NTN COMMUNICATIONS INC, 10-K, 1997-04-15

NTN COMMUNICATIONS INC
10-K, 1997-04-15
TELEVISION BROADCASTING STATIONS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________
FORM 10-K
_________

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1996
COMMISSION FILE NUMBER 1-11460

NTN COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 31-1103425
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(760) 438-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

COMMON STOCK, $.005 PAR VALUE

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.

YES [X] NO [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K ((S) 229.405 of this Chapter) is not contained herein and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [_]

The aggregate market value of the voting stock held by non-affiliates of
Registrant as of April 10, 1997, computed by reference to the closing sale price
of such stock on the American Stock Exchange, was approximately $97,000,000.
(All directors and executive officers of Registrant are considered affiliates.)

At April 10, 1997 Registrant had 23,265,000 shares of Common Stock, $.005
par value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's Annual Report to Shareholders for the period ended
December 31, 1996 are incorporated by reference into Part I of this Report.
Portions of Registrant's definitive Proxy Statement for its August 1997 meeting
of stockholders are incorporated by reference into Part III of this Report.

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TABLE OF CONTENTS
<TABLE>
<CAPTION>

Item Page
<S> <C> <C>
Part I

1. Business 3

2. Properties 18

3. Legal Proceedings 19

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

Part II

5. Market for Registrant's Common Equity and Related Stockholder 20
Matters

6. Selected Financial Data 21

7. Management's Discussion and Analysis of Financial Condition 22
and Results of Operations

8. Consolidated Financial Statements and Supplementary Data 30

9. Changes in and Disagreements with Accountants on Accounting 30
and Financial Disclosure

Part III

10. Directors and Executive Officers of the Registrant 30

11. Executive Compensation 30

12. Security Ownership of Certain Beneficial Owners and Management 30

13. Certain Relationships and Related Transactions 30

Part IV

14. Exhibits, Consolidated Financial Statement Schedule, and 31
Reports on Form 8-K

Index to Consolidated Financial Statements and Schedule F-1

</TABLE>

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PART I

ITEM 1. BUSINESS
--------

FORMATION

NTN Communications, Inc. ("NTN" or the "Company") was originally
incorporated in the State of Delaware on April 13, 1984 under the name of Alroy
Industries. Alroy completed a public offering of its common stock on November
26, 1984. On April 15, 1985, Alroy acquired all of the outstanding stock of
National Telecommunicator Network, Inc. In connection with the acquisition,
Alroy changed its name to NTN Communications, Inc.

In 1993, NTN completed a merger with New World Computing, Inc. ("New
World") pursuant to which New World became a wholly-owned subsidiary of NTN. In
1996, the Company sold all the assets of New World. At December 31, 1996, the
New World subsidiary had no remaining assets and was not engaged in any business
activities.

In 1994, the Company formed LearnStar, Inc. ("LearnStar"). In 1995, the
Company reacquired the shares of LearnStar, Inc. held by others to increase its
ownership in LearnStar to 100%. In December, 1995, the Company entered into an
agreement to sell a 45% interest in LearnStar to Associated Ventures Management,
Inc. ("Associated Ventures"). In September 1996, the Company and Associated
Ventures agreed to rescind the agreement. Accordingly, LearnStar once again
became a wholly-owned subsidiary of NTN.

In 1994, the Company also formed IWN, Inc. ("IWN"), which serves as the
general partner in IWN L.P., a limited partnership engaged in the development of
interactive technology for gaming applications. IWN has no business or
operations apart from its service as a general partner of IWN L.P.

Unless otherwise indicated, references herein to "NTN" or the "Company"
include NTN and its consolidated subsidiaries, New World, LearnStar, IWN Inc.
and IWN L.P.

RECENT DEVELOPMENTS

On March 5, 1997, the Company announced a reorganization of its executive
management personnel in which Patrick J. Downs resigned as Chief Executive
Officer and Chairman of the Board, and Daniel C. Downs resigned as President.
Both men continue to serve on NTN's Board of Directors. In connection with the
reorganization, other personnel changes included the resignation of Mr. Ronald
Hogan as Senior Vice President and the terminations of Mr. Gerald McLaughlin,
formerly Executive Vice President, and Mr. Michael Downs, formerly President and
CEO of LearnStar. The Company has entered into separate agreements with each of
the former officers setting out the terms on which their existing contracts with
NTN will be settled. See Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for additional information, which
is incorporated herein by reference.

Concurrent with the reorganization, Mr. Gerald Sokol, Jr., Chief Operating
Officer and Chief Financial Officer was named President of the Company. Mr. Ed
Frazier, a director of NTN, has assumed the role of acting Chairman of the
Board. Further, the Company announced the formation of an Executive Committee
comprised of Mr. Frazier, who is a former President of Liberty Sports, Inc. and
Mr. Peter Sealey, a former Senior Vice President for the Coca-Cola Company. The
Executive Committee is responsible for developing operational, advertising and
market strategies, as well as revising the strategic plan and developing new
business opportunities for the Company.

A discussion of the general development of the Company for the fiscal year
ended December 31, 1996 is set forth in the letter to the Company's shareholders
contained in the Company's Annual Report to Shareholders and is incorporated
herein by reference. A copy of the Annual Report to Shareholders is included as
Exhibit 13 to this Report.

PRINCIPAL SERVICES AND PRODUCTS

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NTN through its business units and subsidiaries, develops, produces and
distributes individual and multi-player interactive programs to a variety of
media platforms. These interactive sports, trivia games and educational
programs permit multiple viewers to participate with and simultaneously respond
to the programming content. NTN has an exclusive licensing agreement with the
National Football League ("NFL") and understandings or agreements with others to
provide interactive play-along programming, such as its proprietary QB1(R)
football game, in conjunction with live television events. The Company
broadcasts a wide variety of popular games, trivia and informational programming
to group viewing locations such as hotels, sports taverns and restaurants
through its own interactive NTN Network. In addition, NTN brings multi-player
interactive games into consumer households through personal computer on-line
services and interactive television services. NTN currently has two patents
pending with respect to its interactive technology systems. Since NTN
distributes its programs via satellite, cable, telephone and wireless
transmission technologies, its applications are independent of hardware or
technical platforms.

The Company currently provides its products and services to markets which
are in various stages of development. Each is directly related to multi-player
interactive entertainment and education programs, and are as follows:

Network Services ("Network Services", formerly referred to as
"Hospitality") - Live interactive television network ("NTN Network") featuring
sports and trivia games which are broadcast to group environments.

Online/Internet Services (Online/Internet Services", formerly referred to
as "Home") - Live interactive sports and trivia games including those currently
broadcast over the NTN Network to the home consumer market via third-party
providers, such as America On-Line, CompuServe and GTE MainStreet.

LearnStar ("LearnStar") - An interactive, multimedia, curriculum-based
educational system marketed to educational institutions. Marketed through its
wholly-owned subsidiary, LearnStar, Inc.

IWN ("IWN") - IWN is a general partner in a limited partnership that is
currently developing, interactive and transaction processing software and
technology for the gaming industry.

Although the Company has historically derived revenues from licensing it
services to companies in foreign countries ("International Licensing"), there
were no material revenues from this source in 1996. No assurances can be given
that future revenues will be received from this source.

The following is a brief description of each:

NETWORK SERVICES - Network Services represents the majority of the
Company's business, providing a 24-hour-a-day interactive television broadcast
network featuring sports, trivia and informational programming to over 2,600
hospitality sites in the U.S. and 540 sites in Canada. These sites include
restaurant chains (e.g., TGI Friday's, Ruby Tuesdays, Black Angus), national
hotel chains (e.g., Hilton, Holiday Inn, Marriott, Radisson, Sheraton), local
and regional bowling alleys, pizzerias, sports complexes, taverns and military
bases. Through various platforms including satellite, cable and wireless
transmission sources, Network Services can link its subscribers to encourage
local, regional and national competitions for its programming.

ONLINE/INTERNET SERVICES - The Company provides to the home consumer market
many of the same services as Network Services, via on-line, cable delivery and
internet services. Online/Internet Services is not dependent on any particular
technology or method of transmission to deliver its programming. In addition to
the same sports and trivia games which are currently broadcast over the NTN
Network, Online/Internet Services includes other multi-player interactive games
expressly designed for the home environment. For example, through an agreement
with America Online ("AOL"), NTN launched Trivial Pursuit Interactive in May
1996. Currently, revenues are derived from 1) play-along services, in which NTN
services are broadcast along with live events generating subscription fees from
interactive game participation, or "pay-per-play", and 2) information services,
where NTN's database is provided as a value-added information service to
subscribers who want statistical data. Customers include CompuServe, GTE
MainStreet and Bell Canada.

LEARNSTAR - The LearnStar product is provided to educational institutions
in the United States using NTN's proprietary software technology. With a
comprehensive library of over 1,000 interactive academic competitions

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covering many subject areas, LearnStar offers teachers a new and exciting way to
encourage learning and motivation in kindergarten through 12th grade students.

IWN - IWN, was established in 1994 to develop, distribute and market
interactive and transaction services for the gaming industry. IWN is developing
the software and technology for use in gaming applications. IWN is currently
focusing on pari-mutuel wagering and sports betting. The Company has developed
the IWN Gaming Host System ("Gaming Host System"), an on-line transaction
processing engine that provides security, administration, processing and
switching services. The Gaming Host System is designed to provide the back-end
system and support for all of IWN's products, regardless of market niche
application or technical platform.

INTERNATIONAL LICENSING - The Company has licensed independent companies to
broadcast in Australia/New Zealand and South Africa. Its exclusive licensees,
NTN Australasia, Ltd. and MultiChoice, Ltd., operate broadcast centers in
Australia/New Zealand, and South Africa, respectively. Further, the Company
licenses its programs and software to NTN Interactive Network, a company located
in Canada. Licensees, except in Canada, operate their own broadcast center and
produce interactive programs specifically geared to the local culture and
society. The Canadian licensee uses the broadcast provided by the Company on
the NTN Network.

MARKETING AND DISTRIBUTION OF SERVICES AND PRODUCTS

NETWORK SERVICES. Network Services is provided via the NTN Network. The
NTN Network is currently marketed primarily to public viewing locations such as
restaurant chains (e.g., TGI Friday's, Ruby Tuesdays, Black Angus), national
hotel chains (e.g., Hilton, Holiday Inn, Marriott, Radisson, Sheraton), local
and regional bowling alleys, pizzerias, sports complexes, sports taverns and
military bases ("Locations"). The NTN Network serves over 2,600 locations
throughout all 50 of the United States and over 540 sites in Canada. Locations
in Canada are further serviced and marketed to by the Company's independent
licensee, NTN Interactive Network ("NTN Canada").

The NTN Network presently features from 14 hours to 17 hours, depending on
the time zone, of interactive sports and entertainment trivia game programming
on weekdays, with extended programming hours on weekends. The balance of
broadcast time is devoted to a non-audible graphics-based service transmitting
information, including sports scores and upcoming program promotions.

Original programming for the NTN Network is developed and produced at the
Company's corporate offices in Carlsbad, California, for distribution to
Locations. The Company's facilities are equipped with video, satellite and
communications equipment, and multimedia computers. The Company can provide
simultaneous transmission of up to 16 live events for interactive play and a
multitude of interactive games and other programs, allowing distribution of
different programs to customers in different geographical locations.

The Company uses two independent services to distribute NTN programming via
satellite to customers, although it is not dependent upon either service because
there are several other providers that offer similar services. The Company
attempts to use the most effective and least expensive multiple data
transmission techniques to distribute data from the Company's facilities to
customers, including direct connect, internet transmission, and direct satellite
broadcast.

Each Location receives NTN proprietary equipment (a "Location System")
including a personal computer, a satellite data receiving unit (usually a small
satellite dish), and a minimum of ten hand-held, portable keypads
("Playmakers(R)") which players use to make their selections. During live
interactive programs, players participate in the play-along programs using two
television screens. One screen features the live broadcast from the television
network (e.g., ABC's Monday Night Football), while the second screen displays
the NTN Network program. Participants play the game by entering their selection
on Playmakers(R), which transmit a radio signal to the on-site computer or
through connection to the NTN broadcast center (the "Broadcast Center") in
Carlsbad, California. At the conclusion of the broadcast, total scores are
calculated and sent via phone lines. Within seconds, rankings are tabulated and
rankings and scores at each participating Location are transmitted back to such
Location via the NTN Network. This allows players to compete not only with
other patrons at their Location, but against all players across the nation who
are participating interactively on the Network. The following diagram depicts
the transmissions for a typical real-time, interactive game via satellite.

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[NTN BROADCAST CENTER GRAPH APPEARS HERE]

In addition to tabulating Playmaker(R) responses at the Location and
communicating with the Company's Broadcast Center, the Location System can
manipulate screens locally by calling up high-resolution computer generated
graphics and inserting the screens into the broadcast schedule. Accordingly, the
Company offers both national and local advertising.

Interactive Sports Game Programs. Network Services offers a variety of
--------------------------------
sports and entertainment trivia games that challenge players' skill and
knowledge and create significant customer loyalty. An example of interactive
sports programming is QB1(R), the Company's first and most renowned game
program. QB1(R) is an interactive football strategy game exclusively licensed
by the NFL, which tests a player's ability to predict an offensive team's plays
during a live televised football game. Points are awarded based on the accuracy
of the player's prediction, rather than whether the team scores or advances the
ball. The Company broadcasts QB1(R) in conjunction with every NFL game and
selected Canadian Football League and college football games.

The NTN Network presently features the following interactive sports games
programs:

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NTN PLAY-ALONG GAMES - Interactive games played in conjunction with live,
televised events. Games include the following:

GAME DESCRIPTION
---- -----------
<S> <C>

QB1(R) NFL licensed interactive strategy game in
conjunction with live telecasts of college and
professional football games

NTN DiamondBall(R) Major League Baseball licensed interactive
strategy game in conjunction with live telecasts
of professional baseball games

Triples(R) Interactive horse racing game in conjunction
with live telecasts of horse races

Uppercut(R) Interactive strategy game in conjunction with
live telecasts of boxing matches

NTN PowerPlay(R) National Hockey League licensed interactive
strategy game in conjunction with live telecasts
of professional hockey games
</TABLE>

NTN FANTASY GAMES - Fantasy league games that are played in conjunction
with sporting events or rotisserie leagues. Games include the following:
<TABLE>
<CAPTION>

GAME DESCRIPTION
---- -----------
<S> <C>

Brackets(TM) Basketball or hockey tournament prediction game

Dream Team Baseball(TM) Managing a professional all-star baseball team

Football Challenge(TM) Weekly selection of winners of college and
professional football games

Football Fantasy(TM) Managing a professional all-star football team

Hockey Draft(TM) Managing a professional all-star hockey team

Hoops(R) Managing a professional all-star basketball team

Survivor(R) Weekly single elimination prediction game for
professional football

Oddsmaker Challenge(TM) Weekly selection of winners of various sporting
events

</TABLE>

INTERACTIVE TRIVIA GAME PROGRAMS. During trivia game programs, each
Location System simultaneously displays selected trivia questions which are
displayed on the NTN television monitor at each Location. Participants use the
Playmaker(R) to select answers, which are collected, transmitted and tabulated
in a similar manner to NTN's interactive sports games. Participants' scores are
displayed on the dedicated television monitors, along with national, regional
and local rankings, as applicable.

While certain of the Company's sports games are available only during the
seasons when the respective sports are played, trivia game programs allow the
Company to offer year-round interactive programming. The NTN Network generally
provides the trivia programming during evening hours, when Locations,
particularly restaurants

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and taverns, tend to be busiest. Currently, the Company broadcasts between 14
and 17 hours of interactive programs per day. The NTN Network presently
features the following interactive trivia games programs:

NTN PREMIUM TRIVIA GAMES - Promotion-oriented weekly game shows that
generally require 1-2 hours of participation. Prizes are awarded to the top
finishers, except where prohibited by law. Games include the following:
<TABLE>
<CAPTION>

GAME DESCRIPTION
---- -----------
<S> <C>

Trivial Pursuit(R) Interactive version of the famous Trivial
Pursuit game - licensed from Hasbro Interactive.

Playback(TM) Music trivia

Showdown(R) Advanced trivia challenge

SportsIQ(TM) Weekly sports trivia game

Sports Trivia Challenge(R) Advanced sports trivia covering multiple topics

Spotlight(TM) Entertainment and media based trivia game
(movies, music)

</TABLE>

NTN TRIVIA GAMES - General-themed, standard games typically one-half hour
in length. Games include the following:
<TABLE>
<CAPTION>

GAME DESCRIPTION
---- -----------
<S> <C>
Brain Buster(R) Interactive trivia game covering esoteric topics

Countdown(R) Interactive trivia game using word plays

Topix(TM) Theme driven trivia game played under controlled
timing

Wipeout(TM) Interactive trivia game eliminating incorrect
answers

Nightside(R) Adult oriented trivia

Sports Trivia(R) General trivia game covering sports topics

Viewer's Review(R) Audience-supplied content trivia game

Retroactive(TM) Pop-culture trivia with 60's, 70's and 80's
content

Football Weekend Roundup(TM) Football trivia game
</TABLE>

CUSTOM GAMES - Interactive games created specifically for media companies
such as Capital Cities/ABC for simultaneous broadcast with their live telecasts.
<TABLE>
<CAPTION>

GAME DESCRIPTION
---- -----------
<S> <C>

NTN Awards Show(TM) Interactive game played in conjunction with the
Academy Awards, Grammy Awards and other award
shows

NTN Draft Show(TM) Interactive game played in conjunction with the
annual NFL draft
</TABLE>

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Since 1987, Network Services has broadcast the NTN Awards Show(TM) to all
sites in connection with the live Academy Awards telecast. The NTN Awards
Show(TM) contains movie trivia and biographical information on nominees and
allows players to select winners up to the actual announcement and compete with
other players via the NTN Network, in a manner similar to QB1(R).

Information Programming. During the hours in which the Company is not
-----------------------
broadcasting interactive games, the Company uses its broadcast network to
transmit sports information as well as NTN Network programming information. The
Company obtains the majority of its sports information (for which it pays a
monthly fee) from Sportsticker wire service, electronically formats the
information and then retransmits it for broadcast to Locations.

Advertising. The NTN Network operates in a manner similar to the
-----------
television broadcast medium in that a number of minutes of a broadcast hour are
set aside for advertising, promotional spots (promoting NTN Network's
competitions and special events), "tune-in spots" (promoting NTN Network
programming schedule), and public service announcements.

The Company has currently set aside fourteen minutes each hour for
advertising, promotional spots and "tune-in spots." Each of the spots are
designed to be fifteen seconds in length for a total of 56 spots per hour. The
Company can insert advertising messages into its interactive sports and trivia
programming at any number of Locations. Further, messages can be broadcast over
the NTN Network or custom-tailored for a specific Location or several Locations.

The Company sells advertising in blocks of two-fifteen second ad spots per
hour for a total of fourteen hours per day. Further, programming content has
been innovatively blended with the advertiser's logo and message. For example,
the Miller Lite Countdown(R) and Cuervo 1800 Countdown(R) Shows provide 30
minutes of commercial exposure to Miller and Cuervo products. Sponsorships of
programs are also available and provide advertisers with specific premium
exposure within a sponsored program.

Advertisers are also given the opportunity to communicate directly with the
NTN Network's Players Plus(R) ("Players Plus") members, numbering over
1,000,000. Players Plus is a frequent player club which members join by
entering their name, address, zip code and identification number into a
Playmaker(R), which is then captured at the Broadcast Center. A member earns
points each time they play and also a chance to win prizes in the monthly
Players Plus sweepstakes. Sponsors are capable of receiving feedback through
interaction with customers in the form of customer surveys.

Interactive Programming Under Development. The Company is continuing to
-----------------------------------------
develop and market-test other interactive game programs. These include
interactive programming in conjunction with live broadcasts of other sports
events and award shows, as well as additional trivia and stand-alone interactive
games. The Company is also developing interactive games for broadcast with
television game shows, allowing NTN Network viewers to play a televised game
show simultaneously with studio contestants.

ONLINE/INTERNET SERVICES. The Company provides many of the same services
and programs as seen on the NTN Network to the home consumer market via
Online/Internet Services. Online/Internet Services includes multi-player
interactive games, which have already garnered brand recognition via the NTN
Network, into the consumers' households through personal computer on-line
services and interactive television services. In addition, Online/Internet
Services includes other multi-player interactive games designed expressly for
the home environment. The Company offers the games to end users via third party
networks such as America Online and GTE MainStreet. Revenues received include
development fees and monthly broadcast revenues based upon usage and certain
minimum guarantees from these third-party networks. The end-user does not pay
NTN directly, but pays the online service provider who is responsible for paying
the Company.

The current focus of home distribution is via on-line services, such as
AOL, where a substantial customer base already exists. The Company's
interactive sports and trivia games are available on-line 24 hours a day, seven
days a week. The Company distributes games through PC on-line services in
return for a share of the customer revenue in excess of a minimum monthly fee.
The end-user purchases services from a distributor such as AOL who, in turn,
pays NTN.

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Most of the interactive sports and trivia games currently broadcast over
the NTN Network are also available directly to consumers in their homes through
a variety of media, including computer on-line services and interactive
television (ITV) networks. The Company's Online/Internet Services are unique
since the programs are not dependent upon, and consequently not bound by, any
particular technology or method of transmission. Regardless of which technology
emerges as the primary means of transmission on the "information highway",
management believes its programming content will be available to the household.

The Company also assists other companies in providing content and programs
via content distributors. For a share of the revenue generated by consumer use,
the Company provides program translation services and maintains the programs on
its servers.

Online/Internet Services are distributed to on-line and ITV networks, also
known as content distributors. These games, in turn, are made available to
their customer base for a fee. The diagram below depicts the transmissions
necessary for a consumer to use the Company's service in his or her home.

[NTN BROADCAST CENTER GRAPH APPEARS HERE]

LEARNSTAR. The LearnStar teaching system (the "LearnStar System") was
developed as a natural extension of the NTN Network and its entertainment
applications. The LearnStar System is targeted at schools and teachers who are
seeking an educational tool to increase student interest in learning via
interactive competitions in the classroom.

The LearnStar System enables a school to evaluate the academic proficiency
of the students, while creating an enjoyable environment in which students seem
more apt to participate. Using similar technology to that used for the NTN
Network, the LearnStar interactive learning system can conduct academic
competitions, collect data for surveys and provides local, regional and national
testing capabilities. All of these services can be utilized within a single
classroom, at one distinct site, or at multiple schools throughout the country,
all with instantaneous feedback.

Students test their comprehension of material by viewing an academic
competition on a television screen, then answer questions interactively via
hand-held keypads that broadcast signals to and from the LearnStar System. The
questions are posed in a multiple choice format, similar to the nationally
administered Scholastic Aptitude Test. Many competitions feature full-motion
video, colorful graphics and sound. Students work individually or in teams to
answer

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the questions, with scores and team rankings displayed on the television screen
after each question. The LearnStar System offers flexibility - it can be
utilized as a stand-alone resource, moving on a portable cart from classroom to
classroom for use by the entire school, or the LearnStar System can be linked
via satellite on the NTN Network for live national competitions with schools
throughout the US. The LearnStar System includes a dedicated computer control
system with a Pentium processor, CD-ROM unit, proprietary software, printer,
satellite dish, receiver, wireless keypad transceiver, classroom keypad pack
with charging trays, and the LearnStar component cart. Teachers can also develop
unique lesson plans by editing the existing competitions or creating their own
customized quizzes to include current events and to highlight important
information.

The multimedia, interactive LearnStar software features over 1,000 academic
competitions in many subject areas written by experienced educators,
instructional designers and software programmers. LearnStar academic
competitions are carefully written according to state guidelines, national
standards, relevant topics and age appropriateness.

IWN. IWN was established in 1994 to develop, distribute and market
interactive and transaction processing services for the gaming and wagering
industry. IWN has developed the software and technology related to gaming
applications. IWN will continue to develop its products and services for
eventual mass marketing.

Initially, IWN is focusing on the North American pari-mutuel market as the
point of entry due to the enabling legislation that already exists in several
states in the United States and Canadian provinces. This legislation currently
allows racing fans to establish and fund an account at the racetrack, and call
in via telephone to either a live operator or an interactive voice response unit
to place their wager. New York, Pennsylvania and Connecticut presently allow
non-residents to establish accounts and place interstate telephone wagers. Ohio
is considering allowing non-resident accounts and interstate telephone wagering.

IWN's first product, HomeStretch(TM), turns a personal computer into a
gateway for pari-mutuel wagering. The Windows 95-based product will allows
racing fans to establish and fund an account at the racetrack, review race
information, and create wagers. Using a modem, the player connects to IWN's
Gaming Host System, located in Carlsbad, California, which provides connectivity
to the racetrack totalisator system, funds transfer system, and information
providers. The Gaming Host System is an on-line transaction processing engine
that provides the security, administration, financial transaction processing
services and switching capabilities necessary to support interactive gaming and
wagering from the home or virtually anywhere. In October 1996, IWN conducted
real-time contest wagering utilizing HomeStretch(TM) in conjunction with the
Ontario Jockey Club, Canada's premier racing organization, and the 1996
Breeders' Cup. Contest wagering and beta testing is ongoing pending final
regulatory approval to operate the IWN system in conjunction with real money
betting. To date, no significant revenues have been realized from this product.

INTERNATIONAL LICENSING. NTN has provided its services internationally to
expand its international services through licensing agreements. For many years,
NTN has provided service to customers in Canada through its unaffiliated
licensee, NTN Canada. In 1993, NTN issued a 20-year license to an unaffiliated
company in Australia ("NTN Australasia"), to create the first interactive
television network in Australia and New Zealand. In 1994, NTN issued a license
to MultiChoice Ltd., an unaffiliated company, to develop and operate an
interactive broadcast network in South Africa. Generally, the company licenses
operations in foreign countries by granting the rights to use NTN's unique
interactive broadcast technology. NTN provides licensees with technological
know-how and assistance to build a broadcast center, and to develop interactive
products and programs.

MARKETING AND EXPANSION STRATEGY

NETWORK SERVICES. Network Services markets services to customers primarily
through advertising in national trade periodicals, national and regional
industry trade shows, telemarketing, direct mail and direct contact through the
field representatives. All sales prospects are organized and tracked through
shared database software. Currently, services are sold through a regional-based
management team and utilize direct salespersons as well as over 50 independent
representatives. The independent representatives' agreements are typically one-
year agreements, with renewal clauses if the representative meets certain
performance goals. Customers generally execute a renewable one-year contract to
obtain the Company's services and pay a monthly fee of approximately $600.

11
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The Company's future business strategy related to the NTN Network is to
continue to increase available programming and market to additional group
viewing Locations. In addition, the Company intends to develop additional
revenue sources for the NTN Network such as local and regional advertising. No
assurance can be given as to whether the Company will be successful in the
implementation of its business strategy.

ONLINE/INTERNET SERVICES. Since the end-user of Online/Internet Services
is the distributor's customer, the Company relies on the distributor's marketing
efforts to promote its products. However, the Company works in conjunction with
distributors to develop the promotions and advertisements. For example, AOL may
include the Company's game logo on an initial "start-up" screen which millions
of its subscribers can access at no expense to NTN. Furthermore, the Company
supplies distributors such as GTE MainStreet with existing marketing materials
used for the NTN Network, but GTE MainStreet absorbs the majority of the cost
associated with promoting online games to GTE MainStreet customers. Customers
generally pay the Company a fee based on the amount of time that consumers have
participated with the Company's games and services.

In the future, the Company expects its products to elicit more exposure
from the distributors as a result of increased brand recognition and continued
promotions. NTN will continue to take a proactive position with respect to
marketing products to each distributor to ensure inclusion in as many of their
promotional efforts as possible. The Company expects its direct marketing costs
to continue to be minimal. No assurance can be given as to whether the Company
will be successful in the implementation of its business strategy.

LEARNSTAR. To date, the LearnStar System has been sold by a direct sales
force targeting individual schools. In the future, the Company plans to use
independent representatives familiar with the education market to target inner-
city school districts, the nationwide Catholic archdiocese school system and
others. Further, the Company seeks sponsorship from public and private
foundations as well as funding from federal, state and local government
agencies. The Company currently derives revenues from selling the LearnStar
System and a site license to its customers. Current prices for the LearnStar
System range from $18,000 to $25,000, dependent upon volume and other factors.
The Company plans to test market different flexible pricing and financing
arrangements. Marketing and sales efforts are focused on large population
centers in states with funds designated specifically for technology in
education. No assurance can be given as to whether LearnStar will be successful
in the implementation of its business strategy.

IWN. IWN's marketing strategy is to promote the acceptance of interactive
applications to existing gaming and wagering enthusiasts, on-line services users
and interactive television participants. IWN's marketing strategy for
Homestretch(TM) in the interactive pari-mutuel wagering market, is to target
both the racing organization and the racing end-user. The development of this
business will depend on the adoption of enabling legislation in many states and
countries. Utilizing database marketing, IWN will initially target racing fans
who currently use computers for handicapping. This group has been identified as
"early adopters". IWN intends to expand the market to include on-line services
users and other demographic groups which are comfortable with technology and
have an interest in sports. IWN will seek to utilize resources from both
Network Services and Online/Internet Services to generate potential customer
lists. Targeted direct mail, on-line advertising and telemarketing will all be
utilized to promote the IWN services. IWN will seek to generate revenue through
fees charged to process data including wagers, sports information and switching
and transfer services.

Promotion to the racing industry will be through trade shows and direct
sales. IWN's management team has over 25 years of combined experience marketing
services to the gaming and wagering industry. IWN has a relationship with
Autotote Corporation, a public company which processes approximately 75% of the
pari-mutuel handle in the U.S. and which is the exclusive licensee for operating
off-track betting establishments for the State of Connecticut. IWN has also
contracted with Equibase, the official source of information for the
Thoroughbred Racing Association and the Jockey Club, to provide the raw data for
the racing information products. In 1996, IWN licensed its technology to IWN
Australasia, a joint venture between IWN, NTN Australasia (an unaffiliated
licensee) and Sporting Management Concepts. The licensing agreement provides
for license fees, royalties, development fees and equity ownership for IWN. No
assurance can be given as to whether IWN will be successful in the
implementation of its business strategy.

12
<PAGE>

SOURCES OF REVENUE

The following table sets forth information with respect to the principal
sources of the Company's revenues during the years ended December 31, 1996, 1995
and 1994.
<TABLE>
<CAPTION>

YEARS ENDED DECEMBER 31
-----------------------

1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
Network Services $ 20,029 15,559 11,271
Online/Internet Services $ 1,811 620 542
Advertising $ 1,590 1,128 431
Equipment Sales, net $ 1,757 1,803 1,634

</TABLE>

NETWORK SERVICES. The primary market for Network Services is comprised of
approximately 330,000 taverns and restaurants in North America. Other potential
Locations may also be found among hotels, military bases, college campuses,
hospitals, and other group viewing Locations such as country clubs, fraternal
organizations, and bowling centers.

To date, Network Services' customers have generally been public viewing
locations such as restaurant chains (e.g., TGI Friday's, Ruby Tuesdays, Black
Angus), national hotel chains (e.g., Hilton, Holiday Inn, Marriott, Radisson,
Sheraton), local and regional bowling alleys, pizzerias, sports complexes,
sports taverns and military bases. Many of the Company's customers such as
hotel and restaurant chains have multiple Locations. Locations generally enter
into a one-year broadcast service agreement with the Company pursuant to which
they pay a monthly broadcast fee of approximately $600 per Location. The
Company currently serves over 3,000 Locations located in all 50 States and in
Canada.

The Company has a license agreement with NTN Canada (the "Canadian
License"), pursuant to which NTN Canada solicits Locations to the NTN Network in
Canada. Pursuant to the Canadian License, the Company provides NTN Network
programs to Canadian Locations in exchange for an annual license fee payable in
monthly installments based upon the number of Locations in Canada, which
presently number approximately 540.

As a percentage of total revenue, Network Services amounted to 78%, 77% and
70% in 1996, 1995, and 1994, respectively.

ONLINE/INTERNET SERVICES. The Company provides its services to on-line
users pursuant to the agreements with various system providers such as AOL,
CompuServe, and GTE. The on-line computer industry is one of the fastest
growing consumer markets in terms of subscribers. Industry analysts project
that by 1999 more than 100 million consumers will be connected to on-line
computer services. Fees from on-line services are based on the actual use of
the NTN interactive programs by their underlying customers. The Canadian
License also grants NTN Canada the exclusive right to market NTN interactive
services to online users in Canada. The Company is entitled to receive a
royalty equal to 25% of revenues generated from Canadian online customers. No
assurance can be given that any such royalties will be received by the Company.
As a percentage of total revenue, Online/Internet Services amounted to 7%, 3%
and 3% in 1996, 1995, and 1994, respectively.

ADVERTISING REVENUE. The Company sells advertising spots for broadcast on
the NTN Network as well as for Online/Internet Services. Advertisers can buy
time for promotional spots as well as sponsorship of specific events or
programs. As a percentage of total revenue, Advertising amounted to 6%, 6% and
3% in 1996, 1995, and 1994, respectively.

EQUIPMENT SALES. Equipment sales of LearnStar Systems is another source of
revenue for the Company. Typically, Location Systems are provided to customers
but ownership is maintained by the Company or are leased

13
<PAGE>

from independent companies. The Company also sells interactive equipment,
particularly Playmakers(R), to its licensees in Canada, Australia, and South
Africa. Equipment is generally sold to customers with no return rights except in
the case of defect. As a percentage of total revenue, Equipment sales amounted
to 7%, 9% and 10% in 1996, 1995, and 1994, respectively.

RAW MATERIALS

For media platforms such as on-line services, the Company distributes its
programs to the recipients who maintain their own receiving, translation and re-
broadcasting equipment. Accordingly, the Company has no raw materials or
equipment needs for these customers beyond its own back-end servers.

For media platforms such as the NTN Network and LearnStar applications, the
System is assembled from off-the-shelf components available from a variety of
sources, except for the Playmaker(R) package. The Company installs and
maintains service of the Location Systems and LearnStar Systems. The
Playmaker(R) package is currently manufactured to the Company's specifications
by a non-affiliated manufacturer in Taiwan. In 1996, the manufacturer of the
Playmaker(R) package made certain changes to the design and source code of the
Playmakers(R), some of which were not previously authorized by the Company. As
a result, the Company is uncertain if it has all such design plans and source
codes for the Playmaker(R) package. In recent months and currently, the
Company's Network Services customers who have received manufactured
Playmakers(R), have experienced reliability problems with equipment. The
Company has recently experienced an unusually high rate of customer
discontinuing service which is effecting the Company's ability to generate cash
flow and earnings. The Company and the manufacturer are jointly working to
provide a solution to such reliability problems, although no assurances can be
given that a solution can be reached without undue delay and cost. The Company
believes that there are numerous other manufacturers who could supply
Playmakers(R) although no assurances can be given that, if necessary, such
alternative sources could be secured at commercially reasonable costs and
without undue delay.

LICENSING, TRADEMARKS, COPYRIGHTS AND PATENTS

The Company's sports games make use of simultaneous telecasts of sporting
events. As a consequence of the Company's licensees with various sporting
leagues, the Company is also permitted to utilize the trademarks and logos of
national teams and leagues in connection with the playing of an interactive
game.

The Company is party to an exclusive license from the NFL, which grants the
Company the exclusive right to use the trademarks and service marks of the NFL
in connection with the playing and marketing of QB1(R). The NFL license grants
the Company the exclusive data broadcast rights to conduct interactive games in
conjunction with the broadcast of NFL football games, for which the NFL receives
a royalty based on revenues billed by the Company in connection with QB1(R)
play. The agreement with the NFL was renewed on March 25, 1997 and expires in
2000. This most recent agreement expands the Company's rights to include
certain approved online service to all territories in which such online services
are accessible and significantly includes the Internet. There can be no
guarantee that the Company will be able to renew the license in the future.
Further, it is uncertain as to whether the Company's failure to renew the
license will have a material adverse effect on the Company.

In 1994, the Company entered into a three-year exclusive contract with the
Canadian Football League ("CFL") granting the Company the exclusive rights to
the simulcast of data accounts of the events occurring at CFL games, for which
the Company paid a royalty fee to the CFL. The license also includes the
exclusive right to use the CFL trademarks and logos for an interactive game in
connection with the playing and marketing of QB1(R). The Company has no
immediate plans to renew this license.

The Company currently has non-exclusive agreements with Major League
Baseball and the National Hockey League to use live broadcasts of their
respective games in conjunction with broadcasts of NTN DiamondBall(R) and NTN
PowerPlay(R) in Canada. No assurances can be given that the Company will be
able to renew such licenses in the future. Further, it is uncertain as to
whether the Company's failure to renew such licenses will have a material
adverse effect on the Company.

No action has been brought against the Company by the owners of the
applicable rights with respect to any of the Company's broadcasts of interactive
games in conjunction with live sports events.

14
<PAGE>

The Company keeps confidential as trade secrets the software used in the
production of its programs. The hardware used in the Company's operations is
virtually off-the-shelf, except for the Playmaker(R) keypads. The Company owns
copyrights to all of its programs. In addition to the registration of the
trademark for QB1(R), the Company has either received, or is presently applying
for, trademark protection for the names of its other proprietary programming, to
the extent that trademark protection is available for same.

The Company maintains a program directed to the protection of its
intellectual property assets. As part of this program, the Company presently
has two patents pending for an Interactive Learning System and Automated System
for Conducting Auctions with Participants in Remote Locations.

SEASONAL BUSINESS

Overall, the Company's business is not generally seasonal. Revenue from
Network Services and Online/Internet Services is billed monthly as service is
provided to customers. However, sales of new Locations have traditionally been
higher in the Summer and early Fall months compared to the rest of the year.
This trend coincides with the start of the NFL season in August. The
hospitality industry has historically experienced a relatively high business
failure rate. Similarly, the Company has lost customers due to the failure of
customer businesses, to change in ownership or non-renewal of contracts,
collectively referred to as "churn". The Company's historical churn experience
has also been seasonal in that the percentage of churn has been higher following
the completion of the NFL season in February, although churn does occur in all
months. Although the Company's operating history is short, historically,
approximately 25% of the existing Network Services customers at the beginning of
a year, have churned during a year. The Company has implemented marketing
programs and other efforts to reduce the churn rate, however no assurance can be
given that such efforts will be successful.

Online/Internet Services are provided to consumers via online distributors
such as AOL and CompuServe. This industry is still in its infancy and little
historical data is available. The Company has experienced a continual increase
in the number of consumers using these services and no seasonal effect has been
noted.

Sales of LearnStar Systems are generally higher in the early part of the
year and at the traditional beginning of school in September with little or no
activity during the Summer break period.

WORKING CAPITAL

The discussion under "Liquidity and Capital Resources" included in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", is incorporated herein by reference.

SIGNIFICANT CUSTOMERS

The Company's customers are diverse and varied in size as well as location.
The services are provided point to multi-point so that the Company is not
dependent on any one, or a few customers. The Company does not have any
individual customers who accounted for 10% or more of its consolidated revenues
in 1996, 1995 or 1994.

BACKLOG

The Company generally does not have a significant backlog at any time
because the Company normally can deliver and install new Location Systems within
the delivery schedule requested by customers (generally within two weeks)
related to the NTN Network, with a similar delivery and installation pattern for
the LearnStar System. However, the Company announced on October 25, 1996 that
it had suspended shipments of its Playmakers(R) keypads to new Network Services
locations pending approval of the Playmaker(R) by the United States Federal
Communications Commission ("FCC"). The Company's application for approval was
subsequently submitted to the FCC and was approved by the FCC on January 15,
1997. Shipments to new locations, including approximately 290 sites which were
previously awaiting installation, resumed immediately following the FCC approval
and installation was completed on these sites in January and February. For
other distribution platforms, there is no backlog because

15
<PAGE>

services are generally distributed point to multi-point and the Company does not
have to provide specific equipment to the customer, making it relatively simple
to add new customers without any significant delay.

GOVERNMENT CONTRACTS

The Company provides its distribution services to a small number of
government agencies (usually military base recreation units), however the number
of government customers is small compared to the overall customer base.
Contracts with government agencies are provided under generally the same terms
and conditions as other corporate customers and with only minor revisions which
are required by such government agency.

COMPETITIVE CONDITIONS

The Interactive Entertainment industry is still in its formative stage, but
currently may be divided into three major segments: (1) media distribution
services such as on-line services, telephone companies and cable television
companies and the NTN Network; (2) equipment providers such as computer and
peripheral equipment manufacturers; and (3) content and programming providers,
such as movie studios, NTN and software publishers. The Company does not act as
a direct provider of equipment to consumers. The Company operates as a media
distribution service through its own NTN Network. Also, the Company is a
program provider to an array of other media distribution services to consumers
utilizing a variety of equipment and delivery mechanisms.

NTN has a growing number of competitors in the programming segment of the
Interactive Entertainment industry. The Company's programming content is not
dependent upon, and consequently not bound by, any particular technology or
method of distribution to the consumer. The Company's programming is,
therefore, readily available to consumers on a wide variety of entertainment and
media services including: the NTN Network; on-line services including America
Online, Compuserve, and cable television, including GTE MainStreet, which is
available to households in certain regions.

The Interactive Television industry is still in its infancy. The Company
competes with other companies for total entertainment dollars in the
marketplace. The Company's programming competes generally with broadcast
television, pay-per-view, and other content offered on cable television. On
other mediums, the Company competes with other content and services available to
the consumer through on-line services. The Company's programming is interactive
in nature but is distinguished from other forms of interactive programming by
its simultaneous multi-player format and the two-way interactive features.
Presently, the technological capabilities of transmitting entertainment products
to the consumer exceed the supply of quality programming and services available
on the existing delivery systems. The Company is able to utilize the wide
variety of services available for transmission of entertainment products to the
consumer by forming strategic alliances with service providers to supply the
Company's programs for re-transmission. The Company's programming is available
to the consumer over a multitude of media platforms and delivery systems.

NETWORK SERVICES. Currently, Network Services on the NTN Network have no
competitors that furnish live, multi-player interactive entertainment similar in
scope and nature. Although the Company has no direct competitors in this area,
it does compete for total entertainment dollars in the marketplace. Other forms
of entertainment provided in public eating and drinking establishments include
music-based systems and cable and pay-per-view television. However, evidence
provided by customers indicates that patrons are inclined to stay longer and
consume more food and drink when NTN Network interactive games are offered as
the main source of entertainment. Accordingly, Network Services customers
generally tend to view these services as a profit generator rather than a cost
center.

ONLINE/INTERNET SERVICES. In the Online/Internet Services market, the
consumer has a plethora of entertainment options from which to choose, ranging
from cable television to telephone based services to computer on-line providers
and the Internet. The Company offers live, multi-player games and services
which are available to multiple interactive platforms in the home. Also, the
Company competes for a share of the total home entertainment dollars against
broadcast television, pay-per-view and other content offered on cable
television. The Company also competes with other programming available to
consumers through on-line services such as AOL and CompuServe. Cable
television, in its various forms, provides consumers the opportunity to make
viewing selections from anywhere between 30 to 100 free and pay channels, thus
limiting the amount of time devoted to any particular channel. For the

16
<PAGE>

most part, cable television is predominantly a passive medium, and does not
offer the viewer the opportunity to participate in its programming, and even
less frequently, does it offer programming designed for active participation.
On-line providers, such as AOL, can provide literally thousands of options for
content and entertainment, however, such on-line services have traditionally
been confined to that company's subscriber base. Interaction among viewers is
thus limited to the particular program as offered only on the specific on-line
service. The Company offers consumers the opportunity to participate and compete
against other viewers who are seeing the identical program over several
different technological media, including interactive television, personal
computers and/or the NTN Network.

LEARNSTAR. Products and services to education customers utilizing the
LearnStar System were first sold beginning in 1995. The Company competes with
some established businesses which offer educational products, however, the
majority of existing products in the marketplace are passive, rather than
interactive. Such companies include Jostens' Learning, C.C.C. and the Eduquest
Division of IBM. The competitive advantage of the LearnStar System is that it
provides an easy to use, two-way interactive learning method, is very
competitively priced and requires less equipment than traditional systems.
Moreover, the LearnStar System is adaptable to the particular needs of the
individual users and is designed such that it can be used for local, regional,
and national competitions on a mass basis utilizing existing satellite
technology. Although the market for providing learning services to schools is
mature, the Company believes that the market for advanced educational products
which use computers, interactive software and satellite technology is embryonic.

IWN. The U.S. Gaming industry has grown rapidly in recent years. In 1994,
Americans wagered over $400 billion on legal commercial gaming compared to $126
billion in 1982. One survey showed that 61% of American adults wagered in one
or more types of government-approved gambling last year.

One of the reasons for the growth in gaming has been the favorable
regulatory and legislative environment. Many states have accepted gaming as a
means to raise tax revenue and encourage economic development. There are
approximately 200-250 pari-mutuel facilities in the U.S., and seven states have
legalized account-based telephone wagering, including New York and Connecticut,
which allow interstate telephone wagering.

Pari-mutuel wagering is the fourth largest segment in the gaming industry.
While the overall growth of the pari-mutuel handle has been stagnant over the
last five years, particularly when compared to the significant growth in the
overall gaming industry, the shift from on-track wagering to off-track betting
is an important trend. With the total U.S. thoroughbred horse racing handle in
the $10 billion range, off-track betting increased from $2.2 billion in 1987 to
$6.1 billion in 1994. Off-track betting is allowed in 20 of the 40 states where
pari-mutuel wagering is legal and is an increasingly important source of revenue
for racetracks and state governments. IWN's HomeStretch(TM) product is intended
to leverage the trend to off-track wagering by allowing fans to place wagers
from virtually anywhere to their account at the racetrack. Legislative
regulations are pending in many states and countries relating to placing wagers
electronically via computer services or on the Internet. IWN is still in the
development stage and no assurances can be given that it can attain its business
objectives or that regulatory bodies will provide legislation for on-line
wagering.

Assuming enabling legislation, IWN seeks to eventually compete for total
entertainment dollars in the market place. Within the gaming and wagering
industry, competition for the pari-mutuel wagering dollar comes from expanded
alternative gaming opportunities. Outside the industry, pari-mutuel wagering
competes with all forms of entertainment vying for consumer spending dollars.
Potential competitors in the interactive pari-mutuel wagering and gaming market
will include:
<TABLE>
<CAPTION>

COMPANY DESCRIPTION
------- -----------
<S> <C>

On Demand Services Originally part of United Video. Developed a
proprietary set-top box to deliver interactive
television racing and wagering.

Simulcast Racing Network Plans to broadcast a pay-per-view racing channel
with interactive wagering.

Gaming and Entertainment Plans to offer the hotel and sports bar markets
Television closed circuit pay-per-view and sports fantasy
leagues with participant wagering.

</TABLE>

17
<PAGE>

RESEARCH AND DEVELOPMENT

During the three years ended December 31, 1996, the Company incurred
$3,396,000, $1,471,000 and $1,972,000, respectively related to on Company-
sponsored research and development projects, including projects performed by
consultants for the Company.

The Company is currently developing interactive and transaction services
for the gaming industry and continues to develop enhancements to its interactive
software for several media platforms and continues its research into new and
enhanced graphics. There is no assurance that the Company will successfully
complete current or planned development projects or will do so within the time
parameters and budgets established by the Company, and there is no assurance
that a market will develop for any product successfully developed.

The Company works closely with independent user groups in an attempt to
develop enhancements and new services and products in response to customer
needs.

GOVERNMENT REGULATIONS

Compliance with federal, state and local laws have not had a material
effect upon the Company's capital expenditures, earnings or competitive position
to date. On October 25, 1996, the Company reported that it was advised by the
United States Federal Communications Commission (FCC) that its Playmaker(R)
keypad had never received FCC approval. Upon notification, the Company
commenced testing its equipment and submitted its application to the FCC. There
was no interruption of the Company's services to existing NTN Network customers,
nor were any of the Company's Online/Internet Services ever affected. The
Company will also implement a corrective action program to be approved by the
FCC. The Company received approval on January 15, 1997 and immediately began
shipments to new Locations. To date, the FCC has not advised the Company of the
amount of penalty, if any, which may be imposed. In light of the circumstances,
the Company believes that such a monetary penalty may be imposed, however, based
in part on the advice of outside counsel, the Company does not believe that the
amount of such penalty will be substantial so as to have a material, adverse
effect on the financial condition of the Company. The Company does not
anticipate that it will have to incur any material expenses in the future in
order to comply with federal, state or local laws because of the nature of its
current services and products. Gaming laws in certain states currently restrict
the ability of individuals to place wagers off-site from a regulated wagering
facility. The ability of IWN to carry out its business objective will be
dependent upon enabling legislation in states and other countries related to
gaming and electronic wagering.

EMPLOYEES

The Company and its subsidiaries employ approximately 200 people on a full-
time basis and 60 people on a part-time basis, and utilizes independent
contractors on a project basis. In addition, NTN retains a number of non-
affiliated programming and systems consultants. It is expected that as the
Company expands, additional employees and consultants will be required. The
Company believes that its present employees and consultants have the technical
knowledge necessary for the operation of the Company and that it will experience
no particular difficulties in engaging additional personnel with the necessary
technical skills when required. None of the Company's employees are represented
by a union and the Company believes its employee relations are satisfactory.

ITEM 2. PROPERTIES
----------

The Company has a membership in a limited liability company that owns "The
Campus", the three-building complex that houses the Company's headquarters. The
Company has a six-year lease for approximately 39,000 square feet of office and
warehouse space, at a rent of approximately $30,000 per month. The Company also
leases approximately 4,000 square feet of space under a lease that runs through
September, 1998, at a rent of approximately $3,000 per month. The Company does
not anticipate leasing additional space in the next year.

18
<PAGE>

ITEM 3. LEGAL PROCEEDINGS
-----------------

Until recently, the Company was involved as a plaintiff or defendant in
various previously reported lawsuits in both the United States and Canada
involving Interactive Network, Inc. ("IN"). With the court's assistance, the
Company and IN have been able to reach a resolution of all pending disputes in
the United States and have agreed to private arbitration regarding any future
licensing, copyright or infringement issues which may arise between the parties.
There remain two lawsuits involving the Company, its unaffiliated Canadian
licensee and IN, which were filed in Canada in 1992. No substantive action has
been taken in furtherance of either action.

In June, 1996, the Company entered into a Settlement Agreement to resolve
litigation filed by various shareholders of the Company. The case, originally
filed in June, 1993, in the United States District Court for the Southern
District of California, is a consolidation of four lawsuits seeking class action
status to recover unspecified damages for a drop in the market price of the
Company's common stock following an announcement that an anticipated agreement
under which the Company would sell certain equipment and services to an arm of
the Mexican government may be put out to bid. Whereas the Company vigorously
defended this litigation and believes, in part, based upon the opinion of
outside counsel, in the merits of its defense, the Company has entered into the
Settlement Agreement to resolve this matter out-of court to avoid costly and
protracted litigation, in the best interests of its shareholders.

The terms of the settlement are as follows: A settlement fund of $400,000
in cash plus 565,000 warrants to purchase the common stock of NTN ("Settlement
Warrants") was established. Each Settlement Warrant will have a term of three
years from the Date of Issuance, as that term is defined in the Agreement, and
an exercise price equal to the average closing price per share of NTN common
stock on the American Stock Exchange during the twenty trading days immediately
preceding the Date of Issuance. During the period from the second anniversary
of the Date of Issuance until the expiration or exercise of a Settlement
Warrant, the holder of such Settlement Warrant shall have the right, but not the
obligation, to put the Settlement Warrant to NTN for repurchase at a price of
$3.25 per Settlement Warrant (the "Put Right"), provided, however, that this Put
Right shall expire, once, if ever, during the period from and after the Date of
Issuance that the closing price per share of the NTN common stock on the
American Stock Exchange is more that $3.25 above the exercise price of the
Settlement Warrants on any seven trading days, whether consecutive or not. Upon
expiration of the Put Right, NTN shall have nor further obligation to repurchase
the Settlement Warrants. In no event shall NTN have any obligation to
repurchase its common stock. The Settlement cannot be finalized nor can the
exercise price of the Settlement Warrants be set, until an S-3 registration,
which registers the Settlement Warrants, becomes effective. Currently, the
registration is being reviewed by the United States Securities and Exchange
Commission ("SEC") and the Company has responded to inquiries posed by the SEC
related to such registration.

On April 18, 1995, a class action lawsuit was filed in the United States
District Court for the Southern District of California. The complaint alleges
violations of federal securities laws based upon the Company's projections for
the fourth quarter of 1994 and for the 1994 fiscal year, and further alleges
that certain of the Company's insiders sold stock on information not generally
known to the public. The Company, which has assumed the defense of this matter
on behalf of all defendants, has denied liability based upon the allegations
contained in the complaint. Plaintiffs have claimed to be entitled to damages
between $8 million to $10 million. The Company believes, based in part on the
advice of outside counsel, that the actual damages, if any, would be
substantially less than such amount. A pretrial conference to set a trial date
has been scheduled for October 14, 1997. See Item 7 - "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for additional
information, which is incorporated herein by reference.

On July 3, 1995, a single shareholder filed a separate lawsuit in the
United States District Court for the Northern District of Texas containing
allegations essentially identical to those raised in the shareholder lawsuit in
April, 1995. Upon the Company's motion, the case was transferred from Texas to
California. The Company denied the allegations in the complaint and filed its
own counterclaim against third parties for indemnification. On January 21,
1997, the Plaintiff voluntarily dismissed the separate lawsuit against the
Company without prejudice and the Company similarly dismissed its third party
counterclaims.

19
<PAGE>

There can be no assurance that any or all of the foregoing claims will be
decided in favor of the Company, which is not insured against the claims made.
During the pendency of such claims, the Company will continue to incur the costs
of defense of same. If the shareholder litigation is decided in a manner
adverse to the Company, it may have a material adverse effect on the Company's
financial condition and result of operations.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
-------------------------------------------------

No matters were submitted to a vote of security holders through the
solicitations of proxies or otherwise during the fourth quarter of the fiscal
year ended December 31, 1996.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------
MATTERS
- -------

The Company's Common Stock is listed on the American Stock Exchange, under
the symbol "NTN." The prices below are the high and low sales prices for the
Common Stock reported by the American Stock Exchange for the two most recent
fiscal years.
<TABLE>
<CAPTION>

1996 LOW HIGH
---- --- ----
<S> <C> <C>
First Quarter $3 - 1/8 $4 - 7/8
Second Quarter 3 - 7/8 5 - 1/8
Third Quarter 4 - 9/16 6 - 1/8
Fourth Quarter 3 - 7/16 5 - 3/16

1995 LOW HIGH
---- --- ----
First Quarter $5 - 5/8 $8 - 1/4
Second Quarter 4 - 7/16 5 - 13/16
Third Quarter 4 - 3/8 6 - 1/8
Fourth Quarter 4 - 1/8 5 - 3/16
</TABLE>

On April 10, 1997, the closing price for the Common Stock reported on the
American Stock Exchange was $4.625. On that date, there were approximately
4,000 record owners of the Common Stock.

To date, the Company has not declared or paid any cash dividends with
respect to its Common Stock, and the current policy of the Board of Directors is
to retain earnings, if any, after payment of dividends on the Preferred Stock to
provide for the growth of the Company. Consequently, no cash dividends are
expected to be paid on the Company's Common Stock in the foreseeable future.
Further, there can be no assurance that the proposed operations of the Company
will generate the revenues and cash flow needed to declare a cash dividend or
that the Company will have legally available funds to pay dividends.

20
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA
-----------------------

The following tables furnishes information with respect to selected
consolidated financial data of the Company over the past five years.

Statement of Operations Data
(in thousands, except per share data)
<TABLE>
<CAPTION>

YEARS ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total revenue $ 25,711 20,082 16,146 11,123 6,047
Total operating expenses 51,566 25,508 16,102 13,210 8,466
------- ------ ------ ------ ------
Operating income (loss) (25,855) (5,426) 44 (2,087) (2,419)

Other income, net 1 1,409 412 457 24
------- ------ ------ ------ ------
Earnings (loss) from continuing operations (25,854) (4,017) 456 (1,630) (2,395)
Earnings (loss) from
discontinued operations (1,317) 69 251 329 155
Gain from discontinued operations 4,219 - - - -
Income taxes - - - - -
------- ------ ------ ------ ------
Net earnings (loss) $ (22,952) (3,948) 707 (1,301) (2,240)
======= ====== ====== ====== ======
Earnings per share:
Continuing operations $ (1.15) (0.19) 0.02 (0.10) (0.21)
Discontinued operations 0.13 0.00 0.01 0.02 0.01
------- ------ ------ ------ ------
Net earnings (loss) $ (1.02) (0.19) 0.03 (0.08) (0.20)
======= ====== ====== ====== ======

Weighted average equivalent
shares outstanding 22,568 20,301 21,124 17,135 11,344
======= ====== ====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
Balance Sheet Data
(in thousands)
DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total current assets $ 10,655 26,009 18,844 23,102 9,004
Total assets $ 28,504 41,221 31,239 27,240 10,171
Total current liabilities $ 12,775 6,541 4,958 2,933 2,554
Total liabilities $ 18,282 7,770 5,782 3,587 2,739
Shareholders' equity $ 10,222 33,451 25,457 23,653 7,432
</TABLE>

21
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------

GENERAL

Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the selected financial data and
consolidated financial statements and notes thereto included elsewhere herein.

The Company uses existing technology to develop, produce and distribute
two-way multi-player interactive live events and also produces and distributes
its own original interactive programs. The Company's principal sources of
revenue from distribution activities are derived from (a) service distribution
fees in the United States; (b) advertising fees, (c) sales of equipment to
foreign licensees; (d) service distribution fees and royalties from foreign
licensees; and (e) licensing fees from foreign and domestic licensees.

On October 25, 1996, the Company reported that it was advised on September
9, 1996 by the United States Federal Communications Commission that its
Playmaker(R) keypad had not received FCC approval. The Company immediately
suspended shipment of the Playmakers(R) to new NTN Network Locations pending
approval by the FCC. Upon notification, the Company commenced testing its
equipment and submitted its application to the FCC. There was no interruption
of the Company's services to existing NTN Network customers, nor were any of the
Company's Online/Internet Services ever affected. The Company received approval
on January 15, 1997 and immediately began shipments to new Locations, including
approximately 290 new customers which were previously awaiting installation.
The installation of the Locations was completed in January and February 1997.
The Company will also implement a corrective action program to be approved by
the FCC.

RESULTS OF OPERATIONS

Following is a comparative discussion by fiscal year of the results of
operations for the three years ended December 31, 1996. The Company believes
that inflation has not had a material effect on its operations to date.

YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1995

The Company incurred a net loss of $22,952,000 for the year ended December
31, 1996 compared to a net loss of $3,948,000 for the year ended December 31,
1995. In 1996, the Company treated New World as a discontinued operation. The
results include a gain on the sale of the Company's New World subsidiary of
$4,219,000, net of taxes of $16,000, and operating losses of $1,317,000. In the
second quarter, the Company reported an estimated tax expense of $1,000,000. The
change in the estimated tax liability resulting from the sale resulted from a
revision in the estimated income tax provision based on a recently concluded
analysis of the relevant tax laws and a valuation study performed to establish
the Company's minimum tax liability. The 1995 results have been adjusted to
reflect the sale of New World in 1996 as a discontinued operation. The 1996
results also include other significant charges for the resignation and
termination of officers and layoffs of other personnel, cancellation of notes
receivable, loss on buyout of lease commitments, a write-down of assets
associated with business activities that the Company has determined will no
longer be pursued, a write-down for obsolete inventory and equipment, and
accrual for costs and expenses for the resolution of litigation. In addition,
the current year's results of operations include charges related to the issuance
of equity instruments pursuant to the guidelines of SFAS 123. An analysis of
revenue and operating costs follows a discussion of the significant other
charges.

On March 5, 1997, the Company announced a reorganization of its executive
management personnel in which Patrick J. Downs resigned as Chief Executive
Officer and Chairman of the Board, and Daniel C. Downs resigned as President.
Other personnel changes include the resignation of Mr. Ronald Hogan, as Senior
Vice President, and the terminations of Mr. Gerald McLaughlin, formerly
Executive Vice President, and Mr. Michael Downs, formerly

22
<PAGE>

President and CEO of LearnStar, in connection with the reorganization
("Reorganization"). The Company has entered into separate agreements
("Agreements") with each of the former officers setting out the terms on which
their existing employment contracts with NTN will be settled. In compliance with
the Agreements, NTN will continue to pay the former executives their current
annual salaries and other benefits for the remaining terms of their employment
agreements with NTN, which expire on or before December 31, 1999. Charges for
severance recorded related to terminations in 1996 amounted to $840,000. Charges
for severance to be recorded as an expense and liability in the first quarter of
1997 will be $4,578,000. Contractual payments for employment contracts related
to the Agreements are $1,711,000 in 1997, $1,350,000 in 1998 and $1,269,000 in
1999. The Company expects that such amounts will be funded from its on-going
operations. The Company has recorded the charges in 1996 and to be recorded in
1997 in accordance with Emerging Issues Task Force Issues No. 94 - 3.

Most of the former officers, along with Mr. Donald Klosterman, a director
of NTN, were indebted to NTN for certain loans that were made in previous years.
By their terms these loans were cancelable under certain circumstances in
connection with the termination of the officer's employment. Accordingly, in
conjunction with the management reorganization, all outstanding notes receivable
were canceled, and accordingly a charge for $4,252,000 for principal and accrued
interest was recorded in 1996. Included in the loans canceled were personal
loans made to Alan Magerman, a director, and Patrick J. Downs of approximately
$185,000 ($145,000 of principal and $40,000 of accrued interest) and $251,000
($227,000 of principal and $24,000 of accrued interest), respectively.

In addition to the reorganization of executive personnel noted earlier, the
Company had earlier announced the planned lay-offs of non-executive personnel.
The planned lay-offs were not due to a contraction in the Company's core
businesses, but rather were to cost-cutting measures implemented to improve
operations. Severance payments for non-executive lay-offs will not effect
liquidity as the majority of severance and other benefit payments were made in
1996.

From 1993 through June 30, 1996, the Company had entered into various sale
and leaseback arrangements with independent third parties. In the fourth
quarter of 1996, the Company completed a plan to repurchase equipment related to
the aforementioned lease arrangements. The Company recorded a charge of
approximately $2,007,000 related to the termination of these lease transactions.
To the extent possible, management does not intend to use the same sale and
leaseback arrangements as a method of financing in future periods. In addition,
management does not intend to purchase equipment to be held as inventory for
sale and leaseback arrangements. Accordingly, in the fourth quarter of 1996,
the Company reclassified all remaining inventory to Broadcast Equipment and
began recording depreciation charges on all assets placed in service. Although
the program required the immediate use of cash, it is expected to result in
improved future cash flow due to the elimination of many lease payments.
Deferred revenues associated with prior sale-leaseback transactions were netted
against the cost of repurchasing the assets.

The Company performs periodic reviews of its inventory and broadcast
equipment. In connection with such a review, it recently determined that recent
advancements in technology had rendered obsolete certain equipment and inventory
used by the Company which could not be used in the future. Accordingly, a charge
of $2,478,000 was recorded in the third quarter. This charge was not due to a
contraction in the Company's core businesses and will not effect future
liquidity or results of operations.

In June, 1996, the Company entered into a Settlement Agreement to resolve
litigation filed by various shareholders of the Company. The case, originally
filed in 1993, is a consolidation of four lawsuits seeking class action status
to recover unspecified damages for a drop in the market price of the Company's
common stock following an announcement that an anticipated agreement under which
the Company would sell certain equipment and services to an arm of the Mexican
government may be put out to bid. The Company believes there is no basis for
the claimants' allegations and does not believe that liability exists for the
allegations. Nonetheless, to avoid the expense and disruption of protracted
litigation, the Company has entered into the Settlement Agreement to resolve
this matter out-of court.

To settle the case, a settlement fund was established consisting of
$400,000 in cash plus 565,000 warrants to purchase the common stock of NTN
("Settlement Warrants"). Each Settlement Warrant has a term of three years from
the Date of Issuance, as that term is defined in the Agreement, and an exercise
price equal to the average closing price per share of NTN common stock on the
American Stock Exchange during the twenty trading days immediately preceding the
Date of Issuance. During the period from the second anniversary of the Date of
Issuance until the

23
<PAGE>

expiration or exercise of a Settlement Warrant, the holder of such Settlement
Warrant shall have the right, but not the obligation, to put the Settlement
Warrant to NTN for repurchase at a price of $3.25 per Settlement Warrant (the
"Put Right"), provided, however, that this Put Right shall expire, once, if
ever, during the period from and after the Date of Issuance that the closing
price per share of the NTN common stock on the American Stock Exchange is more
that $3.25 above the exercise price of the Settlement Warrants on any seven
trading days, whether consecutive or not. Due to regulatory constraints, the
warrants have not yet been issued and the exercise price has not been
established. Nevertheless, a legal obligation exists for the Company to issue
the warrants, which will be completed as soon as the S-3 registration statement,
which includes the Settlement Warrants, becomes effective, which in turn, will
trigger the issuance of the Settlement Warrants. Although, the Put Right may
expire based on the closing price of the Common Stock over the next three years,
the Company has recognized the potential liability related to the Put Right.
Accordingly, a charge of $1,291,000 for the present value (discounted at 15%)
and related interest expense for the Put Right was recognized in 1996. The
difference between the amount expensed and the total potential liability,
$545,000, will be accreted as interest expense and charged to operations from
September 1996 until the second anniversary of the Date of Issuance. Upon
expiration of the Put Right, NTN shall have no further obligation to repurchase
the Settlement Warrants. In no event shall NTN have any obligation to repurchase
its Common Stock.

On April 18, 1995, a class action lawsuit was filed in United States
District Court. The complaint alleges violations of federal securities laws
based upon the Company's projections for the fourth quarter of 1994 and for the
1994 fiscal year, and further alleges that certain of the Company's insiders
sold stock on information not generally known to the public. The Company, which
has assumed the defense of this matter on behalf of all defendants, has denied
liability based upon the allegations contained in the complaint. Plaintiffs
have claimed to be entitled to damages between $8 million to $10 million. The
Company believes, based in part on the advice of outside counsel, that the
actual damages, if any, would be substantially less than such amount. This
lawsuit has been scheduled for trial to commence in October, 1997. The Company
believes there is no basis for the claimants' allegations. Nonetheless, the
Company may, to avoid the expense and disruption of protracted litigation,
attempt to settle the case. Due to potential settlement costs including the
legal costs and expenses associated with litigation of this nature, including
attorney fees, expert fees and costs, analyses which must be conducted and other
costs necessary to prepare to defend this case at trial and perhaps through the
appeals process, and the inherent expenditures of management time, effort and
resources that will also be required, the Company has recorded a charge against
its current earnings for such costs and expenses.

In December 1995, the Company entered into an agreement to sell a 45%
interest in LearnStar to another company for a $2,500,000 note receivable. No
gain was recognized in 1995 as the Company had not received any payments on the
note. In 1996, the parties agreed to rescind the agreement. No gain was
recorded in 1996.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" ("SFAS 123"), effective for fiscal years beginning after December
31, 1995. SFAS 123 establishes the fair value method of accounting for stock-
based compensation arrangements, under which compensation cost is determined
using the fair value of the stock option at the grant date and the number of
options vested, and is recognized over the period in which the related services
are rendered. The Company has chosen to retain its current intrinsic value
based method for issuances to employees, as allowed by SFAS 123. As further
provided in SFAS 123, the Company has disclosed the pro forma effect of adopting
the fair value based method.

Under SFAS 123, transactions involving non-employees for which goods or
services is the consideration received for the issuance of equity instruments
are to be recorded using the fair value method. The fair value method states
that the amount recorded is to be based an the fair value of the consideration
received or the fair value of the equity instrument issued, whichever is more
reliably measurable. In 1996, the Company issued a total of 616,000 warrants to
non-employees for the purchase of the Company's common stock and recorded a
charge of $1,910,000 related to the issuance of those equity instruments.

In December 1995, the Company entered into a sale, purchase agreement and
investment agreement ("Agreement") with Symphony LLC ("Symphony"), an
unaffiliated company whereby Symphony agreed to purchase a 10% interest in IWN,
Inc. for $350,000 and would make capital contributions totaling $2,650,000 to
IWN L.P., a limited partnership of which IWN Inc. is the general partner.

24
<PAGE>

The Agreement includes a provision whereby Symphony has the option to put
("Put Option") its partnership interest and its shares of IWN Inc. to NTN during
the period from April 1, 1997 through December 1, 1997 for certain
consideration. Accordingly, the Company has included the accounts and results
of operations of. IWN L.P. in the Company's consolidated financial statements.

On April 8, 1997, Symphony exercised the Put Option. At December 31, 1996,
the aggregate obligation assuming the Put Option would be exercised was
$3,045,000. This amount has been recorded as a short-term borrowing in the
consolidated financial statements as of December 31, 1996. The Put Option is
payable in cash or common stock, or a combination thereof, at Symphony's
election (subject to the Company's determination of sufficient funds available),
or conversely Symphony can elect to accept a promissory note for up to two years
bearing interest at 27.5% per annum. Operating losses for IWN L.P. aggregated
$2,961,000 in 1996.

For the current period, total revenues increased 28% from $20,082,000 to
$25,711,000. This increase is the result of growth in most of the Company's
principal revenue activities, Network Services and Online/Internet Services.

Network Services increased 29% from $15,559,000 to $20,029,000. The
increase is primarily due to an expansion in the number of subscriber locations
contracting for services. Online/Internet Services increased 192% from $620,000
to $1,811,000 due to an increase in services to online customers and a notable
growth in consumer revenue hours. In addition, the Company has increased the
number of programs available through this distribution platform. Advertising
revenues related to both Network Services and Online/Internet Services increased
41% from $1,128,000 to $1,590,000 primarily due to an increased number of
commercial spots sold.

Equipment Sales, net decreased 3% from $1,803,000 to $1,757,000. Equipment
sales are predominantly with foreign licensees which are subject to outside
influences and can occur at random times throughout the year. Equipment sales
have been highly volatile in the past and are expected to remain so, as they are
dependent upon the timing of expansion plans of the Company's foreign licensees
and its educational customers.

Operating Expenses related to Network Services and Online/Internet Services
rose from $4,799,000 to $8,602,000, an increase of 79%. The increase is largely
attributable to a charge of $2,478,000 for a write-down of obsolete equipment
and to the expansion in the number of subscribers and on-line services
contracting for services. Exclusive of the charge for obsolete equipment,
operating costs increased 28% compared to a combined increase in Network
Services and Online/Internet Services revenues of 35%.

Selling, General and Administrative expenses increased 55% from $13,080,000
to $20,232,000. Included in selling, general and administrative expenses are
several significant charges incurred in 1996. The significant charges include an
accrual of $1,910,000 pursuant to SFAS No. 123 related to the issuance of
warrants; an accrual of severance benefits to certain officers and other
employees of $840,000; an increase in the allowance for doubtful accounts of
$1,840,000 due to risks associated with Network Service customers, educational
and international customers; additional marketing expenses incurred during the
period that shipments of Playmakers(R) were suspended pending approval from the
FCC of $350,000; and a charge of $222,000 related to a change in estimate for
deferred advertising costs.

Litigation, Legal and Professional expenses increased 277% from $1,720,000
to $6,484,000 due to charges and legal fees associated with settling various
litigation and on-going operations. Included in Legal and Professional services
in 1996 is a charge of $400,000 for settlement and an additional $1,234,000 for
the potential liability associated with the issuance of warrants as part of a
settlement. Equipment lease expense increased 73% from $3,957,000 to $6,837,000
due to the increase in equipment under lease agreements for the majority of the
year and the buyout in late 1996 of certain lease obligations resulting in a
charge of $2,007,000. Depreciation expense increased 117% from $481,000 to
$1,042,000 due to the higher base of depreciable assets that resulted from the
buyout. Research and Development expense increased 131%, from $1,471,000 to
$3,396,000 as the Company expanded its development of gaming applications and
continued its exploration of new technical platforms and interactive services.

In connection with the Reorganization, the Company canceled certain notes
receivable due from executive officers resulting in an expense of $4,252,000.
Other Charges of $721,000 include a write-down of assets associated with
business activities that the Company has determined will no longer be pursued.

25
<PAGE>

Other Income (Expense) decreased from $1,409,000 to $1,000 in 1996. The
1996 results include accreted interest expense associated with the Settlement
Warrants of $57,000. The 1995 results include reimbursement of previously
incurred legal expenses from the Company's insurance carrier of approximately
$1,000,000. There was no tax expense in 1996 and 1995 primarily due to taxable
losses and offsetting temporary differences in both years. The Company
currently has available approximately $33,000,000 of net operating loss
carryovers for federal tax purposes.

YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1994

The Company reported a net loss of $3,948,000 for the year ended December
31, 1995 compared to net earnings of $707,000 for the year ended December 31,
1994. The 1995 and 1994 results have been adjusted to reflect the sale of New
World in 1996 as a discontinued operation.

In 1994, the Company formed LearnStar to pursue interactive educational
applications in the United States. Most of 1994 was devoted to beta testing the
product and conducting preliminary market tests. In 1995, LearnStar began
marketing and selling its product on a full-time basis. Due to start-up costs
and relatively higher marketing costs during the first year of operations, the
LearnStar operations incurred a net loss of $2,149,000 for the year ended
December 31, 1995.

In 1995, the Company set up an allowance of $1,000,000 for inventory in
connection with the upgrading of its broadcast distribution system and expensed
$754,000 of costs incurred in connection with the development of the market in
Mexico. Further, in 1995, the Company experienced a substantial increase in
legal expenses due to increased activities in litigation and other legal matters
along with increased costs of developing and providing products and services,
and increased marketing expenditures.

Total revenues increased 24% from $16,146,000 to $20,082,000. This
increase is the result of growth in many of the Company's principal revenue
activities.

Network Services increased 38% from $11,271,000 to $15,559,000. This
increase is primarily due to an expansion in the number of subscriber locations
and contracting for services from the Company. Online/Internet Services
increased 14% from $542,000 to $620,000. This increase is due to the steady
growth of the number of consumers using these services. Advertising revenue
increased 162% from $431,000 to $1,128,000, predominantly due to an increase of
spots and sponsorships sold.

Equipment Sales, net increased 10% from $1,634,000 to $1,803,000.
Equipment sales include both sale and leaseback transactions and direct sales to
the Company's customers. Equipment sales have been highly volatile in the past
and are expected to remain so, as they are dependent on the timing of expansion
plans of the Company's foreign licensees and, its educational subscribers. The
sales price and cost of sales for equipment sold to customers and others has
been constant for the past two years. Accordingly, the increase in sales for
equipment sold to customers from 1994 to 1995 is wholly attributable to changes
in volume.

License and Royalty Fees and Other Revenue decreased from $2,268,000 to
$972,000 in the current year's period and is predominantly comprised of license
fees and royalties. License Fees in 1995 predominantly relates to Network
Services and international licensing opportunities whereas in 1994 license fees
primarily consisted of inventory transferred to the Company by its United
Kingdom licensee in exchange for release from a license agreement. Licensing
arrangements are not dependent upon seasonal forces and will vary in type and
amount from period to period.

Operating Expenses for Network Services and Online/Internet Services
increased 64% from $2,923,000 to $4,799,000. The increase is largely
attributable to a charge of $1,000,000 in connection with broadcast equipment
and the expansion in the number of subscribers contracting for services.
Selling, General and Administrative expenses rose from $7,728,000 in 1994 to
$13,080,000 in 1995, an increase of 69% due to an increase in the number of
employees hired to develop and produce new products and services and large
increases in marketing activities related to the development of the LearnStar
products and services. Legal and Professional Fees increased 192% from $590,000
to $1,720,000 due to substantial legal expenses incurred relating to litigation
and other legal and corporate matters. Equipment lease expense increased 74%
from $2,275,000 to $3,957,000 due to the increase in equipment

26
<PAGE>

under lease agreements related to the expansion of the NTN Network. Research and
Development expense decreased from $1,972,000 to $1,471,000, or 25% as the
Company increased its efforts in projects in current production.

Other Income (Expense) increased from $412,000 to $1,409,000 or 228%.
Included in Other Income reimbursement of previously incurred legal expenses
from the Company's insurance carrier of approximately $1,000,000. There was no
tax expense in 1995 and 1994 primarily due to taxable losses and offsetting
temporary differences in both years.

LIQUIDITY AND CAPITAL RESOURCES

Following is a discussion of the Company's recent and future sources of and
demands on liquidity, as well as an analysis of liquidity levels. Expenditures
have exceeded revenues from operations through most of the Company's history and
may do so in the future. The Company plans to fund any such deficiency from its
existing cash and, if necessary, from other sources, as discussed below.

In 1996, the Company reported a loss of $22,952,000. The 1996 results
include substantial other charges for the management reorganization and layoffs
of other personnel, cancellation of debt, loss on buyout of lease obligations, a
write-down of assets associated with business activities that the Company has
determined will no longer be pursued, write-down for obsolete inventory and
equipment, and accrual for legal and litigation settlements. In addition, the
current year includes charges related to the issuance of equity instruments as
recorded under the guidelines of SFAS 123. Many of these are non-cash related
charges which will have no impact on future cash flow. None of the non-cash
charges are due to contractions in the core businesses of the Company, and
therefore are not expected to effect future liquidity or results of operations.
Charges for the management reorganization and potential liabilities related to
settlement of litigation will generally be paid over an extended period of time
in excess of one year. The management reorganization and lay-offs of other
employees were not due to a contraction in the Company's core businesses, but
rather are cost-cutting measures being implemented to improve operations. These
liabilities, depending on the extent and timing, could effect future liquidity,
but are expected to be funded from on-going operations.

Total assets decreased 31% from $41,221,000 to $28,504,000 from December
31, 1995 to December 31, 1996. The decrease in assets is primarily due to the
significant charges recorded in the third and fourth quarters noted above. Cash
increased slightly from $6,485,000 at December 31, 1995 to $6,579,000 at
December 31, 1996. Interest-bearing security deposits decreased from $3,775,000
to zero due to the buyout of certain sale and leaseback agreements.

The 24% decrease in Accounts Receivable - Trade from $2,668,000 to
$2,031,000 at December 31, 1996, reflects the overall growth of the Company's
primary operations, the effect of churn from Network Services customers and an
increase in the allowance for doubtful accounts due to risks associated with
Network Service customers, educational and international customers. Accounts
Receivable - Other decreased from $1,750,000 to zero, the result of payments
received and the buyout of certain lease obligations. Notes Receivable - Related
Parties decreased from $4,468,000 to zero, primarily due to the cancellation of
notes receivable related to the management reorganization.

As previously noted, in the fourth quarter of 1996 the Company completed a
program to repurchase inventory and equipment previously sold to and leased back
from third parties. Accordingly, Broadcast Equipment, formerly shown as
Inventory, has been reclassified to non-current assets. The Company does not
intend to sell this equipment in the future, accordingly, depreciation of these
assets commenced in the fourth quarter of 1996. The new policy is expected to
result in improved cash flow due to the elimination of many lease payments.
Further, the Company evaluated its current inventory in light of current and
anticipated operations and determined that certain equipment had become obsolete
and would not be used in the future. Accordingly, a charge of $2,478,000 was
recorded in the 1996 to write-off these assets.

Total liabilities increased 135% from $7,770,000 to $18,282,000 from
December 31, 1995 to December 31, 1996. The increase in Accounts Payable and
Accrued Liabilities from $2,877,000 to $6,182,000 reflects the overall growth of
the Company, the timing of payments, an accrual for liabilities due to severance
of officers and employees and accounting and legal expenses. Short-term
borrowings of $5,060,000 consists of $2,015,000, secured by the cash surrender
value of life insurance policies, and $3,045,000 related to the IWN Put Option.
On April 8, 1997, the holder of the IWN Put Option (Symphony) informed the
Company that the Put Option was being exercised immediately. The Put Option is
payable in cash or common stock, or a combination thereof, at Symphony's
election

27
<PAGE>

(subject to the Company's determination of sufficient funds available), or
conversely Symphony can elect to accept a promissory note for up to two years
bearing interest at 27.5% per annum.

The decrease in total Deferred Revenue (long-term and current) from
$2,253,000 to $1,254,000 reflects the buy-out of lease obligations, amortization
of deferred gains offset by a $500,000 deferral related to an agreement with
Bell Canada. Revenue related to the Bell Canada agreement will be recognized as
product is scheduled to be delivered, beginning in 1997. Other long-term
liabilities is comprised of amounts related to settlement agreements.

Overall, the Company's working capital decreased $21,528,000 from December
31, 1995 to December 31, 1996, primarily the result of the use of cash to buyout
of lease obligations, the significant accruals for settlement agreement and
other liabilities in late 1996 and the reclassification of Broadcast equipment
to non-current assets. At December 31, 1996, the Company had a net working
capital deficiency of $2,120,000. Revenues from the principal business
activities, Network Services, Online/Internet Services, and Advertising grew 35%
in the year ended December 31, 1996 compared to the prior year. The Software
Development and Distribution segment (New World) was sold in June 1996 and no
longer represents a business segment. The Company is expected to continue to
require additional working capital for operating expenses, new services
development, marketing of services and purchase of the hardware components used
in the reception of its services. There can be no assurance that the Company's
currently available resources will be sufficient to allow the Company to support
its operations until such time, if any, as its internally generated cash flow is
able to sustain the Company.

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As shown in the
accompanying consolidated financial statements, the Company has suffered
recurring losses from operations and has a net working capital deficiency of
$2,120,000 as of December 31, 1996. Additionally, the Company has utilized
significant cash flows from operating activities of $8,655,000. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. These consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

Management has implemented an organizational and strategic restructuring
aimed at reducing overhead expenses by 20% and focusing on the Company's
business units. This involved a workforce reduction including five senior
officers, the buyout of many high-rate lease obligations, and restructuring its
management personnel and responsibilities. Management believes that these
factors will contribute toward achieving profitability and improving cash flow.

In the past, the Company has been able to fund its operations and improve
its working capital position by sales of Common Stock, upon exercise of warrants
and options, by leasing transactions for equipment in use at subscriber
locations, and by licensing its technology to foreign licensees. The Company is
exploring alternative capital financing possibilities which may include (i)
licensing and related royalties of the Company's technology and products; (ii)
borrowing arrangements under fixed and revolving credit agreements; or (iii)
sale of additional equity securities. The Company may negotiate for additional
lease and debt financing and additional foreign licensing, however, the extent
to which any of the foregoing may be accomplished, if at all, cannot be
predicted at this time.

The Company has certain lawsuits pending as previously described in "Legal
Proceedings. The Company believes, based in part on the advice of outside,
independent counsel, that there is no basis to claimants allegations, but to
avoid the expense and disruption of protracted litigation has settled certain
cases and may continue to attempt to settle others. The Company provided a
charge against its current earnings for such possible actions, There can be no
assurances that the Company will be successful in settling or defending such
actions or that any or all actions would be decided in favor of the Company or
that the continued cost of defending and prosecuting these actions will not have
a material adverse effect on the Company's financial position or results of
operations.

MARKETING AND EXPANSION PLAN

The Company's plan to reach profitability includes the following elements:
(i) reorganizing and expanding the sales staff; (ii) increasing advertising
sales; (iii) expanding products and services to a wider variety of technological
platforms (iv) expanding Company services to education customers; and (v)
pursuit of additional foreign licensing opportunities.

Throughout the Company's history, the principal component of its revenues
has been derived from Network Services to Locations in the hospitality industry
(restaurants, taverns and hotels). Management believes that this component will
continue to grow in total revenues within the next year, but may decline as a
percentage of the Company's total revenues. To increase the number of
Locations, the Company has taken several steps. It reorganized its sales staff
to accommodate the growth in 1996 and the anticipated growth in 1997. The
Company offers sales and technical support to its independent distributors, who
are responsible for marketing the Company's services to potential Locations. In
1997, the Company will continue to attend national and regional hospitality
industry trade shows and has maintained its budget for advertising in trade
publications.

28
<PAGE>

A major source of growth in 1996 was from Online/Internet Services revenue.
The Company will continue to provide additional programs to current customers in
an effort to increase consumer revenue hours. In addition, the Company will
continue to seek new outlets for its programs and also provide production
services for a fee.

In 1996, the Company enhanced its graphics capabilities and obtained
additional advertising revenues from national advertisers. The Company has a
full-time advertising sales staff and is currently negotiating with several
potential advertisers for commercial spots on the NTN Network as well for the
Company's Online/Internet programs.

Management believes that another market segment with potential for long-
term growth is the market for interactive television services in the home. The
Company expects to remain a provider of specialized programming to networks
operated by other organizations, such as cable networks, computer on-line
systems and wireless or telephone-based communication networks. The Company
expects to deliver the video portion of its programming directly to cable
television systems, with viewer responses processed using equipment developed by
others. In light of this, the Company expects that any significant revenues
from home use of the Company's services will be dependent upon an expansion in
the overall home viewer market for home interactive information and
entertainment services. The Company maintains excellent working relationships
with major providers of home interactive information and entertainment services.
As the market for home interactive information and entertainment services
expands, the Company will seek to capitalize on this market. Revenues to date
from in-home programming have not been significant. No assurance can be given
that plans to expand into the interactive television market will be successful.

The Company has plans to expand its penetration in the education sector as
well. Currently, the LearnStar System is operational at over 100 schools
throughout the nation. In 1997, the Company will focus efforts to expand into
additional schools in many states. Revenues from these sources have not been
significant in the past and no assurance can be given that plans to expand the
education market will be successful.

Although there can be no assurance that the Company will prove to be
successful in implementing its marketing and expansion plan, Management believes
that the Company's prospects have been materially improved by the growth of its
core business activities and increased customer awareness.

29
<PAGE>

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------

See Index to Consolidated Financial Statements and Schedule on page F-0,
which is incorporated herein by reference, for a listing of the Consolidated
Financial Statements and Schedule filed with this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------

None.

PART III

MANAGEMENT

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------

Incorporated by reference to Registrant's definitive Proxy Statement for
its August, 1997 meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days from December 31, 1996.

ITEM 11. EXECUTIVE COMPENSATION
----------------------

Incorporated by reference to Registrant's definitive Proxy Statement for
its August, 1997 meeting of stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------

Incorporated by reference to Registrant's definitive Proxy Statement for
its August, 1997 meeting of stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------

Incorporated by reference to Registrant's definitive Proxy Statement for
its August, 1997 meeting of stockholders.

30
<PAGE>

PART IV

ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, AND REPORTS
----------------------------------------------------------------
ON FORM 8-K
-----------

(a) The following documents are filed as a part of this report:

1,2. Consolidated Financial Statements and Schedule.

The consolidated financial statements and schedule of the Company and its
consolidated subsidiaries are set forth in the "Index to Consolidated Financial
Statements" on page F-0.

3. Exhibits. The following exhibits are filed as a part of this report:
<TABLE>
<S> <C>
10.1 Certificate of Incorporation of the Company (1)
10.2 By-laws of the Company (2)
10.3 1985 Incentive Stock Option Plan, as amended (2)
10.4* 1985 Nonqualified Stock Option Plan, as amended (4)
10.5* Letter of Employment dated July 22, 1996 between NTN Communications,
Inc. and Gerald Sokol, Jr.
10.6 License Agreement with NTN Canada (4)
10.7 National Football League License Agreement (4)
10.8 The Campus Limited Liability Company Agreement (7)
10.9 Lease of Office with The Campus L.L.C. (7)
10.10 Investment Agreement, dated as of December 31, 1995, among NTN
Communications, Inc., IWN, Inc. and Symphony Management Associates,
Inc., without exhibits (8)
10.11 Third Amended and Restated Agreement of Limited Partnership of IWN,
L.P., dated as of December 31, 1995. (8)
10.12 First Amendment to the Third Amended and Restated Agreement of Limited
Partnership of IWN, L.P., dated as of March 11, 1996. (8)
10.13 Stock Purchase Agreement, dated as of December 31, 1995, between NTN
Communications Inc., IWN, Inc. and Symphony Management Associates, Inc.
(8)
10.14 Stockholders Agreement, dated as of December 31, 1995, between NTN
Communications Inc., and Symphony Management Associates, Inc. (8)
10.15 Registration Rights Agreement, dated as of December 31, 1995, between
NTN Communications Inc., and Symphony Management Associates, Inc. (8)
10.16 Guaranty, dated as of December 31, 1995, from Symphony Management
Associates, Inc. in favor of IWN, Inc. and IWN, L.P (8)
10.17 Amended and Restated Technology and Trademark License Agreement, dated
as of December 31, 1995, between NTN Communication, Inc. and IWN, Inc.
(8)
10.18 Amended and Restated Technology and Trademark Sub-license Agreement,
dated as of December 31, 1995, between IWN, Inc. and IWN, L.P. (8)
10.19 Worldwide Technology and Trademark Agreement, dated as of December 31,
1995, between IWN, Inc. and IWN, L.P. (8)
10.20 Non-competition Agreement, dated as of December 31, 1995, between IWN,
Inc. and IWN, L.P. (8)
10.21 Non-competition Agreement, dated as of December 31, 1995, between IWN,
L.P. in favor of NTN Communications, Inc. and IWN, Inc. (8)
10.22 Composite copy of Investment Agreements, dated as of April 24, 1995,
between NTN Communications, Inc. and the investors named therein. (8)
10.23 Composite copy of Investment Agreements, dated as of September 29,
1995, between NTN Communications, Inc. and the investors named therein.
(8)
10.24 Composite copy of Investment Agreements, dated as of October 4, 1995,
between NTN Communications, Inc. and the investors named therein. (8)
10.25 Stock Purchase Agreement by and between NTN Communications, Inc. and
Associated Ventures Management, Inc., dated as of December 22, 1995.
(8)
10.26 Non Recourse Secured Promissory Note issued by the Company to
Associated Ventures Management, Inc., dated December 22, 1995. (8)
10.27* Management Agreement between NTN Communications, Inc. and Associated
Ventures Management, Inc., dated December 22, 1995 (8)
</TABLE>

31
<PAGE>

<TABLE>
<S> <C>
10.28* Resignation and General Release Agreement, dated December 31, 1996
between NTN Communications, Inc. and Patrick J. Downs. (9)
10.29* Resignation and General Release Agreement, dated December 31, 1996
between NTN Communications, Inc. and Daniel C. Downs. (9)
10.30* Resignation and General Release Agreement, dated December 31, 1996
between NTN Communications, Inc. and Ronald E. Hogan
10.31* Resignation and General Release Agreement, dated December 31, 1996
between NTN Communications, Inc. and Gerald P. McLaughlin. (9)
10.32* Resignation and General Release Agreement, dated December 31, 1996
between NTN Communications, Inc. and Michael J. Downs. (9)
10.33* Resignation and General Release Agreement, dated December 31, 1996
between NTN Communications, Inc. and Robert Klosterman. (9)
10.34* Letter agreement, dated March 4, 1997, between NTN and Alan Magerman.
(9)
10.35* Consulting Agreement, dated as of December 31, 1996, between NTN
Communications Inc. and Patrick J. Downs. (9)
10.36* Consulting Agreement, dated as of December 31, 1996, between NTN
Communications Inc. and Daniel C. Downs. (9)
10.37* Consulting Agreement, dated as of December 31, 1996, between NTN
Communications Inc. and Ronald E. Hogan. (9)
10.38* Consulting Agreement, dated as of December 31, 1996, between NTN
Communications Inc. and Gerald P. McLaughlin. (9)
10.39* Consulting Agreement, dated as of March 14, 1997, between NTN
Communications Inc. and Donald Klosterman. (9)
10.40* General Release, dated as of December 31, 1996, between NTN
Communications Inc. and Patrick J. Downs. (9)
10.41* General Release, dated as of December 31, 1996, between NTN
Communications Inc. and Daniel C. Downs. (9)
10.42* General Release, dated as of December 31, 1996, between NTN
Communications Inc. and Ronald E. Hogan. (9)
10.43* General Release, dated as of December 31, 1996, between NTN
Communications Inc. and Gerald P. McLaughlin. (9)
10.44* General Release, dated as of December 31, 1996, between NTN
Communications Inc. and Michael J. Downs. (9)
10.45* General Release, dated as of December 31, 1996, between NTN
Communications Inc. and Robert Klosterman. (9)
10.46 Agreement of Purchase and Sale of Assets dated June 30, 1996 with
schedules and exhibits, among NTN Communications, Inc, New World
Computing Inc., and the 3DO Company. (10)
10.47* Special Stock Option dated August 18, 1996 between NTN Communications,
Inc. and Gerald Sokol, Jr.
10.48* Special Stock Option dated August 25, 1996 between NTN Communications,
Inc. and Robert Bennnet
10.49* Special Stock Option dated August 30, 1996 between NTN Communications,
Inc. and Ed Frazier
23.00 Consent of KPMG Peat Marwick LLP, incorporated by reference.
27.00 Financial Data Schedule.
</TABLE>
______________________
* Management Contract or Compensatory Plan.

(1) Previously filed as an exhibit to the Company's report on Form 10-Q for
the quarter ended June 30, 1991, and incorporated by reference.
(2) Previously filed as an exhibit to the Company's registration statement
on Form S-8, File No. 33-75732, and incorporated by reference.
(3) Previously filed as an exhibit to the Company's report on Form 10-K for
the year ended December 31, 1989, and incorporated by reference.
(4) Previously filed as an exhibit to the Company's report on Form 10-K for
the year ended December 31, 1990, and incorporated by reference.
(5) Previously filed as an exhibit to the Company's report on Form 8-K
dated December 31,1993, and incorporated by reference.

32
<PAGE>

(6) Previously filed as an exhibit to the Company's report on Form 10-K for
the year ended December 31, 1993, and incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's report on Form 10-K for
the year ended December 31, 1994, and incorporated herein by reference.
(8) Previously filed as an exhibit to the Company's report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by reference.
(9) Previously filed as an exhibit to the Company's report on Form 8-K
dated March 5, 1997 and incorporated by reference.
(10) Previously filed as an exhibit to the Company's report on Form 8-K
dated June 30, 1996 and incorporated by reference

(b) Reports on Form 8-K.

None.

33
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

DATED: April 14, 1997

NTN COMMUNICATIONS, INC.

By: /s/ ED FRAZIER
--------------
Ed Frazier, Chairman and Chief Executive Officer

By: /s/ GERALD S. SOKOL, JR
-----------------------
Gerald S. Sokol Jr., President

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ED FRAZIER Acting Chief Executive April 14, 1997
- ------------------------- Officer and Chairman of
Ed Frazier the Board

/s/ ROBERT BENNETT Director April 14, 1997
- -------------------------
Robert Bennett

/s/ PATRICK J. DOWNS Director April 14, 1997
- -------------------------
Patrick J. Downs

/s/ DANIEL C. DOWNS Director April 14, 1997
- -------------------------
Daniel C. Downs

/s/ DONALD C. KLOSTERMAN Director April 14, 1997
- -------------------------
Donald C. Klosterman

/s/ ALAN P. MAGERMAN Director April 14, 1997
- -------------------------
Alan P. Magerman

</TABLE>

34
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-1

Consolidated Financial Statements

Consolidated Balance Sheets as December 31, 1996 and 1995 F-2

Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-3

Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994 F-4

Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-6

Notes to Consolidated Financial Statements F-8

Schedule II F-22

</TABLE>

35
<PAGE>

Independent Auditors' Report
----------------------------

The Board of Directors
NTN Communications, Inc.:

We have audited the consolidated financial statements of NTN Communications,
Inc. and subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule 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 NTN Communications,
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. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has suffered recurring losses
from operations and has a net working capital deficiency that raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

KPMG Peat Marwick LLP

San Diego, California
April 10, 1997

F-1
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 1996 and 1995
<TABLE>
<CAPTION>

ASSETS 1996 1995
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,579,000 6,485,000
Accounts receivable - trade, net of
allowance for doubtful accounts
of $1,563,000 in 1996 and $558,000 in
1995 2,031,000 2,668,000
Accounts receivable - officers and
employees 199,000 100,000
Prepaid expenses and other current
assets 1,846,000 2,223,000
Accounts receivable - other -- 1,750,000
Interest-bearing security deposits -- 1,575,000
Notes receivable - related parties
(notes 4 and 5) -- 1,030,000
Inventory, net (note 6) -- 5,618,000
Net assets of discontinued operations
(note 2) -- 4,560,000
------------- -----------
Total current assets 10,655,000 26,009,000

Broadcast equipment and fixed assets,
net (note 6) 10,103,000 2,023,000
Interest-bearing security deposits -- 2,200,000
Software development costs, net of
accumulated amortization of
$1,829,000 in 1996 and $854,000 in
1995 4,400,000 3,152,000
Notes receivable - related parties
(notes 4 and 5) -- 3,438,000
Retirement plan assets 2,527,000 1,798,000
Other assets 819,000 2,601,000
------------- -----------
Total assets $ 28,504,000 41,221,000
============= ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued
liabilities (note 4) 6,182,000 2,877,000
Short-term borrowings (note 7) 5,060,000 1,356,000
Deferred revenue 254,000 1,024,000
Customer deposits 1,279,000 1,284,000
------------- -----------
Total current liabilities 12,775,000 6,541,000

Deferred revenue 1,000,000 1,229,000
Accrual for settlement warrants (note 14) 1,291,000 --
Other long-term liabilities (note 4) 3,216,000 --
------------- -----------
Total liabilities 18,282,000 7,770,000
------------- -----------
Shareholders' equity (notes 9 and 10):
10% Cumulative convertible preferred
stock, $.005 par value, 10,000,000
shares authorized; issued and
outstanding 161,000 in 1996 and
163,000 in 1995 1,000 1,000

Common stock, $.005 par value,
50,000,000 shares authorized; shares
issued and outstanding 23,177,000 in
1996 and 22,503,000 in 1995 116,000 112,000
Additional paid-in capital 59,583,000 56,747,000
Accumulated deficit (46,139,000) (23,187,000)
------------- -----------
13,561,000 33,673,000
Less treasury stock, at cost, 782,000
shares in 1996 and 50,000 shares in
1995 (3,339,000) (222,000)
------------- -----------
Total shareholders' equity 10,222,000 33,451,000
------------- -----------
Commitments and contingencies (notes 4,
13 and 14)

Total liabilities and
shareholders' equity $ 28,504,000 41,221,000
============= ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-2
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>

1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Revenue:
Network services $ 20,029,000 15,559,000 11,271,000
Online/Internet services 1,811,000 620,000 542,000
Advertising revenue 1,590,000 1,128,000 431,000
Equipment sales, net of cost of sales
of $3,801,000, $4,981,000 and
$2,753,000 in 1996, 1995 and 1994,
respectively 1,757,000 1,803,000 1,634,000
License and royalty fees and other
revenue 524,000 972,000 2,268,000
------------ ---------- ----------
Total revenue 25,711,000 20,082,000 16,146,000
------------ ---------- ----------
Operating expenses:
Operating expenses 8,602,000 4,799,000 2,923,000
Selling, general and administrative 20,232,000 13,080,000 7,728,000
Litigation, legal and professional
expenses 6,484,000 1,720,000 590,000
Equipment lease expense 6,837,000 3,957,000 2,275,000
Depreciation 1,042,000 481,000 614,000
Research and development 3,396,000 1,471,000 1,972,000
Cancellation of notes receivable -
related parties (notes 4 and 5) 4,252,000 -- --
Other charges 721,000 -- --
------------ ---------- ----------
Total operating expenses 51,566,000 25,508,000 16,102,000
------------ ---------- ----------
Operating income (loss) (25,855,000) (5,426,000) 44,000

Other income (expense)
Interest income 391,000 478,000 466,000
Interest expense (390,000) (112,000) (54,000)
Equity in loss of affiliate -- (286,000) --
Other -- 1,329,000 --
------------ ---------- ----------
1,000 1,409,000 412,000

Earnings (loss) from continuing
operations before income taxes (25,854,000) (4,017,000) 456,000
Income taxes (note 8) -- -- --
------------ ---------- ----------
Earnings (loss) from continuing
operations (25,854,000) (4,017,000) 456,000
Earnings (loss) from discontinued
operations (note 2) (1,317,000) 69,000 251,000
Gain on sale of discontinued
operations, net of tax (note 2) 4,219,000 -- --

Net earnings (loss) $(22,952,000) (3,948,000) 707,000
============ ========== ==========

Net earnings (loss) per share:
Continuing operations $ (1.15) (0.19) 0.02
Discontinued operations 0.13 -- 0.01
------------ ---------- ----------
Net earnings (loss) $ (1.02) (0.19) 0.03
============ ========== ==========

Weighted average number of shares
outstanding 22,568,000 20,301,000 21,124,000
============ ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.
F-3
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>

10% CUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- --------------------- PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
------- ------ ---------- -------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 255,000 $1,000 18,856,000 $ 94,000 43,504,000 (19,946,000) -- 23,653,000

Issuance of stock for
exercise of warrants and
options, net of issuance
costs -- -- 306,000 2,000 1,095,000 -- -- 1,097,000

Conversion of preferred
stock to common stock (57,000) -- 16,000 -- -- -- -- --

Net earnings -- -- -- -- -- 707,000 -- 707,000
------- ------ ---------- -------- ---------- ----------- --------- ----------

Balance, December 31, 1994 198,000 $1,000 19,178,000 $ 96,000 44,599,000 (19,239,000) -- 25,457,000

Issuance of stock for
exercise of warrants and
options, net of issuance
costs -- -- 315,000 1,000 679,000 -- -- 680,000

Conversion of preferred
stock to common stock (35,000) -- 10,000 -- -- -- -- --

Issuance of stock in private
offerings, net of issuance
costs -- -- 3,000,000 15,000 11,469,000 -- -- 11,484,000

Treasury shares purchased -- -- -- -- -- -- (222,000) (222,000)

Net loss -- -- -- -- -- (3,948,000) -- (3,948,000)
------- ------ ---------- -------- ---------- ----------- --------- ----------

Balance, December 31, 1995 163,000 $1,000 22,503,000 $112,000 56,747,000 (23,187,000) (222,000) 33,451,000

</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity Continued

For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>

10% CUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- --------------------- PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
------- ------ ---------- -------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of stock for
exercise of warrants and
options, net of issuance
costs -- $ -- 254,000 $1,000 316,000 -- -- 317,000

Conversion of preferred
stock to common stock (2,000) -- -- -- -- -- -- --

Issuance of stock in private
offerings, net of issuance
costs -- -- 420,000 3,000 610,000 -- -- 613,000

Treasury shares purchased -- -- -- -- -- -- (3,117,000) 3,117,000)

Warrants granted to
non-employees -- -- -- -- 1,910,000 -- -- 1,910,000

Net loss -- -- -- -- -- (22,952,000) -- (22,952,000)
------- ------ ---------- -------- ---------- ----------- ---------- -----------
Balance, December 31, 1996 161,000 $1,000 23,177,000 $116,000 59,583,000 (46,139,000) (3,339,000) 10,222,000
======= ====== ========== ======== ========== =========== ========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>

1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(22,952,000) (3,948,000) 707,000
Adjustments:
Gain on sale of discontinued
operations (4,219,000) -- --
Depreciation and amortization 2,265,000 1,078,000 642,000
Provision for doubtful accounts 1,840,000 645,000 375,000
Loss on sale of marketable securities
- available for sale -- 70,000 --
Amortization of deferred gain on sale
and leaseback transactions (898,000) (1,316,000) (1,300,000)
Loss from discontinued operations 1,317,000 -- --
Loss from cancellation of notes received 4,252,000 -- --
Loss on buyout of lease commitments 2,007,000 -- --
Accrual for issuance of warrants 1,910,000 -- --
Accrual for settlement warrants 1,291,000 -- --
Change in discontinued operations (2,761,000) (942,000) (2,994,000)
Change in assets and liabilities:
Accounts receivable - trade 448,000 486,000 (1,119,000)
Software development costs -- -- (594,000)
Inventory, net -- (1,670,000) (719,000)
Prepaid expenses and other assets 1,430,000 (1,659,000) (1,674,000)
Accounts payable and accrued
liabilities, net of amounts paid in
stock 3,305,000 886,000 1,017,000
Deferred revenue (1,101,000) -- --
Other long-term liabilities 3,216,000 -- --
Customer deposits (5,000) 278,000 356,000
------------ ---------- ----------
Net cash used in operating activities (8,655,000) (6,092,000) (5,303,000)
------------ ---------- ----------
Cash flows from investing activities:
Capital expenditures (1,933,000) (1,167,000) (864,000)
Proceeds from sale of discontinued
operations 10,223,000 -- --
Notes receivable 216,000 (2,163,000) (390,000)
Software development costs (2,274,000) (2,070,000) (745,000)
Purchases of other investments -- (103,000) (823,000)
Proceeds from maturities of marketable
securities - available for sale -- -- 2,554,000
Proceeds from sales of marketable
securities - available for sale -- 930,000 --
Proceeds from sale and leaseback
transactions 3,553,000 4,500,000 4,250,000
Deposits related to sale and leaseback
transactions -- (575,000) (2,100,000)
------------ ---------- ----------
Net cash provided by (used in)
investing activities 9,785,000 (648,000) 1,882,000
------------ ---------- ----------
</TABLE>
See accompanying notes to consolidated financial satements.

F-6
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows, Continued

For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>

1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Cash flows from financing activities:
Principal payments on debt $ -- (20,000) (763,000)
Proceeds from issuance of debt 3,704,000 1,368,000 742,000
Purchase of equipment related to sale
and leaseback transactions (2,553,000) (2,470,000) (2,263,000)
Proceeds from issuance of common
stock, less issuance costs paid in
cash 930,000 12,164,000 1,097,000
Repurchase of common stock (3,117,000) (222,000) --
------------ ---------- ----------
Net cash provided by (used in)
financing activities (1,036,000) 10,820,000 (1,187,000)
------------ ---------- ----------
Net increase (decrease) in cash and
cash equivalents 94,000 4,080,000 (4,608,000)

Cash and cash equivalents at beginning
of year 6,485,000 2,405,000 7,013,000
------------ ---------- ----------
Cash and cash equivalents at end of year $ 6,579,000 6,485,000 2,405,000
============ ========== ==========

Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ -- -- --
============ ========== ==========
Income taxes $ -- -- --
============ ========== ==========
</TABLE>

Non-cash investing and financing activities - In 1996, the Company
transferred $5,618,000 of assets previously categorized as Inventory, a current
asset, to Broadcast Equipment, a non-current asset. Refer to note 6.

See accompanying notes to consolidated financial statements.

F-7
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the years ended December 31, 1996, 1995 and 1994

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

NTN Communications, Inc. ("The Company") was organized under the laws of the
state of Delaware in 1984 for the purpose of investing in various business
ventures. The Company, through its business units and subsidiaries develops,
produces and distributes individual and multi-player interactive
entertainment and education programs to a variety of media platforms.

BASIS OF ACCOUNTING PRESENTATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, LearnStar Inc., (LearnStar), the partially-owned
subsidiary IWN Corporation, Inc., and IWN L.P., a limited partnership.

GOING CONCERN

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As shown in the
accompanying consolidated financial statements, the Company has suffered
recurring losses from operations and has a net working capital deficiency of
$2,120,000 as of December 31, 1996. Additionally, the Company has utilized
significant cash flows from operating activities of $8,655,000. These
conditions raise substantial doubt about the Company's ability to continue as
a going concern. These financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

Management has implemented an organizational and strategic restructuring
aimed at reducing overhead expenses by 20% and focusing on the Company's core
business units. This process involved a workforce reduction including five
senior officers, the buyout of certain high-rate lease commitments, and
restructuring its management personnel and responsibilities. Management
believes that these steps will contribute toward achieving profitability and
improving cash flow.

CASH AND CASH EQUIVALENTS

For the purpose of financial statement presentation, the Company considers
all highly liquid investment instruments with original maturities of three
months or less to be cash equivalents. Cash and cash equivalents at December
31, 1996 and 1995, consist of operational cash accounts and certificates of
deposit with original maturities of three months or less.

MARKETABLE SECURITIES - AVAILABLE FOR SALE

Securities available for sale are carried at fair value with unrealized gains
and losses, net of tax, reported as a separate component of shareholders'
equity. The cost of securities sold is based on the specific identification
method.

Proceeds from the sale of investment securities available for sale was
$930,000 in 1995 and gross realized losses included in income in 1995 was
$70,000. There were no sales of investment securities available for sale in
1996.

F-8
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

BROADCAST EQUIPMENT AND FIXED ASSETS

Depreciation of fixed assets is computed using the straight-line method over
the estimated useful lives of the assets (three to five years). Depreciation
of broadcast equipment is computed using the straight-line method over the
estimated useful lives of the assets (two to four years).

INVENTORY

At December 31, 1996, the Company no longer holds assets for sale and
therefore assets formerly reported as inventory are reported as Broadcast
Equipment. Inventory was valued at the lower of cost (first-in, first-out)
or market and consisted principally of finished goods and equipment. The
Company maintained a valuation reserve which reflected the Company's estimate
of the impact on inventory of potential obsolescence, excess quantities, and
declines in market prices.

RETIREMENT PLAN ASSETS

Retirement plan assets consists of long-term life insurance contracts which
are carried at cost which approximate market value.

REVENUE RECOGNITION

Network and Online/Internet Services: Revenue is recognized as the service
is provided by the Company.

Advertising: Revenue for advertising is recognized ratably over the contract
period as advertisements are broadcast or displayed.

Equipment Sales: Revenue is recognized when equipment is shipped or
transferred to the purchaser.

License Fee and Royalties: Revenue is recognized when all material services
or conditions relating to the sale have been performed or satisfied.

INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.

SOFTWARE DEVELOPMENT COSTS

The Company capitalizes costs related to the development of certain software
products. In accordance with Statement of Financial Accounting Standards No.
86, capitalization of costs begins when technological feasibility has been
established and ends when the product is available for general release to
customers. Amortization of costs related to interactive programs is
recognized on a straight line basis over three years.

STOCK-BASED COMPENSATION

Prior to January 1, 1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded
the exercise price.

F-9
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", which
permits entities to recognize as expense over the vesting period, the fair
value of all stock-based awards on the date of grant, alternatively,
SFAS No. 123 also allows entities to continue to apply the provisions of
APB No. 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock options grants made in 1995 and future years
as if the fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.

Under SFAS 123, options or warrants issued to non-employees in exchange for
goods or services received are recorded at the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable.

IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
on January 1, 1996. This 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. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Adoption of SFAS No. 121 did not have an
impact on the Company's financial position or results of operations.

USE OF ESTIMATES

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.

EARNINGS (LOSS) PER SHARE

Earnings per share amounts are computed by dividing net earnings increased by
preferred dividends resulting from the assumed exercise of stock options and
warrants and the assumed conversion of convertible preferred shares, by the
weighted average number of common and common equivalent shares outstanding
during the period. Common stock equivalents represent the dilutive effect of
the assumed exercise of certain outstanding options and warrants and
preferred stock. The impact of the outstanding stock options and warrants
and conversion of preferred stock would have had an anti-dilutive effect in
years where losses are reported, and accordingly, have not been included in
the computation.

RECLASSIFICATIONS

Certain items in the 1995 and 1994 consolidated financial statements have
been reclassified to conform to the 1996 presentation.

F-10
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(2) DISCONTINUED OPERATIONS - NEW WORLD COMPUTING

On June 30, 1996, the Company sold all of the assets and business of its New
World Computing subsidiary ("New World") to the 3DO Company ("3DO") for
approximately $13,600,000. In consideration of the sale, 3DO issued to the
Company approximately 1,018,000 shares of its common stock and assumed
approximately $1,600,000 of liabilities of New World. 3DO guaranteed that
the cash value realized by the Company upon sale of the shares would not be
less than $10.04 per share, notwithstanding the market price of such shares.
The Company sold all of the 3DO shares in 1996 and obtained payment of
$3,877,000 from 3DO pursuant to the guarantee.

The disposal of New World has been classified as discontinued operations in
the accompanying financial statements. Accordingly, the consolidated
financial statements for all prior periods have been reclassified to report
separately the net assets and operating results of the discontinued
business.

The Company recorded a gain on the sale of New World of $4,219,000, net of
tax of $16,000. New Worlds' revenue through the sale date was $2,085,000.
For 1995 and 1994, New World revenues were $5,379,000 and $5,747,000,
respectively.

(3) SALE OF SUBSIDIARY INTERESTS

In December 1995, the Company entered into a sale, purchase agreement and
investment ("Agreement") with Symphony LLC ("Symphony"), an unaffiliated
company whereby Symphony agreed to purchase a 10% interest in IWN, Inc. for
$350,000 and would make capital contributions totaling $2,650,000 to IWN
L.P., a limited partnership of which IWN Inc. is the general partner. In
accordance with the Agreement, the Company issued 400,000 warrants
exercisable at $4.125 per share to Symphony for the purchase of the
Company's common stock. The warrants expire in 2001.

The Agreement includes a provision whereby Symphony has the option to put
("Put Option") its partnership interest and its shares of IWN Inc. to NTN
during the period from April 1, 1997 through December 1, 1997 for certain
consideration. Accordingly, the Company has recorded the contribution
received from Symphony as a short-term borrowing and has consolidated the
accounts and results of operations of IWN L.P. in the financial statements.

On April 8, 1997, Symphony exercised the Put Option. At December 31, 1996,
the aggregate obligation assuming the Put Option would be exercised was
$3,045,000. This amount has been recorded as a short-term borrowing in the
accompanying consolidated financial statements as of December 31, 1996 (note
7). The Put Option is payable in cash or common stock, or a combination
thereof, at Symphony's election (subject to the Company's determination of
sufficient funds available), or conversely Symphony can elect to accept a
promissory note for up to two years bearing interest at 27.5% per annum.
Operating losses for IWN L.P. aggregated $2,961,000 in 1996.

In December 1995, the Company entered into an agreement to sell a 45%
interest in LearnStar to an unaffiliated company for $2,500,000 in return
for a note receivable in the amount of $2,500,000. No gain was recognized in
1995 as the Company had not received any payments on the note. In 1996 the
parties agreed to rescind the agreement. No gain was recorded in 1996.

(4) MANAGEMENT REORGANIZATION

On March 5, 1997, the Company announced a reorganization of its executive
management

F-11
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

personnel in which Patrick J. Downs resigned as Chief Executive Officer and
Chairman of the Board, and Daniel C. Downs resigned as President. In
addition, three other officers resigned or were terminated in connection
with the reorganization ("Reorganization"). The Company has entered into
separate agreements ("Agreements") with each of the former officers setting
out the terms on which their existing employment contracts with NTN will be
settled. In compliance with the Agreements, NTN will continue to pay the
former executives their current annual salaries and other benefits for the
remaining terms of their employment agreements with NTN, which expire on or
before December 31, 1999. In addition, the Company canceled certain notes
receivable from officers as described in note 5.

Pursuant to the Agreements, the Company canceled an aggregate of 2,175,000
of outstanding warrants and options to purchase the common stock of the
Company previously issued to the officers. In addition, the Company agreed
to extend the exercise period and reduce the exercise price of certain other
warrants and options retained by the officers.

Total charges related to the Agreements aggregate $9,670,000 and are
comprised of the following:

<TABLE>
<S> <C>
Cancellation of notes receivable and related accrued
interest of $216,000 (note 5) $ 4,252,000
Contractual payments for employment contracts, net
of discount 3,968,000
Charge related to extension of the exercise period and
reduction in the exercise price of certain warrants and
options 1,450,000
------------
Total charges $ 9,670,000
============
</TABLE>

As of December 31, 1996, $840,000 of these charges are included in accounts
payable and accrued expenses and other long-term liabilities in the
accompanying consolidated financial statements. Of the total charges of
$9,670,000, $5,092,000 was recorded in operations in 1996, including the
charge for the cancellation of notes receivable of $4,252,000. The remaining
$4,578,000 will be recorded as an expense in 1997. Contractual payments for
employment contracts related to the Agreements are $1,711,000 in 1997,
$1,350,000 in 1998 and $1,269,000 in 1999. The above charges were recorded
in accordance with Emerging Issues Task Force Issue No. 94-3.

(5) NOTES RECEIVABLE - RELATED PARTIES

Notes receivable - related parties are as follows:

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Unsecured notes from officers and employees,
bearing interest at 6%-8%. Paid or canceled
in 1996. $ - 680,000

Non-interest bearing unsecured note. Paid in 1996. - 350,000

6% unsecured notes from officers and directors.
Canceled in 1996 due to the reorganization of
executive management personnel. - 3,438,000
------- ---------

Total - 4,468,000

Current portion - (1,030,000)
------- ---------

$ - 3,438,000
======= =========
</TABLE>

F-12
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

In 1995, notes receivable from officers and directors include amounts
advanced to officers and directors to obtain a federal or state income tax
deduction for the Company. In 1991, the Company issued shares of common
stock to officers and directors for deferred compensation from prior years.
In 1993, the Company obtained a tax deduction of $6,900,000 related to this
issuance of this stock. In order to obtain the deduction, the Company was
required to withhold and to deposit amounts with the appropriate government
taxing authorities on behalf of the officers and directors.

In conjunction with the Reorganization, a total of $4,252,000 of loans to
officers and interest were canceled including $3,816,000 related to the
notes receivable described in the previous paragraph along with personal
loans made to Alan Magerman, a director and Patrick J. Downs of $185,000 and
$251,000, respectively.

(6) BROADCAST EQUIPMENT AND FIXED ASSETS

Broadcast equipment and fixed assets are recorded at cost and consist of the
following:

Broadcast equipment $ 8,230,000 -
Furniture and fixtures 917,000 767,000
Other equipment 3,729,000 2,789,000
------------- ----------

12,876,000 3,556,000
Accumulated depreciation (2,773,000) (1,533,000)
------------- ----------

$ 10,103,000 2,023,000
============= ==========
</TABLE>

From 1993 though June 30, 1996, the Company had entered into various sale
and leaseback arrangements. In the fourth quarter of 1996, the Company
completed a plan to repurchase equipment related to the prior years' lease
arrangements. The Company recorded a charge of approximately $2,007,000
related to the termination of these lease arrangements. This charge is
included in equipment lease expense. To the extent possible, management does
not intend to use the same sale and leaseback arrangements as a method of
financing in future periods. In addition, management does not intend to
purchase equipment to be held as inventory for sale and sale and leaseback
arrangements. Accordingly, in the fourth quarter of 1996, the Company
reclassified all remaining inventory to broadcast equipment and began
recording depreciation charges on all assets placed in service.

(7) SHORT-TERM BORROWINGS
Short-term borrowings are as follows:

Variable rate loan (7.2% at December 31,
1996), due in May 1997, secured by
life insurance policies with a cash
surrender value of $2,527,000. $ 2,015,000 1,356,000

Short-term debt related to the IWN Put
Option (note 3) 3,045,000 -
------------ ----------

Total $ 5,060,000 1,356,000
============ ==========
</TABLE>

F-13
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(8) INCOME TAXES

For each of the years ended December 31, 1996, 1995 and 1994, there was no
provision for current or deferred income taxes. The components that
comprise deferred tax assets and liabilities at December 31, 1996 and 1995
are as follows:

1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
NOL carryforwards $ 12,292,000 12,686,000
Legal and litigation accruals 1,711,000 110,000
Allowance for doubtful accounts 696,000 220,000
Compensation and vacation accrual 580,000 242,000
Operating accruals 695,000 -
Sale and leaseback transactions 208,000 803,000
Deferred revenue 199,000 -
Research and experimentation
credit 175,000 -
Other 86,000 137,000
-------------- -----------
Total gross deferred tax assets 16,642,000 14,198,000
Valuation allowance (14,804,000) (11,727,000)
-------------- -----------

Net deferred tax assets $ 1,838,000 2,471,000
-------------- -----------

Deferred tax liabilities:
Capitalized software 1,513,000 2,236,000
Depreciation 129,000 105,000
Other 196,000 130,000
-------------- -----------
Total gross deferred liabilities 1,838,000 2,471,000
-------------- -----------

Net deferred taxes $ - -
============== ===========
</TABLE>

The reconciliation of computed expected income taxes by applying the
federal statutory rate to effective income taxes is as follows:

1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Tax at federal income tax rate $ (7,804,000) (1,342,000) 240,000
State taxes, net of federal benefit 139,000 - -
Settlement warrants 650,000 - -
Change in valuation allowance 3,077,000 1,342,000 (240,000)
Adjustments of net operating loss
carryforwards 3,694,000 - -
Other 244,000 - -
------------ ---------- ----------

Effective income taxes $ - - -
============ ========== ==========
</TABLE>

F-14
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

The net change in the total valuation allowance for the years ended
December 31, 1996 and 1995 was an increase of $3,077,000 and $1,797,000,
respectively, and a decrease of $240,000 for the year ended December 31,
1994. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based on the level of historical operating
results and projections for the taxable income for the future, management
has determined that it is more likely than not that the portion of deferred
tax assets not utilized through the reversal of deferred tax liabilities
will not be realized. Accordingly, the Company has recorded a valuation
allowance to reduce deferred tax assets to the amount that is more likely
than not to be realized.

At December 31, 1996, the Company has available net operating loss
carryforwards of approximately $33,000,000 for federal income tax purposes,
which begin to expire in 2006. The net operating loss carryforwards for
state purposes, which begin to expire in 1997 are approximately
$11,350,000.

(9) COMMON STOCK OPTIONS AND WARRANTS

The Company has two active stock option plans. The 1995 Employee Stock
Option Plan (the "Option Plan") was approved by the shareholders in 1995
and was subsequently amended. Under the Option Plan, options for the
purchase of the Company's common stock may be granted to officers,
directors and employees. Options may be designated as incentive stock
options or as nonqualified stock options and generally vest over three
years, except at the discretion of the Board which can authorize
acceleration of vesting periods. Options under the Option Plan, which have
a term of up to ten years, are exercisable at a price per share not less
than the fair market on the date of grant. The aggregate number of shares
authorized for issuance under the Option Plan is 7,000,000.

In addition, the Company has issued options pursuant to a Special Stock
Option Plan ("Special Plan"). Options issued under the Special Plan are
made at the discretion of the Board of Directors and are designated only as
nonqualified options. The options generally have a term of up to ten years,
are exercisable at a price per share not less than the fair market value on
the date of grant and can vest over various terms.

F-15
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

A summary of the status of the Company's two active stock plans as of
December 31, 1996, 1995 and 1994 and changes during the years ended on
those dates is presented below.

<TABLE>
<CAPTION>
Special Plan Option Plan
-------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding December 31, 1993 - - 1,975,000 $6.12
Granted - - 900,000 6.42
Exercised - - (9,000) 4.10
Canceled - - (20,000) 6.61
------- ----- --------- -----
Outstanding December 31, 1994 - - 2,846,000 6.22
Granted - - 1,767,000 5.24
Exercised - - (10,000) 3.06
Canceled - - (63,000) 6.22
------- ----- --------- -----
Outstanding December 31, 1995 - - 4,540,000 5.84
Granted 600,000 $5.00 2,398,000 3.69
Exercised - - (29,000) 3.07
Canceled - - (220,000) 5.52
------- ----- --------- -----

Outstanding December 31, 1996 600,000 $5.00 6,689,000 $5.09
======= ===== ========= =====

</TABLE>

A summary of options exercisable and the weighted average fair value of
options issued in 1996 and 1995 is as follows:

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Special Plan:
Options exercisable at end of year - -
========== ==========

Weighted average fair value of options
granted during the year $ 4.34 -
========== ==========

Option Plan:
Options exercisable at end of year 3,534,000 2,791,000
========== ==========

Weighted average fair value of options
granted during the year $ 3.24 $ 3.61
========== ==========
</TABLE>

F-16
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

The following table summarizes information about the Special Plan and the
Option Plan as of December 31, 1996.

Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------
Range of Weighted Average
Average Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
Special Plan:
$5.00 - $5.00 600,000 8 years $5.00 - -

Option Plan:
$2.00 - $4.49 2,171,000 10 years $3.45 73,000 $2.05
$4.50 - $6.75 3,143,000 5 years $5.17 2,086,000 $5.31
$6.76 - $8.25 1,375,000 3 years $7.52 1,375,000 $7.52

</TABLE>

The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized in the financial statements for the Special Plan or the Option
Plan. Had compensation cost for the Company's stock-based compensation
plans been determined consistent with SFAS No. 123, the Company's net loss
per share applicable to common stock would have been increased to the pro
forma amounts indicated.

<TABLE>
<CAPTION>
1996 1995
--------------------------
<S> <C> <C> <C>
Net loss As reported $ (22,952,000) (3,948,000)
Pro forma $ (27,823,000) (7,686,000)

Net loss per share As reported $ (1.02) (.19)
Pro forma $ (1.23) (.38)
</TABLE>

Pro forma net loss reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for options
under Statement No. 123 is not reflected in the pro forma net loss amounts
presented above since compensation cost is reflected over the option
vesting periods and compensation cost for options and granted prior to
January 1, 1995 are not considered. The fair value of each option grant in
1996 and 1995 is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1996 - dividend yield of 0% percent, risk-free interest rates ranging from
6.5% to 6.8%, expected volatility of 90%, and expected option lives ranging
from 5 years to 10 years; 1995 - dividend yield of 0% percent, risk-free
interest rate of 6.6%, expected volatility of 90%, and expected option
lives ranging from 5 years to 8 years.

The Company has issued various warrants to non-employees to purchase common
stock, all of which are exercisable as of December 31, 1996. The weighted
average fair value of warrants granted during 1996 and 1995 was $3.11 and
$3.28, respectively. In compliance with SFAS No. 123, the Company expensed
$1,910,000 in 1996 associated with the grant of 616,000 warrants in 1996.
At December 31, 1996 and 1995, the weighted average exercise price of
exercisable warrants was $4.10 and $3.95, respectively. The fair value of
each warrant grant in 1996 and 1995 is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average

F-17
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

assumptions: 1996 - dividend yield of 0% percent, risk-free interest rates
ranging from 5.3% to 6.5%, expected volatility of 90%, and an expected
warrant life of 5 years; 1995 - dividend yield of 0% percent, risk-free
interest rate of 6.5%, expected volatility of 90%, and an expected warrant
life of 5 years. The following summarizes warrants issued and outstanding:

OUTSTANDING
WARRANTS
-----------
<S> <C>

December 31, 1993 3,245,000
Granted 438,000
Exercised (298,000)
Canceled (3,000)
-----------

December 31, 1994 3,382,000
Granted 1,033,000
Exercised (226,000)
Canceled -
-----------

December 31, 1995 4,189,000
Granted 616,000
Exercised (224,000)
Canceled -
-----------

December 31, 1996 4,581,000
===========
</TABLE>

(10) 10% CUMULATIVE CONVERTIBLE PREFERRED STOCK

The Company has authorized 10,000,000 shares of 10% cumulative convertible
preferred stock, of which approximately 161,000 and 163,000 were issued and
outstanding at December 31, 1996 and 1995, respectively. The stock has no
voting rights and has a $1.00 per share liquidation preference over common
stock. At December 31, 1996, each share is currently convertible into .2801
shares of common stock at the option of the holder. During 1996,
approximately 2,000 shares of cumulative convertible preferred stock
converted into approximately 400 shares of common stock.

(11) RETIREMENT AND SAVINGS PLANS

DEFINED BENEFIT PENSION PLAN

In connection with the Reorganization in 1997, the Company canceled a non-
qualified, non-contributory pension plan that covered certain executives.
There was no accrued pension liability related to this plan as of December
31, 1996.

DEFINED CONTRIBUTION PLAN

During 1994, the Company established a defined contribution plan which is
organized under Section 401(k) of the Internal Revenue Code, which allows
employees who have completed at least six months of service or reached age
21, whichever is later, to defer up to 15% of their pay on a pre-tax basis.
The Company, at its discretion, may contribute to the plan. For the years
ended December 31, 1996 and 1995, the Company made no such contributions.

F-18
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

DEFERRED COMPENSATION PLAN

In connection with the Reorganization, the Company canceled an unfunded,
non-qualified deferred compensation plan that covered certain executives.
The accrued plan benefits of $580,000 as of December 31, 1996 are to be
paid to participants in 1997, 1998 and 1999.

(12) FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The Company believes that the
fair value of financial instrument assets and financial instrument
liabilities approximate their carrying value. The following methods and
assumptions were used to estimate the fair value of financial instruments:

The carrying values of cash and cash equivalents, accounts receivable,
accounts receivable - officers and employees, accounts payable and accrued
liabilities and short-term borrowings approximates fair value because of
the short maturity of those instruments. The fair value of the accrual for
settlement warrants and other long-term liabilities are determined using
the present value of expected future cash flows discounted at the interest
rate currently offered by the Company which approximates rates currently
offered by local lending institutions for instruments of similar terms and
risks.

(13) COMMITMENTS AND CONTINGENCIES

The Company leases office and production facilities and equipment under
agreements which expire at various dates. In 1995, the Company entered into
a noncancelable operating lease with an entity which is partially owned by
the Company. Certain leases contain renewal provisions and generally
require the Company to pay utilities, insurance, taxes and other operating
expenses. Additionally, the Company has entered into lease agreements for
certain equipment used in broadcast operations, some of which involve sale
and leaseback transactions. Any deferred gains on sale and leaseback
transactions are amortized to operations over the three year lease terms.
Each of these leases provide an option to the Company to repurchase the
equipment at the estimated fair market value at the end of the lease terms.
Included in other assets are security deposits totaling $184,000 relating
to these agreements. Lease expense under operating leases totaled
$5,648,000, $4,763,000, and $3,272,000 in 1996, 1995 and 1994,
respectively, of which $298,000, $140,000 and $0 were to related parties in
1996, 1995 and 1994, respectively.

F-19
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

Future minimum lease obligations under noncancelable operating leases at
December 31, 1996 are as follows:

YEARS ENDING RELATED PARTY OTHER
------------ ------------- ---------
<S> <C> <C>

1997 $ 330,000 965,000
1998 368,000 958,000
1999 389,000 525,000
2000 413,000 -
2001 178,000 -
------------- ---------

Total $ 1,678,000 2,448,000
============= =========
</TABLE>

The Company provides services to group viewing locations, generally bars
and lounges, and to third party distributors primarily throughout the
United States. In addition, the Company licenses its technology and
products to licensees outside of the United States. Concentration of credit
risk with respect to trade receivables are limited due to the large number
of customers comprising the Company's customer base, and their dispersion
across many different industries and geographies. The Company performs
ongoing credit evaluations of its customers financial condition and,
generally, requires deposits from its customers. At December 31, 1996, the
Company had no significant concentration of credit risk.

(14) LEGAL ACTIONS

Until recently, the Company was involved as a plaintiff or defendant in
various previously reported lawsuits in both the United States and Canada
involving Interactive Network, Inc. ("IN"). With the courts assistance, the
Company and IN have been able to reach a resolution of all pending disputes
in the United States and have agreed to private arbitration regarding any
future licensing, copyright or infringement issues which may arise between
the parties. There remain two lawsuits involving the Company, its
unaffiliated Canadian licensee and IN, which were filed in Canada in 1992.
No substantive action has been taken in furtherance of either action.

In June, 1996, the Company entered into a Settlement Agreement
("Agreement") to resolve litigation filed by various shareholders of the
Company. The case, originally filed in 1993, sought class action status to
recover unspecified damages for a drop in the market price of the Companys
common stock following an announcement that an anticipated agreement under
which the Company would sell certain equipment and services to an arm of
the Mexican government may be put out to bid. The Company believes there is
no basis for the claimants allegations and does not believe that liability
exists for the allegations. Nonetheless, to avoid the expense and
disruption of protracted litigation, the Company has entered into the
Agreement to resolve this matter out-of court.

Pursuant to the Agreement, a settlement fund was established consisting of
$400,000 in cash plus 565,000 warrants to purchase the common stock of NTN
("Settlement Warrants"). Each Settlement Warrant has a term of three years
from the Date of Issuance, as that term is defined in the Agreement, and an
exercise price equal to the average closing price per share of NTN common
stock on the American Stock Exchange during the twenty trading days
immediately preceding the Date of Issuance. (The related registration
statement is pending review and approval by the United States Securities
and Exchange Commission and therefore the exercise price has not been
finalized.) During the period from the second anniversary of the Date of
Issuance until the expiration or exercise of a Settlement Warrant, the
holder of such Settlement Warrant shall have the right, but not the
obligation, to put the Settlement Warrant to NTN for repurchase at a price
of $3.25 per

F-20
<PAGE>

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

Settlement Warrant (the "Put Right"), provided, however, that this Put
Right shall expire, once, if ever, during the period from and after the
Date of Issuance that the closing price per share of the NTN common stock
on the American Stock Exchange is more that $3.25 above the exercise price
of the Settlement Warrants on any seven trading days, whether consecutive
or not. Upon expiration of the Put Right, NTN shall have no further
obligation to repurchase the Settlement Warrants. In no event shall NTN
have any obligation to repurchase its common stock.

Although the Put Right may expire based on the closing price of the common
stock over the next three years, the Company has recognized the potential
liability related to the Put Right. Accordingly, a charge of $1,291,000 for
the present value (discounted at 15%) and related interest expense for the
Put Right was recognized in 1996. The difference between the amount
expensed and the total potential liability, $545,000, will be accreted as
interest expense and charged to operations over the period from September
1996 until the second anniversary of the Date of Issuance.

On April 18, 1995, a class action lawsuit was filed in United States
District Court. The complaint alleges violations of federal securities laws
based upon the Company's projections for the fourth quarter of 1994 and for
the 1994 fiscal year, and further alleges that certain of the Company's
insiders sold stock on information not generally known to the public. The
Company, which has assumed the defense of this matter on behalf of all
defendants, has denied liability based upon the allegations contained in
the complaint. A pretrial conference to set a trial date has been scheduled
for October 1997. The Company believes there is no basis for the claimants'
allegations. Nonetheless, the Company may, to avoid the expense and
disruption of protracted litigation, attempt to settle the case. Due to the
potential settlement costs including legal costs and expenses associated
with litigation of this nature, including attorney fees, expert fees and
costs, analyses which must be conducted and other costs necessary to
prepare to defend this case at trial and perhaps through the appeals
process, and the inherent expenditures of management time, effort and
resources that will also be required, the Company has recorded a charge
against its current earnings for such costs and expenses.

There can be no assurance that any or all of the preceding actions will be
decided in favor of the Company. The Company believes, based in part on the
advice of outside, independent legal counsel, that the costs of defending
and prosecuting these actions will not have a material adverse effect on
the Company's financial position or results of operations.

F-21
<PAGE>

Schedule II
-----------

NTN COMMUNICATIONS, INC. AND SUBSIDIARIES

Valuation and Qualifying Accounts (a)

Years ended December 31, 1996, 1995 and 1994

ADDITIONS BALANCE
ALLOWANCE FOR BALANCE AT CHARGED TO AT END
DOUBTFUL ACCOUNTS BEGINNING EXPENSE DEDUCTIONS (b) OF PERIOD
----------------- ---------- ---------- -------------- ---------
<S> <C> <C> <C> <C>

1994 $ 107,000 375,000 120,000 362,000

1995 $ 362,000 645,000 449,000 558,000

1996 $ 558,000 1,840,000 835,000 1,563,000
</TABLE>

(a) On June 30, 1996, the Company sold all of the assets and business of its
New World Computing subsidiary. The disposal of New World has been
classified as a discontinued operation in the accompanying consolidated
financial statements and the consolidated financial statement above
schedule for all prior periods.

(b) Reflects trade accounts receivable written off during the year.

RESERVE FOR ADDITIONS BALANCE
INVENTORY BALANCE AT CHARGED TO AT END
OBSOLESCENCE BEGINNING EXPENSE DEDUCTIONS (c) OF PERIOD
----------------- ---------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
1994 $ - - - -

1995 $ - 1,000,000 - 1,000,000

1996 $ 1,000,000 2,478,000 (3,478,000) -
</TABLE>

(c) In 1996, the Company completed a program to repurchase equipment previously
sold to and leased back from third parties. The Company does not intend to
sell this equipment in the future, accordingly, depreciation of these
assets commenced in the fourth quarter of 1996. Pursuant to these
transactions, assets formerly shown as inventory have been reclassified to
broadcast equipment.

F-22

<PAGE>

July 22, 1996
EXHIBIT 10.5

Mr. Gerald Sokol, Jr.
9255 Ptarmigan Trail
Littleton, CO 80124

Dear Jerry:

I am pleased to extend our, hopefully, final revised offer of
employment to you as Executive Vice President and Chief Financial Officer of NTN
Communications, Inc. ("NTN"). In this capacity you will report directly to me.
All employees of NTN are considered at will employees.

Your starting base salary will be $192,000 per annum, paid bi-weekly.
In addition, you will be eligible for the NTN executive profit sharing plan, the
details of which will be made available to you. You will be eligible for all of
the benefits we normally offer to our executives.

We will also provide you with an automobile allowance of $500 per
month.

It is our current policy to offer three weeks of vacation to
individuals at your level, subject to the policy guidelines.

We will provide you with relocation assistance by reimbursing the
selling costs associated with the sale of your existing home in Littleton,
Colorado and your moving costs to California. Also, NTN will lend you $150,000
toward a down payment on a home in California. This loan will be forgiven by NTN
over a four year period, provided that you remain employed during this period,
or will be forgiven completely in the event of a "change of control" of the
Company or if I and my brother, Dan Downs, are involuntarily terminated or
demoted from our present positions.

It is my intention, subject to Board of Directors approval, to grant to
you, upon reporting, 250,000 stock
<PAGE>

Mr. Gerald Sokol, Jr.
July 22, 1996
Page 2

options, of which 50,000 will be vested immediately. The remaining 200,000 will
vest in three equal annual installments. The "strike price" will be the actual
closing price of NTN shares traded on the American Stock Exchange on July 16,
1996. In addition, in each of July 1997, 1998 and 1999 you will be granted
100,000 options at the then market price. We will also grant you an additional
100,000 options at the actual closing price on July 16, 1996 with vesting to be
contingent on the market price of NTN shares being $11 or more within 24 months.

All of your options will fully vest upon a "change of control," or in
the event that I and my brother, Dan, are involuntarily terminated or demoted
from our present positions.

Finally, we are prepared to offer you a severance agreement equal to
eight (8) months base salary during the first twelve (12) months of employment,
increasing to ten (10) months in years two and three. This severance arrangement
will end on the first day of your fourth year of employment. This does not cover
your departure from the Corporation in the event of your voluntary termination
or involuntary termination for acts of fraud, self dealing or bringing discredit
upon the Corporation. However, if your employment is terminated at any time
following a change of control you will receive twelve (12) months base salary as
a severance payment in lieu of the severance described above. Any severance
payments made to you will be made on the same basis as your normal payroll
disbursements and will end upon your accepting other employment prior to the
expiration of the severance payments. You will be required to sign a
confidentiality agreement as well as other currently utilized invention and
intellectual property agreements required of all employees.

As you know, we are quite excited about the prospect of your joining us
and we look forward to receiving a favorable response from you.
<PAGE>

Mr. Gerald Sokol, Jr.
July 22, 1996
Page 3

If you are in agreement with the foregoing, I would appreciate your
signing one copy of this letter and returning it to me prior to your reporting
on board.

Very truly yours,

/s/ Patrick J. Downs

Patrick J. Downs
Chairman & CEO
NTN Communications, Inc.

Accepted by:

/s/ Gerald Sokol, Jr.
- ----------------------------
Gerald Sokol, Jr.

- ----------------------------
Date

<PAGE>

EXHIBIT 10.47
NTN COMMUNICATIONS, INC.

SPECIAL STOCK OPTION AGREEMENT

THIS SPECIAL STOCK OPTION AGREEMENT (this "Agreement") is made and
entered into as of August 16, 1996, by and between NTN COMMUNICATIONS, INC., a
Delaware corporation (the "Company"), and GERALD SOKOL, JR., an individual (the
"Optionee").

W I T N E S S E T H

WHEREAS, the Company's Board of Directors authorized the grant to the
Optionee of an option (the "Option") to purchase 400,000 shares of Common Stock,
$.005 par value, of the Company (the "Common Stock") upon the terms and
conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual promises and covenants
made herein and the mutual benefits to be derived herefrom, the parties hereto
agree as follows:

1. Grant of Special Option. The Company hereby grants to the Optionee
-----------------------
the right and option to purchase, in accordance with the terms and conditions of
this Agreement, an aggregate of 400,000 shares of Common Stock at the price of
$5.00 per share (the "Price"), exercisable prior to the close of business on
August 15, 2006 (the "Expiration Date"). The Option is intended not to
constitute an incentive stock option within the meaning of Section 422A of the
Internal Revenue code of 1986, as amended (the "Code") and is not being granted
pursuant to the Company's 1995 Stock Option Plan but pursuant to the Company's
Special Stock Option Plan (the "Plan") adopted August 16, 1996 by the Board of
Directors of the Company.

2. Vesting and Exercisability of Option. The Option will become
----------------------------------------
immediately vested and exercisable only if the closing price of the Common Stock
of the Company on the American Stock Exchange is at least $11 or more for ten
(10) consecutive trading days during the period commecing as of the date hereof
and ending on August 15, 1998. In the event this Option becomes vested, the
right to purchase any or all of such shares will terminate on the close of
business on August 15, 2006; provided, however, that the right to exercise this
Option is subject to early termination upon the Optionee's "Termination of
Employment" (as defined in the Plan). In the event of the Optionee's Termination
of Employment (other than by reason of death) this Option may only be exercised
by Optionee, to the extent exercisable at Termination of Employment, at any time
prior to 90 days after Termination of Employment.

3. Change in Control Event.
-----------------------

Notwithstanding Section 2 hereof, the Option shall become vested and
exercisable in full immediately upon a Change in Control Event. A "Change in
Control Event" shall mean:

(1) The acquisition by any individual entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (a "Person") of beneficial ownership of 50% or
more of the then outstanding voting securities of the Corporation entitled to
vote generally in the election of directors (the "Outstanding Voting

1.
<PAGE>

Securities"); provided, however, that the following acquisitions shall not
-------- -------
constitute a Change in Control Event: (A) any acquisition by the Corporation or
(B) any acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Corporation or any corporation controlled by the Corporation.

(2) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual who becomes a director subsequent
to the date hereof whose election, or nomination for election by the
Corporation's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board; but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or

(3) Approval by the shareholders of the Corporation of a
reorganization, merger or consolidation (a "transaction"), unless, following
such transaction in each case, more than 50% of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
transaction and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entitles who were the beneficial
owners, respectively, of the outstanding Common stock and Outstanding Voting
Securities immediately prior to such transaction; or

(4) Approval by the shareholders of the Corporation of (A) a complete
liquidation or dissolution of the Corporation or (B) the sale or other
disposition of all or substantially all of the assets of the Corporation, unless
such assets are sold to a corporation and following such sale or other
disposition, the condition described in paragraph (3) above is satisfied; or

(5) Any corporate personnel reorganization pursuant to which Optionee
is required to report to someone other than Patrick J. Downs or Daniel Downs.

4. Method of Exercise of Option and Payment of Purchase Price. Each
----------------------------------------------------------
exercise of the Option shall be by means of a written notice of exercise
delivered to the Company and specifying the number of whole shares with respect
to which the Option is being exercised, together with any written statements
required pursuant to Section 9 below and payment of the Price in full in cash or
by check payable to the order of the Company; provided that so-called cashless
exercises may be permitted in the discretion of the Committee administering the
Plan. The delivery of shares pursuant to an exercise of this Option will be
conditional upon payment by the Optionee of amounts sufficient to enable the
Company to pay all applicable federal, state and local withholding taxes.

5. Effect of Death of Optionee. The Option and all other rights
---------------------------
hereunder, to the extent such rights shall not have been exercised, shall,
unless sooner terminated pursuant to the Plan, terminate and become null and
void at the end of twelve months following the Optionee's death. During the
twelve-month period after death, the Option may, to the extent exercisable on

2.
<PAGE>

the date of death (or earlier termination), be exercised by the executor of the
Optionee's will or the administrator of the holder's estate; provided that in no
event may the Option be exercised by any person after the Expiration Date.

6. Non-Assignability of Option. Subject to the provisions of the Plan,
---------------------------
the Option and the rights and privileges conferred hereby are not transferable
or assignable and may not be offered, sold, pledged, hypothecated or otherwise
disposed of in any way (whether by operation of law or otherwise) and shall not
be subject to execution, attachment, garnishment, levy or similar process.
During the Optionee's lifetime, the Option may be exercised only by the
Optionee, or, subject to the provisions of Section 5, within twelve months after
his death by the executor of his will or the administrator of his estate, and
not otherwise, regardless of any community property or other interest therein of
the Optionee's spouse or such spouse's successor in interest. In the event that
the spouse of the Optionee shall have acquired a community property interest in
the Option, the Optionee, or such transferees, may exercise it on behalf of the
spouse of the Optionee or such spouse successor in interest.

7. Adjustments and Other Rights. The rights of the Optionee hereunder
----------------------------
will be subject to adjustments and modifications in certain circumstances and
upon occurrence of certain events including a reorganization, merger,
combination, recapitalization, reclassification, stock split, reverse stock
split, stock dividend or stock consolidation.

8. Optionee Not A Stockholder. Neither the Optionee nor any other
--------------------------
person entitled to exercise the Option shall have any of the rights or
privileges of a shareholder of the Company as to any shares of Common Stock not
actually issued and delivered to him. No adjustment will be made for dividends
or other rights for which the record date is prior to the date on which such
stock certificate or certificates are issued even if such record date is
subsequent to the date upon which notice of exercise was delivered and the
tender of payment was accepted.

9. Application of Securities Laws. No shares of Common Stock may be
------------------------------
purchased pursuant to the Option unless and until any then applicable
requirements of the Securities and Exchange Commission, the California
Department of Corporations and any other regulatory agencies, including any
other state securities law commissioners having jurisdiction over the Company or
such issuance, and any exchanges upon which the Common Stock may be listed,
shall have been fully satisfied. The Optionee represents, agrees and certifies
that:

(a) If the Optionee exercises the Option in whole or in part at a
time when there is not in effect under the Securities Act of 1933, as amended
(the "Act"), a registration statement relating to the Common Stock issuable upon
exercise and available for delivery to him a prospectus meeting the requirements
of Section 10(a)(3) of the Act, the Optionee will acquire the Common Stock
issuable upon such exercise for the purpose of investment and not with a view to
resale or distribution and that, as a condition to each such exercise, he or she
will furnish to the Company a written statement to such effect, satisfactory in
form and substance to the Company, which statement also acknowledges that the
Option shares have not been registered under the Act and are "restricted
securities" within the meaning of Rule 144 under the Act and are subject to
restrictions on transfer; and

3.
<PAGE>

(b) If and when the Optionee proposes to publicly offer or sell the
Common Stock issued to him upon exercise of the Option, the Optionee will notify
the Company prior to any such offering or sale and will abide by the opinion of
counsel to the Company as to whether and under what conditions and
circumstances, if any, he or she may offer and sell such shares, but such
procedure need not be followed if a Prospectus was delivered to the Optionee
with the shares of Common Stock and the Common Stock was and is listed on the
New York Stock Exchange or the American Stock Exchange.

The Optionee understands that the certificate or certificates
representing the Common Stock acquired pursuant to the Option may bear a legend
referring to the foregoing matters and any limitations under the Act and state
securities laws with respect to the transfer of such Common Stock, and the
Company may impose stop transfer instructions to implement such limitations, if
applicable. Any person or persons entitled to exercise the Option under the
provisions of Section 5 above shall be bound by and obligated under the
provisions of this Section 9 to the same extent as is the Optionee.

10. Notices. Any notice to be given under the terms of this Agreement
-------
or pursuant to the Plan shall be in writing and addressed to the Secretary of
the Company at its principal office and any notice to be given to the Optionee
shall be addressed to him at the address given beneath the Optionee's signature
hereto, or at such other address as either party may hereafter designate in
writing to the other party. Any such notice shall be deemed to have been duly
given when enclosed in a properly sealed envelope addressed as aforesaid,
registered or certified, and deposited (postage and registry or certification
fee prepaid) in a post office or branch post office regularly maintained by the
United States Government.

11. Effect of Agreement. This Agreement shall be assumed by, be binding
-------------------
upon and inure to the benefit of any successor or successors of the Company.

12. Applicability of the Plan. The Option and this Agreement will
-------------------------
subject to, and the Company and the Optionee agree to be bound by, all of the
terms and conditions of the Plan as and when adopted by the Board of Directors
of the Company and approved by the Company's stockholders. The rights of the
Optionee will be subject to limitations, adjustments, modifications, suspension
and termination in certain circumstances and upon the occurrence of certain
conditions as set forth in the Plan as originally adopted, but shall not be
adversely affected by any future amendments to the Plan.

13. Laws Applicable to Construction. The Option has been granted,
-------------------------------
executed and delivered as of the day and year first above written in Carlsbad,
California, and the interpretation, performance and enforcement of the Option
and this Agreement shall be governed by the internal laws of the State of
California.

4.
<PAGE>

IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by a duly authorized officer and the Optionee has
hereunto set his hand as of the day and year first above written.

NTN COMMUNICATIONS, INC.,
a Delaware corporation

By: /s/ Patrick J. Downs
----------------------------
Title:
--------------------------

OPTIONEE

/s/ Gerald Sokol, Jr.
--------------------------------
Gerald Sokol, Jr.

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

--------------------------------
[Address]

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
NTN Communications, Inc.

We consent to incorporation by reference in the Registration Statement (No.
33-75732) on Form S-8 of NTN Communications, Inc. of our report dated April 10,
1997, relating to the consolidated balance sheets of NTN Communications, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three year period ended December 31, 1996, and the related
schedule, which report appears in the December 31, 1996 Annual Report on Form
10-K of NTN Communications, Inc. Our report dated April 10, 1997, contains an
explanatory paragraph that states that the Company has suffered recurring losses
from operations and has a net working capital deficiency that raises substantial
doubt about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

/s/ KPMG Peat Marwick LLP

San Diego, California
April 14, 1997

<PAGE>

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<PERIOD-START> JAN-01-1996
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