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 JUNE 30, 2000

                                       OR

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

                         COMMISSION FILE NUMBER 0-28294

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

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

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

Yes [X] No [ ]

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

               30,978,831 shares of Common Stock, $.001 par value,
                      were outstanding as of July 31, 2000.
<PAGE>
                              SILICON GAMING, INC.
                          QUARTERLY REPORT ON FORM 10-Q
                       FOR THE PERIOD ENDED JUNE 30, 1999

                                      INDEX

                                                                            Page
                                                                            ----
PART I     FINANCIAL INFORMATION

Item 1.    Financial Statements:

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

           Consolidated Statements of Operations--Three months
           and six months ended June 30, 2000 and June 30, 1999.............   4

           Consolidated Statements of Cash Flows--Six months
           ended June 30, 2000 and June 30, 1999............................   5

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

Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations........................................   9

PART II    OTHER INFORMATION

Item 5.    Other Information................................................  20

Item 6.    Exhibits and Reports on Form 8-K.................................  21

           Signature........................................................  21
<PAGE>
                          PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                              SILICON GAMING, INC.
                           CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)

                                                         JUNE 30,   DECEMBER 31,
                                                           2000        1999
                                                         --------    --------
                                                       (Unaudited)

                                     ASSETS
CURRENT ASSETS:
  Cash and equivalents ...............................   $  2,467    $    877
  Short-term investments .............................         --       1,000
  Accounts receivable (net of allowances of $1,091
    in 2000 and $1,169 in 1999) ......................      2,165       1,188
  Inventories ........................................      5,058       7,331
  Prepaids and other .................................        382       1,069
                                                         --------    --------
       Total current assets ..........................     10,412      11,465
PROPERTY AND EQUIPMENT, NET ..........................      3,224       3,795
OTHER ASSETS, NET ....................................        382         321
                                                         --------    --------
                                                         $ 14,018    $ 15,581
                                                         ========    ========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY

CURRENT LIABILITIES:
  Accounts payable ...................................   $  1,814    $  1,389
  Accrued liabilities ................................      1,592       1,655
  Deferred revenue ...................................        233         240
  Line of credit .....................................        750         622
  Current portion of long-term obligations ...........        997       1,165
                                                         --------    --------
       Total current liabilities .....................      5,386       5,071
OTHER LONG-TERM LIABILITIES ..........................      1,606       1,611
LONG-TERM OBLIGATIONS ................................     13,548      10,428
LONG-TERM ACCRUED INTEREST ...........................      5,635       5,832

SHAREHOLDERS' DEFICIENCY
  Common Stock, $.001 par value; 750,000,000
    shares authorized; shares outstanding:
    June 30, 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 June 30, 2000-- 39,750: (liquidation
     preference up to $39.75 million) ................     20,000      20,000
  Warrants ...........................................      5,576       5,542
  Notes receivable from shareholders .................       (344)       (345)
    Deferred stock compensation ......................     (4,065)     (4,646)
  Accumulated deficit ................................    (97,447)    (92,035)
                                                         --------    --------
       Total shareholders' deficiency ................    (12,157)     (7,361)
                                                         --------    --------
                                                         $ 14,018    $ 15,581
                                                         ========    ========

                 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      Six Months Ended
                                                        June 30,               June 30,
                                                 --------------------    ------------------
                                                   2000         1999       2000       1999
                                                 --------     -------    -------    -------
<S>                                              <C>          <C>        <C>        <C>
REVENUE:
  Hardware ...............................       $  3,571     $ 3,609    $ 5,549    $ 7,322
  Software ...............................            691       1,502      1,336      2,888
  Participation and other ................            562         616      1,042      1,178
                                                 --------     -------    -------    -------
  Total revenue ..........................       $  4,824     $ 5,727    $ 7,927    $11,388

OPERATING EXPENSES:
  Cost of sales and related
    manufacturing expenses ...............          2,967       2,965      4,954      7,184
  Research and development ...............          1,252       1,483      1,865      3,831
  Selling, general and
    administrative .......................          3,275       2,587      6,411      5,483
  Restructuring charges ..................                        (35)                3,277
                                                 --------     -------    -------    -------
  Total costs and expenses ...............          7,494       7,000     13,230     19,775
                                                 --------     -------    -------    -------
    Loss from operations .................          2,670       1,273      5,303      8,387
  Interest expense, net ..................             13       1,926        109      3,852
                                                 --------     -------    -------    -------
NET LOSS .................................       $  2,683     $ 3,199    $ 5,412    $12,239
                                                 ========     =======    =======    =======

Basic and diluted net loss per share......       $   0.09     $  0.22    $  0.17    $  0.86
                                                 ========     =======    =======    =======

Shares used in computation ...............         30,979      14,376     30,969     14,275
                                                 ========     =======    =======    =======
</TABLE>

                See notes to consolidated financial statements.

                                       4
<PAGE>
                              SILICON GAMING, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                      Six Months Ended
                                                                         June 30,
                                                                   --------------------
                                                                     2000        1999
                                                                   -------     --------
<S>                                                                <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss ....................................................    $(5,412)    $(12,239)
  Reconciliation to net cash used in operating activities:
    Depreciation and amortization .............................        956        2,570
    Accrued interest ..........................................       (197)       2,251
    Accretion of debt discount ................................         --        1,207
    Deferred rent .............................................         (5)        (111)
    Restructuring charges .....................................         --        3,277
    Provision for bad debt ....................................         --          (98)
    Deferred stock compensation ...............................        581           --
         Loss on disposal of property .........................         38           --
  Changes in assets and liabilities:
    Accounts receivable .......................................       (977)       1,109
    Inventories ...............................................      2,273        1,165
    Prepaid and other .........................................        319         (655)
    Participation units .......................................       (210)       1,628
    Accounts payable ..........................................        425          (80)
    Accrued liabilities .......................................        (63)      (1,808)
    Other liabilities .........................................         --          177
    Deferred revenue ..........................................         (7)        (737)
                                                                   -------     --------
      Net cash used in operating activities ...................     (2,279)      (2,344)
                                                                   -------     --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of property and equipment .......................       (235)        (221)
  Proceeds from disposal of property and equipment ............         23           --
  Sales and maturities of short-term investments ..............      1,000           --
  Other assets, net ...........................................         --          (39)
                                                                   -------     --------
      Net cash provided by (used in) investing activities              788         (260)
                                                                   -------     --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Sales of Common Stock, net of notes receivable ..............         --           74
  Collection of note receivable ...............................         --           13
     Proceeds from Debt financing .............................      3,500           --
  Proceeds from term loans and line of credit .................        750           --
  Repayment of bank line of credit ............................       (622)      (2,057)
  Repayment of term loans .....................................       (492)        (478)
  Repayment of capital lease obligations ......................        (55)        (153)
                                                                   -------     --------
      Net cash provided by (used in) financing activities .....      3,081       (2,601)
                                                                   -------     --------
NET DECREASE IN CASH AND EQUIVALENTS ..........................      1,590       (5,205)
  Beginning of period .........................................        877        8,399
                                                                   -------     --------
  End of period ...............................................    $ 2,467     $  3,194
                                                                   =======     ========

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for interest ....................    $   175     $    313
                                                                   =======     ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
  Conversion of preferred stock to Common Stock ...............    $    --     $    410
  Issuance of Common Stock Warrants ...........................    $    34     $     --
                                                                   =======     ========
</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 June 30,  2000,  the
consolidated  statements of  operations  for the three and six months ended June
30, 2000 and 1999,  and the  consolidated  statements  of cash flows for the six
months  ended  June  30,  2000  and  1999,  are  unaudited.  In the  opinion  of
management,  these financial  statements have been prepared on the same basis as
the audited financial statements and include all adjustments, consisting only of
normal recurring  adjustments and accruals,  necessary for the fair presentation
of the financial  position and  operating  results as of such dates and for such
periods.  The  unaudited  information  should  be read in  conjunction  with the
audited  consolidated  financial  statements of Silicon Gaming,  Inc.  ("Silicon
Gaming" or the  "Company") and the notes thereto for the year ended December 31,
1999  included  in the  Company's  Annual  Report  on Form 10-K  filed  with the
Securities and Exchange Commission.

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming  that the Company  will  continue as a going  concern.  The Company has
incurred  operating  losses every year since its  inception and at June 30,2000,
had an accumulated  deficit of  $97,447,000  and a  shareholders'  deficiency of
$12,157,000.  The Company has been required to obtain additional financing every
year to be able to fund its ongoing  operations.  Based on historical  levels of
cash usage,  the above  factors  raise  substantial  doubt  about the  Company's
ability  to  continue  as a going  concern.  In the  fourth  quarter of 1999 the
Company  completed a substantial  restructuring  of its  capitalization  whereby
$39.75  million  of Senior  Discount  Notes and  approximately  $8.3  million of
accrued interest were converted into Preferred Stock, and the remaining terms of
the Senior  Discount Notes were modified to reduce the interest rate thereon and
extend  the  payment  terms.  Concurrent  with the  restructuring,  the  Company
borrowed $3 million under new Senior  Discount Notes and  established a facility
whereby up to an  additional  $2 million  of new  Senior  Discount  Notes may be
issued upon meeting  certain  financial and operational  milestones.  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 March 31, 2001.  The
accompanying  consolidated  financial  statements do not include any adjustments
that might result from the outcome of this uncertainty.

2. NET LOSS PER SHARE

     Basic earnings per share excludes  dilution and is computed by dividing net
income by the  weighted  average of common  shares  outstanding  for the period.
Diluted  earnings per share reflect the  potential  dilution that would occur if
securities or other  contracts to issue Common Stock were exercised or converted
into Common Stock.  Common share equivalents  including stock options,  warrants
and Redeemable  Convertible  Preferred Stock 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):

<TABLE>
<CAPTION>
                                               Three months ended         Six months ended
                                                     June 30,                 June 30
                                              ---------------------     ---------------------
                                                2000         1999         2000         1999
                                              --------     --------     --------     --------
<S>                                           <C>          <C>          <C>          <C>
Net Loss (Numerator):
Net Loss, basic and diluted ..............    $ (2,683)    $ (3,199)    $ (5,412)    $(12,239)
                                              ========     ========     ========     ========

Shares (Denominator)
Weighted average common shares outstanding      30,979       14,437       30,969       14,367
 Weighted average common shares subject to
    repurchase ...........................                      (61)                      (92)
                                                           --------                  --------

 Shares used in computation ..............      30,979       14,376       30,969       14,715
                                              ========     ========     ========     ========

Net Loss Per Share, Basic and Diluted ....    $   0.09     $   0.22     $   0.17     $   0.86
                                              ========     ========     ========     ========
</TABLE>


3. INVENTORIES

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

                                                       JUNE 30,     DECEMBER 31,
                                                        2000            1999
                                                       ------          ------
       Raw materials .....................             $1,317          $  849
       Work in process ...................                747             111
       Finished goods ....................              2,994           6,371
                                                       ------          ------
                                                       $5,058          $7,331
                                                       ======          ======

4. 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 June 30, 2000,  three
customers accounted for 15%, 9% and 9% of accounts receivable,  respectively. As
of December 31, 1999, one customer accounted for 19% of accounts receivable. For
the three months ended June 30, 2000, two customers accounted for 17% and 10% of
revenue and for the six months ended June 30, 2000, two customers  accounted for
11% and 6% of revenue.  For the three months  ended June 30, 1999 two  customers
accounted for 27% and 13% of revenue and for the six months ended June 30, 1999,
one customer accounted for 18% of revenue.

5. BORROWING ARRANGEMENTS

     In May 2000, the Company executed on a $2 million secured revolving line of
credit  agreement  based on the Company's  eligible  accounts  receivable  which
expires May 25, 2001. Borrowings bear interest at the Bank's prime rate (9.5% at
June 30,  2000)  plus  1.5%.  As of June 30,  2000,  the  Company  had  $750,000
outstanding under this facility. This agreement requires the Company to maintain
certain  ratios of tangible  net worth to total debt among other  covenants  (as
defined  in the  agreement)  and the  Company  was in  non-compliance  with  the
agreement  as of June 30,  2000.  The lender has given the  company an  informal
notice of forbearance which is to expire on August 15, 2000. The company expects
to cure this  violation  upon the closing of the Series A Convertible  Preferred
Stock as discussed in FOOTNOTE 7 below.

                                       7
<PAGE>
     Borrowing arrangements consist of the following (in thousands):

                                                 June 30,       December 31,
                                                   2000             1999
                                                 --------         --------
     Senior Discount Notes ..............        $ 10,500         $  9,500
     Capital lease obligations ..........              --               55
     Other long-term obligations ........           1,545            2,038
     Subsidiary's Series A Bridge Loans .           2,500               --
                                                 --------         --------
                                                   14,545           11,593
     Current obligation .................            (997)          (1,165)
                                                 --------         --------
     Long-term obligation ...............        $ 13,548         $ 10,428
                                                 ========         ========

     On June 22,  2000,  the  company,  on  behalf  of one of its  wholly  owned
subsidiary  companies,  entered into a lease for commercial space in the city of
San Francisco for the purpose of  conducting  the business of its  subsidiary at
this  location.  The lease  covers a three year period with total  consideration
over the term of the lease to be approximately  $875,000. The Company shall also
be obligated  for certain  costs in operating  said  premises as well as certain
buildout costs which are expected to be approximately $150,000.

6. OPERATING SEGMENTS

     During the second  quarter,  Silicon Gaming  completed a realignment of its
resources around market  opportunities  by creating a separate  business unit to
investigate market  opportunities in the growing market for Internet gaming. The
Company incurred expenses for its On-line division of approximately $663,000 for
the three and six-month period ended June 30, 2000.

7. SUBSEQUENT EVENTS

     On April 13, 2000 and May 3, 2000,  respectively,  the company, through one
its wholy owned  subsidiaries,  obtained  bridge loan financing in the amount of
$2.5 million  dollars from two  different  parties.  The terms of the  financing
contain an automatic  conversion  feature into a Series A Convertible  Preferred
Stock Share in the subsidiary company,  which conversion feature occurs upon the
completion  of at least,  an  additional  $3.5 million  dollar  financing  under
similar  terms  for the  Series A  Convertible  Preferred  Stock.  The  Series A
Convertible  Preferred  Stock shall be convertible  into one share of the common
stock of the subsidiary upon the occurance of several  factors,  including,  but
not  limited to either an initial  public  offering  of the common  stock of the
subsidiary  or a change in  control  of the  subsidiary,  as defined in the term
sheet.  The loans bear  interest at the rate of 10%,  and are due and payable in
full on demand,  on or after July 12, 2000,  unless  automatically  converted as
described  above,  in which case no  interest  will be due.  The  holders of the
Series A Preferred  Stock shall be entitled to a  liquidation  preference in the
subsidiary  equal to the amount paid per share  (currently  assumed to be $1 per
share), as well as certain other information rights and participation  rights in
subsequent equity offerings of the subsidiary.  As of July 31, 2000,  additional
funding in the amount of $2 million  dollars,  has been  received as part of the
total financing of this Series A Convertible  round, and is currently being held
in escrow pending the receipt of the additional funding from other investors. As
of August 21,  2000,  the initial  funding  investors  have agreed not to demand
payment in full, as per the bridge loan agreement, pending the anticipated close
of this round.

8. NEW ACCOUNTING PRONOUNCEMENTS

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

                                        8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

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

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

OVERVIEW

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

     In the third quarter of 1997,  the Company  introduced  the Odyssey  gaming
platform and it's suite of six gambling  applications.  The  marketing  strategy
called for a  conservative,  focussed  roll-out in which the initial  units were
installed  in a limited  number of  Southern  Nevada  casinos.  After an initial
evaluation period the product was refined and ultimately distributed into nearly
every major US market, as well as select international  markets. Since that time
the  Company  has  rolled  out  ODYSSEY  into  other   jurisdictions   including
Connecticut,  Illinois, Indiana, Iowa, Kansas, Louisiana,  Michigan,  Minnesota,
Mississippi,  Missouri,  New Jersey,  New Mexico,  certain  Canadian  provinces,
certain  international  cruise  line  routes and  Uruguay.  Since the  Company's
initial  product launch,  it has developed and  distributed  nearly 40 different
game applications and achieved an installed base of over 4,500 gaming platforms.

     The Company's products feature  high-resolution  video presented across the
full surface of a large  touchscreen  display.  The games  feature  high-quality
animation,  video  clips,  digital  sound  and a  level  of  visual  appeal  and
interactivity   that  the  Company  believes  is  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.

                                        9
<PAGE>
     The Company's  initial business model was dependent on the proliferation of
its  gaming  platforms.  However,  management  believes  that due to a number of
factors   including  price   resistance,   stagnant  market  growth,   increased
competition,  and a slower rate of  adoption,  the Company was unable to achieve
its projected  sales  volumes.  As such the market for  high-margin  replacement
software never materialized.

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

     The  Company  spent  much of the  second  quarter,  ending  June 30,  2000,
executing it's three-tier  business plan. The Wagering  Content Studio completed
The Family Feud product  suite,  which was launched in Las Vegas in  partnership
with MGM  MIRAGE,  Inc.  This new  gambling  experience  consists of an enhanced
platform,  new package  design,  three  different  game  applications,  a highly
interactive  bonus event,  and a 3,500 square foot boutique casino venue. All of
these  elements  have been  combined to create what the Company  believes is the
industry's first Wagering Attraction, a gambling experience that has the ability
to drive new business.  The Product Sales  division  continued to place and sell
gaming platforms along with new game applications created by our Content Studio.
The Company  capitalized on the opening of the California market with sales into
each of the major  tribal  casinos.  In  addition,  the Company  formalized  its
Internet strategy and initiated the business development and product development
aspects of it's plan.

     Through June 30, 2000, the Company has installed  4,572 ODYSSEY,  QUEST and
FAMILY FEUD machines in  approximately  208 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,  4,322 have been sold  outright or placed on a
revenue-sharing  basis. After returns,  250 machines remain installed on a trial
basis and the casino  operators  are required to purchase the machine  outright,
participate  in SGI's revenue  sharing plan or return the machine to the Company
within a defined trial period.  This  compares to a restated  installed  base of
4,157  machines at March 31, 2000, of which,  256 machines  were  installed on a
trial basis.

     At June 30, 2000 the Company had cash and  equivalents of  $2,467,000.  The
Company has incurred  operating  losses each year since inception and as of June
30,  2000  had  an  accumulated  deficit  of  $97,447,000  and a  deficiency  of
shareholders'  equity of  $12,157,000.  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

                                       10
<PAGE>
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 March 31, 2001.

     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 June 30, 2000 the Company had 86 employees.

REVENUE

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

     The Company generated revenues as follows:

<TABLE>
<CAPTION>
                             Three Months Ended June 30,                Six Months Ended June 30,
                        --------------------------------------    --------------------------------------
                              2000                 1999                 2000                 1999
                        -----------------    -----------------    -----------------    -----------------
                                             (in $'000 except for machine numbers)
<S>                     <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>
Hardware sales          $ 3,571        74%   $ 3,609        63%   $ 5,549        70%   $ 7,322        64%
Software sales              691        14%     1,502        26%     1,336        17%     2,888        25%
Participation revenue       562        12%       616        11%     1,042        13%     1,178        11%
                        -------   -------    -------   -------    -------   -------    -------   -------
   Total revenue        $ 4,824       100%   $ 5,727       100%   $ 7,927       100%   $11,388       100%
                        =======              =======              =======              =======
Total revenue units         755                  468                  977                  895
                        =======              =======              =======              =======
</TABLE>

     Total  revenue units consist of machines sold outright to customers as well
machines owned by the Company placed in casinos under a  participation  program.
For the three  months  ended  June 30,  2000,  revenue  units  consisted  of 378
machines sold outright,  and 377 machines on casino floors under a participation
program.  For the six month period ended June 30, 2000,  revenue units consisted
of 600  machines  sold  outright  and 377  machines  on  casino  floors  under a
participation program.

     Revenue for the quarter ended June 30, 2000 was  $4,824,000,  a decrease of
$903,000, or 16%, from $5,727,000 for the quarter ended June 30, 1999. This also
represents an increase of $1,721,000,  or 55%, from the  $3,103,000  recorded in
the three-month period ended March 31, 2000. The change in sales mix reflects an
increase in direct sales relative to sales on a participation  basis as a result
of introducing the Family Feud game in June, and the benefit of sales to the new
jurisdiction  of  California.  The  average  selling  price  on  hardware  sales
increased to $9,773 in the quarter ended June 30, 2000 compared to $7,771 in the
quarter  ended June 30,  1999,.  This  reflected the effect of the higher priced
Family Feud game and a lower level of  discounts  given to  strategic  corporate
customers  compared  to the prior year  period,  offset  slightly  by some lower
selling prices due to the Company  selling used  equipment to certain  customers
during 2000.

     The decrease in software  revenues for the three months ended June 30, 2000
of $811,000,  or 54%,  compared to the same period in 1999 is a direct result of
the lower number of Odyssey units sold  outright,  the lower  selling  prices of
used equipment in the current year and the impact of focussing on and delivering
the Family Feud Suite of games in the  current  period.  Participation  revenues
decreased  by  $54,000,  or 9%,  compared to the  comparable  period in 1999 due
largely to a reduction  in the number of machines on  participation  programs as
customers have either purchased those machines  outright or returned them to the
Company.

                                       11
<PAGE>
     Revenue for the six months ended June 30, 2000 was  $7,927,000,  a decrease
of $3,461,000,  or 30%, from $11,388,000 for the six months ended June 30, 1999.
For the six month period ended June 30, 2000 total software  sales  decreased by
$1,552,000,  or 54%,  compared to the same period in 1999  reflecting a shift in
the company's  model for software sales as a percentage of total revenue.  Total
participation  revenues decreased by $136,000,  or 12%, due to the reductions in
the number of machines on participation as the Company has converted these units
to sales or were returned to the Company by its customers.

     During the three-month period ended June 30, 2000, two different  customers
accounted for 17% and 10% of revenue.  In the three-month  period ended June 30,
1999, two different customers accounted for 27% and 13% of revenue.  For the six
month period ended June 30, 2000, two different  customers accounted for 11% and
6% of  revenue  and  in  the  six-months  ended  June  30,  1999,  one  customer
represented 18% of revenue.  The Company  expects that a significant  portion of
its  revenues  will remain  consolidated  within a limited  number of  strategic
customers within the gaming industry due to the increasing consolidation that is
taking  place  among  casino  operators.  As an  equipment  vendor to the gaming
industry,  the Company sells  infrequently  to many  customers and the volume of
sales to any particular  customer may vary  significantly from period to period.
As a result,  there can be no assurance that the above strategic  customers will
continue to account for a significant percentage of the Company's revenue in the
future.  The loss of any strategic customer 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  half  year'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 was
$2,967,000, or 62% of revenue, as compared to $2,965,000, or 52% of revenue, for
the  quarters  ended  June 30,  2000 and 1999,  respectively.  Cost of sales was
$4,954,000, or 62% of revenue, as compared to $7,184,000, or 63% of revenue, for
the six months ended June 30, 2000 and 1999, respectively.

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

                                       12
<PAGE>
     Cost of sales and  manufacturing  expenses  are  expected  to  increase  in
absolute  terms  through  2000 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 some benefits of decreased aggregate manufacturing costs
due to the relocation of its manufacturing  activities to its Las Vegas,  Nevada
location.  The  anticipated  manufacturing  expenses  are subject to a number of
risks and uncertainties.

RESEARCH AND DEVELOPMENT

     Research and development ("R&D") expenses include payroll and related costs
of employees engaged in ongoing design and development activities of the Company
and its subsidiary companies, costs paid to outside contractors and specialists,
prototype development expenses, overhead costs, equipment depreciation and costs
of supplies.  To date,  the Company has expensed all costs  associated  with the
research,  design and development of its product.  R&D expenses were $1,252,000,
or 26% of  revenue,  as  compared  to  $1,483,000,  or 26% of  revenue,  for the
quarters  ended  June  30,  2000  and  1999,  respectively.  R&D  expenses  were
$1,865,000,  or 24% of revenue, as compared to $3,831,000, or 34% of revenue for
the six months ended June 30, 2000 and 1999, respectively.

     Of the $1,252,000 in R&D expenses  incurred in the second  quarter  period,
$391,000 or 31% was incurred in  launching  the  activity of the  Company's  new
wholly owned subsidiary,  Wager Works Inc., which did not contribute any revenue
to the  company.  The  decrease in R&D expenses are largely the result of one of
the Company's new strategies involving strategic partnering,  where a portion of
the Company's  expenses incurred for the Wagering Content Studio were subsidized
by an  outside  strategic  partner/customer,  as well as lower  personnel  costs
attributable  to the  Company's  reductions  in its  workforce  and lower use of
engineering  consultants,  offset  by  higher  license  fees and  similar  costs
associated  with the acquisition of outside  technologies.  Since the comparable
period  in 1999,  the focus of the  Company's  R&D  activities  has  changed  to
emphasize new game development,  the introduction of new product platforms,  and
the  introduction  of new game  types.  The  Company  is  focussed  on  offering
additional  features in its  products  that will fully  utilize  the  underlying
technology  used  as  well  as  continuing  to  procure  new  strategic  partner
relationships  to help subsidize a portion of this effort..  This is expected to
require a continued  investment in R&D resources to continue the  development of
the product platform and new platforms to facilitate the elaborate  requirements
of the game development  process in future periods.  With the continuing efforts
to successfully launch the business of its new subsidiary company,  Wager Works,
Inc.,  management  believes the  absolute  level of R&D expenses may increase 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.  SG&A expenses were  $3,275,000,  or 68% of revenue,  as
compared to  $2,587,000,  or 45% of revenue for the quarters ended June 30, 2000
and 1999,  respectively.  SG&A expenses were $6,411,000,  or 81% of revenue,  as
compared to $5,483,000, or 48% of revenue for the six months ended June 30, 2000
and  1999,  respectively.  For the six  months  ended  June 30,  2000 and  1999,
respectively,  approximately  47% of 2000 expenses and 59% of 1999 expenses were
headcount related.

     The  increase  in SG&A  expenses  in 2000  reflects  higher  legal  fees in
connection with ongoing patent  infringement cases that the Company was party to
during  1999  and a suit by a  Company  distributor  in  South  Carolina,  costs
associated with applying for corporate and product licenses as the Company began
selling product into new jurisdictions during the first two quarters of 2000, as
well as costs  incurred  in  launching  the  activity  of its new  wholly  owned

                                       13
<PAGE>
subsidiary,  Wager Works,  Inc..  The Company  intends to restrict the growth in
SG&A  expenses as much as possible in future  periods and believes SG&A expenses
in  absolute  dollars may  increase  and may  decline as a  percentage  of total
revenue.

INTEREST INCOME AND EXPENSE

     Net interest  expense was $13,000 for the quarter  ended June 30, 2000,  as
compared to $1,926,000 for the quarter ended June 30, 1999. Net interest expense
was $109,000 for the six months ended June 30, 2000,  as compared to  $3,852,000
for the six months  ended June 30,  1999.  Included in these totals was interest
income of $17,000  and  $22,000  for the  quarter  ended June 30, 2000 and 1999,
respectively, and $27,000 and $75,000 for the six months ended June 30, 2000 and
1999,  respectively.  Changes in interest income over these periods are directly
attributable  fluctuations in the level of average cash and investment  balances
that the  Company  holds.  The  timing of share  offerings,  issuance  of Senior
Discount Notes, and the rate of spending on operations have impacted the average
level of cash and investments.

     Interest expense was $30,000 and $1,948,000 for the quarters ended June 30,
2000 and 1999,  respectively,  and  $136,000 and  $3,927,000  for the six months
ended June 30, 2000 and 1999,  respectively.  The  decrease in interest  expense
over  these  periods  is  substantially  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 in the first  quarter of 2000,  did not  complete  it new bank  arrangement
until the  second  quarter  of 2000 and  didn't  begin to use its line of credit
until the end of May 2000.  The company  also  reduced  its amount of  equipment
financing in 2000 as well as reducing the  principal  due on capital  leases and
other equipment related borrowings in the second quarter of 2000.

INCOME TAXES

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

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

LIQUIDITY AND CAPITAL RESOURCES

     The Company's  financial condition has continued to stabilize since June of
1999. Cash and equivalents had increased to $2,467,000 at June 30, 2000 compared
to $877,000 at December 31, 1999 and  decreased  compared to  $3,194,000 at June
30, 1999. The increase in cash in the current period as compared to December 31,
1999 is due primarily to new financing  obtained from  additional  borrowings on
the Senior  Discount  Notes,  the  securing  of Bridge  Loan  financing  for the
Company's  wholly  owned  subsidiary,  Wager  Works,  Inc.,  and  the  Company's
continuing  successful  efforts to convert inventory into cash, offset by losses
from ongoing operations.

                                       14
<PAGE>
     As of June 30, 2000 the Company had an  accumulated  deficit of $97,447,000
and a shareholder's deficiency of $12,157,000 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.  In the  quarter  ended June 30,  2000,  the  Company met one of the
operational  milestones identified and established as part if it's November 1999
restructuring  plan.  The company  borrowed an  additional  $1 million of Senior
Discount Notes, and an additional $2 million of new Senior Discount Notes may be
issued in the future depending upon the Company's  ability to meet certain other
financial and operational  milestones.  Management 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 March 31, 2001.

     The  Company's net cash used in operating  activities  was  $2,279,000  and
$2,344,000 for the six months ended June 30, 2000 and 1999,  respectively.  This
modest  decrease in cash used in  operating  activities  reflects  the amount of
non-cash  items  such  as  depreciation  and  amortization  and  deferred  stock
compensation.  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.  For the six
month period ended June 30, 1999, the company experienced a significantly higher
loss from operations, which was mainly offset by substantial non cash charges to
that period for  restructuring  charges,  accrued  interest on a higher level of
debt,  and  accretion  of debt  discount.  These  items were not a factor in the
Company's  current  six month  period for 2000 due to the  restructuring  of the
Company's  balance sheet as a result of the old Senior Note  restructuring  that
occurred in November of 1999.

     Net cash provided by investing  activities  was $788,000 for the six months
ended  June 30,  2000  compared  to net cash used for  investing  activities  of
$260,000 for the six months ended June 30, 1999. The change was primarily due to
the sale of property  and  equipment  and the sale and  maturity  of  short-term
investments as the Company's available cash balances decreased.

     Net cash provided by financing activities was $3,081,000 for the six months
ended  June 30,  2000  compared  to net cash  used in  financing  activities  of
$2,601,000  for the six months  ended June 30,  1999.  The  increase  is related
primarily to the additional debt funding the Company obtained through exercising
some of its  Senior  Discount  Note  funding  it was  entitled  to  through  its
restructuring  agreement  in November of 1999 and the Series A Preferred  Bridge
Loan Financing it obtained for its subsidiary,  Wager Works, Inc. in the current
period.  The period covering the six months of 2000 also included the conversion
of its old line of credit from one banking facility into another, as compared to
the period ending June 30, 1999,  which included a substantial  net reduction in
its line of credit.

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

                                       15
<PAGE>
     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 seeking arbitration as required by the Distribution
Agreement,  seeking to recover outstanding receivables from the distributor. The
distributor filed in South Carolina an action to stay the arbitration portion of
the  agreement  between the Company and the  distributor  and was granted such a
stay. The company filed a motion on August  14th,2000  appealing the decision to
the United  States  Court of  Appeals  for the Fourth  Circuit.  The  Company is
currently awaiting a decision from the Court of Appeals. The costs of responding
to and/or defending this lawsuit may be substantial and may require  significant
amounts of senior management time. Any adverse result from such litigation could
materially and adversely affect the Company's liquidity and capital resources.

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.

     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 or placed on a  participation
basis over 4572 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, Hot Reels - a proprietary
game type, Silver Belle Express and Hitsville.

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     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 MGM Grand,
Inc. premiered on June 2 in the MGM Grand Hotel and Casino in Las Vegas, Nevada.
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,  Wager Works,  Inc., the Company
is exploring  the varying  opportunities  that the Internet  represents  through
applications on the World Wide Web.

     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.

FACTORS AFFECTING FUTURE RESULTS

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

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<PAGE>
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 June 30,
2000, the Company had an accumulated  deficit of $97,447,000 and a deficiency of
shareholders'  equity of  $12,157,000.  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 half year ended June 30, 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
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 half 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 some 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.

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

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

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

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

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

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<PAGE>
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  $10.5 million
outstanding at June 30, 2000 and a hypothetical ten percent increase or decrease
in interest  rates would not have a material  impact on the fair market value of
this debt.  The fair value of the Company's  Senior  Discount Notes may be lower
than the recorded value, but the Company is unable to estimate the fair value at
this time. The Company does not hedge any interest rate exposures.

                           PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits.

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

     (b)  Reports on Form 8-K.

          A Current  Report on Form 8-K was filed on April 25,  2000  announcing
the commencement of an exchange offer by the Company whereby the Company offered
to  exchange  a unit  consisting  of one share of common  stock and a warrant to
purchase  3.59662  shares  of  common  stock  for  each  share of  common  stock
outstanding.  A Current Report on Form 8-K was filed  announcing an extension of
the  exchange  offer from May 19,  2000 to June 23,  2000.  The  exchange  offer
terminated on June 30, 2000. The Company's  exchange agent received 541 election
notices  representing  11,585,457  shares of common stock  participating  in the
exchange offer.

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: August 21, 2000

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