<PAGE>
 
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                                 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 MARCH 31, 1998
 
                                      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)
 
<TABLE>
<S>                                            <C>
                 CALIFORNIA                                      77-0357939
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NUMBER)
</TABLE>
 
                             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.
 
  14,155,591 shares of Common Stock, $.001 par value, were outstanding as of
                                April 30, 1998.
 
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<PAGE>
 
                              SILICON GAMING, INC.
                         QUARTERLY REPORT ON FORM 10-Q
                      FOR THE PERIOD ENDED MARCH 31, 1998
 
                                     INDEX
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
 <C>     <S>                                                               <C>
 PART I  FINANCIAL INFORMATION
 Item 1. Financial Statements:
         Consolidated Balance Sheets--March 31, 1998 and December 31,
         1997............................................................    3
         Consolidated Statements of Operations--Three Months Ended March
         31, 1998 and 1997...............................................    4
         Consolidated Statements of Cash Flows--Three Months Ended March
         31, 1998 and 1997...............................................    5
         Notes to Consolidated Financial Statements......................    6
         Management's Discussion and Analysis of Financial Condition and
 Item 2. Results of Operations...........................................    8
 PART II OTHER INFORMATION
 Item 2. Changes in Securities...........................................   18
 Item 6. Exhibits and Reports on Form 8-K................................   18
         Signature.......................................................   19
</TABLE>
 
                                       2
<PAGE>
 
                         PART I--FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
                              SILICON GAMING, INC.
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                          MARCH 31,  DECEMBER 31,
                                                            1998         1997
                                                          ---------  ------------
<S>                                                       <C>        <C>
                         ASSETS
CURRENT ASSETS:
 Cash and equivalents...................................  $ 11,146     $16,352
 Short-term investments.................................     2,081       4,705
 Accounts receivable (net of allowances of $50).........     4,283       4,930
 Inventories............................................    11,332       6,335
 Prepaids and other.....................................     1,417       1,334
                                                          --------     -------
   Total current assets.................................    30,259      33,656
PROPERTY AND EQUIPMENT, NET.............................     9,201       8,844
PARTICIPATION UNITS, NET................................     4,766       4,825
OTHER ASSETS, NET.......................................     1,618       1,713
                                                          --------     -------
                                                          $ 45,844     $49,038
                                                          ========     =======
          LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
 Accounts payable.......................................  $  4,198     $ 3,151
 Accrued liabilities....................................     2,411       2,983
 Deferred revenue.......................................     1,426       1,478
 Current portion of long-term obligations...............       756         285
                                                          --------     -------
   Total current liabilities............................     8,791       7,897
OTHER LONG-TERM LIABILITIES.............................     1,731       1,007
LONG-TERM OBLIGATIONS...................................    24,022      22,637
REDEEMABLE CONVERTIBLE PREFERRED STOCK--6,884,473 shares
 authorized at March 31, 1998; shares outstanding: March
 31, 1998--1,474,641; December 31, 1997--2,769,424           1,666       3,065
SHAREHOLDERS' EQUITY
 Common Stock, $.001 par value; 50,000,000 shares
  authorized; shares outstanding: March 31, 1998--
  14,147,641; December 31, 1997--13,149,737.............    56,091      54,131
 Warrants...............................................     3,107       3,107
 Notes receivable from shareholders.....................      (202)       (207)
 Unrealized gain on investments.........................         2           1
 Accumulated deficit....................................   (49,364)    (42,600)
                                                          --------     -------
   Total shareholders' equity...........................     9,634      14,432
                                                          --------     -------
                                                          $ 45,844     $49,038
                                                          ========     =======
</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 MARCH
                                                                      31,
                                                                 -------------
                                                                  1998   1997
                                                                 ------ ------
<S>                                                              <C>    <C>
REVENUE:
 Hardware....................................................... $2,424 $  --
 Software.......................................................    720    --
 Participation..................................................    882 $  --
                                                                 ------ ------
                                                                 $4,026 $  --
OPERATING EXPENSES:
 Cost of sales and related manufacturing expenses...............  3,190    941
 Research and development.......................................  2,716  2,007
 Selling, general and administrative............................  3,951  2,126
                                                                 ------ ------
 Total costs and expenses.......................................  9,857  5,074
                                                                 ------ ------
   Loss from operations.........................................  5,831  5,074
 Interest (income)/expense, net.................................    933 $ (412)
                                                                 ------ ------
NET LOSS........................................................ $6,764 $4,662
                                                                 ====== ======
Basic and diluted net loss per share............................ $ 0.51 $ 0.48
                                                                 ====== ======
Shares used in computation...................................... 13,150  9,767
                                                                 ====== ======
</TABLE>
 
 
                See notes to consolidated financial statements.
 
                                       4
<PAGE>
 
                              SILICON GAMING, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                               THREE MONTHS
                                                              ENDED MARCH 31,
                                                              ----------------
                                                               1998     1997
                                                              -------  -------
<S>                                                           <C>      <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss.................................................... $(6,764) $(4,662)
 Reconciliation to net cash used in operating activities:
  Depreciation and amortization..............................   1,176      316
  Accrued interest...........................................     672      --
  Accretion of debt discount.................................     364      --
  Deferred rent..............................................      53       40
 Changes in assets and liabilities:
  Accounts receivable........................................     647      --
  Inventories................................................  (4,997)  (2,522)
  Prepaid and other..........................................     (83)      19
  Participation units........................................    (178)     --
  Accounts payable...........................................   1,047    1,197
  Accrued liabilities........................................    (572)    (184)
  Deferred revenue...........................................     (52)     --
                                                              -------  -------
   Net cash used in operating activities.....................  (8,687)  (5,796)
                                                              -------  -------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Acquisition of property and equipment.......................  (1,197)  (2,047)
 Purchase of short-term investments..........................      --   (1,250)
 Sales and maturities of short-term investments..............   2,625    3,750
 Other Assets, net...........................................      (4)    (161)
                                                              -------  -------
   Net cash provided by investing activities.................   1,424      292
                                                              -------  -------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Sale of common stock, net of notes receivable...............     561      358
 Collection of note receivable...............................       5        7
 Proceeds from term loans....................................   1,560      --
 Repayment of capital lease obligations......................     (69)     (42)
                                                              -------  -------
   Net cash provided by financing activities.................   2,057      323
                                                              -------  -------
NET DECREASE IN CASH AND EQUIVALENTS.........................  (5,206)  (5,181)
 Beginning of period.........................................  16,352   25,583
                                                              -------  -------
 End of period............................................... $11,146  $20,402
                                                              =======  =======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
 INFORMATION:
 Cash paid during the period for interest.................... $    15  $    21
                                                              =======  =======
NONCASH INVESTING AND FINANCING ACTIVITIES:
 Conversion of preferred stock to common stock............... $ 1,399  $   --
                                                              =======  =======
</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 March 31, 1998, the
consolidated statements of operations for the three months ended March 31,
1998 and 1997, and the consolidated statements of cash flows for the three
months ended March 31, 1998 and 1997, 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, 1997 included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
 
  Certain prior year amounts have been reclassified to conform to the current
year presentation.
 
2. INVENTORIES
 
  Inventories are stated at lower of cost (first-in, first-out) or market and
consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                          MARCH 31, DECEMBER 31,
                                                            1998        1997
                                                          --------- ------------
   <S>                                                    <C>       <C>
   Raw materials.........................................  $ 3,924     $3,028
   Work in process.......................................      584        468
   Finished goods........................................    6,824      2,839
                                                           -------     ------
                                                           $11,332     $6,335
                                                           =======     ======
</TABLE>
 
3. LONG-TERM OBLIGATIONS
 
  Long-term obligations consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                        MARCH 31, DECEMBER 31,
                                                          1998        1997
                                                        --------- ------------
   <S>                                                  <C>       <C>
   Senior Discount Notes ($30 million principal
    obligation)........................................  $22,641    $22,277
   Capital lease obligations...........................      577        645
   Other long-term obligation..........................    1,560          0
                                                         -------    -------
                                                         24,778      22,922
   Current portion.....................................    (756)       (285)
                                                         -------    -------
   Long-term portion...................................  $24,022    $22,637
                                                         =======    =======
</TABLE>
 
  In March 1998, the Company entered into a secured equipment term loan with
available credit up to $2 million. Borrowings bear interest at 11% per annum
for a term of 36 months. As of March 31, 1998, the Company had $1,560,000
outstanding under this agreement. The agreement requires the Company to comply
with certain financial covenants, and the Company was in compliance with all
of the covenants at March 31, 1998.
 
                                       6
<PAGE>
 
                             SILICON GAMING, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
4. RECENTLY ISSUED ACCOUNTING STANDARDS
 
  In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" which requires
an enterprise to report, by major components and as a single total, the change
in net assets during the period from non-owner sources. For the three months
ended March 31, 1998 and 1997, comprehensive loss, which was comprised of the
Company's net loss for the periods and unrealized gains (losses) on
investments, was $6,763,000 and $4,638,000, respectively.
 
  In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. Adoption of this statement
will not impact the Company's consolidated financial position, results of
operations or cash flows. The Company will adopt this statement in its
financial statements for the year ending December 31, 1998.
 
5. SUBSEQUENT EVENTS
 
  In April 1998, the Company entered into a $10 million secured revolving line
of credit agreement based on the Company's eligible accounts receivable which
expires December 31, 1999. Borrowings bear interest at the bank's prime rate
(8.50% at March 31, 1998) plus 1%. The line of credit requires the Company to
comply with certain financial covenants, and the Company was in compliance
with all of the covenants at March 31, 1998.
 
                                       7
<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
 
  Silicon Gaming, Inc. ("SGI" or "the Company") is engaged in the design,
development, production, marketing and sale of what it believes will be the
next generation of interactive slot machines for use in casinos and other
gaming establishments. The Company's first product, Odyssey(TM), combines an
advanced multimedia gaming platform with software-based games that the Company
believes to be more engaging and entertaining than other gaming devices
currently available and will, as a result, generate increased win per machine
for the casino operator.
 
  Odyssey features 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 unattainable by the current generation of slot machines.
The majority of today's slot machines are "hardware dominant", consisting of a
fixed and unvarying game played on spinning reels or a small video screen
mounted within a large metal box. By contrast, Odyssey is "software dominant",
in that the attraction and entertainment value of its machines is created by
software programs that run SGI's games. Odyssey offers a selection of a suite
of up to six different games on a single machine. The Company expects that
casino operators will be able to quickly and easily upgrade SGI's machines
simply by installing new software, rather than replacing an entire slot
machine.
 
  The Company commenced commercial sale of Odyssey in May 1997 and prior to
this time was in the development stage. The Company and Odyssey are licensed
for sale in Nevada, Missouri and Mississippi and the Company is in the process
of gaining licenses in additional jurisdictions. As at March 31, 1998 the
Company had an installed base of over 2,000 machines. The Company shipped 660
machines to customers during the quarter, increasing its installed base by
42%. During the quarter, the Company received approval in Nevada to introduce
four new game titles as well as one-dollar and five-dollar denomination
Odyssey machines. Subsequent to the end of the quarter, the Company received
similar approval in Mississippi. In addition, the Company recently received
its corporate license in New Jersey.
 
  The Company was incorporated in California on July 27, 1993. Its principal
offices are located at 2800 W. Bayshore Road, Palo Alto, California, 94303.
The Company also maintains sales and support offices in Las Vegas and Reno,
Nevada, and in Gulfport, Mississippi.
 
                                       8
<PAGE>
 
RESULTS OF OPERATIONS
 
  The Company had a net loss of $6,764,000 and $4,662,000 for the three months
ended March 31, 1998 and 1997, respectively. Increases between these two
periods were due to increases in resources the Company devoted to
manufacturing development and production, building a sales, support and
administrative infrastructure, hiring additional administrative staff, and
ramping up the Company's marketing activities, which were partially offset by
the revenue earned in the current quarter. In the three months ended March 31,
1997 the Company was in the development stage, without revenue. As a result,
the prior period differs from, and may not be comparable to, current or future
periods. Revenue for the three months ended March 31, 1998 of $4,026,000 was
lower than revenue recorded in the three months ended December 31, 1997 of
$5,038,000. Consistent with industry practice, the Company places units with
customers on a 45-day evaluation period. The timing of approvals of new games
in the current quarter meant that a large number of installations in the
quarter were still on evaluation with customers as at March 31, 1998. The
Company was able to install more units in the current quarter than the
previous quarter, however the timing of the new product licensing had a
negative impact on revenue and the number of units that were recorded to
revenue.
 
  The Company sold its first machines in Nevada in May 1997. Since that time
the Company has been broadening the markets in which it sells it product and
expanding its game software library. The Company's quarterly and annual
operating results have been, and will continue to be, affected by a wide
variety of factors that could have a material adverse effect on revenues and
profitability during any particular period. This includes such factors as the
level of orders which are received and can be shipped in a quarter, the
rescheduling or cancellation of sales or trial orders by its customers, the
timing and or ability of the Company to obtain the licenses necessary to
conduct its business, the Company's ability to introduce new software or
hardware products and technologies on a timely basis, new product
introductions by the Company's competitors, and the level of expenditures in
manufacturing, research and development, and sales, general and administrative
functions. Accordingly, it is not possible to estimate future revenue and
operating expenses based upon historical operating performance.
 
  The Company's first commercial product, Odyssey, is significantly different
from the products offered by its competitors. Because sales of the Odyssey and
related software will comprise the Company's only source of revenue for the
foreseeable future, the Company's quarterly and annual operating results will
depend on the success of this single product that is subject to the new
product risks described in the preceding paragraph. In addition, Odyssey's
success will also depend upon the Company's ability to generate new and
successful software-based games which are readily accepted in the marketplace.
Historically, the Company has generally recognized a substantial portion of
its revenues in the last month of a given quarter. A significant portion of
the Company's expenses is fixed in the short term, and the timing of increases
in expenses is based in large part on the Company's forecast of future
revenues. As a result, if revenues do not meet the Company's expectations, it
may be unable to quickly adjust expenses to levels appropriate to actual
revenues, which could have a material adverse effect on the Company's business
and results of operations.
 
  As a result of the foregoing, the Company's operating results and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in net revenues or operating results from levels expected
by securities analysts could have an immediate and significant adverse effect
on the trading price of the Company's common stock.
 
  The market price of the Company's common stock has fluctuated significantly
since its initial public offering in July 1996. The market price of the common
stock could be subject to significant fluctuations in the future based on
factors such as announcements of new products or game titles by the Company or
its competitors, quarterly fluctuations in the Company's financial results or
other gaming machine manufacturing companies' financial results, changes in
analysts' estimates of the Company's financial performance, general conditions
in the gaming or gaming machine manufacturing industries, conditions in the
financial markets and general conditions in the political or business
environment which might adversely affect the gaming industry. In addition, the
stock market in general has experienced extreme price and volume fluctuations,
which have particularly
 
                                       9
<PAGE>
 
affected the market prices for many high technology companies and which have
often been unrelated to the operating performance of the specific companies.
The market price of the Company's common stock has declined substantially from
its historic highs, and may continue to experience significant fluctuations in
the future.
 
 Revenue
 
  Revenue for the three months ended March 31, 1998 was $4,026,000, comprised
of $2,424,000 in hardware sales, $720,000 in software license revenue and
$882,000 in participation revenue. The Company did not have revenue in the
three months ended March 31, 1997. As of March 31, 1998 the Company had an
installed base of over 2,000 machines. In the quarter ended March 31, 1998,
the Company shipped 660 machines, increasing its installed base by 42%.
Revenue was recognized on 310 units, with the remaining units (net of returns)
subject to an initial evaluation period. Due to the early stage of the
Company's product cycle, the Company believes the revenue generated from
future sales will increase significantly with the full rollout of the
Company's product in the current year. The Company believes license revenue
will increase as a percentage of total revenue and in absolute dollars as the
Company's base of installed units continues to increase. Anticipated increases
in revenues, however, are subject to a number of risks and uncertainties. See
"Risk Factors--Uncertain Market Acceptance; Risk of Technical Errors; Single
Product", "--Competition", "--Rapidly Changing Technology" "--Slow Trend in
Legalized Gambling", and "--Regulatory Approval."
 
  The Company began commercial sale of its product in May 1997, and has since
generated revenue from machine sales direct to customers as well as from
software license and participation revenue in the Nevada, Missouri and
Mississippi markets. The Company installs units on casino floors through
direct sales, as well as on a trial basis, consistent with industry practice.
The Company's initial sales of Odyssey include the hardware platform bundled
with a suite of six games, play stoppage entertainment and the Machine
Management System(TM). The Company offers two alternative purchase programs,
consisting of the sale of hardware bundled with either (1) a single game or a
suite of games or (2) a renewable one-year software license, including access
to the Company's entire game library for the term of the license. In addition,
the Company offers a revenue participation plan that allows the Company to
share with casino operators the aggregate win generated by the machines, with
20% going to the Company. Under this plan, the casino accumulates credits that
may be applied to the purchase of the machines after a 90-day, minimum
evaluation period. As of March 31, 1998, the Company had 687 units with
customers under participation arrangements.
 
 Cost of Sales and Related Manufacturing Expenses
 
  Cost of sales and related manufacturing expenses include direct costs of
product sales, payroll and related costs for manufacturing personnel, overhead
costs and depreciation of participation units. Cost of sales and related
manufacturing expenses were $3,190,000 and $941,000 for the three months ended
March 31, 1998 and 1997, respectively. In the three months ended March 31,
1998, manufacturing costs, as well as direct costs of product sales, relate to
the corresponding revenue recognized. In the three months ended March 31, 1997
the Company was in the development stage, without revenue, and manufacturing
expenses did not include direct costs of product sales. As a result, the prior
periods differs from, and may not be comparable to, current or future periods.
Cost of sales and manufacturing expenses are expected to increase through 1998
as the Company increases sales of its product and expands its manufacturing
capacity and infrastructure to produce its product in greater commercial
quantities. Due to manufacturing efficiencies from the tooling of certain
hardware components, the Company expects to achieve a further reduction in per
unit manufacturing costs in future periods; however, aggregate fixed
manufacturing costs are expected to increase as the Company's manufacturing
volume increases. The anticipated manufacturing efficiencies are subject to a
number of risks and uncertainties. See "Risk Factors--Limited Manufacturing
Experience."
 
 Research and Development
 
  Research and development ("R&D") expenses include payroll and related costs
of employees engaged in ongoing design and development activities, fees to
outside contractors, 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 $2,716,000 and
 
                                      10
<PAGE>
 
$2,007,000 for the three months ended March 31, 1998 and 1997, respectively.
Increases over these periods have resulted from the incremental hiring of
personnel, increased use of engineering consultants and license fees and
similar costs associated with the acquisition of outside technologies. The
Company believes that a significant level of R&D expense is required due to
the technical nature of its product and the elaborate requirements of the game
development process. Accordingly, the Company anticipates devoting substantial
resources, including additional personnel, to R&D and that these costs are
expected to increase in absolute dollars in future periods, however these
costs are expected to decrease as a percentage of revenues.
 
 Selling, General and Administrative
 
  Selling, general and administrative ("SG&A") expenses include payroll and
related costs for administrative and executive personnel, sales and marketing
personnel, overhead costs, legal and associated costs, costs associated with
obtaining corporate and product licenses in various jurisdictions and fees for
professional services. SG&A expenses were $3,951,000 and $2,126,000 for the
three months ended March 31, 1998 and 1997, respectively. Increases over these
periods have resulted from the incremental hiring of personnel and expenses
associated with applying for corporate and product licensing in various
jurisdictions and costs associated with the establishment of sales and
marketing organizations as the Company commenced commercial distribution and
production of its product. SG&A expenses are expected to increase
substantially in absolute dollars as the Company invests in increased sales-
and marketing-related activities and in administrative personnel to support
its growing infrastructure, however these costs are expected to decrease as a
percentage of revenues.
 
 Interest Income and Expense
 
  Net interest expense was $933,000 for the three months ended March 31, 1998,
as compared to and net interest income of $412,000 for the three months ended
March 31, 1997. Included in these totals was interest income of $220,000 and
$434,000 for the three months ended March 31, 1998 and 1997, respectively.
Decreases in interest income over these periods were primarily due to lower
average cash and investment balances held compared to prior periods. Interest
expense was $1,153,000 and $22,000 for the three months ended March 31, 1998
and 1997. Increases in interest expense over these periods were primarily due
to interest and amortized debt costs recorded in the quarter ended March 31,
1998 for Senior Discount Notes (the "Notes") issued on September 30, 1997.
 
 Income Taxes
 
  The Company has not been required to pay income taxes due to its net
operating losses in each period since inception. As of December 31, 1997, the
Company had net operating loss carryforwards of approximately $40,800,000 and
$24,900,000 for federal and state income tax purposes, respectively. These
loss carryforwards will expire beginning in the year 2000, if not utilized. As
of December 31, 1997, the Company also has R&D credit carryforwards of
approximately $480,000 and $480,000 for federal and state purposes,
respectively, which expire beginning 2010. A valuation allowance has been
recorded for any deferred tax assets due to uncertainties regarding the
realization of these assets resulting from the lack of earnings history of the
Company. 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.
As of March 31, 1997, approximately $4 million of the Company's net operating
loss carryforwards was subject to such limitation and this limitation is
dependent on the Company's future profitability and the utilization of its net
operating loss carryforwards over a period of time.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Cash, cash equivalents and short-term investments were $13,227,000 as of
March 31, 1998, compared to $21,057,000 as of December 31, 1997. This decrease
was primarily due to increases in cash used in operating activities as the
Company ramped up manufacturing, marketing, and selling of its product,
partially offset by increases in cash provided by investing and financing
activities.
 
 
                                      11
<PAGE>
 
  The Company's net cash used in operating activities was $8,687,000 and
$5,796,000 for the three months ended March 31, 1998 and 1997, respectively.
This increase was due to increases in the Company's net losses, partially
offset by depreciation and amortization, accrued interest, accretion of debt
discount, deferred rent changes in working capital. Working capital was
$21,468,000 and $25,759,000 at March 31, 1998 and December 31, 1997,
respectively. The decrease in working capital consists of increases in
inventory, accrued liabilities, participation units, prepaid and other current
assets, and deferred revenue, offset by decreases in accounts receivable and
accounts payable. These changes are primarily due to the fact that the Company
was ramping up operations and increasing inventory on hand to prepare for the
increased sale of its product in the current year.
 
  Net cash provided by investing activities was $1,424,000 and $292,000 for
the three months ended March 31, 1998 and 1997, respectively. The increase was
primarily due to decreases in the acquisition of fixed assets, primarily
computer equipment and software, decreases in other assets, and increases in
the net cash provided by the purchase, sale and maturity of short-term
investments.
 
  Net cash provided by financing activities was $2,057,000 and $323,000 for
the three months ended March 31, 1998 and 1997, respectively. The increase was
primarily due to proceeds from term loans and the sale of common stock, which
was partially offset by increases in the repayment of capital lease
obligations.
 
  In March 1998, the Company entered into a secured equipment term loan with
available credit up to $2 million. Borrowings bear interest at 11% per annum
for a term of 36 months. As of March 31, 1998, the Company had $1,560,000
outstanding under this agreement. The agreement requires the Company to comply
with certain financial covenants, and the Company was in compliance with all
of the covenants at March 31, 1998.
 
  In April 1998, the Company entered into a $10 million secured revolving line
of credit agreement based on the Company's eligible accounts receivable, which
expires December 31, 1999. Borrowings bear interest at the bank's prime rate
(8.50% at March 31, 1998) plus 1%. The line of credit requires the Company to
comply with certain financial covenants, and the Company was in compliance
with all of the covenants at March 31, 1998.
 
  At March 31, 1998 the Company's principal sources of liquidity included cash
and equivalents of $11,146,000 and short-term investments of $2,081,000. The
Company believes its cash and equivalents, short-term investments, and its
revolving line of credit, together with proceeds from additional financing
sources which the Company believes are available, will be sufficient to meet
its anticipated cash needs for working capital, capital expenditures and
business expansion until the Company generates positive cash flow from
operations. However, there can be no assurances that the Company will generate
positive cash flow within the currently anticipated time frame. In the future,
the Company expects to increase the cash used in operating activities in order
to increase commercial production and distribution of its product, enhance
manufacturing capabilities, expand sales and support operations, increase
research and development activities and add administrative infrastructure.
 
  Cash flow from the Company's initial commercial sales has been negatively
affected by the revenue participation plan that the Company is offering to its
customers. Under this plan, a customer does not purchase the machine outright,
but pays the Company 20% of the win generated by such machine. The customer
also accumulates credits which may be applied to the purchase of the machines.
Although the Company expects that this plan will generate higher revenue per
unit than conventional sales, the cash flow generated by sales under the plan
occurs over an extended period, as the aggregate win per day is earned.
 
  The Company's capital requirements will depend on many factors, including,
but not limited to, the rate at which the Company can introduce its product,
the market acceptance and competitive position of such product, the extent to
which the customers choose the revenue participation plan, the response of
competitors to the Company's product, and the ability of the Company to
satisfy the licensing requirements in various jurisdictions applicable to the
Company, its product, and in some jurisdictions, its officers, directors,
employees or principal shareholders. In addition to financing recently
obtained, the Company may be required to seek additional
 
                                      12
<PAGE>
 
financing before it achieves positive cash flow. In that event, no assurance
can be given that additional financing will be available or that, if
available, it will be available on terms acceptable to the Company or its
shareholders. If adequate funds are not available to satisfy the Company's
short-term or long-term capital requirements, the Company may be required to
limit its operations significantly.
 
RISK FACTORS
 
  UNCERTAIN MARKET ACCEPTANCE; RISK OF TECHNICAL ERRORS; SINGLE PRODUCT. To
achieve commercial success, the Company's product must be accepted both by
casino operators and gaming patrons. Because acceptance of the product by
casino operators will ultimately depend on win per machine, the Company
believes that its ultimate success will depend on player acceptance. The
Company's first gaming platform, Odyssey, has only been installed in casinos
for a limited period and the Company has only limited market studies and
player data to support its belief that Odyssey will be accepted by slot
players. There can be no assurance that Odyssey will be accepted by casino
patrons. Initial player interest in the product may be affected by its novel
design in addition to any inherent advantages it may have over competing
platforms and may therefore not be indicative of the long-term success of
Odyssey in the marketplace. Player preferences are highly subjective, vary
substantially among geographic and demographic markets and are subject to
unpredictable change. Because the Company's product offers features not found
on traditional slot machines, it may not appeal to players for whom
familiarity and predictability are important considerations.
 
  The Company sells its machines at prices that are substantially higher than
the prices of most competing products. In light of these higher sale prices,
coupled with the Company's status as a new and relatively small entrant in a
market dominated by larger companies, Odyssey's success will require that it
demonstrate superior, as opposed to merely comparable, win per machine when
compared to traditional slot machines and other gaming platforms offered by
more established competitors. Although a number of casinos have purchased or
installed the Company's product, any additional purchases of the product by
these casinos, or others that may conduct similar evaluations in the future,
will be subject to the superior performance of the product on the casino
floor.
 
  Odyssey was licensed in 1997 for manufacture, distribution and sale in
Nevada, Missouri and Mississippi. Because of the limited opportunity for the
Company to test its gaming platform under long-term play conditions, there can
be no assurance that a substantial technical difficulty with, or an undetected
error in, the Company's software or hardware will not arise, possibly
resulting in unanticipated costs, installation and production delays or delays
in product licensing.
 
  The Company's success will depend on the success of a single product.
Because sales of its slot machine and related software will comprise the
Company's only source of revenue in the foreseeable future, any interruption
in these sales due to a technical problem will prevent the Company from
earning revenue unless and until the cause of such interruption can be
remedied. As the Company moves into new jurisdictions, including potential
international markets, the Company may be required to make certain
modifications to its product to comply with local regulatory or market
conditions. There can be no assurance that such modifications will be
successful, or that these modifications will be performed in a timely or cost
effective manner. Moreover, should Odyssey fail to win broad acceptance in the
market, the Company's business, financial condition and results of operations
would be materially and adversely affected, and investors would be exposed to
the loss of all or a substantial portion of their investment.
 
  EXPECTATION OF LOSSES; NEGATIVE CASH FLOWS. As of March 31, 1998, the
Company has had net losses since inception, and the Company expects to
continue to incur substantial losses and negative cash flows at least through
mid-1998. There can be no assurance that the Company will become profitable or
cash flow positive at any time in the future. The likelihood of the success of
the Company must be considered in light of the expenses, difficulties and
complications that may affect the Company's ability to achieve profitable
operations and the competitive and regulatory environment in which the Company
must operate. To date, the Company's operations have focused primarily on
product development, and the Company has had limited experience in the areas
of manufacturing, sales, product distribution and customer support.
Accordingly, it is not possible to estimate future
 
                                      13
<PAGE>
 
revenue and operating expenses based upon historical operating performance.
Operating results will depend, in part, on matters over which the Company has
little or no control, including, without limitation, the ability of the
Company to obtain the licenses necessary to conduct its business, competition,
the actual number of orders for its product, gaming regulations and taxes.
 
  CAPITAL REQUIREMENTS. The Company believes that its cash and equivalents,
short-term investments, and its revolving line of credit, together with
proceeds from additional financing sources which the Company believes are
available, will be sufficient to fund its capital and operating requirements
until the Company generates positive cash flow from operations. The Company
recently obtained debt financing to fund its product roll-out, expand
operations, and fund the adoption of its revenue sharing plan. The cash flow
generated by sales under the revenue sharing plan is recognized over an
extended period, as the aggregate win per day is earned, and therefore has an
adverse effect on the Company's working capital compared to other pricing
options. In addition to the financing recently obtained, the Company may be
required to seek additional financing before it achieves positive cash flow.
There can be no assurance that the Company will be able to obtain such
financing, or that, if it is able to obtain such financing, it will be able to
do so on satisfactory terms or on a timely basis. If additional funds are
raised through the issuance of equity, convertible debt or similar securities,
shareholders may experience substantial dilution, and such securities may have
rights or preferences senior to those of Common Stock. Moreover, if adequate
funds are not available to satisfy the Company's short-term or long-term
capital requirements, the Company may be required to limit or discontinue its
revenue sharing plan, scale back its product rollout, or limit its operations
significantly. The Company's capital requirements will depend on many factors,
including, but not limited to, the rate at which the Company introduces its
product, the market acceptance and competitive position of such product, the
extent to which the customers choose the revenue participation plan, the
response of competitors to the product and the ability of the Company's
management and its product to satisfy the corporate licensing and product
licensing requirements in various jurisdictions.
 
  COMPETITION. The gaming machine industry is characterized by intense
competition that is based on, among other things, a device's ability to
generate win per machine through product appeal to players, and knowledge of
customer requirements such as ease of use, quality of service, support and
training, distribution, name recognition and price. In recent years, the
gaming machine market has been dominated by International Game Technology
("IGT") which, according to industry sources, captured approximately 75% of
the market in 1997. IGT's presence as a competitor is bolstered by its
extensive market presence, distribution capacity, player acceptance and
financial, technological and other resources. Several other companies,
including Bally Gaming International, Inc. ("Bally Gaming"), are established
in, or are seeking to enter, the gaming machine business. Companies in
historically unrelated industries, such as Sega Enterprises Ltd. ("Sega"),
have technological resources that could offer them a competitive advantage in
developing multimedia-based gaming machines. In general, the Company's
existing competitors, as well as many potential new competitors, have
significantly greater financial and technical resources than the Company, as
well as more established customer bases and distribution channels, any of
which could afford them a competitive advantage in developing multimedia-based
gaming machines. Any success the Company might have may benefit existing
competitors and induce new competitors to enter the market. If Odyssey
displays a potential to capture a significant share of the gaming machine
market, the Company's competitors can be expected to employ a variety of
tactics to limit erosion of their market share, including price reductions,
acceleration of new product development or acquisition of new, competitive
technologies. In the face of such tactics, there can be no assurance that the
Company will be a successful competitor in the gaming machine industry.
 
  MANAGEMENT OF GROWTH. Execution of the Company's plan of operation will
require significant growth. The Company's current plans for growth will place
a significant strain on the Company's financial, managerial and other
resources. The Company's ability to manage its growth effectively will require
it to continue to improve its operational, financial and management
information systems and to attract, motivate and train key employees. Should
the Company's executives be unable to manage growth effectively, the Company's
business, operating results and financial condition would be materially and
adversely affected.
 
                                      14
<PAGE>
 
  DEPENDENCE ON KEY 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.
Competition is intense for highly skilled product development employees in
particular. There can be no assurance that the Company will be successful in
attracting and retaining such personnel or that it can avoid increased costs
in order to do so. In addition, the Company's officers and key employees are
not bound by noncompetition agreements that extend beyond their employment at
the Company, and there can be no assurance that employees will not leave the
Company or compete against the Company. The Company's failure to attract
additional qualified employees or to retain the services of key personnel
could have a material adverse effect on the Company's operating results and
financial condition. The Company currently maintains a "key-man" life
insurance policy in the amount of $3 million on the life of Andrew S. Pascal,
the Company's Executive Vice President--Marketing and Game Development.
 
  LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS; RISK OF LITIGATION. 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 difficult and costly, and there
can be no assurance that the Company will be able to effectively protect its
technology from misappropriation by competitors. In addition, the protections
offered by trademark, copyright and trade secret laws would not prevent a
competitor from designing games having appearance and functionality that
closely resemble the Company's games. At present, the Company's principal
proprietary technology consists of its game authentication algorithm, which is
designed to prevent tampering with the game software that is resident in its
product, and its random number generator algorithm, which determines the
outcome of each gaming proposition. While the Company believes that these
algorithms are unique at present, there can be no assurance that a competitor
of the Company will not succeed in developing an authentication algorithm or a
random number generator algorithm that performs as well as, or better than,
the Company's. Moreover, although the Company has applied for and received
certain patents and trademarks for its intellectual property, there can be no
assurance that such patents and trademarks will not be successfully challenged
in subsequent litigation.
 
  As the number of software products in the industry increases and the
functionality of these products further overlaps, software developers and
publishers 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 by a desire to disrupt the
Company's business. Although the Company is not currently aware of any claim
that it is infringing upon any intellectual property rights, there can be no
assurance that the Company will not face claims, with or without merit, in the
future. Any such claims or litigation could be costly and could 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.
 
  RAPIDLY CHANGING TECHNOLOGY. The Company's product utilizes 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. 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.
 
  LIMITED MANUFACTURING EXPERIENCE. In order for the Company to be successful,
its product must be manufactured to meet high quality standards in commercial
quantities at competitive prices. The Company has a limited history of
manufacturing Odyssey for commercial distribution and has had no prior
experience in large-
 
                                      15
<PAGE>
 
scale manufacturing of gaming machines. The transition to large-scale
manufacturing of Odyssey will involve various risks and uncertainties
including unforeseen costs or assembly difficulties and the possibility that
anticipated efficiencies or economies of scale will fail to materialize as the
Company begins manufacturing in greater volumes. A failure by the Company to
successfully manage this transition would have a material adverse affect on
the Company's business, operating results or financial condition.
 
  DEPENDENCE ON SINGLE-SOURCE SUPPLIERS. The Company currently obtains a
number of its system's components from single-source suppliers. In particular,
the touchscreen and picture tube that comprise the video display are supplied
by MicroTouch 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 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 failure or delay by any
supplier to furnish the Company with required components would have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
  SLOWING IN TREND TO LEGALIZE GAMING. Growth in demand for slot machines
historically has been driven by the opening of new casinos, including casinos
in jurisdictions where gaming has recently been legalized. However, in recent
years, the legalization of gaming in new jurisdictions has been significantly
reduced; therefore, demand based on new openings will be largely limited to
new projects in existing markets. Certain jurisdictions 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
industry will sustain the rate of growth that was possible in the first half
of this decade.
 
  REGULATORY APPROVAL. The Company will be required to obtain and maintain the
necessary licenses, approvals, findings of suitability and product approvals
in all jurisdictions in which it intends to distribute its product. The
licensing and approval processes can involve extensive examination of the
Company and its officers, directors, employees, principal shareholders and
product and can require significant expenditures of time and resources by the
Company. Distribution of gaming devices in U.S. gaming jurisdictions generally
requires both corporate approval and product approval. The Company and certain
of its subsidiaries have received the requisite corporate approvals in Nevada,
Mississippi, Missouri, Colorado and New Jersey. The Company has also applied
for corporate approval in Minnesota, Indiana, Illinois and with certain native
American tribes in Mississippi and Louisiana, and intends to file for approval
in other jurisdictions where its product can be sold legally. Odyssey was
approved for sale in Nevada on March 20, 1997, and in Missouri and Mississippi
on October 17, 1997 and December 18, 1997, respectively. The Company has also
submitted Odyssey for testing in New Jersey and to Gaming Laboratories
International, Inc. for various jurisdictions. There can be no assurance that
Odyssey will be approved in any additional jurisdiction. The regulations
relating to company and product licensing are subject to change, and other
jurisdictions, including the federal government, may elect to regulate or tax
gaming activities. The Company cannot predict the nature of any such changes
or their impact on the Company. In addition to the initial product approval,
the Company is required to submit all software and hardware modifications to
the various regulatory laboratories. These modifications normally take between
30 and 45 days to process.
 
  Any beneficial holder of the Company's Common Stock may be subject to
investigation by any gaming authority in any jurisdiction in which the Company
does business if such authorities have reason to believe that such ownership
may be inconsistent with the gaming policies of that jurisdiction. Persons who
acquire beneficial ownership of more than certain designated percentages of
the Common Stock may be subject to certain reporting and qualification
procedures. In addition, changes in control of the Company and certain other
corporate
 
                                      16
<PAGE>
 
transactions may not be effected without the prior approval of gaming
authorities in other jurisdictions in which the Company plans to do business.
Such provisions could adversely affect the marketability of the Company's
Common Stock or prevent certain corporate transactions, including mergers or
other business combinations.
 
  YEAR 2000 ISSUES. The inability of computers and software programs to
recognize and properly process data fields containing a two digit year is
commonly know as the Year 2000 issue. As the year 2000 approaches, such
computer systems may be unable to accurately process certain date-based
information. This could result in system failures or miscalculations causing
disruption of operations including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
 
  During 1997 the Company implemented an enterprise-wide management
information system which supports all of the Company's major business
applications including sales and customer service, manufacturing and
distribution, and finance and accounting. Management has determined that the
Year 2000 issue will not pose significant operational problems for its
computer systems. As a result, any costs attributable to the purchase and
implementation of new software will be capitalized and any other costs
incurred in connection with Year 2000 compliance will be expensed as incurred.
 
  The Company is in the process of obtaining assurances from vendors that
timely updates will be made available to ensure that all purchased software
will be 2000 compliant. The Company is also in the process of initiating
formal communications with all of its significant suppliers to determine the
extent to which the Company is vulnerable to Year 2000 issues. However, there
can be no guarantee that if the systems of other companies on which the
Company's systems rely are not timely converted, or if another company fails
to convert, this would not have a material adverse effect on the Company.
 
  The Company currently obtains a significant amount of its revenues from
relatively few customers. There can be no assurance that the Year 2000 issue
will not pose significant problems for the computer systems of these
customers, which could in turn affect the customers ability to purchase
machines and generate revenue for the Company. There can be no assurance
revenue generated for the Company will not be affected by the Year 2000 issues
that these customers might have. The Company cannot predict the nature of any
such changes or their impact on the Company.
 
  The Company expects that any systems or application changes or upgrades
connected with Year 2000 compliance will be completed before December 31,
1998. The Company plans on using both internal and external resources to
replace and test software for Year 2000 compliance. The total cost to the
Company of these Year 2000 compliance activities has not been and is not
anticipated to be material to its financial position or results of operations
in any given year. The total cost of Year 2000 compliance is not expected to
exceed $500,000, the majority of which will be spent on the purchase and
implementation of new software and upgrades. These costs and the date by which
management expects to complete the Year 2000 compliance are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the availability of certain resources, third party
product and modification programs and other factors. However there can be no
assurance that these estimates will be achieved and actual results could
differ materially from those anticipated.
 
  NO DIVIDENDS. The Company has not paid any cash dividends in the past and
does not expect to do so in the foreseeable future.
 
                                      17
<PAGE>
 
                          PART II--OTHER INFORMATION
 
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
 
  During the quarter ended March 31, 1998, certain holders of the Company's
Series A1 and Series B1 Nonvoting Redeemable Convertible Preferred Stock
("Nonvoting Preferred") converted an aggregate of 1,294,783 shares of
Nonvoting Preferred to an aggregate of 863,189 shares of Common Stock.
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 
  (a) Exhibits.
 
<TABLE>
<CAPTION>
   NUMBER EXHIBIT DESCRIPTION
   ------ -------------------
   <C>    <S>
   11.1   Statement Regarding Computation of Loss Per Share
   27.1   Financial Data Schedule
   27.2   Restated Financial Data Schedule
   27.3   Restated Financial Data Schedule
   27.4   Restated Financial Data Schedule
   27.5   Restated Financial Data Schedule
</TABLE>
 
  (b) Reports on Form 8-K.
 
  None.
 
                                      18
<PAGE>
 
                                   SIGNATURE
 
  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/    Thomas E. Carlson
                                            -----------------------------------
                                                    THOMAS E. CARLSON
                                             VICE PRESIDENT--CHIEF FINANCIAL
                                                         OFFICER
                                             (PRINCIPAL FINANCIAL AND CHIEF
                                                   ACCOUNTING OFFICER)
 
Date: May 15, 1998
 
                                       19