the third or fourth quarter of 1998. Two million residents live within a
100-mile radius of Sunland Park, which area includes the cities of El Paso,
Texas and Juarez, Mexico. For the fiscal year ended December 31, 1996, Sunland
Park's total revenue and EBITDA were $7.2 million and $(0.9) million,
respectively, and for the nine month period ended September 30, 1997, Sunland
Park's total revenue and EBITDA were $5.4 million and $(0.5) million,
respectively.

The Company is focusing on the following key strategies in order to pursue
its growth objectives:

- Expand Leading Position in Worldwide Video Lottery Gaming Market: The
Company believes that new markets such as Ontario and South Africa,
and the replacement of older gaming machines and systems in markets
such as Australia and North America, will provide significant future
growth opportunities for VLC. For the fiscal year ended December 31,
1996 and the nine months ended September 30, 1997, VLC's total revenue
from international operations was $20.7 million and $11.7 million,
respectively. The Company believes its state-of-the-art technology,
the historically high net revenue performance of its gaming machines
and its solid reputation among its customers give the Company a
competitive advantage in the video lottery gaming market in the
foreseeable future.

- Develop Casino Opportunities at Racetracks: The Company believes that
a growing market exists for video lottery gaming at racetracks, which
have suffered from declining attendance in recent years due to the
proliferation of casino gaming outside of Las Vegas and Atlantic City.
To permit the racing industry to become more competitive, some states
have enacted legislation that allows video gaming devices at
racetracks, a trend that the Company believes will continue. The
Company intends to participate in this growth by supplying its gaming
machines and systems, partnering with or purchasing racetracks and
owning and operating its own facility, Sunland Park. The Company is
the only full service supplier of state-of-the-art gaming and
pari-mutuel systems

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<PAGE> 7

and services to racetracks in North America and believes it has a
competitive advantage due to its existing United Tote customer
relationships in the pari-mutuel industry.

- Penetrate Casino Markets: The Company intends to leverage the
popularity of its Winning Touch(R) gaming machines to increase its
market penetration in traditional casino venues. With licenses in
virtually all major gaming jurisdictions, VLC is actively marketing its
gaming machines in casino markets worldwide as a high performance
product for replacing older machines. The Company believes that VLC's
new Power Series(TM) gaming machine is capable of producing greater
than average coin-in per day and net win per day than traditional
gaming machines due to its superior graphics, state-of-the-art sound
and playability.

- Selectively Bid on Domestic On-line Contracts and Aggressively Pursue
International On-line Opportunities: On-line lottery contracts for
twelve state lotteries will be up for procurement over the next three
years. Due to the high cost of procuring new contracts, AWI intends to
target those states which it believes will establish a bidding process
based exclusively on technical capability, price and service. This
strategy allows AWI to efficiently allocate its resources so that it
may also pursue international growth opportunities. AWI is currently
targeting approximately 14 jurisdictions worldwide that are expected to
implement on-line lottery programs within the next two years. In 1997,
AWI successfully implemented its MasterLink(R) on-line system for
Chile's Loteria de Concepcion, Canada's Atlantic Lottery Corporation
("ALC") and Norway's Norsk Tipping AS. For the fiscal year ended
December 31, 1996 and the nine months ended September 30, 1997, AWI's
total revenue from international operations was $3.1 million and $7.5
million, respectively.

- Emphasize Customer Service and Optimize Profitability of On-line and
Pari-mutuel Contracts: AWI's sophisticated MasterLink(R) central system
affords the Company the ability to develop add-on products and
services. Given the maturity of the on-line lottery industry, states
are in need of ways to increase lottery ticket sales and reduce costs.
AWI expects to develop new products and services every year for its
existing customers. New products may include additional games, lower
cost terminals or player tracking systems. In addition, AWI continues
to focus on reducing service costs. United Tote has successfully
upgraded its operations and improved customer service. United Tote has
demonstrated that its systems can process the large handles typically
found at the larger racetracks such as Churchill Downs. United Tote
believes that its emphasis on customer service and ability to design,
manufacture and operate pari-mutuel systems that are capable of
processing larger handle volumes will enable it to improve its
profitability and increase its market share.

The Company's principal executive offices are located at 2311 South Seventh
Avenue, Bozeman, Montana, 59715, and its telephone number is (406) 585-6600. At
the most recent annual meeting of stockholders on November 14, 1997, the
Company's stockholders approved all of the matters submitted for a vote of the
stockholders, including a change of the Company's name to Powerhouse
Technologies, Inc. The Company implemented this name change in January, 1998, at
which time its trading symbol was changed to "PWRH".

THE OFFERING

<TABLE>
<S> <C>
Shares to be Sold by the Selling Stockholders............... 1,468,026
Common Stock to be outstanding after this Offering(1)(2).... 10,345,428
NASD Symbol................................................. "PWRH"
</TABLE>

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

(1) As of February 9, 1998.
(2) Excludes 1,002,683 shares of Common Stock issuable upon exercise of stock
options outstanding at December 31, 1997, of which 665,679 were exercisable
at January 31, 1998.

3
<PAGE> 8

SUMMARY FINANCIAL DATA

The following summary consolidated financial and operating data of the
Company is qualified in its entirety by the more detailed information in the
Company's Consolidated Financial Statements, including the related notes,
appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEARS ENDED DECEMBER 31, (UNAUDITED)
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA
Revenues:
On-line lottery.................... $ 51,552 $115,544 $101,559 $ 91,653 $ 88,843 $ 65,790 $ 71,671
Gaming machine and route
operations....................... 59,299 59,069 68,571 61,398 60,186 43,560 51,627
Wagering systems and racetrack
operations(1).................... -- -- 18,652 28,111 27,652 21,534 21,322
-------- -------- -------- -------- -------- -------- --------
Total revenues............ 110,851 174,613 188,782 181,162 176,681 130,884 144,620
Costs and Expenses:
On-line lottery.................... 32,757 67,985 62,397 59,438 59,333 42,596 48,244
Gaming machine and route
operations....................... 37,219 35,074 39,815 35,992 32,911 23,283 28,790
Wagering systems and racetrack
operations....................... -- -- 13,992 22,286 20,104 15,408 15,300
Selling, general and
administrative................... 15,873 30,362 34,000 31,139 28,697 21,618 22,983
Research and development........... 2,570 6,629 8,513 8,888 7,969 5,062 7,122
Other charges(2)................... -- -- 23,994 2,763 34,135 12,935 --
Depreciation and amortization...... 10,351 18,033 20,694 22,587 23,822 17,315 16,943
-------- -------- -------- -------- -------- -------- --------
Total costs and
expenses................ 98,770 158,083 203,405 183,093 206,971 138,217 139,382
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) from operations.... $ 12,081 $ 16,530 $(14,623) $ (1,931) $(30,290) $ (7,333) $ 5,238
Net earnings (loss) from continuing
operations....................... $ 8,349 $ 4,346 $(16,168) $ (2,918) $(24,231) $ (8,295) $ 1,374
Net earnings (loss)................ $ 8,349 $ 4,346 $(16,168) $ (8,400) $(14,735) $ 1,201 $ 14,643
Net Earnings (loss) per share from
continuing operations............ $ 0.74 $ 0.35 $ (1.54) $ (0.28) $ (2.27) $ (0.66) $ 0.13
Net earnings (loss) per share...... 0.74 0.35 (1.54) (0.79) (1.38) 0.10 1.41
Weighted average shares(3)......... 11,316 12,312 10,507 10,608 10,699 12,598 10,406
OTHER DATA
Adjusted EBITDA(4)................. $ 22,432 $ 34,563 $ 30,065 $ 23,419 $ 27,667 $ 22,917 $ 22,181
Cash provided (used) by:
Operations....................... 19,882 31,354 12,167 1,943 18,702 36,101 36,177
Investing Activities............. (48,198) (28,666) (15,097) (22,020) (34,750) (31,616) (6,688)
Financing Activities............. 42,963 (10,540) (1,931) 18,199 18,378 (5,693) (15,763)
BALANCE SHEET DATA
Working capital.................... $ 25,111 $ 51,458 $ 23,344 $ 19,987 $ 28,084 $ (5,364) $ 29,704
Total assets....................... 150,029 139,513 174,032 165,851 168,043 185,550 162,648
Total long-term debt(5)
(excluding current
installments).................... 3,006 855 9,060 12,885 9,312 12,315 32,028
Stockholders' equity............... $103,435 $108,215 $ 94,112 $ 86,448 $ 72,231 $ 87,766 $ 78,107
</TABLE>

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<PAGE> 9

impairments related to five contracts. In 1994, the Company recorded
approximately $24.0 million of special and other unusual charges consisting
of $6.7 million related to inventory and international contract investments
and $17.3 million for impairment of the goodwill attributable to the
acquisition of UWS.
(3) Common stock equivalents are excluded if antidilutive.
(4) Adjusted EBITDA consists of income from operations plus depreciation and
amortization plus the special or other charges described in Footnote 2.
Adjusted EBITDA should not be construed as an alternative to net income or
any other measure of the Company's performance under generally accepted
accounting principles or to cash flows generated by operating, investing and
financing activities as an indicator of the Company's cash flows or a
measure of its liquidity. Management believes that Adjusted EBITDA is a
useful adjunct to net income and other measurements under generally accepted
accounting principles and is a conventionally used financial indicator.
(5) On January 30, 1997, the Company and Electronic Data Systems Corporation
("EDS") reached an agreement to settle certain outstanding claims against
each other. The agreement, among other things, provided for the
extinguishment of outstanding fees of approximately $38.0 million in
exchange for a note payable of approximately $26.1 million which amortizes
between 1999 and 2004 and the return to the Company of approximately 2.5
million of the Company's preferred and common shares. The settlement
resulted in an extraordinary gain of $13.3 million. See Footnote 16 to the
Consolidated Financial Statements for the fiscal year ended December 31,
1996.

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<PAGE> 10

RISK FACTORS

An investment in the Shares involves various risks. Prospective investors
are urged to carefully consider each of the following risks, in conjunction with
the other information contained in this Prospectus, before purchasing the Shares
in the Offering.

RISKS OF NEW AND EXPANDING BUSINESSES

The Company is actively seeking to expand its video and on-line lottery and
gaming operations into jurisdictions that have legalized or are expected to
legalize gaming in the future. There can be no assurance, however, that the
Company will be able to identify or capitalize on any opportunities in suitable
markets. The Company's ability to expand will be dependent upon a number of
factors, many of which are beyond the Company's control, including negotiating
acceptable terms, securing required state, foreign, and local licenses, permits,
and approvals, securing adequate financing on acceptable terms, voter and other
political approvals, demographic trends, and consumers' gaming preferences. As a
result, there can be no assurance that the Company will be able to develop new
markets for its products. See "Business -- Contracts." In addition, the Company
may incur costs in connection with pursuing new video and on-line lottery and
gaming opportunities that it cannot recover and may be required to expense
certain of these costs, which may negatively affect the Company's reported
operating performance for the periods during which such costs are expensed.

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 at
Sunland Park, New Mexico. Under this recently enacted legislation, the Company
will be permitted to operate up to 300 gaming machines at its Sunland Park
racetrack for up to twelve hours per day. The Company does not anticipate that
casino gaming at Sunland Park will be operational until the third or fourth
quarter of 1998. The implementation of racetrack gaming is, however, subject to
formation of a gaming commission, equipment procurements and other regulatory
conditions, including the grant of necessary licenses. At December 31, 1996 and
September 30, 1997, the Company's investment in the racetrack was approximately
$20.0 million, and the Company anticipates expending an additional $8.0 million
for facility enhancements, gaming machines and related equipment in the future.
The recovery of a significant amount of the Company's investment in the
racetrack operations in New Mexico is largely contingent upon the implementation
of gaming legislation in that state. There can be no assurance that the Company
will be able to satisfy the regulatory conditions or be granted the necessary
licenses or that the necessary implementation can be completed on schedule.
Further, casino gaming at racetracks is a new business for the Company, and the
Company has never before owned or operated a casino. No assurance, therefore,
can be given that the Company's gaming operations at Sunland Park will be
profitable to the Company.

COMPETITION

On-line Lottery. The on-line lottery market in the United States is mature
and highly competitive. AWI's principal competitor in the on-line lottery
business, GTECH, is significantly larger, having supplied lottery systems to 29
of the 38 United States on-line lottery jurisdictions. Management believes that
GTECH's resources significantly exceed those of the Company's. Expansion of the
business of the Company's AWI subsidiary in the United States will largely
depend on its ability to (i) obtain new contracts in jurisdictions where a
competitor currently operates the lottery, (ii) obtain contracts from states, if
any, that commence lottery operations in the future, and (iii) retain the
lottery contracts that are currently effective. On-line lottery contracts are
awarded through competitive bidding, both at commencement of lottery operations
and on expiration of existing contracts. AWI has in the past lost certain
contracts when submitted for rebid or been unsuccessful in obtaining certain
contracts previously held by competitors. AWI currently supplies on-line lottery
services to seven states and provides services to Norsk Tipping AS in Norway,
ALC in Canada and Sonda, S.A. in Chile.

Established on-line lotteries recently have also experienced a decline in
growth rates or, in some cases, a leveling or decrease of annual ticket sales
due, among other reasons, to the maturation of existing lottery games and
general economic conditions, as well as to the growth of land-based, river boat
and Native

6
<PAGE> 11

American-owned casinos, which compete indirectly with on-line lotteries. The
level of on-line lottery ticket sales may also be affected by the growth of
instant-ticket lottery games, which also compete with on-line lotteries. Since
the Company derives substantial revenues from domestic sales of lottery tickets,
the loss or nonrenewal of lottery contracts or decreased revenues from such
contracts due to decreased lottery ticket sales could have a material adverse
effect on the Company's business and financial condition.

Gaming Machine and Route Operations. The market for gaming machines,
related software and central control systems is extremely competitive, and there
are a number of established, well-financed and well-known companies producing
machines that compete with each of the product lines of the Company's VLC
subsidiary. Management believes that some of these competitors have greater
capital resources than the Company. In addition, other companies may enter the
video gaming market. Competition among gaming product manufacturers,
particularly with respect to sales of video gaming into new and emerging
markets, is based on competitive customer pricing and financing terms, appeal to
the player, quality of the product and having an extensive distribution and
sales network.

Wagering Systems and Racetrack Operations. Pari-mutuel wagering and
simulcasting in North America is also a highly competitive industry. The
Company's principal competitors in this segment are Autotote Corporation
("Autotote"), AmTote International, Inc. ("AmTote") and, at some facilities, a
limited number of other smaller, local and regional companies. Competition
outside of North America is more fragmented, with competition being provided by
several international and regional companies. No single company maintains a
dominant market position internationally, although certain companies possess
regional strengths. There can be no assurance that the Company will maintain or
improve its position in light of such competition.

The Company's Sunland Park racetrack competes in local and regional markets
with horse tracks, off-track betting, state-run lotteries, casinos and other
gaming facilities. Management believes that some of these competitors have
resources that exceed those of the Company. There can be no assurance that the
Company will maintain or improve its competitive position in the pari-mutuel
wagering industry in light of such competition.

In addition, once the Company implements its gaming operations at Sunland
Park, the Company's gaming operations will face competition from other casino
gaming venues in New Mexico, neighboring states and the rest of the United
States. Venues in Nevada, Mississippi and New Jersey, among others, currently
offer video gaming and mechanical slot machines. The failure to attract or
retain casino gaming customers at the Sunland Park racetrack, whether arising
from such competition or from other factors, could have a material adverse
effect upon the Company's business, financial condition and results of
operations.

GOVERNMENT REGULATION

Most of the jurisdictions in which the Company and its subsidiaries conduct
business or intend to conduct business in the future require various licenses,
permits, findings of suitability or other approvals (collectively, "Government
Approvals") in connection with the manufacture and/or distribution of gaming
devices or provision of goods or services to the on-line lottery and racing
industries. Some jurisdictions allow the Company to operate under a temporary
Government Approval or on a transactional basis during the pendency of a
comprehensive background investigation. While the Company has received a
Government Approval in all of the jurisdictions in which the Company's
applications have been acted upon (including Victoria, Australia and Quebec,
Canada, in which the Company's applications were initially denied and then
subsequently granted), there can be no assurance that required Government
Approvals will be given or renewed in the future. The failure of the Company to
obtain or maintain a Government Approval may have a material adverse effect on
the Company and any such failure in one jurisdiction may result in failures in
other jurisdictions, including those in which the Company has already received
Government Approval. Although the Company does not believe there is any basis
for a failure to obtain or maintain Government Approval, there can be no
assurance that all material Government Approvals will be obtained or maintained.
A significant percentage of the Company's consolidated revenues is derived from
sales to customers in jurisdictions that have enacted legislation permitting
various types of gaming.

7
<PAGE> 12

On-line Lottery. Each of the Company's on-line lottery contracts is a
product of state legislative initiative to create a lottery. Currently, 38
states have enacted legislation expressly providing for the creation of a state
lottery, including the seven states in which the Company currently operates.
This legislation generally authorizes the creation of the lottery as well as a
separate fund into which proceeds from the sale of lottery tickets are to be
deposited. The lottery fund is then used to disburse proceeds in connection with
winning tickets, to subsidize or fund certain special interests of the state
(such as educational or youth programs) and to pay costs incurred in operating
the lottery. While the continued funding of the expenses in running each lottery
(including payments due under each of the lottery contracts) is not based upon
funding from the respective state treasuries but rather upon lottery ticket
sales, the existence of the lottery is subject to continued legislative
authorization.

Gaming Machine and Route Operations. The manufacture, distribution and
operation of gaming machines, related software and central control systems are
subject to extensive federal, provincial, state and local regulation, including
licensing requirements. The Company and its key personnel are required to hold
various licenses from each jurisdiction in which the Company does business. In
addition, each of the Company's proprietary games must be approved in each
jurisdiction in which it is placed. Obtaining required licenses and approvals
can be time consuming and costly and there can be no assurance that any game
will be successfully approved in any jurisdiction. The failure of the Company or
any of its key personnel to obtain or retain a license in any jurisdiction could
have a material adverse effect on the Company or on the ability of the Company
and its key personnel to obtain or retain required licenses in other
jurisdictions. The Company cannot predict the nature of the regulatory scheme in
any jurisdiction that may authorize video gaming operations in the future. Any
such regulatory scheme may be burdensome to the Company, its key personnel and
its stockholders, including, possibly, requirements that the Company cannot
satisfy or limitations on the percentage of the Common Stock that a person may
hold without having to be approved by regulatory authorities.

United Wagering Systems, Inc. The Company's pari-mutuel wagering segment
is also subject to extensive state regulatory and licensing requirements similar
to the Company's on-line lottery and video gaming machine subsidiaries.

Racetrack Operations. The Company's Sunland Park operations are also
subject to extensive state and local regulation and taxation in New Mexico, and
any future wagering or racetrack activities in other jurisdictions may be
similarly regulated and taxed. State and local authorities require various
licenses, permits, and approvals to be held by the Company, and these
authorities may, among other things, revoke the license of any entity licensed
as a gaming corporation, the registration of any entity registered as a holding
company of a gaming corporation, or the license of any individual licensed as an
officer, director, control person, employee or stockholder of a licensed or
registered entity. Gaming licenses and related approvals are deemed to be
privileges under New Mexico law and the laws of other jurisdictions, and no
assurances can be given that existing licenses will not be revoked. Regulatory
changes or increases in applicable taxes or fees in New Mexico or the laws of
other jurisdictions in which the Company may operate could have a material
adverse effect on the Company. In addition, there can be no assurance that
regulations adopted or taxes imposed by New Mexico or other jurisdictions will
not have a material adverse effect on the Company.

A more complete description of the regulatory environment within which the
Company operates is set forth in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.

PRODUCT DEVELOPMENT

The future success of the Company depends to a large extent upon its
ability to design, manufacture and market technologically sophisticated products
that achieve high levels of player acceptance. The Company's business is
characterized by rapidly changing technology and frequent new product
introductions and enhancements. The development of a successful new product or
product design by a competitor could adversely affect sales of the Company's
products and force it to respond quickly with its own competing products. There
can be no assurance that the Company will be successful in identifying,
developing and marketing new products or enhancing its existing products. The
Company's business will be adversely affected

8
<PAGE> 13

if the Company experiences delays in developing new products or enhancements or
if such products or enhancements do not meet and receive all regulatory
approvals and/or gain customer acceptance.

OPERATING HISTORY

The Company incurred net losses for each of its fiscal years ended December
31, 1994, 1995 and 1996, respectively. For the first nine months of fiscal year
1997, the Company reported net earnings. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Historically, the
Company has met its cash flow requirements primarily with cash provided by
operations, public offerings of equity securities and borrowings from financial
institutions. There can be no assurance that the Company will be profitable in
the future.

NEED FOR ADDITIONAL FINANCING

Whether the Company can execute its business strategy depends to a
significant degree on its ability to finance the development, marketing and
production of its products. There can be no assurance that funds will be
available to implement the Company's business strategy on terms acceptable to
the Company.

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

The Company's quarterly operating results have fluctuated in the past, and
may fluctuate significantly in the future, due to a number of factors,
including, among others, the implementation, expiration and size of on-line
lottery contracts and gaming machine orders, the timing and market acceptance of
new products introduced by the Company, changes in the level of operating
expenses, technological advances and new product introductions by the Company's
competitors, competitive conditions in the industry, regulatory approval, the
seasonality of the on-line lottery, wagering systems and racetrack operations
and general economic conditions. Product development and marketing costs are
often incurred in periods before any revenues are recognized from the sales of
products, and gross margins are lower and operating expenses are higher during
periods in which such product development expenses are incurred and marketing
efforts are commenced. Also, the amount of revenues received by the Company
under its on-line lottery contracts is affected by a variety of factors,
including the size of the jackpots, weather and other factors unrelated to the
Company's performance under such lottery contracts. At its current stage of
operations, the Company's quarterly revenues and results of operations may be
materially affected by the receipt or loss of any one on-line lottery contract
or gaming machine order and by the timing of the delivery, installation and
regulatory approval of any lottery or gaming system. The Company believes that
period to period financial results may not be comparable and should not be
relied upon as indications of future performance. Also, fluctuations in
operating results may result in volatility in the price of the Company's Common
Stock.

DEPENDENCE ON KEY CUSTOMERS

Historically, the Company has generated a significant amount of gaming
machine and route operation revenues from customers in certain jurisdictions
with video lottery programs. Revenue from gaming machine sales is subject to
potentially significant fluctuations due to the timing of orders from new
jurisdictions, timing of replacement orders or expansion or contraction of
gaming in jurisdictions in which the Company operates. A significant amount of
the Company's on-line lottery revenues are derived from contracts ranging from
one to five years with varying options for extensions and renewals from seven
individual states. For the year ended December 31, 1996 revenues from customers
in three jurisdictions individually accounted for revenues in excess of 10% of
the Company's consolidated revenues, specifically: Florida Lottery ($30.2
million), Pennsylvania Lottery ($23.2 million) and various activities in Montana
($19.7 million). Loss of any significant current customers, or an inability to
further expand its customer base would adversely affect the Company.

9
<PAGE> 14

CERTAIN ASPECTS OF THE ON-LINE LOTTERY CONTRACTS

Each of the Company's on-line lottery contracts is terminable by each of
the state lotteries for cause, and the lottery contracts with respect to the
States of Delaware, Maryland, Minnesota, Montana, Pennsylvania and South Dakota
may be terminated by the state lotteries for their convenience, when it is in
their best interest or without cause.

The Company's on-line lottery contracts also generally contain demanding
implementation schedules and performance schedules. Failure to perform under
such contracts may result in substantial monetary liquidated damages, as well as
contract termination. Although the imposition of actual liquidated damages is
generally subject to negotiation, such provisions present an ongoing potential
for substantial expense. Damages, if assessed, are usually due within 30 days or
may be deducted from revenues otherwise earned from the lottery. Failure to
repair machines within a specified time period may also result in damages. In
addition, on-line lottery contracts may require the Company to post a
performance bond, which in some cases may be substantial, securing the Company's
performance under such contracts.

AWARD PROTESTS

The on-line lottery business is highly competitive and it is not unusual in
the United States for unsuccessful vendors to challenge contract awards. AWI has
been selected for the award of a new five-year contract to continue operating
Florida's lottery system. A competitor of the Company has unsuccessfully
protested the award and has filed an appeal. The Florida lottery accounted for
34% of AWI's total revenue during 1996. There can be no assurance that the award
to AWI in Florida will be upheld or that AWI will be able to negotiate a new
five-year contract with the Florida lottery.

ADVERSE LEGISLATIVE CHANGES

The lottery, video gaming, wagering and racetrack industries are subject to
extensive regulatory constraints. Legislative changes are usually required prior
to establishment of any new markets for lottery, gaming or wagering products or
services. Similarly, adverse legislative changes, whether as a result of
political or public attitudes toward lottery, gaming or wagering can quickly
close parts or all of existing markets for the Company's products or services or
result in unusual contract changes. The Company cannot predict the speed and
direction of future legislative actions in jurisdictions where the Company is
selling products or services or contemplating the sale of products or services.

INTERNATIONAL SALES

The Company believes its future growth will depend in large part on its
ability to generate international sales. There can be no assurance, however,
that the Company will be successful in generating international sales of its
products. Sales to customers in foreign countries may be subject to a number of
risks, including the risks that agreements may be difficult or impossible to
enforce and receivables difficult to collect through a foreign country's legal
system; foreign customers may have longer payment cycles; or foreign countries
could impose withholding taxes or otherwise tax the Company's foreign income,
impose tariffs, embargoes or exchange controls, or adopt other restrictions on
foreign trade. In addition, the laws of certain countries do not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States. The Company may also be exposed to increased foreign
currency risk and fluctuations in exchange rates could affect demand for the
Company's services. Failure of the Company's efforts to compete successfully or
to expand the distribution of its products in international markets could have a
material adverse effect on the Company's business, operating results and
financial condition.

INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS

International sales denominated in foreign currencies accounted for
approximately $13.9 million or 10% of the Company's total revenues for the nine
months ended September 30, 1997 and $16.6 million or 9% of total revenues for
the fiscal year ended December 31, 1996. Management can give no assurances that
changes in currency and exchange rates will not materially affect the Company's
revenues, costs, cash flows and
10
<PAGE> 15

business practices and plans. Additional risks inherent in the Company's
international business activities generally include unexpected changes in
regulatory requirements, tariffs and other trade barriers, delays in receiving
payments on accounts receivable balances, reimbursement approvals (both
governmental and private), difficulties in managing international operations,
potentially adverse tax consequences, restrictions on repatriation of earnings
and the burdens of complying with a wide variety of foreign laws and
regulations. In addition, the Company's foreign operations would be affected by
general economic conditions in the international markets in which the Company
does business, such as a prolonged economic downturn in Europe or the
Asian-Pacific region. There can be no assurances that such factors will not have
a material adverse effect on the Company's future international revenues and,
consequently, on the Company's business, financial condition, results of
operations or cash flows.

The Company has not historically attempted to hedge the risks of
fluctuating exchange rates given the currencies involved and the terms of
payment granted to its customers.

DEPENDENCE ON KEY PERSONNEL

The success of the Company will be dependent, to a significant extent, upon
the continued services of a relatively small group of executive personnel. The
loss or unavailability of one or more of such executive officers or the
inability to attract or retain key employees in the future could have an adverse
effect upon the Company's operations.

HOLDING COMPANY STRUCTURE; RELIANCE ON DIVIDENDS FROM SUBSIDIARIES

As a holding company whose principal assets are the securities of its
on-line and video lottery and gaming subsidiaries, the Company's ability to meet
debt service obligations and pay operating expenses and dividends, if authorized
by the Company's board of directors, depends primarily on the receipt of
sufficient dividends from such on-line and video lottery and gaming
subsidiaries. In addition, gaming statutes and license requirements in the
jurisdictions in which the Company's subsidiaries currently operate or may
operate in the future may require the maintenance of minimum amounts of
statutory capital and place certain restrictions upon the amount of dividends
that the Company's subsidiaries may pay.

ABILITY TO ISSUE PREFERRED SHARES WITHOUT STOCKHOLDER APPROVAL

The Company's authorized capital consists of 35,000,000 shares of capital
stock. The Board of Directors, without any action by the Company's stockholders,
is authorized to designate and issue up to 10,000,000 shares of preferred stock
in such classes or series as it deems appropriate and to establish the rights,
preferences and privileges of such shares, including dividends, liquidation and
voting rights. Other than shares of the treasury preferred stock pledged to
secure certain indebtedness, no other class of preferred stock is currently
designated and there is no current plan to designate or issue any such
securities. If additional preferred stock was issued, the rights of holders of
preferred stock would be superior to the rights granted to the holders of the
Common Stock. Further, the ability of the Board of Directors to designate and
issue such shares could impede or deter an unsolicited tender offer or takeover
proposal regarding the Company and the issuance of additional shares having
preferential rights could adversely affect the voting power and other rights of
holders of Common Stock.

ABSENCE OF DIVIDENDS

The Company has not paid any dividends on the Common Stock since its
inception and does not anticipate paying any dividends in the foreseeable
future. Earnings of the Company, if any, are expected to be used to finance the
development and expansion of the Company's business. Any future decision with
respect to dividends will depend on future earnings, future capital needs and
the Company's operating and financial condition, among other factors.

11
<PAGE> 16

YEAR 2000 COMPLIANCE

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

OWNERSHIP LIMITATIONS ON SECURITIES OF THE COMPANY

Gaming authorities in one or more jurisdictions (the "Gaming Authorities")
may, at their discretion, require the holder of any security of the Company,
such as the Common Stock, to file applications, be investigated and be found
suitable to own such security of the Company. If a record or beneficial owner of
the Common Stock is required by a Gaming Authority to be found suitable, such
owner will be required to apply for a finding of suitability by such Gaming
Authority. As a general matter, assuming a passive investment intent, only
owners of specified percentages of the Company's voting securities are required
to be found suitable, absent unusual circumstances, which percentage is
typically 5% or above of any class of such securities. The applicant for a
finding of suitability generally must pay all costs of the investigation for
such finding of suitability, provide an initial deposit as determined by the
Gaming Authority to pay the anticipated costs and charges incurred in the
investigation and deposit such additional sums as are required by the Gaming
Authority to pay final costs and charges. If a Gaming Authority determines that
a holder is unsuitable to own the Common Stock or to have any other relationship
with the Company, then the Company can be sanctioned, including the loss of its
approvals, if without the prior approval of the Gaming Authorities, it: (i) pays
to the unsuitable person any dividend, interest, or any distribution whatsoever;
(ii) recognizes any voting right by such person in connection with such
securities; (iii) pays the unsuitable person remuneration in any form; (iv)
makes any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation, or similar transaction; or (v) fails to
pursue all lawful efforts to require such person to relinquish his voting
securities including, if necessary, the immediate purchase of such voting
securities for cash at fair market value.

Any person who fails or refuses to apply for a finding of suitability
within the period of time required or prescribed by a Gaming Authority may be
found unsuitable. The same restrictions apply to a record owner if the record
owner, after request, fails to identify the beneficial owner. Any holder of the
Shares found unsuitable and who holds, directly or indirectly, any beneficial
ownership of the Shares beyond such period of time prescribed by a Gaming
Authority may be guilty of a criminal offense.

CERTAIN ANTITAKEOVER EFFECTS

As a Delaware corporation, the Company is subject to Section 203 of the
Delaware General Corporation Law which, with certain exceptions, imposes certain
restrictions on mergers and other business combinations between the Company and
any holder of 15% or more of the Common Stock. These restrictions may make the
acquisition of control of the Company without the approval of the Company's
Board of Directors more difficult.

12
<PAGE> 17

USE OF PROCEEDS

The Selling Stockholders will receive all of the net proceeds from the sale
of the Shares. If the Underwriters elect to exercise the over-allotment option,
the net proceeds to the Company from the Offering are estimated to be
approximately $2.3 million after deducting the estimated underwriting discounts
and commissions and the estimated expenses of the Offering payable by the
Company. The Company intends to segregate the net proceeds (if any) to it from
the Offering in a separate account and use such net proceeds for (i) the costs
of the Offering (approximately $0.2 million), and (ii) on-line lottery
operations (approximately $2.1 million).

PRICE RANGE OF COMMON STOCK

The principal United States market on which the Common Stock is traded is
the Nasdaq NMS where it is traded under the symbol "PWRH."

The following table sets forth on a per share basis the high and low
trading prices of the Common Stock for the fiscal quarters indicated, as
reported on the Nasdaq NMS.

<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
YEAR ENDED DECEMBER 31, 1995 HIGH LOW
- ---------------------------- ------- -------
<S> <C> <C> <C> <C>
1st Quarter................................................. $ 9 7/8 $ 7 1/8
2nd Quarter................................................. $ 9 5/8 $ 5 1/2
3rd Quarter................................................. $ 7 1/4 $ 4 47/64
4th Quarter................................................. $ 6 1/2 $ 3 1/2
</TABLE>

<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
YEAR ENDED DECEMBER 31, 1996 HIGH LOW
- ---------------------------- ------- -------
<S> <C> <C> <C> <C>
1st Quarter................................................. $ 7 3/8 $ 4 3/8
2nd Quarter................................................. $ 6 7/8 $ 3 3/4
3rd Quarter................................................. $ 4 3/4 $ 2 7/8
4th Quarter................................................. $ 5 3/4 $ 3
</TABLE>

<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
YEAR ENDED DECEMBER 31, 1997 HIGH LOW
- ---------------------------- ------- -------
<S> <C> <C> <C> <C>
1st Quarter................................................. $ 4 7/8 $ 3 1/4
2nd Quarter................................................. $ 6 1/4 $ 3 1/2
3rd Quarter................................................. $11 3/8 $ 5 15/16
4th Quarter................................................. $12 3/4 $ 8 3/4
</TABLE>

<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
YEAR ENDED DECEMBER 31, 1998 HIGH LOW
- ---------------------------- ------- -------
<S> <C> <C> <C> <C>
1st Quarter (through February 9, 1998)...................... $12 5/8 $ 9 7/8
</TABLE>

The closing price of the Common Stock on the Nasdaq NMS as of a recent date
is set forth on the cover page of this Prospectus. As of February 9, 1998, there
were approximately 550 holders of record of the Common Stock.

DIVIDEND POLICY

The Company has never paid cash dividends on its Common Stock and does not
plan to do so in the foreseeable future. The current policy of the Company's
Board of Directors is to reinvest earnings in the operation and expansion of the
Company's business. Further, the Company is a holding company and the operations
of the Company are conducted through its subsidiaries. Accordingly, the ability
of the Company to pay dividends on its Common Stock is dependent on the earnings
and cash flow of its subsidiaries and the availability of such cash flow to the
Company. In addition, certain covenants in the Company's loan agreements
restrict the Company's ability to declare or pay dividends.

13
<PAGE> 18

SELECTED FINANCIAL DATA

The selected data presented below for, and as of the end of, each of the
years in the five-year period ended December 31, 1996 are derived from the
consolidated financial statements of the Company and its subsidiaries, which
financial statements have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The consolidated financial statements as of
December 31, 1995 and 1996, and for each of the years in the three-year period
ended December 31, 1996, and the report thereon, are included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996. The
selected data presented below for the nine months ended September 30, 1997 are
derived from the financial statements of the Company and its subsidiaries as
reported in the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, which are unaudited. The selected consolidated financial
data should be read in conjunction with the consolidated financial statements
and notes thereto of the Company and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
YEARS ENDED DECEMBER 31, (UNAUDITED)
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA
Revenues:
On-line lottery.................... $ 51,552 $115,544 $101,559 $ 91,653 $ 88,843 $ 65,790 $ 71,671
Gaming machine and route
operations....................... 59,299 59,069 68,571 61,398 60,186 43,560 51,627
Wagering systems and racetrack
operations(1).................... -- -- 18,652 28,111 27,652 21,534 21,322
-------- -------- -------- -------- -------- -------- --------
Total revenues............ 110,851 174,613 188,782 181,162 176,681 130,884 144,620
Costs and Expenses:
On-line lottery.................... 32,757 67,985 62,397 59,438 59,333 42,596 48,244
Gaming machine and route
operations....................... 37,219 35,074 39,815 35,992 32,911 23,283 28,790
Wagering systems and racetrack
operations....................... -- -- 13,992 22,286 20,104 15,408 15,300
Selling, general and
administrative................... 15,873 30,362 34,000 31,139 28,697 21,618 22,983
Research and development........... 2,570 6,629 8,513 8,888 7,969 5,062 7,122
Other charges(2)................... -- -- 23,994 2,763 34,135 12,935 --
Depreciation and amortization...... 10,351 18,033 20,694 22,587 23,822 17,315 16,943
-------- -------- -------- -------- -------- -------- --------
Total costs and
expenses................ 98,770 158,083 203,405 183,093 206,971 138,217 139,382
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) from operations.... 12,081 16,530 (14,623) (1,931) (30,290) (7,333) 5,238
Other income (expense)............. 258 (9,032) (242) (1,833) (2,694) (2,160) (2,269)
Income tax benefit (expense)....... (3,990) (3,152) (1,303) 846 8,753 1,198 (1,595)
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss) from continuing
operations....................... 8,349 4,346 (16,168) (2,918) (24,231) (8,295) 1,374
Discontinued operations(1)......... -- -- -- (5,482) 5,482 5,482 --
Extraordinary gain, net............ -- -- -- -- 4,014 4,014 13,269
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss)....... $ 8,349 $ 4,346 $(16,168) $ (8,400) $(14,735) $ 1,201 $ 14,643
Net earnings (loss) per share:
From continuing operations......... $ 0.74 $ 0.35 $ (1.54) $ (0.28) $ (2.27) $ (0.66) $ 0.13
From discontinued operations....... -- -- -- (0.51) 0.51 0.44 --
From extraordinary item............ -- -- -- -- 0.38 0.32 1.28
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss) per
share................... $ 0.74 $ 0.35 $ (1.54) $ (0.79) $ (1.38) $ 0.10 $ 1.41
======== ======== ======== ======== ======== ======== ========
Weighted average shares(3)......... 11,316 12,312 10,507 10,608 10,699 12,598 10,406
OTHER DATA
Adjusted EBITDA(4)............... $ 22,432 $ 34,563 $ 30,065 $ 23,419 $ 27,667 $ 22,917 $ 22,181
Cash provided (used) by:
Operations....................... 19,882 31,354 12,167 1,943 18,702 36,101 36,177
Investing Activities............. (48,198) (28,666) (15,097) (22,020) (34,750) (31,616) (6,688)
Financing Activities............. 42,963 (10,540) (1,931) 18,199 18,378 (5,693) (15,763)
</TABLE>

14
<PAGE> 19
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
YEARS ENDED DECEMBER 31, (UNAUDITED)
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital.................... $ 25,111 $ 51,458 $ 23,344 $ 19,987 $ 28,084 $ (5,364) $ 29,704
Total assets....................... 150,029 139,513 174,032 165,851 168,043 185,550 162,648
Total long-term debt(5)
(excluding current
installments).................... 3,006 855 9,060 12,885 9,312 12,315 32,028
Stockholders' equity............... $103,435 $108,215 $ 94,112 $ 86,448 $ 72,231 $ 87,766 $ 78,107
</TABLE>

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

(1) Wagering systems and racetrack operations revenue and costs since May 3,
1994. See Note 2 to the Consolidated Financial Statements for the fiscal
year ended December 31, 1996.
(2) In 1996, the Company recorded approximately $34.1 million of special charges
consisting of approximately $18.0 million for inventory write-downs
primarily related to the on-line lottery segment, $8.4 million associated
with on-line lottery customer disputes and contract liabilities, $4.6
million for impairment of intangible and other assets for an on-line lottery
contract and $3.1 million related to the wagering systems segment. In 1995,
the Company recorded approximately $2.8 million of special and other unusual
charges associated with exit costs and charges and asset impairments related
to five contracts. In 1994, the Company recorded approximately $24.0 million
of special and other unusual charges consisting of $6.7 million related to
inventory and international contract investments and $17.3 million for
impairment of the goodwill attributable to the acquisition of UWS.
(3) Common stock equivalents are excluded if antidilutive.
(4) Adjusted EBITDA consists of income from operations plus depreciation and
amortization plus the special or other charges described in footnote 2.
Adjusted EBITDA should not be construed as an alternative to net income or
any other measure of the Company's performance under generally accepted
accounting principles or to cash flows generated by operating, investing and
financing activities as an indicator of the Company's cash flows or a
measure of its liquidity. Management believes that Adjusted EBITDA is a
useful adjunct to net income and other measurements under generally accepted
accounting principles and is a conventionally used financial indicator.
(5) On January 30, 1997, EDS reached an agreement to settle certain outstanding
claims against each other. The agreement, among other things, provided for
the extinguishment of outstanding fees of approximately $38.0 million in
exchange for a note payable of approximately $26.1 million which amortizes
between 1999 and 2004 and the return to the Company of approximately 2.5
million of the Company's preferred and common shares. The settlement
resulted in an extraordinary gain of $13.3 million. See Footnote 16 to the
Consolidated Financial Statements for the fiscal year ended December 31,
1996.

15
<PAGE> 20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following table presents for the years indicated, the percentage of
revenues represented by certain operational data, as well as the percentage
change in such items.

<TABLE>
<CAPTION>
PERCENTAGE (%) OF TOTAL
REVENUES
-------------------------- NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------- -------------
1994 1995 1996 1996 1997
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
REVENUES:
On-line lottery..................................... 53.8% 50.6% 50.2% 50.3% 49.6%
Gaming machine and route operations................. 36.3 33.9 34.0 33.3 35.7
Wagering systems and racetrack operations........... 9.9 15.5 15.8 16.4 14.7
----- ----- ----- ----- -----
Total revenue............................. 100.0 100.0 100.0 100.0 100.0
COSTS AND EXPENSES:
On-line lottery..................................... 33.1 32.8 33.6 32.5 33.4
Gaming machine and route operations................. 21.1 19.9 18.6 17.8 19.9
Wagering systems and racetrack operations........... 7.3 12.3 11.4 11.8 10.6
Selling, general and administrative................. 18.0 17.1 16.2 16.5 15.9
Research and development............................ 4.5 4.9 4.5 3.9 4.9
Other charges....................................... 12.7 1.5 19.3 9.9 --
Depreciation and amortization....................... 11.0 12.5 13.5 13.2 11.7
----- ----- ----- ----- -----
Total costs and expenses.................. 107.7 101.0 117.1 105.6 96.4
----- ----- ----- ----- -----
Loss from operations................................ (7.7) (1.0) (17.1) (5.6) 3.6
Other (expense) income, net......................... (0.1) (1.0) (1.5) (1.7) (1.5)
----- ----- ----- ----- -----
Net earnings (loss) before income taxes,
discontinued operations and extraordinary items... (7.8)% (2.0)% (18.6)% (6.3)% 1.0%
===== ===== ===== ===== =====
</TABLE>

Wagering systems and racetrack operations revenue and costs relate to a
subsidiary which was acquired by the Company on May 3, 1994. Consequently,
certain percentages from 1994 are not comparable to 1995 and 1996.

Revenue from the on-line lottery segment consists primarily of a
contractual percentage of lottery ticket sales in states in which the Company
operated as well as revenue from on-line lottery equipment sales. The segment
revenue will 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 in 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.

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. 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. The Company expects video lottery 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.

Revenue from wagering systems and racetrack operations is generated
primarily from a contractual percentage of handle processed through computerized
pari-mutuel wagering systems from over 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

16
<PAGE> 21

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 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 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 ("SG&A") expenses 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 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
development efforts. Development costs are capitalized in accordance with
Statement of Financial Accounting Standards Board Statement No. 86 for certain
software developed for sale or lease.

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

NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH 1996

Consolidated revenues increased by $13.7 million, or 10%, to $144.6 million
from $130.9 million in the first nine months of 1996. The overall gross profit
increased by $2.7 million, or 5%, to $52.3 million from $49.6 million in the
nine months ended September 30, 1996. The Company had net earnings before
extraordinary items of $1.4 million in the first nine months of 1997 as compared
to a net loss of $8.3 million in the first nine months of 1996. Included in the
first nine months of the 1996 results of operations were special, pre-tax
charges of $12.9 million related to the on-line lottery segment. Excluding the
special charges, net of estimated tax benefits, and extraordinary items, the
first nine months of 1996 would have reflected a net loss of approximately $0.5
million.

ON-LINE LOTTERY

Total revenues from the on-line lottery segment increased by $5.9 million,
or 9%, to $71.7 million in the first nine months of 1997 from $65.8 million in
the first nine months of 1996. Revenue from on-line lottery equipment and system
sales was $7.6 million in the first nine months of 1997 as compared to $2.6
million in the first nine months of 1996. The increase reflects increased
revenues from contracts with certain domestic

17
<PAGE> 22

on-line lotteries as well as additional revenue from the successful
implementation of an on-line lottery system in Chile. The $5.9 million increase
in on-line lottery revenues for the nine months ended September 30, 1997 is net
of a $7.3 million decline attributable to two state contracts terminated in
mid-1996. On-line lottery service revenues were $64.1 million in the nine months
ended September 30, 1997 and $63.2 million in the nine months ended September
30, 1996.

The Company's contract with the Washington State Lottery expired in June
1996, and the new contract was awarded to a competitor of the Company. The
expired contract accounted for approximately $5.7 million (6.5%) of the lottery
services revenue in 1996, $10.3 million (11.3%) in 1995 and $10.9 million
(10.8%) in 1994. The expiration date of the current contract with the Florida
Lottery was extended from June 30, 1996, as a result of a delay of the award of
a new contract. On September 2, 1997, the Florida Lottery notified the Company
that the Company had been selected as the most highly qualified bidder for the
award of a new five-year contract pursuant to a reevaluation that resulted from
an earlier protest by a competitor, GTECH Corporation, of the Florida Lottery's
previous selection of the Company. GTECH Corporation has protested the Florida
Lottery's re-selection of the Company as the most qualified bidder. Pending
resolution of the protest, the Company will commence contract negotiations with
the Florida Lottery. On January 5, 1998, the Company and the Florida Lottery
entered into an interim contract to operate the Lottery's on-line system until
the earlier of either the award and implementation of a new agreement or through
January 1, 2000. Under the terms of the Florida request for proposal, sizable
capital expenditures in excess of current credit facilities would be required to
fulfill its terms. The availability of and terms of new financing are subject to
numerous uncertainties and cannot be reasonably predicted.

The gross profit margin for on-line lottery revenues was 33% in the first
nine months of 1997 as compared to 35% in the first nine months of 1996. The
decrease is primarily attributable to lower margins attained on the revenues
from the contract with the Maryland Lottery implemented in the third quarter
1996. The Company anticipates the gross profit margin levels to improve as the
system operation matures; however, there can be no assurance of such
improvements. The expiration of the Company's contract with the Washington
Lottery in June 1996 also contributed to the decline in gross profit margins due
to the relatively higher margin levels from that contract. The Company recorded
other charges of approximately $9.8 million in the nine months ended September
30, 1996 associated with the on-line lottery segment. No such charges were
recorded in 1997. Such other charges represented estimated settlement and
contract rework costs associated with customer disputes stemming from
performance issues with Electronic Data Systems Corporation ("EDS") with which
the Company had contracted to perform certain services for the Company's
customers. Such other charges have been excluded from the determination of gross
profit due to their unusual nature and are not considered by the Company to be
indicative of anticipated future operating results.

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

18
<PAGE> 23

GAMING MACHINE AND ROUTE OPERATIONS

Revenue from the gaming machine and route operations segment increased by
$8.1 million, or 19%, to $51.6 million in the first nine months of 1997 from
$43.5 million in the first nine months of 1996.

Revenue was recognized on shipments of 4,122 units in the first nine months
of 1997 as compared to 3,252 units in 1996. Revenue from leasing and revenue
sharing arrangements was $8.5 million in the first nine months of 1997 as
compared to $7.8 million in 1996.

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

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1996 1997 $ CHANGE % CHANGE
----- ----- -------- --------
<S> <C> <C> <C> <C>
JURISDICTION
DOMESTIC
Montana....................................... $ 2.5 $ 2.6 $ 0.1 4.0%
Montana routes................................ 12.2 13.2 1.0 8.2
Oregon........................................ 4.8 6.1 1.3 27.1
Other, combined............................... 8.7 18.0 9.3 106.8
----- ----- -----
28.2 39.9 11.7 41.5
----- ----- -----
INTERNATIONAL
Quebec........................................ 2.0 8.8 6.8 340.0
Other, combined............................... 13.3 2.9 (10.4) (78.2)
15.3 11.7 (3.6) (23.5)
----- ----- -----
$43.5 $51.6 $ 8.1 18.6%
===== ===== =====
</TABLE>

The gross profit margin from the gaming machine segment, which includes
equipment sales and contract revenue as well as royalty and lease revenues was
44% in the first nine months of 1997 and 47% in the first nine months of 1996.
The decrease reflects relatively higher sales to Quebec which results in lower
gross profit margins for the Company. The gross profit margin from route
operations was 28% in the first nine months of 1997 and 29% in the first nine
months of 1996.

WAGERING SYSTEMS AND RACETRACK OPERATIONS

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

The Company believes that a growing market exists for video lottery gaming
at pari-mutuel racetracks, which have suffered from declining attendance in
recent years due to the proliferation of casino gaming outside of Las Vegas and
Atlantic City. To permit the racing industry to become more competitive, some
states have enacted legislation that allows video gaming devices at racetracks,
a trend that the Company believes will continue. The Company intends to
participate in this growth by supplying its gaming machines and systems,
partnering with or purchasing racetracks and owning and operating its own
facility, Sunland Park. The Company is the only full service supplier of gaming
and pari-mutuel systems and services to racetracks in North America and believes
it has a competitive advantage due to its existing United Tote customer
relationships in the pari-mutuel industry.

The gross profit margin from wagering systems service revenue was 37% in
the first nine months of 1997 as compared to 39% in the first nine months of
1996. The decrease is attributable to increased operating costs in 1997 related
to start-up of operations for live racing at Lone Star Park in Texas, the newest
thoroughbred racetrack in North America as well as higher operating costs in
certain other states. Also contributing to the decrease is the closure of two
customer racetracks which carried relatively higher gross profit margins.
19
<PAGE> 24

Management does not anticipate any significant increase in gross profit margin
levels on service revenue in the near future. The gross profit margin from
equipment sales of $2.1 million was 49% in the first nine months of 1997 as
compared to 40% on $1.7 million of sales in the first nine months of 1996. The
Company experienced a negative gross profit from the racetrack operations of
approximately $0.1 million in the first nine months of 1997 and 1996.

The Company recorded other charges of approximately $3.1 million in the
nine months ended September 30, 1996 associated with its wagering systems
segment. No such charges were recorded in 1997. Approximately $2.8 million of
such other charges represented impairments of long-lived assets recorded in
conjunction with the Company's strategic decision to retain and operate the
wagering systems segment previously reported as discontinued. See Note 2 to the
Company's 1996 Consolidated Financial Statements. Additionally, the Company
consolidated the manufacturing operations of this segment to the Company's
Bozeman, Montana facility, which resulted in employee terminations and other
incremental costs of approximately $0.3 million. These other charges have been
excluded from the determination of gross profit due to their unusual nature and
are not considered by the Company to be indicative of anticipated future
operating results.

SELLING, GENERAL AND ADMINISTRATIVE

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

RESEARCH AND DEVELOPMENT

Research and development expense, net of amounts capitalized for the
development of MasterLink(R) was $7.1 million in the first nine months of 1997
as compared to $5.1 million in the same period in 1996. The Company capitalized
$0.8 million in the first nine months of 1997 and $3.6 million in 1996. Total
research and development expenditures approximated 6% of consolidated revenues
in the first nine months of 1997 and 7% of consolidated revenues in 1996. The
new modules and significant enhancements related to the MasterLink(R) system in
1997 were implemented with the Minnesota, ALC, Norsk Tipping AS and Chile
on-line lottery systems in 1997.

1996 COMPARED WITH 1995

Total revenue in 1996 decreased by $4.5 million (3%) to $176.7 million from
$181.2 million in 1995. The overall gross profit increased by $0.9 million (1%)
to $64.3 million from $63.4 million in 1995. The Company had a net loss from
operations of $24.2 million in 1996 as compared to net loss from operations of
$2.9 million in 1995. The increase in loss reflects significant special and
other unusual charges recorded in 1996. Absent the special and other unusual
charges, the Company would have had net earnings before income taxes of $1.2
million in 1996 and a net loss before income taxes of $1.0 million in 1995. The
improvement reflects the $0.9 million increase in gross profit and reductions in
selling, general and administrative costs and research and development costs,
net of capitalization.

ON-LINE LOTTERY

Revenue from the on-line lottery segment decreased by $2.9 million (3%) to
$88.8 million from $91.7 million in 1995. Included in the on-line lottery
revenue in 1996 and 1995 is $4.4 million and $5.3 million, respectively, of
revenue from international on-line lottery equipment sales.

20
<PAGE> 25

The Company experienced a decline in revenues from its contract with the
Florida Lottery of approximately $5.0 million from 1995 levels as a result of
lower lottery ticket sales and a reduction in the contractual fee percentage.
The Florida Lottery contract accounted for approximately 34% or more of on-line
lottery revenues in the last three years.

The Company's contract with the Washington Lottery expired in June 1996 and
the new contract was awarded to a competitor. The contract accounted for $5.7
million (7%) and $10.4 million (11%) of on-line lottery revenues in 1996 and
1995, respectively.

In December 1995, the Delaware Lottery implemented a video gaming program
which is centrally controlled and monitored by the Company's on-line lottery
system in the state. The implementation of the video gaming program is the
primary reason for a $5.1 million increase in revenues from 1995 levels from the
contract with the Delaware Lottery. The implementation of the video gaming
program in Delaware has also resulted in additional lease revenues for the
Company's gaming machine segment.

In the third quarter 1996 the Company implemented an on-line lottery system
under contract with the Maryland Lottery. The new contract generated $2.9
million of on-line lottery revenue from start-up through December 31, 1996.

The gross profit margin of the on-line lottery segment was 33% in 1996 as
compared to 35% in 1995. The gross profit margin on services revenue in the
on-line lottery segment was 33% in 1996 as compared to 36% in 1995. The decrease
is primarily attributable to a contractual reduction in the fee structure with
the Florida Lottery in 1996. Management does not anticipate significant
fluctuations in gross profit margins in the near future. The gross profit margin
on on-line central system and equipment sales was 30% and 20% in 1996 and 1995,
respectively.

The following describes the Company's accounting for "other" charges
related to the on-line lottery segment. Other charges include charges for
inventory impairments, restructurings, contract exit charges and long-lived
asset impairments. The Company manufactures inventories for sale and lease as
well as use in the provision of services under long-term contracts. Inventories
purchased and manufactured for use in the provision of services are transferred
to property, plant and equipment when installed pursuant to the terms of such
long-term contracts. The inventory charges discussed below have been excluded
from the determination of gross profit. Had these inventories been placed in
service under long-term contracts, depreciation expense would have been
recognized in accordance with the Company's accounting policy.

In 1996, the Company recorded approximately $31.0 million of special
charges related to the Company's on-line lottery segment, which consisted of
$18.0 million for inventory reserves and write-downs, $8.4 million for penalties
and contractual liabilities resulting from customer disputes and $4.6 million
for impairment of intangible and other assets in connection with an on-line
lottery contract. Approximately $9.8 million of the charges were recorded in the
first nine months of 1996. $8.0 million of those charges related to customer
disputes stemming from performance issues with EDS. The remaining $1.8 million
recorded in the first nine months represented charges for inventory impairments.
The $21.2 million of charges recorded in the fourth quarter of 1996 primarily
related to impairments of inventories and intangible assets.

During the three-year period ending December 31, 1996, the Company recorded
approximately $22.7 million of charges representing impairments to on-line
lottery equipment inventories. An aggressive revenue growth strategy in 1994 led
the Company to procure or commit to procure significant levels of inventory in
advance of obtaining a contract to operate an on-line lottery system in the
United Kingdom. The Company was notified in May 1994 that the contract was
awarded to a competitor. In the fourth quarter of 1994, the Company recorded a
$4.1 million charge representing costs to retrofit inventories related to the
United Kingdom procurement for which there was no other demand in the U.S.
market. The Company anticipated demand from a customer in Norway for a portion
of such inventories. The carrying value of inventories related to the on-line
lottery segment was approximately $19.3 million at December 31, 1994, and the
Company believed that potential market opportunities at that time indicated that
such inventory value would be recovered. In the second quarter of 1995, the
Company recorded an additional $0.6 million charge to inventories due to a
reduction in estimated demand by its Norway customer. The carrying value of
inventories

21
<PAGE> 26

related to the on-line lottery segment was approximately $15.9 million at
December 31, 1995, and potential sales opportunities in various international
markets indicated that the remaining value could be recovered. In the second
quarter 1996, the Company recorded an additional charge of $1.1 million to
inventories for another identified reduction in demand. In the fourth quarter of
1996, the Company determined that the remaining inventory related to the United
Kingdom procurement had no remaining market value and charged to expense
approximately $10.4 million. At December 31, 1996, inventories related to the
on-line lottery segment had a carrying value of approximately $2.9 million.

The Company's domestic growth strategy led to the contracts being awarded
to the Company by the Arizona and Kentucky lottery authorities during 1995. The
Arizona lottery system was implemented in late 1995. However, due to a number of
factors, including a short development and installation period, the lottery had
a number of deficiencies that contributed to the early termination of the
contract by the Arizona Lottery in 1996. The Company recognized an impairment
charge of $4.0 million on equipment inventory to reduce the carrying value to
net realizable value for used equipment. Also in 1996, the Company and the
Kentucky Lottery agreed to terminate efforts to finalize a contract. The Company
incurred approximately $2.5 million that was charged to expense as a result of
the agreement.

The United Kingdom, Arizona and Kentucky on-line inventory, which the
Company had planned to place in service to perform specific contracts, was
reviewed in light of existing market conditions and written down to its
estimated market value. Following these charges and write-offs attributable to
unsuccessful business ventures, the Company revised its international strategy
from selling long-term service agreements to one of selling on-line lottery
equipment and licensing technology to use the equipment to partners who would
operate the lottery system. While this strategy may result in lower revenues,
costs of sales and operating profits, it is considered by management to be a
more effective growth strategy.

Domestically, the Company has adopted a strategy of selectively bidding
opportunities where the customer requirements best fit with the Company's
products and services. There can be no assurance that these revised strategies
will be successful. In 1995, the Company recorded approximately $2.5 million of
other charges associated with exit costs and asset impairments related to four
contracts. These charges have been excluded from the determination of gross
profit due to their nature, and they are not considered by the Company to be
indicative of anticipated future gross profits.

In 1996, the Company withheld certain payments to EDS primarily due to EDS
performance issues and related on-line lottery customer disputes. In mid-1996,
the agreement between EDS and the Company was terminated and EDS filed a
complaint against the Company seeking payment of outstanding fees. On January
30, 1997, the Company and EDS settled all claims against each other and agreed
to transition the EDS services and personnel to the Company. The terms of the
settlement include the receipt by the Company of all of the common and preferred
shares owned by EDS (545,454 common and 1,912,728 preferred shares) certain
property, plant and equipment used in the provision of services to on-line
lottery customers and the extinguishment of approximately $38.0 million of
outstanding fees in return for a $26.1 million note payable. 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's on-line lottery subsidiary. The transition of the EDS services and
related employees to the Company was completed in the second quarter of 1997.

The Company paid or accrued approximately $81.6 million and $70.3 million
to EDS for costs and expenses in 1996 and 1995, respectively. Of those costs and
expenses approximately $9.7 million and $2.7 million were capitalized primarily
in conjunction with software development and deferred start-up costs in 1996 and
1995, respectively.

22
<PAGE> 27

GAMING MACHINE AND ROUTE OPERATIONS

Revenue from gaming machine sales and route operations decreased by $1.2
million (2%) to $60.2 million from $61.4 million in 1995.

Revenue was recognized on delivery of 4,557 units in 1996 as compared to
7,772 in 1995. Included in the total units were approximately 917 and 1,562 of
royalty unit sales in 1996 and 1995, respectively. Revenues from sales of units
pursuant to royalty arrangements have minimal related direct costs. The Company
previously earned revenues from sales of units under a royalty arrangement with
an Australian company in certain Australian jurisdictions. The royalty
arrangement was terminated in mid-1997. Additionally, the Company shipped 1,175
gaming machines under lease arrangements to the Oregon, Rhode Island and
Delaware lotteries in 1996 as compared to 1,570 gaming machines shipped to the
Oregon, Rhode Island and Delaware lotteries in 1995.

The following table reflects domestic and international revenue sources
representing 10% or more of the segment's revenues for the years ended December
31, 1995 and 1996 (amounts in millions):

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1995 1996 $ CHANGE % CHANGE
----- ----- -------- --------
<S> <C> <C> <C> <C>
JURISDICTION
DOMESTIC
Montana....................................... $19.3 $19.7 $ 0.4 2.0%
Louisiana..................................... 9.0 1.4 (7.6) (84.4)
Oregon........................................ 6.0 7.1 1.1 18.3
Other......................................... 7.8 11.3 3.5 44.5
----- ----- -----
42.1 39.5 (2.6) (6.2)
----- ----- -----
INTERNATIONAL
Quebec........................................ 12.3 2.2 (10.1) (82.1)
Other......................................... 7.0 18.5 11.5 164.3
----- ----- -----
19.3 20.7 1.4 7.3
----- ----- -----
$61.4 $60.2 $(1.2) (2.0)%
===== ===== =====
</TABLE>

Montana revenue includes $16.5 and $15.3 million from route operations in
1996 and 1995, respectively.

In 1996, voters in approximately one-half of the state's parishes in
Louisiana voted to discontinue video lottery operations in those parishes.
Existing locations will be allowed to operate for approximately two years before
the gaming machines must be removed.

The gross profit margin from the gaming machine segment, which includes
equipment sales and contract revenue, as well as lease revenue, increased to 45%
from 41% in 1995. The increase is primarily attributable to the lower sales
levels in Louisiana and Quebec which historically carry lower margins for the
Company relative to other jurisdictions and higher software sales which carry
higher gross profit margins. The gross profit margin from route operations was
29% in 1996 as compared to 28% in 1995.

WAGERING SYSTEMS AND RACETRACK OPERATIONS

Revenue from the wagering systems and racetrack operations segment
decreased by $0.5 million or (2%) to $27.6 million from $28.1 million in 1995.
The decrease is attributable to a decline in revenues from the racetrack
operations at Sunland Park, New Mexico of approximately $0.9 million offset by
an increase of $0.4 million in revenues generated from wagering systems services
and equipment sales. The decline in revenue at Sunland Park is the result of
lower handle and attendance and lower revenues resulting from a shorter 1996-
1997 live racing season. The increase in revenues for wagering systems is
attributable to revenues from additional services under existing contracts,
renegotiation of existing contracts under more favorable terms and increased
interface fees resulting from increased levels of simulcasting. Lost revenues
from closed customer

23
<PAGE> 28

facilities were offset by these increases as well as additional revenues
generated at customer facilities that are now open year round for simulcasting
and the addition of new customers.

The number of customer contracts declined in 1996 primarily due to closing
of six customer facilities in Kansas, South Dakota, Texas, and Wisconsin. In
1996, United Tote signed contracts with five new customers, and renewed
contracts with six U.S. customers and seven Canadian customers. The Company
plans to continue to renew existing contracts at margins at least comparable to
existing contracts and plans to secure new contracts at comparable margins,
although no assurance can be given that existing contracts will be renewed or
new contracts will be entered into with comparable gross profit margins.

The gross profit margin from the wagering systems and racetrack operations
segment was 27% in 1996 as compared to 21% in 1995. The gross profit margins for
wagering systems services and equipment sales were 38% in 1996 and 30% in 1995.
The increase in margin is due to increases in the simulcasting and interface
revenues which carry higher margins, combined with lower operating expenses from
wagering systems. The Sunland Park racetrack operations yielded a negative gross
profit of $0.3 million in 1996 and $0.2 million in 1995.

The Company recorded other charges of approximately $3.1 million in 1996
associated with the Company's wagering systems segment. $2.8 million of the
charges represented impairments of long-lived assets recorded in conjunction
with the Company's strategic decision to retain and operate the wagering systems
segment previously reported as discontinued. $0.3 million of the charges related
to the consolidation of the manufacturing operations of that segment. In 1995,
the Company recorded $0.3 million of other charges associated with exit costs
for one contract. These charges have been excluded from the determination of
gross profit due to their nature, and they are not considered to be indicative
of anticipated future gross profits.

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, New Mexico. The recently enacted legislation will permit the
Company to operate up to 300 gaming machines per pari-mutuel racetrack facility
for up to twelve hours per day. The implementation of gaming is subject to the
timing and satisfaction of conditions of the legislation, including the state's
formation of a separate commission to oversee the gaming and other regulatory
matters (including the grant of necessary licenses to the Company).
Consequently, the Company does not anticipate that any revenues will be
generated from the approved gaming until the third or fourth quarter of 1998.

SELLING, GENERAL AND ADMINISTRATIVE

Total SG&A expenses decreased by $2.4 million (8%) to $28.7 million from
$31.1 million in 1995. The decrease is primarily attributable to administrative
head-count reductions, cost containment measures and lower trade show spending
offset in part by additional marketing efforts primarily in casino markets.

As a percentage of sales, SG&A expenses were 16% in 1996 as compared to 17%
in 1995. Management anticipates 1997 SG&A levels to be at or near 1996 levels
given the current level of activity. Should business development activities
increase in the next several fiscal quarters, the SG&A levels would follow.

RESEARCH AND DEVELOPMENT

In 1996, the Company expended $8.0 million (net of capitalization) on
research and development activities as compared to $8.9 million (net of
capitalization) in 1995. The Company capitalized approximately $4.1 million and
$2.7 million, respectively, of the development costs primarily in conjunction
with the development of the Company's MasterLink(R) system central system
software. The new modules and significant enhancements related to the
MasterLink(R) system in 1997 were implemented with the Minnesota, ALC, Norsk
Tipping AS and Chile on-line lottery systems in 1997. The Company expects to
continue to refine and enhance the Company's MasterLink(R) system in 1997 for
video and on-line lottery applications as well as continue the development and
enhancement of other on-line, video gaming and wagering systems hardware and
software products.

24
<PAGE> 29

OTHER CHARGES

In 1996, the Company recorded approximately $34.1 million of special
charges consisting of approximately $18.0 million for inventory write-downs
primarily related to the on-line lottery segment, $8.4 million associated with
on-line lottery customer disputes and contract liabilities, $4.6 million for
impairment of intangible and other assets for an on-line lottery contract and
$3.1 million related to the wagering systems segment. Approximately $21.2
million of charges were recorded in the fourth quarter of fiscal year 1996,
primarily related to the Company's revised strategies and resulting estimates
concerning on-line lottery operations. The Company's revised strategies include
more selective bidding on both domestic and international opportunities.

The Company's 1995 consolidated statement of operations includes
approximately $2.8 million of unusual reserves and write-offs associated with
exit costs and charges and asset impairments related to five contracts.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization increased by $1.2 million to $23.8 million
from $22.6 million in 1995. The increase is attributable to approximately $25.5
million of new capital assets placed in service and $10.0 million of capitalized
deferred start-up and software development costs in 1996. The majority of
capital assets procured and manufactured in 1996 were placed in service in the
third quarter in conjunction with the on-line lottery implementation in Maryland
and the delivery of gaming machines under a lease agreement with the Oregon
Lottery.

1995 COMPARED WITH 1994

Total revenue in 1995 decreased by $7.6 million (4%) to $181.2 million from
$188.8 million in 1994. The overall gross profit decreased by $9.1 million (13%)
to $63.4 million from $72.5 million in 1994. The Company had a net loss from
operations of $2.9 million in 1995 as compared to $16.2 million in 1994. The
decrease in losses primarily reflects less special and other charges recorded.
The 1994 charges of $24.0 million represented goodwill impairment of $17.3
million and other charges primarily for inventories of $6.7 million. The Company
also experienced a decline in gross profit margins in 1995 from 1994 levels.

ON-LINE LOTTERY

Revenue from the on-line lottery segment decreased by $9.9 million (10%) to
$91.7 million from $101.6 million in 1994. Included in the on-line lottery
revenue in 1995 and 1994 is $5.3 million and $9.9 million, respectively, of
revenue from international on-line lottery equipment sales. Revenue from the
Company's contract with the Florida Lottery of $35.2 million decreased by $2.4
million from 1994 primarily reflecting a decline in the contractual fee rate.
Also, included in 1994 revenue is $3.1 million from contracts with two off-track
betting corporations in the state of New York that expired in December 1994.

The gross profit margin of the on-line lottery segment was 35% in 1995 as
compared to 39% in 1994. The gross profit margin on services revenue in the
on-line lottery segment was 36% in 1995 as compared to 39% in 1994. The decrease
is primarily attributable to a contractual reduction in the fee structure with
the Florida Lottery in 1995. The gross profit margin on on-line central system
and equipment sales was 20% and 32% in 1995 and 1994, respectively.

In 1995, the Company recorded approximately $2.5 million of other charges
associated with exit costs and asset impairments related to four contracts. $0.5
million of the charges were to record an additional reserve on the United
Kingdom lottery equipment due to a change in market value. In the fourth quarter
1994, the Company recorded a special charge of approximately $5.9 million, which
amount represents reserves and writeoffs for inventory of $4.1 million and
write-offs and accruals of foreign contract investments and commitments of $1.8
million. The Company had purchased inventory in anticipation of a contract in
the United Kingdom that was not awarded to the Company. The 1994 inventory
charge represented the initial

25
<PAGE> 30

adjustment associated with the retrofitting of inventories for alternative
markets. These special charges have been excluded from the determination of
gross profit due to their nature, and they are not considered to be indicative
of anticipated future gross profits.

GAMING MACHINE AND ROUTE OPERATIONS

Revenue from gaming machine sales and route operations decreased by $7.2
million (11%) to $61.4 million from $68.6 million in 1994.

Revenue was recognized on delivery of 7,772 units in 1995 as compared to
10,008 in 1994. Included in the total units were approximately 1,562 and 2,792
of royalty unit sales in 1995 and 1994, respectively. Additionally, the Company
shipped 1,570 gaming machines under lease arrangements to the Oregon, Rhode
Island and Delaware lotteries in 1995 as compared to 400 gaming machines shipped
to the Oregon Lottery in 1994.

The following table reflects domestic and international revenue sources
representing 10% of the segment's revenues for the years ended December 31, 1994
and 1995 (amounts in millions):

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1994 1995 $ CHANGE % CHANGE
JURISDICTION ----- ----- -------- --------
<S> <C> <C> <C> <C>
DOMESTIC
Montana...................................... $17.9 $19.3 $ 1.4 7.8%
Louisiana.................................... 12.0 9.0 (3.0) (25.0)
Other........................................ 13.8 13.8 0 0
----- ----- -----
43.7 42.1 (1.6) (3.6)
INTERNATIONAL
Quebec....................................... 10.5 12.3 1.8 17.1
Other........................................ 14.4 7.0 7.4 105.7
----- ----- -----
24.9 19.3 (5.6) (22.5)
----- ----- -----
$68.6 $61.4 $(7.2) (10.5)%
===== ===== =====
</TABLE>

Montana revenue includes $15.3 and $15.4 million from route operations in
1995 and 1994, respectively.

The gross profit margin from the gaming machine segment, which includes
equipment sales and contract revenue, as well as lease revenue, decreased
slightly to 41% from 42% in 1994. The decrease is primarily attributable to a
revenue decline from the lower royalty unit sales under a technology transfer
agreement between the Company and a Victoria, Australia
manufacturer/distributor. The royalty revenue has nominal direct cost
components. The gross profit margin from route operations was 28% in 1995 as
compared to 29% in 1994.

WAGERING SYSTEMS AND RACETRACK OPERATIONS

Revenue from the wagering systems and racetrack operations was $28.1
million in 1995 compared to $18.7 million for the eight months ended December
31, 1994. The gross profit margin decreased to 21% in 1995 from 25% in the eight
months ended in 1994.

In 1995, the Company recorded $0.3 million of other charges associated with
exit charges related to one contract. In 1994, the Company recorded $18.1
million of special charges related to the wagering systems segment, $17.3
million of which represented a goodwill impairment charge and $0.8 million of
which was to accrue the exit costs related to one contract. These charges have
been excluded from the determination of gross profit due to their nature, and
they are not considered to be indicative of anticipated future gross profits.

On May 3, 1994, the Company completed the purchase of all of the
outstanding stock of UWS. The original purchase price of $29.6 million included
$19.6 million in cash and the issuance of $10.0 million of

26
<PAGE> 31

promissory notes, payable over a three-year period. The Company also assumed
liabilities of approximately $23.4 million and, in connection with the
transaction, recorded goodwill of approximately $30.3 million. At the time of
the acquisition of UWS, the Company anticipated profits from the ongoing
operations of UWS as well as potential growth for pari-mutuel contracts and
operations and favorable gaming legislation in New Mexico and other
jurisdictions.

During the fourth quarter of 1994 and the first quarter of 1995, certain
negative developments affecting UWS and the pari-mutuel wagering industry became
increasingly apparent. These developments included significant declines in gross
revenues and gross margins at pari-mutuel wagering and other facilities due to
pricing pressures and increased competition from other forms of gaming (which
declines the Company believed were permanent), significant unanticipated capital
investment of approximately $15.0 million to meet customer commitments and the
failure of various state legislative initiatives authorizing the introduction of
gaming devices at tracks to materialize as anticipated. The Company took steps
to restructure the business of UWS, including changing management, reducing
costs and renegotiating contracts to the extent possible in an attempt to
mitigate these negative developments. These developments in the aggregate
indicated to the Company that the purchase price it had paid for UWS exceeded
UWS's value, and that, therefore, the goodwill associated with the wagering
systems segment was not recoverable from future operations. As a result, an
impairment of $17.3 million was recorded in the fourth quarter of 1994. The
impairment was determined by using the present value of estimated future
operating cashflows of the wagering segment. After the impairment charge,
approximately $11.7 million of goodwill associated with the racetrack operations
segment of UWS remained.

During 1995, the Company did not pay principal and interest obligations
under the terms of the promissory notes to sellers in the aggregate principal
amount of $10.0 million, which had been issued in conjunction with the
acquisition of UWS in May 1994, because of disputes related to the acquisition.
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 an approximate $4.0 million gain on debt
extinguishment. This gain was recorded in the Company's 1996 statement of
operations.

SELLING, GENERAL AND ADMINISTRATIVE

Total SG&A expenses decreased by $2.9 million (9%) to $31.1 million from
$34.0 million in 1994. The decrease is primarily attributable to lower legal and
professional fees as well as reduced business development expenses. Business
development expenses are primarily lobbying, political contributions, trade
shows, travel, meals and lodging. As a percentage of sales, SG&A expenses were
17% in 1995 as compared to 18% in 1994.

RESEARCH AND DEVELOPMENT

In 1995, the Company expended $8.9 million (net of capitalization) on
research and development activities as compared to $8.5 million (net of
capitalization) in 1994. The Company capitalized approximately $2.7 million and
$5.2 million, respectively, of the development costs primarily in conjunction
with the development of the MasterLink(R) system software.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization increased by $1.9 million to $22.6 million
from $20.7 million in 1994. The increase is attributable to approximately $19.0
million of new capital assets placed in service and $3.5 million of capitalized
deferred start-up and software development costs in 1995. Approximately $8.1
million was placed in service in November and December of 1995 in conjunction
with the Arizona on-line lottery implementation and start-up and the delivery of
approximately 300 gaming machine terminals to the Oregon and Delaware lotteries
as part of the leasing programs with those jurisdictions. Approximately $2.4
million of the $3.5 million capitalized deferred start-up and software
development costs were capitalized in the fourth quarter 1995 in conjunction
with the Arizona on-line lottery implementation and start-up and significant
enhancements to the MasterLink(R) system.

27
<PAGE> 32

LIQUIDITY AND CAPITAL RESOURCES

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

Inventory levels decreased by $3.9 million to $14.4 million from $18.3
million at December 31, 1996. The reduction primarily reflects sales of on-line
lottery equipment to international jurisdictions. The Company manufactures
inventories for sale and lease as well as use in the provision of services under
long-term contracts. Inventories purchased and manufactured for use in the
provision of services are transferred to property, plant and equipment when
installed pursuant to the terms of such long-term contracts.

Management believes that its position to obtain capital resources improved
during the first nine months of 1997 as a result of the Company's improved cash
and debt positions. Total liabilities decreased by $11.3 million in the first
nine months of 1997 due to the settlement between the Company and EDS and due to
the repayments made on interest-bearing debt noted above. Included in the
repayments of interest-bearing debt in the first nine months of 1997 is the
pay-down of the Company's revolving line of credit with First Bank, N.A. Of the
$19.5 million revolving line of credit, $9.5 million is committed to the
Company's bonding program and $10.0 million is available for working capital
needs. At September 30, 1997 none of the $10.0 million was drawn by the Company.
The Company's revolving line of credit agreement with First Bank, N.A. expires
in February 1998. The credit agreement contains certain restrictive covenants,
including requirements with respect to leverage and cash flow ratios, change in
control, payments-of-dividends restrictions and minimum stockholders' equity
covenants. The Company expects to extend or replace the credit facility prior to
its expiration; however, its extension or replacement cannot be assured.

During 1996, 1995 and 1994, the Company sold notes receivable from gaming
machine equipment sales, with a face value of $1.5 million, $2.3 million and
$4.3 million respectively, 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
$4.7 million at December 31, 1996. At September 30, 1997, the Company had a
reserve of $0.3 million established for any losses under the recourse provisions
which reflects a $0.1 million reduction from the December 31, 1996 balance of
$0.4 million. At December 31, 1996, the Company had guaranteed or pledged
security for the indebtedness of others in the amount of approximately $5.8
million (including $4.7 million notes receivable sold to banks and other third
parties).

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 recently enacted
legislation will permit the Company to operate up to 300 gaming machines per
pari-mutuel racetrack facility for up to twelve hours per day. The
implementation of gaming is subject to the timing and satisfaction of conditions
of the legislation, including the state's formation of a separate commission to
oversee the gaming and other regulatory matters (including the grant of
necessary licenses to the Company). Consequently, the Company does not
anticipate that any revenues will be generated from casino gaming at Sunland
Park until the third or fourth quarter of 1998. The Company has had
architectural plans developed for casino gaming at the racetrack facility and
has initiated construction. Current plans call for approximately $8 million of
capital expenditures for facility enhancements, gaming machines and related
equipment.

five more years with options for two extensions of two additional years each.
The existing contract had an expiration date of June 30, 1996. AWI is continuing
the operation of the current on-line lottery system under the terms of the
expired contract under temporary extension. In November 1997, the Company was
awarded a new five-year contract commencing in January 1999 to continue
operating the Pennsylvania Lottery. The current contract expires in December
1998. Sizable capital expenditures in excess of current capital sources may be
required in advance of any anticipated capital generated by a new Florida or
Pennsylvania contract. Accordingly, the Company may need additional financing,
the availability and the terms of which are subject to various uncertainties,
with no assurance that such financing can be obtained.

29
<PAGE> 34

BUSINESS

OVERVIEW

The Company is a diversified gaming company offering a broad selection of
products and services to a variety of customers, including domestic and
international lottery agencies, casino gaming companies, racetracks and route
operators. The Company is the leading worldwide developer and supplier of video
lottery gaming machines and system software and one of the leading developers
and suppliers of equipment, software systems and related services for on-line
lotteries and pari-mutuel systems. In addition, the Company owns and operates
Sunland Park racetrack in New Mexico and intends to open a casino at such
facility with 300 gaming machines in approximately mid-1998.

Automated Wagering International, Inc. AWI designs, manufactures,
assembles, installs, operates and maintains on-line, computer-based networks for
state lotteries in Delaware, Florida, Maryland, Minnesota, Montana, Pennsylvania
and South Dakota. An on-line lottery network consists of lottery terminals
located in numerous retail outlets, a central computer system, computer software
and communications equipment. In the United States, AWI's products and services
are typically marketed to lottery authorities through long-term contracts,
awarded through a competitive bidding process, pursuant to which AWI maintains
ownership of the lottery network and operates it for the state in return for a
percentage of ticket sales. In foreign jurisdictions, lottery equipment is often
sold and related software is often licensed to lottery authorities for a fixed
price.

Video Lottery Consultants, Inc. VLC designs, develops, manufactures and
markets gaming machines, central control system software and related services
for the gaming machine industry. The gaming machine industry includes both video
lottery operations and casino gaming. Video lottery gaming is the use of gaming
machines to provide low stakes entertainment gaming to enhance revenue for
states and other jurisdictions. The machines, offering video versions of games
such as poker, blackjack, bingo and keno and spinning reel games, are generally
located in age-controlled establishments such as bars, taverns and restaurants.
Centralized computer systems typically monitor compliance with governmental
regulation and taxation in this segment of the industry. Both VLC and AWI market
these centralized computer systems, with AWI concentrating on those systems that
also run the jurisdiction's on-line lottery. Video lottery gaming programs
provide substantial incremental sources of revenue to the governmental
jurisdictions without increasing general taxation. Currently seven states in the
United States, five states in Australia, eight Canadian provinces, Iceland,
Norway, Sweden and South Africa have authorized video lottery gaming on a
jurisdiction-wide basis. In addition, VLC sells its Winning Touch(R) gaming
machines to land-based, riverboat and Native American casinos. The Company holds
licenses to sell gaming machines in Nevada, Mississippi and New Jersey, the
three largest casino markets in the United States, as well as in all other major
casino jurisdictions.

United Wagering Systems, Inc. UWS designs, manufactures, operates and
sells computerized pari-mutuel wagering systems commonly referred to as
"totalisators" for horse and greyhound racetracks, off-track wagering facilities
and jai alai frontons in North America, South America, Spain, the Caribbean and
the Philippines. A totalisator system supports pari-mutuel wagering by
controlling the acceptance of wagers, calculating odds and payout, cashing
winning tickets, and performing assorted management, accounting and reporting
functions. Each system consists of central processing computers and peripherals,
betting terminals, proprietary software, tote boards and other displays and
color video generation equipment. The products and services of UWS are typically
marketed to domestic facilities under long-term service contracts. Compensation
is usually based on a minimum fee plus a percentage of the wagering volume of
the facility. Foreign users typically purchase the hardware and license the
software for systems operations. UWS also provides wagering terminals for use in
casino race/sportsbooks.

Sunland Park. The racetrack operation located in Sunland Park, New Mexico,
typically hosts live racing from December until May of each year. Additionally,
the racetrack facility participates in an inter-track wagering network with
other racetracks for the entire year, either as a host track during live racing
or as a guest track when the live racing is located at another track.

30
<PAGE> 35

BUSINESS STRATEGY

The Company is focusing on the following key strategies in order to pursue
its growth objectives:

- Expand Leading Position in Worldwide Video Lottery Gaming Market: The
Company believes that new markets such as Ontario and South Africa, and
the replacement of older gaming machines and systems in markets such as
Australia and North America, will provide significant future growth
opportunities for VLC. For the fiscal year ended December 31, 1996 and
the nine months ended September 30, 1997, VLC's total revenue from
international operations was $20.7 million and $11.7 million,
respectively. The Company believes its state-of-the-art technology, the
historically high net revenue performance of its gaming machines and
its solid reputation among its customers give the Company a competitive
advantage in the video lottery gaming market in the foreseeable future.

- Develop Casino Opportunities at Racetracks: The Company believes that
a growing market exists for video lottery gaming at racetracks, which
have suffered from declining attendance in recent years due to the
proliferation of casino gaming outside of Las Vegas and Atlantic City.
To permit the racing industry to become more competitive, some states
have enacted legislation that allows video gaming devices at
racetracks, a trend that the Company believes will continue. The
Company intends to participate in this growth by supplying its gaming
machines and systems, partnering with or purchasing racetracks and
owning and operating its own facility, Sunland Park. The Company is the
only full service supplier of state-of-the-art gaming and pari-mutuel
systems and services to racetracks in North America and believes it has
a competitive advantage due to its existing United Tote customer
relationships in the pari-mutuel industry.

- Penetrate Casino Markets: The Company intends to leverage the
popularity of its Winning Touch(R) gaming machines to increase its
market penetration in traditional casino venues. With licenses in
virtually all major gaming jurisdictions, VLC is actively marketing its
gaming machines in casino markets worldwide as a high performance
product for replacing older machines. The Company believes that VLC's
new Power Series(TM) gaming machine is capable of producing greater
than average coin-in per day and net win per day than traditional
gaming machines, due to its superior graphics, state-of-the-art sound
and playability.

- Selectively Bid on Domestic On-line Contracts and Aggressively Pursue
International On-line Opportunities: On-line lottery contracts for
twelve state lotteries will be up for procurement over the next three
years. Due to the high cost of procuring new contracts, AWI intends to
target those states which it believes will establish a bidding process
based exclusively on technical capability, price and service. This
strategy allows AWI to efficiently allocate its resources so that it
may also pursue international growth opportunities. AWI is currently
targeting approximately 14 jurisdictions worldwide that are expected to
implement on-line lottery programs within the next two years. In 1997,
AWI successfully implemented its MasterLink(R) on-line system for
Chile's Loteria de Concepcion, Canada's ALC and Norway's Norsk Tipping
AS. For the fiscal year ended December 31, 1996 and the nine months
ended September 30, 1997, AWI's total revenue from international
operations was $3.1 million and $7.5 million, respectively.

31
<PAGE> 36

cost terminals or player tracking systems. In addition, AWI continues
to focus on reducing service costs. United Tote has successfully
upgraded its operations and improved customer service. United Tote has
demonstrated that its systems can process the large handles typically
found at the larger racetracks such as Churchill Downs. United Tote
believes that its emphasis on customer service and ability to design,
manufacture and operate pari-mutuel systems that are capable of
processing larger handle volumes will enable it to improve its
profitability and increase its market share.

AWI

Contracts

United States. AWI derives revenue primarily from contracts with state
lottery organizations throughout the United States. Revenue consists primarily
of a contractual percentage of lottery ticket sales in each state as well as
revenue from installation and sales of on-line lottery systems and equipment.
The segment experiences fluctuations in revenue levels based on relative sizes
of awards or jackpots, the number of terminals on-line and tickets sold in the
states in which the Company operates and on the timing of on-line lottery
systems and equipment sales and installations. The Company expects lottery
services revenue to continue to be a significant component of its total
revenues. The table below sets forth the lottery authorities in the United
States with which AWI presently has facilities management lottery contracts. The
table also sets forth information regarding the term of each contract and, as of
November 30, 1997, the approximate number of retail terminals installed in each
jurisdiction, and the revenues generated by the lottery operations.

<TABLE>
<CAPTION>
TOTAL ON-LINE
DATE OF EXPIRATION LOTTERY TERMINALS LOTTERY TOTAL REVENUES
COMMENCEMENT DATE AUTHORITY OPERATING AT REVENUES IN PER TERMINAL
OF CURRENT OF CURRENT EXTENSION JUNE 30, 1997(2) IN 1997(2)
JURISDICTION CONTRACT CONTRACT(1) OPTIONS 1997 (IN MILLIONS) (IN THOUSANDS)
- ------------ ------------ --------------- ------------------ ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Delaware 10/94 9/02 -- 337 $ 79.9 $237.1
Florida(3) 4/88 1/00 -- 8,240 1,454.2 176.5
Maryland 7/96 7/01 1 three-year plus 3,895 1,038.3 266.6
2 one-year
Minnesota 5/90 8/02 -- 1,918 96.0 50.1
Montana 11/96 11/98 -- 341 22.2 65.1
Pennsylvania(4) 1/89 12/98 -- 4,888 1,298.4 265.6
South Dakota 7/90 05/99 six months 363 12.5 34.4
</TABLE>

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

(1) Expiration dates do not reflect the exercise of the lottery authority's
extension options.
(2) Figures are provided for each state's fiscal year ended June 30, 1997.
(3) The Florida State Lottery accounted for 34% of AWI's total revenues during
1996. AWI has been selected for the award of a new five-year contract to
continue operating Florida's lottery system. A competitor of the Company has
unsuccessfully protested the award and has filed an appeal. If the award is
upheld, the Company will begin negotiations with the Florida Lottery for the
new five-year contract. The Company will continue to operate the lottery
system until the implementation of the new contract under an interim
agreement. The current interim agreement expires upon the earlier of the
award and implementation of a new agreement or January 1, 2000.
(4) The Pennsylvania State Lottery has awarded AWI a new five-year contract
commencing January 1999 to continue operating Pennsylvania's lottery system.
The Pennsylvania State Lottery accounted for 26.1% of AWI's total revenues
during 1996.

International Operations. In February 1991, AWI entered into a contract
with Norsk Tipping AS, the national lottery and soccer pool organization for the
Kingdom of Norway for the purchase of terminals, communications equipment, a
central control system, software and knowledge transfer. Norsk Tipping AS has
ordered and AWI has provided approximately 4,700 on-line terminals from 1991
through September 30, 1997. In September 1997, AWI completed the successful
implementation of its MasterLink(R) on-line system in Chile, for the Loteria de
Concepcion.

Facility Management Contracts. All of AWI's current domestic lottery
contracts are facilities management contracts under which AWI installs, operates
and maintains a lottery network while retaining ownership or control of the
lottery terminal network. The facilities management contracts typically have an
initial term of

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<PAGE> 37

approximately five years, and generally contain one or more options permitting
the lottery authority to extend the initial contract term for additional periods
of up to five years in total. Prior to the expiration of the initial or extended
term, a lottery authority is generally required by law to commence a competitive
bidding process for a new lottery contract. There can be no assurance that AWI
will win a new contract in connection with this process.

AWI installs and commences operations of a lottery network generally within
six to twelve months after being awarded a new lottery contract and, following
the start-up of the lottery network, is responsible for all aspects of the
network's operations. AWI operates lottery networks in each jurisdiction with
two or more central computer systems. In addition, AWI employs a dedicated work
force in each jurisdiction, consisting of a site manager, computer and hotline
operators, customer service and terminal replacement and repair technicians. The
equipment used in any jurisdiction must typically comply with specifications
established by that jurisdiction. New contracts typically require new equipment
of recent manufacture. Terminal equipment is typically depreciated over the term
of the related contract, including extensions upon their exercise, by the
lottery authority. Under certain of AWI's facility management contracts, the
lottery authority has the option to purchase AWI's lottery system during the
contract term at a predetermined price. AWI's role with respect to the continued
operation of a lottery system in the event of the exercise of such purchase
option is defined as part of the purchase option with fees and services included
with the original bid. Exercise of such an option could substantially change the
anticipated profitability of the contract to AWI.

Under many of AWI's facilities management contracts, the lottery authority
has the option to require AWI to install additional terminals and/or add new
lottery games. Such installation may require significant capital expenditures by
AWI. However, since AWI's revenues from such contracts generally depend on the
level of lottery ticket sales, and such sales are generally increased by the
addition of new retail outlets and games, such expenditures have generally been
recovered through the revenues generated by the additional equipment or games
and revenues from existing equipment, although there is no assurance this will
continue to be the case. The potential additional terminals and new games are
agreed to in the bidding process and as such are taken into consideration when
determining the vendor's fee in the original bid.

AWI's contracts with the state lotteries contain provisions for assertion
of liquidated damages against AWI for failure to meet certain performance
standards. These conditions include aggressive implementation schedules and
ongoing performance standards and failure to perform may result in substantial
monetary liquidated damages, as well as contract termination. Liquidated damages
ranging from $5,000 to $250,000 per day for late system start-up and from $1,700
to $15,000 per minute for system downtime beyond a stipulated grace period are
common to the domestic market. Although the actual liquidated damages imposed
are generally subject to negotiation, such provisions present an ongoing
potential for substantial expense. Damages, if assessed, are usually due within
30 days or may be deducted from revenues otherwise earned from the lottery.
Failure to repair terminals within a specified time period may subject AWI to
damages. The Company maintains errors and omissions coverage under risk
management policies which would cover certain but not all claims.

Typically, state lottery contracts also reserve the right to terminate the
contract for cause (i.e., failure of the vendor to substantially perform any
material requirement) after notice and a cure period. The state also reserves
the right to cancel a contract if the state enacts a statute which removes the
authority or ability of the state to conduct a lottery. In general, a state may
also terminate a contract without cause or for the convenience of the lottery,
typically with at least 12 months prior written notice. Reasonable costs,
excluding anticipatory profits, will be reimbursed to the vendor for all
terminations except for a material breach.

Lottery contracts generally require the vendor to post a substantial bond
securing its performance. The terms of such bonds may require significant
collateral in the form of cash, cash equivalents or lines of credit.

Various state on-line lottery contracts contain provisions under which AWI
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. Penalties paid or accrued by AWI
with respect to its contracts during the year ended December 31, 1996 were
approximately 3% of its revenues.

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<PAGE> 38

Products and Services

In 1971, AWI designed and installed, for the New Jersey State Lottery, the
country's first on-line lottery system. Since that time, AWI has developed and
installed many system and service features that have subsequently become common
in the lottery industry, such as the internal control system, down-line loading
for terminals, the cathode ray tube terminal operator display, microfiche data
storage for lottery records, instant game accounting and integrated computerized
terminal maintenance control.

In September 1993, the Company introduced its MasterLink(R) system. The
Company's first U.S. application of the MasterLink(R) system was to the Delaware
Lottery which awarded a five-year contract to AWI in January 1994. Since that
time, the Company has introduced an enhanced version of its MasterLink(R) system
to five additional jurisdictions. The express purpose of the MasterLink(R)system
is to manage an organization's lottery and gaming machines. These gaming
machines might include teller-activated lottery ticket terminals, video lottery
gaming machines, player-activated sports betting terminals, instant ticket
vending machines and other electronic gaming-related devices. The MasterLink(R)
system allows an organization to monitor the status and performance of the
gaming machines within its jurisdiction, conduct accounting of and billing on
the revenue from the gaming machines, and control their configuration and
operations. The MasterLink(R) system is intended to be a flexible,
cost-effective means of providing these capabilities.

The lottery network marketed by AWI consists of the following principal
elements:

- Terminals. AWI designs and manufactures the terminals used in its
networks. The terminals are designed for maximum security, minimum
processing time and flexibility to allow for customization of
application functions to each lottery's specifications.

- Software. AWI designs and provides all application software for its
lottery networks. AWI's software is designed to provide the following
network characteristics: rapid processing, storage and retrieval of
transaction data in high volumes; the ability to down-line load, i.e.,
to reprogram the lottery terminals from the central computer
installation via the communications network to add new games and
feature a high degree of security and redundancy to guard against
unauthorized access and tampering and to ensure continued operations
without data loss; and a comprehensive management information and
control system.

- Central Computers. Each of AWI's lottery networks contains one or
more central computer installations to which the lottery terminals are
connected. AWI's prior generation central control system is designed to
run on the Cyber 930, but the MasterLink(R) system is designed to run
on UNIX-based central computer systems such as IBM RS/6000 systems,
instead of the proprietary Cyber-series computers. The specifications
for the configuration of AWI's central computer installations are
designed to provide continuous availability, high data handling
capability and maximum security.

- Communications. AWI's lottery terminals are typically connected to
the central computer installations by dedicated telephone lines owned
or leased by the jurisdiction in which the network is located in
conjunction with proprietary network communications controllers and
monitored by a proprietary network management system. Due to the
varying nature of telecommunications services available in lottery
jurisdictions, AWI has developed the capability to interface with a
wide range of communications networks. AWI also has the expertise to
provide and integrate alternate technologies, such as microwave and
radio transmission, integrated services digital networking (ISDN), and
data over voice.

- Game Design. An important factor in maintaining and increasing public
interest in lottery games is innovation in game design. The principal
characteristics of game design include frequency of drawing, types of
prizes, cost per play and setting of appropriate odds. The Company's
MasterLink(R) system and Ovation(R) on-line terminals are designed to
efficiently permit the development and rapid deployment of new games
and targeted on-line game-related promotions. For example, in 1996 the
Company introduced its keno module in Maryland, where keno accounts for
over 20% of total handle. The Company believes that these capabilities
should enhance the ability of the
34
<PAGE> 39

lottery authority to increase on-line ticket sales, and result in more
revenue for the Company. These capabilities should also enhance the
Company's success rate in competing for domestic lottery contracts.
There can be no assurance, however, that either will happen.

VLC

The following table, as of September 30, 1997, sets forth certain
information concerning the number of Company (through VLC) and non-Company video
lottery gaming machines in operation in the jurisdictions that currently have
video lottery operations:

<TABLE>
<CAPTION>
CENTRAL VLC SHARE
COMMENCEMENT OWNERSHIP CONTROL NUMBER OF --------------------
JURISDICTION(1) DATE STRUCTURE SYSTEM TERMINALS(2) TERMINALS(3) %
- --------------- ------------ ------------------ ------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Montana(4)................... 1985 Private(5) None 16,150 4,785 29.6%
South Dakota(6).............. 1989 Private VLC 8,045 7,641 95.0
Atlantic Canada(7)........... 1990 Private/Government VLC 9,860 2,889 23.3
Saskatchewan................. 1993 Government GTECH 3,566 1,148 32.2
Quebec....................... 1994 Government VLC 15,351 6,530 42.5
Oregon(8).................... 1992 Government IGT(9) 8,713 4,431 50.9
Louisiana.................... 1992 Private IGT 14,850 8,836 59.5
Alberta, Canada.............. 1992 Government GTECH 5,919 3,964 67.0
Iceland...................... 1991 Charitable VLC 500 450 90.0
Rhode Island(10)............. 1992 Government GTECH 1,622 440 27.1
South Australia.............. 1994 Private VLC 9,259 1,000 10.8
Victoria, Australia(11)...... 1995 Private VLC 11,731 1,396 11.9
Victoria, Australia(11)...... 1995 Trust VLC 11,248 4,994 44.4
Delaware(12)................. 1995 Government AWI 335 275 82.1
Northern Territory........... 1996 Government VLC 400 80 20.0
W. Virginia.................. 1997 Government GTECH 3,000 150 5
Norway....................... 1996 Charitable VLC 300 300 100
------- ------
Total............... 120,849 49,309 40.8%
======= ====== =====
</TABLE>

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

(1) Excludes several jurisdictions in which the Company does not participate,
including Manitoba, Sweden, Tasmania and Queensland.
(2) In operation as of June 1997.
(3) Number of VLC gaming machines sold may vary from number in operation.
(4) Total number of video lottery gaming machines and number of VLC gaming
machines based on number of gaming machines licensed, according to the
Montana Gambling Control Division and VLC shipment reports.
(5) Private includes coin operators and/or location owners.
(6) Total number of gaming machines based on information provided by the South
Dakota Lottery. Number of VLC gaming machines based on VLC shipment
reports.
(7) Total number of gaming machines and number of VLC gaming machines based on
information provided by ALC. Atlantic Canada encompasses the provinces of
New Brunswick, Newfoundland, Nova Scotia and Prince Edward Island. New
Brunswick and Prince Edward Island have adopted a private ownership
structure, while in the provinces of Newfoundland and Nova Scotia, the
gaming machines are owned by the government or its appointed agent.
(8) Total number of gaming machines and number of VLC gaming machines based on
contract with Oregon State Lottery.
(9) International Game Technology. In 1995, the system contract was awarded to
GTECH. Transition of the central system operation to GTECH has not yet been
completed.
(10) Video lottery operations are authorized at only two pari-mutuel facilities
to which the Company is one of four suppliers.
(11) Tattersall Sweep Consultation (the lottery) and TABCORP (the off-track
racing association) are the two approved operators in the state of
Victoria.
(12) VLC supplies video machines to Dover Downs (120) and Delaware Park (155).
IGT supplies video machines to Harrington Midway (60). There are also 2,245
mechanical spinning reel games at the three racetracks.

Gaming Machines and Game Software. The Company, through its VLC subsidiary,
seeks to capture a significant portion of the market for its gaming machines by
offering a technologically advanced and reliable machine to the operator, and a
fun, fast, easy game to the player. The Company's current generation of gaming
machines incorporates interactive touchscreen control technology on a
multi-color video display. Each gaming machine is capable of storing over 100
different games in memory, based on the games' memory requirements. The machine
can present up to twelve different games selected through a menu format, such as
poker, blackjack, bingo and keno and spinning reel games. The player can vary
the amount of each wager. The

35
<PAGE> 40

number of games that may be offered on a gaming machine, the specific games and
the amount that a player can wager are determined by the regulating authority in
each jurisdiction.

The gaming machines also incorporate a variety of menu-driven internal
accounting, security and diagnostic features, such as on screen accounting,
audit and game statistics. The machines have redundant and self-correcting
memory and self-diagnostic circuitry designed for reliability in widely
dispersed locations. The gaming machines are manufactured with a set of custom
components that can interface with various peripheral devices (such as coin and
bill acceptors, coin hoppers, printers and ticket dispensers) in a modular
design for ease of maintenance and flexibility of configuration.

The Company recently introduced its Winning Touch(R)Power Series(TM), VLC's
next generation gaming machine, an enhanced graphics version of its Winning
Touch(R) gaming machine. Besides offering an enhanced graphics engine and
improved sound capabilities, this machine's design provides greater flexibility,
capacity and more efficient software development capabilities than its
predecessor. The Power Series(TM)has been approved by the State of Nevada for
sale in that state. The Company's gaming machines typically sell for between
$4,500 and $7,900, depending on the configuration and generation of the machine
and volume of purchases.

The innovative graphics and advanced technology that have been key
contributors to VLC's success in the video lottery market will benefit the
Company as it seeks to gain market share in the casino marketplace. The games,
the players and the operator's needs, such as enhanced reliability and revenue
generation, are similar for both industries. The knowledge and experience
acquired through its video lottery operations should enable VLC to further
enhance the superior play ability and appeal of its machines in the casino
markets.

The Company produces software chip sets with new gaming features for its
customers. The Company expects these new software chip sets to provide an
increasing portion of the Company's revenue in the future as customers request a
more varied library of games and increased reporting features. Once a new game
is developed, the ease with which the Company's video machine software can be
changed is an attractive selling point.

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<PAGE> 41

Marketing and Distribution. The Company must obtain a license and machine
approval before it can sell machines in either the casino or video lottery
markets. The following chart shows the jurisdictions where VLC currently is
licensed and license applications that have been filed and for which approval is
pending:

CURRENT JURISDICTIONS IN WHICH THE COMPANY OR CERTAIN SUBSIDIARIES ARE LICENSED
TO CONDUCT BUSINESS

<TABLE>
<CAPTION>
LICENSING
APPLICATION
UNITED STATES INTERNATIONAL FILED
- ------------------------------------------------------------------------------------ ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Powerhouse Casino (c)/ Charitable Native American Australia New Mexico
Riverboat (r) Market New South Wales Acoma
South Australia Pojoaque
- ----------------- ----------------- ----------------- ----------------- Western Australia Pueblo of Isleta
Delaware Colorado (c) Mississippi Arizona Tasmania Pueblo of Sandia
Louisiana Indiana (r) Ak-Chin Victoria San Juan Pueblo
Montana Iowa (r) Fort McDowell Northern Territory Quebec (Casino)
Oregon Louisiana (c) Gila River Canada
Rhode Island Louisiana (r) Tonto Apache Alberta
South Dakota Mississippi (r) White Mountain New Brunswick
West Virginia Nevada (c) Apache Newfoundland
New Jersey (c) Yavapai-Apache Nova Scotia
South Dakota (c) Connecticut Ontario
Louisiana Prince Edward Is.
Tunica-Biloxi Quebec
Michigan Saskatchewan
Bay Mills Iceland
Minnesota Norway
Mississippi Peru
Choctaw South Africa
New Mexico Mpumalanga
Santa Ana
North Carolina
Eastern band of
Cherokee
Oregon
Coquille
Grande Ronde
Siletz
Umatilla
Warm Springs
Wisconsin
</TABLE>

The marketing and distribution of gaming machines is controlled to some
extent by the statutory and regulatory structure adopted in each jurisdiction.
The Company markets its gaming machines both through a direct sales force and
distributors. Currently, sales are made through distributors in Louisiana, South
Australia, New Jersey and the Native American markets of the mid-western United
States. In deciding whether to use a distributor in a new jurisdiction, the
Company will consider a variety of factors, including existing relationships
with operators and location owners, the ability of a distributor to service the
market after the sale, the distributor's financial condition, any regulatory
constraints and the long-term economics to the Company of direct sales as
opposed to sales to distributors.

The Company's gaming machines are typically covered by a 90-day parts and
labor warranty. The Company provides after-market parts and service to coin
operators and other servicing agents. These after-market parts and services
include technical repair and hardware and software upgrades and enhancements.
The Company's maintenance staff also provides follow-up services with respect to
updates to hardware and software on the Company's gaming machines.

Central Control Systems. The Company derives revenues from its central
control system software through the grant of licenses to use the software and by
providing installation and maintenance services with respect to the software.
Video lottery gaming machines can be operated either through a central control

37
<PAGE> 42

system controlled by a governmental authority or on a stand-alone basis. In
every video lottery gaming jurisdiction except Montana, the gaming machines are
connected to a central control system. The Company believes that the greater
control and monitoring ability offered through central control systems will
encourage new jurisdictions to adopt a video lottery program and use such
systems. Similar technology can also be used by casinos as monitoring ability
and the use of progressives become increasingly important. The Company's central
control systems are designed with features intended to appeal to the concerns of
the operator, including:

- Security. To ensure security of communications, VLC's machines have
sophisticated features, including encryption, sequencing and timing of
data transmissions.

- Control. Each gaming machine on the system must be enabled by a call
from the central site before it is capable of displaying a playable
game and can be disabled by the central control system at any time.

- Compatibility. The Company's central control system allows gaming
machines made by other manufacturers to run on the system.

- Economy of Operation. The Company's central control system can be
operated in a dial-up format which is economical to install and operate
compared to either a traditional on-line lottery system (using
dedicated lines) or a stand-alone system of non-communicating gaming
machines. However, the system can run in a real-time environment
(on-line) should a jurisdiction require this feature.

- Reports and Audits. The central site receives on-demand reports from
each gaming machine on the system and automatically audits the
programming of every machine on a daily basis.

- Electronic Funds Transfer. The central control system is capable of
processing EFT functions which translate to easier and quicker funds
collection.

- Flexibility. The system is designed to be flexible so as to meet the
needs of various sized markets, to accommodate regulatory changes and
to adapt to new game designs and features.

The Company's central control system software is marketed through the
Company's direct sales force. The marketing efforts for a video lottery central
control system typically begin when a legislative body is considering the
adoption of video lottery enabling legislation. Once enabling legislation
calling for a central control system is adopted, the selection of the central
control system is normally accomplished through a formal bid process that
involves submission of proposals followed by a competitive evaluation period.
The Company's marketing efforts for its lottery products and services also
frequently involve top management in addition to the Company's marketing staff.
The Company also retains persons who are registered as lobbyists in a given
jurisdiction.

The Company designed and installed software for the video lottery central
control systems in South Dakota, Quebec, ALC's multi-jurisdictional system now
covering four provinces in eastern Canada, Tattersalls and TABCORP in Victoria,
Australia, Independent Gaming Corporation in South Australia and the Northern
Territory Racing & Gaming Authority of Northern Territory, Australia, the
Norwegian Red Cross and the Icelandic Gaming Fund Raising in Iceland. The
Company's MasterLink(R) system is state-of-the-art technology, utilizing an IBM
UNIX platform or DEC ALPHA platform as is the case with ALC, and offers
customers the opportunity to operate on-line lottery functions and video lottery
terminals from a single central system.

The first video gaming machine application of the MasterLink(R) system
running concurrently with the traditional on-line lottery application became
operational in Delaware in December 1995, when the gaming facilities licensed by
the Delaware State Lottery at two of the state's pari-mutuel tracks opened. The
system is successfully reporting data from both gaming machines and spinning
reel slot machines as well as the on-line lottery.

38
<PAGE> 43

The video gaming application of the MasterLink(R) system is being marketed
as a stand-alone system under the name Advanced Gaming System. This system is
modular in design and provides for the addition of expansion modules to allow
for progressives, player tracking, casino management systems and slot accounting
systems. The Advanced Gaming System is being marketed to new as well as existing
customers.

Product Research and Development. Video gaming customers look for a variety
of features in video gaming products. The technology in current machines will
develop and improve over time, forcing manufacturers to invest in ongoing game
development. VLC's Winning Touch(R) gaming machine contains libraries with
numerous game variations and allows for swift reprogramming to provide the
newest games. In addition to offering expansive product lines, casinos require
customized services for specific requests, including video graphics, game
development and floor space design.

As video gaming becomes more widespread and players become accustomed to
the ever-improving graphics and interactive features of video games, the Company
believes that gaming machines will make up a larger segment of the gaming
environment. Because of this, the focus of research and development is shifting
toward more emphasis on software development. The same shift is occurring on the
central systems side as both video lottery jurisdictions and casinos demand more
reporting features, downloadable games and additional forms of jackpotting and
linked progressives.

Route Operations. Through three of its subsidiaries, the Company owns,
operates and maintains video lottery and amusement machines in business
establishments located in three areas in southern Montana. The Company believes
its route operations, in addition to generating recurring revenue and
predictable operating profit, enable the Company to understand the needs and
preferences of players and coin operators by providing testing grounds for new
hardware and software concepts. This research enables the Company to observe
player response to various terminal configurations and to use this data to
improve its terminal design.

The Company's route operations primarily utilize coin-operated video poker
and video keno machines. The amusement machines consist principally of
coin-operated video machines, pinball machines, pool tables, CD players and juke
boxes. Based on its familiarity with the relatively small number of competitors
of its route operations and its familiarity with substantially all of the
potential locations for video lottery machines in the market areas, the Company
believes that its route operations have a significant share of the video lottery
machine market in Montana. During the year ended December 31, 1996, the route
operations generated approximately $16.5 million or 9% of the Company's
consolidated revenues.

The Company enters into agreements with owners of business establishments
to install video lottery and amusement machines at their businesses. The number
of machines per location is determined by available space, customer base,
competition, preference of the owner of the establishment, and, in the case of
video lottery gaming machines, licensing limitations. The agreements typically
provide for revenue sharing with the location owner based upon a percentage of
the net revenues generated by the Company's machines. In certain instances, the
Company or one of its subsidiaries may assist the location owner with obtaining
financing relating to the location, including providing a guaranty of such
financing. The agreements require the Company to install, maintain and service
machines installed at the location.

UWS

Contracts

Domestic. UWS provides pari-mutuel wagering services to most North
American customer facilities under long-term service contracts, typically with
5-7 year terms under which the Company provides the pari-mutuel wagering
computer system, as well as the operations, maintenance and supervisory
personnel necessary to operate the system, while the mutuel clerks who issue
tickets on the teller-operated terminals to the patrons of the facility are
employed by the facility. Under such service contracts, the Company at all times
retains ownership of the equipment and is entitled to liquidated damages in the
event a customer cancels without cause.

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<PAGE> 44

Service contract revenues received by UWS from the operation of its
pari-mutuel wagering systems are generally based upon a percentage of the
handle, subject in most instances to minimum fees. Minimum fees under the
service contracts are generally based on the number of days the facility
operates, as well as other factors, including the type of system and number of
terminals installed at the facility and the reliability of the predicted number
of racing days to occur during the term of the contract.

UWS makes certain warranties regarding the operation and reliability of its
wagering systems. In the event of system failure, UWS is generally responsible
for certain liquidated damages, subject to a maximum daily and/or annual amount.
In some instances, UWS may be liable for tickets paid in error or for
counterfeit tickets. Liquidated damages paid or accrued by UWS with respect to
its pari-mutuel contracts during the year ended December 31, 1995 were
approximately 1.6% of its revenue for fiscal 1995 and such liquidated damages
during the year ended December 31, 1996 were less than 0.3% of its revenues for
fiscal 1996.

With the growth of simulcasting, many of UWS's racetrack customers and most
of its OTB customers operate throughout the year. Facilities which are seasonal
generally contract for services only during their operating season, allowing UWS
to move its equipment and personnel to other facilities at the close of an
operating season at a seasonal facility, forming "circuits" among such
facilities.

UWS provides pari-mutuel wagering services to over 120 of approximately 350
pari-mutuel facilities in North America. The installed base of terminals in use
was approximately 8,200 at September 30, 1997.

In some limited instances, North American facilities purchase a pari-mutuel
wagering system from UWS. In such cases, the Company usually enters into
separate service and maintenance agreements for the system.

Until recent years, UWS had historically focused on providing services to
small and medium-sized racetracks; however, since the addition of contracts with
all of the Kentucky thoroughbred racetracks and the Kentucky statewide OTB
network in 1994, UWS has demonstrated its ability to perform at large customer
facilities. The capabilities of UWS's Horizon System were again demonstrated by
handling the record-setting 123rd running of the Kentucky Derby at Churchill
Downs in 1997, where $15.9 million was wagered at the track; an additional $60.7
million was wagered through hubs throughout the country for another North
American single-day record of $76.6 million total combined system handle. UWS
recently signed multi-year contract extensions to its existing totalisator
service contracts with Churchill Downs and Turfway Park racetrack, located in
Florence, Kentucky.

International Sales. UWS has customers in international marketplaces,
including Jamaica, Spain, Mexico, Argentina, Ecuador and the Philippines.
Internationally, there has been growth in the utilization of on-line wagering
systems in established markets. As economic and political situations improve,
new market opportunities open up for U.S. suppliers in less developed countries
where there is an increasing demand for advanced technology.

Wagering systems for facilities outside of North America have generally
been sold rather than operated pursuant to service contracts. Such sales have
been made on a direct sale basis with payments to the Company generally made in
U.S. dollars. Upon the sale of a system, UWS also charges the purchaser a
license fee for use of the Company's proprietary system software and provides
technical assistance and support. The personnel of the Company participate in
the installation and commissioning of these systems but typically the systems
are thereafter operated by the personnel of the customers who are trained at UWS
serviced facilities.

Products

UWS introduced its System 1000 in 1981 and over the years has expanded its
presence throughout the United States and Canada. Through incorporating new
technology and utilizing more efficient hardware, UWS continues to offer the
wagering industry an affordable sell/cash system to both small and medium-sized
tracks. With approximately 1,600 System 1000 terminals in service at customer
locations throughout the world, the System 1000 terminal has proven to be
extremely durable in the racetrack environment. Inspection and maintenance
services are performed at the Montana headquarters of the Company.

40
<PAGE> 45

The newest wagering system developed by UWS, the Horizon System, first
introduced in 1993, features the dual-purpose VERSA(TM) terminal, which has both
a self-service and teller-operated mode, allowing the racetrack to make full use
of all terminals, even on slow race days. The VERSA(TM) terminal thus allows for
significant labor savings and flexibility and versatility. Other terminals in
the Horizon System family are the portable wireless ULTIMA(TM); the cashless
account-betting PROFILE(TM); and a bill-accepting module to convert a VERSA(TM)
into a touch-screen, self-service terminal. Approximately 6,600 VERSA(TM)
terminals are presently in service at customer locations. In 1995, an enhanced
version of the VERSA(TM) as well as a color version were developed. Those new
model terminals were produced in 1996 and are in service at customer locations.

UWS believes that its ability to attract new and retain existing wagering
system customers depends in part on the continuous incorporation of innovative
technological advances to improve its products lines. The Company maintains a
development program directed toward new products and the improvement and
refinement of its present products to expand their uses and applications.

SUNLAND PARK

The racetrack operation of UWS, Sunland Park, is located in Sunland Park,
New Mexico, adjacent to El Paso, Texas. The State of New Mexico recently voted
to allow casino gaming at pari-mutuel racetracks in New Mexico, including the
Company's racetrack in Sunland Park, New Mexico. The recently enacted
legislation permits the Company to operate up to 300 gaming machines per
pari-mutuel racetrack facility for up to twelve hours per day. The
implementation of gaming is subject to the timing and satisfaction of conditions
of the legislation, including the state's formation of a separate commission to
oversee the gaming and other regulatory matters (including the grant of
necessary licenses to the Company). Two million residents live within a 100-mile
radius of Sunland Park, which area includes the cities of El Paso, Texas and
Juarez, Mexico. The Company has had architectural plans developed for casino
gaming at the racetrack facility and has initiated construction. Current plans
call for approximately $8.0 million of capital expenditures for facility
enhancements, gaming machines and related equipment.

MANUFACTURING

The Company's manufacturing facility is located in Bozeman, Montana. The
Company's manufacturing operations consist primarily of assembly and testing of
its on-line lottery, video gaming and pari-mutuel wagering systems machines. The
Company purchases most of the parts, components and subassemblies (some of which
are designed by the Company) from outside sources and then assembles them into
finished products. The Company generally uses standard parts and components that
are available from multiple sources. The Company has contracted with third
parties for the assembly of gaming machines, which the Company utilizes when
demand exceeds the capacity of its Bozeman facility as well as when
contractually required. The Company also has contracted with outside sources for
the manufacture of some of its components. The Company has experienced low
turnover among its work force, high quality of finished goods and low labor
costs.

COMPETITION

On-line Lottery. Competition is intense in the traditional on-line lottery
business. It is not unusual in the United States for contract awards to be
challenged by unsuccessful vendors. Although a growing number of jurisdictions
permit lotteries, relatively few new or rebid contracts are awarded each year.
Although price is a significant competitive factor, other important competitive
factors are the ability to optimize lottery revenues through game design;
customer marketing support; the dependability, security, technological
sophistication and upgrade capability of the network; and the experience and
reputation of the vendor.

AWI's principal competitor in the on-line lottery business, GTECH, is
significantly larger, having supplied lottery systems to 29 of the 38 United
States on-line lottery jurisdictions. This competitor also has a substantial
international presence. The market dominance of this competitor further enhances
its competitive

41
<PAGE> 46

position. Other competitors include International Lottery and Totalizer Systems,
Inc., Scientific Games, Inc., Autotote Corporation, International des Jeux
(Lotto France), EssNet/Alcatel and several other companies.

In jurisdictions with on-line and video lottery gaming products, the
products may compete with each other for entertainment dollars spent on
wagering.

Video Gaming and Route Operations. The Company competes with domestic and
foreign manufacturers of video gaming equipment and providers of traditional
on-line lottery systems and casino-based gaming systems in the sale of its
gaming machines and central control system software. Many of the Company's
competitors have greater financial and other resources than the Company. The
Company faces competition from companies marketing complete video lottery gaming
systems and from companies marketing only video lottery gaming machines as well
as increasing competition in the casino gaming market. Among the Company's
competitors are International Game Technology, Inc., Bally Gaming, Atronic,
Silicon Gaming, Spielo Gaming International, WMS Industries, Casino Data
Systems, Aristocrat and GTECH.

Significant factors which influence the purchase of gaming machines and
central control systems include price, reliability, technical capability,
security, overall earnings power of the product and the experience, financial
condition and reputation of the manufacturer and distributor. In addition,
gaming authorities may impose other qualifications and requirements on the
Company and its competitors in the supply of video gaming products and services
and may also consider the performance record and reputation for integrity of the
vendor.

The Company's route operations compete directly with other machine route
businesses, including numerous small route operators and several route operators
similar in size to the Company's route operations, and with companies selling
video lottery gaming machines directly to location owners. The principal factors
of competition for route operations are the reputation of the route operator and
the quality and earnings potential of the machines offered by the route
operator, the service provided by the route operator and the terms of its
agreement with the location owner.

Wagering Systems and Racetrack Operations. Because of the highly regulated
nature of the pari-mutuel industry and critical functions of the products
supplied, vendors must meet thresholds of reliability, customer service and
reputation ahead of product design and price. Unexpected shutdown of a wagering
system could result in significant loss of revenues so customers will typically
only utilize wagering systems from suppliers with proven abilities at similar
size wagering facilities (both in terms of number of terminals and total
handle).

UWS's principal competitors are Autotote, AmTote and, at some facilities, a
limited number of other smaller, local and regional companies. Competition
outside of North America is more fragmented, with competition being provided by
several international and regional companies. No single company maintains a
dominant market position internationally, although certain companies possess
regional strengths.

Sunland Park does not have direct competition for horse racing in the El
Paso area, although there is an operating greyhound racing facility in Juarez,
Mexico which also offers sports/race wagering on simulcast racing events and
sporting events. Ruidoso Downs, a horse racing facility in Ruidoso Downs, New
Mexico, competes in the same general market as Sunland Park, but currently the
racing dates at the two tracks do not conflict. Also, The Downs at Albuquerque,
New Mexico, historically has competed to some extent against Sunland Park,
commencing in January and continuing through the end of Sunland Park's season.
If the racing dates or schedules of either other track are expended or altered
so that a direct conflict between Sunland Park and the others occurs, it is
likely that there would be a significant effect on operations and revenues of
Sunland Park.

While Texas permits pari-mutuel wagering, there are no pari-mutuel
racetracks in direct competition with Sunland Park's geographic area, although
there has been some effect upon the number and quality of horses available to
run at Sunland Park. Sunland Park also competes against other forms of
entertainment, including sporting events. The States of New Mexico and Texas
currently authorize limited forms of gambling, such as a state lottery, bingo,
and Native American casinos, all of which compete for the leisure dollar and
which have had a significant negative effect on attendance and handle at Sunland
Park in recent years.
42
<PAGE> 47

INTELLECTUAL PROPERTY

The Company may seek and, in some cases, has sought, patents on some of the
technology used in its products. No assurance can be given that any patent
applications filed will be granted, that the patents will not be infringed or
that other parties will not develop similar technology that will not violate the
patents. The Company believes that its technical know-how, trade secrets and the
creative skills of its personnel are more important to its success than any
benefit which patent protection may afford. The Company typically requires
persons such as customers, employees, licensees and subcontractors who have
access to proprietary information concerning its products to sign non-disclosure
agreements, which prohibit the use of this information other than for the
specific purpose for which it is provided, and the Company relies on such
agreements, other security measures and trade-secret laws to protect such
proprietary information.

The Company has pending applications for registration of trademarks in
connection with its products in the United States, Australia and other foreign
countries. The Company intends to file additional applications to register
trademarks in the United States and other key jurisdictions as considered
necessary. The Company also relies on the laws of trade secrets and copyright to
protect its proprietary rights to its central control system software and
various other software programs.

EMPLOYEES

As of September 30, 1997, the Company employed approximately 1,250 people
on a full and part-time basis. Approximately 510, 170, and 380 were employed in
the on-line lottery, gaming machine and wagering systems and racetrack
operations segments, respectively. Another 190 people provide corporate
manufacturing, finance and administration and national marketing services to the
operating segments. Of the total 1,250 people, approximately 120 are part-time
employees in the wagering systems and racetrack operations segment.

The Company has no collective bargaining agreements with any of its
employees and believes that its overall relations with employees are good.

PROPERTIES

The Company's executive offices, principal manufacturing and distribution
facilities occupy approximately 82,000 square feet in a building owned by the
Company and located in Bozeman, Montana. The Company leases approximately 26,000
square feet serving as a warehouse/assembly facility in the Bozeman area and
approximately 8,000 square feet serving as executive offices in Atlanta,
Georgia.

The Company's on-line lottery services subsidiary, AWI, leases facilities
in New Jersey located in a complex of which AWI occupies approximately 46,000
square feet and in Arden Hills, Minnesota, where AWI occupies approximately
13,000 square feet. In connection with its operations in the various
jurisdictions, AWI occupies approximately 40 additional sites, most of which it
holds under lease. The Company leases space in Reno (4,800 square feet) and Las
Vegas (13,900 square feet), Nevada, primarily for product sales and support as
well as assembly, repair and storage of video gaming machine products. Also in
Bozeman, Montana, the Company leases approximately 5,300 square feet out of
which it operates one of its route businesses. The Company also owns two
buildings, one in Billings and one in Livingston, Montana, out of which it
operates its other two route businesses. The Company leases sales and service
offices in Biloxi, Mississippi, Victoria and New South Wales, Australia and
Dover, Delaware.

The Company also leases approximately 2,600 square feet of office space
near Baltimore, Maryland for the administrative offices of UWS. UWS leases
approximately 12,100 square feet in San Diego, California, which primarily
houses the subsidiary's research and development activities. UWS leases
approximately 2,900 square feet of space in Winnipeg, Canada, for administrative
and repair services. The Company's racetrack facility in Sunland Park, New
Mexico, rests on approximately 153 acres and contains in excess of 330,000
square feet inclusive of the grandstand, stables, barns, offices, etc. The
racetrack itself is a one-mile oval track.

43
<PAGE> 48

LEGAL PROCEEDINGS

A 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 gaming machine operators in South Dakota by a
group of other video lottery gaming machine operators, alleging, among other
things, a combination and conspiracy to unlawfully restrain trade in video
lottery gaming 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 South Dakota federal district court granted the
Company's and other defendants' motion for summary judgment, dismissing, with
prejudice, all claims of the plaintiffs in this matter. In December 1996,
plaintiffs filed an appeal of this ruling with the Eighth Circuit of the U.S.
Court of Appeals. On August 29, 1997, the Court of Appeals affirmed the judgment
of the district court, and on September 29, 1997, the Court of Appeals issued an
order denying a rehearing in this matter. The plaintiffs have filed a petition
for a writ of certiorari with the United States Supreme Court, and the petition
was placed on the docket on January 6, 1998.

On December 9, 1996, a purported class action was filed in the Court of
Chancery, Delaware State Court, directing the Company and certain officers and
directors of the Company to fulfill their fiduciary obligations by effecting a
transaction for the acquisition of the Company. On January 2, 1997, the Company
and certain other officers and directors of the Company filed a motion to
dismiss the matter. This matter has been informally stayed for an indefinite
period of time by agreement of the parties.

Although the Company is a party 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 likely have a material adverse effect on the financial position or
results of operations of the Company.

44
<PAGE> 49

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Set forth below is certain information concerning the executive officers
and directors of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard R. Burt(2).............. 50 Chairman and Director
Richard M. Haddrill............. 44 President and Chief Executive Officer, Treasurer and Director
James J. Davey(1)(2)............ 56 Vice Chairman and Director
Patricia W. Becker(1)(2)........ 45 Director
John R. Hardesty................ 57 Director
William Spier(1)(2)(3).......... 62 Director
Dennis V. Gallagher............. 45 General Counsel and Secretary
Michael L. Eide................. 47 President, Video Lottery Consultants, Inc.
Susan J. Carstensen............. 35 Chief Financial Officer
</TABLE>

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

(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Mr. Spier has agreed to resign immediately as director of the Company and
not acquire additional shares of the Common Stock for seven years if the
beneficial ownership of the Selling Stockholders is reduced below 5% of the
total Common Stock outstanding as a result of dispositions. If such
beneficial ownership is reduced below 2% of the total Common Stock
outstanding as a result of dispositions, then Mr. Spier and the Company will
grant each other general releases. See "Selling Stockholders."

Richard R. Burt became a director and chairman of the Company on December
15, 1994. Mr. Burt is a founder and the chairman of IEP Advisors, Inc. in
Washington D.C., a consulting and merchant banking firm. From 1991 to 1994, Mr.
Burt was a partner in McKinsey & Co., a world-wide management consulting firm.
During the period from 1989 to 1991, Mr. Burt served as the Chief Negotiator in
the Strategic Arms Reduction Talks (START) with the former Soviet Union. He was
the U.S. Ambassador to the Federal Republic of Germany from 1985 to 1989. Mr.
Burt was the Assistant Secretary of State for European and Canadian Affairs from
1983 to 1985, and served as Director of Politico-Military Affairs from 1981 to
1983. Mr. Burt also serves as the Chairman of the Board of Weirton Steel, Inc.,
a tin-plate manufacturer, and serves on the Boards of Directors of the Paine
Webber Mutual Funds, Hollinger International, a company owning newspapers in
Europe, Canada, Australia and the United States, and Archer Daniels Midland, an
agri-business company. In addition, Mr. Burt is a member of the Textron
Corporation's International Advisory Council and the Bank of Montreal's
International Advisory Board.

Richard M. Haddrill was appointed as chief executive officer of the Company
on June 18, 1997 and as president of the Company and to its Board of Directors
on August 21, 1996. He filled the Board vacancy created by the resignation of
Stephen Vanderwoude. In addition, on June 18, 1997 he was appointed chief
executive officer of the Company's AWI subsidiary, and has served as president
of AWI since December 1996. Mr. Haddrill joined the Company in December 1994 as
the Company's executive vice president of operations and chief financial
officer. He served as chief financial officer until May 15, 1997. In December
1994, Mr. Haddrill was also appointed treasurer of the Company. In August 1995,
Mr. Haddrill was appointed to the Board of Directors of the Company's UWS
subsidiary, and assumed the position of chief executive officer of UWS in
February 1996. From July 1992 until November 1994, Mr. Haddrill served as
executive vice president -- corporate and president of international
subsidiaries for Knowledgeware, Inc., a provider of application development
software and services worldwide. Prior to joining Knowledgeware, Inc. in 1991 as
an executive vice president and chief financial officer, Mr. Haddrill was the
managing partner of the Colorado and New Mexico offices of the accounting firm
of Ernst & Young from August 1989 to October 1991 and held various positions as
a partner or employee with Ernst & Young from January 1975 to September 1989.

James J. Davey was elected as a director of the Company effective February
25, 1993, and was elected as vice chairman on May 31, 1994. He first joined the
Company as chief operating officer in October 1992. Mr. Davey served as chief
executive officer from February 25, 1993 until May 31, 1994, and from February
24, 1994 until May 31, 1994, he also served as president. From October 1992
until February 1993, Mr. Davey

45
<PAGE> 50

served as president of the Company's on-line lottery services subsidiary, AWI.
From 1986 to October 1992, Mr. Davey was the director for the Oregon State
Lottery. From 1985 to 1986, Mr. Davey was deputy director and assistant director
of administration for the Oregon State Lottery. From 1980 through 1984, Mr.
Davey served as administrator for the Oregon Department of Revenue.

Patricia W. Becker was appointed to the Board of Directors effective
January 18, 1995 to fill a newly-created position thereon. Ms. Becker is a
consultant to the Company and serves as chair of its Compliance Committee. Ms.
Becker served as the chief of staff to Bob Miller, Governor of Nevada, from
October 1993 to January 1995. Prior to that, she was senior vice president,
general counsel and secretary of Harrah's Casino Hotels from June 1989 to July
1993 and vice president, general counsel and secretary from 1984 to 1989. Ms.
Becker was Deputy and Chief Deputy Attorney General assigned to the Nevada
Gaming Division from 1979 until she was appointed to the State Gaming Control
Board, where she served until September 1984. Ms. Becker is a vice chair for the
Gaming Law Section of the American Bar Association, a past president of the
Nevada Trial Lawyers Association and general counsel and a trustee of the
International Association of Gaming Attorneys. Ms. Becker currently serves on
the Board of Directors of Fitzgeralds Gaming Company, a Nevada based company
which owns casinos.

John R. Hardesty was appointed to the Board of Directors effective December
18, 1996 to fill a vacancy thereon created by the resignation of Jeffrey D.
Cushman. Mr. Hardesty is chairman of Electro Dynamics Crystal Corporation, a
manufacturer of electronic components for the communication industry. Mr.
Hardesty also owns 100% of Thermo Dynamics, Inc., a manufacturer of synthetic
quartz for the electronics industry. He serves as a director of LeTeko, Inc., a
gold exploration company. From 1988 until its sale in 1995, Mr. Hardesty was the
owner and chairman of Dixson Inc., a manufacturer of electronic instruments for
the heavy duty truck market and process control market.

William Spier became a director of the Company in July 1991. Mr. Spier was
chairman of DeSoto, Inc., a detergent and household cleaning products
manufacturer, from May 1991 to September 27, 1996 and chief executive officer of
DeSoto, Inc., from May 1991 to January 1994 and from September 1995 to September
27, 1996. He has been president and chairman of Sutton Holding Corp., a New York
based investment company, since 1989. Since 1982 Mr. Spier has been a private
investor. Prior to that time, he was vice chairman of Phibro-Salomon Inc., an
investment banking firm. Mr. Spier is also acting chief executive officer of
Integrated Technology USA, Inc., a developer and marketer of computer
peripherals and telecommunication devices. Mr. Spier is also a director of
Keystone Consolidated Industries, Inc., a manufacturer of steel and wire rod
products, Geotek Communications, Inc., a wireless telecommunications company and
Integrated Technology USA, Inc.

Dennis V. Gallagher was appointed secretary of the Company on May 15, 1997,
and as general counsel to the Company on February 10, 1997. From July 1993 until
February 1997, Mr. Gallagher was vice president and general counsel of Harrah's
Riverboat Casino Entertainment Division located in Memphis, Tennessee. From
November 1984 until July 1993, he served as associate general counsel and
assistant secretary of Harrah's Hotels and Casinos in Reno, Nevada. Mr.
Gallagher was the Chief of the Investigations Division of the Nevada State
Gaming Control Board from November 1983 until November 1984.

Michael L. Eide has served as president and a director of VLC since
December 1, 1994. Prior to that time, he served as treasurer and chief financial
officer of the Company from May 1991 until December 1994, and assistant
secretary from October 1992 through December 1994. He has also held the
positions of secretary, treasurer and assistant secretary with VLC during the
period November 1990 through December 1994. From 1977 to December 1988, Mr. Eide
was a principal in the accounting firm of Neil, Williamson, Eide and Staker in
Bozeman, Montana.

Susan J. Carstensen was appointed chief financial officer on May 15, 1997.
Ms. Carstensen was vice president, finance of the Company from November 7, 1996
to May 15, 1997. From June 1995 to November 1996 she was corporate controller
for the Company. From February 1995 to June 1995 she was the director of
internal audit for the Company. Ms. Carstensen was manager, cost and financial
accounting for Martin Marietta Astronautics Group in Denver, Colorado from May
1991 through February 1995. From August 1985 through May 1991 Ms. Carstensen was
with the accounting firm of Ernst & Young in Denver, Colorado.

46
<PAGE> 51

SELLING STOCKHOLDERS

The following table sets forth the name and the number of shares of Common
Stock beneficially owned and offered hereby by each of the Selling Stockholders.

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK BENEFICIALLY
NAME OF SELLING STOCKHOLDERS OWNED AND OFFERED HEREBY
- ---------------------------- -----------------------------------
<S> <C>
William Spier(1)............................................ 222,252
Video Investment Partners, L.P............................ 207,629
Gabriel Capital, L.P...................................... 222,459
Asgard Ltd................................................ 148,307
LBN Investment Associates, L.P............................ 74,153
Parkway M&A Capital Corporation........................... 74,153
Homer Noble............................................... 74,153
Alpine Associates, Ltd.................................... 370,767
Michael B. Yudin.......................................... 44,493
Michael B. Yudin and Martin I. Ravin, Trustees FBO
Jonathan Yudin......................................... 14,830
Michael B. Yudin and Martin I. Ravin, Trustees FBO Tal
Yudin.................................................. 14,830
------------
Total............................................. 1,468,026
============
</TABLE>

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

(1) At the time the Selling Stockholders (or affiliated parties) acquired shares
of Common Stock in 1992, they granted Mr. Spier sole investment and voting
power with respect to these shares. In February, 1993, on behalf of all of
the Selling Stockholders, Mr. Spier entered into an agreement with the
Company (the "Shareholders Agreement") providing for, among other things,
registration rights with respect to the Common Stock owned by the Selling
Stockholders and the right to board representation. Mr. Spier has exercised
the right under the Shareholders Agreement to have the Selling Stockholders'
Common Stock registered and the Selling Stockholders' shares are being
offered for sale pursuant to this Prospectus. During 1996 and 1997, Mr.
Spier and William P. Lyons, who was appointed to the Board of Directors
pursuant to the Shareholders Agreement as a designee of the Selling
Stockholders, disagreed with the Company on a number of issues involving
corporate governance, corporate management, board and board committee
composition, strategic planning and objectives, executive compensation, and
transactions between the Company and certain directors. In late 1996 and
during the first half of 1997, Mr. Spier made a proposal to acquire the
Company, which was not accepted by the Company's Board of Directors and was
subsequently withdrawn by Mr. Spier. In June 1997, the Board of Directors
did not renominate Mr. Lyons for another term as a director and Mr. Lyons
subsequently resigned as of July 30, 1997. Mr. Spier has advised the Company
that he believes that the Company's addition of Mr. Hardesty to the Board of
Directors in 1996 and its failure to renominate Mr. Lyons constitute
breaches of the Shareholders Agreement. The Company believes it has acted
properly. Mr. Spier (and, prior to his resignation, Mr. Lyons) dissented
from each of the proposals supported by the other members of the Board of
Directors in the Company's Proxy Statement for its Annual Meeting of
Stockholders held on November 14, 1997 and objected to the dissemination of
the Proxy Statement. In connection with the offering of Shares by the
Selling Stockholders, Mr. Spier and the Company entered into an agreement
providing that, if the beneficial ownership of the Selling Stockholders is
reduced below 5% of the outstanding Common Stock as a result of
dispositions, then (i) Mr. Spier will resign immediately as a director of
the Company, and (ii) Mr. Spier will not acquire additional shares of Common
Stock for seven years. The agreement further provides that if the beneficial
ownership of the Selling Stockholders is reduced below 2% of the outstanding
Common Stock as a result of dispositions, then the Selling Stockholders and
the Company will release each other with respect to any claims they may have
against each other. In addition, the agreement requires the Selling
Stockholders in certain circumstances to reimburse the Company for certain
of its expenses incurred in connection with this Offering. In light of the
substantial public disclosure regarding the above-described disagreements
between Messrs. Spier and Lyons, on the one hand, and the Company, on the
other, Mr. Spier believes that this Prospectus and the Registration
Statement of which it is a part, including all documents incorporated
therein by reference, accurately disclose as of the date hereof all material
information relevant to a decision with respect to an investment in the
Shares.

47
<PAGE> 52

PLAN OF DISTRIBUTION

Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") among the Selling Stockholders, the Company,
Gerard Klauer Mattison & Co., Inc. ("Gerard Klauer") and Ladenburg Thalmann &
Co. Inc. ("Ladenburg") (Gerard Klauer and Ladenburg being referred to
collectively as the "Underwriters"), the Selling Stockholders have agreed to
sell to each of the Underwriters, and each of the Underwriters severally has
agreed to purchase from the Selling Stockholders, the shares of Common Stock set
forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ----------------
<S> <C>
Gerard Klauer Mattison & Co., Inc........................... 870,118
Ladenburg Thalmann & Co. Inc................................ 372,908
Cowen & Company............................................. 25,000
Dain Rauscher Inc........................................... 25,000
EVEREN Securities, Inc...................................... 25,000
Janney Montgomery Scott Inc................................. 25,000
Jefferies & Company, Inc.................................... 25,000
JW Charles Securities, Inc.................................. 25,000
McDonald & Company.......................................... 25,000
Raymond James & Associates, Inc............................. 25,000
Van Kasper & Company........................................ 25,000
---------

Total............................................. 1,468,026
=========
</TABLE>

In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase from the Selling
Stockholders all of the shares of Common Stock offered hereby (other than those
subject to the over-allotment option described below), if any such shares are
purchased. In the event of a default by an Underwriter, the Underwriting
Agreement provides that, in certain circumstances, the purchase commitments of
the nondefaulting Underwriter may be increased or the Underwriting Agreement may
be terminated.

The Company has been advised by the Underwriters that they propose to offer
the shares of Common Stock directly to the public at the public offering price
set forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of $0.42 per share. Additionally, the
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $0.10 per share to certain other dealers. After the public offering of Common
Stock, the public offering price, concession and other selling terms may be
changed.

The Company has granted to the Underwriters an option, expiring at the
close of business on the 45th day subsequent to the date of this Prospectus, to
purchase up to 220,204 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus, less the underwriting
discount. The Underwriters may exercise such option only to cover
over-allotments, if any, incurred in the sale of the shares of Common Stock. To
the extent that the Underwriters exercise such option, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the percentage it is required to
purchase of the total number of shares of Common Stock in the above table.

The Company and its directors and executive officers have agreed that they
will not offer, sell or contract to sell or otherwise dispose of, directly or
indirectly, or announce the offering of, any shares of Common Stock or any
securities convertible into, or exchangeable for, shares of Common Stock for a
period of 120 days after the date of this Prospectus, except for (i) the shares
of Common Stock offered hereby, (ii) the issuance of shares by the Company
pursuant to stock options, (iii) the issuance of shares or options by the
Company pursuant to employee benefit, stock option or ownership plans of the
Company outstanding or in effect on the date of this Prospectus, and (iv) the
issuance of options pursuant to an employee stock option plan that is adopted
during such 120-day period on substantially the same terms as any such plan in
effect on the date of
48
<PAGE> 53

this Prospectus (so long as such options may not be exercised prior to the end
of such 120-day period) without the prior written consent of the Underwriters.

The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act or contribute to payments the
Underwriters may be required to make in respect thereof. In addition, the
Selling Stockholders have agreed to reimburse the Underwriters' expenses up to
$150,000.

In connection with this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. Underwriters may bid for and purchase
shares of Common Stock in the open market to cover syndicate short positions. In
addition, the Underwriters may bid for and purchase shares of Common Stock in
the open market to stabilize the price of the Common Stock. These activities may
stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end these activities at any time.

The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase the Common Stock at a price that exceeds the highest independent
bid. In addition, the net daily purchases made by any passive market maker
generally may not exceed 30% of its average daily trading volume in the Common
Stock during a specified two month prior period, or 200 shares, whichever is
greater. A passive market maker must identify passive market making bids on the
Nasdaq electronic inter-dealer reporting system. Passive market making may
stabilize or maintain the market price of the Common Stock above independent
market levels. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.

The Selling Stockholders have engaged Ladenburg to provide to the Selling
Stockholders investment advisory services in connection with a possible
acquisition of the Company by the Selling Stockholders. In connection therewith,
the Selling Stockholders made a proposal to acquire the Company which was
subsequently withdrawn. Ladenburg has received customary fees in connection with
the services rendered to the Selling Stockholders.

LEGAL MATTERS

Certain legal matters relating to the validity of the Common Stock offered
hereby will be passed upon for the Company by Rogers & Hardin LLP, Atlanta,
Georgia. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Kaye, Scholer, Fierman, Hays & Handler, LLP, New
York, New York.

EXPERTS

The consolidated financial statements of Powerhouse Technologies, Inc. and
subsidiaries as of December 31, 1995 and 1996 and for the years ended December
31, 1994, 1995 and 1996 have been included in this Prospectus in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein and upon the authority of said firm as experts in
accounting and auditing.

49
<PAGE> 54

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements (audited):
Independent Auditors' Report.............................. F-2
Consolidated Financial Statements:
Statements of Operations for the years ended December
31, 1996, 1995 and 1994............................... F-3
Balance Sheets as of December 31, 1996 and 1995........ F-4
Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994...................... F-5
Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994............................... F-6
Notes to Consolidated Financial Statements................ F-7
Consolidated Financial Statements (unaudited):
Statements of Earnings for the nine months ended September
30, 1997 and 1996, three months ended September 30,
1997 and 1996.......................................... F-26
Balance Sheets for the years ended September 30, 1997 and
December 31, 1996...................................... F-27
Statement of Stockholders' Equity for the nine months
ended September 30, 1997............................... F-28
Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996............................ F-29
Notes to Financial Statements............................. F-30
</TABLE>

All schedules are omitted because the information prescribed thereon is not
applicable or required or is furnished in the consolidated financial statements
or notes thereto.

F-1
<PAGE> 55

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Powerhouse Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of Powerhouse
Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Powerhouse
Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.

/s/ KPMG PEAT MARWICK LLP
--------------------------------------

Billings, Montana
February 28, 1997

F-2
<PAGE> 56

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
On-line lottery.................................... $ 88,842,968 $ 91,653,710 $101,559,326
Gaming machine and route operations................ 60,186,249 61,397,937 68,571,177
Wagering systems and racetrack operations.......... 27,651,989 28,110,605 18,651,802
------------ ------------ ------------
Total revenues............................. 176,681,206 181,162,252 188,782,305
------------ ------------ ------------
COSTS AND EXPENSES:
On-line lottery.................................... 59,332,807 59,438,258 62,396,996
Gaming machine and route operations................ 32,910,623 35,991,531 39,814,825
Wagering systems and racetrack operations.......... 20,103,761 22,286,127 13,991,770
Selling, general and administrative................ 28,697,610 31,139,361 34,000,545
Research and development........................... 7,969,025 8,887,785 8,513,137
Other charges...................................... 34,135,000 2,762,667 23,994,000
Depreciation and amortization...................... 23,822,437 22,587,049 20,694,018
------------ ------------ ------------
Total costs and expenses................... 206,971,263 183,092,778 203,405,291
------------ ------------ ------------
Loss from operations................................. (30,290,057) (1,930,526) (14,622,986)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income.......................... 1,059,794 1,243,471 1,445,688
Interest expense................................... (3,753,555) (3,077,183) (1,687,441)
------------ ------------ ------------
(2,693,761) (1,833,712) (241,753)
------------ ------------ ------------
Loss before income taxes and extraordinary items..... (32,983,818) (3,764,238) (14,864,739)
Income tax benefit (expense)......................... 8,752,842 846,374 (1,303,034)
------------ ------------ ------------
Net loss from operations............................. (24,230,976) (2,917,864) (16,167,773)
Reversal of (provision for) loss on discontinuance of
wagering systems operations, net................... 5,482,279 (5,482,279) --
------------ ------------ ------------
Net loss before extraordinary items.................. (18,748,697) (8,400,143) (16,167,773)
Extraordinary gain, net.............................. 4,014,050 -- --
------------ ------------ ------------
Net loss............................................. $(14,734,647) $ (8,400,143) $(16,167,773)
============ ============ ============
Net earnings (loss) per share:
From continuing operations......................... $(2.27) $(.28) $(1.54)
From discontinued operations....................... .51 (.51) --
From extraordinary items........................... .38 -- --
------------ ------------ ------------
$(1.38) $(.79) $(1.54)
============ ============ ============
Weighted average shares outstanding.................. 10,698,926 10,608,472 10,506,687
============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 57

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,321,884 $ 1,992,667
Restricted short-term deposits............................ 1,364,231 3,768,385
Accounts receivable, net.................................. 19,352,571 22,254,361
Current installments of notes receivable, net............. 2,818,371 2,814,814
Inventories............................................... 18,296,801 26,399,936
Prepaid expenses.......................................... 1,027,256 1,261,963
Income tax refund receivable.............................. 3,551,415 2,431,068
Deferred income taxes..................................... 15,499,722 7,732,606
------------ ------------
Total current assets.............................. 66,232,251 68,655,800
------------ ------------
Property, plant and equipment............................... 153,123,865 132,325,663
Less accumulated depreciation............................. (78,416,733) (60,493,819)
------------ ------------
Net property, plant and equipment................. 74,707,132 71,831,844
------------ ------------
Restricted cash deposits.................................... 2,521,075 817,024
Notes receivable, excluding current installments............ 2,216,074 3,101,503
Goodwill, net............................................... 10,133,364 10,952,241
Intangible and other assets, net............................ 12,232,860 10,492,573
------------ ------------
$168,042,756 $165,850,985
============ ============
LIABILITIES
Current liabilities:
Notes payable............................................. $ 7,650,000 $ 8,250,000
Current installments of long-term debt.................... 10,604,402 9,588,708
Accounts payable.......................................... 6,645,855 15,490,638
Accrued expenses.......................................... 13,247,658 15,339,707
------------ ------------
Total current liabilities......................... 38,147,915 48,669,053
------------ ------------
Long-term debt, excluding current installments.............. 9,312,371 12,884,564
Due to EDS.................................................. 38,025,010 --
Other liabilities........................................... -- 10,000,000
Deferred income taxes....................................... 10,326,000 7,849,206
------------ ------------
Total liabilities................................. 95,811,296 79,402,823
------------ ------------
Commitments and contingencies (Note 13)

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............... 19,127 19,127
Common stock, $.01 par value. Authorized 25,000,000
shares.................................................... 108,292 106,821
Paid-in capital............................................. 97,764,970 97,284,358
Deferred restricted stock compensation...................... (417,129) (452,991)
Accumulated deficit......................................... (25,243,800) (10,509,153)
------------ ------------
Total stockholders' equity........................ 72,231,460 86,448,162
------------ ------------
$168,042,756 $165,850,985
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 58

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
SERIES A
PREFERRED COMMON RESTRICTED TOTAL
STOCK STOCK PAID-IN STOCK COMPEN- ACCUMULATED STOCKHOLDERS'
PAR VALUE PAR VALUE CAPITAL SATION DEFICIT EQUITY
--------- --------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993............. $ -- $123,188 $ 94,032,726 $ -- $ 14,058,763 $108,214,677
Net loss...................... -- -- -- -- (16,167,773) (16,167,773)
Restricted stock issued....... -- 1,700 1,694,550 (1,696,250) -- --
Amortization of deferred
restricted stock
compensation................ -- -- -- 169,714 -- 169,714
Stock redemption.............. -- (24,582) (65,117,241) -- -- (65,141,823)
Stock issued, net of issue
costs....................... 19,127 5,455 66,427,887 -- -- 66,452,469
Stock issued under stock
purchase plan............... -- 337 272,299 -- -- 272,636
Stock options exercised....... -- 237 326,420 -- -- 326,657
------- -------- ------------ ----------- ------------ ------------
December 31, 1994............. 19,127 106,335 97,636,641 (1,526,536) (2,109,010) 94,126,557
Net loss...................... -- -- -- -- (8,400,143) (8,400,143)
Amortization of deferred
restricted stock
compensation................ -- -- -- 323,545 -- 323,545
Rescission of deferred
restricted stock
compensation................ -- (500) (749,500) 750,000 -- --
Stock issued under stock
purchase plan............... -- 986 397,217 -- -- 398,203
------- -------- ------------ ----------- ------------ ------------
December 31, 1995............. 19,127 106,821 97,284,358 (452,991) (10,509,153) 86,448,162
Net loss...................... -- -- -- -- (14,734,647) (14,734,647)
Deferred restricted stock
compensation................ -- 300 132,900 35,862 -- 169,062
Stock issued under stock
purchase plan............... -- 1,171 347,712 -- -- 348,883
------- -------- ------------ ----------- ------------ ------------
December 31, 1996............. $19,127 $108,292 $ 97,764,970 $ (417,129) $(25,243,800) $ 72,231,460
======= ======== ============ =========== ============ ============
</TABLE>

<TABLE>
<CAPTION>
1994 1995 1996
---------------------------- ---------------------------- ----------------------------
SHARES AMOUNTS OUTSTANDING SERIES A COMMON SERIES A COMMON SERIES A COMMON
BALANCE PREFERRED STOCK STOCK PREFERRED STOCK STOCK PREFERRED STOCK STOCK
- --------------------------- --------------- ---------- --------------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year.......... -- 12,318,805 1,912,728 10,633,544 1,912,728 10,682,109
Sale of stock.............. 1,912,728 545,454 -- -- -- --
Stock issued under stock
purchase plan............ -- 33,742 -- 98,565 -- 117,075
Stock redemption........... -- (2,458,182) -- -- -- --
Restricted stock issued
(rescinded).............. -- 170,000 -- (50,000) -- 30,000
Stock options exercised.... -- 23,725 -- -- -- --
---------- ---------- --------- ---------- --------- ----------
End of year................ 1,912,728 10,633,544 1,912,728 10,682,109 1,912,728 10,829,184
========== ========== ========= ========== ========= ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 59

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $(14,734,647) $ (8,400,143) $(16,167,773)
Adjustments to reconcile net loss to net cash
provided by operating activities:
(Reversal of) provision for loss on sale of
wagering systems operations............... (5,482,279) 5,482,279 --
Depreciation and amortization............... 23,822,437 22,587,049 20,694,018
Other charges............................... 34,135,000 2,762,667 23,994,000
Extraordinary gain, net..................... (4,014,050) -- --
Other, net.................................. 78,447 (50,856) 4,418
Changes in operating assets and liabilities:
Sales of receivables........................ 1,466,952 2,339,710 4,311,874
Receivables, net............................ 1,942,256 (7,502,586) (6,312,382)
Inventories................................. (3,488,868) 6,923,294 (26,066,800)
Prepaid expenses............................ 234,707 103,334 (27,995)
Accounts payable............................ 2,006,279 (12,616,174) 18,538,836
Accrued expenses............................ (10,853,878) (7,044,732) (7,152,483)
Deferred and refundable income taxes........ (6,410,669) (2,640,409) 351,387
------------ ------------ ------------
Net cash provided by operating activities........ 18,701,687 1,943,433 12,167,100
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................... (25,522,476) (19,046,937) (13,332,480)
Expenditures on intangible and other noncurrent
assets ..................................... (10,037,063) (3,540,804) (7,058,678)
Acquisition of business operations, net of cash
acquired.................................... -- -- (26,969,161)
Proceeds from sales of equipment............... 109,440 386,063 357,287
Change in restricted cash deposits............. 700,103 181,728 7,298,152
Maturities (purchases) of available-for-sale
securities, net of purchases................ -- -- 24,607,595
------------ ------------ ------------
Net cash used in investing activities............ (34,749,996) (22,019,950) (15,097,285)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds from notes payable to
banks....................................... (600,000) 8,250,000 --
Proceeds from issuance of long-term debt....... 4,364,424 24,286,477 213,900
Repayments of long-term debt................... (13,078,791) (14,735,245) (4,055,255)
Amounts payable to EDS......................... 27,343,010 -- --
Common stock sold under employee benefit
plans....................................... 348,883 398,203 599,293
Sale of stock, net............................. -- -- 66,452,469
Redemption of common stock..................... -- -- (65,141,823)
------------ ------------ ------------
Net cash provided by (used in) financing
activities..................................... 18,377,526 18,199,435 (1,931,416)
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.................................... 2,329,217 (1,877,082) (4,861,601)
------------ ------------ ------------
Cash and cash equivalents, beginning of year..... 1,992,667 3,869,749 8,731,350
------------ ------------ ------------
Cash and cash equivalents, end of year........... $ 4,321,884 $ 1,992,667 $ 3,869,749
============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.
F-6
<PAGE> 60

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Revenue Recognition. Revenue from the sale of gaming machines, on-line
lottery terminals and related parts is recognized upon delivery to the customer.
Revenue from sales of on-line lottery and video gaming central site systems and
equipment is recognized using the percentage of completion method of accounting
for long-term construction type contracts where costs to complete can reasonably
be estimated or upon acceptance of the system when costs to complete cannot
reasonably be estimated. Prior to revenue recognition on system sales, costs
incurred are applied against progress billings and recorded as a net accrued
liability or other current asset as appropriate.

On-line lottery and wagering systems contract services revenues are
recognized as the services are performed and primarily relate to revenues from
long-term contracts which require installation and operation of on-line lottery
and pari-mutuel wagering networks. Revenues under these contracts are generally
based on a percentage of sales volume, which may fluctuate over the life of the
contracts.

Route operations revenue consists primarily of video machine gaming wagers,
net of payouts and state gaming taxes generated under revenue sharing agreements
with route customers. Route operations revenue is recorded weekly as the
revenues are earned.

Revenue from racetrack operations primarily represents commissions on
wagers placed on live and simulcast pari-mutuel racing at the Company's
racetrack in Sunland Park, New Mexico and is recorded on the day of each race.

Equipment leased to others is accounted for as operating leases, whereby
monthly rentals are recorded as income when earned.

Cash and Cash Equivalents. Cash deposits and all highly liquid debt
instruments with maturities of three months or less are considered cash
equivalents in the statements of cash flows.

Restricted deposits. Cash deposits expected to be refunded or released
within one year are considered restricted short-term deposits. The deposits are
primarily for bonds that are required by customers for proposals and long-term
contracts.

Inventories. The Company manufactures inventories for sale and lease as
well as use in the provision of services under long-term contracts. Inventories
purchased and manufactured for use in the provision of services are transferred
to property, plant and equipment when installed pursuant to the terms of such
long-term contracts. Inventories are carried at the lower of cost or market
value. Cost is determined using the first-in, first-out method and includes
materials, labor, allocated indirect manufacturing overhead as well as initial
tooling and other setup charges.

Accounts and Notes Receivable. Accounts and notes receivable are recorded
at cost, less the related allowance for impaired notes receivable. (See Note 5.)

Property, Plant and Equipment. Property, plant and equipment is stated at
cost. Equipment under capital leases is stated at the lower of the present value
of minimum lease payments at the beginning of the lease term or the fair market
value of the asset at the inception of the lease.

F-7
<PAGE> 61

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Depreciation of property, plant and equipment is calculated using the
straight-line method over the estimated useful lives of the assets or the life
of the related contract (including contract extensions) as follows:

<TABLE>
<CAPTION>
ITEM ESTIMATED LIFE
---- --------------
<S> <C>
Wagering systems and on-line lottery equipment.............. 3-7 years
Buildings and improvements.................................. 7-40 years
Machinery and equipment..................................... 3-10 years
Game operations equipment................................... 7 years
Furniture and fixtures...................................... 5-10 years
</TABLE>

Equipment under capital leases is depreciated on a straight-line basis over
the shorter of the lease term or estimated useful life of the asset.

The Company in 1996 reclassified approximately $2,400,000 of on-line
lottery equipment from property, plant and equipment to inventories held for
sale. (See Note 15.)

Goodwill, Intangible and Other Assets. Goodwill, which represents the
excess of purchase price over fair value of net assets acquired, is amortized on
a straight-line basis over the expected periods to be benefited, currently
estimated at 15 years from acquisition date May 1994 (see Note 2). Intangible
and other assets are stated at cost net of accumulated amortization. Intangible
and other assets are amortized over their respective economic useful lives
ranging up to 10 years. Accumulated amortization of Goodwill, Intangible and
other assets was approximately $12,100,000 and $7,594,000 at December 31, 1996
and 1995, respectively. In 1994, the Company recorded impairment losses on
goodwill based on estimates of discounted future operating cash flows related to
the asset. In June 1995, the Company adopted Statement of Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of" (the "Statement"). The
Statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In performing the
review for recoverability, the Company estimates the future cash flows expected
to result from the use of the asset and its eventual disposition. If the sum of
these expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, the asset is considered "impaired"
and an impairment loss is recognized. Measurement of the impairment loss amount
is based on the fair value of the asset. Fair value is measured based on the
present value of the expected future net cash flows calculated using a discount
rate commensurate with the risks involved.

Foreign Currency Translations and Transactions. Gains and losses from
foreign currency transactions and remeasurements are included in results of
operations.

Income Taxes. Deferred tax assets and liabilities are recognized for the
estimated future consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. The current and noncurrent portions of these deferred tax assets and
liabilities are classified in the balance sheet based on the respective
classification of the assets and liabilities which give rise to such deferred
income taxes.

Earnings 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
antidilutive.

Fair Value of Financial Instruments. The carrying value of financial
instruments, consisting primarily of cash, accounts receivable and accounts
payable, approximates fair value due to the liquid nature of the instruments.
(See Notes 5 and 10 for fair value estimates of notes receivable and long-term
debt.)

F-8
<PAGE> 62

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock based compensation plans. The Company applies Accounting Principles
Board Opinion 25 and related interpretations in accounting for its stock based
compensation plan. Accordingly, no compensation cost has been recognized for
options granted under the plans. (See Note 12.)

Reclassifications. Certain reclassifications have been made to the 1995
and 1994 amounts to conform to the 1996 presentation. (See Note 2.)

Accounting Pronouncements Not Yet Adopted. The Company has capitalized
start-up costs in conjunction with their long-term contracts in the on-line
lottery and wagering systems segments in accordance with Statement of Position
(SOP) 81-1. The AICPA Accounting Standards Executive Committee (AcSEC) approved
for issuance the SOP, Reporting on the Costs of Start-Up Activities, which will
require that costs incurred during a start-up activity (including organization
costs) be expensed as incurred. Before issuance, the SOP must be reviewed and
cleared by the FASB. If cleared by the FASB, it is anticipated that the final
SOP would be released in the second quarter of 1998 and be effective for fiscal
years beginning after December 15, 1998. (See Note 8.) Depending on the level of
the Company's start-up activities, this change in accounting method may be
material.

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

(2) DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED/EXTRAORDINARY ITEM

On May 3, 1994, the Company completed the purchase of all of the
outstanding stock of United Wagering Systems, Inc. ("UWS"). UWS is involved in
the design, manufacture, operation, sale and lease of computerized wagering
systems, primarily pari-mutuel wagering systems, and the ownership and operation
of a racetrack facility. The original purchase price of $29,600,000 included
$19,600,000 in cash and 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 UWS and the pari-mutuel wagering industry became
increasingly apparent. These developments included a significant decline in the
gross revenues at pari-mutuel wagering and other facilities, sharp reductions in
gross margins and the failure of various state legislative initiatives
authorizing the introduction of gaming devices at tracks to occur as
anticipated. The Company's investment in Goodwill, net of amortization,
attributable to the wagering systems segment of UWS of $17,300,000 was written
off in the fourth quarter of 1994, leaving approximately $11,700,000 of Goodwill
associated with the racetrack operations segment of UWS.

During 1995, the Company did not pay principal and interest obligations
under the terms of the promissory notes to the sellers in the aggregate amount
of $10,000,000 made in conjunction with the acquisition of UWS in May 1994. 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 $4,014,050 gain on debt extinguishment. (See Note
10.)

The Company, in the fourth quarter 1995, made a decision to sell UWS,
exclusive of the racetrack in Sunland Park, New Mexico. The Company entered into
a non-binding letter of intent in the fourth quarter 1995 for the sale of this
segment; however, this transaction was abandoned because final terms could not
be negotiated. The Company continued to review other potential opportunities for
the sale of this operation through the second quarter 1996; 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
F-9
<PAGE> 63

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

operations of the wagering systems segment have been reclassified to continuing
operations in all periods presented. The estimated provision for loss on
disposal of $5,482,279, recorded in 1995, was reversed in the third quarter
1996. Concurrent with the reversal, the Company recorded an impairment charge on
certain long-lived assets of the wagering systems segment of approximately
$2,800,000. Additionally, in 1996 the Company implemented a restructuring plan
of the manufacturing and repair and maintenance operations of the wagering
systems segment inclusive of closing a facility in Shepherd, Montana. The
manufacturing of wagering system terminals will be performed in the Company's
Bozeman, Montana facility. Costs and expenses recorded in the third quarter 1996
for the restructuring plan were approximately $300,000.

(3) BUSINESS SEGMENTS

The Company operates principally in three business segments: the sale,
design, manufacture, installation and operation of on-line lotteries; the
design, manufacture, marketing and leasing of gaming machines and central
control systems and related services; and the design, manufacture, sale and
operation of computerized pari-mutuel wagering systems for dog and horse racing
tracks. These segments operate throughout the United States and on a limited
international basis.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
On-line lottery...................................... $ 88,842,968 $ 91,653,710 $101,559,326
Gaming machine and route operations.................. 64,530,676 62,889,528 83,249,299
Wagering systems and racetrack operations............ 27,651,989 28,110,605 18,651,802
Less intercompany revenues......................... (4,344,427) (1,491,591) (14,678,122)
------------ ------------ ------------
Total revenues............................. $176,681,206 $181,162,252 $188,782,305
============ ============ ============
Operating profit (loss):
On-line lottery...................................... $(29,449,203) $ (3,464,191) $ (1,166,855)
Gaming machine and route operations.................. 9,432,769 13,171,240 18,216,598
Wagering systems and racetrack operations............ (3,994,922) (3,831,614) (21,384,805)
General corporate expenses........................... (6,825,851) (8,010,609) (9,284,023)
Interco profit..................................... 547,150 204,648 (1,003,901)
------------ ------------ ------------
Total operating profit (loss).............. $(30,290,057) $ (1,930,526) $(14,622,986)
============ ============ ============
Operating profit (loss) before "other" charges:
On-line lottery...................................... $ 1,622,909 $ 967,167 $ 4,777,145
Gaming machine and route operations.................. 9,432,769 11,894,459 18,216,598
Wagering systems and racetrack operations............ (932,052) (3,568,947) (3,334,805)
General corporate expenses........................... (6,825,851) (8,665,186) (9,284,023)
Interco profit..................................... 547,150 204,648 (1,003,901)
------------ ------------ ------------
Total operating profit before "other"
charges.................................. $ 3,844,925 $ 832,141 $ 9,371,014
============ ============ ============
</TABLE>

F-10
<PAGE> 64

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Capital expenditures:
On-line lottery...................................... $ 16,270,712 $ 8,079,300 $ 7,080,663
Gaming machine and route operations.................. 5,809,103 5,353,786 2,403,181
Wagering systems and racetrack operations............ 3,455,358 4,762,307 3,846,948
Corporate............................................ 402,877 1,352,647 1,284,709
Less intercompany step-up in basis................. (415,574) (501,103) (1,283,021)
------------ ------------ ------------
Total capital expenditures................. $ 25,522,476 $ 19,046,937 $ 13,332,480
============ ============ ============
Depreciation and amortization:
On-line lottery...................................... $ 14,247,555 $ 14,242,014 $ 13,237,470
Gaming machine and route operations.................. 4,908,125 3,772,100 3,424,638
Wagering systems and racetrack operations............ 5,085,807 4,657,756 3,836,063
Corporate............................................ 501,481 620,931 486,193
Less depreciation on intercompany step-up basis.... (920,531) (705,752) (290,346)
------------ ------------ ------------
Total depreciation and amortization........ $ 23,822,437 $ 22,587,049 $ 20,694,018
============ ============ ============
Identifiable assets:
On-line lottery...................................... $ 62,349,531 $ 77,547,719 $ 68,292,863
Gaming machine and route operations.................. 45,656,205 34,904,859 47,149,696
Wagering systems and racetrack operations............ 42,692,115 46,106,131 49,261,426
Corporate............................................ 19,066,692 9,546,562 11,770,845
Less intercompany step-up in basis................. (1,721,787) (2,254,286) (2,443,218)
------------ ------------ ------------
Total identifiable assets....................... $168,042,756 $165,850,985 $174,031,612
============ ============ ============
</TABLE>

Intercompany revenues and expenses from transactions between subsidiaries
are eliminated in consolidation. Operating profit is defined as revenues less
cost of sales, direct and allocable selling, general and administrative
expenses, research and development expenses, and depreciation and amortization
expense attributable to a segment.

Included in the on-line lottery segment is revenue from equipment sales of
approximately $4,408,000, $5,314,000 and $9,940,000 and costs and expenses
associated with equipment sales revenue of approximately $3,062,000, $4,267,000
and $8,235,000 in the years ended December 31, 1996, 1995 and 1994,
respectively.

The gaming machine segment includes operating lease revenue of
approximately $10,726,000, $6,783,000 and $6,047,000 and revenues from royalties
of approximately $627,000, $3,600,000 and $7,200,000 in the years ended December
31, 1996, 1995 and 1994, respectively.

Included in the wagering systems segment is revenue from equipment sales of
approximately $2,140,000, $2,124,000 and $2,330,000 and costs and expenses
associated with equipment sales revenue of approximately $1,295,000, $1,133,000
and $1,143,000 in the years ended December 31, 1996, 1995 and eight months ended
December 31, 1994, respectively.

Revenue related to racetrack operations was approximately $7,153,000,
$7,968,000 and $4,821,000 and operating losses related to racetrack operations
were approximately $(1,569,000), $(1,327,000), and $(874,000) in the years ended
December 31, 1996, 1995 and the eight months ended December 31, 1994,
respectively.

Total identifiable assets of the racetrack operations were approximately
$22,710,000, $23,889,000 and $22,255,000 at December 31, 1996, 1995 and 1994,
respectively.

F-11
<PAGE> 65

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) REVENUE CONCENTRATION

The Company had revenues from customers or distributors within a specific
jurisdiction which accounted for more than 10% of the Company's gaming machine
and route operations revenues approximately as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
----------- ---- ----------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
Montana........................ $19,748,000 32.8 $19,523,000 31.2 $17,927,000 26.1
Quebec......................... 2,169,000 3.6 12,291,000 19.6 10,532,000 15.4
Louisiana...................... 1,389,000 2.3 8,999,000 14.4 12,044,000 17.6
Oregon......................... 7,090,000 11.7 6,054,000 9.7 4,327,000 6.3
</TABLE>

Montana revenue includes total revenues from route operations of
approximately $16,548,000, $15,269,000 and $15,422,000 in the years ended
December 31, 1996, 1995 and 1994, respectively.

The Company derives on-line lottery revenue from contracts ranging from one
to five years with varying options for extensions and renewals and from on-line
lottery system software and equipment sales from customers in ten individual
states and three international jurisdictions. For the years ended December 31,
1996, 1995 and 1994, the following customers accounted for more than 10% of the
Company's on-line lottery revenue:

<TABLE>
<CAPTION>
1996 1995 1994
CONTRACT ------------------ ------------------ ------------------
EXPIRATION AMOUNT % AMOUNT % AMOUNT %
---------- ----------- ---- ----------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Florida............... 6/96 $30,203,000 34.0 $35,247,000 38.5 $37,692,000 37.1
Pennsylvania.......... 12/98 23,164,000 26.1 22,101,000 24.1 22,229,000 21.9
</TABLE>

The Company's contract with the Washington State Lottery expired in June
1996. The expired contract accounted for approximately $5,739,000 (6.5%) of the
lottery services revenue in 1996, $10,382,000 (11.3%) in 1995 and $10,930,000
(10.8%) in 1994. The expiration date of the current contract with the Florida
Lottery was extended from June 30, 1996, as a result of a delay of the award of
a new contract. On October 31, 1996, the Company was notified by the Florida
Lottery that the Company has been selected as the most highly qualified bidder
for the award of a new five-year on-line lottery contract. A competitor, GTECH
Corporation, has protested the Florida Lottery's selection of the Company.
Pending resolution of the protest, the Company will commence contract
negotiations. Under the terms of the request for proposal, sizable capital
expenditures in excess of current credit facilities would be required to fulfill
its terms. The availability of and terms of new financing are subject to
numerous uncertainties and cannot be reasonably predicted.

Export Sales. The Company had total export sales from the United States of
approximately $28,600,000, $30,200,000 and $38,500,000 during the years ended
December 31, 1996, 1995 and 1994, respectively.

F-12
<PAGE> 66

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) NOTES AND ACCOUNTS RECEIVABLE

A summary of receivables follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Trade................................................. $ 20,438,177 $ 23,423,223
Notes receivable...................................... 5,260,118 7,783,514
Accrued interest...................................... 5,415 113,621
------------ ------------
25,703,710 31,320,358
Less allowance for doubtful accounts.................. (1,316,694) (3,149,680)
Less current portion.................................. (22,170,942) (25,069,175)
------------ ------------
$ 2,216,074 $ 3,101,503
============ ============
</TABLE>

The Company finances sales of gaming machine equipment to certain customers
meeting minimum credit standards. Installment notes bear interest at interest
rates of up to 18% and generally mature within one to five years.

At December 31, 1996, approximately 39% of the Company's receivables were
from various governments or their designated agencies. The Company estimates the
fair value of gross notes receivable at December 31, 1996 to approximate
carrying value. This estimate is based on current discount rates for instruments
of similar credit quality available in the secondary market.

Amounts charged to expense for estimated bad debt expenses were
approximately $217,000, $528,000 and $1,275,000 in the years ended December 31,
1996, 1995 and 1994, respectively. The Company wrote off previously reserved
doubtful accounts of approximately $2,050,000, $20,000 and none for the years
ended December 31, 1996, 1995 and 1994, respectively. In 1994, the Company
recorded as part of the purchase accounting entries of the UWS purchase (see
Note 2) approximately $1,073,000 of allowance for doubtful accounts.

(6) INVENTORIES

A summary of inventories, net of valuation reserves, follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Manufacturing:
Raw materials......................................... $ 5,461,972 $15,159,742
Work-in-process....................................... 733,436 673,082
Finished goods........................................ 11,321,877 8,602,181
Customer service and other.............................. 779,516 1,964,931
----------- -----------
$18,296,801 $26,399,936
=========== ===========
</TABLE>

The Company had reserves for inventories of approximately $14,200,000 and
$5,200,000 at December 31, 1996 and 1995, respectively, primarily related to
finished goods. The Company charged to expense for reserves and impairments of
inventories approximately $18,000,000, $1,023,000 and $4,392,000 in the years
ended December 31, 1996, 1995 and 1994, respectively. Of these charges,
$18,000,000, $550,000 and $4,100,000 in the years ended December 31, 1996, 1995
and 1994, respectively, related to the termination of three on-line lottery
projects for which inventory was specifically procured. As of December 31, 1996,
the remaining on-line equipment balance was approximately $2,900,000. The
Company wrote off previously reserved inventories of approximately $9,000,000,
$215,000 and none in the years ended December 31, 1996, 1995 and 1994,

F-13
<PAGE> 67

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respectively. At December 31, 1996, the Company had approximately 500 finished
gaming machines located in various casino gaming locations, under trial
arrangements with customers, included in inventory.

(7) PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Wagering systems and on-line lottery equipment........ $103,572,304 $ 88,207,880
Land, buildings and improvements...................... 14,280,158 14,201,871
Machinery and equipment............................... 5,931,264 5,046,108
Game operations equipment............................. 27,676,069 23,507,049
Furniture and fixtures................................ 1,664,070 1,362,755
------------ ------------
$153,123,865 $132,325,663
============ ============
</TABLE>

In 1996, the Company transferred on-line lottery equipment with a net book
value of approximately $2,400,000 to inventories held for sale in conjunction
with the termination of an on-line lottery contract. During 1995 and 1994, the
Company transferred approximately $1,030,000 and $1,221,000, respectively, of
game operations equipment from inventory to property, plant and equipment in
conjunction with leasing activities and $3,900,000 and none, respectively, from
inventory to property and equipment in connection with installations of
terminals under on-line lottery contracts. Other additions to game operations
equipment and on-line lottery equipment in the three-years ended December 31,
1996, are included in the Consolidated Statement of Cash Flows.

Game operations equipment at December 31, 1996 and 1995 includes gaming
machines with an aggregate cost of approximately $20,866,000 and 16,972,000,
respectively, and carrying value of approximately $11,900,000 and $10,837,000,
respectively, which is being leased to customers. For the years ended December
31, 1996, 1995 and 1994, depreciation expense on this equipment was
approximately $2,830,000, $2,021,000 and $1,710,000, respectively. Two lease
agreements provide rent payments to the Company based on a percentage of net
gaming receipts. One agreement is on a month-to-month basis, the other is for a
five-year period ending in December 2000 with provisions for three one-year
extensions. Another agreement is a master lease whereby individual terminal
shipment lease terms are for one year, with four consecutive automatic one-year
renewals with decreasing lease payments, with an option by the lessee to
terminate the lease at the end of each such year. Future lease receipts, by the
Company, under the contractual lease agreements, assuming renewals, based on the
terminals accepted through December 31, 1996, are approximately as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1997................................................. $ 7,292,000
1998................................................. 5,167,000
1999................................................. 4,235,000
2000................................................. 3,565,000
2001................................................. 386,000
-----------
$20,645,000
===========
</TABLE>

Lease income was approximately $10,726,000, $6,783,000 and $6,047,000 in
1996, 1995 and 1994, respectively.

F-14
<PAGE> 68

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8) INTANGIBLE AND OTHER ASSETS

A summary of intangible and other assets, net of amortization, follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Software development costs.............................. $ 9,059,037 $ 6,679,014
Deferred start-up costs and other....................... 2,646,043 2,260,780
Non-compete agreements.................................. 527,780 1,552,779
----------- -----------
$12,232,860 $10,492,573
=========== ===========
</TABLE>

The Company capitalized approximately $4,124,000, $2,675,000 and $5,154,000
of software development costs in the years ended December 31, 1996, 1995 and
1994, respectively. The costs are primarily related to the development of the
MasterLink(R) system.

Total amortization expense of intangible and other assets (including
Goodwill) was approximately $4,229,000, $3,454,000 and $3,091,000 in 1996, 1995
and 1994, respectively. Amortization of software development costs, included in
total amortization of intangible and other assets, was approximately $1,266,000,
$941,000 and $233,000 in 1996, 1995 and 1994, respectively.

Management estimates that all capitalized development and deferred start-up
costs will be recovered through operations. Should plans for a jurisdiction,
product or product enhancements be abandoned or otherwise expire, the related
costs are expensed. (See Note 15.)

(9) LEASE OBLIGATIONS

The Company has noncancelable operating leases for office space, equipment
and vehicles which expire at various dates over the next five years. Future
minimum lease payments under noncancelable operating leases as of December 31,
1996, including leases to be assumed by the Company in conjunction with the
settlement agreement between the Company and Electronic Data Systems Corporation
("EDS") (see Note 16), are approximately as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1997................................................ $2,754,000
1998................................................ 2,276,000
1999................................................ 968,000
2000................................................ 518,000
2001................................................ 93,000
==========
</TABLE>

In 1996, 1995 and 1994, rental expense was approximately $752,000, $633,000
and $1,709,000, respectively.

F-15
<PAGE> 69

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(10) LONG-TERM DEBT

A summary of long-term debt, including capitalized lease obligations,
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- ----------
<S> <C> <C>
8.25% note payable in monthly installments including
interest, through September 2001 (see Note 2)............. $ 5,728,870 --
7.2% to 10.4% capital lease obligations, due in monthly
installments of $4,573 to $26,567 including interest,
maturing through November 1999............................ 1,753,139 3,753,272
9.0% note payable in monthly installments including interest
through December 1998, secured by assets leased to others
(see Note 7).............................................. 5,164,764 5,200,000
LIBOR plus 2.25% notes payable in equivalent monthly
installments of $250,000 plus interest through February
1998. Secured by stock of subsidiaries.................... 7,270,000 13,520,000
----------- ----------
19,916,773 22,473,272
Less current installments................................... 10,604,402 9,588,708
----------- ----------
Long-term debt, excluding current installments.............. $ 9,312,371 12,884,564
=========== ==========
</TABLE>

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

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1997................................................... $10,604,402
1998................................................... 4,417,997
1999................................................... 2,252,298
2000................................................... 1,638,507
2001................................................... 1,003,569
===========
</TABLE>

Cash paid for interest was approximately $2,567,000, $2,762,000 and
$1,524,000 for the years ended December 31, 1996, 1995 and 1994, respectively.

Based on borrowing rates currently available to the Company for borrowings
with similar terms and maturities, the fair value of long-term debt at December
31, 1996 approximates carrying value.

The Company maintains a credit facility with First Bank, N.A. In
conjunction with the Company's settlement with EDS, effective January 30, 1997
(see Note 16), the credit agreement with First Bank, N.A. was amended to, among
other things, allow for the pari passu securitization of certain assets of the
Company by EDS, extend the maturity date of the revolving line of credit to
February 18, 1998, and increase the line of credit from $17,500,000 to
$19,500,000. In addition to the revolving line of credit, the facility is
structured with two three-year term loans payable through February 1998. The
revolving line of credit which matures February 28, 1998, bears interest at
LIBOR (5.59% at December 31, 1996) plus 2.25% and carries a commitment fee of
.25% on the unadvanced amount. The credit agreement contains certain restrictive
covenants including leverage and cash flow ratios, change in control, payments
of dividend's restrictions and minimum stockholders' equity. Primarily as a
result of the termination of the agreement with EDS in July 1996, the Company
was in default of certain provisions of the credit agreement. The defaults have
been waived by First Bank, N.A. As of December 31, 1996, the Company had
utilized $17,150,000 (including $9,500,000 allocated for irrevocable letters of
credit for the Company's bonding program) of the revolving line of credit.

F-16
<PAGE> 70

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) INCOME TAXES

Income tax expense (benefit) from operations consists of the following:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Current:
Federal..................................... $(3,532,520) $(1,218,616) $ 645,838
State....................................... 70,000 -- (285,448)
Foreign..................................... -- 581,583 591,257
----------- ----------- ----------
(3,462,520) (637,033) 951,647
----------- ----------- ----------
Deferred:
Federal..................................... (3,614,436) 306,354 157,622
State....................................... (1,602,006) (515,695) 193,765
Foreign..................................... (73,880) -- --
----------- ----------- ----------
(5,290,322) (209,341) 351,387
----------- ----------- ----------
$(8,752,842) $ (846,374) $1,303,034
=========== =========== ==========
</TABLE>

The provision for income tax (benefit) expense differs from the amount
which would be provided by applying the Federal statutory income tax rate to
loss from operations before income taxes as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Computed expected tax (benefit)................. $(8,402,621) $(3,236,281) $(5,202,659)
Goodwill impairment............................. -- -- 6,055,002
Extraordinary gain.............................. (1,344,718) -- --
State taxes, net of Federal impact.............. (995,804) (335,202) (59,594)
Increase in valuation reserve................... 1,582,000 1,772,254 --
Tax exempt interest income...................... -- (10,159) (107,621)
Non-deductible expenses......................... 218,703 371,200 507,002
Goodwill amortization........................... 286,607 286,607 471,011
Foreign taxes................................... (73,880) 581,583 591,257
Foreign sales credit............................ -- (276,376) (473,000)
Other, net...................................... (23,129) -- (478,364)
----------- ----------- -----------
$(8,752,842) $ (846,374) $ 1,303,034
=========== =========== ===========
</TABLE>

F-17
<PAGE> 71

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to deferred tax
assets and liabilities consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................ $ 500,971 $ 1,217,481
Inventory reserves..................................... 4,843,591 2,076,717
Provision for discontinued operations.................. -- 2,168,241
Net operating loss carryforward........................ 10,774,111 1,639,562
Tax credits............................................ 1,321,006 1,321,006
Accrued liabilities.................................... 3,367,418 3,034,974
----------- -----------
Deferred tax assets.................................... 20,807,097 11,457,981
----------- -----------
Less valuation reserve................................. (5,307,375) (3,725,375)
----------- -----------
Net deferred tax assets................................ 15,499,722 7,732,606
----------- -----------
Deferred tax liabilities:
Fixed assets, principally depreciation................. (7,797,992) (6,830,385)
Deferred costs......................................... (3,546,568) (2,094,356)
Lease obligations...................................... 638,883 1,075,535
Other.................................................. 379,677 --
----------- -----------
Net deferred tax liabilities........................... (10,326,000) (7,849,206)
----------- -----------
Net deferred income tax asset (liability).............. $ 5,173,722 $ (116,600)
=========== ===========
</TABLE>

The ultimate realization of deferred tax assets is dependent upon the
existence of, or generation of, taxable income in the periods in which those
temporary differences are deductible. Management considers the scheduled
reversal of deferred tax liabilities, taxes paid in carryback years, projected
future taxable income and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future
taxable income over the periods the net deferred tax assets are deductible, at
December 31, 1996, management believes it is more likely than not that the
Company will realize the benefits of these net deductible differences. In 1994,
the Company recorded as part of the purchase accounting entries of the UWS
purchase (see Note 2) approximately $1,772,000 of valuation reserve for deferred
income taxes related to net operating losses of UWS acquired.

The Tax Reform Act of 1986 expanded the corporate alternative minimum tax
(AMT). Under the Act, the Company's tax liability is the greater of its regular
tax or the AMT. The Company is subject to the AMT primarily due to depreciation
limitations for AMT purposes. The AMT actually paid will be allowed as a credit
against regular tax in the future to the extent future regular tax expense
exceeds AMT. At December 31, 1996, the Company has approximately $1,321,000 of
AMT credit carryforwards which are available to reduce future federal regular
income taxes over an indefinite period. In addition, at December 31, 1996, the
Company has approximately $27,200,000 of net operating loss carryforwards
primarily for federal regular income tax purposes which expire in 2011. A
significant amount of the net operating loss carryforward balance is anticipated
to be utilized in 1997, primarily as a result of the gain on extinguishment of
debt discussed in Note 16.

Net cash received from prior period refunds was approximately $2,442,000 in
1996. Cash paid for income taxes was approximately $1,516,000 and $2,254,000
during 1995 and 1994, respectively.

F-18
<PAGE> 72

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(12) BENEFIT PLANS

On May 16, 1994, the Board of Directors adopted the 1994 Stock Incentive
Plan (the "Plan") which was approved by the Company's stockholders on June 15,
1994. The Plan provides for the granting of options, stock appreciation rights,
restricted stock, performance units and performance shares to employees,
consultants and advisors of the Company and the granting of options to
non-employee directors of the Company (collectively or individually, "Awards").
The total number of shares authorized for issuance under the Plan was 1,000,000.
At December 31, 1996, the remaining number of shares available for issuance
under the Plan was 189,500. The Plan replaces the 1992 Stock Incentive Plan
which replaced the 1991 Stock Option Plan. No further stock options will be
granted under the 1991 and 1992 plans. All stock options presently outstanding
under the 1991 and 1992 plans will continue to be governed by the terms of the
1991 Stock Option Plan and 1992 Stock Incentive Plan.

Options granted under the Plan are designated as either incentive stock
options or as non-incentive stock options. The term of the option may not exceed
10 years from the date the option is granted or 15 years in the case of
non-incentive stock options. Incentive stock options owned by stockholders with
more than 10% of the total combined voting power of all classes of stock of the
Company shall be granted at an option price of not less than 100% of the fair
market value at the grant date, and the term of the option may not exceed 5
years from the date of grant.

On February 23, 1993, the Board of Directors adopted a Non-Employee Stock
Option Plan whereby non-employee directors of the Company elected or appointed
after January 1, 1993 shall receive a one-time grant of options to acquire
20,000 shares of Common Stock. The exercise, pricing, vesting, duration and all
other terms and conditions applicable to each option granted under the
Non-Employee Stock Option Plan shall be in accordance with the provisions of the
1992 Stock Incentive Plan.

All options currently outstanding are 100% exercisable no later than 4
years after grant date.

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Outstanding, beginning of year............................ 511,214 $14.23
Granted................................................. 782,500 11.10
Exercised............................................... (23,725) 13.77
Cancelled............................................... (58,620) 14.16
---------
Outstanding, end of year.................................. 1,211,369 12.12
=========
Exercisable, end of year.................................. 372,690 14.54
========= =======
YEAR ENDED DECEMBER 31, 1995
Granted................................................. 70,000 $ 8.33
Exercised............................................... -- --
Cancelled............................................... (361,587) 14.20
---------
Outstanding, end of year.................................. 919,782 11.45
=========
Exercisable, end of year.................................. 539,657 12.44
========= =======
</TABLE>

F-19
<PAGE> 73

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Granted................................................. 352,500 $ 4.78
Exercised............................................... -- --
Cancelled............................................... (348,693) 11.74
---------
Outstanding, end of year.................................. 923,589 8.76
=========
Exercisable, end of year.................................. 547,749 9.67
========= =======
</TABLE>

Information regarding options outstanding and exercisable at December 31,
1996, follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS
------------------------------------------------------- EXERCISABLE
WEIGHTED AVERAGE ----------------
WEIGHTED AVERAGE REMAIN LIFE WEIGHTED AVERAGE
EXERCISE PRICE NUMBER EXERCISE PRICE (YRS) NUMBER EXERCISE PRICE
-------------- ------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$3.00 - 5.00............. 200,000 $ 4.24 9.9 98,333 $ 4.25
$5.00 - 10.00............ 438,333 7.69 8.3 234,160 8.53
$10.00 - 15.00........... 241,256 13.03 6.2 206,256 13.07
$15.00 - 28.00........... 44,000 16.47 7.4 9,000 20.81
------- -------
$3.00 - 28.00............ 923,589 8.76 8.0 547,749 9.67
======= ======= === ======= =======
</TABLE>

The Company applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for stock option and employee stock purchase
benefit plans. Accordingly, no compensation cost has been recognized in the
Company's consolidated statement of operations for options granted and shares
purchased under such plans. Had compensation cost for the options granted and
the shares of Common Stock issued under the Company's plan been determined based
on the fair value at the grant dates for awards under the stock option plan and
purchases under the stock purchase plan consistent with the method of Financial
Accounting Standards Board Statement 123, the Company's net loss and loss per
share amounts would have been as reflected in the pro-forma amounts indicated
below:

<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Net loss.................................................. $(15,352,162) $(8,843,278)
============ ===========
Loss per share............................................ $ (1.43) $ (.83)
============ ===========
</TABLE>

The fair value of the options granted in 1996 and 1995 was estimated using
the Black-Scholes model with the following assumptions for 1996 and 1995:
dividend yield of 0%; expected life of 5 years; volatility of 57% and a
risk-free interest rate of 6%. The effects of applying Financial Accounting
Standards Board Statement No. 123 in this pro-forma disclosure may not be
indicative of future results. Statement 123 does not apply to awards prior to
1995 and additional awards in future years are anticipated.

A stock purchase plan was established in 1991, which is available to all
permanent full-time employees. The Stock Purchase Plan provides for the purchase
of the Company's Common Stock through payroll deductions of up to 3% of an
employee's current compensation. In addition, the Company may make cash
contributions to each employee's stock purchase account in an amount up to 50%
of each payroll deduction credited to the account. The Board of Directors has
authorized 200,000 shares of the Company's Common Stock for issuance under the
Stock Purchase Plan. Under the Stock Purchase Plan, the Company will offer to
sell shares of its Common Stock at the end of each one year period (the
"Purchase Period"), which begins January 1 and ends December 31 of each year.
Shares will be purchased at the lesser of 85% of the fair market value of the
Company's Common Stock on the first or last day of the Purchase Period. There
were 117,075 shares at $2.98 per share purchased in January of 1997 for the 1996
Purchase Period; 98,565 shares at $4.04 per share purchased in January of 1996
for the 1995 Purchase Period; and 33,742 shares at $8.08 per share

F-20
<PAGE> 74

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

purchased in January of 1995 for the 1994 Purchase Period. Under the Stock
Purchase Plan, the Company contributed approximately $117,000, $102,000 and
$91,000 for 1996, 1995 and 1994, respectively.

In 1992, the Board of Directors adopted a 401(k) employee savings plan.
Employer contributions are discretionary under the plan. Employer contributions
under the plan were approximately $237,000, $206,000 and $357,000 for 1996, 1995
and 1994, respectively.

(13) COMMITMENTS AND CONTINGENCIES

During 1996, 1995 and 1994, the Company sold notes receivable from gaming
machine equipment sales, with a face value of $1,466,952, $2,339,710 and
$4,311,874, respectively, 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
$4,678,000 at December 31, 1996. The Company has established reserves for
estimated losses under the recourse provisions. At December 31, 1996, the
Company had guaranteed or pledged security for the indebtedness of others in the
amount of approximately $5,801,000 (including $4,678,000 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 (see Note 15). At December 31, 1996 and 1995, respectively, the
Company had accrued liabilities of approximately $3,115,000 and $2,859,000
representing progress billings and estimated costs to fulfill its obligations to
deliver products and services under certain customer contracts.

The Company typically posts bid, litigation, and performance bonds for
on-line lottery contracts. At December 31, 1996, the Company had collateral in
support of the various bonds outstanding consisting of $3,350,000 of restricted
deposits and $9,500,000 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 in effect as appropriate.

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 on-line lottery contracts with the Minnesota and Florida
lottery authorities. The negotiations for a new contract with the Minnesota
Lottery have been initiated. 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
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 New Mexico is largely contingent upon the implementation
of gaming legislation in the state. On March 21 the New Mexico legislature voted
to allow casino gaming at pari-mutuel racetracks in New Mexico, including the
Company's racetrack in Sunland Park, New Mexico. The bill, which is anticipated
to be signed by the state's

F-21
<PAGE> 75

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Governor, allows, among other things, the operation of up to 300 gaming machines
per pari-mutuel racetrack facility for up to twelve hours per day. The
implementation of gaming is subject to the timing and satisfaction of conditions
of the legislation, including the state's formation of a separate commission to
oversee the gaming and other regulatory matters (including the grant of
necessary licenses to the Company). Consequently, the Company does not
anticipate that any revenues will be generated from the approved gaming until
late 1997 or early 1998.

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.

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.

(14) STOCKHOLDERS' EQUITY

In January 1994, 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 carries
dividend rights equal to the Company's Common Stock, is non-voting, and is
convertible to 1,912,728 shares of Common Stock after ninety days prior written
notice (see Note 16).

In February 1994, the Company completed a transaction with an investor
group represented by William Spier, a director of the Company. As a result of
this transaction, the Company repurchased 2,458,182 shares of its Common Stock
at a cash price of, in effect, $26.50 per share.

(15) OTHER CHARGES

A summary of other charges follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Inventory Impairments........................... $18,000,000 $ 550,000 $ 4,099,000
Customer Disputes and Contract Liabilities...... 8,435,000 1,762,667 2,595,000
Restructuring Charges and Long-Lived Assets
Impairments................................... 7,700,000 450,000 17,300,000
----------- ---------- -----------
$34,135,000 $2,762,667 $23,994,000
=========== ========== ===========
</TABLE>

In 1996 the Company recorded approximately $34,100,000 of special charges
for restructuring costs and asset impairments, consisting of $18,000,000 for
inventory value impairments primarily related to the on-line

F-22
<PAGE> 76

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

lottery segment, $8,400,000 associated with on-line lottery customer disputes
and contract liabilities, $4,600,000 for impairment of intangible and other
assets for an on-line lottery contract and approximately $3,100,000 related to
the wagering systems segment of United Wagering Systems, as discussed in Note 2.
The impairment losses of long-lived assets were measured based on the fair value
of each asset. Fair value was calculated based on the present value of expected
future net cash flows. The $4,600,000 impairment related to an on-line lottery
contract that did not meet Company expectations of profitability levels. The
$2,800,000 impairment discussed in Note 2 was a result of the Company's decision
to replace a predecessor model of a wagering systems terminal. Approximately
$21,200,000 of the charges were recorded in the fourth quarter of 1996,
primarily related to the Company's revised strategies and resulting estimates
regarding on-line lottery operations.

In 1996, the Company recorded approximately $31,000,000 of special charges
related to the Company's on-line lottery segment, which consisted of $18,000,000
for inventory reserves and write-downs, $8,400,000 for penalties and contractual
liabilities resulting from customer disputes and $4,600,000 for impairment of
intangible and other assets in connection with an on-line lottery contract.
Approximately $9,800,000 of the charges were recorded in the first nine months
of 1996, $8,000,000 of those charges related to customer disputes stemming from
performance issues with EDS. The remaining $1,800,000 recorded in the first nine
months represented charges for inventory impairments. The $21,200,000 of charges
recorded in the fourth quarter of 1996 primarily related to impairments of
inventories and intangible assets.

During the three-year period ending December 31, 1996, the Company recorded
approximately $22,700,000 of charges representing impairments to on-line lottery
equipment inventories. An aggressive revenue growth strategy in 1994 led the
Company to procure or commit to procure significant levels of inventory in
advance of obtaining a contract to operate an on-line lottery system in the
United Kingdom. The Company was notified in May 1994 that the contract was
awarded to a competitor. In the fourth quarter of 1994, the Company recorded a
$4,100,000 charge representing costs to retrofit inventories related to the
United Kingdom procurement for which there was no other demand in the U.S.
market. The Company anticipated demand from a customer in Norway for a portion
of such inventories. The carrying value of inventories related to the on-line
lottery segment was approximately $19,300,000 at December 31, 1994, and the
Company believed that potential market opportunities at that time indicated that
such inventory value would be recovered. In the second quarter of 1995, the
Company recorded an additional $550,000 charge to inventories due to a reduction
in estimated demand by its Norway customer. The carrying value of inventories
related to the on-line lottery segment was approximately $15,900,000 at December
31, 1995, and potential sales opportunities in various international markets
indicated that the remaining value could be recovered. In the second quarter
1996, the Company recorded an additional charge of $1,100,000 to inventories for
another identified reduction in demand. In the fourth quarter of 1996, the
Company determined that the remaining inventory related to the United Kingdom
procurement had no remaining market value and charged to expense approximately
$10,400,000. At December 31, 1996, inventories related to the on-line lottery
segment had a carrying value of approximately $2,900,000.

The Company's domestic growth strategy led to the contracts being awarded
to the Company by the Arizona and Kentucky lottery authorities during 1995. The
Arizona lottery system was implemented in late 1995. However, due to a number of
factors, including a short development and installation period, the lottery had
a number of deficiencies that contributed to the early termination of the
contract by the Arizona Lottery in 1996. The Company recognized an impairment
charge of $4,000,000 on equipment inventory to reduce the carrying value to net
realizable value for used equipment. Also in 1996, the Company and the Kentucky
Lottery agreed to terminate efforts to finalize a contract. The Company incurred
approximately $2,500,000 that was charged to expense as a result of the
agreement.

F-23
<PAGE> 77

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

down to its market value. Following these charges and write-offs attributable to
unsuccessful business ventures, the Company revised its international strategy
from selling long-term service agreements to one of selling on-line lottery
equipment and licensing technology to use the equipment to partners who would
operate the lottery system. While this strategy may result in lower revenues,
costs of sales and operating profits, it is considered by management to be a
more effective growth strategy.

In 1995, the Company recorded approximately $2,763,000 of special and other
unusual charges associated with exit costs and charges and asset impairments
related to five contracts. In the second quarter of 1995, the Company determined
that continuing to expend capital resources on certain domestic and
international contract prospects was not in the best interests of the Company
and, to terminate such activities, recorded the necessary charges to write down
applicable investments in long-lived assets to fair value and to record
estimated liabilities. Approximately $2,500,000 of such charges were related to
the on-line lottery segment and $263,000 were related to the wagering systems
segment.

In the fourth quarter 1994, the Company revised its international and
domestic operations strategies. The revision of the international operations to
a strategy of alliances in selective markets and developments in the
international market place resulted in a special charge of $6,694,000
representing reserves and write-offs for inventory of $4,099,000 and write-offs
and accruals of foreign contract investments and commitments of $2,595,000. In
addition to the $6,694,000 of charges, the Company recorded an impairment charge
of approximately $17,300,000 related to the goodwill attributable to the
acquisition of UWS (See Note 2.) Events and circumstances discussed in Note 2
indicated that the goodwill may not be recoverable. Accordingly, the impairment
of goodwill was determined using the present value of estimated future operating
cash flows of the wagering systems segment. The Company adopted Statement of
Financial Accounting Standards No. 121 (SFAS No. 121) in the second quarter of
1995. Accordingly, impairments of long-lived assets recorded subsequent to the
adoption of SFAS No. 121 were based on the fair value of such assets measured as
the present value of expected future net cash flows after a determination that
the undiscounted net cash flows were less than the carrying value thereof.

In addition to the restructuring charges discussed above, the Company's
1994 consolidated statement of operations includes approximately $3,115,000 of
unusual reserves and write-offs recorded in the fourth quarter 1994. Included in
the amount is approximately $1,000,000 of inventory adjustments which resulted
from the Company's reevaluation of future customer needs and product
obsolescence, $450,000 for severance charges, $1,025,000 for estimated
settlements of disputed obligations and $640,000 for write-down of intangible
assets.

(16) EDS RELATIONSHIP/SUBSEQUENT EVENT

In conjunction with the stock sale to EDS in 1994 as discussed in Note 14,
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 $13,280,000 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 property,
plant and equipment used in the provision of EDS services to on-
F-24
<PAGE> 78

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

line lottery customers and the extinguishment of approximately $38,000,000 of
outstanding fees in return for a $26,100,000 note payable. 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 is
anticipated to be completed in the second quarter of 1997. The following
schedule reflects pro-forma amounts as if the settlement had occurred at
December 31, 1996:

<TABLE>
<CAPTION>
DECEMBER 31,
DECEMBER 31, SETTLEMENT/EXTRA- 1996,
1996 REPORTED ORDINARY GAIN, NET PRO-FORMA
------------- ------------------ ---------------
<S> <C> <C> <C>
Current assets............................. $ 66,232,251 $ (3,470,000) $ 62,762,251
Non-current assets......................... 101,810,505 2,700,000 104,510,505
------------ ------------ ------------
Total assets..................... $168,042,756 $ (770,000) $167,272,756
============ ============ ============
Current liabilities........................ $ 38,147,915 $ 7,000,000 $ 45,147,915
Non-current liabilities.................... 57,663,381 (11,950,000) 45,713,381
------------ ------------ ------------
Total liabilities................ $ 95,811,296 $ (4,950,000) $ 90,861,296
============ ============ ============
Stockholders equity exclusive of
accumulated deficit...................... $ 97,475,260 $ (9,100,000) $ 88,375,260
Accumulated deficit........................ (25,243,800) 13,280,000 (11,963,800)
------------ ------------ ------------
Stockholders' equity....................... 72,231,460 4,180,000 76,411,460
------------ ------------ ------------
Total liabilities and equity..... $168,042,756 $ (770,000) $167,272,756
============ ============ ============
Shares outstanding:
Common................................... 10,829,184 (545,454) 10,283,730
Preferred................................ 1,912,728 (1,912,728) --
============ ============ ============
</TABLE>

The Company paid or accrued approximately $81,600,000, $70,300,000 and
$69,400,000 to EDS for costs and expenses in 1996, 1995 and 1994, respectively.
Of those costs and expenses approximately $5,087,000 (net of $4,600,00
impairment charge discussed in Note 15), $2,675,000 and $4,406,000 were
capitalized primarily in conjunction with software development and deferred
start-up costs in 1996, 1995 and 1994, respectively. Included in trade accounts
payable are current balances due to EDS of approximately $1,200,000 and
$10,682,000 at December 31, 1996 and 1995, respectively.

F-25
<PAGE> 79

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1997 1996 1997 1996
-------- -------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
On-line lottery................................... $ 71,671 $ 65,790 $22,764 $20,437
Gaming machine and route operations............... 51,627 43,560 20,126 13,107
Wagering systems and racetrack operations......... 21,322 21,534 6,585 7,390
-------- -------- ------- -------
Total revenues............................ 144,620 130,884 49,475 40,934
-------- -------- ------- -------
COSTS AND EXPENSES:
On-line lottery................................... 48,244 42,596 15,932 15,235
Gaming machine and route operations............... 28,790 23,283 12,235 7,222
Wagering systems and racetrack operations......... 15,300 15,408 4,396 4,996
Selling, general and administrative............... 22,983 21,618 7,743 6,409
Research and development.......................... 7,122 5,062 2,279 1,938
Other charges..................................... -- 12,935 -- 4,700
Depreciation and amortization..................... 16,943 17,315 5,102 5,853
-------- -------- ------- -------
Total costs and expenses.................. 139,382 138,217 47,687 46,353
-------- -------- ------- -------
Earnings (loss) from operations..................... 5,238 (7,333) 1,788 (5,419)
-------- -------- ------- -------
OTHER INCOME (EXPENSE):
Interest and other income......................... 709 751 319 311
Interest expense.................................. (2,978) (2,911) (968) (735)
-------- -------- ------- -------
(2,269) (2,160) (649) (424)
-------- -------- ------- -------
Earnings (loss) before income taxes and
extraordinary items............................... 2,969 (9,493) 1,139 (5,843)
Income tax (expense) benefit........................ (1,595) 1,198 (549) 532
-------- -------- ------- -------
Net earnings (loss) before extraordinary items...... 1,374 (8,295) 590 (5,311)
Reversal of provision for loss on discontinuance of
wagering systems operations....................... -- 5,482 -- 5,541
-------- -------- ------- -------
Net earnings (loss) before extraordinary items...... 1,374 (2,813) 590 230
Extraordinary gain, net............................. 13,269 4,014 -- --
-------- -------- ------- -------
Net earnings (loss)................................. $ 14,643 $ 1,201 $ 590 $ 230
======== ======== ======= =======
Net earnings (loss) per share:
Before extraordinary items........................ $ .13 $ (.66) $ .06 $ .02
Discontinued operations........................... -- .44 -- --
From extraordinary items.......................... 1.28 .32 -- --
-------- -------- ------- -------
$ 1.41 $ .10 $ .06 $ .02
======== ======== ======= =======
Weighted average shares............................. 10,406 12,598 10,524 12,595
======== ======== ======= =======
</TABLE>

See accompanying notes to financial statements.

F-26
<PAGE> 80

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 18,048 $ 4,322
Restricted short-term deposits............................ 765 1,364
Accounts receivable, net.................................. 21,863 19,353
Current installments of notes receivable, net............. 2,559 2,818
Inventories............................................... 14,354 18,297
Prepaid expenses.......................................... 1,418 1,027
Income tax refund receivable.............................. -- 3,551
Deferred income taxes..................................... 11,178 15,500
-------- --------
Total current assets.............................. 70,185 66,232
-------- --------
Property, plant and equipment............................... 150,991 153,124
Less accumulated depreciation............................. (84,715) (78,417)
-------- --------
Net property, plant and equipment................. 66,276 74,707
-------- --------
Restricted cash deposits.................................... 2,437 2,521
Notes receivable, excluding current installments............ 2,718 2,216
Goodwill, net............................................... 9,519 10,134
Intangible and other assets, net............................ 11,513 12,233
-------- --------
$162,648 $168,043
======== ========
LIABILITIES
Current liabilities:
Notes payable............................................. $ -- $ 7,650
Current installments of long-term debt.................... 6,095 10,604
Accounts payable.......................................... 5,275 6,646
Accrued expenses.......................................... 24,612 13,249
Income taxes payable...................................... 4,499 --
-------- --------
Total current liabilities......................... 40,481 38,149
-------- --------
Long-term debt, excluding current installments.............. 32,028 9,312
Other liabilities........................................... -- 38,025
Deferred income taxes....................................... 12,032 10,326
-------- --------
Total liabilities................................. $ 84,541 $ 95,812
-------- --------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value. Authorized 10,000,000
shares; no shares issued.................................. $ -- $ --
Series A Junior Preferred stock, $.01 par value, convertible
non-cumulative. Authorized 1,912,728 shares............... 19 19
Common stock, $.01 par value. Authorized 25,000,000
shares.................................................... 109 108
Paid-in capital............................................. 88,847 97,765
Deferred restricted stock compensation...................... (267) (417)
Accumulated deficit......................................... (10,601) (25,244)
-------- --------
Total stockholders' equity........................ 78,107 72,231
-------- --------
$162,648 $168,043
======== ========
</TABLE>

See accompanying notes to financial statements.

F-27
<PAGE> 81

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
SERIES A
PREFERRED COMMON RESTRICTED TOTAL
STOCK STOCK PAID-IN STOCK ACCUMULATED STOCKHOLDERS'
PAR VALUE PAR VALUE CAPITAL COMPENSATION DEFICIT EQUITY
--------- --------- ------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996.......... $19 $108 $97,765 $(417) $(25,244) $72,231
Net earnings............... -- -- -- -- 14,643 14,643
Stock options
exercised/shares
issued................... -- 1 182 -- -- 183
Shares redeemed pursuant to
EDS settlement........... -- -- (9,100) -- -- (9,100)
Amortization of deferred
restricted stock
compensation............. -- -- -- 150 -- 150
--- ---- ------- ----- -------- -------
September 30, 1997......... $19 $109 $88,847 $(267) $(10,601) $78,107
=== ==== ======= ===== ======== =======
</TABLE>

1997 SHARE DATA

<TABLE>
<CAPTION>
TREASURY STOCK
SERIES A COMMON -----------------
PREFERRED STOCK PREFERRED STOCK SERIES A COMMON
BALANCE ISSUED ISSUED STOCK STOCK
------- --------------- --------------- -------- ------
<S> <C> <C> <C> <C>
Beginning of period....................... 1,913 10,829 -- --
Stock options exercised/shares issued..... -- 42 -- --
Shares redeemed pursuant to EDS
settlement.............................. -- -- (1,913) (545)
----- ------ ------ ----
End of period............................. 1,913 10,871 (1,913) (545)
===== ====== ====== ====
</TABLE>

F-28
<PAGE> 82

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 14,642 $ 1,201
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Reversal of provision for loss on discontinuance of
operations.......................................... -- (5,482)
Depreciation and amortization........................ 16,943 17,315
Other charges........................................ -- 12,935
Extraordinary gain, net.............................. (13,269) (4,014)
Other, net........................................... 211 --
Changes in operating assets and liabilities:
Receivables, net....................................... (2,678) (2,845)
Inventories............................................ 7,296 (4,109)
Prepaid expenses....................................... (391) (244)
Accounts payable....................................... (1,371) 1,658
Due to EDS............................................. -- 26,495
Accrued expenses....................................... 9,397 (5,749)
Income taxes........................................... 5,397 (1,060)
-------- --------
Net cash provided by operating activities................... 36,177 36,101
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (5,824) (23,928)
Expenditures on intangible and other non-current assets... (1,511) (9,860)
Proceeds from sales of equipment.......................... 87 22
Restricted cash deposits.................................. 560 2,150
-------- --------
Net cash used in investing activities....................... (6,688) (31,616)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on notes payable............................. (7,650) (750)
Proceeds from issuance of long-term debt.................. 643 4,364
Repayments of long-term debt.............................. (8,812) (9,307)
Proceeds from stock options exercised..................... 56 --
-------- --------
Net cash used in financing activities....................... (15,763) (5,693)
-------- --------
Net increase (decrease) in cash and cash equivalents........ 13,726 (1,208)
Cash and cash equivalents, beginning of period.............. 4,322 1,993
-------- --------
Cash and cash equivalents, end of period.................... $ 18,048 $ 785
======== ========
</TABLE>

See accompanying notes to financial statements.

F-29
<PAGE> 83

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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.

Accounting Pronouncements Not Yet Adopted. In February 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), "Earnings Per Share," which simplifies the
standards for computing earnings per share ("EPS") by replacing the presentation
of primary EPS with a presentation of basic EPS. SFAS No. 128 requires dual
presentation of basic and diluted EPS by entities with complex capital
structures. Basic EPS includes no dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution of
securities that could share in the earnings of an entity. SFAS No. 128 replaces
Accounting Principles Board Opinion 15 and is effective for financial statements
issued for periods ending after December 15, 1997. The Company has a complex
capital structure per SFAS No. 128. Consequently, the generation of earnings
from continuing operations will result in a dual presentation of basic and
diluted EPS. The Statement requires restatement of prior period EPS
presentations.

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

(2) EDS SETTLEMENT

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

F-30
<PAGE> 84

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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

(3) BUSINESS COMBINATION AND SETTLEMENT

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

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

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

F-31
<PAGE> 85

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(4) INVENTORIES

A summary of inventory follows:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Manufacturing:
Raw materials............................................. $ 5,278,000 $ 5,462,000
Work-in-process........................................... 330,000 733,000
Finished goods............................................ 6,779,000 11,322,000
Ticket paper................................................ 1,547,000 610,000
Customer service and other.................................. 420,000 170,000
----------- -----------
$14,354,000 $18,297,000
=========== ===========
</TABLE>

(5) LONG-TERM DEBT

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Note payable at prime with interest only payments through
1998. Thereafter due in monthly installments, including
interest, through January 2004. Secured by certain
inventories, property and equipment, intangible assets and
treasury stock (see Note 2)............................... $25,738,000 $ --
8.25% note payable in monthly installments, including
interest, through September 2001 (see Note 3)............. 5,115,000 5,729,000
7.2% to 11.0% capital lease obligations, due in monthly
installments of $4,573 to $26,567 including interest,
maturing through May 2002................................. 1,314,000 1,753,000
9.0% note payable in monthly installments including interest
through December 1998, secured by assets leased to
others.................................................... 3,186,000 5,164,000
LIBOR plus 3.25% notes payable in equivalent monthly
installments of $250,000 plus interest through February
1998. Secured by stock of certain subsidiaries............ 2,770,000 7,270,000
----------- -----------
38,123,000 19,916,000
Less current installments................................... 6,095,000 10,604,000
----------- -----------
Long-term debt, excluding current installments.............. $32,028,000 $ 9,312,000
=========== ===========
</TABLE>

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

<TABLE>
<CAPTION>
TWELVE MONTHS ENDING SEPTEMBER 30,
- ----------------------------------
<S> <C>
1998............................................ $6,095,000
1999............................................ 6,299,000
2000............................................ 7,165,000
2001............................................ 6,646,000
2002............................................ 5,808,000
Thereafter...................................... 6,110,000
</TABLE>

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

F-32
<PAGE> 86

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(6) COMMITMENTS AND CONTINGENCIES

The recovery of a significant amount of the Company's investment in the
racetrack operations in Sunland Park, New Mexico is largely contingent upon the
implementation of gaming legislation in the state. On March 21, 1997, the New
Mexico legislature voted to allow casino gaming at pari-mutuel racetracks in New
Mexico, including the Company's racetrack in Sunland Park. The bill allows,
among other things, the operation of up to 300 gaming machines per parimutuel
racetrack facility for up to twelve hours per day. The implementation of gaming
is subject to the timing and satisfaction of conditions of the legislation,
including the state's formation of a separate commission to oversee the gaming
and other regulatory matters (including the grant of necessary licenses to the
Company). Consequently, the Company does not anticipate that any revenues will
be generated from the approved gaming until mid-1998. The Company has had
architectural plans developed for casino gaming at the racetrack facility and
has initiated construction. Current plans call for approximately $8,000,000 of
capital expenditures for facility enhancements, gaming machines and related
equipment.

The Company periodically sells notes receivable from gaming machine
equipment sales to banks and other third parties. The notes are secured by the
underlying equipment. The receivables sold are subject to recourse provisions in
the event of default by the primary obligor. The outstanding balance of the
notes receivable sold with recourse was approximately $2,962,000 at September
30, 1997. The Company has established reserves for estimated losses under the
recourse provisions. At September 30, 1997, the Company had guaranteed or
pledged security for the indebtedness of others in the amount of approximately
$3,860,000 (including $2,962,000 notes receivable sold to banks and other third
parties).

The Company typically posts bid, litigation, and performance bonds for
on-line lottery contracts. At September 30, 1997, the Company had collateral in
support of the various bonds outstanding consisting of $2,750,000 of restricted
deposits and $9,500,000 of irrevocable standby letters of credit. First Bank, N.
A., requires the Company to maintain $2,000,000 of restricted deposits as
collateral for the irrevocable letters of credit. Should the Company fail to
meet contractually specified obligations during the contract term, the lottery
authority may assess damages and exercise its right to collect on the applicable
bond. The Company has had disputes with customers over implementation schedules,
deliverables and other issues. The Company works with these customers to resolve
these differences; however, should the Company be unable to resolve any disputes
in a mutually satisfactory manner, the Company may suffer negative consequences
in its relationships with these and other customers and its pursuit of future
business. The ultimate cost to the Company of such damages (if any) would be net
of its claims under risk management policies.

Historically, the Company has met its cash flow requirements primarily with
cash provided by operations, public offerings of equity securities, and from
borrowings from financial institutions. The Company, in 1996, was named the
successful bidder for a new on-line lottery contract with the Florida lottery.
The award by the Florida Lottery was unsuccessfully protested by a competitor,
and the competitor has filed an appeal which has delayed contract negotiations.
The existing contract had an expiration date of June 30, 1996. AWI is continuing
the operation of the current on-line lottery system under the terms of the
expired contract under an interim agreement. The Company has submitted a bid to
the Pennsylvania Lottery for an on-line lottery contract to replace the contract
the Company currently has with the lottery. The current contract expires in
December 1998. Sizable capital expenditures in excess of current capital sources
may be required in advance of any anticipated capital generated by a new Florida
or Pennsylvania contract. Accordingly, the Company
F-33
<PAGE> 87

POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

may need additional financing, the availability and the terms of which are
subject to various uncertainties, with no assurance that such financing can be
obtained.

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

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.

F-34
<PAGE> 88
[ARTWORK:
(2) Inside Back Cover: Photograph of the AWI Ovation(R) retail terminal with
the phrases "AWI Ovation(R) retail terminal" and "AWI On-Line Lottery Systems
and Services"; Photograph of the VLC Winning Touch(R) Power Series(TM) gaming
machine with the phrases "VLC Winning Touch(R) Power Series(TM) gaming machine"
and "VLC Video Gaming Machines and Central Control Systems"; Photograph of the
United Tote wagering terminal with the phrases "United Tote wagering terminal"
and "United Tote Pari-Mutuel Wagering Systems and Services"; Artist's rendering
of the Company's Sunland Park Casino with the phrases "Artist's rendering of
Sunland Park Casino" and "Sunland Park Casino."]
<PAGE> 89

======================================================

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY ANY SELLING STOCKHOLDER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. ii
Incorporation of Certain Documents by
Reference........................... ii
Prospectus Summary.................... 1
Risk Factors.......................... 6
Use of Proceeds....................... 13
Price Range of Common Stock........... 13
Dividend Policy....................... 13
Selected Financial Data............... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 30
Management............................ 45
Selling Stockholders.................. 47
Plan of Distribution.................. 48
Legal Matters......................... 49
Experts............................... 49
</TABLE>

======================================================
======================================================

1,468,026 SHARES

POWERHOUSE LOGO
COMMON STOCK

--------------------
PROSPECTUS
--------------------

GERARD KLAUER MATTISON
& CO., INC.

LADENBURG THALMANN
& CO. INC.

FEBRUARY 10, 1998

======================================================