SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark one)

    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
 X  of 1934 for the fiscal year ended October 31, 1997, or
---

    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934
---

                          COMMISSION FILE NO. (0-20820)

                        --------------------------------

                              SHUFFLE MASTER, INC.
             (Exact name of registrant as specified in its charter)

                     MINNESOTA                          41-1448495
          (State or other jurisdiction of            (I.R.S. Employer
          incorporation or organization)            Identification No.)

              10901 VALLEY VIEW ROAD
              EDEN PRAIRIE, MINNESOTA                      55344
     (Address of principal executive offices)           (Zip Code)

                                  612-943-1951
              (Registrant's telephone number, including area code)

                        --------------------------------

        Securities registered pursuant to Section 12 (b) of the Act: None
          Securities registered pursuant to Section 12 (g) of the Act:
                     Common Stock, par value $.01 per share

                        --------------------------------


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

                                Yes __X__ No ____

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _____

         As of January 13, 1998, 9,974,651 shares of Common Stock of the
registrant were outstanding. The aggregate market value of Common Stock
beneficially owned by non-affiliates on that date was $68,025,000, based upon
the last reported sale price of the Common Stock at that date by the Nasdaq
National Market System.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Part III of this Annual Report on Form 10-K incorporates by reference
information from the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held March 19, 1998 (1997 Proxy Statement).

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

FORWARD LOOKING STATEMENTS

      This report contains forward-looking statements that reflect risks and
uncertainties that could cause actual results to differ materially from
expectations.

      Factors that could cause actual results to differ materially from
expectations include, but are not limited to, the following: changes in the
level of acceptance of the Company's existing products; competitive advances;
acceleration and/or deceleration of various product development and roll out
schedules; consumer and industry acceptance of the Company's products in new
jurisdictions and new products as introduced; higher than expected product
development and/or roll out costs; current and/or unanticipated future
litigation; general economic conditions; regulatory and jurisdictional issues
involving Shuffle Master, Inc. specifically, and for the gaming industry in
general; the relative financial health of the gaming industry both nationally
and internationally; and the risks and factors described from time to time in
the Company's reports filed with the Securities and Exchange Commission.

GENERAL

      Shuffle Master, Inc. (the "Company") was incorporated in 1983. The Company
develops, manufactures and markets automatic card shuffling equipment (shuffler
systems), table games and video slot machine games for use in the gaming
industry. The Company's growth strategy is based on developing or acquiring
innovative gaming products, including productivity enhancing equipment and new
table and video games.

      Casino gaming is found in 28 states in the United States (including states
in which such gaming is found only on Indian lands, card rooms or off-shore
cruises) as well as in numerous countries worldwide. The Company estimates there
are card games at approximately 11,000 tables in North America, and at more than
8,000 additional tables worldwide.

      The Company develops and markets shuffler systems suitable for use with
the vast majority of table card games. The initial model in the Company's
shuffler product line was first placed in casinos in January 1992. As of October
31, 1997, approximately 3,600 of the Company's shuffler systems have been placed
in casinos or other legal gaming establishments, including 1,600 currently on
lease and a total of 2,000 units sold.

      The Company also develops and markets table games and licenses these
products to casinos. Current revenue generating table games include Let It
Ride(R) (basic version), Let It Ride The Tournament(TM), and Let It Ride
Bonus(TM) games. The Let It Ride(R) basic game was introduced in October 1993,
and the Tournament version was launched in May 1995. In August and September of
1997, the Company converted substantially all of its Tournament tables into a
newly created Bonus version of the game. As of October 31, 1997, there were
approximately 325 Let It Ride(R) basic game tables and approximately 220 Let It
Ride Bonus(TM) tables installed in casinos.

      In addition to shuffler systems and table card games, the Company also
develops and markets video slot machine games. As of October 31, 1997, the
Company actively marketed Let It Ride Bonus Video(TM) and Five Deck Frenzy(TM)
as video slot machine game products. During fiscal 1997, a number of significant
events occurred related to the Company's development of its video game business:

      * In March 1997, the Company acquired directly, or by license, rights to a
library of video game products, concepts and methods from two companies
controlled by Dr. Mark Yoseloff. The games are intended primarily for use in
video slot machines, although some games may also have application in reel slot
machines. Included in the acquisition was a new variation of video draw poker
called Five Deck Frenzy(TM).

      * In May 1997, after receiving approval from the Nevada Gaming Control
Board, the Company began a market test of Five Deck Frenzy(TM) in Nevada under a
joint marketing agreement with IGT. Five Deck Frenzy(TM) is marketed in a
wide-area progressive format and is approved for the Nevada market only. The
Company is now in the process of placing Five Deck Frenzy(TM) units into Nevada
casinos. As of October 31, 1997, there were 54 Five Deck Frenzy(TM) machines
operating in casinos. Installed machines increased to 145 by January 1998.

      * In September 1997, the Company entered into a second joint marketing
alliance with IGT for the development and marketing of stand-alone video slot
versions of certain of the Company's games. The agreement provides for the

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Company to market its game software directly to casino customers in a format
that is compatible with most IGT video machines currently installed in North
American casinos.

THE COMPANY'S PRODUCTS

      SHUFFLER SYSTEMS. The Company's shuffler systems, marketed under the
trademark Shuffle Master Gaming(TM), are automatic card shuffling machines
designed to be used with table card games in casinos and other legal gaming
establishments. These systems, developed by the Company, offer several benefits
to the Company's casino customers, including enhanced security and increased
productivity. Opportunity for dealer card manipulation is significantly reduced,
resulting in increased security. Because the shuffler systems shuffle one or
more decks while a game is played, down time related to dealer shuffling is also
significantly reduced, with a corresponding increase in playing time and "win"
for the casino.

      The Company markets two types of shuffler systems:

      * SINGLE DECK. The Company's single deck shufflers automatically shuffle a
standard deck of playing cards and deposit the deck into a holding tray that is
integrated into the shuffler unit. A second deck is shuffled while a game is
dealt from the first deck. When the game is completed and the first deck has
been used, the second deck is automatically moved into the holding tray to
replace it.

      Variations of the single deck shuffler include a model designed for hand
held dealing, and a model which, after shuffling, counts out cards to be
distributed by the dealer while another deck is being shuffled. The latter model
is the most widely placed and is used with well known specialty card games
including the Company's own Let It Ride(R) game as well as other non-Shuffle
Master games such as Caribbean Stud(R) Poker and Pai Gow Poker. Many specialty
games offer the possibility of large payouts to players. Since the Company's
single deck machines shuffle a "fresh" deck just prior to each hand, the
security of these games is enhanced by reducing the opportunity for dealer card
manipulation.

      * MULTI-DECK. The Company's multi-deck system shuffles two to eight decks
of cards in a batch, primarily for Blackjack table games. Although a different
design than single deck systems, the multi-deck shuffler also shuffles a second
set of cards while the first set is played. The majority of Blackjack games are
played with multiple decks of cards. In addition, certain jurisdictions require
that Blackjack be played with four or more decks. The Company estimates that
Blackjack tables represent at least 80% of casino card tables, excluding poker
rooms.

      TABLE GAMES. The Company first offered table games as a product
complementary to its shuffler line. Table games accounted for approximately 26%
of the Company's revenue in fiscal 1997. The Company markets the following table
games to casinos:

      * LET IT RIDE(R). The Let It Ride(R) table game is a patented five card
stud poker game in which players are paid according to a fixed payout schedule.
Players place three equal bets and are dealt three cards face down. Two
community cards are also dealt face down in front of the dealer. After looking
at their cards, players have the option to withdraw their first bet. The dealer
then turns over one of the community cards, which becomes a common fourth card
to all players at the table, and the players each have the opportunity to
withdraw their second bet (the third bet always remains on the table, and cannot
be withdrawn). The dealer then turns over the second community card, which
becomes a common fifth and final card to all players, and winning hands are paid
according to the predetermined payout schedule.

      The basic Let It Ride(R) game was approved by the Nevada Gaming Control
Board in August 1993, and the Company began licensing it to casinos in October
1993. As of October 31, 1997, the basic Let It Ride(R) table game was approved
for play in 29 U.S. gaming jurisdictions in 21 states, 7 Canadian provinces and
11 other foreign countries.

      * LET IT RIDE BONUS(TM). The Let It Ride Bonus(TM) game was introduced in
fiscal year 1997 and provides a format that adds a bonus paytable to the basic
Let it Ride(R) table game. It is played in the same manner as the basic game
except that the player has an option to make a $1 side wager, also known as the
bonus bet. The bonus bet qualifies the player to be eligible to receive large
bonus payouts in addition to the underlying payouts of the basic game.

      The bonus format was developed in response to evidence that the Let It
Ride The Tournament(TM) game (described below) was experiencing declines in
popularity due to the price of the game to casinos and to lower than adequate
returns to players. With the Bonus format, the price to the casinos was reduced
and offered as a fixed monthly amount. In addition, more liberal paytables for
the side wager were designed. Statistics gathered following the conversion of
Tournament tables in August and September indicated that player participation in
the side bet increased from the low 50% range to over 70%, providing a clear
indication of player acceptance of the new paytables.

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      In addition, without the security requirements of the Tournament format,
regulatory review and approval of the Bonus format has proven to be more rapid,
allowing the Bonus version of Let It Ride(R) to quickly expand beyond
jurisdictional approvals for the Tournament (Nevada, Mississippi, Connecticut
and Missouri).

      As of October 31, 1997, the Let It Ride Bonus(TM) game was approved for
use in 19 U.S. gaming jurisdictions in 15 states, including all major gaming
markets, two Canadian provinces, and three other foreign countries. Approvals
are pending in three additional U.S. jurisdictions, four Canadian provinces and
four foreign countries.

      * LET IT RIDE THE TOURNAMENT(TM). In the Let It Ride The Tournament(TM)
version, players are eligible for both bonus payments and the opportunity to
advance to a multi-round playoff. Formerly offered on a jurisdiction-wide basis
in Nevada and Mississippi, the Tournament is now offered only as requested by
casino customers, primarily large single casino installations in Native American
jurisdictions.

      As of the end of fiscal year 1997, all of the Company's table game
products are offered to casinos for a fixed monthly fee. Prior to September
1997, Let It Ride The Tournament(TM) was billed to each casino on the basis of a
fixed percentage of the $1 side bets wagered by players in that casino.

      The Company is involved in patent litigation regarding its Let It Ride The
Tournament(TM)and Let It Ride Bonus(TM)table games. See Item 3. - Legal
Proceedings.

      VIDEO GAMES. The Company develops and markets video games on its own and
through agreements with third parties. Actively marketed products include Let It
Ride Bonus Video(TM) and Five Deck Frenzy(TM). The Company is developing
additional products for future commercialization. The Company is not involved in
the manufacture of video gaming machines or other types of slot machines.

      * LET IT RIDE BONUS VIDEO(TM). In 1995, the Company entered into an
agreement with Bally Gaming International, Inc. ("Bally"), now Alliance Gaming
Corporation, to develop and manufacture a video bonus version of the Let It
Ride(R) game for use on single game machines manufactured by Bally. The Company
markets Let It Ride Bonus Video(TM) directly to casinos, usually for a fixed
monthly fee. As of October 31, 1997, there were 124 Let It Ride Bonus Video(TM)
machines installed in casinos.

      * FIVE DECK FRENZY(TM). Five Deck Frenzy(TM) is a variation of video draw
poker that deals cards in each of the five card positions on the screen from a
separate and independent deck. The possibility of suited hands not available in
single deck video poker, such as a suited three of a kind, allows a greater
variety of winning poker hands and greater frequency of middle pay hands. The
game is currently offered in a wide-area progressive format. The Company, along
with IGT, its partner in the project, is now in the process of rolling out Five
Deck Frenzy(TM) into Nevada casinos. As of October 31, 1997, there were 54 Five
Deck Frenzy(TM) units operating in casinos.

SIGNIFICANT PRODUCT RELATED DEVELOPMENTS:

      * JOINT MARKETING ALLIANCE WITH IGT. In August 1996, the Company entered
into an agreement with IGT forming a joint marketing alliance to develop and
market the Let It Ride(R) game in a wide-area progressive video format. IGT was
to market and operate the resulting Let It Ride(R) video progressive systems in
North America, with profits from the alliance split equally. In September 1996,
the Company and IGT modified their agreement to add Five Deck Frenzy(TM), also
to be developed and marketed in a wide-area progressive video format.
Subsequently, the Company and IGT concluded that Five Deck Frenzy(TM) would be
the lead product for the marketing alliance and that a wide-area progressive
version of Let It Ride(R) would not be developed in the immediate future.

      * ACQUISITION OF GAMES LIBRARY. In March 1997, the Company entered into an
agreement with Dr. Mark Yoseloff and two corporations owned by him, to acquire
or exclusively license certain video game concepts, products, methods and rights
developed by Dr. Yoseloff. Five Deck Frenzy(TM) was among the games acquired.
Over 20 additional games were acquired, comprising multiple game families, along
with game related mathematical algorithms. Dr. Yoseloff also entered into a five
year employment agreement with the Company beginning August 1, 1997.

      * SECOND JOINT MARKETING ALLIANCE WITH IGT. In September 1997, the Company
entered into a second joint game development and marketing agreement with IGT.
This agreement allows certain of the Company's games to be programmed for
operation on IGT video machine platforms, including IGT's most widely installed
machine, the Player's Edge Plus(R). The agreement provides for IGT and the
Company to share profits equally on revenues from games licensed to casinos for

<PAGE>


use on previously installed machines (referred to as retrofit machines), and for
the Company to receive 100% of profits on revenues from casinos that license and
activate Shuffle Master games supplied with new IGT machines.

CUSTOMERS AND MARKETING

      The Company created the market for shuffler systems with the introduction
of its innovative product line in 1992, focusing its early marketing efforts on
Las Vegas and Reno, Nevada casinos. Today the Company's shuffler products are
broadly placed in casinos throughout North America, with increasing presence
internationally. As of October 31, 1997, the Company had placed its shuffler
systems, Let It Ride(R) games or other products in approximately 400 casinos
throughout the world.

      The Company leases and sells its shuffler systems to casinos and other
lawful gaming establishments. As part of its strategy to maintain and expand its
market position in the automatic shuffler business, the Company has made a
commitment to maintaining a high level of service to its customers. For casinos
within the Company's service areas, the Company provides regular
preventive maintenance service and on-demand repair service on its leased
equipment. The Company also provides service training to its lease customers'
personnel as well as a reasonable number of back-up units to the lessee. For
customers who purchase shuffler systems, the Company offers a service contract
that provides service benefits similar to that on leased units. Outside of
North, Central and South America the Company markets its products primarily
through established gaming supply distributors.

      The Let It Ride(R) table game was introduced to the gaming market in
Nevada in 1993, and has become an established specialty game due to its broad
appeal to players who have limited card playing experience. In North America the
Company markets the different versions of the game directly to casino operators.
In selected international jurisdictions the Company markets the basic version of
the game through distributors. As of October 31, 1997, the Let It Ride(R) basic
game was installed in approximately 160 casinos and the Let It Ride Bonus(TM)
game was installed in approximately 110 casinos.

      Five Deck Frenzy(TM) units are marketed to casino customers in Nevada as
part of a dedicated wide-area progressive system. The game is offered jointly by
the Company and IGT, with Shuffle Master handling sales and marketing and IGT
responsible for installations and progressive system operation. Games are
generally installed in casinos by retrofitting previously installed machines at
no cost to the casino. In some instances, new or used machines may be provided
instead of a retrofit installation. As of October 31, 1997, Five Deck Frenzy(TM)
was installed in seven casinos.

      In order to market its products, the Company is subject to licensing
requirements, and must obtain approvals of specific products. The Company
intends to apply for future approvals or clearances where it believes sufficient
demand for products exists. See additional discussion under "Regulation."

EXPORT SALES

      In fiscal 1997, 1996, and 1995, the Company had export shuffler sales and
shuffler lease revenue, primarily to Canada and Australia, which totaled 17%,
14%, and 23%, respectively, of total revenue.

PRODUCT SUPPLY OPERATIONS

      The Company's product supply operations consist primarily of the
procurement, assembly, warehousing and shipment of shuffler systems and Let It
Ride Bonus(TM) and Let It Ride Tournament(TM) tables, and associated parts and
equipment. Parts include off-the-shelf items as well as components manufactured
to the Company's specifications. The Company also manufactures some parts at its
in-house machine shop. Parts are used for product assembly as well as service
needs. Video product supply operations are limited to procuring video machines
for lease or sale as required for the business, and will include procuring and
stocking parts needed to retrofit casino-owned machines for new games software.
Retrofit parts are expected to include primarily computer chips, glass panels
with game graphics, and button panel components. The Company strives to ensure
that multiple suppliers exist for critical components, and periodically solicits
bids from various suppliers to ensure competitive pricing. Final assembly and
quality control operations are conducted by the Company's employees at its
facility in Eden Prairie, Minnesota for shufflers and at its facility in Las
Vegas, Nevada for game products.

RESEARCH AND DEVELOPMENT

      The Company believes that one of its strengths involves developing new
products from the concept stage through commercialization. This allows the
Company to develop and test not only its own products, but those of others as
well. The Company believes it has achieved a reputation for innovation and
service, based on its development and the market success of its shuffler and Let
It Ride(R) products. Because of this reputation, the Company is frequently
presented with gaming-related products and concepts from third parties, which
the Company screens, evaluates and, in some cases, negotiates to license or
acquire.

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      SHUFFLER PRODUCTS. The Company employs a staff of electrical, mechanical
and software engineers to improve and upgrade its existing products and to
develop new products. The engineering staff is uniquely experienced in card
shuffling requirements and solutions and, excluding the conceptual beginning of
the single deck shuffler, has been instrumental in the development of all the
Company's shuffler products. During fiscal 1997, substantial progress was made
in the development of a next generation of shuffler products. Resources will
continue to be allocated to these projects to support the Company's efforts to
maintain and enhance its market leader position.

      GAME PRODUCTS. In fiscal 1997, the Company established a game product
development group in its Las Vegas office. The Company's game development
efforts include work in market research, creative game design, game programming,
prototype development, and statistical paytable evaluation and design. With
significant emphasis on new game products, the Company expects to increase the
resources devoted to game development.

      Overall, the Company is committed to developing innovative products for
the gaming market, as well as continuously testing and upgrading its existing
products. The Company anticipates that research and development will continue to
account for a material portion of its total expenditures.

      Research and development expenses were approximately $1,692,000 in fiscal
1997, $1,250,000 in fiscal 1996 and $562,000 in fiscal 1995.

COMPETITION

      SHUFFLER SYSTEMS. Automatic card shufflers have been developed by several
other companies, and those companies are continually working to get regulatory
approval and commercial placement of their machines. However, the Company is not
aware of any competitive products which have achieved significant distribution
in North America. While the Company believes the barriers to entry in shuffler
products are substantial, it also assumes in its business planning efforts that
it will face competition. Consequently, the Company is investing in the
development of new shuffler technology.

      GAME PRODUCTS. Unlike shuffler systems, games such as Let It Ride(R) and
Five Deck Frenzy(TM), which the Company licenses to casinos, depend for their
success not only on casinos and other users deciding to use such products but
also on acceptance by the players. Player acceptance of a game often correlates
to the frequency and amount of money returned in a given time frame, as well as
the availability and appeal of the game compared to other games.

      Overall, the marketing of gaming devices and table games to the casino
industry is highly competitive. A number of the Company's video game competitors
and potential competitors have greater manufacturing and marketing capabilities
than the Company and have greater research, development, financial and personnel
resources than the Company.

PATENTS AND TRADEMARKS

      Since 1989, the Company has been awarded ten United States patents related
to its shuffler technology, the Let It Ride(R) basic table game and game
variations, and several video versions of Let It Ride(R). Most of these patents
have a life of 20 years from the date the patent application was filed. No
patent will expire before the year 2007. The Company also has been issued two
patents in South Africa. There are numerous U.S. and various foreign patent
applications pending. No assurance can be given that any such patents will be
issued, or that the patents currently held or new patents, if issued, will be
valid or will provide any significant competitive protection for the Company's
products.

      SHUFFLER SYSTEMS. The Company is not aware of any infringement of patents
or other intellectual property belonging to other manufacturers of automatic
card shufflers. In addition to patent protection, the Company relies upon trade
secret law to attempt to protect its rights to confidential information
regarding development of shuffler systems. However, no assurance can be given
that the Company will be successful in maintaining the confidentiality of
proprietary information. In the absence of valid patent or trade secret
protection, the Company would be vulnerable to competitors who could lawfully
attempt to copy the Company's products.

      LET IT RIDE THE TOURNAMENT(TM) AND LET IT RIDE BONUS(TM). The Company is
currently a party to litigation pending in Federal Court in Las Vegas, Nevada,
Jackson, Mississippi and Hartford, Connecticut in which it is alleged that the
Company's Let It Ride The Tournament(TM) and Let It Ride Bonus(TM) table games
infringe on certain patents owned by Progressive Games, Inc. See description of
legal proceedings at Item 3.

      TRADEMARKS. The Company has applied for and has obtained federal trademark
registrations of the SHUFFLE MASTER(R), LET IT RIDE(R), Fanned card design(R),
and LET IT RIDE THE TOURNAMENT and design(R) trademarks. U.S. federal trademark
applications are pending for the Company's SHUFFLE MASTER GAMING(TM), LET IT
RIDE BONUS(TM), FIVE DECK FRENZY(TM), VIDEO MAH JONG(TM), LET 'EM ROLL(TM) marks

<PAGE>


and for many other important trademarks. The Company has obtained national
registrations for LET IT RIDE(R) in Peru and Costa Rica, and has filed
applications for registration of its more important marks in a number of other
foreign countries.

EMPLOYEES

      As of December 31, 1997, the Company had 128 full-time and 4 part-time
employees. The Company is not subject to any collective bargaining agreement and
believes that its employee relations are good.

REGULATION

      OVERVIEW. The manufacture, sale, lease, license and distribution of the
Company's products require various licenses, permits and approvals, and the
Company is subject to laws and regulations by authorities in most jurisdictions
in which its products are used by persons or entities licensed to conduct gaming
activities. The gaming regulatory requirements vary from jurisdiction to
jurisdiction, and licensing, other approval or finding of suitability processes
with respect to the Company, its management personnel and its products can be
lengthy and expensive. Generally each product must also be reviewed and approved
by gaming authorities. The detail and extent of the review process depends upon
the classification of the product by the respective gaming authority as
associated equipment, gaming equipment or gaming device. In general, gaming
regulatory authorities may deny applications for licenses, other approvals or
findings of suitability for any cause they may deem reasonable.

      The Company is licensed as a manufacturer and distributor of gaming
devices, as a slot route operator and an operator of inter-casino linked systems
in Nevada. The Company is a gaming related casino service industry licensee in
New Jersey and holds supplier, manufacturer and/or distributor licenses in
numerous other jurisdictions throughout North America. The Company has never
been denied a license, permit or approval necessary to do business in any
jurisdiction. Although letters of approval for the current models of the
Company's shuffler systems and apparatus related to the Let It Ride Bonus(TM)
table game have been granted by gaming regulatory agencies, there can be no
assurance that the Company, its current or future products or its management
personnel will receive nor maintain any necessary gaming licenses, other
approvals or findings of suitability.

      SHUFFLER SYSTEMS. The Company has obtained approvals for its shuffler
systems in 35 jurisdictions in North America and has filed for approval of its
shuffler systems and related software in certain other jurisdictions. All of the
Company's card shuffler systems and related software are classified and approved
as associated equipment in Nevada, Mississippi and a number of other
jurisdictions and as gaming equipment in New Jersey, Missouri and most other
jurisdictions. Associated equipment is equipment that is not classified as a
gaming device or gaming equipment, but which has such an integral relationship
to the conduct of licensed gaming that regulatory authorities have discretion to
require manufacturers and distributors to meet licensing or suitability
requirements prior to or concurrent with the use of such equipment in the
respective jurisdiction. Gaming equipment is defined in New Jersey as "any
electronic, electrical, or mechanical contrivance or machine used in connection
with gaming or any game." Although the classification of the shuffler systems
vary among jurisdictions, each jurisdiction generally requires product approvals
and certain licenses or permits to be held by companies and their key personnel
in connection with the manufacture and distribution of such equipment.

      TABLE GAMES AND RELATED EQUIPMENT. The Company has developed the Let It
Ride(R) basic and the Let It Ride Bonus(TM) games. Let It Ride(R) the basic game
is approved in all major gaming markets in North America and numerous other
gaming jurisdictions. The Let It Ride Bonus(TM) table game, including the rules
of play and related equipment, is approved in 21 jurisdictions in North America
and the Company has filed for additional approvals in certain other
jurisdictions. Apparatus related to the Let It Ride Bonus(TM) table game is
regulated in Nevada, Mississippi and most other jurisdictions as associated
equipment. Similar approvals may be required before the Company's table games
and apparatus related to such table games can be marketed in other
jurisdictions. The Company limits conducting business to those jurisdictions
where it has secured required approvals for its products.

      VIDEO GAMES. Most, if not all, gaming authorities classify the Company's
video games as gaming devices. A gaming device is generally defined as a slot or
video machine or mechanical, electrical device the operation of which, upon
payment of consideration, entitles a person to receive something of value.
Although the regulations may vary somewhat for each jurisdiction in which the
Company distributes its video products, there are general approval, reporting,
and notice requirements common to all major gaming markets in North America.
Additionally, video games are classified as gambling devices under federal law.
The Company is registered pursuant to the Federal Gambling Devices Act of 1962
(the "Federal Act"). The Federal Act makes it unlawful, in general, for a person
or business entity to manufacture, deliver, receive, operate, lease or sell
gambling devices in interstate or foreign commerce unless that person or entity
has first registered with the Attorney General of the United States. A gambling
device is generally defined under the Federal Act as any "so-called slot machine
or mechanical device or machine, including certain essential parts." In order to
manufacture, sell, deliver or operate certain of its current and proposed
products, the Company must renew its federal registration annually. In addition,

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various record keeping and equipment identification requirements are imposed by
the Federal Act. Violation of the Federal Act may result in seizure and
forfeiture of the equipment, as well as other penalties.

      GENERAL REGULATION OF STOCKHOLDERS OF PUBLICLY-TRADED CORPORATIONS. In
most jurisdictions, any beneficial owner of the Company's Common Stock is
subject, on a discretionary basis, to being required to file applications with
gaming regulatory authorities, be investigated and be found suitable or
qualified as such. The gaming laws and regulations of most jurisdictions provide
that beneficial owners of more than 5% of the Company's Common Stock are subject
to certain reporting procedures and may be subject to background investigations,
including submission of personal and financial information, and required to be
investigated and licensed, qualified or found suitable as such.

      ADDITIONAL NEVADA REGULATORY MATTERS. The Company is subject to the Nevada
Gaming Control Act (the "Nevada Act"), and to the licensing and regulatory
control of the Nevada State Gaming Control Board (the "Nevada Board"), the
Nevada Gaming Commission (the "Nevada Commission"), and various local, city and
county regulatory agencies (collectively, the "Nevada Gaming Authorities").

      The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the character of persons having any direct or
indirect involvement with gaming to prevent unsavory or unsuitable persons from
having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) application of appropriate accounting practices and procedures;
(iii) maintenance of effective control over the financial practices and
financial stability of licensees, including procedures for internal fiscal
affairs and the safeguarding of assets and revenues; (iv) record-keeping and
reporting to the Nevada Gaming Authorities; (v) fair operation of games; and
(vi) the raising of revenues through taxation and licensing fees.

      The Company has registered with the Nevada Commissioner as a
publicly-traded corporation in addition to being licensed as a manufacturer and
distributor of gaming devices, a slot route operator and an operator of an
inter-casino linked system. Such licenses are not transferable and require
periodic payment of fees. The Nevada Gaming Authorities may limit, condition,
suspend or revoke a license, registration, approval or finding of suitability
for any cause deemed reasonable by such licensing agency. If it were determined
that gaming laws were violated by the Company, the approvals and licenses it
holds could be limited, conditioned, suspended or revoked, and the Company and
the persons involved could be subject to substantial fines for each separate
violation of the gaming laws at the discretion of the Nevada Commission. Each
type of gaming device or associated equipment manufactured, distributed, leased
or sold in Nevada must first be approved by the Nevada Board. The Company must
regularly submit detailed financial and operating reports to the Nevada
Commission. Certain loans, leases, sales of securities and similar financing
transactions must be reported to or approved by the Nevada Commission. Changes
in legislation or in judicial or regulatory interpretations could occur which
could adversely affect the Company.

      Officers, directors and certain key employees of the Company are required
to be licensed by the Nevada Commission, and employees associated with gaming
must obtain work permits which are subject to immediate suspension under certain
circumstances. An application for licensure may be denied for any cause deemed
reasonable by the issuing agency. Changes in licensed positions must be reported
to the issuing agency. In addition to its authority to deny an application for a
license, the Nevada Commission has jurisdiction to disapprove a change in
position by such officer, director or key employee. The Nevada Commission has
the power to require licensed gaming subsidiaries to suspend or dismiss
officers, directors or other key employees and to sever relationships with other
persons who refuse to file appropriate applications or who the authorities find
unsuitable to act in such capacities.

      The Nevada Commission may also require anyone having a material
relationship or involvement with the Company to be found suitable or licensed,
in which case those persons are required to pay the costs and fees of the Nevada
Board in connection with the investigation. Any person who acquires more than 5%
of the Company's voting securities must report the acquisition to the Nevada
Commission; any person who becomes a beneficial owner of 10% or more of the
Company's voting securities will be required to apply for a finding of
suitability. Under certain circumstances, an "Institutional Investor," as such
term is defined in the regulations of the Nevada Commission, which acquires more
than 10% but not more than 15% of the Company's voting securities, may apply to
the Nevada Commission for a waiver of such finding of suitability requirements,
provided the institutional investor holds the voting securities for investment
purposes only. An institutional investor will not be deemed to hold voting
securities for investment purposes unless the voting securities were acquired
and are held in the ordinary course of business as an institutional investor and
not for the purpose of causing, directly or indirectly, the election of a
majority of the board of directors of the Company, any change in the Company's
corporate charter, bylaws, management, policies or operations of the Company, or
any of its gaming affiliates, or any other action which the Nevada Commission
finds to be inconsistent with holding the Company's voting securities for
investment purposes only.

      Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission may
be found unsuitable. The same restrictions apply to a beneficial owner if the
record owner, after request, fails to identify the beneficial owner. Any
security holder found unsuitable and who holds, directly or indirectly, any
beneficial ownership of the Common Stock beyond such period of time as may be
prescribed by the Nevada Commission may be guilty of a gross misdemeanor. The
Company is subject to disciplinary action if, after it receives notice that

<PAGE>


a person is unsuitable to be a security holder or to have any other relationship
with the Company, the Company: (i) pays that person any dividend or interest
upon voting securities of the Company; (ii) allows that person to exercise,
directly or indirectly, any voting right conferred through securities held by
that person; or (iii) gives remuneration in any form to that person. If a
security holder is found unsuitable, the Company may itself be found unsuitable
if it fails to pursue all lawful efforts to require such unsuitable person to
relinquish his or her voting securities for cash at fair market value.
Additionally, the Clark County authorities have taken the position that they
have the authority to approve all persons owning or controlling the stock of any
corporation controlling a gaming license.

      The Nevada Commission has also advised the Company that it may, in its
discretion, require holders of a debt or equity security of a corporation
registered under the Nevada Act to file applications, be investigated and be
found suitable to own the debt or equity security of a registered corporation.
The applicant security holder is required to pay all costs of such
investigation. If the Nevada Commission determines that a person is unsuitable
to own such security, then pursuant to the regulations of the Nevada Commission,
the registered corporation may be sanctioned, including the loss of its
approvals, if, without the prior approval of the Nevada Commission, it: (i) pays
to the unsuitable person any dividends, interest or any distribution whatsoever;
(ii) recognizes any voting right by such unsuitable person in connection with
such securities; (iii) pays the unsuitable person remuneration in any form; or
(iv) makes any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation or similar transaction.

      The Company is required to maintain a current stock ledger in Nevada which
may be examined by the Nevada Commission at any time, and to file with the
Nevada Commission, at least annually, a list of its stockholders. If any
securities are held in trust by an agent or by a nominee, the record holder may
be required to disclose the identity of the beneficial owner to the Nevada
Commission. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company will also be required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act and the
regulations of the Nevada Commission. However, to date, the Nevada Commission
has not imposed such a requirement on the Company.

      The Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Nevada, or retire or extend obligations incurred for such purposes. Also,
changes in control of the Company through merger, consolidation, acquisition of
assets, management or consulting agreements or any form of takeover cannot occur
without prior investigation by the Nevada Board and approval of the Nevada
Commission.

      The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other corporate
defense tactics that affect corporate gaming licensees in Nevada, and
corporations whose stock is publicly-traded that are affiliated with those
operations, may be injurious to stable and productive corporate gaming. The
Nevada Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upon Nevada's gaming
industry and to further Nevada's policy to: (i) assure the financial stability
of corporate gaming operators and their affiliates; (ii) preserve the beneficial
aspects of conducting business in the corporate form; and (iii) promote a
neutral environment for the orderly governance of corporate affairs. Approvals
are, in certain circumstances, required from the Nevada Commission before the
Company can make exceptional repurchases of voting securities above the current
market price thereof and before a corporate acquisition opposed by management
can be consummated. Nevada's gaming regulations also require prior approval by
the Nevada Commission if the Company were to adopt a plan of recapitalization
proposed by the Company's Board of Directors in opposition to a tender offer
made directly to its shareholders for the purpose of acquiring control of the
Company.

      Pursuant to Nevada law, the Company and its affiliates, including any
subsidiaries, may engage in gaming activities outside Nevada ("foreign gaming")
without seeking the approval of the Nevada Commission provided that such
activities are lawful in the jurisdiction where they are to be conducted and
that certain information regarding the foreign operation is provided to the
Nevada Board on a periodic basis. The Company may be disciplined by the Nevada
Commission if it knowingly violates any laws of the foreign jurisdiction
pertaining to the foreign gaming operation, fails to conduct the foreign
operation in accordance with the standards of honesty and integrity required by
Nevada gaming regulations, engages in activities that are harmful to the State
of Nevada or its ability to collect gaming taxes and fees, or employs a person
in the foreign operation who has been denied a license or finding of suitability
in Nevada on the ground of unsuitability.

      OTHER JURISDICTIONS. All jurisdictions that have legalized gaming require
various licenses, permits and/or approvals for manufacturers and distributors of
gaming devices, table games and associated equipment. In general, such
requirements are similar to those of Nevada.

      APPLICATION OF FUTURE OR ADDITIONAL REGULATORY REQUIREMENTS. In the
future, the Company intends to seek the necessary licenses, approvals and
findings of suitability for the Company, its products and its management
personnel in other jurisdictions where significant sales are anticipated to be
made. However, there can be no assurance that such licenses, approvals or
findings of suitability will be obtained and will not be revoked, suspended or
conditioned or that the Company will be able to obtain the necessary approvals
for its future products as they are developed in a timely manner, or at all. If
a license, approval or finding of suitability is required by a regulatory

<PAGE>


authority and the Company fails to seek or does not receive the necessary
license or finding of suitability, the Company may be prohibited from selling
its products for use in the respective jurisdiction or may be required to sell
its products through other licensed entities at a reduced profit to the Company.

ITEM 2. DESCRIPTION OF PROPERTIES

      The Company currently leases space in Eden Prairie, Minnesota for its
corporate offices, production, and research and development functions, and in
Las Vegas, Nevada for marketing, sales, service, and game development. The
Company also leases space for service centers in various locations in the United
States and Canada. The Company believes that its existing properties are
suitable and adequate for its current needs.

ITEM 3. LEGAL PROCEEDINGS

D&D GAMING PATENTS, INC. (PROGRESSIVE GAMES, INC.)

      In January 1995, the Company filed a declaratory judgment action against
D&D Gaming Patents, Inc. ("D&D Gaming"). The Company filed such action due to
allegations by D&D Gaming that the Company's Let It Ride The Tournament(TM)
game infringed on patents held by D&D Gaming. Such action seeks a declaratory
judgment that: (1) three of D&D Gaming's patents, U.S. patent No. 4,861,041;
5,288,077; and 5,364,105 (the "041," the "077" and the "105"), are invalid and
unenforceable; and (2) to the extent that such patents are determined to be
valid and enforceable, such patents are not infringed by Let It Ride The
Tournament(TM).

      In March 1995, D&D Gaming filed suit against the Company, the Company's
Chairman, John Breeding, and the eight Nevada casinos that participated in the
field test of Let It Ride The Tournament(TM), alleging willful patent
infringement of its 041 and 077 patents and demanding that each defendant be
preliminarily and permanently enjoined from infringing the two patents which are
the subject of the litigation, and that each defendant be required to account to
D&D Gaming for damages suffered resulting from the infringement and that such
damages be trebled because of the claimed willful nature of the alleged
infringement. The Company is indemnifying and defending the original eight
Nevada casinos that participated in Let It Ride The Tournament(TM). In March
1995, the Company served its declaratory judgment action on D&D Gaming and
subsequently served its answer to the infringement action. The two actions have
been consolidated.

      In 1996, D&D Gaming assigned all of its patents at issue in the litigation
to Progressive Games, Inc. ("PGI"), and the Court has allowed PGI to be
substituted as a party for D&D Gaming.

      PGI began a separate lawsuit in federal court in Nevada naming 62
additional Nevada casinos as defendants alleging that those defendants, by
playing Let It Ride The Tournament(TM), infringe PGI's 041 and 077 patents. This
action has been consolidated with the first action pending in United States
District Court in Nevada, and the Company is indemnifying and defending the 62
casino defendants named in this second action.

      In June 1996, the United States Patent & Trademark Office rejected all of
the claims of PGI's 105 patent, claims 1-4, 6, 8, 10, and 14 of its 041 patent
and claims 6-21 of its 077 patent. In December 1996 and January 1997, the United
States Patent & Trademark Office again rejected all of the claims of the 105
patent, claims 1-4, 6, 8, 10 and 14 of the 041 patent and claims 6-21 of the 077
patent. PGI has appealed the Patent Office's final rejection to the U.S. Patent
& Trademark Office's Board of Patent Appeals.

      PGI began a separate lawsuit in Mississippi against the casinos which were
participating in the Let It Ride The Tournament(TM) field test. PGI alleges the
casinos' participation infringes the 041 and 077 patents as well as its
progressive apparatus patent, U.S. No. 5,544,893 (the "893") issued August 1996.
The Company was not named as a party to this action but agreed to indemnify the
defendant casinos and has done so and intervened in this action.

      In January 1997, PGI sued the Mashantucket Pequot Tribe by and through the
Mashantucket Pequot Gaming Enterprise dba Foxwoods High Stakes Bingo and Casino
in United States District Court in Connecticut. PGI alleges that the Foxwoods
Casino's participation in Let It Ride The Tournament(TM) infringes the 041, the

<PAGE>


077, the 893, and a recently issued patent titled "Methods of Progressive
Jackpot Gaming," U.S. Patent number 5,584,485 (the "485"). The Company has
agreed to and is defending and indemnifying Foxwoods Casino in this action.

      PGI has amended its complaint to allege that the Company's Let It Ride The
Tournament(TM) table game infringes an additional patent, U.S. Patent No.
5,626,341 (the "341"). Also, PGI has claimed that the Company's Let It Ride
Bonus(TM) table game also infringes its patents.

      The Company believes that PGI's patent claims which are alleged to be
infringed are either invalid or not infringed by the Company's Let It Ride The
Tournament(TM) and Let It Ride Bonus(TM) table games. The Company has agreed to
defend and indemnify all licensees of the Tournament as well as all licensees of
the Company's Let It Ride Bonus(TM) table games against liability resulting from
any such claim or suit brought against the licensee for infringement of
proprietary rights or patent rights arising out of or relating to Let It Ride
The Tournament(TM) or the Let It Ride Bonus(TM) table games. If PGI should
prevail in its suit, management does not expect the action will materially
affect the Company's financial condition.

DD STUD, INC. AND ANCHOR COIN

      The Company had been sued in United States District Court in Nevada by DD
Stud, Inc. and Anchor Coin, both Nevada corporations, and had counterclaimed
against Stanley E. Fulton, Anchor Gaming, DD Stud, Inc., and Anchor Coin. In
August 1997, the Company and DD Stud, Inc., Anchor Coin, Stanley E. Fulton and
Anchor Gaming settled all of their claims and related companion claims. The
financial terms of the settlement were not material.

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

      No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended October 31, 1997.


                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      The Company's common stock is traded on The Nasdaq Stock Market under the
symbol SHFL. As of January 13, 1998, there were 517 shareholders of record. The
following table sets forth quarterly high and low prices for trades of the
Company's common stock for the fiscal years ended October 31, 1997 and 1996.

                                 1997                        1996
                        ----------------------     -----------------------
                           HIGH        LOW            HIGH         LOW
                        ----------- ----------     ----------- -----------

        First quarter   $    12.75  $    8.63      $    15.13  $    10.63
        Second quarter        9.75       6.75           13.00        9.13
        Third quarter        10.00       7.13           17.13       11.50
        Fourth quarter       10.25       7.50           14.13       10.00

      DIVIDEND POLICY

      The Company has not paid dividends on its common stock but rather retained
earnings to provide for the Company's growth. No cash dividends are expected to
be paid on the common stock in the foreseeable future.

<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

In thousands, except per share and ratio amounts      1997            1996            1995            1994            1993
----------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>            <C>              <C>            <C>       
YEAR ENDED OCTOBER 31,

     STATEMENT OF OPERATIONS

     Revenue                                      $    28,736     $    22,587    $     9,833      $    2,373     $      554
                                                  
     Income (Loss) from Operations                      6,686           5,550          1,494          (1,208)        (1,217)
                                                  
     Income (Loss) from Continuing Operations           5,122           2,768          2,338            (889)        (1,086)

     Net Income (Loss)                                  5,122           2,768          2,403          (1,015)        (1,107)
                                                  
     Weighted Average Common and Common           
         Equivalent Shares Outstanding                 10,760          11,293          9,765           8,639          6,902
                                                  
                                                  
AS OF OCTOBER 31,                                 
                                                  
     BALANCE SHEET                                
                                                  
     Cash and Cash Equivalents, and               $    16,306     $    26,478    $    20,828      $    8,902     $    2,628
         Investments                              
                                                  
     Working Capital                                   20,736          27,845         23,297           9,940          2,929
                                                  
     Total Assets                                      40,726          45,297         37,751          15,288          5,475
                                                  
     Long-term Debt                                     1,718              --             --              --             --
                                                  
     Shareholders' Equity                              34,111          39,139         35,099          14,405          4,982
                                                  
     Current Ratio                                        5.4             5.7            9.8            12.3            6.9
                                                  
                                                  
PER COMMON SHARE                                  
                                                  
     Income (Loss) from Continuing                $       .48     $       .25    $       .24      $     (.10)    $     (.16)
         Operations                               
                                                  
     Net Income (Loss)                                    .48             .25            .25            (.12)          (.16)
                                                  
     Book Value                                          3.42            3.50           3.18            1.59            .68
                                                  
     Dividends Declared                                   --             --              --              --             --

</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

BUSINESS OVERVIEW

    The Company's first product was an automatic card shuffling system
introduced to the gaming market in 1992. Since its introduction, the Company's
shuffling systems have generally become required equipment for many table games.
The Company derived 69% of its revenue in fiscal 1997 and 63% of fiscal 1996
revenue from the sale and lease of the Company's automatic card shuffling
systems. The Company has approval for its card shuffling systems in all major
gaming jurisdictions in North America and continues to seek to obtain the
necessary licenses in other jurisdictions.

    In fiscal 1995, the Company introduced Let It Ride The Tournament(TM), a
five card stud poker table game, in which the Company shared revenues with its
casino customers. The Tournament version of Let It Ride(R) allowed players to
place a $1 entry fee to be eligible for immediate bonus payouts with a chance to
enter Let It Ride The Tournament(TM) playoffs. The Company derived revenue from
a percentage of the $1 entry fee. Let It Ride The Tournament(TM) was offered in
Nevada and Mississippi. In the fourth quarter of fiscal 1997, the Company
converted Let It Ride The Tournament(TM) tables to Let It Ride Bonus(TM) tables.
The Bonus game allows the players to make a $1 side bet to be eligible for large
immediate payouts similar to the Tournament game. However, there is no playoff
for the top hands as in the Tournament game. For the Let It Ride Bonus(TM) game,
the Company generates revenue through a monthly licensing fee for each table
placed in casinos. The Company offers the Let It Ride Bonus(TM) table game in 21
jurisdictions. As of October 31, 1997, approximately 545 Let It Ride(R) table
games were installed in casinos, with approximately 220 bonus tables. The
remaining 325 tables are the basic version of Let It Ride(R), for which the
Company receives monthly license fees up to $795 per table from participating
casinos. The basic version of Let It Ride(R) is similar to the Bonus game except
there is no $1 side bet option.

<PAGE>


    In fiscal 1997, the Company acquired a game library which included, among
other games, a game called Five Deck Frenzy(TM), a wide-area progressive video
poker game. The Company entered into a joint marketing agreement with IGT to
market Five Deck Frenzy(TM). At December 31, 1997, there were 117 Five Deck
Frenzy(TM) video poker games in Nevada casinos. The game is currently licensed
for the Nevada market only.

    The Company entered into a second joint marketing agreement with IGT under
which additional video games from the game library are under development for
fiscal 1998 product introduction.

RESULTS OF OPERATIONS

Fiscal 1997 Compared to Fiscal 1996

    Revenue for fiscal 1997 increased to $28,736,000 compared to revenue of
$22,587,000 in fiscal 1996, an increase of $6,149,000, or 27%. Shuffler sales
totaled $9,020,000 in fiscal 1997 compared to $4,558,000 last year while current
year unit sales totaled 1,193 compared to unit sales of 619 last year. Included
in the current year unit sales were 667 units which were converted to a sale
from a lease at the time of sale. Substantially all of these conversion sales
were to casinos in the domestic market. The average per unit sales price
increased to $7,560 in fiscal 1997 from $7,363 since fiscal 1996 sales included
relatively more lower-priced sales to international distributors. For fiscal
1998, the Company has refocused its shuffler placement strategy to lease
installations. The Company, therefore, does not expect its unit sales levels to
increase at the same rate as the fiscal 1997 sales increased compared to fiscal
1996 sales. In addition, effective February 1, 1998, the Company will raise the
sales price of its shuffling systems by approximately 15%. The shuffler lease
base decreased to 1,600 units at October 31, 1997 compared to 1,804 units on
lease at October 31, 1996, principally due to the leased units converted to sold
units during the year. Multi-deck shuffler systems on lease increased by 4%
while single deck units on lease decreased by 18% between the comparable year
ends. Monthly lease pricing was unchanged for all leased shuffler systems
between the years. Revenue from the Let It Ride(R) table game decreased by
$205,000, or 3% from fiscal 1996. In the fourth quarter of fiscal 1997, the
Company converted Let It Ride The Tournament(TM) to the Let It Ride Bonus(TM)
table game in Nevada and Mississippi. The Company generated greater revenues
from Let It Ride The Tournament(TM) game than the Bonus game due to the revenue
sharing of the $1 side bet. To offset the decrease in revenues, the Company
reduced a number of expenses associated with the Let It Ride Bonus(TM) table
game. There were approximately 220 Let It Ride Bonus(TM) tables in casinos as of
October 31, 1997 compared to 200 Tournament tables in casinos as of October 31,
1996. In connection with the Tournament to Bonus conversion of the tables in
casinos, the Company offered for sale certain equipment used with the Tournament
or Bonus table game. Sales of this associated equipment were $517,000 in fiscal
1997. This amount is included with Let It Ride(R) table game revenue in the
consolidated income statements. The Company will continue to offer this
equipment for sale in new Let It Ride Bonus(TM) table installations. Let It
Ride(R) basic tables in casinos increased to 325 tables as of October 31, 1997
compared to 300 as of the prior year end. Effective November 1, 1997, the
Company increased the per table monthly fee for the Let It Ride(R) basic game to
$795 from pricing generally under $300 per table per month. Other revenue was
$1,264,000 in fiscal 1997 and included $490,000 of Let It Ride Bonus Video(TM)
revenue. As of October 31, 1997, there were 124 Let It Ride Bonus Video(TM)
units installed in casinos in various domestic gaming markets compared to 38
units as of October 31, 1996. Other revenue also included approximately $300,000
of revenue earned on the sale of service contracts on shufflers sold. Revenues
from Five Deck Frenzy(TM) were not significant in the current year due to the
mid-year product introduction.

    Gross margin improved to 63.5% in fiscal 1997 compared to 62.9% in the prior
year. The gross margin from each of the products was similar between the
comparable periods. In fiscal 1997, the provision for inventory obsolescence was
$516,000, or 1.8% of revenue compared to $381,000, or 1.7% in fiscal 1996.
Obsolescence provisions were provided for certain obsolete and excess inventory
associated with Let It Ride The Tournament(TM) equipment and early version
shufflers. Field support costs, including service and related expenses,
decreased to 13.3% of revenue in fiscal 1997 from 13.8% of revenue in the prior
year due to the current year increase in revenues. Production related expenses
decreased to .6% of revenue in the current year from 1.8% of revenue in fiscal
1996 due to improved capacity utilization in the production of finished
shufflers.

    Selling, general and administrative expenses were $9,864,000 in fiscal 1997
compared to $7,399,000 in fiscal 1996. Payroll related expenses increased due to
increased staffing levels at the end of fiscal 1996 which carried over to fiscal
1997. However, staffing levels decreased by 10% through job restructuring and
attrition when comparing staffing as of October 31, 1997, to October 31, 1996.
Included in fiscal 1997 staffing expenses was a bonus provision of $665,000
which included bonus payouts to all employees. The prior year bonus expense was
$90,000. Legal expenses increased by $396,000 to $1,180,000 in fiscal 1997
mainly due to ongoing litigation with Progressive Games, Inc. and costs

<PAGE>


associated with litigation with DD Stud, Inc. and Anchor Coin which was settled
in August 1997 (see notes to the consolidated financial statements). The Company
also incurred additional patent related legal expenses in fiscal 1997 due to
seeking patent protection for new products and international market expansion.
Approximately $440,000 of costs were incurred for product registration in new
jurisdictions and costs in support of suitability findings for newly appointed
officers during fiscal 1997. These expenses were $200,000 in fiscal 1996. In
November 1996, the Company took occupancy of a new facility in Las Vegas which
houses its sales, marketing, service and game development functions. Additional
facility related expenses were approximately $335,000 in fiscal 1997 compared to
fiscal 1996. Advertising and promotion expenses decreased by $565,000 in fiscal
1997 due to decreased spending in support of Let It Ride The Tournament(TM) as
the Tournament table game was replaced with the Let It Ride Bonus(TM) table
game. Research and development expenses increased by $443,000, or 35.4% in the
current year compared to last year. Professional fees included in research and
development expenses increased to approximately $350,000 in fiscal 1997 from
$150,000 in fiscal 1996. The Company retained Dr. Mark Yoseloff, in the capacity
of a consultant to the Company, to assist in the development of new video games
and for enhancing the current video offering. On August 1, 1997, Dr. Yoseloff
became Executive Vice President of the Company. The Company also had a new
version shuffler in development as of October 31, 1997.

    Other income, net, is primarily interest income for both years. The decrease
in interest income for the current year resulted from the use of $10,396,000 for
the repurchase of common stock.

    The provision for income taxes was based on an effective tax rate of 34.6%
in fiscal 1997 compared to 23.5% in the prior year. The Company provided for
income taxes in the current year at the statutory rate, while the prior year tax
provision included the benefit of the reversal of a $577,000 valuation allowance
against deferred tax assets.

    Net income was $5,122,000, or $.48 per share compared to $2,768,999, or $.25
in the prior year. The prior year net income included a pre-tax write-off of
$3,370,000 of notes receivable which was equal to approximately $.22 per share.
The weighted average common and common equivalent shares decreased to 10,760,000
in fiscal 1997 compared to 11,293,000 in fiscal 1996 due the repurchase of
1,241,000 of the Company shares during the current year.

Fiscal 1996 Compared to Fiscal 1995

    Revenue in fiscal 1996 increased to $22,587,000 from $9,833,000 in fiscal
1995, an increase of $12,754,000, or 130%. Shuffler lease revenue increased by
57% to $9,684,000 from $6,178,000, as the installed lease base increased to
1,804 from 1,490 at October 31, 1995. The shuffler lease base for the
multi-deck, which was introduced in fiscal 1995, increased by 40% during fiscal
1996, while the shuffler lease base for the single decks increased by 14% in
fiscal 1996. Much of the increase resulted from market expansion into gaming
markets outside of Nevada. Shuffler sales were $4,558,000 compared to $1,574,000
in fiscal 1995, an increase of 190%. In fiscal 1996, the Company first offered
the sale option to its domestic customers. The Company sold 619 units in fiscal
1996 compared to sales of 222 units in fiscal 1995. Revenue from Let It Ride(R)
table game increased by $5,992,000 or 328% in fiscal 1996 from fiscal 1995. Let
It Ride The Tournament(TM) was first introduced in the Nevada market in May of
1995 and made up 92% of fiscal 1996 Let It Ride(R) table game revenues. In June
1996, the Company began a field trial of Let It Ride The Tournament(TM) in
Mississippi. As of October 31, 1996, there were approximately 200 Tournament
tables in casinos in Nevada and Mississippi, compared to 160 Tournament tables
in casinos in Nevada at October 31, 1995.

    Gross margin was 62.9% in fiscal 1996 compared to 64.1% in fiscal 1995. In
fiscal 1996, the Company recorded in cost of leases, sales and Let It Ride(R)
table game, inventory valuation provisions of approximately $381,000 due to
inventory obsolescence on early version shufflers for component parts and
finished shuffler systems. In fiscal 1995, the valuation provision was $28,000.
Another factor affecting gross margin in fiscal 1996 was the ramp up of service
and other field expenses in greater proportion than the increase in revenue.

    Selling, general and administrative expenses increased to $7,399,000 in
fiscal 1996 from $4,244,000 in fiscal 1995. Advertising and promotion expenses
increased to $1,457,000 compared to $896,000 in fiscal 1995. Much of the
increased advertising and promotion expenses were related to Let It Ride The
Tournament(TM). Salaries and related expenses increased as additional staff was
added to support the revenue growth of the Company. The Company increased its
sales force to support expansion into domestic and international markets. Legal
and other professional fees increased to $1,055,000 in fiscal 1996 from $457,000
in fiscal 1995. The Company was a defendant in two lawsuits alleging patent
infringement for its Let It Ride(R) game. Research and development expenses
increased to $1,250,000 from $562,000 in fiscal 1995, an increase of $688,000,
or 122%. Salaries and consultant fees increased by $419,000 as the Company hired
additional research staff as well as retained the services of consultants to
develop new games for the gaming industry, and enhance the current product
offerings.

<PAGE>


    During fiscal 1996, the Company recognized a total loss of $3,370,000 on two
loans advanced to an unrelated company doing business in the gaming industry
("receiving company"). The loans were collateralized by common stock of a
company related to the receiving company. Subsequent to advancing the loans, the
financial condition of the receiving company significantly deteriorated. The
Company did not believe that recovery of the original loans was likely after a
detailed review of the receiving company's and the related company's financial
position, and prospects for future growth. The Company has no additional
financial exposure related to these loans.

    Other income, which was primarily interest income, was $1,438,000 in fiscal
1996 compared to $917,000 in fiscal 1995. Fiscal 1995 other income included
$218,000 of miscellaneous income. The Company's investment balances were
significantly higher in fiscal 1996 due to receipt of over $18,000,000 from the
exercise of warrants in the third and fourth quarters of fiscal 1995.

    Income taxes were provided at a 23.5% effective rate in fiscal 1996 compared
to an effective rate of 3.0% in the prior year. The current year effective rate
includes the benefit of the reversal of a $577,000 valuation allowance against
the deferred tax assets.

    Net income was $2,768,000 or $.25 per share compared to $2,403,000 or $.25
in fiscal 1995. Weighted average common and common equivalent shares increased
to 11,293,000 in fiscal 1996 compared to 9,765,000 in fiscal 1995, due to the
exercise of 1,897,500 common stock warrants late in fiscal 1995.

Recently Issued Accounting Standards

    In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings per Share." This statement establishes standards for
computing and presenting earnings per share and is effective for the Company's
quarter ending January 31, 1998. Earlier application is not permitted, and
restatement of all prior period earnings per share data presented is required
upon adoption. The dilutive effect of stock options and stock warrants will be
excluded under the new requirements for calculating basic earnings per share.
The calculation of fully diluted earnings per share will not significantly
change from the current method. The impact of SFAS No. 128 on the calculation of
primary and fully diluted earnings per share is not expected to materially
affect current earnings per share and earnings per share as previously reported.

    In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement requires companies to classify items of other
comprehensive income by their nature in the financial statements and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet, and is effective for the Company's fiscal year ending October 31, 1998.
Management intends to comply with the disclosure requirements of this statement.

    In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." This statement establishes additional
standards for segment reporting in financial statements and is effective for the
Company's fiscal year ending October 31, 1999. Management is evaluating the
impact of this statement.

Year 2000 Computer Software

    During fiscal 1997, the Company completed a new business system conversion
which included a change in the financial operating software as well as numerous
upgrades to existing processors and other hardware. This conversion was made for
reasons unrelated to the year 2000 computer software issue. Based on the system
conversion, the Company does not anticipate the year 2000 computer issue to
significantly affect its internal operations.

LIQUIDITY & CAPITAL RESOURCES

    At October 31, 1997, the Company had available cash, cash equivalents and
investments of $16,306,000 compared to $26,478,000 at October 31, 1996. The
decrease primarily resulted from $10,396,000 of cash used to repurchase
1,241,000 shares of the Company's common stock. Working capital decreased to
$20,736,000 as of October 31, 1997, from $27,845,000 as of October 31, 1996,
principally due to the use of cash for the repurchase of common shares.

    Cash provided by operating activities in fiscal 1997 was $4,498,000. The
major components of cash provided by operating activities included net income of
$5,122,000, non-cash charges for depreciation and amortization of $3,760,000,
and bad debt and inventory allowance provisions of $563,000. Payment of Let It
Ride The Tournament(TM) playoff prizes in the fourth quarter of fiscal 1997
decreased the Company's cash by $1,874,000. Accounts receivable increased by
$1,834,000 due to increased sales of shufflers and extended payment terms on

<PAGE>


certain of the shuffler sales. Inventories increased by $774,000 as the Company
began sourcing inventory late in fiscal 1997 for the fiscal 1998 manufacture of
single deck shufflers. In addition, greater quantities of finished shufflers
were in inventory at October 31, 1997, to fill a first quarter 1998 sale.
Customer deposits and unearned revenue increased by $611,000 due to an increase
of over $400,000 in unearned revenue on sales of extended service contracts for
sold shufflers.

    Under investing activities, investments decreased by $7,785,000 as the
Company sold investments and used the cash for the share repurchases. Cash was
used to fund the cost of systems leased and held for lease of $2,560,000 and the
purchase of property and equipment of $1,527,000. Approximately $645,000 of
current year property additions were for leasehold improvements and office
furnishings for the Las Vegas, Nevada facility. Other significant property
additions included approximately $500,000 for hardware and software associated
with the new business system conversion completed in fiscal 1997.

    The Company believes its existing cash and investments, and cash provided by
operations will be sufficient to finance the Company's current operations, share
repurchase program and new product development for the foreseeable future.

    At October 31, 1996, the Company had available cash and cash equivalents,
and investments of $26,478,000 compared to $20,828,000 at October 31, 1995. The
increase resulted from cash provided by operations and the issuance of common
shares upon the exercise of common stock options and warrants.

    Cash provided by operating activities in fiscal 1996 was $9,341,000. The
major components of cash provided by operating activities included net income of
$2,768,000, non-cash charges for depreciation and amortization of $2,482,000,
loss on notes receivable of $3,300,000, and bad debt and inventory allowance
provisions of $466,000. Current liabilities increased by $3,274,000. Included in
the change in current liabilities was a $1,428,000 increase in the Tournament
playoff liability. The Company paid out substantially all of these funds at its
Nevada and Mississippi Let It Ride The Tournament(TM) playoffs held in December
1996 and February 1997, respectively. Increases in accounts receivable,
inventories and other current assets of $2,510,000 were the primary operating
uses of cash during fiscal 1996.

    Cash was used in investing activities to fund the cost of systems leased and
held for lease of $2,871,000, to increase investments by $3,435,000, and to fund
the purchase of property and equipment of $2,426,000. Approximately $1,244,000
of current year property additions were for leasehold improvements for the
Company's new leased facility in Las Vegas, Nevada.

    In fiscal 1996, the Company issued 129,000 shares of common stock upon the
exercise of options and warrants, which resulted in proceeds of $1,192,000.

    Working capital increased to $27,544,000 as of October 31, 1996, from
$23,297,000 as of October 31, 1995, principally due to the cash generated from
operations and the issuance of shares of common stock pursuant to the exercise
of options and warrants.

IMPACT OF INFLATION

    To date, inflation has not had a material effect on the Company's
operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                          Independent Auditors' Report


To the Board of Directors and Shareholders
Shuffle Master, Inc.:

We have audited the accompanying consolidated balance sheets of Shuffle Master,
Inc. as of October 31, 1997 and 1996, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for the years ended
October 31, 1997 and 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the 1997 and 1996 consolidated financial statements based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and

<PAGE>


significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such 1997 and 1996 consolidated financial statements present
fairly, in all material respects, the financial position of Shuffle Master, Inc.
as of October 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.


DELOITTE & TOUCHE LLP

Minneapolis, Minnesota
December 5, 1997


                          Independent Auditors' Report


To the Board of Directors and Shareholders
Shuffle Master, Inc.:

We have audited the accompanying consolidated income statement, changes in
shareholders' equity and cash flows of Shuffle Master, Inc. for the year ended
October 31, 1995. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
1995 consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the 1995 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows for Shuffle Master, Inc. for the year ended October 31, 1995, in
conformity with generally accepted accounting principles.


BLANKSI, PETER, KRONLAGE & ZOCH, P.A.

Minneapolis, Minnesota
December 13, 1995

<PAGE>


                         CONSOLIDATED INCOME STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,                                        1997           1996            1995
                                                          -----------    -----------     -----------
<S>                                                       <C>            <C>             <C>        
REVENUE:
    Shuffler lease                                        $    10,840    $     9,684     $     6,178
    Shuffler sales                                              9,020          4,558           1,574
    Let It Ride(R)table game                                    7,612          7,817           1,825
    Other                                                       1,264            528             256
                                                          -----------    -----------     -----------
                                                               28,736         22,587           9,833
                                                          -----------    -----------     -----------

COST AND EXPENSES:
    Cost of leases, sales and Let It Ride(R)table game         10,493          8,388           3,533
    Selling, general and administrative                         9,864          7,399           4,244
    Research and development                                    1,693          1,250             562
                                                          -----------    -----------     -----------
                                                               22,050         17,037           8,339
                                                          -----------    -----------     -----------

Income from operations                                          6,686          5,550           1,494

Loss on notes receivable                                         --           (3,370)           --

Other income, net                                               1,146          1,438             917
                                                          -----------    -----------     -----------

Income before income taxes                                      7,832          3,618           2,411

Provision for income taxes                                      2,710            850              73
                                                          -----------    -----------     -----------

Income from continuing operations                               5,122          2,768           2,338

Discontinued operations, net                                     --             --                65
                                                          -----------    -----------     -----------

NET INCOME                                                $     5,122    $     2,768     $     2,403
                                                          ===========    ===========     ===========

Weighted average common and common
    equivalent shares outstanding                              10,760         11,293           9,765
                                                          ===========    ===========     ===========

EARNINGS PER SHARE:
    Continuing operations                                 $       .48    $       .25     $       .24
    Discontinued operations                                      --             --               .01
                                                          -----------    -----------     -----------

TOTAL EARNINGS PER SHARE                                  $       .48    $       .25     $       .25
                                                          ===========    ===========     ===========

</TABLE>

                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<PAGE>


                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
                                     ASSETS

<TABLE>
<CAPTION>

AS OF OCTOBER 31,                                                1997          1996
                                                              ----------    ----------
<S>                                                           <C>           <C>       
CURRENT ASSETS:
   Cash and cash equivalents                                  $    1,053    $    3,440
   Investments                                                    15,253        23,038
   Accounts receivable, net                                        5,354         3,567
   Notes receivable from related parties                             697           348
   Inventories                                                     2,317         2,059
   Other current assets                                              818         1,319
                                                              ----------    ----------

         Total current assets                                     25,492        33,771

Systems leased to customers pursuant to operating
    leases, net, and systems held for lease                        7,497         7,491

Property and equipment, net                                        3,744         3,039

Intangible assets, net                                             3,840           802

Other                                                                153           194
                                                              ----------    ----------

         TOTAL ASSETS                                         $   40,726    $   45,297
                                                              ==========    ==========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                           $      600    $    1,369
   Accrued liabilities                                             1,483         1,150
   Current portion of long-term obligation
       to related party                                              529          --
   Customer deposits and unearned revenue                          1,946         1,335
   Tournament playoff liability                                      198         2,072
                                                              ----------    ----------

        Total current liabilities                                  4,756         5,926

Deferred income taxes payable                                        141           232

Long-term obligation to related party                              1,718          --

Commitments and contingencies

SHAREHOLDERS' EQUITY:
   Common stock, $.01 par value; 30,000 shares authorized,
       9,968 and 11,177 shares issued and outstanding,
       respectively                                                  100           112
   Additional paid-in capital                                     26,905        37,043
   Retained earnings                                               7,106         1,984
                                                              ----------    ----------

         Total shareholders' equity                               34,111        39,139
                                                              ----------    ----------

         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY           $   40,726    $   45,297
                                                              ==========    ==========

</TABLE>

                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<PAGE>


                           CONSOLIDATED STATEMENTS OF
                         CHANGES IN SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                  RETAINED
                                         COMMON STOCK             ADDITIONAL      EARNINGS
                                   -------------------------       PAID-IN     (ACCUMULATED
                                     SHARES         AMOUNT         CAPITAL        DEFICIT)
                                   ----------     ----------     ----------     ----------
<S>                                    <C>       <C>            <C>            <C>        
BALANCE, OCTOBER 31, 1994               9,081     $       91     $   17,501     $   (3,187)

Common stock options exercised             15                            98

Common stock warrants exercised         1,952             19         18,102

Other                                                                    72

Net income                                                                           2,403
                                   ----------     ----------     ----------     ----------


BALANCE, OCTOBER 31, 1995              11,048            110         35,773           (784)

Common stock options exercised             23              1            151

Common stock warrants exercised           106              1          1,039

Other                                                                    80

Net income                                                                           2,768
                                   ----------     ----------     ----------     ----------

BALANCE, OCTOBER 31, 1996              11,177            112         37,043          1,984

Common stock repurchased               (1,241)           (12)       (10,384)

Common stock options exercised             16                           111

Other                                      16                           135

Net income                                                                           5,122
                                   ----------     ----------     ----------     ----------

BALANCE, OCTOBER 31, 1997               9,968     $      100     $   26,905     $    7,106
                                   ==========     ==========     ==========     ==========
</TABLE>

                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<PAGE>



                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,                                                 1997             1996             1995
                                                                   ------------     ------------     ------------
<S>                                                                <C>              <C>              <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                                     $      5,122     $      2,768     $      2,403
    Adjustments to reconcile net income to cash
       provided by operating activities:
            Depreciation and amortization                                 3,760            2,482            1,417
            Loss on notes receivable                                       --              3,300             --
            Provision for bad debts                                          47               85              101
            Provision for inventory obsolescence                            516              381               28
            Deferred income taxes                                           (45)             232             --
            Other                                                          --               --                (65)
    Changes in operating assets and liabilities:
            Accounts receivable                                          (1,834)          (1,232)          (2,226)
            Notes receivable from related parties                          (349)             (28)            (320)
            Inventories                                                    (774)            (137)            (887)
            Other current assets                                           (246)          (1,113)            (223)
            Accounts payable and accrued liabilities                       (436)           1,145              760
            Customer deposits and unearned revenue                          611              701              364
            Tournament playoff liability                                 (1,874)           1,428              644
                                                                   ------------     ------------     ------------

            Net cash provided by operating activities                     4,498           10,012            1,996
                                                                   ------------     ------------     ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of investments                                           (112,790)         (53,437)         (96,582)
    Proceeds from sales and maturity of investments                     120,575           49,331           86,673
    Payments for systems leased and held for lease                       (2,560)          (2,871)          (4,622)
    Purchases of property and equipment                                  (1,527)          (2,426)            (546)
    Other                                                                   (16)            (364)            (219)
    Advances on long-term notes receivable                                 --               --             (3,031)
                                                                   ------------     ------------     ------------

            Net cash provided by (used in) investing activities           3,682           (9,767)         (18,327)
                                                                   ------------     ------------     ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Repurchase of common stock                                          (10,396)            --               --
    Payments on long-term obligation                                       (275)            --               --
    Proceeds from issuance of common stock and  warrants                    111            1,192           18,219
    Other                                                                    (7)             107             --
                                                                   ------------     ------------     ------------

            Net cash (used in) provided by financing activities         (10,567)           1,299           18,219
                                                                   ------------     ------------     ------------
    Net (decrease) increase in cash and cash equivalents                 (2,387)           1,544            1,888

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                              3,440            1,896                8
                                                                   ------------     ------------     ------------

CASH AND CASH EQUIVALENTS, END OF YEAR                             $      1,053     $      3,440     $      1,896
                                                                   ============     ============     ============

NON CASH TRANSACTIONS:
    Acquisition of intangible assets for debt and equity
       securities                                                  $      2,670     $       --       $       --
                                                                   ============     ============     ============
    Payment of debt with common stock                              $        142     $       --       $       --
                                                                   ============     ============     ============

CASH PAID DURING THE YEAR FOR:
    Income taxes                                                   $      3,179     $        463     $          8
                                                                   ============     ============     ============
    Interest                                                       $         69     $       --       $       --
                                                                   ============     ============     ============

</TABLE>

                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

    DESCRIPTION OF BUSINESS:

         Shuffle Master, Inc. (the "Company") is a supplier of shuffler systems
and proprietary table and video games to the gaming industry. The foundation of
the Company's business has been the development, manufacturing and marketing of
automatic card shuffler systems. The Company's current shuffler offering
includes the multi-deck and single deck shufflers available to casinos through a
purchase or lease option. The Company markets its shuffler systems in most
domestic gaming jurisdictions and internationally through distributors.

         In fiscal 1993, the Company developed a proprietary, five card stud
poker table game called Let It Ride(R) and offered the game to casinos in a
basic version. Let It Ride The Tournament(TM) was introduced in fiscal 1995.
Through early in the fourth quarter of fiscal 1997, the Company derived revenue
on a shared basis with casinos for its Let It Ride The Tournament(TM) game. The
Company collected from the casinos a fixed percentage of each $1 side bet placed
by players on the Let It Ride The Tournament(TM) tables. In the fourth quarter
of fiscal 1997, the Let It Ride The Tournament(TM) format was discontinued and
replaced with the Let It Ride Bonus(TM) format. Let It Ride Bonus(TM) allows the
casino players to make a $1 side bet which provides for larger immediate payouts
in addition to the basic payouts if certain hands are dealt to the player. The
basic version of Let It Ride(R) is similar to the bonus game except that it does
not offer the $1 side bet. The Company generates revenues from installed bonus
and basic tables through a monthly fixed fee to its casino customers.

         In fiscal 1997, the Company introduced a wide-area progressive video
poker game called Five Deck Frenzy(TM) through its joint marketing agreement
with IGT. The Company and IGT share equally in the profits generated by Five
Deck Frenzy(TM). The Company signed a second joint marketing agreement in fiscal
1997 with IGT under which several other video games are currently in
development.

    PRINCIPLES OF CONSOLIDATION:

         The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated.

    INVENTORIES:

         Inventories are stated at the lower of cost (which approximates
first-in, first-out cost) or market.

    LEASING OPERATIONS:

         Shuffling systems leased to customers pursuant to operating leases and
shuffling systems held for lease are stated at cost. Depreciation on leased
shuffling systems is calculated using the straight-line method over three to
four years. Shuffler leases generally are written with indefinite terms. The
Company provides maintenance on its shuffling systems on lease as part of its
normal lease agreement. Leases generally require prepayment of two months lease
payments which are included on the consolidated balance sheets as customer
deposits.

    REVENUE RECOGNITION:

         The Company recognizes sales revenue on the shipment of a shuffling
system. If a customer converts an existing leased shuffling system to a
purchase, the Company recognizes revenue on the effective date of the lease to
sales conversion.

    RESEARCH AND DEVELOPMENT:

         Research and development costs are expensed as incurred.

    CONCENTRATION OF CREDIT RISK:

         The Company has a concentration of credit risk since substantially all
of its receivables are with customers in the gaming industry.

<PAGE>


    PROPERTY AND EQUIPMENT:

         Property and equipment is stated at cost. Depreciation and amortization
is recorded using the straight-line method over the estimated useful life of the
asset of three to seven years, or lease terms for leasehold improvements. The
Company adopted Statement of Financial Accounting Standards No. 121, "Accounting
for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of "
effective November 1, 1996. The adoption of this statement had no material
effect on net income.

    INTANGIBLE ASSETS:

         Intangible assets include purchased new games, patents and licenses.
During fiscal 1997 and 1996, the Company acquired certain intellectual property,
primarily video games, for $3,370,000. Intangible assets are amortized over
their estimated useful lives of three to five years.

    EARNINGS PER SHARE:

         Earnings per share is based on the weighted average number of common
and common equivalent shares outstanding. Common stock equivalents include
outstanding stock options and warrants.

    NEW ACCOUNTING STANDARD:

         In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share." This statement establishes standards for
computing and presenting earnings per share and is effective for the Company's
quarter ending January 31, 1998. Earlier application is not permitted, and
restatement of all prior period earnings per share data presented is required
upon adoption. The dilutive effect of stock options and stock warrants will be
excluded under the new requirements for calculating basic earnings per share.
The calculation of fully diluted earnings per share will not significantly
change from the current method. The impact of SFAS No. 128 on the calculation of
primary and fully diluted earnings per share is not expected to materially
affect current earnings per share and earnings per share as previously reported.

    USE OF ESTIMATES:

         Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenue
and expenses. Actual results could vary from the estimates that were used.

2.  FINANCIAL INSTRUMENTS:

         CASH AND CASH EQUIVALENTS:

         Cash and cash equivalents include short-term investments with original
maturities of three months or less.

         INVESTMENTS:

         The Company classifies all of its securities as available-for-sale. As
of October 31, 1997 and 1996, the cost of securities approximated fair value
which was based on quoted market prices. All of the investments will mature
within one year from October 31, 1997.

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

                                          1997             1996
                                     -------------    --------------
(In thousands)
United States Government
   and Agency Obligations            $   14,036       $   19,270
Corporate Bonds                           1,080            2,072
Other                                       137            1,696
                                     -------------    --------------
                                     $   15,253       $   23,038
                                     =============    ==============

<PAGE>


         FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS:

         The estimated fair value of accounts receivable, notes receivable, and
accounts payable approximates the carrying value due to the relatively
short-term nature of the instruments. The estimated fair value of the note
payable approximates carrying value since the imputed interest rate is close to
the borrowing rate currently available to the Company.

3.    OTHER FINANCIAL STATEMENT DATA:

The following provides additional disclosures for selected information from the
consolidated financial statements:

<TABLE>
<CAPTION>

AS OF OCTOBER 31,                                      1997           1996
                                                    ----------     ----------
(In thousands)
<S>                                                 <C>            <C>       
ACCOUNTS RECEIVABLE:
Trade receivables                                   $    5,504     $    3,667
Less:  Allowance for doubtful accounts                    (150)          (100)
                                                    ----------     ----------
                                                    $    5,354     $    3,567
                                                    ==========     ==========
INVENTORIES:
Raw materials and component parts                   $    1,580     $    1,600
Work-in-process                                            635            432
Finished goods                                             337            187
                                                    ----------     ----------
                                                         2,552          2,219
Less:  Valuation allowance                                (235)          (160)
                                                    ----------     ----------
                                                    $    2,317     $    2,059
                                                    ==========     ==========
SYSTEMS LEASED AND SYSTEMS HELD FOR LEASE:
Systems leased:
Shuffler systems                                    $    4,790     $    5,190
Let It Ride(R)equipment                                  2,194          2,329
                                                    ----------     ----------
                                                         6,984          7,519
Less:  Accumulated depreciation                         (3,680)        (2,456)
                                                    ----------     ----------
                                                         3,304          5,063
Systems held for lease:
Shuffler systems                                         2,273          1,522
Let It Ride(R)equipment                                  1,920            906
                                                    ----------     ----------
                                                    $    7,497     $    7,491
                                                    ==========     ==========
PROPERTY AND EQUIPMENT:
Office furniture and computer equipment             $    2,543     $    1,494
Leasehold improvements                                   1,794          1,528
Production equipment                                       369            363
Other                                                      546            400
                                                    ----------     ----------
                                                         5,252          3,785
Less:  Accumulated depreciation and amortization        (1,508)          (746)
                                                    ----------     ----------
                                                    $    3,744     $    3,039
                                                    ==========     ==========
INTANGIBLE ASSETS:
Purchased new games                                 $    3,370     $     --
Other                                                    1,062          1,024
                                                    ----------     ----------
                                                         4,432          1,024
Less:  Accumulated amortization                           (592)          (222)
                                                    ----------     ----------
                                                    $    3,840     $      802
                                                    ==========     ==========
ACCRUED LIABILITIES:
Compensation                                        $    1,232     $      698
Income taxes                                              --              254
Other                                                      251            198
                                                    ----------     ----------
                                                    $    1,483     $    1,150
                                                    ==========     ==========
</TABLE>

<PAGE>


<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,                          1997           1996           1995
                                            -----------    -----------    -----------
(In thousands)
<S>                                         <C>            <C>            <C>        
COST OF LEASES, SALES AND LET IT RIDE(R)
  TABLE GAME:
Shuffler lease                              $     3,557    $     3,066    $     1,735
Shufflers sales                                   3,186          1,882            655
Let It Ride(R)table game                          2,682          2,748            760
Other                                             1,068            692            383
                                            -----------    -----------    -----------
                                            $    10,493    $     8,388    $     3,533
                                            ===========    ===========    ===========
</TABLE>

4.  INCOME TAXES:

         Deferred income taxes are recorded to reflect the income tax
consequences in future years between the financial reporting and income tax
bases of assets and liabilities using current tax laws and statutory rates.
Income tax expense is the sum of the tax currently payable and the change in
deferred taxes during the period.

         The components of the provision for income taxes are as follows for the
years ended October 31:

<TABLE>
<CAPTION>
                                                1997           1996           1995
                                            -----------    -----------    -----------
(In thousands)
<S>                                         <C>            <C>            <C>         
Current:
   Federal                                  $     2,541    $       678    $       190 
   State                                            124             58             30
                                            -----------    -----------    -----------
                                                  2,665            736            220
Deferred                                             45            114           (147)
                                            -----------    -----------    -----------
                                            $     2,710    $       850    $        73
                                            ===========    ===========    ===========
</TABLE>

         Deferred tax assets and liabilities consisted of the following as of
October 31. Deferred tax assets are included with other current assets on the
balance sheets:

(In thousands)                                  1997            1996
                                             -----------     -----------
Deferred tax liabilities:
Depreciation                                 $      (427)    $      (521)
Research and experimental                            151             237
Intangible amortization                              140              47
Other                                                 (5)              5
                                             -----------     -----------
                                             $      (141)    $      (232)
                                             ===========     ===========
Deferred tax assets:                       
Accrued vacation                             $        89     $       110
Inventory valuation allowance                         83              57
Other                                                 47              98
                                             -----------     -----------
                                             $       219     $       265
                                             ===========     ===========

         There was no valuation allowance as of October 31, 1997 and 1996. The
net change in the valuation allowance for deferred tax assets was a decrease of
$577,000 and $1,045,000 for the years ended October 31, 1996 and 1995,
respectively, principally related to utilization of net operating loss and tax
credit carryforwards.

         The reconciliation of the federal statutory rate to the effective
income tax rate for the years ended October 31 are as follows:

<TABLE>
<CAPTION>
                                                 1997            1996            1995
                                              ----------      ----------      ----------
<S>                                                 <C>             <C>             <C>  
Federal income tax at the statutory rate            34.0%           34.0%           34.0%
Reduction in valuation allowance                    --             (15.9)          (35.5)
State income taxes, net of federal benefit           1.4             1.1             1.4
Other                                                (.8)            4.3             3.1
                                              ----------      ----------      ----------
Effective tax rate                                  34.6%           23.5%            3.0%
                                              ==========      ==========      ==========
</TABLE>

<PAGE>


5.  COMMITMENTS AND CONTINGENCIES:

         OPERATING LEASES:

         The Company leases office, production and warehouse facilities, and
service vans under operating leases. The facility leases are for a period of
four to ten years, have renewal options of three to fifteen years, and include
an allocation of real estate taxes and other operating expenses. Total rent
expense under operating leases was $632,000, $377,000 and $240,000, for the
years ended October 31, 1997, 1996, and 1995, respectively.

         Estimated future minimum lease payments under operating leases as of
October 31, 1997, are as follows:

YEAR ENDING OCTOBER 31,
(In thousands)
            1998               $        730
            1999                        675
            2000                        578
            2001                        266
            2002                        242
            Thereafter                1,047
                               ------------
                               $      3,538
                               ============

         LITIGATION:

         The Company is involved in litigation with Progressive Games, Inc., a
Florida corporation. The Company has a declaratory judgment action pending in
the United States District Court in Nevada, Mississippi and Connecticut
requesting a determination that certain patents owned by Progressive Games, Inc.
are either invalid or not infringed by the Company. Progressive Games, Inc. is
suing the Company in United States District Court in Nevada, Mississippi and
Connecticut alleging the Company's Let It Ride The Tournament(TM) and Let It
Ride Bonus(TM) table games and apparatus infringe certain of Progressive Games,
Inc.'s patents. Progressive Games, Inc. is asking for injunctive relief and
damages.

         The Company has agreed to defend and indemnify, and is defending and
indemnifying all of its Let It Ride The Tournament(TM) and Let It Ride Bonus(TM)
casino licensees who are sued by Progressive Games, Inc. due to their use of the
Let It Ride The Tournament(TM) and Let It Ride Bonus(TM) table games and
apparatus. If Progressive Games, Inc. should prevail in its suit, management
does not believe it would materially affect the Company's financial condition.

         SETTLED LITIGATION:

         The Company had been sued in United States District Court in Nevada by
DD Stud, Inc. and Anchor Coin, both Nevada corporations, and had counterclaimed
against Stanley E. Fulton, Anchor Gaming, DD Stud, Inc., and Anchor Coin. In
August 1997, the Company and DD Stud, Inc., Anchor Coin, Stanley E. Fulton and
Anchor Gaming settled all of their claims and related companion claims. The
financial terms of the settlement were not material.

6.  STOCK OPTIONS AND WARRANTS:

         STOCK OPTIONS:

         In November 1993, the Company's Board of Directors adopted the 1993
Stock Option Plan. The plan permits the granting of incentive stock options
meeting the requirements of Section 422 of the Internal Revenue Code, and
nonqualified options which do not meet the requirements of Section 422. A total
of 725,000 shares of the Company's stock have been reserved for issuance under
the plan. In January 1998, an additional 235,000 shares were added to the
reserved shares under the plan by the Board of Directors. The addition of these
shares is subject to shareholder approval at the March 1998 meeting of
shareholders.

         In November 1993, the Company's Board of Directors adopted an outside
directors stock option plan for the purpose of compensating outside directors
with grants of stock options. There may be an annual option grant of 3,000
shares to each eligible director at a price equal to the fair market value on
the date of the grant. Each option is immediately exercisable and expires seven
years from the grant date. In fiscal 1997, the plan was amended to allow

<PAGE>


discretionary option grants with variable vesting provisions. A total of 150,000
shares of the Company's stock have been reserved for issuance under the plan.

         In October 1997, the Board of Directors granted an option to purchase
94,000 shares of the Company's common stock at $8.75 per share to the former
Chairman of the Board. These options were granted outside of the existing stock
option plans.

         A summary of stock option activity is as follows:

<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,                   1997                        1996                        1995
----------------------          ----------------------      ---------------------        ---------------------
(shares in thousands)                      Wtd. Avg.                   Wtd. Avg.                    Wtd. Avg.
                                Shares    Exer. Price       Shares    Exer. Price        Shares    Exer. Price
                                ------    -----------       ------    -----------        ------    -----------
<S>                                 <C>       <C>              <C>        <C>               <C>        <C>  
Outstanding at
    beginning of year              648       $9.81            482        $8.83             227        $6.81
Granted                            422        8.52            230        11.93             271        10.39
Exercised                          (22)       7.09            (23)        6.56             (15)        6.62
Forfeited                          (66)      12.57            (41)       12.14              (1)        8.13
                                  -----                      -----                       -----
Outstanding at
    end of year                    982       $9.13            648        $9.81             482        $8.83
                                   ===       =====            ===        =====             ===        =====

Options exercisable at end
    of year                        451       $9.01            295        $8.65             227        $7.83
                                   ===       =====            ===        =====             ===        =====
</TABLE>

         The following table summarizes information concerning options
outstanding and exercisable options as of October 31, 1997:

<TABLE>
<CAPTION>

(shares in thousands)                     Weighted-
                                           Average             Weighted-                               Weighted-
 Range of Exercise        Number           Remaining       Average Exercise         Options        Average Exercise
      Prices           Outstanding     Contractual Life          Price            Exercisable            Price
-------------------------------------------------------------------------------------------------------------------
<S>                       <C>               <C>               <C>                     <C>              <C>    
       $1-$4                 1                .1 years         $  2.33                   1              $  2.33
       $4-$8               218               7.0                  6.96                 147                 6.53
      $8-$12               705               8.1                  9.37                 277                 9.84
      $12-$15               58               8.4                 14.65                  26                14.48

</TABLE>

         Effective November 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted by SFAS 123, the Company
has elected to continue following the guidance of APB No. 25 for measurement and
recognition of stock-based transactions with employees. No compensation cost has
been recognized for stock options issued under the 1993 Stock Option Plan since
the exercise price for all options granted was equal to the fair value of the
common stock on the date of grant. If compensation cost for the Company's stock
option plans had been determined based on the fair value at the grant dates for
grants during fiscal 1997 and 1996, consistent with the method provided in SFAS
No. 123, the Company's net income and earnings per share would have been as
follows:

YEAR ENDED OCTOBER 31,                  1997             1996
--------------------------------     ----------       ----------
(In thousands, except per share amounts)

Net income:
         As reported                 $    5,122       $    2,768
         Pro forma                        4,076            2,248

Earnings per share:
         As reported                 $      .48       $      .25
         Pro forma                          .38              .20

Weight average fair value of         $     6.11       $     9.64
options granted during the
year

<PAGE>


         The fair value of options granted under the various option plans during
fiscal 1997 and 1996 was estimated on the date of grant using the Black-Sholes
option-pricing model with the following weighted average assumptions and
results:

YEAR ENDED OCTOBER 31,                       1997               1996
--------------------------------       --------------     --------------
Dividend yield                             None               None
Expected volatility                          52.6%              67.8%
Risk-free interest rate                       6.5%               6.5%
Expected life of options                 9.77 years         9.77 years

         The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock based compensation has
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can significantly affect the
fair value estimate, in management's opinion, use of the existing models for
valuation does not necessarily provide a reliable single measure of the fair
value of its employee stock based compensation.

         WARRANTS AND REDEEMABLE WARRANTS:

         As of October 31, 1997, there were 80,000 warrants outstanding to
purchase common stock at $10.47 per share. In fiscal 1996 and 1995, the holders
exercised 45,000 and 25,000 warrants, respectively. No warrants were exercised
in fiscal 1997.

         In fiscal 1995, the Company sold options for redeemable warrants at
$.11 each to purchase 165,000 shares of common stock at $9.30 per share. The
holders exercised 61,000 and 30,000 of these warrants in fiscal 1996 and 1995,
respectively. As of October 31, 1997, 74,000 redeemable warrants to purchase
common stock were outstanding. These warrants will expire January 20, 1998.

7.  COMMON STOCK REPURCHASE:

         In October 1996, the Company's Board of Directors approved a resolution
providing for the repurchase of up to $5,000,000 of its outstanding common
stock. The Company repurchased 569,000 shares using the total authorization. In
the second quarter of fiscal 1997, the Company's Board of Directors approved a
resolution authorizing repurchase of an additional $5,000,000 of its outstanding
common stock. The Company repurchased 257,000 shares at a total cost of
$1,896,000 under this second authorization. Separately, the Board of Directors
authorized the repurchase of up to $3,500,000 of common stock from the Company's
former Chairman of the Board and his wife, a former director. The Company
repurchased 424,000 shares in October 1997 at a total cost of $3,500,000 under
this authorization.

8.  RELATED PARTY TRANSACTIONS:

         The Company advanced $300,000 to its former Chairman of the Board and a
former director, respectively, in fiscal 1994. The note receivable bears
interest at prime plus 1% (9.5% at October 31, 1997), is secured by a second
mortgage on their primary residence, and matures in February 1998. Subsequent to
October 31, 1997, the loan plus accrued interest was repaid. In fiscal 1997, the
Company advanced $300,000 to its President, Chief Executive Officer and current
Chairman of the Board. The note receivable is secured by 17,000 shares of the
Company's common stock, bears interest at 7% and matures in November 1999.

<PAGE>


         The Company has a non-interest bearing obligation to an Executive Vice
President and director related to the purchase of certain intellectual property,
payable in cash and common stock. The cash portion of the obligation has been
discounted at a rate of seven percent. The obligation is payable as follows:

YEAR ENDING OCTOBER 31,

(In thousands)
                       1998              $529
                       1999               523
                       2000               547
                       2001               581
                       2002                67
                                     ----------
                                        2,247

Less: current portion                    (529)
                                     ----------
                                       $1,718
                                     ==========

9.  DEFINED CONTRIBUTION PLAN:

         The Company sponsors a defined contribution plan which qualifies under
Section 401(k) of the Internal Revenue Code and covers employees who meet
certain age and service requirements. The Company may make matching
contributions to the plan equal to a percentage of employee contributions. No
matching contributions were made to the plan during the fiscal years ended
October 31, 1997, 1996 and 1995.

10. EXPORT SALES:

         In fiscal 1997, 1996, and 1995, the Company had export shuffler sales
and shuffler lease revenue, primarily to Canada and Australia, which totaled
17%, 14%, and 23%, respectively, of total revenue.



                            QUARTERLY FINANCIAL DATA
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                Quarter Ended
                                             -----------------------------------------------------
In thousands, except per share amounts       January 31    April 30        July 31      October 31
--------------------------------------------------------------------------------------------------
<S>                                          <C>           <C>            <C>           <C>      
FISCAL 1997

Revenue                                      $   6,487     $   7,452      $   7,448     $   7,349

Gross Profit                                     4,094         4,832          4,749         4,568

Operating Income                                 1,330         1,929          1,852         1,575

Net Income                                       1,077         1,418          1,341         1,286

Earnings per Share                                 .10           .13            .13           .12


FISCAL 1996

Revenue                                      $   4,749     $   5,453      $   5,884     $   6,501

Gross Profit                                     3,172         3,713          3,572         3,742

Operating Income                                 1,528         1,754          1,507           761

Net (Loss) Income                               (1,097)        1,545          1,435           885

(Loss) Earnings per Share                         (.10)          .14            .13           .08

</TABLE>


<PAGE>


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

      None.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     (a)  Directors of the Registrant.
          The information under the caption "Election of Directors" in the
          Company's 1997 Proxy Statement is incorporated herein by reference.

     (b)  Executive Officers of the Registrant.
          The information under the caption "Executive Officers" in the
          Company's 1997 Proxy Statement is incorporated herein by reference.

     (c)  Compliance With Section 16 (a) of the Exchange Act.
          The information under the caption "Section 16 (a) Beneficial Ownership
          Reporting Compliance" in the Company's 1997 Proxy Statement is
          incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

      The information under the captions "Executive Compensation," "Compensation
of Directors," "Report of Compensation Committee on Executive Compensation,"
"Stock Performance Graph," and "Termination of Employment Arrangement" in the
Company's 1997 Proxy Statement is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's 1997 Proxy Statement is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information under the caption "Certain Relationships and Related Party
Transactions" in the Company's 1997 Proxy Statement is incorporated herein by
reference.


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

      (a)   1.    Financial Statements

                  The following consolidated financial statements and
                  independent auditors' reports are filed as part of this Report
                  on Form 10-K.

                        Independent Auditors' Reports

                        Consolidated Income Statements for the years ended
                        October 31, 1997, 1996, and 1995

                        Consolidated Balance Sheets as of October 31, 1997 and
                        1996 

                        Consolidated Statements of Shareholders' Equity for the
                        years ended October 31, 1997, 1996, and 1995

                        Consolidated Statements of Cash Flows for the years
                        ended October 31, 1997, 1996, and 1995

                        Notes to Consolidated Financial Statements 

                        Quarterly Financial Data (unaudited)

<PAGE>


      (a)   2.    Financial Statement Schedules

                  All financial statement schedules are omitted as the required
                  information is inapplicable or the information is presented in
                  the consolidated financial statements or related notes.

            3.    Exhibits

                  3.1   Articles of Incorporation of Shuffle Master, Inc. as
                        amended July 15, 1992, and June 23, 1995 (Incorporated
                        by reference to the same exhibit number in the Company's
                        Report on Form 10-K for the year ended October 31, 1995)

                  3.2   Bylaws of Shuffle Master, Inc. (Incorporated by
                        reference to the same exhibit number included in the
                        Company's Registration Statement on Form S-18,
                        Registration No. 33-53994C)

                  10.1  Shuffle Master, Inc. 1993 Stock Option Plan
                        (Incorporated by reference to exhibit 10.8 included in
                        the Company's Registration Statement on Form SB-2,
                        Registration No. 33-72224)

                  10.2  Office/Warehouse lease dated August 7, 1995, between
                        Shuffle Master, Inc. and Gerald A. Portnoy (Incorporated
                        by reference to the same exhibit number in the Company's
                        Report on Form 10-K for the year ended October 31, 1995)

                  10.3  Office/Warehouse lease dated October 6, 1995, between
                        Shuffle Master, Inc. and Gerald A. Portnoy (Incorporated
                        by reference to the same exhibit number in the Company's
                        Report on Form 10-K for the year ended October 31, 1995)

                  10.4  Office Lease dated August 7, 1995, between Shuffle
                        Master, Inc. and Gerald Portnoy (Incorporated by
                        reference to the same exhibit number in the Company's
                        Report on Form 10-K for the year ended October 31, 1995)

                  10.5  Shuffle Master, Inc. Outside Directors' Option Plan
                        (Incorporated by reference to exhibit 10.7 included in
                        the Company's Registration Statement on Form SB-2,
                        Registration No. 33-72224)

                  10.6  Office lease dated August 9, 1995, between Shuffle
                        Master, Inc. and Airport Center Associates, a joint
                        venture of Airport Partners, and Copley Investors
                        Limited Partnership (Incorporated by reference to the
                        same exhibit number in the Company's Report on Form 10-K
                        for the year ended October 31, 1995)

                  10.7  Employment Contract, by and between Shuffle Master, Inc.
                        and Mark Yoseloff, dated March 7, 1997 (Incorporated by
                        reference to exhibit 10.1 in the Company's Report on
                        Form 10Q for the quarter ended July 31, 1997)

                  10.8  Purchase Agreement, by and between Shuffle Master, Inc.,
                        and Well Suited L.L.C., and Mark Yoseloff, dated March
                        7, 1997 (Incorporated by reference to exhibit 10.2 in
                        the Company's Report on Form 10Q for the quarter ended
                        July 31, 1997)

                  10.9  Purchase/License Agreement, by and between Shuffle
                        Master, Inc., and Visual Communications Consultants,
                        Inc. dba Advanced Gaming Concepts, and Mark Yoseloff,
                        dated March 7, 1997 (Incorporated by reference to
                        exhibit 10.3 in the Company's Report on Form 10Q for the
                        quarter ended July 31, 1997)

                  10.10 Termination of Employment Arrangement for Joseph J.
                        Lahti, as excerpted from the October 27, 1997 minutes of
                        the Board of Directors meeting

                  23.1  Independent Auditors' Consent

                  23.2  Independent Auditors' Consent

                  27.0  Financial Data Schedule

      (b)   Reports on Form 8-K

            No reports on Form 8-K were filed during the fourth quarter of the
      year ended October 31, 1997.

<PAGE>


                                   SIGNATURES

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

                                          SHUFFLE MASTER, INC.


Dated:      January 28, 1998          By: /s/ Joseph J. Lahti
                                          --------------------------------------
                                          Chief Executive Officer

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

<TABLE>
<CAPTION>

           Signature                             Title                          Date
           ---------                             -----                          ----
<S>                            <C>                                       <C> 
/s/ Joseph J. Lahti             President, Chief Executive Officer,       January 28, 1998
-----------------------------   Treasurer and Chairman of the Board
Joseph J. Lahti

/s/ Gary W. Griffin             Chief Financial Officer                   January 28, 1998
-----------------------------
Gary W. Griffin

/s/ John A. Rahja               Vice President and Controller             January 28, 1998
-----------------------------
John A. Rahja

/s/ Mark L. Yoseloff            Executive Vice President and Director     January 28, 1998
-----------------------------
Mark L. Yoseloff

                                Director                                  January 28, 1998
-----------------------------
David W. Rogers

/s/ Patrick R. Cruzen           Director                                  January 28, 1998
-----------------------------
Patrick R. Cruzen

/s/ Thomas A. Sutton            Director                                  January 28, 1998
-----------------------------
Thomas A. Sutton

</TABLE>