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, 1998, 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 22, 1999, 8,019,284 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 $60,468,000, 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 17, 1999 (Fiscal 1998 Proxy Statement).

<PAGE>


                                TABLE OF CONTENTS


                                     PART I

                                                                            PAGE
Item  1.    Business                                                           1

Item  2.    Properties                                                        10

Item  3.    Legal Proceedings                                                 10

Item  4.    Submission of Matters to a Vote of Security Holders               12


                                     PART II

Item  5.    Market for Registrant's Common Equity and Related Stockholder     12
            Matters

Item  6.    Selected Financial Data                                           13

Item  7.    Management's Discussion and Analysis of Financial Condition       14
            and Results of Operations

Item  7A.   Quantitative and Qualitative Factors about Market Risk            20

Item  8.    Financial Statements and Supplementary Data                       21

Item  9.    Changes in and Disagreements with Accountants on                  38
            Accounting and Financial Disclosure


                                    PART III

Item  10.   Directors and Executive Officers of the Registrant                38

Item  11.   Executive Compensation                                            38

Item  12.   Security Ownership of Certain Beneficial Owners and Management    38

Item  13.   Certain Relationships and Related Transactions                    38


                                     PART IV

Item  14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K   38

<PAGE>


                                     PART I

ITEM 1. BUSINESS

FORWARD LOOKING STATEMENTS
        This report contains forward-looking statements that reflect risks and
uncertainties that could cause actual results to differ materially from
expectations. Factors that could cause actual results to differ materially from
expectations include, but are not limited to, the following: changes in the
market penetration of the Company's products relative to the size of the
available market for those products; changes in the level of acceptance of the
Company's existing products; competitive advances; acceleration and/or
deceleration of various product development and roll out schedules; consumer and
industry acceptance of the Company's existing products in new jurisdictions and
new products as introduced; higher than expected manufacturing, service,
selling, administrative, product development and/or roll out costs; current
and/or unanticipated future litigation; general economic conditions; regulatory
and jurisdictional issues involving Shuffle Master, Inc. specifically, and the
gaming industry in general; the relative financial health of the gaming industry
both nationally and internationally; and other 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 (shuffler systems), table games and video/slot machine game software
for the gaming industry. The Company's growth strategy is to develop or acquire
innovative gaming products, including productivity enhancing equipment and new
table and video games, and market these products worldwide.

        Casino gaming is found in 29 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 card games tables 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 video/slot machines varies
considerably by casino and jurisdiction.

        The Company develops and markets shuffler systems suitable for use with
the vast majority of table card games. The initial model in the Company's
shuffler product line was first placed in casinos in January 1992. As of October
31, 1998, 4,820 of the Company's shuffler systems have been placed in casinos or
other legal gaming establishments, including 1,880 units on lease and 2,940
units sold.

        The Company also develops and markets table card games and licenses
these products to casinos. Current revenue generating table games include the
Let It Ride(R) basic game and Let It Ride Bonus(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. As of October 31, 1998, there were approximately 250 Let It Ride(R)
basic game tables and approximately 375 Let It Ride Bonus(R) tables installed in
casinos.

        In addition to shuffler systems and table card games, the Company also
develops and markets games for video/slot machines. As of October 31, 1998, the
Company actively marketed Let It Ride Bonus Video(R), Five Deck Frenzy(TM) and
Five Deck Poker(TM) as video/slot machine game products, with additional
products in market test stage, including Video Mah Jong(TM), MultiBingo(TM) and
Doors To Riches(TM). During fiscal 1998, the Company made progress in the
development of its video/slot game business in a number of areas:

      * In April 1998, the Company entered into a joint marketing alliance
with Bally Gaming, Inc. to develop and market a video slot game version of Let's
Make A Deal(R) based on the popular television game show. In addition to
features of the original show, the video slot game incorporates the voice and
character of Monty Hall, the host of Let's Make A Deal(R). The game was first
shown at the World Gaming Congress & Expo in September 1998, and is expected to
be launched into the market in mid-fiscal 1999.

      * In May 1998, the Company received regulatory approval to install its
newly developed video poker game, Five Deck Poker(TM), in Nevada. By October 31,
1998, the Company received approvals to market this game in five additional
jurisdictions.


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ITEM 1. BUSINESS (CONTINUED)

      * In July 1998, the Company received regulatory approval to perform
field trials in Nevada for Video Mah Jong(TM), a video/slot version of the
internationally popular gambling game, Mah Jong. In December 1998, the Company
received final approval to install Video Mah Jong(TM) in Nevada.

      * In October 1998, the Company entered into a licensing agreement with
IGT for the development and marketing of non-wide area progressive video/slot
versions of certain of the Company's games. This agreement provides the Company
with the ability to directly control the development and marketing of game
software for use on IGT game machine platforms. The Company will pay IGT
royalties based on a percentage of revenues generated by the games under this
agreement.

THE COMPANY'S PRODUCTS
        SHUFFLER SYSTEMS. The Company's shuffler systems, marketed under the
trademark Shuffle Master Gaming(R), are automatic card shuffling machines
designed to be used with table card games in casinos and other legal gaming
establishments. These systems, developed by the Company, offer several benefits
to the Company's casino customers, including enhanced security and increased
productivity. Opportunity for card manipulation by dealers is significantly
reduced, resulting in increased security. Because the shuffler systems
shuffle/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 60% of the
Company's revenue in fiscal 1998. The Company has developed three types of
shuffler systems:

      * 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, is the most widely placed single deck
shuffler and is used with well known specialty card games including the
Company's own Let It Ride(R) games as well as other non-Shuffle Master games
such as Caribbean Stud Poker(R) and Pai Gow Poker. Many specialty games offer
the possibility of large payouts to players. Since the Company's single deck
machines shuffle a "fresh" deck 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 1998, the Company completed the majority of the
development work on the ACE(TM), its next generation single deck card delivery
system. The Company began field testing the pre-production model of the ACE(TM)
in June 1998 and introduced the new system to the industry in September 1998 at
the World Gaming Congress & Expo in Las Vegas. Production of the ACE(TM) began
in December 1998. Unlike the BG models, the ACE(TM) does not technically shuffle
cards. 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. 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 will track and display 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 multi-deck card shuffler system shuffles
a batch of two to eight decks of cards at a time, primarily for blackjack or
mini-baccarat table games. 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
85% of casino table card games, excluding poker rooms.

      * MULTI-DECK CONTINUOUS. The Company is developing a next generation
multiple deck card delivery system that continuously recirculates cards as they
are played at table games. Designed for use with multi-deck blackjack and
mini-baccarat table games, the continuous "shuffler" system 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


                                       2

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ITEM 1. BUSINESS (CONTINUED)

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 6-12 cards. The machine can shuffle cards
quickly enough to keep up with the normal pace of dealing hands. It is possible
for cards dealt on one hand to be re-dealt on 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.

        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 29% of the Company's revenue in fiscal 1998.
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, 1998, the basic Let It Ride(R) table game was approved
for play in 30 United States gaming jurisdictions in 24 states, 7 Canadian
provinces and 12 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.

        The Bonus format was developed in response to evidence that the Let It
Ride The Tournament(R) game (described below) was experiencing declines in
popularity due to the price of the game to casinos and to low returns to players
on the side bet. With the Bonus format, the price to the casinos was reduced and
offered as a fixed monthly amount. In addition, more liberal paytables for the
bonus bet were designed for players. Statistics gathered immediately following
the conversion of Tournament tables in August and September of 1997 indicated
that player participation in the side bet increased from the low 50% range to
over 70%, providing a clear indication of player acceptance of the new
paytables. Participation data gathered in 1998 shows that participation in the
bonus bet continued to rise, with major gaming venues experiencing participation
rates in excess of 80%. Although the Company does not benefit directly from
increased player participation in the bonus bet, the results provide an
indication of the popularity of the game to players and of the financial benefit
to casinos.

        Without the security requirements of the Tournament format, regulatory
review and approval of the Bonus format has proven to be more rapid, allowing
the Bonus version of Let It Ride(R) to quickly expand beyond jurisdictional
approvals for the Tournament, which were Nevada, Mississippi, Connecticut and
Missouri. As of October 31, 1998, the Let It Ride Bonus(R) game was approved for
use in 26 United States gaming jurisdictions in 21 states, including all major
gaming markets, 3 Canadian provinces, and 2 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 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.

        For fiscal year 1998, all of the Company's table game products are
licensed to casinos for a fixed monthly fee. Let It Ride The Tournament(R) was
previously billed to each casino on the basis of a fixed percentage of the $1
side bets wagered by players in that casino.

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


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ITEM 1. BUSINESS (CONTINUED)

        VIDEO/SLOT GAMES. The Company develops and markets game concepts and
software programs for use on video or slot machines, either on its own or
through agreements with third parties. Actively marketed products include Let It
Ride Bonus Video(R), Five Deck Frenzy(TM) and Five Deck Poker(TM). The Company
is developing or testing additional products for future commercialization,
including Video Mah Jong(TM), MultiBingo(TM) and Doors to Riches(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. Descriptions of revenue generating video/slot products
follow:

      * LET IT RIDE BONUS VIDEO(R). In 1995, the Company entered into an
agreement with Bally Gaming International, 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, 1998, there were
46 Let It Ride Bonus Video(R) machines installed in casinos.

      * FIVE DECK FRENZY(TM). Originally purchased in 1997 as part of the
acquisition of a video games library from Dr. Mark Yoseloff (a director and
executive officer of the Company), Five Deck Frenzy(TM) is a variation of video
draw poker that deals cards in each of the five card positions on the screen
from a separate and independent deck. The possibility of suited hands 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 is marketed to Nevada casinos in a wide-area progressive
format by the Company and IGT through a joint marketing agreement. As of October
31, 1998, there were 164 Five Deck Frenzy(TM) units installed in Nevada.

      * FIVE DECK POKER(TM). Subsequent to the introduction of Five Deck
Frenzy(TM), the Company and IGT developed a non wide-area progressive version of
the game called Five Deck Poker(TM). The game is similar to Five Deck
Frenzy(TM), except that it is installed as a stand alone video slot game or
placed as an in-house progressive game. The Company is now in the process of
rolling out Five Deck Poker(TM) into Nevada, New Jersey, Connecticut and
Minnesota casinos. As of October 31, 1998, there were 89 Five Deck Poker(TM)
games installed in New Jersey and Nevada 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. IGT operates Five Deck Frenzy(TM) progressive systems in Nevada,
with profits from the video poker game alliance split equally.

      * SECOND JOINT MARKETING ALLIANCE WITH IGT. In September 1997, the
Company entered into a second joint game development and marketing agreement
with IGT. This agreement allowed certain of the Company's games to be programmed
for operation on IGT video/slot machine platforms. The agreement provided for
IGT and the Company to share profits equally on revenues from games licensed to
casinos for use on previously installed machines (referred to as retrofit
machines), and for the Company to receive 100% of profits on revenues from
casinos that license and activate Shuffle Master games supplied with new IGT
machines. In October 1998, this agreement was cancelled and replaced by the
licensing agreement described below.

      * 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 machine platforms. In exchange for the license
the Company will pay IGT a royalty based on a percentage of revenue generated by
the Company's games, which are installed on IGT gaming machines. IGT will
provide the company with software support and training. Under this agreement,
the Company is currently marketing Five Deck Poker(TM), is test marketing Video
Mah Jong(TM) and has MultiBingo(TM) and Doors to Riches(TM) ready for market
test.

      * LET'S MAKE A DEAL(R) 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(R),
the popular and long-running television game show hosted by Monty Hall. The
Company's fiscal 1998 video 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 future operating profits
from the game. Let's Make A Deal(R) is expected to be introduced into casinos in
mid-fiscal 1999.

CUSTOMERS AND MARKETING
        The Company created the market for shuffler systems with the
introduction of its innovative product line in 1992, focusing its early
marketing efforts on Las Vegas and Reno, Nevada casinos. Today the Company's
shuffler products are broadly placed in casinos throughout North America, with
increasing presence internationally. As of October 31, 1998, the


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ITEM 1. BUSINESS (CONTINUED)

Company had placed its shuffler systems, Let It Ride(R) games or other products
in approximately 525 casinos throughout the world.

        The Company leases and sells its shuffler systems to casinos and other
lawful gaming establishments. As part of its strategy to maintain and expand its
market position in the automatic shuffler business, the Company has made a
commitment to 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 shuffler systems, the Company offers a service contract that
provides service benefits similar to that on leased units, or a parts warranty
contract.

        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, the TCS Group (TCS). As of October 31, 1998, the Let
It Ride(R) basic game was installed in approximately 130 casinos and the Let It
Ride Bonus(R) game was installed in approximately 175 casinos.

        In North America, Shuffle Master sells and services its shuffler, table
game and video/slot products through its own direct sales force and service
department. As of October 31, 1998, the Company had 29 service employees with
offices in 14 field service locations and 18 service employees that operate out
of the Las Vegas facility.

        Outside of North, Central and South America, the Company markets its
shuffler and selected other products primarily through its international
distributor, 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 October 1998, the Company made its single largest sale, 180
multi-deck shufflers, to TCS' Australian subsidiary.

        Five Deck Frenzy(TM) units are marketed to casino customers in Nevada as
part of a dedicated wide-area progressive system. The game is offered jointly by
the Company and IGT, with Shuffle Master handling sales and marketing and IGT
responsible for installations, progressive system operation and administration.
Games are generally installed in casinos by retrofitting casino-owned machines
at no cost to the casino. In some instances, new or used machines may be
provided instead of a retrofit installation. As of October 31, 1998, Five Deck
Frenzy(TM) was installed in 25 casinos.

        Video and slot games marketed under the licensing agreement with IGT
will be sold and installed by Shuffle Master sales and service personnel. The
Company, at its expense, will provide conversion kits for retrofit of gaming
machines already owned by the casino. Alternately, 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.

        Although marketing plans for Let's Make A Deal(R) are not final, the
Company expects that Ballys' sales force will lead the sales effort, with
Shuffle Master providing secondary sales and marketing support. Bally will also
manufacture and distribute Let's Make A Deal(R) gaming machines, which will be
sold or leased to casino customers, or provided free of charge under certain
game revenue sharing arrangements.

        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 1998, 1997, and 1996, the Company had export shuffler sales
and shuffler lease revenue, primarily to Canada and Australia, which totaled
24%, 17%, and 14%, respectively, of total revenue.

PRODUCT SUPPLY OPERATIONS
        The Company's product supply operations consist primarily of the
procurement, assembly, warehousing and shipment of shuffler systems, Let It Ride
Bonus(R) tables, video/slot software chip sets and machine glass, and associated
parts and equipment. Parts include off-the-shelf items as well as components
manufactured to the Company's specifications. The Company also manufactures some
parts at its in-house machine shop. Parts are used for product assembly as well
as service needs. Video product supply operations may include procuring video
machines for lease or sale as required for the business, and will typically


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ITEM 1. BUSINESS (CONTINUED)

involve procuring and stocking parts needed to retrofit casino-owned machines
for new game software. Retrofit parts include computer chips, glass panels with
game graphics, and button panel components. The Company strives to ensure that
multiple suppliers exist for critical components, and periodically solicits bids
from various suppliers to ensure competitive pricing. Final assembly and quality
control operations are conducted by the Company's employees 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.

        SHUFFLER PRODUCTS. The Company employs a staff of electrical, mechanical
and software engineers to improve and upgrade its existing products and to
develop new products. The engineering staff is uniquely experienced in card
shuffling requirements and solutions and, excluding the conceptual beginning of
the first single deck shuffler, has been instrumental in the development of all
of the Company's shuffler products. During fiscal 1998, substantial progress was
made on the development of the Company's next generation shuffler products,
bringing the ACE(TM) and continuous shuffler concepts into production and
prototype stages, respectively. Resources will continue to be allocated to such
projects to support the Company's efforts to maintain and enhance its market
leader position.

        GAME PRODUCTS. In fiscal 1998, the Company's game product development
group worked on developing game concepts internally, and evaluating third party
game products. The Company's game development efforts include work in market
research, creative game design, game programming, prototype development, and
statistical paytable evaluation and design. With significant emphasis on new
game products as a future revenue source, the Company expects to increase the
resources devoted to game development.

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

        Research and development expenses were $2,462,000, $1,693,000, and
$1,250,000 in fiscal 1998, fiscal 1997, and fiscal 1996, respectively.

COMPETITION
        SHUFFLER SYSTEMS. Automatic card shufflers 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 machines. However, the Company is not aware of any competitive products
that have achieved significant distribution. While the Company believes the
barriers to entry in shuffler products are substantial, it also assumes in its
strategic planning that it will face competition. Consequently, the Company
expects to continue to invest in the development of new shuffler technology.

        GAME PRODUCTS. The success of games such as Let It Ride(R) and Five Deck
Poker(TM), which the Company licenses to casinos, depend not only on casinos
deciding to use such products but also on acceptance by the players. Player
acceptance of a game often correlates to the frequency and amount of money
returned during play, as well as the availability and appeal of the game
compared to other games.

        Overall, the marketing of video/slot games and table games to the casino
industry is highly competitive. A number of the Company's video/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
        Since 1989, the Company has been awarded fifteen United States patents
related to its shuffler and game technology. Products protected by these patents
include the BG single deck series, the MD multi-deck card shuffler series, Let
It Ride(R) stud poker, Five Deck Frenzy(TM), Five Deck Poker(TM), and a variety
of new games which 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.


                                       6

<PAGE>


ITEM 1. BUSINESS (CONTINUED)

        The Company has been issued a number of patents in South Africa, and was
recently awarded a patent protecting Let It Ride(R) stud poker in Australia.
There are domestic and foreign patent applications pending which cover its newly
introduced ACE(TM) card handling system, its continuous shuffler design, and
numerous innovative games. 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.

        SHUFFLER SYSTEMS. The Company is not aware that any of its card handling
equipment infringes the patents and intellectual property of others. In addition
to patent protection, the Company protects much of its technology with
copyrights, trademark, registrations and trade secrets. No assurance can be
given that the Company will be successful in maintaining the confidentiality of
its proprietary information. In the absence of valid patent, copyright,
trademark and trade secret protection, the Company would be vulnerable to
competitors who could lawfully attempt to copy the Company's products.

        LET IT RIDE BONUS(R). The Company and its Let It Ride The Tournament(R)
and Let It Ride Bonus(R) casino customers are defendants in litigation in United
States District Court in Nevada, Mississippi, New Jersey, Connecticut, Illinois,
Indiana, and Missouri, in which Progressive Games, Inc., a wholly-owned
subsidiary of Mikohn Gaming Corp., alleges that the Company's Let It Ride The
Tournament(R) and Let It Ride Bonus(R) games infringe certain patents owned by
Progressive Games, Inc. See description of legal proceedings under Item 3.

        TRADEMARKS. The Company has obtained federal trademark registrations in
the United States for Let It Ride(R), Let It Ride Bonus(R), Let It Ride Bonus
Video(R), the Let It Ride and design logo, the Fanned Card(R) design, Shuffle
Master(R) and Shuffle Master Gaming(R). The Company has a number of
international trademark registrations and numerous international applications
pending. The Company has also sought protection in the United States for a
number of names which the Company plans to use in the future.

EMPLOYEES
        As of December 31, 1998, the Company had 113 full-time and 4 part-time
employees. The Company is not subject to any collective bargaining agreement and
believes that its employee relations are good.

REGULATION
        OVERVIEW. The manufacture, sale, lease, license and distribution of the
Company's products require various licenses, permits and approvals, and the
Company is subject to laws and regulations by authorities in most jurisdictions
in which its products are used by persons or entities licensed to conduct gaming
activities. The gaming regulatory requirements vary from jurisdiction to
jurisdiction, and licensing, other approval or finding of suitability processes
with respect to the Company 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 current models of the Company's shuffler systems, video and table games, and
apparatus related to the Let It Ride Bonus(R) table game have been granted by
gaming regulatory agencies, there can be no assurance that the Company, its
current or future products or its management personnel will receive nor maintain
any necessary gaming licenses, other approvals or findings of suitability.

        SHUFFLER SYSTEMS. The Company has obtained approvals for its shuffler
systems in 42 jurisdictions in North America and has filed for approval of its
shuffler systems and related software in certain other jurisdictions. The
Company's card shuffler systems 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 shuffler systems vary among
jurisdictions, most, if not all, jurisdictions require specific hardware and
software approvals and certain licenses or permits to be held by


                                       7

<PAGE>


ITEM 1. BUSINESS (CONTINUED)

companies, its key personnel, and service technicians in connection with the
manufacture, distribution, service, and repair of such equipment.

        TABLE GAMES AND RELATED EQUIPMENT. The Company has developed the Let It
Ride(R) basic and the Let It Ride Bonus(R) games. Let It Ride(R) the basic game
is approved in all major gaming markets in North America and numerous other
gaming jurisdictions. The Let It Ride Bonus(R) table game, including the rules
of play and related equipment, is approved in 29 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. Similar approvals may be required before the Company's
table games and apparatus related to such table games can be marketed in other
jurisdictions. The Company conducts business only in those jurisdictions where
it has secured required approvals for its products.

        VIDEO/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 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 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, be investigated and be found suitable or
qualified as such. The gaming laws and regulations of most jurisdictions provide
that beneficial owners of more than 5% of the Company's common stock are subject
to certain reporting procedures and may be subject to background investigations,
including submission of personal and financial information 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, 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.


                                       8

<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 such 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.


                                       9

<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 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 selling
its products for use in the respective jurisdiction or may be required to sell
its products through other licensed entities at a reduced profit to the Company.


ITEM 2. PROPERTIES

        The Company leases space in Las Vegas, Nevada for substantially all of
its business activities, except shuffler machine research and development, which
operates out of leased space in Eden Prairie, Minnesota. In addition, the
Company continues to maintain its corporate office in Eden Prairie, Minnesota,
pending completion of the consolidation of its facilities in Las Vegas, Nevada.
(See Facilities Relocation and Other Charges under Item 7.) 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

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

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

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

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


                                       10

<PAGE>


ITEM 3. LEGAL PROCEEDINGS (CONTINUED)

        In June 1996, the United States Patent & Trademark Office rejected all
of the claims of PGI's 105 patent, claims 1-4, 6, 8, 10, and 14 of its 041
patent and claims 6-21 of its 077 patent. In December 1996 and January 1997, the
United States Patent & Trademark Office again rejected all of the claims of the
105 patent, claims 1-4, 6, 8, 10 and 14 of the 041 patent and claims 6-21 of the
077 patent. PGI appealed the Patent Office's final rejection to the U.S. Patent
& Trademark Office's Board of Patent Appeals. In January 1999, the Board of
Patent Appeals affirmed rejection of the broad claims of the 041 and 077 patents
and reversed the rejection of certain claims of the 041 and the 077 patents.
Further, the Board of Patent Appeals reversed the rejection of all of the claims
of the 105 patent which is not asserted against the Company in PGI's
infringement lawsuit. In doing so, the Board of Patent Appeals considered
additional prior art and PGI may either amend its rejected claims or request
rehearing.

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

        In January 1997, PGI sued the Mashantucket Pequot Tribe by and through
the Mashantucket Pequot Gaming Enterprise dba Foxwoods High Stakes Bingo and
Casino in United States District Court in Connecticut. PGI alleges that the
Foxwoods Casino's participation in Let It Ride The Tournament(R) infringes the
041, the 077, the 893, and a patent titled "Methods of Progressive Jackpot
Gaming," U.S. Patent number 5,584,485 (the "485").

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

        In March 1998, PGI began a new action against Boardwalk Regency Corp.
dba Caesars Atlantic City in United States District Court in New Jersey,
alleging that by offering Let It Ride Bonus(R) to its customers, Caesars
infringed the 485 patent. Subsequent to this action, PGI began separate lawsuits
against each additional casino in New Jersey that offered the Company's Let It
Ride Bonus(R) game. In April 1998 the New Jersey court heard arguments on PGI's
request for a preliminary injunction against Boardwalk Regency Corp. dba Caesars
Atlantic City. In August 1998, the New Jersey court issued an injunction
enjoining Boardwalk Regency Corp. dba Caesars Atlantic City from offering the
Let It Ride Bonus(R) game. Thereafter, also in August 1998, the Judicial Panel
on Multi-District Litigation transferred the Boardwalk Regency Corp. litigation
to the U.S. District Court for the Southern District of Mississippi for
consolidated pre-trial proceedings.

        In September 1998, Mikohn Gaming Corp. purchased all of the stock of
PGI. Also, in September and October 1998, PGI initiated actions against the
Company and its Let It Ride Bonus(R) casino customers in the states of Nevada,
Mississippi, New Jersey, Illinois, Indiana, Connecticut, and Missouri alleging
that the Company's Let It Ride The Tournament (R) and Let It Ride Bonus(R) games
infringe the previously mentioned patents and two additional patents, namely
U.S. Patent No. 5,794,964 (Apparatus for Progressive Jackpot Gaming) and U.S.
Patent No. 5,795,225 (Methods of Progressive Jackpot Gaming), the 964 and 225.
All of the above cases have been consolidated for pre-trial proceedings in the
Southern District of Mississippi.

        In November 1998, the New Jersey Casino Control Commission decided to
not allow the Let It Ride Bonus(R) game in any New Jersey casino while one of
the New Jersey casinos (Caesars Atlantic City) was enjoined from offering the
Let It Ride Bonus(R) game.

        The Company brought a motion in the consolidated pre-trial proceeding in
the Southern District of Mississippi to vacate the injunction issued by the New
Jersey court against Boardwalk Regency Corp. dba Caesars Atlantic City.
This matter was argued to the court on January 22, 1999, and a decision is
expected shortly.

        The Company believes that PGI's patent claims which are alleged to be
infringed are either invalid or not infringed by the Company's Let It Ride The
Tournament(R) and Let It Ride Bonus(R) table games. The Company is defending and
indemnifying all licensees of the Tournament as well as all licensees of the
Company's Let It Ride Bonus(R) table games against liability resulting from any
such claim or suit brought against the licensee for infringement of proprietary
rights or patent rights arising out of or relating to Let It Ride The
Tournament(R) or the Let It Ride Bonus(R) table games. If PGI should prevail


                                       11

<PAGE>


ITEM 3. LEGAL PROCEEDINGS (CONTINUED)

in its suit, management does not expect the action will materially affect the
Company's financial condition or results of operations.


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, 1998.


                                     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 22, 1999, there were 468 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, 1998 and 1997:

                                    1998                        1997
                           ---------------------       ---------------------
                               HIGH        LOW           HIGH         LOW
                           --------     --------       --------     --------

        First quarter      $   8.75     $   6.00       $  12.25     $   8.63
        Second quarter        11.50         7.75           9.75         6.75
        Third quarter         10.31         7.50          10.00         7.13
        Fourth quarter         9.06         5.94          10.25         7.50

        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.


                                       12

<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
In thousands, except per common share and ratio amounts           1998        1997        1996        1995        1994
-------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>         <C>         <C>         <C>         <C>     
YEAR ENDED OCTOBER 31,

      INCOME STATEMENT

      Revenue                                                   $ 27,124    $ 28,736    $ 22,587    $  9,833    $  2,373

      Income (Loss) from Operations                                4,313       6,686       5,550       1,494      (1,208)

      Net Income (Loss) from Continuing Operations                 3,343       5,122       2,768       2,338        (889)

      Net Income (Loss)                                            3,343       5,122       2,768       2,403      (1,015)

      Weighted Average Shares Outstanding, assuming dilution       9,753      10,850      11,293       9,765       8,639


AS OF OCTOBER 31,

      BALANCE SHEET

      Cash and Cash Equivalents, and Investments                $  8,472    $ 16,306    $ 26,478    $ 20,828    $  8,902

      Working Capital                                             11,352      20,736      27,845      23,297       9,940

      Total Assets                                                28,293      40,726      45,297      37,751      15,288

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

      Shareholders' Equity                                        21,895      34,111      39,139      35,099      14,405

      Common Shares Outstanding                                    8,015       9,968      11,177      11,048       9,081

      Current Ratio                                                  3.2         5.4         5.7         9.8        12.3


PER COMMON SHARE

      Earnings (Loss) from Continuing Operations                $    .34    $    .47    $    .25    $    .24    $   (.10)

      Earnings (Loss) from Discontinued Operations                    --          --          --          --        (.02)

      Earnings (Loss) per Common Share, basic                        .34         .47         .25         .25        (.12)

      Earnings (Loss) per Common Share, assuming dilution            .34         .47         .25         .25        (.12)

      Book Value                                                    2.73        3.42        3.50        3.18        1.59

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


                                       13

<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
shuffler systems have generally become required equipment for many table games.
The Company generated 60%, 69%, and 63% of its revenue in fiscal 1998, 1997, and
1996, respectively, from the sale and lease of automatic shuffler systems. The
Company has approval for its first generation single deck and its multi-deck
card shuffler systems in all major gaming jurisdictions in North America and
continues to seek to obtain the necessary approvals in other jurisdictions. The
Company has obtained approval in a number of gaming jurisdictions for its new
single deck shuffler called the ACE(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 allows the casino players
to make a $1 side bet which provides for the large immediate payouts similar to
the Tournament game; however, there is no playoff as in the Tournament game.
Revenue is generated by the Let It Ride Bonus(R) game 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, 1998, approximately 625 Let It Ride(R) table games were installed in
casinos, with approximately 375 Bonus tables. The other 250 tables are the basic
version of Let It Ride(R), for which the Company receives monthly license fees
up to $795 per table from casino customers. The basic version of Let It Ride(R)
is similar to the Bonus game except there is no $1 side bet option.

        In the second quarter of fiscal 1998, the Company entered into an
agreement with Bally Gaming, Inc. for the development, manufacture and marketing
of a casino video slot game version of Let's Make A Deal(R). The Company granted
Bally Gaming, Inc. an exclusive license for the use of Let's Make A Deal(R)
intellectual property in gaming machines in certain jurisdictions. The Company
recorded $1,000,000 of licensing income in connection with the signing of this
agreement. Future revenue and expenses related to the development and
distribution of the game will be shared equally by the Company and Bally Gaming,
Inc. The game was shown at the World Gaming Congress & Expo in Las Vegas in
September 1998. The Company expects Let's Make A Deal(R) to be introduced to the
gaming market in mid-fiscal 1999.

        In fiscal 1997, the Company acquired a video game library which included
a wide-area progressive video poker game called Five Deck Frenzy(TM). In
September 1997, the Company entered into a joint marketing agreement with
International Game Technology (IGT) to market Five Deck Frenzy(TM). At October
31, 1998, there were 164 Five Deck Frenzy(TM) video poker games in Nevada
casinos. 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. Five Deck Poker(TM) is similar to Five Deck Frenzy(TM) in
all aspects of game play, except that Five Deck Poker(TM) is a stand alone
casino video poker game not connected to a wide-area progressive system. Five
Deck Poker(TM) may also be played as an intra-casino progressive, which allows a
single casino to offer a progressive jackpot based solely on the play levels in
a specific casino. There were 89 Five Deck Poker(TM) games installed in casinos
as of October 31, 1998.


RESULTS OF OPERATIONS

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 recorded a valuation allowance 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 called the ACE(TM). This charge was included in the cost of
products in the Consolidated Income Statements. Finally, miscellaneous assets
totaling $275,000 were written off and included in selling, general and
administrative expenses.


                                       14

<PAGE>


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

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 last year.
Current year 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.

        Video revenue increased by $1,183,000 to $1,707,000 in fiscal 1998.
Current year video revenue included $1,000,000 received from Bally Gaming, Inc.
under an exclusive license arrangement for the Let's Make A Deal(R) intellectual
property. Video revenue also included revenue from Five Deck Frenzy(TM) 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 the current year. 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 video 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 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 the current year compared to $1,180,000
last 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


                                       15

<PAGE>


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

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. (See Facilities Relocation and Other
Charges.)

        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 video/slot game software development. Amortization
expense of the intangible assets associated with video 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 the current year 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.

        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 current year
provision includes 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 last year. Current year 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 the current year 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.

FISCAL 1997 COMPARED TO FISCAL 1996

REVENUE AND COST OF PRODUCTS

        Revenue for fiscal 1997 was $28,736,000 compared to revenue of
$22,587,000 in fiscal 1996, an increase of $6,149,000, or 27.2%. Shuffler sales
totaled $9,020,000 in fiscal 1997 compared to $4,558,000 in fiscal 1996 while
fiscal 1997 unit sales totaled 1,193 compared to unit sales of 619 in the prior
year. Included in the fiscal 1997 unit sales were 667 units converted to a sale
from a unit under lease at the time of sale. Substantially all of these
conversion sales were to casinos in the domestic market. The average per unit
sales price increased to $7,560 in fiscal 1997 from $7,363 since fiscal 1996
sales included relatively more lower-priced sales to international distributors.
The shuffler lease base decreased to 1,600 units at October 31, 1997 compared to
1,804 units on lease at October 31, 1996, principally due to the leased units
converted to sold units during the year. Multi-deck shuffler systems on lease
increased by 4% while single deck units on lease decreased by 18% between the
comparable year ends. Monthly lease pricing was unchanged for all leased
shuffler systems between the years.

        Revenue from the Let It Ride(R) table game decreased by $205,000, or
3.2% from fiscal 1996. In the fourth quarter of fiscal 1997, the Company
converted Let It Ride The Tournament(R) to the Let It Ride Bonus(R) table game
in Nevada and Mississippi. The Company generated greater revenues from Let It
Ride The Tournament(R) game than the Bonus game due to the revenue sharing of
the $1 side bet. To offset the decrease in revenues, the Company reduced a
number of expenses to support the Let It Ride Bonus(R) table game. There were
approximately 220 Let It Ride Bonus(TM) tables in casinos as of October 31, 1997
compared to 200 Tournament tables in casinos as of October 31, 1996. In
connection with the Tournament to Bonus conversion of tables, the Company sold
the associated equipment for use with the Bonus table game. Sales of this
associated equipment were $517,000 in fiscal 1997. This amount is included with
Let It Ride(R) table game revenue in the consolidated income statements. The
Company will continue to offer this equipment for sale in new Let It Ride
Bonus(R) table installations. Let It Ride(R) basic tables in casinos increased
to 325 tables as of October 31, 1997 compared to 300 as of the prior year end.
Effective November 1, 1997, the Company increased the per table monthly fee for
the Let It Ride(R) basic game to $795 from pricing generally under $300 per
table per month.


                                       16

<PAGE>


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

        Video revenue increased to $524,000 from $76,000 in fiscal 1996.
Substantially all of the video revenue was generated from Let It Ride Bonus
Video(R). Revenues from Five Deck Frenzy(TM) were not significant in fiscal 1997
due to the mid-year product introduction. Other revenue included approximately
$300,000 of revenue recognized on the sale of extended service and warranty
contracts on shufflers sold.

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

OPERATING EXPENSES

        Selling, general and administrative expenses were $9,864,000 in fiscal
1997 compared to $7,399,000 in fiscal 1996. Payroll related expenses increased
due to increased staffing levels at the end of fiscal 1996 which carried over to
fiscal 1997. However, overall staffing levels decreased by 10% through job
restructuring and attrition when comparing staffing as of October 31, 1997, to
October 31, 1996. Included in fiscal 1997 staffing expenses was a bonus
provision of $665,000 which included bonus payouts to all employees. The prior
year bonus expense was $90,000. Legal expenses increased by $396,000 to
$1,180,000 in fiscal 1997 because of ongoing litigation with Progressive Games,
Inc., a wholly owned subsidiary of Mikohn Gaming Corporation, and costs
associated with litigation with DD Stud , Inc. and Anchor Coin which was settled
in August 1997. The Company also incurred additional patent related legal
expenses in fiscal 1997 due to seeking patent protection for new products and
international market expansion. Approximately $440,000 of costs were incurred
for product registration in new jurisdictions and costs in support of
suitability findings for newly appointed officers during fiscal 1997. These
expenses were $200,000 in fiscal 1996. In November 1996, the Company took
occupancy of a new facility in Las Vegas. Additional facility related expenses
were approximately $335,000 in fiscal 1997 compared to fiscal 1996. Advertising
and promotion expenses decreased by $565,000 in fiscal 1997 due to decreased
spending in support of Let It Ride The Tournament(R) as the Tournament table
game was replaced with the Let It Ride Bonus(R) table game. Research and
development expenses increased by $443,000, or 35.4% in fiscal 1997 compared to
fiscal 1996. Professional fees included in research and development expenses
increased to approximately $350,000 in fiscal 1997 from $150,000 in fiscal 1996.
The Company retained Dr. Mark Yoseloff, in the capacity of a consultant to the
Company, to assist in the development of new video games and for enhancing the
current video offering. On August 1, 1997, Dr. Yoseloff became Executive Vice
President of the Company. The Company also had a new version shuffler in
development as of October 31, 1997.

OTHER INCOME AND EXPENSE

        Other income, net, was interest income for both years. The decrease in
interest income for fiscal 1997 resulted from the use of $10,396,000 for the
repurchase of common stock.

        The provision for income taxes was based on an effective tax rate of
34.6% in fiscal 1997 compared to 23.5% in fiscal 1996. The Company provided for
income taxes in fiscal 1997 at the statutory rate, while the prior year tax
provision included the benefit of the reversal of a $577,000 valuation allowance
against deferred tax assets.

        Net income was $5,122,000, or $.47 per diluted share compared to
$2,768,000, or $.25 per diluted share in fiscal 1996. Fiscal 1996 net income
included a pre-tax write-off of $3,370,000 of notes receivable which was equal
to approximately $.22 per share. The weighted average common shares assuming
dilution, decreased to 10,850,000 compared to 11,293,000 in fiscal 1996 due the
repurchase of 1,241,000 of the Company shares during fiscal 1997.

RECENTLY ISSUED ACCOUNTING STANDARDS

        In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This statement requires companies to classify items of
other comprehensive income by their nature in the financial statements and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
balance sheet, and is effective for the Company's fiscal year ending


                                       17

<PAGE>


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

October 31, 1999. Management intends to comply with the disclosure requirements
of this statement.

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

        In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Post Retirement Benefits." This statement revises
employers' disclosures regarding pension and other post retirement benefit
plans, and is effective for the Company's fiscal year ending October 31, 1999.
Management believes that the adoption of this standard will not have a material
impact on its financial condition or results of operations.

        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
specifically in 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.

        While Shuffle Master's review of Year 2000 issues is ongoing, the
Company's preliminary assessment is that it has no material exposure to Year
2000 issues. Key factors in this assessment, as well as certain disclaimers, are
presented below.

        During fiscal 1997 the Company completed: l) 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 compliant.
Based on these changes, the Company does not anticipate that the Year 2000 issue
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. It is now in the process of updating the software to allow operation
without concern for calendar dates. While this particular issue is independent
of the Year 2000 date change, the Company expects to obtain 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 multi-deck continuous shuffler, 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 games for operation on IGT and
IGT progressive systems, and has been informed by IGT that such machines and
systems are Year 2000 compliant. Games currently in the market on Bally machines
are not a significant source of revenue.

        The Company is in the process of evaluating 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 are identified with key vendors, the Company expects to be able to manage
purchases and inventories to minimize Year 2000 issue related delays, if any, 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. At present, management therefore believes that the Company's
exposure to third party Year 2000 risks is not significant. However, there can
be no assurance that affected systems of other companies on which the Company
may rely will be converted or that such failure to convert would not have an
adverse effect on the Company's operations. Management is also unable to gauge
the impact of Year 2000 issues in its casino customers' operations. Such
operations are collectively many times the size of the Company and the Company
does not have the resources to undertake such an evaluation. Similarly, the
Company is not in a position to speculate on the impact of potential system
failures in the economy at large. Management is continuing to analyze, assess,
and plan for various Year 2000 contingencies.

        In view of its fiscal 1997 systems upgrades, no significant expenses
were incurred in fiscal 1998 to address Year 2000 issues. The Company also does
not expect that it will incur any significant expenses related to Year 2000
issues in fiscal 1999.


                                       18

<PAGE>


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

LIQUIDITY & CAPITAL RESOURCES

        At October 31, 1998, the Company had 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 current 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 the current
year. 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 current year 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 shuffler early in its current year
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. Purchases 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 the current
year. The Company repurchased 2,000,000 shares of its common stock at a total
cost of $15,942,000 during fiscal 1998. This share repurchase completed two
separate 1,000,000 share repurchase authorizations approved by the Board of
Directors during fiscal 1998. At October 31, 1998, there was an outstanding
authorization for share repurchases of up to $2,000,000 of common stock, at
specific price limits as 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, 1998, the long-term balance remaining under
this acquisition was $1,217,000 compared to $1,718,000 as of October 31, 1997, a
reduction of $501,000 due to payments made in cash and stock during fiscal 1998.

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

        At October 31, 1997, the Company had available cash, cash equivalents
and investments of $16,306,000 compared to $26,478,000 at October 31, 1996. The
decrease resulted from $10,396,000 of cash used to repurchase 1,241,000 shares
of the Company's common stock. Working capital decreased to $20,736,000 as of
October 31, 1997, from $27,845,000 as of October 31, 1996, and the current ratio
decreased to 5.4 to 1 from 5.7 to 1.

        Cash provided by operating activities in fiscal 1997 was $4,498,000. The
major components of cash provided by operating activities included net income of
$5,122,000, non-cash charges for depreciation and amortization of $3,760,000,
and bad debt and inventory allowance provisions of $563,000. Payment of Let It
Ride The Tournament(R) playoff prizes in the fourth quarter in fiscal 1997
decreased the Company's cash by $1,874,000. Accounts receivable increased by
$1,834,000 due to increased sales of shufflers and extended payment terms on
certain of the shuffler sales. Inventories increased by $774,000 as the Company
began sourcing inventory late in fiscal 1997 for the fiscal 1998 manufacture of
single deck shufflers. In addition, greater quantities of finished shufflers
were in inventory at October 31, 1997, to fill a first quarter fiscal 1998 sale.
Customer deposits and unearned revenue increased by $611,000 due to an increase
of over $400,000 in unearned revenue on sales of extended service and warranty
contracts for sold shufflers.

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

IMPACT OF INFLATION

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


                                       19

<PAGE>


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


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.


                                       20

<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS                                               PAGE

Independent Auditors' Report                                                 22

Consolidated Income Statements for the
years ended October 31, 1998, 1997, and 1996                                 23

Consolidated Balance Sheets, as of October 31, 1998 and 1997                 24

Consolidated Statements of Changes in Shareholders' Equity
for the years ended October 31, 1998, 1997, and 1996                         25

Consolidated Statements of Cash Flows for the years
ended October 31, 1998, 1997, and 1996                                       26

Notes to Consolidated Financial Statements                                   27


                                       21

<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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended October 31, 1998, in conformity with
generally accepted accounting principles.



Minneapolis, Minnesota
December 23, 1998                           DELOITTE & TOUCHE LLP


                                       22

<PAGE>


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

<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,                              1998            1997            1996
                                                ------------    ------------    ------------
<S>                                             <C>             <C>             <C>         
REVENUE:
    Shuffler lease                              $      9,807    $     10,840    $      9,684
    Shuffler sales                                     6,521           9,020           4,558
    Let It Ride(R)table game                           7,864           7,612           7,817
    Video                                              1,707             524              76
    Other                                              1,225             740             452
                                                ------------    ------------    ------------
                                                      27,124          28,736          22,587
                                                ------------    ------------    ------------

COSTS AND EXPENSES:
    Cost of products                                   9,578          10,493           8,388
    Selling, general and administrative                9,336           9,864           7,399
    Research and development                           2,462           1,693           1,250
    Office relocation expenses                         1,435              --              --
                                                ------------    ------------    ------------
                                                      22,811          22,050          17,037
                                                ------------    ------------    ------------

Income from operations                                 4,313           6,686           5,550

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

Other income, net                                        880           1,146           1,438
                                                ------------    ------------    ------------

Income before income taxes                             5,193           7,832           3,618

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

NET INCOME                                      $      3,343    $      5,122    $      2,768
                                                ============    ============    ============


EARNINGS PER COMMON SHARE, BASIC                $        .34    $        .47    $        .25
                                                ============    ============    ============

EARNINGS PER COMMON SHARE, ASSUMING DILUTION    $        .34    $        .47    $        .25
                                                ============    ============    ============


WEIGHTED AVERAGE COMMON SHARES, BASIC                  9,691          10,798          11,116
                                                ============    ============    ============

WEIGHTED AVERAGE COMMON SHARES,
    ASSUMING DILUTION                                  9,753          10,850          11,293
                                                ============    ============    ============
</TABLE>

                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       23

<PAGE>


                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
                                     ASSETS

<TABLE>
<CAPTION>

AS OF OCTOBER 31,                                                 1998           1997
                                                              -----------    -----------
<S>                                                           <C>            <C>        
CURRENT ASSETS:
   Cash and cash equivalents                                  $     2,564    $     1,053
   Investments                                                      5,908         15,253
   Accounts receivable, net                                         3,702          5,354
   Note receivable from related party                                 342            697
   Inventories                                                      2,305          2,317
   Deferred income taxes                                              850            219
   Other current assets                                               827            599
                                                              -----------    -----------

         Total current assets                                      16,498         25,492

SYSTEMS AND EQUIPMENT LEASED UNDER OPERATING
    LEASES, NET, AND HELD FOR LEASE                                 5,103          7,497

PROPERTY AND EQUIPMENT, NET                                         3,065          3,744

INTANGIBLE ASSETS, NET                                              3,098          3,840

OTHER ASSETS                                                          529            153
                                                              -----------    -----------

         TOTAL ASSETS                                         $    28,293    $    40,726
                                                              ===========    ===========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable                                           $     1,002    $       600
   Accrued liabilities                                              1,955          1,483
   Current portion of long-term obligation
       to related party                                               529            529
   Customer deposits and unearned revenue                           1,660          1,946
   Tournament playoff liability                                        --            198
                                                              -----------    -----------

        Total current liabilities                                   5,146          4,756

DEFERRED INCOME TAXES PAYABLE                                          35            141

LONG-TERM OBLIGATION TO RELATED PARTY                               1,217          1,718

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
   Common stock, $.01 par value; 30,000 shares
        authorized; 8,015 and 9,968 shares issued
        and outstanding                                                80            100
   Additional paid-in capital                                      11,366         26,905
   Retained earnings                                               10,449          7,106
                                                              -----------    -----------

         Total shareholders' equity                                21,895         34,111
                                                              -----------    -----------

         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY           $    28,293    $    40,726
                                                              ===========    ===========
</TABLE>

                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       24

<PAGE>


                           CONSOLIDATED STATEMENTS OF
                         CHANGES IN SHAREHOLDERS' EQUITY

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                     RETAINED
                                           COMMON STOCK             ADDITIONAL       EARNINGS
                                     -------------------------       PAID-IN      (ACCUMULATED
                                       SHARES         AMOUNT         CAPITAL         DEFICIT)
                                     ---------     -----------     -----------     -----------
<S>                                     <C>        <C>             <C>             <C>         
BALANCE, OCTOBER 31, 1995               11,048     $       110     $    35,773     $      (784)

Common stock options exercised              23               1             151

Common stock warrants exercised            106               1           1,039

Other                                                                       80

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

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

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

Common stock options exercised              16              --             111

Other                                       16              --             135

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

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

Common stock repurchased                (2,000)            (20)        (15,922)

Common stock options exercised              25              --             194

Other                                       22              --             189

Net income                                                                               3,343
                                     ---------     -----------     -----------     -----------

BALANCE, OCTOBER 31, 1998                8,015     $        80     $    11,366     $    10,449
                                     =========     ===========     ===========     ===========
</TABLE>

                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       25

<PAGE>


                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,                                                 1998            1997            1996
                                                                   -----------     -----------     -----------
<S>                                                                <C>             <C>             <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                                     $     3,343     $     5,122     $     2,768
    ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
       PROVIDED BY OPERATING ACTIVITIES:
            Depreciation and amortization                                3,739           3,760           2,482
            Facilities relocation and other charges                      2,650              --              --
            Loss on notes receivable                                        --              --           3,300
            Provision for bad debts                                        171              47              85
            Provision for inventory obsolescence                           326             516             381
            Deferred income taxes                                         (737)            (45)            232
    CHANGES IN OPERATING ASSETS AND LIABILITIES:
            Accounts receivable                                          1,481          (1,834)         (1,232)
            Notes receivable from related party                            (23)           (349)            (28)
            Inventories                                                   (314)           (774)           (137)
            Other current assets                                          (285)           (246)         (1,113)
            Accounts payable and accrued liabilities                      (296)           (436)          1,145
            Customer deposits and unearned revenue                        (286)            611             701
            Tournament playoff liability                                  (198)         (1,874)          1,428
                                                                   -----------     -----------     -----------

            Net cash provided by operating activities                    9,571           4,498          10,012
                                                                   -----------     -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of investments                                           (22,199)       (112,790)        (53,437)
    Proceeds from sales and maturities of investments                   31,544         120,575          49,331
    Payments for systems and equipment leased and held for
           lease                                                          (212)         (2,560)         (2,871)
    Purchases of property and equipment                                   (668)         (1,527)         (2,426)
    Proceeds received on notes receivable                                  378              --              -- 
    Other                                                                 (843)            (16)           (364)
                                                                   -----------     -----------     -----------

            Net cash provided by (used in) investing activities          8,000           3,682          (9,767)
                                                                   -----------     -----------     -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Repurchase of common stock                                         (15,942)        (10,396)             --
    Payments on long-term obligation to related party                     (312)           (275)             --
    Proceeds from issuance of common stock and  warrants                   194             111           1,192
    Other                                                                   --              (7)            107
                                                                   -----------     -----------     -----------

            Net cash (used in) provided by financing activities        (16,060)        (10,567)          1,299
                                                                   -----------     -----------     -----------
    Net increase (decrease) in cash and cash equivalents                 1,511          (2,387)          1,544

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                             1,053           3,440           1,896
                                                                   -----------     -----------     -----------

CASH AND CASH EQUIVALENTS, END OF YEAR                             $     2,564     $     1,053     $     3,440
                                                                   ===========     ===========     ===========

NON-CASH TRANSACTIONS:
    Acquisition of intangible assets for debt and equity
       securities                                                  $        --     $     2,670     $        --
                                                                   ===========     ===========     ===========
    Payment of debt with common stock                              $       189     $       142     $        --
                                                                   ===========     ===========     ===========

CASH PAID DURING THE YEAR FOR:
    Income taxes                                                   $     2,017     $     3,179     $       463
                                                                   ===========     ===========     ===========
    Interest                                                       $        91     $        69     $        --
                                                                   ===========     ===========     ===========
</TABLE>

                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       26

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

    DESCRIPTION OF BUSINESS:

        Shuffle Master, Inc. (the "Company") is a supplier of shuffler systems
and proprietary table and video/slot game machines and software to the gaming
industry. The foundation of the Company's business has been the development,
manufacturing and marketing of automatic card shuffler systems. The Company's
current shuffler offering includes multi-deck and single deck shufflers
available to casinos through a purchase or lease option. The Company markets its
shuffler systems in all domestic gaming jurisdictions 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(TM) through its joint marketing agreement
with IGT. The Company and IGT share equally in the profits generated by Five
Deck Frenzy(TM). A second game from the Five Deck family 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 an agreement with Bally Gaming, Inc.
for development, manufacture and marketing of a casino video slot game version
of Let's Make A Deal(R). The Company received video license fee revenue under
this agreement in fiscal 1998.

    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:

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

    REVENUE RECOGNITION:

        The Company recognizes sales revenue on the shipment of a shuffler
system. If a customer converts an existing leased shuffler system to a purchase,
revenue is recorded on the effective date of the lease to sales conversion.
Shuffler lease revenue is generated on a monthly basis, generally through
indefinite term leases. Table and video revenue is generated by monthly fixed
license and royalty fees, and 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
consolidated balance sheets as unearned revenue.

    RESEARCH AND DEVELOPMENT:

        Research and development costs are expensed as incurred.


                                       27

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

    CONCENTRATION OF CREDIT RISK:

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

    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 video
games, patents and licenses. Intangible assets are amortized over a period of
three to five years.

    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, 1998, management has determined
that there was no impairment of long-lived assets.

    RECENTLY ISSUED ACCOUNTING STANDARDS:

        In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This statement requires companies to classify items of
other comprehensive income by their nature in the financial statements and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
balance sheet, and is effective for the Company's fiscal year ending October 31,
1999. Management intends to comply with the disclosure requirements of this
statement.

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

        In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Post Retirement Benefits." This statement revises
employers' disclosures regarding pension and other post retirement benefit
plans, and is effective for the Company's fiscal year ending October 31, 1999.
Management believes that the adoption of this standard will not have a material
impact on its financial condition or results of operations.

        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.


                                       28

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

    USE OF ESTIMATES:

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

2.  FINANCIAL INSTRUMENTS:

    CASH AND CASH EQUIVALENTS:

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

    INVESTMENTS:

        The Company classifies all of its securities as available-for-sale. As
of October 31, 1998 and 1997, the cost of securities approximated fair value
which was based on quoted market prices. All of the investments will mature
within one year from October 31, 1998.

    Investments at fair value consisted of the following:

AS OF OCTOBER 31,                      1998             1997
-----------------                  -----------      ----------
(In thousands)
United States Government
   and Agency Obligations          $     4,111      $   14,036
Corporate Bonds                          1,797           1,080
Other                                       --             137
                                   -----------      ----------
                                   $     5,908      $   15,253
                                   ===========      ==========

    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.


                                       29

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.   OTHER FINANCIAL STATEMENT DATA:

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

<TABLE>
<CAPTION>

AS OF OCTOBER 31,                                       1998              1997
-----------------                                   ------------     ------------
(In thousands)
<S>                                                 <C>              <C>         
ACCOUNTS RECEIVABLE:
Trade receivables                                   $      3,827     $      5,504
Less: Allowance for doubtful accounts                       (125)            (150)
                                                    ------------     ------------
                                                    $      3,702     $      5,354
                                                    ============     ============
INVENTORIES:
Raw materials and component parts                   $      1,589     $      1,580
Work-in-process                                              366              635
Finished goods                                               535              337
                                                    ------------     ------------
                                                           2,490            2,552
Less: Valuation allowance                                   (185)            (235)
                                                    ------------     ------------
                                                    $      2,305     $      2,317
                                                    ============     ============
SYSTEMS AND EQUIPMENT LEASED AND HELD FOR LEASE:
Systems and equipment leased:
Shuffler systems                                    $      5,555     $      4,790
Table and video equipment                                  2,061            2,194
                                                    ------------     ------------
                                                           7,616            6,984
Less: Accumulated depreciation                            (4,965)          (3,680)
                                                    ------------     ------------
                                                           2,651            3,304
Systems and equipment held for lease:
Shuffler systems                                           1,361            2,273
Table and video equipment                                  1,561            1,920
                                                    ------------     ------------
                                                           2,922            4,193
Less: Valuation allowance                                   (470)              --
                                                    ------------     ------------
                                                           2,452            4,193
                                                    ------------     ------------
                                                    $      5,103     $      7,497
                                                    ============     ============
PROPERTY AND EQUIPMENT:
Office furniture and computer equipment             $      2,295     $      2,543
Leasehold improvements                                     1,858            1,794
Production equipment                                         314              369
Other                                                        624              546
                                                    ------------     ------------
                                                           5,091            5,252
Less: Accumulated depreciation and amortization           (2,026)          (1,508)
                                                    ------------     ------------
                                                    $      3,065     $      3,744
                                                    ============     ============
INTANGIBLE ASSETS:
Purchased video games                               $      3,370     $      3,370
Other                                                        290            1,062
                                                    ------------     ------------
                                                           3,660            4,432
Less: Accumulated amortization                              (562)            (592)
                                                    ------------     ------------
                                                    $      3,098     $      3,840
                                                    ============     ============
ACCRUED LIABILITIES:
Facilities relocation related charges               $        933     $         --
Compensation                                                 610            1,232
Income taxes                                                 151               --
Other                                                        261              251
                                                    ------------     ------------
                                                    $      1,955     $      1,483
                                                    ============     ============
</TABLE>


                                       30

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEAR ENDED OCTOBER 31,                  1998            1997           1996
----------------------              -----------     -----------     -----------
(In thousands)
COST OF PRODUCTS:
Shuffler lease                      $     3,713     $     3,557     $     3,066
Shuffler sales                            3,044           3,186           1,882
Let It Ride(R)table game                  1,821           2,682           2,748
Video                                       613             474             153
Other                                       387             594             539
                                    -----------     -----------     -----------
                                    $     9,578     $    10,493     $     8,388
                                    ===========     ===========     ===========

OTHER INCOME, NET:
Interest income                     $       971     $     1,215     $     1,438
Interest expense                            (91)            (69)             --
                                    -----------     -----------     -----------
                                    $       880     $     1,146     $     1,438
                                    ===========     ===========     ===========

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 recorded a valuation allowance 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 approximate $1,170,000
and $1,480,000, respectively. The charges and their utilization are summarized
as follows:

AS OF OCTOBER 31, 1998,                       CHARGE      UTILIZED     BALANCE
-----------------------                     ---------    ---------    ---------
(In thousands)
Write-down of assets                        $   1,423    $     953    $     470
Employee severance and termination
    benefits                                    1,050          149          901
Other                                             177          145           32
                                            ---------    ---------    ---------
                                            $   2,650    $   1,247    $   1,403
                                            =========    =========    =========

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:

                                           1998           1997          1996
                                        ----------     ----------    ----------
(In thousands)
CURRENT:
   Federal                              $    2,185     $    2,541    $      678
   Foreign                                      95             --            --
   State                                       307            124            58
                                        ----------     ----------    ----------
                                             2,587          2,665           736
DEFERRED                                      (737)            45           114
                                        ----------     ----------    ----------
                                        $    1,850     $    2,710    $      850
                                        ==========     ==========    ==========


                                       31

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

(In thousands)                                        1998          1997
                                                   ---------     ---------
DEFERRED TAX LIABILITIES:
    Depreciation                                   $    (197)    $    (427)
    Research and experimental                             78           151
    Intangible amortization                               88           140
    Other                                                 (4)           (5)
                                                   ---------     ---------
                                                   $     (35)    $    (141)
                                                   =========     =========
DEFERRED TAX ASSETS:
    Facilities relocation related charges          $     283     $      --
    Inventory and asset valuation allowances             233            83
    Reserves differential for gaming activities          213            --
    Accrued vacation                                      60            89
    Other                                                 61            47
                                                   ---------     ---------
                                                   $     850     $     219
                                                   =========     =========

        There was no valuation allowance as of October 31, 1998 and 1997. The
net change in the valuation allowance for deferred tax assets was a decrease of
$577,000 for the year ended October 31, 1996, due to utilization of net
operating loss and tax credit carryforwards.

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

                                               1998        1997        1996
                                              ------      ------      ------
Federal income tax at the statutory rate        34.0%       34.0%       34.0%
Benefit due to foreign sales corporation        (3.0)        (.9)         --
Reduction in valuation allowance                  --          --       (15.9)
State income taxes, net of federal benefit       3.8         1.4         1.1
Other                                             .8          .1         4.3
                                              ------      ------      ------
Effective tax rate                              35.6%       34.6%       23.5%
                                              ======      ======      ======

6.   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 $707,000, $632,000 and $377,000 for the years
ended October 31, 1998, 1997, and 1996, respectively.

        Estimated future minimum lease payments under operating leases as of
October 31, 1998, are as follows:

YEAR ENDING OCTOBER 31,
    (In thousands)
         1999                $     546
         2000                      373
         2001                      268
         2002                      242
         2003                      242
         Thereafter                806
                             ----------
                             $   2,477
                             ==========


                                       32

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

        LITIGATION:

        The Company is involved in litigation with Progressive Games, Inc., a
Florida corporation, which is a wholly-owned subsidiary of Mikohn Gaming Corp.
The Company has a declaratory judgment action pending in the United States
District Court requesting a determination that certain patents owned by
Progressive Games, Inc. are either invalid or not infringed by the Company.
Progressive Games, Inc. is suing the Company 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) games and apparatus infringe certain of Progressive
Games, Inc.'s patents. Progressive Games, Inc. is asking for injunctive relief
and damages.

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

7.   STOCK OPTIONS AND WARRANTS:

        STOCK OPTIONS:

        In November 1993, the Company's Board of Directors adopted the 1993
Stock Option Plan. The plan permits the granting of incentive stock options
meeting the requirements of Section 422 of the Internal Revenue Code, and
nonqualified options which do not meet the requirements of Section 422. A total
of 960,000 shares of the Company's stock have been reserved for issuance under
the plan. In January 1999, an additional 250,000 shares were added to the
reserved shares under the plan by the Board of Directors. The addition of these
shares to the plan is subject to shareholder approval at the March 1999 meeting
of shareholders.

        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 may be an annual option grant of 3,000 shares to
each eligible director at a price equal to the fair market value on the date of
the grant. Each option is immediately exercisable and expires seven years from
the grant date. A total of 150,000 shares of the Company's stock have been
reserved for issuance under the plan.

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

        A summary of stock option activity is as follows:

<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,                 1998                  1997                   1996
----------------------        ---------------------  ---------------------  ---------------------
                                         Wtd. Avg.              Wtd. Avg.              Wtd. Avg.
(shares in thousands)          Shares   Exer. Price   Shares   Exer. Price   Shares   Exer. Price
                              -------   -----------  -------   -----------  -------   -----------
<S>                           <C>       <C>          <C>       <C>          <C>       <C>    
Outstanding at
    beginning of year             982     $  9.13        648     $  9.81        482     $  8.83
Granted                           272        8.45        422        8.52        230       11.93
Exercised                         (25)       7.79        (22)       7.09        (23)       6.56
Forfeited                        (105)       9.89        (66)      12.57        (41)      12.14
                              -------                -------                -------
Outstanding at
    end of year                 1,124     $  8.93        982     $  9.13        648     $  9.81
                              =======     =======    =======     =======    =======     =======

Options exercisable at end
    of year                       647     $  9.00        451     $  9.01        295     $  8.65
                              =======     =======    =======     =======    =======     =======
</TABLE>


                                       33

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

        The following table summarizes information concerning options
outstanding and exercisable options as of October 31, 1998:

<TABLE>
<CAPTION>

(shares in thousands)                   Weighted-
                                         Average             Weighted-                         Weighted-
      Range              Number         Remaining        Average Exercise     Options      Average Exercise
of Exercise Prices    Outstanding    Contractual Life         Price         Exercisable         Price
-----------------------------------------------------------------------------------------------------------
<S>                       <C>              <C>                <C>               <C>             <C>  
      $1-$3                --               --                   --              --                --
      $3-$6                79              5.6                $5.76              79             $5.76
      $6-$9               719              7.4                 8.17             357              8.15
     $9-$12               269              8.3                10.68             166             10.89
     $12-$15               57              7.4                14.65              45             14.55
</TABLE>

        Effective November 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted by SFAS 123, the Company
has elected to continue following the guidance of APB No. 25 for measurement and
recognition of stock-based transactions with employees 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 1998, 1997, and 1996, consistent with the method provided in SFAS
No. 123, the Company's net income and earnings per share would have been as
follows:

YEAR ENDED OCTOBER 31,                            1998      1997      1996
---------------------------------------------    ------    ------    ------
Net income (in thousands):
            As reported                          $3,343    $5,122    $2,768
            Pro forma                             2,987     4,076     2,248

Earnings per common share, basic:
            As reported                          $  .34    $  .47    $  .25
            Pro forma                               .31       .38       .20

Earnings per common share, assuming dilution:
            As reported                          $  .34    $  .47    $  .25
            Pro forma                               .31       .38       .20

Weighted average fair value of options granted
during the year                                  $ 5.69    $ 6.11    $ 9.64

        The fair value of options granted during fiscal 1998, 1997, and 1996 was
estimated on the date of grant using the Black-Sholes option-pricing model with
the following weighted average assumptions and results:

YEAR ENDED OCTOBER 31,                1998            1997             1996
------------------------         -------------   --------------   --------------
Dividend yield                         None           None             None
Expected volatility                   58.6%          52.6%            67.8%
Risk-free interest rate                5.5%           6.5%             6.5%
Expected life of options           9.75 years      9.77 years       9.77 years

        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.


                                       34

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

        WARRANTS:

        As of October 31, 1998, there were 80,000 warrants outstanding to
purchase common stock at $10.47 per share. In fiscal 1996, the holders exercised
45,000 warrants. No warrants were exercised in fiscal 1998 or fiscal 1997.

8.   COMMON STOCK REPURCHASE:

        During fiscal 1998, the Company's Board of Directors approved two
separate resolutions, each for the repurchase of up to 1,000,000 shares of its
outstanding common stock. The Company repurchased 2,000,000 shares of its common
stock under these resolutions at a total cost of $15,942,000. During fiscal
1997, the Company repurchased 1,241,000 shares at a total cost of $10,396,000.

9.   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 and fiscal 1996 have been
restated to conform with the requirements of SFAS 128.

<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,                                 1998            1997           1996
------------------------------------------------   ------------    -----------    -----------
(In thousands, except per share amounts):
<S>                                                 <C>            <C>            <C>        
NET INCOME                                          $     3,343    $     5,122    $     2,768
                                                    ===========    ===========    ===========

BASIC:
    Weighted average shares outstanding                   9,621         10,706         11,116
    Shares to be issued under asset purchase                 70             92             --
                                                    -----------    -----------    -----------

    Weighted average common shares, basic                 9,691         10,798         11,116
                                                    ===========    ===========    ===========

    Earnings per common share, basic                $       .34    $       .47    $       .25
                                                    ===========    ===========    ===========

ASSUMING DILUTION:
    Weighted average common shares, basic                 9,691         10,798         11,116
    Dilutive impact of options outstanding                   62             52            177
                                                    -----------    -----------    -----------

    Weighted average common shares and potential
            dilutive shares outstanding                   9,753         10,850         11,293
                                                    ===========    ===========    ===========

    Earnings per common share, assuming dilution    $       .34    $       .47    $       .25
                                                    ===========    ===========    ===========
</TABLE>

10.  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.


                                       35

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

        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.

        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.

11.  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 1999.

        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)
                            1999     $   529
                            2000         547
                            2001         581
                            2002          89
                                  -------------
                                       1,746
Less: current portion                   (529)
                                  -------------
                                     $ 1,217
                                  =============

12.  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. No matching contributions were made to the plan during the
fiscal years ended October 31, 1998, 1997 and 1996.

13.  EXPORT SALES:

        In fiscal 1998, 1997, and 1996, the Company had export shuffler sales
and shuffler lease revenue, primarily to Canada and Australia, which totaled
24%, 17%, and 14%, respectively, of total revenue.


                                       36

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                            QUARTERLY FINANCIAL DATA
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                               Quarter Ended
                                                          --------------------------------------------------------
In thousands, except per common share and ratio amounts   January 31     April 30       July 31         October 31
------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>           <C>           <C>               <C>       
FISCAL 1998

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

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

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

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

Earnings (Loss) per Common Share, basic(2)                       .14           .16          (.09)              .15

Earnings (Loss) per Common Share, assuming dilution(2)           .14           .16          (.09)              .15


FISCAL 1997

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

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

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

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

Earnings per Common Share, basic(2)                              .10           .13           .13               .12

Earnings per Common Share, assuming dilution(2)                  .10           .13           .13               .12
</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 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.


                                       37

<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 1998 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 1998 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 1998
                Proxy Statement is incorporated herein by reference.


ITEM 11. EXECUTIVE COMPENSATION

        The information under the captions "Executive Compensation,"
"Compensation of Directors," "Report of Compensation Committee on Executive
Compensation," "Stock Performance Graph," and "Termination of Employment
Arrangement" in the Company's Fiscal 1998 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 1998 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 1998 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, 1998, 1997, and 1996

                                Consolidated Balance Sheets as of October 31,
                                1998 and 1997

                                Consolidated Statements of Shareholders' Equity
                                for the years ended October 31, 1998, 1997, and
                                1996

                                Consolidated Statements of Cash Flows for the
                                years ended October 31, 1998, 1997, and 1996

                                Notes to Consolidated Financial Statements

                                Quarterly Financial Data (unaudited)


                                       38

<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)

                        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, 1998.


                                       39

<PAGE>


                                   SIGNATURES

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

                                          SHUFFLE MASTER, INC.


Dated:    January 28, 1999            By: /s/ Joseph J. Lahti
                                          --------------------------------------
                                          Chief Executive Officer


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

<TABLE>
<CAPTION>
            Signature                            Title                         Date
            ---------                            -----                         ----
<S>                             <C>                                      <C> 
/s/ Joseph J. Lahti             President, Chief Executive Officer,      January 28, 1999
-----------------------------   and Chairman of the Board
Joseph J. Lahti

/s/ Gary W. Griffin             Chief Financial Officer                  January 28, 1999
-----------------------------
Gary W. Griffin

/s/ John A. Rahja               Vice President and Controller            January 28, 1999
-----------------------------
John A. Rahja

/s/ Mark L. Yoseloff            Executive Vice President and Director    January 28, 1999
-----------------------------
Mark L. Yoseloff

/s/ Patrick R. Cruzen           Director                                 January 28, 1999
-----------------------------
Patrick R. Cruzen

/s/ Thomas A. Sutton            Director                                 January 28, 1999
-----------------------------
Thomas A. Sutton

</TABLE>