UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

    FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

     FOR THE TRANSITION PERIOD FROM ______________ TO ______________

                         COMMISSION FILE NUMBER 0-28294


                              SILICON GAMING, INC.
             (Exact Name of Registrant as Specified in Its Charter)


         California                                             77-0357939
(State or Other Jurisdiction of                              (I.R.S. Employer
 Incorporation or Organization)                           Identification Number)

                              2800 W. Bayshore Road
                               Palo Alto, Ca 94303
                    (Address of Principal Executive Offices)

                            Telephone: (650) 842-9000
              (Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 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 [ ]

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
Common Stock, as of the latest practicable date.

               35,279,976 shares of Common Stock, $.001 par value,
                    were outstanding as of October 31, 2000.
<PAGE>
                              SILICON GAMING, INC.
                          QUARTERLY REPORT ON FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2000

                                      INDEX

                                                                            PAGE
                                                                            ----
PART I FINANCIAL INFORMATION

     Item 1. Financial Statements

        Consolidated Balance Sheets--September 30, 2000
          and December 31, 1999 ............................................   3

        Consolidated Statements of Operations--Three months and nine
          months ended September 30, 2000 and September 30, 1999............   4

        Consolidated Statements of Cash Flows--Nine months ended
          September 30, 2000 and September 30, 1999.........................   5

        Notes to Consolidated Financial Statements..........................   6

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

PART II OTHER INFORMATION

     Item 1. Legal Proceedings..............................................  23

     Item 3. Default upon Senior Securities.................................  23

     Item 6. Exhibits and Reports on Form 8-K...............................  23

Signature...................................................................  24

                                       2
<PAGE>
                          PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                              SILICON GAMING, INC.
                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                              September 30,      December 31,
                                                                  2000              1999
                                                                ---------         ---------
                                                               (Unaudited)
<S>                                                             <C>               <C>
                                     ASSETS
CURRENT ASSETS:
  Cash and equivalents ......................................   $   5,778         $     877
  Short-term investments ....................................          --             1,000
  Accounts receivable (net of allowances of $1,075
    in 2000 and $1,169 in 1999) .............................       1,839             1,188
  Inventories ...............................................       4,158             7,331
  Prepaids and other ........................................         591             1,069
                                                                ---------         ---------
       Total current assets .................................      12,366            11,465
PROPERTY AND EQUIPMENT, NET .................................       2,940             3,795
OTHER ASSETS, NET ...........................................         368               321
                                                                ---------         ---------
                                                                $  15,674         $  15,581
                                                                =========         =========
                    LIABILITIES AND SHAREHOLDERS' DEFICIENCY

CURRENT LIABILITIES:
  Accounts payable ..........................................   $   1,596         $   1,389
  Accrued liabilities .......................................       1,499             1,655
  Deferred revenue ..........................................         119               240
  Line of credit ............................................         750               622
  Current portion of long-term obligations ..................         832             1,165
                                                                ---------         ---------
       Total current liabilities ............................       4,796             5,071
OTHER LONG-TERM LIABILITIES .................................       1,603             1,611
LONG-TERM OBLIGATIONS .......................................      11,954            10,428
LONG-TERM ACCRUED INTEREST ..................................       5,562             5,832

MINORITY INTEREST ...........................................       5,345                --

SHAREHOLDERS' DEFICIENCY
  Common Stock, $.001 par value; 750,000,000 shares
    authorized; shares outstanding: September 30, 2000--
    34,994,042; December 31, 1999-- 30,949,273 ..............      64,139            64,123
  Preferred stock, $.001 par value; 6,884,473 shares
    authorized; shares outstanding at June 30, 2000--
    39,750: (liquidation preference up to $39.75 million)....      20,000            20,000
  Warrants ..................................................       6,465             5,542
  Notes receivable from shareholders ........................        (343)             (345)
  Deferred stock compensation ...............................      (3,774)           (4,646)
  Accumulated deficit .......................................    (100,073)          (92,035)
                                                                ---------         ---------
       Total shareholders' deficiency .......................     (13,586)           (7,361)
                                                                ---------         ---------
                                                                $  15,674         $  15,581
                                                                =========         =========
</TABLE>

                 See notes to consolidated financial statements.

                                       3
<PAGE>
                              SILICON GAMING, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                            Three Months Ended         Nine Months Ended
                                                               September 30,             September 30,
                                                          ----------------------      -------------------
                                                            2000          1999          2000        1999
                                                          --------      --------      --------   --------
<S>                                                      <C>          <C>            <C>        <C>
REVENUE:
  Hardware ..........................................     $  1,974      $    932      $  7,523     $  8,254
  Software ..........................................          425           448         1,761        3,337
  Participation and other ...........................          571           619         1,613        1,796
                                                          --------      --------      --------     --------
       Total revenue.................................     $  2,970      $  1,999      $ 10,897     $ 13,387

OPERATING EXPENSES:
  Cost of sales and related manufacturing expenses...        2,151         1,329         7,105        8,513
  Research and development ..........................        1,746         1,191         3,505        5,023
  Selling, general and administrative ...............        3,912         2,484        10,429        7,969
  Restructuring charges .............................           --            --            --        3,277
                                                          --------      --------      --------     --------
  Total costs and expenses ..........................        7,809         5,004        21,039       24,782
                                                          --------      --------      --------     --------
  Loss from operations ..............................        4,839         3,005        10,142       11,395
  Interest (income)/expense, net ....................           69         1,975           178        5,824
                                                          --------      --------      --------     --------
  Net loss before minority interest .................        4,908                      10,320
  Minority Interest .................................         (869)                       (869)
                                                          --------      --------      --------     --------
NET LOSS ............................................     $  4,039      $  4,980      $  9,451     $ 17,219
                                                          ========      ========      ========     ========

Basic and diluted net loss per share ................     $   0.12      $   0.34      $   0.30     $   1.20
                                                          ========      ========      ========     ========

Shares used in computation ..........................       33,942        14,561        31,463       14,361
                                                          ========      ========      ========     ========
</TABLE>

                 See notes to consolidated financial statements.

                                       4
<PAGE>
                              SILICON GAMING, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                         Nine Months Ended
                                                                           September 30,
                                                                     ------------------------
                                                                       2000            1999
                                                                     --------        --------
<S>                                                                 <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss ....................................................     $ (9,451)       $(17,219)
  Reconciliation to net cash used in operating activities:
   Minority Interest ..........................................         (869)
   Depreciation and amortization ..............................        1,347           3,663
   Accrued interest ...........................................         (270)          3,376
   Accretion of debt discount .................................           --           1,825
   Deferred rent ..............................................           (9)           (105)
   Restructuring charges ......................................           --           3,277
   Provision for bad debt .....................................          (94)            (98)
   Deferred stock compensation ................................          872              --
   Loss from disposal of property .............................           84              --
  Changes in assets and liabilities:
   Accounts receivable ........................................         (557)          3,774
   Inventories ................................................        3,173           1,221
   Prepaids and other .........................................          453            (752)
   Participation units ........................................          445           2,123
   Accounts payable ...........................................          207            (841)
   Accrued liabilities ........................................         (156)         (2,098)
   Other liabilities ..........................................           --             177
   Deferred revenue ...........................................         (121)           (991)
                                                                    --------        --------
       Net cash used in operating activities ..................       (4,947)         (2,668)
                                                                    --------        --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of property and equipment .......................       (1,032)           (238)
  Proceeds from disposal of property and equipment ............           23              --
  Sales and maturities of short-term investments ..............        1,000              --
  Other assets, net ...........................................           --             (66)
                                                                    --------        --------
       Net cash used in investing activities ..................           (9)           (304)
                                                                    --------        --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Sales of Common Stock, net of notes receivable ..............           16              72
  Proceeds from sale of Subsidiary Preferred Stock ............        7,628              --
  Proceeds from issuance of warrants for Subsidiary
  Preferred Stock .............................................          889              --
  Collection of note receivable ...............................            2              18
  Proceeds from debt financing ................................        2,000              --
  Proceeds from term loans and line of credit .................          750              --
  Repayment of bank line of credit ............................         (622)         (3,456)
  Repayment of term loans .....................................           --            (727)
  Repayment of capital lease obligations ......................         (806)           (232)
                                                                    --------        --------
       Net cash provided by (used in) financing activities.....        9,857          (4,325)
                                                                    --------        --------
NET DECREASE IN CASH AND EQUIVALENTS ..........................        4,901          (7,297)

  Beginning of period .........................................          877           8,399
                                                                    --------        --------
  End of period ...............................................     $  5,778        $  1,102
                                                                    ========        ========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for interest ....................     $    248        $    391
  Conversion of preferred stock to Common Stock ...............     $     --        $    410
                                                                    ========        ========
</TABLE>
                 See notes to consolidated financial statements.

                                       5
<PAGE>
                              SILICON GAMING, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

     The accompanying  consolidated  balance sheet as of September 30, 2000, the
consolidated  statements  of  operations  for the  three and nine  months  ended
September 30, 2000 and 1999, and the  consolidated  statements of cash flows for
the nine months ended September 30, 2000 and 1999, are unaudited. In the opinion
of management,  these financial  statements have been prepared on the same basis
as the audited financial statements and include all adjustments, consisting only
of  normal   recurring   adjustments  and  accruals,   necessary  for  the  fair
presentation  of the financial  position and operating  results as of such dates
and for such periods.  The unaudited  information  should be read in conjunction
with the audited  consolidated  financial  statements  of Silicon  Gaming,  Inc.
("Silicon  Gaming" or the  "Company")  and the notes  thereto for the year ended
December 31, 1999  included in the  Company's  Annual  Report on Form 10-K filed
with the Securities and Exchange Commission.

     The accompanying  consolidated financial statements have been prepared on a
going  concern  basis,  which  contemplates  the  realization  of assets and the
satisfaction  of liabilities  in the normal course of business.  The Company has
incurred  operating  losses every year since its  inception and at September 30,
2000, had an accumulated deficit of $100,073,000 and a shareholders'  deficiency
of  $13,586,000.  The Company has been required to obtain  additional  financing
every year to be able to fund its ongoing operations. Based on historical levels
of cash usage,  the above  factors raise  substantial  doubt about the Company's
ability  to  continue  as a going  concern.  In the  fourth  quarter of 1999 the
Company  completed a substantial  restructuring  of its  capitalization  whereby
$39.75  million  of Senior  Discount  Notes and  approximately  $8.3  million of
accrued interest were converted into Preferred Stock, and the remaining terms of
the Senior  Discount Notes were modified to reduce the interest rate thereon and
extend  the  payment  terms.  Concurrent  with the  restructuring,  the  Company
borrowed $3 million under new Senior  Discount Notes and  established a facility
whereby up to an  additional  $2 million  of new  Senior  Discount  Notes may be
issued upon meeting  certain  financial and operational  milestones.  During the
third  quarter,  management  continued to review  financing and other  strategic
alternatives  available  to the  Company  such  as  additional  equity  or  debt
offerings  in the  Company  or  certain  of its  subsidiaries,  joint  ventures,
alternative  distribution  channels,  direct  investment  by third  parties into
several of the Company's  strategic  business  opportunities  and sale of all or
part of the Company's assets to improve the Company's liquidity position.

     Accordingly the company began discussions with several qualified  companies
regarding strategic  partnerships.  Ultimately management agreed in principle to
be acquired via a plan of merger with International Gaming Technology,  a Nevada
corporation,  ("IGT"),  which management believed to be in the best interests of
the  shareholders.  While a  definitive  agreement  of  merger  has not yet been
executed,  on October 16, 2000, the company executed a letter of intent from IGT
expressing  their  interest  in a cash for stock  transaction  as well as a $2.5
million  dollar  advance from IGT, and is focusing its  resources and efforts in
contemplation  of completing  this proposed  merger as its operating  plan. (SEE
FOOTNOTE 8, SUBSEQUENT EVENTS, BELOW)

2. SIGNIFICANT TRANSACTIONS

     On August 18, 2000,  WagerWorks,  Inc.,  (WagerWorks"),  formerly  known as
uBet.com, Inc. ("uBet"), the Company's wholly owned subsidiary, sold 3.7 million
shares of its Series A  Preferred  Stock to an outside  investor  group for $7.6
million. At the time of the investment,  WagerWorks,  Inc had a retained deficit
of approximately  $1.4 million that offset a portion of the minority interest on
a  consolidated  basis.  The  Company  has  allocated  the  entire  net  loss of
WagerWorks  for the period  from August 18,  2000 to  September  30, 2000 to the
minority  interest based on the  requirements  outlined in Emerging  Issues Task
Force  Bulletin No.  99-10,  PERCENTAGE  USED TO DETERMINE  THE AMOUNT OF EQUITY
METHOD LOSSES.

     On August 21, 2000,  WagerWorks  granted  warrants to buy 368,098 shares of
its Series A Preferred  Stock at a price of $2.0375  and  122,699  shares of its
Series A Preferred Stock at a price of $0.01 to a certain customer and investor.
These warrants were  immediately  exercisable  for Series A Preferred  Stock and

                                       6
<PAGE>
expire on August 21, 2005.  The warrants were granted in  connection  with a Web
site  development  agreement  entered  into between  WagerWorks  and the warrant
holder.  The agreement  called for the agreement  partner to make a $1.0 million
non-refundable  advance  payment for development of the Web site. The fair value
of the warrants,  $889,000, was calculated on the date of grant and was deducted
from the $1.0 million payment.

     The Web site  development  agreement  also calls for WagerWorks to host Web
sites  of the  agreement  partner  on  WagerWorks'  servers  and on  WagerWorks'
premises.  The agreement partner will reimburse WagerWorks up to $800,000,  upon
the purchase of the hardware necessary to host the Web sites. Upon completion of
the Web site,  WagerWorks  is committed to share 50-60% of  advertising  revenue
with the agreement  partner with the exact percentage  depending on the level of
gross advertising revenue generated, as set forth in the agreement.

     The  Web  site  development  agreement  has a term  of 5  years  but can be
terminated upon 30 days notice after 18 months if the aggregate  payments to the
agreement  partner or the  number of active  subscribers  do not exceed  certain
levels set forth in the  agreement.  The  agreement  also can be extended for an
additional 5 years at the option of the agreement partner if certain  conditions
are met.

3. NET LOSS PER SHARE

     Basic earnings per share excludes  dilution and is computed by dividing net
income by the  weighted  average of common  shares  outstanding  for the period.
Diluted  earnings per share reflect the  potential  dilution that would occur if
securities or other  contracts to issue Common Stock were exercised or converted
into Common Stock.  Common Stock equivalents  including stock options,  warrants
and Redeemable  Convertible  Preferred Stock have been excluded from all periods
presented, as their effect would be antidilutive.

     The following is a reconciliation of the numerators and denominators of the
basic and diluted net loss per share computations (in thousands except per share
amounts):

<TABLE>
<CAPTION>
                                                     Three Months Ended       Nine Months Ended
                                                        September 30,            September 30
                                                     --------------------    -------------------
                                                       2000        1999        2000       1999
                                                     --------    --------    --------   --------
<S>                                                  <C>         <C>         <C>        <C>
Net Loss (Numerator):
Net Loss, basic and diluted .....................    $  4,039    $  4,980    $  9,451   $ 17,219
                                                     ========    ========    ========   ========
Shares (Denominator)
Weighted average common shares outstanding.......      33,942      14,589      31,463     14,433
Weighted average common shares subject to
  repurchase ....................................                     (28)                   (72)
                                                     --------    --------    --------   --------

Shares used in computation ......................      33,942      14,561      31,463     14,361
                                                     ========    ========    ========   ========
Net Loss Per Share, Basic
  and Diluted ...................................    $   0.12    $   0.34    $   0.30   $   1.20
                                                     ========    ========    ========   ========
</TABLE>

4. INVENTORIES

     Inventories are stated at lower of cost (first-in, first-out) or market and
consist of the following (in thousands):

                                                    September 30,   December 31,
                                                        2000            1999
                                                       ------          ------
Raw materials ............................             $1,274          $  849
Work in process ..........................                669             111
Finished goods ...........................              2,215           6,371
                                                       ------          ------
                                                       $4,158          $7,331
                                                       ======          ======

                                       7
<PAGE>
5. CONCENTRATION OF CREDIT RISK

     Financial   instruments   which   potentially   subject   the   Company  to
concentrations  of credit risk consist  primarily of cash  equivalents and trade
accounts receivable.  The Company invests only in high credit quality short-term
debt with its surplus funds. The Company performs ongoing credit  evaluations of
its customers' financial condition and limits the amount of credit extended when
deemed  necessary but generally  requires no collateral.  The Company  maintains
reserves for estimated  potential credit losses. As of September 30, 2000, three
customers accounted for 15%, 13% and 7% of accounts receivable, respectively. As
of December 31, 1999, one customer accounted for 19% of accounts receivable. For
the three months ended  September 30, 2000, two customers  accounted for 14% and
6% of revenue and for the nine months ended September 30, 2000,  three customers
accounted for 9%, 5% and 4% of revenue, respectively. For the three months ended
September  30, 1999 one customer  accounted  for 23% of revenue and for the nine
months ended September 30, 1999, one customer accounted for 16% of revenue.

6. BORROWING ARRANGEMENTS

     In May 2000, the Company  executed a $2 million  secured  revolving line of
credit  agreement  based on the Company's  eligible  accounts  receivable  which
expires May 25, 2001. Borrowings bear interest at the Bank's prime rate (9.5% at
September  30,  2000) plus 1.5%.  As of  September  30,  2000,  the  Company had
$750,000 outstanding under this facility. This agreement requires the Company to
maintain  certain  ratios  of  tangible  net  worth to total  debt  among  other
covenants (as defined in the  agreement)  and the Company was in  non-compliance
with the  agreement as of June 30, 2000,  and remained in  non-compliance  as of
September  30,  2000.  The lender had given the  company an  informal  notice of
forbearance  which was to expire on August 15, 2000,  but has agreed  informally
not to act on such  forbearance  as of November 14,  2000.  The company has paid
down  $250,000 of this  outstanding  line of credit in October of 2000,  and has
purchased a  certificate  of deposit in the amount of $500,000 with the creditor
bank,  and  secured  the  remaining  $500,000  open  line of  credit  with  this
certificate  of deposit.  The company is in the process of evaluating the merits
of continuing  the current line of credit under the original terms or the option
of paying it off with the security provided by the certificate of deposit.

     Borrowing arrangements consist of the following (in thousands):

                                                   September 30,    December 31,
                                                       2000             1999
                                                     --------         --------
Senior Discount Notes ......................         $ 11,500         $  9,500
Capital lease obligations ..................               --               55
Other long-term obligations ................            1,286            2,038
                                                     --------         --------
                                                       12,786           11,593
Current obligation .........................             (832)          (1,165)
                                                     --------         --------
Long-term obligation .......................         $ 11,954         $ 10,428
                                                     ========         ========

7. OPERATING SEGMENTS

     During the second  quarter,  Silicon Gaming  completed a realignment of its
resources around market  opportunities  by creating a separate  business unit to
investigate market  opportunities in the growing market for Internet gaming. The
Company incurred  expenses for its On-line division of approximately  $1,645,000
for the three month  period ended  September  30,  2000,  of which  $869,000 was
allocated to the  minority  interest  and  $2,308,000  for the nine month period
ended  September  30,  2000,  of which  $869,000  was  allocated to the minority
interest.

                                       8
<PAGE>
8. SUBSEQUENT EVENTS

     On  October  16,  2000,  the  company  executed  a letter  of  intent  from
International  Gaming Technologies ("IGT") to acquire, via a plan of merger, the
assets and  liabilities  of the Company.  The Company also  received a check for
$2,500,000 as an advance from IGT to be applied towards the total  consideration
paid by IGT to SGI under the proposed terms of the merger.

     Under the terms of the proposed  transaction,  the total consideration paid
by  International  Game  Technology  would  be $45  million,  with  this  amount
increased by the amount of Silicon  Gaming's  current  assets on hand at closing
consisting of cash,  accounts receivable and prepaid expenses and reduced by the
amount of all indebtedness and other  liabilities of Silicon Gaming not yet paid
by SGI by closing,  including any unpaid sale transaction expenses. In addition,
an anticipated  but undefined  adjustment will also be made for any inventory on
hand at the closing date in conjunction with SGI's net operating  losses,  above
and below certain thresholds.

     As part of the proposed  transaction,  International  Game Technology would
also receive up to a 5% interest (on a fully-diluted  basis) in WagerWorks Inc.,
a majority-owned  subsidiary of Silicon Gaming.  As a condition of closing,  SGI
will have to either sell or otherwise dispose of its interest in WagerWorks Inc,
prior to the merger closing date.

     As of November 20, 2000, no definitive sale agreement has been reached, and
it is not certain whether the parties will reach a definitive  agreement.  If an
agreement  is  reached,  it is  also  uncertain  whether  all  necessary  gaming
approvals,   regulatory  approvals,   third-party  consents  and  other  closing
conditions will be satisfied

9. NEW ACCOUNTING PRONOUNCEMENTS

     In December 1999, the Securities and Exchange  Commision (SEC) issued Staff
Accounting   Bullitin   (SAB)  No.  101,   "Revenue   Recognition  in  Financial
Statements,"   which  provided  the  SEC  staff's  views  on  selected   revenue
recognition  issues.  The guidance in SAB 101 must be adopted  during the fourth
quarter of fiscal  2000 and the  effects,  if any,  are  required to be recorded
through a retroactive,  cumulative-effect  adjustment as of the beginning of the
fiscal year,  with a restatement of all prior interim  quarters in the year. Our
management has not completed its evaluation of the effects, if any, that SAB 101
will have on the Company's income statement  presentation,  operating results or
financial position.

                                       9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     THIS  DISCUSSION  INCLUDES  A NUMBER OF  FORWARD-LOOKING  STATEMENTS  WHICH
REFLECT THE COMPANY'S  CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL
PERFORMANCE.  THESE FORWARD-LOOKING  STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING THOSE REFERRED TO IN THE RISK FACTORS SECTION BELOW AND
ELSEWHERE  HEREIN AND CONTAINED IN THE COMPANY'S  PREVIOUSLY FILED ANNUAL REPORT
ON FORM  10-K,  THAT  COULD  CAUSE  ACTUAL  RESULTS  TO DIFFER  MATERIALLY  FROM
HISTORICAL  RESULTS  OR  THOSE  ANTICIPATED.   IN  THIS  DISCUSSION,  THE  WORDS
"ANTICIPATES,"   "BELIEVES,"   "EXPECTS,"   "INTENDS,"   "FUTURE"   AND  SIMILAR
EXPRESSIONS IDENTIFY  FORWARD-LOOKING  STATEMENTS.  READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF
THE DATE HEREOF.

     THE FOLLOWING  DISCUSSION  SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED
CONSOLIDATED  FINANCIAL  STATEMENTS AND NOTES THERETO INCLUDED IN PART I--ITEM 1
OF THIS  REPORT AND THE  AUDITED  CONSOLIDATED  FINANCIAL  STATEMENTS  AND NOTES
THERETO  INCLUDED  IN THE  COMPANY'S  ANNUAL  REPORT ON FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.

OVERVIEW

     The  Company  was  incorporated  on July 27, 1993 with a charter to design,
develop,  manufacture and distribute a new breed of interactive gaming machines.
It was the  Company's  strategy to  implement  a new  product  paradigm in which
software-based gaming platforms would displace the traditional fixed-application
slot  machines.  Through  early 1997,  the Company  focussed on  executing  it's
product  development  plans  while  at  the  same  time  preparing  to  initiate
operations.  Substantial investments were made in the infrastructure required to
sell, build,  fulfill, and ultimately service machines in each of the major U.S.
gaming markets.

     In the third quarter of 1997,  the Company  introduced  the Odyssey  gaming
platform and it's suite of six gambling  applications.  The  marketing  strategy
called for a  conservative,  focussed  roll-out in which the initial  units were
installed  in a limited  number of  Southern  Nevada  casinos.  After an initial
evaluation period the product was refined and ultimately distributed into nearly
every major US market, as well as select international  markets. Since that time
the  Company  has  rolled  out  ODYSSEY  into  other   jurisdictions   including
Connecticut,  Illinois, Indiana, Iowa, Kansas, Louisiana,  Michigan,  Minnesota,
Mississippi,  Missouri,  New Jersey,  New Mexico,  certain  Canadian  provinces,
certain  international  cruise  line  routes and  Uruguay.  Since the  Company's
initial  product launch,  it has developed and  distributed  nearly 40 different
game applications and achieved an installed base of over 4,700 gaming platforms.

     The Company's products feature  high-resolution  video presented across the
full surface of a large  touchscreen  display.  The games  feature  high-quality
animation,  video  clips,  digital  sound  and a  level  of  visual  appeal  and
interactivity  that the Company  believes is  difficult to attain by the current
generation  of  slot  machines.  The  Company  is  attempting  to  maximize  the
entertainment  value offered on the video screen by providing multiple levels of
achievement  within certain games so that, through successful play over a period
of time,  a  player  may  advance  to a  bonusing  sequence  and win  additional
jackpots.  SGI believes  that by utilizing  these  features,  it will  encourage
longer and more frequent periods of play by existing slot machine  customers and
attract new gaming  customers who are seeking greater  entertainment  value than
that  offered by the  current  generation  of slot  machines.  The  Company  has
designed  its machines  with a number of unique  player  features,  such as play
stoppage  entertainment(TM).  In addition,  the product's modular components and
Machine Management System(TM) software provide easy-to-use  diagnostics designed
to minimize player  inconvenience  and machine down time. The Company  currently
offers several products  including  ODYSSEY(TM),  a multi-game  machine that can
play up to six  different  games on the same machine,  and QUEST,  a single-game
machine.

                                       10
<PAGE>
     The Company's  initial business model was dependent on the proliferation of
its  gaming  platforms.  However,  management  believes  that due to a number of
factors   including  price   resistance,   stagnant  market  growth,   increased
competition,  and a slower rate of  adoption,  the Company was unable to achieve
its projected  sales  volumes.  As such the market for  high-margin  replacement
software never materialized.

     In the Spring of '99 the Company  re-formulated  it's business strategy and
implemented  a new plan.  The  strategy  called  for the  company  to more fully
leverage it's development  capabilities while minimizing the expenses related to
maintaining  it's  distribution  channel.  The  result  was a 35%  reduction  in
operating  expenses,  and the formation of three distinct  business  units,  the
Wagering Content Studio, Product Sales, and WagerWorks.com. The Wagering Content
Studio is focussed  on creating  new game  experiences  that can be  distributed
off-line into the domestic  casino markets  through the Product Sales  division,
and  on-line  both  domestically  and  internationally   through  it's  Internet
division.

     The Company  spent much of the third  quarter  ending  September  30, 2000,
executing its  three-tier  business  plan. The Wagering  Content  Studio,  after
completing  the launch of its Family Feud product suite in the second quarter in
partnership with MGM MIRAGE,  Inc., continued to evaluate the performance of the
product and implemented  changes and  enhancements as a result of monitoring the
marketplace  and customer  response.  In  addition,  more Family Feud units were
produced and rolled out in some of the other MGM Mirage's properties in Southern
Nevada.  The Product Sales division continued to place and sell gaming platforms
along with new game  applications  created by our Wagering  Content Studio.  The
Company  continued to  capitalize on the opening of the  California  market with
sales to the major tribal casinos.  In addition,  the Company raised capital for
the  full  development  of  its  Internet  business   opportunity   through  its
subsidiary,  WagerWorks,  along with finalizing a formal  customer  relationship
with one of its  investor/partners.  WagerWorks  continued  to make  significant
technological   progress  towards  the  completion  of  its   infrastructure  in
anticipation of a first or second quarter 2001 launch date for its site.

     Through September 30, 2000, the Company has installed 4,714 ODYSSEY,  QUEST
and FAMILY FEUD machines in approximately 204 properties throughout Connecticut,
Iowa, Indiana, Louisiana,  Michigan, Minnesota,  Mississippi,  Missouri, Nevada,
New Mexico, certain Canadian provinces, certain international cruise line routes
and Uruguay.  Of these  machines,  4,567 have been sold  outright or placed on a
revenue-sharing  basis. After returns,  147 machines remain installed on a trial
basis and the casino  operators  are required to purchase the machine  outright,
participate  in SGI's revenue  sharing plan or return the machine to the Company
within a defined trial period.  This  compares to a restated  installed  base of
4,572  machines at June 30, 2000,  of which,  250 machines  were  installed on a
trial basis.

     At September 30, 2000 the Company,  on a consolidated  basis,  had cash and
equivalents  of  $5,778,000,of  which,  $5,451,000  was owned by WagerWorks  and
$327,000 was owned by Silicon Gaming . The Company has incurred operating losses
each year  since  inception  and as of  September  30,  2000 had an  accumulated
deficit of $100,073,000 and a deficiency of shareholders' equity of $13,586,000.
The Company has been  required to obtain  additional  financing  each year to be
able to fund its ongoing  operations.  Based on historical levels of cash usage,
the above  factors  raise  substantial  doubt  about the  Company's  ability  to
continue as a going concern.  In late 1998 and early 1999 the Company took steps
to  reduce  the level of  operating  expenses  and made a number  of  management
decisions  which  resulted in total  reductions of the  Company's  work force by
approximately 70% and made significant cuts in expenditures  across the Company.
Management also announced the relocation of its  manufacturing to its Las Vegas,
Nevada facility and the closure of its Mountain View,  California  manufacturing
facility.  In November 1999, the Company, with the consent of the holders of its
Senior Discount Notes, was able to convert  approximately  $40 million principal
amount of debt plus $8.3 million in accrued  interest into a 57% equity stake in
the Company,  and to obtain  commitments for additional  financing from the debt
holders.  The  aforementioned  actions  resulted  in the  Company  reducing  its
operating   expenses  by   approximately   40%,  its  interest   obligations  by
approximately  80%, and reduced the cash used in operations by approximately 80%
from the levels of the prior year.  Management continued to review financing and
other strategic  alternatives  available to the Company such as additional share

                                       11
<PAGE>
or debt offerings in the Company or certain of its subsidiaries, joint ventures,
alternative  distribution  channels,  direct  investment  by third  parties into
several of the Company's  strategic business  opportunities and sale of all or a
portion of the Company's  assets, to improve the Company's  liquidity  position.
During the third  quarter of fiscal  year 2000,  the  Company  identified  three
candidates  to  approach  to  propose  joint  ventures  or  strategic  alliances
regarding marketing and distributing its products.  These discussions eventually
lead to two of the candidates offering to purchase the Company through a merger.
Through  negotiations between the candidates and the Company's  management,  and
approval from the board of directors, on October 16, 2000, the Company agreed in
principle  to  be  acquired  via  a  plan  of  merger  with  International  Game
Technology,  a Nevada  corporation,  ("IGT").  While a  definitive  agreement of
merger has not yet been  executed,  the  company  executed a letter of intent as
well as receiving a $2.5 million dollar advance from the acquiring  corporation,
IGT, and is focusing its  resources and efforts in  contemplation  of completing
this proposed merger as its operating plan. (SEE NOTE 8 TO FINANCIAL STATEMENTS)

     Silicon  Gaming is  headquartered  in Palo Alto,  California  and has sales
offices  in Reno  and Las  Vegas,  Nevada,  and in  Gulfport,  Mississippi.  The
Company's  products are now manufactured at the Company's location in Las Vegas,
Nevada. At September 30, 2000 the Company had 92 employees.

     REVENUE  The  Company  generates  hardware  revenue  from  the  sale of its
products and related parts and accessories.  All products are sold with licensed
software and customers  have the choice of either a paid-up or renewable  annual
license.  The Company places products in casinos under a  participation  program
where it receives 20% of the net win generated by the product as revenue.  Total
revenue  units include  machines sold outright as well as machines  placed under
the participation programs.

     The Company generated revenues as follows:

<TABLE>
<CAPTION>
                           Three Months Ended September 30,          Nine Months Ended September 30,
                        --------------------------------------    --------------------------------------
                              2000                 1999                 2000                 1999
                        -----------------    -----------------    -----------------    -----------------
                                             (in $'000 except for machine numbers)
<S>                     <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>
Hardware sales          $ 1,974        67%   $   932        47%   $ 7,523        69%   $ 8,254        62%
Software sales              425        14%       448        22%     1,761        16%     3,337        25%
Participation revenue       571        19%       619        31%     1,613        15%     1,796        13%
                        -------   -------    -------   -------    -------   -------    -------   -------
   Total revenue        $ 2,970       100%   $ 1,999       100%   $10,897       100%   $13,387       100%
                        =======              =======              =======              =======
Total revenue units         497                   43                1,025                  639
                        =======              =======              =======              =======
</TABLE>

     Total  revenue units consist of machines sold outright to customers as well
machines owned by the Company placed in casinos under a  participation  program.
For the three months ended  September 30, 2000,  revenue units  consisted of 223
machines sold outright,  and 274 machines on casino floors under a participation
program.  For the nine month period ended  September  30,  2000,  revenue  units
consisted of 751 machines  sold outright and 274 machines on casino floors under
a participation program.

     Revenue  for the  quarter  ended  September  30,  2000 was  $2,970,000,  an
increase of $971,000,  or 49%, from  $1,999,000 for the quarter ended  September
30, 1999.  The change in sales mix reflects an increase in direct sales relative
to sales on a  participation  basis as a result of  introducing  the Family Feud
game and the benefit of sales to the new jurisdiction of California. The average
selling  price on  hardware  sales  decreased  to  $8,850 in the  quarter  ended
September 30, 2000  compared to $9,845 in the quarter ended  September 30, 1999.
This  reflected  the effect of lower selling  prices due to the Company  selling
used equipment to certain customers during the third quarter of 2000.

                                       12
<PAGE>
     The decrease in software  revenues for the three months ended September 30,
2000 of $23,000,  or 5%,  compared to the same period in 1999 is a direct result
of the lower number of Odyssey units sold outright,  the lower selling prices of
used equipment in the current year and the impact of focussing on and delivering
the Family Feud Suite of games in the  current  period.  Participation  revenues
decreased  by  $48,000,  or 8%,  compared to the  comparable  period in 1999 due
largely to a reduction  in the number of machines on  participation  programs as
customers have either purchased those machines  outright or returned them to the
Company.

     Revenue for the nine months ended  September  30, 2000 was  $10,897,000,  a
decrease of  $2,490,000,  or 19%,  from  $13,387,000  for the nine months  ended
September  30, 1999.  For the nine month period ended  September  30, 2000 total
software sales decreased by $1,576,000,  or 47%,  compared to the same period in
1999  reflecting  a  shift  in the  company's  model  for  software  sales  as a
percentage of total revenue. Total participation revenues decreased by $183,000,
or 10%, due to the reductions in the number of machines on  participation as the
Company has converted  these units to sales or they were returned to the Company
by its customers.

     During the  three-month  period ended  September  30, 2000,  two  different
customers  accounted for 14% and 6% of revenue.  In the three-month period ended
September  30, 1999,  one customer  accounted  for 23% of revenue.  For the nine
month period ended September 30, 2000, three different  customers  accounted for
9%, 5% and 4% of revenue  respectively,  and in the nine months ended  September
30, 1999, one customer  represented  16% of revenue.  The Company expects that a
significant  portion of its revenues will remain  consolidated  within a limited
number of strategic  customers  within the gaming industry due to the increasing
consolidation  that is taking  place among  casino  operators.  As an  equipment
vendor to the gaming industry,  the Company sells infrequently to many customers
and the volume of sales to any particular  customer may vary  significantly from
period  to  period.  As a  result,  there  can be no  assurance  that the  above
strategic customers will continue to account for a significant percentage of the
Company's  revenue  in the  future.  The loss of any  strategic  customer  could
adversely affect the Company's business and results of operations.

COST OF SALES

     Cost of sales  includes  the direct  costs of product  sales as well as the
unabsorbed costs of the Company's manufacturing  operations.  Cost of sales also
includes   license  fees  and  royalties  paid  to  third  parties  as  well  as
depreciation on machines placed on the participation programs. Cost of sales was
$2,151,000, or 72% of revenue, as compared to $1,329,000, or 66% of revenue, for
the quarters ended September 30, 2000 and 1999, respectively.  Cost of sales was
$7,105,000, or 65% of revenue, as compared to $8,513,000, or 64% of revenue, for
the nine months ended September 30, 2000 and 1999, respectively.

     The  increase  in cost of sales as a  percentage  of revenue  for the three
month period is a reflection of several factors.  The introduction of the Family
Feud suite of games,  a unique,  fully  integrated  specialty  product,  had the
effect  of  raising  per  unit  costs  on that  portion  of cost of  sales  that
represented  the  cost of this  product.  This  was  offset  slightly  by  lower
manufacturing  overhead costs  associated with the refurbishing and reselling of
used machines  taken back by the company,  benefits  derived from the tooling of
certain of its hardware components, and from some cost reductions in some of the
components  included in its machines  other than the Family Feud suite of games.
Due to significant levels of finished goods inventory,  the Company manufactured
minimal  new  product  outside of the new Family  Feud games  during the quarter
ended September 30, 2000, and this has prevented it from obtaining  further cost
reductions in its products.  The Company does not anticipate that cost reduction
will continue into future  periods.  The Company  believes that as it introduces
more unique, fully integrated specialty products, per-unit costs may increase in
future periods.

     If  management's  plan to  merge  into  IGT as  mentioned  earlier  in this
document, does not materialize, and the Company is able to continue operating as
a going  concern,  cost of sales and  manufacturing  expenses  are  expected  to

                                       13
<PAGE>
increase  in  absolute  terms as the  Company  increases  sales  volume  for its
product,  while  gross  margins  are  expected  to  remain  volatile  due to the
products'  sensitivity  to volume levels.  The Company  believes that it will be
able to continue to see some benefits of decreased aggregate manufacturing costs
due to the relocation of its manufacturing  activities to its Las Vegas,  Nevada
location.  The  anticipated  manufacturing  expenses  are subject to a number of
risks and uncertainties.

RESEARCH AND DEVELOPMENT

     Research and development ("R&D") expenses include payroll and related costs
of employees engaged in ongoing design and development activities of the Company
and its subsidiary companies, costs paid to outside contractors and specialists,
prototype development expenses, overhead costs, equipment depreciation and costs
of supplies.  To date,  the Company has expensed all costs  associated  with the
research,  design and development of its product.  R&D expenses were $1,746,000,
or 88% of  revenue,  as  compared  to  $1,191,000,  or 60% of  revenue,  for the
quarters  ended  September  30, 2000 and 1999,  respectively.  R&D expenses were
$3,505,000,  or 32% of revenue, as compared to $5,023,000, or 38% of revenue for
the nine months ended September 30, 2000 and 1999, respectively.

     Of the $1,746,000 in R&D expenses  incurred in the second  quarter  period,
$1,220,000  or 70% was  incurred in  launching  the  activity  of the  Company's
subsidiary,  Wager Works,  which did not  contribute any revenue to the company.
The decrease in R&D expenses  (calculated by excluding the  WagerWorks  portion)
are  largely  the  result  of one  of the  Company's  new  strategies  involving
strategic partnering, where a portion of the Company's expenses incurred for the
Wagering   Content   Studio   were   subsidized   by   an   outside    strategic
partner/customer, as well as lower personnel costs attributable to the Company's
reductions in its workforce and lower use of engineering consultants,  offset by
higher license fees and similar costs associated with the acquisition of outside
technologies.  Since the  comparable  period in 1999, the focus of the Company's
R&D activities has changed to emphasize new game  development,  the introduction
of new product platforms, and the introduction of new game types. The Company is
focussed on offering additional features in its products that will fully utilize
the  underlying  technology  used as well as continuing to procure new strategic
partner  relationships  to help  subsidize a portion of this effort.  This would
result in the  expectation  requiring  continued  investment in R&D resources to
continue the development of the product platform and new platforms to facilitate
the elaborate  requirements of the game  development  process in future periods.
With the  continuing  efforts to  successfully  launch the  business  of its new
subsidiary company, Wager Works, Inc., management believes the absolute level of
R&D expenses  would  increase in future  periods,  if viewed on a going  concern
basis.

SELLING, GENERAL AND ADMINISTRATIVE

     Selling,  general and administrative  ("SG&A") expenses include payroll and
related   costs  for   administrative   and  executive   personnel,   sales  and
customer-support  organization  personnel,  marketing and  licensing  personnel,
overhead costs,  legal and associated costs, costs associated with obtaining and
retaining  corporate and product licenses in various  jurisdictions and fees for
professional  services.  SG&A expenses were $3,912,000,  or 131% of revenue,  as
compared to $2,484,000,  or 124% of revenue for the quarters ended September 30,
2000 and 1999, respectively.  SG&A expenses were $10,429,000, or 96% of revenue,
as compared to $7,969,000, or 60% of revenue for the nine months ended September
30,  2000 and 1999,  respectively.  For the three and nine month  periods  ended
September 30, 2000 respectively,  approximately 24% and 26% of the SG&A expenses
were headcount related.

     The  increase  in SG&A  expenses  in 2000  reflects  higher  legal  fees in
connection with ongoing patent  infringement cases that the Company was party to
during  1999  and a suit by a  Company  distributor  in  South  Carolina,  costs
associated with applying for corporate and product licenses as the Company began
selling  product into new  jurisdictions  during the first two quarters of 2000,
increased patent application activity during the third quarter period as well as
costs incurred in development activity of its subsidiary, Wager Works, Inc.. The
Company  intends to restrict the growth in SG&A  expenses as much as possible in
future  periods and believes SG&A expenses in absolute  dollars may increase and
may decline as a percentage of total revenue.

                                       14
<PAGE>
INTEREST INCOME AND EXPENSE

     Net interest  expense was $69,000 for the quarter ended September 30, 2000,
as compared to $1,975,000 for the quarter ended September 30, 1999. Net interest
expense was $178,000 for the nine months ended  September  30, 2000, as compared
to $5,824,000  for the nine months ended  September 30, 1999.  Included in these
totals  was  interest  income of  $19,000  and  $13,000  for the  quarter  ended
September 30, 2000 and 1999, respectively,  and $46,000 and $88,000 for the nine
months  ended  September  30, 2000 and 1999,  respectively.  Changes in interest
income over these  periods are  directly  attributable  to  fluctuations  in the
average level of cash and investment balances that the Company holds. The timing
of share offerings,  issuance of Senior Discount Notes, and the rate of spending
on operations have impacted the average level of cash and investments.

     Interest  expense  was  $87,000  and  $1,988,000  for  the  quarters  ended
September 30, 2000 and 1999,  respectively,  and $224,000 and $5,912,000 for the
nine months ended  September  30, 2000 and 1999,  respectively.  The decrease in
interest  expense over these periods is substantially  due to the  restructuring
the Company  underwent in November of 1999.  The holders of the Senior  Discount
Notes  exchanged  $39.75 million  principal  notes and accrued  interest of $8.3
million for Preferred  Stock that is convertible  into a 57% voting  interest in
the Company. Concurrent with this conversion, the holders of the Senior Discount
Notes  invested an  additional  $3 million of New Senior  Discount  Notes in the
Company.  The company also paid off its revolving line of credit with its former
bank in the first  quarter of 2000,  did not  complete  it new bank  arrangement
until  the  second  quarter  of 2000 and did not begin to use its line of credit
until the end of May 2000.  The company  also  reduced  its amount of  equipment
financing in 2000 as well as reducing the  principal  due on capital  leases and
other equipment related borrowings in the second quarter of 2000.

INCOME TAXES

     The Company has not been  required to pay income taxes due to the fact that
it has had net operating  losses in each period since the  Company's  inception.
The Tax Reform Act of 1986 and the California Act of 1987 impose restrictions on
the utilization of net operating loss and tax credit  carryforwards in the event
of an "ownership  change" as defined by the Internal Revenue Code. The Company's
ability to  utilize  its net  operating  loss and tax  credit  carryforwards  is
subject to limitation pursuant to these  restrictions.  The Company underwent an
ownership change as of the date of the debt restructuring in November,  1999. As
a result,  the Company lost the potential tax benefits of the net operating loss
carryforwards and the tax credit carryforwards that existed at that time.

     A valuation  allowance has been recorded for any deferred tax assets due to
uncertainty  regarding the ultimate  realization of these assets  resulting from
the lack of earnings history of the Company.

LIQUIDITY AND CAPITAL RESOURCES

     The  Company's  financial  condition has  deteriorated  since June of 2000.
While cash and  equivalents on a consolidated  basis had increased to $5,778,000
at September  30, 2000  compared to $877,000 at December 31, 1999 and  increased
compared to $1,102,000 at September 30, 1999, $5,451,000 of cash and equivalents
were  owned by its  minority  owned  subsidiary,  WagerWorks.  Effectively,  the
Company's  cash position on a  non-consolidated  basis was $327,000 on September
30,  2000,  a decrease of $550,000  from the  $877,000  position on December 31,
1999. The decrease in cash in the current period for the Company,  excluding the
amount from it minority  owned  subsidiary,  was due  primarily  from  continued
losses from operations,  offset by additional  borrowings on the Senior Discount
Notes and the Company's continuing  successful efforts to convert inventory into
cash, offset by losses from ongoing operations.

     As of  September  30,  2000  the  Company  had an  accumulated  deficit  of
$100,073,000 and a shareholder's deficiency of $13,586,000 and has had operating
losses every year since its  inception.  The Company has been required to obtain
additional financing each year to be able to fund its ongoing operations. In the

                                       15
<PAGE>
fourth quarter of 1999 the Company completed a substantial  restructuring of its
capitalization whereby $39.75 million of Senior Discount Notes and approximately
$8.3 million of accrued  interest were converted into Preferred  Stock,  and the
remaining  terms of the  Senior  Discount  Notes  were  modified  to reduce  the
interest  rate  thereon  and  extend  the  payment  terms.  Concurrent  with the
restructuring,  the Company  borrowed $2 million under new Senior Discount Notes
and established a facility  whereby up to an additional $3 million of new Senior
Discount  Notes may be issued upon meeting  certain  financial  and  operational
milestones.  In the  quarter  ended June 30,  2000,  the  Company met one of the
operational  milestones identified and established as part if it's November 1999
restructuring  plan.  The company  borrowed an  additional  $1 million of Senior
Discount Notes, and an additional $2 million of new Senior Discount Notes may be
issued in the future depending upon the Company's  ability to meet certain other
financial and operational milestones.

     Management  continued to review financing and other strategic  alternatives
available  to the Company  such as  additional  equity or debt  offerings in the
Company or certain of its subsidiaries, joint ventures, alternative distribution
channels,  direct  investment  by third  parties into  several of the  Company's
strategic business opportunities and sale of all or part of the Company's assets
to improve the Company's liquidity position.  During the third quarter of fiscal
year 2000, the Company  identified three candidates to approach to propose joint
ventures  or  strategic  alliances  regarding  marketing  and  distributing  its
products. These discussions eventually lead to two of the candidates offering to
purchase  the  Company  through  a  merger.  Through  negotiations  between  the
candidates  and the  Company's  management,  and  approval  from  the  board  of
directors,  on October 16, 2000,  the Company agreed in principle to be acquired
via a plan of merger with International Game Technology,  a Nevada  corporation,
("IGT").  While a definitive agreement of merger has not yet been executed,  the
company  executed a letter of intent as well as receiving a $2.5 million  dollar
advance from the acquiring  corporation,  IGT, and is focusing its resources and
efforts in  contemplation  of completing  this proposed  merger as its operating
plan.

     The  Company's net cash used in operating  activities  was  $4,947,000  and
$2,668,000 for the nine months ended September 30, 2000 and 1999,  respectively.
This  increase in cash used in operating  activities  reflects a decrease in the
amount of non-cash items such as depreciation and amortization.  The Company was
able to continue to reduce its  investments  in inventory and increase its level
of  payables,  offset  by an  increase  in its level of  receivables,  as it has
improved its asset  management  and focussed on converting  its existing  assets
into cash to improve its  liquidity  situation.  For the nine month period ended
September 30, 1999,  the company  experienced a  significantly  higher loss from
operations,  which was mainly  offset by  substantial  non cash  charges to that
period for  restructuring  charges,  accrued interest on a higher level of debt,
and accretion of debt  discount.  These items were not a factor in the Company's
current nine month  period for 2000 due to the  restructuring  of the  Company's
balance sheet as a result of the old Senior Note  restructuring that occurred in
November of 1999.

     Net cash used in investing  activities was $9,000 for the nine months ended
September  30,  2000  compared  to net cash  used for  investing  activities  of
$304,000 for the nine months ended  September 30, 1999. The change was primarily
due to the  sale  of  property  and  equipment  and the  sale  and  maturity  of
short-term investments as the Company's available cash balances decreased.

     Net cash  provided by  financing  activities  was  $9,857,000  for the nine
months  ended  September  30,  2000  compared  to net  cash  used  in  financing
activities  of  $4,325,000  for the nine months ended  September  30, 1999.  The
increase  is related  primarily  to the  additional  debt  funding  the  Company
obtained  through  exercising  some of its Senior  Discount  Note funding it was
entitled to through its restructuring agreement in November of 1999 and the sale
of Series A Preferred  Stock  Financing  (for the  benefit of minority  interest
shareholders) it obtained for its subsidiary,  Wager Works,  Inc. in the current
period. The period covering the nine months of 2000 also included the conversion
of its old line of credit from one banking facility into another, as compared to
the period ending September 30, 1999, which included a substantial net reduction
in its line of credit.

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<PAGE>
     In March 2000, the Company entered into a secured  revolving line of credit
with a new bank based upon eligible accounts receivable. Under the terms of this
borrowing  arrangement,  which will expire in May 2001 (and subject to automatic
renewal  provisions),  the Company may borrow up to $2 million.  Borrowings bear
interest  at the bank's  prime  rate  (9.50% at June 30,  2000)  plus 1.5%.  The
Company  issued the bank  warrants to acquire  $35,000 worth of shares of Common
Stock at a per share price not to exceed $.35 (35 cents) per share, which may be
exercised over a five-year period.  The exercise price of the warrants adjust to
the fair market value of the underlying  common stock,  at the date of exercise,
with a maximum  cumulative  exercise value of $35,000.  In May 2000, the Company
finalized its contract  involving this  revolving  line of credit,  and borrowed
$750,000, which was the outstanding amount due as of September 30, 2000.

     In March 2000 the Company  was served  papers in  connection  with a patent
infringement lawsuit filed against it and one other slot machine manufacturer by
International Game Technology, Inc. (IGT). As disclosed in November 1999, IGT is
alleging infringement of a patent issued to IGT in September 1999 entitled "Game
Machine and Method  Using Touch  Screen".  The  Company is  presently  unable to
determine  the  financial  impact,  if any,  of this  litigation.  The  costs of
defending  this  lawsuit,  if  necessary,  may be  substantial  and may  require
significant  amounts of senior  management  time.  Any adverse  result from such
litigation  could  materially and adversely  affect the Company's  liquidity and
capital resources.

     In March 2000, a former distributor of the Company's  products,  filed suit
against  the Company in the United  States  District  Court for the  District of
South Carolina.  The distributor seeks repayment of $1 million, plus damages, in
connection  with machines  previously  shipped to the  distributor  in 1998. The
Company is in the process of seeking arbitration as required by the Distribution
Agreement,  seeking to recover outstanding receivables from the distributor. The
distributor filed in South Carolina an action to stay the arbitration portion of
the  agreement  between the Company and the  distributor  and was granted such a
stay. The company filed a motion on August  14th,2000  appealing the decision to
the United  States  Court of  Appeals  for the Fourth  Circuit.  The  Company is
currently awaiting a decision from the Court of Appeals. The costs of responding
to and/or defending this lawsuit may be substantial and may require  significant
amounts of senior management time. Any adverse result from such litigation could
materially and adversely affect the Company's  liquidity and capital  resources.
The Company has established a provision for the possible  non-collection of this
receivable  on its  books,  and the  balance  sheet  as of  September  30,  2000
essentially valuing the account, net of the provision, at zero

     FACTORS AFFECTING FUTURE RESULTS

     MANAGEMENT  OF  CHANGING  BUSINESS - The Company has spent part of the last
year as well as all of the nine  months  of the year  2000,  trying to shift its
business  strategy from one of high-volume  manufacturing  and placement of slot
machines with a goal of capturing  market share,  to a strategy that  emphasizes
the  quality  and  feature  content of new game  titles and takes  advantage  of
revenue-sharing opportunities.  The Company plans on offering product extensions
and variations of successful  existing games in 2000,  however the emphasis will
shift from  volume-based to one of providing a unique,  fully-integrated  gaming
experience.  This transition  represents a significant challenge for the Company
and its management and employees, and places increased demand on its systems and
controls.  The Company's  ability to manage this change will require the Company
to  continue  to change,  expand and improve  its  operational,  management  and
financial  systems  and  controls to manage any  outsourcing  or  relocation  of
existing activities.  Key to effecting this change in business is the ability of
the Company to sell its existing  inventory  of ODYSSEY and QUEST  products in a
timely manner and to resolve  outstanding  collections  issues with customers to
provide  sufficient  working  capital  during this  transition  process.  If the
Company is not able to generate  adequate  funds from its  working  capital in a
timely manner, the Company's business, operating results and financial condition
will be materially and adversely affected.

                                       17
<PAGE>
     LIQUIDITY - The Company has funded its operations to date primarily through
private and public  offerings of its equity  securities,  the issuance of Senior
Discount Notes, term and equipment loans and from bank borrowings. At September,
2000, the Company had an accumulated deficit of $100,073,000 and a deficiency of
shareholders'  equity of  $13,586,000.  The  Company  has repaid all amounts due
under the former line of credit and has  negotiated  a new line of credit with a
different financial institution on better terms. Management of the company began
discussions with several qualified companies  regarding strategic  partnerships.
Ultimately  management  agreed in  principle to be acquired via a plan of merger
with  International  Gaming Technology,  a Nevada  corporation,  ("IGT"),  which
management  believed to be in the best  interests of the  shareholders.  While a
definitive  agreement of merger has not yet been executed,  on October 16, 2000,
the company  executed a letter of intent from IGT expressing their interest in a
cash for  stock  transaction  and is  focusing  its  resources  and  efforts  in
contemplation  of completing  this proposed merger as its operating plan. If the
plans that management has undertaken to improve the Company's liquidity position
are  not  successfully  completed  in  a  timely  manner  it  is  probable  that
insufficient funds will exist to satisfy the Company's  operating  requirements.
The Company will be required to make adjustments to its operating  activities to
operate within the  restrictions of its liquidity and this could have a material
adverse  affect upon the  Company's  business,  operating  results and financial
condition.  To the extent that the Company sells additional shares or issues any
convertible  debt  securities,  this  could  result in  additional  dilution  to
existing  shareholders.  There can be no assurance that the Company will be able
to raise additional funds when and if needed.

     VOLATILITY  OF STOCK - The  market  price of the  Company's  stock has been
highly volatile and subject to large fluctuations. The Company's stock price may
be  affected  by factors  such as actual or  unanticipated  fluctuations  in the
Company's results of operations,  new product or technical  introductions by the
Company  or  any of its  competitors,  developments  with  respect  to  patents,
copyrights or proprietary  rights,  conditions or trends in the gaming industry,
changes in or failure by the Company to meet securities analysts'  expectations,
general market  conditions and other factors.  The Company's stock now trades on
the Over The Counter (OTC) Bulletin Board.  This may affect the level of trading
activity in the Company's stock, result in higher bid/ask spreads,  and increase
the cost of  raising  additional  equity for the  Company,  as well as result in
higher levels of volatility in the price of the Company's stock.

     RETENTION OF PERSONNEL - The  operations  of the Company  depend to a great
extent on the management efforts of its officers and other key personnel, and on
the ability to attract new key personnel and retain existing key personnel.  The
Company has experienced  some turnover among its senior  management  during 1999
and the portion of the year through September 30, 2000. The Company also reduced
its  workforce  by  approximately  20% in December  1998 and by a further 40% in
March 1999.  These factors,  combined with the Company's poor operating  results
and the significant decrease in the price of the Company's Common Stock may have
an  adverse  affect on the  Company's  ability to retain  and  motivate  its key
employees.  Competition  is  intense  for  highly  skilled  product  development
employees in particular.  In addition,  the Company's officers and key employees
are not bound by non-competition  agreements that extend beyond their employment
at the Company,  and there can be no  assurance  that  employees  will leave the
Company  or  compete  against  the  Company.  The  Company's  failure to attract
additional  qualified employees or to retain its existing employees could have a
material  adverse  affect  on the  Company's  operating  results  and  financial
condition.

     CUSTOMER  RETENTION - The Company's ability to sell product may be hampered
due to the financial  position of the Company which  presents risks to customers
that the  Company  may not be able to  fulfill  its  obligations  under  license
agreements or be available to provide  warranty,  repair or upgrade  services on
products that it has already sold.  The Company  experienced  negative  reaction
from customers who held these views during 1999 and, to a lesser extent, through
the first nine months of the year 2000. These customers have indicated that they
may  not  purchase  additional  product  from  the  Company.  Completion  of the

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<PAGE>
Company's debt  restructuring  in November 1999 mitigates these risks,  however,
the Company continues to experience some negative sentiments from its customers.
Certain of the Company's  competitors have  significantly  greater financial and
marketing  resources  than the  Company  and may use  their  financial  position
relative to the  Company's'  to achieve a competitive  advantage.  To the extent
that this  results in the loss of any of the  Company's  strategic  customers or
results in a loss of sales  opportunities,  the  Company's  business,  operating
results and financial condition may be adversely affected.

     INTELLECTUAL   PROPERTY  RIGHTS  -  The  Company  regards  its  product  as
proprietary  and  relies  primarily  on  a  combination  of  patent,  trademark,
copyright  and trade  secret laws and  employee  and  third-party  nondisclosure
agreements to protect its proprietary rights.  Defense of intellectual  property
rights can be costly,  and there can be no  assurance  that the Company  will be
able to effectively protect its technology from misappropriation by competitors.

     As the number of software products in the gaming industry increases and the
functionality  of  these  products  further  overlap,  software  developers  and
publishers  or  competitors  may  increasingly  become  subject to  infringement
claims.  The Company may also become  subject to  infringement  claims,  with or
without merit,  that are brought by competitors  who are motivated with a desire
to disrupt the Company's business. The Company and three of its competitors were
notified  by one of its  competitors,  IGT, of a  potential  infringement  claim
during  November 1999.  This required  senior  management to work with the other
defendants to provide  information to IGT that it believes repudiates the claims
alleged  by IGT.  In  March  2000,  the  Company  and  one  other  slot  machine
manufacturer  were  notified  by  one  of  its  competitors,  IGT,  of a  patent
infringement  lawsuit  filed  against  it.  The  company  has not yet  presently
responded to this latest  lawsuit.  Any such claims or litigation  can be costly
and result in a diversion of management's attention, which could have a material
adverse effect on the Company's business and financial condition. Any settlement
of such claims or adverse  determinations  in such litigation  could also have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.

     CHANGING  LEGISLATIVE  ENVIRONMENT  -The opening of new casinos,  including
casinos in jurisdictions  where gaming has recently been legalized  historically
has driven growth for demand in slot  machines.  However,  in recent years,  the
legalization of gaming in new jurisdictions  has been reduced;  therefore demand
based on new  openings  may be  largely  limited  to new  projects  in  existing
markets.  Certain  markets,  which currently  permit gaming,  are  contemplating
legislation to limit, reduce or eliminate gaming. If successful such legislation
could limit growth  opportunities for the Company. As a result of these factors,
there can be no assurance  that the slot machine market will sustain the rate of
growth that was possible in the first half of this decade.

     RAPIDLY  CHANGING  TECHNOLOGY - The  Company's  products  utilize  hardware
components  that have been  developed  primarily  for the personal  computer and
multimedia industries. These industries are characterized by rapid technological
change and product enhancements. The Company's ability to remain competitive and
retain any technological lead may depend in part upon its ability to continually
develop new slot machine  games that take full  advantage  of the  technological
possibilities  of  state-of-the-art  hardware.  The  Company has not updated its
product offering to take advantage of enhanced  hardware  components since 1998.
Should any current or potential  competitor of the Company succeed in developing
a  competing  software-based  gaming  platform,  such  competitor  could be in a
position to  outperform  the Company in its ability to exploit  developments  in
microprocessor,  video or other multimedia technology.  The emergence of a suite
of slot machine  games that is superior to the  Company's  in any respect  could
substantially  diminish the Company's  product sales and thereby have a material
adverse effect on the Company's operating results.

     DEPENDENCE  ON  SINGLE-SOURCE  SUPPLIERS  - The Company  currently  obtains
certain  systems  components  from  single-source  suppliers.  In particular the
touchscreen  and picture tube that  comprise  the video  display are supplied by
MircoTouch Systems,  Inc. and Philips Display Components Company,  respectively.
The Company does not have long-term  supply  contracts with these  suppliers but
rather obtains these  components on a purchase order basis.  Although the design
of these  components is not unique or proprietary and the Company  believes that

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<PAGE>
it could identify  alternative sources of supply, if necessary,  there can be no
assurance that the Company would be able to procure,  substitute or produce such
components  without a significant  interruption  in its assembly  process in the
event that these single  sources were unable to supply  these  components.  Even
where the Company has multiple sources of supply for a component,  industry-wide
component  shortages,  such as those that have  occurred  with various  computer
components, could significantly delay productivity,  increase costs or both. The
Company is also exploring exclusive  outsourcing  arrangements  whereby a single
third party contract manufacturer might assemble all or a significant portion of
new products that the Company may plan to introduce. The failure or delay by any
supplier to furnish the Company with the required  components or products  would
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

ITEM 7A

     Market Risk  Disclosures:  The  following  discussion  about the  Company's
market risk  disclosures  involves  forward-looking  statements.  Actual results
could differ materially from those projected in the forward-looking  statements.
The Company is exposed to market risk  related to changes in interest  rates and
equity  security  price risk.  The Company  does not have  derivative  financial
instruments for speculative or trading purposes.

     The Company has fixed rate  long-term debt of  approximately  $11.5 million
outstanding  at September 30, 2000 and a  hypothetical  ten percent  increase or
decrease in interest  rates would not have a material  impact on the fair market
value of this debt. The fair value of the Company's Senior Discount Notes may be
lower than the  recorded  value,  but the Company is unable to estimate the fair
value at this time. The Company does not hedge any interest rate exposures.

                           PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     In March 2000, a former distributor of the Company's  products,  filed suit
against  the Company in the United  States  District  Court for the  District of
South Carolina.  The distributor seeks repayment of $1 million, plus damages, in
connection  with machines  previously  shipped to the distributor in December of
1998. The Company  responded to the complaint  requesting that the proceeding be
stayed  while the  parties  went  through  arbitration  in  accordance  with the
Distribution  Agreement  pursuant  to  which  the  machines  were  shipped.  The
distributor filed a response  requesting the court to reject the stay. The court
ruled in favor of the Distributor  and the Company  appealed the decision to the
United  States Court of Appeals for the Fourth  Circuit on August 14, 2000.  The
Company is awaiting a decision from the Court of Appeals.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits.

           Number        Exhibit Description
           ------        -------------------
           27.1          Financial Data Schedule

     (b)  Reports on Form 8-K.

          None

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<PAGE>
Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                        SILICON GAMING, INC.


                                        By /s/ Andrew S. Pascal
                                           -------------------------------------
                                           Andrew S. Pascal
                                           President, Chief Executive Officer,


Date: November 21, 2000

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