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, 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.

               30,978,831 shares of Common Stock, $.001 par value,
                     were outstanding as of April 30, 2000.
<PAGE>
                              SILICON GAMING, INC.
                          QUARTERLY REPORT ON FORM 10-Q
                       FOR THE PERIOD ENDED MARCH 31, 2000

                                      INDEX

                                                                            Page
                                                                            ----
PART I    FINANCIAL INFORMATION

Item 1.   Financial Statements:

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

          Consolidated Statements of Operations--Three months
          ended March 31, 2000 and 1999.....................................   4

          Consolidated Statements of Cash Flows--Three months
          ended March 31, 2000 and 1999.....................................   5

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

Item 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations.........................................  10

PART II   OTHER INFORMATION

Item 1.   Legal Proceedings.................................................  21

          Exhibits and Reports on Form 8-K..................................  21

          Signature.........................................................  22
<PAGE>
                          PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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


                                                         March 31,  December 31,
                                                           2000        1999
                                                         --------    --------
                                                        (Unaudited)
                                     ASSETS
CURRENT ASSETS:
  Cash and equivalents ...............................   $    837    $    877
  Short-term investments .............................                  1,000
  Accounts receivable (net of allowances of $1,044
    in 2000 and $1,169 in 1999) ......................      1,963       1,188
  Inventories ........................................      5,801       7,331
  Prepaids and other .................................        834       1,069
                                                         --------    --------
     Total current assets ............................      9,435      11,465
PROPERTY AND EQUIPMENT, NET ..........................      3,313       3,795
OTHER ASSETS, NET ....................................        299         321
                                                         --------    --------
         TOTAL ASSETS ................................   $ 13,047    $ 15,581
                                                         ========    ========

                    LIABILITIES AND SHAREHOLDERS' DEFICIENCY

CURRENT LIABILITIES:
  Accounts payable ...................................   $  1,252    $  1,389
  Accrued liabilities ................................      1,545       1,655
  Deferred revenue ...................................      1,131         240
  Line of credit .....................................        622
  Current portion of long-term obligations ...........      1,152       1,165
                                                         --------    --------
     Total current liabilities .......................      5,080       5,071
OTHER LONG-TERM LIABILITIES ..........................      1,609       1,611
LONG-TERM OBLIGATIONS ................................     10,379      10,428
LONG-TERM ACCRUED INTEREST ...........................      5,777       5,832

SHAREHOLDERS' DEFICIENCY

  Common Stock, $.001 par value; 750,000,000 shares
    authorized; shares Outstanding: March 31, 2000--
    30,978,831; December 31, 1999--30,949,273 ........     64,123      64,123
  Preferred Stock, $.001 par value; 6,884,473 shares
    authorized; shares outstanding at March 31, 2000--
    39,750 (liquidation preference up to $39.75
    million) .........................................     20,000      20,000
  Warrants ...........................................      5,542       5,542
  Notes receivable from shareholders .................       (344)       (345)
  Deferred stock compensation ........................     (4,355)     (4,646)
  Accumulated deficit ................................    (94,764)    (92,035)
                                                         --------    --------
     Total shareholders' deficiency ..................     (9,798)     (7,361)
                                                         --------    --------
                                                         $ 13,047    $ 15,581
                                                         ========    ========

                 See notes to consolidated financial statements.

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

                                                           Three Months Ended
                                                                 March 31,
                                                          ----------------------
                                                           2000           1999
                                                          -------        -------
REVENUE:
  Hardware .......................................        $ 1,978        $ 3,672
  Software .......................................            645          1,387
  Participation ..................................            448            602
     Other .......................................             32
                                                          -------        -------
  Total revenue ..................................        $ 3,103        $ 5,661

OPERATING EXPENSES:
  Cost of sales and related
    manufacturing expenses .......................          1,987          4,219
  Research and development .......................            613          2,348
  Selling, general and
    administrative ...............................          3,136          2,896
  Restructuring charges ..........................                         3,312
                                                          -------        -------
  Total costs and expenses .......................          5,736         12,775
                                                          -------        -------
       Loss from operations ......................          2,633          7,114

  Interest expense, net ..........................             96          1,926

NET LOSS .........................................        $ 2,729        $ 9,040
                                                          =======        =======
Basic and diluted net loss per share .............        $  0.09        $  0.64
                                                          =======        =======
Shares used in computation .......................         30,959         14,115

                 See notes to consolidated financial statements.

                                       4
<PAGE>
                              SILICON GAMING, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

                                                             Three Months Ended
                                                                  March 31,
                                                             ------------------
                                                              2000       1999
                                                             -------    -------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss ...............................................   $(2,729)   $(9,040)
  Reconciliation to net cash used in operating activities:
    Depreciation and amortization ........................       517      1,726
    Accrued interest .....................................       (55)     1,125
    Accretion of debt discount ...........................                  599
    Deferred stock compensation ..........................       291
    Restructuring charges ................................                2,566
    Deferred rent ........................................        (2)        19
  Changes in assets and liabilities:
    Accounts receivable ..................................      (775)     1,297
    Inventories ..........................................     1,530        553
    Prepaid and other ....................................       235         10
    Participation units ..................................       (44)       406
    Accounts payable .....................................      (137)      (529)
    Accrued liabilities ..................................      (110)      (285)
    Deferred revenue .....................................       891       (285)
                                                             -------    -------
      Net cash used in operating activities ..............      (388)    (1,838)
                                                             -------    -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of property and equipment ..................        --       (311)
  Sale of property and equipment .........................         9         --
  Sales and maturities of short-term investments .........     1,000         --
  Other assets, net ......................................        22        (31)
                                                             -------    -------
      Net cash provided by (used in) investing activities      1,031       (342)
                                                             -------    -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from term loans and line of credit ............       250
  Repayment of bank line of credit .......................      (622)    (1,868)
  Sale of Common Stock, net of notes receivable ..........        --         48
  Collection of note receivable ..........................         1          9
  Repayment of term loans ................................      (265)      (235)
  Repayment of capital lease obligations .................       (47)       (76)
                                                             -------    -------
      Net cash provided by financing activities ..........      (683)    (2,122)
                                                             -------    -------
NET DECREASE IN CASH AND EQUIVALENTS .....................       (40)    (4,302)
  Beginning of period ....................................       877      8,399
                                                             -------    -------
  End of period ..........................................   $   837    $ 4,097
                                                             =======    =======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for interest ...............   $   182    $   173
                                                             -------    =======
  Conversion of preferred stock to Common Stock ..........   $    --    $    --
                                                             =======    =======

                 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,  2000,  the
consolidated  statements of operations for the three months ended March 31, 2000
and 1999,  and the  consolidated  statements  of cash flows for the three months
ended  March 31, 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 assuming
that the Company  will  continue as a going  concern.  The Company has  incurred
operating  losses every year since its  inception and at March  31,2000,  had an
accumulated deficit of $94,764,000 and a shareholders' deficiency of $9,798,000.
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 $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.  Management continues 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.
Management believes that these steps, plus sales related to proposed new product
introductions,  will provide sufficient cash and working capital for the Company
to meet its ongoing obligations and to allow it to continue operating as a going
concern  through  at  least  the  end of  2000.  The  accompanying  consolidated
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.

     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 reflects the potential
dilution that would occur if securities or other contracts to issue Common Stock
were  exercised  or  converted  into  Common  Stock.  Common  share  equivalents
including  stock options,  warrants and Redeemable  Convertible  Preferred Stock
aggregating  104,534,555  shares,  116,712,841  shares and  235,092,858  shares,
respectively,  as of March  31,2000 and  4,652,569  shares,  919,443  shares and
983,143 shares, respectively,  as of March 31, 1999, have been excluded from all
periods presented, as their effect would be antidilutive.

                                       6
<PAGE>
     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):

                                                            Three months ended
                                                                March 31,
                                                           --------------------
                                                             2000        1999
                                                           --------    --------
     Net Loss (Numerator):
     Net Loss, basic and diluted .......................   $ (2,729)   $ (9,040)
                                                           ========    ========
     Shares (Denominator)
     Weighted average common shares outstanding ........     30,959      14,277
     Weighted average common shares subject
       to repurchase ...................................                   (162)
                                                           --------    --------
     Shares used in computation .......................      30,959      14,115
                                                           ========    ========
     Net Loss Per Share, Basic and Diluted .............   $   0.09    $   0.64
                                                           ========    ========

     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):

                                                  March 31,       December 31,
                                                    2000             1999
                                                   -------          -------
     Raw materials ......................          $   971          $   849
     Work in process ....................              642              111
     Finished goods .....................            4,188            6,371
                                                   -------          -------
                                                   $ 5,801          $ 7,331
                                                   =======          =======

3.   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 March 31,  2000,  two
customers accounted for 18% and 8% of accounts receivable.  For the three months
ended March 31, 2000, one customer  accounted for 10% of revenue.  For the three
months ended March 31, 1999, one customer accounted for 15% of revenue.

                                       7
<PAGE>
4.   BORROWING ARRANGEMENTS

     The Company had a $4 million  secured  revolving  line of credit  agreement
     based on the  Company's  eligible  accounts  receivable,  which  expired on
     December 31, 1999. The Company subsequently repaid all outstanding balances
     under this  agreement in February  2000. As of April 30, 2000,  the company
     was in the process of formalizing a new revolving line of credit.  See Note
     5.

     Borrowing arrangements consist of the following (in thousands):

                                                         March 31,  December 31,
                                                           2000        1999
                                                         --------    --------
     Senior Discount Notes  ...........................  $  9,750    $  9,500
     Capital lease obligations ........................         8          55
     Other long-term obligations ......................     1,773       2,038
                                                         --------    --------

                                                           11,531      11,593
     Current obligation ...............................    (1,152)     (1,165)
                                                         --------    --------
     Long-term portion ................................  $ 10,379    $ 10,428
                                                         ========    ========

                                       8
<PAGE>
5. SUBSEQUENT EVENTS

     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 has not yet responded to the
lawsuit and the Company's management denies the assertions of infringement.  The
Company is presently unable to determine the financial  impact,  if any, of this
litigation.  The costs of  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.  No  adjustments  have  been  made in the  accompanying
consolidated financial statements relating to this litigation.

     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  arbitration  as  required  by the  Distribution
Agreement,  seeking to recover outstanding receivables from the distributor when
it received  this  lawsuit.  The Company is still in the  preliminary  stages of
investigating the allegations contained in the suit and has not yet responded to
the complaint.

     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 initially expire in May 2001 (and subject to
automatic  renewal  provisions),  the  Company  may  borrow  up to  $2  million.
Borrowings  will bear  interest at the bank's prime rate (9.50% at May 18, 2000)
plus 1.5%.  The Company  will issue the bank  warrants to up 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.

     On April 13, 2000 and May 3, 2000,  respectively,  the company, through one
its wholy-owned  subsidiaries,  entered into convertible note (the  "Convertible
Notes")  financing  agreements  for $2.5  million.  The  Convertible  Notes bear
interest  at a rate of 10% per annum  with  principal  and  interest  to convert
automatically into Series A Convertible Notes Preferred Stock Share to be issued
by the subsidiary  company,  upon the completion of an additional $3.5 issuance.
The  Convertible  Notes shall be due and payable in full on demand,  on or after
July 12, 2000, unless automatically converted as described above.

                                       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  to  design,  develop,
manufacture and distribute  interactive  gaming devices that implement  advanced
multimedia technologies using  state-of-the-art,  off-the-shelf  components.  In
1997 the Company  successfully  introduced  its first  product,  ODYSSEY(TM),  a
multi-game,  video-based slot machine,  into the Nevada market.  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.  In 1998 the  Company
introduced  QUEST,  a  single-game  platform  that  utilizes  many  of the  same
components  as the  ODYSSEY,  and in 1999 the Company  introduced  a  slant-top,
single-game platform, to increase its penetration of the casino floor.

     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  unattainable  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.

     The  Company  spent  much  of the  first  quarter  ending  March  31,  2000
implementing  and executing the different  product and market  opportunities  it
identified in the fourth quarter of 1999,  while  continuing to address its poor
liquidity  position,  retaining  its  key  personnel  and  taking  such  actions
necessary  to enable the  Company to continue  operating.  While  product  sales
continued to represent a  significant  portion of the  company's  business,  the
company also established some strategic  partnerships to support and enhance the
opportunity it identified in creating custom integrated  attractions through its
development  group. In so doing, the company believes it has shifted some of the

                                       10
<PAGE>
risk it used to absorb entirely,  in creating new products and designs,  to some
its new strategic  partners,  while retaining much of the opportunity,  if these
products succeed.  The uncertainty  surrounding the Company's future, along with
the reductions in the Company's  workforce,  negatively  impacted its ability to
retain some key employees, especially in its sales organizations.  These factors
also  negatively  impacted the Company's  sales  performance for the three month
period ending March 31, 2000, as compared to the similar period for 1999, as the
Company was forced to rebuild its sales  organization.  Through these  difficult
times, and with less resources, the Company has continued to sell it products in
the marketplace.

         Through  March 31, 2000,  the Company has  installed  4,747 ODYSSEY and
QUEST 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,  4,491  have  been  sold  outright  or placed on a
revenue-sharing  basis. After returns,  256 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.

     At March 31, 2000 the Company had cash and  equivalents  of  $837,000.  The
Company has incurred  operating losses each year since inception and as of March
31,  2000  had  an  accumulated  deficit  of  $94,764,000  and a  deficiency  of
shareholders'  equity of  $9,798,000  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
has recently  obtained a line of credit with a new bank on more favorable  terms
so that this financing  source remains  available to the Company.  Management is
also  reviewing  financing   alternatives  available  to  the  Company  such  as
additional   share  or  debt   offerings  in  the  Company  or  certain  of  its
subsidiaries,  joint ventures,  alternative  distribution channels and sale of a
portion of the Company's  assets, to improve the Company's  liquidity  position.
Management  believes  that  these  steps,  plus  sales  related  to new  product
introductions  will provide  sufficient cash and working capital for the Company
to meet its ongoing obligations and to allow it to continue operating as a going
concern through at least the end of 2000.

     Prior to March  1997  the  Company  was in the  development  stage  and its
primary  activities  were  focussed  on product  development,  including  system
hardware and software, game concept development and software coding. Towards the
end of 1996  the  Company  began  manufacturing  slot  machines  for  commercial
distribution.  The  Company  sold  its  first  product  in  May  1997  following
completion of a customer  evaluation period.  Prior to this time the Company did
not  generate  any  revenues  from  product  sales.  Once  the  Company  started
generating  revenue from product sales,  the focus of its  expenditures  changed
from product  development to building its infrastructure to support the sale and
distribution of its products.

                                       11
<PAGE>
     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 March 31, 2000 the Company had 89 employees.

RESULTS OF OPERATIONS

     The Company  had a net loss of  $2,729,000  in the quarter  ended March 31,
2000, a decrease of  $6,311,000,  or 70%, from  $9,040,000 for the quarter ended
March 31, 1999.  In the previous  quarter,  the Company  recorded  approximately
$3,300,000  in charges  relating to the 35%  reduction in its  workforce and for
costs associated with the closure of its Mountain View, California manufacturing
facility. Revenue decreased to $3,103,000 in the quarter ended March 31, 2000, a
decrease of $2,558,000,  or 45%, from $5,661,000 for the quarter ended March 31,
1999 and  decreased  by $424,000  or 12% from  $3,527,000  in the quarter  ended
December 31,  1999.  The Company  commenced  sale of its product in May 1997 and
since that time had increased  revenue by  introducing  its product and new game
titles, entering new markets and jurisdictions, and ramping up its sales in such
markets.  This  increase in revenue was coupled with  increases in resources the
Company had devoted to  manufacturing  development and production,  research and
development, building a sales, support and administrative infrastructure, hiring
additional  administrative staff, ramping up the Company's marketing activities,
and financing its  operations.  The  implementation  of one of the company's new
strategies involving strategic partnering,  resulted in less revenue recognition
as well as lower costs in the research and development  area. The company offset
expenses incurred in the quarter by $644,000, which was received and recorded as
reimbursement  of  development  expenses  as opposed  to  revenue.  Because  the
Company's  sales are  dependent on a few large orders in each period,  quarterly
sales have been and may be expected to remain volatile.

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:

                                              Three Months Ended March 31,
                                      ------------------------------------------
                                              2000                    1999
                                              ----                    ----
                                       (in $'000, except for machine numbers)

Hardware sales                        $2,011        65%       $3,672         65%
Software sales                           645        21%        1,387         24%
Participation revenue                    448        14%           11%
                                      ------       ---        ------        ---
  Total revenue                       $3,103       100%       $5,661        100%
                                      ======                  ======

     Total revenue units                 222                     407

     As can be seen in the above  table,  the  Company's  total  revenue  in the
three-month  period  ended  March 31, 2000  decreased  by  $2,558,000  or 45% to
$3,103,000 from the $5,661,000  recorded in the  three-month  period ended March
31,  1999.  This  also  represented  a  decrease  of  $424,000  or 12%  from the
$3.527,000  recorded in the  three-month  period ended  December  31, 1999.  The
average selling price on machines sold outright increased to $9,193 in 2000 from
the $9,022 in 1999  reflecting  a resulting  lower level of  discounts  given to
strategic corporate customers compared to the prior year period.

                                       12
<PAGE>
     The  decreases  in  participation  revenue and in software  revenue in 2000
compared to 1999 reflect decisions made by management during 1999 to remove poor
performing machines from the participation programs, which reduced the number of
machines on  participation  by almost 50%,  and by a decision in 1998 to convert
customers from the renewable annual license program,  which caused a decrease in
software  revenues in 1999.  Management  believes  that  eliminating  the annual
license  program will bring the Company more into line with its  competitors and
will result in increased  future  revenue  opportunities  as customers  will now
purchase  new game  titles  from the  Company or engage the  services of the new
integrated  attractions  development  group.  The Company  believes  that in the
future,  participation  revenues  will  increase in absolute as well as relative
terms as it places more of its new products on a participation  basis,  and that
in relative  terms,  hardware  sales will  increase and software  revenues  will
decrease from current levels.

     During the three-month  period ended March 31, 2000, one customer accounted
for 10% of revenue. In the three-month period ended March 31, 1999, one customer
accounted for 15% of revenue.  The Company expects that a significant portion of
its  revenues  will remain  concentrated  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 would adversely affect the Company's
business and results of operations.

     The Company believes the revenue  generated from sales will increase in the
current  year  over  the  first  quarter's  results,  as the  Company's  base of
installed units continues to increase,  and the Company  believes  participation
revenue will increase as a percentage of total revenue and in absolute  dollars.
Anticipated increases in revenue,  however, are subject to a number of risks and
uncertainties.  See "Factors  Affecting  Future Results - Management of Changing
Business;   "Liquidity",    "Customer   Retention"   ,   "Changing   Legislative
Environment", "Intellectual Property Rights", and "Rapidly Changing Technology".

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
were $1,987,000, or 64% of revenue, as compared to $4,219000, or 75% of revenue,
for the quarters  ended March 31, 2000 and 1999,  respectively.  The decrease in
cost of sales as a percentage of revenue reflects lower  manufacturing  overhead
costs.  The per-unit  manufacturing  cost has  decreased as the Company began to
realize  benefits  from the tooling of certain of its hardware  components,  and
from cost reductions in many of the components included in its machines.  Due to
significant levels of finished goods inventory, the Company manufactured minimal
product during the quarter ended March  31,2000,  and this has prevented it from
obtaining  further  cost  reductions  in its  products.  The  Company  does  not
anticipate  that this rate of 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.

     Cost of sales and  manufacturing  expenses  are  expected  to  increase  in
absolute  terms  through  1999 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 seeing the 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. See "Risk Factors - Limited Manufacturing Experience

                                       13
<PAGE>
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,   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 $613,000, or
20% of revenue, as compared to $2,348,000,  or 41% of revenue,  for the quarters
ended March 31, 2000 and 1999, respectively.

     The decrease in R&D expenses are largely the result of one of the Company's
new strategies involving strategic  partnering,  where $644,000 of the companies
expenses in this category for the current quarter, were subsidized by an outside
strategic partner/customer, as well as by 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.  This is
expected to require a continued  heavy  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.

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. Approximately 48% of SG&A expenses are headcount related.
SG&A expenses were $3,136,000, or 101% of revenue, as compared to $2,896,000, or
51% of revenue, for the quarters ended March 31, 2000 and 1999, respectively.

     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 quarter of 2000, as well
as a  stabilization  in the number of employees  following the reductions in the
Company's  workforce  in the first  quarter  of 1999.  The  Company  intends  to
restrict the growth in SG&A  expenses as much as possible in future  periods and
expects  SG&A  expenses in absolute  dollars and as a  percentage  of revenue to
decline.

INTEREST INCOME AND EXPENSE

     Net interest  expense was $96,000 for the quarter  ended March 31, 2000, as
compared to $1,926,000  for the quarter ended March 31, 1999.  Included in these
totals was  interest  income of $10,000 and $50,000 for the quarter  ended March
31, 2000 and 1999,  respectively.  Changes in interest income over these periods
are  directly  attributable  to  fluctuations  in the level of average  cash and
investments  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 $106,000 and  $1,976,000 for the quarters ended March
31, 2000 and 1999,  respectively.  The  decrease in interest  expense over these
periods is due to the  restructuring  the Company  underwent  in the 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 $2
million of New Senior  Discount Notes in the Company.  The company also paid off
it revolving  line of credit with its former  bank,  and did not complete it new
bank arrangement until the second quarter of 2000.

                                       14
<PAGE>
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'
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 stabilized  somewhat since March of
1999.  Cash and equivalents had decreased to $837,000 at March 31, 2000 compared
to  $1,877,000  at  December  31, 1999 and  $4,097,000  at March 31,  1999.  The
decrease in cash in the current period is due to losses from ongoing  operations
that the Company has  incurred  and due to the  repayment  of $622,000  from the
Company's revolving line of credit arrangement of February 1999.

     As of March 31, 2000 the Company had an accumulated deficit of $94,764,,000
and a shareholder's  deficiency of $9,978,000 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 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.  Management  continues  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.
Management believes that these steps, plus sales related to proposed new product
introductions,  will provide sufficient cash and working capital for the Company
to meet its ongoing obligations and to allow it to continue operating as a going
concern through at least the end of 2000.

     The net cash used in operating  activities  was $388,000 and $1,838,000 for
the quarters ended March 31, 2000 and 1999, respectively.  This decrease in cash
used in  operating  activities  reflects  the amount of  non-cash  items such as
depreciation and amortization, deferred stock compensation and accrued interest.
The Company was able 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.

     Net cash  provided by investing  activities  was  $1,031,000  for the three
months ended March 31, 2000 compared to net cash used for  investing  activities
of $342,000 for the three months ended March 31, 1999.  The change was primarily
due to no new  acquisition  of fixed assets,  the sale of property and equipment
and the sale and maturity of short-term  investments as the Company's  available
cash balances decreased.

                                       15
<PAGE>
     Net cash used in  financing  activities  was  $683,000 for the three months
ended  March 31,  2000  compared  to net cash used in  financing  activities  of
$2,122,000 for the three months ended March 31, 1999. The decrease is related to
the  timing  of  repayments  against  the  Company's  bank line of credit in the
current  period,  as compared to the prior period,  and proceeds from a new term
loan in the first quarter of the year 2000.

     In March, 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 initially expire in May 2001 (and subject to
automatic  renewal  provisions),  the  Company  may  borrow  up to  $2  million.
Borrowings  will bear  interest at the bank's prime rate (9.50% at May 18, 2000)
plus 1.5%. The Company will issue 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 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 has not yet responded to the
lawsuit and the Company's management denies the assertions of infringement.  The
Company is presently unable to determine the financial  impact,  if any, of this
litigation.  The costs of  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.

     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  arbitration  as  required  by the  Distribution
Agreement,  seeking to recover outstanding receivables from the distributor when
it received  this  lawsuit.  The Company is still in the  preliminary  stages of
investigating the allegations contained in the suit and has not yet responded to
the complaint.  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.

OUTLOOK

     This outlook  section and other sections in this  Quarterly  Report on Form
10-Q contain a number of  forward-looking  statements that reflect the Company's
current views with respect to future events and future  financial  performances.
Because  they relate to future  activities,  there is a high degree of risk that
such events will not  materialize  and readers  should not place undue  reliance
upon them as actual results may differ materially.

     To date the  Company  has  focused  many of its  resources  on  creating  a
business based on the high-volume  manufacturing and sale of slot machines.  The
Company has  historically  emphasized the selling of its hardware  platforms but
has  relied  on  frequent   releases  of  new  game  software  to  drive  market
penetration.

     The Company has struggled in its endeavors against many competitors who are
significantly  larger and who have much greater  resources than the Company.  In
addition, there have been certain changes in the competitive landscape since the
Company was formed.  These changes have led the Company to develop and implement
a new, three-pronged business strategy.

                                       16
<PAGE>
     The Company has  established  separate,  internal  business units that will
focus on what the Company believes are its most promising  opportunities,  given
the current market conditions and the Company's core competencies.  The business
units are: Product Sales, the Wagering Content Studio, and On-Line.

     The Company remains  committed to supporting and growing its installed base
of slot machines.  To date, the Company has sold over 4157 units.  The Company's
sales and support  team is, once again,  fully  staffed and new  products are in
development for both the slant-top and the upright platform. The Company intends
to change its focus from one of frequent  game  releases to one that  emphasizes
the quality and feature  content of new game titles.  It will also offer product
extensions and variations of existing  successful game titles. The most recently
released  games  are  performing  at or near  the top of the  market  for  their
respective  categories  and  denominations.  These titles  include:  Banana-Rama
Deluxe, Cash Cruise, and Hot Reels - a proprietary game type.

     In addition to the continued sale of slot machines,  the Company's Wagering
Content  Studio  will  develop  and bring to market a new class of  brand-based,
wagering attraction.  These attractions represent a more complete  environmental
experience  and call for a minimum level of marketing and  promotional  support.
The Wagering  Content Studio is an outgrowth of the Company's need to more fully
exploit  the  technology  inherent  in  its  game  platforms  and  the  creative
capabilities  of its  development  organization.  The Company is also seeking to
develop proprietary versions of its wagering attractions for a limited number of
customers/partners,   and  has  already   entered  into  one  such   development
relationship.  The result of this relationship between the Company and a premier
casino  operator  will  premier on June 1 in a major  gaming  jurisdiction.  The
Company is currently in negotiation with additional casino operators, other slot
manufacturers,  and other intellectual property and brand-based content holders.
By  partnering  with  outside  parties  the  Company  believes it can offset its
development risk and costs,  achieve higher revenues and increase the likelihood
of product success.

     With respect to the On-Line business unit, the Company is presently testing
the  heavily  trafficked  waters of the World  Wide Web,  exploring  the  myriad
opportunities that the Internet represents.

     The  Company  also  intends  to  continue  its  program  of  improving  and
solidifying  its  financial   position.   The  Company  is  considering  raising
additional  capital in either the parent company or directly into certain of its
subsidiaries,  in order to fund new product and system  development.  Management
also  intends  to  simplify  the  business  and focus  resources  so that it can
continue to minimize  the level of cash usage as the  Company  transitions  to a
business model that takes advantage of revenue-sharing opportunities.

     The Company's  future results of operations  and the other  forward-looking
statements  contained in this outlook - in particular the  statements  regarding
potential  partnerships  with casino  operators or other third parties,  and the
possible  raising  of  additional  capital  -  involve  a number  of  risks  and
uncertainties.  In addition to the factors  discussed above, the following could
also cause actual  results to differ  materially:  the success of the  Company's
game titles, changes in customer order patterns, competitive factors such as new
competitor  products  or game  introductions  or changes in pricing  strategies,
reluctance of casino operators to use participation-based products or to partner
with the  Company in  product  development,  the  Company's  level of  financial
resources  and adequate cash flows,  the  stability of the Company's  management
team and  workforce,  and the  ability of the  Company to meet all  initial  and
ongoing licensing requirements of the jurisdictions in which it sells products.

     The  Company  believes  that  it has  the  product  offerings,  facilities,
personnel,  and competitive  resources needed for business  success,  but future
revenue,  costs, margins, and profits are all influenced by a number of factors,
including those discussed above and the need for the Company to raise additional
funds, all of which are inherently difficult to predict.

                                       17
<PAGE>
FACTORS AFFECTING FUTURE RESULTS

     MANAGEMENT  OF  CHANGING  BUSINESS - The Company has spent part of the last
year as well as all of the first  quarter 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.

     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 March
31,2000,  the Company had an accumulated deficit of $94,764,000 and a deficiency
of  shareholders'  equity of $9,798,000.  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 is also reviewing
financing alternatives available to the Company such as additional share or debt
offerings  in the  Company  or  certain  of its  subsidiaries,  joint  ventures,
alternative  distribution channels and sale of all or a portion of the Company's
assets.  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 quarter ended March 31, 2000. In February  1999,  the Company  announced
the appointment of a new Chief Executive  Officer.  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

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<PAGE>
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,  in the
first quarter of the year 2000. These customers have indicated that they may not
purchase  additional product from the Company.  Completion of the Company's debt
restructuring  in November  1999  mitigates  these risks,  however,  the Company
continues to experience these negative sentiments from its customers. Certain of
the Company's competitors who have significantly greater financial and marketing
resources  than the Company are also trying to take  advantage of the  Company's
financial position and are fueling the speculation about the Company's financial
position.  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  overlaps,  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.

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     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
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 considering exclusive outsourcing  arrangements whereby a single
third party contract  manufacturer will assemble all or a significant portion of
new products that the Company is planning 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  $9.75 million
outstanding  at March  31,  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.

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<PAGE>
                           PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     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). 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. A fuller description of these
proceedings  is set  forth  under  PART I,  Note 5 of the  financial  statements
entitled " Subsequent Events".

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

     A consent action by a majority of the outstanding shares of common stock of
the company was  executed on February 7, 2000,  approving  an  amendment  to the
Articles of  Incorporation  of the company to increase the authorized  number of
shares of common  stock from  50,000,000  to  750,000,000.  The number of shares
voting in favor of the amendment was 15,657,490. No shareholder meeting was held
and no shares were voted against approval of the amendment.  The company filed a
14c-2  Information  Statement  relating to the consent action on January 7, 2000
and delivered the information  statement to shareholders on or about January 10,
2000.

ITEM 5. OTHER INFORMATION.

     On April  21,  2000,  the  company  commenced  an  exchange  offer  whereby
participating  shareholders  were offered the opportunity to exchange each share
of common stock for a unit consisting of one share of common stock and a warrant
to purchase 3.59662 shares of common stock at an exercise price of $0.1528.  The
warrants would not be  exercisable  for the firs twelve months  following  their
issuance and would expire, if not earlier terminated or exercised, on the fourth
anniversary  date following  their  issuance.  The company  announced on May 18,
2000,  that it was extending the expiration  date of the exchange offer from May
19, 2000, to June 23, 2000.  The company  issued a press release dated April 21,
2000,  announcing the  commencement of the exchange offer. The press release was
filed as an exhibit to a Current Report on Form 8-K filed on April 25, 2000. The
company also filed a Schedule TO on April 20, 2000,  disclosing the terms of the
exchange offer and filed the Offering  Circular and other documents  distributed
to shareholders as an exhibit to the Schedule TO.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

     (a) Exhibits

         None

     (b) Reports on Form 8-K.

     A Current Report on Form 8-K was filed on February 14, 2000 announcing that
an amendment  to the Articles of  Incorporation  had been filed  increasing  the
authorized number of shares of common stock from 50,000,000 to 750,000,000.  The
amendment was approved by a majority of the  outstanding  shares of common stock
by consent action.

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                                    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/ Andrew S. Pascal
                              --------------------------------------------------
                              Andrew S. Pascal
                              President, Chief Executive Officer,
                              Acting Chief Financial Officer
                              (Principal Financial and Chief Accounting Officer)

Date: May 22, 2000

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