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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-KSB

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

         For the Fiscal Year ended September 30, 1998 

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

         For the transition period from _______ to _________

                         Commission file number 0-28318
                             Multimedia Games, Inc.
                 (Name of Small Business Issuer in Its Charter)

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

 8900 Shoal Creek Blvd., Suite 300
           Austin, Texas                                     78759
           -------------                                     -----
(Address of Principal Executive Offices)                   (Zip Code)

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

Securities Registered Under Section 12(b) of the Exchange Act:  NONE

Securities Registered Under Section 12(g) of the Exchange Act:  Common Stock, 
                                                                $.01 par value
                                                                Class A Warrants
                                                                Class B Warrants

         Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days Yes x  No
                                                                     ---
 
         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ]

         State the issuer's revenues for its most recent fiscal year:
$70,537,000.

         The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the issuer as of November 30, 1998 was $31,033,260.

         The number of shares outstanding of the issuer's Common Stock as of
November 30, 1998, was 5,409,825.

         Transitional Small Business Disclosure Format (check one):

         Yes    No X
            ---   ---


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                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         The Company designs and develops interactive high-speed Class II bingo
games and related electronic player stations (EPS) and equipment that are
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-pathed 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 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. Through its MegaRacing division, the Company transmits horse racing
signals and provides communications and data services to off-track betting (OTB)
facilities operated by Indian tribes.

         Prior to August 1995, the Company's principal business was providing
its TV bingo game shows. In August 1995, the Company introduced MegaMania, its
first interactive high-speed Class II bingo game. MegaMania, and the other
interactive high speed bingo games subsequently designed, developed and
introduced by the Company, are live Class II bingo games transmitted to EPS that
are interconnected to one another through the Company's communications network.
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 to
continue a card in play, daubing or "covering" a number on a card and declaring
a winning bingo. 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 and are marketed to bingo halls owned and operated on
behalf of American Indian tribes. The Company believes that its interactive
games have significantly increased the bingo hall's earnings per player position
at those bingo halls where its interactive games are played. As of September 30,
1998, there were 3,271 EPS in operation at 64 independently owned Indian bingo
halls located in 11 different states. Also as of September 30, 1998, the
Company's live TV bingo game show, MegaBingo, was being delivered to 47
independently owned Indian bingo halls located in 14 different states.

         In May 1998, the Company launched MegaRacing, which transmits horse
racing signals and provides communications and data services to OTB facilities
operated by Indian tribes pursuant to compacts with the State in which the
tribes are located. The Company presently serves five OTB facilities in the
State of Oklahoma.

         Multimedia Games, Inc. (the "Company") was incorporated under the laws
of the State of Texas on August 30, 1991. Unless the context otherwise requires,
the term the "Company" includes Multimedia Games, Inc., and its subsidiaries -
TV Games, Inc., MegaBingo, Inc., Multimedia Creative Services, Inc. and American
Gaming Network L.L.C. The Company's executive offices are located at 8900 Shoal
Creek Blvd., Suite 300, Austin, Texas, 78757, and its telephone number is (512)
371-7100.

         MegaBingo(TM), MegaCash(TM), MegaBingo Lite(TM), MegaMania(TM),
FlashCash(TM), Big Hit Bingo(TM), Bingo Express(TM), Peoples Choice Bingo(TM)
and MegaRacing(TM) are trademarks and tradenames of the Company, and all
references herein are deemed to include the applicable tradename or trademark
designation.


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RISK FACTORS

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

LEGAL CONSIDERATIONS.

         INDIAN GAMING. The operation of gaming on Indian lands is subject to
the Indian Gaming Regulatory Act of 1988 ("IGRA" or the "Gaming Act"), which
also created the National Indian Gaming Commission ("NIGC") to promulgate rules
and regulations to enforce certain aspects of IGRA and to protect tribal
interests involved in gaming activities.

         The Company has designed and operates its bingo games 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.

         MEGAMANIA LITIGATION. 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 November 9, 1998, the U.S. Attorney filed a motion with the
District Court requesting the District Court to alter or amend its judgment. The
District Court has yet to rule on the November 9 motion.

         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 Company is not able to predict whether either or both of these
decisions will be appealed by the government to the applicable Federal Circuit
Court of Appeals or what the outcome of any such appeal would be.

         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. 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



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currently offered by the Company would likely be adversely effected 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.

         DEVELOPING LEGAL ENVIRONMENT. The environment in which the Company
conducts its business is relatively new and presents significant legal and
operating challenges and uncertainties. Fundamental issues concerning the scope
and intent of IGRA remain unresolved, as do issues relating to the jurisdiction
and authority of different Federal, State, local and tribal governments and
agencies. For example, prior to the initiation by the Department of Justice of
the MegaMania litigation, the Company had received and had relied upon opinions
from the NIGC that MegaMania was Class II gaming. While the NIGC has its own
powers of enforcement, the Department of Justice has been maintaining that it
retains enforcement powers over gambling devices and is not bound by NIGC
determinations. As a result, the Company faces uncertainty as to whether other
actions will be initiated by the Department of Justice in the future.

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

         NETWORK GAMING LITIGATION. On January 23, 1998, the Company filed a
complaint against Network Gaming International Corporation ("NGI") in the
Federal District Court for the Northern District of Oklahoma alleging breach of
contract. On February 2, 1998, NGI filed a complaint against the Company in the
same Federal District Court alleging, among other things, breach of contract,
misappropriation of trade secrets, fraud and interference with prospective
advantage. The complaint by NGI seeks $62 million in damages and other specified
and unspecified relief and also names Gordon T. Graves, the Company's Chairman
of the Board, and Larry D. Montgomery, the Company's former President, as
individual defendants. These actions are in the very preliminary stages and only
limited discovery has been taken by either party. The Company intends to
vigorously defend against the claims of NGI and to prosecute its own claim.
While the Company believes that it will ultimately prevail on the merits, no
assurances to that effect can be given. In any event, the cost of defending the
actions could be substantial.

         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. These
actions are in very preliminary stages. A hearing was held on November 20, 1998
by the Multidistrict Litigation Panel established under Federal law to determine
issues relating to the consolidation of the two cases. To date, no decision has
been made by the Panel. The Company intends to vigorously defend against these
claims and expects to prevail



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on the merits, although no assurances to that effect can be given. In any event,
the cost of defending against the claims could by substantial.

FUTURE FINANCING.

         The purchase, assembly and installation of additional EPS to further
expand the Company's interactive gaming operations will require funding from
external sources. Prior to the initiation of the MegaMania litigation, the
Company financed such activities primarily through the issuance of equity
securities and from cash flow from operations. After the initiation of the
MegaMania litigation, the uncertainties relating to the legality of the
Company's interactive bingo activities and the depressed market for the
Company's equity securities made it more difficult and expensive for the Company
to obtain financing. As a result, the Company financed the purchase, assembly
and installation of EPS and the significant cost of prosecuting the MegaMania
litigation primarily through the sale of EPS to private investors, including
related parties. The effective cost of these sale transactions was significantly
higher than could have been obtained by the Company from the more traditional
sources of financing had those sources been available to the Company. Whether
the October 23, 1998 and November 23, 1998 decisions of the Oklahoma and
California Federal District Courts holding that MegaMania is legal Class II
gaming will significantly change these conditions cannot be predicted at this
time; however, there are early indications that the Company's ability to obtain
financing are improving. 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.

COMPETITION.

         The Company competes with all forms of gaming and other leisure
activities. Given the limitations placed on Class II gaming, it is difficult for
the Company to compete in places where casino, slot machines and other forms of
Class III gaming are permitted. In Class II gaming facilities, the Company
competes against a growing number of games and competitors. This competition is
expected to increase following the October 23, 1998 and November 23, 1998
decisions of the Oklahoma and California Federal District Courts holding that
MegaMania is legal Class II gaming, which will likely encourage existing and
additional competitors to introduce interactive bingo games based upon the
Company's business model.

TRIBAL REGULATION.

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

         In addition, gaming on Indian lands is generally closely administered
by tribal officials. Most tribes have established a regulatory framework to
administer the conduct of gaming on Indian lands. These regulations generally
include licensing and approval procedures and reporting and audit requirements.
Not all constituencies within each Indian tribe view gaming favorably, and
changes in tribal officials have in the past, and could in the future, result in
a more difficult environment in which to conduct the Company's business at a
particular tribe. Moreover, perceptions and attitudes concerning the integrity
and morality of gaming are



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highly sensitive matters with most tribes and seemingly minor or irrelevant
matters, including rumor and innuendo about the legality of the Company's
activities, can and have been used by competitors and by competing tribal
constituencies as a basis for changing or attempting to change existing
relationships between tribes and the Company. The Company expects this
environment to continue in the future but believes that its sensitivity to these
matters, and the personnel and policies it has in place, will enable it to
effectively manage the issues that will inevitably arise.

TECHNOLOGICAL INNOVATION.

         The Company believes that an important factor to its future success
will include its continued development of new products that appeal to the tastes
of consumers and the introduction of such products in a timely manner.
Successful product development and introduction depends upon a number of
factors, including the identification of products expected to appeal to consumer
preferences and the timely completion of design and testing. Importantly, any
new or modified gaming products that are intended for the Class II gaming market
will be designed and operated to meet the requirements of Class II gaming. The
Company may or may not solicit the approval of the NIGC that any new or modified
gaming products meet the requirements of Class II gaming. Even if the Company
does solicit NIGC approval, the NIGC may or may not grant approval as the NIGC
has recently indicated an unwillingness to rule on the Class II status of games.
As a result of these and other factors, there can be no assurance that the
Company will continue to develop and introduce new products in a timely manner
that will achieve commercial success.

DEPENDANCE UPON FEW CUSTOMERS

         For the year ended September 30, 1998, each of two tribes accounted for
approximately 17% (34% combined) of the Company's total gaming revenues. One of
these tribes accounted for approximately 26% of the Company's total gaming
revenues in 1997. No other tribe accounted for more than 10% of the Company's
total gaming revenues in either year. While the Company believes that its
relationship with all of its tribal customers is good, the loss of either of the
two tribes would have a material and adverse effect upon the Company's financial
condition and results of operations.

PRIZE FULFILLMENT.

         The prizes awarded under the Company's bingo games are based upon
attaining an assumed level of gross game receipts and statistical assumptions as
to the frequency of winners. With respect to its interactive gaming activities,
the Company has not experienced over any statistically relevant period of time a
"game deficit" where aggregate prizes have exceeded aggregate game revenues.
With respect to its TV bingo game shows, the Company self-insures against
smaller prizes and obtains insurance through a third party for larger jackpots.
Prize risk is also shared with participating bingo halls through funds reserved
from bingo card sale receipts and deposited into a prize allocation account. No
assurances can be given that the Company will not experience abnormally high
rates of jackpot prize wins in the future.

SIGNIFICANT OUTSTANDING OPTIONS AND WARRANTS.

         As of September 30, 1998, there were outstanding rights to purchase an
aggregate of 3,255,343 shares of Common Stock at exercise prices ranging from
$2.00 to $13.38 per share (with the vast majority of such rights at exercise
prices ranging from $2.00 to $8.00 per share). Of these outstanding rights,
2,224,218 are immediately exercisable and the remainder become exercisable in
substantially equal annual increments over the next three years. In addition to
such rights, the shares of the Company's Series A Preferred Stock are



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immediately convertible into 435,195 shares of Common Stock. To the extent that
such rights and Series A Preferred Stock are exercised or converted, dilution to
the Company's shareholders will occur. Moreover, the terms upon which the
Company will be able to obtain additional equity capital may be adversely
affected, since the holders of such rights and Series A Preferred Stock can be
expected to exercise or convert them at a time when the Company would, in all
likelihood, be able to obtain any needed capital on terms more favorable to the
Company than the exercise terms provided in such securities.

ABSENCE OF DIVIDENDS.

         The Company has never declared or paid any cash dividends on its Common
Stock. The Company intends to retain its earnings to finance the growth and
development of its business and therefore does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future.

FORWARD LOOKING STATEMENTS

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








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PRODUCTS AND SERVICES

         GENERAL. The Company designs and develops its own interactive
high-speed Class II bingo games to run over its multi-pathed interactive
communications network. The game design process involves matching game
parameters to the needs of the target consumer group and includes graphics
design, software programming and test feedback. The Company also designs and
assembles the electronic player stations (EPS) used as technological aids to the
play of its interactive bingo games. The EPS, which are essentially smart
computer terminals that allow players to select and play bingo cards by
interacting through touching the EPS screen, are interconnected through a common
carrier communications network, which is the backbone of the Company's
multi-pathed interactive network. This interconnection allows players to compete
against one another in a live bingo game to win a common pooled prize in
accordance with the requirements of Class II gaming. 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. Through its MegaRacing division,
the Company transmits horse racing signals and provides communications and data
services to off-track betting (OTB) facilities operated by Indian tribes.

         In connection with all of these activities, the Company provides its
tribal customers virtually all of the "back office" record keeping necessary to
account for revenues and prize payouts. The Company's systems enable it to
account, by bingo hall and individual EPS, for game revenues and payouts and to
prepare and disseminate reports to its tribal customers.

         INTERACTIVE GAMES. As of December 1, 1998, the Company's offering of
high speed interactive Class II bingo games consisted of MegaMania, FlashCash,
BingoExpress and Big Hit Bingo. The Company plans to introduce People's Choice
Bingo by the end of this calendar year. All of the interactive games are
variations of bingo and have several attributes in common. For example, to play,
a player first opens an account with a cashier at the bingo hall and is issued a
receipt for the amount deposited containing a personal identification number
("PIN"). Players then use the touch screen on the EPS to input their PIN and
activate the EPS to join a game. Winnings and losses are recorded to each
player's account and the positive balance in a player's account can be claimed
from the cashier at any time. Players can replenish their account by making
additional deposits with the cashier or by inserting money in the bill acceptor
on the EPS. Play commences once the minimum number of players or bingo cards
required for a particular game have logged onto the game. A live ball draw is
conducted at a host Indian bingo hall. The numbers from the ball draw are
transmitted simultaneously via a common carrier digital frame relay
communications network to all other participating bingo halls and appear on the
interconnected EPS participating in the particular game. Players are able to
daub their cards and declare a winning bingo by interacting with the EPS touch
screen or pressing a mechanical button.

         The factors that distinguish one game from another are the minimum
number of players or bingo cards required to commence a game, the predetermined
patterns required in order to win a prize, the size and number of prizes, and
the frequency of winning each prize. Each game is also accompanied by its own
unique graphics and sound.

         In MegaMania, a game will not begin unless there are at least 48 cards
being played by at least 12 people. Randomly generated cards are displayed at
each EPS and players are given the option of keeping the card(s) displayed,
asking for a different card(s) or not playing the card(s) at all. No player may
play more than four bingo cards per EPS. Each card played costs an initial 25
cents. The bingo numbers drawn are visually displayed on the EPS screen three at
a time and are also communicated audibly. After each three ball sequence, a
player must take the affirmative step of pressing a "daub" button on the
computer screen to daub, or cover,


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the called numbers on each card being played. When a player achieves a
straight-line bingo, they are given eight seconds to declare the "bingo" by
using the touch pad on the EPS. If a player fails to declare the "bingo" within
the allotted time, he or she is said to "sleep" the bingo, and the game
continues. After each sequence of three balls are drawn and announced, the
player is given eight seconds to decide whether to continue a card in play by
electing to "ante up" an additional 25 cents per card, or dropping one or more
of the cards from play. Once a card has been dropped, it cannot be played again
during that game. When the first player(s) covers and declares a straight line
"bingo", all players nationwide are notified of the existence of the bingo. The
declaration of "bingo" by a player ends the straight-line game nationwide. Upon
declaring the bingo, the player wins a prize that is determined by the number of
cards being played by all players, the number of balls that have been drawn, and
the number of other players declaring bingo simultaneously. The largest possible
prize comes if a single player is able to declare bingo after only four balls
have been drawn, the lowest mathematically possible number of ball draws that
would allow a player to declare bingo. Interim prizes are also awarded to each
person who covers two corners of a card based from each three ball draw. A
player can win more than one interim prize by covering more than two corners of
the card. If no interim prize has been awarded prior to a winning straight line
bingo, the game continues until at least one prize is awarded for covering at
least two corners of a card.

         FlashCash bingo is a straight line bingo game similar to MegaMania
except that there is no ante-up feature to keep a card in play and there are no
interim prizes awarded for covering corners. BingoExpress awards prizes to
players who cover one or more corners of their card, with the size of the prizes
varying based upon the number of corners covered in relation to the number of
balls drawn. If a player covers two corners on the first two numbers drawn, that
player is eligible for a "jackpot draw" where two additional numbers are drawn
and the player wins an additional prize if one or two of the remaining corners
on a card are covered. Big Hit Bingo awards prizes for covering the four numbers
adjacent to the "free" square in the middle of the bingo card, which is
graphically depicted on the EPS screen as a pitcher's mound on a baseball
diamond. Prizes are awarded for scoring a single (i.e., covering the number to
the right of the "free" square corresponding to first base), double, triple or
home run and the number of balls drawn.

         The Company receives a fee of approximately 25% of the net winnings, or
"hold" from its interactive games. During fiscal 1998, the average net winnings
of the Company's interactive games exceeded $20,000 per EPS per year. The annual
incremental cost to the Company and the bingo hall to operate an additional EPS
was less than $2,000.

         ELECTRONIC PLAYER STATIONS. The Company currently offers over 11 models
of EPS. Each EPS has a screen that displays the bingo cards being played and the
bingo numbers drawn. The screen also serves as a touch pad that allows a player
to make game decisions, such as which cards to play or drop and to declare a
winning bingo. The EPS house computer terminal equipment that allow the EPS to
communicate with the bingo network. EPS vary according to height, width and
depth (to accommodate, in part, the differing space needs of bingo hall
customers), screen size and other features affecting appearance and the visual
appeal to players.

         TV BINGO GAME SHOWS. MegaBingo, MegaCash and MegaBingo Lite are bingo
games and associated TV shows produced by the Company and telecast live to
television monitors at participating bingo halls by means of a closed-circuit,
television satellite and broadband telephone communications network. The
Company's broadcast studio is currently located at a host Indian bingo hall. The
studio houses the equipment used to produce and televise the ball drawings and
verify winning cards, including television production equipment and satellite
up-link equipment. MegaBingo, MegaCash and MegaBingo Lite games are
approximately 12 minutes in duration and represent only a limited percentage of
the total number of bingo


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games conducted by each participating bingo hall operator during any given bingo
session. MegaBingo affords the opportunity for a winning player to win a jackpot
prize of up to $2,000,000 (paid $100,000 in cash and the remainder in the form
of a 24-year annuity) by having a winning bingo within a specified number of
ball draws and spinning the MegaBingo wheel. MegaCash, which is conducted on the
Company's network each Saturday and Sunday in matinee sessions, carries a
jackpot of $100,000 or, by spinning the MegaBingo wheel, up to $1,000,000, for
players with winning bingos within a specified number of ball draws. MegaBingo
Lite is similar to MegaBingo, but involves fewer halls and smaller prizes (e.g.,
jackpot prizes of $25,000). Each game also carries lesser consolation prizes for
players having a winning bingo after more than a specified number of ball draws.
Prizes also vary depending upon the price paid by a player for a card (e.g.,$2,
$3 or $6 per card).

         During 1998, revenues from the Company's TV bingo game shows were $12.2
million. While the contribution to net margin from these games was considerably
less significant to the Company than from its interactive bingo games, the TV
bingo game shows are well publicized due to the potential size of jackpots and
offer positive benefits by attracting additional players to bingo halls.

         In support of its live broadcasts, the Company utilizes, among other
things, television production equipment, satellite transmission and reception
equipment, computer hardware and software, conference calling equipment and
specially printed ticket stocks typically imprinted with serial numbers and the
game's logo. The Company has contracted with a vendor for the satellite time
necessary to transmit its telecast games. With the exception of the computer
software, which is custom developed by or on behalf of the Company, all other
gaming equipment and supplies required for the operation of the telecast games
are typically available off-the-shelf from a number of vendors. The Company's
central game computers are located on Indian trust land and communications
equipment is located in the Company's offices in Tulsa, Oklahoma and Austin,
Texas.

         GAMING CONTRACTS. Virtually all of the Company's revenues are derived
through contracts with Indian tribes. The Company's contract with each bingo
hall operator typically identifies the games, equipment and services to be
provided by the Company and the terms of payment. In general, the Company and
the tribe share in the "hold" or profit generated from the play of the game in
percentages that vary depending upon levels of profitability. Certain tribes
purchase EPS outright from the Company while others purchase EPS on an
installment basis out of a dedicated percentage of the revenues generated by the
EPS. In some instances, the Company has leased EPS to tribes at rentals based
upon a percentage of the "hold."

PRIZE FULFILLMENT

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

         Specified initial portions of the MegaBingo Fee are deposited in
separate prize reserve accounts for the MegaBingo Operators from which loans may
be made to the prize allocation account in the event of a game deficit. However,
during the past five years there has never been a game deficit and no loans have
ever been made. Such loans from the MegaBingo Operators' prize reserve accounts
would be liabilities of the Company



                                      -10-
<PAGE>   11




and would have to be repaid when there are sufficient funds in the prize
allocation account available for such purpose. Each MegaBingo Operator is
entitled to the return of its prize reserve funds upon termination of its IGS
Agreement. In addition, those parties who have completed their prize reserve
funding obligations are entitled to receive formula-determined refunds of their
respective prize reserve funds from time to time to the extent it is determined
that such funds are not required to assure the payment of MegaBingo Prize
Allocation Costs.

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

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

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

MARKETING, ADVERTISING AND PROMOTION

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

INTELLECTUAL PROPERTY

         The Company relies on trade secrets, proprietary know-how and
continuing technological innovation to develop and maintain its competitive
position. However, there can be no assurance that, insofar as the Company relies
on trade secrets and unpatented know-how, others will not independently develop
similar technology or that secrecy will not be breached.


                                      -11-

<PAGE>   12




COMPETITION

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

         The Company also competes with other bingo operations conducted both on
and off Indian lands, including bingo conducted with the use of electronic aids
such as card minders that provide interactivity and enable players to play
multiple numbers of bingo cards simultaneously. Given the limitations placed on
Class II gaming, it is difficult for the Company to compete in places where
casino, slot machines and other forms of Class III gaming are permitted. In
Class II gaming facilities, the Company competes against a growing number of
games and competitors. This competition is expected to increase following the
October 23, 1998 and November 23, 1998 decisions of the Oklahoma and California
Federal District Courts holding that MegaMania is legal Class II gaming, which
will likely encourage existing and additional competitors to introduce
interactive bingo games based upon the Company's model.

EMPLOYEES

         As of September 30, 1998, the Company had 141 full-time and part-time
employees, including 27 engaged in field operations, five in game design, 46 in
computer operations relating to bingo activities, 13 in accounting functions,
two in the design and assembly of EPS, 12 in sales and marketing activities, 12
in other general administrative and executive functions and 14 full-time and
part-time bingo hall employees. The Company does not have a collective
bargaining agreement with any of its employees and considers its relationship
with its current employees to be good. The Company also engages four independent
contractors as computer programmers to produce the Company's interactive gaming
software. In addition, approximately 30 individuals were employed by tribes to
operate the Company's games in their respective halls all of whom are reimbursed
by the Company.

GOVERNMENTAL REGULATION

         INDIAN GAMING. The operation of gaming on Indian reservations is
subject to the Indian Gaming Regulatory Act of 1988 (25 U.S.C. Sections 2701, et
seq.) (the "Gaming Act" or "IGRA"), which created the National Indian Gaming
Commission (the "NIGC") to promulgate regulations to enforce certain aspects of
IGRA.

         IGRA classifies games that may be played on Indian land into three
categories. Class I gaming includes traditional Indian social and ceremonial
games and is regulated only by the tribes. Class II gaming includes bingo,
pull-tabs, lotto, punch boards, tip jars, instant bingo, certain card games
played under limited circumstances and other games similar to bingo if those
games are played at the same location where bingo is played. Class II gaming
does not include gaming conducted with gambling devices which NIGC regulations
have defined as being gambling devices subject to the Johnson Act (see
discussion below). Class III gaming consists of all forms of gaming that are not
Class I or Class II, such as video casino games, slot machines, most table games
and keno.

         IGRA provides that Indian tribes may engage in Class II gaming, if (i)
the state in which the Indian reservation is located permits such gaming for any
purpose by any person, (ii) the gaming is not otherwise specifically prohibited
on the Indian reservation by Federal law, (iii) the gaming is conducted in
accordance

                                      -12-
<PAGE>   13




with a tribal ordinance which has been approved by the NIGC, and (iv) several
other requirements are met, including the requirement that an Indian tribe shall
have the sole proprietary interest and responsibility for the conduct of gaming,
and that primary management officials and key employees must be licensed by the
tribe.

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

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

         The NIGC has determined that the agreements pursuant to which the
Company provides its Class II games, equipment and services are service
agreements and not management contracts, thereby allowing the Company to obtain
more favorable terms than would have been permitted had the contracts been
determined to be management contracts. There is no assurance however, that
further review of these agreements by the NIGC are alternative interpretation of
applicable laws and regulations will not require substantial modifications to
the agreements and cause the operations of the Company to be marginally
profitable or even unprofitable.

         JOHNSON ACT. 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." Regulations adopted by the NIGC further define "gambling
devices" as devices prohibited by the so-called Johnson Act.

         The Johnson Act defines an illegal gambling device as a "machine or
mechanical device" designed "primarily" for gambling and that, when operated,
delivers money to a player "as the result of the application of an element of
chance." Courts that have considered the scope of the Johnson Act in relation to
IGRA have generally determined that the Johnson Act does not prohibit the use of
electronic aids to bingo that operate to broaden the participation of players to
play against one another rather than against a machine. In the two cases that
specifically addressed the question of the Company's EPS, the two courts also
held that the element of chance was not inherent within the EPS itself (as would
be the case with a slot machine) but rather was inherent to the game of bingo,
thus also taking the Company's EPS outside the scope of the Johnson Act.

         OTHER. Existing Federal and state regulations may also impose civil and
criminal sanctions for various activities prohibited in connection with gaming
operations including false statements on applications and failure


                                      -13-
<PAGE>   14




or refusal to obtain necessary licenses described in the regulations. Violation
of any of these existing or newly adopted regulations may have a substantial
adverse effect on the Company.

ITEM 2.  PROPERTIES

         In Tulsa, Oklahoma, the Company leases approximately 9,440 sq. ft. of
office space for its operations headquarters which expires in October 2001 and
approximately 1,000 sq. ft. of warehouse space which expires in March, 2000. The
Company leases approximately 2,000 sq. ft. of office space for some of its
computer programmers in Dallas, Texas, which expires in June 1999. In Austin,
Texas, the Company leases approximately 16,000 sq. ft. of factory space for its
EPS assembly operations (expiring in February 2001) and 1,200 sq. ft. of office
space on a month to month basis for its executive headquarters. Aggregate annual
rentals under these five leases are approximately $200,000. The Company believes
that such leases will be renewed as they expire or that alternative properties
can be leased on acceptable terms. The Company also houses a portion of its
satellite link equipment in a trailer located adjacent to the Cheyenne-Arapaho
bingo hall in Concho, Oklahoma at no cost.

ITEM 3. LITIGATION

         See "Item 1. Description of the Business-Risk Factors-Legal
Considerations" for a discussion of the material litigation involving the
Company.

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

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

         Not applicable



                                      -14-
<PAGE>   15




                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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


<TABLE>
<CAPTION>

Fiscal Quarter                                High                Low
--------------                                ----                ---
<S>                                          <C>                <C>   
First Quarter 1997                            6.000              4.375

Second Quarter 1997                          10.750              4.750

Third Quarter 1997                           12.000              8.250

Fourth Quarter 1997                          13.875             10.375

First Quarter 1998                           16.875             13.250

Second Quarter 1998                          14.875              8.410

Third Quarter 1998                            9.688              2.875

Fourth Quarter 1998                           5.125              2.375
</TABLE>


         There were approximately 150 shareholders of record of the Common Stock
on October 23, 1998. However, included in this total was over 3,868,000 shares
held in street name by Cede & Co., or approximately 72% of the Company's
outstanding Common Stock. The Company believes that the shares held in street
name are held for in excess of 1,500 beneficial owners.


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

BUSINESS OVERVIEW

         The Company designs and develops interactive high-speed Class II bingo
games and related electronic player stations (EPS) and equipment that are
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-pathed 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 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. Through its MegaRacing division, the Company transmits horse racing
signals and provides communications and data services to off-track betting (OTB)
facilities operated by Indian tribes.



                                      -15-
<PAGE>   16




         Prior to August 1995, the Company's principal business was providing
its TV bingo game shows. In August 1995, the Company introduced MegaMania, its
first interactive high-speed Class II bingo game. MegaMania, and the other
interactive high speed bingo games subsequently designed, developed and
introduced by the Company, are live Class II bingo games transmitted to EPS that
are interconnected to one another through the Company's communications network.
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 to
continue a card in play, daubing or "covering" a number on a card and declaring
a winning bingo. 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 and are marketed to bingo halls owned and operated on
behalf of American Indian tribes. The Company believes that its interactive
games have significantly increased the bingo hall's earnings per player position
at those bingo halls where its interactive games are played. As of September 30,
1998, there were 3,271 EPS in operation at 64 independently owned Indian bingo
halls located in 11 different states. Also as of September 30, 1998, the
Company's live TV bingo game show, MegaBingo, was being delivered to 47
independently owned Indian bingo halls located in 14 different states.

         In May 1998, the Company launched MegaRacing, which transmits horse
racing signals and provides communications and data services to OTB facilities
operated by Indian tribes pursuant to compacts with the State in which the
tribes are located. The Company presently serves five OTB facilities in the
State of Oklahoma.

RESULTS OF OPERATIONS

         An analysis of the Company's gaming revenues and direct gaming expenses
were as follows for the years ended September 30, 1998 and 1997.

<TABLE>
<CAPTION>

                                                   1998            1997
                                                   ----            ----
<S>                                          <C>                <C>         
Interactive Gaming:
      Gaming Revenue, Net of Prizes(1)       $  49,467,000      $ 20,507,000

      Allotments to Hall Operators             (37,846,000)      (15,334,000)
                                             -------------      ------------
      Net Interactive Gaming Profit          $  11,621,000      $  5,173,000
                                             =============      ============

TV Bingo Game Shows: (2)
      Gross Revenues                         $  12,173,000      $ 13,504,000

      Bingo Prizes and Related Costs            (8,823,000)       (9,381,000)

      Allotments to Hall Operators              (1,741,000)       (2,568,000)
                                             -------------      ------------
         Net TV Bingo Profit                 $   1,609,000      $  1,555,000
                                             =============      ============
</TABLE>

--------------------
(1)  Interactive gaming gross revenues and prizes are netted for financial
     statement presentation purposes.
(2)  TV bingo game shows consist of MegaBingo, MegaCash and MegaBingo Lite.



                                      -16-
<PAGE>   17

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

         REVENUES - Total revenues for fiscal year 1998 were $70.5 million as
compared to $39.1 million in 1997, an 80% increase. The increase is due to an
81% increase in gaming revenues over 1997, primarily as a result of the
Company's interactive games which generated revenues of $49.5 million during
1998 as compared to $20.5 million in 1997. The increase in interactive gaming
revenues for 1998 primarily resulted from newly installed electronic player
stations and games. The Company had an average of approximately 2,140 electronic
player stations in daily operation during the year ended September 30, 1998,
compared to an average of approximately 950 during the year ended September 30,
1997. TV bingo game show revenues decreased $1.3 million or 10% in 1998 as
compared to 1997, primarily as the result of player headcount being down at most
bingo facilities across the country, and several bingo halls electing not to
continue playing MegaBingo during 1998.

         The Company believes interactive gaming revenues will increase in
fiscal 1999 over fiscal 1998, primarily as the result of an increase in the
average number of electronic player stations that are expected to be in daily
operation. TV bingo game show revenues, however, may continue to decrease as the
result of decreased MegaBingo play at the halls.

         Revenue from sales of electronic player stations increased by $1.8
million, going from $3.2 million in 1997 to $5.0 million in 1998, with $1.3
million of the increase coming from related party sales. The increase was
primarily due to the sale of 984 units in 1998 as compared to 616 units in 1997.
Of the 984 units sold in 1998, 663 were sold to Equipment Purchasing II L.L.C.,
an entity controlled by Gordon T. Graves, the Company's Chairman of the Board
and Chief Executive Officer. Of the 616 units sold in 1997, 456 were sold to
Equipment Purchasing L.L.C., an entity owned and controlled by Mr. Graves.

         Lease revenues from electronic player stations leased to Indian tribes
grew from $1.8 million in 1997 to $3.4 million in 1998. This increase is due to
the expansion of the number of EPS out on lease to various tribes.

         Other revenues increased by $.4 million in 1998 as compared to 1997.
The primary reasons for the increase were the introduction of MegaRacing in 1998
with revenues of $280,000 and management fees of $175,000 derived from equipment
sold to Equipment Purchasing L.L.C. and Equipment Purchasing II, L.L.C.

         BINGO PRIZES AND RELATED COSTS - Bingo prizes and related costs
decreased $.6 million or 6% during 1998 as compared to 1997. The decrease in
these costs is commensurate with the decrease in TV bingo game show revenues
discussed above. Interactive gaming revenues are recorded net of prize costs;
therefore, the prizes have no effect on bingo prizes and related costs.

         ALLOTMENTS TO HALL OPERATORS - Allotments to hall operators consist of
the halls' share of the gaming income after prizes and allocable prize costs.
Allotments to hall operators increased 121% to $39.6 million in 1998, as
compared to $17.9 million in 1997. The primary reason for the increase is hall
commissions related to interactive gaming where the allotment to hall operators
increased from $15.3 million in 1997 to $37.8 million in 1998, an increase of
147%. The decrease in hall commissions related to TV bingo game shows is caused
primarily by the decrease in MegaBingo revenues discussed above.

         COST OF ELECTRONIC PLAYER STATIONS SOLD - Cost of electronic player
stations sold were $2.7 million in 1998 as compared to $1.7 million in 1997, or
an increase of $1.0 million. Cost of



                                      -17-
<PAGE>   18




electronic player stations sold associated with related party sales were $1.9
million in 1998, or an increase of $.7 million over 1997. The overall increase
was due to the higher number of electronic player stations sold in 1998, as
discussed above. The gross margin on electronic player station sales was
$468,000 in 1998 and $270,00 in 1997, and the gross margin for related party
sales was $1.9 million and $1.3 million in 1998 and 1997, respectively.

         SALARIES AND WAGES - Salaries and wages increased $.8 million, or 35%
during 1998 as compared to 1997. Most of the increase relates to additional
personnel hired to assist in the installation, training and maintenance related
to the interactive gaming network.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $4.9 million, or 98% during 1998 as compared
to 1997. Approximately 45% or $2.2 million of the increase was the result of the
MegaMania litigation and legal and regulatory activities. The remainder of the
increase is primarily due to an increase in travel of $.4 million, an increase
in interactive gaming telecommunications of $.4 million, an increase in employee
benefits of $.4 million, an increase of $.3 million in advertising and
promotions and an increase in consulting and contract labor of $.2 million, all
related to the expansion of the interactive gaming network. In addition, there
was a write-off of capitalized software cost of $.4 million.

         AMORTIZATION AND DEPRECIATION - Amortization and depreciation increased
$1.2 million, or 66% during 1998 as compared to 1997. The increase results from
electronic player stations and software programming costs capitalized during
1998 and 1997. The Company made $6.0 million in capital additions during 1998.

         INTEREST INCOME - Interest income increased $255,000 in 1998 primarily
as a result of electronic player stations sold for cash and notes receivable.

         INCOME TAX - Income tax expense increased to $1.5 million in 1998 from
a tax benefit of $.5 million in 1997. The 1998 increase is the result of greater
pretax income in 1998 and reflects an effective tax rate of 40% on pretax income
of $3.7 million. The tax benefit in 1997 resulted from the removal of a
valuation allowance related to net operating losses.

FUTURE EXPECTATIONS AND FORWARD LOOKING STATEMENTS

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

LIQUIDITY AND CAPITAL RESOURCES

         At September 30, 1998, the Company had unrestricted cash and cash
equivalents of $1.9 million, a $.5 million decrease from September 30, 1997.
During the year ended September 30, 1998, $5.5 million of cash was provided by
operations versus $.6 million used for operations in 1997. The change is
primarily due to the collection of related party notes receivable, an increase
in accounts payable and accrued expenses, an increase


                                      -18-
<PAGE>   19




in amortization and depreciation and an increase in net income, partially offset
by increases in accounts and notes receivable, inventory and prepaid expenses.
The Company used $6.0 million in investing activities in 1998, almost entirely
for additions to fixed assets, consisting primarily of software development for
interactive gaming and hardware for interactive gaming player stations and game
operation. Working capital at September 30, 1998 was $4.8 million.

         In March 1998, the Company entered into an agreement to sell electronic
player stations and related equipment to a third party for a sales price of
approximately $2.4 million. The sales price was paid in March 1998 by delivery
to the Company of a promissory note of the third party purchaser that was due
and payable on or before April 30, 1998. Subsequent to March 31, 1998, the third
party purchaser assigned its right under the purchase agreement to a
newly-formed limited liability company ("EPLLC-2"). An affiliate of Gordon T.
Graves, the Company's Chairman of the Board and Chief Executive Officer, and
Clifton Lind, the Company's President and Chief Operating Officer, each owned a
10.5% interest in EPLLC-2. Mr. Graves also owns and controls the corporation
having management authority over EPLLC-2. The terms of the sale which was
assigned to EPLLC-2 are the same as the original terms entered into with the
third party purchaser in March 1998. The promissory note was paid by EPLLC-2 on
May 15, 1998.

         In June 1998, the Company sold electronic player stations and related
equipment to EPLLC-2 for a sales price of approximately $1.4 million, which
included a non-refundable deposit of $140,000 received on the effective date of
the transaction. The sales price was paid in June 1998 by delivery to the
Company of a promissory note of EPLLC-2 that was due and payable on or before
July 15, 1998 out of funds contributed to EPLLC-2 from a group of investors that
did not include either Mr. Graves or Mr. Lind or any other officer, director or
employee of the Company. As a result of the additional contribution, the
ownership interest of each of Mr. Graves and Mr. Lind in EPLLC-2 was reduced to
6.36%. Mr. Graves continues to own and control the corporation having management
authority over EPLLC-2.

         The EPS and related equipment purchased by EPLLC-2 has been leased to a
number of Indian tribes under terms where the Company and EPLLC-2 share in a
percentage of the revenues generated by the use and operation of the EPS at the
tribes' bingo facilities. As an inducement to consummate the March 1998 sale,
the Company had agreed to issue to the original third party issuer, and did
issue to EPLLC-2, warrants to purchase 20,000 shares of common stock
(exercisable for a period of five years, non-exercisable in the first year) at
an exercise price of $9.44 per share, which was the market value of the common
stock on the date the equipment purchase agreement was executed. The estimated
fair market value of these warrants was $1,000 and has been recorded as
additional cost of sales. As an inducement to consummate the June 1998 sale, the
Company issued to EPLLC-2 warrants to purchase 262,500 shares of common stock
(exercisable for a period of five years, non-exercisable in the first year) at
an exercise price of $7.00 per share which was in excess of the market value of
the common stock on the date the equipment purchase agreement was executed
($3.50 per share) The estimated fair market value of these warrants was $26,250
and has been recorded as additional cost of sales.

         In connection with the sale of the equipment, the Company also entered
into a two year management agreement with EPLLC-2 whereby the Company is
responsible for proposing, establishing and modifying the MegaMania game
procedures and the related game accounting procedures; supervising and
administering the rental agreement with the Indian tribe; using its best efforts
to re-lease the purchased equipment to other parties if the present rental
agreement is terminated; collecting all rents due under the rental agreement;
performing all necessary repairs and maintenance, but not bearing any risk of
loss for damages; conducting necessary marketing; maintaining insurance; and
paying all sales and use taxes and performing other administrative functions. As
compensation for these services, the Company will receive $10.00 per electronic
player station as a re-leasing fee and $10.00 per electronic player station per
month as a management fee. The Company has


                                      -19-
<PAGE>   20




the option to repurchase the equipment at its then fair market value if after
giving effect to the payment of such repurchase price and the net rental income
received by EPLLC-2, EPLLC-2 has received a 20% internal rate of return.

         During the year ended September 30, 1998, the Company incurred legal
and professional fees and expenses of approximately $3.2 million, or an increase
of $2.6 when compared to the year ended September 30, 1997. Most of the increase
was incurred in the second quarter of fiscal 1998, as the Company responded to
the December 31, 1997 actions by the Tulsa U.S. Attorney in attempting to
shut-down the Company's MegaMania bingo game. While legal fees and expenses
related to MegaMania and other litigation involving the Company will continue to
be significant in fiscal 1999, such fees and expenses are not expected to
approach the levels seen in fiscal 1998.

         In December 1998, the Company renewed its Credit Agreement with a bank,
which provides for a term loan of $561,000 and a revolving line of credit of
$1.0 million. Principal of $9,510 and interest are payable monthly until the
loan becomes due on October 31, 2000. The interest rate is the Chase Manhattan
Bank, N.A. prime rate plus 1/2% (9% at September 30, 1998). There was $561,000
outstanding on the term loan and $70,000 was outstanding under the revolving
line of credit at September 30, 1998.

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

         The Company believes that its current operations, including the payment
of its expected legal fees and expenses, can be sustained from cash from
operations. However, the purchase, assembly and installation of additional EPS
to further expand the Company's interactive gaming operations will require
funding from external sources. Prior to the initiation of the MegaMania
litigation, the Company financed such activities primarily through the issuance
of equity securities and cash flow from operations. After the initiation of the
MegaMania litigation, the uncertainties relating to the legality of the
Company's interactive bingo activities and the depressed market for the
Company's equity securities made it more difficult and expensive for the Company
to obtain financing. As a result, the Company financed the purchase, assembly
and installation of EPS and the significant cost of prosecuting the MegaMania
litigation primarily through the sale of EPS to private investors, including
related parties. The effective cost of these sale transactions was significantly
higher than could have been obtained by the Company from the more traditional
sources of financing had those sources been available to the company. Whether
the October 23, 1998 and November 23, 1998 decisions of the Oklahoma and
California Federal District Courts holding that MegaMania is legal Class II
gaming will significantly change these conditions cannot be predicted at this
time; however, there are early indications that the Company's ability to obtain
financing have improved. 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.



                                      -20-

<PAGE>   21


CONTINGENCIES

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

INFLATION AND OTHER COST FACTORS

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

IMPACT OF YEAR 2000 ("Y2K")

The "Year 2000 Issue" is the result of 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 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.

The Company has identified its Y2K risk in three categories: Internal business
software, interactive game software and TV bingo game show software.

INTERNAL BUSINESS SOFTWARE. During 1997 and 1998, as part of a business
modernization program intended to reduce time and improve profitability, the
Company purchased the windows system of MAS 90, which the software vendor has
indicated is Y2K compliant. The Company is in the implementation phase for this
system and other ancillary financial systems with full implementation scheduled
for July 31, 1999. This system will include a detailed manufacturing and
inventory system. Based on this schedule, the Company expects to be in full Y2K
compliance with its internal financial systems before the year 2000. However, if
due to unforeseen circumstances, the implementation is not completed on a timely
basis, the Y2K could have a material impact on the manufacturing operations of
the Company. Contingency plans have been established in this area, where the
Company believes there is some risk if the system is not implemented before the
year 2000. Those plans include adapting some of the Company's currently existing
MAS 90 systems to be Y2K compliant. The cost of making those adaptations is not
expected to be material and would be expensed in the period incurred.

INTERACTIVE GAME SOFTWARE. The Company's interactive games have been configured
using the Microsoft four digit system which is Y2K compliant. All current games
as well as future games will also be in Y2K compliance.

TV BINGO GAME SHOW SOFTWARE. The Company is currently gathering data to assess
the impact of the Y2K on its TV bingo game show system. If the Company is unable
to achieve Y2K compliance for this system, the Y2K could have a material impact
on the TV bingo game show operations of the Company. Since the Company is in the
information gathering phase, the Company does not currently have a contingency
plan in place.



                                      -21-
<PAGE>   22




ITEM 7. FINANCIAL STATEMENTS

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


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

           None




                                      -22-
<PAGE>   23




                                    PART III

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

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

<TABLE>
<CAPTION>

      Name                            Age             Position
      ----                            ---             --------   
<S>                                    <C>            <C>
Gordon T. Graves                       61             Chairman of the Board, Chief Executive Officer and
                                                      Director
Clifton E. Lind                        52             President and Chief Operating Officer

Gordon T. Sjodin                       57             President of MegaBingo Inc.

Michael E. Newell                      47             Vice President

Frederick E. Roll                      55             Vice President, Secretary and Chief Financial Officer

Robert F. Lannert                      43             Vice President

Jim Holmes                             56             Vice President

Daniel J. Sarnoff                      42             President of TV Games, Inc.

George J. Akmon                        55             Vice President and Chief Financial Officer Elect

Gary L. Loebig                         50             Vice President

Larry D. Montgomery                    61             Vice Chairman of the Board and Director

Thomas W.  Sarnoff                     71             Director

Gregory N. Stern                       53             Director
</TABLE>

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

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



                                      -23-
<PAGE>   24




         CLIFTON E. LIND has been the President and Chief Operating Officer of
the Company since June 1998. From January 1997 until joining the Company as
President, Mr. Lind was President of Celmark, Inc., an Austin, Texas based
company owned by Mr. Lind that provided management and financial consulting
services to start-up companies and that provided financial consulting services
to the Company. From 1991 to 1993, Mr. Lind was the Executive Vice President,
Chief Operating Officer and Chief Financial Officer of KDT Industries, where he
worked with Mr. Graves. From 1994 until January 1997, Mr. Lind was the President
and Chief Executive Officer of KDT Industries

         GORDON T. SJODIN was Vice President of the Company since September 1994
prior to being elected President of the Company's wholly-owned subsidiary,
MegaBingo, Inc., in December 1998. In April 1994, Mr. Sjodin joined MegaBingo,
Inc., as its Vice President - Sales and served in such position until September
1994, when he became Vice President of the Company. From August 1989 until April
1994, Mr. Sjodin was employed by AGE as, successively, Director, Sales and
Marketing, and Director, Corporate Development.

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

         FREDERICK E. ROLL has been Vice President and Secretary of the Company
since September 1994, having joined the Company in February 1994 as its acting
general manager and Chief Financial Officer. From November 1990 until joining
the Company, Mr. Roll was a certified public accountant in his own practice.
From 1983 until October 1990, Mr. Roll was Chief Financial Officer, Vice
President and an owner of Park Hill Nurseries, Ltd., a commercial nursery. Mr.
Roll has been the Chief Financial Officer of the Company since January 1997. In
January 1999, Mr. Roll will be succeeded as Chief Financial Officer by Mr.
Akmon.

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

         JIM HOLMES was President of MegaBingo, Inc. from August, 1998 until
December 1998 when he was elected Vice President of the Company. Since 1991 and
prior to joining the Company, Mr. Holmes was the President of Jim Holmes &
Company, a corporation owned by Mr. Holmes that provided management and
consulting services to both the private and public sectors primarily with
respect to establishing lotteries. Mr. Holmes was instrumental in establishing
lotteries in the Philippines, UK and the Ukraine. During this period Mr. Holmes
was also an officer of NORAM which provided management services to Class III
gaming facilities of certain Indian tribes.

         DANIEL J. SARNOFF was a Vice President of the Company from March, 1995
until July, 1996 and again from February, 1997 to September 1998 when he was
named President of TV Games, Inc., a Company subsidiary. Mr. Sarnoff served as a
director of the Company from September, 1994 until July 10, 1996, and again from
March, 1997 until December 1997 when he resigned to be replaced by his father,
Thomas Sarnoff. Since 1993, Mr. Sarnoff has been President and Chief Executive
Officer of Pioneer Pictures which develops and packages movies for television.
From August, 1989 until May, 1990, Mr. Sarnoff served as President of RKO
Express Pictures and from June, 1990 until May, 1993 Mr. Sarnoff was involved
with production and marketing for Bonanza Ventures Inc. From 1986-1990 Mr.
Sarnoff founded and was Chief Executive Officer



                                      -24-
<PAGE>   25




of Super TVOLTA, which designs international television lottery programs.
Previously, Mr. Sarnoff was responsible for new business development, NBC SPOT
Sales, New York, and was a member of the RCA new business task force.

         GEORGE J. AKMON was elected a Vice President of the Company in December
1998 and will become the Chief Financial Officer of the Company effective
January 1, 1999. From September 1994 until joining the Company, Mr. Akmon was
the Chief Operating Officer and Chief Financial Officer of North American Gaming
and Entertainment Corporation, a publicly traded company that operates casino
properties. From February 1994 until September 1994, Mr. Akmon was a consultant
to International Building Materials, Inc. with respect to the development of
international markets. From June 1992 until February 1994, Mr. Akmon was a
consultant to Gaming Associates, Inc. during which time Mr. Akmon provided
management and financial consulting services to an Indian casino and to the
Dunes Hotel and Country Club in Las Vegas, Nevada. For more than five years
prior to that Mr. Akmon served in various management and financial capacities
with Hilton Head Holdings and its related companies in South Carolina.

         GARY L. LOEBIG was elected a Vice President of the Company - New Market
Development in December 1998. Since 1984, Mr. Loebig was employed by Stuart
Entertainment, dba Bingo King, Omaha, Nebraska, a publicly traded company
engaged in the manufacture and sale of bingo cards and related equipment and
products. With Bingo King, Mr. Loebig served in various capacities, beginning as
general sales manager and last serving as Senior Vice President - Market and
Product Development.

         LARRY D. MONTGOMERY has been a director of the Company since November
1992. Mr. Montgomery was the President of the Company from November 1992 until
December 1996, having held the position of Chief Executive Officer from November
1992 through September 1994. From December 1991 until December 1993, Mr.
Montgomery was also a private consultant to gaming companies. From 1989 through
1991, Mr. Montgomery was the President of Public Gaming Research Institute, and
from 1987 to 1989 was the Executive Director of the Kansas State Lottery. Mr.
Montgomery is currently an independent consultant to the Company specializing in
regulatory affairs.

         THOMAS W. SARNOFF was elected as a director of the Company in December
1997, to fill the vacancy resulting from the resignation of his son, Daniel J.
Sarnoff. Thomas W. Sarnoff was employed by the National Broadcasting Company,
Inc. ("NBC") for over 25 years, holding positions that included Vice President,
Production and Business Affairs, Executive Vice President of West Coast
activities, and last serving as President of NBC Entertainment Corporation from
1969 to 1977. After retiring from NBC in 1977, Mr. Sarnoff has been engaged in
the production of television and film entertainment, primarily through Sarnoff
Entertainment Corporation which was formed in 1981. Mr. Sarnoff serves on many
civic and charitable organizations and is currently the President and a member
of the Board of Directors of the Academy of Television Arts & Sciences
Foundation.

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

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

         No family relationship exists between any of the directors or executive
officers of the Company, except that Thomas W. Sarnoff is the father of Daniel
J. Sarnoff.

                                      -25-
<PAGE>   26




SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.

         During the fiscal year ended September 30, 1998, three officers and one
director were delinquent in making filings under Section 16(a) of the Securities
Exchange Act of 1934, as amended. Larry D. Montgomery, a Director of the
Company, was delinquent in reporting three transactions: an October, 1997
exercise of a stock option, a January 1998 exercise of a warrant, and an April
1998 exercise of four stock options. Frederick E. Roll, Vice President and Chief
Financial Officer of the Company, Mike Newell, Vice President of the Company,
and Gordon Sjodin, Vice President of the Company, were all delinquent in
reporting the acquisition of common stock upon the exercise of warrants in
January, 1998.










                                      -26-
<PAGE>   27




ITEM 10.  EXECUTIVE COMPENSATION

         SUMMARY COMPENSATION TABLE. The following table sets forth certain
information concerning the annual compensation for the Company's chief executive
officer and for each other executive officer earning more than $100,000 for the
fiscal year ended September 30, 1998 (the "named executive officers"):

                                            SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                  Long Term
                                                                 Compensation
                                                                    Awards
                                                                  Securities
                                                    Annual        Underlying
                             Compensation          Options/        All Other
Financial Position         Year       Salary    Warrants(#)(1)   Compensation(2)
------------------         ----       ------    --------------   ---------------
<S>                        <C>      <C>           <C>              <C>     
Gordon T. Graves           1998     $ 87,308            (3)        $  4,213
Chairman and CEO           1997       70,000            (4)           3,877
                           1996       65,423            --              485

Clifton E. Lind (5)        1998      156,733       338,000            2,492
President and COO

Larry D. Montgomery(6)     1998      171,777        22,500            3,560
                           1997      115,160        10,000            6,474
                           1996      100,939         5,000            3,238

Gordon T. Sjodin           1998      115,731        10,100            7,647
Vice President             1997      120,360         5,000            7,222
                           1996      115,669         4,445            3,309
</TABLE>


(1)      Consists of shares of Common Stock underlying options granted pursuant
         to the Company's 1994 Employee Stock Option Plan, 1996 Stock Incentive
         Plan and President's Place. (See "Stock Plans" below).

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

(3)      Does not include shares of Common Stock underlying warrants issued to
         Equipment Purchasing II L.L.C. See Item 12. Certain Relationships and
         Related Transactions.

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

(5)      Mr. Lind became President and COO of the Company in June, 1998.
         Includes amounts paid to Mr. Lind since that date and for the period
         commencing October 1, 1997 through June, 1998 while Mr. Lind served as
         a consultant to the Company.

(6)      Mr. Montgomery served as President of the Company during 1996 and 1997
         and resigned as President in December 1997. Mr. Montgomery remained an
         employee of the Company until April 1998 at which time he became a
         consultant. Amounts paid in 1998 include all amounts paid to Mr.
         Montgomery while an employee and amounts paid to him as a consultant
         after April 1998. See Item 12. Certain Relationships and Related
         Transactions.



                                      -27-
<PAGE>   28




         OPTION/WARRANT GRANT TABLE. The following table sets forth certain
information regarding options and warrants granted by the Company during its
fiscal year ended September 30, 1998 to the named executive officers.

                    OPTION/WARRANT GRANTS IN LAST FISCAL YEAR

                                Individual Grants

<TABLE>
<CAPTION>
                            Number of            % of Total
                           Securities             Options/
                           Underlying             Warrants
                            Options/             Granted to
                            Warrants            Employees in             Price          Expiration
Name                       Granted (#)           Fiscal Year         Per Share (1)         Date
----                       -----------          ------------         -------------        -------
<S>                          <C>                    <C>                  <C>              <C>
Gordon T. Graves(2)              ---                  ---                  ---               ---
 
Clifton E. Lind              338,000                45.68%               $3.81                (3)

Larry D. Montgomery           22,500                  3.0%               $3.81              1/08/08


Gordon T. Sjodin              10,100                 1.35%               $3.81              1/08/08
</TABLE>


-----------------
(1) Is the exercise price of the options after giving effect to the repricing
discussed below under "Option Repricing."

(2) Does not include (i) shares of Common Stock underlying warrants issued to
Equipment Purchasing II L.L.C.. See Item 12. Certain Relationships and Related
Transactions.

(3) 27,000 options expire in May 2002; 50,000 options expire in September 2002;
49,000 options expire in February 2007; 162,000 options expire in August 2007;
and 50,000 options expire in January 2008.



                                      -28-
<PAGE>   29




         AGGREGATE OPTION/WARRANT EXERCISES AND YEAR-END OPTION TABLE. The
following table sets forth certain information regarding the exercise of stock
options and warrants during the fiscal year ended September 30, 1998, and the
unexercised stock options and warrants held as of September 30, 1998, by the
named executive officers.

<TABLE>
<CAPTION>

Name                         No. of          Value          No. of Securities               Value of Unexercised In-
----                         Shares          Realized       Underlying Unexercised          The-Money Options at FY-
                             Acquired        $ (1)          Options at FY-End               End (2)
                             Upon            ---------      ----------------------          ----------------------------
                             Exercise
                             --------                       Exercisable   Unexercisable     Exercisable    Unexercisable
                                                            -----------   -------------     ------------   -------------
<S>                          <C>             <C>            <C>              <C>               <C>           <C>
Gordon T. Graves(3)          --------        --------       --------         --------          --------      --------
Clifton E. Lind              --------        --------       --------          338,000          --------      --------
Larry D. Montgomery(4)         64,940        $661,139           ----           22,500          --------      --------
Gordon T. Sjodin(5)             1,940        $ 15,559         47,250           12,350          $  6,750      --------
</TABLE>

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

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

(2)      Market value of the underlying Common Stock at fiscal year end ($2.65
         per share), minus the exercise price.

(3)      Does not include shares of Common Stock underlying warrants issued to
         Equipment Purchasing L.L.C., or Equipment Purchasing II L.L.C.. See
         Item 12. Certain Relationships and Related Transactions.

         OPTION REPRICING. On June 12, 1998, the Board of Directors of the
Company canceled all outstanding options held by optionees under the 1996 Stock
Incentive Plan and granted new options to all such optionees. The new options
were for the same number of shares and upon the same terms of expiration and
vesting as the canceled options, except that the exercise price for the new
options was $3.81 per share, the market value of the Common Stock on June 12,
1998. In effect, therefore, the Board of Directors reduced the exercise price of
all such outstanding options which had exercise prices at the time of
cancellation ranging from $4.38 per share to $13.38 per share. A total of
275,300 options granted to over 65 employees under the 1996 Stock Incentive Plan
were repriced by the June 12, 1998 action.

         Also at the June 12, 1998 meeting, Mr. Lind was offered the position of
President of the Company and the President's Plan was established as an
inducement to Mr. Lind to accept the position. Pursuant to the President's Plan,
Mr. Lind was granted options to purchase 338,000 shares at $3.81 per share, the
market value of the Common Stock on June 12, 1998. In connection with the grant
under the President's Plan, all options and warrants to purchase Common Stock
that had previously been granted to Mr. Lind in consideration of prior financial
and consulting services to the Company (aggregating 338,000 shares at exercise
prices ranging from $5.68 to $13.38 per share) were canceled. These have been
treated as repriced options for purposes of the Repricing Table set forth below.

         The Board of Directors took such action in the belief that it was
appropriate in order to attract and retain the qualified personnel desired to
operate the Company. By June 12, 1998, the legality of the Company's activities
was being challenged by the Department of Justice before two Federal District
Courts and one shareholder class action had been filed. The uncertainties raised
by these actions, and the time and attention devoted by personnel to assist in
the defense of these actions while at the same time trying to expand and operate
the business, placed severe strains on all personnel who were asked to meet this
challenge. The


                                      -29-
<PAGE>   30




existence of the Department of Justice litigation had also resulted in a
precipitous decline in the market price of the Company's Common Stock so that
all of the repriced options were significantly "underwater." Since the Board of
Directors believes that the incentives offered by stock options are important to
employee morale and retention, after careful consideration of the challenges and
opportunities facing the Company, the Board of Directors made the good faith
judgment that it was in the best interests of the Company and its stockholders
to lower the exercise price of outstanding options, thus restoring the
opportunity for employees to receive value in the near term by continuing to
persevere against litigation that is perceived by most employees as unfair and
unjust and building the Company through increased and improved operations.


                                 REPRICING TABLE


<TABLE>
<CAPTION>

                             Number of Shares                                                               Option Term
                                Underlying           Exercise Price of            New Exercise             Remaining at
Name                         Repriced Options       Terminated Options      Price of Repriced Options     Repricing Date
----                         ----------------       ------------------      -------------------------     --------------
<S>                               <C>                      <C>                        <C>                    <C>    
Gordon T. Graves                   -----                   -----                      -----                    -----
Clifton E. Lind                   338,000                   (1)                       $3.81                     (1)
Larry D. Montgomery               15,000                   $7.50                      $3.81                   9 years
Gordon T. Sjodin                   5,000                   $4.37                      $3.81                   8 years
                                   5,000                   $9.50                      $3.81                   9 years
</TABLE>

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

(1)      The expiration date of new options granted to Mr. Lind remains the same
         as the options and warrants that were canceled/repriced. The exercise
         price of the canceled/repriced options was as follows; 27,000 options
         at $10.00 per share expiring in May 2002; 50,000 warrants at $13.38 per
         share expiring in September 2002; 49,000 options at $5.68 per share
         expiring in February 2007; 54,000 options at $8.00 per share expiring
         in August 2007; 54,000 options at $10.00 per share expiring in August
         2007; 54,000 options at $12.00 per share expiring in August 2007; and
         50,000 options at $9.50 per share expiring in January 2008.

STOCK PLANS.

         In November 1994, the stockholders of the Company approved the
Company's 1994 Employee Stock Option Plan (the "1994 Plan") and the 1994
Director Stock Option Plan ("Director Plan"), under which options to purchase an
aggregate of 360,000 shares and 60,000 shares, respectively, of Common Stock
were reserved for issuance. As of September 30, 1998, options to purchase
182,000 shares and 40,000 shares, respectively, of Common Stock were outstanding
under the 1994 Plan and the Director Plan. No options granted under the Director
Plan had been exercised. After the adoption of the Company's 1996 Stock
Incentive Plan, no new options were granted under the 1994 Plan or the Director
Plan.

         In August 1996, the Board of Directors adopted the Company's 1996
Incentive Stock Plan (the "1996 Plan") pursuant to which 543,982 shares of
Common Stock or Common Stock equivalents may be issued plus an additional number
of shares or share equivalents equal to 10% of the number of shares of Common
Stock issued by the Company after September 30, 1998 and prior to December 31,
2000.

         The 1996 Plan is administered by the Board of Directors of the Company
(the "Administrator"). The Administrator has the authority, subject to the terms
of the 1996 Plan, to determine when and to whom to make


                                      -30-
<PAGE>   31




grants under the 1996 Plan, the number of shares to be covered by the grants,
the types and terms of "Awards" to be granted under the 1996 Plan (which are
stock based incentives and may include incentive stock options, non-qualified
stock options, stock appreciation rights, restricted stock, performance shares
and deferred stock purchases), the exercise or purchase price of the shares of
Common Stock and Common Stock equivalents subject to the Awards, and to
prescribe, amend and rescind rules and regulations relating to the 1996 Plan.

         As of September 30, 1998, there were outstanding under the 1996 Plan
options to purchase 401,950 shares of Common Stock, all at an exercise price of
$3.81 per share. Of these outstanding options, 275,300 were granted in June
1998, in substitution for and cancellation of all options then outstanding under
the 1996 Plan which had exercise prices in excess of $3.81 per share.

         In connection with the employment of Clifton E. Lind as President of
the Company in June 1998, the Company established the President's Plan pursuant
to which options to purchase 338,000 shares of Common Stock at $3.81 per share
were granted to Mr. Lind. The options are intended to qualify as incentive stock
options, subject to approval of the stockholders of the Company at the next
annual meeting of stockholders. Approximately a third of the options became
exercisable in December 1998, with the balance becoming exercisable in
substantially equal installments over the next three years. Vesting of the
options accelerate if Mr. Lind is terminated without cause or upon a change of
control of the Company.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

         The following table sets forth certain information as of September 30,
1998, with respect to the number of shares of Common Stock and of Series A
Preferred Stock owned by (i) each person known by the Company to own
beneficially more than 5% of the outstanding shares of, respectively, the Common
Stock and the Series A Preferred Stock, (ii) each director of the Company, (iii)
each named executive officer, and (iv) all directors and executive officers of
the Company as a group:




                                      -31-
<PAGE>   32

<TABLE>
<CAPTION>

                                          Common Stock                             Preferred Stock
                                        ----------------                          ----------------- 
                                            Number of                                  Number of
                                             Shares                                     Shares
                                          Beneficially             Percent           Beneficially           Percent
          Beneficial Owner                    Owned              of Class(1)             Owned            of Class(1)
          ----------------                ------------           -----------         -------------        -----------
<S>                                       <C>                       <C>               <C>                    <C>  
Gordon T. Graves                          1,087,620 (2)             20.0              80,175 (3)             88.8%
1604 Crested Butte
Austin, Texas 78746

Clifton E. Lind                             135,838 (4)              2.5               -----                 ----
2 Las Brisas
Austin, Texas 78746

Larry D. Montgomery                         103,184 (5)              1.9               1,411                  1.5
1920 S. West Union Road
Topeka, Kansas 66615

Gordon T. Sjodin                             69,548 (6)              1.3               1,272                  1.4
5804 E. 104th Street
Tulsa, Oklahoma 74137

Thomas W. Sarnoff                             2,500 (7)               (9)              -------                ----
2451 Century Hill
Los Angeles, California 90067

Gregory N. Stern                             22,500 (8)               (9)                ---                   ---
130 Barton Road
Stow, Massachusetts 01775

All executive officers and                1,547,595 (10)            28.4              83,351                 91.8
directors as a group
(11 persons)
</TABLE>

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

(1)      Based upon 5,439,824 shares of Common Stock and 90,789 shares of Series
         A Preferred Stock outstanding.

(2)      Consists of (i) 591,545 shares owned of record by Graves Properties,
         Ltd., a limited partnership controlled by Mr. Graves, (ii) 51,000
         shares owned by Graves Management, Inc. Defined Benefit Trust (Graves
         Management, Inc. is a corporation controlled by Mr. Graves), (iii)
         44,200 shares owned of record by Mr. Graves, and (iv) 400,875 shares
         issuable upon the conversion of the Series A Preferred Stock. Does not
         include an aggregate of 90,600 shares as to which Mr. Graves disclaims
         beneficial ownership, consisting of: (i) 44,100 shares owned of record
         by Cynthia Graves, Mr. Graves' wife, and (ii) 46,500 shares
         beneficially owned by the Gordon Graves Grandchildren Trust.

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


                                      -32-
<PAGE>   33




(4)      Consists of (i) 6,088 shares owned of record by Mr. Lind, and (ii)
         129,750 shares issuable upon the exercise of options that become
         exercisable on December 12, 1998.

(5)      Consists of (i) 96,129 shares owned of record by Mr. Montgomery, and
         (ii) 7,055 shares issuable upon conversion of the Series A Preferred
         Stock.

(6)      Consists of (i) 13,433 shares owned of record by Mr. Sjodin, (ii)
         49,750 shares issuable upon the exercise of stock options that are
         currently exercisable (48,500 shares) or are exercisable within the
         next 60 days (1,250 shares), and (iii) 6,360 shares issuable upon
         conversion of the Series A Preferred Stock.

(7)      Consists of shares issuable upon the exercise of stock options that
         become exercisable on December 12, 1998.

(8)      Consists of shares issuable upon the exercise of currently exercisable
         stock options (20,000 shares) or that become excusable on December 12,
         1998 (2,500 shares).

(9)      Less than 1%.

(10)     Consists of (i) 810,305 shares owned of record, (ii) 323,000 shares
         issuable upon the exercise of stock options that are currently
         exercisable (184,500 shares) or are exercisable on or before December
         12, 1998 (138,500 shares), and (iii) 414,290 shares issuable upon
         conversion of Series A Preferred Stock.


ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

EQUIPMENT SALES

          In March 1998, the Company entered into an agreement to sell EPS and
related equipment to a third party for a sales price of approximately $2.4
million. The sales price was paid in March 1998 by delivery to the Company of a
promissory note of the third party purchaser that was due and payable on or
before April 30, 1998. Subsequent to March 31, 1998, the third party purchaser
assigned its right under the purchase agreement to a newly-formed limited
liability company ("EPLLC-2"). An affiliate of Gordon T. Graves, the Company's
Chairman of the Board and Chief Executive Officer, and Clifton E. Lind, the
Company's President and Chief Operating Officer, each owned a 10.5% interest in
EPLLC-2. Mr. Graves also owns and controls the corporation having management
authority over EPLLC-2. The terms of the sale which was assigned to EPLLC- 2 are
the same as the original terms entered into with the third party purchaser in
March 1998. The promissory note was paid by EPLLC-2 on May 15, 1998.

          In June 1998, the Company sold EPS and related equipment to EPLLC-2
for a sales price of approximately $1.4 million, which included a non-refundable
deposit of $140,000 received on the effective date of the transaction. The sales
price was paid in June 1998 by delivery to the Company of $140,000 in cash and a
promissory note of EPLLC-2 that was due and paid on July 15, 1998 out of funds
contributed to EPLLC-2 from a group of investors that did not include either Mr.
Graves or Mr. Lind or any other officer, director or employee of the Company. As
a result of the additional contribution, the ownership interest of each of Mr.
Graves and Mr. Lind in EPLLC-2 was reduced to 6.36%. Mr. Graves continues to own
and control the corporation having management authority over EPLLC-2.


                                      -33-
<PAGE>   34




          The EPS and related equipment purchased by EPLLC-2 has been leased to
a number of Indian tribes under terms where the Company and EPLLC-2 share in a
percentage of the revenues generated by the use and operation of the EPS at the
tribes' bingo facilities. As an inducement to consummate the March 1998 sale,
the Company had agreed to issue to the original third party issuer, and did
issue to EPLLC-2, warrants to purchase 20,000 shares of common stock
(exercisable for a period of five years, non-exercisable in the first year) at
an exercise price of $9.44 per share, which was the market value of the common
stock on the date the equipment purchase agreement was executed. The estimated
fair market value of these warrants was $1,000 and has been recorded as
additional cost of sales. As an inducement to consummate the June 1998 sale, the
Company issued to EPLLC-2 warrants to purchase 262,500 shares of common stock
(exercisable for a period of five years, non-exercisable in the first year) at
an exercise price of $7.00 per share which was in excess of the market value of
the common stock on the date the equipment purchase agreement was executed
($3.50 per share). The estimated fair market value of these warrants was $26,250
and has been recorded as additional cost of sales.

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

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

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

          In connection with the sale of the equipment, the Company also entered
into a management agreement with EPLLC and EPLLC-2 whereby the Company is
responsible for proposing, establishing and modifying interactive game
procedures and the related game accounting procedures; supervising and
administering the rental agreement with the Indian tribe; using its best efforts
to re-lease the purchased equipment to other parties if the present rental
agreement is terminated; collecting all rents due under the rental agreement;
performing



                                      -34-
<PAGE>   35




all necessary repairs and maintenance, but not bearing any risk of loss for
damages; conducting necessary marketing; maintaining insurance; and paying all
sales and use taxes and performing other administrative functions. As
compensation for these services, the Company will receive $10.00 per EPS  as a
re-leasing fee and $10.00 per EPS per month as a management fee ($15.00 per EPS
per month in the case of EPLLC-2). The Company has the option to repurchase the
equipment at its then fair market value if after giving effect to the payment
of such repurchase price and the net rental income received by EPLLC and
EPLLC-2, respectively, such entity has received a 20% internal rate of return.

          During 1998, EPLLC and EPLLC-2 paid $175,000 in management fees to the
Company pursuant to these contracts.

          Because of uncertainties relating to the legality of the Company's
interactive gaming activities and the ability of lenders to obtain rights to
collateral located on Indian lands, the Company has found it difficult to obtain
equipment purchase financing on terms acceptable to the Company. Accordingly,
the Company believes that the terms of the equipment sales to EPLLC and EPLLC-2
are at least as favorable as could have been obtained from more traditional
sources of financing.

CONSULTING AGREEMENT

          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 has a term of five years, but may be terminated by either
party with six months notice given at any time after January 1, 1999. Mr.
Montgomery is compensated at the rate of $126,000 annually, and received a bonus
of $57,500 in September 1998 and is to receive 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 office space in Topeka, Kansas.

AMERICAN GAMING NETWORK

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


                                      -35-
<PAGE>   36




ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

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

<TABLE>
<CAPTION>

<S>                                                                                                             <C>
Report of Independent Accountants................................................................................41

Consolidated Balance Sheet, September 30, 1998...................................................................42

Consolidated Statements of Operations, Years Ended September 30,
          1998 and 1997..........................................................................................44

Consolidated Statements of Changes in Stockholders Equity, Years Ended
          September 30, 1998 and 1997............................................................................45

Consolidated Statements of Cash Flows, Years Ended September 30,
          1998 and 1997..........................................................................................46

Notes to Consolidated Financial Statements.......................................................................47
</TABLE>


(a) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS ANNUAL REPORT:

<TABLE>
<CAPTION>

Exhibit No.                                 Title                                                Location
-----------                                 -----                                                --------
<S>                        <C>                                                                     <C>
3.1                        Amended and Restated Articles of Incorporation                          (4)
3.2                        Bylaws                                                                  (1)
10.1                       Form of Integrated Gaming Services Agreement                            (1)
10.2                       Contingent Grand Prize Risk Assumption
                            Agreement dated October 1, 1995, between
                            the Company and SCA Promotions, Inc.                                   (2)
10.3                       Form of 1992-3 Warrant Certificate Issued by the Company                (1)

10.4                       Form of 1995 Warrant Certificate Issued by the Company                  (1)
10.5                       Registration Rights Agreement dated
                            January 23, 1995 between the Company
                            and holders of certain Warrants                                        (1)
10.6                       Registration Rights Agreement dated January 23, 1995
                            between the Company and holders of certain Warrants                    (1)
10.7                       Registration Rights Agreement among  the Company and holders of
                             certain Warrants                                                      (2)
10.8                       1994 Employee Stock Option Plan                                         (1)
10.9                       1994 Director Stock Option Plan                                         (1)
10.10                      1996 Stock Incentive Plan                                               (2)
10.11                      President's Plan                                                        (7)
10.12                      Unit Purchase Agreement dated August 14, 1996 between
                            the Company and the AGN Investor Group                                 (2)
10.13                      Right of First Refusal Agreement dated  August 14, 1996
                             between the Company  and the AGN Investor Group                       (2)

</TABLE>




                                      -36-

<PAGE>   37

<TABLE>


<S>                        <C>                                                                     <C>

10.14                      Put/Call Agreement dated August 14, 1996
                             between the Company and AGN Venturer L.L.C.                           (2)
10.15                      Registration Rights Agreement between
                             the Company and AGN Venturer L.L.C.                                   (2)
10.16                      Limited Liability Company Agreement
                             of American Gaming Network L.L.C.                                     (2)
10.17                      Certificate of Merger of American  Gaming Network LP into
                             American Gaming Network L.L.C.                                        (2)
10.18                      Form of Several Guaranty of AGN Investor Group                          (2)
10.19                      Form of Amendment to Warrants                                           (3)
10.20                      Form of Class A Warrant                                                 (5)
10.21                      Form of Class B Warrant                                                 (5)
10.22                      Warrant Agreement dated November 12, 1996 between
                            the Company and Corporate Stock Transfer, as Warrant Agent             (5)
10.23                      Amendment to Warrant Agreement, dated July 18, 1997                     (5)
10.24                      Consulting Agreement, dated April 15, 1998, between the
                           Company and Larry D. Montgomery.                                        (7)
10.25                      Amendment to Consulting Agreement dated August 31, 1998.                (7)
10.26                      Equipment Purchase Agreement (June 1998)                                (7)
10.27                      Rental Pool Agreement (June 1998)                                       (7)
10.28                      Management Agreement (June 1998)                                        (7)
10.29                      Equipment Purchase Agreement (March 1998)                               (7)
10.30                      Rental Pool Agreement (March 1998)                                      (7)
10.31                      Management Agreement (March 1998)                                       (7)
10.32                      Equipment Purchase Agreement (June 1997)                                (7)
10.33                      Rental Pool Agreement (June 1997)                                       (7)
10.34                      Management Agreement (June 1997)                                        (7)
10.35                      Equipment Purchase Agreement (September 1997)                           (7)
10.36                      Rental Pool Agreement (September 1997)                                  (7)
10.37                      Management Agreement (September 1997)                                   (7)
10.38                      Shareholder Rights Plan                                                 (6)
21.1                       Subsidiaries of Registrant                                              (7)
23.1                       Consent of PricewaterhouseCoopers LLP                                   (7)
24.1                       Power of Attorney (included on page 38)                                 (7)
27.1                       Financial Data Schedule                                                 (7)
</TABLE>

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

(1)       Indicates incorporated by reference to the Company's Form 10-KSB filed
          with the Commission for the fiscal year ended September 30, 1994.

(2)       Indicates incorporated by reference to the Company's Form 10-KSB filed
          with the Commission for the fiscal year ended September 30, 1996.

(3)       Indicates incorporated by reference to the Company's Registration
          Statement on Form SB-2 filed with the Commission on July 3, 1997.

(4)       Indicates incorporated by reference to the Company's Form 10-QSB filed
          with the Commission for the quarter ended March 31, 1997.

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




                                      -37-
<PAGE>   38




(6)       Incorporated by reference to the Company's registration statement on
          Form 8-A, filed with the Commission on October 23, 1998.

(7)       Filed herewith.

(b) THERE WERE NO REPORTS ON FORM 8-K FILED DURING THE FOURTH QUARTER OF FISCAL
YEAR 1998.



                                      -38-


<PAGE>   39
                                POWER OF ATTORNEY

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


                                   SIGNATURES


         In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.

                                           MULTIMEDIA GAMES, INC.




Dated: December 16 , 1998                  By:   /S/ Frederick E. Roll
                                                 ---------------------
                                                 Frederick E. Roll
                                                 Vice President - Controller and
                                                 Chief Financial Officer




                                      -39-
<PAGE>   40


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


<TABLE>
<S>                                     <C>                                     <C>
/S/ Gordon T. Graves                    Chairman of the Board                   December 16, 1998
-------------------------------         Chief Executive
Gordon T. Graves                        Officer and Director                    

/S/ Frederick E. Roll                   Vice President and                      December 16, 1998
-------------------------------         CFO
 Frederick E. Roll                                                              

/S/ Larry D. Montgomery                 Vice Chairman of the Board              December 16, 1998
-------------------------------         and Director
Larry D. Montgomery                     


/S/ Thomas W. Sarnoff                   Director                                December 16, 1998
-------------------------------
Thomas W. Sarnoff


/S/ Gregory N. Stern                    Director                                December 16, 1998
-------------------------------
Gregory N. Stern
</TABLE>




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

         The Registrant has not sent to its security holders any annual report
covering the Registrant's last fiscal year, or any proxy statement, form of
proxy or other proxy soliciting material with respect to any annual or meeting
of security holders. In connection with its 1999 annual meeting of stockholders,
the Company anticipates sending its 1998 annual report and proxy materials to
security holders.




                                      -40-
<PAGE>   41


                        REPORT OF INDEPENDENT ACCOUNTANTS


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


         In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows present fairly, in all material respects, the financial position
of Multimedia Games, Inc. and Subsidiaries at September 30, 1998, and the
results of their operations and their cash flows for each of the two years in
the period ended September 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

                                              PRICEWATERHOUSECOOPERS LLP

Tulsa, Oklahoma
December 4, 1998





                                      -41-
<PAGE>   42


                     MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                               SEPTEMBER 30, 1998


<TABLE>
                                    ASSETS
<S>                                                                       <C>        
Current Assets:
  Cash and cash equivalents                                               $ 1,881,000
  Accounts Receivable:
         Trade, net of allowance for doubtful accounts
         of $181,000                                                        2,005,000
         Other                                                                637,000
   Inventory                                                                2,534,000
   Prepaid expenses                                                           568,000
   Notes receivable                                                           783,000
   Notes receivable - related parties                                       1,227,000
   Deferred tax asset                                                         246,000
                                                                          -----------

   Total current assets                                                     9,881,000



Restricted cash and cash equivalents                                        1,636,000
Property and equipment, net                                                 7,653,000
Other assets                                                                  110,000
Goodwill, net                                                                 445,000
                                                                          -----------

Total assets                                                              $19,725,000
                                                                          ===========
</TABLE>

                              (Continued)




                                      -42-
<PAGE>   43

                     MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                               SEPTEMBER 30, 1998


(Continued)

<TABLE>
                     LIABILITIES AND STOCKHOLDERS' EQUITY

<S>                                                                       <C>         
Current liabilities:
   Notes Payable                                                          $     70,000
   Current portion of long-term debt                                           336,000
   Accounts payable and accrued expenses                                     4,371,000
   Prize fulfillment fees payable                                              296,000
                                                                          ------------
   Total current liabilities                                                 5,073,000
                                                                          ------------

Long-term debt                                                                 531,000
Other long-term liabilities                                                  1,429,000
Deferred tax liability                                                          15,000

Commitments and Contingencies (Note 8)

Stockholders' equity:
   Preferred stock, Series A, $.01 par value, 2,000,000                          1,000
      shares authorized, 90,789 shares
      issued and outstanding
   Common stock, $.01 par value, 25,000,000 shares                              54,000
      authorized, 5,439,824 shares issued and
      5,405,825 shares outstanding
   Additional paid-in capital                                               12,803,000
   Stockholder notes receivable                                               (817,000)
   Treasury stock, 33,999 shares at cost                                       (87,000)
   Retained Earnings                                                           723,000
                                                                          ------------
   Total stockholders' equity                                               12,677,000
                                                                          ------------

Total liabilities and stockholders' equity                                $ 19,725,000
                                                                          ============
</TABLE>



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





                                      -43-
<PAGE>   44


                     MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997


<TABLE>
<CAPTION>
                                                                              1998             1997
                                                                          ------------     ------------
<S>                                                                       <C>              <C>         
Revenues:
   Gaming revenue                                                         $ 61,640,000     $ 34,011,000
   Electronic player station sales                                           1,273,000          808,000
   Electronic player station sales - related party                           3,750,000        2,436,000
   Electronic player station lease revenue                                   3,416,000        1,786,000
   Other                                                                       458,000           11,000
                                                                          ------------     ------------

  Total revenues                                                            70,537,000       39,052,000
                                                                          ------------     ------------


Operating costs and expenses:
   Bingo prizes and related costs                                            8,823,000        9,381,000
   Allotments to hall operators                                             39,587,000       17,902,000
   Cost of electronic player stations sold                                     805,000          538,000
   Cost of electronic player stations sold - related party                   1,878,000        1,183,000
   Salaries and wages                                                        3,017,000        2,227,000
   Selling, general and administrative expenses                              9,932,000        5,049,000
   Amortization and depreciation                                             2,950,000        1,775,000
                                                                          ------------     ------------

   Total operating costs and expenses                                       66,992,000       38,055,000
                                                                          ------------     ------------


                       Operating income                                      3,545,000          997,000

Interest income                                                                284,000           29,000
Interest expense                                                              (125,000)        (167,000)
                                                                          ------------     ------------
Income before income taxes                                                   3,704,000          859,000
Income tax benefit (expense)                                                (1,489,000)         452,000
                                                                          ------------     ------------

Net income                                                                $  2,215,000     $  1,311,000
                                                                          ============     ============

Basic earnings per share                                                  $        .40     $        .29
                                                                          ============     ============

Diluted earnings per share                                                $        .35     $        .23
                                                                          ============     ============
</TABLE>


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




                                      -44-
<PAGE>   45



                     MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997



<TABLE>
<CAPTION>
                                                     PREFERRED STOCK                   COMMON STOCK
                                               -----------------------------    ----------------------------    ------------    
                                                  NUMBER                           NUMBER                         ADDITIONAL    
                                                    OF                               OF                            PAID-IN      
                                                  SHARES           AMOUNT          SHARES          AMOUNT          CAPITAL      
                                               ------------     ------------    ------------    ------------    ------------    
<S>                                                 <C>         <C>                <C>          <C>             <C>             
Balance, September 30, 1996                         134,318     $      1,000       2,859,200    $     29,000    $  6,296,000    
Exercise of common stock
     warrants                                          --               --           625,216           6,000       3,154,000    
Sale of common stock                                   --               --         1,159,500          12,000       2,800,000    
Exercise of stock options                              --               --            47,750            --           138,000    
Conversion of preferred stock
     to common stock                                (25,126)            --           125,630           1,000          (1,000)   
Payment of shareholders notes                          --               --              --              --              --      
Registration fees and offering
     costs                                             --               --              --              --          (108,000)   
Preferred stock dividends
     ($1.10 per preferred share)                       --               --              --              --              --      
Value of options and warrants
     associated with consulting services               --               --              --              --            10,000    
Value of warrants associated
     with related party equipment sales                --               --              --              --             8,000    
Net income                                             --               --              --              --              --      
                                               ------------     ------------    ------------    ------------    ------------    
Balance, September 30, 1997                         109,192            1,000       4,817,296          48,000      12,297,000    
Exercise of common stock
     warrants                                          --               --             4,388            --             9,000    
Exercise of stock options                              --               --           114,125           1,000         288,000    
Conversion of preferred stock
     to common stock                                (18,403)            --            92,015           1,000          (1,000)   
Exercise of AGN option                                 --               --           412,000           4,000         242,000    
Registration fees and offering
     costs                                             --               --              --              --           (59,000)   
Value of warrants associated with
     related party equipment sales                     --               --              --              --            27,000    
Preferred stock dividends
     ($1.10 per preferred share)                       --               --              --              --              --      
Net income                                             --               --              --              --              --
                                               ------------     ------------    ------------    ------------    ------------    
Balance, September 30, 1998                          90,789     $      1,000       5,439,824    $     54,000    $ 12,803,000    
                                               ============     ============    ============    ============    ============    



<CAPTION>
                                                  STOCKHOLDER                       RETAINED           TOTAL
                                                    NOTES                           EARNINGS        STOCKHOLDERS'
                                                  RECEIVABLE     TREASURY STOCK     (DEFICIT)          EQUITY
                                                 ------------     ------------     ------------     ------------
<S>                                              <C>              <C>              <C>              <C>         
Balance, September 30, 1996                      $ (1,271,000)    $    (87,000)    $ (2,574,000)    $  2,394,000
Exercise of common stock
     warrants                                         (13,000)            --               --          3,147,000
Sale of common stock                                     --               --               --          2,812,000
Exercise of stock options                                --               --               --            138,000
Conversion of preferred stock
     to common stock                                     --               --               --               --
Payment of shareholders notes                         688,000             --               --            688,000
Registration fees and offering
     costs                                               --               --               --           (108,000)
Preferred stock dividends
     ($1.10 per preferred share)                         --               --           (123,000)        (123,000)
Value of options and warrants
     associated with consulting services                 --               --               --             10,000
Value of warrants associated
     with related party equipment sales                  --               --               --              8,000
Net income                                               --               --          1,311,000        1,311,000
                                                 ------------     ------------     ------------     ------------
Balance, September 30, 1997                          (596,000)         (87,000)      (1,386,000)      10,277,000
Exercise of common stock
     warrants                                          (4,000)            --               --              5,000
Exercise of stock options                            (149,000)            --               --            140,000
Conversion of preferred stock
     to common stock                                     --               --               --               --
Exercise of AGN option                                (68,000)            --               --            178,000
Registration fees and offering
     costs                                               --               --               --            (59,000)
Value of warrants associated with
     related party equipment sales                       --               --               --             27,000
Preferred stock dividends
     ($1.10 per preferred share)                         --               --           (106,000)        (106,000)
Net income                                               --               --          2,215,000        2,215,000
                                                 ------------     ------------     ------------     ------------
Balance, September 30, 1998                      $   (817,000)    $    (87,000)    $    723,000     $ 12,677,000
                                                 ============     ============     ============     ============
</TABLE>



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




                                      -45-
<PAGE>   46


                     MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997


<TABLE>
<CAPTION>
                                                                         1998            1997
                                                                     -----------     -----------
<S>                                                                  <C>             <C>        
Cash flows from operating activities:
   Net income                                                        $ 2,215,000     $ 1,311,000
   Adjustments to reconcile net income to cash
      provided by (used for) operating activities:
      Amortization and depreciation                                    2,950,000       1,775,000
      Loss on write-off of software costs                                395,000            --
      Deferred tax benefit (expense)                                     227,000        (458,000)
      Other non-cash expenses                                             (7,000)        119,000
      (Increase) decrease in:
         Accounts receivable                                          (1,076,000)     (1,274,000)
         Notes receivable                                               (497,000)       (286,000)
         Notes receivable - related party                              1,210,000      (2,437,000)
         Inventory                                                    (2,023,000)       (153,000)
        Prepaid expenses                                                (507,000)         31,000
        Other assets                                                     381,000        (144,000)
      Increase (decrease) in:
         Accounts payable and accrued expenses                         2,518,000         561,000
         Hall's share of surplus                                            --          (120,000)
         Prize fulfillment fees payable                                 (301,000)        277,000
         Other long-term liabilities                                     (13,000)        231,000
                                                                     -----------     -----------
Net cash provided by (used for) operating activities                   5,472,000        (567,000)
                                                                     -----------     -----------
Cash flows from investing activities:
   Acquisition of property and equipment                              (5,983,000)     (4,104,000)
   Increase in cash and restricted cash balances                         (13,000)       (249,000)
                                                                     -----------     -----------
   Net cash provided by (used for) investing activities               (5,996,000)     (4,353,000)
                                                                     -----------     -----------
Cash flows from financing activities:
   Proceeds from sale of common stock including collection of
      shareholder notes                                                  264,000       5,877,000
   Proceeds from debt                                                    335,000         658,000
   Principal payments of debt                                           (468,000)       (620,000)
   Payment of preferred stock dividends                                 (106,000)       (123,000)
                                                                     -----------     -----------
   Net cash provided by (used for ) financing activities                  25,000       5,792,000
                                                                     -----------     -----------
Net change in cash and cash equivalents                                 (499,000)        872,000
Cash and cash equivalents, beginning of period                         2,380,000       1,508,000
                                                                     -----------     -----------
Cash and cash equivalents, end of period                             $ 1,881,000     $ 2,380,000
                                                                     ===========     ===========

Supplemental cash flow data:
   Interest paid                                                     $   125,000     $   167,000
                                                                     ===========     ===========
   Income taxes paid                                                 $   239,000     $      --
                                                                     ===========     ===========
</TABLE>



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




                                      -46-
<PAGE>   47


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

1.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

           OPERATIONS - The Company designs and develops interactive high-speed
           Class II bingo games and related electronic player stations (EPS) and
           equipment that are 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-pathed
           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 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. Through its MegaRacing division,
           the Company transmits horse racing signals and provides
           communications and data services to off-track betting (OTB)
           facilities operated by Indian tribes.

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

           CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
           debt instruments with remaining maturities when purchased of three
           months or less to be cash equivalents.

           RESTRICTED CASH AND CASH EQUIVALENTS - Restricted cash and cash
           equivalents include $269,000 held in reserve for MegaBingo prizes
           under the provisions of the Integrated Services Agreements with the
           tribes and $1,367,000 representing the present value of investments
           held by the Company's prize fulfilment firm related to outstanding
           jackpot prize winner annuities.

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

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

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

           GOODWILL--The amount paid for the assets of MegaBingo plus the
           liabilities assumed in excess of the fair value of the identifiable
           assets purchased has been recorded as goodwill. The Company 


                                      -47-
<PAGE>   48

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


           amortizes goodwill over 20 years using the straight-line method.
           Goodwill is reported net of accumulated amortization in the
           accompanying financial statements. Accumulated amortization amounted
           to $102,000 and $75,000 at September 30, 1998 and 1997, respectively.

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

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

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

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

           RECLASSIFICATIONS - Certain 1997 balances have been reclassified to
           conform to 1998 reporting.




                                      -48-
<PAGE>   49

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



           INCOME PER COMMON SHARE - Income per common share is computed in
           accordance with Statement of Financial Accounting Standards No. 128
           ("FAS 128"), which is effective for reporting periods ending after
           December 15, 1997. FAS 128 requires the restatement of prior year's
           earnings per share to conform to the new standard. Presented below is
           a reconciliation of income available to common stockholders 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.

<TABLE>
<CAPTION>
                                                             FOR THE YEAR ENDED
                                                                   9/30/98

                                                                                Per Share
                                                   Income           Shares        Amount
                                                 ------------    -----------    -----------
<S>                                              <C>               <C>          <C>        
Net income                                       $ 2,215,000
Less: preferred stock dividends                     (106,000)
                                                 -----------
            Basic EPS:
Income available to common stockholders            2,109,000       5,335,200    $       .40
                                                                                ===========
            Effect of Dilutive Securities:
Options                                                              317,154
Warrants                                                             147,456
Convertible preferred stock                          106,000         442,050
                                                 -----------     -----------


            Diluted EPS:
Income available to common stockholders
plus assumed conversions                         $ 2,215,000       6,241,860    $       .35
                                                 ===========     ===========    ===========
</TABLE>






                                      -49-
<PAGE>   50

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



<TABLE>
<CAPTION>
                                                               FOR THE YEAR ENDED
                                                                   9/30/97

                                                                                Per Share
                                                   Income          Shares         Amount
                                                 -----------     -----------    -----------
<S>                                              <C>               <C>          <C>        
Net income                                       $ 1,311,000
Less: preferred stock dividends                     (123,000)
                                                 -----------
            Basic EPS:
Income available to common stockholders            1,188,000       4,082,231    $       .29
                                                                                ===========
            Effect of Dilutive Securities:
Options                                                              339,042
Warrants                                                             332,199
Convertible preferred stock                          123,000         527,210
Contingent shares                                                    376,945
            Diluted EPS:
Income available to common
stockholders plus assumed conversions            $ 1,311,000       5,657,627    $       .23
                                                 ===========     ===========    ===========
</TABLE>


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

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

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

           STOCK BASED COMPENSATION - The Company applies Accounting Principles
           Board Opinion No. 25 in accounting for its stock option plans. Under
           this standard, no compensation expense is recognized for grants of
           options which include an exercise price equal to or greater than the
           market price of the stock on the date of grant. Accordingly, based on
           the Company's grants in 1998 and 1997, no compensation expense has
           been recognized.





                                      -50-
<PAGE>   51

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



2.         MEGABINGO TRANSACTIONS; INTEGRATED SERVICES AGREEMENTS

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

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

3.         PROPERTY AND EQUIPMENT

           At September 30, 1998, the Company's property and equipment consisted
           of the following:

<TABLE>
<S>                                                         <C>           
                  Gaming and satellite equipment            $    9,469,000
                  Software costs                                 2,599,000
                  Other                                            172,000
                                                            --------------
                  Total property and equipment                  12,240,000
                  Less accumulated depreciation                 (4,587,000)
                                                            --------------

                  Property and equipment, net               $    7,653,000
                                                            ==============
</TABLE>

           Depreciation expense amounted to $2,900,000 and $1,748,000 during the
           years ended September 30, 1998 and 1997, respectively. The net book
           value of capitalized software costs at September 30, 1998, was
           $1,974,000. Depreciation expense related to software cost amounted to
           $621,000 and $310,000, during the years ended September 30, 1998 and
           1997, respectively.

           In addition, in connection with a December 1995 transaction, the
           Company capitalized the $500,000 cost of a license acquired from
           National Gaming International Corporation ("NGI"), which the Company
           began amortizing over the five-year term of the related license
           agreement. As of September 30, 1998, the Company determined that the
           then unamortized portion of this asset and certain additional related
           software development costs (aggregating $395,000 at September 30,
           1998) had been impaired as a result of the status of certain
           litigation (see Note 8) and accordingly reduced the carrying value of
           the asset to zero.




                                      -51-
<PAGE>   52


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

4.         LONG-TERM DEBT

           In December 1998, the Company renewed its Credit Agreement with a
           bank, which provides for a term loan of $561,000 and a revolving line
           of credit of $1.0 million. Principal of $9,510 and interest are
           payable monthly until the loan becomes due on October 31, 2000. The
           interest rate is the Chase Manhattan Bank, N.A. prime rate plus 1/2%
           (9% at September 30, 1998). There was $561,000 outstanding on the
           term loan and $70,000 was outstanding under the revolving line of
           credit at September 30, 1998.

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

           The remaining $306,000 of long-term debt consists primarily of notes
           used to finance the purchase of electronic gaming player station
           components. The notes are due in monthly installments plus interest
           at approximately 12%. The notes are collateralized by the equipment
           purchased.

           Based upon the borrowing rates currently available to the Company for
           borrowings with similar terms, the Company believes that the carrying
           amount of these borrowings at September 30, 1998, approximates fair
           value.

           At September 30, 1998, aggregate future maturities of long-term debt
           are as follows: 1999 - $336,000; 2000 - $199,000 and 2001 - $332,000.




                                      -52-
<PAGE>   53


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

5.         INCOME TAXES

           The provision for income taxes (benefit) consisted of the following
           for the years ended September 30, 1998 and 1997:

<TABLE>
<CAPTION>
Current:                                      1998           1997
                                            ----------     ----------

<S>                                         <C>            <C>    
   Federal                                  $1,128,000     $    --
   State                                       134,000          --
   Deferred                                    227,000       (452,000)
                                            ----------     ----------

Net income tax expense (benefit)            $1,489,000     $ (452,000)
                                            ==========     ==========
</TABLE>


           A reconciliation of the expected income tax expense (benefit) based
           upon the federal statutory rate of 34% and the taxes reflected in tax
           expense is as follows for the years ended September 30, 1998 and
           1997:

<TABLE>
<CAPTION>
                                               1998          1997
                                            ----------    ----------
<S>                                         <C>           <C>       
Expected federal income
   tax expense                              $1,259,000    $  292,000
State income tax expense,
   net of Federal benefit                      148,000          --
Nondeductible expenses                          21,000        15,000
Use of net operating losses                       --        (307,000)
Change in valuation allowance
   of net operating losses                        --        (452,000)
Other                                           61,000          --
                                            ----------    ----------
Net income tax expense (benefit)            $1,489,000    $ (452,000)
                                            ==========    ==========
</TABLE>





                                      -53-
<PAGE>   54

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



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

<TABLE>
<CAPTION>
                                               1998
                                            ---------
<S>                                         <C>      
Deferred tax asset - current:
   Accounts receivable allowance            $  69,000
   Accrued liabilities                         83,000
   Net operating losses                        94,000
                                            ---------

Net current deferred tax asset              $ 246,000
                                            =========

Deferred tax asset - noncurrent:
   Tax credit carryforward                  $   5,000
   Trademark                                   19,000
Deferred tax liability - noncurrent
   Goodwill                                   (13,000)
   Depreciation                               (26,000)
                                            ---------
Net noncurrent deferred tax
(liability)                                 $ (15,000)
                                            =========
</TABLE>

           At September 30, 1998, the Company's net operating loss carryforward
           for income tax purposes was approximately $250,000. Because of the
           sale of equity securities in November 1996, the Company's use of its
           net operating loss carryforwards is limited to approximately $800,000
           in any one taxable year. The Company's net operating loss
           carryforwards expire in 2009 through 2011.

6.         STOCKHOLDERS' EQUITY

           Series A Preferred Stock

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

           During 1997, 25,126 outstanding Series A preferred shares were
           converted into 125,630 shares of the Company's common stock. During
           1998, 18,403 outstanding Series A preferred shares were converted
           into 92,015 shares of the Company's common stock.

           Based on the number of shares of Series A preferred stock outstanding
           at September 30, 1998, an additional 435,195 shares of common stock
           would be issued if a full conversion were to occur. Of the Series A
           preferred stock outstanding, 80,175 shares (convertible into 400,875
           common shares) are owned by or under the control of the Company's
           Chairman/Chief Executive Officer.





                                      -54-
<PAGE>   55

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



           The Series A preferred stock has a liquidation preference over the
           Company's common stock equal to $10 per share of Series A preferred
           stock, or $908,000 in the aggregate at September 30, 1998. The
           holders of the Series A preferred stock are entitled to a cumulative
           preferred dividend, payable quarterly, at the rate of $1.10 per share
           per annum. In the event the Company remains in arrears for more than
           two quarters, holders of the Series A preferred stock voting as a
           class are entitled to elect a majority of the Company's Board of
           Directors.

           Common Stock

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

           Common Stock Warrants and Options

           In connection with past financing arrangements and as compensation
           for consulting and professional services, the Company has issued
           warrants and options to purchase its common stock. The following
           tables summarize such warrant and option activity for 1998 and 1997:




                                      -55-
<PAGE>   56



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


           1998 ACTIVITY:

<TABLE>
<CAPTION>

                                           Number of                                                      Number of              
                                            Warrants/                                                     Warrants/   
Exercise                                    Options                                                        Options    
 Price                                     Outstanding                                                   Outstanding    Exercisable
  Per               Expiration              October 1,                               Expired/            September 30, September 30,
 Share                 Date                   1997         Granted      Exercised    Canceled                1998           1998   
---------          -------------           ---------      ---------     ---------    ---------            ---------    -------------
<C>                <C>                     <C>            <C>           <C>          <C>                  <C>           <C>
$2.00              Sep 97-Jan 98               4,268            --          4,268             --                 --              --
$4.00              Jul 2000                   18,750            --             --             --             18,750          18,750
$6.60              Jul 98                      5,216            --            120          5,096                 --              --
$8.00              Aug 2001                1,792,143            --             --             --          1,792,143       1,792,143
$5.688             Feb 2007                  100,000            --             --             --            100,000         100,000
$8.00              Aug 2007                   54,000            --             --         54,000                 --              --
$10.00             Aug 2007                   54,000            --             --         54,000                 --              --
$12.00             Aug 2007                   54,000            --             --         54,000                 --              --
$10.00             Aug 2002                   27,000            --             --         27,000                 --              --
$11.00             May 2002                   50,000            --             --             --             50,000          50,000
$13.38             Sept 2002                 100,000                       50,000                            50,000          50,000
$9.44*             Mar 2003                       --        20,000             --             --             20,000              --
$7.00*             Jan 2003                       --       262,500             --             --            262,500              --
                                           ---------     ---------      ---------      ---------          ---------       ---------
                                           2,259,377       282,500         54,388        194,096          2,293,393       2,010,893
                                           =========     =========      =========      =========          =========       =========
</TABLE>





                                      -56-
<PAGE>   57

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


         1997 ACTIVITY:

<TABLE>
<CAPTION>

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


            *Indicates warrant/option is not currently exercisable.






                                      -57-
<PAGE>   58


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



7.         STOCK OPTION AND EMPLOYEE BENEFIT PLANS 

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

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

           In August 1996, the Board of Directors of the Company approved the
           1996 Stock Incentive Plan (the 1996 Plan). Under the 1996 Plan,
           various stock based incentive awards may be made including incentive
           stock options, non-qualified stock options, stock appreciation
           rights, restricted stock, performance shares or deferred stock
           purchases. Options issued under the 1996 Plan vest ratably over a
           four-year period from the date of grant. The total number of shares
           of common stock or common stock equivalents that may be issued under
           the 1996 Plan is 543,982 plus an amount equal to 10% of the number of
           shares of common stock issued by the Company after September 30, 1998
           and prior to December 31, 2000. In order to have grants made which
           qualify as incentive stock options, the 1996 Plan was approved by the
           Company's stockholders in March 1997.

           The activity relating to stock option issuances under the above plans
           are as follows for each of the two years ending September 30, 1998
           and 1997:








                                      -58-
<PAGE>   59




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


           1998 ACTIVITY:

<TABLE>
<CAPTION>

                                           Number of                                 
                                            Warrants/                               Number of   
Exercise                                    Options                                  Options    
 Price                                     Outstanding                  Exercised  Outstanding           Exercisable  
  Per               Expiration              October 1,                  Expired/   September 30,         September 30,
 Share                 Date                   1997         Granted      Canceled       1998                   1998
---------          -------------           ---------      ---------     ---------    ---------             ---------
<C>                <C>                        <C>          <C>          <C>            <C>               <C>
1993 PLAN:

$ 1.50                Oct 97                   35,000            --       35,000           --
                            
1994                        
DIRECTOR                    
PLAN:                       
                            
$ 2.50              Jul 2004                   40,000            --           --       40,000            40,000
                            
1994                        
EMPLOYEE                    
PLAN                        
                            
$ 2.00              Mar 2005                   56,000            --       28,000       28,000            17,250
$ 2.50              Jul 2004                  110,000            --           --      110,000           110,000
$ 2.50              Feb 2006                   30,000            --        7,500       22,500             7,500
$ 2.75              Jul 2005                    7,500            --           --        7,500             3,750
$ 4.00              Apr 2006                   19,000            --        5,000       14,000             7,000
                                               
1996 STOCK
INCENTIVE 
PLAN

$ 4.375             Oct 2006                  137,000            --      137,000           --                --
$ 4.750             Jan 2007                   17,000            --       17,000           --                -- 
$ 5.500             Feb 2007                   32,500            --       32,500           --                -- 
$ 5.688             Feb 2007                   69,000            --       69,000           --                -- 
$ 7.141             Feb 2007                   10,000            --       10,000           --                -- 
$ 8.000             Mar 2007                    2,500            --        2,500           --                -- 
$ 9.500             Jan 2008                      --        121,100      121,100           --                -- 
$ 3.813             Oct 2006                      --         85,950           --       85,950            10,950 
                    Jan 2007                      --         17,000        1,750       15,250             2,500 
</TABLE>




                                      -59-
<PAGE>   60


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

<TABLE>
<CAPTION>

                                           Number of                                 
                                            Warrants/                               Number of   
Exercise                                    Options                                  Options    
 Price                                     Outstanding                  Exercised  Outstanding        Exercisable  
  Per               Expiration              October 1,                  Expired/   September 30,      September 30,
 Share                 Date                   1997         Granted      Canceled       1998               1998
---------          -------------           ---------      ---------     ---------    ---------          ---------
<C>                <C>                        <C>          <C>          <C>            <C>               <C>
                  Feb 2007                     --            62,500         7,500       55,000            13,750
                  Mar 2007                     --             2,500            --        2,500               625
                  Jan 2008                     --           118,300         1,500      116,800                --
                  Jun 2008                     --           101,650           200      101,450                --
                  Aug 2008                     --            25,000            --       25,000                --
1998
PRESIDENT'S 
PLAN

$ 3.813           May 2002                     --            27,000            --       27,000                --
$ 3.813           Sept 2002                    --            50,000            --       50,000                --
$ 3.813           Feb 2007                     --            49,000            --       49,000                --
$ 3.813           Aug 2007                     --           162,000            --      162,000                --
$ 3.813           Jan 2008                     --            50,000            --       50,000                --
                                        ---------         ---------     ---------    ---------         ---------
                                          565,500           872,000       475,550      961,950           213,325
                                        =========         =========     =========    =========         =========
</TABLE>




                                      -60-
<PAGE>   61



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


1997 ACTIVITY:


<TABLE>
<CAPTION>
                                                                            
                                           Number of                                Number of   
Exercise                                    Options                                  Options    
 Price                                     Outstanding                  Exercised  Outstanding  
  Per               Expiration              October 1,                  Expired/   September 30,
 Share                 Date                   1996         Granted      Canceled       1997     
---------          -------------           ---------      ---------     ---------    ---------  
<C>                 <C>                    <C>        <C>                <C>          <C>

1993 PLAN:

$1.50                Oct 97                  45,000         --            10,000       35,000

1994 
DIRECTOR
PLAN:

$2.50                Jul 2004                40,000         --                --       40,000


1994 
EMPLOYEE 
PLAN

$2.00                Mar 2005                56,000         --                --       56,000

$2.50                Jul 2004               120,000         --            10,000      110,000

$2.50                Feb 2006                75,000         --            45,000       30,000

$2.75                Jul 2005                15,000         --             7,500        7,500

$4.00                Apr 2006                19,000         --                --       19,000


1996 STOCK
INCENTIVE PLAN

$4.375               Oct 2006                    --    145,000             8,000      137,000

$4.750               Jan 2007                    --     17,000                --       17,000

$5.500               Feb 2007                    --     43,000            10,500       32,500

$5.688               Feb 2007                    --     69,000                --       69,000

$7.141               Feb 2007                    --     10,000                --       10,000

$8.000               Mar 2007                    --      2,500                --        2,500
                                            -------    -------           -------      -------
                                            370,000    286,500            91,000      565,500
                                            =======    =======           =======      =======
</TABLE>




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

           In June 1998, the Board of Directors of the Company approved the
           President's Plan pursuant to which options to purchase 338,000 shares
           of common stock were granted to Clifton Lind as an inducement to
           become the President and Chief Operating Officer of the Company. The
           options are intended to qualify as incentive stock options, subject
           to approval of the stockholders of the Company at the next annual
           meeting of stockholders. All of the options have an exercise price of
           $3.81 per share, which was the market value of the Common Stock on
           the date of grant. None of the options were exercisable at September
           30, 1998. 



                                      -61-
<PAGE>   62


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


           The Company has elected to follow APB Opinion No. 25, "Accounting for
           Stock Issued to Employees," in accounting for its employee stock
           options rather than the alternative fair value accounting provided
           for under SFAS No. 123, "Accounting for Stock-Based Compensation."
           Accordingly, no compensation cost has been recognized in fiscal 1998
           and 1997 associated with employee stock options. Pro forma
           information regarding net income and earnings per share is required
           by SFAS No. 123. This information is required to be determined as if
           the Company had accounted for its employee stock options granted
           subsequent to September 30, 1995, under the fair value method of that
           statement. The fair value of options granted in fiscal years 1998 and
           1997 reported below has been estimated at the date of grant using a
           Black-Scholes option pricing model with the following assumptions:


<TABLE>
<CAPTION>
                                         1998         1997
                                       ---------    ---------
<S>                                    <C>          <C>      
Weighted average Life                  3.5 YEARS    3.5 YEARS
Risk-free interest rate                     5.70%        6.56%
Expected volatility                           72%          72%
Expected dividend yield                None         None
</TABLE>

           The Black-Scholes option valuation model was developed for use in
           estimating the fair value of traded options that have no vesting
           restrictions and are fully transferable. In addition, option
           valuation models require the input of highly subjective assumptions,
           including the expected stock price volatility. Because the Company's
           options have characteristics significantly different from those of
           traded options, and because changes in the subjective input
           assumptions can materially affect the fair value estimate, in the
           opinion of management, the existing models do not necessarily provide
           a reliable single measure of the fair value of its options. The
           weighted average estimated fair value of employee stock options
           granted during 1998 and 1997 was $2.33 and $3.22 per share,
           respectively. The estimated fair value of options granted during 1998
           and 1997 under the Company's stock option plans totaled $2,012,000
           and $631,000, respectively.

           OPTION REPRICING. On June 12, 1998, the Board of Directors of the
           Company canceled all outstanding options held by optionees under the
           1996 Stock Incentive Plan and granted new options to all such
           optionees. The new options were for the same number of shares and
           upon the same terms of expiration and vesting as the canceled
           options, except that the exercise price for the new options was $3.81
           per share, the market value of the Common Stock on June 12, 1998. In
           effect, therefore, the Board of Directors reduced the exercise price
           of all such outstanding options and which had exercise prices at the
           time of cancellation ranging from $4.38 per share to $13.38 per
           share. In connection with the grant under the President's Plan, all
           options and warrants to purchase Common Stock that had previously
           been granted to Mr. Lind in consideration of prior financial and
           consulting services to the Company (aggregating 338,000 shares at
           exercise prices ranging from $5.68 to $13.38 per share) were also
           canceled. A total of 275,300 options granted to over 65 employees
           under the 1996 Stock Incentive Plan were repriced by the June 12,
           1998 action. The estimated fair value of the options canceled in 1998
           in connection with the repricing of employee stock options totaled
           $879,000.


                                      -62-
<PAGE>   63


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


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


<TABLE>
<CAPTION>
                                                 1998             1997
                                            -------------    -------------
<S>                                         <C>              <C>          
Net income:
         As reported                        $   2,215,000    $   1,311,000
         Pro forma                              1,933,000          969,000
Basic earnings per common share:
         As reported                        $         .40    $         .29
         Pro forma                          $         .34    $         .21
Diluted earnings per common share:
         As reported                        $         .35    $         .23
         Pro forma                          $         .31    $         .17
</TABLE>

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

           During 1994, the Company established an employee savings plan
           pursuant to Section 401(K) of the Internal Revenue Code. The plan
           provides for the employees to make tax deferred deposits into the
           plan to the extent of 6% of their annual base compensation. The
           Company matches half of the allowed employee contributions and such
           Company contributions amounted to $56,000 and $34,000 for the years
           ended September 30, 1998 and 1997, respectively.

8.         COMMITMENTS AND CONTINGENCIES

           MEGAMANIA LITIGATION. 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 November 9, 1998, the U.S. Attorney filed a motion with
           the District Court requesting that it alter or amend its judgment.
           The District Court has yet to rule on the November 9 motion.

           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 Company is not able to predict whether either or both of these
           decisions will be appealed by the government to the applicable
           Circuit Court of Appeals or what the outcome of any such appeal would
           be. No assurances can be given that there will be no other challenges
           made to the legality of the 


                                      -63-
<PAGE>   64



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


           Company's interactive bingo activities or that, if made, the Company
           will be successful on the merits. If MegaMania is ultimately
           determined to be Class III gaming, the loss of the MegaMania business
           would 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 effected 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.

           OTHER LITIGATION

           NETWORK GAMING. On January 23, 1998, the Company filed a complaint
           against Network Gaming International Corporation ("NGI") in the
           Federal District Court for the Northern District of Oklahoma alleging
           breach of contract. On February 2, 1998, NGI filed a complaint
           against the Company in the same Federal District Court alleging,
           among other things, breach of contract, misappropriation of trade
           secrets, fraud and interference with prospective advantage. The
           complaint by NGI seeks $62 million in damages and other specified and
           unspecified relief and also names Gordon T. Graves, the Company's
           Chairman of the Board, and Larry D. Montgomery, the Company's former
           President, as individual defendants. These actions are in the very
           preliminary stages and only limited discovery has been taken by
           either party. The Company intends to vigorously defend against the
           claims of NGI and to prosecute its own claim. While the Company
           believes that it will ultimately prevail on the merits, no assurances
           to that effect can be given. In any event, the cost of defending the
           actions could be substantial.

           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.

           These actions are in very preliminary stages. A hearing was held on
           November 20, 1998 by the Multidistrict Litigation Panel established
           under Federal law to determine issues relating to the consolidation
           of the two cases. The Company intends to vigorously defend against
           these claims and expects to prevail on the merits. However, the cost
           of defending against the claims could by substantial.

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



                                      -64-
<PAGE>   65



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


           PRIZE FULFILLMENT FIRM

           In order to reduce the need for prize reserve account funds and to
           further reduce exposure to game deficits during periods of abnormally
           high rates of jackpot prize wins, MBI has engaged a related party
           firm specializing in prize fulfillment services to pay jackpot prizes
           won during the term of a prize fulfillment agreement. The prize
           fulfillment agreement specifies a maximum cumulative liability over
           the term of the contract, in exchange for fees based on gross game
           receipts. Prize fulfillment premiums amounted to $1,157,000 and
           $2,642,000 for the years ended September 30, 1998 and 1997,
           respectively. The current arrangements with such firm expire on
           December 31, 1998. There can be no assurance that the prize
           fulfillment agreement will be available at all or on commercially
           acceptable terms upon the expiration of the existing agreement.

           Under the terms of the prize fulfillment agreement, the Company is
           reimbursed for prizes awarded at an amount equal to the present value
           for the jackpot prize payments less a deductible which is $15,000 per
           occurrence. These prize fulfillment funds are then utilized to
           satisfy the obligation to the jackpot prize winner through a lump-sum
           cash payment or the purchase of an annuity. In those cases where the
           prize winner elects an annuity, the obligation has historically been
           discharged by purchasing annuity contracts from insurance companies
           rated by A.M. Best as A+, with the prize winner listed as the sole
           beneficiary. Purchased annuity contracts entered into prior to April
           15, 1994 by an assignor of such contracts to the Company, which
           provide for various insurance companies to make payments directly to
           prize winners over a specified period of time in the aggregate amount
           of approximately $6,549,000 are outstanding at September 30, 1998.
           The outstanding amounts include 22 annuity contracts aggregating
           approximately $5,349,000 which were purchased from an insurance
           carrier that is currently under an Order of Rehabilitation to the
           Michigan State Commissioner of Insurance. Under this Order, payments
           under all such contracts will continue until ordered otherwise by the
           State of Michigan. It is unknown at this time as to whether further
           court actions will result in reductions in amounts owed under these
           annuity contracts. There can be no assurance that this or any other
           insurance company responsible for outstanding annuities will continue
           to fulfill all their obligations under the annuity contracts.

           The Company is not responsible for any obligations to prize winners
           prior to April 15, 1994, whether in lieu of annuities or in respect
           of shortfalls on annuities or otherwise (except for specifically
           assumed liabilities which amounted to approximately $63,000 at
           September 30, 1998). Further, the Company is not responsible for
           prize annuities awarded during the period April 15, 1994 through
           December 22, 1994, except as to the obligation to discharge
           obligations of the MegaBingo operations with the assets of the
           MegaBingo operation and under the indemnification provisions of the
           AGE Services Agreement. The present value, at September 30, 1998, of
           the prize annuities awarded from April 15, 1994 to December 22, 1994,
           which are not reflected in the financial statements, is $171,000. The
           present value of the prize annuities and market value of the related
           treasury investments at September 30, 1998 of prize annuities awarded
           subsequent to December 23, 1994 through September 30, 1997 was
           approximately $1,367,000, which has been reflected as restricted
           investments and other long-term liabilities in the accompanying
           financial statements.

           Beginning in August 1994, the Company began a policy of funding prize
           annuities with United States Treasury Bills with maturities which
           correspond to the due dates of the annuity payments. Under its
           arrangements with the prize fulfillment firm, the prize fulfillment
           firm purchases the treasury securities 


                                      -65-
<PAGE>   66



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



           and administrates payments to the winners. The Company believes that
           this annuity payment structure will minimize the risk of annuity
           defaults on future prizes awarded.

           OPERATING LEASES

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

<TABLE>
<S>                                              <C>      
                           1999                  $  202,000
                           2000                  $  185,000
                           2001                  $  122,000
                           2002                  $   39,000

</TABLE>

           Rental expense during fiscal years 1998 and 1997 amounted to $229,000
           and $131,000, respectively.

9.         RELATED PARTY TRANSACTIONS

           In March 1998, the Company entered into an agreement to sell
           electronic player stations and related equipment to a third party for
           a sales price of approximately $2.4 million. The sales price was paid
           in March 1998 by delivery to the Company of a promissory note of the
           third party purchaser that was due and payable on or before April 30,
           1998. Subsequent to March 31, 1998, the third party purchaser
           assigned its right under the purchase agreement to a newly-formed
           limited liability company ("EPLLC-2"). An affiliate of Gordon T.
           Graves, the Company's Chairman of the Board and Chief Executive
           Officer, and Clifton Lind, the Company's President and Chief
           Operating Officer, each owned a 10.5% interest in EPLLC-2. Mr. Graves
           also owns and controls the corporation having management authority
           over EPLLC-2. The terms of the sale which was assigned to EPLLC-2 are
           the same as the original terms entered into with the third party
           purchaser in March 1998. The promissory note was paid by EPLLC-2 on
           May 15, 1998.

           In June 1998, the Company sold electronic player stations and related
           equipment to EPLLC-2 for a sales price of approximately $1.4 million,
           which included a non-refundable deposit of $140,000 received on the
           effective date of the transaction. The sales price was paid in June
           1998 by delivery to the Company of cash of $140,000 and a promissory
           note of EPLLC-2 that was due and payable on or before July 15, 1998
           out of funds contributed to EPLLC-2 from a group of investors that
           did not include either Mr. Graves or Mr. Lind or any other officer,
           director or employee of the Company. As a result of the additional
           contribution, the ownership interest of each of Mr. Graves and Mr.
           Lind in EPLLC-2 was reduced to 6.36%. Mr. Graves continues to own and
           control the corporation having management authority over EPLLC-2.

           The EPS and related equipment purchased by EPLLC-2 has been leased to
           a number of Indian tribes under terms where the Company and EPLLC-2
           share in a percentage of the revenues generated by the use and
           operation of the EPS at the tribes' bingo facilities. As an
           inducement to consummate the March 1998 sale, the Company had agreed
           to issue to the original third party issuer, and did issue to
           EPLLC-2, warrants to purchase 20,000 shares of common stock
           (exercisable for a period of five years, non-exercisable in the first
           year) at an exercise price of $9.44 per share, which was the market
           value of the common stock on the date the equipment purchase
           agreement was executed. The estimated fair 


                                      -66-
<PAGE>   67



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



           market value of these warrants was $1,000 and has been recorded as
           additional cost of sales. As an inducement to consummate the June
           1998 sale, the Company issued to EPLLC-2 warrants to purchase 262,500
           shares of common stock (exercisable for a period of five years,
           non-exercisable in the first year) at an exercise price of $7.00 per
           share which was in excess of the market value of the common stock on
           the date the equipment purchase agreement was executed ($3.50 per
           share) The estimated fair market value of these warrants was $26,250
           and has been recorded as additional cost of sales.

           In connection with the sales of the electronic player stations to
           EPLLC-2, the Company recorded revenues of $3,750,000 during the year
           ended September 30, 1998 with related costs of sales of $1,878,000.

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

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

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

           As an inducement to consummate the June 1997 sale, the Company issued
           to EPLLC warrants to purchase 50,000 shares of common stock at an
           exercise price of $11.00 per share, which was the market value of the
           common stock on the date of issuance. The estimated fair market value
           of these warrants was $2,500 and has been recorded as additional cost
           of sales. As an inducement to consummate the September 1997 sale, the
           Company issued to EPLLC warrants to purchase 100,000 shares of common
           stock at an exercise price of $13.38 per share which was the market
           value of the common stock on the date of issuance. The estimated fair
           market value of these warrants was $5,000 and has been recorded as 


                                      -67-
<PAGE>   68



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



           additional cost of sales. The warrants will become exercisable one
           year after the date of issue and expire five years after the date of
           issue. The warrants are redeemable by the Company at $.10 per share
           if the closing price of the common stock for 20 consecutive trading
           days has been at least 150% of the applicable exercise price.

           In connection with the sale of the equipment, the Company also
           entered into a management agreement with EPLLC and EPLLC-2 whereby
           the Company is responsible for proposing, establishing and modifying
           interactive game procedures and the related game accounting
           procedures; supervising and administering the rental agreement with
           the Indian tribe; using its best efforts to re-lease the purchased
           equipment to other parties if the present rental agreement is
           terminated; collecting all rents due under the rental agreement;
           performing all necessary repairs and maintenance, but not bearing
           any risk of loss for damages; conducting necessary marketing;
           maintaining insurance; and paying all sales and use taxes and
           performing other administrative functions. As compensation for these
           services, the Company will receive $10.00 per electronic player
           station as a re-leasing fee and $10.00 per electronic player station
           per month as a management fee ($15.00 per electronic player station
           per month in the case of EPLLC-2). The Company has the option to
           repurchase the equipment at its then fair market value if after
           giving effect to the payment of such repurchase price and the net
           rental income received by EPLLC and EPLLC-2, respectively, such
           entity has received a 20% internal rate of return.

           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 has a term of five
           years, but may be terminated by either party with six months notice
           given at any time after January 1, 1999. Mr. Montgomery is
           compensated at the rate of $126,000 annually, and received a bonus of
           $57,500 in September 1998 and is to receive 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.

10.        ELECTRONIC PLAYER STATION LEASES

           The Company sells its interactive gaming electronic player stations
           to its customers for cash or through revenue sharing arrangements.
           Under the revenue sharing arrangements, a portion of the revenue from
           the player stations is paid to the Company until the sales price of
           the unit, plus interest, is recovered. Approximately $1,786,000 was
           received under such provisions during 1997 and $3,416,000 in 1998.
           Outstanding principal under equipment sales pursuant to such revenue
           sharing arrangements amounted to $4,152,000 at September 30, 1998.
           Generally, title to the player stations transfers to the lessee at
           the end of the lease period. Revenue from the equipment sales
           pursuant to revenue sharing is recorded as revenue as it is earned
           because the Company generally must continue to operate the electronic
           player station network in order to realize the sales proceeds. There
           can be no assurance that the Company will realize the entire amount
           of $4,152,000 at September 30, 1998, because customers could elect to
           remove the player stations prior to their being fully paid for or
           because the economic performance of the player stations at a
           particular location is not sufficient to amortize the principal of
           the revenue sharing obligation.



                                      -68-
<PAGE>   69




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


           The cost and net book value at September 30, 1998 of electronic
           player station lease equipment amounted to $3,204,000 AND $1,506,000,
           respectively. Electronic player station lease equipment is
           depreciated over a three year period unless the rate of payments
           being received in relation to total payments indicates transfer of
           title will occur to the lessee on a more rapid rate.

11.        CONCENTRATIONS OF CREDIT RISK

           The Company maintains its cash in bank deposit accounts which at
           times may exceed the federal depository insurance limits. As of
           September 30, 1998, the Company had concentrations of cash in one
           bank totaling approximately $1,400,000. The Company has not
           experienced any losses on such accounts in the past.

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

           Approximately 48% and 45% of gaming revenues during the years ended
           September 30, 1998 and 1997, respectively, were derived from halls
           operated by four tribes. Two tribes each accounted for approximately
           17% of gaming revenues in 1998 and one tribe accounted for
           approximately 26% of gaming revenues in 1997. Accounts receivable
           from one tribe at September 30, 1998, accounted for approximately 30%
           of total trade accounts receivable.

           Notes receivable consist of financial instruments issued by customers
           for the purchase of EPS. Substantially all of the Company's notes
           receivable are from Native American Indian tribes or their gaming
           enterprises, as discussed above. Notes receivable-related parties are
           due from EPLLC or EPLLC-II, as discussed in Note 9. All of the
           Company's notes receivable are collateralized by the related EPS.



                                      -69-

<PAGE>   70
                                 EXHIBIT INDEX
                                 -------------
<TABLE>
<CAPTION>

Exhibit No.                                 Title                                                Location
-----------                                 -----                                                --------
<S>                        <C>                                                                     <C>
3.1                        Amended and Restated Articles of Incorporation                          (4)
3.2                        Bylaws                                                                  (1)
10.1                       Form of Integrated Gaming Services Agreement                            (1)
10.2                       Contingent Grand Prize Risk Assumption
                            Agreement dated October 1, 1995, between
                            the Company and SCA Promotions, Inc.                                   (2)
10.3                       Form of 1992-3 Warrant Certificate Issued by the Company                (1)

10.4                       Form of 1995 Warrant Certificate Issued by the Company                  (1)
10.5                       Registration Rights Agreement dated
                            January 23, 1995 between the Company
                            and holders of certain Warrants                                        (1)
10.6                       Registration Rights Agreement dated January 23, 1995
                            between the Company and holders of certain Warrants                    (1)
10.7                       Registration Rights Agreement among  the Company and holders of
                             certain Warrants                                                      (2)
10.8                       1994 Employee Stock Option Plan                                         (1)
10.9                       1994 Director Stock Option Plan                                         (1)
10.10                      1996 Stock Incentive Plan                                               (2)
10.11                      President's Plan                                                        (7)
10.12                      Unit Purchase Agreement dated August 14, 1996 between
                            the Company and the AGN Investor Group                                 (2)
10.13                      Right of First Refusal Agreement dated  August 14, 1996
                             between the Company  and the AGN Investor Group                       (2)

</TABLE>



<PAGE>   71

<TABLE>


<S>                        <C>                                                                     <C>

10.14                      Put/Call Agreement dated August 14, 1996
                             between the Company and AGN Venturer L.L.C.                           (2)
10.15                      Registration Rights Agreement between
                             the Company and AGN Venturer L.L.C.                                   (2)
10.16                      Limited Liability Company Agreement
                             of American Gaming Network L.L.C.                                     (2)
10.17                      Certificate of Merger of American  Gaming Network LP into
                             American Gaming Network L.L.C.                                        (2)
10.18                      Form of Several Guaranty of AGN Investor Group                          (2)
10.19                      Form of Amendment to Warrants                                           (3)
10.20                      Form of Class A Warrant                                                 (5)
10.21                      Form of Class B Warrant                                                 (5)
10.22                      Warrant Agreement dated November 12, 1996 between
                            the Company and Corporate Stock Transfer, as Warrant Agent             (5)
10.23                      Amendment to Warrant Agreement, dated July 18, 1997                     (5)
10.24                      Consulting Agreement, dated April 15, 1998, between the
                           Company and Larry D. Montgomery.                                        (7)
10.25                      Amendment to Consulting Agreement dated August 31, 1998.                (7)
10.26                      Equipment Purchase Agreement (June 1998)                                (7)
10.27                      Rental Pool Agreement (June 1998)                                       (7)
10.28                      Management Agreement (June 1998)                                        (7)
10.29                      Equipment Purchase Agreement (March 1998)                               (7)
10.30                      Rental Pool Agreement (March 1998)                                      (7)
10.31                      Management Agreement (March 1998)                                       (7)
10.32                      Equipment Purchase Agreement (June 1997)                                (7)
10.33                      Rental Pool Agreement (June 1997)                                       (7)
10.34                      Management Agreement (June 1997)                                        (7)
10.35                      Equipment Purchase Agreement (September 1997)                           (7)
10.36                      Rental Pool Agreement (September 1997)                                  (7)
10.37                      Management Agreement (September 1997)                                   (7)
10.38                      Shareholder Rights Plan                                                 (6)
21.1                       Subsidiaries of Registrant                                              (7)
23.1                       Consent of PricewaterhouseCoopers LLP                                   (7)
24.1                       Power of Attorney (included on page 38)                                 (7)
27.1                       Financial Data Schedule                                                 (7)
</TABLE>

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

(1)       Indicates incorporated by reference to the Company's Form 10-KSB filed
          with the Commission for the fiscal year ended September 30, 1994.

(2)       Indicates incorporated by reference to the Company's Form 10-KSB filed
          with the Commission for the fiscal year ended September 30, 1996.

(3)       Indicates incorporated by reference to the Company's Registration
          Statement on Form SB-2 filed with the Commission on July 3, 1997.

(4)       Indicates incorporated by reference to the Company's Form 10-QSB filed
          with the Commission for the quarter ended March 31, 1997.

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

(6)       Incorporated by reference to the Company's registration statement on
          Form 8-A, filed with the Commission on October 23, 1998.

(7)       Filed herewith.