<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    Form 10-Q

[X] Quarterly Report under Section 13 or 15(D) of the Securities Exchange Act of
    1934

                 For the Quarterly Period Ended: March 31, 2002

[_] Transition Report Pursuant to Section 13 or 15(D) of the Securities Exchange
    Act of 1934

           For the transition period from ___________ to ____________


                         Commission File Number: 0-28318

                             Multimedia Games, Inc.
             (Exact Name of Registrant as Specified in its Charter)


                  Texas                              74-2611034
        (State or Other Jurisdiction                (IRS Employer
              of Incorporation)                  Identification Number)


                        8900 Shoal Creek Blvd., Suite 300
                               Austin, Texas 78757
                    (Address of Principal Executive Offices)

                                 (512) 371-7100
              (Registrant's Telephone Number, Including Area Code)

                     (Former name, former address and former
                   fiscal year, if changed since last report)


Indicate by check whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days:
Yes  X    No
    ---

As of March 31, 2002 there were 12,551,927 shares of the Company's Common Stock,
par value $.01, outstanding.

<PAGE>

                                    FORM 10-Q

                                      INDEX

<TABLE>
<CAPTION>
<S>                                                                                                              <C>
PART I.  FINANCIAL INFORMATION
------------------------------
Item 1.  Financial Statements

Condensed Consolidated Balance Sheets
(As of March 31, 2002 (unaudited) and September 30, 2001 (audited)) ...........................................   3

Unaudited Condensed Consolidated Statements of Income
(For the three months ended March 31, 2002 and 2001) ..........................................................   4

Unaudited Condensed Consolidated Statements of Income
(For the six months ended March 31, 2002 and 2001) ............................................................   5

Unaudited Condensed Consolidated Statements of Cash Flows
(For the six months ended March 31, 2002 and 2001) ............................................................   6

Notes to Unaudited Consolidated Financial Statements ..........................................................   7

Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations ................  11

Item 3. Quantitative and Qualitative Disclosures about Market Risk ............................................  16

PART II. OTHER INFORMATION
--------------------------
Item 1.  Legal Proceedings ....................................................................................  17

Item 6.  Exhibits and Reports on Form 8-K .....................................................................  18
</TABLE>

                                       2

<PAGE>

                                     PART I
                             FINANCIAL INFORMATION

                             MULTIMEDIA GAMES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                   As of March 31, 2002 and September 30, 2001

<TABLE>
<CAPTION>
                                                                       March 31,     September 30,
                                                                         2002            2001
                                                                    --------------  ---------------
                                               ASSETS                (Unaudited)        (Audited)
<S>                                                                <C>             <C>
CURRENT ASSETS:
   Cash and cash equivalents                                       $   17,479,000  $    4,868,000
   Accounts receivable
     Trade                                                              5,702,000       3,794,000
     Game reserve                                                             ---          81,000
     Other                                                                429,000         123,000
   Allowance for doubtful accounts                                       (301,000)       (343,000)
   Inventory                                                            1,324,000       2,634,000
   Prepaid expenses                                                     1,635,000       1,877,000
   Notes receivable                                                       608,000         711,000
   Deferred taxes                                                         517,000         765,000
                                                                    -------------   -------------
         Total current assets                                          27,393,000      14,510,000
Restricted cash and long-term investments                               1,409,000       1,764,000
Inventory - non-current                                                 5,071,000       4,096,000
Property and equipment, net                                            29,400,000      21,664,000
Deferred taxes                                                          2,743,000       1,895,000
Other assets                                                            1,938,000         375,000
Goodwill, net                                                             349,000         363,000
                                                                    -------------   -------------
         Total assets                                              $   68,303,000  $   44,667,000
                                                                    =============   =============
                               LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Current portion of long-term debt                               $      136,000  $           --
   Accounts payable and accrued expenses                               11,645,000       7,673,000
   Federal income tax payable                                           2,728,000       1,150,000
   State income tax payable                                             2,624,000       1,377,000
   Halls' share of surplus                                                719,000             ---
   Prize fulfillment fees payable                                          29,000          99,000
                                                                    -------------   -------------
         Total current liabilities                                     17,881,000      10,299,000
Long-term debt, less current portion                                      228,000             ---
Other long-term liabilities                                             1,416,000       2,000,000
                                                                    -------------   -------------
         Total liabilities                                             19,525,000      12,299,000
                                                                    -------------   -------------
Commitments and contingencies (Note 2)
Stockholders' equity:
   Preferred stock, Series A, $0.01 par value, 2,000,000 shares
     authorized, none and 9,203 shares issued and outstanding                  --              --
   Common stock, $0.01 par value, 25,000,000 shares authorized
   13,626,272 and 12,983,538 shares issued, and
   12,551,927 and 11,909,799 shares outstanding, respectively             136,000         130,000
   Additional paid-in capital                                          37,644,000      32,586,000
   Stockholders' notes receivable                                      (2,169,000)     (1,896,000)
   Treasury stock, 1,074,345 and 1,073,739 shares
      at cost, respectively                                            (5,847,000)     (5,830,000)
   Retained earnings                                                   19,014,000       7,378,000
                                                                    -------------   -------------
         Total stockholders' equity                                    48,778,000      32,368,000
                                                                    -------------   -------------
         Total liabilities and stockholders' equity                $   68,303,000  $   44,667,000
                                                                    =============   =============
</TABLE>

    The accompanying notes are an integral part of the condensed consolidated
                              financial statements.

                                        3

<PAGE>

                             MULTIMEDIA GAMES, INC.
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
               For the Three Months Ended March 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                2002                2001
                                                          ----------------    ---------------
REVENUES:                                                    (Unaudited)        (Unaudited)
<S>                                                       <C>                 <C>
   Gaming revenue - Class II                              $     71,037,000    $    24,658,000
   Gaming revenue - Class III                                    1,479,000          1,107,000
   Player station sale and lease revenue                         3,069,000          1,007,000
   Other                                                           367,000            212,000
                                                          ----------------    ---------------
         Total revenues                                         75,952,000         26,984,000
   Bingo prizes and related costs                                 (262,000)          (374,000)
   Allotments to hall operators                                (50,385,000)       (17,628,000)
                                                          ----------------    ---------------
         Net revenues                                           25,305,000          8,982,000
                                                          ----------------    ---------------
OPERATING COSTS AND EXPENSES:
   Cost of electronic player stations sold                       2,497,000            721,000
   Selling, general and administrative expenses                  8,034,000          4,308,000
   Amortization and depreciation                                 3,613,000          2,278,000
                                                          ----------------    ---------------
         Total operating costs and expenses                     14,144,000          7,307,000
                                                          ----------------    ---------------
         Operating income                                       11,161,000          1,675,000
Interest income                                                     48,000             22,000
Interest expense                                                   (11,000)          (156,000)
                                                          ----------------    ---------------
Income before income taxes                                      11,198,000          1,541,000
Income tax expense                                              (4,309,000)          (596,000)
                                                          ----------------    ---------------
         Net income                                       $      6,889,000    $       945,000
                                                          ----------------    ---------------

Basic earnings per share                                  $           0.56    $          0.11
                                                          ================    ===============

Diluted earnings per share                                $           0.47    $          0.10
                                                          ================    ===============
</TABLE>

    The accompanying notes are an integral part of the condensed consolidated
                              financial statements.

                                        4

<PAGE>

                             MULTIMEDIA GAMES, INC.
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                For the Six Months Ended March 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                2002                2001
                                                          ----------------    ---------------
REVENUES:                                                   (Unaudited)         (Unaudited)
<S>                                                       <C>                 <C>
   Gaming revenue - Class II                              $    127,625,000    $    44,145,000
   Gaming revenue - Class III                                    2,789,000          2,024,000
   Player station sale and lease revenue                         3,777,000          1,907,000
   Other                                                           652,000            515,000
                                                          ----------------    ---------------
         Total revenues                                        134,843,000         48,591,000
   Bingo prizes and related costs                                 (732,000)        (1,489,000)
   Allotments to hall operators                                (90,426,000)       (31,079,000)
                                                          ----------------    ---------------
         Net revenues                                           43,685,000         16,023,000
                                                          ----------------    ---------------
OPERATING COSTS AND EXPENSES:
   Cost of electronic player stations sold                       2,814,000            910,000
   Selling, general and administrative expenses                 15,151,000          8,102,000
   Amortization and depreciation                                 6,811,000          4,609,000
                                                          ----------------    ---------------
         Total operating costs and expenses                     24,776,000         13,621,000
                                                          ----------------    ---------------
         Operating income                                       18,909,000          2,402,000
Interest income                                                    112,000             57,000
Interest expense                                                   (28,000)          (332,000)
                                                          ----------------    ---------------
Income before income taxes                                      18,993,000          2,127,000
Income tax expense                                              (7,353,000)          (818,000)
                                                          ----------------    ---------------
         Net income                                       $     11,640,000    $     1,309,000
                                                          ----------------    ---------------
Basic earnings per share                                  $           0.95    $          0.15
                                                          ================    ===============
Diluted earnings per share                                $           0.80    $          0.13
                                                          ================    ===============
</TABLE>

    The accompanying notes are an integral part of the condensed consolidated
                              financial statements.

                                        5

<PAGE>

                             MULTIMEDIA GAMES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                For the Six Months Ended March 31, 2002 and 2001
<TABLE>
<CAPTION>
                                                                                  2002                    2001
                                                                              ------------            ------------
<S>                                                                           <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES:                                          (Unaudited)             (Unaudited)
Net income                                                                    $ 11,640,000            $  1,309,000
Adjustments to reconcile net income to cash and cash equivalents
 provided by operating activities:
 Amortization and depreciation                                                   6,811,000               4,609,000
 Options issued to consultants                                                      36,000                     ---
 Provision for bad debts                                                           296,000                  20,000
 Loss on disposal of property and equipment                                            ---                  (1,000)
 Inventory reserve                                                                 219,000                 121,000
 Deferred taxes                                                                   (600,000)               (587,000)
 Tax benefit of stock options exercised                                          2,867,000                     ---
 (Increase) decrease in:
   Accounts receivable                                                          (2,552,000)                651,000
   Inventory                                                                    (2,576,000)             (2,068,000)
   Prepaid expenses                                                                242,000                (226,000)
   Other assets                                                                 (1,469,000)                 32,000
   Federal and state income tax payable                                            (42,000)                (19,000)
   Prize fulfillment fees payable                                                  (70,000)                (31,000)
   Notes receivable                                                                103,000               2,023,000
   Accounts payable and accrued expenses                                         3,472,000                 755,000
   Halls' share of surplus                                                         800,000                 531,000
                                                                              ------------            ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                       19,177,000               7,119,000
                                                                              ------------            ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Acquisition of property and equipment and patents                             (11,935,000)             (2,553,000)
 Restricted cash and long-term investments
   and other long-term liabilities                                                 271,000                 (13,000)
                                                                              ------------            ------------
NET CASH USED IN INVESTING ACTIVITIES                                          (11,664,000)             (2,566,000)
                                                                              ------------            ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from exercise of stock options, warrants,
   and related tax benefit                                                       5,028,000                 163,000
 Proceeds from (repayments on) note payable, net                                   399,000              (1,226,000)
 Principal payments of debt                                                        (35,000)               (274,000)
 Payment on NGI lawsuit settlement                                                     ---                (290,000)
 Decrease in stockholders' notes receivable                                       (273,000)                 (4,000)
 Preferred stock dividends                                                          (4,000)                (50,000)
 Purchase of treasury stock                                                        (17,000)             (1,794,000)
                                                                              ------------            ------------
NET CASH PROVIDED BY (USED IN)
    FINANCING ACTIVITIES                                                         5,098,000              (3,475,000)
                                                                              ------------            ------------
Net increase in cash and cash equivalents                                       12,611,000               1,078,000
Cash and cash equivalents, beginning of period                                   4,868,000               1,315,000
                                                                              ------------            ------------
Cash and cash equivalents, end of period                                      $ 17,479,000            $  2,393,000
                                                                              ============            ============
SUPPLEMENTAL CASH FLOW DATA:
  Interest paid                                                               $     28,000            $    359,000
                                                                              ============            ============
  Federal income tax paid                                                     $  2,261,000            $  1,110,000
                                                                              ============            ============
NON-CASH TRANSACTIONS:
  Transfer of inventory to property and equipment                             $  2,692,000            $  1,365,000
                                                                              ============            ============
</TABLE>

    The accompanying notes are an integral part of the condensed consolidated
                              financial statements.

                                       6

<PAGE>

                             MULTIMEDIA GAMES, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

The accompanying financial statements should be read in conjunction with the
Company's consolidated financial statements and footnotes contained within the
Company's Annual Report on Form 10-K for the year ended September 30, 2001.

The financial statements included herein as of March 31, 2002 and for each of
the three and six months ended March 31, 2002 and 2001 have been prepared by the
Company without an audit, pursuant to accounting principles generally accepted
in the United States of America, and the rules and regulations of the Securities
and Exchange Commission. They do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. The information presented
reflects all adjustments consisting solely of normal recurring adjustments which
are, in the opinion of management, considered necessary to present fairly the
financial position, results of operations, and cash flows for the periods.
Operating results for the three and six months ended March 31, 2002 are not
necessarily indicative of the results which will be realized for the year ending
September 30, 2002.

Reclassification - Certain reclassifications were made to the prior period
financial statements to conform to the current period financial statement
presentation. These reclassifications did not have an impact on previously
reported financial position or results of operations.

Accounting Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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 materially from these estimates in the
near term.

Stock Split - On January 24, 2002, the Board of Directors authorized a
three-for-two split of the Company's common stock, paid in the form of a stock
dividend on February 11, 2002. All references in the accompanying financial
statements to the number of common shares and per-share amounts have been
restated to reflect the stock split.

Income Per Common Share - Income per common share is computed in accordance with
Statement of Financial Accounting Standards No. 128 ("FAS 128"). Presented below
is the computation of basic and diluted earnings per share also presented in the
accompanying statements of income.

<TABLE>
<CAPTION>
                                                                 Three Months Ended
                                                                      March 31,
                                                                2002            2001
                                                           --------------  --------------
     <S>                                                   <C>             <C>
     Income available to common shareholders - basic       $    6,888,000  $      920,000
                                                           ==============  ==============
     Income available to common shareholders - diluted     $    6,889,000  $      945,000
                                                           ==============  ==============
     Weighted average common shares outstanding                12,355,374       8,018,606
     Effect of dilutive securities:
        Options                                                 2,119,911         996,849
        Warrants                                                  226,315          31,278
        Convertible preferred stock                                 5,383         652,792
                                                           --------------  --------------
     Weighted average common and potential shares
     outstanding                                               14,706,983       9,699,525
                                                           ==============  ==============

     Basic earnings per share                              $         0.56  $         0.11
                                                           ==============  ==============
     Diluted earnings per share                            $         0.47  $         0.10
                                                           ==============  ==============
</TABLE>

                                       7

<PAGE>

                             MULTIMEDIA GAMES, INC.
       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>
                                                                 Six Months Ended
                                                                     March 31,
                                                               2002            2001
                                                          --------------  --------------
     <S>                                                  <C>             <C>
     Income available to common shareholders - basic      $   11,636,000  $    1,259,000
                                                          ==============  ==============
     Income available to common shareholders - diluted    $   11,640,000  $    1,309,000
                                                          ==============  ==============
     Weighted average common shares outstanding               12,186,329       8,135,051
     Effect of dilutive securities:
        Options                                                2,121,409         903,630
        Warrants                                                 251,401          27,971
        Convertible preferred stock                               23,140         652,792
                                                          --------------  --------------
     Weighted average common and potential shares
     outstanding                                              14,582,279       9,719,444
                                                          ==============  ==============

     Basic earnings per share                             $         0.95  $         0.15
                                                          ==============  ==============
     Diluted earnings per share                           $         0.80  $         0.13
                                                          ==============  ==============
</TABLE>

2. COMMITMENTS AND CONTINGENCIES

Virtually all of the Company's business relates to gaming activities on Native
American lands. These activities are subject to the Johnson Act and the Indian
Gaming Regulatory Act ("IGRA") which created the National Indian Gaming
Commission ("NIGC") to establish federal standards for gaming on Native American
lands. IGRA identifies three classes of gaming which are each subject to
specific degrees of regulation. The Johnson Act defines "illegal games" and
"illegal equipment," which include any "machine or mechanical device" designed
"primarily" for gambling that, when operated, delivers money to a player "as the
result of the application of an element of chance."

In addition to these federal statutes, all Native American tribes are required
by IGRA to adopt ordinances to regulate gaming as a condition of their right to
conduct gaming on Native American lands. These ordinances often include the
establishment of gaming commissions that make their own judgment about whether
an activity is Class II or Class III gaming. Generally, this independent
judgment has been exercised for games introduced into the market prior to any
determination of legality by the NIGC. Historically, when the NIGC has
determined that an activity is Class III gaming after it has been introduced,
tribes have either been unwilling to continue the activity or game, or have
litigated the matter in federal court.

Individual states are also becoming increasingly proactive in attempting to
regulate Native American gaming conducted within their borders. State agencies
often make their own assessment of whether an activity is Class II or Class III
gaming, independent of the NIGC, IGRA, and federal and Native American
governments.

Some fundamental issues relating to the scope and intent of IGRA, the
jurisdiction and authority of the NIGC, other federal agencies, state
authorities and Native American governments, and the regulation of gaming on
Native American lands remain unresolved and ambiguous. As a result, the legality
of our activities could be subject to regulatory challenges, litigation, and
enforcement actions by multiple regulatory bodies. Any such action could
materially and adversely affect the Company's ability to install and operate its
player stations and games, could be costly to defend and could divert
management's time and attention away from operations.

The Department of Justice has asserted in the past and continues to assert that:

     .    any electronic or mechanical device used in gaming, such as the player
          stations used to play the Company's Class II games, are illegal and in
          violation of the Johnson Act; and

     .    the "spinning reel" design used as a graphic in many of the Company's
          Class II games is a facsimile of a slot machine and, therefore, cannot
          be used in a Class II game.

Substantially all of the Company's revenues are derived from the operation of
player stations that could be subject to these challenges. If any such challenge
is made against the Company, it would divert management's time and attention
away from operations and could materially and adversely affect the Company's
ability to install and operate its games. A successful challenge to the Class II
status of the Company's MegaNanza game could materially and adversely affect the
Company's business.

                                       8

<PAGE>

                             MULTIMEDIA GAMES, INC.
       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

There is no assurance that new laws and regulations relating to the Company's
business will not be enacted or that existing laws and regulations will not be
amended or reinterpreted in a manner adverse to the Company's business. Any
regulatory change could materially and adversely affect the installation and use
of existing and additional player stations, games and systems, and the Company's
ability to generate revenues from some or all of its Class II games. Regulatory
uncertainty also increases the Company's cost of doing business. The Company
dedicates significant time and incurs significant expense for new game
development without any assurance that the NIGC or other federal, state and
local agencies or Native American governments will agree that each game meets
applicable regulatory requirements. The Company also devotes significant time
and expense to dealing with federal, state and Native American agencies having
jurisdiction over Native American gaming, and in complying with the various
regulatory regimes that govern its business.

In January 2001, the Company introduced a new Class II game called MegaNanza.
MegaNanza generated approximately $98.3 million, or 73%, of total revenues for
the six months ended March 31, 2002. Prior to introducing MegaNanza into each
new Native American market in which the Company operates, the Company obtained a
determination from each appropriate Native American authority that MegaNanza was
a legal Class II bingo game. There is no assurance that the Company will be able
to obtain similar determinations from future customers or that the Native
American authorities governing existing MegaNanza customers will not alter prior
determinations in a manner adverse to the Company. Even if the NIGC agrees that
MegaNanza is a Class II bingo game, the Department of Justice may pursue its own
independent action against the Company, and the Company may need to seek
judicial remedies against the NIGC, the Department of Justice or both. Any
litigation would be time consuming and expensive and would divert management's
attention from operations, and there is no assurance that the ultimate outcome
would be in the Company's favor. A negative outcome to any such litigation would
adversely affect the Company's ability to generate revenues from its
New-Generation platform Class II player stations.

On March 22, 2002, the NIGC published proposed rules that, if adopted, would
change the definitions of technological aids and of electronic or
electromechanical facsimiles used in Class II gaming. The release contains no
explanation by the NIGC of the purpose or effect of the proposed changes. If
adopted in their current form, the proposed definitions could result in the
failure of certain of the Company's games, including its popular MegaNanza game,
to qualify as a Class II game. In that case, the Company may have to challenge
the proposed regulations in court, where a favorable outcome cannot be
predicted. In the event the proposed regulations are adopted and enforced as
written, the Company could be forced to substantially modify the design and play
of its current offering of Class II games. Any litigation would be time
consuming and expensive. Also, if the Company were required to modify its
current offering of Class II games, there is no assurance that our modified
games could be operated at speeds materially comparable to the speeds at which
its current offering of Class II games can be played, or that any modified games
would appeal to the gaming and entertainment preferences of end users.

The comment period on the proposed rules has been extended through May 12, 2002.
The Company cannot predict whether the proposed rules will be adopted in their
current form, or as modified, or at all.

On April 15, 2002, the Company received an advisory opinion from the Deputy
General Counsel of the NIGC, stating that MegaNanza was a Class III game as
defined by the IGRA. The advisory opinion was in response to a request made by
the Company more than a year ago seeking a determination by the NIGC that
MegaNanza is a Class II game. Advisory opinions rendered by the Deputy General
Counsel are not the final decisions of the NIGC and are not binding upon the
Chairman of the NIGC or upon the NIGC itself.

The Company cannot predict whether a majority of the NIGC commissioners will
agree with the advisory opinion, if they will be open to discussion on the
subject, or if the Chairman of the NIGC will exercise his statutory right to
take enforcement actions against tribes that continue to operate MegaNanza. The
gaming commissions of the Company's Class II customers previously independently
determined that MegaNanza and the Company's other New-Generation games are Class
II games. The Company cannot predict whether the advisory opinion will cause any
of these customers to change their independent determinations. The Company
expects that some customers will seek to deploy the Company's newer Class II
gaming systems, and others will challenge the advisory opinion through the
regulatory resolution process, and in court, if necessary.

The Company regularly faces legal uncertainties in Class II gaming, and believes
that it will be able to respond to the extent necessary, to any changes in laws
and regulations and to the needs of its customers by rapidly adopting,
developing and deploying new products.

                                       9

<PAGE>

                             MULTIMEDIA GAMES, INC.
       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

On April 18, 2002, the Company filed a lawsuit in the United States District
Court for the Northern District of Oklahoma, Tulsa, Oklahoma, against the NIGC
seeking a judicial declaration that two versions of MegaNanza are Class II
games. A successful challenge to the Class II status of the MegaNanza game could
materially and adversely affect the Company's business. Even if successful,
litigation can be time-consuming, costly and distract management's attention. In
addition, these or other regulatory developments or any regulatory enforcement
actions could disrupt the Company's or its customers' business operations,
impair the Company's operating results, or cause a decline in the Company's
customers' purchases of its products.

License Agreements. In December 1999, the Company entered into a license
agreement with WMS(R) Gaming, Inc. ("WMS") to use certain trademarks, logos and
other audiovisual aids and graphics in the Washington State Class III market.
The Company's contract requires it to purchase a minimum number of licenses to
operate games over specified periods. This agreement will expire on September
12, 2002. As of March 3l 2002, the Company is in compliance with all provisions
of the agreement.

In April 2001, the Company entered into a license agreement with Bally Gaming,
Inc., a subsidiary of Alliance Gaming Corporation ("Bally") to use certain of
Bally's trademarks, logos and other audiovisual aids and graphics in the
Washington State Class III market. The Company's contract requires it to
purchase a minimum number of licenses to operate games over specified periods.
During September 2001, Bally extended the license agreement to provide the
Company access to Bally's catalog of game themes for use in Class II bingo
games. This extension also requires the Company to purchase a minimum number of
Class II licenses over a specified period.

                                       10

<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
        OF OPERATIONS

Overview

We are the leading supplier of online systems and linked, interactive electronic
games and player stations to the rapidly growing Native American gaming market.
We design and develop networks, software and content that provide our customers
with a comprehensive gaming system. Historically, we have focused our efforts on
Class II gaming systems and Class III video lottery systems used primarily by
Native American tribes.

Our recent revenue growth has been driven primarily by our technological
innovation and the increase in the installed base of our player stations. Our
gaming platforms enable us to regularly launch new games that we believe provide
end users with greater levels of entertainment. We believe that this leads to a
greater number of end users and to increased end-user spending rates. Since our
inception, we have produced MegaBingo, a live paper bingo game featuring a live
bingo ball draw that we televise to multiple bingo halls throughout the United
States. MegaBingo enables players in participating halls to compete with players
in other halls in a single live bingo game to win a large jackpot prize. In May
1996, we introduced our Class II Legacy platform together with MegaMania, the
first in a series of high-speed, interactive bingo games played on player
stations linked with one another via nationwide, online telecommunications
network. In January 2001, we introduced our Class II MegaNanza game, which plays
faster than our Legacy games and has generated increased revenues for our
customers and for us. In June 1999, we first installed Class III video lottery
systems in the State of Washington, which currently is the only state where
Class III video lottery systems are permitted by Native American-state compact.

Our New-Generation platform operates at considerably faster speeds than our
Legacy platform, generally resulting in end users playing a greater number of
games on our New-Generation platform than they otherwise could have on our
Legacy platform in the same amount of time. As a result of the faster speed of
play and higher payout ratios, we believe that end users derive a higher level
of satisfaction from playing our New-Generation platform games. We believe that
this enhanced satisfaction results in end users playing games on our
New-Generation platform for longer periods of time than they would have played
on our Legacy platform, resulting in a higher hold per day per player station on
our New-Generation platform player stations.

We derive our Class II gaming revenues primarily from participation arrangements
with our customers. Under these arrangements, we retain ownership of player
stations installed at our customers' bingo halls and receive revenue based on a
percentage of the hold per day generated by each player station. The hold per
day is reported by us as gaming revenue and represents the total amount wagered
by end users on a given player station less the total amount of prizes paid to
end users. Payments made to the halls for their share of the hold per day are
recorded in our results of operations as "Allotments to Hall Operators," and are
deducted from our total revenues to arrive at our net revenues. A comparatively
small and declining share of our Class II gaming revenue is from the sale of
Class II player stations under lease-purchase arrangements. Under these
arrangements, we receive a series of lease payments based on a percentage of a
customer's revenue generated from the leased player station. At the end of the
lease period, we transfer ownership of the player station to the customer. Due
to the pace at which we introduce new technology into our games and systems, we
believe our Class II customers generally prefer to rent our player stations
under participation arrangements rather than to incur capital costs that may be
lost to obsolescence. Our reporting of revenues from our television bingo game
show, MegaBingo, which accounts for the balance of our Class II gaming revenues,
differs from this model. Revenues from MegaBingo are recorded by us prior to the
payment of prizes to end users and prior to an allotment to the hall operator of
its share of MegaBingo revenues.

The majority of our Class III video lottery systems are sold for an up-front
purchase price. In addition, we also receive back-office fees based on a share
of the hold per day. Back-office fees cover our service and maintenance of the
back-office server installed in each hall to run our Class III games and the
related player tracking systems. For those video lottery systems sold to our
customers, the back-office fees are considerably smaller than the revenue share
we receive from Class II player stations being rented under participation
agreements. Accordingly, we derive our revenues from Class III gaming to a
greater extent from the sale of player stations as compared to the Class II
market. We also enter into either participation or lease-purchase arrangements
for our Class III video lottery systems that are similar to those for our Class
II systems.

Our sales of Class III video lottery systems peaked in 2000, as initial sales
were made pursuant to newly adopted Native American-state compacts with the
State of Washington which limited the number of installed Class III video
lottery systems permitted on Native American land. We anticipate that the sale
of Class III video lottery systems will

                                       11

<PAGE>

increase in 2002, as the compact limit on the number of Class III video lottery
systems has increased and new Native American gaming facilities are under
construction.

We have license agreements with WMS Gaming Inc. and Bally Gaming Inc. to use
certain trademarks, logos and graphics in connection with our Class III games.
We, in turn, resell these licenses to our customers in connection with the
installation of our Class III video lottery terminals using these licenses.
Revenues from these license fees are included in other revenues in our results
of operations. We also have a similar license agreement for the Class II market
with Bally Gaming Inc. We do not resell Class II licenses, as we only install
our Class II games and player stations with our customers on a participation
arrangement basis.

In addition to bingo prizes and related costs and allotments to hall operators,
our next largest expense directly related to our Class II and Class III gaming
revenue is amortization and depreciation. Most of our Class II player stations
are owned by us and we depreciate the cost of these player stations generally
over two to five years. We also capitalize certain costs related to the design
and development of our gaming products and systems, which we amortize generally
over eighteen months to five years. Our cost of player stations sold is the
smallest component of our expenses as a percentage of our total revenues, and is
commensurate with the contribution made by sales of player stations to our total
revenues.

RESULTS OF OPERATIONS

The following table outlines our installed player station base as of March 31:

                                                   2002         2001
                                                ----------   ----------
               Installed End of Period:
                 Class II
                    New-Generation Platform         3,775          456
                    Legacy Platform                 2,674        3,478
                                                  -------      -------
                      Total Class II                6,449        3,934
                 Class III                          1,873        1,318

Three Months Ended March 31, 2002 and 2001

Total revenues increased 181% to $76.0 million in the three months ended March
31, 2002, from $27.0 million in the same period in 2001. This increase was
primarily the result of more MegaNanza EPS in place during the second quarter of
fiscal 2002 compared to the same quarter of fiscal 2001. For the three months
ended March 31, 2002, MegaNanza generated revenues of $56.0 million, based on an
average of 3,490 electronic player stations in daily operation during the three
months. For the three months ended March 31, 2002, we had an average of 2,724
Class II Legacy player stations in daily operation, a 25% decrease from 3,615 in
the same period of 2001. This decrease was primarily the result of the
replacement of many of our Legacy player stations with our more profitable
MegaNanza and other New Generation player stations. Total revenues from Class
III games increased 36% to $1.5 million for the three months ended March 31,
2002, from $1.1 million for the same period in 2001. Class III back-office fees
increased 53% to $697,000 in the three months ended March 31, 2002 from $456,000
in the same period of 2001. This increase resulted from a 40% increase in the
average number of Class III video lottery systems in service to 1,855 units for
the three months ended March 31, 2002, from 1,318 units in the same period in
2001. Television bingo game show revenues increased 11% to $344,000 in the three
months ended March 31, 2002, from $309,000 in the same period of 2001. This
increase was the result of a greater number of halls participating in MegaBingo
due to the roll out of the revised game format introduced in November 2001.

Player station sale and license revenue increased by 210% to $3.1 million for
the three months ended March 31, 2002 from $1.0 million in same period of 2001.
This increase was primarily the result of the sale of Class III player stations
during the current quarter and corresponding growth in revenue from Class III
licensing fees.

Other revenue, which consisted primarily of service and maintenance fees,
increased 73% to $367,000 for the three months ended March 31, 2002, from
$212,000 in the same period of 2001. This increase was related to a greater
number of player stations in place.

                                       12

<PAGE>

Bingo prizes and related costs decreased 30% to $262,000 for the three months
ended March 31, 2002 from $374,000 in the same period of 2001. This decrease was
caused primarily by lower insurance costs due to the changes in game format.

Allotments to hall operators increased 186% to $50.4 million for the three
months ended March 31, 2002, from $17.6 million in the same period of 2001. This
increase was attributable to the increase in hall commissions related to our
Class II gaming, and is commensurate with the overall increase in our Class II
gaming revenue.

Cost of sales increased to $2.5 million for the three months ended March 31,
2f002 from $721,000 in the same period of 2001. This increase was commensurate
with the overall increase in our player stations and licenses sold.

Selling, general and administrative expenses increased 86% to $8.0 million for
the three months ended March 31, 2002 from $4.3 million in the same period of
2001. Salaries and wages increased primarily as a result of additional personnel
hired to address our Class II electronic gaming network needs and the pursuit of
new business, including the Class III video lottery business. Employee benefits
increased as a result of performance-based incentives covering substantially all
employees, and an increase in health and life insurance premiums due to a
greater number of employees. Advertising and promotions expenses increased
primarily as a result of our enhanced effort to advertise and promote certain
games in 2002. Legal and professional fees increased primarily as a result of
increased legal and professional services for research into new products and
markets. Consulting and contract labor increased primarily due to our increased
emphasis on the development, upgrade and maintenance of games and systems.

Amortization and depreciation expense increased 57% to $3.6 million for the
three months ended March 31, 2002 from $2.3 million for the same period of 2001,
primarily as a result of depreciation on a greater number of player stations in
service.

Interest income increased 118% to $48,000 for the three months ended March 31,
2002 from $22,000 in the same period of 2001. The increase in interest income
was primarily the result of stockholder notes receivable increasing 181% to $2.2
million as of March 31, 2002 from $784,000 as of March 31, 2001.

Interest expense decreased 93% to $11,000 for the three months ended March 31,
2002 from $156,000 in the same period of 2001. This decrease related to the
decrease in our outstanding debt, primarily from the payment of the remaining
balance on our existing credit facility in September 2001.

Income tax expense increased 621% to $4.3 million for the three months ended
March 31, 2002, from $596,000 in the same period of 2001. This represented an
effective tax rate of 39% for each of the three months ended March 31, 2002 and
2001.

Six Months Ended March 31, 2002 and 2001

Total revenues increased 171% to $134.8 million in the six months ended March
31, 2002, from $48.6 million in the same period in 2001. This increase was
primarily the result of the introduction of MegaNanza in January 2001. For the
six months ended March 31, 2002, MegaNanza generated revenues of $98.4 million,
based on an average of 3,038 electronic player stations in daily operation
during the six months. For the six months ended March 31, 2002, we had an
average of 2,872 Class II Legacy player stations in daily operation, a 24%
decrease from 3,769 in the same period of 2001. This decrease was primarily the
result of the replacement of many of our Legacy player stations with our more
profitable MegaNanza and other New Generation player stations. Total revenues
from Class III games increased 40% to $2.8 million for the six months ended
March 31, 2002, from $2.0 million for the same period in 2001. Class III
back-office fees increased 53% to $1.3 million in the six months ended March 31,
2002 from $851,000 in the same period of 2001. This increase resulted from a 30%
increase in the average number of Class III video lottery systems in service to
1,703 units for the six months ended March 31, 2002, from 1,313 units in the
same period in 2001. Television bingo game show revenues decreased 52% to
$669,000 in the six months ended March 31, 2002, from $1.4 million in the same
period of 2001. This decrease was the result of a reduction from the prior year
in both the number of halls participating in MegaBingo and the number of
sessions played per week, as end users have migrated to our faster Class II and
Class III systems.

Player station sale and license revenue increased by 100% to $3.8 million for
the six months ended March 31, 2002 from $1.9 million in the same period of
2001. This increase was primarily the result of increased Class III player
station and license placement in the second quarter of fiscal 2002.

                                       13

<PAGE>

Other revenue, which consisted primarily of service and maintenance fees,
increased 27% to $652,000 for the six months ended March 31, 2002 from $515,000
in the same period of 2001. This increase was related to a greater number of
player stations in place.

Bingo prizes and related costs decreased 51% to $732,000 for the six months
ended March 31, 2002 from $1.5 million in the same period of 2001. This decrease
was caused primarily by the decrease in MegaBingo revenues discussed above.

Allotments to hall operators increased 191% to $90.4 million for the six months
ended March 31, 2002 from $31.1 million in the same period on 2001. This
increase was attributable to the increase in hall commissions related to our
Class II gaming activities and is commensurate with the overall increase in our
Class II gaming revenue.

Cost of sales increased 208% to $2.8 million for the six months ended March 31,
2002 from $910,000 in the same period of 2001. This increase was commensurate
with the overall increase in our player stations and licenses sold.

Selling, general and administrative expenses increased 88% to $15.2 million for
the six months ended March 31, 2002 from $8.1 million in the same period of
2001. Software expenses increased as a result of more Class III video lottery
systems being placed in the six months ended March 31, 2002 than in the same
period in 2001. Salaries and wages increased primarily as a result of additional
personnel hired to address our Class II electronic gaming network needs and the
pursuit of new business, including the Class III video lottery business.
Employee benefits increased as a result of performance-based incentives covering
substantially all employees and an increase in health and life insurance
premiums due to a greater number of employees. Advertising and promotions
expenses increased primarily as a result of our enhanced effort to advertise and
promote certain games in 2002. Legal and professional fees increased primarily
as a result of increased legal and professional services for research into new
products and markets. Consulting and contract labor increased primarily due to
our increased emphasis on the development, upgrade and maintenance of games and
systems.

Amortization and depreciation expense increased 48% to $6.8 million for the six
months ended March 31, 2002 from $4.6 million for the same period of 2001,
primarily as a result of depreciation on a greater number of player stations in
service.

Interest income increased 97% to $112,000 for the six months ended March 31,
2002 from $57,000 in the same period of 2001. The increase in interest income
was primarily the result of stockholder notes receivable increasing 181% to $2.2
million as of March 31, 2002 from $784,000 as of March 31, 2001.

Interest expense decreased 92% to $28,000 for the six months ended March 31,
2002 from $332,000 in the same period of 2001. This decrease related to the
decrease in our outstanding debt, primarily from the payment of the remaining
balance on our existing credit facility in September 2001.

Income tax expense increased 805% to $7.4 million for the six months ended March
31, 2002, from $818,000 in the same period of 2001. This represented an
effective tax rate of 39% and 38% for the six months ended March 31, 2002 and
2001, respectively.

The trademarks and tradenames used by us in our Class II and Class III games
include: Betnet(TM), Players Passport(TM), MegaBingo(R), MegaCash(R),
MegaMania(R), FlashCash(R), Big Cash Bingo(R), Flash 21 Bingo(R), Spin &
Shout(R), Freedom 7's(R), Red Hot Diamonds(R), Fruit Cocktail(R), Fruit Cocktail
Deluxe(R), Diamond Cherry Bell Magic(R), Spinning Cherries Royale(R),
Meltdown(R), Keno Madness(R), High Noon Poker(R), Diamond Crown Jewels(R), Wild
Spinner(R) and Vortex(R). All references herein to those trademarks and
tradenames are deemed to include the applicable tradename or trademark
designation.

                                       14

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2002, we had unrestricted cash and cash equivalents of $17.5
million, compared to $2.4 million at March 31, 2001. Our working capital at
March 31, 2002 was $9.5 million, compared to a deficit of $1.1 million at March
31, 2001.

As of March 31, 2002, total contractual cash obligations were as follows:

<TABLE>
<CAPTION>
                                              Less Than     One to Four
                                               One Year        Years           Total
                                            -------------  -------------   -------------
<S>                                         <C>            <C>             <C>
               Long-term debt/(1)/          $     364,000  $     136,000   $     228,000
               Operating leases/(2)/            1,064,000        465,000         599,000
               Purchase Commitments             5,989,000      3,927,000       2,062,000
                                            -------------  -------------   -------------
                      Total                 $   7,417,000  $   4,528,000   $   2,889,000
                                            =============  =============   =============
</TABLE>

               (1)  Long-term debt represents a three-year auto-purchase loan
                    that has an annual interest rate of 8% and matures in
                    December 2004.

               (2)  Operating leases for our facilities and office equipment
                    that expire at various times throughout 2004

Cash flow provided by operating activities was $19.2 million for the six months
ended March 31, 2002, compared to $7.1 million for the same period in 2001. This
increase was the result of improved operations for 2002, partially offset by an
increase in accounts receivable and inventory, and a decrease in accounts
payable and accrued expenses.

Cash used in investing operations was $11.7 million for the six months ended
March 31, 2002, compared to $2.6 million for the same period in 2001. The
increase was the result of an increase in the acquisition of property and
equipment to $11.9 million for the six months ended March 31, 2002, compared to
$2.6 million for the six months ended March 31, 2001.

Cash provided by financing activities was $5.1 million for the six months ended
March 31, 2002 compared to cash used in financing activities of $3.5 million for
the same period in 2001. For the six months ended March 31, 2002, we received
proceeds from the exercise of stock options and warrants and the related tax
benefit totaling $5.0 million. The cash flow used in financing activities for
the six months ended March 31, 2001 related primarily to the repayment of debt
totaling $1.8 million, and the purchase of treasury stock totaling $1.8 million.

Our Board of Directors authorized us to repurchase 450,000 shares of our common
stock, effective April 2000, and an additional 1,500,000 shares of our common
stock, effective September 2001. The timing and total number of shares
repurchased will depend on prevailing market conditions and other investment
opportunities. During fiscal 2000 and 2001, we repurchased 190,875 and 831,866
shares of our common stock at an average cost of $2.67 and $6.31, respectively.
No shares were repurchased by us during the quarter ended March 31, 2002, when,
we had approximately 3.3 million options and warrants outstanding, with exercise
prices ranging from $1.67 to $24.01 per share. Of the options and warrants
outstanding, approximately 850,000 were exercisable at March 31, 2002.

On July 29, 1999, we entered into a $10 million revolving credit facility with
Coast Business Credit, a division of Southern Pacific Bank. The credit facility
was paid in full and terminated September 28, 2001.

Effective September 28, 2001, we entered into a new revolving credit facility
with Washington Mutual Bank, FA. Under this credit agreement, we may borrow up
to $14.0 million, subject to the condition that we maintain an equivalent amount
of cash and cash equivalents on hand to collateralize any borrowings. On March
31, 2002, we terminated this credit facility without ever having incurred any
borrowing, and we currently do not have a borrowing facility with any lender. We
are evaluating opportunities to secure borrowing capacity under new facilities,
but there can be no assurance that we will enter into any such facility.

We have not filed state income tax returns for the states of California and
Oklahoma for the tax years 1995 through 2001. For 1995 through 1997, we do not
expect to owe taxes, as we had net operating losses during those years. For the
tax years 1998 through March 31, 2002, we have accrued $2.6 million in estimated
state tax liability, including interest at an assumed rate of 10%, but excluding
provision for penalties. While we have not been assessed the taxes from these
two states, we are in the process of completing the state income tax returns,
and will pay all taxes due

                                       15

<PAGE>

during upon the completion and filing of such returns. However, there can be no
assurance that the amount of actual state income tax liability will be not
greater than the amount we have accrued.

Our projected capital expenditures for the next year will consist primarily of
player stations that are placed with our Class II customers under rental
arrangements, and may include substantial capital expenditures in connection
with potential acquisitions and gaming facility development. In pursuing our
acquisition strategy and our strategy to partner with our customers and
prospective customers in the development of gaming facilities that will house
our player stations, we may make expenditures that could significantly affect
our cash flow and liquidity, and use a significant portion of both our cash flow
from operations and any proceeds we receive from any debt or equity financing we
undertake. Our total capital expenditures will depend upon the number of player
stations that we are able to place in service during the year. Additional
capital expenditures will be required for player stations if we are successful
in introducing our games into new markets, such as the charity bingo market. In
addition to manufacturing our own player stations, we also purchase player
stations and licenses from Bally Gaming Inc. and WMS Gaming Inc.

We believe that our current operations can be sustained with cash from
operations. There can be no assurance, however, that our business will continue
to generate cash flow at current levels. Our performance and financial results
are, to a certain extent, subject to general conditions in or affecting the
Native American gaming industry and to general economic, political, financial,
competitive, legislative and regulatory factors beyond our control. There can be
no assurance that sufficient funds will be available to enable us to make
necessary capital expenditures and to make discretionary investments in the
future.

SEASONALITY

We believe our operations are not materially affected by seasonal factors,
although we have experienced fluctuations in our revenues from period to period.
After the holiday season, our revenues generally build steadily, with our last
fiscal quarter (July through September) traditionally being our strongest
quarter.

CONTINGENCIES

For information regarding contingencies, see "PART II - Item 1. Legal
Proceedings."

INFLATION AND OTHER COST FACTORS

Our operations have not been, nor are they expected to be, materially affected
by inflation. However, our 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, we expect to continue to incur increased legal and other
similar costs associated with regulatory compliance requirements and the
uncertainties present in the operating environment in which we do business.

FUTURE EXPECTATIONS AND FORWARD-LOOKING STATEMENTS

This Quarterly Report and the information incorporated herein by reference
contains various "forward-looking statements" within the meaning of Federal and
state securities laws, including those identified or predicated by the words
"believes," anticipates," "expects," "plans," or similar expressions. Such
statements are subject to a number of uncertainties that could cause the actual
results to differ materially from those projected. Such factors include, but are
not limited to, the uncertainties inherent to the outcome of any litigation of
the type described in this quarterly report under "PART II - Item 1. Legal
Proceedings," as well as those other factors as described under "Item 1.
Business - Risk Factors," contained in our Annual Report on Form 10-K for the
fiscal year ended September 30, 2001, which are incorporated herein by this
reference. Given these uncertainties, readers of this Quarterly Report are
cautioned not to place undue reliance upon such statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are not subject to any interest rate, exchange rate, or commodity price
risks.

                                       16

<PAGE>

                                     PART II
                                OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

Virtually all of our business relates to gaming activities on Native American
lands. These activities are subject to the Johnson Act and the Indian Gaming
Regulatory Act ("IGRA") which created the National Indian Gaming Commission
("NIGC") to establish federal standards for gaming on Native American lands.
IGRA identifies three classes of gaming which are each subject to specific
degrees of regulation. The Johnson Act defines "illegal games" and "illegal
equipment," which include any "machine or mechanical device" designed
"primarily" for gambling that, when operated, delivers money to a player "as the
result of the application of an element of chance."

In addition to these federal statutes, all Native American tribes are required
by the IGRA to adopt ordinances to regulate gaming as a condition of their right
to conduct gaming on Native American lands. These ordinances often include the
establishment of gaming commissions that make their own judgment about whether
an activity is Class II or Class III gaming. Generally, this independent
judgment has been exercised for games introduced into the market prior to any
determination of legality by the NIGC. Historically, when the NIGC has
determined that an activity is Class III gaming after it has been introduced,
tribes have either been unwilling to continue the activity or game, or have
litigated the matter in federal court.

Individual states are also becoming increasingly proactive in attempting to
regulate Native American gaming conducted within their borders. State agencies
often make their own assessment of whether an activity is Class II or Class III
gaming independent of the NIGC, IGRA and federal and Native American
governments.

Some fundamental issues relating to the scope and intent of IGRA, the
jurisdiction and authority of the NIGC, other federal agencies, state
authorities and Native American governments, and the regulation of gaming on
Native American lands remain unresolved and ambiguous. As a result, the legality
of our activities could be subject to regulatory challenges, litigation, and
enforcement actions by multiple regulatory bodies. Any such action could
materially and adversely affect our ability to install and operate our player
stations and games, could be costly to defend and could divert management's time
and attention away from our operations.

The Department of Justice has asserted in the past and continues to assert that:

     .    any electronic or mechanical device used in gaming, such as the player
          stations used to play our Class II games, are illegal and in violation
          of the Johnson Act; and

     .    the "spinning reel" design used as a graphic in many of our Class II
          games is a facsimile of a slot machine and, therefore, cannot be used
          in a Class II game.

Substantially all of our revenues are derived from the operation of player
stations that could be subject to these challenges. If any such challenge is
made against us it would divert our management's time and attention away from
our operations and could materially and adversely affect our ability to install
and operate our games. A successful challenge to the Class II status of our
MegaNanza game could materially and adversely affect our business.

We cannot assure you that new laws and regulations relating to our business will
not be enacted or that existing laws and regulations will not be amended or
reinterpreted in a manner adverse to our business. Any regulatory change could
materially and adversely affect the installation and use of existing and
additional player stations, games and systems and our ability to generate
revenues from some or all of our Class II games. Regulatory uncertainty also
increases our cost of doing business. We dedicate significant time and incur
significant expense for new game development without any assurance that the NIGC
or other federal, state and local agencies or Native American governments will
agree that each of our games meets applicable regulatory requirements. We also
devote significant time and expense to dealing with federal, state and Native
American agencies having jurisdiction over Native American gaming, and in
complying with the various regulatory regimes that govern our business.

In January 2001, we introduced a new Class II game called MegaNanza. Prior to
introducing MegaNanza into each new Native American market in which we operate,
we obtained a determination from each appropriate Native American authority that
MegaNanza was a legal Class II bingo game. We cannot assure you that we will be
able to obtain similar determinations from future customers or that the Native
American authorities governing existing MegaNanza customers will not alter prior
determinations in a manner adverse to us. Even if the NIGC agrees that MegaNanza
is a Class II bingo game, the Department of Justice may pursue its own
independent action against us,

                                       17

<PAGE>

and we may need to seek judicial remedies against the NIGC, the Department of
Justice or both. Any litigation would be time consuming and expensive, and would
divert management's attention from our operations, and we cannot assure you that
the ultimate outcome would be in our favor. A negative outcome to any such
litigation would adversely affect our ability to generate revenues from our
New-Generation platform Class II player stations.

On March 22, 2002, the NIGC published proposed rules that, if adopted, would
change the definitions of technological aids and of electronic or
electromechanical facsimiles used in Class II gaming. The release contains no
explanation by the NIGC of the purpose or effect of the proposed changes. If
adopted in their current form, the proposed definitions could result in the
failure of certain of our games, including our popular MegaNanza game, to
qualify as a Class II game. In that case, we may have to challenge the proposed
regulations in court, where a favorable outcome cannot be predicted. In the
event the proposed regulations are adopted and enforced as written, we could be
forced to substantially modify the design and play of our current offering of
Class II games. Any litigation would be time consuming and expensive. Also, if
we were required to modify our current offering of Class II games, we cannot
assure you that our modified games could be operated at speeds materially
comparable to the speeds at which our current offering of Class II games can be
played or that any modified games would appeal to the gaming and entertainment
preferences of end users.

The comment period on the proposed rules has been extended through May 12, 2002.
We cannot predict whether the proposed rules will be adopted in their current
form, or as modified, or at all.

On April 15, 2002, we received an advisory opinion from the Deputy General
Counsel of the NIGC, stating that MegaNanza was a Class III game as defined by
the IGRA. The advisory opinion was in response to a request we made more than a
year ago seeking a determination by the NIGC that MegaNanza is a Class II game.
Advisory opinions rendered by the Deputy General Counsel are not the final
decisions of the NIGC and are not binding upon the Chairman of the NIGC or upon
the NIGC itself.

We cannot predict whether a majority of the NIGC commissioners will agree with
the advisory opinion, if they will be open to discussion on the subject, or if
the Chairman of the NIGC will exercise his statutory right to take enforcement
actions against tribes that continue to operate MegaNanza. The gaming
commissions of our Class II customers previously independently determined that
MegaNanza and our other New-Generation games are Class II games. We cannot
predict whether the advisory opinion will cause any of these customers to change
their independent determinations. We expect that some customers will seek to
deploy our newer Class II gaming systems, and others will challenge the advisory
opinion through the regulatory resolution process, and in court, if necessary.

We regularly face legal uncertainties in Class II gaming, and believe that we
will be able to respond to the extent necessary, to any changes in laws and
regulations and to the needs of our customers by rapidly adopting, developing
and deploying new products.

On April 18, 2002, we filed a lawsuit in the United States District Court for
the Northern District of Oklahoma, Tulsa, Oklahoma, against the NIGC seeking a
judicial declaration that two versions of MegaNanza are Class II games. A
successful challenge to the Class II status of our MegaNanza game could
materially and adversely affect our business. Even if successful, litigation can
be time-consuming, costly and distract management's attention. In addition,
these or other regulatory developments or any regulatory enforcement actions
could disrupt our or our customers' business operations, impair our operating
results, or cause a decline in our customers' purchase of our products.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

(a)  No exhibits are filed as part of this Quarterly Report on Form 10-Q.

(b)  A report on Form 8-K was filed by the Company on March 11, 2002, reporting
     a presentation to analysts and investors.

     A report of Form 8-K was filed by the Company on April 11, 2002, reporting
     on the receipt of an advisory opinion from the NIGC.

     A report of Form 8-K was filed by the Company on April 23, 2002, reporting
     a presentation to analysts and investors.

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<PAGE>

                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Dated May 13, 2002                        Multimedia Games, Inc.


                                          By: /s/ Craig S. Nouis .
                                             ---------------------
                                             Craig S. Nouis
                                             Chief Financial and Principal
                                             Accounting Officer

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