MULTIMEDIA GAMES INC, SB-2, 1997-07-03

MULTIMEDIA GAMES INC
SB-2, 1997-07-03
AMUSEMENT & RECREATION SERVICES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1997
REGISTRATION NO. 333-
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
MULTIMEDIA GAMES, INC.
(Name of Small Business Issuer in Its Charter)
---------------------

<TABLE>
<S> <C> <C>
TEXAS 7922 74-2611034
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>

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

<TABLE>
<S> <C>
7335 SOUTH LEWIS AVENUE, SUITE 204 7335 SOUTH LEWIS AVENUE, SUITE 204
TULSA, OKLAHOMA 74136 TULSA, OKLAHOMA 74136
(918) 494-0576 (918) 494-0576
(Address and Telephone Number Of Principal (Address and Principal Place of Business or
Executive Offices) Intended
Principal Place of Business)
</TABLE>

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FREDERICK E. ROLL, VICE PRESIDENT
MULTIMEDIA GAMES, INC.
7335 SOUTH LEWIS AVENUE, SUITE 204
TULSA, OKLAHOMA 74136
(918) 494-0576
(Name, Address and Telephone Number of Agent for Service)
---------------------
Copies to:
LARRY W. SANDEL
HALL, ESTILL, HARDWICK, GABLE, GOLDEN & NELSON
320 SOUTH BOSTON AVENUE, SUITE 400
TULSA, OKLAHOMA 74103
(918) 594-0400
---------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after
this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
==================================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PER UNIT PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Warrants................ 1,518,833 $ 2.75(1) $ 4,176,790.70 $1,701.80
Class B Warrants................ 523,310 $ 2.75(1) $ 1,439,102.50
- ------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value,
underlying Warrants(3)........ 2,042,143 $10.75(2) $21,953,037.00 $6,652.45
==================================================================================================================
</TABLE>

(1) Estimated solely for purposes of calculating the amount of the registration
fee, based upon the excess of the average of the bid and asked prices of the
Registrant's Common Stock on June 30, 1997, over the exercise price of the
Warrants.
(2) Estimated pursuant to Rule 457(c) solely for purposes of calculating the
amount of the registration fee, based upon the average of the bid and asked
prices of the Registrant's Common Stock on June 30, 1997.
(3) Pursuant to Rule 416, there are also being registered such additional shares
of Common Stock as may become issuable pursuant to anti-dilution provisions
of the Warrants.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2

MULTIMEDIA GAMES, INC.

CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM SB-2

<TABLE>
<CAPTION>
ITEM NUMBERS OF FORM SB-2 AND TITLE OF ITEM PROSPECTUS CAPTION
------------------------------------------- ------------------
<S> <C> <C>
1. Front of Registration Statement and Outside Front Cover
Page of Prospectus................................... Front of Registration Statement;
Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................... Inside Front Cover Page of Prospectus;
Available Information
3. Summary Information and Risk Factors................... Prospectus Summary; Risk Factors
4. Use of Proceeds........................................ Use of Proceeds
5. Determination of Offering Price........................ Not Applicable
6. Dilution............................................... Not Applicable
7. Selling Security Holders............................... Selling Securityholders
8. Plan of Distribution................................... Outside Front Cover Page of Prospectus;
Plan of Distribution
9. Legal Proceedings...................................... Risk Factors; The Company -- Litigation
10. Directors, Executive Officers, Promoters and Control
Persons.............................................. Management
11. Security Ownership of Certain Beneficial Owners and
Management........................................... Security Ownership of Certain
Beneficial Owners and Management
12. Description of Securities.............................. Description of Securities
13. Interest of Named Experts and Counsel.................. Legal Matters; Independent Public
Accountants
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities....................... Disclosure of Commission Position on
Indemnification and Securities Act
Liabilities
15. Organization Within Last Five Years.................... Prospectus Summary; The Company
16. Description of Business................................ Prospectus Summary; The Company
17. Management's Discussion and Analysis or Plan of
Operation............................................ Management's Discussion and Analysis of
Financial Condition and Results of
Operations
18. Description of Property................................ The Company -- Properties
19. Certain Relationships and Related Transactions......... Certain Relationships and Related
Transactions
20. Market for Common Equity and Related Stockholder
Matters.............................................. Market Prices of Common Stock
21. Executive Compensation................................. Management -- Executive Compensation
22. Financial Statements................................... Financial Statements
23. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.................. Not Applicable
</TABLE>
<PAGE> 3

PROSPECTUS

MULTIMEDIA GAMES, INC.

1,518,833 REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS
523,310 REDEEMABLE CLASS B COMMON STOCK PURCHASE WARRANTS
2,042,143 SHARES OF COMMON STOCK, $.01 PAR VALUE, UNDERLYING THE WARRANTS
---------------------
This Prospectus relates to 1,518,833 issued and outstanding Redeemable
Class A Common Stock Purchase Warrants (the "Class A Warrants"), 523,310 issued
and outstanding Redeemable Class B Common Stock Purchase Warrants (the "Class B
Warrants" and, together with the Class A Warrants, the "Warrants"), and the
2,042,143 shares (the "Shares") of Common Stock, par value $.01 per share (the
"Common Stock"), underlying the Warrants, of Multimedia Games, Inc. (the
"Company"). The Shares are issuable from time to time by the Company upon the
exercise of the Warrants, and the Warrants and the Shares (when issued) may be
offered and sold from time to time by the Selling Securityholders named herein
(the "Selling Securityholders"). See "Plan of Distribution."

Each Warrant entitles the holder thereof to purchase one share of Common
Stock at an exercise price of $8.00 per share, subject to certain adjustments.
The Warrants become exercisable on November 7, 1997 and expire on November 12,
2001, if not exercised on or prior to that date. The Warrants are redeemable at
the option of the Company for $.10 per Warrant on not less than 30 days prior
written notice at any time after November 7, 1997, in the case of the Class A
Warrants, and at any time after February 7, 1999, in the case of the Class B
Warrants. See "Description of Securities."

The Common Stock is traded on the Nasdaq SmallCap Market under the symbol
"MGAM". On June 30, 1997, the last reported sale price of the Common Stock was
$10.75 per share. The Company has applied to list the Warrants and the Shares
for quotation on the Nasdaq SmallCap Market upon the effectiveness of this
offering. Prior to this offering there has been no public market for the
Warrants and there can be no assurance that any such market will develop.

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

THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON PAGE
6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

The Company will not receive any of the proceeds from the sale of the
Warrants and Shares (collectively, the "Securities") by the Selling
Securityholders. The Company will bear all costs relating to the registration of
the Securities, which are estimated to be approximately $90,000. Certain of the
Selling Securityholders have entered into agreements, directly or indirectly,
with Walsh, Manning Securities, LLC ("Walsh Manning"), that restrict the sale of
the Securities by such Selling Securityholder without the consent of Walsh
Manning. See "Selling Securityholders."

THE DATE OF THIS PROSPECTUS IS JULY , 1997.
<PAGE> 4

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE SELLING SECURITYHOLDERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT
RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER WOULD BE
UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK AND WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 6
Forward Looking Statements.................................. 12
Use of Proceeds............................................. 12
Market Prices of Common Stock............................... 13
Capitalization.............................................. 14
Selected Financial Data..................................... 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
The Company................................................. 21
Management.................................................. 28
Certain Relationships and Related Transactions.............. 31
Security Ownership of Certain Beneficial Owners and
Management................................................ 32
Selling Securityholders..................................... 33
Plan of Distribution........................................ 35
Description of Securities................................... 36
Independent Public Accountants.............................. 38
Legal Matters............................................... 38
Available Information....................................... 38
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities................................ 40
Index to Financial Statements............................... F-1
Financial Statements........................................ F-2
</TABLE>

The Company intends to furnish its shareholders with annual reports
containing audited financial statements certified by an independent accounting
firm. The Company's fiscal year ends September 30 of each year.

2
<PAGE> 5

PROSPECTUS SUMMARY

The following information does not purport to be complete and is qualified
in its entirety by references to the more detailed information and financial
statements (including notes thereto) appearing elsewhere in this Prospectus.

THE COMPANY

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 to bingo players located off Indian lands through its 49% interest in
American Gaming Network, L.L.C.

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 games 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., 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.

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

Multimedia Games, Inc. was incorporated under the laws of the State of
Texas on August 30, 1991. Unless the context otherwise requires, the term
"Company" includes Multimedia Games, Inc., and its subsidiaries -- TV Games,
Inc., MegaBingo, Inc., and Multimedia Creative Services, Inc., as well as the
activities conducted by the Company through its 49% interest in American Gaming
Network, L.L.C. ("AGN"). 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.
3
<PAGE> 6

THE OFFERING

Risk Factors.............. Investment in the Securities offered hereby involves
a high degree of risk and, therefore, the Securities
should not be purchased by anyone who cannot afford
the loss of their entire investment. Prospective
purchasers of the Securities should carefully review
and consider the factors set forth under "Risk
Factors" as well as the other information contained
herein, before purchasing any of the Securities.

Securities Offered........ 1,518,833 Redeemable Class A Warrants, 523,310
Redeemable Class B Warrants and the 2,042,143 shares
of Common Stock issuable by the Company upon the
exercise of the Warrants, are being offered by the
Selling Securityholders named herein. See "Selling
Securityholders" and "Plan of Distribution".

Each Warrant entitles the holder to purchase from the
Company one share of Common Stock at an exercise
price of $8.00 per share, subject to certain
adjustments to prevent dilution. The Warrants become
exercisable on November 7, 1997, and expire at 5:00
p.m. Eastern Time on November 12, 2001, if not
exercised prior to that time. The Warrants are
redeemable, in whole or in part, at the option of the
Company, for $.10 per Warrant, upon not less than 30
days prior written notice, at any time after November
7, 1997, in the case of the Class A Warrants, and at
any time after February 7, 1999, in the case of the
Class B Warrants; provided that (i) the closing bid
quotation of the Common Stock is at least 150% of the
then exercise price of the Warrant on each of the 20
trading days ending not later than the seventh
trading day prior to the day on which notice of
redemption is given; and (ii) the Company has an
effective registration statement covering the
Warrants and the Shares. See "Description of
Securities."

Use of Proceeds........... The Company will receive none of the proceeds from
the sale of the Securities offered hereby by the
Selling Securityholders; however, the Company will
receive proceeds at the rate of $8.00 per Share, for
each Share issued upon the exercise of a Warrant.
4
<PAGE> 7

SUMMARY FINANCIAL INFORMATION

The summary financial information set forth below is derived from the
financial statements of the Company appearing elsewhere in this Prospectus. Such
information should be read in conjunction with such financial statements and the
notes thereto.

INCOME STATEMENT AND OPERATING DATA:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED MARCH 31,
SEPTEMBER 30, -------------------------
1996 1997 1996
------------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Total revenues........................................ $22,887,000 $15,850,000 $9,492,000
Operating income...................................... 202,000 124,000 139,000
Net income............................................ 40,000 37,000 128,000
Earnings (loss) per common and equivalent share,
primary and fully diluted........................... $ (0.04) $ (0.01) $ 0.02
</TABLE>

BALANCE SHEET DATA:

<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, SEPTEMBER 30,
1997 1996
----------- -------------
(UNAUDITED)
<S> <C> <C>
Working capital....................................... $ 669,000 $ 172,000
Total assets.......................................... 9,653,000 7,431,000
Current portion of long-term debt and notes payable... 388,000 247,000
Long-term debt........................................ 823,000 1,587,000
Stockholders equity................................... $5,265,000 $2,394,000
</TABLE>

5
<PAGE> 8

RISK FACTORS

Prospective purchasers of the Securities should carefully consider the
following risk factors as well as the other information contained in this
Prospectus before making an investment in the Securities.

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 Service 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
"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 as defined in the Gaming Act, and was therefore in violation of
the law or not. 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 randomly generated numbers.

The Memorandum of Understanding allowed the Company until July 15, 1997, to
make the agreed changes but indicated the willingness of the NIGC to grant
appropriate extensions if the Company was unable to institute the changes for
technical reasons or for reasons beyond the control of the Company. 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.

On May 12, 1997, the Company received a letter from the then Acting Chair
of the NIGC stating that the NIGC would not necessarily be bound by the
Memorandum of Understanding by declaring it "null and void", that the NIGC would
not in the future pre-approve proposed changes to the Company's games, and that
the NIGC would make its determination on the Class II status of the modified
MegaMania game only after the Company had completed its changes and submitted
the modified version of the game to the NIGC. The May 12, 1997 letter still gave
the Company until July 15, 1997, to make the agreed changes but also stated that
the Company was expected to cease operation of the current MegaMania game by
July 15, 1997, unless the NIGC had specifically approved the modified version of
the game by that time.

6
<PAGE> 9

The Company has 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. No assurances
can be given that the NIGC will honor the determination made in its April 9,
1997, letter and accept the modified version of MegaMania as a Class II game. If
the NIGC does not honor the determination made in its April 9, 1997 letter, the
Company intends to vigorously defend its position that MegaMania is a Class II
game; however, if the Company is not successful in these efforts, it may be
necessary to discontinue the operation of MegaMania.

In entering into the Memorandum of Understanding and agreeing to a
timetable for the implementation of changes to its 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, the
Company has not been advised of this resolution by the U.S. Attorney. On the
other hand, the Company has also never received written confirmation from the
U.S. Attorney that the Company was, in fact, the subject of an investigation.

The inquiry and on-site inspection that, at the Company's invitation, was
conducted by the U.S. Attorney several months ago has not, to the Company's
knowledge, developed into any other action on the part of the U.S. Attorney.
However, on May 6, 1997, in response to an inquiry by the Absentee Shawnee tribe
of Oklahoma, and with no knowledge of the NIGC opinions issued to the Company or
of the Memorandum of Understanding between the Company and the NIGC, the First
Assistant U.S. Attorney for the Office of the U.S. Attorney in the Western
District of Oklahoma issued a letter to the tribe stating that the Company's
unmodified version of the MegaMania bingo game was considered by that Office to
be an illegal Class III gaming activity. As a result of this letter, the
Absentee Shawnee tribe has suspended the play of MegaMania on its reservation.
During the quarter ended March 31, 1997, the Absentee Shawnee tribe accounted
for approximately 3% of the Company's revenues from MegaMania. The First
Assistant U.S. Attorney has now been provided with the NIGC opinions and the
Memorandum of Understanding, but there is no assurance that the First Assistant
U.S. Attorney will reverse his previous position.

Over time, the Company does not believe that the changes to its MegaMania
game will materially and adversely affect consumer interest and acceptance of
MegaMania, although no assurances to that effect can be given. There is evidence
to suggest that existing players of the unmodified version of the MegaMania game
will reduce their level of play until the enhanced interactive requirements of
the new version become familiar.

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 the Memorandum of
Understanding or any of their opinions previously issued to the Company. There
also can be no assurances that the U.S. Attorney, the First Assistant U.S.
Attorney or the Department of Justice 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 First Assistant U.S. Attorney or the Department of Justice, 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.

7
<PAGE> 10

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 technological 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 service agreements has 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 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 45 Indian
tribes that provide the Company with the exclusive right to conduct bingo
operations in their respective Indian lands of which approximately 15 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 "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

8
<PAGE> 11

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 "Management's Discussion and Analysis of Financial Condition
and Results of Operation -- Liquidity and Capital Resources."

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 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.

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 $40,000 in the fiscal year
ended September 30, 1996 (as compared to $505,000 in the prior fiscal year), and
net income of $37,000 for the six months ended March 31, 1997 (as compared to
$128,000 in the comparable six month period of the prior year), the Company has
incurred an accumulated deficit of $2,610,000 since its inception in August 1991
through March 31, 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.

9
<PAGE> 12

SIGNIFICANT OUTSTANDING OPTIONS AND WARRANTS

As of March 31, 1997, there were outstanding immediately exercisable stock
options to purchase an aggregate of 145,000 shares of Common Stock at exercise
prices ranging from $1.50 to $4.00 per share, immediately exercisable warrants
to purchase an aggregate of 380,536 shares of Common Stock at exercise prices
ranging from $2.00 to $6.60 per share, and shares of the Company's Series A
Preferred Stock that are immediately convertible into 652,840 shares of Common
Stock. In addition to the 2,042,143 Warrants offered hereby which become
exercisable on November 7, 1997, there were outstanding additional options to
purchase 528,000 shares of Common Stock at exercise prices ranging from $1.50 to
$5.50 per share that are generally exercisable in equal annual increments over
the next four years commencing in July 1997, and an option to exchange interests
in AGN for up to 412,000 shares of Common Stock at the equivalent of $3.00 per
share that becomes exercisable on August 14, 1997. To the extent that such
options, warrants 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 options, warrants 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 business and therefore does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future.

CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS

At such time as the Warrants become registered under the Securities Act of
1933, as amended (the "Securities Act"), holders of the Warrants will be able to
exercise the Warrants only if (i) a current prospectus under the Securities Act
relating to the Shares is then in effect and (ii) the Shares are qualified for
sale or exempt from qualification under the applicable securities laws of the
states in which the various holders of Warrants reside. Although the Company has
agreed to use its best efforts to maintain a current registration covering the
Shares, there can be no assurance that the Company will be able to do so. The
value of the Warrants may be greatly reduced if a registration covering the
Shares is not kept current or if the Shares are not qualified, or exempt from
qualification, in the states in which the holders of Warrants reside. Persons
holding Warrants who reside in jurisdictions in which the Shares are not
qualified and in which there is no exemption will be unable to exercise their
Warrants and would either have to sell their Warrants or allow them to expire
unexercised.

CONTINUED NASDAQ QUOTATION

The Company's Common Stock is quoted on the Nasdaq SmallCap Market and the
Warrants have been approved for quotation on the Nasdaq SmallCap Market.
However, there can be no assurance that the Company will meet the criteria for
continued quotation of these securities on Nasdaq. The minimum continued
quotation criteria include, among other things, that the Company have total
assets of at least $2,000,000 and capital and surplus of at least $1,000,000;
that the minimum bid price for the Common Stock be $1.00 per share; and that the
minimum market value of the "public float" (i.e., the shares held by
non-insiders) of the Common Stock be at least $1,000,000. If the Company's
securities were excluded from Nasdaq, it would adversely affect the prices of
such securities and the ability of holders to sell them.

In the event that the Company is unable to satisfy Nasdaq's continued
quotation criteria, trading, if any, in the Company's securities would
thereafter be conducted in the "pink sheets" or the NASD's Electronic Bulletin
Board. In the absence of the Common Stock being quoted on Nasdaq, or the Company
having $2,000,000 in net tangible assets, trading in the Common Stock would be
covered by Rule 15g-9 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") for non-Nasdaq and non-exchange listed securities.
Under such rule, broker-dealers who recommend such securities to persons other
than established customers and accredited investors must make a special written
suitability determination for the purchaser and receive the

10
<PAGE> 13

purchaser's written agreement to a transaction prior to sale. Securities are
exempt from this rule if the market price is at least $5.00 per share.

The Securities and Exchange Commission (the "Commission") has adopted
regulations that generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
Such exceptions include an equity security listed on Nasdaq and an equity
security issued by an issuer that has (i) net tangible assets of at least
$2,000,000, if such issuer has been in continuous operation for three (3) years,
(ii) net tangible assets of at least $5,000,000, if such issuer has been in
continuous operation for less than three (3) years, or (iii) average revenue of
at least $6,000,000 for the preceding three (3) years. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith.

If the Company's Common Stock was subject to the regulations on penny
stocks, the market liquidity for the Common Stock would be severely and
adversely affected by limiting the ability of broker-dealers to sell the Common
Stock in the public market. There is no assurance that trading in the Company's
securities will not be subject to these or other regulations that would
adversely affect the market for such securities.

POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS.

The Warrants offered hereby are redeemable, in whole or in part, at a price
of $.10 per Warrant, at any time after November 7, 1997, in the case of the
Class A Warrants, and at any time after February 7, 1999, in the case of the
Class B Warrants; provided that (i) prior notice of not less than 30 days is
given to the Warrant holders; (ii) the closing bid price of the Company's Common
Stock for the twenty (20) consecutive trading days ending not later than seven
days prior to the date on which the notice of redemption is given, shall have
exceeded 150% of the then exercise price per share of the Warrants; and (iii)
Warrant holders shall have the right to exercise the Warrants until the close of
the business day preceding the date fixed for redemption. Notice of redemption
of the Warrants could force the holders to exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous for them to do so, or to
sell the Warrants at the current market price when they might otherwise wish to
hold them, or to accept the redemption price, which may be substantially less
than the market value of the Warrants at the time of redemption.

SHARES AVAILABLE FOR FUTURE SALE; SALES BY AFFILIATES

Of the 4,040,307 shares of Common Stock outstanding at March 31, 1997,
3,024,124 shares are either held by nonaffiliates and are freely traded in the
public market or are currently registered under the Securities Act for sale to
the public by the holders thereof. The remaining 1,016,183 shares may be deemed
"restricted securities" as that term is defined under the Securities Act, and in
the future may be sold pursuant to a registration under the Securities Act, in
compliance with Rule 144 under the Securities Act, or pursuant to another
exemption therefrom. Rule 144 provides that, in general, a person holding
restricted securities for a period of one year may, every three months
thereafter, sell in brokerage transactions an amount of shares which does not
exceed the greater of one percent (1%) of the number of shares of the Company's
then outstanding Common Stock or the average weekly trading volume of the Common
Stock during the four calendar weeks prior to such sale. Rule 144 also permits,
under certain circumstances, the sale of shares without any quantity limitations
by a person who is not an affiliate of the Company and was not an affiliate at
any time during the 90 day period prior to sale and who has satisfied a two year
holding period. Virtually all of such 1,016,183 restricted shares have been held
for more than one year and are, therefore, eligible for immediate sale under
Rule 144, subject to the volume limitations described above.

In addition, 652,840 shares of Common Stock are issuable upon conversion of
the Series A Preferred Stock and are eligible for resale under Rule 144 without
regard to such volume limitations, except as to 416,755 of such shares that are
held by affiliates of the Company. The Company has also granted registration
rights to the holders of 412,000 shares of Common Stock issuable upon the
exercise of the put and call agreement described in Note 3 of the Notes to the
Company's September 30, 1996, Consolidated Financial Statements (the "Put and
Call Agreement"). The Company has also currently registered 313,250 shares under
the Securities Act for sale to the

11
<PAGE> 14

public that are issuable upon the exercise of outstanding stock options. See
"Description of Securities -- Shares Eligible for Future Sale".

In connection with the transactions pursuant to which the Selling
Securityholders acquired the Securities offered hereby, virtually all of the
Selling Securityholders and each of the officers, directors and certain holders
(directly and indirectly) of one percent (1%) or more of the Company's Common
Stock agreed with Walsh, Manning not to sell the Securities or any other
securities of the Company then held by such persons until June 22, 1998 (or
November 22, 1998, in the case of such officers, directors and 1% holders).

AUTHORIZATION OF PREFERRED STOCK

The Company's Certificate of Incorporation authorizes the issuance of
"blank check" preferred stock with such designation, rights and preferences as
may be determined from time to time by the Board of Directors. The Company has
designated a class of shares of preferred stock as Series A Cumulative
Convertible Preferred Stock (the "Series A Preferred Stock"). As of March 31,
1997, there were 134,318 shares of Series A Preferred Stock outstanding, of
which 80,175 shares are owned by Gordon T. Graves, the Chairman and Chief
Executive Officer of the Company, and his affiliated company, and an aggregate
of 5,880 shares are owned by four other officers or directors of the Company.
The Series A Preferred Stock has a liquidation preference of $10 per share plus
accrued and unpaid dividends and is currently convertible, at the option of the
holder, at a rate of five shares of Common Stock for each one share of Series A
Preferred Stock. The holders of the Series A Preferred Stock have the right to
elect a majority of the Board of Directors in the event the Company is in
arrears in the payment of two consecutive quarterly dividend payments. Although
the Company has never been in arrears in the payment of two consecutive
quarterly dividends, it has historically remained in arrears as to one quarterly
dividend payment. The Board of Directors is empowered, without shareholder
approval, to make additional issuances of preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Company's Common Stock. In
the event of additional issuances, the preferred stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Although the Company has no present intention
to issue any additional shares of its preferred stock, there can be no assurance
that the Company will not do so in the future. See "Description of Securities."

FORWARD LOOKING STATEMENTS

This Prospectus 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 "Risk Factors". Given these uncertainties,
prospective purchasers are cautioned not to place undue reliance upon such
statements.

USE OF PROCEEDS

The Company will not receive any of the proceeds from the sale of any of
the Securities by the Selling Securityholders. However, the Company will receive
proceeds from the issuance of shares of Common Stock upon the exercise of the
Warrants at $8.00 per share. If the Warrants are exercised in full, the Company
will receive $16,337,144 of gross proceeds therefrom.

12
<PAGE> 15

MARKET PRICES OF COMMON STOCK

The Company's Common Stock has been listed on the Nasdaq Small Cap 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 by the National Quotation
Bureau, Incorporated.

<TABLE>
<CAPTION>
CALENDAR QUARTER HIGH LOW
---------------- ------ -----
<S> <C> <C>
First Quarter 1996.......................................... 3.625 2.125
Second Quarter 1996......................................... 6.50 3.625
Third Quarter 1996.......................................... 5.75 3.625
Fourth Quarter 1996......................................... 5.875 4.88
First Quarter 1997.......................................... 6.00 4.47
Second Quarter 1997......................................... 11.875 8.25
</TABLE>

On June 30, 1997, the closing bid price of the Common Stock as reported by
Nasdaq was $10.75.

13
<PAGE> 16

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1997, adjusted for the receipt of $687,500 on May 28, 1997, as payment
for stockholder notes receivable related to the purchase of Common Stock
(unaudited).

<TABLE>
<S> <C>
Short-term debt, including current portion of long-term
debt(1)................................................... 388,000
===========
Long-term debt(1)........................................... 823,000
Stockholders equity(2)(3):
Preferred stock, Series A, $.01 par value, 2,000,000
shares authorized, 134,318 shares issued and
outstanding............................................ 1,000
Common stock, $.01 par value, 10,000,000 shares
authorized, 4,074,306 shares issued and 4,040,307
outstanding............................................ 41,000
Additional paid-in capital................................ 9,219,000
Stockholder notes receivable(4)........................... (611,500)
Treasury Stock............................................ (87,000)
Accumulated deficit....................................... (2,610,000)
-----------
Total stockholders' equity................................ 5,952,500
-----------
Total capitalization........................................ $ 6,755,500
===========
</TABLE>

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

(1) See Note 6 of Notes to September 30, 1996 Consolidated Financial Statements
for a description of the terms of the indebtedness to a bank.

(2) Does not include shares of Common Stock reserved for issuance as follows:
(i) 2,042,143 shares upon the exercise of the Warrants, (ii) 380,536 shares
upon the exercise of currently exercisable warrants at prices ranging from
$2.00 to $6.66 per share, (iii) 145,000 shares upon the exercise of
currently exercisable options granted under the Company's stock option plan,
at prices ranging from $1.50 to $4.50 per share, (iv) 528,000 shares upon
the exercise of outstanding options granted under the Company's stock option
plans at exercise prices ranging from $1.50 to $5.50 per share that are
generally exercisable in equal annual increments over four years commencing
in July, 1997, (v) 652,840 shares upon the conversion of the Series A
Preferred Stock, and (vi) 412,000 shares upon the exercise of the Put and
Call Agreement.

(3) In May, 1997, the Company's Articles of Incorporation were amended to
increase the number of its authorized shares of Common Stock from 10,000,000
to 25,000,000.

(4) Includes a promissory note of Gordon T. Graves in the principal amount of
$583,090, bearing interest at 6% and due on February 28, 2001 (see "Certain
Relationships and Related Transactions").

14
<PAGE> 17

SELECTED FINANCIAL DATA

The selected financial data as of September 30, 1996 and for the years
ended September 30, 1996 and 1995, are derived from the financial statements of
the Company which have been audited by Coopers & Lybrand L.L.P., independent
public accountants, whose report thereon is included elsewhere in this
Prospectus along with such financial statements.

The selected financial data as of March 31, 1997 and for the six months
ended March 31, 1997 and 1996, have been derived from the Company's unaudited
financial statements. In the opinion of management, these financial statements
have been prepared on the same basis as the Company's audited financial
statements and include all adjustments necessary for the fair presentation of
the Company's financial position and the results of operations. These interim
results are not necessarily indicative of results that can be expected for the
year ending September 30, 1997.

The financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of the Company appearing elsewhere in
this Prospectus.

INCOME STATEMENT AND OPERATING DATA:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
-------------------------- ---------------------------
1996 1995 1997 1996
----------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Bingo gaming revenue................... $21,653,000 $14,841,000 $14,858,000 $8,401,000
Total revenues......................... 22,887,000 17,112,000 15,850,000 9,492,000
Bingo prizes, hall allotments and
related costs........................ 17,293,000 12,156,000 11,891,000 6,815,000
Total operating costs.................. 22,685,000 16,521,000 15,726,000 9,353,000
Operating income....................... 202,000 591,000 124,000 139,000
Net income............................. 40,000 505,000 37,000 128,000
Earnings (loss) per common and
equivalent share, primary............ (0.04) 0.26 (0.01) 0.02
Earnings (loss) per common and
equivalent share, fully diluted...... $ (0.04) $ 0.24 $ (0.01) $ 0.02
</TABLE>

BALANCE SHEET DATA:

<TABLE>
<CAPTION>
AS OF MARCH 31, 1997 AS OF SEPTEMBER 30, 1996
-------------------- ------------------------
(UNAUDITED)
<S> <C> <C>
Working capital...................................... $ 669,000 $ 172,000
Total assets......................................... 9,653,000 7,431,000
Current portion of long-term debt and notes
payable............................................ 388,000 247,000
Long-term debt....................................... 823,000 1,587,000
Stockholders equity.................................. $5,265,000 $2,394,000
</TABLE>

15
<PAGE> 18

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

BUSINESS OVERVIEW

The Company was organized to develop, promote and produce lawful gaming
activities over the information highway, including but not limited to,
satellites, television, telephone and the Internet. 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 furnish the
marketing and other operating services required in the conduct of high stakes
bingo games conducted under the names MegaBingo, MegaCash and MegaBingo Lite
(the "MegaBingo Games"). MegaBingo and MegaCash are played simultaneously using
a closed-circuit television satellite link at 45 independently owned bingo halls
located in 14 states throughout the United States, operated primarily on behalf
of American Indian tribes. MegaBingo Lite provides smaller prizes to similarly
linked Indian bingo halls and is presently delivered to 10 bingo halls located
in the State of Oklahoma.

In August 1995, the Company introduced MegaMania, an interactive high-speed
bingo game developed by the Company that is played on electronic player stations
interconnected among participating Indian bingo halls. Significant revenue
generation for MegaMania did not begin until March 1996. As of May 8, 1997,
MegaMania is played at 36 independently owned American Indian bingo halls
located in 8 different states, primarily Oklahoma.

RESULTS OF OPERATIONS

The Six Months Ended March 31, 1997 and 1996:

The Company's total operating revenues were $15,850,000 and $9,492,000 for
the six months ended March 31, 1997 and 1996 respectively, or an increase of
$6,358,000 for the current period. The increase was primarily a result of an
increase in gaming revenue of $6,457,000, an increase in electronic player
station sales of $111,000, and an increase in electronic player station lease
revenue of $588,000, partially offset by a decrease in the sale of intellectual
property of $500,000 and a decrease of other income of $298,000. The increase in
gaming revenue was driven by increased MegaMania gaming revenues during the six
months ended March 31, 1997 from newly-installed electronic player stations,
partially offset by MegaBingo revenue decreases. The Company had an average of
approximately 1,008 electronic player stations in operation during the six
months ended March 31, 1997, compared to an average of approximately 150 during
the same six months of 1996.

Bingo prizes and commissions were $4,379,000 and $5,056,000 for the six
months ended March 31, 1997 and 1996 respectively, or a decrease of $677,000.
The decrease resulted from decreased MegaBingo revenue during the period.

Allotments to hall operators were $7,512,000 and $1,759,000 for the six
months ended March 31, 1997 and 1996 respectively. The increase of $5,753,000
resulted from the increase in MegaMania revenues.

Costs of electronic player stations sold were $217,000 and $55,000 for the
six months ended March 31, 1997 and 1996, respectively or an increase of
$162,000. The increase was due to increased sales of electronic player stations.

Salaries and wages were $952,000 and $733,000 for the six months ended
March 31, 1997 and 1996 respectively, or an increase of $219,000. Salaries and
wages increased during the six months ended March 31, 1997 due to additional
staff needed for the increased MegaMania operations.

Selling, general and administrative expenses were $2,063,000 and $1,539,000
for the six months ending March 31, 1997 and 1996, respectively, or an increase
of $524,000. The increase is primarily due to an increase in legal and
professional fees of approximately $176,000 for the six months ended March 31,
1997, primarily as a result of increased legal and regulatory activity, an
increase in telephone expenses of approximately $400,000

16
<PAGE> 19

related primarily to increased MegaMania activity, partially offset by a
decrease in business meals and travel of approximately $57,000 during the six
months ended March 31, 1997.

Amortization and depreciation was $603,000 and $211,000 for the six months
ending March 31, 1997 and 1996 respectively, or an increase of $392,000. The
increase resulted primarily from the acquisition of additional MegaMania
electronic player stations leased to independently owned Indian bingo halls and
computer software costs capitalized during 1996.

Fiscal Year Ended September 30, 1996 vs. September 30, 1995

An analysis of the Company's revenues and direct gaming expenses were as
follows for the years ended September 30, 1996 and 1995.

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
MegaBingo, MegaCash and MegaBingo Lite:

Gross Revenues............................................ $15,579,000 $16,123,000(1)
Prizes and Related Costs.................................. (9,697,000) (9,706,000)(1)
Allotments to Hall Operators.............................. (3,188,000) (3,200,000)(1)
----------- -----------
Net MegaBingo Margin.............................. $ 2,694,000 $ 3,217,000
=========== ===========
MegaMania:
Gaming Revenue, Net of Prizes(2).......................... $ 6,074,000 $ 106,000
Allotments to Hall Operators.............................. (4,408,000) (75,000)
----------- -----------
Net MegaMania Margin.............................. $ 1,666,000 $ 31,000
=========== ===========
</TABLE>

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

(1) Not presented consistent with the service fee accounting used in the
financial statements prior to December 22, 1994. See Note 1 of Notes to
Consolidated Financial Statements.

(2) 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. See "Index to Financial
Statements."

Revenues -- Total revenues for fiscal year 1996 were $22.9 million as
compared to $17.1 million in 1995, a 33.7% increase. The increase is due to a
39.6% increase in gaming revenues over 1995, primarily as a result of the
Company's new MegaMania game which generated revenues of $6.1 million during
1996 as compared to $.1 million in 1995. MegaBingo revenues decreased $.5
million in 1996 as compared to 1995, after eliminating the netting effects of
the service fee accounting used in 1995. The decrease in MegaBingo revenues is
the net of (i) $1.0 million generated by the MegaBingo Lite network in 1996,
(ii) the Company not conducting the one-time MegaMega game in 1996 as it did in
1995, (iii) player headcount being down at most bingo facilities across the
country, and (iv) several bingo halls electing not to continue playing the
MegaBingo game during 1996.

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 facilities of a major network tribe
subsequent to year end.

Non-gaming revenues during 1996 were $1.2 million, or $.4 million less than
in 1995. The primary reason for the decrease was the discontinuance of the
Company's business relationship with Graff which resulted in $.95 million in
revenues in 1995 and only $.2 million up to the termination of the relationship
in January 1996. The decrease in other revenues related to Graff was offset by
$.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 increased
$.7 million or 7.4% during 1996 as compared to 1995; however, after eliminating
the netting effects of the service fee accounting in 1995 and the $.5 million in
additional prizes related to the MegaBingo Lite network, such costs were
actually $.6 million lower in 1996 as compared to 1995. 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

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insured, were consistent in their relation to MegaBingo revenues from 1996 to
1995. 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 142.7% to $7.6 million in 1996, as
compared to $3.1 million in 1995. After eliminating the netting effects of the
service fee accounting in 1995 and the $.2 million in hall commissions paid on
the MegaBingo Lite network, such allotments to hall operators increased $4.1
million during 1996 as compared to 1995. The primary reason for the increase is
hall commissions related to MegaMania which were $4.4 million in 1996. The
decrease in hall commissions related to MegaBingo is caused by the decrease in
MegaBingo revenues discussed above.

Salaries and wages -- Salaries and wages increased $.3 million, or 18.3%
during 1996 as compared to 1995; however, most of the increase came in the
fourth quarter of 1996 and 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 $.7 million, or 27.5% during 1996 as compared
to 1995. The increase relates primarily to MegaMania telecommunications,
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
$.3 million, or 111.6% during 1996 as compared to 1995. The increase results
from MegaMania electronic player station and software programming costs
capitalized during 1996. The Company made $1.8 million in capital additions
during 1996.

Interest Expense -- Interest expense increased $.1 million to $.2 million
in 1996, primarily as a result of interest expense recognized on the Bridge Debt
related to financing costs and the value of warrants attached to the Bridge
Debt.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1996, the Company had unrestricted cash and cash
equivalents of $1.5 million, only a slight decrease from September 30, 1995.
During the year ended September 30, 1996, $.3 million of cash was used in
operations versus $.7 million provided by operations in 1995. The change is
primarily due to decreased net income and cash used to build inventories,
partially offset by an increase in amortization and depreciation. The Company
added $1.8 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 consummated in February-March 1996 which generated
$1.0 million in proceeds and a Bridge Debt placement in August 1996 which
generated $.8 million in gross proceeds. In connection with the Bridge Debt, the
Company issued 533,310 warrants to purchase common stock at $8.00 per warrant,
including 173,310 warrants issued to the placement agent in the transaction.
Upon completion of the November placement described below, the terms of the
Bridge Debt warrants were amended to be identical to those issued in the
November placement, including redemption provisions. Additional debt was
incurred to help finance the acquisition of MegaMania player stations of
approximately $.2 million which is due over the next two to three years. Working
capital at September 30, 1996 was $.2 million.

In November 1996, the Company completed a $3.4 million private placement of
its common stock wherein 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. In the November placement, 1.2 million shares were sold and 1.5 million
warrants were issued, including 350,000 warrants issued to the placement agent
in the transaction. The warrants are 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.

The November placement generated net cash proceeds of approximately $2.1
million in addition to repaying the outstanding Bridge Debt of $.8 million. The
proceeds of the November placement will be used by the Company to expand its
MegaMania network through the purchase and installation of additional MegaMania
player stations and related equipment. The proforma effects of the November
placement are reflected on the consolidated balance sheet under the columnar
heading "proforma."

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At March 31, 1997, the Company had $973,000 in unrestricted cash and cash
equivalents, a decrease of $535,000 from September 30, 1996. During the six
month period ended March 31, 1997, the Company had negative cash flow from
operations of $462,000 versus positive cash flow of $149,000 in the same period
of the prior year. The primary components of cash flows from operations in the
current six month period include an increase in accounts and notes receivable of
$1,047,000, a decrease in prize fulfillment fees payable of $320,000, primarily
offset by an increase in amortization and depreciation to $603,000 and an
increase in accounts payable and accrued expenses of $321,000. The Company used
$2,284,000 for investing activities, primarily related to capital expenditures
for MegaMania electronic player stations. The capital expenditures were funded
by increasing long term debt and with the proceeds of a private offering of the
Company's common stock in November 1996 which generated net proceeds after
offering costs, of $2,027,000. As a result, at March 31, 1997, the Company had
positive working capital of $669,000.

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.

The Memorandum of Understanding allowed the Company until July 15, 1997, to
make the agreed changes but indicated that the willingness of the NIGC to grant
appropriate extensions if the Company was unable to institute the changes for
technical reasons or for reasons beyond the control of the Company. 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.

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<PAGE> 22

with the U.S. Attorney over the Class II status of MegaMania would be resolved.
However, the Company has not been advised of this resolution by the U.S.
Attorney. On the other hand, the Company has also never received written
confirmation from the U.S. Attorney that the Company was, in fact, the subject
of an investigation.

Over time, the Company does not believe that the planned changes to its
MegaMania game will materially and adversely affect consumer interest and
acceptance of MegaMania, although no assurances to that effect can be given.
There is evidence to suggest that existing players of the unmodified version of
the MegaMania game will reduce their level of play until the enhanced
interactive requirements of the new version become familiar.

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 the Memorandum of
Understanding or any of their opinions issued to the Company. There also can be
no assurances that the U.S. Attorney, the First Assistant U.S. Attorney or the
Department of Justice 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.

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 enacted, so as to limit the authority of tribes to
self-regulate Class II gaming or to change the definition of Class II gaming.

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.

ACCOUNTING PRONOUNCEMENTS

See Note 1 of the Notes to Consolidated Financial Statements regarding
newly issued accounting pronouncements.

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THE COMPANY

GENERAL

Prior to August 1995, the Company's principal business was to conduct high
stakes bingo games conducted 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 generally larger prizes
than could be offered by bingo halls 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, thereby allowing players to compete against one
another to win a common pooled prize.

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 bingo have been insignificant.

Multimedia Games, Inc. was incorporated under the laws of the State of
Texas on August 30, 1991. Unless the context otherwise requires, the term
"Company" includes Multimedia Games, Inc., and its subsidiaries -- TV Games,
Inc., MegaBingo, Inc., and Multimedia Creative Services, Inc., as well as the
activities conducted by the Company through its 49% interest in AGN. 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.

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

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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 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 March 31, 1997, 39 halls had approximately
1,100 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 randomly generated numbers. These changes have
been implemented and the new version of the MegaMania game is expected to be in
operation by mid-July, 1997. See "Risk Factors -- Government Regulation;
Possible Illegality of Company Activities."

AGN 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 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.

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The Company has IGS Agreements with approximately 47 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.

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 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 have 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. SCA owns warrants to purchase 45,682 shares of the Company's Common
Stock at $2.00 per share and holds 62,815 shares of Common Stock acquired in
April 1997 upon the conversion of 12,563 shares of Series A Preferred Stock.

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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 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, 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, such as lotto, table games, sports betting and pari-mutuel wagering, as
well as other bingo operations, conducted both on and off Indian lands in the
United States. 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 Company's competitors
have substantially greater financial and personnel resources than the Company.

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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. At present, the Company is not aware of any
Class II bingo game similar in operation to MegaMania; however, given the
initial success and popularity of that game, the Company anticipates competition
to MegaMania in the future.

EMPLOYEES

As of March 31, 1997, the Company had 78 full-time and part-time employees,
consisting of 15 engaged in field operations, 14 in computer operations relating
to bingo activities, eight in accounting functions, three in sales and marketing
activities, 18 in other general administrative and executive functions and 20
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. sec.sec.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 "Risk Factors -- Governmental
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 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.

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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 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.

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.

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 agreeing to a

26
<PAGE> 29

timetable for the implementation of changes to its 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, the
Company has not been advised of this resolution by the U.S. Attorney. On the
other hand, the Company has also never received written confirmation from the
U.S. Attorney that the Company was, in fact, the subject of an investigation.

The inquiry and on-site inspection that, at the Company's invitation, was
conducted by the U.S. Attorney several months ago has not, to the Company's
knowledge, developed into any other action on the part of the U.S. Attorney.
However, on May 6, 1997, in response to an inquiry by the Absentee Shawnee tribe
of Oklahoma, and with no knowledge of the NIGC opinions issued to the Company or
of the Memorandum of Understanding between the Company and the NIGC, the First
Assistant U.S. Attorney for the Office of the U.S. Attorney in the Western
District of Oklahoma issued a letter to the tribe stating that the Company's
unmodified version of the MegaMania bingo game was considered by that Office to
be an illegal Class III gaming activity. As a result of this letter, the
Absentee Shawnee tribe has suspended the play of MegaMania on its reservation.
The First Assistant U.S. Attorney has now been provided with the NIGC opinions
and the Memorandum of Understanding, but there is no assurance that the First
Assistant U.S. Attorney will reverse his previous position.

See "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.

27
<PAGE> 30

MANAGEMENT

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
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 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.

28
<PAGE> 31

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.

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.

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, 1996 (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.............. 1996 $ 65,423 $ 485
Chairman of the Board and 1995 46,364(3) --
Chief Executive Officer 1994 19,121(3) --
Larry D. Montgomery........... 1996 100,939 5,000 3,238
President and Chief 1995 108,000 13,000 3,420
Operating Officer 1994 107,311(4) 623
Gordon T. Sjodin.............. 1996 115,669 4,445 3,309
Vice President 1995 108,000 -- 13,206
1994 41,540(5) 45,000 623
</TABLE>

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

(1) Represents 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); does not include
shares of Common Stock underlying warrants acquired for investment (See
"Certain Relationships and Related Transactions" below).

(2) Represents contributions made by the Company on behalf of the named
executive officers to the Company's 401(k) plan.

(3) Such amount (except for $1,129) was contributed by Mr. Graves to the
Company.

(4) Includes $8,769 represented by a one-year note (subject to extension for
three months) issued to Mr. Montgomery in July 1994 which accrued interest
at 10% per annum and was subsequently converted into Series A Preferred
Stock.

(5) Mr. Sjodin joined the Company in April, 1994.

29
<PAGE> 32

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, 1996 to the named executive officers (exclusive
of warrants acquired for investment which are discussed in "Certain
Relationships and Related Transactions"):

OPTION/WARRANT GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
% OF TOTAL
NUMBER OF OPTIONS/
SECURITIES WARRANTS
UNDERLYING GRANTED TO
OPTIONS/ EMPLOYEES
WARRANTS IN PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR PER SHARE DATE
---- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Gordon T. Graves.................................. -- -- -- --
Larry D. Montgomery............................... 5,000 3.1 $4.00 4/1/06
Gordon T. Sjodin.................................. 4,500 2.8 $4.00 4/1/06
</TABLE>

Aggregate Option/Warrant Exercises and Year-End Option Table. The following
table sets forth certain information regarding stock options and warrants held
as of September 30, 1996 by the named executive officers (exclusive of warrants
acquired for investment as discussed in "Certain Relationships and Related
Transactions"). No named executive officer exercised any stock options or
warrants during said period (except for warrants acquired for investment as
described in "Certain Relationships and Related Transactions"):

AGGREGATE OPTION/WARRANTS EXERCISES AND
FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/WARRANTS AT IN-THE-MONEY OPTIONS/
YEAR END(#) WARRANTS AT YEAR-END(*)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gordon T. Graves.............................. -- -- $ -- $ --
Larry D. Montgomery........................... 39,250 23,750 165,187 83,563
Gordon T. Sjodin.............................. 22,500 27,000 73,125 81,000
</TABLE>

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

(*) Calculated on the basis of the fair market value of the underlying
securities at year-end, less the exercise price.

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, 1996, options to purchase
285,000 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. As a result of the adoption of the Company's 1996 Stock
Incentive Plan (the "1996 Plan"), no further options will be granted under the
1994 Plan or the Director Plan.

At September 30, 1996, options for an aggregate of 45,000 shares of Common
Stock had been granted to Larry D. Montgomery and remained outstanding under the
Company's 1993 Salaried Employee Participation Plan. 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 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 "Additional Shares"). As of March 31,
1997, the Additional Shares

30
<PAGE> 33

equaled 129,325, creating a total of 403,645 shares of Common Stock or Common
Stock equivalents issuable under the 1996 Plan as of such date.

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.

The Company has agreed with Walsh, Manning that the Company will not,
without the consent of Walsh, Manning, 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. As of September 30, 1996, the Company had not granted any options
under the 1996 Plan. As of March 31, 1997, the Company had granted outstanding
options to purchase 368,000 shares of Common Stock, at exercise prices ranging
from $4.375 to $5.50 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.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During 1996, Gordon T. Graves, the Company's Chairman and Chief Executive
Officer, exercised warrants to purchase 291,545 shares of Common Stock at $2.00
per share. Such exercise was accomplished by the issuance to the Company of Mr.
Graves' promissory note due in five years and bearing interest at 6% per annum.
Also during 1996, Mr. Sjodin exercised for cash 2,500 warrants to purchase
Common Stock at $1.50 per share.

In January 1995, Messrs. Graves (including a limited partnership controlled
by Mr. Graves), Montgomery, Sjodin and Newell, along with other non-employee
investors that included SCA Promotions, Inc. ("SCA"), exchanged certain
outstanding subordinated notes due them by the Company for shares of the
Company's Series A Preferred Stock, at the exchange price of $10 principal
amount of such notes for each share of Series A Preferred Stock. In connection
with such exchange, the Company issued its substitute warrants for other
warrants held by such parties. As a result of such exchange, Mr. Graves (and
such limited partnership) held 80,175 shares of Series A Preferred Stock and
substitute warrants for the purchase of 291,545 shares of Common Stock; Messrs.
Montgomery and Sjodin each held 534 shares of Series A Preferred Stock and
substitute warrants for the purchase of 1,940 shares of Common Stock; and Mr.
Newell held 107 shares of Series A Preferred Stock and substitute warrants for
the purchase of 388 shares of Common Stock. All of the substitute warrants have
an exercise price of $2.00 per share of Common Stock.

In August, 1996, Mr. Graves, along with other investors, acquired a 10%
interest in AGN Venturer LLC, for $50,000 in cash and the several guarantee
(i.e., 10%) of a $336,000 note payable to the Company by AGN Venturer LLC. AGN
Venturer LLC owns 51% of AGN.

31
<PAGE> 34

Mr. Nickell is a principal shareholder of SCA which indemnifies the Company
against a portion of its prize fulfillment risk. The Company believes that the
terms of the Risk Assumption Agreement with SCA are at least as favorable as
could have been obtained by the Company with an unaffiliated third party.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of March 31, 1997,
with respect to the number of shares of Common Stock and Series A Preferred
Stock owned by (i) each person known by the Company to own beneficially more
than 5% of the outstanding shares of each of the Common Stock and 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 SERIES A PREFERRED STOCK
--------------------------- ------------------------
NUMBER OF NUMBER OF
SHARES SHARES
BENEFICIALLY PERCENT BENEFICIALLY PERCENT
BENEFICIAL OWNER OWNED OF CLASS OWNED OF CLASS
---------------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Gordon T. Graves................................... 1,043,420(1) 23.5 80,175(2) 59.7
1604 Crested Butte
Austin, Texas 78746

SCA Promotions, Inc. .............................. 108,497(3) 2.6 12,563 9.4
8300 Douglas Avenue
Suite 625
Dallas, Texas 75225

Frank T. Nickell................................... 108,497(3)(4) 2.6 12,563(4) 9.4
350 Park Avenue,
21st Floor
New York, New York 10022

Larry D. Montgomery................................ 84,684(5) 2.0 1,411 1.1
1920 S. West Union Road
Topeka, Kansas 66615

Gordon T. Sjodin................................... 46,358(6) 1.1 1,272 (7)
5804 E. 104th Street
Tulsa, Oklahoma 74137

Daniel J. Sarnoff.................................. 46,607(8) 1.1 2,000 2.9
1861 Nichols Canyon
Los Angeles, California 90046

Gregory N. Stern................................... 13,334(9) (7) -- --
130 Barton Road
Stow, Massachusetts 01775

All executive officers and directors as a group (7
persons)......................................... 1,272,931(10) 27.6 83,351 62.1

</TABLE>
- ---------------

(1) Consists of (i) 318,818 shares owned of record by Mr. Graves, (ii) 272,727
shares owned of record by Graves Properties, Ltd., a limited partnership
controlled by Mr. Graves, (iii) 51,000 shares owned by Graves Management,
Inc., a corporation controlled by Mr. Graves and (iv) 400,875 shares
issuable upon the conversion of the Series A Preferred Stock. Excludes 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.

(2) 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.

32
<PAGE> 35

(3) Consists of (i) 45,682 shares issuable upon the exercise of currently
exercisable warrants, and (ii) 62,815 shares issuable upon the conversion
of the Series A Preferred Stock. The Series A Preferred Stock was converted
by each of SCA Promotions, Inc. and Mr. Nickell in April 1997.

(4) Excludes shares of Common Stock and Series A Preferred Stock beneficially
owned by SCA Promotions, Inc., in which Mr. Nickell is a principal
shareholder, as to which Mr. Nickell disclaims any beneficial ownership.

(5) Consists of (i) 30,000 shares owned of record by Mr. Montgomery, (ii)
39,250 shares issuable upon the exercise of currently exercisable stock
options, (iii) 3,250 shares issuable upon exercise of stock options that
become exercisable within the next 60 days, (iv) 5,129 shares issuable upon
the exercise of currently exercisable warrants, and (v) 7,055 shares
issuable upon conversion of the Series A Preferred Stock.

(6) Consists of (i) 11,750 shares owned of record or beneficially by Mr.
Sjodin, (ii) 4,623 shares issuable upon the exercise of currently
exercisable warrants, (iii) 1,125 shares issuable upon the exercise of the
stock options that become exercisable within the next 60 days, (iv) 22,500
shares issuable upon the exercise of currently exercisable stock options,
and (v) 6,360 shares issuable upon conversion of the Series A Preferred
Stock.

(7) Less than 1%.

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

(9) Consists of (i) 39,334 shares issuable upon the exercise of currently
exercisable stock options by Mr. Sarnoff and (ii) 7,273 shares issuable
upon the exercise of currently exercisable warrants.

(10) Consists of (i) 684,695 shares owned of record, (ii) 130,416 shares
issuable upon the exercise of currently exercisable stock options, (iii)
4,375 shares issuable upon the exercise of stock options that become
exercisable within the next 60 days, (iv) 36,690 shares issuable upon the
exercise of currently exercisable warrants and (v) 416,755 shares issuable
upon conversion of Series A Preferred Stock.

SELLING SECURITYHOLDERS

The following table sets forth for each Selling Securityholder, as of March
31, 1997 (June 5, 1997, in the case of the Warrants and the Shares), the number
of Warrants and shares of Common Stock beneficially owned by such Selling
Securityholder prior to this offering, the maximum number of Warrants and Shares
to be offered and sold from time to time by such Selling Securityholder and the
number of shares of Common Stock to be beneficially owned by such Selling
Securityholder after this offering.

<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED PRIOR TO
OFFERING(1) SECURITIES BEING OFFERED SHARES
----------------------- ------------------------- BENEFICIALLY
COMMON COMMON OWNED AFTER
NAME WARRANTS STOCK WARRANTS STOCK OFFERING(2)
- ---- ---------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Class A Warrant Holders:
Leonard Anderson.................... 8,000 16,000 8,000 8,000 8,000
Baystate Development Trust.......... 40,333 48,666 40,333 40,333 8,333
Michael Crowther.................... 16,667 38,334 16,667 16,667 21,667
W. Donald DeWitt.................... 4,166 13,332 4,166 4,166 9,166
EAB Associates, LLC................. 819,497 819,497 819,497 819,497 --
G.W. Egermayer, Jr.................. 10,000 30,000 10,000 10,000 20,000
Albert Feuerstein................... 8,333 8,333 8,333 8,333 --
First National Trust Assc........... 8,333 16,666 8,333 8,333 8,333
FBO: Roger A. Granberg
Galaxy Investments.................. 121,459 121,459 121,459 121,459 --
Hampton & Harbor, Inc............... 58,334 58,334 58,334 58,334 --
Ronald & Joyce Heller............... 5,625 5,625 5,625 5,625 --
lnterpacific Capital Corp........... 190,002 290,004 190,002 190,002 100,002
Jasmineville Corp N.V............... 11,250 11,250 11,250 11,250 --
Helaine Kaplan (3).................. 22,500 22,500 22,500 22,500 --
</TABLE>

33
<PAGE> 36
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED PRIOR TO
OFFERING(1) SECURITIES BEING OFFERED SHARES
----------------------- ------------------------- BENEFICIALLY
COMMON COMMON OWNED AFTER
NAME WARRANTS STOCK WARRANTS STOCK OFFERING(2)
- ---- ---------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Stanley A. Kaplan................... 22,500 61,500 22,500 22,500 39,000
M.S. Farrell Holdings............... 33,334 33,334 33,334 33,334 --
Michael Metter...................... 18,000 18,000 18,000 18,000 --
Michael Miller...................... 11,250 71,250 11,250 11,250 60,000
Theo Muller......................... 11,250 11,250 11,250 11,250 --
Bette Nagelberg..................... 5,625 9,791 5,625 5,625 4,166
John N. Oertel...................... 6,666 15,832 6,666 6,666 9,166
Kenneth Orr......................... 8,000 8,000 8,000 8,000 --
Quad Capital Partners(3)............ 39,167 39,167 39,167 39,167 --
Morris Stellar...................... 16,667 38,334 16,667 16,667 21,667
Universal Partners, LLP............. 11,250 79,583 11,250 11,250 68,333
Windy City, Inc..................... 5,625 9,791 5,625 5,625 4,166
Dean Zachman........................ 5,000 15,333 5,000 5,000 10,333
--------- --------- --------- --------- -------
Sub-Totals.................. 1,518,833 1,911,165 1,518,833 1,518,833 392,332
--------- --------- --------- --------- -------
Class B Warrant Holders:
Theodore Burns...................... 109,578 109,578 109,578 109,578 --
Victor DiGioia...................... 5,000 5,000 5,000 5,000 --
Stanley Goldstein................... 5,000 5,000 5,000 5,000 --
Craig Gross......................... 164,366 264,366 164,366 164,366 100,000
Lawrence Kaplan(3).................. 75,000 174,375 75,000 75,000 99,375
Frank J. Skelly, III................ 164,366 264,366 164,366 164,366 100,000
--------- --------- --------- --------- -------
Sub-Totals.................. 523,310 822,685 523,310 523,310 299,375
--------- --------- --------- --------- -------
Total Selling Securityholders:...... 2,042,143 2,733,850 2,042,143 2,042,143 691,707
========= ========= ========= ========= =======
</TABLE>

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

(1) Common Stock beneficially owned includes the Shares issuable upon the
exercise of the Warrants, notwithstanding that the Warrants do not become
exercisable until November 7, 1997.

(2) Assumes the sale of all Warrants and Shares offered hereby by the Selling
Securityholders. Based upon 4,040,307 shares of Common Stock outstanding on
March 31, 1997.

(3) Lawrence Kaplan is an advisor to the Company's Board of Directors and is a
principal in G-V Capital, Inc. Helaine Kaplan is Mr. Kaplan's spouse and Mr.
Kaplan is a partner in Quad Capital Partners.

(4) In August 1996 and November, 1996, the Company completed the private
placement of the Class A Warrants and the Shares related thereto. As
consideration for acting as placement agent for the Company in such private
placements, designees of Walsh, Manning were issued the Class B Warrants.
Craig Gross and Frank J. Skelly, III, are the principal owners of EAB
Associates, LLC, which in turn is the principal owner of Walsh Manning.

(5) In connection with the August and November private placements, each Selling
Securityholder, (other than EAB Associates, Hampton & Harbor, Inc., and the
holders of the Class B Warrants), (i) agreed not to sell any Securities
until June 22, 1998, without the prior consent of Walsh Manning, and (ii)
granted to Walsh Manning or its designee a right of first refusal, expiring
on June 22, 1998, to purchase any Securities proposed to be sold by such
Selling Securityholder. The Securities shown in the table as owned by EAB
Associates, LLC, were acquired pursuant to the exercise of such right of
first refusal.

All of the Securities were issued subject to agreements of the Company (the
"Registration Agreements") wherein the Company has agreed to keep the
Registration Statement of which this Prospectus forms a part continuously
effective for so long as the Warrants remain outstanding.

34
<PAGE> 37

PLAN OF DISTRIBUTION

The Company will not receive any proceeds from the sale of the Securities
by a Selling Securityholder; however, the Company will receive proceeds from the
issuance of shares of Common Stock upon the exercise of the Warrants at $8.00
per share. If the Warrants are exercised in full, the Company will receive
$16,337,144 of gross proceeds therefrom. Each of the Selling Securityholders may
sell Securities directly or through broker-dealers who may act solely as agents,
or who may acquire Securities as principals. The Securities may be sold from
time to time by the Selling Securityholders, or by pledgees, donees, transferees
or other successors in interest to the Selling Securityholders. The distribution
of the Securities may be effected in one or more transactions that may take
place through the Nasdaq SmallCap Market, including block trades or ordinary
broker's transactions, or through privately negotiated transactions, or through
a combination of any such methods of sale, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage fees
or commissions may be paid by the Selling Securityholders in connection with
such sales.

The aggregate proceeds to the Selling Securityholders from the sale of the
Securities will be the purchase price of the Securities sold less the aggregate
agents' commissions and other expenses of issuance and distribution not borne by
the Company. The Selling Securityholders and any dealers or agents that
participate in the distribution of the Securities may be deemed to be
"underwriters" within the meaning of the Securities Act, and any profit on the
sale of the Securities by them and any commissions received by any such dealers
or agents may be deemed to be underwriting discounts and commissions under the
Securities Act. Each Selling Securityholder (except as otherwise stated in the
footnotes to the table under "Selling Securityholders") has granted to Walsh
Manning a right of first refusal, expiring June 22, 1998, to purchase any
Securities proposed to be sold by the Selling Securityholder. To the extent
Walsh Manning exercises such right of first refusal and resells the Securities,
Walsh Manning may be deemed to be an "underwriter" within the meaning of the
Securities Act.

The Selling Securityholders may effect transactions by selling the
Securities directly or through broker-dealers acting either as principal or as
agent, and such broker-dealers may receive compensation in the form of usual and
customary or specifically negotiated underwriting discounts, concessions or
commissions from the Selling Securityholders.

Under the Registration Agreements, the Company has agreed to bear all of
the expenses of registration of the Securities under the Federal and state
securities laws, including filing fees. Such expenses payable by the Company are
currently estimated to be $90,000.

The Company has advised the Selling Securityholders that the
anti-manipulative provisions of Regulation M under the Exchange Act may apply to
their sales in the market, has furnished each Selling Securityholder with a copy
of Regulation M and has informed them of the need for delivery of copies of this
Prospectus. There can be no assurance that any of the Selling Securityholders
will sell any of the Securities offered by them hereunder.

Pursuant to the Registration Agreements, the Company has agreed to
indemnify the Selling Securityholders against certain liabilities, including
certain potential liabilities under the Securities Act, or to contribute to
payments the Selling Securityholders may be required to make in respect thereof.

35
<PAGE> 38

DESCRIPTION OF SECURITIES

The Company is authorized to issue 25,000,000 shares of Common Stock, par
value $.01 per share, and 2,000,000 shares of Preferred Stock, par value $10 per
share. As of March 31, 1997, there were 4,040,307 shares of Common Stock
outstanding, 134,318 shares of Series A Preferred Stock issued and outstanding,
1,518,833 Class A Warrants issued and outstanding and 523,310 Class B Warrants
issued and outstanding.

COMMON STOCK

Subject to the rights of the holders of any shares of Preferred Stock which
may be issued in the future, and subject to the rights of the holders of Series
A Preferred Stock to elect a majority of the Board of Directors in the event the
Company is in arrears in the payment of two consecutive quarterly dividend
payments, holders of shares of Common Stock and holders of shares of the Series
A Preferred Stock, voting together as a single class, are entitled to cast one
vote for each share of Common Stock and Series A Preferred Stock held at all
stockholders' meetings for virtually all purposes, including the election of
directors. Directors are elected each year at the Company's annual meeting of
stockholders to serve for a period of one year and until their respective
successors have been duly elected and qualified.

Common stockholders have the right to share ratably in such dividends on
shares of Common Stock as may be declared by the Board of Directors out of funds
legally available therefor. Upon liquidation or dissolution, each outstanding
share of Common Stock will be entitled to share equally in the assets of the
Company legally available for distribution to stockholders after the payment of
all debts and other liabilities, subject to any superior rights of the holders
of Preferred Stock. The Series A Preferred Stock has a preference in liquidation
of $10 per share.

Common stockholders have no preemptive rights. There are no conversion or
redemption privileges or sinking fund provisions with respect to the Common
Stock. All of the outstanding shares of Common Stock are, and all of the shares
of Common Stock offered hereby will be, validly issued, fully paid and
nonassessable. The Common Stock does not have cumulative voting rights so
holders of more than 50% of the outstanding Common Stock can elect 100% of the
Directors of the Company if they choose to do so, subject to the rights of the
holders of outstanding Series A Preferred Stock as described above.

PREFERRED STOCK

The Board of Directors is authorized to issue shares of Preferred Stock,
$10 par value per share, from time to time in one or more series. The Board may
issue a series of Preferred Stock having the right to vote on any matter
submitted to stockholders, including, without limitation, the right to vote by
itself as a series, or as a class together with any other or all series of
Preferred Stock. The Board of Directors may determine that the holders of
Preferred Stock voting as a class will have the right to elect one or more
additional members of the Board of Directors, or the majority of the members of
the Board of Directors. The Board of Directors has designated a series of
Preferred Stock as Series A Preferred Stock which has the right to elect a
majority of the Board of Directors in the event the Company is in arrears in the
payment of two consecutive quarterly dividend payments.

The Board of Directors may also grant to holders of any series of Preferred
Stock preferential rights to dividends and amounts payable in liquidation.
Furthermore, the Board of Directors may determine whether the shares of any
series of Preferred Stock may be convertible into Common Stock or any other
series of Preferred Stock of the Company at a specified conversion price or
rate, and upon other terms and conditions as determined by the Board of
Directors.

SERIES A PREFERRED STOCK

The Board of Directors has designated 134,318 shares of Preferred Stock as
Series A Preferred Stock, of which 80,175 shares are held by Gordon Graves, the
Chairman and Chief Executive Officer of the Company, and his affiliated company,
and an aggregate of 3,176 shares are held by four other officers or directors of
the Company. The holders of the Series A Preferred Stock have the right to elect
a majority of the Board of Directors in the event the Company is in arrears in
the payment of two consecutive quarterly dividend payments. The

36
<PAGE> 39

Series A Preferred Stock bears dividends at the rate of $.275 per quarter
payable on January 1, April 1, July 1 and October 1 of each year. The Series A
Preferred Stock is convertible into Common Stock at the rate of five shares of
Common Stock for each one share of Series A Preferred Stock. The Series A
Preferred Stock has a preference on liquidation of $10 per share plus accrued
and unpaid dividends and is redeemable by the Company for $10 per share plus
accrued and unpaid dividends under certain circumstances.

LOCK-UP AGREEMENTS

In connection with the transactions pursuant to which certain of the
Selling Securityholders acquired the Securities offered hereby, virtually all of
the Selling Securityholders and each of the officers, directors and certain
holders (directly and indirectly) of one percent (1%) or more of the Company's
Common Stock agreed with Walsh Manning not to sell the Securities or any other
securities of the Company then held by such persons until June 22, 1998 (or
November 22, 1998, in the case of such officers, directors and 1% holders). See
Note 5 of the Notes to the Selling Securityholder table.

WARRANTS

Terms. Each Warrant entitles the holder thereof to purchase one share of
Common Stock from the Company at an exercise price equal to $8.00 per share,
subject to adjustment in certain circumstances. The Warrants become exercisable
on November 7, 1997, and unless exercised, will automatically expire on November
12, 2001.

Registration Rights. In connection with the transactions pursuant to which
the Selling Securityholders acquired the Securities offered hereby, the Company
agreed to notify the holders (the "Holders") of the Securities of the filing of
the Registration Statement of which this Prospectus forms a part, and to include
the Securities in such Registration Statement at the request of such Holder. In
addition, commencing on April 7, 1997, Walsh Manning or the holders on a
combined basis of a majority of the Securities may demand that the Company file
a Registration Statement covering the Securities. Either action is to be taken
at the Company's expense except for brokerage commissions, transfer taxes and
the fees of counsel to the Holders.

The Company is required only to use its best efforts to cause the
Securities covered by the Registration Statement to be registered or otherwise
qualified for sale in the states designated by the Holders. It may in fact not
be practicable to qualify the Securities for sale in every state in which a
Holder resides. Accordingly, it is possible that the substantial restrictions on
the transferability of the Securities will continue, even after registration.
See "Risk Factors -- Current Prospectus and State Registration Required to
Exercise Warrants."

The registration rights of the Holders expire on November 12, 2001.

Redemption. The Warrants are redeemable, in whole or in part, at the option
of the Company, at $.10 per Warrant, upon not less than 30 days prior written
notice, at any time after November 7, 1997, in the case of the Class A Warrants,
and at any time after February 7, 1999, in the case of the Class B Warrants;
provided that (i) the closing bid price quotation of the Company's Common Stock
is at least 150% of the then exercise price of the Warrant on each of the 20
trading days ending not later than the seventh trading day prior to the day on
which notice of redemption is given; and (ii) the Warrants and the Shares have
been registered under the Securities Act.

Warrant Agreement. The Warrants are issued pursuant to a Warrant Agreement
between the Company and Corporate Stock Transfer, Denver, Colorado, as warrant
agent, and are subject to the terms and provisions thereof.

TRANSFER AGENT AND WARRANT AGENT

The Transfer Agent for the Company's Common Stock is Corporate Stock
Transfer, Denver, Colorado.

The Warrant Agent for the Warrants is Corporate Stock Transfer, Denver,
Colorado.

37
<PAGE> 40

INDEPENDENT PUBLIC ACCOUNTANTS

The consolidated balance sheet of the Company as of September 30, 1996, 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, 1996, appearing elsewhere in this Prospectus and in the Registration
Statement of which this Prospectus forms a part, have been included herein and
therein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of said firm as experts in accounting and
auditing.

With respect to the unaudited interim financial information for the six
month period ended March 31, 1997, included in this Prospectus, the independent
accountants have reported that they have applied limited procedures in
accordance with professional standards for a review of such information.
However, their separate report appearing elsewhere in this Prospectus and in the
Registration Statement of which this Prospectus forms a part, states that they
did not audit and they do not express an opinion on that interim financial
information. Accordingly, the degree of reliance on their reports on such
information should be restricted in light of the limited nature of the review
procedures applied. The accountants are not subject to the liability provisions
of Section 11 of the Securities Act of 1933 for their report on the unaudited
interim financial information because that report is not a "report" or a "part"
of the registration statement prepared or certified by the accountants within
the meaning of Sections 7 and 11 of the Act.

LEGAL MATTERS

The validity of the Securities offered hereby has been passed upon for the
Company by Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C., Tulsa,
Oklahoma. Attorneys who are shareholders or employed by Hall, Estill, Hardwick,
Gable, Golden & Nelson, P.C. who have provided advice with respect to this
offering in the aggregate own less than $50,000 in value of the Company's
securities.

AVAILABLE INFORMATION

The Company is subject to the information requirements of the Exchange Act
and, in accordance therewith, files proxy statements, reports and other
information with the Commission. Such proxy statements, reports and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices in Chicago, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and in New York, Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the
Commission maintains a Web site that contains proxy statements, reports and
other information filed electronically by the Company with the Commission which
can be accessed over the Internet at http://www.sec.gov. The Common Stock is
quoted on the Nasdaq SmallCap Market. Reports and information concerning the
Company may be inspected at the National Association of Securities Dealers,
Inc., at 1735 K Street, N.W., Washington, D.C. 20006.

This Prospectus constitutes a part of a Registration Statement on Form SB-2
(the "Registration Statement") filed on July 3, 1997, as the same may from time
to time be amended, by the Company with the Commission under the Securities Act.
This Prospectus omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration Statement and to the
exhibits relating thereto for further information with respect to the Company
and the Securities offered hereby. Statements contained herein concerning the
provisions of any document are not necessarily complete and, in each instance,
reference is made to a copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.

38
<PAGE> 41

The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus has been delivered, upon
written or oral request of such person, a copy of any and all of the information
incorporated herein by reference, other than the exhibits to such information
(unless such exhibits are specifically incorporated by reference into such
information). Requests should be directed to Multimedia Games, Inc. at its
principal executive offices, 7335 South Lewis Avenue, Suite 204, Tulsa, Oklahoma
74136 Attention: Corporate Secretary (918) 494-0576.

39
<PAGE> 42

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES

The Company's By-Laws authorize the Company to indemnify any present or
former director, officer, employee, or agent of the Company, or a person serving
in a similar post in another organization at the request of the Company, against
expenses, judgments, fines, and amounts paid in settlement incurred by him in
connection with any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative, to the
fullest extent not prohibited by the Texas Business Corporation Act, public
policy or other applicable law. Article 202 of the Texas Business Corporation
Act authorizes a corporation to indemnify its directors, officers, employees, or
agents in terms sufficiently broad to permit such indemnification under certain
circumstances for liabilities (including provisions permitting advances for
expenses incurred) arising under the Act.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

40
<PAGE> 43

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Historical and Pro Forma Balance Sheets,
September 30, 1996........................................ F-3
Consolidated Statements of Operations, Years Ended September
30, 1996 and 1995......................................... F-4
Consolidated Statements of Changes in Stockholders Equity,
Years Ended September 30, 1996 and 1995................... F-5
Consolidated Statements of Cash Flows, Years Ended September
30, 1996 and 1995......................................... F-6
Notes to Consolidated Financial Statements.................. F-7
Report of Review by Independent Accountants................. F-22
Consolidated Balance Sheet, March 31, 1997 (unaudited)...... F-23
Consolidated Statements of Operations, Six Months Ended
March 31, 1997 and 1996 (unaudited)....................... F-24
Consolidated Statements of Cash Flows, Six Months Ended
March 31, 1997 and 1996 (unaudited)....................... F-25
Notes to Consolidated Unaudited Financial Statements........ F-26
</TABLE>

F-1
<PAGE> 44

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, 1996, 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, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, 1996 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended September 30, 1996, in conformity with generally
accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Tulsa, Oklahoma
December 18, 1996

F-2
<PAGE> 45

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996

ASSETS

<TABLE>
<CAPTION>
HISTORICAL PROFORMA
----------- -------------
(UNAUDITED --
SEE NOTE 9)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 1,508,000 $ 3,565,000
Accounts Receivable:
Trade, net of allowance for doubtful accounts of
$76,000.............................................. 247,000 247,000
Other.................................................. 45,000 45,000
Inventory................................................. 358,000 358,000
Prepaid expenses.......................................... 92,000 92,000
----------- -----------
Total current assets.............................. 2,250,000 4,307,000
=========== ===========
Restricted cash and cash equivalents........................ 1,534,000 1,534,000
Note receivable from American Gaming Network LLC............ 336,000 336,000
Property and equipment, net................................. 2,616,000 2,616,000
Other assets................................................ 196,000 91,000
Goodwill, net............................................... 499,000 499,000
----------- -----------
Total assets...................................... $ 7,431,000 $ 9,383,000
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 50,000 $ 50,000
Current portion of long-term debt......................... 197,000 197,000
Due to American Gaming Network LLC........................ 99,000 99,000
Accounts payable and accrued expenses..................... 1,292,000 1,292,000
Halls' share of surplus................................... 120,000 120,000
Prize fulfillment fees payable............................ 320,000 320,000
----------- -----------
Total current liabilities......................... 2,078,000 2,078,000
----------- -----------
Bridge notes payable........................................ 800,000 --
Long-term debt.............................................. 787,000 787,000
Other long-term liabilities................................. 1,372,000 1,372,000

Commitments and Contingencies (Note 11)

Stockholders' equity:
Preferred stock, Series A, $.01 par value, 2,000,000
shares authorized, 134,318 shares issued and
outstanding............................................ 1,000 1,000
Common stock, $.01 par value, 10,000,000 shares
authorized, 2,859,200 shares and 4,018,033 proforma
shares issued and 2,825,201 shares and 3,984,034
proforma shares outstanding............................ 29,000 40,000
Additional paid-in capital................................ 6,296,000 9,071,000
Stockholder notes receivable.............................. (1,271,000) (1,271,000)
Treasury stock, 33,999 shares at cost..................... (87,000) (87,000)
Accumulated deficit....................................... (2,574,000) (2,608,000)
----------- -----------
Total stockholders' equity........................ 2,394,000 5,146,000
----------- -----------
Total liabilities and stockholders' equity........ $ 7,431,000 $ 9,383,000
=========== ===========
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE> 46

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Gaming revenue........................ $21,653,000 $14,841,000
MegaBingo services fee................ 669,000
Other................................. 1,234,000 1,602,000
----------- -----------
Total revenues................ 22,887,000 17,112,000
----------- -----------
Operating costs and expenses:
Bingo prizes and related costs........ 9,697,000 9,026,000
Allotments to hall operators.......... 7,596,000 3,130,000
Salaries and wages.................... 1,659,000 1,402,000
Selling, general and administrative
expenses........................... 3,149,000 2,470,000
Amortization and depreciation......... 529,000 250,000
Other................................. 55,000 243,000
----------- -----------
Total operating costs and
expenses................... 22,685,000 16,521,000
----------- -----------
Operating income........................ 202,000 591,000
Interest income......................... 51,000 31,000
Interest expense........................ (213,000) (117,000)
----------- -----------
Net income.............................. $ 40,000 $ 505,000
=========== ===========
Earnings (loss) per common and
equivalent share, 2,872,258 and
1,555,471 shares, respectively........ $ (.04) $ .26
=========== ===========
Earnings (loss) per common and
equivalent share assuming full
dilution, 2,872,258 and 1,679,067
shares, respectively.................. $ (.04) $ .24
=========== ===========
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE> 47

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------- -------------------
NUMBER NUMBER ADDITIONAL STOCKHOLDER
OF OF PAID-IN NOTES
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE
------- ------ --------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1994...... -- $ -- 1,311,008 $13,000 $2,345,000 $ --
Common stock issued for legal
and consulting services..... 7,841 -- 1,000 -- 80,000 --
Preferred stock issued in
exchange for notes
payable..................... 120,977 1,000 -- -- 1,208,000 --
Sale of common stock.......... -- -- 267,273 3,000 547,000 (200,000)
Compensation recognized and
adjustment to unearned
compensation................ -- -- -- -- (10,000) --
Exercise of common stock
warrants.................... -- -- 260,667 2,000 520,000 --
Sale of preferred stock....... 7,500 -- -- -- 75,000 --
Preferred stock dividends
($.70 per preferred
share)...................... -- -- -- -- -- --
Net income.................... -- -- -- -- -- --
------- ------ --------- ------ --------- -----------
Balance, September 30, 1995... 136,318 1,000 1,839,948 18,000 4,765,000 (200,000)
Exercise of common stock
warrants.................... -- -- 28,332 -- 50,000 --
Sale of common stock.......... -- -- 699,375 8,000 941,000 --
Exercise of common stock
warrants by Chairman........ -- -- 291,545 3,000 580,000 (583,000)
Purchase of treasury stock.... -- -- -- -- -- 200,000
Issuance of treasury stock.... -- -- -- -- (47,000) (688,000)
Redemption of preferred
stock....................... (2,000) -- -- -- (20,000) --
Preferred stock dividends
($1.10 per preferred
share)...................... -- -- -- -- -- --
Value of warrants associated
with Bridge Notes........... -- -- -- -- 27,000 --
Net income.................... -- -- -- -- -- --
------- ------ --------- ------- ---------- -----------
Balance, September 30, 1996... 134,318 $1,000 2,859,200 $29,000 $6,296,000 $(1,271,000)
======= ====== ========= ======= ========== ===========

TREASURY TOTAL
STOCK/ STOCKHOLDERS'
UNEARNED ACCUMULATED EQUITY
COMPENSATION DEFICIT (DEFICIT)
------------ ----------- -------------
<S> <C> <C> <C>
Balance, October 1, 1994...... $ (21,000) $(2,874,000) $ (537,000)
Common stock issued for legal
and consulting services..... -- 80,000
Preferred stock issued in
exchange for notes
payable..................... -- -- 1,209,000
Sale of common stock.......... -- -- 350,000
Compensation recognized and
adjustment to unearned
compensation................ 21,000 -- 11,000
Exercise of common stock
warrants.................... -- -- 522,000
Sale of preferred stock....... -- -- 75,000
Preferred stock dividends
($.70 per preferred
share)...................... -- (96,000) (96,000)
Net income.................... -- 505,000 505,000
--------- ----------- ----------
Balance, September 30, 1995... -- (2,465,000) 2,119,000
Exercise of common stock
warrants.................... (14,000) -- 36,000
Sale of common stock.......... -- -- 949,000
Exercise of common stock
warrants by Chairman........ -- -- --
Purchase of treasury stock.... (808,000) -- (608,000)
Issuance of treasury stock.... 735,000 -- --
Redemption of preferred
stock....................... -- -- (20,000)
Preferred stock dividends
($1.10 per preferred
share)...................... -- (149,000) (149,000)
Value of warrants associated
with Bridge Notes........... -- -- 27,000
Net income.................... -- 40,000 40,000
--------- ----------- ----------
Balance, September 30, 1996... $ (87,000) $(2,574,000) $2,394,000
========= =========== ==========
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE> 48

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 40,000 $ 505,000
Adjustments to reconcile net income to cash provided by
(used for) operating activities:
Amortization and depreciation.......................... 529,000 250,000
Software license fee................................... (500,000) --
Other non-cash expenses................................ 84,000 31,000
(Increase) decrease in:
Accounts and notes receivable........................ (367,000) (468,000)
Inventory............................................ (358,000) --
Other................................................ (75,000) (9,000)
Increase (decrease) in:
Accounts payable and accrued expenses................ 361,000 390,000
----------- -----------
Net cash provided by (used for) operating activities...... (286,000) 699,000
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment..................... (1,294,000) (364,000)
Net cash acquired in the purchase of MegaBingo assets..... -- 355,000
Other..................................................... -- (2,000)
----------- -----------
Net cash provided by (used for) investing activities...... (1,294,000) (11,000)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock........................ 985,000 819,000
Proceeds from sale of preferred stock..................... -- 75,000
Proceeds from debt........................................ 1,062,000 1,102,000
Principal repayments of debt.............................. (171,000) (1,131,000)
Payment of preferred stock dividends...................... (149,000) (96,000)
Preferred stock redemption................................ (10,000) --
Financing Costs........................................... (166,000) --
----------- -----------
Net cash provided by (used for) financing activities..... 1,551,000 769,000
----------- -----------
Net change in cash and cash equivalents..................... (29,000) 1,457,000
Cash and cash equivalents, beginning of period.............. 1,537,000 80,000
----------- -----------
Cash and cash equivalents, end of period.................... $ 1,508,000 $ 1,537,000
=========== ===========
Supplemental disclosure of interest paid:................... $ 102,000 $ 141,000
=========== ===========
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE> 49

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")
were organized to develop, promote and produce lawful gaming activities over the
information highway, including but not limited to, satellites, television, wires
and the Internet. 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 furnish the
marketing and other operating services required in the conduct of high stakes
bingo games conducted under the names MegaBingo, MegaCash and MegaBingo Lite
(the "MegaBingo Games"). MegaBingo and MegaCash are played simultaneously using
a closed-circuit television satellite link at independently owned bingo halls
located in several states throughout the United States, operated primarily on
behalf of American Indian tribes. MegaBingo Lite provides smaller prizes to
similarly linked Indian bingo halls located in the State of Oklahoma.

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.)

Generally speaking, Class II gaming may be conducted on Indian lands if the
state in which the Indian reservation is located permits such gaming for any
purpose by any person. Class III gaming, on the other hand, may be conducted
pursuant to a compact reached between the Indian tribe and the state in which
the tribe is located.

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.

Consolidation Principles -- These 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"). All intercompany transactions have been eliminated in
consolidation.

These financial statements also include TV Games' allocable share of income
or losses (to the extent of the Company's investment basis) from American Gaming
Network L.L.C ("AGN"), which is accounted for under the equity method.

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 $246,000 held in reserve for MegaBingo prizes under the
provisions of the Integrated Services Agreements with the tribes and $1,288,000
representing the present value of investments held by the Company's prize
fulfillment firm related to outstanding jackpot prize winner annuities.

F-7
<PAGE> 50

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Inventory -- Inventory consists primarily of computer equipment components
for MegaMania player stations. 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
using the straight line method. Predominately all of the Company's property and
equipment is depreciated over 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.

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. 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 $48,000 and $20,000 at September 30, 1996 and 1995, 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. The specific methodology of 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, the tax valuation allowance
and the provision for and disclosure of litigation and loss contingencies.
Actual results may differ from these estimates in the near term.

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, 1996 and 1995. 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.

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.

F-8
<PAGE> 51

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

From April 1994 to December 1994, the Company principally derived its
revenue under a services agreement (the "AGE Services Agreement") to operate the
MegaBingo and MegaCash games for American Gaming and Entertainment ("AGE"). Such
revenues consisted of a fee equal to 95% of the net operating cash flow
generated in the conduct of such games and payments to the Company for expenses
incurred by the Company in the course of operating such bingo activities. These
revenues were recorded as the cash flow was generated and as the expenses were
incurred, respectively.

Revenues from the sale of electronic player stations is recorded when the
units are delivered to the purchaser. Lease revenues from the lease of the
MegaMania player stations, which are generally based on a percentage of revenue
generated by the player stations, are reflected in other revenue and recognized
as the revenues are generated by the player stations.

Project development revenue relates to amounts paid to the Company for
Internet development activities undertaken for Graff Pay-Per-View, Inc. (See
Note 3).

Revenues related to certain intellectual property sold to Graff were
recognized when the related documentation evidencing the transfer of the
Company's ownership rights was executed.

Impact of Financial Accounting Pronouncements -- In March 1995, Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of," was issued. The
statement establishes accounting standards for the impairment of long-lived
assets, such as property and equipment and intangibles. The Company does not
believe the new standard will significantly impact its financial statement
evaluation of impairment of long-lived assets.

In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" was issued. The statement requires the
computation of compensation for grants of stock, stock options and other equity
instruments issued to employees based on fair value. The compensation calculated
is to be either recorded as an expense in the financial statements or,
alternatively, disclosed. The Company anticipates it will elect the disclosure
method of complying with the new standard. Under existing accounting rules, the
Company's stock option grants have not resulted in compensation expense.
Accordingly, under the provisions of the new statement, pro forma net income to
be disclosed may be lower than net income reported in the financial statements.

These pronouncements will be effective for the Company in fiscal 1997.

2. MEGABINGO TRANSACTIONS

In December 1993, MBI entered into an Asset Purchase Agreement with AGE to
purchase substantially all of the assets used by AGE in its bingo gaming
activities (the "AGE Assets"), including the assets used in the conduct of the
MegaBingo and MegaCash games but excluding the Integrated Services Agreements
between AGE and various Indian tribes (the "AGE Contracts"). At the same time,
MBI purchased for $100,000 an option to enter into the AGE Services Agreement to
provide AGE, on an exclusive basis, the services required by AGE to conduct its
bingo activities pursuant to the AGE Contracts.

On April 15, 1994, MBI exercised its option and entered into the AGE
Services Agreement. On December 23, 1994, MBI purchased the AGE Assets pursuant
to the AGE Asset Purchase Agreement for a purchase price consisting of cash and
notes aggregating $1.8 million, plus the assumption of certain specified
liabilities of AGE. The notes were paid in 1995 out of the proceeds of bank debt
and the issuance of preferred stock by the Company, at which time the fee
payable under the AGE Services Agreement increased to 100% of the net cash flow
generated by the AGE Contracts retained by AGE plus expenses.

The AGE Services Agreement expires on April 15, 1997, subject to extension
by MBI for an additional two years if MBI has not, in its own name, entered into
Integrated Services Agreements with tribes accounting for 90% or more of the
aggregate gross player attendance in AGE's bingo operations as of April 15,
1994. As of

F-9
<PAGE> 52

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

September 30, 1996, MBI had not entered into Integrated Services Agreements with
tribes accounting for 90% of such gross player attendance and anticipates
exercising its option to extend the AGE Services Agreement for an additional two
years.

Service fees for the period October 1, 1994 to December 22, 1994 amounted
to $669,000 which included $132,000 representing MBI's share of cash flow and
$537,000 in payments to MBI by AGE for associated expenses. Since December 23,
1994, the acquisition date, the revenues and expenses of the MegaBingo Games
have been reflected in the financial statements at their gross amounts and not
netted and recorded as a services fee.

Virtually all of the Company's revenues are derived from the Integrated
Services Agreements with various tribes. The Company, in its name and 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 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 pending negotiations.

Approximately 43% and 39% of revenues (inclusive of MegaBingo and MegaMania
revenues) during the years ended September 30, 1996 and 1995, respectively, were
derived from halls operated by four tribes, including 22% and 11% derived from
two tribes in 1996.

3. GRAFF TRANSACTIONS

In July 1995, the Company entered into a series of agreements (the
"Agreements") with Graff Pay-Per-View ("Graff") in which Graff purchased a 33%
interest in certain previously developed intellectual property from the Company
for $500,000. The $500,000 was paid in the form of a note payable to the Company
which bore interest at 8% and was payable over three years.

Pursuant to the Agreements, the Company and Graff each contributed their
ownership interests in the intellectual property to a joint venture, American
Gaming Network, JV. ("AGN JV"). AGN JV was established to pursue the development
of gaming opportunities over the Internet.

In addition, Graff agreed to pay the Company an additional $450,000 to
develop a business plan for AGN JV and design certain new products for use on
the Internet. At September 30, 1995, the Company's development efforts were
substantially complete, and it therefore recognized the entire amount as revenue
in fiscal year 1995. At September 30, 1995, $375,000 had been received under
such provisions, and $75,000 was due July 31, 1996.

Graff also purchased 100,000 shares of the Company's common stock for $2.75
per share. The $275,000 purchase price was paid in the form of a note, of which
$75,000 was paid prior to September 30, 1995. The remaining $200,000 was due
August 1, 1996 and was shown as a reduction of equity. In connection with the
above transactions, Graff was granted a warrant to acquire 175,000 shares of the
Company's common stock at $2.50 per share. The Company subsequently reduced the
exercise price of such warrant to $2.25 per share and upon exercise of the
warrant by the payment of cash, the Company granted an additional 175,000
warrants to Graff which are exercisable at $3.50 per share and remain
unexercised.

Pursuant to the Agreements, Graff was to provide the needed capital to
finance AGN JV. During 1996, Graff indicated that it did not intend to provide
further funding for AGN JV and that it wanted a third party to assume its
contractual obligations to AGN JV and the Company. Although not obligated to do
so, because of the decision by Graff not to further fund the efforts of AGN JV,
the Company provided approximately $336,000 to AGN JV for development activities
which are to be reimbursed to the Company by AGN JV.

At June 30, 1996, Graff was indebted to the Company for a total of
approximately $800,000, $200,000 of which was presented as a direct reduction of
equity at June 30, 1996. Additionally, Graff owned 275,000 shares

F-10
<PAGE> 53

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of the Company's common stock and held warrants to purchase an additional
175,000 shares of common stock at $3.50 per share.

In July 1996, the Company entered into an agreement with Graff whereby the
Company accepted the 275,000 shares of the Company's common stock owned by Graff
as payment for amounts owed by Graff to the Company ($808,000 at the time).
Additionally, Graff's interest in AGN was acquired for $100,000 in cash and a
note for $400,000 (the $400,000 Graff Note") payable in three years by a new
entity ("AGN Venturers LLC") established by the Company. Graff retained its
175,000 warrants. Contemporaneously, the Company sold AGN Venturers LLC to a
group of investors ("Investors"), one of which is a related party who acquired
10% of AGN Venturers LLC, for $100,000, an agreement of the Investors to
contribute $400,000 to AGN JV and a several Investor guarantee of AGN JV's note
payable to the Company in the amount of $336,000. The $336,000 note payable by
AGN JV to the Company is in reimbursement of amounts advanced by the Company as
described above. At September 30, 1996, $99,000 of the proceeds from the
Investors which was deposited to the accounts of the Company had not been
transferred to AGN JV's bank account.

Simultaneously with the sale of AGN Venturers LLC, the Company and the
Investors entered into a put and call agreement pursuant to which, during a one
year window commencing in August 1997, the Investors can put AGN Venturers LLC's
interest in AGN JV to the Company for 278,666 shares of the Company's common
stock plus a number of common shares equal to the principal paid on the $400,000
Graff Note divided by three. Under the call provisions of the agreement, the
Company can, during such one year window period, call one-half of AGN Venturers
LLC's interest in AGN JV for 278,666 shares of the Company's common stock plus a
number of common shares equal to the principal paid on the $400,000 Graff note
divided by three. As of the date of these financial statements, management of
the Company cannot determine what specific value, if any, should be assigned to
the put and call agreement, but believes such value is not significant.
Accordingly, no amounts have been recorded in the financial statements related
to the put and call agreement.

Also in July 1996, the Company entered into agreements with two investors
whereby each investor purchased 125,000 of the shares of common stock previously
owned by Graff for $2.75 per share. Notes were issued to the Company for the
purchase price of the stock bearing interest at 10.5% and payable in one year.
The notes receivable will be shown as a reduction of equity until such time as
the notes are collected.

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.

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.

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.

F-11
<PAGE> 54

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. PROPERTY AND EQUIPMENT

At September 30, 1996, the Company's property and equipment consisted of
the following:

<TABLE>
<S> <C>
Gaming and satellite equipment.......... $2,158,000
Software costs.......................... 1,103,000
Other................................... 58,000
----------
Total property and equipment............ 3,319,000
Less accumulated depreciation........... (703,000)
----------
Property and equipment, net............. $2,616,000
==========
</TABLE>

Depreciation expense amounted to $479,000 and $229,000 during the years
ended September 30, 1996 and 1995, respectively. The net book value of
capitalized software cost at September 30, 1996, was $901,000. Depreciation
expense related to software cost amounted to $159,000 and $4,000, during the
years ended September 30, 1996 and 1995, respectively.

6. NOTES PAYABLE

Notes payable consist of the Company's outstanding borrowings on its
revolving line of credit with its financial institution and $800,000 in Bridge
Debt. The revolving line of credit is in the amount of $100,000, under which
there were $50,000 in outstanding borrowings at September 30, 1996. The
revolving line of credit bears interest at Chase Manhattan Bank N.A. prime rate
(8 1/4% at September 30, 1996) plus 1/2% and matures on August 15, 1997.
Interest is payable monthly.

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 bears interest at 10.5%, is due in one
year and is 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 common shares were issued to the
placement agent and 360,000 redeemable warrants were issued to the purchasers of
the Bridge Debt (collectively, the "Bridge Warrants"). Each 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 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 $28,000 will be recognized in the
first quarter of fiscal 1997. The Bridge Debt was converted into common stock
and warrants in connection with the November Placement and therefore has been
reflected as long-term notes payable in the accompanying consolidated balance
sheet.

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 discussed in Note 6
above. 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%.

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.

F-12
<PAGE> 55

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The remainder 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 and to the extent of approximately
$100,000, are guaranteed by the Company's Chairman/Chief Executive Officer.
Subsequent to year end, approximately $120,000 was borrowed under similar terms,
but without a guarantee.

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, 1996, approximates fair value.

At September 30, 1996, aggregate future maturities of long-term debt are as
follows: 1997 -- $197,000; 1998 -- $195,000 and 1999 -- $592,000.

8. INCOME TAXES

The provision for income taxes (benefit) consisted of the following for the
years ended September 30, 1996 and 1995:

<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Current:
Federal.............................................. $ 32,000 $ 204,000
State................................................ 5,000 32,000
Deferred............................................. (37,000) (236,000)
-------- ---------
Net income tax expense................................. $ -- $ --
======== =========
</TABLE>

A reconciliation of the expected income tax expense based upon the federal
statutory rate of 34% and the taxes reflected in tax expense is as follows for
the years ended September 30, 1996 and 1995:

<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Expected federal income tax expense.................... $ 14,000 $ 171,000
State tax expense...................................... 1,000 21,000
Nondeductible meals.................................... 13,000 10,000
Use of net operating losses for which valuation
allowances existed................................... (28,000) (202,000)
-------- ---------
Net income tax expense................................. $ -- $ --
======== =========
</TABLE>

F-13
<PAGE> 56

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax asset -- current:
Accounts receivable allowance....................... $ 29,000 $ 21,000
Vacation accrued.................................... 23,000 19,000
Valuation allowance................................. (52,000) (40,000)
--------- ---------
Net current deferred taxes............................ $ -- $ --
========= =========
Deferred tax asset -- noncurrent:
Net operating losses................................ $ 749,000 $ 787,000
Deferred tax liability -- noncurrent:
Goodwill............................................ (6,000) (3,000)
--------- ---------
743,000 784,000
Valuation Allowance................................... (743,000) (784,000)
--------- ---------
Net noncurrent deferred taxes......................... $ -- $ --
========= =========
</TABLE>

In spite of the generation of profits in the past two years, the Company
has provided a valuation allowance for all deferred tax assets in excess of
deferred tax liabilities due to the lack of historical operational profitability
and the number of new products/ventures in which the Company is involved.

At September 30, 1996, the Company's operating loss carryforward for income
tax purposes was approximately $1,972,000. 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 $573,000 in 2008 and
$1,399,000 in 2009.

9. STOCKHOLDERS' EQUITY

Series A Preferred Stock

During fiscal year 1995, the Company's stockholders voted to amend the
Company's articles of incorporation to provide for the issuance of up to
2,000,000 shares of preferred stock in series as defined by the Board of
Directors. In January 1995, the Board of Directors approved a Series A preferred
stock which is cumulative, voting and has a par value of $.01 per share. The
Series A preferred stock is subject to redemption at the election of the Company
for $10 per share.

In February 1995, holders of certain outstanding debt of the Company
elected to convert the indebtedness into 106,476 shares of the Series A
preferred stock and 5,841 shares of the Series A preferred stock were issued in
satisfaction of amounts owed for professional services. Additionally in 1995,
12,500 shares of the Series A preferred stock were issued in satisfaction of
$125,000 principal amount of MBI's promissory notes issued to AGE in connection
with the purchase of the AGE Assets. In late 1995, an additional 11,501 shares
of Series A preferred stock were issued for cash and in satisfaction of
outstanding indebtedness. 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.

Beginning in January 1997, the Series A preferred stock is convertible into
common stock at the rate of five shares of common for one share of Series A
preferred stock. Based on the number of shares of Series A preferred stock
outstanding at September 30, 1996, an additional 671,590 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.

F-14
<PAGE> 57

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
$1,343,000 in the aggregate at September 30, 1996. The holders of the Series A
preferred stock are entitled to a cumulative preferred dividend, payable
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.

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. 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 has 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. The
purpose of this exercise at this time was to maintain current ownership levels
in the Company's common stock in order 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 (a
"Redeemable Warrant"). After nine months, each Redeemable Warrant may be called
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. Redeemable Warrants
totaling 350,000 were granted to the placement agent in connection with the
November Placement. Proceeds from the November Placement (which included the
conversion of the Bridge Debt discussed below) are intended to finance the
expansion of the Company's MegaMania network. The proforma effects of the
November Placement have been reflected on the consolidated balance sheet under
the heading "proforma" as though the November Placement had been completed as of
September 30, 1996.

The November Placement was preceded by a private placement of bridge debt
financing in the amount of $800,000 (the "Bridge Debt") which was completed in
early August 1996. Redeemable Warrants representing 360,000 shares accompanied
the Bridge Debt and an additional 173,310 Redeemable Warrants were granted to
the placement agent. The Bridge Debt was converted into common stock and
Redeemable Warrants in connection with the completion of the November Placement.

F-15
<PAGE> 58

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Common Stock Warrants

In connection with past financing arrangements and as compensation for
consulting and professional services, the Company has issued warrants to
purchase its common stock. The following tables summarize such warrant activity
for 1996 and 1995:

1995 ACTIVITY:

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
WARRANTS WARRANTS
EXERCISE OUTSTANDING OUTSTANDING
PRICE EXPIRATION OCTOBER 1, EXPIRED/ SEPTEMBER 30,
PER SHARE DATE 1994 GRANTED EXERCISED CANCELED 1995
--------- ------------- ----------- ------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 Dec 94-Oct 95 16,000 -- -- 10,000 6,000
$1.40 - 1.50 Jul 95-Dec 95 106,000 13,000 85,667 -- 33,333
$2.00 Sep 97-Jan 98 7,273 387,177 -- -- 394,450
$2.50 Mar 2000 -- 185,000 175,000 -- 10,000
$2.75 May 97-Jul 97 470,942 -- -- 387,177 83,765
$3.50 Jul 2000 -- 175,000 -- -- 175,000
$4.00 Jul 2000 -- 18,750 -- -- 18,750
$6.60 Jul 98 23,550 -- -- -- 23,550
------- ------- ------- ------- -------
623,765 778,927 260,667 397,177 744,848
======= ======= ======= ======= =======
</TABLE>

1996 ACTIVITY:

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
WARRANTS WARRANTS
EXERCISE OUTSTANDING OUTSTANDING
PRICE EXPIRATION OCTOBER 1, EXPIRED/ SEPTEMBER 30,
PER SHARE DATE 1995 GRANTED EXERCISED CANCELED 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 -- 533,310 -- -- 533,310
------- ------- ------- ------- -------
744,848 533,310 319,877 20,001 938,280
======= ======= ======= ======= =======
</TABLE>

Other than with respect to the $8.00 warrants, which are not exercisable
until August 1997, all of the above warrants are currently exercisable.

F-16
<PAGE> 59

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. 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. 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. 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 a result of the
shares of common stock issued in the November Placement, a total of 403,000
shares of common 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 must be approved by the Company's stockholders before
August 1997.

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

1995 ACTIVITY:

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
EXERCISE OPTIONS OPTIONS
PRICE OUTSTANDING EXERCISED/ OUTSTANDING
PER EXPIRATION OCTOBER 1, EXPIRED/ SEPTEMBER 30,
SHARE DATE 1994 GRANTED CANCELED 1995
-------- ---------- ----------- ------- ---------- -------------
<S> <C> <C> <C> <C> <C>
1993 Plan:
$1.50................................. Oct 97 65,000 -- 20,000 45,000
1994 Director Plan:
$2.50................................. Jul 2004 40,000 -- -- 40,000
1994 Employee Plan $2.00................ Mar 2005 -- 91,000 -- 91,000
$2.50................................. Jul 2004 130,000 -- -- 130,000
$2.75................................. Jul 2005 -- 24,500 -- 24,500
------- ------- ------ -------
235,000 115,500 20,000 330,500
======= ======= ====== =======
</TABLE>

F-17
<PAGE> 60

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1996 ACTIVITY:

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
EXERCISE OPTIONS OPTIONS
PRICE OUTSTANDING EXERCISED/ OUTSTANDING EXERCISABLE
PER EXPIRATION OCTOBER 1, EXPIRED/ SEPTEMBER 30, SEPTEMBER 30,
SHARE DATE 1995 GRANTED CANCELED 1996 1996
-------- ---------- ----------- ------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1993 Plan:
$1.50................................. Oct 97 45,000 -- -- 45,000 27,000
1994 Director Plan:
$2.50................................. Jul 2004 40,000 -- -- 40,000 26,668
1994 Employee Plan
$2.00................................. Mar 2005 91,000 35,000 56,000 14,000
$2.50................................. Jul 2004 130,000 10,000 120,000 60,000
$2.50................................. Feb 2006 -- 75,000 -- 75,000 --
$2.75................................. Jul 2005 24,500 -- 9,500 15,000 3,750
$3.00................................. Oct 2005 -- 60,000 60,000 -- --
$4.00................................. Apr 2006 -- 26,000 7,000 19,000 --
------- ------- ------- ------- -------
330,500 161,000 121,500 370,000 131,418
======= ======= ======= ======= =======
</TABLE>

Subsequent to September 30, 1996, the Company's Board of Directors granted
162,500 options to employees throughout the Company pursuant to the 1996 Plan.
The options vest ratably over a four year period, are exercisable at a price of
$4.375 per share and expire ten years from the date of grant. 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.

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 and $21,000 for
the years ended September 30, 1996 and 1995.

11. COMMITMENTS AND CONTINGENCIES

Pending Investigation

On October 16, 1996, the Company was advised by the Office of the U.S.
Attorney in Tulsa, Oklahoma (the "U.S. Attorney") that the Company was part of a
criminal investigation to determine whether, in the opinion of the U.S.
Attorney, the Company's MegaMania bingo game constituted Class II or Class III
gaming, as defined by the Indian Gaming Regulatory Act of 1988 (the "Gaming
Act"). MegaMania has been designed and is operated as a Class II game within the
definition of bingo set forth in the Gaming Act. In a written opinion dated July
10, 1996, the Company was informed by the National Indian Gaming Commission
("NIGC"), of the NIGC's determination that MegaMania constituted a Class II
game. The Company has relied on the NIGC's opinion in conducting its operations
and believes that the NIGC made its determination with a complete and accurate
understanding of the facts and the applicable law. The Company is unaware of any
circumstances that would have caused the investigation by the U.S. Attorney or
on what basis the U.S. Attorney could conclude that MegaMania is not a Class II
game.

No assurances can be given that the U.S. Attorney will not conclude that
MegaMania is Class III gaming. If the U.S. Attorney does reach such a
conclusion, 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.

F-18
<PAGE> 61

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $3,041,000 and
$3,278,000 for the years ended September 30, 1996 and 1995, respectively. The
current arrangements with such firm expire on February 28, 1997 and are
currently being negotiated for extension. 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 $7,808,000 are outstanding at September 30, 1996. The outstanding
amounts include 23 annuity contracts aggregating approximately $6,168,000 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 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 $84,000 at September 30, 1996). 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, 1996, of the prize annuities awarded from April 15, 1994 to
December 22, 1994, which are not reflected in the financial statements, amount
to approximately $273,000. The present value of the prize annuities and market
value of the related treasury investments at September 30, 1996 of prize
annuities awarded subsequent to December 23, 1994 through September 30, 1996 was
approximately $1,288,000, which has been reflected as restricted investments and
other long-term liabilities in the accompanying financial statements.

Beginning in August of 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.

F-19
<PAGE> 62

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 1996 and 1995 amounted to $117,000 and
$68,000, respectively.

12. RELATED PARTY TRANSACTIONS

Of $1,266,000 of short-term debt issued in 1994, and converted into
preferred stock in 1995, the Company's Chairman/Chief Executive Officer,
president, prize fulfillment firm and a principal of the prize fulfillment firm
purchased $802,000, $5,000, $126,000 and $126,000, respectively, and received
warrants to purchase 291,545, 1,940, 45,682 and 45,682 shares of the Company's
common stock at $2.75 per share, respectively. Each of these four parties also
elected to exchange such notes and warrants for Series A preferred stock and
warrants to acquire shares of the Company's common stock at $2.00 per share. In
connection with the exchange of the notes and warrants, the Company's
Chairman/Chief Executive Officer, president, the prize fulfillment firm and a
principal of the prize fulfillment firm received 80,175, 534, 12,563, and 12,563
shares of Series A preferred stock, respectively, and 291,545, 1,940, 45,682 and
45,682 warrants to acquire the Company's common stock at $2.00 per share,
respectively. In connection with amounts loaned to the Company, the four
received interest of $19,000, $0, $3,000 and $3,000, respectively, during fiscal
year 1995. See also Notes 3, 9 and 11.

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 is reflected within Other
revenues in the accompanying Consolidated Statements of Operations. Outstanding
principal under equipment sales pursuant to such revenue sharing arrangements
amounted to $910,000 at September 30, 1996. Generally, title to the player
stations transfers to the lessee at the end of the lease period. Revenue from
the equipment sales earned 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 shown as outstanding
at September 30, 1996, 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, 1996 of MegaMania lease
equipment amounted to $428,000 and $407,000, 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.

F-20
<PAGE> 63

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 1996 and
1995, the Company had concentrations of cash in one bank totaling $1,397,000 and
$1,468,000, respectively. The Company has not experienced any losses on such
accounts in the past.

Accounts receivable represent short-term credit granted to the Company's
clients 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 clients, due to
the historical experience of the Company on receivable collections, management
considers credit risk limited with respect to accounts receivable.

F-21
<PAGE> 64

INDEPENDENT ACCOUNTANT'S REPORT

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

We have reviewed the accompanying consolidated balance sheet of Multimedia
Games, Inc. and Subsidiaries as of March 31, 1997, and the related consolidated
statements of operations and cash flows for the six month period ended March 31,
1997. These financial statements are the responsibility of the Company's
management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Tulsa, Oklahoma
May 6, 1997

F-22
<PAGE> 65

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997
(UNAUDITED)

ASSETS

<TABLE>
<S> <C>
Current Assets:
Cash and cash equivalents............. $ 973,000
Accounts Receivable:
Trade, net of allowance for
doubtful accounts of $60,000...... 1,181,000
Other.............................. 158,000
Inventory, at cost.................... 368,000
Prepaid expenses...................... 182,000
-----------
Total current assets.......... 2,862,000
-----------
Restricted cash and cash equivalents.... 1,539,000
Note receivable from American Gaming
Network LLC........................... 336,000
Property and equipment, net of
accumulated depreciation of
$1,270,000............................ 4,305,000
Other assets............................ 125,000
Goodwill, net of accumulated
amortization of $62,000............... 486,000
-----------
Total assets.................. $ 9,653,000
===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Notes payable......................... $ 100,000
Current portion of long-term debt..... 288,000
Due to American Gaming Network LLC.... 62,000
Accounts payable and accrued
expenses........................... 1,650,000
Halls' share of surplus............... 93,000
Prize fulfillment fees payable........ --
-----------
Total current liabilities..... 2,193,000
-----------
Bridge notes payable.................... --
Long-term debt.......................... 823,000
Other long-term liabilities............. 1,372,000
Commitments and Contingencies (Note 3)
Stockholders' equity:
Preferred stock, Series A, $.01 par
value, 2,000,000 shares authorized,
134,318 shares issued and
outstanding........................ 1,000
Common stock, $.01 par value,
10,000,000 shares authorized,
4,074,306 shares issued and
4,040,307 shares outstanding....... 41,000
Additional paid-in capital............ 9,219,000
Stockholder notes receivable.......... (1,299,000)
Treasury stock, 33,999 shares at
cost............................... (87,000)
Accumulated deficit................... (2,610,000)
-----------
Total stockholders' equity............ 5,265,000
-----------
Total liabilities and
stockholders' equity.......... $ 9,653,000
===========
</TABLE>

See notes to unaudited consolidated financial statements.

F-23
<PAGE> 66

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)

<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Revenues:
Gaming Revenue............................................ $14,858,000 $8,401,000
Electronic player station sales........................... 403,000 292,000
Electronic player station lease revenue................... 588,000 --
Software license revenue.................................. -- 500,000
Other..................................................... 1,000 299,000
----------- ----------
Total revenues.................................... 15,850,000 9,492,000
----------- ----------
Operating costs and expenses:
Bingo prizes and commissions.............................. 4,379,000 5,056,000
Allotments to hall operators.............................. 7,512,000 1,759,000
Cost of electronic player stations sold................... 217,000 55,000
Salaries and wages........................................ 952,000 733,000
Selling, general and administrative expenses.............. 2,063,000 1,539,000
Amortization and depreciation............................. 603,000 211,000
----------- ----------
Total operating costs and expenses................ 15,726,000 9,353,000
----------- ----------
Operating income............................................ 124,000 139,000
Interest income............................................. 12,000 32,000
Interest expense............................................ (99,000) (43,000)
----------- ----------
Net income.................................................. $ 37,000 $ 128,000
=========== ==========
Earnings (loss) per common and equivalent share, primary and
fully diluted............................................. $ (.01) $ .02
=========== ==========
</TABLE>

See notes to unaudited consolidated financial statements.

F-24
<PAGE> 67

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)

<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................ $ 37,000 $ 128,000
Adjustments to reconcile net income to
cash provided by (used for)
operating activities:
Bad debt expense................... -- 270,000
Amortization and depreciation...... 603,000 211,000
Other non-cash expenses............ 71,000 --
(Increase) decrease in:
Accounts and notes receivable.... (1,047,000) (298,000)
Inventory........................ (10,000) --
Prepaid expenses................. (90,000) (43,000)
Other assets..................... -- 11,000
Increase (decrease) in:
Accounts payable and accrued
expenses........................ 321,000 (535,000)
Halls' share of surplus.......... (27,000) 149,000
Prize fulfillment fees payable... (320,000) 219,000
Other long-term liabilities...... -- 37,000
----------- ----------
Net cash provided by (used
for) operating activities... (462,000) 149,000
----------- ----------
Cash flows from investing activities:
Acquisition of property and
equipment.......................... (2,279,000) (842,000)
Increase in cash balances in
restricted escrow.................. (5,000)
Other................................. -- 6,000
----------- ----------
Net cash provided by (used
for) investing activities... (2,284,000) (836,000)
----------- ----------
Cash flows from financing activities:
Proceeds from sale of common stock.... 2,108,000 970,000
Increase in long-term debt............ 362,000 --
Principal repayments of debt.......... (185,000) (75,000)
Payment of preferred stock
dividends.......................... (74,000) (76,000)
Purchase of treasury stock............ -- (10,000)
----------- ----------
Net cash provided by (used
for) financing activities... 2,211,000 809,000
----------- ----------
Net change in cash and cash
equivalents........................... (535,000) 122,000
Cash and cash equivalents, beginning of
period................................ 1,508,000 1,537,000
----------- ----------
Cash and cash equivalents, end of
period................................ $ 973,000 $1,659,000
=========== ==========
</TABLE>

See notes to unaudited consolidated financial statements.

F-25
<PAGE> 68

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

The accompanying financial statements should be read in conjunction with
the Company's financial statements for the fiscal year ended September 30, 1996
contained elsewhere herein.

The financial statements included herein as of March 31, 1997 and for the
six month periods ended March 31, 1997 and 1996, have been prepared by the
Company, without an audit, pursuant to generally accepted accounting principles
and the rules and regulations of the Securities and Exchange Commission. The
information presented reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair statement of results for the periods. Results for the six months ended
March 31, 1997, are not necessarily indicative of the results which will be
realized for the year ending September 30, 1997. Certain prior period
information has been reclassified to conform to current period presentation.

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 six months ended March 31, 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 which were $74,000 and $76,000,
respectively, for the six months ended March 31, 1997 and 1996. Weighted average
shares outstanding on a primary basis were 4,065,850 and 2,200,000,
respectively, for the six months ended March 31, 1997 and 1996. Weighted average
shares outstanding on a fully diluted basis were 5,291,908 and 2,261,000,
respectively, for the six months ended March 31, 1997 and 1996.

Impact of Financial Accounting Pronouncements -- In February 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("FAS 128"). FAS 128 will change the
computation, presentation and disclosure requirements for earnings per share.
FAS 128 requires the presentation of "basic" and "diluted" earnings per share,
as defined, for all entities with complex capital structures. FAS 128 is
effective for financial statements issued for periods ending after December 15,
1997, and requires restatement of all prior period earnings per share amounts.
The Company has not yet determined the impact that FAS 128 will have on its
earnings per share when adopted.

2. FINANCING ACTIVITIES

In November 1996, the company completed a private placement of
approximately 1.2 million shares of 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 (a "Redeemable
Warrant"). After nine months, each Redeemable Warrant may be called 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. Redeemable Warrants
totaling 350,000 were granted to the placement agent in connection with the
November Placement. Proceeds from the November Placement (which included the
conversion of the Bridge Debt discussed below) are intended to finance the
expansion of the Company's MegaMania network.

F-26
<PAGE> 69

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. COMMITMENTS AND CONTINGENCIES

Pending Investigation. On October 16, 1996, the Company was orally informed
by the Office of the U.S. Attorney in Tulsa, Oklahoma (the "U.S. Attorney") that
the Company was part of an investigation to determine whether, in the opinion of
the U.S. Attorney, the Company's MegaMania bingo game constituted Class II or
Class III gaming, as defined by the Indian Gaming Regulatory Act of 1988 (the
"Gaming Act"). MegaMania has been designed and is operated by the Company as a
Class II game within the definition of bingo set forth in the Gaming Act. In a
written opinion dated July 10, 1996, the Company was informed by the National
Indian Gaming Commission ("NIGC"), of the NIGC's determination that MegaMania
constituted a Class II game.

On April 8, 1997 the Company signed a memorandum of understanding with the
NIGC to implement certain changes to the Company's MegaMania bingo game in order
to maintain the Commission's classification of the game as bingo. Classification
as a bingo game allows MegaMania to be offered by high-stakes Indian bingo halls
in all 47 of those States where charity bingo is allowed by State law as long as
the game occurs on Indian trust land. The Commission originally requested that
these changes be made by April 11, 1997, but agreed in the memorandum to extend
that time sufficiently to assure a more orderly conversion and allow the present
game to continue until the new changes are completed.

No assurances can be given that either the NIGC or the U.S. Attorney will
not later conclude that MegaMania is Class III gaming. If either the NIGC or the
U.S. Attorney concludes that MegaMania is Class III gaming, 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 operations.

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.

F-27
<PAGE> 70

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

See "Disclosure of Commission Position on Indemnification For Securities
Act Liabilities" in the Prospectus.

The directors and officers of the Company are entitled to indemnification
by the Selling Securityholders against any cause of action, loss, claim, damage,
or liability to the extent it arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
this Registration Statement and the Prospectus contained herein, as the same
shall be amended or supplemented, made in reliance upon or in conformity with
written information furnished to the Company by such Selling Securityholder.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following are the estimated expenses in connection with the
distribution of the securities being registered:

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 8,354
Accounting Fees and Expenses................................ 15,000
Attorneys' Fees and Expenses................................ 25,000
Printing Fees and Expenses.................................. 20,000
Blue Sky Fees and Expenses.................................. 2,000
Nasdaq Listing Fees......................................... 7,500
Miscellaneous............................................... 12,146
Total............................................. $90,000
</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

In November 1996, the Company completed a private placement (the "November
Placement") for cash and the conversion of the Bridge Notes (described below) of
1,158,833 shares of Common Stock and 1,158,833 Redeemable Common Stock Purchase
Warrants (the "Placement Warrants") at a purchase price of $3.00 per share of
Common Stock to a group of accredited investors. Each Placement Warrant entitled
the holder thereof to purchase one share of Common Stock at $8.00 per share
(subject to adjustments) at any time on and after August 7, 1997 and prior to
the November 12, 2001 expiration of the Placement Warrants. The Placement
Warrants were redeemable by the Company for $.10 per Warrant after August 7,
1997, if the closing bid price of the Company's Common Stock has been at least
$12.00 for 20 consecutive trading days. Walsh Manning acted as the placement
agent for the Company in connection with the November Placement and received
350,000 Redeemable Common Stock Purchase Warrants (the "Placement Agent
Warrants"), a commission of $347,650 and a nonaccountable expense allowance of
$104,295. The November Placement was not registered under the Securities Act in
reliance upon the exemption from registration pursuant to Section 4(2) of the
Securities Act and Rule 501 of Regulation D promulgated thereunder.

In August 1996, the Company consummated the private placement (the "Bridge
Placement") for cash of $800,000 principal amount of 10.5% notes due August 7,
1997 (the "Bridge Notes") and 360,000 Redeemable Common Stock Purchase Warrants
(the "Bridge Warrants") to a group of accredited investors. The Bridge Notes
were converted into shares of Common Stock and Placement Warrants in connection
with the November Placement at a conversion rate of $3.00 principal amount of
Bridge Note for one share of Common Stock and one Bridge Warrant. Walsh Manning
acted as placement agent for the Company in connection with the Bridge Placement
and received 173,310 Redeemable Common Stock Purchase Warrants (the "Bridge
Placement Warrants"), commissions of $40,000 and an unaccountable expense
allowance of $12,000. The Bridge Placement was not registered under the
Securities Act in reliance upon the exemption contained in Section 4(2) of the
Securities Act and Rule 501 of Regulation D promulgated thereunder.

II-1
<PAGE> 71

In June 1997, the Placement Warrants and the Bridge Warrants were amended
to become the Class A Warrants and the Placement Agent Warrants and the Bridge
Placement Warrants were amended to become the Class B Warrants.

In August 1996, the Company sold 125,000 shares of Common Stock at $2.75
per share to each of Frank J. Skelly, III and Craig Gross. Messrs. Skelly and
Gross are the principal owners of EAB Associates, LLC, which in turn is the
principal owner of Walsh Manning. Payment of the purchase price for the shares
was a 10.5% promissory note of each purchaser payable on August 7, 1997. The
transaction was not registered under the Securities Act in reliance upon the
exemption contained in Section 4(2) of the Securities Act.

In March 1996, the Company consummated the private placement (the "March
1996 Placement") for cash of 550,000 shares of Common Stock at $2.00 per share
to a group of accredited investors. G-V Capital acted as placement agent for the
Company in connection with the March 1996 Placement and received 39,375 shares
of Common Stock, commissions of $82,500 and an unaccountable expense allowance
of $27,500. Pursuant to the terms of the March 1996 Placement, the Company
agreed to issue additional shares of Common Stock in the event the Company
failed to file a registration statement with the Commission. As a result of such
provision, the Company issued an additional 117,875 shares of Common Stock. The
March 1996 Placement and subsequent issuance of the additional shares was not
registered under the Securities Act in reliance upon the exemption contained in
Section 4(2) of the Securities Act and Rule 501 of Regulation D promulgated
thereunder.

In July 1994, the Company adopted its 1994 Employee Stock Option Plan (the
"1994 Plan") pursuant to which, through March 31, 1997, options to purchase
240,000 shares of Common Stock at prices ranging from $2.50 to $4.00 per share
have been granted and remain outstanding and options to purchase 20,000 shares
at exercise prices ranging from $2.00 to $2.50 per share have been exercised.

In July 1994, the Company adopted its 1994 Director Stock Option Plan (the
"Director Plan") pursuant to which, through March 31, 1997, options to purchase
40,000 shares of Common Stock at a price of $2.50 per share have been granted
and remain outstanding.

In August 1996, the Company adopted its 1996 Stock Incentive Plan (the
"1996 Plan") pursuant to which, through March 31, 1997, options to purchase
368,000 shares of Common Stock at prices ranging from $4.375 to $5.50 per share
have been granted and remain outstanding.

On March 11, 1997, the Company registered under the Securities Act the
shares and options subject to the forgoing Plans on Form S-8.

During 1996, Gordon T. Graves, the Company's Chairman and Chief Executive
Officer, exercised warrants to purchase 291,545 shares of Common Stock at $2.00
per share. Such exercise was accomplished by the issuance to the Company of Mr.
Graves' promissory note due in five years and bearing interest at 6% per annum.
Also during 1996, Gordon T. Sjodin, a Vice President of the Company, exercised
for cash 2,500 warrants to purchase Common Stock at $1.50 per share. Such
issuances were not registered under the Securities Act in reliance upon the
exemption contained in Section 4(2) of the Securities Act.

In July 1995, the Company issued (i) 100,000 shares of Common Stock to
Graff Pay-Per-View, Inc. ("Graff") at $2.75 per share (the "Graff Shares"), (ii)
175,000 shares of Common Stock to Graff for cash at $2.25 per share upon the
exercise of a Common Stock purchase warrant granted to Graff in July 1995, and
(iii) 175,000 Common Stock Purchase Warrants to Graff exercisable at $3.50 per
share (the "Graff Warrant"). The consideration for the issuance of the Graff
Shares was a 6.37% promissory note of Graff due in August 1996. The
consideration for the issuance of the Graff Warrant was the exercise by Graff of
the warrant referred to in clause (ii) above. The issuances to Graff were not
registered under the Securities Act in reliance upon the exemption contained in
Section 4(2) of the Securities Act.

In January, 1995, Mr. Graves (including a limited partnership controlled by
Mr. Graves), Mr. Sjodin, Larry D. Montgomery, the President of the Company, and
Michael E. Newell, a Vice President of the Company, along with other nonemployee
accredited investors, exchanged certain outstanding subordinated notes due them
by the Company for shares of the Company's Series A Preferred Stock, at the
exchange price of $10 principal amount of such notes for each share of Series A
Preferred Stock. In connection with such exchange, the Company

II-2
<PAGE> 72

issued 136,318 shares of Series A Preferred Stock and its substitute warrants,
exercisable at $2.00 per share and expiring in January 1998, for other warrants
held by such parties. Such issuances were not registered under the Securities
Act in reliance upon the exemption contained in Section 4(2) of the Securities
Act.

From time to time during 1994, the Company issued 91,038 warrants to
purchase Common Stock at an exercise price of $2.75 per share to various
accredited investors for consulting and professional services rendered to the
Company. Such issuances were not registered under the Securities Act in reliance
upon the exemption contained in Section 4(2) of the Securities Act.

ITEM 27. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. TITLE LOCATION
----------- ----- --------
<S> <C> <C> <C>
3.1 -- Amended and Restated Articles of Incorporation.............. (5)
3.2 -- Bylaws...................................................... (1)
5.1 -- Opinion of Hall, Estill, Hardwick, Gable, Golden & Nelson re
Legality................................................. (3)
10.1 -- Form of Integrated 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 1994 Original Warrants........ (1)
10.10 -- Registration Rights Agreement dated January 23, 1995 between
the Company and holders of 1995 Substitute 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)
</TABLE>

II-3
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE LOCATION
----------- ----- --------
<S> <C> <C> <C>
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)
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)
15.1 -- Letter regarding unaudited interim financial information.... (3)
21.1 -- Subsidiaries of Registrant.................................. (3)
23.1 -- Consent of Coopers & Lybrand L.L.P.......................... (3)
24.1 -- Power of Attorney (included on page II-8)................... (3)
</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) Filed herewith.

(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.

ITEM 28. UNDERTAKINGS

(a) The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement to;

(i) include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and

(iii) include any additional or changed material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement;

provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with
or furnished to the Commission by the Registrant pursuant to Section 13 or
15(d) or the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.

II-4
<PAGE> 74

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

II-5
<PAGE> 75

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on SB-2 and has duly caused this Registration Statement,
or amendment thereto, to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Tulsa, State of Oklahoma on the 1st day of July,
1997.

MULTIMEDIA GAMES, INC.

By: /s/ GORDON T. GRAVES
----------------------------------
Name: Gordon T. Graves
Title: Chairman of the Board

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 Registration Statement,
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.

In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<S> <C> <C>
/s/ GORDON T. GRAVES Chairman of the Board Chief Dated: July 1, 1997
- ---------------------------------------- Executive Officer and Director
Gordon T. Graves

/s/ LARRY D. MONTGOMERY President and Chief Operating Dated: July 1, 1997
- ---------------------------------------- Officer and Director
Larry D. Montgomery

/s/ FREDERICK E. ROLL Vice President, Controller and Dated: July 1, 1997
- ---------------------------------------- Chief Financial Officer
Frederick E. Roll

/s/ DANIEL J. SARNOFF Vice President and Director Dated: July 1, 1997
- ----------------------------------------
Daniel J. Sarnoff

/s/ GREGORY N. STERN Director Dated: July 1, 1997
- ----------------------------------------
Gregory N. Stern
</TABLE>

II-6
<PAGE> 76

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. TITLE LOCATION
- ----------- ----- --------
<C> <S> <C> <C>
3.1 -- Amended and Restated Articles of Incorporation.............. (5)
3.2 -- Bylaws...................................................... (1)
5.1 -- Opinion Hall, Estill, Hardwick, Gable, Golden & Nelson re
Legality................................................. (3)
10.1 -- Form of Integrated 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 1994 Original Warrants........ (1)
10.10 -- Registration Rights Agreement dated January 23, 1995 between
the Company and holders of 1995 Substitute 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)
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)
</TABLE>
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE LOCATION
- ----------- ----- --------
<C> <S> <C> <C>
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 Warrant Amendment................................... (3)
15.1 -- Letter regarding unaudited interim financial information.... (3)
21.1 -- Subsidiaries of Registrant.................................. (3)
23.1 -- Consent of Coopers & Lybrand L.L.P.......................... (3)
24.1 -- Power of Attorney (included on page II-6)................... (3)
</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) Filed herewith.

(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.

<PAGE> 1
EXHIBIT 5.1

Opinion of Hall, Estill & Hardwick

July 2, 1997

Multimedia Games, Inc.
7335 South Lewis Avenue
Tulsa, Oklahoma 74136

RE: REGISTRATION STATEMENT ON FORM SB-2

Ladies and Gentlemen:

We have examined the Registration Statement on Form SB-2, to be filed by
you with the Securities and Exchange Commission in connection with the
registration under the Securities Act of 1933, as amended, of 1,518,833 Class A
Warrants and 523,310 Class B Warrants (the "Warrants") and the shares of Common
Stock (the "Shares") issuable upon the exercise of the Warrants, to be offered
for sale for the benefit of certain selling shareholders. As your counsel in
connection with this transaction, we have examined the proceedings proposed to
be taken in connection with said sale of the Shares.

It is our opinion that (i) the Warrants are legally and validly issued and
constitute the binding obligation of the Company, and (ii) the Shares, when
issued and paid for in accordance with the terms of the Warrants, will be
legally and validly issued, fully paid, and nonassessable.

We consent to the use of this opinion as an exhibit to the Registration
Statement, including the prospectus constituting a part thereof, and any
amendment thereto.

Very truly yours,

HALL, ESTILL, HARDWICK, GABLE, GOLDEN &
NELSON

<PAGE> 1
EXHIBIT 10.35

MULTIMEDIA GAMES, INC.

7335 South Lewis Avenue, Suite 204
Tulsa, Oklahoma 74136
Telephone No. (918) 494-0576
Fax No. (918) 497-2051

May 19, 1997

TO THE HOLDERS OF REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
OF MULTIMEDIA GAMES, INC.

Multimedia Games, Inc. (the "Company") hereby requests the consent of the
holders of the Company's Redeemable Common Stock Purchase Warrants expiring
November 12, 2001 (the "Warrants"), to amend the terms of the Warrants as
described below.

There are 2,042,143 Warrants issued and outstanding, of which 360,000
Warrants (the "Bridge Warrants") were issued by the Company to investors in
connection with a "Bridge Offering" consummated in August 1996, and 1,158,833
Warrants (the "Offering Warrants") were issued by the Company to investors in
connection with a "Private Offering" consummated in November 1996. The
remaining 523,310 Warrants (the "Designee Warrants"), were issued by the
Company to designees of Walsh, Manning Securities, LLC ("Walsh Manning"), as
compensation for Walsh Manning acting as the Company's Placement Agent in
connection with the Bridge Offering and Private Offering.

At present, the terms of all of the Warrants are identical. Each Warrant
represents the right to purchase one share of the Company's Common Stock at
$8.00 per share, and each Warrant is exercisable at any time after August 12,
1997, and prior to November 12, 2001. Each Warrant is also subject to
redemption by the Company at any time after August 12, 1997 at $0.10 per
Warrant, subject to certain conditions.

It is proposed that the Warrants be amended as follows:

1. With respect to each of the Bridge Warrants and Offering Warrants
(collectively, the "Bridge and Offering Warrants"),

(a) the first date upon which the Bridge and Offering Warrants would
become exercisable would be extended from August 12, 1997 until November
7, 1997;

(b) the first date upon which the Bridge and Offering Warrants could
be redeemed by the Company would be extended from August 12, 1997 until
November 7, 1997; and

<PAGE> 2

2. With respect to each of the Designee Warrants,

(a) the first date upon which the Designee Warrants would become
exercisable would be extended from August 12, 1997 until November 7, 1997;

(b) the first date upon which the Designee Warrants could be redeemed
by the Company would be extended from August 12, 1997 until February 7,
1999; and

Except as expressly set forth above, all of the other terms of the
Warrants will remain unchanged, including without limitation, the $8.00 per
share exercise price of the Warrants and the conditions the Company must
satisfy in order to redeem the Warrants.

As of the date hereof, designees of Walsh Manning own all of the Designee
Warrants and affiliates of Walsh Manning own 787,497 of the Bridge and Offering
Warrants. Walsh Manning has agreed with the Company to consent to the foregoing
amendments; therefore, it should be expected that virtually all of such
designees and affiliates will consent to amend the Warrants held by them. In
that event, all of the Designee Warrants and at least 51.8% of the Bridge and
Offering Warrants will be amended as described above.

In connection with obtaining the agreement of Walsh Manning to consent to
the proposed amendments, Messrs. Frank J. Skelly, III and Craig Gross, the
principal owners of Walsh Manning, agreed to prepay their respective promissory
notes due the Company of $343,750 each, and Walsh Manning agreed to exercise
250,000 Class A Warrants in installments over a period of two months following
the effective date of a registration statement proposed to be filed by the
Company to register the Warrants and the shares of Common Stock issuable upon
the exercise of the Warrants (the "Warrant Shares") under the Securities Act of
1933, as amended (the "1933 Act").

If any Warrant holder elects not to consent to the proposed amendments,
the terms and provisions of the Warrants held by such non-consenting holder
will remain unchanged except that such unmodified Warrants will be designated
as Class C Warrants in the records of the Company.

Each holder of Warrants has entered into an agreement with Walsh Manning
(i) not to sell the Warrants or Warrant Shares prior to June 22, 1998, without
the consent of Walsh Manning, and (ii) granting Walsh Manning a right of first
refusal, expiring on June 22, 1998, to purchase any Warrants and Warrant Shares
proposed to be sold by such holder. These agreements will remain in effect
regardless of whether a holder consents or not to the proposed amendments and
regardless of whether the Warrants and Warrant Shares are registered under the
1933 Act.

-2-

<PAGE> 3

If you elect to consent to the proposed amendments, please so indicate by
signing, dating and returning to the Company the Consent form attached to this
letter. If a Consent form is not received from you by June 6, 1997, the terms
and conditions of your Warrants will not be amended and will remain as
currently in effect, except that such unmodified Warrants will be designated as
Class C Warrants. Completed Consent forms may be hand delivered or mailed to
the Company at the address for the Company set forth above, or may be delivered
to the Company by fax at the fax number for the Company set forth above. All
such deliveries should be to the attention of Frederick E. Roll, Secretary, to
assure receipt by the Company.

If you have any questions, please contact either Ted Burns at Walsh
Manning (Telephone No. (212) 422-5700), or Fred Roll at the Company (Telephone
No. (918) 594-0479). Your prompt and favorable consideration of this request
will be appreciated.

-3-

<PAGE> 4

CONSENT

Reference is made to the letter (the "Letter") dated May 19, 1997, from
Multimedia Games, Inc. (the "Company") to each of the holders of the Company's
Redeemable Common Stock Purchase Warrants expiring on November 12, 2001 (the
"Warrants"). The undersigned hereby consents to the amendments to the Warrants
as described in the Letter with respect to all Warrants owned by the
undersigned as of the date hereof.

Dated _____, 1997
------------------------------------
Signature

------------------------------------
Print Name

Address:
----------------------------

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

Telephone:
Fax No.:

-4-

<PAGE> 1

EXHIBIT 15.1
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Multimedia Games, Inc.
Registration on Form SB-2

We are aware that our report dated May 6, 1997 on our review of the interim
financial information of Multimedia Games, Inc. for the six months ended March
31, 1997, is included herein. Pursuant to Rule 436(C) under the Securities Act
of 1933, this report should not be considered a part of the registration
statement prepared or certified by us within the meaning of Sections 7 and 11
of that Act.

COOPERS & LYBRAND L.L.P.

Tulsa, Oklahoma
July 2, 1997

<PAGE> 1
EXHIBIT 21.1

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

<PAGE> 1

EXHIBIT 23.1

Consent of Coopers & Lybrand L.L.P.

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated December 18, 1996, on
our audits of the consolidated financial statements of Multimedia Games, Inc.
and Subsidiaries. We also consent to the reference to our firm under the
caption "INDEPENDENT PUBLIC ACCOUNTANTS."

COOPERS & LYBRAND L.L.P.

Tulsa, Oklahoma
July 2, 1997