**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K/A**

 

**(Mark one)**

**x****                             ****ANNUAL REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For thefiscal year ended October 31, 2007**

** **

**OR**

** **

**o****                                ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**Commission File No. (0-20820)**

 

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**SHUFFLEMASTER, INC.**

(Exact name of registrant asspecified in our charter)

 

| **Minnesota**                             | ** ** | **41-1448495**      |
|-------------------------------------------|------------|---------------------|
| (State or other  jurisdiction of          |       | (I.R.S. Employer    |
| incorporation or  organization)           |       | Identification No.) |
| ** **                                | ** ** | ** **          |
| **1106 Palms  Airport Drive**             | ** ** |                |
| **Las Vegas,  Nevada**                    | ** ** | **89119**           |
| (Address of principal  executive offices) |       | (Zip Code)          |

 

**702-897-7150**

(Registrant’s telephone number, including area code)

 

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Securities registeredpursuant to Section 12 (b) of the Act: **None**

 

Securities registeredpursuant to Section 12 (g) of the Act:

 

**CommonStock, par value $.01 per share**

 

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Indicate by check mark if the registrant is awell-known seasoned issuer as defined in Rule 405 of the SecuritiesAct.  Yes o No x

 

If this report is annual or transition,indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the SecuritiesExchange Act of 1934.  Yes o No x

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.  Yes x No o

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-accelerated filer.See definition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

 
| Large accelerated filer x | Accelerated filer o | Non-accelerated filer o |
|--------------------------------|--------------------------|------------------------------|

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2).  Yes oNo x

 

As of January 11, 2008, 35,247,755 sharesof Common Stock of the Registrant were outstanding. The aggregate market valueof Common Stock beneficially owned by non-affiliates on that date was$302,073,260 based upon the last reported sale price of the Common Stock onthat date by The NASDAQ National Market.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Parts II and III of this Annual Report on Form 10-Kincorporate by reference information from the Registrant’s Proxy Statement forits Annual Meeting of Shareholders to be held on March 26, 2008 (“Fiscal2007 Proxy Statement”) to be filed with the SEC within 120 days of the endof the fiscal year covered by this report.

 

 

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**EXPLANATORY NOTE**

 

Shuffle Master, Inc. (the “Company”) amended its Annual Report on Form 10-Kfor the fiscal year ended October 31, 2007 (“Form 10-K/A”) that waspreviously filed with the Securities and Exchange Commission (the “SEC”) on January 18,2008 (“Original Filing”).  The Form 10-K/Awas filed in order to add language in the Reports of Independent RegisteredPublic Accounting Firm (“Auditor’s Opinions”) to indicate that the nature,timing and extent of audit tests were also applied to the financial statementschedule (“Schedule II”) which reference was inadvertently excluded from theAuditor’s Opinions included in the Original Filing.  Schedule II was included in the OriginalFiling; however, the Auditor’s Opinions omitted a reference to Schedule II.Additionally, the Auditor’s Opinions were revised to refer to theCompany’s changed methodology of accounting for share-based compensation toconform to Statement of Financial Accounting Standards No. 123(R), *Share-Based Payment* in November 2005. Norevisions and / or adjustments were made to the audited Consolidated Statementsof Income, Consolidated Balance Sheets, Consolidated Statements of Changes inShareholders’ Equity and Consolidated Statements of Cash Flows or to ScheduleII as part of this amendment.

 

As a result of the amendment related to the Auditor’s Opinions, theCompany also included expanded discussion in Note 7 -Debt and Long-TermLiabilities, Note 14 - Operating Segments and Note 15 – Commitments andContingencies to the audited consolidated financial statements included in Item8 in the Form 10-K/A in response to a comment letter received from the SEC inconnection with its review of the Original Filing, the Company’s Form 10-Q forthe quarter ended January 31, 2008 and the Company’s Definitive Proxy Statementfiled on February 15, 2008 (the “Comment Letter”).  In Note 7, we included the debt compliancecovenant ratios and respective limitations as defined in our Senior SecuredRevolving Credit Facility Agreement.  InNote 14, we added discussion related to unallocated corporate expenses includedin segment operating income.  In Note 15,we added clarification language to each of the pending litigation under legalproceedings. The Comment Letter recommended including expanded discussion,where relevant, in any future filings. This amendment is deemed a future filing.

 

All information in the amendment is as of January 18, 2008 anddoes not reflect any subsequent information or events other than the expandeddiscussion as noted above. In addition, in accordance with Rule 12b-15promulgated under the Securities and Exchange Act of 1934, as amended, thisamendment also includes updated certifications from our Chief Executive Officerand Chief Financial Officer as Exhibits 31.1, 31.2, 32.1 and 32.2.

 

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**SHUFFLE MASTER, INC.**

**ANNUAL REPORT ON FORM 10-K/A FOR THEYEAR ENDED OCTOBER 31, 2007**

 

**TABLE OF CONTENTS**

 
| ** **       | **Page**                                                                              |
|------------------|---------------------------------------------------------------------------------------|
|             |                                                                                  |
| **Part II** |                                                                                  |
| ** **       |                                                                                  |
| Item 8.          | Financial Statements and Supplementary Data                                           | 1 |
| Item 9.          | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure | 38 |
| Item 9A.         | Controls and Procedures                                                               | 38 |
| Item 9B.         | Other Information                                                                     | 41 |
|             |                                                                                  |   |
| **Part IV** |                                                                                  |
| ** **       | ** **                                                                            |   |
| Item 15.         | Exhibits and Financial Statement Schedules                                            | 42 |

 

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**ITEM 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                                                                                                                        | **Page** |
|-----------------------------------------------------------------------------------------------------------------------------------|----------|
| Report of Independent Registered Public Accounting Firm                                                                           | 2        |
| Consolidated Statements of Income for the years ended  October 31, 2007, 2006, and 2005                                      | 3        |
| Consolidated Balance Sheets as of  October 31, 2007 and 2006                                                                 | 4        |
| Consolidated Statements of Changes in  Shareholders’ Equity for the years ended October 31, 2007, 2006, and  2005       | 5        |
| Consolidated Statements of Cash Flows for  the years ended October 31, 2007, 2006, and 2005                                  | 6        |
| Notes to consolidated financial statements                                                                                        | 8        |
| Quarterly Financial Data (unaudited)                                                                                              | 36       |
| Financial Statement Schedule II—Valuation  and Qualifying Accounts for the years ended October 31, 2007, 2006 and  2005 | 37       |

 

1

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directorsand Shareholders of

Shuffle Master, Inc.

Las Vegas, Nevada

 

We have audited theaccompanying consolidated balance sheets of Shuffle Master, Inc. andsubsidiaries (the “Company”) as of October 31, 2007 and 2006, and the relatedconsolidated statements of income, shareholders’ equity, and cash flows foreach of the three years in the period ended October 31, 2007. Our auditsalso included financial statement Schedule II – Valuation and Qualifying Accountsfor each of the three years in the period ended October 31, 2007.  These financial statements and financialstatement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon the financial statements and financial statement schedule based on ouraudits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Shuffle Master, Inc and subsidiaries as of October 31,2007 and 2006, and the results of their operations and their cash flows foreach of the three years in the period ended October 31, 2007, inconformity with accounting principles generally accepted in the United Statesof America. Also, in our opinion, such financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly, in all material respects, the information set forththerein.

 

Asdiscussed in Note 8 to the consolidated financial statements, on November 1,2005, the Company changed its method of accounting for share-based compensationto conform to Statement of Financial Accounting Standards No. 123(R), *Share-Based Payment*.

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the Company’s internal control over financial reporting as of October 31,2007, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated January 18,2007 expressed an unqualified opinion on the Company’s internal control over financialreporting.

 

 

Las Vegas, NevadaJanuary 18, 2008

 

2

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**SHUFFLE MASTER, INC.**

 

**CONSOLIDATED STATEMENTS OF INCOME**

 

**(In thousands, except per share amounts)**

 
| ** **                                    | ** ** | **Year Ended October 31,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenue:**                                  |       |                                      |       |   |   |   |   |
| Product leases and royalties                  |       | $                                         | 56,426     |   | $ | 49,551 |   | $ | 48,571 |   |
| Product sales and service                     |       | 122,315                                   |       | 113,202 |   | 63,997 |   |
| Other                                         |       | 110                                       |       | 238 |   | 292 |   |
| **Total revenue**                             |       | 178,851                                   |       | 162,991 |   | 112,860 |   |
| **Costs and expenses:**                       |       |                                      |       |   |   |   |   |
| Cost of leases and royalties                  |       | 17,221                                    |       | 11,794 |   | 9,692 |   |
| Cost of sales and service                     |       | 57,764                                    |       | 44,927 |   | 19,568 |   |
| **Gross profit**                              |       | 103,866                                   |       | 106,270 |   | 83,600 |   |
| Selling, general and administrative           |       | 61,947                                    |       | 51,299 |   | 30,559 |   |
| Research and development                      |       | 17,337                                    |       | 12,910 |   | 7,784 |   |
| Gain on sale of patent                        |       | —                                    |       | (4,566 | ) | — |   |
| In-process research and development           |       | —                                    |       | 19,145 |   | — |   |
| **Total costs and expenses**                  |       | 154,269                                   |       | 135,509 |   | 67,603 |   |
| Income from operations                        |       | 24,582                                    |       | 27,482 |   | 45,257 |   |
| Other expense                                 |       | (9,974                                    | )          | (6,699 | ) | (657 | ) |
| Equity method investment loss                 |       | (306                                      | )          | (416 | ) | — |   |
| Impairment of investments                     |       | —                                    |       | (1,655 | ) | (1,000 | ) |
| Income from continuing operations before  tax |       | 14,302                                    |       | 18,712 |   | 43,600 |   |
| Income tax (benefit) provision                |       | (1,999                                    | )          | 13,373 |   | 14,496 |   |
| Income from continuing operations             |       | 16,301                                    |       | 5,339 |   | 29,104 |   |
| Discontinued operations, net of tax           |       | 78                                        |       | (246 | ) | 76 |   |
| **Net income**                                |       | $                                         | 16,379     |   | $ | 5,093 |   | $ | 29,180 |   |
| **Basic earnings per share:**                 |       |                                      |       |   |   |   |   |
| Continuing operations                         |       | $                                         | 0.47       |   | $ | 0.15 |   | $ | 0.83 |   |
| Discontinued operations                       |       | —                                    |       | — |   | 0.01 |   |
| Net income                                    |       | $                                         | 0.47       |   | $ | 0.15 |   | $ | 0.84 |   |
| **Diluted earnings (loss) per share:**        |       |                                      |       |   |   |   |   |
| Continuing operations                         |       | $                                         | 0.46       |   | $ | 0.15 |   | $ | 0.80 |   |
| Discontinued operations                       |       | —                                    |       | (0.01 | ) | — |   |
| Net income                                    |       | $                                         | 0.46       |   | $ | 0.14 |   | $ | 0.80 |   |
| **Weighted average shares outstanding:**      |       |                                      |       |   |   |   |   |
| Basic                                         |       | 34,680                                    |       | 34,585 |   | 34,924 |   |
| Diluted                                       |       | 35,276                                    |       | 36,052 |   | 36,378 |   |

 

See notes toconsolidated financial statements

 

3

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**SHUFFLE MASTER, INC.**

 

**CONSOLIDATED BALANCE SHEETS**

 

**(In thousands, except per share amounts)**

 
| ** **                                                                                                 | ** ** | **October 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                 | ** ** | **2007**             | ** ** | **2006** | ** ** |
| **ASSETS**                                                                                                 |       |                 |       |   |   |
| **Current assets:**                                                                                        |       |                 |       |   |   |
| Cash and cash equivalents                                                                                  |       | $                    | 4,392      |   | $ | 8,906 |   |
| Investments                                                                                                |       | —               |       | 11 |   |
| Accounts receivable, net of allowance for  bad debts of $476 and $1,422                                    |       | 35,045               |       | 32,662 |   |
| Investment in sales-type leases and notes  receivable, net                                                 |       | 9,092                |       | 10,064 |   |
| Inventories                                                                                                |       | 34,081               |       | 24,658 |   |
| Prepaid income taxes                                                                                       |       | 4,110                |       | 1,138 |   |
| Deferred income taxes                                                                                      |       | 7,959                |       | 6,785 |   |
| Other current assets                                                                                       |       | 5,286                |       | 5,172 |   |
| **Total current assets**                                                                                   |       | 99,965               |       | 89,396 |   |
| Investment in sales-type leases and notes  receivable, net                                                 |       | 6,124                |       | 11,510 |   |
| Products leased and held for lease, net of  current portion                                                |       | 15,886               |       | 11,282 |   |
| Property and equipment, net                                                                                |       | 11,242               |       | 9,779 |   |
| Intangible assets, net                                                                                     |       | 91,343               |       | 77,904 |   |
| Goodwill                                                                                                   |       | 105,354              |       | 91,700 |   |
| Deferred income taxes                                                                                      |       | 14,476               |       | 4,294 |   |
| Other assets                                                                                               |       | 15,377               |       | 9,342 |   |
| **Total assets**                                                                                           |       | $                    | 359,767    |   | $ | 305,207 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                             |       |                 |       |   |   |
| **Current liabilities:**                                                                                   |       |                 |       |   |   |
| Accounts payable                                                                                           |       | $                    | 11,548     |   | $ | 11,217 |   |
| Accrued liabilities                                                                                        |       | 15,015               |       | 11,326 |   |
| Customer deposits                                                                                          |       | 2,213                |       | 2,017 |   |
| Deferred revenue                                                                                           |       | 5,489                |       | 5,499 |   |
| Income taxes payable                                                                                       |       | —               |       | 938 |   |
| Note payable and current portion of  long-term liabilities                                                 |       | 3,932                |       | 77,294 |   |
| Total current liabilities                                                                                  |       | 38,197               |       | 108,291 |   |
| Long-term liabilities, net of current  portion                                                             |       | 232,698              |       | 158,753 |   |
| Deferred income taxes                                                                                      |       | 1,238                |       | 5,614 |   |
| **Total liabilities**                                                                                      |       | 272,133              |       | 272,658 |   |
| **Commitments and Contingencies**                                                                          |       |                 |       |   |   |
| **Shareholders’ equity:**                                                                             |       |                 |       |   |   |
| Preferred stock, no par value; 507 shares  authorized; none outstanding                                    |       |                 |       |   |   |
| Common stock, $0.01 par value; 151,875  shares authorized; 35,198 and 34,895 shares issued and outstanding |       | 352                  |       | 349 |   |
| Additional paid-in capital                                                                                 |       | 6,492                |       | 717 |   |
| Retained earnings                                                                                          |       | 38,770               |       | 22,391 |   |
| Accumulated other comprehensive income                                                                     |       | 42,020               |       | 9,092 |   |
| **Total shareholders’ equity**                                                                        |       | 87,634               |       | 32,549 |   |
| **Total liabilities and shareholders’ equity**                                                        |       | $                    | 359,767    |   | $ | 305,207 |   |

 

See notes toconsolidated financial statements

 

4

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** **

**SHUFFLE MASTER, INC.**

 

**CONSOLIDATED STATEMENTS CHANGES INSHAREHOLDERS’ EQUITY**

 

**(In thousands)**

 
| ** **                                                 | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Deferred** | ** ** | **Retained**     | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Total  Shareholders’** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|------------------|------------|---------------------------------------|------------|-------------------------------|------------|
| ** **                                                 | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Compensation** | ** ** | **Earnings**                          | ** ** | **Income**                    | ** ** | **Equity** | ** ** |
| **Balance, November 1, 2004**                         |       | 34,958                |       | $                       | 233        |         | $          | 9,593            |       | $                                     | (1,765     | )                             | $          | 698 |   | $ | 5,970 |   | $ | 14,729 |   |
| *Comprehensive Income:*                                    |       |                  |       |                    |       |         |       |             |       |                                  |       |                          |       |   |   |
| Net Income                                                 |       | —                |       | —                  |       | —       |       | —           |       | 29,180                                |       | —                        |       | 29,180 |   |
| Currency translation adjustment                            |       | —                |       | —                  |       | —       |       | —           |       | —                                |       | (4,260                        | )          | (4,260 | ) |
| Unrealized loss on investments                             |       | —                |       | —                  |       | —       |       | —           |       | —                                |       | (165                          | )          | (165 | ) |
| *Total comprehensive income*                               |       |                  |       |                    |       |         |       |             |       |                                  |       |                          |       | 24,755 |   |
| Stock repurchased                                          |       | (1,473                | )          | (15                     | )          | (26,048      | )          | —           |       | (12,580                               | )          | —                        |       | (38,643 | ) |
| Options exercised                                          |       | 851                   |       | 9                       |       | 6,283        |       | —           |       | —                                |       | —                        |       | 6,292 |   |
| Accelerated vesting of options                             |       | —                |       | —                  |       | 60           |       | —           |       | —                                |       | —                        |       | 60 |   |
| Tax benefit from stock options                             |       | —                |       | —                  |       | 5,287        |       | —           |       | —                                |       | —                        |       | 5,287 |   |
| FY 2004 tax (true-up)                                      |       | —                |       | —                  |       | 229          |       | —           |       | —                                |       | —                        |       | 229 |   |
| Issuance of restricted stock                               |       | 193                   |       | 2                       |       | 4,781        |       | (4,297           | )          | —                                |       | —                        |       | 486 |   |
| Amortization of deferred compensation                      |       | —                |       | —                  |       | —       |       | 274              |       | —                                |       | —                        |       | 274 |   |
| January 2005 stock split                              |       | (2                    | )          | 116                     |       | (185         | )          | —           |       | —                                |       | —                        |       | (69 | ) |
| **Balance, October 31, 2005**                         |       | 34,527                |       | 345                     |       | —       |       | (5,788           | )          | 17,298                                |       | 1,545                         |       | 13,400 |   |
| *Comprehensive Income:*                                    |       |                  |       |                    |       |         |       |             |       |                                  |       |                          |       |   |   |
| Net Income                                                 |       | —                |       | —                  |       | —       |       | —           |       | 5,093                                 |       | —                        |       | 5,093 |   |
| Currency translation                                       |       | —                |       | —                  |       | —       |       | —           |       | —                                |       | 7,382                         |       | 7,382 |   |
| Reclassification of loss on investments                    |       | —                |       | —                  |       | —       |       | —           |       | —                                |       | 165                           |       | 165 |   |
| *Total comprehensive income*                               |       |                  |       |                    |       |         |       |             |       |                                  |       |                          |       | 12,640 |   |
| Reclass deferred compensation to APIC                      |       | —                |       | —                  |       | (5,788       | )          | 5,788            |       | —                                |       | —                        |       | — |   |
| Stock repurchased                                          |       | (317                  | )          | (3                      | )          | (8,662       | )          | —           |       | —                                |       | —                        |       | (8,665 | ) |
| Options exercised                                          |       | 697                   |       | 7                       |       | 7,867        |       | —           |       | —                                |       | —                        |       | 7,874 |   |
| Shares surrendered and retired for stock  option exercises |       | (76                   | )          | (1                      | )          | (2,119       | )          | —           |       | —                                |       | —                        |       | (2,120 | ) |
| Share-based compensation expense                           |       | —                |       | —                  |       | 5,512        |       | —           |       | —                                |       | —                        |       | 5,512 |   |
| Tax benefit from stock option exercises                    |       | —                |       | —                  |       | 3,908        |       | —           |       | —                                |       | —                        |       | 3,908 |   |
| Issuance of restricted stock                               |       | 64                    |       | 1                       |       | (1           | )          | —           |       | —                                |       | —                        |       | — |   |
| **Balance, October 31, 2006**                         |       | 34,895                |       | 349                     |       | 717          |       | —           |       | 22,391                                |       | 9,092                         |       | 32,549 |   |
| *Comprehensive Income:*                                    |       |                  |       |                    |       |         |       |             |       |                                  |       |                          |       |   |   |
| Net Income                                                 |       | —                |       | —                  |       | —       |       | —           |       | 16,379                                |       | —                        |       | 16,379 |   |
| Currency translation                                       |       | —                |       | —                  |       | —       |       | —           |       | —                                |       | 32,850                        |       | 32,850 |   |
| Reclassification of loss on investments                    |       | —                |       | —                  |       | —       |       | —           |       | —                                |       | 78                            |       | 78 |   |
| *Total comprehensive income*                               |       |                  |       |                    |       |         |       |             |       |                                  |       |                          |       | 49,307 |   |
| Stock repurchased                                          |       | (77                   | )          | (1                      | )          | (1,962       | )          | —           |       | —                                |       | —                        |       | (1,963 | ) |
| Options exercised                                          |       | 229                   |       | 3                       |       | 2,544        |       | —           |       | —                                |       | —                        |       | 2,547 |   |
| Shares surrendered and retired for stock  option exercises |       | (76                   | )          | (1                      | )          | (750         | )          | —           |       | —                                |       | —                        |       | (751 | ) |
| Share-based compensation expense                           |       | —                |       | —                  |       | 4,812        |       | —           |       | —                                |       | —                        |       | 4,812 |   |
| Tax benefit from stock option exercises                    |       | —                |       | —                  |       | 1,133        |       | —           |       | —                                |       | —                        |       | 1,133 |   |
| Issuance of restricted stock                               |       | 227                   |       | 2                       |       | (2           | )          | —           |       | —                                |       | —                        |       | — |   |
| **Balance, October 31, 2007**                         |       | 35,198                |       | $                       | 352        |         | $          | 6,492            |       | $                                     | —     |                          | $          | 38,770 |   | $ | 42,020 |   | $ | 87,634 |   |

 

See notes toconsolidated financial statements

 

5

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** **

**SHUFFLE MASTER, INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**(In thousands)**

 
| ** **                                                                     | ** ** | **Year Ended October 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                     | ** ** | **2007**                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Cash flows from operating activities:**                                      |       |                                      |       |   |   |   |   |
| Net income                                                                     |       | $                                         | 16,379     |   | $ | 5,093 |   | $ | 29,180 |   |
| Adjustments to reconcile net income to cash  provided by operating activities: |       |                                      |       |   |   |   |   |
| Depreciation and amortization                                                  |       | 19,421                                    |       | 16,662 |   | 11,218 |   |
| Amortization of debt issuance costs                                            |       | 1,327                                     |       | 1,511 |   | 961 |   |
| Share-based compensation                                                       |       | 4,812                                     |       | 5,512 |   | 760 |   |
| In-process research and development                                            |       | —                                    |       | 19,145 |   | — |   |
| Gain on patent sale                                                            |       | —                                    |       | (4,566 | ) | — |   |
| Equity method investment loss                                                  |       | 306                                       |       | 416 |   | — |   |
| Provision for bad debts                                                        |       | (406                                      | )          | (537 | ) | 229 |   |
| Write-down for inventory obsolescence                                          |       | 1,415                                     |       | 345 |   | (140 | ) |
| Loss on disposal of property                                                   |       | —                                    |       | — |   | 66 |   |
| Gain on sale of leased assets                                                  |       | (2,511                                    | )          | — |   | — |   |
| Excess tax benefit from stock option  exercises                                |       | (854                                      | )          | (3,682 | ) | 5,287 |   |
| Tax benefit from stock option exercises                                        |       | 279                                       |       | 226 |   | — |   |
| Impairment of investments                                                      |       | —                                    |       | 1,655 |   | 1,000 |   |
| Changes in operating assets and liabilities:                                   |       |                                      |       |   |   |   |   |
| Accounts receivable                                                            |       | 1,245                                     |       | (2,407 | ) | (6,526 | ) |
| Investment in sales-type leases and notes  receivable                          |       | 6,801                                     |       | (2,459 | ) | (7,942 | ) |
| Inventories                                                                    |       | (5,803                                    | )          | (4,033 | ) | (3,483 | ) |
| Accounts payable and accrued liabilities                                       |       | 5,505                                     |       | (2,434 | ) | 2,318 |   |
| Customer deposits and deferred revenue                                         |       | (232                                      | )          | 3,382 |   | (48 | ) |
| Income taxes, net of stock option exercises                                    |       | (20                                       | )          | — |   | — |   |
| Deferred income taxes                                                          |       | (8,315                                    | )          | (3,042 | ) | (2,403 | ) |
| Prepaid income taxes                                                           |       | (2,690                                    | )          | 3,232 |   | 6,730 |   |
| Other                                                                          |       | (3,611                                    | )          | 2 |   | (2,699 | ) |
| **Net cash provided by operating activities**                                  |       | 33,048                                    |       | 34,021 |   | 34,508 |   |
| **Cash flows from investing activities:**                                      |       |                                      |       |   |   |   |   |
| Purchases of investments                                                       |       | —                                    |       | (32,435 | ) | (11,847 | ) |
| Proceeds from sale and maturities of  investments                              |       | 13                                        |       | 49,232 |   | 17,330 |   |
| Proceeds from sale of leased assets                                            |       | 4,070                                     |       | 1,845 |   | 1,632 |   |
| Payments for products leased and held for  lease                               |       | (10,085                                   | )          | (9,167 | ) | (9,520 | ) |
| Purchases of property and equipment                                            |       | (2,774                                    | )          | (2,196 | ) | (2,210 | ) |
| Purchases of intangible assets                                                 |       | (2,397                                    | )          | (4,313 | ) | (7,239 | ) |
| Acquisition of businesses, net of cash  acquired                               |       | (21,946                                   | )          | (114,608 | ) | (228 | ) |
| Net proceeds from patent sale                                                  |       | —                                    |       | 7,500 |   | 9,039 |   |
| Other                                                                          |       | —                                    |       | — |   | (3,483 | ) |
| **Net cash used by investing activities**                                      |       | (33,119                                   | )          | (104,142 | ) | (6,526 | ) |
| **Cash flows from financing activities:**                                      |       |                                      |       |   |   |   |   |
| Proceeds from acquisition financing                                            |       | —                                    |       | 115,000 |   | — |   |
| Payments on acquisition financing                                              |       | (70,000                                   | )          | (45,000 | ) | — |   |
| Proceeds from senior secured revolving  credit facility                        |       | 87,680                                    |       | — |   | — |   |
| Payments on senior secured revolving credit  facility                          |       | (12,000                                   | )          | — |   | — |   |
| Proceeds from other borrowings                                                 |       | 1,926                                     |       | 4,153 |   | — |   |
| Repurchases of common stock                                                    |       | (1,933                                    | )          | (8,665 | ) | (38,643 | ) |
| Proceeds from issuances of common stock,  net                                  |       | 2,061                                     |       | 7,874 |   | 6,512 |   |
| Debt issuance costs                                                            |       | (1,722                                    | )          | (554 | ) | — |   |
| Excess tax benefit from stock option  exercises                                |       | 854                                       |       | 3,682 |   | — |   |
| Payment on notes payable and other  liabilities                                |       | (10,379                                   | )          | (10,567 | ) | (2,896 | ) |
| **Net cash provided (used) by financing  activities**                          |       | (3,513                                    | )          | 65,923 |   | (35,027 | ) |
| **Effect of exchange rate changes on cash**                                    |       | (930                                      | )          | (175 | ) | (256 | ) |
| **Net increase (decrease) in cash and cash  equivalents**                      |       | (4,514                                    | )          | (4,373 | ) | (7,301 | ) |
| **Cash and cash equivalents, beginning of  year**                              |       | 8,906                                     |       | 13,279 |   | 20,580 |   |
| **Cash and cash equivalents, end of year**                                     |       | $                                         | 4,392      |   | $ | 8,906 |   | $ | 13,279 |   |

 

See notes toconsolidated financial statements

 

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** **

**SupplementalDisclosures of Cash Flows Information—**

 
| ** **                                                                                                | ** ** | **Year Ended October 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2007**                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Non-cash Investing and Financing  transactions:**                                                       |       |                                      |       |   |   |   |   |
| Mimimum consideration for patent purchase                                                                 |       | $                                         | —     |   | $ | — |   | $ | 9,229 |   |
| Accrued direct acquisition costs related to  acquisitions                                                 |       | 792                                       |       | 1,750 |   | — |   |
| Note payable and minimum consideration  issued in connection with the acquisition of a business or assets |       | 2,922                                     |       | — |   | 880 |   |
| Issuance of restricted stock                                                                              |       | 5,773                                     |       | 2,113 |   | 4,781 |   |
| Recharacterization of prepaid royalty                                                                     |       | 1,750                                     |       | — |   | — |   |
| **Cash paid for:**                                                                                        |       |                                      |       |   |   |   |   |
| Income taxes, net of refunds                                                                              |       | $                                         | 8,475      |   | $ | 11,033 |   | $ | 5,576 |   |
| Interest                                                                                                  |       | 5,844                                     |       | 5,559 |   | 1,919 |   |

 

See notes to consolidatedfinancial statements

 

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**SHUFFLE MASTER, INC.**

 

**Notesto Consolidated Financial Statements**

 

**(In thousands, except per share amounts)**

 

**1. DESCRIPTION OF BUSINESS AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

***Description ofbusiness.*** We develop, manufacture and market technology and entertainment-basedproducts for the gaming industry for placement on the casino floor. Ourproducts primarily relate to our casino customers’ table game activities andfocus on either increasing their profitability, productivity and security orexpanding their gaming entertainment offerings. Our business is segregated intothe following four product segments: Utility Products, Proprietary Table Games,Electronic Table Systems, and Electronic Gaming Machines.

 

Our Utility Products include a full line of automatic card shufflersfor use with the vast majority of card table games as well as chip sortingmachines for use on roulette tables. We also have acquired and/or havedeveloped other products that automatically gather data to enable casinos totrack table game play, such as Table iDTM (part of our Intelligent TableSystemTM), currently in development with International Game Technology (“IGT”)and Progressive Gaming International Corporation (“PGIC”).

 

Our Proprietary Table Games (“PTG”) include our portfolio of live tablegames including poker, blackjack, baccarat, and pai gow poker-based tablegames, progressive table games with bonusing options, side bets and proprietarytable game licensing for other gaming media, such as legal internet gaminglicenses.

 

Our Electronic Table Systems (“ETS”) include e-Table platforms such asTable MasterTM, Vegas Star®, Rapid Table Games®, as wellas our wireless gaming.

 

Our Electronic Gaming Machines (“EGM”) include our PC-based video slotmachines with an extensive selection of video slot titles, which include arange of bonus round options.

 

We lease, license or sell our products. When we lease or license ourproducts, we generally negotiate a month-to-month operating lease. When we sellour products, we offer our customers a choice between a sale, a longer-termsales-type lease or other long-term financing. We offer our products worldwidein markets that are highly regulated. We manufacture our products at ourheadquarters and manufacturing facility in Las Vegas, Nevada, as well as at ourAustralian headquarters in Milperra, New South Wales. In addition, we outsourcethe manufacturing of certain of our products in the United States, Europe andAsia Pacific.

 

All of our product lines compete or will compete with other gamingproducts, such as slot machines, blackjack tables, keno, craps, and roulette,for space on the casino floor.

 

***Principles ofconsolidation.*** Our consolidated financial statements have been prepared pursuant to therules and regulations of the Securities and Exchange Commission (“SEC”)and in accordance with accounting principles generally accepted in the UnitedStates of America (“GAAP”) and include all adjustments necessary to fairlypresent our consolidated results of income, financial position and cash flowsfor each period presented.

 

Our consolidated financial statements include the accounts of ShuffleMaster, Inc. and our wholly-owned domestic and foreign subsidiaries. Allsignificant inter-company accounts and transactions have been eliminated. Wehave no unconsolidated subsidiaries.

 

***Investment in Sonaand Other Investments.***  Our investment in and the operating resultsof Sona Mobile Holdings Corp. (“Sona”) which is not required to be consolidatedin our consolidated financial statements, was previously accounted for inaccordance with Accounting Principles Board (“APB”) Opinion No. 18 (“APB 18”),“*The Equity Method of Accounting forInvestments in Common Stock”*, based on our assessment of ourrelationship with Sona at the time of the investment. In our initialassessment, we concluded that we had the ability to exercise significantinfluence over Sona due to our President having a seat on the Sona Board ofDirectors. Due to the resignation of our President from the Sona Board ofDirectors on June 12, 2007, using the guidance of APB 18, we have nowconcluded that we no longer have the ability to exercise significant influenceover Sona and that the equity method of accounting is no longer appropriate forour investment. As of June 12, 2007, we have accounted for our investmentunder the cost method of accounting on a prospective basis and 

 

8

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as an available for sale marketable securityusing the guidance of Statement of Financial Accounting Standards (“SFAS”) No. 115,“*Accounting for Certain Investments in Debtand Equity Securities”*.

 

We review our investments for other than temporary impairment wheneverevents or changes in business circumstances indicate that the carrying amountof the investments may not be fully recoverable. There was no such impairmentloss recorded during the year ended October 31, 2007. During fiscal 2006we recognized pre-tax impairment charges of $1,655 related to our investment inSona.

 

As of October 31, 2005, we analyzed our cost method investmentusing the methodology described above and determined that such investment wasimpaired. Accordingly, we recorded a $1,000 impairment write-down equal to thefull amount of the investment. Such impairment charge is reflected inimpairment of investments.

 

***Use of Estimates andAssumptions.*** The preparation of our consolidated financial statements in conformitywith GAAP requires the use of estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities at the date of the consolidated financial statements, and thereported amounts of revenues and expenses during the reporting periods.Significant estimates and assumptions are used for, but not limited to: (1) allowancefor doubtful accounts; (2) asset impairments, including goodwill andindefinite lived trade names; (3) depreciable lives of assets; (4) usefullives of intangible assets; (5) income tax valuation allowances; (6) fairvalue of stock options; and (7) contingency and litigation reserves.Future events and their effects cannot be predicted with certainty;accordingly, our accounting estimates require the exercise of judgment. Theaccounting estimates used in the preparation of our consolidated financialstatements will change as new events occur, as more experience is acquired, asadditional information is obtained and as our operating environment changes. Weevaluate and update our assumptions and estimates on an ongoing basis. Actualresults could differ from those estimates.

 

***Inventories.***  Inventories are stated at the lower of cost,determined on a first-in-first-out basis, or market. Inventory write-downstotaled $1,415, $345 and ($140) for fiscal years ended 2007, 2006 and 2005.

 

***Revenue recognition.***  We recognize revenue when the followingcriteria are met:

 

·                  persuasiveevidence of an arrangement between us and our customer exists,

 

·                  shipment hasoccurred or services have been rendered,

 

·                  the price isfixed or determinable, and

 

·                  collectibilityis reasonably assured.

 

We earn our revenue in a variety of ways. We offer our products forlease or sale. We also sell service and warranty contracts for our soldequipment. Proprietary table games are sold under lifetime licensing agreementsor licensed on a monthly or daily fee basis. We recognize revenues net of anytaxes collected from our customers that are later remitted to governmentalauthorities.

 

*Product lease and royalties revenue—*Leaseand royalty revenue is earned from the leasing of our tangible products and thelicensing of our intangible products, such as our proprietary table games. Werecognize revenue monthly, based on a monthly fixed fee or on participationarrangements, generally through indefinite term operating leases. Lease androyalty revenue commences upon the completed installation of the product. Leaseterms are generally cancellable with 30 days notice.

 

*Product sales and service revenue*—Wegenerate sales revenue through the sale of equipment in each product segment,including sales revenue from sales-type leases and the sale of lifetimelicenses for our proprietary table games. Financing for intangible property andsales-type leases for tangible property have payment terms ranging generallyfrom 30 to 60 months and are interest-bearing at market interest rates.Revenue from the sale of equipment is recorded upon shipment. If a customerpurchases existing leased equipment, revenue is recorded on the effective dateof the purchase agreement. Revenue on service and warranty contracts isrecognized over the terms of the contracts, which are generally one year.Revenue from the sale of lifetime licenses, under which we have no continuingobligations, is recorded on the effective date of the license agreement.

 

Certain of our products contain software, and as such we haveconsidered the guidance contained in Statement of Position 97-2 (“SOP 97-2”),“*Software Revenue Recognition*”,as modified by SOP No. 98-9, “*SoftwareRevenue*

 

9

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*Recognition, With Respect to CertainTransactions*”. Under this guidance when leasing orselling software, we consider whether the software component is incidental tothe product as a whole based on the following criteria:

 

·                  Whether thesoftware is a significant focus of the marketing effort or is sold separately

 

·                  Whetherpost-contract customer support or PCS (PCS includes the right to receiveservices or unspecified upgrades/enhancements, or both, offered to users orresellers) is provided

 

·                  Whether thedevelopment and production costs of the software as a component of the cost ofthe product is incidental, as defined in SFAS No. 86, “*Accounting for the Costs of Computer Software to BeSold, Leased, or Otherwise Marketed*”

 

·                  Whether anagreement includes service elements (other than PCS related services), such astraining or installation, and whether such services are essential to thefunctionality of the software or whether such software is considered “off-the-shelf”(off-the-shelf software is software that is marketed as a stock item that canbe used by customers with little or no customization). Conversely, “coresoftware” requires significant customization of the software in order for thesoftware to be used by the end customer

 

Some of our revenue arrangements contain multiple deliverables, such asa product sale combined with a service element or the delivery of a futureproduct. If an arrangement requires the delivery or performance of multipleelements, we apply the guidance from SOP 97-2, as amended, Emerging IssuesTask Force (“EITF”) 03-05, “*Applicability ofAICPA Statement of Position 97-2 to Non-Software Deliverables in an ArrangementContaining More-Than-Incidental Software and FASB Emerging Issues Task Force (“EITF”)No. 00-21, “Revenue Arrangements with Multiple Deliverables.”*Deliverables are divided into separate units of accounting if:

 

·                  The delivereditems have value to the customer on a stand alone basis

 

·                  We haveobjective and reliable evidence of the fair value of the undelivered item

 

Delivery of any undelivered item is considered probable andsubstantially in our control

 

If these criteria are not met, we do not recognize revenue until allessential elements have been delivered. If the installation of the product isnot considered inconsequential and perfunctory, then we defer revenuerecognition until installation is complete.

 

***Businesscombinations.*** We account for business combinations in accordance with SFAS No. 141,“*Accounting for Business Combinations*”(“SFAS 141”) and SFAS No. 142, “*Accountingfor Goodwill and Other Intangible Assets*” (“SFAS 142”), andrelated interpretations. SFAS 141 requires that we record the net assetsof acquired businesses at fair value, and we must make estimates andassumptions to determine the fair value of these acquired assets and assumedliabilities.

 

During fiscal 2007 and 2006, we acquired PGIC’s Table Game Division (“TGD”)and Stargames Limited (“Stargames”), respectively. As a part of the valuationprocess, we applied significant judgment and utilized a variety of assumptionsin determining the fair value of acquired assets and liabilities assumed, andin-process research and development, including market data, estimated futurecash flows, growth rates, current replacement cost for similar capacity forcertain fixed assets, market rate assumptions for contractual obligations andsettlement plans for contingencies and liabilities.

 

The PGIC TGD purchase price allocation is preliminary and may beadjusted for up to one year after the acquisition. Changes to the assumptionswe used to estimate fair value could impact the recorded amounts for acquiredassets and assumed liabilities and significant changes to these balances couldhave a material impact to our future reported results. For instance, lower orhigher fair values assigned to certain amortizable intangible assets couldresult in lower or higher amounts of income statement charges.

 

***Advertising costs.***  We expense advertising and promotional costsas incurred, which totaled approximately $2,353, $2,069, and $576, for thefiscal years ended October 31, 2007, 2006 and 2005, respectively.

 

***Research anddevelopment costs.*** We incur research and development costs to develop our new andnext-generation products. Our products generally reach technologicalfeasibility when we receive gaming regulatory product approval which generallyoccurs concurrent with our products being made available to our customers.Accordingly, research and development costs are expensed as incurred.

 

10

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***Concentration ofcredit risk.*** Our financial instruments that have potential concentrations of creditrisk include cash and cash equivalents, accounts receivable, investments insales-type leases and notes receivable. We place our cash and cash equivalentswith high credit quality institutions. Accounts receivable, investments insales-type leases and notes receivable have concentration of credit riskbecause they all relate to our customers in the gaming industry. From time totime, we make significant sales to customers that exceed 10% of ourthen-outstanding accounts receivable balance. As of October 31, 2007, nocustomer balances exceeded 10% of our net trade accounts receivable. No singlecustomer’s balance exceeded 10% of our investment in sales-type leases andnotes receivable. For the year ended October 31, 2007, no individualcustomer accounted for more than 10% of consolidated revenue.

 

***Installation Costs.***  Installation costs for leased products areexpensed as incurred.

 

***Products leased andheld for lease.*** Our products are primarily leased to customers pursuant to operatingleases. Products leased and held for lease are stated at cost, net ofdepreciation. Depreciation on leased products is calculated using thestraight-line method over the estimated customer life of one to five years. Weprovide maintenance of our products on lease as part of our normal leaseagreements. Leases of shufflers generally require prepayment of two months’lease payments, which are included in the consolidated balance sheets ascustomer deposits.

 

***Property andequipment.*** Property and equipment is stated at cost. Depreciation is recorded usingthe straight-line method over the estimated useful life of the asset of threeto eight years, or lease terms, if shorter, for leasehold improvements.

 

***Goodwill and OtherIntangible assets.*** We account for goodwill and other intangibles under the guidance ofSFAS 141 and SFAS 142.

 

We review our goodwill for impairment using a two step impairment test.The reviews are performed at the reporting unit level, which we have determinedis the equivalent to our reportable segments. In the first step, we estimatethe fair value of the reporting unit and compare it to the book value of thereporting unit, including its goodwill. If the fair value is less than the bookvalue, then we would perform a second step to compare the implied fair value ofthe reporting unit’s goodwill to its book value. The implied fair value of thegoodwill is determined based on the estimated fair value of the reporting unitless the fair value of the reporting unit’s identifiable net assets. We wouldrecord an impairment charge to the extent that the book value of the reportingunit’s goodwill exceeds its fair value. We are required to test goodwill andother indefinite lived intangibles for impairment at least annually, or uponthe occurrence of a triggering event. Absent any impairment indicators, weperform our goodwill impairment testing during October of each year. Nogoodwill impairments were recorded in any periods presented.

 

Intangible assets include intellectual property for games, patents,trademarks, copyrights, licenses, developed technology, customer relationshipsand non-compete agreements that were purchased separately or acquired inconnection with a business combination. Except for the trademarks related tothe Stargames and Casinos Austria Research & Development GmbH &Co KG (“CARD”) acquisitions, which are not subject to amortization, all of oursignificant intangible assets are definite lived and, accordingly, amortizedover their expected useful lives which range from 1 to 15 years. Weamortize substantially all of our intangible assets proportionate to therelated projected revenue from the utilization of the intangible asset. Webelieve this method reflects the pattern in which the economic benefits of theintangible asset are consumed or otherwise used up. For certain otherintangibles, we use the straight-line amortization method. See Note 6 formore information. We also review these intangible assets for impairment inaccordance with SFAS No. 144 whenever events or changes in circumstancesindicate that we may not be able to recover the asset’s carrying amount (seebelow).

 

***Impairment oflong-lived assets.*** We estimate the useful lives of our long-lived assets, excludinggoodwill, based on historical experience, estimates of products’ commerciallives, the likelihood of technological obsolescence and estimates of theduration of commercial viability for patents, licenses and games.

 

We review our long-lived assets, excluding goodwill, for impairmentwhenever events or circumstances indicate the carrying value may not berecoverable or warrant a revision to the estimated remaining useful life, inaccordance with SFAS No. 144, *“Accountingfor the Impairment or Disposal of Long-Lived Assets”* (“SFAS 144”),and SFAS 142. We would record an impairment loss if the carrying amount ofthe asset or asset group is not recoverable (as determined by undiscounted cashflows) and the carrying amount exceeds its estimated fair value. Fair value isdetermined based on discounted expected future cash flows. As of October 31,2007, we did not have any such impairment loss. Impairments were recognized infiscal years 2006 and 2005 as discussed above.

 

***Deferred revenue.***  Deferred revenue consists of amountscollected or billed in excess of recognizable revenue.

 

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***Foreign currencytranslation.*** Our foreign subsidiaries’ asset and liability accounts are translatedinto U.S. dollar amounts at the exchange rate in effect at the balance sheetdate. Foreign exchange translation adjustments are recorded as a separatecomponent of shareholders’ equity. Revenue and expense accounts are translatedat the average exchange rates. Transaction gains and losses are included inother expense on our consolidated statements of income.

 

***Earnings per commonshare.*** Basic earnings per share is calculated by dividing net income by theweighted average number of common shares outstanding and issuable during theyear. Diluted earnings per share is similar to basic, except that the weightedaverage number of shares outstanding is increased by the potentially dilutiveeffect of outstanding stock options, restricted stock and contingentconvertible notes, if applicable, during the year, using the treasury stockmethod.

 

***Recently issued oradopted accounting standards.*** In August 2007,the Financial Accounting Standards Board (“FASB”) proposed FASB Staff Position(FSP) APB 14-a, *“Accounting forConvertible Debt Instruments That May Be Settled in Cash upon Conversion(Including Partial Cash Settlement)”* (“FSP APB 14-a”). Ifapproved, FSP APB 14-a will require us to separately account for theliability and equity components of our Notes and recognize additional interestexpense at our nonconvertible debt borrowing rate. If the FSP is issued asdrafted, it will be effective for fiscal 2009 and will require retrospectiveapplication. We are currently evaluating the proposed FSP and it may result inhigher interest expense related to our Notes for all periods presented.

 

In December 2007, the FASB issued SFAS No. 141R, “BusinessCombinations” (SFAS 141R), which establishes principles and requirementsfor the reporting entity in a business combination, including recognition andmeasurement in the financial statements of the identifiable assets acquired,the liabilities assumed, and any non-controlling interest in the acquiree. Thisstatement also establishes disclosure requirements to enable financialstatement users to evaluate the nature and financial effects of the businesscombination. SFAS 141R applies prospectively to business combinations forwhich the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2008, and interimperiods within those fiscal years. SFAS 141R will become effective for ourfiscal year beginning November 1, 2009. We are currently evaluating theeffect the adoption of SFAS 141R will have on our consolidated financialstatements.

 

In February 2007, the FASB issued SFAS No. 159 “*The Fair Value Option for Financial Assets andFinancial Liabilities*” (“SFAS 159”). SFAS 159 expands theuse of fair value measurement by permitting entities to choose to measure manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value. This statement is effectivefor us beginning in November 2008. We have not yet determined whether wewill elect to measure any items at fair value under SFAS 159.

 

In September 2006, the FASB issued SFAS No. 157, “*Fair Value Measurements*” (“SFAS 157”),which defines fair value, establishes a framework for measuring fair value inGAAP, and expands disclosures about fair value measurements. SFAS 157 doesnot require any new fair value measurements, but provides guidance on how tomeasure fair value by providing a fair value hierarchy used to classify thesource of the information. This statement is effective for us beginning in November 2008.We are evaluating whether adoption of this statement will result in a change toour fair value measurements.

 

In June 2006, the FASB issued FIN 48, “*Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109*” (“FIN 48”).FIN 48 prescribes the recognition threshold and measurement criteria fordetermining the tax benefit amounts to recognize in the financial statements.This interpretation is effective for us beginning in November 2007. We areevaluating the potential impact of adopting this interpretation on our futureresults of operations, financial position or cash flows. FIN 48 requiresthat tax positions be assessed using a two-step process. A tax position isrecognized if it meets a “more likely than not” threshold, and is measured atthe largest amount of benefit that is greater than 50 percent likely ofbeing realized. Uncertain tax positions must be reviewed at each balance sheetdate. Liabilities recorded as a result of this analysis must generally berecorded separately from any current or deferred income tax accounts, and areclassified as current (“Other accrued liabilities”) or long-term (“Otherlong-term liabilities”) based on the time until expected payment. A cumulativeeffect adjustment to retained earnings was not required as a result of theimplementation of FIN 48. At this time, the Company estimates a range of$1,000 to $3,000 of unrecognized tax liability as a result of theimplementation of FIN 48.

 

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In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”)No. 108, “*Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements*” (“SAB 108”). SAB 108 requiresanalysis of misstatements using both an income statement (rollover) approachand a balance sheet (iron curtain) approach in assessing materiality andprovides for a one-time cumulative effect transition adjustment. SAB 108was effective for our fiscal year 2007. The adoption of this statement did nothave a material impact on our results of operations, financial position or cashflows.

 

**2. ACQUISITIONS, OTHER SIGNIFICANTTRANSACTIONS AND DISPOSITIONS**

 

***PGIC Table GamesDivision.*** On September 26, 2007, we entered into a purchase agreement for theacquisition of PGIC’s Table Games Division (“TGD”) business (“PurchaseAgreement”), including certain worldwide rights and lease contracts for all ofPGIC’s table game titles including Caribbean Stud® and Texas Hold’Em Bonus®, as well as a software distribution license agreement (“SoftwareDistribution License Agreement”). Further, we also entered into an amended andrestated license agreement with PGIC amending the current license agreementoriginally entered into on September 29, 2006, which granted us certainexpanded rights.

 

The acquisition grants us all of PGIC’s rights, title, and interest, ona worldwide basis (except for certain defined carved-out customers and ofelectronic and video rights to the acquired games), in and to all of the assetsin or part of the table games division including, without limitation, allintellectual property, hardware, software, existing customer agreements,installed table game base and inventory.

 

Under the terms of the Purchase Agreement, we paid to PGIC an upfrontpayment of approximately $19,800. The Purchase Agreement also provides forfuture earn-out payments, where permitted, beginning in calendar 2008,including $3,500 in total non-interest bearing guaranteed minimum payments overa 4-year period, as follows: For each of 2008 and 2009, the guaranteed minimumamounts are $1,000 each year, paid quarterly; and for 2010 and 2011, are $750each year, also paid quarterly. The future earn-out payments are based on thegrowth of the acquired TGD business in excess of annual baseline revenue ofapproximately $4,800. For 2008 and 2009, the earn-out will be 23% of revenueabove the baseline amount; for 2010 and 2011, the earn-out will be 19% ofrevenue above the baseline; and for 2012 to 2016, 10.75% of revenue above thebaseline. Actual earn-out payments are applied against the annual guaranteedminimum amounts. Future earn-out payments in excess of the minimum guaranteedpayments will be added to the purchase price in accounting for the businesscombination. The recurring revenue for the twelve months ended June 30,2007 of the acquired TGD business totaled approximately $4,800. The acquiredinstalled lease base as of September 1, 2007, totaled approximately 600 tables.

 

Under the Software Distribution License Agreement, we acquired PGIC’sGame ManagerTM software and related table hardware (collectively, the “GMS”).The Software Distribution License Agreement provides a framework for us tofurther utilize the GMS, as well as use PGIC’s Casinolink® JackpotSystemTM for installations where the GMS cannot handle the total number oftables and/or properties being managed. We paid PGIC a $3,000 advance ofroyalties due under the Software Distribution License Agreement within10 days of signing the Purchase Agreement. Once the $3,000 advance isrecouped, PGIC will receive recurring quarterly royalty payments for the placementof PGIC’s progressive technology on our proprietary table games, subject to ourfurther recoupment of $1,750 related to an earlier licensing transaction withPGIC. The royalty rate for our proprietary games is 15% of the net incrementalrevenue attributable to adding the progressive element.

 

The following table sets forth the determination of the considerationpaid for the PGIC TGD at the date of acquisition:

 
| Cash                                                |   | $     | 19,755 |   |
|-----------------------------------------------------|--------|-------|--------|--------|
| Minimum future consideration, non-interest  bearing |   | 2,922 |   |
| Direct acquisition costs                            |   | 1,233 |   |
| Total purchase price                                |   | $     | 23,910 |   |

 

In accordance with SFAS 141, the transaction was accounted for asa business combination and, accordingly, the preliminary purchase price wasallocated to the underlying assets acquired based upon their estimated fairvalues at the date of the acquisition. No liabilities were assumed in thistransaction. We are currently in the process of determining the fair valuesbased on discounted cash flows and estimates. The purchase price allocation ispreliminary and may be adjusted for up to one year after the acquisition. Thefollowing table sets forth the preliminary allocation of the purchase price:

 

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| Inventory                                                                       |   | $      | 883    |   |
|---------------------------------------------------------------------------------|--------|--------|--------|--------|
| Property and equipment                                                          |   | 1,101  |   |
| Customer relationships, average life of  10 years                          |   | 11,221 |   |
| Backlog, average life of 1 year                                            |   | 126    |   |
| Tradenames, trademarks, patents, and  copyrights, average life of 10 years |   | 2,999  |   |
| Covenant not to compete, life of  7 years                                  |   | 207    |   |
| Goodwill                                                                        |   | 7,373  |   |
|                                                                            |   | $      | 23,910 |   |

 

The acquisition of the PGIC TGD enhances the product offering in ourPTG segment. These factors result in the recognition of certain intangibleassets and goodwill. Backlog and covenant not to compete are being amortized ona straight-line basis over their useful lives. Customer relationships andtradenames, trademarks, patents, and copyrights are being amortized based ontheir projected revenue streams. Backlog and tradenames, trademarks, patents,and copyrights are charged to cost of leases and royalties, a component ofgross margin. Customer relationships and covenant not to compete are reflectedin selling, general and administrative expenses in the condensed consolidatedstatements of income.

 

**3. FINANCIAL INSTRUMENTS**

 

***Cash and cashequivalents.*** Cash and cash equivalents include short-term investments with maturitiesof three months or less from their date of purchase. We maintain cash balancesthat exceed federally insured limits; however, we have incurred no losses onsuch accounts.

 

***Investments.***  We classify all of our securities asavailable-for-sale. Our investments are recorded at fair market value, which,as of October 31, 2007 and 2006, includes $0 of unrealized gains.

 

Investments at fair value consisted of the following as of October 31:

 
| ** **                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| United States government and agency  obligations |       | $        | —     |     | $          | 11 |   |
|                                                  |            |          |            |          |            |  |  |

 

***Fair valuedisclosures of financial instruments.***  We estimate that the fair values of accountsreceivable, the current portion of investment in sales-type leases and notesreceivable, accounts payable and short term borrowings approximate theircarrying values due to the relatively short-term nature of the instruments. Itis impracticable to estimate the fair value of the long-term portion of ourinvestment in sales-type leases and notes receivable.

 

We estimate that the fair value of our $150,000 Contingent ConvertibleSenior Notes (the “Notes”) as of October 31, 2007, was $138,353 based onquoted market prices.

 

**4. RECEIVABLES AND INVESTMENT IN SALES-TYPELEASES**

 

The following provides additional disclosure for accounts receivable,notes receivable and investment in sales-type leases as of October 31:

 
| ** **                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| **Accounts receivable, net:** |       |     |       |     |       |
| Trade receivables             |       | $        | 35,521     |     | $          | 34,084 |   |
| Less: allowance for bad debts |       | (476     | )          | (1,422   | )          |
| Total                         |       | $        | 35,045     |     | $          | 32,662 |   |

 
| ** **                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Investment in sales-type leases and notes  receivable, net:**         |       |     |       |     |       |
| Minimum sales-type lease payments                                       |       | $        | 10,715     |     | $          | 15,314 |   |
| Notes receivable—table game licenses                               |       | 7,798    |       | 11,395   |       |
| Sub-total sales-type leases and notes  receivable                       |       | 18,513   |       | 26,709   |       |
| Less: interest sales-type leases                                        |       | (1,085   | )          | (1,615   | )          |
| Less: deferred service revenue                                          |       | (1,976   | )          | (2,839   | )          |
| Less: allowance for bad debts                                           |       | (236     | )          | (681     | )          |
| Investment in sales-type leases and notes  receivable, net              |       | 15,216   |       | 21,574   |       |
| Less: current portion sales-type leases                                 |       | (4,266   | )          | (4,512   | )          |
| Less: current portion notes  receivable—table game licenses        |       | (4,826   | )          | (5,552   | )          |
| Long-term portion investment in sales-type  leases and notes receivable |       | $        | 6,124      |     | $          | 11,510 |   |

 

14

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We maintain provisions for bad debts for estimated credit losses thatresult from the inability of our customers to make required payments. Theprovisions for bad debts are estimated based on historical experience andspecific customer collection issues.

 

Sales-type leases are interest-bearing at fixed market interest rates,require monthly installment payments over periods ranging generally from 30 to60 months and contain bargain purchase options. Notes receivable includesfinancing arrangements for sales of our intellectual property products. Amountsare interest-bearing at fixed market interest rates and require monthlyinstallments ranging generally from 30 to 60 months. Future minimum leasepayments (principal, deferred revenue and interest) to be received for bothsales-type leases and notes receivable are as follows:

 
| ** **                                                      | ** ** | **Year Ending October 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                      | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Total** | ** ** |
| **Investment in sales-type leases and notes  receivable, net:** |       |                                       |       |   |   |   |   |   |   |   |   |
| Future sales-type lease payments                                |       | $                                          | 6,794      |   | $ | 3,491 |   | $ | 430 |   | $ | — |   | $ | 10,715 |   |
| Notes receivable—table game licenses                       |       | 4,587                                      |       | 2,609 |   | 594 |   | 9 |   | 7,799 |   |
| Sub-total sales-type leases and notes  receivable               |       | 11,381                                     |       | 6,100 |   | 1,024 |   | 9 |   | 18,514 |   |
| Less: interest sales-type leases                                |       | (788                                       | )          | (262 | ) | (35 | ) | — |   | (1,085 | ) |
| Less: deferred service revenue                                  |       | (1,265                                     | )          | (641 | ) | (71 | ) | — |   | (1,977 | ) |
| Less: allowance for bad debts                                   |       | (236                                       | )          | — |   | — |   | — |   | (236 | ) |
| Investment in sales-type leases and notes  receivable, net      |       | $                                          | 9,092      |   | $ | 5,197 |   | $ | 918 |   | $ | 9 |   | $ | 15,216 |   |

 

15

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**5. OTHER BALANCE SHEET DATA**

 

The following provides additional disclosure for selected balance sheetaccounts as of October 31:

 
| ** **                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| **Inventories:**                  |       |     |       |     |       |
| Raw materials and component parts |       | $        | 18,975     |     | $          | 9,585 |   |
| Work-in-process                   |       | 2,141    |       | 3,051    |       |
| Finished goods                    |       | 12,965   |       | 12,022   |       |
| **Total**                         |       | $        | 34,081     |     | $          | 24,658 |   |

 
| ** **                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| **Products leased and held for lease:** |       |     |       |     |       |
| Utility products                        |       | $        | 29,678     |     | $          | 21,500 |   |
| Less: accumulated depreciation          |       | (22,802  | )          | (13,864  | )          |
| **Utility Products, net**               |       | 6,876    |       | 7,636    |       |
| Proprietary Table Games                 |       | 1,783    |       | 845      |       |
| Less: accumulated depreciation          |       | (703     | )          | (836     | )          |
| **Proprietary Table Games, net**        |       | 1,080    |       | 9        |       |
| Electronic Table Systems                |       | 12,076   |       | 4,415    |       |
| Less: accumulated depreciation          |       | (4,146   | )          | (778     | )          |
| **Electronic Table Systems, net**       |       | 7,930    |       | 3,637    |       |
| Electronic Gaming Machines              |       | 222      |       | 222      |       |
| Less: accumulated depreciation          |       | (222     | )          | (222     | )          |
| **Electronic Gaming Machines, net**     |       | —   |       | —   |       |
| **Total, net**                          |       | $        | 15,886     |     | $          | 11,282 |   |

 
| ** **                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| **Property and equipment:**             |       |     |       |     |       |
| Office furniture and computer equipment |       | $        | 8,143      |     | $          | 6,835 |   |
| Less: accumulated depreciation          |       | (5,273   | )          | (4,824   | )          |
| **Property and equipment, net**         |       | 2,870    |       | 2,011    |       |
| **Leasehold Improvements:**             |       | 5,302    |       | 4,673    |       |
| Less: accumulated depreciation          |       | (3,144   | )          | (2,702   | )          |
| **Leasehold Improvements, net**         |       | 2,158    |       | 1,971    |       |
| **Production equipment and other:**     |       | 11,669   |       | 9,672    |       |
| Less: accumulated depreciation          |       | (5,455   | )          | (3,875   | )          |
| **Production equipment and other, net** |       | 6,214    |       | 5,797    |       |
| **Total, net**                          |       | $        | 11,242     |     | $          | 9,779 |   |

 
| ** **                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| **Other long-term assets:** |       |     |       |     |       |
| Debt issuance costs, net    |       | $        | 2,833      |     | $          | 2,369 |   |
| Deposits                    |       | 3,872    |       | 3,507    |       |
| Investment in Sona          |       | 1,749    |       | 1,931    |       |
| PGIC TGD prepaid royalty    |       | 4,750    |       | —   |       |
| Other                       |       | 2,173    |       | 1,535    |       |
| **Total**                   |       | $        | 15,377     |     | $          | 9,342 |   |

 

Total debt issuance costs incurred with the issuance of long-term debtare capitalized and amortized as interest expense using the effective interestmethod over the term of the related debt. Amortization of debt issuance costswere $1,327 and $1,511 for the year ended October 31, 2007 and 2006,respectively. Debt issuance costs related to the $100,000 senior securedrevolving credit facility (the “Revolver”) obtained in November 2006 were$1,742.

 

Deposits are primarily comprised of a $3,000 security deposit relatedto our patent infringement lawsuit against Elixir Gaming Technologies, Inc.,(formerly “VendingData”) and deposits associated with equipment purchases. SeeNotes 15 and 16 for more information related to the Elixir GamingTechnologies, Inc., (formerly “VendingData”) litigation.

 

Other long term assets of $2,173 and $1,535, respectively, principallyinclude $1,659 and $1,433, respectively, of prepaid corporate development feesand $512 and $0, respectively, of restricted cash related to the King’sGaming Inc. contingent consideration related to the purchase of the PlayFour PokerTM patent and trademark. See Note 7 for more information.

 

16

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We classify our investment in Sona as available-for-sale. Ourinvestment is recorded at fair market value, which, as of October 31, 2007and October 31, 2006, was $1,749 and $1,931, respectively.

 

**6. INTANGIBLE ASSETS AND GOODWILL**

 

***Amortized intangibleassets.***  Allof our recorded intangible assets, excluding goodwill and the Stargames andCARD trademarks, are subject to amortization. Amortization expense was $19,421,$9,045, and $5,954 for each of the years ended October 31, 2007, 2006, and2005, respectively.

 

Amortized intangible assets are comprised of the following as of October 31:

 
| ** **                     | ** ** | **Weighted Avg  Useful Life** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------|------------|-----------------------------------------|------------|----------|------------|----------|------------|
| Amortized intangible assets:   |       |                                    |       |     |       |     |       |
| Patents, games and products    |       | 10 years                           |       | $        | 62,465     |     | $          | 53,452 |   |
| Less: accumulated amortization |       |                                    |       | (23,945  | )          | (15,159  | )          |
|                           |       |                                    |       | 38,520   |       | 38,293   |       |
| Customer relationships         |       | 10 years                           |       | 23,537   |       | 10,221   |       |
| Less: accumulated amortization |       |                                    |       | (2,251   | )          | (767     | )          |
|                           |       |                                    |       | 21,286   |       | 9,454    |       |
| Licenses and other             |       | 6 years                            |       | 5,136    |       | 6,313    |       |
| Less: accumulated amortization |       |                                    |       | (1,813   | )          | (1,661   | )          |
|                           |       |                                    |       | 3,323    |       | 4,652    |       |
| Developed technology           |       | 4 years                            |       | 10,254   |       | 8,510    |       |
| Less: accumulated amortization |       |                                    |       | (4,486   | )          | (1,596   | )          |
|                           |       |                                    |       | 5,768    |       | 6,914    |       |
| PGIC Backlog                   |       | 1 Year                                  |       | 126      |       | —   |       |
| Less: accumulated amortization |       |                                    |       | (11      | )          | —   |       |
|                           |       |                                    |       | 115      |       | —   |       |
| **Total**                      |       |                                    |       | $        | 69,012     |     | $          | 59,313 |   |

 

Changes in gross balances relate primarily to foreign currencytranslation adjustments and the acquisition of PGIC’s TGD.

 

Estimated amortization expense related to recorded intangible assets,excluding the Stargames and CARD trademarks, is as follows:

 
| **Year ending October 31,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2008                                       |       | $          | 14,340     |   |
| 2009                                       |       | 13,894     |       |
| 2010                                       |       | 10,191     |       |
| 2011                                       |       | 7,588      |       |
| 2012                                       |       | 5,107      |       |
| Thereafter                                 |       | 17,892     |       |
|                                       |       | $          | 69,012     |   |

 

***Trademarks.***  Intangibles with an indefinite lifeconsisting of the Stargames and CARD trademarks are not amortized and were$22,331 and $18,591 as of October 31, 2007 and 2006, respectively.

 

***Goodwill.***  Changes in the carrying amount of goodwillfor the year ended October 31, 2007, are as follows:

 
| ** **                                          | ** ** | **Utility  Products** | ** ** | **Proprietary  Table Games** | ** ** | **Electronic  Table Systems** | ** ** | **Electronic  Gaming  Machines** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|-----------------------------------|------------|------------------------------------|------------|----------------------------------|------------|-----------|------------|
| Balance at October 31, 2006                    |       | $                     | 38,346     |                              | $          | —                             |       | $                                | 42,043     |      | $          | 11,311 |   | $ | 91,700 |   |
| Foreign currency translation adjustment             |       | 5,110                 |       | —                            |       | 8,500                              |       | 2,288                            |       | 15,898    |       |
| Adjustments to Stargames purchase price  allocation |       | —                |       | —                            |       | (7,578                             | )          | (2,039                           | )          | (9,617    | )          |
| PGIC TGD Acquisition                                |       | —                |       | 7,373                             |       | —                             |       | —                           |       | 7,373     |       |
| Balance at October 31, 2007                    |       | $                     | 43,456     |                              | $          | 7,373                              |       | $                                | 42,965     |      | $          | 11,560 |   | $ | 105,354 |   |

 

Our goodwill originated from our acquisitions of foreign subsidiariesand the PGIC TGD. For both domestic and foreign income tax purposes, goodwillis amortized using the straight-line method and deducted over its statutoryfifteen year life. Goodwill has been assigned to our Utility Products, PTG, ETSand EGM reporting units, as defined under SFAS 142.

 

17

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Adjustments to goodwill for the year ended October 31, 2007,related to the final purchase price allocation for the Stargames acquisition aswell as an adjustment at Stargames related to the reversal of an approximately$1,550 pre-acquisition liability, included in accrued liabilities, for apotential Australian Goods and Services Tax (“GST”) liability associated withexport of sales in the period December 2001 through November 2006.Goodwill was also impacted by approximately $400 of other Stargames tax-relatedadjustments.

 

For the fiscal year ended October 31, 2007, a $7,659 decrease togoodwill and corresponding decrease to deferred tax liability was recognized.This adjustment relates to recording additional tax basis for the Stargames PC3and other non-amortizable identified intangibles acquired in the acquisition.These financial accounting assets had originally been recorded without acorresponding tax asset as the availability of a deduction was dependent oninterpretation of newly enacted Australian tax consolidation rules whichwere unclear. During the fourth quarter, we concluded our Australianconsolidation process and performed additional research to confirm whethercertain assets would qualify for a tax deduction or amortization. Based onthese efforts, we adjusted goodwill to reflect the existence of a tax asset andhence the corresponding reduction in the deferred tax liability originallyrecorded.

 

**7. DEBT AND LONG-TERM LIABILITIES**

 

Debt and long-term liabilities consisted of the following as of October 31:

 
| ** **                                                                              | ** ** | **October 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                              | ** ** | **2007**             | ** ** | **2006** | ** ** |
| Contingent convertible senior notes  (Notes), fixed rate interest at 1.25%, due 2024    |       | $                    | 150,000    |   | $ | 150,000 |   |
| Senior secured revolving credit facility  (Revolver)                                    |       | 75,680               |       | — |   |
| Bridge loan, due November 2006 (Old  Credit Agreement)                             |       | —               |       | 70,000 |   |
| Stargames credit facility                                                               |       | —               |       | 3,872 |   |
| BTI acquisition contingent consideration                                                |       | 2,434                |       | 4,441 |   |
| ENPAT note payable, non-interest bearing,  due in installments through 2007             |       | 2,985                |       | 5,823 |   |
| PGIC TGD minimum consideration,  non-interest bearing, due in installments through 2011 |       | 2,922                |       | — |   |
| Kings Gaming Inc. contingent  consideration                                        |       | 512                  |       | — |   |
| Bet the Set “21” contingent consideration                                     |       | 478                  |       | 526 |   |
| VIP note payable                                                                        |       | —               |       | 329 |   |
| Other                                                                                   |       | 1,619                |       | 1,056 |   |
|                                                                                    |       | 236,630              |       | 236,047 |   |
| Less: current portion                                                                   |       | (3,932               | )          | (77,294 | ) |
|                                                                                    |       | $                    | 232,698    |   | $ | 158,753 |   |

 

***ContingentConvertible Senior Notes.***  In April 2004, we issued $150,000 ofNotes due 2024 through a private placement under Rule 144A of theSecurities Act of 1933. The Notes are unsecured and bear interest at a fixedrate of 1.25% per annum. Interest is payable semi-annually in arrears on April 15and October 15 of each year, beginning October 15, 2004.

 

Holders may convert any outstanding Notes into cash and shares of ourcommon stock at an initial conversion price per share of $28.07. Thisrepresents a conversion rate of approximately 35.6210 shares of common stockper $1,000 in principal amount of Notes. The value of the cash and shares ofour common stock, if any, to be received by a holder converting $1,000principal amount of the Notes will be determined based on the applicableConversion Rate, Conversion Value, Principal Return, and other factors, each asdefined in the indenture covering these Notes.

 

The Notes are convertible, at the holders’ option, into cash and sharesof our common stock, under any of the following circumstances:

 

·                  during anyfiscal quarter commencing after the date of original issuance of the Notes, ifthe closing sale price of our common stock over 20 trading days, during theprevious quarter, is more than 120% of the conversion price of the Notes on thelast trading day of the previous quarter;

 

·                  if we havecalled the Notes for redemption and the redemption has not yet occurred;

 

·                  during the fivetrading day period immediately after any five consecutive trading day period inwhich the trading price of the Notes per $1,000 principal amount for each dayof such period was less than 95% of the product of the closing sale price ofour common stock on such day multiplied by the number of shares of our commonstock issuable upon conversion of $1,000 in principal amount of the Notes,provided that, if on the date of any conversion pursuant to this trading pricecondition, our common stock price on such date is greater 

 

18

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than the conversion price but less than 120%of the conversion price, then the holder will be entitled to receive ConversionValue (as defined in the indenture covering these Notes) equal to the principalamount of the Notes, plus accrued and unpaid interest including liquidateddamages, if any; or

 

·                  upon theoccurrence of specified corporate transactions.

 

We may call some or all of the Notes at any time on or after April 21,2009, at a redemption price, payable in cash, of 100% of the principal amountof the Notes to be redeemed, plus accrued and unpaid interest and includingliquidated damages, if any, up to but not including the date of redemption. Inaddition, the holders may require us to repurchase all or a portion of theirNotes on April 15, 2009, 2014 and 2019, at 100% of the principal amount ofthe Notes, plus accrued and unpaid interest and including liquidated damages,if any, up to but not including the date of repurchase, payable in cash. Upon achange in control, as defined in the indenture governing the Notes, holders mayrequire us to repurchase all or a portion of their Notes, payable in cash equalto 100% of the principal amount of the Notes plus accrued and unpaid interest andliquidated damages, if any, up to but not including the date of repurchase.

 

***$100,000 SeniorSecured Revolving Credit Facility.***  On November 30, 2006, we entered into a$100,000 Revolver with Deutsche Bank Trust Company Americas, as a Lender, andas the Administrative Agent Deutsche Bank Securities Inc. and Wells FargoBank, N.A., as Joint Lead Arrangers and Book Managers and Wells Fargo Bank,N.A. as Syndication Agent. We initially drew $71,180 on the bank facility,which was used to repay in its entirety the Old Credit Agreement. We drew anadditional $4,500, net of payments, on the Revolver during fiscal 2007, whichwas used in part to fund the PGIC TGD acquisition. The outstanding balance onthe Revolver was $75,680 at October 31, 2007. Our effective interest rateas of October 31, 2007 was 7.5%. Any remaining amount available under theRevolver will be used for working capital, capital expenditures, permittedasset acquisitions, and general corporate purposes, including sharerepurchases. The Revolver will mature on November 30, 2011.

 

The interest rate under the Revolver is based on the sum of therelevant Base Rate or Eurodollar Rate plus the Applicable Margin, based on thetotal leverage ratio as defined, each as in effect from time to time. The obligationsunder the revolving credit facility are guaranteed by each wholly-owneddomestic subsidiary of ours that is not an immaterial subsidiary and eachwholly-owned domestic subsidiary that is not an immaterial subsidiary of theCompany established, created or acquired after November 30, 2006, if any.The Revolver contains customary affirmative and negative covenants fortransactions of this nature, including but not limited to restrictions andlimitations on the following:

 

·                  Permittedacquisitions;

 

·                  Incurrence ofindebtedness;

 

·                  Granting orincurrence of liens;

 

·                  Payment ofdividend and other distributions in respect of our equity securities;

 

·                  Acquire assetsand make investments;

 

·                  Sales of assets;

 

·                  Transactionswith affiliates;

 

·                  Mergers;

 

·                  Total leverageratio;

 

·                  Interest expensecoverage ratio; and

 

·                  Agreements torestrict dividends and other payments from subsidiaries.

 

At October 31, 2007, we had approximately $24,320 of availableremaining credit under the Revolver. Further, as of October 31, 2007, wewere in compliance with all financial covenants. We have two financialmaintenance covenants under our Credit Facility: a Total Leverage Ratio and anInterest Expense Coverage ratio. Our Credit Agreement prohibits us fromexceeding a Total Leverage Ratio, as defined therein, of 4.5:1. Our TotalLeverage Ratio as of October 31, 2007 was 3.8 to 1.0. Our Credit Agreementrequires us to maintain an Interest Coverage Ratio, as defined therein, inexcess of 3.0 to 1.0. Our Interest Coverage Ratio as of October 31, 2007was 8.4 to 1.0.

 

***Stargames creditfacility.*** Stargames had banking facilities with the Australia and New ZealandBanking Group (“ANZ”). The facilities had a borrowing capacity of AU $12,700,but we elected to pay all amounts outstanding and cancel 

 

19

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the Stargames credit facility effective October 31,2007. The amount outstanding as of October 31, 2006, was $3,872. Interestrates were based on the bank bill swap yield, as defined, plus a margin.

 

The facilities were secured by a cross guarantee and indemnity betweenall the operating entities of the Stargames group. The agreements provided forcollateralization of all the assets and operations of all members of theStargames group as well as the operating facilities of Stargames based inMilperra, New South Wales, Australia.

 

***BTI liabilities.***  In connection with our acquisition of certaingames and related assets of Bet Technology, Inc. (“BTI”) in February 2004,we recorded an initial estimated liability of $7,616 for contingent installmentpayments computed as the excess fair value of the acquired assets over thefixed installments and other direct costs. The contingent consideration isnon-interest bearing. Beginning November 2004, we pay monthly noteinstallments based on a percentage of certain revenue from BTI games for aperiod of up to ten years, not to exceed $12,000. The balance of this liabilityas of October 31, 2007 and October 31, 2006, were $2,434 and $4,441,respectively.

 

***ENPAT note payable.***  In December 2004, we purchased two RFIDtechnology patents from ENPAT for $12,500. The purchase price was comprised ofan initial payment of $2,400 followed by a $1,100 payment in January 2005and non-interest bearing annual installments through December 2007. Thebalance as of October 31, 2007 and October 31, 2006, of $2,985 and$5,823, respectively, represents the discounted present value of the futurepayments, including imputed interest of approximately $146 and $265,respectively. The remaining principal and interest payment of $3,000 was paidin December 2007.

 

***KingsGaming Inc. contingent consideration.***  In April 2007, we purchased the PlayFour Poker patent and trademark from Kings Gaming Inc. for a totalpurchase price of $1,140. Of the total $1,140 purchase price, $500 wasdeposited into an interest bearing escrow account for Kings Gaming Inc, whichshall remain in escrow until September 1, 2012 (“Maturity Date”);consequently the $500 is classified as a restricted asset on our balance sheetin other long term assets. Upon expiration of the escrow period, KingsGaming Inc. will be entitled to the $500 escrowed amount and interestearned thereon contingent upon no claims being made against the purchasedpatent and trademark, as outlined in the Intellectual Property PurchaseAgreement, dated April 17, 2007 (“Effective Date”). On each anniversary ofthe Effective Date until the Date of Maturity, Kings Gaming, Inc. shallonly be entitled to interest accrued in the interest bearing escrow account.The balance of this liability as of October 31, 2007 was $512. Oureffective interest rate as of October 31, 2007 was 5.8%.

 

***Bet the Set “21”contingent consideration.***  In connection with our acquisition of Bet theSet “21” in June 2005, we recorded contingent consideration of $560. Thecontingent consideration is non-interest bearing and consists of quarterlypayments of 22.5% of “adjusted gross revenues,” as defined, attributed to theBet the Set “21” side bet table games up to a maximum of $560. The balance ofthis liability as of October 31, 2007 and October 31, 2006, was $478and $526, respectively.

 

***PGIC Table GamesDivision minimum consideration.***  In connection with our acquisition of PGIC’sworldwide TGD on September 26, 2007, we recorded minimum consideration of$3,500 due in non-interest bearing quarterly installments through December 2011.The minimum consideration consists of quarterly payments for each calendar yearbeginning in 2008 through 2011. The annual minimum consideration amounts to bepaid in 2008 and 2009 are $1,000 each year and the annual minimum considerationamounts to be paid in 2010 and 2011 are $750 each year. The balance as of October 31,2007 of $2,922 represents the discounted present value of the future payments,excluding imputed interest of approximately $578 using an effective interestrate of 7.25%.

 

Maturities of long-term debt for the five fiscal years endingsubsequent to October 31, 2007, are as follows:

 
| **Year ending October 31,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2008                                       |       | $          | 3,932      |   |
| 2009                                       |       | 151,259    |       |
| 2010                                       |       | 736        |       |
| 2011                                       |       | 1,288      |       |
| 2012                                       |       | 75,947     |       |
| Thereafter                                 |       | 3,468      |       |
| Total                                      |       | $          | 236,630    |   |

 

20

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**8. SHARE-BASED COMPENSATION**

 

***Adoption ofSFAS 123R.*** Effective November 1, 2005, we account for stock-based compensationin accordance with SFAS No. 123 (revised 2004) (“SFAS 123R”), “*Share-Based Payment*”, and SAB No. 107(“SAB 107”), “*Share-Based Payment*”requiring the measurement and recognition of all share-based compensation underthe fair value method. We previously accounted for stock-based compensation inaccordance with APB Opinion No. 25 (“APB 25”), “*Accounting for Stock Issued to Employees*”,and the FASB’s Interpretation No. 44, “*Accountingfor Certain Transactions Involving Stock Compensation, an Interpretation of APBOpinion No. 25*”, and disclosed supplemental information inaccordance with SFAS No. 123 (“SFAS 123”), “*Accounting for Stock-Based Compensation*.”Under these standards, we did not incur compensation expense for employee stockoptions when the exercise price was at least 100% of the market value of ourcommon stock on the date of grant. SFAS 123R requires that all stock-basedcompensation, including shares and share-based awards to employees, be valuedat fair value. We measure the fair value of share-based awards using theBlack-Scholes model.

 

Under SFAS 123R, compensation is attributed to the periods ofassociated service. For awards granted prior to November 1, 2005, suchexpense is being recognized on an accelerated basis since that is the methodthat we previously applied in our supplemental disclosures. Beginning withawards granted on November 1, 2005, such expense is being recognized on astraight-line basis over the vesting period of the awards. Forfeitures areestimated at the time of grant, with such estimate updated periodically andwith actual forfeitures recognized currently to the extent they differ from theestimate.

 

We adopted SFAS 123R by applying the modified-prospectivetransition method and reclassified previously recorded deferred compensation toadditional paid-in capital (“APIC”). Under this method, we began applying thevaluation and other criteria of SFAS 123R on November 1, 2005, andbegan recognizing expense for the unvested portion of previously issued grantsat the same time, based on the valuation and attribution methods originallyused to calculate the disclosures.

 

In addition, SFAS 123R requires the excess tax benefit fromstock-option exercises—tax deductions in excess of compensation costrecognized—to be classified as a financing activity. Previously, all taxbenefits from stock option exercises were classified as operating activities.We have evaluated the provisions of SFAS 123R-3, “*Transition Election Related to Accounting for TaxEffects of Share-Based Payment Awards*” and have elected thealternative method for establishing the APIC pool. The $854 and $3,682 ofexcess tax benefits in fiscal 2007 and 2006, respectively, are classified asoperating cash outflows and financing cash inflows.

 

21

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***Share-based awardplans.***  In February 2004,our board of directors adopted and, in March 2004, our shareholdersapproved the Shuffle Master, Inc. 2004 Equity Incentive Plan (the “2004Plan”) and the Shuffle Master, Inc. 2004 Equity Incentive Plan forNon-Employee Directors (the “2004 Directors’ Plan”). These approved plansreplaced our prior plans and no further options may be granted from the priorplans. Both the 2004 Plan and the 2004 Directors’ Plan provide for the grant ofstock options, stock appreciation rights (none issued), restricted stock, andrestricted stock units, individually or in any combination (collectivelyreferred to as “Awards”). Stock options may not be granted at an exercise priceless than the market value of our common stock on the date of grant and may notbe subsequently repriced. Equity granted under the 2004 Plan generally vest inequal increments over four years and expire in ten years. Equity granted underthe 2004 Directors’ Plan generally vest immediately and expire in ten years,although initial equity grants to directors upon joining the Board can partlyvest either immediately and/or partly over one or two years.

 

The 2004 Plan provides for the grants of Awards to our officers, otheremployees and contractors. The maximum number of Awards which may be granted is2,700 of which no more than 1,890 may be granted as restricted stock. The 2004Directors’ Plan provides for the grants of Awards to our non-employeedirectors. The maximum number of Awards which may be granted is 1,125 of whichno more than 788 may be granted as restricted stock.

 

As of October 31, 2007, 956 and 867 shares are available for grantunder the 2004 Plan and 2004 Directors’ Plan, respectively. A summary ofactivity under our share-based payment plans for the year ended October 31,2007 is presented below:

 
| ** **                                            | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-------------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at October 31, 2005                  |       | 3,822      |       | $                                          | 17.01      |                                                | 7.0        |                                |       |   |
| Granted                                               |       | 142        |       | 32.96                                      |       |                                                |       |                                |       |
| Exercised                                             |       | (697       | )          | 11.30                                      |       |                                                |       |                                |       |
| Forfeited or expired                                  |       | (136       | )          | 13.55                                      |       |                                                |       |                                |       |
| Outstanding at October 31, 2006                  |       | 3,131      |       | 19.16                                      |       | 7.0                                                 |       |                                |       |
| Granted                                               |       | 142        |       | 27.23                                      |       |                                                |       |                                |       |
| Exercised                                             |       | (229       | )          | 11.12                                      |       |                                                |       |                                |       |
| Forfeited or expired                                  |       | (138       | )          | 29.96                                      |       |                                                |       |                                |       |
| Outstanding at October 31, 2007                  |       | 2,906      |       | 19.68                                      |       | 6.4                                                 |       | 2,757                               |       |
| Exercisable at October 31, 2007                  |       | 2,330      |       | 17.71                                      |       | 6.0                                                 |       | 2,757                               |       |
| Vested and expected to vest at  October 31, 2007 |       | 2,757      |       | $                                          | 19.68      |                                                | 6.4        |                                | 2,757      |   |

 

The total intrinsic value of stock options exercised during the yearended October 31, 2007 and 2006 was $4,158 and $13,070, respectively. Thetotal income tax benefits from stock option exercises during the year ended October 31,2007 and 2006 were $1,133 and $3,908, respectively. As of October 31,2007, there was a total of $4,045 of unamortized compensation related to stockoptions, which expense is expected to be recognized over a weighted-averageperiod of 2.1 years. As noted earlier, we are recognizing expense forawards granted prior to November 1, 2005 on an accelerated basis, so adisproportionate amount of unamortized expense will be recognized in the first12 months of this weighted-average period.

 

During the years ended October 31, 2007, 2006 and 2005 we issued227, 64 and 193 shares of restricted stock, respectively, with an aggregatefair value of $5,773, $2,113 and $4,781, respectively. The total value of eachrestricted stock grant, based on the fair market value of the stock on the dateof grant, is amortized to compensation expense over the related vesting period.Net income, as reported, for the year ended October 31, 2007 and 2006,reflects $2,149 and $1,275 respectively, of amortization of restricted stockcompensation.

 

22

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During the years ended October 31, 2007, 2006 and 2005, we granted142, 142, and 983 stock options, respectively, with a grant date fair value of$1,467, $1,773 and $4,798, respectively.

 

A summary of activity related to restricted stock for the year ended October 31,2007 is presented below:

 
| ** **                         | ** ** | **Shares** | ** ** | **Weighted Average  Grant-Date Fair Value** | ** ** |
|------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| Nonvested at October 31, 2005 |       | 276        |       | $                                                          | 19.11      |   |
| Granted                            |       | 64         |       | 33.27                                                      |       |
| Exercised                          |       | —     |       | —                                                     |       |
| Forfeited                          |       | —     |       | —                                                     |       |
| Nonvested at October 31, 2006 |       | 340        |       | 26.01                                                      |       |
| Granted                            |       | 227        |       | 25.42                                                      |       |
| Exercised                          |       | (30        | )          | 33.02                                                      |       |
| Forfeited                          |       | (51        | )          | 25.94                                                      |       |
| Nonvested at October 31, 2007 |       | 486        |       | $                                                          | 26.19      |   |

 

As of October 31, 2007, there was $7,423 of unamortizedcompensation expense related to restricted stock, which expense is expected tobe recognized over a weighted-average period of 2.1 years.

 

***Recognition ofcompensation expense.***  The following table shows information aboutcompensation costs recognized for the years ended October 31:

 
| ** **              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Compensation costs:** |       |     |       |     |       |     |       |
| Stock options           |       | $        | 1,881      |     | $          | 3,515    |       | $ | 60 |   |
| Restricted stock        |       | 2,931    |       | 1,997    |       | 759      |       |
| Total compensation cost |       | 4,812    |       | 5,512    |       | 819      |       |
| Related tax benefit     |       | $        | (1,313     | )        | $          | (1,720   | )          | $ | (300 | ) |

 

Reported share-based compensation expense was classified as follows forthe years ended October 31:

 
| ** **                          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cost of sales                       |       | $        | 43         |     | $          | 102      |       | $ | — |   |
| Selling, general and administrative |       | 4,391    |       | 5,108    |       | 819      |       |
| Research and development            |       | 378      |       | 302      |       | —   |       |
| Total share-based compensation      |       | $        | 4,812      |     | $          | 5,512    |       | $ | 819 |   |

 

We estimate the fair value of each stock option award on the grant dateusing the Black-Scholes valuation model incorporating the weighted-averageassumptions noted in the following table (assumptions in 2005 were used tocompute the pro forma compensation for disclosure purposes only). Optionvaluation models require the input of highly subjective assumptions, andchanges in assumptions used can materially affect the fair value estimate.Expected volatility and dividends are based on historical factors related toour common stock. Expected term represents the estimated weighted-average timebetween grant and employee exercise. Risk free interest rate is based on U.S.Treasury rates appropriate for the expected term.

 
| ** **                    | ** ** | **Year Ended October 31,** | ** ** |
|-------------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Option valuation assumptions: |       |                                      |       |   |   |   |   |
| Expected dividend yield       |       | None                                      |       | None |   | None |   |
| Expected volatility           |       | 39.6                                      | %          | 37.1 | % | 49.5 | % |
| Risk-free interest rate       |       | 4.6                                       | %          | 4.7 | % | 3.4 | % |
| Expected term                 |       | 4.2 years                            |       | 4.4 years |   | 5.3 years |   |

 

23

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***Pro formadisclosures.*** Had we accounted for these plans during 2005 under the fair value methodallowed by SFAS 123, our net income and earnings per share would have beenreduced to recognize the fair value of employee options, as follows for theyears ended October 31:

 
| ** **                                                | ** ** | **2005** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|
| Net income                                                |       |     |       |
| As reported                                               |       | $        | 29,180     |   |
| Incremental after-tax pro forma share-based  compensation |       | (10,485  | )          |
| Comparative net income (prior year pro  forma)            |       | $        | 18,695     |   |
| Basic earnings per share                                  |       |     |       |
| As reported                                               |       | $        | 0.84       |   |
| Pro forma                                                 |       | $        | 0.54       |   |
| Diluted earnings per share                                |       |     |       |
| As reported                                               |       | $        | 0.80       |   |
| Pro forma                                                 |       | $        | 0.51       |   |

 

**9. EARNINGS PER SHARE**

 

Shares used to compute basic and diluted earnings per share fromcontinuing operations for the years ended October 31 are as follows:

 
| ** **                                                       | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income from continuing operations                                |       | $        | 16,301     |     | $          | 5,339    |       | $ | 29,104 |   |
| Basic:                                                           |       |     |       |     |       |     |       |
| Weighted average shares                                          |       | 34,680   |       | 34,585   |       | 34,924   |       |
| Diluted:                                                         |       |     |       |     |       |     |       |
| Weighted average shares, basic                                   |       | 34,680   |       | 34,585   |       | 34,924   |       |
| Dilutive impact of options and restricted  stock outstanding     |       | 593      |       | 1,176    |       | 1,343    |       |
| Dilutive effect of contingent convertible  notes                 |       | 3        |       | 291      |       | 111      |       |
| Weighted average shares, diluted                                 |       | 35,276   |       | 36,052   |       | 36,378   |       |
| Basic earnings per share                                         |       | $        | 0.47       |     | $          | 0.15     |       | $ | 0.83 |   |
| Diluted earnings per share                                       |       | $        | 0.46       |     | $          | 0.15     |       | $ | 0.80 |   |
| Weighted average anti-dilutive shares  excluded from diluted EPS |       | 6,739    |       | 993      |       | 1,350    |       |

 

We account for the $150,000 of Notes due 2024 (the “Notes”) inaccordance with FASB EITF No. 04-08 (“EITF 04-08”), “The Effect ofContingently Convertible Debt on Diluted Earnings Per Share” which requires usto include the dilutive effect of our outstanding Notes shares in our dilutedearnings per share calculation, regardless of whether the market price triggeror other contingent conversion feature has been met. Because our Notes includea mandatory cash settlement feature for the principal payment, we applied thetreasury stock method. This method results in incremental dilutive shares whenthe average fair value of our common stock for a reporting period exceeds theinitial conversion price per share of $28.07. For certain quarters during theyears ended October 31, 2007, 2006, and 2005, the average fair value ofour common stock exceeded $28.07, and accordingly, the dilutive effect isincluded in our diluted shares calculation.

 

**10. SHAREHOLDERS’ EQUITY**

 

***Common stockrepurchases.*** Our board of directors periodically authorizes us to repurchase sharesof our common stock. Under our existing board authorization, during the yearended October 31, 2007, we repurchased 77 shares of our common stock for atotal of $1,963 at an average price of $25.50. As of October 31, 2007,$28,203 remained outstanding under our board authorization. Under our boardauthorization, during the years ended October 31, 2006 and 2005, werepurchased 317 and 1,473 shares of our outstanding stock at total costs of$8,665 and $38,643, respectively. We cancel shares that we repurchase.

 

The timing of our repurchases of our common stock pursuant to our boardof directors’ authorization is dependent on future opportunities and on ourviews, as they may change from time to time, as to the most prudent uses of ourcapital resources, including cash and borrowing capacity.

 

***Tax benefit fromstock option exercises.***  During each of the years ended October 31,2007, 2006 and 2005, we recorded income tax benefits of $1,133, $3,908, and$5,287, respectively, related to deductions for employee stock optionexercises. These tax benefits, which reduced income taxes payable and increasedadditional paid-in capital by an equal amount, had no effect on our provisionfor income taxes.

 

24

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***Preferred stockpurchase rights.*** In February 2005, we amended our Shareholder Rights Agreement,dated June 26, 1998 (the “Rights Agreement”). As more fully describedtherein, and subject to the terms thereof, the Rights Agreement, as amended,generally gives holders of our common stock rights to acquire shares of ourpreferred stock upon the occurrence of specified events. The amendment (a) eliminatedall requirements in the Rights Agreement that actions, approvals anddeterminations to be taken or made by our board of directors be taken or madeby a majority of the “Continuing Directors,” and (b) reflects the changeof the name of our stock transfer agent to Wells Fargo Bank, N.A. The amendmenteliminated from the Rights Agreement those provisions commonly referred to as “deadhand” provisions.

 

The Shareholder Rights Agreement was implemented by distributing onepreferred share purchase right (a “Right”) for each outstanding share of ourcommon stock held of record as of July 10, 1998. Additionally, we furtherauthorized and directed the issuance of one Right with respect to each share ofour common stock that shall become outstanding thereafter until the Rightsbecome exercisable or they expire as described below. Each Right initiallyentitles holders of our common stock to buy one one-hundredth of a share of ourPreferred Stock at a price of $5.33 (as currently adjusted), subject toadjustment. The Rights will generally become exercisable after a person orgroup acquires beneficial ownership of 20% or more of our common stock orannounces a tender offer upon consummation of which such person or group wouldown 20% or more of our common stock.

 

If any person or group becomes the owner of 20% or more of our commonstock, then, in lieu of the right to purchase any Preferred Stock, each Rightwill therefore entitle its holder (other than an acquiring person or member ofan acquiring group) to purchase shares of our common stock in an amount equalto the exercise price ($5.33, as currently adjusted) of one one-hundredth shareof the preferred stock divided by 50% of the then-current market price of oneshare of common stock.

 

In addition, if we are acquired in a merger or other businesscombination transaction, or sell 20% or more of our assets or earnings powerthen, in lieu of the right to purchase Preferred Stock, each Right willthereafter generally entitle its holder to purchase common shares of theacquiring company using the same formula as for our common stock.

 

The Rights expire in June 2008 unless earlier redeemed orterminated. At the option of our board of directors, we generally may amend theRights or redeem the Rights at $0.01 per Right at any time prior to the time aperson or group has acquired 20% of our common stock.

 

**11. EMPLOYEE BENEFIT PLANS**

 

***U.S. definedcontribution plan.*** We sponsor a defined contribution plan, which qualifies under Section 401(k) ofthe Internal Revenue Code and covers U.S. employees who meet certain age andservice requirements. We may make matching contributions to the plan based on apercentage of employee compensation and actual contributions. In the yearsended October 31, 2007, 2006 and 2005, we elected to make matchingcontributions of 50% of employee contributions up to 4% of compensation,totaling $335, $248, and $234, respectively.

 

***Austrian pensioncommitments.*** In April and May 2004, we formalized our defined contributionpension agreements with certain Austrian employees. We pay contributions to anexternal pension fund administered by ÖPAG Pensionskassen AG. Aggregate pensionexpense relating to our Austrian agreements in the years ended October 31,2007, 2006 and 2005 were $102, $53, and $36, respectively.

 

**12. OTHER EXPENSE**

 

Other expense is comprised of the following:

 
| ** **                       | ** ** | **October 31,** | ** ** |
|----------------------------------|------------|----------------------|------------|
| ** **                       | ** ** | **2007**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest income                  |       | $                    | 1,644      |   | $ | 1,998 |   | $ | 2,336 |   |
| Interest expense                 |       | (7,487               | )          | (6,863 | ) | (2,302 | ) |
| Amortization of debt issue costs |       | (1,327               | )          | (1,511 | ) | (961 | ) |
| Foreign currency (loss) gain     |       | (3,109               | )          | (414 | ) | 215 |   |
| Other                            |       | 305                  |       | 91 |   | 55 |   |
| Total Other expense              |       | $                    | (9,974     | ) | $ | (6,699 | ) | $ | (657 | ) |

 

Interest income relates to our investment in sales-type leases andnotes receivable portfolio.

 

25

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Interest expense for the year ended October 31, 2007 primarilyrelates to interest on our Notes and Revolver. Interest expense during fiscal2006 primarily relates to interest on the Notes and on our Old CreditAgreement. Interest expense during fiscal 2005 relates principally to ourNotes.

 

Amortization of debt issue costs for the year ending October 31,2007 relate to our Notes and the Revolver. For fiscal years presented prior to2007, amortization of debt issue costs relates primarily to the Notes.

 

Foreign currency (loss) gain relates to fluctuations of the U.S.dollar, the Euro, the Australian dollar and the Pataca. Our foreign subsidiariesengage in activities with us and certain customers in U.S. dollar denominatedcontracts. Additionally, we have initiated the settling of certaininter-company balances, which has resulted in the recognition of additionalforeign currency fluctuations pursuant to SFAS No. 52, “*Foreign Currency Translation*” for the yearended October 31, 2007.

 

**13. INCOME TAXES**

 

We record deferred income taxes to reflect the income tax consequencesin future years between the financial reporting and income tax bases of assetsand liabilities, and future tax benefits such as net operating loss carryforwards and other tax credits. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which the differences are expected to reverse. We provide valuationallowances to reduce deferred tax assets to an amount that is more likely thannot to be realized. We evaluate the likelihood of recovering our deferred taxassets by estimating sources of future taxable income. The provision for incometaxes is the sum of the tax currently payable and the change in deferred taxesduring the year.

 

The income tax (benefit) provision attributable to our continuing anddiscontinued operations was as follows for the years ended October 31:

 
| ** **              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Continuing operations   |       | $        | (1,999     | )        | $          | 13,373   |       | $ | 14,496 |   |
| Discontinued operations |       | 46       |       | (90      | )          | 44       |       |
| **Total**               |       | $        | (1,953     | )        | $          | 13,283   |       | $ | 14,540 |   |

 

The components of the (benefit) provision for income taxes fromcontinuing operations was as follows for the years ended October 31:

 
| ** **    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------|------------|----------|------------|----------|------------|----------|------------|
| **Current:**  |       |     |       |     |       |     |       |
| Federal       |       | $        | 6,345      |     | $          | 13,647   |       | $ | 16,364 |   |
| State         |       | 747      |       | 658      |       | 1,210    |       |
| Foreign       |       | 64       |       | 1,290    |       | (526     | )          |
|          |       | 7,156    |       | 15,595   |       | 17,048   |       |
| **Deferred:** |       |     |       |     |       |     |       |
| Federal       |       | (1,586   | )          | (1,343   | )          | (2,980   | )          |
| State         |       | (82      | )          | (60      | )          | (312     | )          |
| Foreign       |       | (7,487   | )          | (819     | )          | 740      |       |
|          |       | (9,155   | )          | (2,222   | )          | (2,552   | )          |
| **Total**     |       | $        | (1,999     | )        | $          | 13,373   |       | $ | 14,496 |   |

 

26

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Deferred tax assets and liabilities consisted of the following as of October 31:

 
| ** **                                  | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Deferred tax assets:**                    |       |     |       |     |       |     |       |
| Inventories                                 |       | $        | 5,458      |     | $          | 4,429    |       | $ | 976 |   |
| Accounts receivable                         |       | 236      |       | 684      |       | 368      |       |
| Employee benefits                           |       | 1,157    |       | 768      |       | 234      |       |
| Deferred revenue                            |       | 277      |       | 835      |       | 44       |       |
| Investment impairment write-downs           |       | 1,236    |       | 1,033    |       | 376      |       |
| Other reserves                              |       | 977      |       | 317      |       | 415      |       |
| Stock awards                                |       | 2,758    |       | 2,081    |       | 380      |       |
| Fixed Assets                                |       | 659      |       | 391      |       | 87       |       |
| Foreign net operating loss carryforward     |       | 3,666    |       | 1,410    |       | 407      |       |
| Contingent consideration on patent purchase |       | 1,095    |       | 1,926    |       | 2,525    |       |
| Foreign tax credits / receivables           |       | 248      |       | 331      |       | —   |       |
| Intangible assets                           |       | 6,640    |       | —   |       | —   |       |
| Other                                       |       | 1,032    |       | 304      |       | 133      |       |
| **Total gross deferred tax assets**         |       | 25,439   |       | 14,509   |       | 5,945    |       |
| Less: valuation allowance                   |       | (1,505   | )          | (880     | )          | (363     | )          |
| **Deferred tax assets**                     |       | 23,934   |       | 13,629   |       | 5,582    |       |
| **Deferred tax liabilities:**               |       |     |       |     |       |     |       |
| Goodwill                                    |       | 2,478    |       | 1,608    |       | 908      |       |
| Intangible assets                           |       | —   |       | 5,959    |       | 273      |       |
| Other                                       |       | 259      |       | 597      |       | 164      |       |
| **Total gross deferred tax liabilities**    |       | 2,737    |       | 8,164    |       | 1,345    |       |
| **Net deferred tax assets**                 |       | $        | 21,197     |     | $          | 5,465    |       | $ | 4,237 |   |

 

As of October 31, 2007, we have available $6,781, $3,441, $2,010,and $903 of net operating losses in Australia, Austria, New Zealand and Macau,respectively. These losses can be carried forward indefinitely. We haverecorded a deferred tax asset of $3,666 related to these operating losses. Wehave recorded a valuation allowance of $1,265 to fully offset $2,006 and $2,010of net operating losses in Australia and New Zealand, respectively. We areproviding this valuation allowance due to a history of losses and noidentifiable sources of significant future taxable income in those entities.The remaining valuation allowance of $240 relates to Australian capital losscarry forwards which can only be offset by capital gains. We are providing thisvaluation allowance as there are no current known prospects for capital gain.

 

We have not provided U.S. Federal income tax on $2,875 of undistributedearnings of our foreign subsidiaries because we intend to permanently reinvestsuch earnings outside the United States. Upon distribution of these earnings inthe form of dividends or otherwise, we would be subject to U.S. income taxes,subject to adjustment for foreign tax credits. Determination of the amount ofunrecognized deferred U.S. income tax liability is not practicable because ofthe complexities associated with its hypothetical calculation.

 

The reconciliation of the federal statutory rate to our effectiveincome tax rate for continuing operations for the years ended October 31was as follows:

 
| ** **                                 | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal income tax at the statutory rate   |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| Stargames PC4 software technology          |       | (46.9    | )%         | 0.0      | %          | 0.0      | %          |
| In-process research and development        |       | (0.0     | )%         | 35.8     | %          | 0.0      | %          |
| Foreign dividend inclusion                 |       | 0.0      | %          | 9.9      | %          | 0.0      | %          |
| Other permanent differences                |       | (7.0     | )%         | (6.0     | )%         | (1.9     | )%         |
| State income taxes, net of federal benefit |       | 2.1      | %          | 2.5      | %          | 2.1      | %          |
| Tax credits                                |       | (2.7     | )%         | (8.4     | )%         | (1.8     | )%         |
| Effect from foreign tax rate differences   |       | 2.6      | %          | 1.4      | %          | 0.7      | %          |
| Other                                      |       | 2.9      | %          | 1.3      | %          | (0.8     | )%         |
| Effective tax rate                         |       | (14.0    | )%         | 71.5     | %          | 33.3     | %          |

 

For the fiscal year ended October 31, 2007, a $6,707 decrease toincome tax expense and corresponding increase to deferred tax assets wasrecognized. This adjustment relates to recording amortizable tax basis for theStargames PC4 technology which had previously been written off for financialpurposes as IPR&D. At the date of acquisition, the determination of the taxtreatment was uncertain, pending interpretation of newly enacted Australian taxconsolidation rules which were unclear in their application and for whichadditional guidance was anticipated. During the tax consolidation process, itwas determined that the tax deduction related to IPR&D may be available inthe form of software asset amortization for tax purposes. Accordingly, weperformed additional research to determine whether the asset would qualify 

 

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for a tax deduction and over what period oftime. The research was finalized in the fourth quarter, and confirmed that taxamortization is appropriate for the PC4 technology. As such, we recorded adeferred tax asset for the tax-only amortizable asset and reduced income taxexpense.

 

**14. OPERATING SEGMENTS**

 

In accordance with SFAS No. 131, *Disclosuresabout Segments of an Enterprise and Related Information*, we reportsegment information based on the “management approach”. The management approachdesignates the internal reporting used by management for making decisions andassessing performance as the source of our reportable segments.

 

In August 2007, we instituted some organizational changes at ourglobal headquarters in Las Vegas, Nevada to support the implementation of ourfive-point strategy. Specifically, our Las Vegas-based operations were beendivided into two distinct entities: a corporate headquarters group and a newprofit center called Shuffle Master—Americas. The organizational changes alsoincluded the formation of the Corporate Product Group (“CPG”). The CPG isresponsible for overseeing the creation and development of our existing andfuture product lines. In addition to including key corporate executivesresponsible for product content and product strategy, the CPG will also overseeour global product research and development.

 

As part of our reorganization and the continued implementation of ourfive-point strategy, we reanalyzed our historical reportable segments, theUtility Products and Entertainment Products segments, and determined that itwas appropriate to expand our reportable segments to include Utility Products,

 

Proprietary Table Games, Electronic Table Systems and Electronic GamingMachines. Prior periods have been reclassified to conform to this presentation.Our reportable segments are our operating segments.

 

We manage our business primarily on a product division basis. Ourreportable segments are comprised of Utility Products, Proprietary Table Games,Electronic Table Systems and Electronic Gaming Machines.

 

Our Utility Products includes a full line of automatic card shufflersfor use with the vast majority of card table games as well as chip sortingmachines for use on roulette tables. We also have acquired and/or aredeveloping other products that automatically gather data to enable casinos totrack table game play, such as Table iD (part of our ITS), currently indevelopment with IGT and PGIC.

 

Our PTG includes our portfolio of live table games including poker,blackjack, baccarat, and pai gow poker-based table games, progressive tablegames with bonusing options, and side bets as well as licenses for legalinternet wagering.

 

Our ETS includes e-Table platforms such as Table MasterTM, Vegas Star®,Rapid Table Games®, as well as our wireless gaming content.

 

Our EGM includes our PC-based video slot machines with an extensiveselection of video slot titles, which include a range of bonus round options.

 

Each segment’s activities include the design, development, acquisition,manufacture, marketing, distribution, installation and servicing of its productlines. All periods presented have been reclassified to conform to our currentreportable segments.

 

We evaluate the performance of our operating segments based on netrevenues, gross margin and operating income. Segment revenues include leasing,licensing, or selling of products within each reportable segment. Segmentoperating income includes net revenues attributable to third parties andexpenses directly and indirectly associated with the product lines included ineach segment. Direct expenses primarily include depreciation of leased assets,amortization of intangible assets, cost of products sold, shipping,installation, commissions, product approval costs, research and development andproduct related litigation. Indirect expenses include an activity-basedallocation of other general product-related costs, the most significant ofwhich are service and selling expenses, including stock-based compensationexpense, and manufacturing overhead. Capital expenditures include amountsreported in our consolidated statements of cash flows for purchases of leasedproducts, property and equipment, and intangible assets plus the financed ornon-cash portion of these purchases which is excluded from cash flows

 

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Operating income for each segment excludes other income and expense,income taxes and certain expenses that are managed outside of the operatingsegments. The amounts classified as unallocated corporate expenses consistprimarily of costs related to overall corporate management and supportfunctions. These include costs related to executive management, accounting andfinance, general sales support, legal and compliance costs, office expenses,and other amounts for which allocation to specific segments is not practicable.Segment assets exclude corporate assets.

 

The following provides financial information concerning our reportablesegments of our continuing operations for the years ended October 31:

 
| ** **                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Revenue:**                       |       |     |       |     |       |     |       |
| Utility products                   |       | $        | 78,457     |     | $          | 86,792   |       | $ | 67,029 |   |
| Proprietary Table Games            |       | 33,125   |       | 38,316   |       | 39,517   |       |
| Electronic Table Systems           |       | 27,890   |       | 16,555   |       | 6,022    |       |
| Electronic Gaming Machines         |       | 39,269   |       | 21,090   |       | —   |       |
| Unallocated Corporate              |       | 110      |       | 238      |       | 292      |       |
|                               |       | $        | 178,851    |     | $          | 162,991  |       | $ | 112,860 |   |
| **Gross profit:**                  |       |     |       |     |       |     |       |
| Utility products                   |       | $        | 48,086     |     | $          | 55,707   |       | $ | 45,496 |   |
| Proprietary Table Games            |       | 28,154   |       | 33,742   |       | 36,696   |       |
| Electronic Table Systems           |       | 13,891   |       | 9,936    |       | 2,154    |       |
| Electronic Gaming Machines         |       | 14,027   |       | 7,225    |       | —   |       |
| Unallocated Corporate              |       | (292     | )          | (340     | )          | (746     | )          |
|                               |       | $        | 103,866    |     | $          | 106,270  |       | $ | 83,600 |   |
| **Operating income:**              |       |     |       |     |       |     |       |
| Utility products                   |       | $        | 33,783     |     | $          | 42,445   |       | $ | 32,595 |   |
| Proprietary Table Games            |       | 23,465   |       | 30,451   |       | 33,732   |       |
| Electronic Table Systems           |       | 6,600    |       | (16,638  | )          | (203     | )          |
| Electronic Gaming Machines         |       | 7,390    |       | 3,528    |       | —   |       |
| Unallocated Corporate              |       | (46,656  | )          | (32,304  | )          | (20,867  | )          |
|                               |       | $        | 24,582     |     | $          | 27,482   |       | $ | 45,257 |   |
| **Depreciation and amortization:** |       |     |       |     |       |     |       |
| Utility products                   |       | $        | 8,634      |     | $          | 8,535    |       | $ | 7,186 |   |
| Proprietary Table Games            |       | 2,661    |       | 2,214    |       | 1,951    |       |
| Electronic Table Systems           |       | 5,305    |       | 2,513    |       | 413      |       |
| Electronic Gaming Machines         |       | 586      |       | 384      |       | —   |       |
| Unallocated Corporate              |       | 3,562    |       | 4,527    |       | 2,629    |       |
|                               |       | $        | 20,748     |     | $          | 18,173   |       | $ | 12,179 |   |
| **Capital expenditures:**          |       |     |       |     |       |     |       |
| Utility products                   |       | $        | 3,352      |     | $          | 6,139    |       | $ | 11,395 |   |
| Proprietary Table Games            |       | 1,969    |       | 577      |       | 577      |       |
| Electronic Table Systems           |       | 8,004    |       | 5,730    |       | 4,626    |       |
| Electronic Gaming Machines         |       | 103      |       | 500      |       | —   |       |
| Unallocated Corporate              |       | 1,828    |       | 2,730    |       | 2,371    |       |
|                               |       | $        | 15,256     |     | $          | 15,676   |       | $ | 18,969 |   |
| **Assets, end of year:**           |       |     |       |     |       |     |       |
| Utility products                   |       | $        | 121,822    |     | $          | 109,689  |       | $ | 99,265 |   |
| Proprietary Table Games            |       | 53,635   |       | 41,956   |       | 33,786   |       |
| Electronic Table Systems           |       | 89,259   |       | 80,838   |       | 7,193    |       |
| Electronic Gaming Machines         |       | 37,495   |       | 28,842   |       | —   |       |
| Unallocated Corporate              |       | 57,556   |       | 43,882   |       | 52,873   |       |
|                               |       | $        | 359,767    |     | $          | 305,207  |       | $ | 193,117 |   |

 

Revenues by geographic area are determined based on the location of ourcustomers. For the years ended October 31, 2007, 2006 and 2005, sales tocustomers outside the United States accounted for 55%, 44%, and 23% ofconsolidated revenue, respectively. No individual customer accounted for morethan 10% of consolidated revenue.

 

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The followingprovides financial information concerning our operations by geographic area forthe years ended October 31:

 
| ** **                          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Revenue:**                        |       |     |       |     |       |     |       |   |   |   |   |   |   |
| United States                       |       | $        | 80,331     |     | 44.9       | %        | $          | 90,569 |   | 55.6 | % | $ | 87,250 |   | 77.3 | % |
| Canada                              |       | 7,314    |       | 4.1      | %          | 7,103    |       | 4.4 | % | 5,303 |   | 4.7 | % |
| Other North America                 |       | 1,828    |       | 1.0      | %          | 2,747    |       | 1.7 | % | 2,214 |   | 2.0 | % |
| Europe                              |       | 9,702    |       | 5.4      | %          | 9,920    |       | 6.1 | % | 8,147 |   | 7.2 | % |
| Australia                           |       | 52,417   |       | 29.3     | %          | 27,149   |       | 16.7 | % | 2,440 |   | 2.2 | % |
| Asia                                |       | 21,809   |       | 12.2     | %          | 24,003   |       | 14.7 | % | 6,631 |   | 5.9 | % |
| Other                               |       | 5,450    |       | 3.1      | %          | 1,500    |       | 0.8 | % | 875 |   | 0.7 | % |
|                                |       | $        | 178,851    |     | 100.0      | %        | $          | 162,991 |   | 100.0 | % | $ | 112,860 |   | 100.0 | % |
| **Long-lived assets, end of year:** |       |     |       |     |       |     |       |   |   |   |   |   |   |
| United States                       |       | $        | 95,193     |     | 36.6       | %        | $          | 61,152 |   | 28.3 | % | $ | 56,143 |   | 47.4 | % |
| Austria                             |       | 56,618   |       | 21.8     | %          | 53,667   |       | 24.9 | % | 53,799 |   | 45.4 | % |
| Australia                           |       | 107,691  |       | 41.5     | %          | 100,364  |       | 46.5 | % | 6,617 |   | 5.6 | % |
| Other                               |       | 300      |       | 0.1      | %          | 628      |       | 0.3 | % | 1,866 |   | 1.6 | % |
|                                |       | $        | 259,802    |     | 100.0      | %        | $          | 215,811 |   | 100.0 | % | $ | 118,425 |   | 100.0 | % |

 

**15. COMMITMENTS AND CONTINGENCIES**

 

***Operating leases.***  We lease office, production, warehouse andservice facilities, and service vans under operating leases. The facilityleases are for periods ranging from one to ten years, include renewal options,and include an allocation of real estate taxes and other operating expenses.Total rent expense under operating leases was approximately $1,934 $1,560, and$1,116 for the years ended October 31, 2007, 2006, and 2005, respectively.

 

Estimatedfuture minimum lease payments under operating leases as of October 31,2007, are as follows:

 
| **Year ending October 31,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2008                                       |       | $          | 1,483      |   |
| 2009                                       |       | 1,283      |       |
| 2010                                       |       | 1,061      |       |
| 2011                                       |       | 717        |       |
| 2012                                       |       | 545        |       |
| Thereafter                                 |       | —     |       |
|                                       |       | $          | 5,089      |   |

 

***Purchase commitments.***  From time to time, we enter into commitmentswith our vendors to purchase inventory at fixed prices or in guaranteedquantities. As of October 31, 2007, our significant inventory purchasecommitments totaled $14,794 which are generally due within one year, andprimarily relate to our one2six shufflers, Easy Chipper C, Table Master, VegasStar, Rapid Table Games, and our EGMs.

 

***Minimum royalty payments.***  We have entered into certain agreementsrelated to the licensing of intellectual property for use in our business whichcontain annual minimum royalty payments. The aggregate annual minimum royaltypayments are approximately $28,081 through 2019. The annual minimum royaltypayments under one of these agreements are only required in order for us topreserve our exclusivity rights.

 

***Employment agreements.***  We have entered into employment contractswith our corporate officers and certain other key employees with durationsranging from one to three years. Significant contract provisions includeminimum annual base salaries, healthcare benefits, bonus compensation ifperformance measures are achieved and non-compete provisions. These contractsare primarily “at will” employment agreements, under which the employee or wemay terminate employment. If we terminate any of these employees without cause,then we are obligated to pay the employee severance benefits as specified intheir individual contract. As of October 31, 2007, minimum aggregateseverance benefits totaled $5,747.

 

***Tax contingencies.***  The Company has open tax years with varioussignificant taxing jurisdictions including the United States, Australia,Austria and Canada. Such open years contain matters that could be subject todiffering interpretations of applicable tax laws and regulations as they relateto the amount, timing or inclusion of revenue and expenses or the sustainabilityof income tax credits for a given audit period. As of October 31, 2007,the Company has established a liability of $248 for those matters where theamount of loss is probable and reasonably estimable. The amount of theliability is based on management’s best estimate given the Company’s historywith similar matters and interpretations of current laws and regulations.

 

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***Legal Proceedings.***  In the ordinary course of business, we areinvolved in various legal proceedings and other matters that are complex innature and have outcomes that are difficult to predict. In accordance withSFAS 5, “*Accounting for Contingencies,*”we record accruals for such contingencies to the extent that we conclude thatit is probable that a liability will be incurred and the amount of the relatedloss can be reasonably estimated. Our assessment of each matter may changebased on future unexpected events. An unexpected adverse judgment in anypending litigation could cause a material impact on our business operations,intellectual property, results of operations or financial position. Unlessotherwise expressly stated, we believe costs associated with litigation willnot have a material impact on our financial position or liquidity, but may bematerial to the results of operations in any given period. We assume noobligation to update the status of pending litigation, except as may berequired by applicable law, statute or regulation.

 

1.*             VendingData II—*InOctober 2004, we filed a second patent infringement lawsuit (“VendingDataII”) against VendingData Corporation (“VendingData”). We settled our firstpatent infringement lawsuit against VendingData on July 12, 2005 (“VendingDataI”). This second suit alleges that the use, importation and offering for saleof VendingData’s PokerOneTM shuffler infringes another patent owned by us (adifferent patent than the patents that were the subject of the VendingData Icase). VendingData II was filed in the U.S. District Court for the District ofNevada (the “Court”) in Las Vegas, Nevada. The complaint seeks an unspecifiedamount of damages against VendingData and a preliminary and permanentinjunction against VendingData’s infringing conduct. VendingData has deniedinfringement and has also filed a counterclaim for a declaratory judgment of non-infringement.

 

On November 29,2004, the Court granted our motion for a preliminary injunction (the “Injunction”).The Injunction became effective upon our posting of a $3,000 cash security withthe Court on November 30, 2004. This security deposit is included in othernon-current assets on our consolidated balance sheet, and is available toVendingData to the extent, if any, that VendingData proves and is otherwiselegally entitled to any actual damages, if any, which the Injunction causedVendingData if, in fact, it is found that the Injunction was wrongfully issued.On December 17, 2004, the Court denied VendingData’s two emergency motionsto modify the Injunction.

 

In March 2005,the Court of Appeals for the Federal Circuit (the “Federal Circuit”) stayed theInjunction based on a technical defect in the Court’s process in granting theInjunction, and not on its merits. On December 27, 2005, the FederalCircuit vacated the Injunction and ordered the Court to perform a more completeclaim construction analysis in order to deal with any future motions on whetheror not to reinstate the Injunction. Two of the three judges on the FederalCircuit panel stated that under VendingData’s claim construction the PokerOnelikely did not literally infringe. We continue to believe that infringementexists under either our claim construction or VendingData’s claim construction.The Federal Circuit did not rule on which claim construction is the properone.

 

In May 2005,the Court held a Markman hearing for construction of the claims. On September 26,2005, U.S. Magistrate Lawrence R. Leavitt for the District of Nevada issued hisClaim Construction Report and Recommendation in the Markman hearing concerningVendingData’s PokerOneTM shuffler. The Magistrate’s findings were limited to hisinterpretation of certain words in the patent claim asserted by us, and heagreed with the interpretation put forth by VendingData. On February 26,2007, the Court adopted and accepted, without modification, the Magistrate’sRecommendation. The Magistrate’s Recommendation, as adopted by the Court, isnot a determination of whether the PokerOneTM infringes the asserted patent, nordoes it speak to the validity of our claims. There can be no guarantee that,upon any further appeal of the Court’s adoption of the Magistrate’sRecommendation, the Federal Circuit will agree with our claim construction.

 

On April 5,2007, we filed a motion for release of a $3,000 cash security, whichVendingData has opposed. The Court has not yet ruled on that motion.

 

On April 27,2007, VendingData filed a motion for summary judgment claiming that thePokerOneTM does not infringe.

 

On May 23,2007, the Court entered an order granting VendingData’s motion for a protectiveorder staying all further discovery in the case pending resolution ofVendingData’s motion for summary judgment, other than further discovery grantedShuffle Master pursuant to an emergency motion heard on May 10, 2007. On May 31,2007, Shuffle Master opposed VendingData’s motion for summary judgment ofnon-infringement, and brought a cross motion for summary judgment that thePokerOneTM does infringe.

 

We believe thelikelihood of some unfavorable outcome in this matter is reasonably possible.We cannot, however, at this time, reasonably estimate an expected loss, if any.Further, subject to judicial risks beyond our control, we do not believe thatthe loss, if any, would be material.

 

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2.*             Awada*—On April 25and April 26, 2005, our rescission trial was held in the District Court inClark County, Nevada in the case against us and our CEO, Mark Yoseloff, broughtby plaintiffs Yehia Awada and Gaming Entertainment, Inc. At the conclusionof the trial, the court granted our rescission motion, ordering that thesubject contract, called the “Game Option Agreement”, be rescinded and/or void.On May 18, 2005, the Court entered Findings of Fact/Conclusions of Lawconfirming the Court’s rescission ruling. Among the findings, the Court foundthat the actions of the plaintiffs Awada and Gaming Entertainment, Inc.demonstrated that the plaintiffs never had any intention of conveying to us theexclusive license to the 3-Way Action game, as they had agreed and wererequired to do under the Game Option Agreement. The Court further found that wehad established by a preponderance of the evidence that the plaintiffs hadmaterially failed to perform their obligations under the Game Option Agreementand that we were entitled to the remedy of rescission. On May 5, 2005, theCourt ruled on the parties’ damages requests in connection with the case and asrequired under Nevada law. Plaintiffs were seeking approximately $13,000 indamages. The Court ordered that the total damages under Nevada law due to thesuccessful rescission of the Game Option Agreement was $130, including allinterest. The damages amount was paid in June 2006.

 

Plaintiffshave appealed the Court’s order granting the rescission of the “Game OptionAgreement” to the Nevada Supreme Court.

 

We do notbelieve that we will suffer any loss, but if we did, such loss, at this time,cannot be reasonably estimated. Further, subject to judicial risks beyond ourcontrol, we do not believe that the loss, if any, would be material.

 

3.*             GEI—*In July 2004,we filed a patent infringement lawsuit against Gaming Entertainment, Inc.and Yehia Awada (“GEI”) in the U.S. District Court for the District of Nevada,in Las Vegas, Nevada. The lawsuit alleges that GEI’s 3-5-7 PokerTM gameinfringes one of our Three Card Poker® patents and one of ourLet-It-Ride® patents. We are seeking a permanent injunction and anas yet undetermined amount of damages against GEI. GEI has answered ourcomplaint, denying infringement, and also seeking a ruling that the patents areinvalid. Fact and expert discovery is complete. In November 2005, theCourt held a Markman hearing for construction of the claims. On September 28,2007, the Magistrate ruled in our favor in the Markman hearing on claimconstruction. The defendants have appealed. In March 2006, GEI filed and,we opposed, several summary judgment motions challenging the validity of theThree Card Poker patent involved in this litigation. GEI filed its reply briefsin April 2006, and the summary judgment motions are pending. The case isstayed pending resolution of the summary judgment motions.

 

On November 16,2007, the Court adopted the Magistrate’s ruling in our favor on the claimsconstruction and overruled the defendants’ objections to the Magistrate’sruling. The Court ordered supplemental briefing on the pending summary judgmentmotions as a result of this ruling. We filed supplemental briefs and thedefendants did not. We are still awaiting a ruling on the summary judgment.

 

4.*             Awada II*—On September 12,2005, we filed a new lawsuit against defendants Awada and Gaming Entertainment, Inc.The lawsuit alleges that our Four Card Poker game is being infringed andillegally copied by the defendants’ Play Four Poker game. The lawsuit claimsthat the defendants are violating the federal Lanham Act by infringing thetrademark/trade dress of our Four Card Poker game layout, and that thedefendants are committing acts of unfair competition, interference withprospective business advantage and conversion. Our action seeks appropriateinjunctive relief against defendants’ Play Four Poker game layout, as well asunspecified monetary damages. On September 15, 2005, the U.S. DistrictCourt for the District of Nevada issued a temporary restraining orderprohibiting the defendants from displaying or advertising the infringinglayout.

 

On or about December 6,2005, the defendants answered our complaint and denied all liability. They alsofiled counterclaims for alleged patent misuse, anti-trust violations based onsaid patent misuse, patent invalidity, unfair competition, unfair trade practices,and other related claims. The counterclaims seek an unspecified amount ofdamages, disgorgement of our profits as a result of our alleged unfair tradepractices, and preliminary and permanent injunctive relief against our allegedunfair trade practices. The defendants filed these counterclaims against bothus and our CEO. We completely and uncategorically deny the defendants’counterclaims, and intend to vigorously oppose them. On January 9, 2006,we filed a motion to dismiss all of defendants’ counterclaims. On January 24,2006, the defendants filed an opposition to our motion to dismiss. On March 27,2006, the Court granted our motion for a preliminary injunction and dismissedfour of the defendants’ seven counterclaims. On April 19, 2007, the Courtgranted our summary judgment motions on trade dress infringement and defendants’counterclaims, and all of those counterclaims were dismissed with prejudice.All other claims were dismissed with prejudice, except our trademarkinfringement claim that was dismissed without prejudice. A permanent injunctionwas also entered.

 

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On May 17,2007, Awada filed an appeal to the Ninth Circuit Court of Appeals on allissues. On September 18, 2007, the Ninth Circuit Court of Appealsdismissed the appeal of Gaming Entertainment, Inc. for lack ofprosecution. The appeal continues with the Appellant Yehia Awada. The appeal ispending. We do not believe that we will suffer any loss, but if we did, suchloss, at this time, cannot be reasonably estimated. Further, subject tojudicial risks beyond our control, we do not believe that the loss, if any,would be material.

 

5.*             MP Games I—*In July 2004,we filed a complaint against MP Games LLC and certain other defendants inthe U.S. District Court for the District of Nevada, in Las Vegas, Nevada. Thecomplaint alleges that the defendants’ MP21 System infringes two patents ownedby us. The complaint also alleges misappropriation of trade secrets againstcertain, but not all, of the defendants, and also includes claims forcorrection of named inventor on certain related patents held in the name ofcertain of the defendants. We are seeking a permanent injunction and damagesagainst all of the defendants. The defendants have answered our complaintdenying infringement and also claiming that the two patents are invalid. Thedefendants have also counterclaimed against us, claiming that we infringeseveral of their patents, and that we misappropriated certain of their tradesecrets, and are seeking damages against us. We deny any infringement,misappropriation or wrongdoing. In May 2005, the Court dismisseddefendants’ breach of contract counterclaim.

 

In a Two-PartyAgreement transaction with IGT, IGT purchased a 50% ownership interest in thetwo patents which are the subject of this lawsuit, and IGT has been added as anamed plaintiff in this lawsuit.

 

On December 20,2005, the Court entered its Markman order, construing the disputed claims inthe various patents-in-suit. The Court ruled in our favor on a number ofdisputed terms and in the defendants’ favor on others. Some or all of theserulings may be overturned on appeal.

 

In August 2006,the Court dismissed all but one of the defendants’ trade secretmisappropriation claims. Subsequently, pursuant to a partial settlementagreement, the parties dismissed all of their trade secret claims.

 

Recently, thedefendants filed seven summary judgment motions dealing with variousnon-infringement and invalidity arguments. We also filed a summary judgmentmotion seeking to invalidate two of the four patents asserted by thedefendants. These motions have been fully briefed.

 

In light ofthe Supreme Court’s decision in KSR v. Teleflex, the Court has permitted theparties to submit supplemental expert reports on the issue of obviousness, takesupplemental depositions of these experts, and submit supplemental briefing tothe Court on the issue of obviousness. Given this additional briefing andexpert disclosures, the Court put off the summary judgment hearing until February 6,2008.

 

At this time,we do not believe that we will suffer any loss, but if we did, such loss, atthis time, cannot be reasonably estimated. Further, subject to judicial risksbeyond our control, we do not believe that the loss, if any, would be material.

 

6.*             Class ActionLawsuit—*

 

a.             Stocke—OnJune 1, 2007, a putative class action complaint for violation of thefederal securities laws against the Company and our Chief Executive Officer,Mark L. Yoseloff, and former Chief Financial Officer, Richard L. Baldwin, wasfiled in the U.S. District Court for the District of Nevada on behalf ofpersons who purportedly purchased our stock between December 22, 2006, andMarch 12, 2007. The case is entitled Joseph Stocke vs. Shuffle Master, Inc.,Mark L. Yoseloff and Richard L. Baldwin. We, as well as, Dr. Yoseloff and Mr. Baldwin,were served with the complaint on June 6, 2007. The complaint assertsclaims pursuant to Sections 10(b) and 20(a) of the SecuritiesExchange Act of 1934, and Rule 10b-5 promulgated thereunder. These claimsallegedly relate to our March 12, 2007, announcement that we would restateour Fiscal Fourth Quarter and full year financial results. The complaint seekscompensatory damages in an unstated amount. On or about August 4, 2007,four plaintiffs moved the Court for appointment as lead plaintiff. No decisionhas yet been made. On or about September 6, 2007, one of those plaintiffswithdrew its application for appointment. For reasons discussed below, at thistime, we have not responded to the complaint.

 

b.             Armistead—OnJune 12, 2007, a second putative class action complaint for violation ofthe federal securities laws against the Company and Dr. Yoseloff and Mr. Baldwinwas filed in the U.S. District Court for the District of Nevada. The case isentitled Robert Armistead, Jr. vs. Shuffle Master, Inc., Mark L.Yoseloff and Richard L. Baldwin. The Company, Dr. Yoseloff and Mr. Baldwinwere served with the complaint on June 12, 2007. This lawsuit effectivelymirrors the allegations in the Stocke lawsuit filed against these samedefendants on 

 

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June 1,2007, except that the Armistead complaint was filed on behalf of persons whopurchased our stock between March 20, 2006, and March 12, 2007.

 

c.             Tempel—OnJune 25, 2007, a third putative class action complaint for violation ofthe federal securities laws against the Company, Dr. Yoseloff and Mr. Baldwinwas filed in the U.S. District Court for the District of Nevada. The case isentitled Andrew J. Tempel vs. Shuffle Master, Inc., Mark L. Yoseloff andRichard L. Baldwin. This lawsuit is a “copycat” lawsuit of the Stocke lawsuitfiled against these same defendants on June 1, 2007.

 

On June 22,2007, a Joint Stipulation was filed in the U.S. District Court for the Districtof Nevada providing that all presently filed and any subsequently filed relatedclass actions shall be consolidated and captioned In Re Shuffle Master, Inc.Securities Litigation. We are not required to answer, move against or otherwiserespond to any class action complaints until a consolidated complaint is filed.

 

The Companybelieves that all of the above purported class action suits are without meritand intends to vigorously defend each of these cases. Due to the uncertainty ofthe ultimate outcome of these matters, the impact on future financial resultsis not subject to reasonable estimates. However, we have tendered these casesto our Directors and Officers insurance carriers.

 

At this time,we do not believe that we will suffer any loss, but if we did, such loss, atthis time, cannot be reasonably estimated. Further, subject to judicial risksbeyond our control, we do not believe that the loss, if any, would be material.

 

7.*             WMS (U.S.)*—On August 6,2007, WMS Gaming Inc. (“WMS”) filed a complaint against Stargames and theCompany in the United States District Court for the Northern District ofIllinois, Eastern Division alleging breach of contract based upon the allegedfailure to make the 2007 minimum royalty payment when due. The Company moved todismiss on the basis that this complaint was not ripe as it was filed beforethe 30-day cure period had elapsed, and since the Company had now made theminimum royalty payment that formed the basis for WMS’s complaint, the suit wasmoot.

 

On August 22,2007, WMS filed an amended complaint seeking to enjoin the Australian WMS casediscussed below. This amended complaint also included declaratory judgmentclaims seeking a declaration that WMS did not breach its contract with theCompany as alleged in the Australian WMS case as discussed below.

 

At this time,we do not believe that we will suffer any loss, but if we did, such loss, atthis time, cannot be reasonably estimated. Further, subject to judicial risksbeyond our control, we do not believe that the loss, if any, would be material.

 

8.*             WMS (Australia)—*OnAugust 15, 2007, Stargames, the Company’s affiliate, filed suit in NewSouth Wales, Australia alleging a breach of contract by WMS relating to itsfailure in 2006 to provide certain software game masters to Stargames inaccordance with the terms of the contract and seeking damages related thereto.

 

On August 23,2007, the Company sought and obtained an ex parte order enjoining WMS fromseeking to enjoin the Australia case. At this time, we do not believe that wewill suffer any loss, but if we did, such loss, at this time, cannot bereasonably estimated. Further, subject to judicial risks beyond our control, wedo not believe that the loss, if any, would be material.

 

9.*             ShareholderDerivative Suits—*

 

a.             ShareholderDerivative Lawsuit I—On September 7, 2007, Pirelli Armstrong TireCorporation Retiree Medical Benefits Trust filed a shareholder derivativecomplaint in the U.S. District Court for the District of Nevada against ourCEO, Mark Yoseloff, our President, Paul Meyer, our former CFO, Richard Baldwin,our General Counsel, Jerome Smith, and the current members of our Board ofDirectors. The Company was also named as a nominal defendant. On September 24,2007, plaintiffs voluntarily dismissed Jerome Smith from the case withoutprejudice. The complaint, on behalf of the Company, alleges breach of fiduciaryduty and related causes of action against the defendants. The allegationsgenerally relate to the restatement of the Company’s Fiscal 2006 annual resultsand our acquisition of Stargames. The complaint seeks an unspecified amount ofdamages.

 

34

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b.             ShareholderDerivative Lawsuit II—On September 17, 2007, Chad Hodgkins filed ashareholder derivative complaint against our CEO, Mark Yoseloff, our formerCFO, Richard Baldwin, former Board of Directors member Todd Jordan and currentBoard of Directors members Mr. Saunders and Mr. Castle. The Companywas also named as a nominal defendant. The complaint was filed in the U.S.District Court for the District of Nevada. The complaint, on behalf of theCompany alleges breach of fiduciary duty and related causes of action againstthe defendants. The allegations generally relate to the restatement of theCompany’s Fiscal 2006 annual results, and are very similar to the allegationsin the three class actions suits described above. The complaint seeks anunspecified amount of damages. We have tendered these cases to our Directorsand Officers insurance carriers.

 

On October 24,2007, the Court approved a stipulation to transfer the Hodgkins case to JudgeDawson, who had already been assigned the Pirelli case. At this time, we do notbelieve that we will suffer any loss, but if we did, such loss, at this time,cannot be reasonably estimated. Further, subject to judicial risks beyond ourcontrol, we do not believe that the loss, if any, would be material.

 

See SubsequentEvents.

 

In theordinary course of conducting our business, we are, from time to time, involvedin other litigation, administrative proceedings and regulatory governmentinvestigations. Such other matters could have a material impact on our businessoperations, intellectual property, results of operations or financial position.

 

**16. SUBSEQUENT EVENTS**

 

(The numbereditems correspond to the numbered items of the Legal Proceedings):

 

2.*             Awada*—OnDecember 27, 2007, the Nevada Supreme Court denied the appeal filed by theplaintiffs with regard to the District Court’s rescission judgment and itsdismissal of all claims related to the breach of contract issues, and affirmedthe District Court’s order granting the rescission of the “Game OptionAgreement”. The Supreme Court also remanded to the District Court, onprocedural grounds, the remaining non-contract claims. We now intend to seekdismissal of these claims.

 

3.*             GEI*—OnNovember 16, 2007, the Court adopted the Magistrate’s ruling in our favoron the claims construction and overruled the defendants objections to theMagistrate’s ruling. The Court ordered supplemental briefing on the pendingsummary judgment motions as a result of this ruling. We filed supplementalbriefs and the defendants did not. We are still awaiting a ruling on thesummary judgment motions.

 

5.*             MPGames I*—Due to a scheduling conflict of certain counsel, the Court hasmoved the summary judgment hearing so that the hearing begins on February 28,2008.

 

6.*             Class ActionLawsuits*—On November 30, 2007, the Court appointed the “Shuffle MasterInstitutional Investor Group,” consisting of the Tulsa Municipal Employees’Retirement Plan and the Oklahoma Firefighters Pension and Retirement System, asLead Plaintiff. Grant & Eisenhofer is the Lead Plaintiff’s counsel.The Lead Plaintiff has until mid-January 2008 to file an amended complaint.

 

7 & 8*       WMS (U.S.) and WMS(Australia)*—On December 19, 2007 both cases were dismissed withprejudice, and the parties reached a confidential settlement agreement, theterms of which are not material to the Company.

 

9.*             ShareholderDerivative Suits*—On October 24, 2007, the Court approved a stipulationto transfer the Hodgkins case to Judge Dawson, who had already been assignedthe Pirelli case. On November 9, 2007, the Court ordered the Hodgkins caseto be consolidated into the Pirelli case. Additionally, any future derivativeactions alleging similar facts and legal theories will be consolidated into thePirelli case. The Law Firm of Coughlin Stoia Geller Rudman &Robbins LLP has been appointed lead counsel. A consolidated amendedcomplaint is due to be filed in mid-February 2008.

 

35

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**SHUFFLE MASTER, INC.**

 

**QUARTERLY FINANCIAL DATA**

 

**(Unaudited, in thousands except per shareamounts)**

 
| ** **                                     | ** ** | **Quarter Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **January 31**    | ** ** | **April 30** | ** ** | **July 31** | ** ** | **October 31** | ** ** |
| **2007:**                                      |       |                   |       |   |   |   |   |   |   |
| Revenue                                        |       | $                      | 37,341     |   | $ | 44,644 |   | $ | 45,135 |   | $ | 51,731 |   |
| Gross Profit                                   |       | 23,173                 |       | 26,675 |   | 25,913 |   | 28,104 |   |
| Income from continuing operations              |       | 1,951                  |       | 3,427 |   | 2,736 |   | 8,187 |   |
| Net income                                     |       | 2,025                  |       | 3,440 |   | 2,735 |   | 8,179 |   |
| Earnings per share—continuing operations: |       |                   |       |   |   |   |   |   |   |
| Earnings per share, basic                      |       | 0.06                   |       | 0.10 |   | 0.08 |   | 0.24 |   |
| Earnings per share, diluted                    |       | 0.05                   |       | 0.10 |   | 0.08 |   | 0.23 |   |
| **2006:**                                      |       |                   |       |   |   |   |   |   |   |
| Revenue                                        |       | $                      | 33,318     |   | $ | 43,303 |   | $ | 40,737 |   | $ | 45,633 |   |
| Gross Profit                                   |       | 23,396                 |       | 28,849 |   | 27,388 |   | 26,673 |   |
| Income (loss) from continuing operations       |       | 7,218                  |       | (12,632 | ) | 7,443 |   | 3,310 |   |
| Net income (loss)                              |       | 7,353                  |       | (12,720 | ) | 7,269 |   | 3,191 |   |
| Earnings per share—continuing operations: |       |                   |       |   |   |   |   |   |   |
| Earnings (loss) per share, basic               |       | 0.21                   |       | (0.37 | ) | 0.21 |   | 0.09 |   |
| Earnings (loss) per share, diluted             |       | 0.20                   |       | (0.37 | ) | 0.20 |   | 0.09 |   |

 

36

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**SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS**

 

**Years Ended October 31, 2007, 2006 and2005**

 
| ** **                                                                       | ** ** | **Column B**             | ** ** | **Column C**                     | ** ** | **Column D**          | ** ** | **Column E**      | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------|------------|---------------------------------------|------------|----------------------------|------------|------------------------|------------|
| ** **                                                                       | ** ** | **Balance at**           | ** ** | **Additions**                         | ** ** | ** **                 | ** ** | ** **             | ** ** |
| **Column A**                                                                | ** ** | **Beginning of  Period** | ** ** | **Charged to  Expense (a)** | ** ** | **Stargames  Acquisition** | ** ** | **Deductions/  Other** | ** ** | **Balance at End  of Period** | ** ** |
| Allowance for bad debts (Accounts  receivable):                                  |       |                          |       |                                  |       |                       |       |                   |       |   |   |
| 2007                                                                             |       | $                             | 1,422      |                                  | $          | 36                         |       | $                      | —     |   | $ | 982 |   | $ | 476 |   |
| 2006                                                                             |       | $                             | 283        |                                  | $          | (777                       | )          | $                      | 1,907      |   | $ | (9 | ) | $ | 1,422 |   |
| 2005                                                                             |       | $                             | 740        |                                  | $          | (165                       | )          | $                      | —     |   | $ | 292 |   | $ | 283 |   |
| Allowance for bad debts (Investment in  sales-type leases and notes receivable): |       |                          |       |                                  |       |                       |       |                   |       |   |   |
| 2007                                                                             |       | $                             | 681        |                                  | $          | (443                       | )          | $                      | —     |   | $ | 2 |   | $ | 236 |   |
| 2006                                                                             |       | $                             | 631        |                                  | $          | 240                        |       | $                      | —     |   | $ | 190 |   | $ | 681 |   |
| 2005                                                                             |       | $                             | 491        |                                  | $          | 394                        |       | $                      | —     |   | $ | 254 |   | $ | 631 |   |

 

----

(a)   Forthe year ended October 31, 2006, favorable collections efforts, primarilyat Stargames, resulted in a credit of ($777) in the provision for bad debtsrelated to accounts receivable.

 

37

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**ITEM 9. CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM9A. CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

**Management’sAssessment of Internal Control over Financial Reporting**

 

We maintain disclosure controlsand procedures that are designed to provide reasonable assurance thatinformation required to be disclosed in our reports under the SecuritiesExchange Act of 1934 is recorded, processed, summarized, and reported within thetime period specified in the Securities and Exchange Commission’s rules andforms and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.

 

As required by Rule 13a-15(b) promulgatedunder the Exchange Act, our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the design andoperating effectiveness as of October 31, 2007 of our disclosure controlsand procedures, as defined in Rule 13a-15(e) promulgated under theExchange Act. This evaluation was performed using the Internal Control —Evaluation Framework developed by the Committee of Sponsoring Organizations ofthe Treadway Commission (“COSO”). Based on this evaluation our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of October 31, 2007. Therefore, we believethat the consolidated financial statements included in this Annual Report on Form 10-Kcorrectly present our financial condition, results of operations and cash flowsfor the periods covered thereby in all material respects.

 

***Changes in Internal Control over FinancialReporting during the Quarter Ended October 31, 2007***

 

During the fiscal year ended October 31,2007, management designed and implemented remediation steps over certainmaterial weaknesses reported in our Annual Report on Form 10-K/A dated April 23,2007, as described below. These remediation steps were developed followinginvestigation and review of the processes and activities surrounding thematerial weaknesses and include changes to these processes to prevent or detectsimilar future occurrences.

 

***Material Weaknesses in Internal Control overFinancial Reporting Previously Reported***

 

·      Inadequateinternal controls over the evaluation and review of non-routine transactionsinvolving judgments and estimates to determine that such transactions arerecorded in accordance with generally accepted accounting principles. Thisweakness in operating effectiveness of internal controls resulted inadjustments to revenue recognized, and the impairment write-down of an equitymethod investment. The deficiencies were concluded to be a material weaknessbased on the significance of the potential misstatement of the annual andinterim financial statements and the significance of the controls overnon-routine transactions and revenue recognition to the preparation of reliablefinancial statements.

 

·      Inadequateresources in our accounting and finance departments. This condition led toinadequate internal controls over the reconciliation and analysis of theinter-company inventory accounts. The control over the elimination ofinter-company profit was not designed to provide reasonable assurance of thecompleteness of the inventory subject to elimination. Additionally, analyticalreview procedures did not operate effectively in identifying the error in atimely manner. Certain checklists to ensure the completeness and accuracy ofthe inter-company elimination process did not exist. This weakness in thedesign and operating effectiveness of internal controls resulted in arestatement of our consolidated financial statements for the fiscal year ended October 31,2006. This material weakness was identified in conjunction with the preparationof our quarterly financial statements for the quarter ended January 31,2007. The identification of this material weakness and related inadvertenterror resulted in a restatement and amendment of our annual report on Form 10-K/Afor the fiscal year ended October 31, 2006, which was filed on April 23,2007.

 

During the fiscal year ended October 31,2007 we have completed certain remediation initiatives including:

 

38

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**Remediationof Material Weakness Relating to Evaluation and Review of Non-routineTransactions involving Judgments and Estimates and Non-Standard RevenueRecognition**

 

·      Establishedprocedures related to the evaluation of non-routine events and transactions toensure appropriate communication of these events and transactions to thesubsidiary and corporate accounting and finance departments through executivemeetings, accounting staff meetings and close meetings. Established a processto review newly implemented controls relating to non-routine events andtransactions.

 

·      Implementedand documented additional accounting policies and key assumptions for theassessment of transactions and events involving judgments and estimates.

 

·      Enhancedcurrent policies, practices and controls related to revenue recognition.

 

·      Recurringtraining sessions focused on awareness of revenue recognition concepts withemphasis on non-standard contracts have been performed at the corporate officeand foreign subsidiaries.

 

·      Increasedthe depth and breadth of sub-certifiers throughout the organization, includingforeign subsidiaries, particularly relating to the disclosure of non-standardcontracts.

 

·      Reorganizedthe Las Vegas based Shuffle Master accounting and finance departments into twodistinct departments as part of some broader organizational changes of ourglobal headquarters in Las Vegas. Additional positions and/or changes inresponsibilities were created within the newly defined accounting and financedepartments that provide additional levels of analysis and review ofnon-routine transactions, appropriate application of generally acceptedaccounting principles and proper determination of significant estimates andjudgments. All positions were filled at fiscal year end by permanent employeesor qualified temporary consultants.

 

As of October 31, 2007, weare able to conclude that the controls related to the evaluation and review ofnon-routine transactions involving estimates and judgments were operatingeffectively and that we have remediated this material weakness.

 

**Remediationof Material Weakness Relating to Staffing and the Identification and ProperElimination of Inter-company Inventory Transactions**

 

·      Establishedthe transfer pricing process by creating detailed procedures for the costaccounting role to ensure identification and appropriate elimination ofinter-company inventory transactions. Further, management established a processto review these newly implemented procedures relating to the elimination ofinter-company inventory.

 

·      Providedadditional and on-going training to our finance and accounting staff (includingour foreign subsidiaries) on the application of technical accounting pronouncements,policies and procedures, especially in the area of transfer pricing andinter-company inventory transactions.

 

·      Reorganizedthe Las Vegas based Shuffle Master accounting and finance departments into twodistinct departments as part of some broader organizational changes of ourglobal headquarters in Las Vegas. Additional positions and/or changes inresponsibilities were created within the newly defined accounting and financedepartments that provide additional levels of analysis and review of non-routinetransactions, appropriate application of generally accepted accountingprinciples and proper determination of significant estimates and judgments. Allpositions were filled at fiscal year end by permanent employees or qualifiedtemporary consultants.

 

As of October 31, 2007, weare able to conclude that the controls related to the identification and properelimination of intercompany inventory transactions were operating effectively,that adequate resources had been retained in the finance and accountingdepartment and that we have remediated this material weakness.

 

39

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Shareholders of

 Shuffle Master, Inc.

 Las Vegas, Nevada

 

Wehave audited the internal control over financial reporting of Shuffle Master, Inc.subsidiaries (the “Company”) as of October 31, 2007, based on criteriaestablished in*Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed by,or under the supervision of, the company’s principal executive and principalfinancial officers, or persons performing similar functions, and effected bythe company’s board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof the inherent limitations of internal control over financial reporting,including the possibility of collusion or improper management override ofcontrols, material misstatements due to error or fraud may not be prevented ordetected on a timely basis. Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

Inour opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of October 31, 2007, based onthe criteria established in*InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States) the consolidated financialstatements and financial statement schedule as of and for the year ended October 31,2007 of the Company and our report dated January 18, 2008 expressed an unqualifiedopinion on those financial statements and financial statement schedule andincludes an explanatory paragraph relating to the adoption of Statement ofFinancial Accounting Standards No. 123(R), *Share-BasedPayment* on November 1, 2005.

 

 

 Las Vegas, Nevada

 January 18, 2008

 

40

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**ITEM 9B. OTHER INFORMATION**

 

None.

 

41

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**PART IV**

 

**ITEM 15. EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

 
| (a)    | 1.       | Financial Statements                                                                                                                                                                                                                                                                                                                                                            |
|--------|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |     | See index to consolidated financial statements included as  Item 8 to this Annual Report.                                                                                                                                                                                                                                                                                  |
|   | 2.       | Financial Statement Schedules                                                                                                                                                                                                                                                                                                                                                   |
|   |     | See Item 8 to this Annual Report for applicable financial  statement schedules.                                                                                                                                                                                                                                                                                            |
|   | 3.       | Management Contracts, Compensatory Plans and Arrangements                                                                                                                                                                                                                                                                                                                       |
|   |     | Management contracts, compensatory plans and arrangements are listed  as exhibits 10.1 through 10.24 included in Item 15(b) of this  Annual Report.                                                                                                                                                                                                                   |
|   |     |                                                                                                                                                                                                                                                                                                                                                                            |
| (b)    | Exhibits |
|   |     |
|   | 3.1      | Articles of Incorporation of Shuffle Master, Inc. as amended July 15,  1992 (Incorporated by reference to exhibit 3.2 in our Annual Report on  Form 10-K for the year ended October 31, 1995).                                                                                                                                                         |
|   | 3.2      | Articles of Amendment to Articles of Incorporation of Shuffle  Master, Inc., effective January 14, 2005 (incorporated by reference  to exhibit 3.2 to our Annual Report on Form 10-K, filed  January 13, 2005).                                                                                                                                        |
|   | 3.3      | Articles of Correction of Articles of Amendment of Articles of  Incorporation of Shuffle Master, Inc., effective March 15, 2005  (incorporated by reference to exhibit 3.1 to our Current Report on  Form 8-K, filed March 18, 2005).                                                                                                                  |
|   | 3.4      | Bylaws of Shuffle Master, Inc., as amended and restated  (Incorporated by reference to exhibit 3.2 in our Quarterly Report on  Form 10-Q for the quarter ended July 31, 2002).                                                                                                                                                                              |
|   | 3.5      | Amendment to Shuffle Master’s Corporate Bylaws, as adopted by our  board of directors on January 11, 2005 (incorporated by reference to  exhibit 3.4 to our Annual Report on Form 10-K, filed  January 13, 2005).                                                                                                                                      |
|   | 4.1      | Shareholder Rights Plan dated June 26, 1998 (Incorporated by  reference to our Current Report on Form 8-K dated June 26, 1998).                                                                                                                                                                                                                                  |
|   | 4.2      | Amendment No. 1 to Rights Agreement dated January 25, 2005  (Incorporated by reference to our Current Report on Form 8-K dated  February 10, 2005).                                                                                                                                                                                                         |
|   | 4.3      | Registration Rights Agreement dated May 13, 2004, by and between  Casinos Austria AG on the one hand and Shuffle Master, Inc. on the other  hand (Incorporated by reference to exhibit 10.2 in our Quarterly Report  on Form 10-Q for the quarter ended April 30, 2004).                                                                               |
|   | 4.4      | Agreement and Guaranty dated May 12, 2004, by and between  Casinos Austria AG and Cai Casinoinvest Middle East GMBH on  the one hand and Shuffle Master, Inc. on the other hand (Incorporated by  reference to exhibit 10.3 in our Quarterly Report on Form 10-Q for  the quarter ended April 30, 2004).                                |
|   | 4.5      | Purchase Agreement, dated April 15, 2004, among Shuffle  Master, Inc. and Deutsche Bank Securities, Inc. relating to the  1.25% Contingent Convertible Senior Notes due 2024 (Incorporated by reference  to exhibit 10.4 in our Quarterly Report on Form 10-Q for the  quarter ended April 30, 2004).                                             |
|   | 4.6      | Registration Rights Agreement dated April 21, 2004, among  Shuffle Master, Inc. and Deutsche Bank Securities, Inc. and  Goldman, Sachs & Co relating to the 1.25% Contingent Convertible  Senior Notes due 2024 (Incorporated by reference to exhibit 10.5 in our  Quarterly Report on Form 10-Q for the quarter ended April 30,  2004). |
|   | 4.7      | Indenture, dated as of April 21, 2004, between Shuffle  Master, Inc. and Wells Fargo Bank, N. A. relating to the 1.25%  Contingent Convertible Senior Notes due 2024 (Incorporated by reference to  exhibit 10.6 in our Quarterly Report on Form 10-Q for the quarter  ended April 30, 2004).                                                     |
|   | 10.1     | Shuffle Master, Inc. 2002 Stock Option Plan (Incorporated by  reference to Exhibit B in our Proxy Statement dated February 11,  2002).                                                                                                                                                                                                                           |
|        |          |                                                                                                                                                                                                                                                                                                                                                                                 |  |

 

42

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|   | 10.2  | Amendment to the Shuffle Master, Inc. 2002 Stock Option Plan  (Incorporated by reference to exhibit 10.33 in our Quarterly Report on  Form 10-Q for the quarter ended April 30, 2002).                                                                                                                                                                                                                                              |
|--------|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.3  | Shuffle Master, Inc. Restated Outside Directors’ Option Plan  dated January 24, 2002 (Incorporated by reference to exhibit 10.32  in our Annual Report on Form 10-K for the year ended October 31,  2001).                                                                                                                                                                                                                |
|   | 10.4  | Shuffle Master, Inc. 2004 Equity Incentive Plan (Incorporated by  reference to our Proxy Statement dated February 23, 2004).                                                                                                                                                                                                                                                                                                                  |
|   | 10.5  | Shuffle Master, Inc. 2004 Equity Incentive Plan for Non-Employee  Directors (Incorporated by reference to our Proxy Statement dated February 23,  2004).                                                                                                                                                                                                                                                                                      |
|   | 10.6  | Employment Agreement, by and between Shuffle Master, Inc. and  Mark Yoseloff, dated February 23, 2004 (Incorporated by reference  to exhibit 10.1 in our Quarterly Report on Form 10-Q for the  quarter ended January 31, 2004).                                                                                                                                                                                          |
|   | 10.7  | Covenant Not to Compete by and between Shuffle Master, Inc. and  Mark L. Yoseloff, dated February 23, 2004 (Incorporated by  reference to exhibit 10.2 in our Quarterly Report on Form 10-Q for  the quarter ended January 31, 2004).                                                                                                                                                                                     |
|   | 10.8  | First amendment to Employment Agreement, by and between Shuffle  Master, Inc. and Mark L. Yoseloff (Incorporated by reference to  exhibit 10.1 in our Current Report on Form 8-K, filed June 8,  2007).                                                                                                                                                                                                                        |
|   | 10.9  | Employment Agreement, by and between Shuffle Master, Inc. and  Brooke Dunn, dated January 9, 2006 (Incorporated by reference to  exhibit 10.5 in our Annual Report on Form 10-K for the year ended  October 31, 2005).                                                                                                                                                                                                         |
|   | 10.10 | Employment Agreement by and between Shuffle Master, Inc. and  Paul Meyer dated October 31, 2005 (Incorporated by reference to  exhibit 10.1 in our Current Report on Form 8-K, filed on  November 4, 2005).                                                                                                                                                                                                                    |
|   | 10.11 | Patent Purchase Agreement by and between International Game  Technology and Shuffle Master, Inc. dated June 13, 2005 (request  for confidential treatment filed with SEC) (Incorporated by reference to  exhibit 10.1 of our Quarterly Report on Form 10-K, filed  September 9, 2005).                                                                                                                                         |
|   | 10.12 | Product Development and Integration Agreement by and among Shuffle  Master, Inc., Progressive Gaming International Corporation and International  Game Technology dated June 13, 2005 (request for confidential treatment  filed with SEC) (Incorporated by reference to exhibit 10.2 of our  Quarterly Report filed September 6, 2006 (confidential Treatment  requested under 17 C. F. R. Section 240.24b-2). |
|   | 10.13 | Distributorship Agreement by and between Machines Games  Automatics, S.A. and Shuffle Master GMBH & CO KG dated  May 17, 2005 (request for confidential treatment filed with SEC) (filed  as exhibit 10.1 to our Current Report on Form 8-K, filed  September 16, 2005)                                                                                                                                          |
|   | 10.14 | Call Option Deed by and between Shuffle Master, Inc. and  CVC Limited dated November 15, 2005 (Incorporated by reference to  exhibit 10.1 of our Current Report on Form 8-K, filed  November 15, 2005).                                                                                                                                                                                                                   |
|   | 10.15 | Call Option Deed by and between Shuffle Master, Inc. and  CVC Communication and Technology Pty Ltd. dated November 15,  2005 (Incorporated by reference to exhibit 10.2 of our Current Report on  Form 8-K, filed November 15, 2005).                                                                                                                                                                                |
|   | 10.16 | Pre-Bid Agreement between Shuffle Master, Inc. and Stargames  Corporation Pty Limited dated November 15, 2005 (Incorporated by  reference to exhibit 10.3 of our Current Report on Form 8-K, filed  November 15, 2005).                                                                                                                                                                                                   |
|   | 10.17 | Shuffle Master Australasia Pty Ltd’s Bidder Statement, along  with Stargames’ Target Statement, each dated November 15, 2005  (Incorporated by reference to exhibit 10.4 of our Current Report on  Form 8-K, filed November 15, 2005).                                                                                                                                                                               |
|   | 10.18 | Patent Licensing Agreement between Shuffle Master, Inc. and  Progressive Gaming International Corporation dated September 29, 2006  (Request for Confidential Treatment filed with SEC).                                                                                                                                                                                                                                                      |

 

43

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|   | 10.19 | Credit Agreement, dated November 30, 2006, among Shuffle  Master, Inc., Deutsche Bank Trust Company Americas, Deutsche Bank,  Deutsche Bank Securities, Inc. and Wells Fargo Bank, N.A.  (Incorporated by reference to exhibit 10.1 of our Current Report on  Form 8-K, filed December 6, 2006).                                |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.20 | Amendment No. 1, dated April 5, 2007 to the Credit  Agreement, dated as of November 30, 2006, among Shuffle  Master, Inc., Deutsche Bank Trust Company Americas, as Administrative  Agent and the lenders party thereto (Incorporated by reference to  exhibit 10.1 in our Current Report on Form 8-K, filed April 6,  2007).   |
|   | 10.21 | Security Agreement, dated November 30, 2006, between Shuffle  Master, Inc. and the guarantors party thereto in favor of Deutche Bank  Trust Company Americas (Incorporated by reference to exhibit 10.2 of our  Current Report on Form 8-K, filed December 6, 2006).                                                                      |
|   | 10.22 | Purchase Agreement by and among shuffle Master, Inc., on the one  hand, and Progressive Gaming International and Progressive Games, Inc.  on the other hand, dated September 26, 2007 (Incorporated by reference  to exhibit 10.1 (a) in our Current Report on form 8-K, filed  September 28, 2007).                            |
|   | 10.23 | Amended and Restated License Agreement by and among Shuffle  Master, Inc., on the one hand, and Progressive Gaming International on  the other hand, dated September 26, 2007 (Incorporated by reference to  exhibit 10.1 (b) in our Current Report on Form 8-K, filed  September 28, 2007).                                         |
|   | 10.24 | Software Distribution License Agreement by and among Shuffle  Master, Inc. and its affiliates, on the one hand, and Progressive Gaming  International Corporation and its affiliates, on the other hand, dated  September 26, 2007 (Incorporated by reference to exhibit 10.1 in  our Current Report on form 8-K, filed October 2, 2007). |
|   | 10.25 | First amendment to Employment Agreement, by and between Shuffle  Master, Inc. and Brooke Dunn (Incorporated by reference to  exhibit 10.1 in our Current Report on Form 8-K, filed  January 11, 2008).                                                                                                                                         |
|   | 21    | Subsidiaries of Registrant                                                                                                                                                                                                                                                                                                                                         |
|   | 23    | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                           |
|   | 31.1  | Certification of Chief Executive Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                          |
|   | 31.2  | Certification of Chief Financial Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                          |
|   | 32.1* | Certification of Chief Executive Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                          |
|   | 32.2* | Certification of Chief Financial Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                          |

 

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| * |   | Exhibits 32.1 and 32.2 are furnished to accompany this report on  Form 10-K but shall not be deemed “filed” for the purposes of  Section 18 of the Securities Exchange Act of 1934 or otherwise and shall  not be deemed incorporated by reference into any registration statements  filed under the Securities Act of 1933. |
|---|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                     | SHUFFLE MASTER, INC. |
|--------------------------|----------------------|
|                     |                 |
| Dated: July 8, 2008 | By:                  | /s/ MARK L. YOSELOFF |
|                     |                 | Chairman and Chief Executive Officer |

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated:

 
| **Signature**          | ** ** | **Title**                                                         | ** ** | **Date**           | ** ** |
|------------------------|------------|-------------------------------------------------------------------|------------|--------------------|------------|
|                   |       |                                                              |       |               |       |
| /s/ MARK L. YOSELOFF   |       | Chairman and Chief Executive Officer                              |       | July 8,  2008 |       |
| Mark L. Yoseloff       |       | (Principal Executive Officer)                                     |       |               |       |
|                   |       |                                                              |       |               |       |
| /s/ PAUL C. MEYER      |       | President and Chief Operating Officer                             |       | July 8,  2008 |       |
| Paul C. Meyer          |       |                                                              |       |               |       |
|                   |       |                                                              |       |               |       |
| /s/ COREEN SAWDON      |       | Senior Vice President, Chief Accounting  Officer and Acting Chief |       | July 8,  2008 |       |
| Coreen Sawdon          |       | Financial Officer (Principal Accounting  Officer)                 |       |               |       |
|                   |       |                                                              |       |               |       |
| /s/ LOUIS CASTLE       |       | Director                                                          |       | July 8,  2008 |       |
| Louis Castle           |       |                                                              |       |               |       |
|                   |       |                                                              |       |               |       |
| /s/ PHILLIP C. PECKMAN |       | Director                                                          |       | July 8,  2008 |       |
| Phillip C. Peckman     |       |                                                              |       |               |       |
|                   |       |                                                              |       |               |       |
| /s/ GARRY W. SAUNDERS  |       | Director                                                          |       | July 8,  2008 |       |
| Garry W. Saunders      |       |                                                              |       |               |       |

 

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