MULTIMEDIA GAMES INC, 10KSB, 1997-12-29

MULTIMEDIA GAMES INC
10KSB, 1997-12-29
AMUSEMENT & RECREATION SERVICES

Previous: ENVIROTEST SYSTEMS CORP /DE/, 10-K, 1997-12-29

Next: OLYMPIC RECEIVABLES FINANCE CORP, 8-K, 1997-12-29

<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-KSB

[x] Annual Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the Fiscal Year ended September 30, 1997

[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from _______ to _________

Commission file number 0-28318

Multimedia Games, Inc.
----------------------
(Name of Small Business Issuer in Its Charter)

Texas 74-2611034
----- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)

7335 S. Lewis Avenue, Suite 204
Tulsa, Oklahoma 74136
--------------- -----
(Address of Principal Executive Offices) (Zip Code)

(918) 494-0576
--------------
(Issuer's Telephone Number,
Including Area Code)

<TABLE>
<S> <C>
Securities Registered Under Section 12(b) of the Exchange Act: NONE
Securities Registered Under Section 12(g) of the Exchange Act: Common Stock, $.01 par value
Class A Warrants
Class B Warrants
</TABLE>

Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days Yes x
No

Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB [ ]

State the issuer's revenues for its most recent fiscal year:
$39,052,000.

The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the issuer as of December 15, 1997 was $64,199,764.

The number of shares outstanding of the issuer's Common Stock as of
December 15, 1997, was 5,325,372.

Transitional Small Business Disclosure Format (check one):

Yes No X
----- -----

<PAGE> 2
PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

Prior to August 1995, the Company's principal business was to conduct
high stakes bingo games under the names MegaBingo, MegaCash and MegaBingo Lite.
MegaBingo and MegaCash are played simultaneously at multiple bingo halls using
a closed-circuit television satellite link thereby allowing a greater number of
players to compete against one another for prizes generally larger than could
be offered by a bingo hall acting alone. The participating bingo halls are
owned and operated on behalf of American Indian tribes and are located in the
States of Arizona, California, Kansas, Minnesota, New Mexico, Oklahoma and
South Dakota, among others. MegaBingo Lite provides smaller prizes to
similarly linked Indian bingo halls and is presently delivered to bingo halls
primarily located in the State of Oklahoma. The Company believes that its
MegaBingo, MegaCash and MegaBingo Lite games are the only regularly scheduled
multi-hall, high stakes bingo games in the United States.

In August 1995, the Company introduced MegaMania, a high-speed bingo
game developed by the Company that allows customers to purchase bingo cards and
to play bingo on an interactive electronic player station that requires rapid
decisions and presents game results in a fast-action color video format
featuring graphics and animation accompanied by sound. The stations are
interconnected with other stations at participating bingo halls through the
Company's computer network, thus allowing players to compete against one
another to win a common pooled prize.

The Company's gaming revenues emanate from the proceeds of bingo card
sales, with profits derived from revenues remaining after payment of prizes,
bingo hall commissions and operating expenses. The Company also derives other
revenues from the sale and lease of MegaMania player stations and related
equipment.

American Gaming Network, L.L.C., which was a 49% owned subsidiary of
the Company until the Company acquired the other 51% interest in October 1997,
accepts orders and purchases bingo cards at Indian bingo halls and plays those
cards at the bingo halls on behalf of proxy play participants who are located
off the Indian lands. To date, revenues from proxy play bingo have been
insignificant.

Multimedia Games, Inc. (the "Company") was incorporated under the laws
of the State of Texas on August 30, 1991. Unless the context otherwise
requires, the term the "Company" includes Multimedia Games, Inc., and its
subsidiaries - TV Games, Inc., MegaBingo, Inc., Multimedia Creative Services,
Inc. and American Gaming Network L.L.C. The Company's executive offices are
located at 7335 South Lewis Avenue, Suite 204, Tulsa, Oklahoma 74136, and its
telephone number is (918) 494-0576.

MegaBingo(R), MegaCash(R), MegaBingo Lite(TM) and
MegaMania(TM) are registered trademarks and tradenames of the Company, and all
references herein are deemed to include the applicable tradename or trademark
designation.

-2-
<PAGE> 3
RISK FACTORS

The following risk factors should be carefully considered in
connection with the other information and financial statements contained in
this Report on Form 10-KSB.

GOVERNMENT REGULATION; POSSIBLE ILLEGALITY OF COMPANY ACTIVITIES. In
doing business with Indian tribes and participating in tribal gaming
activities, the Company is subject to various Federal regulations and laws
regarding the manner in which business can be transacted. The operation of
gaming on Indian lands is subject to the Indian Gaming Regulatory Act of 1988
(the "Gaming Act"), which also established the National Indian Gaming
Commission ("NIGC") with the authority to promulgate rules and regulations to
enforce certain aspects of the Gaming Act and to protect tribal interests
involved in gaming activities. The NIGC has previously given favorable rulings
regarding the Company's Integrated Gaming Services Agreements with the tribes
and has determined them to be service contracts rather than management
contracts, thereby allowing the Company to obtain more favorable terms than
would have been permitted had the agreements been determined to be management
contracts. See "Item 1. Description of the Business - Risk Factors -
Dependance Upon Tribal Contracts" and "The Company - Integrated Gaming Services
Agreements."

On July 10, 1996, the NIGC issued its opinion that the Company's
MegaMania game is a Class II rather than a Class III gaming activity. This
opinion was of significance because, generally speaking, Class II gaming may be
conducted on Indian lands if the state in which the Indian land is located
permits such gaming for any purpose by any person. Class III gaming, on the
other hand, which includes gaming such as video casino games, slot machines,
most table games (e.g., blackjack and craps) and keno, may only be conducted
pursuant to a compact reached between the Indian tribe and the state in which
the tribe is located. MegaMania was designed and is operated by the Company as
a Class II game within the definition of bingo set forth in the Gaming Act, and
the Company has relied upon the opinion of the NIGC in operating its MegaMania
game.

On October 16, 1996, the Office of the U.S. Attorney in Tulsa,
Oklahoma (the "U.S. Attorney"), orally informed the Company that the U.S.
Attorney was conducting an independent investigation to determine whether, in
the opinion of the U.S. Attorney, the Company's MegaMania bingo game constituted
Class III or Class II gaming. The Company believes that its MegaMania game
meets all of the requirements of a Class II game of bingo and that the NIGC has
the regulatory authority to make final and binding determinations on the
classification of games. However, in order to resolve any differences between
the NIGC and the U.S. Attorney, on April 8, 1997, the Company entered into a
Memorandum of Understanding with the NIGC to implement certain changes to its
MegaMania game. These changes generally require the bingo card holder to take
certain actions in order to daub the card and to indicate a bingo win, and also
require the drawing of bingo numbers using a physical ball blower or as a result
of some other human activity rather than the use of electronically generated
random numbers. In addition to the Memorandum of Understanding, the NIGC issued
a letter to the Company dated April 9, 1997, concluding that the MegaMania game,
if modified in accordance with the Memorandum of Understanding, would conform to
the definition of bingo in the Gaming Act and would thus be a Class II game.

The Company modified its MegaMania game to meet the terms of the
Memorandum of Understanding and on June 9, 1997, submitted the modified version
of the MegaMania game to the NIGC for its review and evaluation. Based upon
that review and evaluation, on July 23, 1997, the Acting General Counsel of the
NIGC informed the Company in a written advisory opinion that the revised
MegaMania game constituted Class II gaming and that tribes may play the revised
game without risk of enforcement action by the NIGC.

-3-

<PAGE> 4
In entering into the Memorandum of Understanding and implementing the
changes to its then current MegaMania game, the Company believed that any
remaining interpretive disagreements with the U.S. Attorney over the Class II
status of MegaMania would be resolved. However, subsequent to July 23, 1997,
the Company and certain tribes in Oklahoma received letters from the U.S.
Attorney and other U.S. Attorney offices in Oklahoma informing the Company and
the tribes that such offices continue to consider the Company's MegaMania game
to be an illegal Class III gaming activity.

There can be no assurance that the NIGC, either on its own initiative
or as the result of pressure from or cooperation with other agencies such as
the Department of Justice, will adhere to the terms of its July 23, 1997,
advisory opinion or any of their opinions previously issued to the Company.
There also can be no assurances that the Department of Justice or any local
U.S. Attorney's offices will accept any of the opinions or actions of the NIGC
regarding the Company's activities, and not seek to challenge the legality of
the Company's activities.

If adverse determinations or actions are taken by the NIGC, the U.S.
Attorney, the Department of Justice or any local U.S. Attorney's offices, the
Company intends to vigorously defend its position that MegaMania is a Class II
game. No assurances can be given that the Company will be successful on the
merits. If MegaMania is ultimately determined to be Class III gaming, the loss
of the MegaMania business would have a material adverse effect upon the
Company's financial condition and results of operation.

There can be no assurance that the NIGC, either on its own initiative
or as the result of pressure from or cooperation with other agencies such as
the Department of Justice, will not enact additional regulations or reinterpret
existing regulations in a manner that would have a material and adverse effect
upon the Company, including requiring the Company to restructure its existing
contractual arrangements with Indian tribes or requiring changes in the way the
Company's games are conducted so that such games are classified as Class II.
Any such restructuring of the Company's games has the additional risk that such
games will no longer appeal to consumers or be acceptable to the tribes. There
can also be no assurance that the Gaming Act or other Federal laws will not be
amended, or new legislation or regulations enacted, so as to limit the
authority of tribes to self-regulate Class II gaming or to change the
definition of Class II gaming in a manner adverse to the Company's business.

DEVELOPING OPERATING ENVIRONMENT. The environment in which the
Company conducts its business is relatively new and presents significant
operating challenges and uncertainties. The Gaming Act was adopted in 1988 and
the development of the Federal, State and tribal infrastructure to regulate the
proliferation of Indian gaming activities has occurred only since that time.
Fundamental issues concerning the scope and intent of the Gaming Act remain
unresolved, as do issues relating to the jurisdiction and authority of
different Federal, State, local and tribal governments and agencies. The NIGC
was not fully operational until February 1993, and prior to that the Bureau of
Indian Affairs was responsible for certain functions now performed by the NIGC.
As a result, the adoption and implementation of regulations in furtherance of
the Gaming Act have moved cautiously and there is a comparative lack of case
law or interpretation of such regulations or of the Gaming Act. Moreover, the
Company is on the leading edge of the rapid advancement of technological
innovation in gaming, and issues relating, for example, to the use of
electronic aids for the playing of games and gaming on the Internet are either
novel or lack historical precedent sufficient to enable the Company to predict
with certainty the outcome of planned actions or the response of regulatory
authorities.

TRIBAL REGULATION. Each Federally recognized Indian tribe has the
standing of a sovereign nation. As such, without approval from the tribes, the
tribes cannot be sued or otherwise held accountable under any but tribal laws.
Each tribe which is a party to the Company's Integrated Gaming Services
Agreements has

-4-

<PAGE> 5
waived its sovereign immunity to the Company as it relates to equipment used in
the conduct of games or to the revenues of the gaming facility. Although the
Company has never experienced any difficulties in this regard, there can be no
assurance that a particular tribe will not invoke its sovereign immunities with
respect to obligations and/or contracts with the Company which could have the
effect of rendering the Company's contracts unenforceable.

In addition, gaming on Indian lands is generally closely administered
by tribal officials. Most tribes have established a regulatory framework to
administer the conduct of gaming on Indian lands. These regulations generally
include licensing and approval procedures and reporting and audit requirements.
Not all constituencies within each Indian tribe view gaming favorably, and
changes in tribal officials have in the past, and could in the future, result
in a more difficult environment in which to conduct the Company's business at a
particular tribe. Moreover, perceptions and attitudes concerning the integrity
and morality of gaming are highly sensitive matters with most tribes and
seemingly minor or irrelevant matters, including rumor and innuendo about the
legality of the Company's activities, can and have been used by competitors and
by competing tribal constituencies as a basis for changing or attempting to
change existing relationships between tribes and the Company. The Company
expects this environment to continue in the future but believes that its
sensitivity to these matters, and the personnel and policies it has in place,
will enable it to effectively manage the issues that will inevitably arise.

DEPENDANCE UPON TRIBAL CONTRACTS. Virtually all of the Company's
revenues are derived from contracts with Indian tribes. The Company has
written agreements with approximately 50 Indian tribes that provide the
Company with the exclusive right to conduct bingo operations in their
respective Indian lands of which approximately 20 contracts are on a month to
month basis. No assurances can be given that any of such contracts will be
renewed upon the expiration of their term or that, if renewed, the terms and
conditions thereof will be favorable to the Company, nor can any assurances be
given that a tribe or tribes will not cancel any of such agreements prior to
the expiration of their stated term. A failure to renew such contracts upon
terms favorable to the Company or the cancellation of a significant number of
such contracts would have a material adverse effect upon the Company's business
and results of operations. See "Item 1. Description of the Business - The
Company - Integrated Gaming Services Agreements."

FUTURE FINANCING. The Company's future business plans are dependent
upon its ability to finance its activities on a timely basis, particularly for
the purchase and installation of additional MegaMania player stations and
related equipment. To date, the Company has financed such activities primarily
through the issuance of equity securities and from operations. Uncertainties
relating to the legality of MegaMania as a Class II bingo game and to the
ability of lenders to secure and enforce rights on Indian lands, have made it
more difficult for the Company to locate, and more expensive for the Company to
obtain, equipment and lease rental financing from the more traditional sources
of such funds. Because of these factors, any additional financing will likely
involve the issuance of equity related securities which could result in
substantial dilution to the Company's then existing shareholders. Any
inability to obtain additional financing when needed could have a material
adverse effect on the Company's ability to achieve its planned objectives and
any expectations of the market as to the Company's future performance. See
"Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation - Liquidity and Capital Resources" and "Item 12. Certain
Relationships and Related Transactions."

CUSTOMER DEMAND; COMPETITION. The Company's product development and
marketing activities are based upon the Company's assessment of customer demand
for gaming services in establishments in which the Company provides services.
Significant changes in customer demand or preference for gaming products in a
given geography, including competing gaming and other leisure activities, could
have an adverse impact on

-5-
<PAGE> 6
the Company's business and results of operations. Significant competition to
the Company's MegaMania game should be expected based upon the initial
popularity of that game. See Item 1. Description of the Business - The Company
- - Competition.

TECHNOLOGICAL INNOVATION. The Company believes that an important
factor to its future success will include its continued development of new
products that appeal to the tastes of consumers and the introduction of such
products in a timely manner. Successful product development and introduction
depends upon a number of factors, including the identification of products
expected to appeal to consumer preferences and the timely completion of design
and testing. Importantly, any new or modified gaming products will be designed
and operated to meet the requirements of Class II gaming. The Company expects
to continue to solicit the approval of the NIGC that any new or modified gaming
products meet the requirements of Class II gaming so the interpretations and
policies of the NIGC with respect to the requirements for Class II gaming will
also affect the timing and nature of any new products; however, the Company does
not always expect to be able to obtain such approval prior to the introduction
of new products. As a result of these and other factors, there can be no
assurance that the Company will continue to develop and introduce new products
in a timely manner that will achieve commercial success.

ACCUMULATED DEFICIT; UNCERTAIN PROFITABILITY. Although the Company
achieved net income of $1,311,000 in the fiscal year ended September 30, 1997
(as compared to $40,000 in the prior fiscal year), the Company has incurred an
accumulated deficit of $1,386,000 since its inception in August 1991 through
September 30, 1997. No assurances can be given that the Company will be able to
maintain profitable operations in the future. In addition, such profits, if
any, are not expected to be commensurate or proportional with any increases in
revenues as the Company expects to continue to experience significant general
and administrative expenses associated with addressing the regulatory and other
operating uncertainties facing the Company in the developing operating
environment in which the Company conducts its business.

PRIZE FULFILLMENT. The prizes awarded under the Company's bingo games
are based upon attaining an assumed level of gross game receipts and statistical
assumptions as to the frequency of winners. To date, the Company has not
experienced a "game deficit" where prize allocations have exceeded game
revenues; however, no assurances can be given that the Company will not
experience abnormally high rates of jackpot prize wins in the future.

SIGNIFICANT OUTSTANDING OPTIONS AND WARRANTS. As of September 30,
1997, there were outstanding immediately exercisable rights to purchase an
aggregate of 2,006,627 shares of Common Stock at exercise prices ranging from
$1.50 to $8.00 per share, and shares of the Company's Series A Preferred Stock
that are immediately convertible into 545,960 shares of Common Stock. In
addition, there were outstanding additional rights to purchase an aggregate of
1,239,250 shares of Common Stock at exercise prices ranging from $1.50 to $13.38
per share, of which 412,000 became exercisable subsequent to September 30, 1997
and were exercised prior to December 15, 1997 at $3.00 per share, approximately
400,000 become exercisable during calender 1998 and the remainder become
exercisable in substantially equal annual increments over the following four
years. To the extent that such rights and Series A Preferred Stock are exercised
or converted, dilution to the Company's shareholders will occur. Moreover, the
terms upon which the Company will be able to obtain additional equity capital
may be adversely affected, since the holders of such rights and Series A
Preferred Stock can be expected to exercise or convert them at a time when the
Company would, in all likelihood, be able to obtain any needed capital on terms
more favorable to the Company than the exercise terms provided in such
securities.

ABSENCE OF DIVIDENDS. The Company has never declared or paid any cash
dividends on its Common Stock. The Company intends to retain its earnings, if
any, to finance the growth and development of its

-6-
<PAGE> 7
business and therefore does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future.

SHARES AVAILABLE FOR FUTURE SALE; SALES BY AFFILIATES. Virtually all
of the shares of Common Stock issuable upon the exercise of the rights and
convertible securities described above as well as the 4,783,297 shares of Common
Stock outstanding at September 30, 1997, are either held by non-affiliates and
are freely traded in the public market, are currently registered under the
Securities Act for sale to the public by the holders thereof or are eligible for
immediate sale under Rule 144, subject to certain volume limitations. Sales of
substantial amounts of Common Stock, or the perception of such sales, could
adversely affect the prevailing market prices of the Common Stock.

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-KSB contains various "forward-looking
statements" within the meaning of Federal and state securities laws, including
those identified or predicated by the words "believes," "anticipates,"
"expects," "plans" or similar expressions. Such statements are subject to a
number of uncertainties that could cause the actual results to differ
materially from those projected. Such factors include, but are not limited to,
those described under "Risk Factors". Given these uncertainties, investors are
cautioned not to place undue reliance upon such statements.

CURRENT GAMES

The MegaBingo, MegaCash and MegaBingo Lite games are telecast live to
television monitors at each participating bingo hall by means of a
closed-circuit, television satellite network which, except for the satellite,
is designed, owned and operated by the Company. The Company's broadcast studio
is currently located at the Cheyenne-Arapaho Lucky Star gaming facility which
is approximately 20 miles west of Oklahoma City in Concho, Oklahoma. The studio
houses the equipment needed to produce and televise the game drawings and
verify winning cards, including television production equipment and satellite
up-link equipment. The Company's central game computers and communications
equipment are located in the Company's principal offices in Tulsa, Oklahoma.
MegaBingo and MegaCash game drawings are conducted in the Cheyenne-Arapaho
facility and MegaBingo Lite drawings are conducted in the broadcast studio.
MegaBingo, MegaCash and MegaBingo Lite games are approximately 12 minutes in
duration and represent only a limited percentage of the total number of bingo
games conducted by each participating bingo hall operator during any given
bingo session.

The MegaBingo, MegaCash and MegaBingo Lite games allow customers to
enter a participating bingo hall and purchase a bingo card for a game that will
be played at a future designated time. Prize money emanates from the proceeds
of bingo card sales, with profits to the Company derived from revenues from
bingo card sales remaining after prizes, bingo hall commissions and operating
expenses are paid. The Company believes that its MegaBingo, MegaCash and
MegaBingo Lite games are the only regularly scheduled multi-hall, high stakes
bingo games in the United States.

In the MegaBingo game, which is conducted on the Company's satellite
gaming network seven nights per week, a player pays either $3 for a single
bingo game face card or $5 for a bingo game card consisting of three separate
game faces. When a player covers a card after 50 balls or fewer are drawn and
calls bingo, and the winning card is verified, the player is given the chance
to win a jackpot prize of up to $1,000,000 (paid $100,000 in cash and the
remainder in the form of a 24-year annuity) by spinning the MegaBingo wheel. If
there is no winner after 50 balls or fewer are drawn, the game continues until
a player calls bingo. Once that

-7-

<PAGE> 8
player's card is verified, the player will receive a consolation prize of
$2,500 if a $3 card was played, or $5,000 if a $5 card was played, as well as
certain lesser prizes. MegaBingo Lite is similar to MegaBingo, but involves
fewer halls and smaller prizes (e.g., jackpot prizes of $25,000). In the
MegaCash game, which is conducted on the Company's network each Saturday and
Sunday in matinee sessions, the player pays either $2 or $5 for the same single
bingo game face card, which carries a jackpot of, respectively, $100,000 or, by
spinning the MegaBingo wheel, up to $1,000,000. If there is no MegaCash winner
after 50 balls or fewer are drawn, the game continues until bingo is called and
a consolation winner is determined. Consolation prizes are $2,500 for a $2
card, or $5,000 for a $5 card, as well as certain lesser prizes. Typically, 13
games of MegaBingo and two of MegaCash are played each week.

MegaMania utilizes electronic player stations that are interconnected
via the Company's computer network throughout participating bingo halls. The
Company has designed MegaMania such that it requires sound strategic
decisions to be made rapidly and repeatedly by players in order to maximize
prize payout; presents game results in a fast-action color video presentation
featuring state-of-the-art graphics and animation accompanied by sound; pays
back approximately 85% of the total amount wagered in prizes to players; pits
players against one another to win a common pooled prize in accordance with the
rules of Class II bingo; costs only a quarter per card, per cycle; pays out a
prize of $25 to $150+ for every completed game (which is about 90 seconds
duration); and pays out other progressive jackpot prizes based on winning
within a specified number of bingo balls drawn. As of December 15, 1997, 49
halls had approximately 1,712 electronic player stations playing MegaMania.

On April 8, 1997, the Company entered into a Memorandum of
Understanding with the NIGC to implement certain changes to its MegaMania game.
These changes generally require the bingo card holder to take certain actions in
order to daub the card and to indicate a bingo win and to require the drawing of
bingo numbers using a physical ball blower or as a result of some other human
activity rather than the use of electronically generated random numbers. These
changes have been implemented and the new version of the MegaMania game is
currently in operation. See "Item 1. Description of the Business - Risk
Factors - Government Regulation; Possible Illegality of Company Activities."

Through American Gaming Network, L.L.C., ("AGN"), the Company offers
proxy play services of the MegaBingo game to off-reservation participants. AGN
accepts orders and purchases bingo cards at on-reservation Indian bingo halls
and plays those cards at the bingo halls on behalf of proxy play participants.
To date, revenues from proxy play services have been insignificant.

INTEGRATED GAMING SERVICES AGREEMENTS ("IGS AGREEMENTS")

Virtually all of the Company's revenues are derived from contracts
with Indian tribes. The Company's contract with each bingo hall operator is
typically for five years, and provides for a variety of integrated, multi-hall
games on an exclusive basis. Participation in the Company's multi-hall network
not only generates additional profit for the bingo hall, but also allows the
bingo hall operators to advertise jackpot prizes well in excess of those
offered by other bingo halls where the Company's games are not played, thus
providing participating halls a competitive advantage.

The Company has IGS Agreements with approximately 50 Indian tribes,
of which approximately one-third have unexpired terms of approximately three
years and one-third have unexpired terms of approximately two years. The
remaining contracts are currently under negotiation and are being continued on
a month to month basis.

-8-

<PAGE> 9
In order to provide protection against the risk that prizes awarded to
players in the MegaBingo and MegaCash games might exceed game revenues, the
terms of the IGS Agreements with the various hall operators that conduct
MegaBingo and MegaCash (the "MegaBingo Operators"), provide that a fixed
percentage of gross game receipts from those games (the "MegaBingo Prize
Allocation") is deposited in a prize allocation account from which prizes,
prize fulfillment fees and bank fees are paid ("MegaBingo Prize Allocation
Costs"). The MegaBingo Operator and the Company are each entitled to a fee
(the "MegaBingo Fee") which approximates 15% of gross game receipts increased
by its share of cumulative game surplus and decreased, in the case of the
Company, by 100% of all game deficits. A surplus (or deficit) exists to the
extent that the MegaBingo Prize Allocation exceeds (or is exceeded by) the
MegaBingo Prize Allocation Costs.

Under the terms of the IGS Agreements, specified initial portions of
the MegaBingo Fee are deposited in separate prize reserve accounts for the
MegaBingo Operators from which loans may be made to the prize allocation
account in the event of a game deficit. However, during the past five years
there has never been a game deficit and no loans have ever been made. Such
loans from the MegaBingo Operators' prize reserve accounts would be liabilities
of the Company and would have to be repaid when there are sufficient funds in
the prize allocation account available for such purpose. Each MegaBingo
Operator is entitled to the return of its prize reserve funds upon termination
of its IGS Agreement. In addition, those parties who have completed their
prize reserve funding obligations are entitled to receive formula-determined
refunds of their respective prize reserve funds from time to time to the extent
it is determined that such funds are not required to assure the payment of
MegaBingo Prize Allocation Costs.

Under the IGS Agreements, the Company may procure such technical,
marketing and other support as it determines is necessary to operate the games,
and is obligated to obtain any licenses and approvals required for the
operation of the games, to provide errors and omissions insurance coverage
against the possibility of duplication of prize liabilities, and to guarantee
the payment of prizes won in the games by letters of credit, performance bonds,
insurance or other guarantees.

The IGS Agreements obligate the tribes to provide space to operate the
games and to provide such advertising and promotion as they determine to be
beneficial. The parties to the IGS Agreements have also constituted audit,
legal, marketing and operations committees which provide oversight for the
games and exercise specific approval functions mandated by the IGS Agreements.

MegaMania electronic player stations are placed in participating halls
pursuant to an addendum to the IGS Agreements (the "IGS Addendums") or other
contractual arrangements satisfactory to the Company. Pursuant to the IGS
Addendums, the tribes typically purchase the MegaMania equipment from the
Company by allocating to the Company a portion of the tribes' share of
MegaMania game revenues until the agreed purchase price of the stations has
been paid. In some instances, the Company has leased the stations to the
tribes at rentals related to MegaMania game revenues.

PRIZE FULFILLMENT

The MegaBingo and MegaCash games are designed assuming a certain
minimum level of gross game receipts, with MegaBingo Prize Allocation Costs
averaged over long periods of time expected to be less than the MegaBingo Prize
Allocation. In order to reduce the need for prize reserve account funds and to
further reduce exposure to game deficits during periods of abnormally high
rates of jackpot prize wins, the Company is party to an agreement (the "Risk
Assumption Agreement") with SCA Promotions, Inc. ("SCA"), which specializes in
prize fulfillment services, to pay jackpot prizes won during the term of the
agreement.

-9-
<PAGE> 10
For an administrative fee (based on a fixed percentage of gross game
sales receipts) and prize fulfillment fees (based on a varying percentage of
gross game sales receipts) paid to SCA with funds from the MegaBingo Prize
Allocation, the Company receives an amount equal to the present value of the
jackpot prize payments less a deductible of $13,000. The Company also advances
the first $37,000 of SCA's liability for each prize pay-off, which is
subsequently deducted from fees due SCA. These prize fulfillment funds are then
utilized to satisfy the obligation to the jackpot prize winner through a
lump-sum cash payment or the purchase of an annuity.

SCA may cease its prize fulfillment responsibilities if its total
cumulative prize payouts exceed its fees earned under the contract by
$2,500,000. SCA is required at all times to maintain not less than $500,000 of
prize fulfillment resources in the form of a performance bond or other mutually
acceptable escrow arrangement. The Risk Assumption Agreement expires on August
31, 1998.

GAMING EQUIPMENT

In support of its MegaBingo, MegaCash and MegaBingo Lite games, the
Company utilizes, among other things, television production equipment,
satellite transmission and reception equipment, computer hardware and software,
conference calling equipment and specially printed ticket stocks typically
imprinted with the game's logo. The Company has contracted with a vendor for
satellite time to transmit the aforementioned games. With the exception of the
computer software, which is custom developed by or on behalf of the Company,
all other gaming equipment and supplies required for the operation of the
aforementioned games are typically available off-the-shelf from a number of
vendors. Under the IGS Agreements, any satellite dishes and monitoring
equipment then dedicated for use thereunder revert to the bingo halls upon the
expiration of such arrangements.

MegaMania electronic player stations consists primarily of electronic
equipment and computer hardware. With the exception of the computer software,
which is custom developed by or for the Company and is the property of the
Company (either outright or through licensing or joint venture arrangements
with others), substantially all of the electronic equipment and computer
hardware is available from a number of other vendors,although significant lead
times exist with respect to certain components.

MARKETING, ADVERTISING AND PROMOTION

The Company arranges national and local news coverage of the Company's
games and currently provides press releases to local newspapers regarding
recent jackpot wins as well as the introduction of the Company's games at new
network halls. In addition, the Company uses a variety of focused advertising
and promotion, including direct mailings in localities near network halls
advertising the availability of the Company's games, discount coupons for new
players and the purchase of advertising space in specialized bingo newsletters.
The Company's games typically are prominently featured in the participating
halls' program materials, such as calendars and flyers, and on outdoor
billboards near certain participating halls.

SERVICE MARKS AND PATENTS

The Company owns registered service marks for "MegaBingo(R)" and
"MegaCash(R)". The Company also utilizes the trademarks "MegaBingo Lite(TM)" in
connection with its special game introduced in a limited number of halls, and
"TV MegaBingo(TM)" in connection with its televised game and "MegaMania(TM)" in
connection with its game played on electronic player stations. The Company
relies on trade secrets, proprietary know-how and continuing technological
innovation to develop and maintain its competitive position. However,

-10-
<PAGE> 11
there can be no assurance that, insofar as the Company relies on trade secrets
and unpatented know-how, others will not independently develop similar
technology or that secrecy will not be breached.

COMPETITION

The Company believes that it competes with virtually all other forms of
gaming, including lotto, table games, sports betting and pari-mutuel wagering.
The intensity of such competition depends upon several factors, including the
nature and accessability of the gaming activity and the demographics of the
players' population. Most all of the companies engaged in such gaming
activities have substantially greater financial and personnel resources than the
Company.

The Company also competes with other bingo operations conducted both on
and off Indian lands, including bingo conducted with the use of electronic aids
such as card minders that provide interactivity and enable players to play
multiple numbers of bingo cards simultaneously. The Company believes that its
MegaBingo, MegaCash and MegaBingo Lite are the only multi-hall, high stakes
bingo games currently available on or off Indian lands in the United States.
However, another company has recently announced its intention to begin offering
a multi-hall, satellite linked bingo game in early 1998 in competition with the
Company. The Company also has competition to its MegaMania game and, given the
success of that game to date, expects even greater competition in the future.

EMPLOYEES

As of September 30, 1997, the Company had 106 full-time and part-time
employees, consisting of 18 engaged in field operations, 32 in computer
operations relating to bingo activities, seven in accounting functions, five in
sales and marketing activities, 19 in other general administrative and
executive functions and 25 full-time and part-time bingo hall employees. The
Company does not have a collective bargaining agreement with any of its
employees and considers its relationship with its current employees to be good.
In addition, approximately 30 individuals were employed by tribes to operate
the Company's games in their respective halls all of whom are reimbursed by the
Company.

GOVERNMENTAL REGULATION

GENERAL. The operation of gaming on Indian reservations is subject to
the Indian Gaming Regulatory Act of 1988 (25 U.S.C. Sections 2701, et seq.)
(the "Gaming Act" or "IGRA"), which created the National Indian Gaming
Commission (the "NIGC") to promulgate regulations to enforce certain aspects of
IGRA. The NIGC became fully operational in February 1993, prior to which the
Bureau of Indian Affairs was responsible for certain functions of the NIGC in
accordance with guidelines formulated by the Assistant Secretary of the
Interior for Indian Affairs. Shortly after IGRA was enacted, the Federal
Communications Commission ("FCC") and the United States Postal Service amended
their regulations to allow the use of television, telephone and the United
States mail for certain purposes in regard to Indian gaming, as long as the
gaming was in compliance with IGRA. On questions of compliance, the FCC defers
to the NIGC. Due to the relatively recent adoption of the foregoing
provisions, it is anticipated that statutes and regulations may be amended in
the future to correct initial deficiencies or to respond to changes in the
gaming industry. Management of the Company believes that it is not in
violation of any regulations or laws, but there is a risk that the regulations
or laws may change, or that new interpretations may be given to existing laws
and regulations, which may restrict or prohibit the games currently operated
and planned by the Company. See "Item 1. Description of the Business- Risk
Factors - Government Regulation; Possible Illegality of Company Activities."

INDIAN GAMING. IGRA classifies games that may be played on Indian
land into three categories. Class I gaming includes traditional Indian social
and ceremonial games and is regulated only by the tribes. Class II gaming
includes bingo, pull-tabs, lotto, punch boards, tip jars, instant bingo,
certain card games played under

-11-
<PAGE> 12
limited circumstances and other games similar to bingo if those games are
played at the same location where bingo is played. Class III gaming consists
of all forms of gaming that are not Class I or Class II, such as video casino
games, slot machines, most table games and keno.

IGRA provides that Indian tribes may engage in Class II gaming,
including the conduct of high-stakes bingo games, if (i) the state in which the
Indian reservation is located permits such gaming for any purpose by any
person, (ii) the gaming is not otherwise specifically prohibited on the Indian
reservation by Federal law, (iii) the gaming is conducted in accordance with a
tribal ordinance which has been approved by the NIGC, and (iv) several other
requirements are met, including the requirement that an Indian tribe shall have
the sole proprietary interest and responsibility for the conduct of gaming, and
that primary management officials and key employees must be licensed by the
tribe.

Under IGRA, the NIGC has the power to inspect and examine all Indian
gaming facilities, to conduct background checks on all persons associated with
Class II Indian gaming, to inspect, copy and audit all records of Indian gaming
facilities, and to hold hearings, issue subpoenas, take depositions and adopt
regulations in furtherance of its responsibilities. IGRA authorizes the NIGC
to impose civil penalties for violations of its regulations or of the Act, and
also imposes Federal criminal sanctions for illegal gaming on Indian
reservations and for theft from Indian gaming facilities.

IGRA also regulates Indian gaming management contracts. The Act
provides that the Gaming Commission may approve a management contract only
after determining that the contract provides for (i) adequate accounting
procedures and verifiable financial reports, which must be furnished to the
tribe, (ii) tribal access to the daily operations of the gaming enterprise,
including the right to verify daily gross revenues and income, (iii) minimum
guaranteed payments to the tribe, which must have priority over the retirement
of development and construction costs, (iv) a ceiling on the repayment of
development and construction costs, (v) a contract term not exceeding five
years and a management fee not exceeding thirty percent of net revenues,
provided that the NIGC may approve up to a seven year term and a forty percent
return to the Manager if the Chairman of the NIGC is satisfied that the capital
investment required, and the income projections for the particular gaming
activity, justify the larger percentage and longer term. Certain other
requirements for approval of a management contract are specified in the
regulations promulgated by the NIGC.

IGRA requires the NIGC to review all management contracts and
collateral agreements approved by the Bureau of Indian Affairs before the
creation of the NIGC to ensure that such agreements are in compliance with
IGRA. The NIGC has determined that the IGS Agreements are service agreements
and not management contracts, thereby allowing the Company to obtain more
favorable terms than would have been permitted had the contracts been
determined to be management contracts. There is no assurance however, that
further reviews of the IGS Agreements by the NIGC or alternative interpretation
of applicable laws and regulations will not require substantial modifications
to the IGS Agreements and cause the operations of the Company to be marginally
profitable or even unprofitable.

OFF-RESERVATION GAMING SERVICE. Through AGN, the Company plans to use
proxy play services to bring bingo games to a regional or national
off-reservation audience and as a result, may also be subject to rules
promulgated by the NIGC, the FCC or other agencies governing whether a
broadcast station, the Internet or cable network may carry information
regarding the results of a Class II bingo game played on Indian lands. The
Senate Committee on Indian Affairs, when drafting IGRA, indicated that the
intent of the law was to allow Indians to use the latest technological aids,
including television, satellites and telephones, on and off the reservation, to
conduct bingo games. In July 1995, the Chairman of the NIGC ruled that proxy
play of bingo was allowed under IGRA. There can be no assurance, however, as
regulations are reinterpreted or new laws

-12-
<PAGE> 13
enacted, that the Company's proposals to reach home viewers through commercial
broadcasts, the Internet, or cable networks may not be constrained or
prohibited.

OTHER. Existing Federal and state regulations may also impose civil
and criminal sanctions for various activities prohibited in connection with
gaming operations including false statements on applications and failure or
refusal to obtain necessary licenses described in the regulations. Violation
of any of these existing or newly adopted regulations may have a substantial
adverse effect on the Company.

ITEM 2. PROPERTIES

The Company leases approximately 9,440 sq.ft. of space for its
executive offices located at 7335 S. Lewis Avenue, Tulsa, Oklahoma. The lease
expires in October 2001. The Company also leases approximately 1,030 sq.ft. of
office space for some of its computer programmers in the Pavilion Office Park
Building in Dallas, Texas, which lease expires in June 1999. Aggregate annual
rentals under the two leases are $107,000. The Company believes that such
leases will be renewed as they expire or that alternative properties can be
leased on acceptable terms. The Company also houses a portion of its satellite
link equipment in a trailer located adjacent to the Cheyenne-Arapaho bingo hall
in Concho, Oklahoma at no cost.

ITEM 3. LITIGATION

On April 8, 1997, the Company entered into a Memorandum of
Understanding with the NIGC to implement certain changes to its MegaMania game.
In entering into the Memorandum of Understanding and implementing the changes
to its MegaMania game, the Company believed that any remaining interpretive
disagreements with the U.S. Attorney over the Class II status of MegaMania
would be resolved. However, subsequent to July 23, 1997, the Company and
certain tribes in Oklahoma received letters from the U.S. Attorney and other
U.S. Attorney offices in Oklahoma informing the Company and the tribes that
such offices continue to consider the Company's MegaMania game to be an illegal
Class III gaming activity. To date, no enforcement action has been instituted
by the Department of Justice. If instituted, the Company intends to vigorously
defend the legality of MegaMania as a Class II gaming activity.

See "Item 1. Description of the Business - Risk Factors - Government
Regulation; Possible Illegality of Company Activities."

The Company is also the subject of various pending and threatened
claims arising out of the ordinary course of business. Management believes
that any liability resulting from such claims will not have a material adverse
effect on the results of operations or the financial condition of the Company.

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

Not applicable

-13-
<PAGE> 14
PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock has been listed on the NASDAQ SmallCap
Stock Market under the symbol MGAM since May 15, 1996. Prior to that, the
Company's Common Stock was traded on the OTC Bulletin Board and in the
over-the-counter market "pink sheets" under the symbol "MGAM". The following
table sets forth the range of the quarterly high and low bid prices, as
reported in the Wall Street Journal, for the last two fiscal years.

<TABLE>
<CAPTION>
Fiscal Quarter High Low
- -------------- ---- ---
<S> <C> <C>
First Quarter 1996 $ 3.25 2.25
Second Quarter 1996 3.625 2.125
Third Quarter 1996 6.50 3.625
Fourth Quarter 1996 5.75 4.75
First Quarter 1997 6.00 4.375
Second Quarter 1997 10.75 4.75
Third Quarter 1997 12.00 8.25
Fourth Quarter 1997 13.875 10.375

</TABLE>

There were approximately 331 shareholders of record of the Common Stock on
September 30, 1997.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION

BUSINESS OVERVIEW

The Company provides satellite linked, high stakes bingo games and
interactive high speed bingo games played on interconnected electronic player
stations to participating bingo halls owned primarily by American Indian tribes
located throughout the United States. The Company also provides proxy play
services for its MegaBingo and MegaCash games to bingo players located off
Indian lands through a subsidiary's 49% interest in American Gaming Network
L.L.C. ("AGN").

Prior to August 1995, the Company's principal business was to conduct
high stakes bingo games under the names MegaBingo, MegaCash and MegaBingo Lite.
MegaBingo and MegaCash are played simultaneously at multiple bingo halls using
a closed-circuit television satellite link thereby allowing a greater number
of players to compete against one another for prizes generally larger than
could be offered by a bingo hall acting alone. The participating bingo halls
are owned and operated on behalf of American Indian tribes and are located in
the States of Arizona, California, Kansas, Minnesota, New Mexico, Oklahoma
and South Dakota, among others. MegaBingo Lite provides smaller prizes to
similarly linked Indian bingo halls and is presently delivered to bingo halls
located primarily in the State of Oklahoma.

-14-

<PAGE> 15
Significant revenue generation for MegaMania did not begin until March
1996. As of December 15, 1997, MegaMania is played at 49 independently owned
American Indian bingo halls located in 10 different states, primarily Oklahoma.

RESULTS OF OPERATIONS

An analysis of the Company's gaming revenues and direct gaming expenses
were as follows for the years ended September 30, 1997 and 1996.

<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
MegaBingo, MegaCash and
MegaBingo Lite:

Gross Revenues $ 13,504,000 $ 15,579,000
Bingo Prizes and Related Costs (9,381,000) (9,697,000)
Allotments to Hall Operators (2,568,000) (3,188,000)
------------- -------------
Net MegaBingo Margin $ 1,555,000 $ 2,694,000
============= =============

MegaMania:

Gaming Revenue, Net of Prizes(1) $ 20,507,000 $ 6,074,000
Allotments to Hall Operators (15,334,000) (4,408,000)
------------- -------------
Net MegaMania Margin $ 5,173,000 $ 1,666,000
============= =============
</TABLE>

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

(1) MegaMania gross revenues and prizes are netted for financial statement
presentation purposes.

The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included under Item 7.
Financial Statements.

REVENUES - Total revenues for fiscal year 1997 were $39.1 million as
compared to $22.9 million in 1996, a 70.6% increase. The increase is due to a
57.1% increase in gaming revenues over 1996, primarily as a result of the
Company's MegaMania game which generated revenues of $20.5 million during 1997
as compared to $6.1 million in 1996. The increase in MegaMania revenues for
1997 primarily resulted from newly installed electronic player stations. The
Company had an average of approximately 950 electronic player stations in daily
operation during the year ended September 30, 1997, compared to an average of
approximately 450 during the year ended September 30, 1996. MegaBingo revenues
decreased $2.1 million or 13.3% in 1997 as compared to 1996. The decrease in
MegaBingo revenues is the result of player headcount being down at most bingo
facilities across the country, and several bingo halls electing not to continue
playing the MegaBingo game during 1997.

The Company expects MegaMania revenues to continue to increase over the
coming year. MegaBingo revenues, however, may continue to decrease as the result
of decreased MegaBingo play at the halls and the introduction by a competitor
of a competing game.

Revenue from sales of electronic player stations increased by $2.9 million,
going from $.4 million in 1996 to $3.2 million in 1997, with $2.4 million of the
increase coming from related party sales. The increase was primarily due to the
sale of 616 units in 1997 as compared to the receipt of commissions on sales of
third party player stations and only peripheral equipment being sold by the
Company in 1996. Of the 616 units sold in 1997, 456 were sold to Equipment
Purchasing LLC, an entity owned and controlled by Gordon T. Graves, the Company
Chairman of the Board and Chief Executive Officer (see "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources," for further discussion).

Lease revenues from electronic player stations leased to Indian tribes
grew from $.1 million in 1996 to $1.8 million in 1997. This increase is due to
the expansion of the MegaMania network of units out on lease to various tribes.

-15-

<PAGE> 16
Other revenues during 1997 were $.8 million less than in 1996. The primary
reason for the decrease was the discontinuance of the Company's business
relationship with Graff which resulted in $.2 million in revenues in 1996 and
$0 in 1997, and by a decrease of $.5 million in software license revenues
attributable to the license of the MegaBingo software for use in Canada and
China to AI Software during 1996.

BINGO PRIZES AND RELATED COSTS - Bingo prizes and related costs decreased
$.3 million or 3.3% during 1997 as compared to 1996. The decrease in these
costs is not commensurate with the decrease in revenues for MegaBingo discussed
above because most of the prizes offered on the MegaBingo network are fixed in
amount and are not sensitive to the volume of cards sold in a particular bingo
session. Jackpot prize costs, which are insured, were consistent in their
relation to MegaBingo revenues from 1997 to 1996. MegaMania revenues are
recorded net of prize costs; therefore, MegaMania prizes have no effect on
bingo prizes and related costs.

ALLOTMENTS TO HALL OPERATORS - Allotments to hall operators consist of the
halls' share of the gaming income after prizes and allocable prize costs.
Allotments to hall operators increased 135.7% to $17.9 million in 1997, as
compared to $7.6 million in 1996. The primary reason for the increase is hall
commissions related to MegaMania where the allotment to hall operators increased
from $4.4 million in 1996 to $15.3 million in 1997, an increase of 247.9%. The
decrease in hall commissions related to MegaBingo is caused by the decrease in
MegaBingo revenues discussed above.

COST OF ELECTRONIC PLAYER STATIONS SOLD - Cost of electronic player stations
sold were $1.7 million in 1997 as compared to $.1 million in 1996, or an
increase of $1.6 million. Cost of electronic player stations sold associated
with related party sales were $1.2 million in 1997. The overall increase was due
to the higher number of electronic player stations sold in 1997, as discussed
above.

SALARIES AND WAGES - Salaries and wages increased $.6 million, or 34%
during 1997 as compared to 1996. Most of the increase relates to additional
personnel hired to assist in the installation, training and maintenance related
to the MegaMania network.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $1.9 million, or 60.3% during 1997 as
compared to 1996. The increase relates primarily to MegaMania
telecommunications, legal, operational, training and support costs.
Additionally, travel costs related to the sales, installation and maintenance
efforts for MegaMania contributed to the increase.

AMORTIZATION AND DEPRECIATION - Amortization and depreciation increased
$1.2 million, or 236% during 1997 as compared to 1996. The increase results
from MegaMania electronic player station and software programming costs
capitalized during 1997. The Company made $4.2 million in capital additions
during 1997.

INTEREST EXPENSE - Interest expense decreased $46,000 in 1997, primarily as
a result of interest expense recognized on the Bridge Debt related to financing
costs in 1996.

INCOME TAX BENEFIT - The Company recorded an income tax benefit of $452,000
for the year ended September 30, 1997 related to the utilization of its net
operating loss carryforward. In future years, the Company expects to recognize
income tax expense at the statutory rate (federal and state) of approximately
38%.

FUTURE EXPECTATIONS AND FORWARD LOOKING STATEMENTS

This Annual Report and the information incorporated herein by reference
contains various "forward-looking statements" within the meaning of Federal and
state securities laws, including those identified or predicated by the words
"believes," "anticipates," "expects," "plans," or similar expressions. Such
statements are subject to a number of uncertainties that could cause the actual
results to differ materially from those projected. Such factors include, but
are not limited to, those described under "Item 1. Description of Business -
Risk Factors". Given these uncertainties, readers of this Annual Report are
cautioned not to place undue reliance upon such statements.

-16-
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1997, the Company had unrestricted cash and cash
equivalents of $2.4 million, a $.9 million increase from September 30, 1996.
During the year ended September 30, 1997, $.7 million of cash was used in
operations versus $.3 million in 1996. The change is primarily due to an
increase in accounts and notes receivable, partially offset by an increase in
amortization and depreciation and an increase in net income. The Company used
$4.2 million in investing activities in 1997, almost entirely for the addition
of $4.2 million to fixed assets, consisting primarily of software development
for MegaMania and hardware for MegaMania player stations and game operation.
Financing activities which funded the investing activities consisted of a
private placement of stock in November 1996 which generated $2.1 million in
net cash proceeds, as more fully discussed below. In connection with the
November placement and the prior year Bridge Debt placement, the Company issued
2,042,143 warrants to purchase common stock at $8.00 per warrant, including
523,310 warrants issued to the placement agent in the transactions (250,000 of
these warrants were exercised during the current year, generating another $2.0
million in proceeds). In addition, another 305,000 warrants were exercised
during the current year generating $1.0 million in cash proceeds and $.7 million
in notes receivable from stockholders. Working capital at September 30, 1997
was $3.9 million.

In November 1996, the Company completed a $3.4 million private placement of
its common stock wherein the purchasers acquired for $3.00 one share of common
stock and a five-year warrant to acquire another share of common stock for $8.00
(a "Class A Warrant"). In the November placement, 1.2 million shares were sold
and 1.5 million warrants were issued, including 350,000 "Class B" warrants to
the placement agent in the transaction. After November 1997, each Class A
warrant is redeemable by the Company for $.10 if and when the Company's common
stock price is greater than $12.00 for 20 consecutive trading days. After
February 1999, each Class B warrant may be redeemed by the Company for $.10 when
the Company's common stock price is greater than $12.00 for 20 consecutive
trading days.

The November placement generated net cash proceeds of approximately $2.1
million and the conversion to common stock of the outstanding Bridge Debt of $.8
million. The proceeds of the November placement are being used by the Company to
expand its MegaMania network through the purchase and installation of additional
MegaMania player stations and related equipment.

The Company believes that its current operations can be sustained from
cash from operations. However, the purchase and installation of additional
electronic player stations to expand the Company's MegaMania operations will
require funding from external sources. Such funding is expected to be obtained
from proceeds from the sale of equipment subject to leases and the issuance of
additional equity. No assurances can be given that the Company will be able to
obtain such funding on a timely basis or upon terms satisfactory to the Company.

In June 1997, Graves Properties, Ltd., a limited partnership controlled by
Gordon T. Graves, the Company's Chairman and Chief Executive Officer, formed
Equipment Purchasing L.L.C. ("EPLLC") for the purpose of purchasing MegaMania
player stations from the Company and leasing the stations to Indian tribes. In
June 1997, EPLLC purchased approximately 100 MegaMania player stations from the
Company for a total purchase price of $637,347, payable in two promissory notes
of EPLLC, one a short term note in the principal amount of $400,000 bearing
interest at approximately 7% per annum, and the other a 12% note in the
principal amount of $237,347 due in two years, with interest only payable
monthly. In December 1997, EPLLC paid the short term note in full. The purchased
equipment has been leased to a tribe under terms where the Company receives a
percentage of the revenues generated by the equipment in consideration of
providing the equipment and the MegaMania game to the tribe. The Company and
EPLLC have agreed to a sharing of such percentage of revenues, with EPLLC
receiving a share equal to the greater of a fixed percentage amount or such
amount as is necessary to satisfy EPLLC's monthly payment on the purchase note
due to the Company and to amortize on a monthly basis the cash contributed to
EPLLC by Graves Properties, Ltd.

In September 1997, EPLLC purchased approximately 345 MegaMania player
stations from the Company for a total purchase price of approximately
$1,800,000, of which $990,000 was paid in cash in December 1997, and the balance
with a 12% note of EPLLC in the principal amount of $810,000 due in two years,
with interest only payable monthly. The purchased equipment has been leased to
five different tribes under terms where the Company receives a percentage of the
revenues generated by the equipment which is shared with EPLLC under terms
consistent with those of the June 1997 sale discussed above.

In connection with the sales of the electronic player stations to EPLLC, the
Company recorded revenues of $2,436,000 during the year ended September 30,
1997 with related costs of sales of $1,183,000.

As an inducement to consummate the June 1997 sale, the Company issued to
EPLLC 50,000 warrants to purchase common stock at an exercise price of $11.00
per share, which was the market value of the common stock on the date of
issuance. The estimated fair market value (as determined by an investment
banker) of these warrants is $2,500 and has been recorded as additional costs of
sales. As an inducement to consummate the September 1997 sale, the Company
issued to EPLLC 100,000 warrants to purchase common stock at an exercise price
of $13.38 per share which was the market value of the common stock on the date
of issuance. The estimated fair market value (as determined by an investment
banker) of these warrants is $5,000 and has been recorded as additional cost of
sales. The warrants will become exercisable one year after the date of issue and
expire five years after the date of issue. The warrants are redeemable by the
Company at $.10 per share if the closing price of the common stock for 20
consecutive trading days has been at least 150% of the applicable exercise
price.

In connection with the sale of the equipment, the Company also entered into
a two year management agreement with EPLLC whereby the Company is responsible
for proposing, establishing and modifying the MegaMania game procedures and the
related game accounting procedures; supervising and administering the rental
agreement with the Indian tribe; using its best efforts to re-lease the
purchased equipment to other parties if the present rental agreement is
terminated; collecting all rents due under the rental agreement; performing all
necessary repairs and maintenance, but not bearing any risk of loss for damages;
conducting necessary marketing; maintaining insurance; and paying all sales and
use taxes and performing other administrative functions. As compensation for
these services, the Company will receive $10.00 per electronic player station as
a re-leasing fee and $10.00 per electronic player station per month as a
management fee. The Company has the option to repurchase the equipment at its
then fair market value if after giving effect to the payment of such repurchase
price and the net rental income received by EPLLC, EPLLC has received a 20%
internal rate of return.

CONTINGENCIES

For information regarding contingencies, see "Item 3. Litigation."

INFLATION AND OTHER COST FACTORS

The Company's operations have not been, nor are they expected to be,
materially affected by inflation. However, the Company's operational expansion
is affected by the cost of hardware components, which are not considered to be
inflation sensitive, but rather sensitive to changes in technology and
competition in the hardware markets. In addition, the Company expects it will
continue to incur increased legal and other similar costs associated with
compliance with regulatory requirements and the uncertainties present in the
operating environment in which the Company conducts its business.

-17-
<PAGE> 18
ITEM 7. FINANCIAL STATEMENTS

The financial statements filed in this Annual Report on Form 10-KSB are
listed in the Index to Financial Statements appearing in Part III, Item 13.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

None

-18-
<PAGE> 19
PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The executive officers and directors of the Company, and their
respective ages and positions with the Company are as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gordon T. Graves 60 Chairman of the Board, Chief Executive Officer and Director

Larry D. Montgomery 59 President and Director

Daniel J. Sarnoff 41 Vice President and Director

Gordon T. Sjodin 56 Executive Vice President

Michael E. Newell 46 Vice President

Frederick E. Roll 54 Vice President, Secretary and Chief Financial Officer

Robert F. Lannert 42 Vice President

Gregory N. Stern 52 Director
</TABLE>

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

GORDON T. GRAVES has been Chairman of the Board and a director of the
Company since its inception, and has been Chief Executive Officer since
September 1994. Since December 1993 and from 1989 to 1990, Mr. Graves has been
the President of Graves Management, Inc., a management consultant and
investment company. From 1992 through December 1993, Mr. Graves was president
and Chief Executive Officer of Arrowsmith Technologies, Inc. ("Arrowsmith"), a
computer systems company. From 1991 to 1993, Mr. Graves was employed by KDT
Industries, Inc., a high-tech manufacturing and services company and an
affiliate of Arrowsmith, as, successively, Vice President of Corporate
Development and President. From 1987 to 1989, Mr. Graves was the Chairman of
the Board of Directors of Gamma International Ltd. (currently American Gaming
and Entertainment, Ltd., a company co-founded by him).

LARRY D. MONTGOMERY has been President and a director of the Company
since November 1992, having held the position of Chief Executive Officer from
November 1992 through September 1994. From December 1991 until December 1993,
Mr. Montgomery was also a private consultant to gaming companies. From 1989
through 1991, Mr. Montgomery was the President of Public Gaming Research
Institute, and from 1987 to 1989 was the Executive Director of the Kansas State
Lottery.

DANIEL J. SARNOFF has been Vice President of the Company since
February 1, 1997. Mr. Sarnoff served as a director of the Company from
September, 1994 until July 10, 1996, and was elected as a

-19-
<PAGE> 20
Director at the Company's annual meeting of shareholders on March 29, 1997.
Mr. Sarnoff was a Vice President of the Company from March, 1995 until July 10,
1996. Mr. Sarnoff also serves as President and Chief Executive Officer of TV
Games, Inc., a wholly owned subsidiary of the Company. Since 1993, Mr. Sarnoff
has been President and Chief Executive Officer of Pioneer Pictures which
develops and packages movies for television. From August, 1989 until May,
1990, Mr. Sarnoff served as President of RKO Express Pictures and from June,
1990 until May, 1993 Mr. Sarnoff was involved with production and marketing for
Bonanza Ventures Inc. From 1986-1990 Mr. Sarnoff founded and was Chief
Executive Officer of Super TVOLTA, which designs international television
lottery programs. Previously, Mr. Sarnoff was responsible for new business
development, NBC SPOT Sales, New York, and was a member of the RCA new business
task force.

GORDON T. SJODIN has been Vice President of the Company since
September 1994. In April 1994, Mr. Sjodin joined the Company's wholly-owned
subsidiary, MegaBingo, Inc., as its Vice President - Sales and served in such
position until September 1994, when he became President and Chief Executive
Officer of MegaBingo, Inc. From August 1989 until April 1994, Mr. Sjodin was
employed by AGE as, successively, Director, Sales and Marketing, and Director,
Corporate Development.

MICHAEL E. NEWELL has been Vice President of the Company since
September 1994. In April 1994, Mr. Newell joined MegaBingo, Inc. as its Vice
President-Chief Operating Officer and served in such position until November
1995, when he became Senior Vice President- of game operations for the Company.
From 1988 until April 1994, Mr. Newell was employed by AGE as Director,
MegaBingo operations.

FREDERICK E. ROLL has been Vice President and Secretary of the Company
since September 1994, having joined the Company in February 1994 as its acting
general manager and Chief Financial Officer. From November 1990 until joining
the Company, Mr. Roll was a certified public accountant in his own practice.
From 1983 until October 1990, Mr. Roll was Chief Financial Officer, Vice
President and an owner of Park Hill Nurseries, Ltd., a commercial nursery. Mr.
Roll has been the Chief Financial Officer of the Company since January 1997.

ROBERT F. LANNERT has been Vice President of the Company since August
1997. Mr. Lannert has been employed by the Company since June 1996 as
supervisor of its computer and data processing operations. From 1988 until
August 1995, Mr. Lannert was Director of data processing for Debartolo Racing
at Remington Park, Oklahoma City, Oklahoma , and from August 1995 until joining
the Company, Mr. Lannert was Vice President of Operations for Spector
Entertainment Group.

GREGORY N. STERN has been a director of the Company since December
1993. Mr. Stern has worked as an independent management consultant to The
Littleton Group, since leaving RKS Associates, a venture capital firm, in 1989,
where he served as a general partner.

All directors hold office until the next annual meeting of
shareholders or until their successors are elected and qualified. Officers are
appointed by the Board of Directors and serve at the discretion of the Board.

No family relationship exists between any of the directors or
executive officers of the Company.

-20-
<PAGE> 21
The Company has granted to Walsh Manning Securities, LLC, the
Placement Agent for certain recent private offerings of securities by the
Company, the right to have a representative attend meetings of the Company's
Board of Directors as an observer.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.

During the fiscal year ended September 30, 1997, four officers and one
director were delinquent in making filings under Section 16(a) of the
Securities Exchange Act of 1934, as amended. Larry D. Montgomery, President of
the Company, was delinquent in reporting three transactions, all of which
occurred in March 1997. During March 1997, Mr. Montgomery made a gift of
2,000 shares, exercised an employee stock option for 10,000 shares and disposed
of 10,000 shares. Frederick E. Roll, Vice President and Chief Financial
Officer of the Company, was delinquent in reporting two transactions, both of
which occurred in March 1997. During March 1997, Mr. Roll exercised an
employee stock option for 10,000 shares and disposed of 10,000 shares. Gordon
Sjodin, Vice President of the Company, was delinquent in reporting the
acquisition of 2,683 shares in June 1997. Gregory T. Stern, a Director of the
Company, was delinquent in reporting an option grant in February 1997 to
purchase 10,000 shares of Common Stock. Robert F. Lannert was elected a Vice
President of the Company in August 1997 and was delinquent in filing his
initial report on Form 3 for that month.

-21-
<PAGE> 22
ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE. The following table sets forth certain
information concerning the annual compensation for the Company's chief
executive officer and each executive officer earning more than $100,000 for the
fiscal year ended September 30, 1997 (the "named executive officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Long Term
Compensation
Awards
Securities
Compensation Annual Underlying
----------------- Options/ All Other
Financial Position Year Salary Warrants(#)(1) Compensation(2)
- ------------------ ---- -------- -------------- ------------
<S> <C> <C> <C> <C>
Gordon T. Graves 1997 $ 70,000 (3) $ --
Chairman of the 1996 65,423 -- 485
Board and Chief 1995 46,364(4) -- --
Executive Officer

Larry D. Montgomery 1997 115,160 10,000 --
President and Chief 1996 100,939 5,000 3,238
Operating Officer 1995 108,000 13,000 3,420

Gordon T. Sjodin 1997 120,360 5,000 --
Vice President 1996 115,669 4,445 3,309
1995 108,000 -- 13,206
</TABLE>

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

(1) Consists of shares of Common Stock underlying options granted pursuant
to the Company's 1994 Employee Stock Option Plan, 1996 Stock
Incentive Plan and its Salaried Employee Participation Plan, and
underlying warrants issued in lieu of compensation in July 1994 (see
"Stock Plans" below).
(2) Consists of contributions made by the Company on behalf of the named
executive officers to the Company's 401(k) plan.
(3) Does not include (i) shares of Common Stock underlying warrants issued
to Equipment Purchasing LLC, or (ii) shares of Common Stock issuable
upon the exercise by AGN Venturers of a put right. See Item 12.
Certain Relationships and Related Transactions.
(4) Such amount (except for $1,129) was contributed by Mr. Graves to the
Company.

OPTION/WARRANT GRANT TABLE. The following table sets forth
certain information regarding options and warrants granted by the Company
during its fiscal year ended September 30, 1997 to the named executive
officers.

-22-
<PAGE> 23
OPTION/WARRANT GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
Individual Grants

Number of % of Total
Securities Options/
Underlying Warrants
Options/ Granted to
Warrants Employee in Price Expiration
Name Granted (#) Fiscal Year Per Share Date
- ---- ----------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Gordon T. Graves(1) -- -- -- --

Larry D. Montgomery 5,000 0.9 $4.375 10/18/06
5,000 0.9 $5.688 2/20/07

Gordon T. Sjodin 5,000 0.9 $4.375 10/18/06
</TABLE>

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

(1) Does not include (i) shares of Common Stock underlying warrants issued to
Equipment Purchasing LLC, or (ii) shares of Common Stock issuable upon the
exercise by AGN Venturers of a put right. See Item 12. Certain Relationships
and Related Transactions.

AGGREGATE OPTION/WARRANT EXERCISES AND YEAR-END OPTION TABLE. The
following table sets forth certain information regarding the exercise of stock
options and warrants during the fiscal year ended September 30, 1997, and the
unexercised stock options and warrants held as of September 30, 1997, by the
named executive officers.

<TABLE>
<CAPTION>
Name No. of Value No. of Securities Value of Unexercised In-
Shares Realized Underlying Unexercised The-Money Options at
Acquired $ (1) Options at FY-End FY-End (2)
Upon -------- ---------------------- ------------------------
Exercise
-------- Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gordon T. Graves(3) -- -- -- -- -- --

Larry D.Montgomery(4) 10,000 $85,000 33,750 29,250 $389,189 $305,905

Gordon T. Sjodin(5) -- -- 34,875 19,625 $377,577 $198,983
</TABLE>

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

(1) Market value of underlying Common Stock on date of exercise, minus the
exercise price.
(2) Market value of the underlying Common Stock at fiscal year end, minus
the exercise price.
(3) Does not include (i) shares of Common Stock underlying warrants issued
to Equipment Purchasing LLC, or (ii) shares of Common Stock issuable
upon the exercise by AGN Venturers of a put right. See Item 12.
Certain Relationships and Related Transactions.
(4) Does not include warrants acquired for investment in January 1995 to
purchase 5,129 shares of Common Stock, of which 3,189 were exercised
in June 1997 at $2.75 per share.
(5) Does not include warrants acquired for investment in January 1995 to
purchase 4,623 shares of Common Stock, of which 2,683 were exercised
in June 1997 at $2.75 per share.

-23-
<PAGE> 24
STOCK PLANS. In November 1994, the stockholders of the Company
approved the Company's 1994 Employee Stock Option Plan (the "1994 Plan") and
the 1994 Director Stock Option Plan ("Director Plan"), under which options to
purchase an aggregate of 360,000 shares and 60,000 shares, respectively, of
Common Stock were reserved for issuance. As of September 30, 1997, options to
purchase 222,500 shares and 40,000 shares, respectively, of Common Stock were
outstanding under the 1994 Plan and the Director Plan. No options granted
under the Director Plan had been exercised. After the adoption of the Company's
1996 Stock Incentive Plan, no new options were granted under the 1994 Plan or
the Director Plan.

As of September 30, 1997, options for an aggregate of 45,000 shares
of Common Stock had been granted to Larry Montgomery under the Company's 1993
Salaried Employee Participation Plan, of which 10,000 shares were exercised in
March 1997 and 35,000 remained outstanding. Such Plan has been terminated and
no further options will be granted thereunder.

In August 1996, the Board of Directors adopted the Company's 1996
Incentive Stock Plan (the "1996 Plan") pursuant to which 274,320 shares of
Common Stock or Common Stock equivalents may be issued plus an additional
number of shares or share equivalents equal to 10% of the number of shares of
Common Stock issued by the Company after August 15, 1996 and prior to December
31, 2000.

The 1996 Plan will be administered by the Board of Directors of the
Company or by a committee of the Board designated for such purpose (the
"Administrator"). The Administrator will have authority, subject to the terms
of the 1996 Plan, to determine when and to whom to make grants under the 1996
Plan, the number of shares to be covered by the grants, the types and terms of
"Awards" to be granted under the 1996 Plan (which are stock based incentives
and may include incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock, performance shares and deferred stock
purchases), the exercise or purchase price of the shares of Common Stock and
Common Stock equivalents subject to the Awards, and to prescribe, amend and
rescind rules and regulations relating to the 1996 Plan.

As of September 30, 1997, there were outstanding under the 1996 Plan
options to purchase 277,000 shares of Common Stock , at exercise prices
ranging from $4.375 per share to $8.00 per share.

Under the terms of the 1996 Plan, Awards may be granted by the
Administrator in its discretion to key employees (including officers and
directors who are employees) of the Company and any of its subsidiary
corporations as well as to consultants, advisors and other independent
contractors to the Company.

The exercise price of stock appreciation rights and of non-qualified
or incentive stock options may not be less than 100% of the fair market value
of the underlying shares of Common Stock on the date of grant. Other Awards may
be granted at such price as the Administrator determines.

Shares of Common Stock purchased upon the exercise of an option are to
be paid for in cash or through the delivery of other shares of Common Stock
with a value equal to the total option price or in a combination of cash and
such shares, or with money lent by the Company to the optionee in compliance
with applicable law and on terms and conditions to be determined by the
Administrator.

-24-
<PAGE> 25
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of September 30,
1997, with respect to the number of shares of Common Stock and of Series A
Preferred Stock owned by (i) each person known by the Company to own
beneficially more than 5% of the outstanding shares of, respectively, the
Common Stock and the Series A Preferred Stock, (ii) each director of the
Company, (iii) each named executive officer, and (iv) all directors and
executive officers of the Company as a group:

<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------ ---------------

Number of Number of
Shares Shares
Beneficially Percent Beneficially Percent
Beneficial Owner Owned of Class(1) Owned of Class(1)
- ---------------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Gordon T. Graves 1,084,620(2) 22.5 80,175(3) 73.4%
1604 Crested Butte
Austin, Texas 78746

Larry D. Montgomery 90,684(4) 1.9 1,411 1.3
1920 S. West Union Road
Topeka, Kansas 66615

Gordon T. Sjodin 55,733(5) 1.2 1,272 1.1
5804 E. 104th Street
Tulsa, Oklahoma 74137

Daniel J. Sarnoff 48,500(6) 1.0 2,000 1.8
1861 Nichols Canyon
Los Angeles, California 90046

Gregory N. Stern 20,000(7) (8) -- --
130 Barton Road
Stow, Massachusetts 01775

All executive officers 1,353,553(9) 28.0 83,351 76.3
and directors as a group
(eight persons)
</TABLE>

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

(1) Based upon 4,783,297 shares of Common Stock and 109,192 shares of
Series A Preferred Stock outstanding.

(2) Consists of (i) 591,545 shares owned of record by Graves Properties,
Ltd., a limited partnership controlled by Mr. Graves, (ii) 51,000
shares owned by Graves Management, Inc., a corporation controlled by
Mr. Graves, (iii) 41,500 shares issued in October/December 1997 upon
the exercise of the AGN Venturers' put right, and (iv) 400,875 shares
issuable upon the conversion of the Series A Preferred Stock. Does
not include an aggregate of 90,600 shares as to which Mr. Graves
disclaims beneficial ownership, consisting of: (i) 44,100 shares
owned of record by Cynthia Graves, Mr. Graves' wife, and (ii) 46,500
shares beneficially owned by the Gordon Graves Grandchildren Trust.

-25-
<PAGE> 26
(3) Consists of (i) 5,175 shares owned of record by Mr. Graves, and (ii)
75,000 shares owned of record by Graves Properties, Ltd., a limited
partnership controlled by Mr. Graves.

(4) Consists of (i) 31,189 shares owned of record by Mr. Montgomery, (ii)
50,500 shares issuable upon the exercise of stock options that are
currently exercisable (40,250 shares) or are exercisable within the
next 60 days (10,250 shares), (iii) 1,940 shares issuable upon the
exercise of currently exercisable warrants, and (iv) 7,055 shares
issuable upon conversion of the Series A Preferred Stock.

(5) Consists of (i) 11,433 shares owned of record or beneficially by Mr.
Sjodin, (ii) 1,940 shares issuable upon the exercise of currently
exercisable warrants, (iii) 36,000 shares issuable upon the exercise
of stock options that are currently exercisable (34,875 shares) or
are exercisable within the next 60 days (1,125 shares), and (iv) 6,360
shares issuable upon conversion of the Series A Preferred Stock.

(6) Consists of shares issuable upon the exercise of currently
exercisable stock options.

(7) Consists of shares issuable upon the exercise of currently
exercisable stock options.

(8) Less than 1%.

(9) Consists of (i) 686,155 shares owned of record, (ii) 204,875 shares
issuable upon the exercise of stock options that are currently
exercisable (191,250 shares) or are exercisable within the next 60
days (13,625 shares), (iii) 4,268 shares issuable upon the exercise
of currently exercisable warrants, (iv) 41,500 shares issued to Mr.
Graves in October/December 1997 upon the exercise of the AGN
Venturers' put right, and (v) 416,755 shares issuable upon conversion
of Series A Preferred Stock.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In June 1997, Graves Properties, Ltd., a limited partnership
controlled by Gordon T. Graves, the Company's Chairman and Chief Executive
Officer, formed Equipment Purchasing L.L.C. ("EPLLC") for the purpose of
purchasing MegaMania player stations from the Company and leasing the stations
to Indian tribes. In June 1997, EPLLC purchased approximately 100 MegaMania
player stations from the Company for a total purchase price of $637,347,
payable in two promissory notes of EPLLC, one a short term note in the principal
amount of $400,000 bearing interest at approximately 7% per annum, and the other
a 12% note in the principal amount of $237,437 due in two years, with interest
only payable monthly. In December 1997, EPLLC paid the short term note in full.
The purchased equipment has been leased to a tribe under terms where the
Company receives a percentage of the revenues generated by the equipment in
consideration of providing the equipment and the MegaMania game to the tribe.
The Company and EPLLC have agreed to a sharing of such percentage of revenues,
with EPLLC receiving a share equal to the greater of a fixed percentage amount
or such amount as is necessary to satisfy EPLLC's monthly payment on the
purchase note due the Company and to amortize on a monthly basis the cash
contributed to EPLLC by Graves Properties, Ltd.

In September 1997, EPLLC purchased approximately 345 MegaMania player
stations from the Company for a total purchase price of approximately
$1,800,000, of which $990,000 was paid in cash in December 1997, and the balance
with a 12% note of EPLLC in the principal amount of $810,000 due in two years,
with interest only payable monthly. The purchased equipment has been leased to
five different tribes under terms where the Company receives a percentage of
the revenues generated by the equipment which is shared with EPLLC under terms
consistent with those of the June 1997 sale discussed above.

In connection with the sales of electronic player stations to EPLLC,
the Company recorded revenues of $2,436,000 during the year ended September 30,
1997 with related costs of sales of $1,183,000.

-26-
<PAGE> 27
As an inducement to consummate the June 1997 sale, the Company issued
to EPLLC 50,000 warrants to purchase common stock at an exercise price of $11.00
per share, which was the market value of the common stock on the date of
issuance. The estimated fair market value of these warrants is $2,500 and has
been recorded as additional cost of sales. As an inducement to consummate the
September 1997 sale, the Company issued to EPLLC 100,000 warrants to purchase
common stock at an exercise price of $13.38 per share which was the market value
of the common stock on the date of issuance. The estimated fair market value of
these warrants is $5,000 and has been recorded as additional cost of sales. The
warrants will become exercisable one year after the date of issue and expire
five years after the date of issue. The warrants are redeemable by the Company
at $.10 per share if the closing price of the common stock for 20 consecutive
trading days has been at least 150% of the applicable exercise price.

Because of uncertainties relating to the legality of MegaMania and
the ability of lenders to obtain rights to collateral located on Indian lands,
the Company has found it difficult to obtain equipment purchase financing on
terms acceptable to the Company. Accordingly, the Company believes that the
terms of the equipment sales to EPLLC are at least as favorable as could have
been obtained from more traditional sources of financing.

In August 1996, the Company sold AGN Venturers LLC to a group of
investors that included Mr. Graves as to a 10% interest in AGN Venturer LLC.
AGN Venturers LLC owned a 51% interest in AGN, the Company's proxy play
subsidiary. Mr. Graves purchased the 10% interest for $50,000 in cash and a
several guarantee (i.e., 10%) of a $336,000 note payable to the Company by AGN.
As part of the transaction, the Company and AGN Venturers LLC entered into a
Put and Call Agreement pursuant to which AGN Venturers LLC had the right to
"put" back to the Company the 51% interest in AGN and repay the $336,000 note
in exchange for 278,667 shares of Common Stock. The Put and Call Agreement
further provides that the Company would issue AGN Venturers LLC an additional
133,333 shares upon the payment by AGN Venturers LLC of a $400,000 note due the
former partner in AGN which was guaranteed by AGN. In October 1997, AGN
Venturers LLC exercised its "put" right with respect to the 278,667 shares and
in December 1997 paid the $400,000 note and exercised its "put" right with
respect to the 133,333 shares. As a result, since October 1997, AGN is 100%
owned by the Company. Pursuant to the exercise of the put rights by AGN
Venturers, Mr. Graves acquired 41,200 shares of Common Stock.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

THE FOLLOWING REPORTS AND FINANCIAL STATEMENTS ARE INCLUDED IN PART II,
ITEM 7- FINANCIAL STATEMENTS:

<TABLE>
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Consolidated Balance Sheet, September 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Consolidated Statements of Operations, Years Ended September 30,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Consolidated Statements of Changes in Stockholders Equity, Years Ended
September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Consolidated Statements of Cash Flows, Years Ended September 30,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>

-27-

<PAGE> 28
(a) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS ANNUAL REPORT:

<TABLE>
<CAPTION>
Exhibit No. Title Location
- ----------- ----- --------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation (5)
3.2 Bylaws (1)
10.1 Form of Integrated Gaming Services Agreement (1)
10.2 Contingent Grand Prize Risk Assumption
Agreement dated October 1, 1995, between
the Company and SCA Promotions, Inc. (2)
10.3 Lease Agreement dated October 10, 1996, between
the Company and Intervest-Southern Oaks LP (2)
10.4 Form of 1992-3 Warrant Certificate Issued by the Company (1)
10.5 Form of 1995 Warrant Certificate Issued by the Company (1)
10.6 Form of Bridge Warrant (2)
10.7 Form of Private Placement Warrant (2)
10.8 Form of Bridge Note (2)
10.9 Registration Rights Agreement dated
January 23, 1995 between the Company
and holders of certain Warrants (1)
10.10 Registration Rights Agreement dated January 23, 1995
between the Company and holders of certain Warrants (1)
10.11 Registration Rights Agreement among the Company and holders of
Bridge Warrants and Private Placement Warrants (2)
10.12 Stock Option Agreement dated October 24, 1992 between
the Company and Larry Montgomery (1)
10.13 1994 Employee Stock Option Plan (1)
10.14 1994 Director Stock Option Plan (1)
10.15 1996 Stock Incentive Plan (2)
10.16 Unit Purchase Agreement dated August 14, 1996 between
the Company and the AGN Investor Group (2)
10.17 Right of First Refusal Agreement dated August 14, 1996
between the Company and the AGN Investor Group (2)
10.18 Put/Call Agreement dated August 14, 1996
between the Company and AGN Venturer LLC (2)
10.19 Registration Rights Agreement between
the Company and AGN Venturer LLC (2)
10.20 Limited Liability Company Agreement of AGN Venturer LLC (2)
10.21 Limited Liability Company Agreement
of American Gaming Network LLC (2)
10.22 Certificate of Merger of American Gaming Network LP into
American Gaming Network LLC (2)
10.23 Form of Several Guaranty of AGN Investor Group (2)
10.24 Purchase Agreement dated June 25, 1996 between
the Company and Graff Pay-Per-View, Inc. ("Graff") (2)
10.25 Registration Rights Agreement between the Company and Graff (2)
10.26 Form of Stock Purchase Agreement between
the Company and Frank J. Skelly, III and Craig Gross (2)
10.27 Form of Registration Rights Agreement between
the Company and Frank J. Skelly, III and Craig Gross (2)
10.28 Placement Agency Agreement dated July 24, 1996 between
the Company and Walsh, Manning Securities, Inc. (2)
10.29 Placement Agency Agreement dated January 29, 1996
between the Company and G-V Capital Corp. (2)
</TABLE>

(b) There were no reports on FORM 8-K filed during the fourth quarter of fiscal
year 1997.

-28-
<PAGE> 29
<TABLE>
<S> <C> <C>
10.30 Press Release dated April 9, 1997 (5)
10.31 Memorandum of Understanding with NIGC (5)
10.32 July 10, 1996 letter from the NIGC to the Company (4)
10.33 April 9, 1997 letter from the NIGC to the Company (4)
10.34 May 12, 1997 letter from the NIGC to the Company (4)
10.35 Form of Amendment to Warrants (3)
10.36 July 23, 1997 Advisory Opinion of the NIGC (3)
10.37 Form of Class A Warrant (6)
10.38 Form of Class B Warrant (6)
10.39 Warrant Agreement dated November 12, 1996 between
the Company and Corporate Stock Transfer, as Warrant Agent (6)
10.40 Amendment to Warrant Agreement, dated July 18, 1997 (6)
11.1 Earnings Per Share Statement (7)
21.1 Subsidiaries of Registrant (7)
23.1 Consent of Coopers & Lybrand L.L.P. (7)
24.1 Power of Attorney (included on page II-8) (7)
27.1 Financial Data Schedule (7)
</TABLE>

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

(1) Indicates incorporated by reference to the Company's Form 10-KSB
filed with the Commission for the fiscal year ended September 30,
1994.
(2) Indicates incorporated by reference to the Company's Form 10-KSB
filed with the Commission for the fiscal year ended September 30,
1996.
(3) Indicates incorporated by reference to the Company's Registration
Statement on Form SB-2 filed with the Commission on July 3, 1997..
(4) Indicates incorporated by reference to the Company's Registration
Statement on Form S-3, filed with the Commission on June 3, 1997.
(5) Indicates incorporated by reference to the Company's Form 10-QSB
filed with the Commission for the quarter ended March 31, 1997.
(6) Incorporated by reference to the Company's registration statement on
Form 8-A, filed with the Commission on July 29, 1997.
(7) Filed herewith.

-29-
<PAGE> 30
POWER OF ATTORNEY

Know all men by these presents, that each person whose signature appears
below constitutes and appoints Gordon T. Graves and Frederick E. Roll, and
each of them singly, his or her true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him or her and in his
or her name, place and stead, in any and all capacities (including his or her
capacity as a director or officer of Multimedia Games, Inc.) to sign any and
all amendments (including post-effective amendments) to this Annual Report, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.

SIGNATURES

In accordance with 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 hereunto duly authorized.

MULTIMEDIA GAMES, INC.

Dated: December 29, 1997 By: /S/ Frederick E. Roll
-------------------------------
Frederick E. Roll
Vice President - Controller and
Chief Financial Officer

-30-

<PAGE> 31
In accordance with the requirements of the Securities Exchange Act of
1934, this Annual Report has been signed by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.

<TABLE>
<S> <C> <C> <C>
/S/ Gordon T. Graves Chairman of the Board
--------------------------------- Chief Executive
Gordon T. Graves Officer and Director December 29, 1997

/S/ Larry Montgomery President and Chief
--------------------------------- Operating Officer
Larry Montgomery and Director December 29, 1997

/S/ Frederick E. Roll Vice President and
--------------------------------- Controller December 29, 1997
Frederick E. Roll

/S/ Daniel J. Sarnoff Vice President and
--------------------------------- Director December 29, 1997
Mike Howard

/S/ Gregory Stern Director December 29, 1997
---------------------------------
Gregory Stern
</TABLE>

SUPPLEMENTAL INFORMATION TO BE
FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE EXCHANGE ACT BY
NON-REPORTING ISSUERS

The Registrant has not sent to its security holders any annual report
covering the Registrant's last fiscal year, or any proxy statement, form of
proxy or other proxy soliciting material with respect to any annual or meeting
of security holders. In connection with its 1998 annual meeting of
stockholders, the Company anticipates sending its 1997 annual report and proxy
materials to security holders.

-31-
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders
Multimedia Games, Inc.

We have audited the accompanying consolidated balance sheet of
Multimedia Games, Inc. and Subsidiaries as of September 30, 1997, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the two years in the period ended September 30,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
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 consolidated financial
position of Multimedia Games, Inc. and Subsidiaries as of September 30, 1997
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Tulsa, Oklahoma
December 23, 1997

-32-
<PAGE> 33
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
1997
------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,380,000
Accounts Receivable:
Trade, net of allowance for doubtful accounts
of $123,000 1,443,000
Other 123,000
Inventory 511,000
Prepaid expenses 61,000
Notes receivable 286,000
Notes receivable - related parties 1,427,000
Due from AGN LLC 381,000
Deferred tax asset 79,000
------------
Total current assets 6,691,000
------------

Restricted cash and cash equivalents 1,783,000
Notes receivable - related party 1,010,000
Property and equipment, net 4,970,000
Other assets 95,000
Deferred tax asset - non-current 379,000
Goodwill, net 472,000
------------
Total assets $ 15,400,000
============
</TABLE>

Continued

-33-
<PAGE> 34
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997

Continued

<TABLE>
<CAPTION>
1997
------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of long-term debt $ 395,000
Accounts payable and accrued expenses 1,853,000
Prize fulfillment fees payable 597,000
------------
Total current liabilities 2,845,000
------------

Long-term debt 675,000
Other long-term liabilities 1,603,000

Commitments and Contingencies (Note 11)

Stockholders' equity:
Preferred stock, Series A, $.01 par value, 2,000,000
shares authorized, 109,192 shares issued
and outstanding 1,000
Common stock, $.01 par value, 25,000,000 shares
authorized, 4,817,296 shares issued and
4,783,297 shares outstanding 48,000
Additional paid-in capital 12,297,000
Stockholder notes receivable (596,000)
Treasury stock, 33,999 shares at cost (87,000)
Accumulated deficit (1,386,000)
------------
Total stockholders' equity 10,277,000
------------

Total liabilities and stockholders' equity $ 15,400,000
============
</TABLE>

See notes to consolidated financial statements.

-34-
<PAGE> 35
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Gaming revenue $ 34,011,000 $ 21,653,000
Electronic player station sales 808,000 360,000
Electronic player station sales - related party 2,436,000 --
Electronic player station lease revenue 1,786,000 64,000
Other 11,000 810,000
------------ ------------

Total revenues 39,052,000 22,887,000
------------ ------------

Operating costs and expenses:
Bingo prizes and related costs 9,381,000 9,697,000
Allotments to hall operators 17,902,000 7,596,000
Cost of electronic player stations sold 538,000 55,000
Cost of electronic player stations sold -
related party 1,183,000 --
Salaries and wages 2,227,000 1,659,000
Selling, general and administrative expenses 5,049,000 3,149,000
Amortization and depreciation 1,775,000 529,000
------------ ------------

Total operating costs and expenses 38,055,000 22,685,000
------------ ------------

Operating income 997,000 202,000

Interest income 29,000 51,000
Interest expense (167,000) (213,000)
------------ ------------

Income before income taxes 859,000 40,000
Income tax benefit 452,000 --
------------ ------------
Net income $ 1,311,000 $ 40,000
============ ============

Earnings (loss) per common and equivalent share,
4,459,176 and 2,872,258 shares, respectively $ .27 $ (.04)
============ ============

Earnings (loss) per common and equivalent share
assuming full dilution, 6,462,188 and 2,872,258
shares, respectively $ .20 $ (.04)
============ ============
</TABLE>

See notes to consolidated financial statements.

-35-
<PAGE> 36
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996

Preferred Stock Common Stock
--------------------- -----------------------------
Number Number
of of
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, September 30, 1995 136,318 $ 1,000 1,839,948 $ 18,000

Exercise of common stock warrants -- -- 28,332 --
Sale of common stock -- -- 699,375 8,000
Exercise of common stock warrants
by Chairman -- -- 291,545 3,000
Purchase of treasury stock -- -- -- --
Issuance of treasury stock -- -- -- --
Redemption of preferred stock (2,000) -- -- --
Preferred stock dividends ($1.10 per
preferred share) -- -- -- --
Value of warrants associated with Bridge
Notes -- -- -- --
Net income -- -- -- --
----------- ----------- ----------- -----------
Balance, September 30, 1996 134,318 1,000 2,859,200 29,000

Exercise of common stock warrants 625,216 6,000
Sale of common stock 1,159,500 12,000
Exercise of Stock Options 47,750 --
Conversion of Preferred stock to Common stock (25,126) -- 125,630 1,000
Payment of Shareholders Notes
Registration Fees and Offering Costs
Preferred stock dividends ($1.10 per
preferred shares)
Value of options and warrants associated
with consulting services -- -- -- --
Value of warrants associated with
related party equipment sales -- -- -- --
Net Income -- -- -- --
----------- ----------- ----------- ----------
Balance, September 30, 1997 109,192 $ 1,000 4,817,296 $ 48,000
=========== =========== =========== ==========
</TABLE>

Additional Stockholder Treasury/Stock Total
Paid-in Notes Unearned Accumulated Stockholders'
Capital Receivable Compensation Deficit Equity
---------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1995 $ 4,765,000 $ (200,000) $ -- $ (2,465,000) $ 2,119,000

Exercise of common stock warrants 50,000 -- (14,000) -- 36,000
Sale of common stock 941,000 -- -- -- 949,000
Exercise of common stock warrants
by Chairman 580,000 (583,000) -- --
Purchase of treasury stock -- 200,000 (808,000) -- (608,000)
Issuance of treasury stock (47,000) (688,000) 735,000 -- --
Redemption of preferred stock (20,000) -- -- -- (20,000)
Preferred stock dividends ($1.10 per
preferred share) -- -- -- (149,000) (149,000)
Value of warrants associated with Bridge
Notes 27,000 -- -- -- 27,000
Net income -- -- -- 40,000 40,000
----------- ----------- ----------- ----------- -----------

Balance, September 30, 1996 6,296,000 (1,271,000) (87,000) (2,574,000) 2,394,000

Exercise of common stock warrants 3,154,000 (13,000) -- -- 3,147,000
Sale of common stock 2,800,000 -- -- -- 2,812,000
Exercise of Stock Options 138,000 -- -- -- 138,000
Conversion of Preferred stock to Common stock (1,000) -- -- -- --
Payment of Shareholders Notes -- 688,000 -- -- 688,000
Registration Fees and Offering Costs (108,000) -- -- -- (108,000)
Preferred stock dividends ($1.10 per
preferred share) -- -- -- (123,000) (123,000)
Value of options and warrants associated
with consulting services 10,000 -- -- -- 10,000
Value of warrants associated with
related party equipment sales 8,000 -- -- -- 8,000
Net Income -- -- -- 1,311,000 1,311,000
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1997 $12,297,000 $ (596,000) $ (87,000) $(1,386,000) $10,277,000
=========== =========== =========== =========== ===========
</TABLE>

See notes to the consolidated financial statements.

-36-
<PAGE> 37
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,311,000 $ 40,000
Adjustments to reconcile net income to cash
provided by (used for) operating activities:
Amortization and depreciation 1,775,000 529,000
Deferred tax benefit (458,000) --
Software license fee -- (500,000)
Other non-cash expenses 119,000 84,000
(Increase) decrease in:
Accounts receivable (1,274,000) (367,000)
Notes receivable (286,000) --
Notes receivable - related party (2,437,000) --
Inventory (153,000) (358,000)
Prepaid expenses 31,000 --
Due from AGN LLC (144,000) (75,000)
Increase (decrease) in:
Accounts payable and accrued expenses 561,000 361,000
Hall's share of surplus (120,000) --
Prize fulfillment fees payable 277,000 --
Other long-term liabilities 231,000 --
------------ ------------
Net cash provided by (used for) operating activities (567,000) (286,000)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (4,104,000) (1,294,000)
Increase in cash and restricted cash balances (249,000) --
------------ ------------
Net cash provided by (used for) investing activities (4,353,000) (1,294,000)
------------ ------------
Cash flows from financing activities:
Proceeds from sale of common stock including collection
of shareholder notes 5,877,000 985,000
Proceeds from debt 658,000 1,062,000
Principal payments of debt (620,000) (171,000)
Payment of preferred stock dividends (123,000) (149,000)
Purchase of treasury stock -- (10,000)
Financing costs -- (166,000)
------------ ------------
Net cash provided by (used for ) financing activities 5,792,000 1,551,000
------------ ------------
Net change in cash and cash equivalents 872,000 (29,000)

Cash and cash equivalents, beginning of period 1,508,000 1,537,000
------------ ------------

Cash and cash equivalents, end of period $ 2,380,000 $ 1,508,000
============ ============
Supplemental disclosure of interest paid: $ 167,000 102,000
============ ============
</TABLE>

See notes to consolidated financial statements

-37-

<PAGE> 38
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OPERATIONS - Multimedia Games, Inc. and its subsidiaries (the
"Company") provides satellite linked, high stakes bingo games and
interactive high speed bingo games played on interconnected electronic
player stations to participating bingo halls owned primarily by
American Indian tribes located throughout the United States. The
Company also provides proxy play services for its MegaBingo and
MegaCash games to bingo players located off Indian lands through a
subsidiary's 49% interest in American Gaming Network L.L.C. ("AGN").
To date, revenues from proxy play bingo have been insignificant.

In August 1995, the Company introduced MegaMania, a high-speed bingo
game developed by the Company that allows customers to purchase bingo
cards and to play bingo on an interactive electronic player station
that requires rapid decisions and presents game results in a
fast-action color video format featuring graphics and animation
accompanied by sound. The stations are interconnected with other
stations at participating bingo halls through the Company's computer
network, thus allowing players to compete against one another to win a
common pooled prize.

The Company's games are currently designed to be operated as Class II
games as defined by the Indian Gaming Regulatory Act of 1988 ("IGRA").
IGRA classifies gaming on Indian lands into three classes. Class I
gaming includes traditional Indian social and ceremonial games and is
regulated only by the tribes. Class II gaming includes bingo,
pull-tabs, lotto, punch boards, tip jars, instant bingo, certain card
games played under limited circumstances and other games similar to
bingo if those games are played at the same location where bingo is
played. Class III gaming consists of all forms of gaming that are not
Class I or Class II, such as video casino games, slot machines, most
table games and keno. (See Note 11.)

-38-
<PAGE> 39
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

CONSOLIDATION PRINCIPLES - The financial statements include the
activities of Multimedia Games, Inc. and its three wholly owned
subsidiaries, MegaBingo, Inc. ("MBI"), Multimedia Creative Services,
Inc. and TV Games, Inc. ("TV Games").

The financial statements also include TV Games' allocable share of
income or losses (to the extent of the Company's investment basis)
from AGN, which is accounted for under the equity method. In October
1997, the Company acquired the remaining 51% interest in AGN (see Note
3).

CASH AND CASH EQUIVALENTS - For purposes of the statement of cash
flows, the Company considers all highly liquid debt instruments with
remaining maturities when purchased of three months or less to be cash
equivalents.

RESTRICTED CASH AND CASH EQUIVALENTS - Restricted cash and cash
equivalents include $256,000 held in reserve for MegaBingo prizes
under the provisions of the Integrated Services Agreements with the
tribes and $1,527,000 representing the present value of investments
held by the Company's prize fulfilment firm related to outstanding
jackpot prize winner annuities.

INVENTORY - Inventory consists primarily of computer equipment
components for MegaMania player stations and completed MegaMania
player station units. Inventory is carried at the lower of cost,
(first-in, first-out) or market.

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
The cost of property and equipment is depreciated over its estimated
useful life generally using the straight line method. Equipment under
leases which convey ownership to the leasee at the end of the lease
term is depreciated over the shorter of the lease term or three years.
Predominately all of the Company's property and equipment is
depreciated over two to five years. Sales and retirements of
depreciable property are recorded by removing the related cost and
accumulated depreciation from the accounts. Gains or losses on sales
and retirements of property are reflected in operations.

Under the provisions of the Integrated Services Agreements with the
tribes, any MegaBingo satellite dishes and monitoring equipment
purchased and placed at the hall locations revert to the ownership of
the tribe at the end of the agreement. This provision does not apply
to MegaMania related equipment.

-39-
<PAGE> 40
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

GOODWILL--The amount paid for the assets of MegaBingo plus the
liabilities assumed in excess of the fair value of the identifiable
assets purchased has been recorded as goodwill (see Note 2). The
Company amortizes goodwill over 20 years using the straight-line
method. Goodwill is reported net of accumulated amortization in the
accompanying financial statements. Accumulated amortization amounted
to $75,000 and $48,000 at September 30, 1997 and 1996, respectively.

The Company continually re-evaluates the carrying amount of goodwill
as well as the amortization period to determine whether current events
and circumstances warrant adjustments to the carrying value and/or
estimates of useful lives. Estimated future pre-interest cash flows
associated with the assets of the MegaBingo business is used for this
evaluation. At this time, the Company believes that no impairment of
goodwill has occurred and that no reduction of the estimated useful
life is warranted.

INCOME TAXES - The Company applies the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting
for Income Taxes." Under SFAS No. 109, deferred tax liabilities or
assets arise from differences between the tax basis of assets or
liabilities and their basis for financial reporting, and are subject
to tests of realizability in the case of deferred tax assets. The
amount of deferred tax liabilities or assets is calculated by applying
the provisions of enacted tax laws to determine the amount of taxes
payable or refundable currently or in future years. A valuation
allowance is provided for deferred tax assets to the extent
realization is not judged to be more likely than not.

TREASURY STOCK - The Company utilizes the cost method for accounting
for its treasury stock acquisitions and dispositions.

ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Examples include provisions for bad debts and inventory obsolescence,
asset lives of equipment, deferred tax assets, and the provision for
and disclosure of litigation and loss contingencies. Actual results may
differ from these estimates in the near term.

RECLASSIFICATIONS - Certain 1996 balances have been reclassified to
conform to 1997 reporting.

INCOME (LOSS) PER COMMON SHARE - Income (loss) per common share is
computed on the basis of the weighted average shares of common stock
outstanding for the years ended September 30, 1997 and 1996. Options
and warrants are common stock equivalents and, along with contingent
stock issuances, are considered in the computation of income per
common share using the treasury stock method when they are dilutive.
To determine income per common share, net income is adjusted for
preferred stock dividends, whether paid or not.

-40-
<PAGE> 41
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

REVENUE - Revenues from the operation of the MegaBingo, MegaMania and
other bingo games are recognized as the gaming session for which the
cards were purchased occurs. MegaMania revenues are recorded net of
prizes awarded.

Lease revenues from the lease of MegaMania player stations are
generally based on a percentage of revenue generated by the player
stations and are recognized as the revenues are generated by the
player stations. See Note 13.

Revenues from the sale of electronic player stations are recorded when
the player stations are delivered to the purchaser.

STOCK BASED COMPENSATION - The Company applies Accounting Principles
Board Opinion No. 25 in accounting for its stock option plans. Under
this standard, no compensation expense is recognized for grants of
options which include an exercise price equal to or greater than the
market price of the stock on the date of grant. Accordingly, based on
the Company's grants in 1997 and 1996, no compensation expense has been
recognized.

2. MEGABINGO TRANSACTIONS; INTEGRATED SERVICES AGREEMENTS

In December 1994, MBI purchased substantially all of the assets used by
American Gaming and Entertainment Ltd. (formerly Gamma International,
Ltd. and referred to herein as "AGE") in its bingo gaming activities
(the "AGE Assets"), including the assets used in the conduct of the
MegaBingo and MegaCash games. The AGE Assets did not include certain
Integrated Services Agreements between AGE and various Indian tribes.
Most of the AGE Integrated Services Agreements have been replaced by
Integrated Services Agreements between the Company and the applicable
Indian tribe. The Company continues to service those AGE Integrated
Services Agreements that have not been replaced (the "AGE Contracts")
pursuant to a services agreement with AGE (the "AGE Services
Agreement") for a fee of 100% of the net cash flow generated by the AGE
Contracts plus expenses incurred by the Company. Since December 1994,
the revenues and expenses of the MegaBingo games serviced under the AGE
Contracts have been reflected in the financial statements at their
gross amounts and not netted and recorded as service fees. The AGE
Services Agreement is scheduled to expire in April 1999.

Virtually all of the Company's revenues are derived from the
Integrated Services Agreements with various tribes. The Company, in
its name or in the name of AGE, has written agreements with
approximately 50 American Indian tribes that provide the Company with
the exclusive right to conduct bingo operations on their respective
Indian lands. Approximately 20 of these agreements were

-41-
<PAGE> 42
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

renewed for five (5) year terms in 1995 and half of the remaining
contracts have unexpired terms of between two and three years. The
remaining contracts are being continued on a month to month basis.

Approximately 45% and 43% of revenues (inclusive of MegaBingo and
MegaMania revenues) during the years ended September 30, 1997 and
1996, respectively, were derived from halls operated by four tribes,
including 26% derived from one tribe in 1997.

3. AMERICAN GAMING NETWORK

American Gaming Network LLC and its predecessors ("AGN") was originally
formed by the Company and a 50% third party partner in July 1995 to
pursue the development of gaming opportunities on the Internet.

In July 1996, the Company purchased the 50% interest of the third
party partner through a newly formed entity ("AGN Venturers LLC"), for
consideration that included a $400,000 note payable by the new
entity to the third party partner (the " $400,000 Note).
Contemporaneously, the Company sold AGN Venturers LLC to a group of
investors ("Investors"), for $100,000, the agreement of the Investors
to contribute $400,000 to AGN and a several guarantee of each Investor
of AGN's note payable to the Company in the amount of $336,000, which
evidenced working capital advances previously made to AGN by the
Company. One of the Investors is Gordon T. Graves, the Company's
Chairman of the Board and Chief Executive Officer, who acquired 10% of
AGN Venturers LLC. At September 30, 1997, in addition to the $336,000
note, AGN owed the Company $45,000. The $336,000 note was paid off in
October 1997.

Simultaneously with the sale of AGN Venturers LLC,the Company and AGN
Venturers LLC entered into a Put and Call Agreement pursuant to which
AGN Venturers LLC had the right to "put" back to the Company its 51%
interest in AGN and repay the $336,000 note in exchange for 278,667
shares of Common Stock. The Put and Call Agreement further provides
that the Company would issue AGN Venturers LLC an additional 133,333
shares upon the payment by AGN Venturers LLC of a $400,000 note due the
former partner in AGN which was guaranteed by AGN. In October 1997,
AGN Venturers LLC exercised its "put" right with respect to the 278,667
shares and in December 1997 paid the $400,000 note and exercised its
"put" right with respect to the 133,333 shares. As a result, beginning
in the first quarter of fiscal 1998, AGN is 100% owned by the Company.
As a result of the exercise of the put rights by AGN Venturers, Mr.
Graves acquired 41,200 shares of Common Stock.

4. DISTRIBUTION AND LICENSING AGREEMENT WITH NETWORK GAMING

In December 1995, the Company entered into distribution and licensing
agreements with Network Gaming International Corporation (formerly AI
Software, Inc.; "Network Gaming"), a company with its principal
offices located in Vancouver, British Colombia.

-42-
<PAGE> 43
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

For $500,000, Network Gaming purchased and was appointed the exclusive
distributor of the Company's MegaBingo and MegaCash systems and other
game software for use in Canada and China. The revenue from the sale
of the license agreement is reflected as other revenue in the
accompanying financial statements for the year ended September 30,
1996.

The Company purchased (for $500,000) and was appointed the exclusive
distributor of all Network Gaming bingo and other game software,
including future games that are being developed or will be developed,
for use in the United States of America Native Indian market,
including the "off reservation" market, and the State of Texas. The
cost of the license is reflected in property and equipment and is
being amortized over five years, the term of the agreement.

5. PROPERTY AND EQUIPMENT

At September 30, 1997, the Company's property and equipment consisted
of the following:

<TABLE>
<S> <C>
Gaming and satellite equipment $ 5,020,000
Software costs 2,176,000
Other 101,000
-----------
Total property and equipment 7,297,000
Less accumulated depreciation (2,327,000)
-----------

Property and equipment, net $ 4,970,000
===========
</TABLE>

Depreciation expense amounted to $1,748,000 and $479,000 during the
years ended September 30, 1997 and 1996, respectively. The net book
value of capitalized software costs at September 30, 1997, was
$1,770,000. Depreciation expense related to software cost amounted to
$310,000 and $159,000, during the years ended September 30, 1997 and
1996, respectively.

6. BRIDGE DEBT

In August 1996, Bridge Debt was raised in anticipation of the Company's
private placement of equity securities which was completed in November
1996 (the "November Placement"). The Bridge Debt bore interest at
10.5%, was due in one year and was mandatorily redeemable from the
proceeds of the November Placement. (see Note 9). In connection with
the Bridge Debt, redeemable warrants representing the right to purchase
173,310 shares of common stock were issued to the placement agent (the
"Class B Bridge Warrants") and redeemable warrants representing the
right to purchase 360,000

-43-
<PAGE> 44
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

shares of common stock were issued to the purchasers of the Bridge
Debt (the "Class A Bridge Warrants and, together with the Class B
Bridge Warrants, the "Bridge Warrants"). Each Class A Bridge Warrant
represents the right to purchase one share of common stock at $8.00
per share (subject to adjustments) and has identical terms as the
Class A Warrants issued in the November Placement. Each Class B
Bridge Warrant represents the right to purchase one share of common
stock at $8.00 per share (subject to adjustments) and has identical
terms as the Class B Warrants issued in the November Placement. The
value assigned to the Bridge Warrants as well as the remainder of the
Bridge Debt issuance costs have been treated as an adjustment to the
effective interest rate of the Bridge Debt. Approximately $84,000 in
interest cost was recognized during 1996 related to the value of the
Bridge Warrants and issuance costs and an additional $40,000 was
recognized in the year ending September 30, 1997. The Bridge Debt was
converted into common stock and warrants in connection with the
November Placement.

7. LONG-TERM DEBT

In August 1995, the Company entered into a Revolving Credit and Term
Loan Agreement (the "Credit Agreement"), which as amended, provided
for a term loan in the amount of $837,000 and a revolving line of
credit. The proceeds of the original loan along with 12,500 shares of
the Company's Series A preferred stock were used to satisfy debt
incurred in the purchase of the AGE Assets (see Note 2). Principal of
$9,510 and interest are payable monthly until October 31, 1998, at
which time all outstanding principal and interest are due. The
interest rate is the Chase Manhattan Bank, N.A. prime rate plus 1/2%
(9% at September 30, 1997). There was $675,000 outstanding on the term
loan at September 30, 1997 and there were no outstanding balances on
the revolver at September 30, 1997.

The term loan is collateralized by substantially all of the tangible
and intangible assets of Multimedia Games, Inc. and MBI. The debt is
also guaranteed by the Company's Chairman/Chief Executive Officer.
The Credit Agreement contains covenants which, among other things,
require the Company to maintain a minimum net worth, debt service
coverage ratio and gross gaming revenues, all as defined by the Credit
Agreement.

The remaining $395,000 of long-term debt consists primarily of debt
used to finance the purchase of electronic gaming player station
components. The debts are due in monthly payments plus interest at
approximately 12%. The debts are collateralized by the equipment
purchased.

Based upon the borrowing rates currently available to the Company for
bank borrowings with similar terms, the Company believes that the
carrying amount of these borrowings at September 30, 1997,
approximates fair value.

At September 30, 1997, aggregate future maturities of long-term debt
are as follows: 1998 - $395,000; 1999 - $203,000 and 2000 - $472,000.

-44-
<PAGE> 45
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

8. INCOME TAXES

The provision for income taxes (benefit) consisted of the following
for the years ended September 30, 1997 and 1996:

<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current:
Federal $ -- $ 32,000
State -- 5,000
Deferred (452,000) (37,000)
----------- -----------

Net income tax expense
(benefit) $ (452,000) $ --
=========== ===========
</TABLE>

A reconciliation of the expected income tax expense (benefit) based
upon the federal statutory rate of 34% and the taxes reflected in
tax expense is as follows for the years ended September 30, 1997 and
1996:

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Expected federal income
tax expense $ 292,000 $ 14,000
Nondeductible meals 15,000 13,000
Use of net operating losses (307,000) --
Change in valuation allowance
of net operating losses (452,000) (27,000)
------------ ------------
Net income tax expense (benefit) $ (452,000) $ --
============ ============
</TABLE>

Differences between the book value and the tax basis of the Company's
assets and liabilities and net operating losses results in deferred
tax assets and liabilities as follows:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax asset - current:
Accounts receivable allowance $ 47,000 $ 29,000
Vacation accrued 32,000 23,000
Valuation allowance -- (52,000)
-------- --------
Net current deferred taxes $ 79,000 $ --
======== ========
</TABLE>

-45-
<PAGE> 46

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

<TABLE>
<S> <C> <C>
Deferred tax asset - noncurrent:
Net operating losses $ 629,000 $ 749,000
Tax credit carryforward 6,000 --
Deferred tax liability - noncurrent:
Goodwill (10,000) (6,000)
Depreciation (246,000) --
------------- -------------

379,000 743,000

Valuation Allowance -- (743,000)
------------- -------------

Net noncurrent deferred taxes $ 379,000 $ --
============= =============
</TABLE>

Based on the generation of taxable income before the utilization of the
net operating loss carryforward in the past three years, the Company
has removed the valuation allowance for all deferred tax assets in
excess of deferred tax liabilities, under the assumption that it is
more likely than not that future taxable income will be generated to
realize the deferred tax assets.

At September 30, 1997, the Company's net operating loss carryforward
for income tax purposes was approximately $1,654,000. Because of the
private placement of equity in November 1996, the Company's use of its
net operating loss carryforwards will be limited to approximately
$800,000 in any one taxable year. The Company's net operating loss
carryforwards expire in 2008 through 2010.

9. STOCKHOLDERS' EQUITY

Series A Preferred Stock

During fiscal year 1995, the Company amended its articles of
incorporation to provide for the issuance of up to 2,000,000 shares of
preferred stock in such series and with such rights and preferences as
may be approved by the Board of Directors. In January 1995, the Board
of Directors approved a Series A preferred stock which is cumulative,
voting and convertible. The Series A preferred stock is subject to
redemption at the election of the Company for $10 per share.

During 1996, 2,000 outstanding Series A preferred shares were canceled
in exchange for a combination of the cancellation of amounts owed to
the Company and cash. During 1997, 25,126 outstanding Series A
preferred shares were converted into 125,630 shares of the Company's
common stock.

Commencing in January 1997, the Series A preferred stock is
convertible into common stock at the rate of five shares of common for
each share of Series A preferred stock. Based on the number of shares
of Series A preferred stock outstanding at September 30, 1997, an
additional 545,960 shares of common stock would be issued if a full
conversion were to occur. Of the Series A preferred stock
outstanding, 80,175 shares (convertible into 400,875 common shares)
are owned by or under the control of the Company's Chairman/Chief
Executive Officer.

The Series A preferred stock has a liquidation preference over the
Company's common stock equal to $10 per share of Series A preferred
stock, or $1,092,000 in the aggregate at September 30, 1997. The
holders of the Series A preferred stock are entitled to a cumulative
preferred dividend, payable

-46-
<PAGE> 47
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

quarterly, at the rate of $1.10 per share per annum. In the event the
Company remains in arrears for more than two quarters, holders of the
Series A preferred stock voting as a class are entitled to elect a
majority of the Company's Board of Directors.

In October 1997, an additional 18,403 shares of Series A preferred
stock was converted into 92,615 shares of common stock.

Common Stock

In February and March 1996, the Company completed a private placement
(the March Placement) of 589,375 shares of its common stock at a price
of $2.00 per share, including 39,875 shares issued to the placement
agent for the transaction. The March Placement generated net proceeds
after offering costs of approximately $949,000. The shares sold were
subject to a provision in a registration rights agreement which
required the Company to issue 1/10th of a share for each share
originally issued in the March Placement for each 90 day period after
the closing date that the Company failed to file a registration
statement with the SEC. Because of the pending offering of Bridge
Debt and the November Placement, the Company was unable to file the
registration statement until November 1996, and accordingly an
additional 110,000 shares were issued pursuant to this provision.

Concurrently with the March Placement, the Board of Directors
authorized the exercise by the Company's Chairman/Chief Executive
Officer of previously issued common stock purchase warrants to acquire
291,545 shares of the Company's common stock at $2.00 per share. Such
exercise was accomplished by the issuance to the Company of a note
bearing interest at 6% and due in five years. Such exercise was
intended to avoid a change in ownership for tax purposes which could
limit the amount of net operating losses available in any future
annual period to offset taxable income of the Company.

In November 1996, the Company completed a private placement of
approximately 1.2 million shares of the Company's common stock for
$3.00 per share. Each of the 1.2 million shares sold was accompanied
by a redeemable warrant to purchase an additional share of the
Company's common stock for $8 commencing in November 1997 (a "Class A
Warrant"). After November 7, 1997, each Class A Warrant may be
redeemed by the Company for $.10 when the closing bid price of the
Company's common stock has been at least $12.00 for 20 consecutive
trading days. A total of 350,000 Class B Warrants were granted to the
placement agent in connection with the November Placement. Each Class
B warrant represents the right to purchase one share of the Company's
common stock for $8 commencing in November 1997, and may be redeemed
by the Company after February 7, 1999, when the closing bid price of
the Company's common stock has been at least $12.00 for 20 consecutive
trading days.

The November Placement was preceded by a private placement of Bridge
Debt and the issuance of Bridge Warrants as described in Note 6.

-47-
<PAGE> 48
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

Common Stock Warrants and Options

In connection with past financing arrangements and as compensation for
consulting and professional services, the Company has issued warrants
and options to purchase its common stock. The following tables
summarize such warrant and option activity for 1997 and 1996:

1996 ACTIVITY:

<TABLE>
<CAPTION>
Number of Number of
Exercise Warrants Warrants
Price Outstanding Outstanding
Per Expiration October Expired/ September
Share Date 1, 1995 Granted Exercised Canceled 30, 1996
------------- --------------- -------------- ----------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 Oct 95 6,000 -- 6,000 -- --
$1.50 Oct 95-Dec 95 33,333 -- 13,332 20,001 --
$2.00 Sep 97-Jan 98 394,450 -- 291,545 -- 102,905
$2.50 Mar 2000 10,000 -- -- -- 10,000
$2.75 May 97-Jul 97 83,765 -- 9,000 -- 74,765
$3.50 Jul 2000 175,000 -- -- -- 175,000
$4.00 Jul 2000 18,750 -- -- -- 18,750
$6.60 Jul 98 23,550 -- -- -- 23,550
$8.00 Aug 2001 -- 523,310 -- -- 523,310
---------- ---------- ---------- --------- ----------
744,848 523,310 319,877 20,001 928,280
========== ========== ========== ========= ==========
</TABLE>

-48-
<PAGE> 49
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

1997 ACTIVITY:

<TABLE>
<CAPTION>
Number of Number of
Exercise Warrants/ Warrants/
Price Options Options
Per Expiration Outstanding Expired/ Outstanding
Share Date October 1, 1996 Granted Exercised Canceled September 30, 1997
----- ---------- --------------- ------- --------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
$2.00 Sep 97-Jan 98 102,905 -- 98,637 -- 4,268
$2.50 Mar 2000 10,000 -- 10,000 -- --
$2.75 May 97-Jul 97 74,765 -- 71,531 3,234 --
$3.50 Jul 2000 175,000 -- 175,000 -- --
$4.00 Jul 2000 18,750 -- -- -- 18,750
$6.60 Jul 98 23,550 -- 18,334 -- 5,216
$5.688* Feb 2007 -- 100,000 -- -- 100,000
$ 8.00* Aug 2007 -- 54,000 -- -- 54,000
$10.00* Aug 2007 -- 54,000 -- -- 54,000
$12.00* Aug 2007 -- 54,000 -- -- 54,000
$ 8.00 Aug. 2001 523,310 1,518,833 250,000 -- 1,792,143
$10.00* May 2002 -- 27,000 -- -- 27,000
$11.00* June 2002 -- 50,000 -- -- 50,000
$13.38* Sept. 2002 -- 100,000 -- -- 100,000
------- --------- ------- ------- ---------
928,280 1,957,833 623,502 3,234 2,259,377
======= ========= ======= ======= =========
</TABLE>

*Indicates warrant/option is not currently exercisable.

10. STOCK OPTION AND EMPLOYEE BENEFIT PLANS

During fiscal year 1993, the Company's Board of Directors approved a
Salaried Employee Participation Plan (the "1993 Plan") and reserved an
aggregate of 200,000 shares of common stock to be issued thereunder.
Options issued under the 1993 Plan vest ratably over a five-year
period from the date of grant. Commencing with the adoption of the
1996 Plan discussed below, no further grants of options will be made
under the 1993 Plan.

In November 1994, the stockholders of the Company approved the
Company's 1994 Director Stock Option Plan (the Director Plan) and the
Company's 1994 Employee Stock Option Plan (the 1994 Employee Plan)
previously adopted by the Board of Directors, pursuant to which 60,000
shares and 360,000 shares, respectively, of the Company's common stock
were reserved for issuance. Options issued under the Director Plan and
the 1994 Employee Plan vest ratably over a five-year period from the
date of grant. Commencing with the adoption of the 1996 Plan discussed
below, no further grants of options will be made under either the
Director Plan or the 1994 Employee Plan.

In August 1996, the Board of Directors of the Company approved the 1996
Stock Incentive Plan (the 1996 Plan). Under the 1996 Plan, various
stock based incentive awards may be made including incentive stock
options, non-qualified stock options, stock appreciation rights,
restricted stock, performance shares or deferred stock purchases.
Options issued under the 1996 Plan vest ratably over a four-year period
from the date of grant. The total number of shares of common stock or
common stock equivalents that may be issued under the 1996 Plan is
274,320 plus an amount equal to 10% of the number of shares of common
stock issued by the Company after August 15, 1996 and prior to December
31, 2000. As of September 30, 1997, a total of 478,330 shares of common

-49-

<PAGE> 50
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

stock or common stock equivalents were available for grant under the
1996 Plan. The Company has agreed with the placement agent of its
November Placement that it will not grant options under the 1996 Plan
to purchase more than 200,000 shares during the one year period ending
July 24, 1997, or more than 100,000 shares during each of the three
one year periods thereafter. In order to have grants made which
qualify as incentive stock options, the 1996 Plan was approved by the
Company's stockholders in March 1997.

The activity relating to stock option issuances under the above plans
are as follows for each of the two years ending September 30, 1997 and
1996:

-50-
<PAGE> 51
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

1996 ACTIVITY:

<TABLE>
<CAPTION>
Number of Number of
Exercise Options Options
Price Outstanding Exercised/ Outstanding
Per Expiration October Expired/ September
Share Date 1, 1995 Granted Canceled 30, 1996
------------- --------------- ------------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
1993 PLAN:
$1.50 Oct 97 45,000 -- -- 45,000

1994 DIRECTOR
PLAN:
$2.50 Jul 2004 40,000 -- -- 40,000

1994 EMPLOYEE
PLAN
$2.00 Mar 2005 91,000 -- 35,000 56,000
$2.50 Jul 2004 130,000 -- 10,000 120,000
$2.50 Feb 2006 -- 75,000 -- 75,000
$2.75 Jul 2005 24,500 -- 9,500 15,000
$3.00 Oct 2005 -- 60,000 60,000 --
$4.00 Apr 2006 -- 26,000 7,000 19,000
------- ------- ------- -------
330,500 161,000 121,500 370,000
======= ======= ======= =======
</TABLE>

-51-
<PAGE> 52
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

1997 ACTIVITY:

<TABLE>
<CAPTION>
Number of Number of
Exercise Options Options
Price Outstanding Exercised/ Outstanding Exercisable
Per Expiration October Expired/ September September
Share Date 1, 1996 Granted Canceled 30, 1997 30, 1997
------------- --------------- -------------- ----------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 PLAN:
$1.50 Oct 97 45,000 -- 10,000 35,000 27,000

1994 DIRECTOR
PLAN:
$2.50 Jul 2004 40,000 -- -- 40,000 40,000

1994 EMPLOYEE
PLAN
$2.00 Mar 2005 56,000 -- -- 56,000 28,000
$2.50 Jul 2004 120,000 -- 10,000 110,000 80,000
$2.50 Feb 2006 75,000 -- 45,000 30,000 7,500
$2.75 Jul 2005 15,000 -- 7,500 7,500 --
$4.00 Apr 2006 19,000 -- -- 19,000 4,750

1996 STOCK
INCENTIVE PLAN
$4.375 Oct 2006 -- 145,000 8,000 137,000 --
$4.750 Jan 2007 -- 17,000 -- 17,000 --
$5.500 Feb 2007 -- 43,000 10,500 32,500 --
$5.688 Feb 2007 -- 69,000 -- 69,000 --
$7.141 Feb 2007 -- 10,000 -- 10,000 --
$8.000 Mar 2007 -- 2,500 -- 2,500 --
--------- --------- ------- -------- --------
370,000 286,500 91,000 565,500 187,250
========= ========= ======= ======== ========
</TABLE>

The Company expects to continue to issue stock options to new
employees as they are hired and to current employees as incentives
from time to time.

The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its employee stock
options rather than the alternative fair value accounting provided for
under SFAS No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized in fiscal 1997
and 1996 associated with employee stock options. Pro forma information
regarding net income and earnings per share is required by SFAS No.
123. This information is required to be determined as if the Company
had accounted for its employee stock options granted subsequent to
September 30, 1995, under the fair value method of that statement. The
fair value of options granted in fiscal years 1997 and 1996 reported
below has been estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions:

<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Weighted average Life 3.5 years 3.5 years

Risk-free interest rate 6.56% 6.12%
Expected volatility 72% 72%

Expected dividend yield None None
</TABLE>

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions,
including the expected stock price volatility.

-52-
<PAGE> 53
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

Because the Company's options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value
estimate, in the opinion of management, the existing models do not
necessarily provide a reliable single measure of the fair value of its
options. The weighted average estimated fair value of employee stock
options granted during 1997 and 1996 was $3.22 and $1.72 per share,
respectively. The fair value of options granted during 1997 and 1996
under the Company's stock option plans totalled $631,000 and $255,000,
respectively.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:

<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net income (loss):
As reported $ 1,311,000 $ 40,000
Pro forma $ 969,000 $ (45,000)

Earnings (loss) per common share:
As reported $ .27 $ (.04)
Pro forma $ .19 $ (.07)

Earnings (loss) per common share,
fully diluted:
As reported $ .20 $ (.04)
Pro forma $ .15 $ (.07)
</TABLE>

The above SFAS No. 123 pro forma disclosures are not necessarily
representative of the effect SFAS No. 123 will have on the pro forma
disclosure of future years.

During 1994, the Company established an employee savings plan pursuant
to Section 401(K) of the Internal Revenue Code. The plan provides
for the employees to make tax deferred deposits into the plan to the
extent of 6% of their annual base compensation. The Company matches
half of the allowed employee contributions and such Company
contributions amounted to $34,000 for each of the years ended
September 30, 1997 and 1996.

11. COMMITMENTS AND CONTINGENCIES

Pending Investigation

-53-
<PAGE> 54
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

informing the Company and the tribes that such offices continue to
consider the Company's MegaMania game to be an illegal Class III
gaming activity. To date, no enforcement action has been instituted by
the Department of Justice. If instituted, the Company intends to
vigorously defend the legality of MegaMania as a Class II gaming
activity.

Litigation

The Company is a party to various lawsuits and claims arising out of
the ordinary course of its business. No accrual for potential loss
has been made in the accompanying financial statements as management
does not believe that the likelihood of a material loss is probable at
this time.

Prize Fulfillment Firm

In order to reduce the need for prize reserve account funds and to
further reduce exposure to game deficits during periods of abnormally
high rates of jackpot prize wins, MBI has engaged a related party firm
specializing in prize fulfillment services to pay jackpot prizes won
during the term of a prize fulfillment agreement. The prize
fulfillment agreement specifies a maximum cumulative liability over
the term of the contract, in exchange for fees based on gross game
receipts. Prize fulfillment premiums amounted to $2,642,000 and
$3,041,000 for the years ended September 30, 1997 and 1996,
respectively. The current arrangements with such firm expire on
December 31, 1998. There can be no assurance that the prize
fulfillment agreement will be available at all or on commercially
acceptable terms upon the expiration of the existing agreement.

Under the terms of the prize fulfillment agreement, the Company is
reimbursed for prizes awarded at an amount equal to the present value
for the jackpot prize payments less a deductible which is $15,000 per
occurrence. These prize fulfillment funds are then utilized to
satisfy the obligation to the jackpot prize winner through a lump-sum
cash payment or the purchase of an annuity. In those cases where the
prize winner elects an annuity, the obligation has historically been
discharged by purchasing annuity contracts from insurance companies
rated by A.M. Best as A+, with the prize winner listed as the sole
beneficiary. Purchased annuity contracts entered into by AGE prior to
April 15, 1994, which provide for various insurance companies to make
payments directly to prize winners over a specified period of time in
the aggregate amount of approximately $6,085,000 are outstanding at
September 30, 1997. The outstanding amounts include 22 annuity
contracts aggregating approximately $5,055,000 which were
purchased from an insurance carrier that is currently under an Order
of Rehabilitation to the Michigan State Commissioner of Insurance.
Under this Order, payments under all such contracts will continue
until ordered otherwise by the State of Michigan. It is unknown at
this time as to whether further court actions will result in
reductions in amounts owed under these annuity

-54-
<PAGE> 55
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

contracts. There can be no assurance that this or any other
insurance company responsible for outstanding annuities will continue
to fulfill all their obligations under the annuity contracts.

The Company is not responsible for any obligations to prize winners
prior to April 15, 1994, whether in lieu of annuities or in respect of
shortfalls on annuities or otherwise (except for specifically assumed
liabilities which amounted to approximately $77,000 at September 30,
1997). Further, the Company is not responsible for prize annuities
awarded during the period April 15, 1994 through December 22, 1994,
except as to the obligation to discharge obligations of the MegaBingo
operations with the assets of the MegaBingo operation and under the
indemnification provisions of the AGE Services Agreement. The present
value, at September 30, 1997, of the prize annuities awarded from
April 15, 1994 to December 22, 1994, which are not reflected in the
financial statements, is $214,000. The present value of the
prize annuities and market value of the related treasury investments
at September 30, 1997 of prize annuities awarded subsequent to
December 23, 1994 through September 30, 1997 was approximately
$1,527,000, which has been reflected as restricted investments
and other long-term liabilities in the accompanying financial
statements.

Beginning in August 1994, the Company began a policy of funding prize
annuities with United States Treasury Bills with maturities which
correspond to the due dates of the annuity payments. Under its
arrangements with the prize fulfillment firm, the prize fulfillment
firm purchases the treasury securities and administrates payments to
the winners. The Company believes that this annuity payment structure
will minimize the risk of annuity defaults on future prizes awarded.

Operating Leases

The Company leases its executive offices and other corporate offices
under non-cancelable operating leases. Future minimum rentals by
fiscal year under these arrangements are as follows:

Rental expense during fiscal years 1997 and 1996 amounted to $131,000
and $117,000, respectively.

-55-
<PAGE> 56
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

12. RELATED PARTY TRANSACTIONS

In June 1997, Graves Properties, Ltd., a limited partnership
controlled by Gordon T. Graves, the Company's Chairman and Chief
Executive Officer, formed Equipment Purchasing L.L.C. ("EPLLC") for
the purpose of purchasing MegaMania player stations from the Company
and leasing the stations to Indian tribes. In June 1997, EPLLC
purchased approximately 100 MegaMania player stations from the Company
for a total purchase price of $637,347, payable in two promissory
notes of EPLLC, one a short term note in the principal amount of
$400,000 bearing interest at approximately 7% per annum, and the other
a 12% note in the principal amount of $237,344 due in two years,
with interest only payable monthly. In December 1997, EPLLC paid the
short term note in full. The purchased equipment has been leased to a
tribe under terms where the Company receives a percentage of the
revenues generated by the equipment in consideration of providing the
equipment and the MegaMania game to the tribe. The Company and EPLLC
have agreed to a sharing of such percentage of revenues, with EPLLC
receiving a share equal to the greater of a fixed percentage amount or
such amount as is necessary to satisfy EPLLC's monthly payment on the
purchase note due the Company and to amortize on a monthly basis the
cash contributed to EPLLC by Graves Properties, Ltd.

In September 1997, EPLLC purchased approximately 345 MegaMania player
stations from the Company for a total purchase price of approximately
$1,800,000, of which $990,000 was paid in cash in December 1997, and
the balance with a 12% note of EPLLC in the principal amount of
$810,000 due in two years, with interest only payable monthly. The
purchased equipment has been leased to five different tribes under
terms where the Company receives a percentage of the revenues generated
by the equipment which is shared with EPLLC under terms consistent with
those of the June 1997 sale discussed above.

In connection with the sales of the electronic player stations to
EPLLC, the Company recorded revenues of $2,436,000 during the year
ended September 30, 1997 with related costs of sales of $1,183,000.

As an inducement to consummate the June 1997 sale, the Company issued
to EPLLC 50,000 warrants to purchase common stock at an exercise price
of $11.00 per share, which was the market value of the common stock on
the date of issuance. The estimated fair market value (as determined by
an investment banker) of these warrants is $2,500 and has been recorded
as additional cost of sales. As an inducement to consummate the
September 1997 sale, the Company issued to EPLLC 100,000 warrants to
purchase common stock at an exercise price of $13.38 per share which
was the market value of the common stock on the date of issuance. The
estimated fair market value (as determined by an investment banker) of
these warrants is $5,000 and has been recorded as additional cost of
sales. The warrants will become exercisable one year after the date of
issue and expire five years after the date of issue. The warrants are
redeemable by the Company at $.10 per share if the closing price of the
common stock for 20 consecutive trading days has been at least 150% of
the applicable exercise price.

In connection with the sale of the equipment, the Company also entered
into a two year management agreement with EPLLC whereby the Company is
responsible for proposing, establishing and modifying the MegaMania
game procedures and the related game accounting procedures; supervising
and administering the rental agreement with the Indian tribe; using its
best efforts to re-lease the purchased equipment to other parties if
the present rental agreement is terminated; collecting all rents due
under the rental agreement; performing all necessary repairs and
maintenance, but not bearing any risk of loss for damages; conducting
necessary marketing; maintaining insurance; and paying all sales and
use taxes and performing other administrative functions. As
compensation for these services, the Company will receive $10.00 per
electronic player station as a re-leasing fee and $10.00 per electronic
player station per month as a management fee. The Company has the
option to repurchase the equipment at its then fair market value if
after giving effect to the payment of such repurchase price and the net
rental income received by EPLLC, EPLLC has received a 20% internal rate
of return.

-56-

<PAGE> 57
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

13. MEGAMANIA LEASES

The Company sells its electronic player stations to its customers for
cash or through revenue sharing arrangements. Under the revenue
sharing arrangements, a portion of the revenue from the player stations
is paid to the Company until the sales price of the unit, plus
interest, is recovered. Approximately $64,000 was received under such
provisions during 1996 and $1,786,000 in 1997. Outstanding principal
under equipment sales pursuant to such revenue sharing arrangements
amounted to $2,969,000 at September 30, 1997. Generally, title to the
player stations transfers to the lessee at the end of the lease period.
Revenue from the equipment sales pursuant to revenue sharing is
recorded as revenue as it is earned because the Company generally must
continue to operate the MegaMania network in order to realize the sales
proceeds. There can be no assurance that the Company will realize the
entire amount of $2,969,000 at September 30, 1997, because customers
could elect to remove the player stations prior to their being fully
paid for or because the economic performance of the player stations at
a particular location is not sufficient to amortize the principal of
the revenue sharing obligation.

The cost and net book value at September 30, 1997 of MegaMania lease
equipment amounted to $3,285,000 and $2,681,000, respectively.
MegaMania lease equipment is depreciated over a three year period
unless the rate of payments being received indicates transfer of title
will occur to the lessee on a more rapid rate.

14. CONCENTRATIONS OF CREDIT RISK

The Company maintains its cash in bank deposit accounts which at times
may exceed the federal depository insurance limits. As of September
30, 1997 and 1996, the Company had concentrations of cash in one bank
totaling $1,499,000 and $1,397,000, respectively. The Company has
not experienced any losses on such accounts in the past.

Accounts receivable represent short-term credit granted to customers
for which collateral is generally not required. Substantially all of
the Company's accounts receivable are from Native American Indian
tribes or their gaming enterprises. Additionally, a large percentage
of these tribes have their reservations and gaming operations in the
state of Oklahoma. Despite the industry and geographic concentrations
related to the Company's customers, due to the historical experience of
the Company on receivable collections, management considers credit risk
limited with respect to accounts receivable.

-57-
<PAGE> 58
INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

11.1 Earnings Per Share Statement
21.1 Subsidiaries of Registrant
23.1 Consent of Coopers & Lybrand L.L.P.
24.1 Power of Attorney (included on page II-8)
27.1 Financial Data Schedule

<PAGE> 1
EXHIBIT 11.1

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
EARNINGS PER SHARE STATEMENT

<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
PRIMARY EARNINGS PER SHARE 1997 1996
---------- -----------
<S> <C> <C>
Net income 1,311,000 40,000
Preferred dividends (123,000) (149,000)
---------- ----------
Net income available for common shares 1,188,000 (109,000)
---------- ----------
Weighted average number of common and common
equivalent shares outstanding - primary,
including dilutive common stock equivalents 4,459,176 2,872,258

Primary Earnings Per Share 0.27 (0.04)
========== ==========

FULLY DILUTED EARNINGS PER SHARE

Net income 1,311,000 40,000
---------- ----------
Net income available for common shares 1,311,000 40,000
---------- ----------
Weighted average number of common and common
equivalent shares outstanding - fully dilutive,
including dilutive common stock equivalents 6,462,188 2,872,258

Fully Diluted Earnings Per Share 0.20 (0.04)
========== ==========
</TABLE>

<PAGE> 1
EXHIBIT 21

SUBSIDIARIES OF REGISTRANT

TV Games, Inc., a Delaware corporation

MegaBingo, Inc., a Delaware corporation

Multimedia Creative Services, Inc., a Delaware corporation

MLS, Inc., a Texas corporation

American Gaming Network L.L.C. a Delaware limited liability company
(100% owned as of October 1997)

<PAGE> 1
EXHIBIT 23.1
Consent of Coopers & Lybrand

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statements of
Multimedia Games, Inc., on Form S-3 (File Nos. 333-16729; 333-28367; and
333-36319) of our reported dated December 23, 1997, on our audits of the
consolidated financial statements of Multimedia Games, Inc. and subsidiaries
as of September 30, 1997 and for each of the two years in the period ended
September 30, 1997, which report is included in this Annual Report on Form
10-KSB.

COOPERS & LYBRAND L.L.P.

Tulsa, Oklahoma
December 26, 1997

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THIS ANNUAL REPORT ON FORM 10-KSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,380,000
<SECURITIES> 0
<RECEIVABLES> 1,689,000
<ALLOWANCES> 123,000
<INVENTORY> 511,000
<CURRENT-ASSETS> 6,691,000
<PP&E> 7,297,000
<DEPRECIATION> 2,327,000
<TOTAL-ASSETS> 15,400,000
<CURRENT-LIABILITIES> 2,845,000
<BONDS> 0
0
1,000
<COMMON> 48,000
<OTHER-SE> 10,228,000
<TOTAL-LIABILITY-AND-EQUITY> 15,400,000
<SALES> 3,244,000
<TOTAL-REVENUES> 39,052,000
<CGS> 1,721,000
<TOTAL-COSTS> 38,055,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 167,000
<INCOME-PRETAX> 859,000
<INCOME-TAX> (452,000)
<INCOME-CONTINUING> 1,311,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,311,000
<EPS-PRIMARY> .27
<EPS-DILUTED> .20

</TABLE>