<PAGE>   1



                       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, 2000

              [ ] 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 April 14, 2000 there were 5,619,150 shares of the Company's Common Stock,
par value $.01, outstanding.









<PAGE>   2



                                    FORM 10-Q

                                      INDEX


PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
<S>                                                                                                              <C>
Condensed Consolidated Balance Sheets
(March 31, 2000 (unaudited) and September 30, 1999)...............................................................3

Unaudited Condensed Consolidated Statements of Income
(Three months ended March 31, 2000 and 1999)......................................................................4

Unaudited Condensed Consolidated Statements of Income
(Six months ended March 31, 2000 and 1999)........................................................................5

Unaudited Condensed Consolidated Statements of Cash Flows
(Six months ended March 31, 2000 and 1999)........................................................................6

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

Item 2.  Management's Discussion and Analysis of Financial Conditions and Results of Operations..................12

Item 3.  Quantitative and Qualitative Disclosures about Market Risk..............................................18

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.......................................................................................19

Item 6.  Exhibits................................................................................................20
</TABLE>











                                      -2-






<PAGE>   3



                                     PART I
                              FINANCIAL INFORMATION

                     MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                   As of March 31, 2000 and September 30, 1999

<TABLE>
<CAPTION>
                                                                            MARCH 31,     SEPTEMBER 30,
ASSETS                                                                        2000             1999
                                                                         -------------    -------------
Current assets:                                                            (Unaudited)
<S>                                                                      <C>              <C>
     Cash and cash equivalents                                           $   1,690,000    $   1,295,000
     Accounts receivable:
       Trade                                                                 1,968,000        1,897,000
       Game reserve                                                                 --          721,000
       Other                                                                   235,000          291,000
     Allowance for doubtful accounts                                          (580,000)        (527,000)
     Inventory                                                               2,424,000        3,121,000
     Prepaid expenses                                                          606,000          559,000
     Notes receivable                                                          501,000          490,000
     Deferred tax asset                                                      1,634,000        1,500,000
                                                                         -------------    -------------
TOTAL CURRENT ASSETS                                                         8,478,000        9,347,000

Restricted cash and long-term investments                                    2,044,000        2,075,000
Inventory, non-current                                                       1,808,000        1,300,000
Property and equipment, net                                                 13,565,000       15,421,000
Investment in Gamebay                                                           18,000               --
Other assets                                                                   307,000          320,000
Goodwill, net                                                                  404,000          417,000
                                                                         -------------    -------------
TOTAL ASSETS                                                             $  26,624,000    $  28,880,000
                                                                         =============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Notes payable                                                       $   6,210,000    $   8,137,000
     Current portion of long-term debt                                         562,000        1,586,000
     Accounts payable and accrued expenses                                   2,682,000        4,161,000
     Hall's Share of Surplus                                                   821,000               --
     Prize fulfillment fees payable                                            145,000          172,000
     Deferred revenue                                                          400,000               --
                                                                         -------------    -------------
TOTAL CURRENT LIABILITIES                                                   10,820,000       14,056,000

Long-term debt, less current portion                                         1,595,000        1,885,000
Other long-term liabilities                                                  1,814,000        1,816,000
Deferred tax liability                                                         835,000          621,000
Stockholders' equity:
     Preferred stock, Series A, $.01 par value, 2,000,000 shares
       authorized, 90,789 shares issued and outstanding                          1,000            1,000
     Common stock, $.01 par value, 25,000,000 shares authorized
       5,653,149 and 5,528,149 shares issued, and
       5,619,150 and 5,494,150 shares outstanding;                              57,000           55,000
     Additional paid-in capital                                             13,485,000       13,173,000
     Stockholder notes receivable                                             (791,000)        (758,000)
Treasury stock, 33,999 shares at cost                                          (87,000)         (87,000)
Deficit                                                                     (1,105,000)      (1,882,000)
                                                                         -------------    -------------
Total stockholders' equity                                                  11,560,000       10,502,000
                                                                         -------------    -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               $  26,624,000    $  28,880,000
                                                                         =============    =============
</TABLE>


See notes to unaudited condensed consolidated financial statements.








                                      -3-
<PAGE>   4





                     MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
               FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                               2000             1999
                                                          -------------    -------------
<S>                                                       <C>              <C>
REVENUES:
     Gaming revenue                                       $  22,584,000    $  21,517,000
     Electronic player station sales                            145,000           69,000
     Electronic player station lease revenue                    390,000          651,000
     Other                                                      143,000          369,000
                                                          -------------    -------------
TOTAL REVENUES                                               23,262,000       22,606,000
                                                          -------------    -------------

OPERATING COSTS AND EXPENSES:
     Bingo prizes and related costs                           1,608,000        2,068,000
     Allotments to hall operators                            14,867,000       14,394,000
     Cost of electronic player stations sold                     69,000           39,000
     Salaries and wages                                       1,238,000        1,351,000
     Selling, general and administrative expenses             2,497,000        2,964,000
     NGI judgment and related fees                                2,000          280,000
     Amortization and depreciation                            1,760,000        1,235,000
                                                          -------------    -------------

TOTAL OPERATING COSTS AND EXPENSES                           22,041,000       22,331,000
                                                          -------------    -------------

OPERATING INCOME                                              1,221,000          275,000

OTHER INCOME AND EXPENSES:
Interest income                                                  31,000          128,000
Interest expense                                               (223,000)         (42,000)
Equity in net loss of affiliate                                (269,000)              --
                                                          -------------    -------------

Income before income taxes                                      760,000          361,000

Income tax expense                                              255,000          144,000
                                                          -------------    -------------

NET INCOME                                                $     505,000    $     217,000
                                                          =============    =============

Basic earnings per share                                  $         .08    $         .03
                                                          -------------    -------------

Diluted earnings per share                                $         .08    $         .03
                                                          -------------    -------------
</TABLE>


See notes to unaudited condensed consolidated financial statements.






                                      -4-
<PAGE>   5






                     MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                FOR THE SIX MONTHS ENDED MARCH 31, 2000 AND 1999
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                               2000             1999
                                                          -------------    -------------
<S>                                                       <C>              <C>
REVENUES:
     Gaming revenue                                       $  41,204,000    $  40,925,000
     Electronic player station sales                            144,000          370,000
     Electronic player station lease revenue                  1,183,000        1,305,000
     Other                                                      253,000          758,000
                                                          -------------    -------------
TOTAL REVENUES                                               42,784,000       43,358,000
                                                          -------------    -------------

OPERATING COSTS AND EXPENSES:
     Bingo prizes and related costs                           3,445,000        4,385,000
     Allotments to hall operators                            26,903,000       27,410,000
     Cost of electronic player stations sold                     69,000          190,000
     Salaries and wages                                       2,431,000        2,255,000
     Selling, general and administrative expenses             4,678,000        5,982,000
     NGI judgment and related fees                                3,000          446,000
     Amortization and depreciation                            3,828,000        2,396,000
                                                          -------------    -------------

TOTAL OPERATING COSTS AND EXPENSES                           41,357,000       43,064,000
                                                          -------------    -------------

OPERATING INCOME                                              1,427,000          294,000

OTHER INCOME AND EXPENSES:
Interest income                                                  68,000          141,000
Software licensing rights                                       600,000               --
Interest expense                                               (439,000)         (72,000)
Equity in net loss of affiliate                                (332,000)              --
                                                          -------------    -------------

Income before income taxes                                    1,324,000          363,000

Income tax expense                                              496,000          145,000
                                                          -------------    -------------

NET INCOME                                                $     828,000    $     218,000
                                                          =============    =============

Basic earnings per share                                  $         .14    $         .03
                                                          -------------    -------------

Diluted earnings per share                                $         .14    $         .03
                                                          -------------    -------------
</TABLE>



See notes to unaudited condensed consolidated financial statements.












                                      -5-
<PAGE>   6




                     MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE SIX MONTHS ENDED MARCH 31, 2000 AND 1999
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                    2000             1999
                                                               -------------    -------------
<S>                                                            <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                     $     828,000    $     218,000
Adjustments to reconcile net income to cash
   provided by operating activities:
     Amortization and depreciation                                 3,828,000        2,396,000
     Deferred taxes                                                   80,000          751,000
     Gain/Loss on disposal of Property and Equipment                  75,000               --
     Equity in net loss of affiliate                                 332,000               --
     (Increase) decrease in:
       Accounts receivable                                           748,000          975,000
       Inventory                                                     189,000         (620,000)
       Prepaid expenses                                              (46,000)          45,000
       Other assets                                                       --          (12,000)
       Accounts payable and accrued expenses                      (1,088,000)        (844,000)
       Note payment on NGI lawsuit settlement                       (925,000)              --
       Hall's Share of Surplus                                       821,000               --
       Prize fulfillment fees payable                                (28,000)           1,000
                                                               -------------    -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                          4,814,000        2,910,000
                                                               -------------    -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Acquisition of property and equipment                        (2,371,000)      (4,662,000)
     Increase in restricted cash and long-term investments
       and other long-term liabilities                                31,000            2,000
                                                               -------------    -------------
NET CASH USED IN INVESTING ACTIVITIES                             (2,340,000)      (4,660,000)
                                                               -------------    -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from sale of common stock
       including collection of shareholder notes                          --          149,000
     Proceeds from (repayments on) debt                           (1,927,000)         795,000
     Principal payments on debt                                      (77,000)        (178,000)
     Payment of preferred stock dividends                            (75,000)         (25,000)
                                                               -------------    -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES               (2,079,000)         741,000
                                                               -------------    -------------

Net change in cash and cash equivalents                              395,000       (1,009,000)
Cash and cash equivalents, beginning of period                     1,295,000        1,881,000
                                                               -------------    -------------
Cash and cash equivalents, end of period                       $   1,690,000    $     872,000
                                                               =============    =============

SUPPLEMENTAL CASH FLOW DATA:
Interest paid                                                  $     358,000    $      72,000
Taxes paid                                                            75,000          140,000

NON-CASH TRANSACTIONS:
Acquisition of fixed assets with:
     Notes receivable                                          $          --    $     992,000
     Debt                                                                 --          211,000
     Warrants                                                             --          112,000
</TABLE>

See notes to unaudited condensed consolidated financial statements.









                                      -6-
<PAGE>   7




                     MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
                          NOTES TO UNAUDITED CONDENSED
                        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, 1999.

The financial statements included herein as of March 31, 2000 and for each of
the three and six month periods ended March 31, 2000 and 1999, have been
prepared by the Company, without an audit, pursuant to generally accepted
accounting principles and the rules and regulations of the Securities and
Exchange Commission. They do not include all of the information and footnotes
required by generally accepted accounting principles 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, 2000, are not necessarily indicative of the results
which will be realized for the year ending September 30, 2000. The September 30,
1999 balance sheet was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.

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 a reconciliation of income available to common shareholders and the
differences between actual weighted average shares outstanding, which are used
in computing basic earnings per share, and diluted weighted average shares,
which are used in computing diluted earnings per share.


                           FOR THE THREE MONTHS ENDED
                                 MARCH 31, 2000
<TABLE>
<CAPTION>
                                                                                         PER SHARE
                                                        INCOME           SHARES           AMOUNT
                                                     -------------    -------------   -------------
<S>                                                  <C>              <C>             <C>
Net Income, as reported                              $     505,000
Less: preferred stock dividends                            (50,000)              --              --
                                                     -------------    -------------   -------------
Basic EPS:
Income available to common shareholders                    455,000        5,619,150   $         .08
Effect of Dilutive Securities:
     Options                                                    --           34,878              --
     Warrants                                                   --               --              --
     Convertible preferred stock                            50,000          435,195              --
                                                     -------------    -------------   -------------
Diluted EPS:
Income available to common shareholders
plus assumed conversions                             $     505,000        6,089,223   $         .08
                                                     =============    =============   =============
</TABLE>









                                      -7-
<PAGE>   8





                           FOR THE THREE MONTHS ENDED
                                 MARCH 31, 1999
<TABLE>
<CAPTION>
                                                                                                               PER SHARE
                                                                                INCOME           SHARES          AMOUNT
                                                                             -------------    -------------   -------------
<S>                                                                          <C>              <C>              <C>
Net Income as reported                                                       $     217,000
Less: preferred stock dividends                                                    (25,000)              --              --
                                                                             -------------
Basic EPS:
Income available to common shareholders                                            192,000        5,446,546   $         .03

Effect of Dilutive Securities:
     Options                                                                            --          441,058              --
     Warrants                                                                           --           39,116              --
     Convertible preferred stock                                                    25,000          435,195              --
                                                                             -------------    -------------
Diluted EPS:
Income available to common shareholders
plus assumed conversions                                                     $     217,000        6,361,915   $         .03
                                                                             =============    =============   =============
</TABLE>




                            FOR THE SIX MONTHS ENDED
                                 MARCH 31, 2000


<TABLE>
<CAPTION>
                                                                                                               PER SHARE
                                                                                INCOME           SHARES          AMOUNT
                                                                             -------------    -------------   -------------
<S>                                                                          <C>              <C>              <C>
Net Income as reported                                                       $     828,000
Less: preferred stock dividends                                                    (75,000)              --              --
                                                                             -------------

Basic EPS:
Income available to common shareholders                                            753,000        5,561,773   $         .14

Effect of Dilutive Securities:
     Options                                                                            --           33,594              --
     Warrants                                                                           --               --              --
     Convertible preferred stock                                                    75,000          435,195              --
                                                                             -------------    -------------

Diluted EPS:
Income available to common shareholders
plus assumed conversions                                                     $     828,000        6,035,562   $         .14
                                                                             =============    =============   =============
</TABLE>



                            FOR THE SIX MONTHS ENDED
                                 MARCH 31, 1999

<TABLE>
<CAPTION>
                                                                                                               PER SHARE
                                                                                INCOME           SHARES          AMOUNT
                                                                             -------------    -------------   -------------
<S>                                                                          <C>              <C>              <C>
Net Income as reported                                                       $     218,000
Less: preferred stock dividends                                                    (50,000)              --              --
                                                                             -------------

Basic EPS:
Income available to common shareholders                                            168,000        5,429,870   $         .03

Effect of Dilutive Securities:
     Options                                                                            --          367,890              --
     Warrants                                                                           --           32,166              --
     Convertible preferred stock                                                    50,000          435,195              --
                                                                             -------------    -------------
Diluted EPS:
Income available to common shareholders
plus assumed conversions                                                     $     218,000        6,265,121   $         .03
                                                                             =============    =============   =============
</TABLE>









                                      -8-
<PAGE>   9




2. COMMITMENTS AND CONTINGENCIES

MEGAMANIA LITIGATION. The Company has designed and operated its MegaMania bingo
game and related equipment so as to meet the requirements of Class II gaming
under the Indian Gaming Regulatory Act of 1988, as amended ("IGRA"). Class II
gaming is defined by IGRA as including "the game of chance commonly known as
bingo (whether or not electronic, computer or other technological aids are used
in connection therewith)..." However, the definition of Class II gaming excludes
so-called "gambling devices" which are defined as "electronic or
electromechanical facsimiles of any game of chance or slot machines of any
kind." Generally speaking, IGRA allows Class II gaming to 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), most lottery games and keno, may only be conducted on
Indian land pursuant to an agreement between the Indian tribe and the state in
which the tribe is located. The Class III games and equipment sold and operated
by the Company in the state of Washington is pursuant to an agreement between
that state and local Indian tribes.

On December 31, 1997, the U.S. Attorney for the Northern District of Oklahoma
filed a civil forfeiture action in Federal District Court challenging the Class
II status of the Company's interactive bingo game, MegaMania. On October 23,
1998, the District Court issued a judgment holding that MegaMania was legal
Class II gaming. The decision found that MegaMania was a game of bingo and that
the electronic player stations ("EPS") used to play MegaMania were technological
aids to the play of bingo as permitted by IGRA and were not gambling devices.

On May 14, 1998, the Assistant U.S. Attorney for the Northern District of
California also filed a civil forfeiture in Federal District Court that
challenged the Class II status of MegaMania. On November 23, 1998, the District
Court issued a Memorandum and Order holding that MegaMania was legal Class II
gaming. As with the decision of the Oklahoma District Court, the Order of the
California District Court found that MegaMania was a game of bingo and that the
EPS used to play MegaMania were technological aids to the play of bingo as
permitted by IGRA and were not gambling devices.

The government has appealed both decisions to the applicable Federal Circuit
Court of Appeals. Oral argument on the appeal to the Tenth Circuit was heard on
May 9, 2000. Oral argument on the appeal to the Ninth Circuit has been set for
June 14, 2000. The Company is not able to predict what the outcome of either
appeal will be.

If MegaMania is ultimately determined to be Class III gaming, the loss of the
MegaMania business would likely have a material adverse effect upon the
Company's financial condition and results of operation. In addition, if the EPS
used to aid the play of MegaMania are ultimately held to be gambling devices,
all of the other Class II bingo games currently offered by the Company would
likely be adversely affected, which 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 or any future litigation challenging
the Company's interactive bingo activities will likely be significant.

Since the beginning of the MegaMania litigation, the Company has sought to
mitigate the risks of an adverse decision by broadening and diversifying its
product line and seeking new markets. The Company has developed new interactive
bingo games which it believes meet the requirements of Class II gaming, has
expanded into the Class III market in the state of Washington, and has pursued
the charity bingo and Internet markets. There can be no assurance, however, that
these initiatives will be able to fully replace the loss of MegaMania, which
remains the Company's most successful product offering.

OTHER CHALLENGES TO INTERACTIVE GAMES; CHANGES IN LAW AND REGULATIONS. No
assurances can be given that there will be no other challenges made to the
legality of the Company's interactive bingo activities or that, if made, the
Company will be successful on the merits. While the Company attempts to design
and operate its Class II games in accordance with IGRA and the regulations and
opinions of the National Indian Gaming Commission ("NIGC"), it is not always
successful in doing so. For example, in February, 1999, the Company introduced
EverGreen as a Class II game. In November 1999, the NIGC issued an opinion that
EverGreen was not Class II gaming. As a result, the Company modified those
aspects of EverGreen that the NIGC found objectionable.

There can be no assurance that the NIGC, either on its own initiative or as the
result of pressure from or cooperation with other agencies such as the
Department of Justice, will not enact additional regulations or reinterpret
existing regulations in a manner that would have a material and adverse effect
upon the Company, including requiring the Company to restructure its existing
contractual arrangements with Indian tribes or requiring changes in the way the
Company's games are conducted so that






                                      -9-
<PAGE>   10

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 IGRA 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.

In addition, the NIGC has issued a set of minimum internal control standards
("MICS") for Indian bingo hall operations, and will require hall compliance by
February, 2000. The Company has complied with the software database and data
retention requirements of MICS in January 2000. Beginning in February 2000, the
NIGC has granted a six-month exception to its requirement for lockable,
removable bill acceptors in each EPS. It has not yet been determined what impact
there will be on the tribes and the Company if this requirement goes into
effect, except that the tribes and the Company will incur increased costs to
manufacture new EPS meeting these requirements, and to convert and modify EPS
already in operation.

OTHER LITIGATION

NETWORK GAMING LITIGATION SETTLEMENT. In December 1999, the Company entered into
an agreement with Network Gaming International Corporation ("NGI") that settled
a $3.1 million verdict against the Company for breach of contract. The verdict
was awarded in November 1999 by a jury in the Federal District Court for the
Northern District of Oklahoma. Pursuant to the settlement, the Company paid
$800,000 to NGI in December 1999, an additional $125,000 in January 2000, and
has agreed to pay NGI an additional $2.15 million in cash over three years. In
addition, the Company delivered 125,000 shares of Common Stock to NGI. All
payments to NGI under the agreement are secured by a lien on the Company's
assets that is junior and subordinate to the lien of the Company's senior bank
lender. If the Company defaults on its payment obligation to NGI, NGI has
reserved the right to pursue collection of its total judgment, plus interest and
attorney's fees, aggregating $3.5 million, less any amounts previously paid by
the Company.

While the Company believes it will be able to meet its obligation to NGI and its
other creditors with cash from operations, there is no assurance that the
Company will be able to do so. In any event, the cash required to pay NGI and to
meet the Company's other obligations will likely have an adverse effect upon the
Company's plans for future growth.

In December 1999, the Company's credit facility with Coast Business Credit was
amended in connection with obtaining Coast's consent to the terms of the
settlement of the NGI litigation. The amendment waived the tangible net worth
covenant violation that resulted from the settlement, increased the early
termination fee payable by the Company in the event the Company prepays the
credit facility prior to its maturity in July 2002, and required the Company to
pay a $100,000 fee to Coast in consideration for the amendment.

SHAREHOLDER CLASS ACTIONS. On May 29, 1998, a shareholder class action was filed
against the Company in the Federal District Court for the Southern District of
California. Also named as defendants were Gordon T. Graves and Larry D.
Montgomery. The action, which seeks an unspecified amount of damages on behalf
of all similarly situated shareholders, alleges that the Company violated
federal securities laws by making allegedly false and misleading statements
regarding the legality of MegaMania. On July 24, 1998, a similar class action
was filed in the Federal Court for the Northern District of Oklahoma. In January
1999, the two cases were consolidated in the Northern District of Oklahoma. On
March 22, 1999, the class action plaintiffs filed an amended complaint that also
named Clifton E. Lind, the Company's President and Chief Operating Officer, as
an additional defendant and included allegations that the Company violated
federal securities laws by making allegedly false and misleading statements
regarding transactions between the Company and Equipment Purchasing LLC and
Equipment Purchasing II LLC. On April 19, 1999, the Company filed its Motion to
Dismiss all of the claims of the plaintiffs. The Court has yet to rule on the
Company's Motion. The Company intends to vigorously defend against these claims
and expects to prevail on the merits, although no assurances to that effect can
be given. In any event, the cost of defending against the claims could be
substantial.

LICENSE AGREEMENT WITH WMS GAMING, INC. In December 1999, the Company entered
into a license agreement with WMS Gaming, Inc. ("WMS") to use the trademarks,
logos and other audio-visual aids and graphics used by WMS in its highly
successful Class III gaming devices. The license is limited to Indian gaming in
the State of Washington, and commits the Company to purchase a minimum of 1,000
units a year for two years at $2,500 per unit, subject to the right of the
Company to terminate the agreement after one year by paying $500 per each
remaining unit under the commitment. The first machines using materials covered
in the WMS agreement will be shipped to customers in June of 2000.






                                      -10-
<PAGE>   11


3. RELATED PARTY TRANSACTIONS


On October 1, 1998, the Company exercised its option to acquire 356 electronic
player stations and related equipment (EPS) for $1.45 million from Equipment
Purchasing LLC ("EP LLC"), a limited liability company owned by an affiliate of
Gordon T. Graves, the Chairman and Chief Executive Officer of the Company. The
Company had originally sold the EPS to EP LLC in June and September 1997 at an
aggregate sales price of approximately $2.44 million. Pursuant to agreements
entered into at the time of the June and September 1997 sale transactions, the
Company had an option to repurchase the EPS from EP LLC at fair market value.
While the purchase price paid by the Company was not the result of an
arms-length negotiation with an unaffiliated third party, the Company believes
that such purchase price is comparable to what the Company would have paid to an
unaffiliated third party. The purchase price was paid by (i) cancellation by the
Company of $992,000 in notes receivable due from EP LLC, (ii) the assumption by
the Company of $77,800 in debt owed by the affiliate of Mr. Graves to a
financial institution, (iii) the payment by the Company of $133,000 to EP LLC,
(iv) the delivery to EP LLC of a 6% promissory note of the Company in the
principal amount of $133,000 due on April 1, 1999 (which was later extended to
September 30, 1999), (v) the issuance of 50,000 warrants to purchase shares of
common stock of the Company at $3.81 per share expiring on June 30, 2002, and
(vi) the issuance of 50,000 warrants to purchase shares of common stock of the
Company at $3.81 per share expiring on September 30, 2002. On October 1, 1998,
the closing price of the Company's common stock as quoted on the NASDAQ SmallCap
market was $2.50 per share. The warrants, which were valued by the Company and
EP LLC at $112,000, were issued in cancellation of warrants to purchase the same
number of shares that had been granted to EP LLC in connection with the June and
September 1997 sale transactions at exercise prices of $11.00 and $13.38 per
share. The $133,000 paid to EP LLC was applied by the affiliate of Mr. Graves to
pay a portion of outstanding notes due the Company by such affiliate.

On July 31, 1999 the Company exercised its option to acquire 663 EPS for $2.37
million from Equipment Purchasing II LLC ("EP II LLC"), a limited liability
company controlled by an affiliate of Gordon T. Graves, the Chairman and Chief
Executive Officer of the Company, and of which an affiliate of Mr. Graves and
Clifton E. Lind, the Company's President and Chief Operating Officer, each owned
6.36%. The Company had originally sold the EPS to EP II LLC in March and June
1998 at an aggregate sales price of approximately $3.75 million. Pursuant to
agreements entered into at the time of the March and June 1998 sale
transactions, the Company had an option to repurchase the EPS from EP II LLC at
fair market value if, after giving effect to the repayment and the income
previously received by EP II LLC, EP II LLC would receive at least a 20% return
on its net investment. While the purchase price paid by the Company was not the
result of an arms-length negotiation, the Company believes that such purchase
price is comparable to what the Company would have paid to an unaffiliated third
party.


On April 15, 1998, the Company entered into a Consulting Agreement, as later
amended, with Larry D. Montgomery, a Director of the Company. Mr. Montgomery was
the President and COO of the Company until December 1997. The Consulting
Agreement had a term of five years, but could be terminated by either party with
six months' notice given at any time after January 1, 1999. The Company gave
notice of termination of the agreement on September 30, 1999, but has continued
to use the services of Mr. Montgomery on a month to month basis after the
agreement expired in March 2000. Mr. Montgomery is compensated at the rate of
$126,000 annually, and received a bonus of $57,500 in September 1998, and an
additional bonus of $3,000 in November 1998. The Company has also agreed to pay
the cost of all premiums on life, health and disability insurance for Mr.
Montgomery and his family for five years and, during the term of the agreement,
will pay Mr. Montgomery rent of $1,000 per month for the use of an office in
Topeka, Kansas.


On September 1, 1999, the Company engaged Jefferies & Company, Inc.
("Jefferies"), an investment banking firm located in Santa Monica, California,
to act as the exclusive financial advisor to the Company in connection with
financing and acquisition related activities. Mr. Ali Alizadeh, a Director of
the Company, is an officer and employee of Jefferies. Pursuant to the agreement,
the Company agreed to pay Jefferies a fee of $120,000 at the rate of $10,000 per
month. In addition, the Company agreed to pay Jefferies a "success fee" for any
financing or acquisition transaction consummated by the Company during the term
of the agreement, which may be terminated by either party upon notice.

Gregory N. Stern, a former Director of the Company who resigned in June 1999,
was involved with establishing Gamebay.com, Inc., a subsidiary of the Company,
while he was a Director of the Company. In connection with his resignation, the
Company agreed to pay Mr. Stern two percent (2%) of whatever interest the
Company retained or received in Gamebay.com, including two percent (2%) of the
490,000 shares of common stock of Gamebay.com held by the Company and two
percent (2%) of any royalties received by the Company from Gamebay.com pursuant
to a license to use the Company's intellectual property.





                                      -11-
<PAGE>   12


In July 1999, Gamebay.com granted options to Gordon T. Graves, the Chairman of
the Board and Chief Executive Officer of the Company, and to Daniel J. Sarnoff,
the President of Gamebay.com and the son of Thomas W. Sarnoff, a Director of the
Company, to purchase 29,800 shares and 59,600 shares, respectively, of the
common stock of Gamebay.com at $1.00 per share. The Company determined the fair
value of these options as of the date of grant and recognized a minimal
compensation expense.

The Company believes that the terms of each of these transactions were as fair
to the Company as could have been obtained from unrelated third parties in
arms-length negotiations.

4. GAMEBAY.COM, INC.

In December 1999, the Company's wholly-owned subsidiary, Gamebay.com, issued 71%
of its equity securities to a group of investors for $6.5 million. In connection
with that transaction, the Company transferred to Gamebay.com a license to use
the Company's intellectual property for Internet non-gaming purposes. In
consideration of the license transfer, the Company received a one time fee of
$1.0 million. $600,000 of this amount was received in cash, and the remaining
$400,000 is payable at the end of one year, with interest payments to be made
quarterly. Accordingly, in the first quarter, ended December 31, 1999, the
Company recognized a gain on sale of $600,000, and recorded deferred revenue of
$400,000 for the note portion of the proceeds. Gamebay.com made the interest
payment to the Company during the second quarter as scheduled. The Company is
also entitled to a royalty of 5% of Gamebay.com's gross revenue.

5. SUBSEQUENT EVENT

Subsequent to March 31, 2000, the Board of Directors authorized the Company to
repurchase up to 300,000 shares of its common stock, subject to the approval of
the Company's lender. The timing and number of shares repurchased will depend on
prevailing market conditions and other investment opportunities. Shares of the
Company's stock recently traded at 3 5/16 on an average daily volume of 28,857
shares.

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

GENERAL

The Company designs and develops interactive high-speed Class II bingo games and
Class III video lottery games and related EPS and equipment, marketed to Native
American bingo halls located throughout the United States. The Company operates
its interactive bingo games on behalf of its tribal customers through a
multi-path communications network. The network interconnects EPS located at
multiple bingo halls, thereby enabling players to simultaneously participate in
a live bingo game and to compete against one another to win a common pooled
prize. The EPS enable players to log on to the network, select the bingo cards
of their choice and to interact with the game to make game decisions such as
whether or not to continue a card in play, to daub or "cover" a number on a card
and to declare a winning bingo. The Company also produces high-stakes TV bingo
game shows that are televised live to multiple participating Indian bingo halls
linked via closed circuit satellite and broadband telephone communications
networks.

Most of the Company's games and equipment are designed and operated to meet the
requirements for Class II gaming as defined in the Indian Gaming Regulatory Act
of 1988. During fiscal 1999, the Company also designed, developed and marketed
Class III games and equipment in the state of Washington. As of March 31, 2000,
there were 4,406 EPS in operation at 78 independently owned Indian gaming
facilities located in seven different states, of which 602 EPS were Class III,
located in five bingo halls in the state of Washington. This compares to 4,374
EPS that were in operation at December 31, 1999 at 76 bingo halls located in
eight different states, of which 556 were Class III EPS located in four bingo
halls in the state of Washington. Also as of March 31, 2000, the Company's live
TV bingo game show, MegaBingo, was being delivered to 42 independently owned
Indian bingo halls located in eight states and the District of Columbia, a
decrease of three bingo halls compared to December 31, 1999.

During fiscal 1999, the Company formed Gamebay.com, Inc. as a wholly-owned
subsidiary, to pursue the development of non-gambling activities on the Internet
using interactive bingo games as a platform to derive advertising and product
sale revenues. In December 1999, Gamebay.com entered into a licensing agreement
with MGAM to use all of the Company's intellectual property for non-gambling
sweepstakes internet applications, for a one-time fee of $1.0 million, of which
$400,000 is payable at the end of one year. The Company will also receive a
perpetual royalty of five percent of Gamebay's gross revenue. In connection with
the license transfer, Gamebay issued approximately 71% of its shares









                                      -12-
<PAGE>   13

of common stock (including shares of preferred stock convertible into common
stock) in a private placement to a group of investors for $6.5 million.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2000 AND 1999

NET INCOME was $505,000 for the second quarter of fiscal 2000, compared to
$217,000 for the second quarter of fiscal 1999, an increase of $288,000, or
133%. Company operations resulted in income before taxes of $760,000 for the
three months ended March 31, 2000, an increase of $398,000, or 110% from 1999's
$361,000. The Company's earnings before interest, taxes, depreciation and
amortization (EBITDA) amounted to $2,712,000 for the second fiscal quarter, up
$1,202,000, or 80% from 1999's $1,510,000. For the second quarter of fiscal
2000, legal and professional fees (including fees related to NGI), a component
of Selling, General and Administrative Expenses (SG&A), decreased $346,000, or
52%, from the second quarter of fiscal 1999. At March 31, 2000, there were 4,406
(602 Class III) EPS in operation, as compared to 4,420 (520 Class III) at
September 30, 1999, and 4,024 Class II at March 31, 1999. The amount of
depreciation and amortization recorded for the second quarter of fiscal 2000
increased $525,000, or 43% over the second quarter of fiscal 1999.

REVENUES totaled $23,262,000 for the second quarter of fiscal 2000, compared to
$22,606,000 for the second quarter of fiscal 1999, a increase of $656,000 or 3%.
The Company's interactive games generated revenues of $20,665,000 for the three
months ended March 31, 2000, including $452,000 from Class III gaming, as
compared to $18,726,000 in the second quarter of fiscal 1999, a increase of
$1,939,000, or 10%. For the three months ended March 31, 2000, TV bingo game
show revenues of $1,919,000 declined $872,000, or 31% from 1999's $2,791,000.
This reflected the continuation of the trend experienced during fiscal 1999 of
player headcounts declining at most bingo facilities across the country. In
addition, a reduction in the number of halls participating in MegaBingo during
fiscal 1999 also affected second quarter performance.

Hall participation in MegaBingo has declined for a number of reasons. Some halls
have reduced their paper bingo operations to pursue the more lucrative Class II
interactive or Class III markets. Finally, some customers who have a sufficient
number of traditional bingo players have elected to conduct their own
high-stakes bingo games.

SALES of $144,000 for 23 EPS were recorded in the second quarter of fiscal 2000,
in comparison to $68,000 for 10 EPS units sold in the second quarter of fiscal
1999.

LEASE REVENUES from EPS leased to Native American Tribes decreased from $651,000
in the second quarter of fiscal 1999 to $390,000 in 2000, a 40% decrease. The
decrease is due to a high number of lease payoffs in the first quarter of fiscal
2000 and the fact that the majority of subsequent EPS placements have been on
rental contracts.

OTHER REVENUES decreased to $143,000 in the second quarter of fiscal 2000, a
decrease of $226,000, or 61%, compared to the second quarter of fiscal 1999.
Other revenues for the current quarter consisted of Class III back-office fees
totaling $139,000, and equipment service revenue amounting to $4,000. The
decrease is due to the discontinuation of MegaRacing in February 1999.

OPERATING COSTS AND EXPENSES totaled $22,041,000 for the second quarter of
fiscal 2000, compared to $22,331,000 for the second quarter of fiscal 1999, down
$290,000 or 1%, primarily as the result of the following:

BINGO PRIZES AND RELATED COSTS amounted to $1,608,000 for the three months ended
March 31, 2000, compared to $2,068,000 for the three months ended March 31,
1999, a decrease of $461,000, or 22%. This decrease is less than proportional to
the decline in TV Bingo game show revenue, due to the fixed level of costs
required to produce the TV Bingo game shows. Interactive gaming revenues, on the
other hand, are recorded net of prize costs; therefore, those prizes are not
reflected in the above amount.

ALLOTMENTS TO HALL OPERATORS consist of the bingo halls' share of the
interactive gaming and TV game show revenues after prizes and allocable prize
costs. Allotments to hall operators increased $472,000, or 3%, to $14,867,000
for the three months ended March 31, 2000, compared to $14,394,000 for the three
months ended March 31, 1999. The increase is due to the higher interactive
gaming revenue for the second fiscal quarter of 2000 as compared to the same
period in 1999.




                                      -13-
<PAGE>   14


SALARIES AND WAGES amounted to $1,238,000 for the three months ended March 31,
2000, compared to $1,351,00 for the three months ended March 31, 1999, a
decrease of $113,000, or 8%. The decrease is due to a decline in the number of
employees from March 31, 1999 to the same period in 2000.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased $467,000 or 16% to
$2,497,000 for the three months ended March 31, 2000, compared to $2,964,000 for
the three months ended March 31, 1999. Approximately 15%, or $68,000 of the
decrease reflected the reduction in legal and professional fees and expenses
related to the MegaMania litigation, regulatory and general legal matters. The
aggregate of legal and professional fees amounted to $324,000 for the second
quarter of fiscal 2000, compared to $392,000 in the second quarter of fiscal
1999, down 17%. Contributing to the decrease in the current quarter's overall
cost structure versus the comparable quarter of the prior fiscal year was slower
growth in the interactive gaming network. This factor resulted in the following
changes: consulting and contract labor - up $29,000, or 10%; rent for facilities
and equipment - up $3,000, or 1%; travel - down $72,000, or 23%; interactive
gaming telecommunications - down $88,000, or 19%; employee benefits - down
$12,000, or 4%; advertising and promotions - down $73,000, or 37%; miscellaneous
expenses - down $83,000, or 20%; and repairs, maintenance and supplies - up
$143,000, or 120%.

NGI JUDGMENT AND RELATED EXPENSES decreased from $280,000 for the three months
ended March 31, 1999 to $2,000 in the second quarter of fiscal 2000, or 99%. The
lawsuit was settled in December of 1999.

AMORTIZATION AND DEPRECIATION increased $526,000, or 43%, to $1,761,000 for the
three months ended March 31, 2000, compared to $1,235,000 for the same period in
1999. The increase results primarily from depreciation on a greater number of
EPS, both rentals and lease purchases, placed in service during fiscal 1999, and
the repurchase of EPS from EP LLC and EP II LLC. Approximately $61,000 of the
increase was from software programming costs capitalized during 1999 and 2000.
The Company made $14 million in capital additions during fiscal 1999.

INTEREST INCOME amounted to $31,000 for the three months ended March 31, 2000,
compared to $128,000 for the three months ended March 31, 1999, a decrease of
$97,000, or 76%. This resulted from interest accrued on shareholder notes being
corrected in the second quarter of 1999.

INTEREST EXPENSE amounted to $223,000 for the three months ended March 31, 2000,
compared to $41,000 for the three months ended March 31, 1999, an increase of
$182,000, or 444%. This increase resulted from the use of a working capital line
of credit put in place during the fourth quarter of fiscal 1999.

EQUITY IN NET LOSS OF AFFILIATE amounted to $269,000 for the second quarter of
fiscal 2000. As a result of Gamebay's issuance of 71% of its shares of common
stock, the Company is recording the investment using the equity method and is
recognizing its pro rata share of Gamebay's estimated second quarter net loss.

INCOME TAX amounted to $255,000 for the three months ended March 31, 2000,
compared to $144,000 for the three months ended March 31, 1999, an increase of
approximately $110,000, or 77%. This increase is the result of higher pretax
income with an effective tax rate of approximately 40%.

SIX MONTHS ENDED MARCH 31, 2000 and 1999

NET INCOME was $828,000 for the first six months of fiscal 2000, compared to
$218,000 for the six months ended March 31, 1999, an increase of $610,000 or
280%. Company operations resulted in income before taxes of $1,324,000 for the
six months ended March 31, 2000, an increase of $961,000, or 265% from 1999's
$363,000. The Company's earnings before interest, taxes, depreciation and
amortization (EBITDA) amounted to $5,523,000 for the first six months, up
$2,833,000, or 105% from 1999's $2,690,000. During the first six months of
fiscal 2000, the Company recorded substantial legal and professional fees
related to the MegaMania and Network Gaming litigation, although at reduced
levels compared to the first six months of fiscal 1999. Legal and professional
fees (including fees related to NGI) for the first six months of fiscal 2000
decreased $885,000, or 61% over the first six months of fiscal 1999. The amount
of depreciation and amortization recorded for the first six months of fiscal
2000 increased $1,432,000, or 60% over the first six months of fiscal 1999.

REVENUES totaled $42,784,000 for the first six months of fiscal 2000, compared
to $43,358,000 for the first six months of fiscal 1999, a decrease of $574,000,
or 1%. The Company's interactive games generated revenues of $37,215,000 for the
six months ended March 31, 2000, including $740,000 from Class III gaming, as
compared to $35,565,000 in the first six months of fiscal 1999, an increase of
$1,650,000, or 5%. For the six months ended March









                                      -14-
<PAGE>   15

31, 2000, TV bingo game show revenues of $3,988,000 declined $1,372,000, or 26%
from 1999's $5,360,000. This reflected the continuation of the trend experienced
during fiscal 1999 of player headcounts declining at most bingo facilities
across the country. In addition, the reduction in the number of halls
participating in MegaBingo during fiscal 1999 also affected second quarter
performance.

Hall participation in MegaBingo has declined for a number of reasons. Some halls
have reduced their paper bingo operations to pursue the more lucrative Class II
interactive or Class III markets. Finally, some customers who have a sufficient
number of traditional bingo players have elected to conduct their own
high-stakes bingo games.

Sales of $144,000 for 23 EPS were recorded in the first six months of fiscal
2000, in comparison to $369,000 for 62 EPS units sold in the first six months of
fiscal 1999.

Lease revenues from EPS leased to Native American Tribes decreased from
$1,304,000 in the first six months of fiscal 1999 to $1,183,000 in 2000, a
decrease of $121,000, or 9%. The decrease is due to a high number of lease
payoffs in the first quarter of 2000, and the majority of subsequent EPS being
placed on rental contracts.

Other revenues decreased to $253,000 in the first six months of fiscal 2000, a
decrease of $505,000, or 67%, compared to the first six months of fiscal 1999.
Other revenues for the current period consisted of Class III back-office fees
totaling $233,000, and equipment service revenue amounting to $20,000. The
decrease is due to the discontinuation of MegaRacing in February 1999.

OPERATING COSTS AND EXPENSES totaled $41,357,000 for the first six months of
fiscal 2000, compared to $43,064,000 for the first six months of fiscal 1999,
down $1,707,000 or 4%, primarily as the result of the following:

BINGO PRIZES AND RELATED COSTS amounted to $3,445,000 for the six months ended
March 31, 2000, compared to $4,385,000 for the six months ended March 31, 1999,
a decrease of $940,000, or 21%. This decrease is less than proportional to the
decline in TV Bingo game show revenue, due to the fixed level of costs required
to produce the TV Bingo game shows. Interactive gaming revenues, on the other
hand, are recorded net of prize costs; therefore, those prizes are not reflected
in the above amount.

ALLOTMENTS TO HALL OPERATORS consist of the bingo halls' share of the
interactive gaming and TV game show revenues after prizes and allocable prize
costs. Allotments to hall operators decreased $507,000, or 2%, to $26,903,000
for the six months ended March 31, 2000, compared to $27,410,000 for the six
months ended March 31, 1999. Hall commissions related to TV Bingo game shows
declined as a result of the decrease in the MegaBingo play.

COST OF ELECTRONIC PLAYER STATIONS SOLD decreased $121,000 for the six months
ended March 31, 2000, because fewer EPS units were sold during the current
period.

SALARIES AND WAGES amounted to $2,431,000 for the six months ended March 31,
2000, compared to $2,255,000 for the six months ended March 31, 1999, an
increase of $176,000, or 8%. Most of this increase relates to personnel hired to
address the Company's interactive gaming network needs, such as installation,
training and maintenance, the operation of the interactive game ball draw
equipment, and the pursuit of new business, including the Class III video
lottery business.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased $1,304,000 or 22% to
$4,678,000 for the six months ended March 31, 2000, compared to $5,982,000 for
the six months ended March 31, 1999. Approximately 34%, or $442,000 of the
decrease reflected the reduction in legal and professional fees and expenses
related to the MegaMania litigation, regulatory and general legal matters. The
aggregate of legal and professional fees amounted to $563,000 for the first six
months of fiscal 2000, compared to $1,005,000 in the first six months of fiscal
1999, down 44%. Contributing to the decrease in the current period's overall
cost structure versus the comparable period of the prior fiscal year was slower
growth in the interactive gaming network. This factor resulted in the following
changes: consulting and contract labor - down $100,000 or 16%; rent for
facilities and equipment - up $30,000, or 6%; travel - down $203,000, or 33%;
interactive gaming telecommunications - down $165,000, or 17%; employee
benefits - up $35,000, or 7%; advertising and promotions - down $98,000, or 29%;
miscellaneous expenses - up $49,000, or 9%; and repairs, maintenance and
supplies - up $149,000, or 53%.






                                      -15-
<PAGE>   16


NGI JUDGMENT AND RELATED EXPENSES decreased from $446,000 for the six months
ended March 31, 1999 to $3,000 in the first six months of fiscal 2000, or 99%.
The lawsuit was settled in December of 1999.

AMORTIZATION AND DEPRECIATION increased $1,432,000 or 60%, to $3,828,000 for the
six months ended March 31, 2000, compared to $2,396,000 for the same period in
1999. The increase results primarily from depreciation on a greater number of
EPS, both rentals and lease purchases, placed in service during fiscal 1999, and
the repurchase of EPS from EP LLC and EP II LLC. This increase includes
approximately $1,141,000 in depreciation on EPS under lease or rental in 2000;
approximately $141,000 for software programming costs capitalized during 1999
and 2000; as well as the rapid write-off (approximately $150,000 of the
increase) of leased Class III EPS due to the unusually short pay-back time of
these units. The Company made $14 million in capital additions during fiscal
1999.

SOFTWARE LICENSING FEES totaled $600,000 for the current six month period. The
Company licensed the right to use its interactive gaming software for
non-gambling sweepstakes purposes to Gamebay.com. In consideration of the
license grant, the Company received a one-time fee of $1.0 million. $600,000 of
this amount was received in cash, and the remaining $400,000 is payable at the
end of one year.

INTEREST INCOME amounted to $68,000 for the six months ended March 31, 2000,
compared to $141,000 for the six months ended March 31, 1999, a decrease of
$73,000, or 52%. This was a result of interest accruing on notes receivable from
stockholders and Gamebay.com, Inc.

INTEREST EXPENSE amounted to $439,000 for the six months ended March 31, 2000,
compared to $72,000 for the six months ended March 31, 1999, an increase of
$367,000, or 509%. This increase resulted from the use of a working capital line
of credit put in place during the fourth quarter of fiscal 1999.

EQUITY IN NET LOSS OF AFFILIATE amounted to $332,000 for the six months ended
March 31, 2000. As a result of Gamebay's issuance of 71% of its shares of common
stock, the Company is recording the investment using the equity method and is
recognizing its pro rata share of Gamebay's estimated net loss since December
1999.

INCOME TAX amounted to $496,000 for the six months ended March 31, 2000,
compared to $145,000 for the six months ended March 31, 1999, an increase of
approximately $351,000, or 242%. This increase is the result of higher pretax
income with an effective tax rate of approximately 40%.

LIQUIDITY AND CAPITAL RESOURCES

During the first six months of fiscal 2000, $4.8 million of cash was provided by
operations, versus $2.9 million provided by operations in the comparable period
of fiscal 1999. At March 31, 2000, the Company had unrestricted cash and cash
equivalents of $1.7 million, a $395,000 increase from September 30, 1999. The
Company records all of the amount outstanding under its working capital line of
credit as a current liability. Negative working capital at March 31, 2000
amounted to $2.3 million compared to $4.7 million at September 30, 1999. Working
capital was primarily used for the acquisition of additional fixed assets, which
consisted primarily of software development for interactive gaming, and hardware
for interactive gaming player stations and game operation. The Company paid
$925,000 to NGI during the first six months of fiscal 2000, as required under
the settlement agreement. The Company invested $2.3 million during the first six
months of fiscal 2000, almost entirely in software development and manufacturing
costs for interactive gaming assets. These software development and
manufacturing costs are expected to continue at a fixed level to meet customer
demand for internally financed lease and rental products, until the Company
identifies a third-party financing source.

On July 29, 1999 the Company entered into a revolving credit facility with Coast
Business Credit, a Division of Southern Pacific Bank located in Los Angeles,
California. Pursuant to the credit facility, the Company may borrow up to $10
million, or such lesser amount as is permitted under various borrowing base
formulas. As of March 31, 2000, under the most restrictive of the borrowing base
formulas, there were $8.6 million of borrowings available to the Company, of
which $6.2 million had been borrowed and was outstanding. The credit facility
expires in July 2002, but is automatically renewed for one year periods unless
either party gives 60 days' notice of termination. The credit facility is
secured by all assets of the Company and the personal guarantee of $1.5 million
from the Company's Chairman and CEO, Gordon T. Graves. The initial application
of the funds available under this facility were used to repay $1.9 million of
debt owed to two other banks; approximately $2.4 million was used for the
repurchase of EPS owned by the EP LLC II partnership, and approximately $4
million was used to relieve outstanding accounts payable, which for the most
part included components for the manufacture of Class III Video Lottery devices
and past due legal







                                      -16-
<PAGE>   17

and professional fees. Borrowings under the facility bear interest, payable
monthly, at a rate equal to the greater of 9% or 1.75% above the prime rate from
time to time in effect. All of the Company's revenues are deposited into a
"blocked" account controlled by the Bank, and disbursements from the "blocked"
account may be made only with the approval of the Bank. In December 1999, the
credit facility was amended in connection with obtaining Coast's consent to the
terms of the NGI litigation settlement. The amendment waived any defaults that
may have resulted from the settlement, increased the early termination fee
payable by the Company in the event the Company prepays the credit facility
prior to its July 2002 maturity, and required the Company to pay Coast a
$100,000 fee in consideration for the amendment. If the credit facility were to
expire without being renewed, the Company believes it could obtain financing
from other sources sufficient to retire the then outstanding balance of the
facility.

The Company believes that its current operations, including the payment of its
expected legal fees and expenses, can be sustained with cash from operations.
The Company has adequate inventory on hand to support the assembly and
installation of approximately 700 additional EPS to further expand the Company's
interactive gaming operations, requiring little cash from future operations. In
addition, the Company has approximately 300 used EPS available for use in its
rental pool. To expand interactive gaming operations beyond this 1,000 unit
level will require funding from external sources. Due to the terms of the credit
facility with Coast Business Credit, and the settlement agreement with NGI, both
of which are secured by all of the Company's assets, it is not likely that the
Company can obtain funding from external sources in the foreseeable future. The
inability to obtain additional financing when needed could have a material
adverse effect on the Company's ability to achieve its planned objectives, as
well as any expectations the market might have about the Company's future
performance.

During the first six months of fiscal 2000, the Company incurred legal and
professional fees and expenses of $565,000, a decrease of $440,000 from the same
period in fiscal 1999. The decrease is the result of the resolution of the NGI
matter and lower expenses for the MegaMania litigation. While legal fees and
expenses related to MegaMania and other litigation involving the Company will
continue to be significant in fiscal 2000, such fees and expenses are not
expected to approach the levels experienced throughout fiscal 1998 and 1999.

Subsequent to March 31, 2000, the Board of Directors authorized the Company to
repurchase up to 300,000 shares of its common stock, subject to the approval of
the Company's lender. The timing and number of shares repurchased will depend on
prevailing market conditions and other investment opportunities. Shares of the
Company's stock recently traded at 3 5/16 on an average daily volume of 28,857
shares.

CONTINGENCIES

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

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 regulatory compliance
requirements, and the uncertainties present in the operating environment in
which the Company conducts its business.

SEASONALITY

The Company's operations are affected by seasonal factors as follows. The first
fiscal quarter (October through December) is the Company's weakest quarter
because consumers' discretionary spending is traditionally directed toward
holiday activities. After the holiday season, sales build steadily during the
second fiscal quarter, taking into account the negative impacts of winter
weather. During the third fiscal quarter, sales increase at a greater rate due
to the warmer weather and the passing of the April 15 tax deadline. The last
fiscal quarter (July through September) is traditionally the Company's best
quarter due the continuation of warm weather and the advent of vacation season.

IMPACT OF YEAR 2000 ("Y2K")

The "Year 2000 Problem" results from computer programs that were written using
two digits rather than four to define the applicable year. If the Company's
computer programs with date-sensitive functions are not Y2K compliant, they






                                      -17-
<PAGE>   18

may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure, or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.

Prior to the advent of the year 2000, the Company identified its Y2K risk in
three categories: Internal business software, interactive game software and TV
bingo game show software. The Company took actions in each of these categories
to become Y2K compliant, and experienced no significant Y2K-related problems
subsequent to the beginning of the year.

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 the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1999, 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

Except for the effects of short-term interest rates, under the Company's line of
credit, which the Company does not consider material, the Company is not subject
to any other interest rate, exchange rate, or commodity price risks.









                                      -18-
<PAGE>   19




                                     PART II
                                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

MEGAMANIA LITIGATION. The Company has designed and operated its MegaMania bingo
game and related equipment so as to meet the requirements of Class II gaming
under IGRA. Class II gaming is defined by IGRA as including "the game of chance
commonly known as bingo (whether or not electronic, computer or other
technological aids are used in connection therewith)..." However, the definition
of Class II gaming excludes so-called "gambling devices" which are defined as
"electronic or electromechanical facsimiles of any game of chance or slot
machines of any kind." Generally speaking, IGRA allows Class II gaming to 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), most lottery games and keno, may
only be conducted on Indian land pursuant to an agreement between the Indian
tribe and the state in which the tribe is located. The Class III games and
equipment sold and operated by the Company in the state of Washington is
pursuant to an agreement between that state and local Indian tribes.

On December 31, 1997, the U.S. Attorney for the Northern District of Oklahoma
filed a civil forfeiture action in Federal District Court challenging the Class
II status of the Company's interactive bingo game, MegaMania. On October 23,
1998, the District Court issued a judgment holding that MegaMania was legal
Class II gaming. The decision found that MegaMania was a game of bingo and that
the EPS used to play MegaMania were technological aids to the play of bingo as
permitted by IGRA and were not gambling devices.

On May 14, 1998, the Assistant U.S. Attorney for the Northern District of
California filed a civil forfeiture in Federal District Court that also
challenged the Class II status of MegaMania. On November 23, 1998, the District
Court issued a Memorandum and Order holding that MegaMania was legal Class II
gaming. As with the decision of the Oklahoma District Court, the Order of the
California District Court found that MegaMania was a game of bingo and that the
EPS used to play MegaMania were technological aids to the play of bingo as
permitted by IGRA and were not gambling devices.

The government has appealed both decisions to the applicable Federal Circuit
Court of Appeals. Oral argument on the appeal to the Tenth Circuit was heard on
May 9, 2000. Oral argument on the appeal to the Ninth Circuit has been set for
June 14, 2000. The Company is not able to predict what the outcome of either
appeal will be.

If MegaMania is ultimately determined to be Class III gaming, the loss of the
MegaMania business would likely have a material adverse effect upon the
Company's financial condition and results of operation. In addition, if the EPS
used to aid the play of MegaMania are ultimately held to be gambling devices,
all of the other Class II bingo games currently offered by the Company would
likely be adversely affected, which 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 or any future litigation challenging
the Company's interactive bingo activities will likely be significant.

Since the beginning of the MegaMania litigation, the Company has sought to
mitigate the risks of an adverse decision by broadening and diversifying its
product line and seeking new markets. The Company has developed new interactive
bingo games which it believes meet the requirements of Class II gaming, has
expanded into the Class III market in the state of Washington, and has pursued
the charity bingo and Internet markets. There can be no assurance, however, that
these initiatives will be able to fully replace the loss of MegaMania, which
remains the Company's most successful product offering.

OTHER CHALLENGES TO INTERACTIVE GAMES; CHANGES IN LAW AND REGULATIONS. No
assurances can be given that there will be no other challenges made to the
legality of the Company's interactive bingo activities or that, if made, the
Company will be successful on the merits. While the Company attempts to design
and operate its Class II games in accordance with IGRA and the regulations and
opinions of the NIGC, it is not always successful in doing so. For example, in
February, 1999, the Company introduced EverGreen as a Class II game. In November
1999, the NIGC issued an opinion that EverGreen was not Class II gaming. As a
result, the Company is modifying those aspects of EverGreen that the NIGC found
objectionable.

There can be no assurance that the NIGC, either on its own initiative or as the
result of pressure from or cooperation with other agencies such as the
Department of Justice, will not enact additional regulations as described above,
or





                                      -19-
<PAGE>   20


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 IGRA 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.

In addition, the NIGC has issued a set of minimum internal control standards
(MICS) for Indian bingo hall operations, and will require hall compliance by
February, 2000. The Company has complied with the software database and data
retention requirements of MICS in January 2000. Beginning in February 2000, the
NIGC has granted a six-month exception to its requirement for lockable,
removable bill acceptors in each EPS. It has not yet been determined what impact
there will be on the tribes and the Company if this requirement goes into
effect, except that the tribes and the Company will incur increased costs to
manufacture new EPS meeting these requirements, and to convert and modify EPS
already in operation.

OTHER LITIGATION

NETWORK GAMING LITIGATION SETTLEMENT. In December 1999, the Company entered into
an agreement with Network Gaming International Corporation ("NGI") that settled
a $3.1 million verdict against the Company for breach of contract that had been
awarded in November 1999 by a jury in the Federal District Court for the
Northern District of Oklahoma. Pursuant to the NGI settlement, the Company
accrued $800,000 as of September 30,1999, which amount was paid to NGI in
December 1999. The Company has agreed to pay NGI an additional $2.28 million in
cash over three years, of which $125,000 was paid during the second quarter of
fiscal 2000. In addition, the Company delivered 125,000 shares of Common Stock
to NGI. All payments to NGI under the agreement are secured by a lien on the
Company's assets that is junior and subordinate to the lien of the Company's
senior bank lender. If the Company defaults on its payment obligation to NGI,
NGI has reserved the right to pursue collection of its total judgment, plus
interest and attorney's fees, aggregating $3.5 million, less any amounts
previously paid by the Company.

While the Company believes it will be able to meet its obligation to NGI and its
other creditors with cash from operations, there is no assurance that the
Company will be able to do so. In any event, the cash required to pay NGI and to
meet the Company's other obligations will likely have an adverse effect upon the
Company's plans for future growth.

SHAREHOLDER CLASS ACTIONS. On May 29, 1998, a shareholder class action was filed
against the Company in the Federal District Court for the Southern District of
California. Also named as defendants were Gordon T. Graves and Larry D.
Montgomery. The action, which seeks an unspecified amount of damages on behalf
of all similarly situated shareholders, alleges that the Company violated
federal securities laws by making allegedly false and misleading statements
regarding the legality of MegaMania. On July 24, 1998, a similar class action
was filed in the Federal Court for the Northern District of Oklahoma. In January
1999, the two cases were consolidated in the Northern District of Oklahoma. On
March 22, 1999, the class action plaintiffs filed an amended complaint that also
named Clifton E. Lind, the Company's President and Chief Operating Officer, as
an additional defendant and included allegations that the Company violated
federal securities laws by making allegedly false and misleading statements
regarding transactions between the Company and Equipment Purchasing LLC and
Equipment Purchasing II LLC. On April 19, 1999, the Company filed its Motion to
Dismiss all of the claims of the plaintiffs. The Court has yet to rule on the
Company's Motion. The Company intends to vigorously defend against these claims
and expects to prevail on the merits, although no assurances to that effect can
be given. In any event, the cost of defending against the claims could be
substantial.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  The exhibit filed as part of this Quarterly Report on Form 10-Q is listed
     in the attached Index to Exhibits.

(b)  No reports on Form 8-K were filed by the Company during the quarter ended
     March 31, 2000.








                                      -20-
<PAGE>   21




                                   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 12, 2000                  Multimedia Games, Inc.



                                    By: /s/ Frank W. Rehanek, Jr.
                                       ----------------------------------------
                                        Frank W. Rehanek, Jr.
                                        Chief Financial and Principal
                                        Accounting Officer




<PAGE>   22





                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                DESCRIPTION
-------               ------------
<S>            <C>
  27           Financial Data Schedule
</TABLE>