SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K


(Mark one)
__X__ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934 X for the fiscal year ended October 31, 1999, 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. __X__

      As of January 21, 2000, 7,154,393 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 $59,471,000 based upon the last reported sale
price of the Common Stock at that date by The Nasdaq Stock Market.

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 24, 2000 (Fiscal 1999 Proxy Statement).

<PAGE>


                                TABLE OF CONTENTS

                                     PART I

                                                                            PAGE
Item  1.   Business                                                            1

Item  2.   Properties                                                         12

Item  3.   Legal Proceedings                                                  12

Item  4.   Submission of Matters to a Vote of Security Holders                13

                                     PART II

Item  5.   Market for Registrant's Common Equity and Related Stockholder
           Matters                                                            13

Item  6.   Selected Financial Data                                            14

Item  7.   Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                          15

Item  7A.  Quantitative and Qualitative Factors about Market Risk             21

Item  8.   Financial Statements and Supplementary Data                        22

Item  9.   Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure                                41

                                    PART III

Item  10.  Directors and Executive Officers of the Registrant                 41

Item  11.  Executive Compensation                                             41

Item  12.  Security Ownership of Certain Beneficial Owners and Management     41

Item  13.  Certain Relationships and Related Transactions                     41

                                     PART IV

Item  14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K    41

<PAGE>


                                     PART I


ITEM 1. BUSINESS

FORWARD LOOKING STATEMENTS

        This report contains forward-looking statements. Such statements reflect
and are subject to 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 consumer or commercial acceptance of the
Company's existing products and new products as introduced; competitive
advances; acceleration and/or deceleration of various product development and
rollout schedules; higher than expected manufacturing, service, selling,
administrative, product development and/or rollout cost; current and/or
unanticipated future litigation; regulatory and jurisdictional issues involving
Shuffle Master or its products specifically, and for the gaming industry in
general; general and casino industry economic conditions; the financial health
of the Company's casino and distributor customers 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 Minnesota in
1983. The Company develops, manufactures and markets automatic card shuffling
equipment (shufflers), and gaming products such as table games and slot machine
game software for the gaming industry. Additionally, the Company distributes
casino chip sorting machines and accessories under a distribution agreement with
TCS America, Inc. The Company's growth strategy is to develop or acquire
innovative gaming products and systems, including productivity enhancing
equipment, new table and slot games, and game processing hardware and software
technology, and market these products worldwide.

        Casino gaming is found in 31 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 that there are approximately 17,000 table games in North America, and
over 10,000 additional tables worldwide. Casino gaming grew tremendously over
the last decade, and the Company believes both the North American and
international markets for gaming-related products will continue to expand.
However, the mix of table games and slot machines varies considerably by casino
and jurisdiction.

        The Company develops and markets shuffler products suitable for use with
the vast majority of table games. The initial model in the Company's shuffler
product line was first placed in casinos in January 1992. As of October 31,
1999, 5,736 of the Company's shufflers have been placed in casinos or other
legal gaming establishments, including 2,253 units on lease and 3,483 units
sold.

        The Company also develops and markets table games and licenses these
products to casinos. Current revenue generating table games include the Let It
Ride(R) basic game, Let It Ride Bonus(R) game and Three Card Poker(R) game. The
Let It Ride(R) basic game was introduced in October 1993. Let It Ride The
Tournament(R) was launched in May 1995, and in August 1997, the Company
introduced the Bonus version of the game. The Bonus version has since replaced
the Tournament version in all but one jurisdiction. In May 1999, the Company
acquired the Three Card Poker(R) table card game from its developer and
distributor. As of October 31, 1999, there were approximately 845 of the
Company's table games installed in casinos, including approximately 424 Let It
Ride Bonus(R) tables, approximately 233 Let It Ride(R) basic game tables and
approximately 188 Three Card Poker(R) tables.

        In addition to table games in its line of gaming products, the Company
also develops and markets games for slot machines. As of October 31, 1999, the
Company actively marketed Let's Make A Deal(TM), Five Deck Poker(TM) and Let It
Ride Bonus Video(R) as video slot machine game products, with The Three
Stooges(TM) in market test stage and Press Your Luck(TM) under development. As
of October 31, 1999, the Company had 526 slot machine games installed in
casinos, with Let's Make A Deal(TM) accounting for 320 of the total. During
fiscal 1999, the Company made progress in the development of its slot game
business in a number of areas:

    * In March 1999, the Company, in a joint marketing agreement with Bally
Gaming, Inc., introduced the Let's Make A Deal(TM) video slot game, based on the
popular television game show. As of October 31, 1999, approvals to market this
game had been secured in three United States gaming jurisdictions.


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ITEM 1. BUSINESS (CONTINUED)

    * In March 1999, the Company entered into a joint marketing alliance with
Acres Gaming, Inc. to develop and market a slot game based on the sounds and
images of the The Three Stooges(TM). The game was first shown at the World
Gaming Congress & Expo in September 1999, and is expected to be launched into
the market in the first quarter of fiscal 2000.

    * In July 1999, the Company entered into a license agreement to secure the
rights to and create a video slot game version of Press Your Luck(TM), based on
the popular television game show appearing in the early 1980's.

    * In July 1999, the Company also began internally developing game systems
that incorporate PC hardware and gaming-specific software on which the Company's
and other slot games may be operated.

THE COMPANY'S PRODUCTS

        GAME EQUIPMENT

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

        Shuffler lease and sales revenue accounted for approximately 59% of the
Company's revenue in fiscal 1999. The Company has developed three types of
shufflers:

    * SINGLE DECK. The Company's single deck shufflers automatically shuffle a
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 for use
in the next hand.

        The initial model single deck shuffler and its variations are designated
as the BG series. BG shufflers include a model designed for hand held dealing
and a model which, after shuffling, counts out cards to be distributed by the
dealer. The latter model, the BG-3, was the most widely placed single deck
shuffler until the introduction of the ACE(TM) single deck model during fiscal
1999. Single deck shufflers are used with specialty card games such as the
Company's own Let It Ride(R) and Three Card Poker(R) games and other non-Shuffle
Master games such as Caribbean Stud Poker(R) and Pai Gow Poker. Since the
Company's single deck machines shuffle a "fresh" deck prior to each hand, the
security of these games is enhanced by reducing the opportunity for dealer card
manipulation. The Company's single deck shufflers also minimize dealer errors in
delivering the proper number of cards and speed up game play.

        During fiscal 1999, the Company began production and marketing of the
ACE(TM), its next generation single deck card delivery system. Unlike the BG
models, the ACE(TM) does not shuffle cards in a traditional manner. Instead, it
sorts cards into shelves on a vertically moving elevator in random order
according to computer generated instructions. Software instructs the ACE(TM) to
put the appropriate number of randomly selected cards in each shelf as necessary
to create the required hands for the specific game being played. Shelves then
dispense the hands in random order. Hands are delivered more quickly than the
Company's BG model single deck shufflers. The ACE(TM) is smaller, has fewer
moving parts, is expected to require less service, has a universal power supply
for international electrical currents, is easily programmable by casino pit
personnel to be used with a variety of single deck games and tracks and displays
usage and hands played data for the casino operator. It can be used for the
Company's specialty card games as well as other non-Shuffle Master single deck
specialty games.

    * MULTI-DECK BATCH. The Company's MD series multi-deck card shufflers
shuffle a batch of two to eight decks of cards at a time, primarily for
blackjack or mini-baccarat table games. When the shuffling of a batch is
complete, the dealer then manually unloads the shuffled decks and places them in
a standard card shoe. Although a different design than single deck systems, the
multi-deck shuffler also shuffles a second batch of cards while the first batch
is played. The majority of blackjack games are played with multiple decks of
cards. Certain jurisdictions require that blackjack be played with four or more
decks. The Company estimates that blackjack tables represent approximately 70%
of casino table games, excluding poker rooms.


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ITEM 1. BUSINESS (CONTINUED)

    * MULTI-DECK CONTINUOUS. During fiscal 1999, The Company completed the
initial development of its next generation multiple deck card delivery system,
the King(TM), that continuously "reshuffles" cards (using the same sorting
process as the ACE(TM)) as they are played at table games. Designed for use with
multi-deck blackjack and mini-baccarat table games, the King(TM) is based on the
same basic design and chassis as the ACE(TM). The continuous model uses a larger
elevator with more shelves and an integrated mechanical shoe. Cards played in
any given hand are collected by the dealer at the completion of the hand,
reloaded into the machine and immediately sorted in random order. Cards are then
mechanically delivered into the shoe when sensors in the shoe call for
additional cards. The speed of the shuffling and delivery action allows the shoe
to operate with only a small buffer of cards. The machine can shuffle cards
quickly enough to keep up with the normal pace of dealing hands. It is possible
for cards dealt in one hand to be re-dealt in the next hand, which eliminates
card counting and tracking. The Company expects that casino demand for its
continuous shufflers will be driven by interest in improved game security and
table productivity. The Company believes that its continuous shuffler will
appeal to some casinos more than others and expects that this model will coexist
with and complement its multi-deck batch shuffler model. As of December 31,
1999, some minor additional design work was required, with market introduction
of the King(TM) expected in the second quarter of fiscal 2000.

        DISTRIBUTED EQUIPMENT. In January 1999, the Company entered into an
agreement with TCS America, Inc. ("TCS") whereby the Company will distribute,
service and share in the profits from the lease and sale in the U.S. and the
Caribbean of TCS' Chipper Champ(R) chip sorting product line and other TCS
products. Chipper Champ machines sort chips at roulette tables and serve both to
save labor and add security by detecting counterfeit chips. Other TCS products
distributed by the Company include roulette winning number displays, roulette
wheel analysis products and air rails used to move smoke away from gaming
tables.

        GAMING PRODUCTS

        TABLE GAMES. The Company first began offering table games to increase
demand for its shuffler line. Driven by the success of Let It Ride(R), table
games accounted for approximately 33% of the Company's revenue in fiscal 1999.
The Company markets the following table games to casinos:

    * LET IT RIDE(R). The basic 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 separate, 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, 1999, the basic Let It Ride(R) table game was approved
for play in 31 United States gaming jurisdictions in 24 states, seven Canadian
provinces and 14 other foreign countries.

    * LET IT RIDE BONUS(R). The Let It Ride Bonus(R) game was introduced in
August 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 from a separate payout schedule, in addition to the underlying payouts
of the basic game. Participation data gathered in 1999 shows that participation
in the bonus bet in major gaming venues was in excess of 85%. As of October 31,
1999, the Let It Ride Bonus(R) game was approved for use in 28 United States
gaming jurisdictions in 21 states, including all major gaming markets, three
Canadian provinces, and five other foreign countries.

    * LET IT RIDE THE TOURNAMENT(R). This version of Let It Ride was launched in
May 1995. In Let It Ride The Tournament(R) players were eligible for both bonus
payouts and the opportunity to advance to a multi-round playoff. Formerly
offered on a company-sponsored jurisdiction-wide basis in Nevada and
Mississippi, the Tournament is now offered only as requested by casino
customers, and is currently operated on a continual basis in one tribal casino.
The Company generates revenue from this casino on a monthly fixed fee. The
casino is solely responsible for payout of the Tournament cash awards.

    * THREE CARD POKER(R). The Company acquired the rights to Three Card
Poker(R), a patented table game, in May 1999 from its developer and distributor,
Derek Webb and Prime Table Games. In this game, players place wagers on three
card stud hands, with options to bet against the dealer, bet on the value of
their own hand or both. Winning hands are paid according to a pre-


                                       3
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ITEM 1. BUSINESS (CONTINUED)

determined payout schedule and bonus payouts may be earned on certain hands when
wagering against the dealer. When acquired, Three Card Poker(R) was approved for
play in eight United States gaming jurisdictions. As of October 31, 1999, the
Three Card Poker(R) game was approved for use in 20 United States gaming
jurisdictions in 13 states.

        For fiscal year 1999, all of the Company's table game products were
licensed to casinos for a fixed monthly fee.

        In December 1999, the Company settled patent litigation regarding its
Let It Ride The Tournament(R), Let It Ride Bonus(R) and Three Card Poker(R)
table games. See Item 3. - Legal Proceedings.

        SLOT GAMES. The Company develops and markets game concepts and software
programs for use on slot machines, either on its own or through agreements with
third parties. Actively marketed products include Let's Make A Deal(TM), Five
Deck Poker(TM), and Let It Ride Bonus Video(R). The Company is developing or
testing additional products for future commercialization, including The Three
Stooges(TM) and Press Your Luck(TM). The Company is not involved in the
manufacture of gaming machines, although it does occasionally purchase and sell
or lease such machines in connection with its game marketing efforts. Slot
revenue accounted for approximately 4% of the Company's revenue in fiscal 1999.
Descriptions of revenue-generating slot products follow:

    * LET'S MAKE A DEAL(TM). The Company and Bally Gaming, Inc. jointly
introduced this video slot game version based on the popular television game
show after receiving approval from the Nevada Gaming Control Board in March
1999. In October 1999, the Company received approval from gaming authorities in
Connecticut and New Jersey as well. As of October 31, 1999 Let's Make A Deal(TM)
games were installed in approximately 40 casinos in Nevada.

    * FIVE DECK POKER(TM). Originally purchased in 1997 as part of the
acquisition of a slot games library from Dr. Mark Yoseloff (now a director and
executive officer of the Company), Five Deck Poker(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 that are
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 was originally marketed to Nevada casinos in a wide-area
progressive format under the brand name "Five Deck Frenzy(TM)" by the Company
and IGT through a joint marketing agreement. In October 1999, the Company and
IGT discontinued the Five Deck Frenzy(TM) video slot game and converted the
remaining games into Five Deck Poker(TM) video slot games. As of October 31,
1999, Five Deck Poker(TM) games were installed in 16 casinos in New Jersey,
Nevada, Connecticut and Minnesota.

        * LET IT RIDE BONUS VIDEO(R). In 1995, the Company entered into an
agreement with Bally Gaming, Inc. ("Bally"), which was subsequently acquired by
Alliance Gaming Corporation, to develop and manufacture a video bonus version of
the Let It Ride(R) game for use on machines manufactured by Bally. The Company
markets Let It Ride Bonus Video(R) directly to casinos, usually for a fixed
monthly fee. As of October 31, 1999, Let It Ride Bonus Video(R) games were
installed in four casinos.

SIGNIFICANT PRODUCT RELATED AGREEMENTS

    * JOINT MARKETING ALLIANCE WITH IGT. In September 1996, the Company entered
into an agreement with IGT forming a joint marketing alliance to develop and
market the Five Deck Frenzy(TM) video poker game in a wide-area progressive
video format. The Company and IGT operated Five Deck Frenzy(TM) progressive
systems in Nevada from fiscal 1997 through 1999, with profits from the video
poker game alliance split equally.

    * LICENSING AGREEMENT WITH IGT. In October 1998, the Company entered into a
licensing agreement with IGT that allows the Company to develop and market its
games for use on IGT slot machine platforms. In exchange for the license the
Company pays IGT a royalty based on a percentage of revenue generated by the
Company's games, which are installed on IGT slot machines. The Company is
currently marketing Five Deck Poker(TM) under this agreement.

    * LET'S MAKE A DEAL(TM) LICENSE AGREEMENT WITH BALLY GAMING, INC. In April
1998, the Company entered into a joint marketing agreement with Bally Gaming,
Inc. to develop and market a video slot version of Let's Make A Deal(TM), the
popular and long-running television game show hosted by Monty Hall. The
Company's fiscal 1998 slot revenue included $1.0 million of licensing income
related to the signing of this agreement, which provides that the two companies
will share equally in development costs, capital, and operating profits from the
game. Let's Make A Deal(TM) was introduced into casinos in the second quarter of
fiscal 1999.


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ITEM 1. BUSINESS (CONTINUED)

    * DISTRIBUTION AGREEMENT WITH TCS AMERICA, INC. In January 1999, the Company
entered into a profit sharing and distribution agreement with TCS America, Inc.
("TCS") that provides the Company the exclusive right in the United States and
Caribbean to distribute, sell, lease and service gaming related equipment
manufactured by TCS. Equipment covered by this agreement includes TCS' Chipper
Champ(R) and Chipper Champ Plus(R) casino chip sorting machines as well as TCS'
roulette number display systems. The Company's fiscal 1999 other revenue
included $1,047,000 in lease, sale and service revenue related to this
agreement. As of October 31, 1999, the Company shared in lease revenue from the
placement of 116 Chipper Champ(R) machines.

    * THE THREE STOOGES(TM) LICENSE AGREEMENT WITH ACRES GAMING, INC. In March
1999, the Company entered into a game development and marketing agreement with
Acres Gaming, Inc. to jointly develop, market and distribute a casino slot game
using the sounds and images of The Three Stooges(TM) enabled by Acres' Bonusing
Technology(TM) and plasma flat panel video screens. The two companies will share
profits equally. In November 1999, The Three Stooges(TM) slot game received
final approval by the Nevada Gaming Control Board for casino installation in
Nevada.

CUSTOMERS AND MARKETING

        The Company created the market for shufflers 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, 1999, the Company had placed its game
equipment and gaming products in over 630 casinos throughout the world.

        The Company leases and sells its shufflers 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 maintain 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 shuffler units to the lessee. To customers that
purchase shufflers, the Company offers a service contract that provides service
benefits similar to that on leased units, or a parts warranty contract.

        The Company's table game product line includes Let It Ride(R) and Three
Card Poker(R). 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 enjoy a more casual, social card game, or who are new to
or intimidated by table games. In North America, the Company markets the
different versions of the game directly to casinos. In selected international
jurisdictions, the Company markets the basic version of the game through its
international distributor, Technical Casino Supplies, Ltd. In May 1999, the
Company acquired Three Card Poker(R), which is marketed in the same manner as
the Company's other table games. Three Card Poker(R) is currently marketed only
in United States gaming jurisdictions.

        In North America, Shuffle Master sells and services its shuffler, table
game and slot products through its own direct sales force and service
department. As of October 31, 1999, the Company had 12 sales employees and 60
service employees, with 42 service employees in 18 field locations and 18
service employees based in the Company's Las Vegas facility.

        Outside of North, Central and South America, the Company markets its
shuffler and selected other products primarily through its international
distributor, Technical Casino Supplies, Ltd. ("TCS"). This exclusive
distribution relationship was established in February 1998. TCS is a privately
held international gaming products manufacturing and marketing company with
headquarters in London, England. TCS has field sales offices located in Spain,
Australia, South Africa and the United States.

        In addition to the Company's agreement to have TCS distribute the
Company's products internationally, the Company entered into an agreement in
fiscal 1999 with TCS' subsidiary, TCS America, Inc., to distribute, in the
United States and the Caribbean, products manufactured by TCS.

        Slot games marketed under the licensing agreement with IGT are sold and
installed by Shuffle Master sales and service personnel. The Company, at its
expense, provides conversion kits for retrofit of gaming machines already owned
by the casino. Under the agreement, the Company may also offer its games in
connection with the sale of new gaming machines, which it may purchase through
IGT, or which may be sold directly to the casino by IGT. In such cases the
Company will market its game software product separately from the gaming
machine, with chip sets and glass provided by the Company at its own expense.


                                       5
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ITEM 1. BUSINESS (CONTINUED)

        Sales efforts for Let's Make A Deal(TM) are led by Bally Gaming, Inc.'s
sales force with the Company providing secondary sales and marketing support.
Bally also manufactures and distributes Let's Make A Deal(TM) video slot
machines, which are sold or leased to casino customers or are provided free of
charge under certain game revenue sharing arrangements.

        The marketing plan for The Three Stooges(TM) slot game calls for the
Company to take the lead role in service, sales, marketing and administrative
responsibilities.

        In order to market its products, the Company is subject to
jurisdictional licensing requirements, and must obtain approvals for all of its
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 1999, 1998, and 1997, the Company had export shuffler sales
and shuffler lease revenue, primarily to Canada and Australia, which totaled
17%, 24%, and 17%, respectively, of total revenue.

PRODUCT SUPPLY OPERATIONS

        The Company's product supply operations consist primarily of the
procurement, assembly, warehousing and shipment of shufflers, Let It Ride
Bonus(R) tables, slot game software chip sets and machine glass panels, 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. Slot product supply operations include
procuring slot machines for lease or sale as required for the business, and will
typically involve procuring and stocking parts needed to retrofit casino-owned
machines for new game software. The Company also supplies products, parts and
accessories related to its distribution agreement with TCS America, Inc. 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 checks are conducted by the
Company's employees in Las Vegas, Nevada.

RESEARCH AND DEVELOPMENT

        The Company believes that one of its strengths involves developing new
products from the conceptual 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.

        SHUFFLERS. 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 first
single deck shuffler, has been instrumental in the development of all of the
Company's shuffler products. During fiscal 1999, substantial progress was made
on the development of the Company's next generation shuffler products, resulting
in full production of the ACE(TM) single deck shuffler, and advancing the
King(TM) continuous shuffler toward production. Resources will continue to be
allocated to such projects to support the Company's efforts to maintain and
enhance its market leader position.

        GAMING PRODUCTS. In fiscal 1999, the Company's gaming product
development group worked on developing game concepts and gaming related
technology internally, and evaluating third party game products. The Company's
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 gaming products as a future revenue
source, the Company expects to increase the resources devoted to game and gaming
technology 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 significant portion of its total expenditures. Research and
development expenses were $3,468,000, $2,462,000, and $1,693,000, in fiscal
1999, fiscal 1998, and fiscal 1997, respectively.


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<PAGE>


ITEM 1. BUSINESS (CONTINUED)

COMPETITION

        GAME EQUIPMENT. Automatic card shufflers and chip sorting machines have
been developed by several other companies, and Shuffle Master believes that
those companies are continually working to obtain regulatory approval and
commercial placement of their equipment. In the past year, several competitive
shuffler products have been placed in casinos in modest quantities, including
those offered by Casinos Austria Research and Development (an Austrian company
marketing the Shuffle Star continuous shuffler), Gaming Products (an Australian
company marketing the Quick Draw continuous shuffler) and Casinovations (a U.S.
company marketing a multi-deck batch shuffler). While firm information on all
competitive placements is not practically obtainable, the Company believes that
no product has achieved world wide placements in excess of 600 units. The
Shuffle Star has no substantive presence in the U.S., while Casinovations has
little presence outside the U.S. The Quick Draw product can be found in a small
number of casinos in the U.S. and Australia. In general terms, competition has
achieved placements by offering products at prices that are often lower than the
Company's prices. The Company believes that it has the only complete line of
shuffler products, including single deck, batch multi-deck and continuous
multi-deck shufflers, and that its products provide higher levels of reliability
and security. In addition, the Company's shuffler products are supported by a
national and international service network that other companies cannot easily
duplicate. These beliefs notwithstanding, the Company cannot provide assurances
that a competitive product will not gain substantial placements in the future.

        GAMING PRODUCTS. The success of table games such as Let It Ride
Bonus(R), Let It Ride(R) basic and Three Card Poker(R) and slot games such as
the Company's Let's Make A Deal(TM), Three Stooges(TM), Press Your Luck(R) and
Five Deck Poker(TM), depend not only on casinos deciding to use such products
but also on acceptance by players. Player acceptance of a game often correlates
to the frequency and amount of money returned during play, as well as the
availability and appeal of the game compared to other games.

        In general, there are continual efforts by small companies and
entrepreneurs to develop and market table games, although few are successful and
many do not compete directly with the Company's products. The Company's major
competitor in specialty games is Mikohn Gaming Corp., who markets the Caribbean
Stud Poker game through its Progressive Games, Inc. subsidiary. The Company
believes that there are approximately 900 Caribbean Stud Poker tables worldwide.

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

PATENTS AND TRADEMARKS

        PATENTS. Since 1989, the Company has been awarded sixteen United States
utility patents and one United States design patent related to its shuffler and
game technologies. Products protected by these patents include the BG single
deck shuffler series, the MD multi-deck shuffler series, the ACE(TM) single deck
shuffler, Let It Ride(R) stud poker, Five Deck Poker(TM), and a variety of new
games that have not yet been introduced. 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.

        In 1999, the Company completed a number of intellectual property
acquisitions to strengthen its position as a technology leader in card shufflers
and proprietary table games. Early in the year, a group of patents was acquired
that protects a table game chip detection technology. In mid-fiscal 1999, the
company acquired the rights to the popular Three Card Poker(R) casino table
game. In December 1999, the Company acquired the U.S. and foreign rights in
Canada, Europe and Australia to certain card sorting and shuffling technology
that will strengthen its position as the leader in card handling technology.

        One new U.S. patent was issued to the Company in fiscal 1999, and it
expects to receive at least two new patents in early calendar 2000. The number
of new patent applications filed in 1999 rose dramatically over the previous
year, and it is expected that the number of patents that issue in the next year
will rise also. Patent applications filed in 1999 seek protection for
innovations in card handling technology, slot game system architecture and game
play methods. Previously filed utility patent applications protecting the design
of the ACE(TM) and King(TM) card shufflers are pending in the United States
Patent Office. No assurance can be given that any such patents will issue, or
that the patents currently held or new patents that may issue will be valid or
will provide any competitive protection for the Company's products.

        TRADEMARKS. The Company owns nineteen federal trademark registrations in
the United States for Let It Ride(R), Let It Ride Bonus(R), Let It Ride The
Tournament (R), Three Card Poker(R), its distinctive Fanned Card design, it's
Three Card design,


                                       7
<PAGE>


ITEM 1. BUSINESS (CONTINUED)

Shuffle Master Gaming(R) and others. The Company currently has 46 pending U.S.
trademark applications, as well as numerous foreign trademark applications and
registrations. The Company obtained its first Community Trademark Registration
(for Let It Ride(R)) in 1999 that recognizes the Company's trademark rights
throughout most of Western Europe. The Company has sought protection for a
number of names it plans to use in the future.

        INFRINGEMENT AND INTELLECTUAL PROPERTY PROTECTION. The Company is not
aware that any of its card handling products infringe the patents and other
intellectual property rights of others. In addition to patents, the Company
protects much of its intellectual property with copyrights, trademarks and
non-disclosure agreements. No assurance can be given that the Company will be
successful in maintaining the confidentiality of its proprietary information. In
the absence of a valid patent, copyright, trademark or trade secret protection,
the Company would be vulnerable to competitors who would lawfully attempt to
copy the Company's products. The Company recently entered into a settlement
agreement with Mikohn Gaming Corp. and its wholly owned subsidiary, Progressive
Games, Inc. (see Item 3. - Legal Proceedings).

EMPLOYEES

        As of December 31, 1999, the Company had 141 full-time and one temporary
employee. 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 and its management, can be lengthy and expensive.
Generally, each product must also be reviewed and approved by each gaming
authority. The detail and extent of the review process depends upon the
classification of the product by the respective gaming authority as a new game,
game variation, 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. Most Company licenses
must be renewed annually. The Company has never been denied a license, permit or
approval necessary to do business in any jurisdiction. Although approvals for
the Company's current products 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.

        SHUFFLERS. The Company has obtained approvals for its shuffler products
in 45 jurisdictions in North America and has filed for approval of its shuffler
products and related software in certain other jurisdictions. The Company's card
shufflers and related software are classified and approved as associated
equipment in Mississippi, Louisiana, Illinois, and a number of other
jurisdictions and as gaming equipment in Nevada, New Jersey, Missouri and Iowa.
Associated equipment is equipment that is not classified as a gaming device or
gaming equipment, but due to its integral relationship to the conduct of
licensed gaming, 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 shufflers vary among jurisdictions, most, if not all,
jurisdictions require specific hardware and software approvals and certain
licenses or permits to be held by companies, their key personnel, and service
technicians in connection with the manufacture, distribution, service, and
repair of such equipment.


                                       8
<PAGE>


ITEM 1. BUSINESS (CONTINUED)

        TABLE GAMES AND RELATED EQUIPMENT. The Company has developed the Let It
Ride(R) basic and the Let It Ride Bonus(R) games. The basic Let It Ride(R) game
is approved in all major gaming markets in North America and numerous other
gaming jurisdictions. The Let It Ride Bonus(R) table game, including the rules
of play and related equipment, is approved in 31 jurisdictions in North America
and the Company has filed for additional approvals in certain other
jurisdictions. Apparatus related to the Let It Ride Bonus(R) table game is
regulated in Nevada, Mississippi, New Jersey and most other jurisdictions as
associated equipment. Three Card Poker(R) is approved for use in twenty
jurisdictions in North America and submitted for approval in certain others.
Similar approvals are required before the Company's table games and apparatus
related to such table games can be marketed in other jurisdictions. The Company
conducts business only in those jurisdictions where it has secured required
approvals for its products.

        SLOT GAMES. Most, if not all, gaming authorities classify the Company's
video slot game machines and software as gaming devices. A gaming device is
generally defined as a video 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 slot products,
there are approval, reporting, and notice requirements common to all major
gaming markets in North America. Additionally, video slot game machines and
software 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 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 video 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, 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, and undergo investigation to be found suitable or
qualified as such. The gaming laws and regulations of most jurisdictions provide
that beneficial owners of 5% or more 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 required in order to
be 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 Commission 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
inter-casino linked systems. 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, slot game, table game or associated equipment
manufactured, distributed, leased, licensed or sold in Nevada must first be
approved by the Nevada Board and the Nevada Commission and 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 also 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.


                                       9
<PAGE>


ITEM 1. BUSINESS (CONTINUED)

        Officers, directors and certain key employees of the Company are
required to be found suitable 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 suitability may be denied for
any cause deemed reasonable by the issuing agency. Changes in certain key
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 an officer, director or key employee. The
Nevada Commission has the power to require licensed gaming companies 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 record 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 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 (Nevada) 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. 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 certain public offerings of its securities
without the prior approval of the Nevada Commission. 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.


                                       10
<PAGE>


ITEM 1. BUSINESS (CONTINUED)

        Approvals are 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.

        OTHER JURISDICTIONS. All jurisdictions that have legalized gaming
require various licenses, permits and/or approvals for and reporting of certain
transactions by 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
authority and the Company fails to seek or does not receive the necessary
license or finding of suitability, the Company may be prohibited from
distributing its products for use in the respective jurisdiction or may be
required to provide its products through other licensed entities at a reduced
profit to the Company.


                                       11
<PAGE>


ITEM 2. PROPERTIES

        The Company leases an approximately 32,000 square foot facility in Las
Vegas, Nevada for substantially all of its business activities, except shuffler
machine research and development, which operates out of an approximately 7,400
square foot facility in Eden Prairie, Minnesota. The Company continues to
maintain its corporate office in Eden Prairie, Minnesota, following completion
of the consolidation of its facilities in Las Vegas, Nevada. 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

        On December 28, 1999 the Company settled all of its litigation with
Progressive Games, Inc. ("PGI"), a wholly owned subsidiary of Mikohn Gaming
Corporation ("Mikohn"). The Company made a one-time payment of $2,750,000 to PGI
and consented to the validity, enforceability and infringement of certain PGI
patents. This settlement amount was accrued as an expense in the consolidated
financial statements as of October 31, 1999.

        The Company had been involved in litigation with PGI and its
predecessor, D&D Gaming, Inc. ("D&D") since 1995. D&D and subsequently PGI sued
the Company and its Let It Ride The Tournament(R) and Let It Ride Bonus(R)
casino customers in United States District Court in Nevada, Mississippi,
Connecticut, New Jersey, Illinois, Indiana, and Missouri, alleging that the
Company's Let It Ride The Tournament(R) and Let It Ride Bonus(R) table games and
apparatus infringed certain of their patents. D&D and PGI requested injunctive
relief and damages. Pursuant to the order of the Judicial Panel on
Multi-district Litigation, all of the then pending actions were transferred to
the Southern District of Mississippi for coordinated or consolidated pretrial
proceedings.

        The Company agreed to defend and indemnify all of its Let It Ride The
Tournament(R) and Let It Ride Bonus(R) casino licensees who were sued due to
their use of the Let It Ride The Tournament(R) and Let It Ride Bonus(R) table
games and apparatus.

        In May 1999, PGI sued the Company, alleging that the Company's then
recently introduced Bahama Bonus(TM) table game infringed certain of PGI's
patents. PGI requested injunctive relief and damages.

        In August 1999, PGI sued the Company as an additional defendant in a
pending lawsuit originally brought by PGI against Prime Table Games, Inc., Derek
Webb and Hannah O'Donnell. In this case, PGI claimed that the Company's Three
Card Poker(R) table game infringed certain of PGI's patents. The Company, as
part of its purchase agreement to acquire the rights of the Three Card Poker(R)
game, agreed to defend and indemnify Prime Table Games, Inc., Derek Webb and
Hannah O'Donnell for claims arising out of their use of the Three Card Poker(R)
game.

        As part of the settlement in December 1999, the Company entered into
cross-license and cross-supplier agreements with PGI/Mikohn in settlement of all
outstanding issues with respect to the Let It Ride Bonus(R), Let It Ride The
Tournament(R), Bahama Bonus(TM) and Three Card Poker(R) games. The cross-license
agreements provide that all future revenue of Let It Ride Bonus(R), Let It Ride
The Tournament(R) and Three Card Poker(R) will be royalty-free to the Company
and that PGI and Mikohn shall have the exclusive rights to the Bahama Bonus(TM)
table game worldwide except for Nevada, where the Company has retained exclusive
rights subject to its obligation to pay PGI/Mikohn pre-negotiated royalties on
Bahama Bonus(TM) table game revenue. The Company will pay pre-negotiated
royalties for other games it may market utilizing a side bet with a fixed
payout. PGI/Mikohn will pay the Company future royalties of approximately
$580,000 per year over the next five years for the rights to use the Company's
multi-tiered game wagering patent and certain other patents and intellectual
property.

        As part of the settlement PGI has released and will dismiss all claims
against Prime Table Games, Derek Webb, Hannah O'Donnell and the Company's casino
licensees named in the litigation, which satisfies the Company's indemnification
obligation.


                                       12
<PAGE>


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, 1999.

                                     PART II

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

        STOCK LISTING

        The Company's common stock is traded on The Nasdaq Stock Market under
the symbol SHFL. As of January 21, 2000, there were 406 shareholders of record.
The following table sets forth quarterly high and low prices for trades of the
Company's common stock for the years ended October 31, 1999 and 1998:

                                1999                            1998
                    --------------------------      ---------------------------
                       HIGH            LOW             HIGH              LOW
                    --------------------------      ---------------------------

First quarter       $     9.13      $     6.50      $     8.75       $     6.00
Second quarter            8.25            6.50           11.50             7.75
Third quarter            10.25            6.75           10.31             7.50
Fourth quarter            9.69            7.56            9.06             5.94

        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.

        TRANSFER AGENT

        The Company's transfer agent and registrar is Norwest Bank Minnesota,
N.A., Shareowner Services, 161 North Concord Exchange, South St. Paul, Minnesota
55075, (800) 468-9716.


                                       13
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA


<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS               1999         1998         1997         1996         1995
--------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>          <C>          <C>          <C>          <C>
YEAR ENDED OCTOBER 31,

   INCOME STATEMENT

   Revenue                                                   $  28,926    $  27,124    $  28,736    $  22,587    $   9,833

   Income from Operations                                        5,286        4,313        6,686        5,550        1,494

   Net Income from Continuing Operations                         3,598        3,343        5,122        2,768        2,338

   Net Income                                                    3,598        3,343        5,122        2,768        2,403

   Weighted Average Shares Outstanding, assuming dilution        7,961        9,753       10,850       11,293        9,765


AS OF OCTOBER 31,

   BALANCE SHEET

   Cash and Cash Equivalents, and Investments                $   5,641    $   8,472    $  16,306    $  26,478    $  20,828

   Working Capital                                               7,427       11,352       20,736       27,845       23,297

   Total Assets                                                 30,605       28,293       40,726       45,297       37,751

   Long-term Debt                                                  677        1,217        1,718           --           --

   Shareholders' Equity                                         21,402       21,895       34,111       39,139       35,099

   Common Shares Outstanding                                     7,475        8,015        9,968       11,177       11,048

   Current Ratio                                                   1.9          3.2          5.4          5.7          9.8


PER COMMON SHARE

   Earnings from Continuing Operations                       $     .45    $     .34    $     .47    $     .25    $     .24

   Earnings from Discontinued Operations                            --           --           --           --           --

   Earnings per Common Share, basic                                .45          .34          .47          .25          .25

   Earnings per Common Share, assuming dilution                    .45          .34          .47          .25          .25

   Book Value                                                     2.86         2.73         3.42         3.50         3.18

   Dividends Declared                                               --           --           --           --           --
</TABLE>


                                       14
<PAGE>


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 shuffler system
introduced to the gaming market in 1992. Since its introduction, the Company's
shufflers have generally become required equipment for many table games. The
Company generated 59%, 60%, and 69%, of its revenue in fiscal 1999, 1998, and
1997, respectively, from the lease and sale of automatic shufflers. The Company
has approval for its single deck shufflers and its multi-deck batch shuffler in
all major gaming jurisdictions in North America and continues to seek to obtain
the necessary approvals in other jurisdictions. The Company has also obtained
approval in Nevada and Mississippi for its new multi-deck continuous shuffler,
the King(TM), and is in the process of obtaining additional approvals.

        In fiscal 1995, the Company introduced Let It Ride The Tournament(R), 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 (also called a side bet) to be eligible for immediate bonus
payouts with a chance to qualify for Let It Ride The Tournament(R) playoffs. The
Company derived revenue from a percentage of the $1 side bet. In the fourth
quarter of fiscal 1997, the Company converted Let It Ride The Tournament(R)
tables to Let It Ride Bonus(R) tables. The Bonus game continues to offer the $1
side bet, which provides for large immediate payouts but affords no playoff
opportunity. Revenue for the Let It Ride Bonus(R) game is generated through a
monthly licensing fee ranging from $995 to $1,995 for each table placed in
casinos. The Let It Ride Bonus(R) table game is approved in 31 jurisdictions. As
of October 31, 1999, 657 Let It Ride(R) table games were installed in casinos,
including 424 Bonus tables and 233 basic version tables. The basic version of
Let It Ride(R), for which the Company receives monthly license fees up to $795
per table, is similar to the Bonus game except that there is no $1 side bet
option.

        In fiscal 1997, the Company acquired a slot game library, which included
a wide-area progressive video poker game called Five Deck Frenzy(R). In
September 1997, the Company entered into a joint marketing agreement with
International Game Technology ("IGT") to market Five Deck Frenzy(R). The Company
developed a second game from the Five Deck concept called Five Deck Poker(TM).
This game is marketed under a separate joint marketing agreement with IGT
entered into in October 1998. Five Deck Poker(TM) is similar to Five Deck
Frenzy(R) except that Five Deck Poker(TM) is a stand-alone game not connected to
a wide-area progressive system. In October 1999, the Company and IGT decided to
discontinue Five Deck Frenzy(R) and converted the remaining games into Five Deck
Poker(TM) games.

        In the second quarter of fiscal 1998, the Company entered into an
agreement with Bally Gaming, Inc. ("Bally") for the development, manufacture and
marketing of a casino video slot game version of Let's Make A Deal(TM). The
Company granted Bally an exclusive license for the use of Let's Make A Deal(TM)
intellectual property in gaming machines in certain jurisdictions. In fiscal
1998, the Company recorded $1,000,000 of licensing income in connection with the
signing of this agreement, under which revenue and expenses related to the
development and distribution of the game are shared equally by the Company and
Bally. The Company and Bally introduced Let's Make A Deal(TM) to the gaming
market in the second quarter of fiscal 1999, and at October 31, 1999, there were
320 Let's Make A Deal(TM) video slot games in Nevada casinos.

        In the first quarter of fiscal 1999, the Company entered into a joint
marketing agreement with TCS America, Inc. ("TCS") to lease and sell chip
sorting machines (the Chipper Champ(TM) and Chipper Champ Plus(TM)) and
accessories in the United States and the Caribbean. The Company agreed to share
equally the capital cost and revenue and expenses of leasing or selling TCS's
products. The Company initially purchased an interest in 102 Chipper Champ(TM)
machines and, as of October 31, 1999, shared in the cost and revenue of 116
machines.

        In the third quarter of fiscal 1999, the Company acquired Three Card
Poker(R), a poker table game, from its developer and distributor, adding 153
table games to its table lease base. Revenue is generated by the Three Card
Poker(R) game through a monthly license fee of up to $795 for each table placed
in casinos. As of October 31, 1999, 188 tables were installed in casinos.


                                       15
<PAGE>


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

RESULTS OF OPERATIONS

ROYALTY SETTLEMENT

        On December 28, 1999 the Company settled all of its litigation with
Progressive Games, Inc. ("PGI"), a wholly owned subsidiary of Mikohn Gaming
Corporation ("Mikohn"). The Company made a one-time payment of $2,750,000
($1,760,000 or $.22 per diluted share, after tax) to PGI and consented to the
validity, enforceability and infringement of certain PGI patents. This
settlement amount was accrued as an expense in the consolidated financial
statements as of October 31, 1999. The Company will not pay future royalties for
Let It Ride Bonus(R), Let It Ride The Tournament(R) or Three Card Poker(R). It
will pay pre-negotiated royalties if it markets other table games utilizing a
side bet with a fixed payout.

        Under separate license agreements, PGI/Mikohn will pay the Company
future royalties of approximately $580,000 per year over the next five years for
the rights to use the Company's coin sensing patents, the Company's multi-tiered
game wagering patent and the Company's intellectual property related to its
Bahama Bonus(TM) table game. The Company and PGI/Mikohn also entered into a
mutually beneficial cross-supplier agreement.

FACILITIES RELOCATION AND OTHER CHARGES

        In the third quarter of fiscal 1998, the Company recorded a pre-tax
charge of $2,650,000 ($1,680,000 or $.17 per diluted share, after tax), due to
the relocation of the Company's administrative functions and manufacturing
operations from Minneapolis, Minnesota to Las Vegas, Nevada, and decreases in
the valuation of certain assets. Relocation related charges of $1,435,000 were
recorded for employee severance, facility related asset write-offs and
write-downs, and office lease cancellation costs. The Company determined that it
would terminate 47 employees in its production, administrative and research and
development departments, resulting in severance and termination benefit charges
of $1,050,000. The Company recorded a write-down of $940,000 against inventories
of certain older model single deck shufflers and component parts, in advance of
the planned introduction of the new ACE(TM) single deck shuffler model. This
charge was included in the cost of products. Additionally, miscellaneous assets
totaling $275,000 were written off and recorded in selling, general and
administrative expenses.

        In fiscal 1999, the Company determined that eight engineers would not be
terminated and that it would retain a portion of its Minnesota office lease due
to the growth and direction of its research and development efforts.
Additionally, nine administrative employees elected to relocate and to not
accept severance benefits. As a result, $199,000 in severance benefits and
$14,000 in office lease cancellation charges were not used and were reversed in
fiscal 1999.

FISCAL 1999 COMPARED TO FISCAL 1998

        REVENUE AND COST OF PRODUCTS

        Revenue for fiscal 1999 was $28,926,000, an increase of $1,802,000, or
6.6% from the prior year. During fiscal 1999, the Company continued to emphasize
shuffler lease installations, which resulted in lower sales revenue. Shuffler
lease revenue was $11,168,000 in fiscal 1999 compared to $9,807,000 in the prior
year, an increase of 13.9%. The installed base of shufflers on lease increased
to 2,253 at October 31, 1999, from 1,880 units at October 31, 1998, an increase
of 373 units, or 19.8%. Lease revenue increased at a lower rate than the volume
increase due to both the Company's strategy of leasing shufflers to certain
customers on a part-time basis and the effect of competitive pricing in certain
jurisdictions. As of October 31, 1999 the installed lease base of single deck
shufflers on lease was 1,404 units, an increase of 290 units, or 26%, between
the years. This increase was attributable to the placement of 735 ACE(TM)
shufflers on lease in fiscal 1999, offset by a net reduction of 445 BG
shufflers, the majority of which were exchanged for ACE(TM) shufflers. In
addition, there were 839 multi-deck shufflers installed on lease as of October
31, 1999, an increase of 73 units, or 9.5%, from October 31, 1998. Shuffler
sales were $4,740,000, compared to $6,521,000 in fiscal 1998. Unit sales totaled
541 in fiscal 1999 compared to 903 last year. Current year unit sales included
sales of 430 new units and 111 units converted to a sale from a lease, as
compared to 743 new unit sales and 160 conversions in the prior year. The
average revenue per shuffler sold increased to $8,761 from $7,246 in fiscal 1999
due to a change in the mix of shufflers sold toward domestic sales of
higher-priced multi-deck and ACE(TM) shufflers.

        Revenue from the Let It Ride(R) table game increased by $1,762,000 to
$9,626,000 in fiscal 1999. Included in this category for fiscal 1999 was revenue
from Let It Ride Bonus(R), Let It Ride(R) basic, sales of associated equipment
for Let It Ride Bonus(R) and Three Card Poker(R), a table game that the Company
acquired in the third fiscal quarter. Total installed Bonus tables


                                       16
<PAGE>


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

increased from 375 at October 31, 1998, to 424 at October 31, 1999. Let It
Ride(R) basic tables in casinos decreased to 233 at October 31, 1999, from 250
tables as of October 31, 1998. Substantially all of the net decrease in basic
tables resulted from casinos converting basic tables to Let It Ride Bonus(R)
tables in New Jersey after the motion to vacate the injunction prohibiting the
use of the Let It Ride Bonus(R) tables was granted in the fourth fiscal quarter.
Three Card Poker(R) contributed an incremental $433,000 in revenue in fiscal
1999 as table counts increased from 153 units at acquisition in May 1999 to 188
units at October 31, 1999.

        Slot revenue decreased by $610,000 to $1,097,000 in fiscal 1999. The
decrease was due to the inclusion in fiscal 1998 of revenue from a license fee
of $1,000,000 from Bally under an exclusive license arrangement for Let's Make A
Deal(TM) intellectual property. In the second fiscal quarter of 1999, the
Company and Bally jointly introduced the Let's Make A Deal(TM) video slot game
and the Company's share of the game's revenue for the year was $333,000. Slot
revenue also included revenue from Five Deck Poker(TM), Five Deck Frenzy(R) and
Let It Ride Bonus Video(R).

        Other revenue increased to $1,189,000 from $192,000 due to revenue
earned from the lease of Chipper Champ(R) chip sorting machines and the sale of
accessories under the Company's joint marketing agreement with TCS America,
Inc., which was entered into in the first fiscal quarter.

        Gross margin improved to 68.4% in fiscal 1999 from 64.7% in fiscal 1998.
Excluding the one-time inventory write-down charge of $940,000 and the
$1,000,000 of licensing income from Bally Gaming, Inc., gross margin would have
been 67.0% in fiscal 1998. Gross margin increased due to a shift in product mix
in 1999 toward higher margin shuffler and table lease revenue, which comprised
71.9% of revenue in fiscal 1999 and 65.2% of revenue in fiscal 1998.
Additionally, gross margin on shuffler sales in 1999 increased twelve percentage
points from 1998 and field service and installation costs decreased 1% to 10.2%
of revenue in fiscal 1999 due to the increase in total revenue for the year.
These margin increases were offset by lower margin revenue under the TCS
agreement and from video products. Gross margin in 1998 included the recording
of the $1,000,000 license fee under the Bally agreement.

        OPERATING EXPENSES

        Selling, general and administrative expenses decreased by $843,000 or
9.0% to 8,493,000 in fiscal 1999 compared to $9,336,000 in the prior year.
Advertising and promotion expenses decreased by $292,000 to $609,000 in fiscal
1999 due to decreased promotional, event and trade show activity. Legal fees
decreased by $205,000 to $835,000 in fiscal 1999 as litigation activity
diminished prior to the settlement with PGI. Rent expense and salary expense
decreased by a net of $126,000 and $100,000, respectively, in 1999. Cost savings
related to the facilities relocation initiated in the third fiscal quarter of
1998 have been partly offset by expansion of staff to meet the growth
requirements of the business since the time of relocation.

        Research and development expenses increased by $1,006,000, or 40.9%, to
$3,468,000 in fiscal 1999. Approximately $426,000 of the increase was due to
increased consulting and contract programming for new game and system
development. Legal expenses related to securing and maintaining domestic and
international patents and trademarks increased by $280,000. Development costs
related to the introduction of the Let's Make A Deal(TM) and The Three
Stooges(TM) slot games increased by approximately $112,000 in fiscal 1999.
Finally, amortization expense of intellectual property increased $183,000 in
1999 to $765,000, due primarily to the introductions of the Let's Make A
Deal(TM) video slot game and the Three Card Poker(R) table game during the
second and third fiscal quarters.

        OTHER INCOME AND EXPENSE

        Other income, net, was interest income for both years. Interest income
decreased to $418,000 from $971,000 in fiscal 1999 due to the decrease in cash
and investments of $2,831,000 from the prior year end. Interest expense was
$81,000 and $91,000 in fiscal 1999 and 1998, respectively.

        NET INCOME AND EARNINGS PER COMMON SHARE

        The provision for income taxes was based on an effective tax rate of
36.0% in fiscal 1999 compared to 35.6% in fiscal 1998. The current year
provision includes a 2.7% benefit from the foreign sales corporation compared to
3.0% in fiscal 1998, due to a decrease in qualified export revenue as a
percentage of total revenue. The provision for state income taxes, net of
federal tax benefits, decreased to 3.6% from 3.8% in the prior year as the
Company slightly decreased its revenue and profits in states requiring filing
and payment of income-based taxes.


                                       17
<PAGE>


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

        Net income was $3,598,000, or $.45 per diluted share, compared to
$3,343,000, or $.34 per diluted share last year. Current year net income
included royalty settlement expenses of $2,750,000 ($1,760,000 after taxes. or
$.22 per share). Fiscal 1998 net income included expenses of $2,650,000
($1,680,000 after taxes, or $.17 per share) due to the consolidation of the
Company's facilities and write-downs and write-offs of certain assets. Weighted
average common shares - assuming dilution, decreased to 7,961,000 shares in the
current year compared to 9,753,000 in the prior year due to the repurchase of
585,000 shares in fiscal 1999 and 2,000,000 shares in fiscal 1998.

FISCAL 1998 COMPARED TO FISCAL 1997

        REVENUE AND COST OF PRODUCTS

        Revenue for fiscal 1998 was $27,124,000, a decrease of $1,612,000, or
5.6% from the prior year. Shuffler sales were $6,521,000 compared to $9,020,000
in fiscal 1997. During fiscal 1998, the Company refocused its shuffler placement
strategy to emphasize lease installations, which resulted in lower sales
revenue. Unit sales totaled 903 in fiscal 1998 compared to 1,193 in the prior
year. Fiscal 1998 unit sales included sales of 743 new units and 160 units
converted to a sale from a lease, compared to 526 new unit sales and 667
conversions in the prior year. The average revenue per shuffler sold decreased
to $7,246 from $7,560 in fiscal 1997 due to an increase in units sold at lower
distributor pricing for most international sales. In addition, even though the
Company increased the selling price of shufflers by approximately 15% effective
February 1, 1998, over 40% of total unit sales occurred in the first quarter of
fiscal 1998, prior to the price increase. Shuffler lease revenue was $9,807,000
in fiscal 1998 compared to $10,840,000 in the prior year. The installed base of
shufflers on lease increased to 1,880 at October 31, 1998, from 1,600 units at
October 31, 1997. Although the lease base increased by 280 units, or 17.5%, the
lease revenue did not show a similar increase since over 200 units were
installed in the second half of fiscal 1998. In addition, during fiscal 1998,
the Company began a part-time lease program whereby its customers could lease
shufflers at a price below the standard monthly lease price if the casino
customer met certain requirements. The installed lease base of multi-deck
shufflers increased by 33% from October 31, 1997, while single deck shufflers on
lease increased by 9% between the years.

        Revenue from the Let It Ride(R) table game increased by $252,000 to
$7,864,000 in fiscal 1998. Included in this category for fiscal 1998 was revenue
from Let It Ride Bonus(R), Let It Ride(R) the basic game, and sales of
associated equipment for Let It Ride Bonus(R). During the fourth quarter of
fiscal 1997, the Company converted substantially all of its Let It Ride The
Tournament(R) tables to Let It Ride Bonus(R) tables. Total installed Bonus
tables increased from 220 at October 31, 1997, to 375 at October 31, 1998.
Revenue increased slightly as increases in installed units were offset by lower
average per table revenue, while operating profits improved substantially as a
result of significant cost reductions. The per table revenue for Let It Ride
Bonus(R) is a fixed monthly fee compared to a higher variable monthly fee
charged for Let It Ride The Tournament(R) tables. Let It Ride(R) basic tables in
casinos decreased to 250 at October 31, 1998, from 325 tables as of October 31,
1997. Substantially all of the net decrease resulted from casinos converting
basic tables to Let It Ride Bonus(R) tables. However, Let It Ride(R) basic
revenue increased between the years due to the price increase effective November
1997.

        Slot revenue increased by $1,183,000 to $1,707,000 in fiscal 1998.
Fiscal 1998 slot revenue included $1,000,000 received from Bally Gaming, Inc.
under an exclusive license arrangement for the Let's Make A Deal(TM)
intellectual property. Slot revenue also included revenue from Five Deck
Frenzy(R) and Let It Ride Bonus Video(R). Other revenue increased to $1,225,000
from $740,000 in the prior year due to a $475,000 increase in revenue recognized
on warranty and service contracts sold to customers that purchased shufflers.

        Gross margin improved to 64.7% in fiscal 1998 from 63.5% in fiscal 1997.
Excluding the one-time inventory valuation charge of $940,000, gross margin
would have been 68.2% in fiscal 1998. The margin percentage on Let It Ride(R)
table games improved during fiscal 1998, due to the conversion to Let It Ride
Bonus(R). The direct expenses required to support Let It Ride The Tournament(R)
are not required to support the Bonus game. The margin also improved due to the
recording of the license fee revenue of $1,000,000 under the Bally Gaming, Inc.
agreement with insignificant related product expenses. Field service costs to
support the installed base of shufflers and Let It Ride Bonus(R) tables
decreased as a percentage of revenues by 3.2% between the years, which also
improved the gross margin. The Company streamlined its field service support
activities and closed certain of its underutilized field service offices during
fiscal 1998.

        OPERATING EXPENSES

        Selling, general and administrative expenses decreased by $528,000, or
5.4% to $9,336,000 in fiscal 1998 compared to $9,864,000 in the prior year.
Staffing related expenses decreased by $1,087,000 between the years, including a
$502,000


                                       18
<PAGE>


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

decrease to $163,000 for employee bonus expense. Fiscal 1997 also included
compensation for employees terminated during the year. The remaining decrease
resulted from an overall reduction in staffing levels. Legal fees decreased by
$140,000 to $1,040,000 in fiscal 1998 compared to $1,180,000 in the prior year.
Fiscal 1997 included legal fees for a lawsuit that was settled in August 1997.
Patent related legal fees also decreased between the years. Bad debt expense
increased to $171,000 in fiscal 1998 compared to $47,000 in fiscal 1997. The
Company experienced a significant loss due to a casino customer in Atlantic
City, New Jersey filing for bankruptcy protection. Consulting fees increased by
$184,000 in fiscal 1998 from product-related contracts, human resource and
investment banker fees. The Company retained CIBC Oppenheimer late in fiscal
1998 to explore strategic alternatives. International sales expenses increased
by $136,000 resulting from a change in the Company's international distributor.
Fiscal 1998 selling, general and administrative expenses included $275,000 of
miscellaneous asset write-offs for certain fixed assets and intangibles.
Operating expenses also included a separate charge of $1,435,000 related to the
facilities relocation.

        Research and development expenses increased by $769,000, or 45.4%,
between the years. Approximately $372,000 of the increase resulted from
increased staffing levels in slot game software development. Amortization
expense of the intangible assets associated with slot game intellectual property
acquired in fiscal 1997 increased by $282,000 in fiscal 1998 compared to fiscal
1997, due to a full year of amortization in fiscal 1998 and only three months of
amortization in the prior year. Prototype materials and outside engineering fees
increased by $138,000 in the year ended October 31, 1998, due to research
efforts in the development of the new generation single deck shuffler and a
continuous shuffler.

        OTHER INCOME AND EXPENSE

        Other income, net, was interest income for both years. Interest income
decreased to $1,069,000 from $1,215,000 in fiscal 1997 due to the decrease in
cash and investments of $7,834,000 from the prior year end. Interest expense was
$91,000 and $69,000 in fiscal 1998 and 1997, respectively.

        NET INCOME AND EARNINGS PER COMMON SHARE

        The provision for income taxes was based on an effective tax rate of
35.6% in fiscal 1998 compared to 34.6% in fiscal 1997. The fiscal 1998 provision
included a 3.0% benefit from the foreign sales corporation compared to .9% in
fiscal 1997, due to a significant increase in qualified export revenue. The
provision for state income taxes, net of federal benefits, increased to 3.8%
from 1.4% in the prior year as the Company increased its revenues and profits in
states requiring filing and payment of income-based taxes.

        Net income was $3,343,000, or $.34 per diluted share, compared to
$5,122,000, or $.47 per diluted share in fiscal 1997. Fiscal 1998 net income
included expenses of $2,650,000 before taxes ($1,680,000, or $.17 per share
after taxes) due to the consolidation of the Company's facilities and valuation
adjustments on certain assets. Weighted average common shares - assuming
dilution, decreased to 9,753,000 shares in fiscal 1998 compared to 10,850,000 in
the prior year due to the repurchase of 2,000,000 shares in fiscal 1998 and
1,241,000 shares in fiscal 1997.

RECENTLY ISSUED ACCOUNTING STANDARDS

        In August 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and is
effective for the Company's year ending October 31, 2000. Management believes
that adoption of this statement will not have a material impact on its financial
condition or results of operations.

YEAR 2000

        The Year 2000 readiness issue arises from the inability of older
software in computer information systems or other devices with date-sensitive
functions to properly recognize and accurately process date-sensitive
information on and after January 1, 2000. This problem is expected to exist in
computer programs that have defined dates using a two-digit year. If the Company
or its customers, suppliers, or other third parties rely on systems that are at
risk for this problem and fail to make necessary corrections, the result could
be failure or malfunction of certain computer systems and other devices
dependent upon date-sensitive functions. For companies so affected, this problem
could cause disruptions of operations, including, among other things, a
temporary inability to operate or distribute equipment or products, process
transactions, send invoices, or engage in other normal business activities.


                                       19
<PAGE>


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

        While Shuffle Master's assessment of Year 2000 issues is ongoing, the
new year is approximately one month old as of the filing date of this report and
the Company has not experienced any effects from Year 2000 issues. A summary of
the Company's preparation for Year 2000 issues, as well as certain disclaimers,
is presented below.

        During fiscal 1997 the Company completed: 1) a business system
conversion involving all of its core financial and operating applications
software, 2) an upgrade of processors or complete systems in substantially all
of its servers and personal computers, 3) an upgrade of its network software and
most of its personal computer applications software and, 4) an upgrade of its
main phone system and voice mail software. These conversions and upgrades were
made for reasons unrelated to the Year 2000 issue, but are Year 2000 ready.
Based on these changes, the Company does not believe that the Year 2000 issue
has or will significantly affect its internal operations.

        In early fiscal 1999, the Company determined that it has date-sensitive
functions in the operating system software for its Let It Ride Bonus(R) game
equipment. The Company updated the software to allow operation without concern
for calendar dates. The required updates are now 100% complete. The Company
obtained all necessary regulatory approvals for the upgraded software during
1999. The Company's first generation single deck and multi-deck shuffler
products operate without date-sensitive functions. The Company's newer shuffler
products, including the ACE(TM) and the King(TM), use software that references
dates for service reporting functions only and have been designed to operate
during and after the Year 2000. The Company also markets or will market games
for operation on IGT, Bally Gaming and Acres Gaming systems, and was informed by
these companies that such machines and systems were Year 2000 ready.

        The Company has evaluated its key vendors' and service providers' Year
2000 readiness to determine the extent to which such relationships may affect
the Company's operations. In the event that Year 2000 issues were to have been
identified with key vendors, the Company expected to be able to manage purchases
and inventories to minimize the Year 2000 issue related delays in parts supply.
In addition, a significant portion of the Company's revenue is recurring in
nature and is not, in the short term, materially dependent on new unit
production. Management believes that the Company's exposure to third party Year
2000 risks is not significant and is diminishing rapidly with passage of time.
However, there can be no assurance that systems of other companies on which the
Company may rely were converted or that such failure to convert would not have
an adverse effect on the Company's operations. It appears that none of the
Company's casino customers experienced any Year 2000 problems, however, such
operations are collectively many times the size of the Company and the Company
does not have the resources to undertake a complete evaluation.

        In view of its fiscal 1997 systems upgrades, no significant expenses
were incurred in fiscal 1999 to address Year 2000 issues. The Company also does
not expect that it will incur any significant expenses related to Year 2000
issues during the remainder of fiscal 2000.

LIQUIDITY & CAPITAL RESOURCES

        At October 31, 1999, the Company had cash, cash equivalents and
investments of $5,641,000 compared to $8,472,000 at October 31, 1998. Working
capital decreased to $7,427,000 at October 31, 1999, compared to $11,352,000 at
October 31, 1998, and the current ratio decreased to 1.9 at October 31, 1999,
from 3.2 at the end of the prior year. The use of $4,592,000 for the repurchase
of common stock during fiscal 1999 contributed to the decrease in cash, working
capital and the current ratio at October 31, 1999. The inclusion in accrued
expenses as of October 31, 1999 of the $2,750,000 royalty settlement paid to PGI
in December 1999, and amounts owed to Bally under the Company's joint marketing
agreement with Bally also decreased working capital and the current ratio.

        Cash provided by operating activities was $8,617,000 in fiscal 1999. The
significant items comprising such cash provided in fiscal 1999 were net income
of $3,598,000 and non-cash charges for depreciation, amortization and valuation
provisions of $5,025,000. Deferred income taxes, net, increased by $1,250,000,
principally due to fiscal 1999 income tax deduction deferrals for the royalty
settlement with PGI and the excess of book over tax depreciation and
amortization. Changes in operating assets and liabilities included an increase
in inventories of $2,689,000 from October 31, 1998, to October 31, 1999. The
Company purchased raw materials related to the production of its new continuous
multi-deck shuffler, the King(TM), and slot machine finished goods in
anticipation of placing Let's Make A Deal(TM) video slot games. Accounts payable
and accrued expenses increased by $3,495,000 due to the accrual of the royalty
settlement with PGI and amounts owed to Bally under the Company's joint
marketing agreement with Bally.


                                       20
<PAGE>


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

        Investing activities used $4,935,000 of cash during fiscal 1999. The
investments balance decreased by $1,743,000 as the Company sold investments and
used the proceeds to fund share repurchases. Investments in leased and available
for lease assets totaled $3,042,000 and included the purchase of $1,106,000 in
slot games, $1,082,000 in Chipper Champ(TM) chip sorting machines under the
Company's joint marketing agreement with TCS America, Inc., and the transfer of
$854,000 in shufflers and table games from inventory. The Company also invested
$3,384,000 in intellectual property, including the Three Card Poker(R) table
game and other licenses and patents for slot and shuffler products.

        Cash flows from financing activities used $4,770,000 in fiscal 1999. The
Company repurchased 585,000 shares of its common stock at a total cost of
$4,592,000 during fiscal 1999. At October 31, 1999, there was an outstanding
authorization for share repurchases of up to 151,500 of common stock, at
specific price limits set by the Board of Directors.

        The Company does not have any long-term debt or capital leases, except
for the debt incurred by the Company to acquire intellectual property from a
related party. As of October 31, 1999, the long-term balance remaining under
this acquisition was $677,000 compared to $1,217,000 as of October 31, 1998, a
reduction of $540,000 due to payments made in cash and stock during fiscal 1999.

        The Company believes its existing cash and investments, and cash
provided by operations will be sufficient to finance the Company's current
operations and new product development for the foreseeable future. Additionally,
the Company secured a two year, $10,000,000 revolving line of credit from U.S.
Bank, N.A. in September 1999 to provide quick access to funds that might be
required for working capital needs related to product rollouts, product or
intellectual property acquisitions and share repurchases.

        At October 31, 1998, the Company had available cash, cash equivalents
and investments of $8,472,000 compared to $16,306,000 at October 31, 1997.
Working capital decreased to $11,352,000 at October 31, 1998, compared to
$20,736,000 at October 31, 1997, and the ratio decreased to 3.2 to 1 at October
31, 1998, from 5.4 at the end of the prior year. The decrease in cash, working
capital and the current ratio at October 31, 1998, resulted from the use of
$15,942,000 for the repurchase of common stock

        Cash provided by operating activities was $9,571,000 in fiscal 1998. The
significant items comprising such cash provided in fiscal 1998 were net income
of $3,343,000, non-cash charges for depreciation, amortization and valuation
provisions of $4,236,000, and the provision for the facilities relocation and
other charges of $2,650,000. Deferred income taxes, net, increased by $737,000,
principally due to fiscal 1998 income tax deduction deferrals for the facilities
relocation related expenses and the charge-off for the inventory valuation
provision. Changes in operating assets and liabilities include a reduction of
$1,481,000 in accounts receivable due to a significant decrease in receivables
related to sales of shufflers. Inventories increased by $314,000 from October
31, 1997, to October 31, 1998. The Company increased production quantities of
its multi-deck shuffle early in its fiscal 1998 fourth quarter to ensure product
availability as all production was essentially shut down late in the fourth
quarter because of the relocation of the Company's manufacturing operations.

        Investing activities provided $8,000,000 of cash during fiscal 1998. The
investments balance decreased by $9,345,000 as the Company sold investments and
used the proceeds to fund share repurchases. The Company received cash of
$378,000 on a note receivable in fiscal 1998. Purchase of property and equipment
totaled $668,000 in fiscal 1998, and included approximately $270,000 of
leasehold improvements for the Las Vegas facility, which included office
expansion and the construction of production space to accommodate the facility
consolidation.

        Cash flows from financing activities used $16,060,000 in fiscal 1998,
including the repurchase of 2,000,000 shares of its common stock at a total cost
of $15,942,000 during fiscal 1998.

IMPACT OF INFLATION

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Not applicable.


                                       21
<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS                                             PAGE

Independent Auditors' Report                                               23

Consolidated Income Statements for the
years ended October 31, 1999, 1998, and 1997                               24

Consolidated Balance Sheets as of October 31, 1999 and 1998                25

Consolidated Statements of Changes in Shareholders' Equity
for the years ended October 31, 1999, 1998, and 1997                       26

Consolidated Statements of Cash Flows for the years
ended October 31, 1999, 1998, and 1997                                     27

Notes to Consolidated Financial Statements                                28-39

Quarterly Financial Data                                                   40


                                       22
<PAGE>


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. (the Company) as of October 31, 1999 and 1998, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended October 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the 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
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 consolidated financial statements present fairly,
in all material respects, the financial position of Shuffle Master, Inc. as of
October 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended October 31, 1999, in conformity
with generally accepted accounting principles.



Minneapolis, Minnesota
December 29, 1999                       DELOITTE & TOUCHE LLP


                                       23
<PAGE>


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

<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,                         1999             1998            1997
                                           ------------     ------------    ------------
<S>                                        <C>              <C>             <C>
REVENUE:
    Shuffler lease                         $     11,168     $      9,807    $     10,840
    Shuffler sales and service                    5,846            7,554           9,613
    Table games                                   9,626            7,864           7,612
    Slot games                                    1,097            1,707             525
    Other                                         1,189              192             146
                                           ------------     ------------    ------------

                                                 28,926           27,124          28,736
                                           ------------     ------------    ------------

COSTS AND EXPENSES:
    Cost of products                              9,142            9,578          10,493
    Selling, general and administrative           8,493            9,336           9,864
    Research and development                      3,468            2,462           1,693
    Royalty settlement                            2,750               --              --
    Office relocation expenses                     (213)           1,435              --
                                           ------------     ------------    ------------

                                                 23,640           22,811          22,050
                                           ------------     ------------    ------------

Income from operations                            5,286            4,313           6,686

Other income, net                                   337              880           1,146
                                           ------------     ------------    ------------

Income before income taxes                        5,623            5,193           7,832

Provision for income taxes                        2,025            1,850           2,710
                                           ------------     ------------    ------------

NET INCOME                                 $      3,598     $      3,343    $      5,122
                                           ============     ============    ============

EARNINGS PER COMMON SHARE, BASIC           $        .45     $        .34    $        .47
                                           ============     ============    ============

EARNINGS PER COMMON SHARE,
   ASSUMING DILUTION                       $        .45     $        .34    $        .47
                                           ============     ============    ============

WEIGHTED AVERAGE COMMON SHARES, BASIC             7,921            9,691          10,798
                                           ============     ============    ============

WEIGHTED AVERAGE COMMON SHARES,
    ASSUMING DILUTION                             7,961            9,753          10,850
                                           ============     ============    ============
</TABLE>


                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       24
<PAGE>


                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                     ASSETS

AS OF OCTOBER 31,                                                             1999            1998
                                                                          ------------    ------------
<S>                                                                       <C>             <C>
CURRENT ASSETS:
     Cash and cash equivalents                                            $      1,476    $      2,564
     Investments                                                                 4,165           5,908
     Accounts receivable, net                                                    3,482           3,702
     Note receivable from related party                                             74             342
     Inventories                                                                 4,524           2,305
     Deferred income taxes                                                       1,470             850
     Other current assets                                                          762             827
                                                                          ------------    ------------

        Total current assets                                                    15,953          16,498

SYSTEMS AND EQUIPMENT LEASED AND HELD FOR LEASE                                  5,309           5,103

PROPERTY AND EQUIPMENT, NET                                                      2,628           3,065

INTANGIBLE ASSETS, NET                                                           5,717           3,098

NON-CURRENT DEFERRED INCOME TAXES                                                  595              --

OTHER ASSETS                                                                       403             529
                                                                          ------------    ------------

TOTAL ASSETS                                                              $     30,605    $     28,293
                                                                          ============    ============


                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
     Accounts payable                                                     $      1,607    $      1,002
     Accrued liabilities                                                         4,632           1,955
     Current portion of long-term obligation  to related party                     546             529
     Customer deposits and unearned revenue                                      1,741           1,660
                                                                          ------------    ------------

        TOTAL CURRENT LIABILITIES                                                8,526           5,146

DEFERRED INCOME TAXES PAYABLE                                                       --              35

LONG-TERM OBLIGATION TO RELATED PARTY                                              677           1,217

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
     Common stock, $.01 par value; 30,000 shares authorized; 7,475 and
         8,015 shares issued  and outstanding                                       75              80
     Additional paid-in capital                                                  7,280          11,366
     Retained earnings                                                          14,047          10,449
                                                                          ------------    ------------

        TOTAL SHAREHOLDERS' EQUITY                                              21,402          21,895
                                                                          ------------    ------------

        TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                        $     30,605    $     28,293
                                                                          ============    ============
</TABLE>


                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       25
<PAGE>


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

<TABLE>
<CAPTION>
                                           COMMON STOCK              ADDITIONAL                          TOTAL
                                  -----------------------------       PAID-IN          RETAINED      SHAREHOLDERS'
                                     SHARES           AMOUNT          CAPITAL          EARNINGS         EQUITY
                                  ------------     ------------     ------------     ------------    ------------
<S>                               <C>              <C>              <C>              <C>             <C>
BALANCE, OCTOBER 31, 1996               11,177     $        112     $     37,043     $      1,984    $     39,139

Common stock repurchased                (1,241)             (12)         (10,384)              --         (10,396)
Common stock options exercised              16               --              111               --             111
Other                                       16               --              135               --             135
Net income                                  --               --               --            5,122           5,122
                                  ------------     ------------     ------------     ------------    ------------

BALANCE, OCTOBER 31, 1997                9,968              100           26,905            7,106          34,111

Common stock repurchased                (2,000)             (20)         (15,922)              --         (15,942)
Common stock options exercised              25               --              194               --             194
Other                                       22               --              189               --             189
Net income                                  --               --               --            3,343           3,343
                                  ------------     ------------     ------------     ------------    ------------


BALANCE, OCTOBER 31, 1998                8,015               80           11,366           10,449          21,895

Common stock repurchased                  (585)              (5)          (4,587)              --          (4,592)
Common stock options exercised              23               --              156               --             156
Options issued for services                 --               --              156               --             156
Other                                       22               --              189               --             189
Net income                                  --               --               --            3,598           3,598
                                  ------------     ------------     ------------     ------------    ------------

BALANCE, OCTOBER 31, 1999                7,475     $         75     $      7,280     $     14,047    $     21,402
                                  ============     ============     ============     ============    ============
</TABLE>


                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       26
<PAGE>


                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,                                                      1999             1998             1997
                                                                        ------------     ------------     ------------
<S>                                                                     <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                                                         $      3,598     $      3,343     $      5,122
     ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
     PROVIDED BY OPERATING ACTIVITIES:
          Depreciation and amortization                                        4,416            3,739            3,760
          Office relocation and other charges                                   (213)           2,650               --
          Provision for bad debts                                                139              171               47
          Provision for inventory obsolescence                                   470              326              516
          Deferred income taxes                                               (1,250)            (737)             (45)
          Stock options issued for services                                      156               --               --
     CHANGES IN OPERATING ASSETS AND LIABILITIES
          Accounts and notes receivable                                           81            1,481           (1,834)
          Notes receivable from related party                                    268              (23)            (349)
          Inventories                                                         (2,689)            (314)            (774)
          Other current assets                                                    65             (285)            (246)
          Accounts payable and accrued liabilities                             3,495             (296)            (436)
          Customer deposits and unearned revenue                                  81             (286)             611
          Other                                                                   --             (198)          (1,874)
                                                                        ------------     ------------     ------------

          Net cash provided by operating activities                            8,617            9,571            4,498
                                                                        ------------     ------------     ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of investments                                                (10,080)         (22,199)        (112,790)
     Proceeds from the sales and maturities of investments                    11,823           31,544          120,575
     Proceeds received on note receivable                                         --              378               --
     Investment in products leased and held for lease                         (3,042)            (212)          (1,795)
     Purchases of property and equipment                                        (378)            (668)          (1,527)
     Purchases of intangible assets                                           (3,384)              --             (765)
     Other                                                                       126             (843)             (16)
                                                                        ------------     ------------     ------------

          Net cash provided by investing activities                           (4,935)           8,000            3,682
                                                                        ------------     ------------     ------------
CASH FLOWS FROM FINANCING ACTIVITIES
     Repurchase of common stock                                               (4,592)         (15,942)         (10,396)
     Payments on long-term obligation to related party                          (523)            (312)            (275)
     Proceeds from issuance of common stock                                      345              194              111
     Other                                                                        --               --               (7)
                                                                        ------------     ------------     ------------

          Net cash provided by financing activities                           (4,770)         (16,060)         (10,567)
                                                                        ------------     ------------     ------------

     NET DECREASE IN CASH AND CASH EQUIVALENTS                                (1,088)           1,511           (2,387)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                   2,564            1,053            3,440
                                                                        ------------     ------------     ------------

CASH AND CASH EQUIVALENTS, END OF YEAR                                  $      1,476     $      2,564     $      1,053
                                                                        ============     ============     ============
NON-CASH TRANSACTION:
     Acquisition of intangible assets for debt and equity securities    $         --     $         --     $      2,670
                                                                        ============     ============     ============
     Payment of obligation to related party with common stock           $        189     $        189     $        142
                                                                        ============     ============     ============
CASH PAID FOR:
     Income taxes                                                       $      2,704     $      2,017     $      3,179
                                                                        ============     ============     ============
     Interest                                                           $         81     $         91     $         69
                                                                        ============     ============     ============
</TABLE>


                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       27
<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 products
and proprietary table and slot games and software to the gaming industry. The
foundation of the Company's business has been the development, manufacturing and
marketing of automatic card shufflers. The Company's current shuffler offering
includes multi-deck and single deck shufflers available to casinos through a
purchase or lease option. The Company markets its shuffler products in all
domestic gaming jurisdictions directly and internationally through a
distributor.

        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(R) was introduced in fiscal 1995. In
fiscal 1997, the Let It Ride The Tournament(R) table game format was
discontinued and replaced with the Let It Ride Bonus(R) format. Let It Ride
Bonus(R) allows the casino players to make a $1 side bet which provides for
larger immediate, predetermined payouts in addition to the basic payouts. 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(R) through a joint venture agreement with
IGT. The Company and IGT shared equally in the profits generated by Five Deck
Frenzy(R). A second related game called Five Deck Poker(TM) is currently
marketed by the Company under a separate joint marketing agreement with IGT.

        In fiscal 1998, the Company entered into an agreement with Bally Gaming,
Inc. to develop, manufacture and market a casino video slot game version of
Let's Make A Deal(TM). The Company received a $1,000,000 license fee under this
agreement in fiscal 1998 and began earning operating revenue following the
introduction of Let's Make A Deal(TM) in fiscal 1999.

        In fiscal 1999, the Company purchased the Three Card Poker(R) table game
from its developer and distributor. The Company also entered into an agreement
with Acres Gaming, Inc. to develop, manufacture and market a casino slot game
based on The Three Stooges(TM). The Company has since discontinued its Five Deck
Frenzy(R) joint venture agreement with IGT and converted those games to Five
Deck Poker(TM) games.

        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:

        Shufflers leased to customers pursuant to operating leases and shufflers
held for lease are stated at cost. Depreciation on leased shufflers is
calculated using the straight-line method over three to four years. The Company
provides maintenance on its shufflers 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 shuffler
system. If a customer purchases an existing leased shuffler system, revenue is
recorded on the effective date of the purchase. Shuffler lease revenue is
generated on a monthly basis, generally through indefinite term operating
leases. Table and slot revenue is generated by monthly fixed and revenue
participation license and royalty fees as well as equipment sales and leasing.
The Company also recognizes revenue through the sale of service and warranty
contracts on its sold shufflers. Prepaid service and warranty contracts are
included in the


                                       28
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

consolidated balance sheets as unearned revenue. Revenue on service and warranty
contracts is recognized on a straight line basis over the life of the contract.

        RESEARCH AND DEVELOPMENT:

        Research and development costs are expensed as incurred.

        CONCENTRATION OF CREDIT RISK:

        The Company has a concentration of credit risk in so far as all of its
receivables are with customers in the gaming industry. The Company has no
material concentration of accounts receivable among any of its casino customers.

        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 five years, or lease terms for leasehold improvements.

        INTANGIBLE ASSETS:

        Intangible assets include purchased intellectual property for games,
patents, trademarks, copyrights and licenses. Intangible assets are amortized
over a period of three to ten years.

        INVESTMENT IN JOINT VENTURES:

        The Company uses the equity method for accounting for its investment in
joint ventures.

        EARNINGS PER COMMON SHARE:

        Basic earnings per common share is calculated using income available to
common shareholders divided by the weighted average number of common shares
outstanding during the year. Diluted earnings per common share is similar to
basic except that the weighted average number of common shares outstanding is
increased to give effect to all potential dilutive common shares outstanding
during the period.

        IMPAIRMENT OF LONG-LIVED ASSETS:

        Management periodically reviews the carrying value of long-lived assets
for potential impairment by comparing the carrying value of these assets to the
estimated undiscounted future cash flows expected to result from the use of
these assets. Should the sum of the related, expected future net cash flows be
less than the carrying value, an impairment loss would be recognized. An
impairment loss would be measured by the amount by which the carrying value of
the asset exceeds the fair value of the asset with fair value being determined
using discounted cash flows. As of October 31, 1999, management has determined
that there was no impairment of long-lived assets.

        RECENTLY ISSUED ACCOUNTING STANDARDS:

        In August 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and is
effective for the Company's year ending October 31, 2000. Management believes
that adoption of this statement will not have a material impact on its financial
condition or results of operations.

        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.


                                       29
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

        RECLASSIFICATIONS:

        Certain reclassifications have been made to the October 31, 1998 and
1997 Consolidated Financial Statements to conform to the October 31, 1999
financial statement presentation. These reclassifications had no effect on the
operating results for the years ended October 31, 1998 and 1997, as previously
reported.

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. The
Company records investments at fair market value, which, as of October 31, 1999
and 1998, approximated amortized cost. All of the investments will mature within
one year from October 31, 1999.

        Investments at fair value consisted of the following:

AS OF OCTOBER 31,                                    1999            1998
------------------                                ----------     ----------
(IN THOUSANDS)
United States Government and Agency Obligations   $    2,232     $    4,111
Corporate Bonds                                        1,933          1,797
                                                  ----------     ----------
                                                  $    4,165     $    5,908
                                                  ==========     ==========

        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:

AS OF OCTOBER 31,                                     1999           1998
-----------------                                 ----------     ----------
(IN THOUSANDS)
ACCOUNTS RECEIVABLE:
Trade receivables                                 $    3,617     $    3,827
Less: Allowance for doubtful accounts                   (135)          (125)
                                                  ----------     ----------
                                                  $    3,482     $    3,702
                                                  ==========     ==========

INVENTORIES:
Raw materials and component parts                 $    2,598     $    1,404
Work-in-process                                          564            366
Finished goods                                         1,362            535
                                                  ----------     ----------
                                                  $    4,524     $    2,305
                                                  ==========     ==========


                                       30
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.  OTHER FINANCIAL STATEMENT DATA (CONTINUED):

<TABLE>
<CAPTION>
                                                 1999             1998
                                             ------------     ------------
<S>                                          <C>              <C>
PRODUCTS LEASED AND HELD FOR LEASE:
Products leased:
Game equipment                               $      6,697     $      5,555
Gaming products                                     3,231            2,061
                                             ------------     ------------
                                                    9,928            7,616
                                             ------------     ------------
Products held for lease:
Game equipment                                      2,242            1,361
Gaming products                                       741            1,561
                                             ------------     ------------
                                                    2,983            2,922
                                             ------------     ------------
                                                   12,911           10,538
Less: Accumulated depreciation                     (7,602)          (4,965)
                                             ------------     ------------
                                                    5,309            5,573
Less: Valuation allowance                              --             (470)
                                             ------------     ------------
                                             $      5,309     $      5,103
                                             ============     ============

PROPERTY AND EQUIPMENT:
Office furniture and computer equipment      $      2,005     $      2,295
Leasehold improvements                              2,045            1,858
Production equipment                                  359              314
Other                                                 553              624
                                             ------------     ------------
                                                    4,962            5,091
Less: Accumulated depreciation                     (2,334)          (2,026)
                                             ------------     ------------
                                             $      2,628     $      3,065
                                             ============     ============

INTANGIBLE ASSETS:
Purchased slot games                         $      3,370     $      3,370
Purchased table games                               3,000               --
Other                                                 685              290
                                             ------------     ------------
                                                    7,055            3,660
Less: Accumulated amortization                     (1,338)            (562)
                                             ------------     ------------
                                             $      5,717     $      3,098
                                             ============     ============
ACCRUED LIABILITIES:
Royalty settlement                           $      2,750     $         --
Compensation                                          939              610
Income taxes                                          542              151
Facilities relocation and related charges             154              933
Other                                                 247              261
                                             ------------     ------------
                                             $      4,632     $      1,955
                                             ============     ============
</TABLE>

<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,                           1999             1998             1997
----------------------                       ------------     ------------     ------------
<S>                                          <C>              <C>              <C>
(IN THOUSANDS)
COST OF PRODUCTS:
Game equipment                               $      6,220     $      6,757     $      6,743
Gaming products                                     2,922            2,821            3,750
                                             ------------     ------------     ------------
                                             $      9,142     $      9,578     $     10,493
                                             ============     ============     ============

OTHER INCOME, NET:
Interest income                              $        418     $        971     $      1,215
Interest expense                                      (81)             (91)             (69)
                                             ------------     ------------     ------------
                                             $        337     $        880     $      1,146
                                             ============     ============     ============
</TABLE>


                                       31
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4.  FACILITIES RELOCATION AND OTHER CHARGES:

        In the third quarter of fiscal 1998, the Company recorded a pre-tax
charge of $2,650,000 ($1,680,000 or $.17 per diluted share, after tax), due to
the relocation of the Company's administrative functions and manufacturing
operations from Minneapolis, Minnesota to Las Vegas, Nevada, and decreases in
the valuation of certain assets. Relocation related charges of $1,435,000 were
recorded for employee severance, facility related asset write-offs, and office
lease cancellation costs. The Company determined that it would terminate 47
employees in its production, administrative and research and development
departments, resulting in severance and termination benefit charges of
$1,050,000. The Company recorded a write-down of $940,000 against inventories of
certain single deck shufflers and component parts, in advance of the planned
introduction of the next generation of single deck shuffler model. This charge
was included in the cost of products. In addition, miscellaneous assets totaling
$275,000 were written off and recorded in selling, general and administrative
expenses. The cash and non-cash components of the charge approximated $1,170,000
and $1,480,000, respectively.

        In fiscal 1999 the Company determined that eight engineers would not be
terminated and that it would retain a portion of its Minnesota office lease due
to the growth and direction of its research and development efforts.
Additionally, nine administrative employees elected to relocate and to not
accept severance benefits. As a result, $199,000 in severance benefits and
$14,000 in office lease cancellation charges were not used and were reversed in
fiscal 1999. The remaining severance liability of $154,000 as of October 31,
1999 represents severance benefits to be paid to two former employees in fiscal
2000.

<TABLE>
<CAPTION>
                                                                                                 LIABILITY
                                                   1998                                        AS OF OCTOBER
                                                  CHARGE         UTILIZED        NOT USED        31, 1999
                                               ------------    ------------    ------------    ------------
(IN THOUSANDS)
<S>                                            <C>             <C>             <C>             <C>
Write-down of assets                           $      1,423    $      1,423    $         --    $         --
Employee severance and termination benefits           1,050             697             199             154
Other                                                   177             163              14
                                               ------------    ------------    ------------    ------------
                                               $      2,650    $      2,283    $        213    $        154
                                               ============    ============    ============    ============
</TABLE>

5.  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>
                                                                   1999            1998            1997
                                                               ------------    ------------    ------------
(IN THOUSANDS)
<S>                                                            <C>             <C>             <C>
CURRENT:
   Federal                                                     $      2,817    $      2,185    $      2,541
   State                                                                388             307             124
   Foreign                                                               70              95              --
                                                               ------------    ------------    ------------
                                                                      3,275           2,587           2,665
DEFERRED                                                             (1,250)           (737)             45
                                                               ------------    ------------    ------------
                                                               $      2,025    $      1,850    $      2,710
                                                               ============    ============    ============
</TABLE>


                                       32
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>

(IN THOUSANDS)                                                 1999             1998
                                                           ------------     ------------
<S>                                                        <C>              <C>
DEFERRED TAX ASSETS:
    Royalty settlement                                     $        990     $         --
    Joint venture                                                   263              213
    Inventory write-down and asset valuation allowances              54              233
    Accrued vacation                                                 45               60
    Facilities relocation and related charges                        37              283
    Other                                                            81               61
                                                           ------------     ------------
                                                           $      1,470     $        850
                                                           ============     ============

NON-CURRENT DEFERRED TAX ASSETS (LIABILITIES):
    Depreciation                                           $        244     $       (197)
    Intangibles amortization                                        238               88
    Research and experimental                                        58               78
    Options paid for services                                        55               --
    Other                                                            --               (4)
                                                           ------------     ------------
                                                           $        595     $        (35)
                                                           ============     ============
</TABLE>

        The Company recognized no valuation allowance as of October 31, 1999 and
1998 to offset its deferred tax assets. Management believes that it is more
likely than not that the Company will realize the full benefit of its deferred
tax assets on the basis of its evaluation of the Company's anticipated
profitability over the years when the underlying temporary differences are
expected to become tax deductions.

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

<TABLE>
<CAPTION>
                                                               1999             1998             1997
                                                           ------------     ------------     ------------
<S>                                                                <C>              <C>              <C>
Federal income tax at the statutory rate                           34.0%            34.0%            34.0%
State income taxes, net of federal benefit                          3.6              3.8              1.4
Benefit due to foreign sales corporation                           (2.7)            (3.0)             (.9)
Other                                                               1.1               .8               .1
                                                           ------------     ------------     ------------
Effective tax rate                                                 36.0%            35.6%            34.6%
                                                           ============     ============     ============
</TABLE>

6.  CREDIT AGREEMENT

        In September 1999, the Company entered into a $10,000,000 revolving
credit agreement with a bank for working capital needs, stock repurchases, new
product rollouts and the acquisition of new games. Borrowing under the credit
agreement must be repaid no later than October 6, 2002, though the Company may
annually request that the maturity of the credit agreement be extended by
another year.

        Additionally, current borrowings are limited in amount to the lesser of
$10,000,000 or twice the Company's earnings before interest, taxes,
depreciation, and amortization for the most recent cumulative four quarters. The
Company may borrow funds, provided, however, that it maintains certain current
debt service coverage and interest coverage ratios. The interest rate on
borrowings under the credit agreement will be, at the Company's option, either
the bank's prime rate or LIBOR, either adjusted for a premium determined by the
Company's leverage ratio as of the most recent quarter. Borrowings under the
credit agreement are secured by substantially all accounts receivable,
inventory, and products leased and held for lease. The Company had no
outstanding borrowings under the credit agreement as of October 31, 1999.


                                       33
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7.  COMMITMENTS AND CONTINGENCIES:

        OPERATING LEASES:

        The Company leases office, production, warehouse and service 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 $525,000, $707,000, and $632,000 for the
years ended October 31, 1999, 1998, and 1997, respectively.

Estimated future minimum lease payments under operating leases as of October 31,
1999, are as follows:

YEAR ENDED OCTOBER 31,
----------------------
(IN THOUSANDS)

2000                            $      471
2001                                   392
2002                                   339
2003                                   293
2004                                   234
Thereafter                             571
                                ----------
                                $    2,300
                                ==========

        LITIGATION:

        On December 28, 1999 the Company settled all of its litigation with
Progressive Games, Inc. ("PGI"), a wholly owned subsidiary of Mikohn Gaming
Corporation ("Mikohn"). The Company made a one-time payment of $2,750,000
($1,760,000 or $.22 per diluted share, after tax) to PGI and consented to the
validity, enforceability and infringement of certain PGI patents. This
settlement amount was accrued as an expense in the consolidated financial
statements as of October 31, 1999. The Company will not pay future royalties for
Let It Ride Bonus(R), Let It Ride The Tournament(R) and Three Card Poker(R). It
will pay pre-negotiated royalties if it markets other table games utilizing a
side bet with a fixed payout.

        Under separate license agreements, PGI/Mikohn will pay the Company
future royalties of approximately $580,000 per year over the next five years for
the rights to use the Company's coin sensing patents, the Company's multi-tiered
game wagering patent and the Company's intellectual property related to its
Bahama Bonus(TM) table game. The Company and PGI Mikohn also entered into a
mutually beneficial cross-supplier agreement.

        As part of the settlement PGI has released and will dismiss all claims
against Prime Table Games, Derek Webb, Hannah O'Donnell and the Company's casino
licensees named in the litigation, which satisfies the Company's indemnification
obligation.

8.  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. In March
1999, shareholders approved the addition of 250,000 shares to the plan,
increasing the total of shares of the Company's common stock reserved for
issuance under the plan to 1,210,000 shares.

        In November 1993, the Company's Board of Directors adopted the Outside
Directors' Option Plan for the purpose of compensating outside directors with
grants of stock options. There will 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. A total of 150,000 shares of the Company's stock have been
reserved for issuance under the plan.


                                       34
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

        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.

        In December 1998, the Board of Directors granted to a consultant an
option to purchase 40,000 shares at $7.00 per share.

            A summary of stock option activity and weighted average exercise
prices follows:

<TABLE>
<CAPTION>

YEARS ENDED OCTOBER 31,                    1999                      1998                      1997
-----------------------         ------------------------   ------------------------   ------------------------

                                               EXERCISE                  EXERCISE                   EXERCISE
(SHARES IN THOUSANDS)              SHARES        PRICE        SHARES       PRICE         SHARES       PRICE
                                ------------------------   ------------------------   ------------------------
<S>                                  <C>      <C>                 <C>    <C>                 <C>    <C>
Outstanding beginning of year        1,124    $     8.93          982    $     9.13          648    $     9.81
Granted                                127          7.25          272          8.45          422          8.52
Exercised                              (23)         6.59          (25)         7.79          (22)         7.09
Forfeited                              (33)         8.68         (105)         9.89          (66)        12.57
                                ------------------------   ------------------------   ------------------------
Outstanding at end of year           1,195    $     8.80        1,124    $     8.93          982    $     9.13
                                ========================   ========================   ========================

Exercisable end of year                885    $     9.00          647    $     9.00          451    $     9.01
                                ========================   ========================   ========================
</TABLE>

        The following table summarizes information concerning options
outstanding and options exercisable as of October 31, 1999:

(SHARES IN THOUSANDS)

<TABLE>
<CAPTION>
                                                  WEIGHTED
                                                   AVERAGE        WEIGHTED                      WEIGHTED
                                                  REMAINING        AVERAGE                       AVERAGE
                                   OPTIONS       CONTRACTUAL      EXERCISE       OPTIONS        EXERCISE
   RANGE OF EXERCISE PRICES      OUTSTANDING        LIFE           PRICE       EXERCISABLE       PRICE
------------------------------   ---------------------------------------       -----------------------
<S>                                 <C>              <C>           <C>             <C>           <C>
           $3 - $6                     76            4.6          $ 5.76            76          $ 5.76
           $6 - $9                    811            6.0            8.08           551            8.15
           $9 - $12                   251            6.9           10.74           201           10.94
          $12 - $15                    57            5.6           14.65            57           14.65
                               -----------------------------------------       -----------------------
                                    1,195            6.1          $ 8.80           885          $ 9.00
                               =========================================       =======================
</TABLE>

        Effective November 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). 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 and
directors. No compensation cost has been recognized for stock options issued
under the 1993 Stock Option Plan and the Outside Directors' Option Plan since
the exercise price for all options granted was at least 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 1999, 1998, and 1997, consistent with the method
provided in SFAS 123, the Company's net income and earnings per share would have
been as follows:


                                       35
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,                                                  1999             1998             1997
----------------------                                               ----------       ----------       ----------
<S>                                                                  <C>              <C>              <C>
Net income (IN THOUSANDS):
            As reported                                              $    3,598       $    3,343       $    5,122
            Pro forma                                                     3,181            2,987            4,076

Earnings per common share, basic:
            As reported                                              $      .45       $      .34       $      .47
            Pro forma                                                       .40              .31              .38

Earnings per common share, assuming dilution:
            As reported                                              $      .45       $      .34       $      .47
            Pro forma                                                       .40              .31              .38

Weighted average fair value of options granted during the year       $     5.13       $     5.69        $    6.11
</TABLE>

        The fair value of options granted during fiscal 1999, 1998, and 1997 was
estimated on the date of grant using the Black-Sholes option-pricing model with
the following weighted average assumptions and results:

<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,                  1999             1998             1997
----------------------             ------------    -------------   --------------
<S>                                  <C>              <C>              <C>
Dividend yield                             None             None             None
Expected volatility                       60.9%            58.6%            52.6%
Risk-free interest rate                    6.2%             5.5%             6.5%
Expected life of options             8.14 years       9.75 years       9.77 years
</TABLE>

        The Black-Sholes 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:

        As of October 31, 1999, all warrants outstanding to purchase common
stock had expired. No warrants were exercised in fiscal 1999.

9.  COMMON STOCK REPURCHASE:

        In October 1998, the Company's Board of Directors approved a resolution
to repurchase up to $2,000,000 of its outstanding common stock. In July 1999,
the Board rescinded unutilized authorizations under this resolution and approved
a new authorization to repurchase up to 500,000 shares. The Company repurchased
585,000 shares of its common stock under these two resolutions at a total cost
of $4,592,000. During fiscal 1998, the Company repurchased 2,000,000 shares at a
total cost of $15,942,000. As of October 31, 1999, the amount remaining under
the July 1999 board authorization was 151,500 shares. In November 1999, the
Board of Directors approved an additional resolution to repurchase up to
$2,000,000 of its outstanding common stock.


                                       36
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. EARNINGS PER COMMON SHARE:

        Effective December 15, 1997, the Company adopted the Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128).
Earnings per common share amounts for fiscal 1997 has been restated to conform
with the requirements of SFAS 128.

<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,                                            1999            1998           1997
----------------------                                        ------------    ------------    ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
<S>                                                           <C>             <C>             <C>
NET INCOME                                                    $      3,598    $      3,343    $      5,122
                                                              ============    ============    ============

BASIC:
    Weighted average shares outstanding                              7,873           9,621          10,706
    Shares to be issued under asset purchase                            48              70              92
                                                              ------------    ------------    ------------

    Weighted average common shares, basic                            7,921           9,691          10,798
                                                              ============    ============    ============

    Earnings per common share, basic                          $        .45    $        .34    $        .47
                                                              ============    ============    ============

ASSUMING DILUTION:
    Weighted average common shares, basic                            7,921           9,691          10,798
    Dilutive impact of options outstanding                              40              62              52
                                                              ------------    ------------    ------------


    Weighted average common shares and potential dilutive\
         shares outstanding                                          7,961           9,753          10,850
                                                              ============    ============    ============

    Earnings per common share, assuming dilution              $        .45    $        .34    $        .47
                                                              ============    ============    ============
</TABLE>


11. SHAREHOLDER RIGHTS PLAN:

        PREFERRED STOCK:

        On June 26, 1998, the Board of Directors designated and established
100,031 shares of no par value Series A Junior Participating Preferred Stock
(Preferred Stock). Holders of Preferred Stock are entitled to one hundred votes
on any matters submitted to vote by the shareholders of the Company, an
aggregate dividend of one hundred times any dividend declared on common stock
and a liquidation preference of one hundred times any liquidation payment amount
to common shareholders. No shares of Preferred Stock have been issued.

        SHAREHOLDER RIGHTS PLAN:

        On June 26, 1998, the Board of Directors of the Company adopted a
shareholder rights plan and declared a dividend distribution of one preferred
stock purchase right (a Right) for each outstanding common share to shareholders
of record on July 10, 1998. Additionally, the Board of Directors further
authorized and directed the issuance of one Right for each share of common stock
that shall become outstanding between July 10, 1998, and the earliest of the
Distribution Date, Redemption Date and the Final Expiration Date, all as defined
in the plan.

        Each Right will entitle the registered holder (unless the holder is an
Acquiring Person, as defined) to purchase from the Company one one-hundredth of
a share of Preferred Stock at $18 per one one-hundredth of a share of Preferred
Stock, subject to adjustments (the Purchase Price). The Rights generally become
exercisable if a person or group acquires, or tenders for, 20% or more of the
Company's common shares. In such event, upon exercise of the Right, the holder
of a Right may receive common shares having a value of two times the Purchase
Price.


                                       37
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

        The Rights will expire on June 26, 2008, unless they become exercisable
or are amended before that date, but may be redeemed by the Company for $.01 per
Right. After a person or group becomes an Acquiring Person, the Rights may not
be redeemed and may only be amended in limited circumstances.

12. RELATED PARTY TRANSACTIONS:

        In fiscal 1997, the Company advanced $300,000 to its President, Chief
Executive Officer and Chairman of the Board. The note receivable is secured by
17,000 shares of the Company's common stock, bears interest at seven percent and
matures in November 2002. As of October 31, 1999, the balance of the note
receivable was $374,000, including $74,000 in accrued interest due by February
2000. The non-current portion of this notes receivable is recorded in other
assets in the balance sheet.

        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, and is payable as follows:

YEAR ENDING OCTOBER 31,
-----------------------
(IN THOUSANDS)
2000                              $      546
2001                                     580
2002                                      97
                                  ----------
                                       1,223
Less: current portion                   (546)
                                  ----------
                                  $      677
                                  ==========

13. 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 based on a percentage of employee compensation and
actual contributions. In 1999 the Company elected to make a matching
contribution of 50% of employee contributions up to 4% of compensation, totaling
$71,000. However, no matching contributions were made to the plan during the
fiscal years ended October 31, 1998 and 1997.

14. EXPORT SALES:

        In fiscal 1999, 1998, and 1997, the Company had export shuffler sales
and shuffler lease revenue, primarily to Canada and Australia, which totaled
17%, 24%, and 17%, respectively, of total revenue.

15. SEGMENT REPORTING:

        In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
established standards for reporting information about operating segments in
annual financial statements and required selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. The Company's chief operating decision
maker is the Chief Executive Officer.

        The Company operates in two business segments: game equipment and gaming
products. The game equipment segment primarily designs, manufactures and
installs shufflers for sale or lease. It also distributes, installs and services
casino chip sorting machines and accessories for sale or lease. The gaming
products segment includes the design, manufacture, installation and service of
proprietary table games and slot games. Gaming products are either sold or
produce recurring revenue through fixed or participation leases. The Company
does not allocate corporate expenses to its business segments.


                                       38
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,                                      1999             1998             1997
-----------------------                                 ------------     ------------     ------------
(IN THOUSANDS)
REVENUE
<S>                                                     <C>              <C>              <C>
     Game equipment                                     $     18,203     $     17,361     $     20,454
     Gaming products                                          10,723            9,763            8,282
                                                        ------------     ------------     ------------
                                                              28,926           27,124           28,736
                                                        ============     ============     ============

OPERATING INCOME
     Game equipment                                            9,896            8,250           10,888
     Gaming products                                           1,155            4,084            3,023
     Corporate                                                (5,765)          (8,021)          (7,225)
                                                        ------------     ------------     ------------
                                                               5,286            4,313            6,686
                                                        ============     ============     ============

DEPRECIATION AND AMORTIZATION
     Game equipment                                            1,948            1,536            1,637
     Gaming products                                           1,609            1,154            1,239
     Corporate                                                   859            1,049              884
                                                        ------------     ------------     ------------
                                                               4,416            3,739            3,760
                                                        ============     ============     ============

ASSETS
     Game equipment                                            8,644            6,472            9,783
     Gaming products                                          10,388            7,736            9,225
     Corporate                                                11,573           14,085           21,718
                                                        ------------     ------------     ------------
                                                              30,605           28,293           40,726
                                                        ============     ============     ============

CAPITAL EXPENDITURES
     Game equipment                                            1,960               --            1,795
     Gaming products                                           4,466              212            3,435
     Corporate                                                   378              668            1,527
                                                        ------------     ------------     ------------
                                                        $      6,804     $        880     $      6,757
                                                        ============     ============     ============
</TABLE>


                                       39
<PAGE>


                            QUARTERLY FINANCIAL DATA
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                  Quarter Ended
                                                          -------------------------------------------------------------
IN THOUSANDS, EXCEPT PER COMMON SHARE                        January 31     April 30       July 31         October 31
-----------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>           <C>           <C>              <C>
FISCAL 1999

<Revenue                                                    $    5,978    $    6,958    $    7,951       $    8,039

Gross Profit                                                     4,240         4,755         5,291            5,497(2)

Operating Income (Loss)                                          1,512         1,888         2,289             (403)

Net Income (Loss)                                                1,033         1,269         1,501             (205)

Earnings (Loss) per Common Share, basic (3)                        .13           .16           .19             (.03)

Earnings (Loss) per Common Share,  assuming dilution (3)           .13           .16           .19             (.03)


FISCAL 1998

Revenue                                                     $    7,291    $    7,132    $    5,491       $    7,210

Gross Profit                                                     4,747         5,106         2,817            4,876

Operating Income                                                 1,899         2,269        (1,724)(1)        1,869

Net Income                                                       1,379         1,627          (941)           1,278

Earnings (Loss) per Common Share, basic(3)                         .14           .16          (.09)             .15

Earnings (Loss) per Common Share, assuming dilution(3)             .14           .16          (.09)             .15
</TABLE>


        (1)     The third quarter of fiscal 1998 included $2,650,000 of charges
                related to the relocation of the Company's administrative
                functions and manufacturing operations, and certain inventory
                and fixed asset valuation adjustments. See notes to consolidated
                financial statements.

        (2)     The fourth quarter of 1999 included $2,750,000 of charges
                related to the settlement of the Company's litigation with
                Progressive Games, Incorporated and the payment of past
                royalties. See notes to consolidated financial statements.

        (3)     The sum of the quarterly earnings per common share does not
                equal the amount reported for the fiscal year as quarterly
                calculations are made independently during the fiscal year.


                                       40
<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 Fiscal 1999 Proxy Statement is incorporated herein by
                reference.

        (b)     Executive Officers of the Registrant.
                The information under the caption "Executive Officers" in the
                Company's Fiscal 1999 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 Fiscal 1999
                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" and "Stock Performance Graph" in the Company's Fiscal 1999 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 Fiscal 1999 Proxy Statement
is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information under the caption "Certain Relationships and Related
Transactions" in the Company's Fiscal 1999 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' report are filed as part of this
                        Report on Form 10-K.

                        Independent Auditors' Report
                        Consolidated Income Statements for the years ended
                        October 31, 1999, 1998, and 1997
                        Consolidated Balance Sheets as of October 31, 1999 and
                        1998
                        Consolidated Statements of Shareholders' Equity for the
                        years ended October 31, 1999, 1998, and 1997
                        Consolidated Statements of Cash Flows for the years
                        ended October 31, 1999, 1998, and 1997
                        Notes to Consolidated Financial Statements
                        Quarterly Financial Data (unaudited)


                                       41
<PAGE>


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

                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    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)
                        10.3    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 exhibit 10.6 in
                                the Company's Report on Form 10-K for the year
                                ended October 31, 1995)
                        10.4    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)
                        10.5    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)
                        10.6    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)
                        10.7    Termination of Employment Arrangement for Joseph
                                J. Lahti, as excerpted from the October 27, 1997
                                minutes of the Board of Directors meeting
                                (Incorporated by reference to exhibit 10.10 in
                                the Company's Report on Form 10K for the year
                                ended October 31, 1997)
                        10.8    Shareholder Rights Plan, dated June 26, 1998
                                (Incorporated by reference to the Company's
                                Report on Form 8K dated June 26, 1998)
                        10.9    Revolving Credit Note, dated September 30, 1999,
                                by and between Shuffle Master, Inc. and
                                affiliates and U.S. Bank National Association.
                        10.10   Credit Agreement, dated September 30, 1999, by
                                and between Shuffle Master, Inc. and affiliates
                                and U.S. Bank National Association.
                        10.11   Security Agreement, dated September 30, 1999, by
                                and between Shuffle Master, Inc. and affiliates
                                and U.S. Bank National Association.
                        10.12   Settlement Agreement, dated December 28, 1999,
                                by and between Shuffle Master, Inc., Progressive
                                Games, Inc. and Mikohn Gaming Corporation.
                        10.13   Non-exclusive License Agreement (Exhibit 4),
                                dated December 28, 1999, by and between Shuffle
                                Master, Inc. and Progressive Games, Inc.
                        10.14   Non-exclusive License Agreement (Exhibit 5),
                                dated December 28, 1999, by and between Shuffle
                                Master, Inc. and Progressive Games, Inc.
                        10.15   Exclusive License Agreement (Exhibit 6), dated
                                December 28, 1999, by and between Shuffle
                                Master, Inc., Progressive Games, Inc. and Mikohn
                                Gaming Corporation.
                        10.16   Non-exclusive License Agreement (Exhibit 7),
                                dated December 28, 1999, by and between Shuffle
                                Master, Inc., Progressive Games, Inc. and Mikohn
                                Gaming Corporation.


                                       42
<PAGE>


                        10.17   Cross Supplier Agreement (Exhibit 8), dated
                                December 28, 1999, by and between Shuffle
                                Master, Inc. and Mikohn Gaming Corporation.

                        23.1    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, 1999.


                                       43
<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 31, 2000           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:


      Signature                         Title                         Date
      ---------                         -----                         ----

/s/ Joseph J. Lahti       President, Chief Executive Officer,   January 31, 2000
-----------------------   and Chairman of the Board
Joseph J. Lahti

/s/ Gary W. Griffin       Chief Financial Officer               January 31, 2000
-----------------------
Gary W. Griffin

/s/ Gerald W. Koslow      Corporate Controller                  January 31, 2000
-----------------------
Gerald W. Koslow

/s/ Mark L. Yoseloff      Executive Vice President and          January 31, 2000
-----------------------   Director
Mark L. Yoseloff

/s/ Patrick R. Cruzen     Director                              January 31, 2000
-----------------------
Patrick R. Cruzen

/s/ Thomas A. Sutton      Director                              January 31, 2000
-----------------------
Thomas A. Sutton


                                       44