MULTIMEDIA GAMES INC, POS AM, 1998-01-28

MULTIMEDIA GAMES INC
POS AM, 1998-01-28
AMUSEMENT & RECREATION SERVICES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY , 1998
REGISTRATION NO. 333-30721
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------

AMENDMENT NO. 2
(POST-EFFECTIVE AMENDMENT NO. 1)
TO

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------

MULTIMEDIA GAMES, INC.
(Name of Small Business Issuer in Its Charter)
---------------------

<TABLE>
<C> <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>

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<TABLE>
<C> <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 Executive (Address of Principal Place of Business or Intended
Offices) 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: [ ]

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 Securities
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>

i
<PAGE> 3

PROSPECTUS

MULTIMEDIA GAMES, INC.

100,667 REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS

283,944 REDEEMABLE CLASS B COMMON STOCK PURCHASE WARRANTS

1,792,143 SHARES OF COMMON STOCK, $.01 PAR VALUE

This Prospectus relates to 100,667 issued and outstanding Redeemable Class
A Common Stock Purchase Warrants (the "Class A Warrants") and to 283,944
Redeemable Class B Common Stock Purchase Warrants (the "Class B Warrants") which
may be offered and sold from time to time by the Selling Securityholders named
herein (the "Selling Securityholders"). This Prospectus also relates to
1,792,143 shares (the "Shares") of Common Stock, par value $.01 per share (the
"Common Stock") of Multimedia Games, Inc. (the "Company"), that are issuable
from time to time by the Company upon the exercise of such Warrants and upon the
exercise of the other issued and outstanding Class A Warrants and Class B
Warrants of the Company held by persons other than the Selling Securityholders
(together and collectively, the "Warrants"). 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 became 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 January 24, 1998, the last reported sale price of the Common Stock
was $10.015 per share. The Class A Warrants are traded on the Nasdaq SmallCap
Market under the symbol "MGAMW". On January 24, 1998, the last reported sale
price of the Class A Warrants was $5.125 per Warrant. The Class B Warrants are
traded on the Nasdaq SmallCap Market under the symbol "MGAMZ". On January 20,
1998, the last reported sale price of the Class B Warrants was $5.875 per
Warrant.

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 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 $100,000. 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 January , 1998.
<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>
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 6
Forward Looking Statements.................................. 11
Use of Proceeds............................................. 11
Market Prices of Securities................................. 12
Capitalization.............................................. 13
Selected Financial Data..................................... 14
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
The Company................................................. 20
Management.................................................. 27
Certain Relationships and Related Transactions.............. 32
Security Ownership of Certain Beneficial Owners and
Management................................................ 33
Selling Securityholders..................................... 34
Plan of Distribution........................................ 35
Description of Securities................................... 36
Experts..................................................... 38
Legal Matters............................................... 38
Available Information....................................... 38
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities................................ 39
Index to Financial Statements............................... F-1
Report of Independent Accountants........................... F-2
Financial Statements........................................ F-3
</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

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

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

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

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

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

MegaBingo, MegaCash, 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.

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............ 100,667 Class A Warrants and 283,944 Class B
Warrants are being offered by the Selling
Securityholders named herein; and 1,792,143
shares of Common Stock are being offered by the
Company to the holders of the Warrants upon the
exercise thereof. 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 became 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>
YEAR ENDED SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Total revenues.......................................... $39,052,000 $22,887,000
Operating income........................................ 997,000 202,000
Net income.............................................. 1,311,000 40,000
Earnings (loss) per common and equivalent share,
primary.............................................. $ .27 $ (.04)
Earnings (loss) per common and equivalent share,
fully diluted........................................ $ .20 $ (.04)
</TABLE>

BALANCE SHEET DATA:

<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1997
-------------
<S> <C>
Working capital........................................... $ 3,846,000
Total assets.............................................. 15,400,000
Current portion of long-term debt......................... 395,000
Long-term debt............................................ 675,000
Stockholders equity....................................... $10,277,000
</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

On December 31, 1997, the U.S. Attorney for the Northern District of
Oklahoma (the "Tulsa U.S. Attorney") filed a civil forfeiture action in the
Federal District Court for the Northern District against the player stations and
centralized computer equipment used to play MegaMania located in the Northern
District. Pursuant to the civil forfeiture action, agents of the Federal Bureau
of Investigation ("FBI") entered the Company's headquarters in Tulsa, Oklahoma
and seized the Company's central computer system which caused the play of
MegaMania to cease throughout the Company's nationwide MegaMania network. Agents
also entered the bingo halls of the Cherokee Nation and Seneca-Cayuga tribe in
the Northern District and seized approximately 300 MegaMania player stations.
Agents also entered the bingo hall of the Choctaw nation in the Eastern District
of Oklahoma and seized the Company's bingo ball blower that was used to draw
numbers for the play of MegaMania. No other seizure or enforcement action was
taken outside the Northern District.

About 18 hours following the seizure actions, the Company was again
operating MegaMania throughout its MegaMania network through the use of back-up
systems, except at the bingo halls in the Northern District where the MegaMania
player stations were seized, and such play has continued without interference or
interruption since that time. No other seizure or enforcement actions have been
instituted or taken against the Company or any of its customers regarding
MegaMania since the initial actions taken on December 31, 1997.

On January 5, 1998, the Company and the Seneca-Cayuga tribe filed a
Complaint For Declaratory Relief in the Northern District seeking a declaration
by the courts that MegaMania is a legal Class II bingo game as permitted by the
Indian Gaming Regulatory Act of 1988 (the "Gaming Act"). On January 12, 1998,
the Choctaw Nation of Oklahoma, the Chickasaw Nation of Oklahoma and the
Cheyenne-Arapaho Tribe of Oklahoma filed a similar Complaint For Declaratory
Relief in the Federal Court for the District of Columbia seeking a declaration
by the courts that MegaMania is a legal Class II bingo game.

On January 23, 1998, the Company, the Seneca-Cayuga tribe and the Cherokee
Nation entered into a standstill agreement with the Tulsa U.S. Attorney and the
other U.S. Attorneys in Oklahoma which allowed the bingo halls of the
Seneca-Cayuga's and Cherokee's to immediately commence playing MegaMania,
assured the Company and the tribes that no other seizure or enforcement action
would be taken in Oklahoma, and agreed to a speedy trial on the merits of
MegaMania within 120 days. As a result of the standstill agreement, the Company
believes there will be no seizure or enforcement actions taken against MegaMania
in any of the United States during the pendency of the trial on the merits of
MegaMania as a Class II bingo game. The Company intends to vigorously defend its
position that MegaMania is a Class II game; however, 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. Even if the Company is successful on the merits, the legal fees and
expenses to be incurred by the Company related to the MegaMania litigation will
be significant and are expected to materially and adversely affect the Company's
reported earnings during the periods in which the legal fees are rendered and
the related costs incurred by the Company.

6
<PAGE> 9

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 and the various Indian tribes that play MegaMania have relied upon
the opinions of the NIGC in operating and playing MegaMania. The NIGC has also
issued rulings regarding the Company's Integrated Gaming Services Agreements
with the tribes and has determined them to be service contracts rather than
management contracts, thereby allowing the Company to obtain more favorable
terms than would have been permitted had the agreements been determined to be
management contracts. See "Dependance Upon Tribal Contracts" and "The
Company -- Integrated Gaming Services Agreements."

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

DEVELOPING OPERATING ENVIRONMENT

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

TRIBAL REGULATION

Each Federally recognized Indian tribe has the standing of a sovereign
nation. As such, without approval from the tribes, the tribes cannot be sued or
otherwise held accountable under any but tribal laws. Each tribe which is a
party to the Company's Integrated Gaming Services Agreements has waived its
sovereign immunity to the Company as it relates to equipment used in the conduct
of games or to the revenues of the gaming facility. Although the Company has
never experienced any difficulties in this regard, there can be no assurance
that a particular tribe will not invoke its sovereign immunities with respect to
obligations and/or contracts with the Company which could have the effect of
rendering the Company's contracts unenforceable.

In addition, gaming on Indian lands is generally closely administered by
tribal officials. Most tribes have established a regulatory framework to
administer the conduct of gaming on Indian lands. These regulations generally
include licensing and approval procedures and reporting and audit requirements.
Not all constituencies within each Indian tribe view gaming favorably, and
changes in tribal officials have in the past, and could in the future, result in
a more difficult environment in which to conduct the Company's business at a
particular tribe. Moreover, perceptions and attitudes concerning the integrity
and morality of gaming are highly sensitive matters with most tribes and
seemingly minor or irrelevant matters, including rumor and innuendo about the
legality of the Company's activities, can and have been used by competitors and
by competing tribal
7
<PAGE> 10

constituencies as a basis for changing or attempting to change existing
relationships between tribes and the Company. The Company expects this
environment to continue in the future but believes that its sensitivity to these
matters, and the personnel and policies it has in place, will enable it to
effectively manage the issues that will inevitably arise.

DEPENDANCE UPON TRIBAL CONTRACTS

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

FUTURE FINANCING

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

CUSTOMER DEMAND; COMPETITION

The Company's product development and marketing activities are based upon
the Company's assessment of customer demand for gaming services in
establishments in which the Company provides services. Significant changes in
customer demand or preference for gaming products in a given geography,
including competing gaming and other leisure activities, could have an adverse
impact on the Company's business and results of operations. Significant
competition to the Company's MegaMania game should be expected based upon the
initial popularity of that game. See "The Company -- Competition."

TECHNOLOGICAL INNOVATION

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

8
<PAGE> 11

the Company will continue to develop and introduce new products in a timely
manner that will achieve commercial success.

ACCUMULATED DEFICIT; UNCERTAIN PROFITABILITY

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

PRIZE FULFILLMENT

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

SIGNIFICANT OUTSTANDING OPTIONS AND WARRANTS

As of September 30, 1997, there were outstanding immediately exercisable
rights to purchase an aggregate of 2,006,627 shares of Common Stock at exercise
prices ranging from $1.50 to $8.00 per share (which includes the 1,792,143
Warrants), and shares of the Company's Series A Preferred Stock that are
immediately convertible into 545,960 shares of Common Stock. In addition, there
were outstanding additional rights to purchase an aggregate of 1,239,250 shares
of Common Stock at exercise prices ranging from $1.50 to $13.38 per share, of
which 412,000 became exercisable subsequent to September 30, 1997 and were
exercised prior to December 15, 1997 at $3.00 per share; of the remaining
827,250 shares, approximately 400,000 become exercisable during calendar 1998
and the remainder become exercisable in substantially equal annual increments
over the following four years. To the extent that such rights and Series A
Preferred Stock are exercised or converted, dilution to the Company's
shareholders will occur. Moreover, the terms upon which the Company will be able
to obtain additional equity capital may be adversely affected, since the holders
of such rights and Series A Preferred Stock can be expected to exercise or
convert them at a time when the Company would, in all likelihood, be able to
obtain any needed capital on terms more favorable to the Company than the
exercise terms provided in such securities.

ABSENCE OF DIVIDENDS

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

Holders of the Warrants will be able to exercise the Warrants only if (i) a
current prospectus under the Securities Act 1933, as amended (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

9
<PAGE> 12

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 Common Stock and Warrants are quoted 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 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 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. It should be
expected that a notice of redemption of the Warrants will result in a decline in
the market price of the Warrants and the Common Stock.

10
<PAGE> 13

SHARES AVAILABLE FOR FUTURE SALE; SALES BY AFFILIATES

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

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 September
30, 1997, there were 109,192 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 1,792,143 Warrants outstanding at the date
of this Prospectus are exercised in full, the Company will receive $14,337,144
of gross proceeds therefrom.

11
<PAGE> 14

MARKET PRICES OF SECURITIES

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

<TABLE>
<CAPTION>
FISCAL QUARTER HIGH LOW
-------------- ------- -------
<S> <C> <C>
First Quarter 1996.......................................... $ 3.25 $ 2.25
Second Quarter 1996......................................... 3.62 2.12
Third Quarter 1996.......................................... 6.50 3.625
Fourth Quarter 1996......................................... 5.75 4.75
First Quarter 1997.......................................... 6.00 4.37
Second Quarter 1997......................................... 10.75 4.75
Third Quarter 1997.......................................... 12.00 8.25
Fourth Quarter 1997......................................... 13.87 10.37
</TABLE>

On January 24, 1998, the closing bid price of the Common Stock as reported
by Nasdaq was $10.015.

The Company's Class A Warrants and Class B Warrants have been listed on the
NASDAQ SmallCap Stock Market under the symbols "MGAMW" and "MGAMZ",
respectively, since August 6, 1997. The following table sets forth the range of
the quarterly high and low bid prices for the Warrants, as reported in the Wall
Street Journal, since that date.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
CLASS A WARRANTS:
8/6/97-9/30/97.............................................. $ 4.37 $ 1.50
10/1/07-12/31/97............................................ 9.62 4.37
1/1/98-1/20/98.............................................. 8.00 5.12
CLASS B WARRANTS:
8/6/97-9/30/97.............................................. $ 5.37 $ 4.50
10/1/07-12/31/97............................................ 11.50 5.37
1/1/98-1/20/98.............................................. 10.00 5.00
</TABLE>

On January 24, 1998, the closing bid price of the Class A Warrants was
$5.125 and on January 20, 1998, the closing bid price of the Class B Warrants
was $5.875.

12
<PAGE> 15

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 30, 1997.

<TABLE>
<S> <C>
Current portion of long-term debt(1)........................ $ 395,000
===========
Long-term debt(1)........................................... 675,000
Stockholders equity(2):
Preferred stock, Series A, $.01 par value, 2,000,000
shares authorized, 109,192 shares issued and
outstanding............................................ 1,000
Common stock, $.01 par value, 25,000,000 shares
authorized, 4,817,296 shares issued and 4,783,297
outstanding............................................ 48,000
Additional paid-in capital................................ 12,297,000
Stockholder notes receivable(3)........................... (596,000)
Treasury Stock............................................ (87,000)
Accumulated deficit....................................... (1,386,000)
-----------
Total stockholders' equity................................ 10,277,000
-----------
Total capitalization........................................ $10,952,000
===========
</TABLE>

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

(1) See Note 7 of Notes to September 30, 1997 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) 1,792,143 shares upon the exercise of the Warrants, (ii) 214,484 shares
upon the exercise of currently exercisable rights at prices ranging from
$1.50 to $8.00 per share, (iii) 827,250 shares upon the exercise of rights
at prices ranging from $1.50 to $13.38 per share, (iv) 545,960 shares upon
the conversion of the Series A Preferred Stock, and (v) 412,000 shares that
were issued at $3.00 per share in October/December upon the exercise of the
Put and Call Agreement (see "Certain Relationships and Related
Transactions").

(3) 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").

13
<PAGE> 16

SELECTED FINANCIAL DATA

The selected financial data as of September 30, 1997 and for the years
ended September 30, 1997 and 1996, 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 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,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Gaming revenue............................................ $34,011,000 $21,653,000
Total revenues............................................ 39,052,000 22,887,000
Bingo prizes, and related costs........................... 9,381,000 9,697,000
Allotments to hall operators.............................. 17,902,000 7,596,000
Total operating costs..................................... 38,055,000 22,685,000
Operating income.......................................... 997,000 202,000
Net income................................................ 1,311,000 40,000
Earnings (loss) per common and equivalent share, $ .27 (.04)
primary.................................................
Earnings (loss) per common and equivalent share, fully $ .20 $ (.04)
diluted.................................................
</TABLE>

BALANCE SHEET DATA:

<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1997
-------------
<S> <C>
Working capital............................................. $ 3,846,000
Total assets................................................ 15,400,000
Current portion of long-term debt........................... 395,000
Long-term debt.............................................. 675,000
Stockholders equity......................................... $10,277,000
</TABLE>

14
<PAGE> 17

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

BUSINESS OVERVIEW

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

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

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

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
MegaBingo, MegaCash and
MegaBingo Lite:
Gross Revenues........................................... $13,504,000 $15,579,000
Bingo Prizes and Related Costs........................... (9,381,000) (9,697,000)
Allotments to Hall Operators............................. (2,568,000) (3,188,000)
----------- -----------
Net MegaBingo Margin..................................... $ 1,555,000 $ 2,694,000
=========== ===========
MegaMania:
Gaming Revenue, Net of Prizes(1)......................... $20,507,000 $ 6,074,000
Allotments to Hall Operators............................. (15,334,000) (4,408,000)
----------- -----------
Net MegaMania Margin..................................... $ 5,173,000 $ 1,666,000
=========== ===========
</TABLE>

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

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

The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto. See "Index to Financial
Statements."

Revenues -- Total revenues for fiscal year 1997 were $39.1 million as
compared to $22.9 million in 1996, a 70.6% increase. The increase is due to a
57.1% increase in gaming revenues over 1996, primarily as a result

15
<PAGE> 18

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

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

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

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

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

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

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

Cost of Electronic Player Stations Sold -- Cost of electronic player
stations sold were $1.7 million in 1997 as compared to $.1 million in 1996, or
an increase of $1.6 million. Cost of electronic player stations sold associated
with related party sales were $1.2 million in 1997. The overall increase was due
to the higher number of electronic player stations sold in 1997, as discussed
above.

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

Selling, General and Administrative Expenses -- Selling, general and
administrative expenses increased $1.9 million, or 60.3% during 1997 as compared
to 1996. The increase relates primarily to MegaMania

16
<PAGE> 19

telecommunications, legal, operational, training and support costs.
Additionally, travel costs related to the sales, installation and maintenance
efforts for MegaMania contributed to the increase.

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

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

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

FUTURE EXPECTATIONS AND FORWARD LOOKING STATEMENTS

This 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 "Description of Business Risk Factors".
Given these uncertainties, readers of this Prospectus are cautioned not to place
undue reliance upon such statements.

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

17
<PAGE> 20

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

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

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

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

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

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

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<PAGE> 21

CONTINGENCIES

On December 31, 1997, the U.S. Attorney for the Northern District of
Oklahoma (the "Tulsa U.S. Attorney") filed a civil forfeiture action in the
Federal District Court for the Northern District against the player stations and
centralized computer equipment used to play MegaMania located in the Northern
District. Pursuant to the civil forfeiture action, agents of the Federal Bureau
of Investigation ("FBI") entered the Company's headquarters in Tulsa, Oklahoma
and seized the Company's central computer system which caused the play of
MegaMania to cease throughout the Company's nationwide MegaMania network. Agents
also entered the bingo halls of the Cherokee Nation and Seneca-Cayuga tribe in
the Northern District and seized approximately 300 MegaMania player stations.
Agents also entered the bingo hall of the Choctaw Nation in the Eastern District
of Oklahoma and seized the Company's bingo ball blower that was used to draw
numbers for the play of MegaMania. No other seizure or enforcement action was
taken outside the Northern District.

On January 23, 1998, the Company, the Seneca-Cayuga tribe and the Cherokee
Nation entered into a standstill agreement with the Tulsa U.S. Attorney and the
other U.S. Attorneys in Oklahoma which allowed the bingo halls of the
Seneca-Cayuga's and Cherokee's to immediately commence playing MegaMania,
assured the Company and the tribes that no other seizure or enforcement action
would be taken in Oklahoma, and agreed to a speedy trial on the merits of
MegaMania within 120 days. As a result of the standstill agreement, the Company
believes there will be no seizure or enforcement actions taken against MegaMania
in any of the United States during the pendency of the trial on the merits of
MegaMania as a Class II bingo game. The Company intends to vigorously defend its
position that MegaMania is a Class II game; however, 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. Even if the Company is successful on the merits, the legal fees and
expenses to be incurred by the Company related to the MegaMania litigation will
be significant and are expected to materially and adversely affect the Company's
reported earnings during the periods in which legal fees are rendered and the
related costs incurred by the Company.

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.

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<PAGE> 22

THE COMPANY

GENERAL

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

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.

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

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<PAGE> 23

and MegaBingo Lite games are approximately 12 minutes in duration and represent
only a limited percentage of the total number of bingo games conducted by each
participating bingo hall operator during any given bingo session.

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

In the MegaBingo game, which is conducted on the Company's satellite gaming
network seven nights per week, a player pays either $3 for a single bingo game
face card or $5 for a bingo game card consisting of three separate game faces.
When a player covers a card after 50 balls or fewer are drawn and calls bingo,
and the winning card is verified, the player is given the chance to win a
jackpot prize of up to $1,000,000 (paid $100,000 in cash and the remainder in
the form of a 24-year annuity) by spinning the MegaBingo wheel. If there is no
winner after 50 balls or fewer are drawn, the game continues until a player
calls bingo. Once that player's card is verified, the player will receive a
consolation prize of $2,500 if a $3 card was played, or $5,000 if a $5 card was
played, as well as certain lesser prizes. MegaBingo Lite is similar to
MegaBingo, but involves fewer halls and smaller prizes (e.g., jackpot prizes of
$25,000). In the MegaCash game, which is conducted on the Company's network each
Saturday and Sunday in matinee sessions, the player pays either $2 or $5 for the
same single bingo game face card, which carries a jackpot of, respectively,
$100,000 or, by spinning the MegaBingo wheel, up to $1,000,000. If there is no
MegaCash winner after 50 balls or fewer are drawn, the game continues until
bingo is called and a consolation winner is determined. Consolation prizes are
$2,500 for a $2 card, or $5,000 for a $5 card, as well as certain lesser prizes.
Typically, 13 games of MegaBingo and two of MegaCash are played each week.

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

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

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

INTEGRATED GAMING SERVICES AGREEMENTS ("IGS AGREEMENTS")

Virtually all of the Company's revenues are derived from contracts with
Indian tribes. The Company's contract with each bingo hall operator is typically
for five years, and provides for a variety of integrated, multi-hall games on an
exclusive basis. Participation in the Company's multi-hall network not only
generates
21
<PAGE> 24

additional profit for the bingo hall, but also allows the bingo hall operators
to advertise jackpot prizes well in excess of those offered by other bingo halls
where the Company's games are not played, thus providing participating halls a
competitive advantage.

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

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

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

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

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

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

PRIZE FULFILLMENT

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

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<PAGE> 25

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

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

GAMING EQUIPMENT

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

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

MARKETING, ADVERTISING AND PROMOTION

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

SERVICE MARKS AND PATENTS

The Company owns registered service marks for "MegaBingo(R)" and
"MegaCash(R)". The Company also utilizes the trademarks "MegaBingo Lite(TM)" in
connection with its special game introduced in a limited number of halls, and
"TV MegaBingo(TM)" in connection with its televised game and "MegaMania(TM)" in
connection with its game played on electronic player stations. The Company
relies on trade secrets, proprietary know-how and continuing technological
innovation to develop and maintain its competitive position. However, there can
be no assurance that, insofar as the Company relies on trade secrets and
unpatented know-how, others will not independently develop similar technology or
that secrecy will not be breached.

COMPETITION

The Company believes that it competes with virtually all other forms of
gaming, including lotto, table games, sports betting and pari-mutuel wagering.
The intensity of such competition depends upon several factors, including the
nature and accessibility of the gaming activity and the demographics of the
players'
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<PAGE> 26

population. Most all of the companies engaged in such gaming activities have
substantially greater financial and personnel resources than the Company.

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

EMPLOYEES

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

GOVERNMENTAL REGULATION

General. The operation of gaming on Indian reservations is subject to the
Indian Gaming Regulatory Act of 1988 (25 U.S.C. 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 -- Government
Regulation; Possible Illegality of Company Activities."

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

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<PAGE> 27

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

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

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

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

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<PAGE> 28

LITIGATION

On December 31, 1997, the U.S. Attorney for the Northern District of
Oklahoma (the "Tulsa U.S. Attorney") filed a civil forfeiture action in the
Federal District Court for the Northern District against the player stations and
centralized computer equipment used to play MegaMania located in the Northern
District. Pursuant to the civil forfeiture action, agents of the FBI entered the
Company's headquarters in Tulsa, Oklahoma and seized the Company's central
computer system which caused the play of MegaMania to cease throughout the
Company's nationwide MegaMania network. Agents also entered the bingo halls of
the Cherokee Nation and Seneca-Cayuga tribe in the Northern District and seized
approximately 300 MegaMania player stations. Agents also entered the bingo hall
of the Choctaw Nation in the Eastern District of Oklahoma and seized the
Company's bingo ball blower that was used to draw numbers for the play of
MegaMania. No other seizure or enforcement action was taken outside the Northern
District.

The operation of gaming on Indian lands is subject to 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 opinions that the Company's MegaMania game
is a Class II rather than a Class III gaming activity. These opinions are 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
and the various Indian tribes that play MegaMania have relied upon the opinions
of the NIGC in operating and playing MegaMania. The NIGC has also issued rulings

26
<PAGE> 29

regarding the Company's Integrated Gaming Services Agreements with the tribes
and has determined them to be service contracts rather than management
contracts, thereby allowing the Company to obtain more favorable terms than
would have been permitted had the agreements been determined to be management
contracts. See "Risk Factors -- Dependance Upon Tribal Contracts" and "The
Company -- Integrated Gaming Services Agreements."

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.

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>
Chairman of the Board, Chief Executive Officer and
Gordon T. Graves... 60 Director
Larry D.
Montgomery....... 59 President and Director
Daniel J.
Sarnoff.......... 41 Vice President and Director
Gordon T. Sjodin... 56 Executive Vice President
Michael E.
Newell........... 46 Vice President
Frederick E.
Roll............. 54 Vice President, Secretary and Chief Financial Officer
Robert F.
Lannert.......... 42 Vice President
Gregory N. Stern... 52 Director
</TABLE>

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

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

Daniel J. Sarnoff as 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.

27
<PAGE> 30

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

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

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

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

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

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

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

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

28
<PAGE> 31

EXECUTIVE COMPENSATION

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

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
SECURITIES
COMPENSATION ANNUAL UNDERLYING
--------------- OPTIONS/ ALL OTHER
FINANCIAL POSITION YEAR SALARY WARRANTS(#)(1) COMPENSATION(2)
------------------ ---- -------- -------------- ---------------
<S> <C> <C> <C> <C>
Gordon T. Graves............................. 1997 $ 70,000 (3) $--
Chairman of the 1996 65,423 -- 485
Board and Chief 1995 46,364(4) -- --
Executive Officer
Larry D. Montgomery.......................... 1997 115,160 10,000 --
President and Chief 1996 100,939 5,000 3,238
Operating Officer 1995 108,000 13,000 3,420
Gordon T. Sjodin............................. 1997 120,360 5,000 --
Vice President 1996 115,669 4,445 3,309
1995 108,000 -- 13,206
</TABLE>

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

(1) Consists of shares of Common Stock underlying options granted pursuant to
the Company's 1994 Employee Stock Option Plan, 1996 Stock Incentive Plan and
its Salaried Employee Participation Plan, and underlying warrants issued in
lieu of compensation in July 1994 (see "Stock Plans" below).

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

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

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

Option/Warrant Grant Table. The following table sets forth certain
information regarding options and warrants granted by the Company during its
fiscal year ended September 30, 1997 to the named executive officers.

OPTION/WARRANT GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/
UNDERLYING WARRANTS
OPTIONS/ GRANTED TO
WARRANTS EMPLOYEE IN PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR PER SHARE DATE
---- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Gordon T. Graves(1)............................... -- -- -- --
Larry D. Montgomery............................... 5,000 0.9 $4.375 10/18/06
5,000 0.9 $5.688 2/20/07
Gordon T. Sjodin.................................. 5,000 0.9 $4.375 10/18/06
</TABLE>

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

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

29
<PAGE> 32

Aggregate Option/Warrant Exercises and Year-End Option Table. The following
table sets forth certain information regarding the exercise of stock options and
warrants during the fiscal year ended September 30, 1997, and the unexercised
stock options and warrants held as of September 30, 1997, by the named executive
officers.

<TABLE>
<CAPTION>
NO. OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
NO. OF VALUE OPTIONS AT FY-END OPTIONS AT FY-END (2)
SHARES ACQUIRED REALIZED --------------------------- ---------------------------
NAME UPON EXERCISE $(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gordon T. Graves(3).............. -- -- -- -- -- --
Larry D. Montgomery(4)........... 10,000 $85,000 33,750 29,250 $389,189 $305,905
Gordon T. Sjodin(5).............. -- -- 34,875 19,625 $377,577 $198,983
</TABLE>

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

(1) Market value of underlying Common Stock on date of exercise, minus the
exercise price.

(2) Market value of the underlying Common Stock at fiscal year end, minus the
exercise price.

(4) Does not include warrants acquired for investment in January 1995 to
purchase 5,129 shares of Common Stock, of which 3,189 were exercised in June
1997 at $2.75 per share.

(5) Does not include warrants acquired for investment in January 1995 to
purchase 4,623 shares of Common Stock, of which 2,683 were exercised in June
1997 at $2.75 per share.

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

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

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

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

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

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

30
<PAGE> 33

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.

31
<PAGE> 34

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

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

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

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

32
<PAGE> 35

As a result, since October 1997, AGN is 100% owned by the Company. Pursuant to
the exercise of the put rights by AGN Venturers, Mr. Graves acquired 41,200
shares of Common Stock.

During 1996, Gordon T. Graves 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.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
-------------------------- --------------------------
NUMBER OF NUMBER OF
SHARES SHARES
BENEFICIALLY PERCENT BENEFICIALLY PERCENT
BENEFICIAL OWNER OWNED OF CLASS(1) OWNED OF CLASS(1)
---------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Gordon T. Graves.................................. 1,084,620(2) 22.5 80,175(3) 73.4%
1604 Crested Butte
Austin, Texas 78746
Larry D. Montgomery............................... 90,684(4) 1.9 1,411 1.3
1920 S. West Union Road
Topeka, Kansas 66615
Gordon T. Sjodin.................................. 55,733(5) 1.2 1,272 1.1
5804 E. 104th Street
Tulsa, Oklahoma 74137
Daniel J. Sarnoff................................. 48,500(6) 1.0 2,000 1.8
1861 Nichols Canyon
Los Angeles, California 90046
Gregory N. Stern.................................. 20,000(7) (8) -- --
130 Barton Road
Stow, Massachusetts 01775
All executive officers and directors as a group
(eight persons)................................. 1,353,553(9) 28.0 83,351 76.3
</TABLE>

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

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

(2) Consists of (i) 591,545 shares owned of record by Graves Properties, Ltd., a
limited partnership controlled by Mr. Graves, (ii) 51,000 shares owned by
Graves Management, Inc., a corporation controlled by Mr. Graves, (iii)
41,500 shares issued in October/December 1997 upon the exercise of the

33
<PAGE> 36

AGN Venturers' put right, and (iv) 400,875 shares issuable upon the
conversion of the Series A Preferred Stock. Does not include an aggregate of
90,600 shares as to which Mr. Graves disclaims beneficial ownership,
consisting of: (i) 44,100 shares owned of record by Cynthia Graves, Mr.
Graves' wife, and (ii) 46,500 shares beneficially owned by the Gordon Graves
Grandchildren Trust.

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

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

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

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

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

(8) Less than 1%.

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

SELLING SECURITYHOLDERS

The following table sets forth for each Selling Securityholder, as of
January 6, 1998, the number of Warrants and, as of December 15, 1997, the number
of 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 SECURITIES
OWNED PRIOR BEING
TO OFFERING(1) 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
G.W. Egermayer, Jr............................. 10,000 20,000 10,000 10,000 10,000
First National Trust Assc...................... 8,333 16,666 8,333 8,333 8,333
FBO: Roger A. Granberg
Interpacific Capital Corp...................... 40,000 40,000 40,000 40,000 --
M.S. Farrell Holdings.......................... 1,000 1,000 1,000 1,000 --
Quad Capital Partners(3)....................... 16,667 16,667 16,667 16,667 --
Morris Stellar................................. 16,667 38,334 16,667 16,667 21,667
------- ------ ------- ------- -------
Sub-Totals............................... 100,667 148,667 100,667 100,667 48,000
------- ------ ------- ------- -------
</TABLE>

34
<PAGE> 37

<TABLE>
<CAPTION>
SECURITIES
BENEFICIALLY SECURITIES
OWNED PRIOR BEING
TO OFFERING(1) OFFERED
------------------ ------------------- SHARES BENEFICIALLY
COMMON COMMON OWNED AFTER
NAME WARRANTS STOCK WARRANTS STOCK OFFERING(2)
---- -------- ------ -------- ------- -------------------
<S> <C> <C> <C> <C> <C>
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.................................... 164,366 229,366 164,366 164,366 65,000
------- ------ ------- ------- -------
Sub-Totals............................... 283,944 348,944 283,944 283,944 65,000
------- ------ ------- ------- -------
Total Selling Securityholders:................... 384,611 497,611 384,611 384,611 113,000
======= ====== ======= ======= =======
</TABLE>

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

(1) Common Stock beneficially owned includes the Shares issuable upon the
exercise of the Warrants.

(2) Assumes the sale of all Warrants and Shares offered hereby by the Selling
Securityholders. Based upon 4,783,297 shares of Common Stock outstanding on
September 30, 1997.

(3) Lawrence Kaplan is an advisor to the Company's Board of Directors and is a
partner in Quad Capital Partners.

(4) In connection with the private placement of the Warrants in August and
November, each Selling Securityholder, (other than 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.

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.

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 1,792,143 Warrants outstanding at the date of this Prospectus
are exercised in full, the Company will receive $14,337,144 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.

35
<PAGE> 38

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 $100,000.

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.

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 $.01
per share. As of September 30, 1997, there were 4,783,297 shares of Common Stock
outstanding, 109,192 shares of Series A Preferred Stock issued and outstanding,
1,268,833 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,
$.01 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

36
<PAGE> 39

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 109,192 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 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 4 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 became 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

37
<PAGE> 40

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.

EXPERTS

The consolidated balance sheet of the Company as of September 30, 1997, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the two years in the period ended September
30, 1997, 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 that firm as experts in accounting and
auditing.

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 do not own any securities of the Company.

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, File No. 333-30721 (the "Registration Statement"), as the same may from
time to time be amended, by the Company with the

38
<PAGE> 41

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.

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.

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.

39
<PAGE> 42

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Accountants........................... F-1
Consolidated Balance Sheet, September 30, 1997.............. F-2
Consolidated Statements of Operations, Years Ended September F-4
30, 1997 and 1996.........................................
Consolidated Statements of Changes in Stockholders Equity, F-5
Years Ended September 30, 1997 and 1996...................
Consolidated Statements of Cash Flows, Years Ended September F-6
30, 1997 and 1996.........................................
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 43

REPORT OF INDEPENDENT ACCOUNTANTS

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

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

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Multimedia Games, Inc. and Subsidiaries as of September 30, 1997 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Tulsa, Oklahoma
December 23, 1997

F-2
<PAGE> 44

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997

ASSETS

<TABLE>
<S> <C>
Current Assets:
Cash and cash equivalents................................... $ 2,380,000
Accounts Receivable:
Trade, net of allowance for doubtful accounts of $123,000... 1,443,000
Other....................................................... 123,000
Inventory................................................. 511,000
Prepaid expenses.......................................... 61,000
Notes receivable.......................................... 286,000
Notes receivable -- related parties....................... 1,427,000
Due from AGN L.L.C........................................ 381,000
Deferred tax asset........................................ 79,000
-----------
Total current assets...................................... 6,691,000
-----------
Restricted cash and cash equivalents........................ 1,783,000
Notes receivable -- related party........................... 1,010,000
Property and equipment, net................................. 4,970,000
Other assets................................................ 95,000
Deferred tax asset -- non-current........................... 379,000
Goodwill, net............................................... 472,000
-----------
Total assets................................................ $15,400,000
===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of long-term debt......................... $ 395,000
Accounts payable and accrued expenses..................... 1,853,000
Prize fulfillment fees payable............................ 597,000
-----------
Total current liabilities................................. 2,845,000
-----------
Long-term debt.............................................. 675,000
Other long-term liabilities................................. 1,603,000
Commitments and Contingencies (Note 11)
Stockholders' equity:
Preferred stock, Series A, $.01 par value, 2,000,000
shares authorized, 109,192 shares issued and
outstanding............................................ 1,000
Common stock, $.01 par value, 25,000,000 shares
authorized, 4,817,296 shares issued and 4,783,297
shares outstanding..................................... 48,000
Additional paid-in capital................................ 12,297,000
Stockholder notes receivable.............................. (596,000)
Treasury stock, 33,999 shares at cost..................... (87,000)
Accumulated deficit....................................... (1,386,000)
-----------
Total stockholders' equity................................ 10,277,000
-----------
Total liabilities and stockholders' equity.................. $15,400,000
===========
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE> 45

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Gaming revenue............................................ $34,011,000 $21,653,000
Electronic player station sales........................... 808,000 360,000
Electronic player station sales -- related party.......... 2,436,000 --
Electronic player station lease revenue................... 1,786,000 64,000
Other..................................................... 11,000 810,000
----------- -----------
Total revenues............................................ 39,052,000 22,887,000
----------- -----------
Operating costs and expenses:
Bingo prizes and related costs............................ 9,381,000 9,697,000
Allotments to hall operators.............................. 17,902,000 7,596,000
Cost of electronic player stations sold................... 538,000 55,000
Cost of electronic player stations sold -- related
party.................................................. 1,183,000 --
Salaries and wages........................................ 2,227,000 1,659,000
Selling, general and administrative expenses.............. 5,049,000 3,149,000
Amortization and depreciation............................. 1,775,000 529,000
----------- -----------
Total operating costs and expenses........................ 38,055,000 22,685,000
----------- -----------
Operating income.......................................... 997,000 202,000
Interest income............................................. 29,000 51,000
Interest expense............................................ (167,000) (213,000)
----------- -----------
Income before income taxes.................................. 859,000 40,000
Income tax benefit.......................................... 452,000 --
----------- -----------
Net income.................................................. $ 1,311,000 $ 40,000
=========== ===========
Earnings (loss) per common and equivalent share, 4,459,176
and 2,872,258 shares, respectively........................ $ .27 $ (.04)
=========== ===========
Earnings (loss) per common and equivalent share assuming
full dilution, 6,462,188 and 2,872,258 shares,
respectively.............................................. $ .20 $ (.04)
=========== ===========
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE> 46

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------- -------------------- TREASURY
NUMBER NUMBER ADDITIONAL STOCKHOLDER STOCK/
OF OF PAID-IN NOTES UNEARNED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION DEFICIT
-------- ------ ---------- ------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1995................ 136,318 $1,000 1,839,948 $18,000 $ 4,765,000 $ (200,000) $ -- $(2,465,000)
Exercise of common
stock warrants...... -- -- 28,332 -- 50,000 -- (14,000) --
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 (808,000) --
Issuance of treasury
stock............... -- -- -- -- (47,000) (688,000) 735,000 --
Redemption of
preferred stock..... (2,000) -- -- -- (20,000) -- -- --
Preferred stock
dividends ($1.10 per
preferred share).... -- -- -- -- -- -- -- (149,000)
Value of warrants
associated with
Bridge Notes........ -- -- -- -- 27,000 -- -- --
Net income............ -- -- -- -- -- -- -- 40,000
-------- ------ ---------- ------- ----------- ----------- --------- -----------
Balance, September 30,
1996................ 134,318 1,000 2,859,200 29,000 6,296,000 (1,271,000) (87,000) (2,574,000)
Exercise of common
stock warrants...... -- -- 625,216 6,000 3,154,000 (13,000) -- --
Sale of common
stock............... -- -- 1,159,500 12,000 2,800,000 -- -- --
Exercise of stock
options............. -- -- 47,750 -- 138,000 -- -- --
Conversion of
preferred stock to
common
stock............... (25,126) -- 125,630 1,000 (1,000) -- -- --
Payment of
shareholders
notes............... -- -- -- -- -- 688,000 -- --
Registration fees and
offering costs...... -- -- -- -- (108,000) -- -- --
Preferred stock
dividends ($1.10 per
preferred share).... -- -- -- -- -- -- -- (123,000)
Value of options and
warrants associated
with consulting
services............ -- -- -- -- 10,000 -- -- --
Value of warrants
associated with
related party
equipment sales..... -- -- -- -- 8,000 -- -- --
Net income............ -- -- -- -- -- -- -- 1,311,000
-------- ------ ---------- ------- ----------- ----------- --------- -----------
Balance, September 30,
1997................ 109,192 $1,000 4,817,296 $48,000 $12,297,000 $ (596,000) $ (87,000) $(1,386,000)
======== ====== ========== ======= =========== =========== ========= ===========

TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance, September 30,
1995................ $ 2,119,000
Exercise of common
stock warrants...... 36,000
Sale of common
stock............... 949,000
Exercise of common
stock warrants by
Chairman............ --
Purchase of treasury
stock............... (608,000)
Issuance of treasury
stock............... --
Redemption of
preferred stock..... (20,000)
Preferred stock
dividends ($1.10 per
preferred share).... (149,000)
Value of warrants
associated with
Bridge Notes........ 27,000
Net income............ 40,000
-----------
Balance, September 30,
1996................ 2,394,000
Exercise of common
stock warrants...... 3,147,000
Sale of common
stock............... 2,812,000
Exercise of stock
options............. 138,000
Conversion of
preferred stock to
common
stock............... --
Payment of
shareholders
notes............... 688,000
Registration fees and
offering costs...... (108,000)
Preferred stock
dividends ($1.10 per
preferred share).... (123,000)
Value of options and
warrants associated
with consulting
services............ 10,000
Value of warrants
associated with
related party
equipment sales..... 8,000
Net income............ 1,311,000
-----------
Balance, September 30,
1997................ $10,277,000
===========
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE> 47

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,311,000 $ 40,000
Adjustments to reconcile net income to cash provided by
(used for) operating activities:
Amortization and depreciation.......................... 1,775,000 529,000
Deferred tax benefit................................... (458,000) --
Software license fee................................... -- (500,000)
Other non-cash expenses................................ 119,000 84,000
(Increase) decrease in:
Accounts receivable.................................. (1,274,000) (367,000)
Notes receivable..................................... (286,000) --
Notes receivable -- related party.................... (2,437,000) --
Inventory............................................ (153,000) (358,000)
Prepaid expenses..................................... 31,000 --
Due from AGN L.L.C................................... (144,000) (75,000)
Increase (decrease) in:
Accounts payable and accrued expenses................ 561,000 361,000
Hall's share of surplus.............................. (120,000) --
Prize fulfillment fees payable....................... 277,000 --
Other long-term liabilities.......................... 231,000 --
----------- -----------
Net cash provided by (used for) operating activities........ (567,000) (286,000)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment..................... (4,104,000) (1,294,000)
Increase in cash and restricted cash balances............. (249,000) --
----------- -----------
Net cash provided by (used for) investing activities...... (4,353,000) (1,294,000)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock including collection of
shareholder notes...................................... 5,877,000 985,000
Proceeds from debt........................................ 658,000 1,062,000
Principal payments of debt................................ (620,000) (171,000)
Payment of preferred stock dividends...................... (123,000) (149,000)
Purchase of treasury stock................................ -- (10,000)
Financing costs........................................... -- (166,000)
----------- -----------
Net cash provided by (used for) financing activities...... 5,792,000 1,551,000
----------- -----------
Net change in cash and cash equivalents..................... 872,000 (29,000)
Cash and cash equivalents, beginning of period.............. 1,508,000 1,537,000
----------- -----------
Cash and cash equivalents, end of period.................... $ 2,380,000 $ 1,508,000
=========== ===========
Supplemental disclosure of interest paid:................... $ 167,000 $ 102,000
=========== ===========
</TABLE>

See Notes to Consolidated Financial Statements.

F-6
<PAGE> 48

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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.)

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

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

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

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

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

Property and Equipment -- Property and equipment are stated at cost. The
cost of property and equipment is depreciated over its estimated useful life
generally using the straight line method. Equipment

F-7
<PAGE> 49

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

under leases which convey ownership to the lessee at the end of the lease term
is depreciated over the shorter of the lease term or three years. Predominately
all of the Company's property and equipment is depreciated over two to five
years. Sales and retirements of depreciable property are recorded by removing
the related cost and accumulated depreciation from the accounts. Gains or losses
on sales and retirements of property are reflected in operations.

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

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

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

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

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

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

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

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

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> 50

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

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

2. MEGABINGO TRANSACTIONS; INTEGRATED SERVICES AGREEMENTS

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

Virtually all of the Company's revenues are derived from the Integrated
Services Agreements with various tribes. The Company, in its name or in the name
of AGE, has written agreements with approximately 50 American Indian tribes that
provide the Company with the exclusive right to conduct bingo operations on
their respective Indian lands. Approximately 20 of these agreements were renewed
for five (5) year terms in 1995 and half of the remaining contracts have
unexpired terms of between two and three years. The remaining contracts are
being continued on a month to month basis.

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

3. AMERICAN GAMING NETWORK

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

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

F-9
<PAGE> 51

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

who acquired 10% of AGN Venturers L.L.C. At September 30, 1997, in addition to
the $336,000 note, AGN owed the Company $45,000. The $336,000 note was paid off
in October 1997.

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

4. DISTRIBUTION AND LICENSING AGREEMENT WITH NETWORK GAMING

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

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

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

5. PROPERTY AND EQUIPMENT

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

<TABLE>
<S> <C>
Gaming and satellite equipment.............................. $ 5,020,000
Software costs.............................................. 2,176,000
Other....................................................... 101,000
-----------
Total property and equipment................................ 7,297,000
Less accumulated depreciation............................... (2,327,000)
-----------
Property and equipment, net................................. $ 4,970,000
===========
</TABLE>

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

6. BRIDGE DEBT

In August 1996, Bridge Debt was raised in anticipation of the Company's
private placement of equity securities which was completed in November 1996 (the
"November Placement"). The Bridge Debt bore

F-10
<PAGE> 52

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interest at 10.5%, was due in one year and was mandatorily redeemable from the
proceeds of the November Placement. (see Note 9). In connection with the Bridge
Debt, redeemable warrants representing the right to purchase 173,310 shares of
common stock were issued to the placement agent (the "Class B Bridge Warrants")
and redeemable warrants representing the right to purchase 360,000 shares of
common stock were issued to the purchasers of the Bridge Debt (the "Class A
Bridge Warrants and, together with the Class B Bridge Warrants, the "Bridge
Warrants"). Each Class A Bridge Warrant represents the right to purchase one
share of common stock at $8.00 per share (subject to adjustments) and has
identical terms as the Class A Warrants issued in the November Placement. Each
Class B Bridge Warrant represents the right to purchase one share of common
stock at $8.00 per share (subject to adjustments) and has identical terms as the
Class B Warrants issued in the November Placement. The value assigned to the
Bridge Warrants as well as the remainder of the Bridge Debt issuance costs have
been treated as an adjustment to the effective interest rate of the Bridge Debt.
Approximately $84,000 in interest cost was recognized during 1996 related to the
value of the Bridge Warrants and issuance costs and an additional $40,000 was
recognized in the year ending September 30, 1997. The Bridge Debt was converted
into common stock and warrants in connection with the November Placement.

7. LONG-TERM DEBT

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

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

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

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

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

F-11
<PAGE> 53

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. INCOME TAXES

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

<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Current:
Federal................................................... $ -- $ 32,000
State..................................................... -- 5,000
Deferred.................................................. (452,000) (37,000)
--------- --------
Net income tax expense (benefit)............................ $(452,000) $ --
========= ========
</TABLE>

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

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

F-12
<PAGE> 54

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>
1997 1996
--------- --------
<S> <C> <C>
Deferred tax asset -- current:
Accounts receivable allowance............................. $ 47,000 $ 29,000
Vacation accrued.......................................... 32,000 23,000
Valuation allowance....................................... -- (52,000)
--------- --------
Net current deferred taxes.................................. $ 79,000 $ --
========= ========
Deferred tax asset -- noncurrent:
Net operating losses...................................... $ 629,000 $749,000
Tax credit carryforward................................... 6,000 --
Deferred tax liability -- noncurrent
Goodwill.................................................. (10,000) (6,000)
Depreciation.............................................. (246,000) --
--------- --------
379,000 743,000
Valuation Allowance......................................... -- (743,000)
--------- --------
Net noncurrent deferred taxes............................... $ 379,000 $ --
========= ========
</TABLE>

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

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

9. STOCKHOLDERS' EQUITY

Series A Preferred Stock

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

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

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

F-13
<PAGE> 55

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
$1,092,000 in the aggregate at September 30, 1997. The holders of the Series A
preferred stock are entitled to a cumulative preferred dividend, payable
quarterly, at the rate of $1.10 per share per annum. In the event the Company
remains in arrears for more than two quarters, holders of the Series A preferred
stock voting as a class are entitled to elect a majority of the Company's Board
of Directors.

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

Common Stock

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

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

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

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

F-14
<PAGE> 56

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Common Stock Warrants and Options

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

1996 ACTIVITY:

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
EXERCISE WARRANTS WARRANTS
PRICE OUTSTANDING OUTSTANDING
PER EXPIRATION OCTOBER 1, EXPIRED/ SEPTEMBER 30,
SHARE DATE 1995 GRANTED EXERCISED CANCELED 1996
- -------- ---------- ----------- --------- --------- -------- -------------
<C> <C> <C> <C> <C> <C> <C>
$1.00 Oct 95 6,000 -- 6,000 -- --
$1.50 Oct 95-Dec 95 33,333 -- 13,332 20,001 --
$2.00 Sep 97-Jan 98 394,450 -- 291,545 -- 102,905
$2.50 Mar 2000 10,000 -- -- -- 10,000
$2.75 May 97-Jul 97 83,765 -- 9,000 -- 74,765
$3.50 Jul 2000 175,000 -- -- -- 175,000
$4.00 Jul 2000 18,750 -- -- -- 18,750
$6.60 Jul 98 23,550 -- -- -- 23,550
$8.00 Aug 2001 -- 523,310 -- -- 523,310
------- --------- ------- ------ ---------
744,848 523,310 319,877 20,001 928,280
======= ========= ======= ====== =========
</TABLE>

1997 ACTIVITY:

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
EXERCISE WARRANTS WARRANTS
PRICE OUTSTANDING OUTSTANDING
PER EXPIRATION OCTOBER 1, EXPIRED/ SEPTEMBER 30,
SHARE DATE 1996 GRANTED EXERCISED CANCELED 1997
- -------- ---------- ----------- --------- --------- -------- -------------
<C> <C> <C> <C> <C> <C> <C>
$2.00 Sep 97-Jan 98 102,905 -- 98,637 -- 4,268
$2.50 Mar 2000 10,000 -- 10,000 -- --
$2.75 May 97-Jul 97 74,765 -- 71,531 3,234 --
$3.50 Jul 2000 175,000 -- 175,000 -- --
$4.00 Jul 2000 18,750 -- -- -- 18,750
$6.60 Jul 98 23,550 -- 18,334 -- 5,216
$5.688* Feb 2007 -- 100,000 -- -- 100,000
$8.00* Aug 2007 -- 54,000 -- -- 54,000
$10.00* Aug 2007 -- 54,000 -- -- 54,000
$12.00* Aug 2007 -- 54,000 -- -- 54,000
$8.00 Aug. 2001 523,310 1,518,833 250,000 -- 1,792,143
$10.00* May 2002 -- 27,000 -- -- 27,000
$11.00* June 2002 -- 50,000 -- -- 50,000
$13.38* Sept. 2002 -- 100,000 -- -- 100,000
------- --------- ------- ------ ---------
928,280 1,957,833 623,502 3,234 2,259,377
======= ========= ======= ====== =========
</TABLE>

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

*Indicates warrant/option is not currently exercisable.

10. STOCK OPTION AND EMPLOYEE BENEFIT PLANS

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

In November 1994, the stockholders of the Company approved the Company's
1994 Director Stock Option Plan (the Director Plan) and the Company's 1994
Employee Stock Option Plan (the 1994 Employee Plan) previously adopted by the
Board of Directors, pursuant to which 60,000 shares and 360,000 shares,
respectively, of the Company's common stock were reserved for issuance. Options
issued under the Director Plan and the 1994 Employee Plan vest ratably over a
five-year period from the date of grant. Commencing

F-15
<PAGE> 57

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

with the adoption of the 1996 Plan discussed below, no further grants of options
will be made under either the Director Plan or the 1994 Employee Plan.

In August 1996, the Board of Directors of the Company approved the 1996
Stock Incentive Plan (the 1996 Plan). Under the 1996 Plan, various stock based
incentive awards may be made including incentive stock options, nonqualified
stock options, stock appreciation rights, restricted stock, performance shares
or deferred stock purchases. Options issued under the 1996 Plan vest ratably
over a four-year period from the date of grant. The total number of shares of
common stock or common stock equivalents that may be issued under the 1996 Plan
is 274,320 plus an amount equal to 10% of the number of shares of common stock
issued by the Company after August 15, 1996 and prior to December 31, 2000. As
of September 30, 1997, a total of 478,330 shares of common stock or common stock
equivalents were available for grant under the 1996 Plan. The Company has agreed
with the placement agent of its November Placement that it will not grant
options under the 1996 Plan to purchase more than 200,000 shares during the one
year period ending July 24, 1997, or more than 100,000 shares during each of the
three one year periods thereafter. In order to have grants made which qualify as
incentive stock options, the 1996 Plan was approved by the Company's
stockholders in March 1997.

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

1996 ACTIVITY:

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

F-16
<PAGE> 58

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1997 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 1996 GRANTED CANCELED 1997 1997
-------- ---------- ----------- ------- ---------- ------------- -------------
<C> <C> <C> <C> <C> <C> <C>
1993 PLAN:
$1.50 Oct 97 45,000 -- 10,000 35,000 27,000
1994 DIRECTOR PLAN:
$2.50 Jul 2004 40,000 -- -- 40,000 40,000
1994 EMPLOYEE PLAN:
$2.00 Mar 2005 56,000 -- -- 56,000 28,000
$2.50 Jul 2004 120,000 -- 10,000 110,000 80,000
$2.50 Feb 2006 75,000 -- 45,000 30,000 7,500
$2.75 Jul 2005 15,000 -- 7,500 7,500 --
$4.00 Apr 2006 19,000 -- -- 19,000 4,750
1996 STOCK INCENTIVE PLAN:
$4.375 Oct 2006 -- 145,000 8,000 137,000 --
$4.750 Jan 2007 -- 17,000 -- 17,000 --
$5.500 Feb 2007 -- 43,000 10,500 32,500 --
$5.688 Feb 2007 -- 69,000 -- 69,000 --
$7.141 Feb 2007 -- 10,000 -- 10,000 --
$8.000 Mar 2007 -- 2,500 -- 2,500 --
----------- ------- ---------- ------------- -------------
370,000 286,500 91,000 565,500 187,250
=========== ======= ========== ============= =============
</TABLE>

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

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

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Weighted average Life....................................... 3.5 years 3.5 years
Risk-free interest rate..................................... 6.56% 6.12%
Expected volatility......................................... 72% 72%
Expected dividend yield..................................... None None
</TABLE>

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of the fair value of its options. The weighted average estimated fair
value of employee stock options granted during 1997 and 1996

F-17
<PAGE> 59

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

was $3.22 and $1.72 per share, respectively. The fair value of options granted
during 1997 and 1996 under the Company's stock option plans totalled $631,000
and $255,000, respectively.

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

<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Net income (loss):
As reported............................................... $1,311,000 $ 40,000
Pro forma................................................. 969,000 (45,000)
Earnings (loss) per common share:
As reported............................................... $ .27 $ (.04)
Pro forma................................................. $ .19 $ (.07)
Earnings (loss) per common share, fully diluted:
As reported............................................... $ .20 $ (.04)
Pro forma................................................. $ .15 $ (.07)
</TABLE>

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

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

11. COMMITMENTS AND CONTINGENCIES

Pending Investigation

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.

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

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-18
<PAGE> 60

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Prize Fulfillment Firm

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

Under the terms of the prize fulfillment agreement, the Company is
reimbursed for prizes awarded at an amount equal to the present value for the
jackpot prize payments less a deductible which is $15,000 per occurrence. These
prize fulfillment funds are then utilized to satisfy the obligation to the
jackpot prize winner through a lump-sum cash payment or the purchase of an
annuity. In those cases where the prize winner elects an annuity, the obligation
has historically been discharged by purchasing annuity contracts from insurance
companies rated by A.M. Best as A+, with the prize winner listed as the sole
beneficiary. Purchased annuity contracts entered into by AGE prior to April 15,
1994, which provide for various insurance companies to make payments directly to
prize winners over a specified period of time in the aggregate amount of
approximately $6,085,000 are outstanding at September 30, 1997. The outstanding
amounts include 22 annuity contracts aggregating approximately $5,055,000 which
were purchased from an insurance carrier that is currently under an Order of
Rehabilitation to the Michigan State Commissioner of Insurance. Under this
Order, payments under all such contracts will continue until ordered otherwise
by the State of Michigan. It is unknown at this time as to whether further court
actions will result in reductions in amounts owed under these annuity contracts.
There can be no assurance that this or any other insurance company responsible
for outstanding annuities will continue to fulfill all their obligations under
the annuity contracts.

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

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

F-19
<PAGE> 61

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 1997 and 1996 amounted to $131,000 and
$117,000, respectively.

12. RELATED PARTY TRANSACTIONS

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

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

F-20
<PAGE> 62

MULTIMEDIA GAMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. MEGAMANIA LEASES

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

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

14. CONCENTRATIONS OF CREDIT RISK

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

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

F-21
<PAGE> 63

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................................ 17,500
Attorneys' Fees and Expenses................................ 30,000
Printing Fees and Expenses.................................. 22,500
Blue Sky Fees and Expenses.................................. 2,000
Nasdaq Listing Fees......................................... 7,500
Miscellaneous............................................... 12,146
--------
Total............................................. $100,000
========
</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

In February 1997, the Company granted an option to purchase 100,000 shares
of Common Stock at an exercise price of $5.688 per share to an independent
contractor for services rendered to the Company. The transaction was not
registered under the Securities Act in reliance upon the exemption contained in
Section 4(2) of the Securities Act.

In August 1997, the Company granted three separate options to purchase
54,000 shares of Common Stock exercise prices of $8.00, $10.00 and $12.00 per
share, respectively. to an independent contractor for services rendered to the
Company. The transaction was not registered under the Securities Act in reliance
upon the exemption contained in Section 4(2) of the Securities Act.

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.

II-1
<PAGE> 64

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.

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 August 1996, the Company adopted its 1996 Stock Incentive Plan (the
"1996 Plan") pursuant to which, through September 30, 1997, options to purchase
277,000 shares of Common Stock at prices ranging from $4.375 to $8.00 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
II-2
<PAGE> 65

Company, along with other non-employee 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 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.

During the three months ended September 30, 1997, the Company issued 45,682
shares of Common Stock at a price of $2.00 per share upon the exercise of
warrants granted in January 1995 in transactions exempt from registration under
the Securities Act pursuant to Section 4(2) thereof.

During the six months ended June 30, 1997, the Company issued 263,683
shares of Common Stock in transactions exempt from registration under the
Securities Act pursuant to Section 4(2) thereof, as follows:

(a) 125,000 shares upon the conversion of 25,126 shares of Series A
Preferred Stock originally issued in January 1995.

(b) 8,531 shares at a price of $2.75 per share upon the exercise of
warrants originally issued in July 1994.

(d) 18,334 shares at a price of $6.00 per share upon the exercise of
warrants originally issued in July 1993.

(e) 45,682 shares at a price of $2.00 per share upon the exercise of
warrants originally issued in January 1995.

(f) 1,506 shares for services rendered.

(g) 54,000 shares at a price of $2.75 per share upon the exercise of
warrants originally issued in May 1994.

In May 1997, the Company issued warrants to purchase 27,000 shares of
Common Stock at $10.00 per share. The warrants become exercisable in May 1998
and expire in May 2002. The warrants were issued to a consultant for services
rendered in a transaction exempt from registration under the Securities Act
pursuant to Section 4(2) thereof.

In June 1997, the Company issued warrants to purchase 50,000 shares of
Common Stock at $11.00 per share. The warrants become exercisable in June 1998
and expire in June 2002. The warrants were issued to a company owned and
controlled by Gordon T. Graves, the Chairman and Chief Executive Officer of the
Company, as an inducement to purchase electronic player stations from the
Company. The issuance of the warrants was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof.

In September 1997, the Company issued warrants to purchase 100,000 shares
of Common Stock at $13.38 per share. The warrants become exercisable in
September 1998 and expire in September 2002. The warrants were issued to a
company owned and controlled by Gordon T. Graves, the Chairman and Chief
Executive Officer of the Company, as an inducement to purchase electronic player
stations from the Company. The issuance of the warrants was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof.

II-3
<PAGE> 66

ITEM 27. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE LOCATION
------- ----- --------
<C> <S> <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)
10.27 -- Form of Registration Rights Agreement between the Company
and Frank J. Skelly, III and Craig Gross (2)
10.28 -- Placement Agency Agreement dated July 24, 1996 between
the Company and Walsh, Manning Securities, Inc. (2)
10.29 -- Placement Agency Agreement dated January 29, 1996 between
the Company and G-V Capital Corp. (2)
</TABLE>

II-4
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE LOCATION
------- ----- --------
<C> <S> <C>
10.30 -- Press Release dated April 9, 1997 (5)
10.31 -- Memorandum of Understanding with NIGC (5)
10.32 -- July 10, 1996 letter from the NIGC to the Company (4)
10.33 -- April 9, 1997 letter from the NIGC to the Company (4)
10.34 -- May 12, 1997 letter from the NIGC to the Company (4)
10.35 -- Form of Amendment to Warrants (3)
10.36 -- July 23, 1997 Advisory Opinion of the NIGC (3)
10.37 -- Form of Class A Warrant (7)
10.38 -- Form of Class B Warrant (7)
10.39 -- Warrant Agreement dated November 12, 1996 between the
Company and Corporate Stock Transfer, as Warrant Agent (7)
10.40 -- Amendment to Warrant Agreement, dated July 18, 1997 (7)
10.41 -- Press Release issued January 2, 1998 (6)
10.42 -- Press Release issued January 5, 1998 (6)
10.43 -- Complaint For Declaratory Relief filed in the Northern
District of Oklahoma on January 5, 1999 (6)
21.1 -- Subsidiaries of Registrant (8)
23.1 -- Consent of Coopers & Lybrand L.L.P. (9)
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) Previously 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.

(6) Indicates incorporated by reference to the Company's Report on Form 8-K,
filed with the Commission on January 6, 1997.

(7) Incorporated by reference to the Company's registration statement on Form
8-A, filed with the Commission on July 29, 1997.

(8) Indicates incorporated by reference to the Company's Form 10-KSB filed with
the Commission for the fiscal year ended September 30, 1997.

(9) Filed herewith.

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

II-5
<PAGE> 68

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.

(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-6
<PAGE> 69

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 27th day of
January, 1998.

MULTIMEDIA GAMES, INC.

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

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>
<C> <S> <C>
/s/ GORDON T. GRAVES Chairman of the Board Dated: January 27, 1998
- ----------------------------------------------------- Chief Executive
Gordon T. Graves Officer and Director

* Director Dated: January 27, 1998
- -----------------------------------------------------
Larry D. Montgomery

* Vice President, Dated: January 27, 1998
- ----------------------------------------------------- Controller and Chief
Frederick E. Roll Financial Officer

Director Dated: January 27, 1998
- -----------------------------------------------------
Thomas Sarnoff

* Director Dated: January 27, 1998
- -----------------------------------------------------
Gregory N. Stern

/s/ * FREDERICK E. ROLL
- -----------------------------------------------------
By: Frederick E. Roll
Attorney-In-Fact
</TABLE>

II-7
<PAGE> 70

INDEX TO EXHIBITS

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

(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) Previously 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.

(6) Indicates incorporated by reference to the Company's Report on Form 8-K,
filed with the Commission on January 6, 1997.

(7) Incorporated by reference to the Company's registration statement on Form
8-A, filed with the Commission on July 29, 1997.

(8) Indicates incorporated by reference to the Company's Form 10-KSB filed with
the Commission for the fiscal year ended September 30, 1997.

(9) Filed herewith.

<PAGE> 1

EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in the Prospectus constituting part of this
Post-Effective Amendment to Registration Statement on Form SB-2 (file number
333-30721) of our report dated December 23, 1997, 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 "EXPERTS" and
"SELECTED FINANCIAL DATA."

COOPERS & LYBRAND L.L.P.

Tulsa, Oklahoma

January 26, 1998